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Www.strothman.com. Estate Planning Keeping More for Your Family Presented by Dennis L. Thomas CPA ABV JD LL.M.-Taxation Strothman and Company.

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Presentation on theme: "Www.strothman.com. Estate Planning Keeping More for Your Family Presented by Dennis L. Thomas CPA ABV JD LL.M.-Taxation Strothman and Company."— Presentation transcript:

1 www.strothman.com

2 Estate Planning Keeping More for Your Family Presented by Dennis L. Thomas CPA ABV JD LL.M.-Taxation Strothman and Company

3 www.strothman.com Judge Learned Hand; “Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.” Gregory v. Helvering, 69 F;2d 809, 810 (2d Cir. 1934) STROTHMAN ESTATE PLANNING TEAM

4 www.strothman.com ESTATE PLANNING PHILOSOPHY Control Retain cash flow to maintain accustomed manner of living Minimize taxes Incorporate charitable goals

5 www.strothman.com AGENDA I.Introductions II.Estate Planning Process III.Essential Estate Planning Documents IV.Revocable Trusts V.Kentucky Inheritance Tax VI.Federal, Gift and Generation Skipping Transfer Tax VII.Irrevocable Trusts (Break) VIII.Bypass Trusts vs. Portability IX.Valuation Planning X.Tax Basis Adjustments XI.Questions

6 www.strothman.com GOALS What do we want to accomplish with Estate Planning? – Give our loved ones peace of mind – Keep our loved ones out of court (to the extent possible) – Prevent disputes among our loved ones

7 www.strothman.com ESSENTIAL ESTATE PLANNING DOCUMENTS! Four Documents: Last Will and Testament Power of Attorney Healthcare Directive - Living Will -Healthcare Surrogate -HIPPA Release Revocable Trust

8 www.strothman.com LAST WILL AND TESTAMENT A legal declaration by which you (the testator):  Name another person (the executor) to manage your estate; and  Direct the transfer of your assets at your death Why “Essential”?  If you don’t have a Will, your assets will not be distributed according to your wishes, but according to Kentucky law.

9 www.strothman.com LAST WILL AND TESTAMENT Formalities for a Kentucky Will to be valid:  Must be at least 18 years of age  Must be of sound mind  Must be wholly in the testator’s own handwriting or signed in the presence of two witnesses who also sign in the presence of the testator and each other

10 www.strothman.com GENERAL POWER OF ATTORNEY Written permission to represent you or act on your behalf Generally for dealing with your finances “Durable” power of attorney = Not affected or made invalid by the maker’s incapacity “Springing” power of attorney = Takes effect only after the maker’s incapacity

11 www.strothman.com GENERAL POWER OF ATTORNEY Why “essential”? – Without a power of attorney, court approval is required for anyone else to act on your behalf and perform most financial tasks

12 www.strothman.com HEALTH CARE POWER OF ATTORNEY Authorization of another (a health care surrogate) to make health care decisions for you when you no longer have decisional capacity Why “essential”?  If you don’t name a health care surrogate, no one can act on your behalf with regard to health care decisions

13 www.strothman.com AUTHORIZATION FOR DISCLOSURE OF PROTECTED HEALTH INFORMATION HIPAA – major penalties for sharing health information Names the individuals with whom doctors and hospitals can share your health information Why “essential”? – Without this authorization, doctors and hospitals are prevented from sharing your health information with anyone

14 www.strothman.com LIVING WILL A set of written instructions that specifies what you want to have happen medically if you are no longer capable of making decisions – Directs withholding of life support, medicine, drugs, nutrition, and hydration if attending physician and one other physician determine that (1) you are permanently unconscious or (2) you have a terminal condition

15 www.strothman.com LIVING WILL Why “essential”?  Without a living will, a hospital generally will not remove life support

16 www.strothman.com THE “ESSENTIAL” ESTATE PLANNING The Essentials: At the minimum, Execute the 4 essential documents Organize your affairs Conduct a family meeting

17 www.strothman.com TRUSTS What is a Revocable Trust? Benefits of revocable trusts:  Avoid probate  Confidentiality  Simplifies asset management if disability  No estate and gift tax savings

18 www.strothman.com PROBATE What is Probate?  A court-supervised, legal process  The validity of a Will is determined  The executor is appointed  The court oversees the gathering of assets, the payment of creditors, and the distribution of property to beneficiaries

19 www.strothman.com PROBATE How do you avoid probate?  Revocable Trust  Deeds – Joint with right of survivorship  Revocable Trust  Bank Accounts – Jointly owned or titled as paid on death accounts (POD)  IRA, Annuities and Life Insurance naming a designated beneficiary that survives the decedent

20 www.strothman.com FIDUCIARY ROLES EXECUTOR GUARDIAN TRUSTEE POWER OF ATTORNEY HEALTH CARE SURROGATE HIPAA REPRESENTATIVE ADVISORY COMMITTEE

21 www.strothman.com KENTUCKY INHERITANCE TAX  Repeal of Kentucky Estate Tax - ATRA  Federal Estate tax – Credit for State death taxes vs.  Federal Estate tax – Deduction for State death taxes

22 www.strothman.com KENTUCKY INHERITANCE TAX  Class A Exempt Beneficiaries 1.Spouse 2.Children (blood, step or adopted as infant) 3.Grandchildren(blood, step or adopted as infant) 4.Sibling (whole or half)  Certain nonprofit organizations are exempt under KRS 140.060  Gifting in contemplation of death  No gift tax

23 www.strothman.com KENTUCKY INHERITANCE TAX  Class B beneficiaries include: 1.Niece/Nephew (blood) 2.Daughter-in-law/Son-in-law 3.Aunt/Uncle 4.Great Grandchild  Class C beneficiaries include any beneficiary not in Class A or Class B or is not exempt under KRS 140.060.

24 www.strothman.com KENTUCKY INHERITANCE TAX Inheritance Amount Over Class B Beneficiary Rates Class C Beneficiary Rates $ 500 0%6% $ 1,000 4%6% $ 10,000 5%8% $ 20,000 6%10% $ 30,000 8%12% $ 45,000 10%14% $ 60,000 12%16% $100,00014%16% $200,00016%16%

25 www.strothman.com FEDERAL ESTATE, GIFT AND GENERATION SKIPPING TRANSFER TAX Unlimited marital deduction – 1981 Recent U.S. Supreme Court case of United States v. Windsor 133 S. Ct. 2675 (2013)

26 www.strothman.com CURRENT DEVELOPMENTS FEDERAL ESTATE, GIFT AND GENERATION SKIPPING TRANSFER TAX YEAR TAX YEARANNUAL GIFT EXCLUSION 1979 – 2001 $10,000 2002 – 2005 $11,000 2006 – 2008 $12,000 2009 - 2012 $13,000 2013 -2015 (est.) $14,000 Annual exclusion gifts at $14,000 per donee from each donor for 2013 and 2014 tax year

27 www.strothman.com CURRENT DEVELOPMENTS FEDERAL ESTATE, GIFT AND GENERATION SKIPPING TRANSFER TAX TYPE OF TAX 2014 EXEMPTION AMOUNT * TAX RATES ESTATE TAX $5,340,000040% GIFT TAX $5,340,000040% GENERATION SKIPPING TRANSFER TAX (GSTT) $5,340,000040% EXEMPTION AND RATES AFTER AMERICAN TAXPAYER RELIEF ACT OF 2012 (ATRA)

28 www.strothman.com EXEMPTION COMPARISON

29 www.strothman.com IRREVOCABLE GIFT TRUST  Assets generally estate tax exempt  Annual exclusion gifts – “Crummey Withdrawal Rights”  Use of the gift tax exemption

30 www.strothman.com LEVERAGING THE EXEMPTION Irrevocable Life Insurance Trust Husband Initial Gift Life Insurance Cash Value: Irrevocable Life Insurance Trust Wife, Trustee Notices to Crummey Beneficiaries Annual Gift of Premium Payment Beneficiary: Wife, Then Children

31 www.strothman.com IRREVOCABLE GIFT TRUST  Dynasty Trusts – Use of the GST tax exemption – Rule against perpetuities repealed in Kentucky

32 www.strothman.com TAXATION OF TRUSTS INCOME TAX IMPLICATIONS Grantor Trusts Complex and Simple Trusts Qualified Subchapter S Trusts (QSST) Electing Small Business

33 www.strothman.com Trust Tax Rates After American Taxpayer Relief Act of 2012 (ATRA) If taxable income is: The tax rate is: Not over $2,450 15% $2,451 - $5,700 25% $5,701 - $8,750 28% $8,751 - $11,950 33% $11,951 and up 39.6%* Note that Long-term capital gain rates were increased to 20% *Plus a 3.8% Medicare surtax on unearned income exceeding the top tax bracket

34 www.strothman.com TRUST TAX PLANNING ESTATE TAX EFFECTIVE INCOME TAX EFFECTIVE NO REVOCABLE TRUST YES NO IDGT NO YES “CLIFFORD” TRUST YES TESTAMENTARY TRUST

35 www.strothman.com IRREVOCABLE GIFT TRUST Nontax benefits of using a Dynasty Trust – Creditor protection issues

36 www.strothman.com BYPASS TRUST PLANNING What is a Bypass Trust? What is the planning strategy? How is the planning strategy implemented? Assets funding a Bypass Trust are:  Not subject to estate tax  Generally held in trust for the life of the surviving spouse and benefits the children and grandchildren at the death of the surviving spouse  Potentially subject to higher income and capital gains tax rates

37 www.strothman.com BYPASS TRUST PLANNING Last Will and Testament Executor = Spouse Provision to leave personal property by memorandum, then to Spouse, if living and if not, then to children. Residue distributed to Revocable Trust Last Will and Testament Executor = Spouse Provision to leave personal property by memorandum, then to Spouse, if living and if not, then to children. Residue distributed to Revocable Trust Wife’s Estate mirrors Husband’s Fund B in trust for Spouse’s benefit (currently equal to $5,250,000 less any prior gifts) Revocable Trust Fund A for Spouse outright in fee and free of trust Distributes to Children

38 www.strothman.com BYPASS TRUST PLANNING Last Will and Testament Executor = Spouse Provision to leave personal property by memorandum, then to Spouse, if living and if not, then to children. Residue distributed to Revocable Trust Last Will and Testament Executor = Spouse Provision to leave personal property by memorandum, then to Spouse, if living and if not, then to children. Residue distributed to Revocable Trust Wife’s Estate mirrors Husband’s Fund B in trust for Spouse’s benefit (currently equal to $5,250,000 less any prior gifts) Revocable Trust Fund A for Spouse outright in fee and free of trust (or in trust) Distributes to Children

39 www.strothman.com PORTABILITY  Allows surviving spouse to use unused exemption of deceased spouse  Must file a Federal estate tax return at the death of the first spouse to claim use of the decedent’s unused portion  Appreciating assets in surviving spouse’s estate vs. Bypass Trust where the appreciation of assets outside the surviving spouse’s estate

40 www.strothman.com PORTABILITY Husband ASSETS EXEMPTION AMOUNT Tax on assets above combined exemption amounts Wife

41 www.strothman.com TRUST DECANTING A.Evaluate trustee’s power to decant  Must have the power to distribute principal B.Evaluate trustee’s duties in connection with decanting C.Determine the applicable law  Differences between old and new trust must be permitted under Kentucky statute D.Address trustee’s risk  Can be minimized by obtaining a release or consent from the beneficiaries

42 www.strothman.com FAMILY COMPANIES/VALUATION PLANNING CHOICE OF ENTITY

43 www.strothman.com FAMILY COMPANIES/VALUATION PLANNING  Types of LLC membership interest 1)Voting or Participating 2)Non-voting or Non-participating  Things to consider when forming a new LLC 1)Ownership structure 2)Management 3)Business Purpose 4)Assets 5)Potential gifting to the next generation 6)Tax Status of Entity

44 www.strothman.com FAMILY COMPANIES/VALUATION PLANNING  Valuation discounts applied to transfers of non- voting/non-participating interests in an entity: A.Lack of Marketability B.Lack of Control  Fractional interest discounts available on transfers of interest in assets such as: A.Real Estate B.Note Receivable

45 www.strothman.com ADJUSTMENTS TO BASIS EVENT/ASSET TYPE ADJUSTED/ NOT ADJUSTED HOW BASIS IS DETERMINED FOR SALE PURPOSES DeathAdjusted Fair Market Value (FMV) At Date of Decedent’s Death GiftNot Adjusted (unless gift tax paid) Lesser of FMV (at the time of the gift) or Donor’s Tax Basis* IRA,401(k), Annuity and Installment Sales Not AdjustedCarryover Basis of Decedent Life InsuranceAdjusted to Death Benefit/Not Taxable* N/A (Note: no estate tax either if owned by a child of the decedent or an irrevocable trust)

46 www.strothman.com ADJUSTMENTS TO BASIS

47 www.strothman.com DEDUCTIBILITY OF MEDICAL EXPENSES “Qualified Long Term Services” are considered medical expenses and are deductible for income tax purposes. (IRC§7702B) The portion of care attributable to medical care is the only portion deductible when the principle reason for care is not medical. (Treas. Reg. §1.213-1(e)(1)(v).

48 www.strothman.com DEDUCTIBILITY OF MEDICAL EXPENSES FACILITIES Nursing Home Personal Care Assisted Living

49 www.strothman.com DEDUCTIBILITY OF NURSING HOME EXPENSES Since the primary purpose of a nursing home is to provide medical care, the entire cost is tax deductible as a medical expense.

50 www.strothman.com DEDUCTIBILITY OF ASSISTED LIVING EXPENSES  A licensed health care practitioner has to certify that the resident is unable to perform at least 2 out of 6 of the activities of daily living OR that they require substantial supervision to protect their health and safety due to severe cognitive decline.  Obtain a statement from the licensed health care professional at least once every 12 months.

51 www.strothman.com CURRENT DEVELOPMENTS DEDUCTIBILITY OF MEDICAL EXPENSES Deductible when medical expenses exceed the following: – 7.5% of AGI (in 2012) – 10% of AGI if the taxpayer is under 65 (starting in 2013) – 10% of AGI for every taxpayer (starting in 2016) Care provided by non-medical personnel is deductible when it is for a person with dementia needing 24 hour care. (Estate of Baral)

52 www.strothman.com ESTATE PLAN FLOW CHART JOE TAXPAYER JANE TAXPAYER Disclaimer CHILDREN CHILD’S ESTATE GRANDCHILDREN WILL REVOCABLE TRUST FAMILY TRUST THE TAXPAYER FAMILY IRREVOCABLE TRUST  GIFT  INCOME  RESIDUE

53 www.strothman.com DENNIS L. THOMAS CPA ABV JD LL.M.-TAXATION Partner Strothman and Company Certified Public Accountants and Advisors 1600 Waterfront Plaza 325 W. Main Street Louisville, KY 40202 502.585.1600 dthomas@strothman.com


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