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Planning for the Future – Living Trusts, Estate and Tax Planning By Thomas F. McGuire Robert I. Ury Arnstein & Lehr LLP © 2007 All Rights Reserved.

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Presentation on theme: "Planning for the Future – Living Trusts, Estate and Tax Planning By Thomas F. McGuire Robert I. Ury Arnstein & Lehr LLP © 2007 All Rights Reserved."— Presentation transcript:

1 Planning for the Future – Living Trusts, Estate and Tax Planning By Thomas F. McGuire Robert I. Ury Arnstein & Lehr LLP © 2007 All Rights Reserved

2 Basic Estate Planning Why do I need a Will?

3 Reasons: Control over who inherits (relatives, charities, friends, etc.) Control over who administers estate Possible reduced costs Estate tax planning Structuring benefits for minor or disabled beneficiary Designation of a guardian for minor children

4 What is a “living trust”? You are the grantor/settlor You normally act as your own trustee Provides for management of assets at death or upon disability Substitutes for traditional will

5 Advantage of Living Trusts Avoidance of probate proceedings at death Avoidance of guardianship proceedings upon disability Ease of administration Reduced costs of administration Privacy and Timing Issues

6 Creditor Protection??? Self-settled trust is not normally protected from creditors Domestic protection trusts and offshore trusts might offer some protection Spendthrift provisions offer protection to ultimate trust beneficiaries

7 Marital Deduction Planning

8 “Applicable Exemption Amount”

9 Combining Use of Unlimited Marital Deduction and Exemption Amount Unlimited marital deduction exists for property passing to spouse Without proper planning, all property will qualify for marital deduction and exemption of first spouse will be wasted Through proper planning, you can double the amount of property exempt from estate tax

10 Plan A: All to Spouse or “I Love You” Plan At first death, all property passes to surviving spouse No tax is paid due to marital deduction At second death, all property is included in gross estate

11 Results: Exemption of first spouse is wasted More estate tax is paid at second spouse’s death Second spouse has total control over assets – can give assets away to whomever he or she chooses (i.e. new spouse upon remarriage)

12 A Better Plan: Marital Trust/Family Trust Arrangement Amount of exemption allocated to Family Trust Amount in excess of exemption allocated to Marital Trust

13 Results: Property is available to surviving spouse as needed, but Family Trust is not taxed at survivor’s death Marital trust defers any estate tax ultimately payable until after both deaths Exemption is doubled If desired, deceased spouse retains ultimate control over distribution

14 Trust Structure Issues Long-Term Trusts

15 Generation-Skipping Trusts Makes property available to next generation but keeps property out of estate tax base Protects beneficiary’s interest from claims of creditors Beneficiary can be trustee and can have power of appointment Limitation – GST Exemption Amount “Dynasty” trusts and the Rule Against Perpetuities

16 Criteria for Trust Distributions Support Comfort Health Education Best Interests Standard of living considered? Possible use of incentive provisions? Beneficiary as own trustee?

17 Powers of Appointment Build flexibility into estate plan Can be limited (i.e. descendants, spouses & charities) or broad (anyone other than creditors or estate) Can be lifetime or testamentary in nature Independent trustee can be given power to create a power in the future – “power to create a power”

18 Living Wills and Health Care Powers of Attorney/Directives Allows doctor or agent to make health care decisions Includes life support decisions Supplements will or trust

19 Property Powers of Attorney Allows agent to manage financial assets in the event of disability Should be made “durable” in nature – effective even if legal determination of disability Useful even if living trust is in place

20 Advanced Estate Planning Techniques

21 Irrevocable Life Insurance Trusts Allows removal of life insurance from gross estate Trust is irrevocable in nature Removes “incidents of ownership” from insured Caveat: Three Year Rule Also removes insurance proceeds from second spouse’s estate

22 What is a “Crummey” notice? Allows gift to trust to qualify for $12,000 per person annual exclusion (avoids gift of “future interest”) Withdrawal right may be limited to a window period Leverage of GST exemption possible

23 Qualified Personal Residence Trust (“QPRT”) Gift of one or two residences to trust for a term of years Gift is based upon actuarial remainder interest at time of transfer Growth in value is removed from estate Upon expiration of term, grantor leases property back from beneficiaries If residence sold, converts to a GRAT arrangement

24 Grantor Retained Annuity Trusts (“GRATs”) Individual transfers assets to a trust for a fixed term reserving an annuity interest Gift is valued based upon remainder interest at time of transfer (“zero out” GRAT possible) If trust can achieve rate of return greater than IRS rate, tax savings will be achieved

25 Family Limited Partnerships/LLCs Discounting may be available for estate and gift tax purposes – Caveat: Strangi case Retention of control while shifting of value Possible creditor protection Centralization of management Consolidation of assets

26 Installment Sales/SCINs Can be used to effectuate an estate “freeze” Income tax consequences may be avoided through sale to intentionally defective trust Must be structured carefully to avoid IRS challenge

27 Gifting to Minors Effective Use of Annual Gift Tax Exclusion

28 Methods of Gifting: Outright Gifts Direct Payments for Tuition and Medical Expenses Uniform Transfers to Minors Act Gifts Section 2503(c) Trusts “Crummey” Trusts Section 529 Plans

29 Section 529 Qualified State Tuition Programs Prepaid Tuition credits versus Section 529 Plan Savings Account “Qualified Higher Education Expenses” Tax-free if used for educational purposes Subject to tax and penalty if not used for education “Front loading” of gifts

30 Charitable Giving Techniques

31 Methods of Giving: Outright gifts Bequests Charitable Gift Annuities Insurance Policies Charitable Remainder Trusts Charitable Lead Trusts Private Charitable Foundations Retirement Plans/IRAs

32 Outright Gifts Current gift while living Can be restricted or unrestricted Current income tax deduction available No capital gains on appreciated gifts

33 Bequest Gift included in will or trust Can be restricted or unrestricted Possible availability of estate tax charitable deduction Opportunity to make a difference after you’re gone

34 Charitable Gift Annuities Contribution to charity in exchange for guaranteed payment for life Portion of payment coming back is tax-free Immediate income tax deduction available Possible reduction of estate taxes

35 Insurance Policies Name charity as owner and/or beneficiary of insurance policy Tax deduction for policy value when transferred Continuing tax deduction for premium payments subsequent to transfer of ownership

36 Charitable Remainder Trusts Variable (Unitrust) or Fixed Income (Annuity Trust) retained for life or term of years Charity receives assets upon expiration of life/term Income tax deduction based upon actuarial value of remainder

37 Charitable Lead Trusts Charity receives income for term (up to 20 years) Upon expiration of term, property reverts to donor or heirs Possible income tax deduction if taxed as grantor trust

38 IRAs or Retirement Plans Perhaps the most efficient means of charitable giving Avoids both estate tax and income tax on proceeds at death Owner retains use of funds while living


40 Compensation Planning and Practice Agreements

41 Employment Agreements – Terms to Include Scope of professional services Term of agreement Salary Additional Compensation Additional Benefits (i.e. insurance) Potential future ownership interest Expense reimbursements Restrictive covenants Other provisions....

42 Fringe Benefits Tax Implications Substantiation Requirements Types of Expenses Group-Term Insurance Disability Coverage Medical Coverage Cafeteria Plans Flexible Spending Arrangements

43 Fringe Benefits (cont’d) Health Reimbursement Accounts Health Savings Accounts Dependent Care Assistance Fringe Benefit Exclusions

44 Entity Selection – Choices: Partnership S Corporation C Corporation Limited Liability Company Limited Liability Partnership

45 Shareholders’ and Partners’ Agreements Agreement which defines rights of parties upon death, disability, retirement and occurrence of other events Can be funded or unfunded Purposes –Protect against ownership by unwanted 3 rd parties –Provide a market for owner’s interest –Fix a market value for owner’s interest –Protect S Corporation election

46 Types of Agreements Redemption Cross-Purchase Insurance Funded Combination “Wait and See” Comparison of Structures

47 Some Provisions to be Included... Transfer prohibition or restrictions Mandatory buy-out Right of First Refusal Right of First Opportunity Go-Along Rights Lock In Period Definition of Events requiring or permitting repurchase Purchase price determination method

48 Deferred Compensation Plan Selection and Administration

49 Qualified Plans Pension plans (“defined benefit”) Profit-sharing plans (“defined contribution”) 401(k) Plans Tax treatment and plan qualification requirements Keogh Plans for self-employeds Affiliated groups/Leased Employees

50 Individual Retirement Accounts Traditional IRAs Roth IRAs Simple IRAs Simplified Employee Pensions (SEPs) Non-deductible IRAs

51 Other Qualified Plans... Section 403(b) Plans – generally available only to educational organizations and tax-exempts Section 457 Plans – maintained by tax-exempts and State governmental agencies

52 Some Qualified Plan Administration Issues: Treatment of life insurance coverage held in qualified plans Treatment of participant plan loans Hardship distributions from qualified plans Fiduciary Restrictions –Investment Issues –Self-Dealing Issues –Conflict of Interest Issues –Anti-Assignment Rules

53 Non-Qualified Deferred Compensation

54 Tax Treatment Historically, benefits not taxable until received and non-deductible by employer until included in employee’s income – But see IRC Section 409A Plan is unsecured and participant is a general creditor of employer Rights are generally non-transferable “Rabbi” trust can be used to fund employer’s obligations

55 Use of Insurance as an Asset Reserve Supplemental Life Insurance Split-Dollar Life Insurance Arrangements –Economic benefit regime? –Loan regime?

56 Deferred Compensation Alternatives Cash value life insurance Charitable remainder trusts Impact of new 15% capital gain and dividend rate – See Example

57 Practice Sales versus Continuation What factors should I consider?

58 Tax Treatment of Non-Qualified Plans and Section 457 Plans Ordinary income treatment when received Rollover to an IRA not available (exception for 457(b) governmental plans) Tax-free transfer to an IRA or qualified plan not allowed Distributions from Section 457 plans must begin at age 70-1/2 or separation from service

59 Qualified Plan or IRA Distributions Tax treatment of ordinary withdrawals 10% early distribution penalty 50% late distribution penalty for failure to distribute MRD Post-Death Distributions and Rollovers Withholding Requirements

60 Required Minimum Distribution Rules Lifetime distributions using uniform table – exception for spouse more than 10 years younger Post-death distributions if death occurs before required beginning date Post-death distributions if death occurs after required beginning date

61 Importance of Designating a Beneficiary Extended payout over beneficiary’s life expectancy available Maximum five year payout if no beneficiary named and participant dies prior to required beginning date

62 Example - $1,500,000 IRA IRA Account Holder Dies at Age 60 5% Growth Assumed YearChild, Age 60, named as Beneficiary Required Minimum Distrib. No Designated Beneficiary Required Minimum Distrib. 139.8$37,6880$0 238.8$38,8190$0 337.8$39,9840$0 436.8$41,1830$0 535.8$42,419100.00$1,688,264 634.8$43,691 733.8$45,002 832.8$46,352 931.8 (etc.)$47,743

63 Example - Continued Comparison of Net After-Tax Assets YearChild as Beneficiary No Designated Beneficiary 1$1,020,073 2$1,056,119$1,049,924 3$1,094,402$1,082,462 4$1,133,188$1,115,125 5$1,174,158$1,143,515.... 10$1,394,577$1,287,483 15$1,647,712$1,449,576 20$1,938,665$1,632,078

64 Trusts as Designated Beneficiaries Must be valid under local law Beneficiaries must be ascertainable Trust must be irrevocable as of participant’s death Plan administrator must receive copy of trust or alternative documentation Life expectancy of oldest beneficiary will be used! “Look through” rules apply.

65 Participant Distribution Options Joint and survivor annuities – spousal consent required to vary Lump-sum Distributions Rollovers Annuity contract distributions

66 Thank You!

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