1. New Federal Tax Laws Affecting Estate Planning

2. Nothing, Nada, Zip!

3. Since January 1, 2011, the Federal Estate Tax law provides for an estate tax rate of 35 percent with an exclusion amount of $5.12 million (the extra $120,000 is an inflation adjustment for 2012).

4. The current law expires (“sunsets”) on December 31, 2012!

5. As of January 1, 2013, in the absence of further action by Congress, the estate tax goes back to the $1M exemption and a 55% tax bracket (if you don’t think that will happen, then you have already forgotten 2010!); in addition, the Democrats have stated that lowering the exemption to the 2009 levels of $3.5M and 45% is a “top priority” for any new law.

6. In fact, President Obama’s proposed 2013 federal budget proposal is based on a return to the $3.5M exemption and a 45% tax rate.

7. When will we know?

8. It’s an election year!!

9. There is every likelihood that nothing will be done until December IF then!

10. There is every likelihood that nothing will be done until December IF then AND, even if Congress acts, the odds are good that it will be another short- term “fix”!

11. WHAT DOES THIS ALL MEAN?

12. Every estate plan (RLT or Wills) for a married couple with an estate above $1M needs to have a contingency plan.

13. THE ANSWER

14. THE ANSWER: A “Disclaimer Trust” OR an “Intentionally Defective Marital Deduction Trust”

15. The “Disclaimer Trust”:

16. Everything goes to the survivor but the survivor can, within 9 months, disclaim any or all of the deceased spouse’s interest into an irrevocable trust (i.e., an “exemption” or “by-pass” trust).

17. The “Disclaimer Trust”: Not recommended for an estate over $3.5M.

18. The “Disclaimer Trust”: Better to use a “QTIP Trust” with “Clayton Election”

19. The “QTIP Trust” with “Clayton Election”: 15 months to make election Permits survivor to have a LPOA Avoids issues with “Portability”

20. The “Disclaimer Trust”: Do not use if there is an issue with “control”

21. The “Intentionally Defective Marital Deduction Trust”

22. What about an “A/B Trust”?

23. The “A/B Trust”:

24. “A” Trust is the survivor’s revocable trust

25. The “A/B Trust”: “A” Trust is the survivor’s revocable trust “B” Trust is the irrevocable trust

26. The “A/B Trust”: “A” Trust is the survivor’s revocable trust “B” Trust is the irrevocable trust  Must be funded with decedent’s estate up to the exemption amount

27. The “A/B Trust”: “A” Trust is the survivor’s revocable trust “B” Trust is the irrevocable trust  Funded with decedent’s estate up to the exemption amount  Purpose is to keep “B” Trust out of the survivor’s taxable estate

28. Problems with the “A/B Trust”:

29. “B” Trust is the irrevocable trust  Funded with decedent’s estate up to the exemption amount

30. Problems with the “A/B Trust”: “B” Trust is the irrevocable trust  Funded with decedent’s estate up to the exemption amount If control is an issue and the decedent’s estate exceeds the exemption, the balance goes to the survivor

31. Problems with the “A/B Trust”: “B” Trust is the irrevocable trust  Purpose is to keep “B” Trust out of the survivor’s taxable estate

32. Problems with the “A/B Trust”: “B” Trust is the irrevocable trust  Purpose is to keep “B” Trust out of the survivor’s taxable estate This will lose the “stepped-up basis” on the assets in the “B” Trust at the survivor’s death

33. The “step-up” means that inherited property receives a new cost basis equal to the property's fair market value on the date of the decedent's death. In other words, the heirs can sell the inherited assets and pay no capital gains tax.

34. Problems with the “A/B Trust”: “B” Trust is the irrevocable trust  Purpose is to keep “B” Trust out of the survivor’s taxable estate ONLY ASSETS INCLUDED IN THE TAXABLE ESTATE ARE ELIGIBLE FOR THE STEP- UP

35. The “Intentionally Defective Marital Deduction Trust”:

36. Creates an irrevocable trust for all of the decedent’s assets

37. The “Intentionally Defective Marital Deduction Trust”: Creates an irrevocable trust for all of the decedent’s assets SOLVES THE CONTROL ISSUE

38. The “Intentionally Defective Marital Deduction Trust”: Creates an irrevocable trust for all of the decedent’s assets “Intentionally” designed to be included in the survivor’s taxable estate

39. The “Intentionally Defective Marital Deduction Trust”: “Intentionally” designed to be included in the survivor’s taxable estate SOLVES THE STEPPED-UP BASIS ISSUE -- NOW THE ENTIRE ESTATE RECEIVES A STEP-UP AT THE SECOND DEATH

40. The “Intentionally Defective Marital Deduction Trust”: Creates an irrevocable trust for all of the decedent’s assets “Intentionally” designed to be included in the survivor’s taxable estate Has “disclaimer” option to fund “Exemption Trust” if needed.

41. The “Intentionally Defective Marital Deduction Trust”: Has “disclaimer” option to fund “Exemption Trust” if needed. PROTECTS IF THE EXEMPTION DOES COME BACK TO $1M (OR IF CLIENTS HIT THE LOTTERY!).

42. Besides “control”, there are other advantages to creating an Irrevocable Trust at the first death:

43. Creditor Protection

44. Besides “control”, there are other advantages to creating an Irrevocable Trust at the first death: Creditor Protection Medicaid Planning

45. “Portability”

46. Current law provides for "portability" between spouses of the maximum exclusion. Generally, portability allows a surviving spouse to elect to take advantage of the unused portion of the estate tax exclusion of his or her predeceased spouse, thereby providing the surviving spouse with a larger exclusion amount.

47. “Portability” NOTE: The “deceased spousal exclusion amount” is available to the surviving spouse only if an election is made on a timely filed estate tax return for the deceased spouse (even if an estate tax return would otherwise not be required).

48. Example #1 Assume that Husband dies in 2012, leaving $1M to his daughter and the balance of his estate of $3M to Wife (no tax is due). An election is made on Husband’s estate tax return to permit Wife to use Husband’s unused exemption. Thereafter, Wife’s exemption is now $9M (her $5M basic exemption plus the $4M of Husband’s unused exemption), which she may use for lifetime gifts or for transfers at death.

49. Example #2 Assume that Husband dies in 2013 and the exemption has been reduced to $3.5M, Husband leaves $1M to his daughter and the balance of his estate of $3M to Wife (no tax is due). An election is made on Husband’s estate tax return to permit Wife to use Husband’s unused exemption. Thereafter, Wife’s exemption is now $6M (her $3.5M basic exemption plus the $2.5M of Husband’s unused exemption), which she may use for lifetime gifts or for transfers at death.

50. The biggest argument in support of portability is that it will prevent married couples from having to create "costly" estate plans that contain "complex" trusts.

51. But not so fast! There are still plenty of reasons why married couples should consider Trust planning and why unwed couples may need it too; portability is really a “get out of jail card” for those who don't do anything or if the totally unexpected should occur. There are a number of reasons for married clients to still create an estate plan which creates a trust or trusts after the first death:

52. PLANNING

53. Planning to “lock-in” the full exemption

54. Given the uncertainty surrounding the estate tax, having an exemption trust will protect the full $5M amount if one spouse dies and the Democrats are later successful in "rolling-back" the exemption to $3.5 (or if the exemption should “sunset” back to the $1M. Portability may also be lost if the surviving spouse remarries and is later widowed again.

55. Planning to “lock-in” the full exemption Planning for appreciation

56. Funding an “exemption trust” also protects appreciating assets from estate tax at the survivor’s death.

57. Planning to “lock-in” the full exemption Planning for appreciation Planning for blended families and/or “control”

58. For a second/third marriage (or even for a first marriage), if one or both of the clients is concerned with the survivor being able to change the beneficiaries (e.g., remarriage, separate children, etc.), the irrevocable trust is still necessary (as previously mentioned, even when there are no tax issues -- as when the total estate is under $3.5M or even $1M).

59. Planning to “lock-in” the full exemption Planning for appreciation Planning for blended families and/or “control” Providing creditor protection for the surviving spouse

60. As previously mentioned, creating an irrevocable trust at the first death provides asset protection from creditors, lawsuits and/or Medicaid “spend-down”. In addition, any assets owned by an irrevocable trust will be protected from a divorce settlement if the surviving spouse remarries and then later divorces.

61. Planning to “lock-in” the full exemption Planning for appreciation Planning for blended families and/or “control” Providing creditor protection for the surviving spouse Planning for state estate taxes

62. Currently, there are 16 states plus the DC that impose a separate state estate tax, so trust planning may be necessary in order to “double” the state exemption and defer payment of state estate taxes until the death of the surviving spouse (so far, no state with an estate tax has adopted the concept of “portability” for the unused exemption of the first to die). Even if the client resides in a state currently without a separate estate tax, that state may subsequently elect to impose a tax or the survivor may, after the first death, indicate that there is a possibility of moving to a state which does have a separate state estate tax (e.g., move to be closer to children/grandchildren).

63. Planning to “lock-in” the full exemption Planning for appreciation Planning for blended families and/or “control” Providing creditor protection for the surviving spouse Planning for state estate taxes Planning for the “generation-skipping tax”

64. Portability does not apply to the GST tax, so in order to fully leverage the GST exemptions of both spouses for GST trust planning, it will still be necessary to create a trust at the first spouse’s death. The so-called “Dynasty Trusts” are becoming increasingly popular.

65. Planning to “lock-in” the full exemption Planning for appreciation Planning for blended families and/or “control” Providing creditor protection for the surviving spouse Planning for state estate taxes Planning for the “generation-skipping tax” Planning for same sex or unwed couples

66. Until same sex marriage is recognized by the federal government, same sex couples will need to use trust planning in order to be able to take full advantage of the exemption (state and federal) at both deaths (and the same goes for unwed couples).

67. Problems with “Portability” No planning to “lock-in” the full exemption No planning for appreciation No planning for blended families and/or “control” No creditor protection for the surviving spouse No planning for state estate taxes No planning for the “generation-skipping tax” No planning for same sex or unwed couples

68. Trust Planning under Current Law

69. Considerations:

70. Trust Planning under Current Law Considerations: – “Roll back” to $1M in 2013 is somewhat unlikely

71. Trust Planning under Current Law Considerations: – “Roll back” to $1M in 2013 is unlikely – “Roll back” to $3.5M by 2014 is quite likely

72. Trust Planning under Current Law Considerations: – “Roll back” to $1M in 2013 is unlikely – “Roll back” to $3.5M by 2013 is quite likely – “Portability” will most likely be extended

73. Trust Planning under Current Law Considerations: – “Roll back” to $1M in 2013 is unlikely – “Roll back” to $3.5M by 2013 is quite likely – “Portability” will most likely be extended – Any new law will probably not be permanant

74. Trust Planning under Current Law Planning Techniques: – “Probate Avoidance Trust”

75. Trust Planning under Current Law “Probate Avoidance Trust”: All assets remain in the original trust – no irrevocable trust is created with the deceased spouse’s assets  Best for estates under $1M  Simple! No separate accounting or tax return.  However, no protection for:  Children  Creditors  Medicaid

76. Trust Planning under Current Law New Planning Techniques: – “Probate Avoidance Trust” – “Disclaimer Trust”

77. Trust Planning under Current Law “Disclaimer Trust”: All assets initially remain in the original trust – but survivor has 9 months to create an irrevocable trust with some or all of the deceased spouse’s assets  More tax planning than the Probate Avoidance Trust  Lets the survivor decide if an irrevocable trust is needed.  Best for estates from $1M up to $3.5M  However,  No protection for children  No “Limited Power of Appointment” permitted  No “step-up” for assets in the irrevocable trust

78. Trust Planning under Current Law New Planning Techniques: – “Probate Avoidance Trust” – “Disclaimer Trust” – “Intentionally Defective Marital Deduction Trust”

79. Trust Planning under Current Law “Intentionally Defective Marital Deduction Trust”: Decedent’s assets go in to an irrevocable trust which qualifies for the Marital Deduction  Any amount up to $3.5M  Safeguards the children  Survivor can have a Limited Power of Appointment  Assets are protected from the survivor’s creditors  Assets do not need to be “spent down” for Medicaid (allocate residence to the survivor’s trust)  Assets get a new basis at survivor’s death  Contingent “disclaimer” provision  Does require planning at first death and a separate tax return

80. Trust Planning under Current Law New Planning Techniques: – “Probate Avoidance Trust” – “Disclaimer Trust” – “Intentionally Defective Marital Deduction Trust” – “QTIP Trust” with “Clayton Election”

81. Trust Planning under Current Law “QTIP with Clayton Election”:  Like the Marital Deduction Trust; funds the MD portion first, then the Exemption Trust (as an election).  Use for larger estates where combined estate is above $7M or either spouse’s estate will exceed $3.5M  Assets in the MD Trust are stepped-up at 2 nd death, but assets in the Exemption Trust are not.  Because this is an election:  15 months to make election  Limited Power of Appointment over entire trust

82. Trust Planning under Current Law New Planning Techniques: – “Probate Avoidance Trust” – “Disclaimer Trust” – “Intentionally Defective Marital Deduction Trust” – “QTIP Trust” with “Clayton Election” – “QTIP Trust”

83. Trust Planning under Current Law Traditional “QTIP”:  Funds the Exemption Trust first, then the MD Trust with the excess.  Use for larger estates where combined estate is above $10M or either spouse’s estate will exceed $5M  Assets in the MD Trust are stepped-up at 2 nd death, but assets in the Exemption Trust are not.  Limited Power of Appointment over entire trust

84. Trust Planning under Current Law New Planning Techniques: – “Probate Avoidance Trust” – “Disclaimer Trust” – “Intentionally Defective Marital Deduction Trust” – “QTIP Trust” with “Clayton Election” – “QTIP Trust” – “QDOT”

85. Trust Planning under Current Law “QDOT”:  “Qualified Domestic Trust”  Use if either spouse is a non-citizen and the other spouse’s estate will exceed $3.5M  Like a QTIP which funds the Exemption Trust first, then the MD Trust with the excess.  Must have US citizen as the trustee or co-trustee of the MD Trust.  Any distribution of principal from the MD Trust during survivor’s lifetime are subject to 35% (could be 45%) estate tax.  Unlimited Marital Deduction is a “deferral” of tax; the QDOT insures Uncle will get his share.

86. Trust Planning under Current Law “Non-Traditional Couples”:  Federal tax law only recognizes a “traditional” marriage between a man and a woman; there is no Marital Deduction available.  Use a Probate Avoidance Trust for under $1M if no issue of control and no wish for creditor/Medicaid protection  Use a Disclaimer Trust for estates between $1M and $5M if no issue of control and clients want survivor to determine if irrevocable trust is needed.  Use the modified “A/B Trust” for any size estate when control is an issue or if the estate is greater than $5 or to force the use of the irrevocable trust.  “Modified” means there is no “formula” for funding the irrevocable trust; all of the deceased parties assets are held in the trust even if above the federal exemption amount.  Excess will be taxed whether held in trust or distributed outright to partner.  However, assets in the irrevocable trust are not subject to an additional tax at the partner’s death; i.e., up to $10M can pass tax free.