Estate Planning: Concepts and Strategies CHAPTER 16 Estate Planning: Concepts and Strategies Add notes here. Chapter 16: Estate Strategies

INTRODUCTION Major Objectives of Estate Planning: Preserve the assets accumulated Develop strategies for passing them on to beneficiaries Minimize estate taxes Basic estate plan includes four documents: Will Living Trust Financial Power of Attorney Health Care Power of Attorney This chapter is divided into three parts: Estate Tax Reduction Strategies Estate Preservation and Distribution Rules Miscellaneous Estate Planning Techniques Chapter 16: Estate Strategies

ESTATE TAX REDUCTION STRATEGIES INTRODUCTION Major objective of estate planning is to eliminate, or significantly reduce, potential estate tax MARITAL DEDUCTION Property passing to a spouse is generally free from federal estate or gift taxes because of unlimited marital deduction If spouse is unconditional beneficiary, life insurance proceeds also qualify as marital deduction property For most families estate planning is essential because significant estate taxes might become due upon death of second spouse Example I: Mr. Becker leaves his $5.5 million estate outright to his wife Betty Chapter 16: Estate Strategies

ESTATE TAX REDUCTION STRATEGIES MARITAL DEDUCTION (Contd.) Example II: Mr. Becker leaves $5 million to his wife and remaining $500,000 to his children Example III: Mr. Becker owns $7 million estate. Betty has a negligible estate. He leaves his entire estate to Betty. These examples illustrate that: Consequences of leaving large estate to surviving spouse should be carefully weighed It might be better to leave assets in a trust and completely avoid paying estate taxes Chapter 16: Estate Strategies

ESTATE TAX REDUCTION STRATEGIES JOINT OWNERSHIP: Key Advantages If property is held jointly with right of survivorship, upon death surviving joint owner automatically owns the property without necessity of probate Property held jointly by married couples cannot be taken away in settlement of debt If a person is sole owner of out of state vacation home, the will must be probated in two states. Joint ownership would eliminate this requirement. Joint ownership can be used to shift income to a family member in a lower tax bracket Joint property can be used to achieve special objectives. If a mother wants to gift $13,000 (2012) to her daughter, but still wants to use the money, she can place it in a joint bank account in both names Chapter 16: Estate Strategies

ESTATE TAX REDUCTION STRATEGIES JOINT OWNERSHIP: Key Disadvantages The survivor could end up with an estate exceeding $5.12 million (2012), resulting in higher estate taxes Where all properties are jointly owned and there is no will, if both spouses die in an accident, the entire property would be distributed according to rigid laws of intestate succession An important problem associated with joint ownership of highly appreciated assets involves both federal income and estate taxes Example: John and Betty Jones bought a house for $30,000 in 1966 and held it jointly until John died in January 2012, when the house was worth $200,000 Chapter 16: Estate Strategies

ESTATE TAX REDUCTION STRATEGIES JOINT OWNERSHIP: Key Disadvantages (Contd.) Joint tenancy does not provide complete control over the asset because order of deaths can significantly change the outcome Unmarried joint tenants can increase estate tax liability for their heirs Planning Strategies: Option 1: One spouse holds the property only in his/her name, and transfers to the other via a will Option 2: The property is split down the middle during the individuals’ lifetimes. Each spouse then leaves his or her estate in trust to the children with an income interest to the other spouse. The result is a total avoidance of estate taxes upon both deaths. Chapter 16: Estate Strategies

ESTATE TAX REDUCTION STRATEGIES LIFETIME GIFTS An Overview Gift Tax Calculation Planning Ideas Involving Gifts Annual Exclusion Special Property Gifting via a Trust Gifts to Charity Disadvantages of Gifts Estate With and Without Lifetime Gifts Conclusion Chapter 16: Estate Strategies

ESTATE TAX REDUCTION STRATEGIES TRUSTS Estate Taxes and Trusts Key Issues Bypass Trust Power of Appointment Trust Marital Trust QTIP Trust Estate Trust Life Insurance Trust Charitable Trust Charitable Remainder Annuity Trust Charitable Remainder Unitrust Charitable Lead Trust Pooled Income Fund Irrevocable Gift Trust Chapter 16: Estate Strategies

TRUSTS AND TAXES Table 16-1 Trusts and Taxes Chapter 16: Estate Strategies

USE OF BYPASS TRUST Testamentary No estate taxes on first death; minimized or eliminated at second death Chapter 16: Estate Strategies

QTIP MARITAL TRUST Marital Trust Figure 16-1 QTIP Marital Trust Marital Trust Decedent controls assets even after death Used if surviving spouse unable to handle own affairs Surviving spouse has control over assets Chapter 16: Estate Strategies

A-B Living Trust Utilizing a QTIP Marital Trust Figure 16-2 A-B Living Trust Trust controls distribution of assets Income paid out to spouse at least annually Qualify for unlimited marital deduction Decedent controls ultimate distribution to beneficiaries at death of second Chapter 16: Estate Strategies

Comparative Features of Key Trusts Table 16-3 Comparative Features of Key Trusts Chapter 16: Estate Strategies

Irrevocable Life Insurance Trust Figure 16-3 The Irrevocable Life Insurance Trust Life Insurance Trust To shelter life proceeds must give up ownership As long as die after three years this might work Chapter 16: Estate Strategies

Charitable Trusts Irrevocable Gift Trust Charitable Trust These trusts involve distribution of income and the assets of the trust Charitable Remainder Annuity Trust Annual payments to beneficiaries Lifetime but no longer than 20 years Distribution of assets to charity at the end Included in estate but get the charity deduction Charitable Remainder Unitrust Beneficiaries get a variable income Future contributions are permitted Charitable Lead Trust Income to the charity Remainder to beneficiaries Irrevocable Gift Trust Chapter 16: Estate Strategies

Charitable Remainder Trust Figure 16-4 Charitable Remainder Trust Chapter 16: Estate Strategies

SOPHISTICATED TAX REDUCTION STRATEGIES FAMILY LIMITED PARTNERSHIPS Advantages A person can discount gifts of limited partnership interests One can freeze the value of property by passing future appreciation to the intended beneficiaries One can reduce his/her gross estate without giving up control of the underlying property held by the FLP A person can reduce gross estate and protect property from creditors and non-family ownership An FLP can result in substantial savings in taxes Disadvantages An FLP is not for everyone -- counsel must ensure that the FLP has a legitimate business purpose Chapter 16: Estate Strategies

SOPHISTICATED TAX REDUCTION STRATEGIES WEALTH REPLACEMENT TRUST Replaces Gifted Assets Covers Estate Taxes SPRINKLING TRUSTS CRUMMEY TRUST GENERATION SKIPPING TRANSFER TAX DYNASTY TRUSTS LEVERAGING GSTT EXEMPTION SPLIT DOLLAR ARRANGEMENT DISCLAIMER Chapter 16: Estate Strategies

SOPHISTICATED TAX REDUCTION STRATEGIES GENERATION SKIPPING TRANSFER TAX To stop huge transfers Everyone entitled to transfer total of 1.1 without GSTT GSTT tax is max of estate tax Slows the transfer beyond generation of one’s children Chapter 16: Estate Strategies

SOPHISTICATED TAX REDUCTION STRATEGIES GRANTOR RETAINED ANNUITY TRUST AND GRANTOR RETAINED UNITRUST An Overview Key Advantages QUALIFIED PERSONAL RESIDENCE TRUST Chapter 16: Estate Strategies

GRANTOR RETAINED ANNUITY TRUST Figure 16-7 Grantor Retained Annuity Trust Chapter 16: Estate Strategies

QUALIFIED PERSONAL RESIDENCE TRUST Figure 16-8 Qualified Personal Residence Trust Transfer home while retaining right to live in the home rent free for X years If die within X years, gift tax of the remainder asset If live beyond, the asset will be included in the estate Chapter 16: Estate Strategies

Miscellaneous Estate Planning Issues Basis rules for gifts and estate distributions Gift The basis is the basis the donor had in the asset The original cost at which they paid for it Death The basis is the market value on the date of death or within 90 days I purchased stock for $10,000 twenty years ago. It is now worth $300,000. If I gift it, the donee will not pay any taxes until they sell. The capital gains will be the market price – 10,000 If I die and the heir receives it, my estate will pay taxes on the 300,000. The heir would only pay taxes if they sold and then only the difference between the market price and 300,000 Chapter 16: Estate Strategies