1. Estate Planning: Concepts and Strategies
CHAPTER 16
Estate Planning: Concepts and Strategies
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Chapter 16: Estate Strategies

2. 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

3. 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

4. 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

5. 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

6. 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 and held it jointly until John died in January 2012, when the house was worth $200,000
Chapter 16: Estate Strategies

7. 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

8. 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

9. 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

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

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

12. 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

13. 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
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14. Comparative Features of Key Trusts
Table Comparative Features of Key Trusts
Chapter 16: Estate Strategies

15. Irrevocable Life Insurance Trust
Figure 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

16. 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

17. Charitable Remainder Trust
Figure Charitable Remainder Trust
Chapter 16: Estate Strategies

18. 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

19. 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

20. 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

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

22. GRANTOR RETAINED ANNUITY TRUST
Figure Grantor Retained Annuity Trust
Chapter 16: Estate Strategies

23. 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

24. 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