Planning for the future –living trusts, estate and tax planning

Combining Use of Unlimited Marital Deduction and Exemption Amount • Unlimited marital deduction exists for property passing to spouse • Without proper planning, all property will qualif

Planning for the Future – Living Trusts, Estate and

Tax Planning

ByThomas F McGuire

Robert I UryArnstein & Lehr LLP

© 2007 All Rights Reserved

Basic Estate Planning

Why do I need a Will?

• 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

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

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

• Spendthrift provisions offer

protection to ultimate trust

beneficiaries

Marital Deduction

Planning

“Applicable Exemption Amount”

0 500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 3,500,000

2004-2005

2008

2006-2009 2010 2011

Exemption

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

Plan A: All to Spouse or

“I Love You” Plan

• At first death, all

• 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)

A Better Plan: Marital Trust/Family Trust Arrangement

• Amount of exemption allocated to Family Trust

• Amount in excess of exemption allocated to Marital Trust

• 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

Trust Structure Issues

Long-Term Trusts

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

Criteria for Trust Distributions

considered?

• Possible use of incentive

provisions?

• Beneficiary as own trustee?

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”

Living Wills and Health Care Powers of Attorney/Directives

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

Advanced Estate Planning Techniques

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

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

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

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

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

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

Gifting to Minors

Effective Use of

Annual Gift Tax

Exclusion

Section 529 Qualified State

Tuition Programs

• Prepaid Tuition credits

versus Section 529 Plan

• Subject to tax and penalty

if not used for education

• “Front loading” of gifts

Charitable Giving

Techniques

• Charitable Remainder Trusts

• Charitable Lead Trusts

• Private Charitable Foundations

• Retirement Plans/IRAs

Outright Gifts

• Current gift while living

• Can be restricted or unrestricted

• Current income tax deduction

available

• No capital gains on appreciated gifts

• 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

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

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

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

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

Compensation Planning

and Practice Agreements

• Additional Benefits (i.e insurance)

• Potential future ownership interest

• Expense reimbursements

• Restrictive covenants

• Other provisions

Fringe Benefits (cont’d)

• Health Reimbursement Accounts

• Health Savings Accounts

• Dependent Care Assistance

• Fringe Benefit Exclusions

Entity Selection – Choices:

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

permitting repurchase

• Purchase price determination method

Deferred Compensation Plan Selection and Administration

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

• Non-deductible IRAs

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

Some Qualified Plan Administration

Issues:

• Treatment of life insurance coverage held

in qualified plans

• Treatment of participant plan loans

• Hardship distributions from qualified plans

Non-Qualified Deferred

Compensation

• Rights are generally non-transferable

employer’s obligations

Use of Insurance as an Asset

Deferred Compensation

Alternatives

• Cash value life insurance

• Charitable remainder trusts

• Impact of new 15% capital gain and dividend rate – See Example

Practice Sales versus

Continuation

What factors should I consider?

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

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

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

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

Example - $1,500,000 IRA IRA Account Holder Dies at Age 60

5% Growth Assumed

60, named as Beneficiary

Required Minimum Distrib.

No Designated Beneficiary

Required Minimum Distrib.

Example - Continued Comparison of Net After-Tax Assets

Year Child as

Beneficiary

No Designated Beneficiary

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.

Participant Distribution Options

• Joint and survivor annuities –

spousal consent required to vary

• Lump-sum Distributions

• Rollovers

• Annuity contract distributions

Thank You!