Advanced Estate Planning

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1 Advanced Estate Planning October 7, 2014 Presented by Gregory E. Lambourne, Esq. Brown & Streza LLP Irvine, CA Review of Basic Estate Planning Health Care Directives Powers of Attorney The Probate Process Last Will and Testament Living (Revocable) Trust Private Estate & Trust Administration 1

2 Advanced Estate Planning KEY GOALS: Reduce Avoid, Estate, and GST Taxes Growth/Appreciation Outside Control of Use & Distribution After Transfers Provide Multi-Generational Support Asset Protection for Beneficiaries Advanced Estate Planning Non 2

3 Advanced Estate Planning Non Taxable Transfers 40% Tax Rate Advanced Estate Planning Non Taxable Transfers Exempt Transfers Windows of Opportunity 3

4 Non Sample of Advanced EP Strategies Annual Exclusion s Health and Education Exclusion s Lifetime Exemption s Custodial Accounts for Minors Qualified 529 Tuition Plans and much more! Intra-Family Loans Irrevocable Life Insurance Trusts Installment Sale to Irrevocable Trust Family Limited Partnerships Private Annuities Grantor Retained Income Trusts Qualified Trusts Charitable Trusts Charitable Annuities Private Foundations Supporting Organizations 4

5 Annual Exclusion s Tax-free $14,000 per beneficiary per spouse per year Non-taxable and no reporting required Does not reduce lifetime gift tax exemption Must be a present interest, not a future benefit Best strategy for long-term gift giving Powerful when combined with other tools Non Independent Trust & Trustee Annual Exemption Up to $14k Annually Per Beneficiary 5

6 Health & Education Exclusion s Unlimited exclusion for health and education gifts In addition to annual exclusion Does not reduce lifetime gift tax exemption Must be paid directly to provider Includes prepaying non-refundable tuition Includes prepaid health insurance or costs Non Provider Health & Education Exemption Unlimited Amount Payments to Providers for Beneficiary Health and Education Services 6

7 Lifetime Exemption s Up to $5.34 million lifetime exemption per taxpayer Over and above the $14,000 annual exclusion Requires allocation by filing gift tax return GST tax exemption automatic where applicable Spouses can elect gift splitting exemption allocation Allows a wealthy person to transfer up to $10.68M. Non Independent Trust & Trustee Lifetime Exemption Up to $5.34M each, or $10.68M for a couple 7

8 Custodial Accounts for Minors Account opened for benefit of minor child Parent or other may serve as custodian for the account Simple to establish, simply by titling: Parent, as custodian for Child under CA Uniform Transfers to Minors Act Counts as completed gift for gift and estate tax purposes Income reported by child, part of child s estate Accessible by child at age 18 unless donor elects age 21 Non Custodial Account for Minors Annual Exemption Up to $14k annually 8

9 Qualified 529 Tuition Plans Account established for payment of education expenses Qualifies for annual exclusion even though a future interest May contribute up to 5 years worth of annual exclusion at once Contributions must be in cash All income tax exempt and qualified education distributions exempt Account owner and beneficiary can be changed Not considered an asset of the student for financial aid purposes Is considered an asset of the parent if parent is the owner Non Qualified 529 Tuition Plan Annual Exemption Annual Exclusions $14,000 per Lump up to 5 years worth CA max $350k per 9

10 Intra-Family Loans Actual loan with obligation to repay is not a taxable gift Interest free loan is taxable gift of the foregone interest Certain narrow but useful exceptions ($10k, $100k) IRS applicable federal rate (AFR) is the minimum interest AFR usually much lower than market rates Non-taxable gift requires annual interest charges Powerful when combined with other tools Non Family Loan Principal & Interest 10

11 Irrevocable Life Insurance Trusts You establish an irrevocable trust with independent trustee Trust purchases life insurance on your life You transfer annual amounts to cover premium payments Trust gives beneficiaries right of withdrawal for 30 days, then lapses Right of withdrawal makes gift of future interest a present gift Requires timely notice of contributions to make the right legitimate Requires trust hold cash until withdrawal rights expire Insurance proceeds not included in your taxable estate Non Independent Trust & Trustee Annual Exclusion Annual + Right of Withdrawal Premium Death Benefit Insurance Company 11

12 Installment Sale to Irrevocable Trust You sell undervalued / appreciable assets to irrevocable trust You take a long-term promissory note paying AFR as payment No gain recognition if a grantor trust for tax purposes Grantor trust if right to swap assets of fair market value If not a grantor trust, gains spread out over note payments Future appreciation takes place outside taxable estate Can use a self-cancelling note if premium interest rate paid Non Independent Trust & Trustee Lifetime Exemption Up to $10.68M Combined FMV Sale Principal & Interest Income Tax Payments Any Amount 12

13 Family Limited Partnerships You form a limited partnership with 1% voting, 99% nonvoting shares You contribute appreciated assets with no tax effect You own all the shares the transfer is disregarded for tax purposes Important to document non-tax purposes of limited partnership After seasoning period, you gift all or part of the non-voting shares The gift of non-voting interest gets a valuation discounts (15-40%) Discount for lack of control and marketability of nonvoting shares You continue to control investments and non-tax distributions Effectively transfers 99% of value at a discount with no loss of control Powerful in conjunction with annual gifting and installment sales Non Taxable No Tax on Exchange Non 100% Owned Investment LLC Independent Trust & Trustee 1% Voting Shares 99% Non Voting Shares 13

14 Non Taxable No Tax on Exchange Non 100% Owned Investment LLC Independent Trust & Trustee 1% Voting Shares Non Taxable Swap 99% Non Voting Shares Non Taxable No Tax on Exchange Non 100% Owned Investment LLC Independent Trust & Trustee Non Taxable Swap 1% Voting Shares Annual & Lifetime s ~15 40% Discount 99% Non Voting Shares 14

15 Private Annuities Similar to sale using an installment note sold in exchange for an annuity payment Must abide Section 7520 rate (120% of AFR) when calculating Annuity can be secured or unsecured by the payor If secured, gain recognized over each annuity payment If unsecured, proposed regulation is to recognize gain immediately Annuity terminates upon death, unlike promissory note Removes asset and future appreciation from taxable estate Non Independent Trust & Trustee Lifetime Exemption Up to $10.68M Combined Private Annuity FMV Sale Principal & Interest Income Tax Payments Any Amount 15

16 Grantor Retained Income Trusts You establish and fund an irrevocable trust You retain an income interest in the trust for a certain term Income interest is an annuity or unitrust (annual percentage) amount After the term, all assets pass to the remainder beneficiaries Present value of the remainder interest is the taxable gift Larger retained interest reduces the amount of the taxable gift All appreciation is removed from your estate If you pass away during term, assets included in taxable estate Non Income During Trust Term Lifetime Exemption GRIT Partial after Term Ends Independent Trust & Trustee 16

17 Qualified Trusts You establish an irrevocable trust and contribute your residence You retain the right to occupy the property during a certain term After term, the property passes to the remainder beneficiaries Present value of the remainder interest is the taxable gift All residence appreciation is removed from your estate Longer retained use term reduces the amount of the taxable gift But longer retained term increases chance of dying within term If you die during the term, the assets are included in taxable estate If you outlive the term, the home ownership passes to your heirs You must pay fair market rent to avoid inclusion in your taxable estate Rent payments reduce your taxable estate, but require careful planning Non FMV Rent after Term Ends Use During Trust Term Qualified Interest Partial Qualified Personal Residence Trust Residence after Term Ends Irrevocable Trust & Trustee 17

18 Charitable Trusts You create an irrevocable trust with a split interest for charity Charitable Remainder Trust = YOU retain income for certain term Charitable Lead Trust = CHARITY receives income for certain term Income interest is an annuity or unitrust (annual percentage) amount Present value of non-charitable benefit is the taxable gift Can be zeroed out by making charitable gift equal to present value Good testamentary estate tax elimination strategy, if assets appreciate Good way to leave children additional amounts above exemption Non Income During Trust Term Qualified Interest + Charitable Deduction Charitable Remainder Trust Partial after Term Ends Charity 18

19 Charitable Annuities Part gift to a charity and part purchase of an annuity Amount transferred over the annuity present value is the charity gift value is deductible from income, gift, and estate taxes Because part sale, capital gain recognized for non-gift portion Can elect to have gain recognized over the annuity payments Payments part excluded (return of principal) Rest of payment is part gains and part ordinary income Charity obligation to pay annuity even if exceeds original gift Can be secured by charity endowment, if agreed Non Preferred Charity Charitable Annuity Charitable Deduction Annuity Purchase Annuity Payments 19

20 Private Foundations You create a corporation or trust for charitable purposes The entity applies for 501(c)(3) tax exemption You contribute property and receive a tax deduction Deduction of fair market value of cash and marketable securities Deduction limited to basis for other property Deduction limited to 30% of AGI for cash, 20% for other property Can carry-over excess deduction for up to 5 years Requires annual IRS Form 990-PF filings Must pay 2% income tax on investment income Extensive regulations and prohibitions against self-dealing, etc. Non Private Foundation LIMITED Charitable Deduction 20

21 Donor Advised Funds You establish a private account with a public charity You recommend investments and distributions Public charity approves and manages investments and distributions Public charity owns the account, so you get full tax deductions Simple and no administration or reporting requirements for you Public charity charges small fee for administration Same restrictions as private foundation against self-dealing, etc. Investment and Charitable Distribution Recommendations FULL Charitable Deduction Non Donor Advised Fund 21

22 Supporting Organizations You create corporation or trust to support specified charities Applies for 501(c)(3) tax exemption as supporting organization Must have certain ties and/or involvement of supported charities Treated as public charity for tax deduction purposes You can more directly influence investment and distributions More flexible than donor advised fund and private foundation Same restrictions as private foundation against self-dealing, etc. Non Supporting Organization FULL Charitable Deduction 22

23 Questions? 23

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