Presenting a live 90-minute webinar with interactive Q&A. Today s faculty features:

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Estate Planning with Education Trusts and 529 Plans Establishing Education Trusts for Tax Savings, Drafting Education Provisions in Revocable Trusts, and Incorporating 529 Plans WEDNESDAY, JANUARY 9, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Gregory Herman-Giddens, President, TrustCounsel, Chapel Hill, N.C. Robert Deschene, Attorney, Deschene Law Office, North Attleborough, Mass. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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5 Estate Planning with Education Trusts and 529 Plans January 9, 2013 Robert Deschene, Attorney at Law Massachusetts Rhode Island Church Street North Attleborough MA Material in this PowerPoint is drawn from Incorporating Education Trusts and 529 Plans in in Estate Plans, by Gregory Herman-Giddens Used with permission for educational purposes. All rights reserved.

6 Advantages of Education Trusts Disadvantages of Non-Trust Education Funds Coverdale Education Savings Accounts Annual contributions limited to only $2000 Custodial Accounts (under UGMA or UTMA) Parents contribution irrevocable & nonrefundable by child/beneficiary Trust assets included in parents taxable estate (until child is 18 or 21) Child can use money as he wishes after reaching age of majority Trust assets treated as child s assets for financial aid purposes, and therefore higher percentage counted as available (35% or 20%) 6 6

7 Advantages of Education Trusts Non-Trust Education Fund (cont.) 2503(c) Trusts (or Minor s Trusts ) Only one trust beneficiary allowed Beneficiary must be given right to withdraw all trust assets at age 21 Any undistributed income held in the trust is taxed at high graduated trust rates (i.e., 35% in 2012 for income of $12,650) 7 7

8 Advantages of Education Trusts Advantages of 529 Plans over Education Funds State-operated education savings programs, and donor can choose which states plan to use, not only home state) Donor maintains total control over trust funds, and how they are managed and invested Donor may change investment strategies at any time Donor may recoup contributions for personal use if necessary (subject to income tax and 10% penalty) 8 8

9 Advantages of Education Trusts Advantages of 529 Plans over Education Funds (cont.) Annual right to rollover to another State s 529 Plan Right to change beneficiary (provided new beneficiary is qualified family member) Plans can be created to benefit not only minor family members, but adults or non-relatives No income tax on withdrawals if used for qualified higher education expenses Plan assets treated as parents assets for financial aid purposes, so only 5.6% counted, not 35% or 20% 9 9

10 Advantages of Education Trusts Advantage of Education Trusts 2 types of education trusts: Education Trusts Owning 529 Plans Trusts Tuition-Only Trusts Education Trusts Owning 529 Plans 529 Plans alone normally offer only limited trust asset protection from creditor claims Trust owning a 529 Plan contains spendthrift language to protect against creditors of donor and beneficiaries 10 10

11 Advantages of Education Trusts Avoids ownership of the 529 Plan by an individual, who may die or become incapacitated, instead allowing seamless control of 529 Plan by successor trustee Distributions for non-qualified (viz., non-educational) purposes can be retained in trust: Prevents their re-inclusion in donor s taxable estate Protects them from beneficiary s creditor claims Trustee manages Plan under fiduciary duty 11 11

12 Advantages of Education Trusts Tuition-Only Trusts (HEET Trusts) IRC 2503(e) makes any direct tuition payments to an educational institution excludible from gift tax and/or (if the beneficiary is a skip person ) excludible from the generation-skipping transfer (GST) tax No need to allocate GST exemption to HEET trust Trust can provide for more than one beneficiary Trust may own 529 Plans if distributions for tuition only Trust can be used for all educational levels, not only higher education 12

13 Estate Planning with Education Trusts and 529 Plans January 9, 2013 Gregory Herman-Giddens, JD, LLM, TEP, CFP Attorney at Law North Carolina Florida New York Main Office 205 Providence Rd., Chapel Hill, NC Gregory Herman-Giddens

14 Structuring Education Trusts Drafting an Education Clause in an RLT Defining Education Generally Included in standard HEMS distribution clauses Education is an ascertainable standard under IRC 2041 and 2514 Include a general definition in the trust (See Appendix 1) Include more than traditional academic courses? Room and board Fees Supplies Tutoring Transportation 14

15 Structuring Education Trusts Specific Education Clauses For trust grantors who desire to fund only certain types of education and/or levels of achievement Factors to consider What levels/types of education? Primary, secondary, college, grad school Community college or trade school Beauty school Certain institutions only All or only certain courses of study Certain GPA required? Time period What happens if the beneficiary doesn t meet conditions See Appendix

16 Structuring Education Trusts Standalone Education Trusts Practical considerations Amount funded Trustee 529 Plan Trusts Include provision expressly authorizing 529 Plans See Exhibit C Advantages discussed earlier 16 16

17 Structuring Education Trusts 529 Plan Trusts (cont.) Disadvantages Tax Complications Gift GST Income Funds not accessible by donor/grantor Financial aid Beneficiary s interest in trust counted at 35% 2008 IRS Advance Notice of Proposed Rulemaking Proposal only Prohibits trust ownership of 529 Plans Only transfers by current account owner treated as basis 17 17

18 Structuring Education Trusts Tuition Only Trusts Health and Education Exclusion Trusts (HEETS) IRC 2503(e) exempts direct payments for tuition/healthcare from GST HEET Trusts do not require allocation of GST exemption Can be for tuition only or include medical payments Include charity as beneficiary to avoid GST taxable termination Can be used for primary and secondary education, unlike 529 Plans Can invest in 529 Plans with limitations to use of those funds for college tuition only 18 18

19 Incorporating 529 Plans in Education Trusts 529 Plans in General State-run college education savings programs Post secondary education expenses only Qualified Higher Education Expenses (QHEE) College, grad or professional school, community college Expenses for room and board permitted Not limited to state of residence No limits on out of state colleges Contribution limits Vary, but usually $ K 19 19

20 Incorporating 529 Plans in Education Trusts 529 Plans in General (cont.) Federal guidelines for state operation 1998 Notice of Proposed Rulemaking 2008 Advance Notice of Proposed Rulemaking Guidance Notices Final regulations pending Direct sold vs. Advisor sold 20 20

21 Incorporating 529 Plans in Education Trusts Features of 529 Plans Wide investment choices Conservative to aggressive Target date (college start) Online management Reallocation of investments Contributions Withdrawals/payments 21 21

22 Incorporating 529 Plans in Education Trusts Features of 529 Plans (cont.) Donor retains full control Ability to change beneficiaries (within family) Right to withdraw funds for any purpose Ability to rollover to another plan (once annually) 22 22

23 Incorporating 529 Plans in Education Trusts Gift Tax Considerations Contributions qualify for annual exclusion 5 year gift tax annual exclusion front-loading Not for gifts to trust directly Estate Tax Considerations Excluded from estate of owner Included in taxable estate of beneficiary 23

24 Incorporating 529 Plans in Education Trusts Income Tax Considerations Growth tax-free if used for QHEE 10% penalty and tax on withdrawals otherwise Not deductible for federal income tax purposes Some states allow limited income tax deduction Trust rates for undistributed income Top federal rate of 39.6% at about $12,000 income 3.8 Medicare surtax starting in 2013 Grantor trust treatment may be advisable 24 24

25 Incorporating 529 Plans in Education Trusts Asset Protection Federal Law - No protection Exception bankruptcy State law About one-half of states provide some protection Significant advantage of ownership in irrevocable trusts Include Spendthrift provision 25 25

26 Incorporating 529 Plans in Education Trusts Financial aid considerations 529 Plans considered asset of parent for FAFSA purposes Assessed at 5.6% Student asset rate is 35% Independent students 20% Trust assets Beneficiary s interest in a trust assessed at 35% Cannot practically draft around issue 26 26

27 Resource on 529 Plans SavingForCollege.com run by CPA Joe Hurley - State-by-state comparisons - Q & A - Calculators 27

28 Contact Information Gregory Herman-Giddens, JD, LLM, TEP, CFP Attorney at Law (NC, FL, TN, NY) Offices in North Carolina, Miami and New York City Thank You for Attending! 28 28

29 Tax Implications and Benefits Custodial Accounts (UGMA/UTMA) Income taxation: Taxed to child/beneficiary up to threshold ($1900 in 2012), then at donor/parent s rate Estate/Gift taxation: Trust assets included in parent/donor s taxable estate until beneficiary reaches majority 2503(c) Trusts ( Minors Trusts ) Income taxation: Retained income taxed at higher trust rates 29 29

30 Tax Implications and Benefits Taxation of 2503(c) Trusts ( Minors Trusts ) (cont.) Estate/gift taxation: 529 Plans Contributions qualify for annual gift tax exclusion ($14K in 2013) Income taxation: Tax-free growth if distributions for educational purposes Non- educational distributions are taxable, with 10% penalty Contributions not deductible for federal tax, maybe for some States income tax 30 30

31 Tax Implications and Benefits Taxation of 529 Plans (cont.) Estate/gift taxation: Removed from donor s taxable estate (but retains control) Change of beneficiary to qualified family member has no tax consequences (but: if to skip person, then GST tax?) Contributions qualify for the annual gift tax exclusion ($14K) Lump-sum initial front-loaded contribution of 5 years of annual exclusion (or $70,000) permitted (note: must file election) But note: If donor fails to survive 5 years, portion of excluded assets pulled back into donor s taxable estate 31 31

32 Tax Implications and Benefits Trusts Owning 529 Plans Income taxation: If created as grantor trust, then taxed to donor/parent No state income tax deduction allowed for contributions Estate/gift taxation: Excluded from donor s taxable estate (provided donor does not serve as trustee) Non-qualified distributions can be held in trust, rather than being pulled back into donor s taxable estate Contributions qualify for annual gift tax exclusion ($14K), provided beneficiary is given Crummey right of withdrawal 32

33 Tax Implications and Benefits Taxation of Trusts Owning 529 Plans (cont.) No 5-year front-loading of annual exclusion is available (as with 529 Plans) Tuition-Only Trusts (HEET Trusts) Income taxation: If non-grantor trust, taxed to trust, but with charitable deduction if distributions to charitable beneficiary If grantor trust, taxed to donor (not trust), and since tax payments not treated as gift, allows trust corpus to grow faster Estate/gift taxation: Contributions subject to estate and gift tax (but ways to avoid or minimize) 33

34 Tax Implications and Benefits Taxation of Tuition-Only Trusts (HEET Trusts) (cont.) No Gift/GST tax if structured so that: No distributions are made to any skip person for other than qualified educational (or medical) purposes; and The trust has at least one non- skip person (e.g., a charity) as a beneficiary, thereby avoiding potential for taxable termination for GST tax purposes Generation-Skipping Tax & Education Trusts Education trusts for benefit of any skip person (viz., family members more than one generation younger than donor (e.g., grandchild), or other beneficiaries who are more than 37½ years younger than donor) 34

35 Tax Implications and Benefits Generation-Skipping Tax & Education Trusts (cont.) Applies to any gifts made to skip persons exceeding lifetime GST tax exemption Gifts made pursuant to the annual exclusion ($14K in 2013) not subject to GST tax provided: Trust is for skip person s benefit only; and Trust assets will be includable in skip person s taxable estate, or skip person s death will be a taxable termination Allocate lifetime GST tax exemption to ensure trust has GST tax exclusion ratio of zero 35

36 Contact Information Robert Deschene Attorney at Law (MA & RI) Thank You for Attending! 36 36