Estate Planning For and After The Tax Relief Act of 2010

Transcription

1 Estate Planning For and After The Tax Relief Act of 20 Chuck Sharpe Sharpe & Associates, PLLC 4925 Greenville Ave., Suite 425 Dallas, Texas (214) Here We Are After years of speculation and debate Title: Tax Relief, Unemployment Insurance Authorization, and Job Creation Act of 20 aka Tax Relief Act of 20 Two-year fix; will we see a repeat of 20 in 2012? New Estate, Gift and GST Exemptions and Rates Some of the exemptions/rates applied in

2 Estate Planning For and After The Tax Relief Act of 20 What has changed?... Sharpe & Associates, PLLC 4925 Greenville Ave. Suite 675 Dallas, TX Estate Tax $5 exemption and 35% rate began January 1, 20; however Scheduled to go back to $1 in 2013 For deaths in 20, can elect out of estate tax and into carryover basis Must file election Good client contact topic $5 exemption is indexed for inflation in 2012 with 20 as base year 4 2

3 Gift Tax $5 exemption began in 2011 (20 remained $1 ) Scheduled to go back to $1 in 2013 Indexed for inflation in 2012 with 20 as base year 35% began in 20 Reunified with estate tax and GST exemptions in 2011 Enormous impact on sophisticated planning techniques 5 GST Tax $5 exemption (indexed for inflation) began January 1, 20 and 35% rate began January 1, 2011 GST tax rate in 20 was 0%; inclusion ratio is not zero No GST tax on GST transfers, HOWEVER Transfers to a multi-generational trust that also provides for children requires an allocation of GST exemption No GST tax on GST transfers in 20 Direct skips Taxable distributions Taxable terminations 6 3

4 Portability Surviving spouse can use unused exemption of last deceased spouse (remarriage will not remove right, but if new spouse dies, only get that spouse s unused exemption) Surviving spouse gets his/her exclusion amount, PLUS deceased spousal unused exclusion amount Executor must file timely estate tax return for first spouse and make election for survivor to be able to use unused amount Also applies to gifts (but not to GST) 7 Estate Planning For and After The Tax Relief Act of 20 What hasn t changed?... Sharpe & Associates, PLLC 4925 Greenville Ave. Suite 675 Dallas, TX

5 What Wasn t in TRA of 20? Loss of valuation discounting After much discussion since the Clinton administration, valuation discounts on family limited partnerships and LLCs still exist Minimum term for Grantor Retained Annuity Trusts (GRATs) There was tremendous momentum in 2009 and early 20 suggesting a year minimum term on GRATs while part of several bills, it didn t make the final TRA 9 Estate Planning For and After The Tax Relief Act of 20 But wait a minute... Sharpe & Associates, PLLC 4925 Greenville Ave. Suite 675 Dallas, TX

6 Obama Admin 2012 Budget Proposal Return Estate Tax Exemption to $3.5 ; Gift Tax Exemption to $1 Estate/gift tax rate of 45% Make portability provisions permanent Eliminate valuation discounts for FLPs and FLLCs Limit trust duration to 90 years from creation Set minimum GRAT terms to years 11 Estate Planning For and After The Tax Relief Act of 20 How will we plan for the known and unknown?... Sharpe & Associates, PLLC 4925 Greenville Ave. Suite 675 Dallas, TX

7 Planning At All Wealth Levels Bypass Trust and QTIP Planning Most clients won t rely on portability provisions Additional reasons to provide trusts for surviving spouse Will of John Smith At John s Death Estate Tax Exclusion Amount No Estate Tax Remaining Property At John s Death Smith Bypass Trust Income and principal to Jane for HEMS Smith Marital Trust All remaining property other than amount to Smith Bypass Trust All income to Jane at least quarterly Principal to Jane for HEMS 13 Planning At All Wealth Levels Clean up of existing plans ILIT maintenance Obtaining Tax ID #s Documenting loans to family members Clients can t loan money to children at 0% interest rate 14 7

8 Planning At All Wealth Levels Funding of revocable trusts, FLPs and LLCs Avoiding probate and transfer complexity at death More revocable trusts FLPs and LLCs to hold land and oil/gas interests Administration of prior/ongoing estates and trusts 15 Planning At All Wealth Levels Updating beneficiary designations Creditor protection planning Intra-Family Loans? Continues to be a powerful transfer planning tool Client keeps his/her wealth Interest rates are still very low May 2011 S/T 0.56%; M/T 2.44%; L/T 4.19% 16 8

9 Gifting? Reduced estate tax concerns for wealthy families (amazing how the definition of that term changes with legislative updates) General rule is to gift now and gift big Will the gift tax exemption remain $5? Can gift split if one spouse owns all assets Use of lifetime gift exemption concerns Eases concern: Reduces finding balance among gifting use assets to descendants, funding ILITs, seeding money to grantor trusts, etc. Increases concern: Previously, if failed in first $1, there was estate tax exemption remaining at death. Now, you can use it all, so use it wisely! 17 Gifting? $5 Million Client Little or no gifting Possibly some annual exclusion gifting for older clients who fear a lowering of the estate tax exemption $ - $15 Million Client Gifts of annual exclusion amount; funding of 529 plans for children/ grandchildren $25 Million Client Gifting of some/all of $5 exemption, depending on age of client More than ever, clients looking to gift, but still want access to assets 18 9

10 Charitable Giving? $5 Million Client Very little charitable giving as part of estate plan General continuation of annual charitable giving $ - $15 Million Client Estate taxes at this level greatly reduced if $5 estate tax exemption For some clients, $ is enough to leave to children and will leave the rest to charity $25 Million Client Some larger charitable gifts Greater use donor advised funds and charitable lead annuity trusts 19 Life Insurance? $5 Million Client Has always been a part of planning and that will continue at all levels Policies at this level will primarily be used for support purposes Few ILITs $ - $15 Million Client Some life insurance may be purchased to fund estate taxes Still the 2 nd simplest estate planning option (straight gifting is 1 st ) $25 Million Client Larger gift exemption provides more flexibility for the wealthy to fund policies More predictable than other strategies (GRATs, CLTs, etc.) ILITs still a viable option to remove proceeds from estate 20

11 Family Limited Partnerships? $5 Million Client Creditor protection is still at the forefront of estate and financial planning The uses for family limited partnerships will continue to rise consolidation of oil/gas interests, land, rental real estate Implement now it might be difficult for IRS to argue FLP created for tax purposes $ - $15 Million Client and $25 Million Client Creditor protection Discounting of estate Those clients interested in gifting may want to give FLP interests rather than cash 21 GRATs? $5 Million Client The increased exemption has made the GRAT less necessary at lower levels $ - $15 Million Client Generally not applicable at this level, except for those who are entrepreneurs or those who want to dip their toe in the gifting pool (i.e. they are ready to give up current net worth) Interest rates still at extremely low levels which increases chances of GRAT success $25 Million Client At this level, GRATs are still a great option, but most will use some or all of the gift tax exclusion before doing a GRAT Clients may want to implement GRAT soon to avert any change in legislation which will limit GRAT terms 22 11

12 Self Settled Trusts Traditionally established for creditor protection Grantor transfers assets into trust for his/her benefit and retains some rights in the property Trust must be established in state providing self-settled trust protection (Alaska, Delaware, Nevada and South Dakota most popular) Trust must have a Trustee in state where established are creditor protected, but subject to estate taxes PLR created new possibilities Grantor established self-settled trust (in state allowing such trusts) Appointed independent trustee to make distributions to grantor Grantor given no power to appoint assets at death, but beneficiary of trust out of the estate for estate tax purposes 23 Estate Planning For and After The Tax Relief Act of 20 The Soft Issues... Sharpe & Associates, PLLC 4925 Greenville Ave. Suite 675 Dallas, TX

13 Soft Issues Exemption of $5 less people subject to estate taxes Because of TRA 20, estate planning has become less technical and allows for broader discussions of the soft issues Clients are addressing more philosophical questions regarding money 25 Soft Issues Marital Issues Client s second marriage Trustees of surviving spouse s trust Kids marriages What if child already has received money? 26 13

14 Soft Issues Drug Testing More clients focusing on the dangers of mixing addiction and money Provisions can limit distributions to beneficiaries who do not pass regular or special drug tests Powers of Appointment Flexibility vs. Control The more time clients put into designing their estate plans, the less they want spouses and children to change plan 27 Soft Issues Directed Trusts A trust in which the grantor instructs certain powers to be exercised by someone other than the Trustee Investments and Distributions are typical powers Different from a delegated trust where Trustee delegates responsibilities Beneficiary Designations Does client want life insurance proceeds and retirement plan benefits to flow under estate plan? Clients using beneficiary designations as exception to estate plan 28 14

15 Soft Issues - Unitrust What is a Unitrust? Sometimes referred to as a Total Return Trust Unitrust refers to a distribution standard that is a stated percentage of trusts assets distributed to beneficiaries Generally set at between 3% and 5% Removes distribution discretion - if set percentage, the Trustee doesn t make distribution decisions Reduces chances of conflict between Trustee and beneficiaries 29 Soft Issues - Unitrust Who is right client? Client worried about giving too much to children, but doesn t have other options Client wants money to last for successive generations Client wants to pass on a philosophy on money 30 15

16 Soft Issues Trustee Selection Obvious Qualities Good with money Trustworthy Other Qualities to Consider Knowledge of trust accounting and tax planning Discretionary decisions similar to grantor Ability to maintain good relationship with beneficiaries while remaining impartial Will Trustee follow provisions of estate plan? 31 Soft Issues Trustee Selection Child as Trustee Benefits Simple Able to control assets while maintaining protections Removes possible cantankerous relationship between child and outside Trustee regarding distributions Child as Trustee Concerns Child may have previously been in financial trouble may be spent on child s spouse Child may take advantage of discretion Child may loosely give money to charity common 32 16

17 Soft Issues Trustee Selection Surviving Spouse as Trustee Benefits Simple - the common method for bypass and QTIP trusts The couch factor if you don t name the spouse as Trustee, you may sleep on the couch Surviving spouse familiar with spouse s assets Surviving Spouse as Trustee Concerns Do spouses have the same ideals regarding money? Will the surviving spouse follow the estate plan? Are there children from another marriage? What if the surviving spouse remarries? 33 Conclusion PRIME YOUR CLIENTS NOW 20 proved to be difficult to educate and implement strategies for clients because of the unknown It s a great time to clean up estate plans and entities Talk to clients about what they really want the soft issues For larger clients, be ready to make large gifts 34 17

18 Estate Planning For and After The Tax Relief Act of 20 Additional Material... Sharpe & Associates, PLLC 4925 Greenville Ave. Suite 675 Dallas, TX Charitable Lead Trust (CLT) A charitable lead trust is an estate planning strategy (versus a charitable remainder trust which is more of an income tax strategy) Can be implemented during life or at death Can completely eliminate estate taxes Better if client is charitably inclined, but doesn t have to be Many clients (and advisors) view the CLT as better to give money to charity than the IRS this is NOT a fair analogy 36 18

19 Charitable Lead Trust (CLT) removed from the donor s estate by transferring the assets to a charitable lead trust $ $ in in CLAT CLAT $ $ In In No No estate/gift estate/gift tax tax upon upon transfer transfer 37 Charitable Lead Trust (CLT) Charitable beneficiary receives stream of payments for term of trust $ $ in in $697,300 $697,300 Annuity Annuity For For Years Years 6.973% Annuity Payment CLAT CLAT $ $ In In No No estate/gift estate/gift tax tax upon upon transfer transfer Charity 38 19

20 Charitable Lead Trust (CLT) Noncharitable beneficiaries (i.e. children) receive remaining trust principal $ $ in in $697,300 $697,300 Annuity Annuity For For Years Years Charity 6.973% Annuity Payment CLAT CLAT $ $ In In No No estate/gift estate/gift tax tax upon upon transfer transfer At At The The End End Of Of Years Years $14.7 $14.7 Million Million Trusts for Children 39 Charitable Lead Trust (CLT) Donor pays estate or gift tax based upon the present value of the noncharitable remainder interest $ $ in in During During Year Year Period Period $14 $14 Million Million 6.973% Annuity Payment At At The The End End Of Of Years Years $14.7 $14.7 Million Million CLAT CLAT $ $ In In No No estate/gift estate/gift tax tax upon upon transfer transfer Charity Transfer Transfer $ $ PV PV of of Annuity Annuity $ $ Estate/Gift Value $ 0 Estate/Gift Value $ 0 Trusts for Children 40 20

21 Charitable Lead Trust (CLT) Can be used at client s death or during client s lifetime CLT can reduce estate tax exposure, transfer assets to children, and fund charity/private foundation If used at death, a formula can be used to limit amount passing to a CLT (i.e. ½ or ¼ of taxable estate at death) 0% of taxable estate could result in no estate taxes The amount left to a CLT at death can be adjusted during client s lifetime as other strategies are implemented 41 Why CLTs Aren t Used More CLTs keep assets tied up for a long period of time CLT success (i.e. leaving assets to family) depends on market performance low performance, possibly no assets to family Too complicated It may be easier to pay the estate tax and move on or just leave assets directly to charity Too many decisions to make (for client and advisors) Many more decisions to be with a CLT than with a GRAT 42 21

22 CLT Implementation Decisions Decision Term vs. Life-Term? Grantor Trust vs. Non- Grantor Trust? Use Lifetime Gift Exclusion to Fund? Impact/Another Decision Created during life or at death? Client too-old for term? Client in bad health? Does client need/want upfront charitable deduction? How will assets be invested? Annuity/unitrust payments smaller, but CLT may still not be successful 43 Irrevocable Life Insurance Trust (ILIT) Irrevocable trust owns life insurance policy on insured Funded with contributions from grantor ILIT pays insurance premiums At death of insured, insurance proceeds are not included in insured s estate 44 22

23 Irrevocable Life Insurance Trust (ILIT) INSURED Step Step 1 1 Cash ILIT Step Step 2 2 Premiums Proceeds INSURANCE COMPANY Step Step 4 4 No Estate Tax Step Step 3 3 (At Insured s Death) Trust Trust for for Spouse Spouse (and (and Children) Children) for for Rest Rest of of Spouse s Spouse s Lifetime Lifetime No Estate Tax Spouse / Descendants 45 ILIT Benefits Can save 35% (or more) in estate taxes on proceeds Provides liquidity for estate taxes and support Proceeds can be protected from creditors/divorce Success of ILIT easier to predict than other strategies Generally no income tax return no trust income 46 23

24 ILIT Pitfalls Proper consulting is essential BEFORE DRAFTING Beneficiary and Trustee decisions are not obvious Match purpose of trust with purpose of life insurance policy Paying proceeds Community Property v. Separate Property If annual exclusion gifts are used, withdrawal ( Crummey ) notices must be given to trust beneficiaries Survival Issues 3 Year Rule 47 ILIT Community Property Concerns Policy: First-to-Die Purpose: Provide for Surviving Spouse Issue: If community property is contributed to the ILIT, the surviving spouse has retained an interest in the trust property Result: Proceeds possibly included in surviving spouse s estate for estate tax purposes Procedure: Partition community property and contribute insured s separate property to ILIT Community property CAN be contributed to an ILIT which holds only second-to-die policies 48 24

25 Proper Policy? Proper Purpose? Purpose / Type of Policy Provide for surviving spouse (First-to-die policy) Second-to-die policy Term Policy Retirement (i.e. VUL) Use of an existing policy Drafting Issues Insured should not serve as Trustee Can not use community property to pay premiums Who is the beneficiary of the ILIT? Shouldn t be Spouse Administrative burdens worth it? Insured can not be beneficiary of ILIT VUL may not be appropriate unless self-settled Insured must survive 3 years from date of transfer of policy to ILIT 49 Estate Planning For and After The Tax Relief Act of 20 Questions? Sharpe & Associates, PLLC 2006 Sharpe & Associates, PLLC. All Rights Reserved. 25