Prepared and Presented By: Heather Flanagan, J.D., LL.M., TEP Vice President, Senior Wealth Planner Phone: 302-429-2287 Heather.Flanagan@pnc.com PNC Delaware Trust Company 222 Delaware Avenue, 18 th Floor Wilmington, Delaware 19801 The information in this presentation is not intended to provide tax or legal advice. An attorney should be consulted to explain any legal or tax issues addressed in these materials. Because of the generality of this presentation, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal and tax advice from licensed professionals.
Tax Exemptions and Rates 2012 Law 2013 Law Gift tax exemption $5.12 million $1 million Estate tax exemption $5.12 million $1 million Gift and estate tax top rate 35% 55% (60% between $10 million and $20 million) Generation-skipping transfer tax exemption $5.12 million $1.4 million (estimated) GST tax top rate 35% 55% Tax laws are changing. 2013 law is stated as it is at the time this presentation was made. Please consult with your attorney regarding any future changes 1
Planning Opportunity for 2012 If Mr. Clark wanted to make a gift of $5.12 Million this year to a trust, he would not owe any federal gift taxes. Florida currently does not have a gift tax and so gift tax would also not be payable at the state level. If married, the Clarks could gift $10.24 Million. Mr. Clark Completed Gift Transfer Can Pay Income Tax on Income of Trust Tantamount to an Additional Tax Free Transfer Irrevocable Trust Assets are not in Mr. Clark s Estate Mr. Clark would eliminate tax on the appreciation of the assets in the trust. Eliminate future estate tax on $5.12 million ($10.24 Million if married and gifts are split). Transfer appreciating property outside of estate. Transfer additional amounts gift tax free by paying trust income tax. Tax cost to Mr. Clark for transferring $5.12 million or to Mr. and Mrs. Clark for transferring $10.24 million in 2012 = $0 2
If No Planning in 2012 Mr. Clark (single) If Mr. Clark dies with $5.12 million in his estate in 2013 Estate Tax Exemption would only be $1 million and the Florida pickup tax would apply as it did prior to 2002 with the amount of the tax being tied to the amount of the now restored Federal credit for state death taxes. Estate Net Estate Tax after application of the unified credit and state death tax credit Florida State Death Tax: $5,120,000 $1,705,800 $ 405,200 Amount of Mr. Clark s Estate Going to his Children: Tax Cost to Mr. Clark s Estate in 2013: $3,009,000 $2,111,000 3
If No Planning in 2012 Mr. and Mrs. Clark Assume Mrs. Clark dies in 2013 leaving everything to Mr. Clark and Mr. Clark then dies with $10.24 million in his estate in 2013 Estate Tax Exemption would only be $1 million and the Florida pick up tax would apply as it did prior to 2002 with the amount of the tax being tied to the amount of the now restored Federal credit for state death taxes. Estate Net Estate Tax after application of the unified credit and state death tax credit Florida State Death Tax: $10,240,000 $3,833,800 $1,105,200 Amount of Mr. Clark s Estate Going to his Children: Tax Cost to the Clark s estates in 2013: $5,301,000 $4,939,000 4
Enhanced Features Using Delaware Dynasty Tax free compounding for future generations Increased Privacy and Confidentiality Direction Split duties of fiduciaries Creditor Protection Asset Protection Trusts Delaware s Court of Chancery History of Administering Trusts These features can be layered on top of Dynasty and Tax Planning benefits to supercharge an estate plan Florida s Trust law is based on the Uniform Trust Code (UTC) 5
Dynasty Planning Tax Reform Act of 1986 - introduced a transfer tax on generationskipping transfers (GST). There currently is a $5,120,000 exemption for GST taxes. Note The estate, gift and GST tax exemptions are scheduled to sunset to $1 Million at the end of this year. GST-exempt (Dynasty) Trust - avoids the huge bite of transfer taxes at each generation. Delaware Abolished Its Rule Against Perpetuities in 1995. Florida Fla. For trusts created after December 31, 2000, there is a 360 year limit for trusts to exist. Stat. 689.225(2)(f). 6
Dynasty Planning Leveraged Exemptions Current Federal law allows for family members to use valuation discounts to leverage gifts of closely held entities. Business Owner Keeps 5% Voting $7 M of Assets 95% Non Voting LLC Interest Family LLC 5% Voting LLC Interest Dynasty Trust Gift $6,650,000 Value with Non Voting LLC interest using $4,655,000 of exemption (assuming a 30% entity level discount)* Apply Estate/Gift and GST Tax Exemptions * Discounts, for tax purposes, must be determined by a business valuation expert Proposed Federal legislation could limit valuation discounts for family businesses. Proposed Federal legislation could also limit exempt trusts to a 90 year term, thereby eliminating (for Generation-Skipping Transfer Tax purposes) dynasty planning with perpetual trusts. 7
Privacy and Confidentiality Delaware - Ability to Limit Disclosure of Beneficial Interest 12 Del. C. 3303(a) the terms of a governing instrument may expand, restrict, eliminate, or otherwise vary the rights and interests of beneficiaries, including, but not limited to, the right to be informed of the beneficiary's interest for a period of time Florida Duty to Inform and Account Fla. Stat. 736.0813 The Trustee must give notice to the qualified beneficiaries (living persons who are current beneficiaries, intermediate beneficiaries and first line remainder beneficiaries whether vested or contingent) within 60 days after accepting the trust or the trust becomes irrevocable: Trust s existence Identity of the Settlor Right to Request a Copy of the Trust Instrument Right to Accountings Fiduciary Lawyer-Client privilege applies to Trustee and any attorney employed by the Trustee Florida law does allow for a designated representative to get the notice. Fla. Stat. 736.0306 8
Direction Statute Delaware Allows a Grantor residing anywhere to take advantage of Delaware s beneficial trust laws by naming a Delaware Trustee who is responsible for the details of trust administration. Flexibility to name specific advisors to carry out specialized actions within the trust. Florida Enacted a directed trust statute July 1, 2008 Fla. Stat. 736.0703(9). Trustee still holds some oversight responsibility If Trustee has actual knowledge of advisor s willful misconduct, there may be some liability. 9
Direction Trusts - Delaware Open Architecture Special Business Advisor Insurance Advisor Distribution Advisor Delaware Trust Delaware Trustee Assets: Equities, Fixed Income, Closely Held Businesses, Insurance and Alternatives Trust Protector Investment Advisor Investment Consulting Firm hired by Investment Advisor provides manager oversight and consolidated performance measurement reporting Equities Managed by Third Party Manager Fixed Income Manager Alternatives (Hedge Funds and Private Equity) 10
Self Settled Spendthrift Trusts Delaware Enacted its Qualified Dispositions in Trust Act in 1997. 12 Del C. 3570 et. seq. Florida Does not currently have a similar statute. Currently 14 states with Domestic Asset Protection Laws: Alaska, Colorado, Delaware, Hawaii, Missouri, Nevada, New Hampshire, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia and Wyoming. 11
Delaware Asset Protection Trusts (DAPTs) There is an amount of flexibility allowed in DAPTs Grantor may retain a variety of powers Structuring Delaware Asset Protection Trusts 1. Completed gift/grantor trust 2. Completed gift/non-grantor trust 3. Incomplete gift/grantor trust 4. Incomplete gift/non-grantor trust Grantor All income, losses and credits of the trust will continue to be taxed to the Grantor Completed Gift Transfer is subject to transfer tax Delaware DING Trusts Non-Grantor Grantor is not taxed on trust income Incomplete Gift Transfer is not subject to transfer tax 12
Asset Protection Delaware Asset Protection Trusts Qualified Dispositions in Trust Act (1997) Grantor can transfer assets to an irrevocable trust and be a possible beneficiary of that trust. May be appealing to Grantors who are reluctant to use their full exemption amounts this year if they are worried that they may need those assets in the future. Possible strategy for premarital planning. Planning strategy to keep family businesses and family wealth in the family. Avoid Fraudulent Transfers to Trust Proper due diligence performed by the drafting attorney. Review assets and set up realistic expectations by the drafting attorney. Transfer a portion of Grantor s assets depending on the facts of each situation and the advice of legal and accounting advisors. The trust should be considered a nest egg (that is, not used for current distributions). Exception Creditors 13
Delaware Asset Protection Trusts Grantor may retain a wide variety of powers In a DAPT, the Grantor may retain the following powers: Veto a distribution from the trust. Have a limited power of appointment exercisable by will or other written instrument by the Grantor effective only upon the Grantor s death. Exception is: the power to appoint to the Grantor, Grantor s creditors, the Grantor s estate or the creditors of the Grantor s estate. Rights to income. Rights to income or principal from a charitable remainder unitrust or charitable reminder annuity trust and the right to release such interest in whole or in part to the charitable organization with a succeeding beneficial interest in the trust. Rights to income or principal from a grantor retained annuity trust (GRAT) or grantor retained unitrust (GRUT) or receipt of up to 5% of the initial value of trust assets or their value. Rights to principal if within the Trustee s discretion and pursuant to a distribution standard. Right to remove a trustee or adviser and to appoint a new trustee or adviser. Right to use property held under a qualified personal residence trust (QPRT) or posses a qualified annuity interest. Right to income or principal to pay income taxes due on trust income if within Trustee s discretion or pursuant to a mandatory direction or pursuant to an adviser s discretion. Ability of Trustee to pay Grantor s debts outstanding at Grantor s death, and expenses of administering the Grantor s estate including estate or inheritance taxes. 14
Opportunity - Asset Protection and Premarital Planning Business Owner Doctor Director Inherited Wealth Completed Gift Transfer Delaware Asset Protection Trust Transfers a portion of the Grantor s net worth to protect as a nest egg Uses marketable securities to fund the trust Makes the transfer with no known creditors and in advance of the wedding date Does not need to disclose assets to fiancé, unlike a premarital agreement Protects assets in the event of a divorce or lawsuit 15
Business Succession with Confidentiality EXAMPLE: Mom and Dad are Making Use of their Estate Tax Exemptions by setting up an irrevocable trust to benefit their daughter and son. Daughter is about to get divorced and they do not want her to share information about the family s wealth with their son-in-law. Son is a spendthrift and unsure of what he wants to do with his life. He is also about to get married and his fiancée is reluctant to sign a prenuptial agreement. 16
Business Succession with Confidentiality cont. GRANTORS: (Mom and Dad) Transfer to Trust Not treated as a taxable sale for income tax purposes Mom and Dad pay the income tax, further depleting their taxable estates A toggle switch can be drafted to turn off Grantor trust status in the future if Mom and Dad no longer wish to pay income tax on the Trust s income Mom and Dad can freeze the value of their estates, in part preventing future appreciation on the Trust s assets from accumulating in their estates Assets in the Trust are safe from Mom s and Dad s creditors and protected for beneficiaries. Provisions can also be included to protect beneficiaries from creditor s claims including a divorcing spouse. This technique can be used to gradually transition a business to the next generation while maintaining control over the business and having time to mentor the children for the responsibility of running the company. The children do not need to be told about the Trust until a future date determined by the grantor. $10M Gift Sale of $90M of Business Stock Note at low interest rate 17 TRUST: Not in Grantors Estates for Estate Tax Purposes. Grantors pay income tax on trust assets allowing trust to grow without reduction for income tax.
Creditor Protection - Tenancy by the Entireties Jim and Jane are married, live in Florida and want to establish a revocable trust as part of their estate plan. They are both in high liability professions and have always held their joint assets as tenancy by the entireties. However, they are concerned that if they put their jointly held assets in a Florida revocable trust, those assets will lose their tenancy by the entireties protection. Transferring those assets to a revocable trust effectively breaks the character of those assets and each of them would hold a tenancy in common interest in the asset in the trust. Jim and Jane can each set up either a revocable or an irrevocable Delaware trust to hold their tenancy by the entireties properties and not lose the creditor protection afforded by Florida statutory law. If a creditor tries to satisfy a claim against one of them from the assets in their trusts, the creditor will be limited to an order by the Delaware Court of Chancery to distribute the assets back to Jim and Jane as tenancy by the entireties property. GRANTOR Husband TBE Assets DELAWARE TRUST Claim Husband s Creditor GRANTOR Wife TBE Assets DELAWARE TRUST Claim Wife s Creditor 18
Decanting Statute Delaware Delaware s decanting statute allows the Grantor to name an advisor who can move the Delaware trust to another jurisdiction without court intervention if another jurisdiction is a better fit in the future. Florida Florida s decanting statute is found at Fla. Stat. 736.04117 enacted July 1, 2007. Common Law Phipps v. Palm Beach Trust Co., 142 Fla. 782, 196 So. 299 (1940). Supreme Court of Florida held that a trustee could invade trust property by paying it over to another trust for the beneficiary of the original trust. Trustee s discretionary distribution authority is comparable to a special power of appointment in favor of the beneficiaries of the trust. 19
Moving Existing Trusts to Delaware What contacts does trust have with other states? What needs to be done to sever ties with other states? Judicial Non-judicial allowed in Florida under Fla. Stat. 736.0111 Caution regarding tax issues QTIP trusts GST exempt trusts Establish situs in Delaware Appoint a Delaware Trustee Decant assets to a Delaware Trust Reform the Trust by Court Petition 20
Compare Delaware to Other States Other states have, or are establishing, beneficial trust laws including: Alaska, Nevada and South Dakota, to name just a few. However, Delaware has the Delaware Chancery Court and a long history maintaining beneficial trust law for Delaware situs trusts. 21
Delaware vs. Alaska History: Delaware (Over 200 years of trust friendly laws) (1899) Alaska 1997 first beneficial trust laws enacted Delaware is in the Top Tier for Financial Soundness (Good, Bad and Ugly: Barron s Looks at the State of the States, Barron s, Aug. 29, 2011). Alaska rated in second tier Ranked Number One Court System as rated by the US Chamber of Commerce State Liability Systems Ranking Study every year since inception (December 2001- January 2012) Alaska s has ranked between 13 th and 43 rd (2012 13 th ) Access to Educated Trust Professionals 40 million within 150 miles Alaska 450,000 within 150 miles of Anchorage Trust Businesses 53 (as of February 2011) Alaska - 5 Information Taken From: A Comparison of the Leading Trust Jurisdictions by Jocelyn Margolin Borowsky, Esq. and Richard W. Nenno, Esq., Tax Management Estates, Gifts, and Trusts Journal, 37 EGTJ 233, 07/12/2012. 22
Delaware vs. Nevada History: Delaware (Over 200 years of trust friendly laws) (1899) Nevada 1999 first beneficial trust laws enacted Delaware is in the Top Tier for Financial Soundness (Good, Bad and Ugly: Barron s Looks at the State of the States, Barron s, Aug. 29, 2011). Nevada rated in third tier Ranked Number One Court System as rated by the US Chamber of Commerce State Liability Systems Ranking Study every year since inception (December 2001- January 2012) Nevada s has ranked between 28 th and 40 th (2012 37 th ) Access to Educated Trust Professionals 40 million within 150 miles Nevada 2.5 million within 150 miles of Las Vegas Trust Businesses 53 (as of February 2011) Nevada- 18 Information Taken From: A Comparison of the Leading Trust Jurisdictions by Jocelyn Margolin Borowsky, Esq. and Richard W. Nenno, Esq., Tax Management Estates, Gifts, and Trusts Journal, 37 EGTJ 233, 07/12/2012. 23
Delaware vs. Nevada Rule Against Perpetuities Nevada s law may be invalid because Nevada s Constitution continues to contain the following prohibition: No perpetuities shall be allowed except for eleemosynary purposes. Unlike Delaware, Nevada permits trustors to create new unitrusts only as APTs and that provision might not satisfy the Treasury Department s safe harbor because a trust may set the distribution amount below 3% or above 5%. Unlike Delaware, Nevada does not have a statute that allows testators and trustors to establish perpetual noncharitable purpose trusts. Asset Protection Trusts: Fraudulent Transfer issues arise at the time of trust creation. If the trust is properly created, it does not matter what the statute of limitations is. If the statute of limitations is important, an offshore trust may be preferred. Nevada s limitations period will not apply if the debtor ends up in bankruptcy. Oshins ranking of DAPT jurisdictions weighing 30% of the ranking based on the fact that Delaware has exception creditors for items such as child support or maintenance and Nevada does not, may be focusing weight on items that are not as practical as considering the differences between each jurisdiction s court system. Information Taken From: A Comparison of the Leading Trust Jurisdictions by Jocelyn Margolin Borowsky, Esq. and Richard W. Nenno, Esq., Tax Management Estates, Gifts, and Trusts Journal, 37 EGTJ 233, 07/12/2012. 24
Disclosure The following disclosure is made in accordance with the rules of Treasury Department Circular 230 governing standards of practice before the Internal Revenue Service: Any description pertaining to federal taxation contained herein is not intended or written to be used, and cannot be used by you or any other person, for the purpose of (i) avoiding any penalties that may be imposed by the Internal Revenue Code, and (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. PNC Financial Services Group, Inc. ( PNC ) uses the names PNC Wealth Management, PNC Institutional Investments and Hawthorn PNC Family Wealth SM to provide investment and wealth management, fiduciary services, FDIC-insured banking products and services and lending of funds through its subsidiary, PNC Bank, National Association, which is a Member FDIC, and uses the names PNC Wealth Management and Hawthorn PNC Family Wealth SM to provide certain fiduciary and agency services through its subsidiary, PNC Delaware Trust Company. "PNC Wealth Management" and "PNC Institutional Investments" are registered trademarks and "Hawthorn PNC Family Wealth" is a service mark of The PNC Financial Services Group, Inc. This report is furnished for the use of PNC and its clients and does not constitute the provision of investment, legal or tax advice to any person. It is not prepared with respect to the specific investment objectives, financial situation or particular needs of any specific person. Use of this report is dependent upon the judgment and analysis applied by duly authorized investment personnel who consider a client s individual account circumstances. Persons reading this report should consult with their PNC account representative regarding the appropriateness of investing in any securities or adopting any investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. The information contained in this report was obtained from sources deemed reliable. Such information is not guaranteed as to its accuracy, timeliness or completeness by PNC. The information contained in this report and the opinions expressed herein are subject to change without notice. PNC does not provide legal, tax or accounting advice. Past performance is no guarantee of future results. Neither the information in this report nor any opinion expressed herein constitutes an offer to buy or sell, nor a recommendation to buy or sell, any security or financial instrument. Accounts managed by PNC and its affiliates may take positions from time to time in securities recommended and followed by PNC affiliates. Securities are not bank deposits, nor are they backed or guaranteed by PNC or any of its affiliates, and are not issued by, insured by, guaranteed by, or obligations of the FDIC, or the Federal Reserve Board. Securities involve investment risks, including possible loss of principal. 2012 The PNC Financial Services Group, Inc. All rights reserved. 25