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 TUESDAY, JUNE 16, 2015 1pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Michael T. Clear, Partner, Wiggin and Dana, Greenwich, Conn. Laura French, J.D., LL.M. in Taxation, Founder, French Law Group LLC, Conyers, Ga. Stephen M. Worrall, Attorney, The Manely Firm, Marietta, Ga. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.
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ESTATE PLANNING WITH EDUCATION TRUSTS AND 529 PLANS June 16, 2015 Steve Worrall The Manely Firm, P.C. 211 Roswell Street Marietta GA 3060 770-421-0808 steve@allfamilylaw.com www.allfamilylaw.com www.georgiafamilylaw.com Material in this PowerPoint is drawn in part from Incorporating Education Trusts and 529 Plans in in Estate Plans, by Gregory Herman-Giddens 2013, and Estate Planning with Education Trusts and 529 Plans, by Robert Deschene 2013. Used with permission for educational purposes. All rights reserved.
Advantages of Education Trusts Types of educational funding vehicles Non-Trust Coverdale Education Savings Accounts Custodial Accounts (under UGMA or UTMA) 529 Plans Trust 2503(c) Trusts (or Minor s Trusts ) Tuition-Only Trusts (Health & Education Exclusion Trusts or HEET Trusts) Crummey Trusts 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%) 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., 39.6% in 2015 for income over $12,300) 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) 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% 10
Advantages of Education Trusts Advantage 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 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 (that is, 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 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 13
Advantages of Education Trusts Crummey Trust Named after D. Clifford Crummey, the first taxpayer to use this kind of trust successfully. May be used for gifts to beneficiaries of any age. Any time you give property to the trust, the beneficiary must have the right to withdraw the contribution during a brief window (typically 30 or 60 days). If the beneficiary does not withdraw the property, the gift becomes final and is locked in the trust until the trust terminates. The right to withdraw the contribution converts it into a present interest, thereby ensuring that the gift qualifies for the gift tax exclusion. 14
Advantages of Education Trusts Benefits of a Crummey Trust: The beneficiary has no right to receive the property at age 18 or 21, unlike 2503(c) Minor's Trusts or UGMA/UTMA accounts. The trust continues for as long as specified in the trust agreement. The trust can be established for multiple beneficiaries, including beneficiaries who have already reached age 21. Although the beneficiary has the right to withdraw any contribution, few beneficiaries will exercise this right because they know that the donor could stop giving future contributions. 15
Advantages of Education Trusts Benefits of Crummey Trust, cont d The maximum amount the beneficiary can withdraw is the annual contribution, not the entire trust. Once the beneficiary has waived his right to withdraw a particular contribution, control over the contribution rests with the trustee. The trustee has the right to make distributions from the trust for the benefit of the beneficiary. Although the trust has a separate taxpayer identification number and files an annual tax return, the beneficiary must in most cases pay income tax on the trust's income. 16
Advantages of Education Trusts Disadvantages of Crummey Trusts: High setup and administration costs. The annual waiver must be in writing. The trust is treated as an asset of the child for financial aid purposes (high impact). If the donor acts as a trustee, the trust will be included in the donor's gross taxable estate. It is best if the trustee is someone other than the donor or the donor's spouse. There is a chance that the beneficiary will not cooperate. 17
Steve Worrall Steve (Stephen M.) Worrall helps parents of minor children plan for the unthinkable, from a parent's perspective. He is the senior estate planning, probate and adoption attorney at The Manely Firm, P.C., with offices in Marietta, Atlanta, Canton, Lawrenceville and Savannah. He is an experienced wills, trusts and estate planning attorney, probate lawyer and adoption attorney in Marietta, Georgia. He concentrates his practice in all areas of estate planning including wills, trusts, probate, special needs planning and guardianship, and adoption and other areas of family law, including prenuptial agreements, postnuptial agreements and collaborative divorce law. 18
Advantages of Education Trusts Contact Info: Steve Worrall The Manely Firm, P.C. 211 Roswell Street Marietta GA 3060 770-421-0808 steve@allfamilylaw.com www.allfamilylaw.com www.georgiafamilylaw.com 19
Estate Planning with Education Trusts Michael T. Clear June 16, 2015
2015 Wiggin and Dana LLP Estate Planning with Education Trusts Structuring Education Trusts Why Use a Trust: Tax Planning Management of Assets Control Asset Protection Incentives Flexibility 21
2015 Wiggin and Dana LLP Estate Planning with Education Trusts Structuring Education Trusts Lifetime Planning Tax planning Incentive for family to save Testamentary Planning Rising exemptions require less estate tax planning 22
2015 Wiggin and Dana LLP Estate Planning with Education Trusts Structuring Education Trusts Trusts for a Specific Individual Trusts for Children Trusts for Descendants 23
2015 Wiggin and Dana LLP Estate Planning with Education Trusts Structuring Education Trusts Trust Provisions Specific Education IRC Section 2041 and 2514 Complete Discretion 24
2015 Wiggin and Dana LLP Estate Planning with Education Trusts Structuring Education Trusts Level of education Room and board, fees, supplies, tutoring, transportation, study abroad Incentives: GPA Majors Time Period Bonus at completion of certain achievements Failure of conditions? 25
2015 Wiggin and Dana LLP Estate Planning with Education Trusts Structuring Education Trusts Health Education Exclusion Trusts IRC 2503(c) exempts direct payments for tuition/healthcare from GST HEET Trusts do not require allocation of GST Tuition only or include medical payments Charitable inclusion to avoid GST taxable termination Can be used for primary or secondary education Can own 529 Plans 26
2015 Wiggin and Dana LLP Hot Topics in Estate Planning Trust Owned 529 Plan 2008 IRS Advance Notice of Proposed Rulemaking Proposal Prohibits trust ownership of 529 Plans Only transfer by current account owner treated as basis 27
2015 Wiggin and Dana LLP Estate Planning with Education Trusts Trust Owned 529 Plan Trust owned 529 Plan is an investment decision by the Trustee Existing trust assets will need to be liquidated in order to invest in a 529 plan Trust is named as the participant of the 529 plan A specific person is named as the Beneficiary of the 529 plan Trusts with multiple beneficiaries may require multiple plans 28
2015 Wiggin and Dana LLP Estate Planning with Education Trusts Trust Owned 529 Plan Specific authorization in the trust agreement Review of distribution provisions in the trust agreement Review 529 plan and process for changes to the beneficiary of the plan Consider income tax savings and whether or not such savings outweigh the possible penalty 29
2015 Wiggin and Dana LLP Estate Planning with Education Trusts Michael T. Clear Michael T. Clear is a partner in Wiggin and Dana's Private Client Services Department. Michael focuses his practice on estate planning, estate and trust administration, probate litigation and business succession planning. He guides fiduciaries and beneficiaries through estate settlement and trust administration matters. His estate and trust administration practice often intertwines with his probate litigation practice where he advises clients in will and trust construction cases, contested accounting proceedings, fiduciary removal proceedings, payment of unpaid claims and conservatorship and guardianship matters. Michael received his J.D. magna cum laude from the Quinnipiac University School of Law. mclear@wiggin.com 203-363-7675 30
2015 Wiggin and Dana LLP Hot Topics in Estate Planning Wiggin and Dana Wiggin and Dana LLP is a full-service law firm of approximately 150 lawyers with six offices in the Northeast, including Greenwich, Stamford, New Haven and Hartford, Connecticut, as well as New York and Philadelphia. Since its founding in 1934, the Firm has served the legal needs of entrepreneurs, corporate executives and other wealthy individuals and their families, as well as charitable and educational institutions, emerging companies, middle market business organizations and Fortune 500 corporations. 31
ESTATE PLANNING WITH EDUCATION TRUSTS AND 529 PLANS TAXES, TAXES, TAXES Laura French, J.D., LL.M. in Taxation French Law Group, LLC The Mom Lawyer 921 Commercial Street NE, Conyers, GA 30013 770-648-6239 lfrench@frenchlawgroup.com
Laura French, J.D., LL.M in Taxation Wills, Trusts & Estates Attorney Corporate and Business Law LL.M. in Taxation Frequent Speaker on Variety of Topics lfrench@frenchlawgroup.com @frenchlawgroup or @themomlawyer on Twitter French Law Group, LLC and The Mom Lawyer on FB FRENCH LAW GROUP, LLC 33
Education Trusts and 529 Plans IRC 2503(c) 529 Plans Ways to pass enormous wealth to future generations while avoiding estate, gift, and some income tax FRENCH LAW GROUP, LLC 34
2503(c) Minor s Trusts Irrevocable Trust for Minor Child One Beneficiary per Trust Must meet 2503(c) rules carefully observe No substantial restrictions on TTE ability to make distributions Income and Principle Distributions Discretionary available) Undistributed Income is taxed at Trust Tax Rate Trust Assets belong to Child at Age 21 (must be FRENCH LAW GROUP, LLC 35
IRC 2503(c) Qualifies for gift tax exclusion ($14000/ year/ person/ beneficiary) No gift tax or GST if tuition payments are made to an educational institution All education levels permitted (not just higher education - WINNING) May contain provision to allow assets to stay in trust at beneficiary s discretion upon age 21 FRENCH LAW GROUP, LLC 36
IRC 2503(c) Gifts qualify for annual exclusion * Trustee discretion to make distributions of income and principal from the trust to the child or for the child s benefit until the child attains the age of 21; * Beneficiary permitted to withdraw the entire balance of the trust at age 21; * Beneficiary dies before age 21, balance of the trust must be payable to the beneficiary's estate or must pass according to a general power of appointment of the beneficiary. FRENCH LAW GROUP, LLC 37
IRC 2503(c) Age 21 window of withdrawal No withdrawal trust continues for period specified Donor may not be TTE if Donor desires exclusion from gross estate FRENCH LAW GROUP, LLC 38
529 PLANS Adopted by Congress in 1996 1999: $5.75 billion invested in 529 plans 2014: $244 billion invested in 529 plans WHY? TAX SAVINGS Investment Growth FRENCH LAW GROUP, LLC 39
529 PLANS Tax Benefits to Investor Contributing After-Tax Dollars Gift Tax Exclusion ($14000/ annually or 5 year plan) Estate Tax Exclusion Growth is not subject to taxation Distributions are not subject to taxation Qualified Higher-Education Expenses Tuition, Fees Room, Board Computers, similar supplies DISTRIBUTIONS: TAX FREE TO INVESTOR AND RECIPIENT FRENCH LAW GROUP, LLC 40
529 PLANS IRC 529(c)(1) No amount shall be includible in gross income of a designated beneficiary under a qualified tuition program No amount shall be includible in gross income of a contributor to a qualified tuition program on behalf of a designated beneficiary with respect to any distribution or earnings under such program FRENCH LAW GROUP, LLC 41
529 PLANS WEALTH TRANSFER Aging Grandparents of 4 children $14,000 x 2 = $28,000 per grandchild per year $28,000 x 4 = $112,000 per year Assume grandchildren these ages: 4 (14 years gifting) = 392,000 7 (11 years gifting) = 196,000 10 (9 years gifting) = 252,000 10 (9 years gifting) = 252,000 *** Great use of RMDs *** Watch State Limits FRENCH LAW GROUP, LLC 42
529 PLANS Other Features of 529 plans Limited reporting Only if annual gift tax exceeded Only if withdrawals taken (like an IRA) Investor has control over assets during growth Can be directed to another beneficiary Can be withdrawn Some states allow contributions to be deducted (check jurisdiction) Income tax impact varies among states Coordination with other Tax Credits American Opportunity Tax Credit ($2500 of $4000) o Must be deducted from total expense o Example: $20,000 in tuition - $4000 AOTC = $16,000 in qualified 529 expenses FRENCH LAW GROUP, LLC 43
529 PLANS PENALTIES 10% n/a if due to AOTC or excess distributions due to scholarships Plus taxes if non-qualified expense STATE LAW Some States do have tax on 529 plans double check to ensure compliance FRENCH LAW GROUP, LLC 44
529 PLANS & STATE LAW http://www.savingforcollege.com/compare_529_plans/?pl an_question_ids%5b%5d=85&page=compare_plan_questi ons Examples: Alabama: Non-Alabama 529 plan distributions are not income tax exempt Georgia: Non-qualified distributions go on the account owner s income tax return, not return of investor or beneficiary return FRENCH LAW GROUP, LLC 45
529 PLANS AND RLTs Transferring a 529 to an RLT: Allows you to have certainty with successor TTE Ensure funds are used for B (and not by subsequent owner who would have original owner powers to withdraw) Authorize TTE to withdraw for other non-education purposes (subject to tax, but could be useful) Spendthrift Language FRENCH LAW GROUP, LLC 46
529 PLANS and RLTs RLT ownership of 529 plan avoids individual ownership Trustee manages RLT/ 529 plan under fiduciary duty FRENCH LAW GROUP, LLC 47
529 PLANS Bonus Trivia Excess Funds: Can be held by Owner Can be used by Owner (penalties apply) Distributed to Beneficiary/ Income shifted to lower bracket Leave funds for future generations FRENCH LAW GROUP, LLC 48