Transcript ILITs, SLATs, GRATs, and Other Four-Letter Words

ILITs, SLATs, GRATs, and
Other Four-Letter Words
Presented by:
Julius H. Giarmarco, J.D., LL.M.
Giarmarco, Mullins & Horton, P.C.
101 W. Big Beaver Road, 10th Floor
Troy, Michigan 48084
(248) 457-7200
[email protected]
www.disinherit-irs.com
Introduction
 The federal estate tax is only vulnerable to lifetime
gifting.
 And there are generally three types of gifts you can
make:
 Gifts of life insurance.
 Gifts that shift or reduce value.
 Gifts to charity.
Estate, Gift and GenerationSkipping Tax Exemptions
 Increased estate, gift and GST tax exemptions.
 Lower estate, gift and GST tax rates.
Estate Tax
Exemption
Gift Tax
Exemption
Estate/Gift Tax
Rate
GST Exemption
Annual Gift Tax
Exclusion
2012
$5.12 million
$5.12 million
35%
$5.12 million
$13,000
2013
$1 Million
$1 million
55%
$1 million
$13,000
Year
Under current tax law, surviving spouses of decedents who die in 2011 or 2012
may use the unused federal estate and gift tax exemptions of their deceased
spouse.
Four Basic Techniques to
Minimize Your
Estate Tax Liability
1. Pay for your grandchildren’s education. Tuition paid
directly to an educational organization is exempt from
gift tax.
2. Pay your grandchildren’s medical bills. Medical bills
paid directly to the provider are exempt from gift tax.
3. Gift cash. Up to $13,000 ($26,000 for couples) per
recipient can be gifted without gift tax each year.
4. For people with more than $5.12 million in assets,
start gifting it before 12/31/2012.
Use of $5.12 Million
Gift Tax Exemption
Can you afford to give it all away?
Is spousal access important?
Outright or in trust?
Dynasty trust and GST exemption.
Leveraging the gifts – FLLCs – discounts
are still alive!
May not be here after 2012 – sunset.
Eight Advanced Techniques to
Minimize Your
Estate Tax Liability
1.Dynasty Trusts.
2.Irrevocable Life Insurance Trusts
(ILITs).
3.Spousal Lifetime Access Trusts
(SLATs).
4.Family Limited Liability Companies
(FLLCs).
Eight Advanced Techniques to
Minimize Your
Estate Tax Liability
5.Grantor Retained Annuity Trusts
(GRATs).
6.Intentionally Defective Grantor Trusts
(IDGTs).
7.Qualified Personal Residence Trusts
(QPRTs).
8.Zero Estate Tax Plans.
Dynasty Trust –
Overview of Technique
Dynasty Trust
Grantor
No transfer tax paid.
Discretionary Distributions
to Children for Life
Advantages
•Creditor protection
•Divorce protection
•Estate tax protection
•Dispositive plan protection
•Spendthrift protection
•Consolidation of capital
No transfer tax paid.
Discretionary Distributions
to Grandchildren for Life
No transfer tax paid.
Discretionary Distributions
to Great-Grandchildren
for Life
No transfer tax paid.
Future Generations
Dynasty Trust vs.
35% Estate Tax Every 30 Years
$1 Million
After-Tax Growth
Value of Dynasty
Trust After 120
Years
Value of Property if
No Trust
3.00%
$34,710,987
$6,196,128
4.00%
$110,662,561
$19,753,959
5.00%
$348,911,561
$62,282,970
6.00%
$1,088,187,748
$194,248,314
7.00%
$3,357,788,383
$599,386,213
8.00%
$10,252,992,943
$1,830,223,321
9.00%
$30,987,015,749
$5,531,375,980
10.00%
$92,709,068,818
$16,549,148,216
Irrevocable Life Insurance Trusts
(“ILITs”)
ILITs
Life insurance trusts remain a key
planning tool.
Increased exemptions provide
additional opportunities.
An ILIT will typically be designed as
both a grantor trust and a generationskipping trust.
ILITs
Structure of the ILIT
1. Gift
Grantor
2. Crummey Letter
Trust
3. Pay Premiums
Life
Insurance
Company
4. Pay Death
Proceeds
6. Distribute Assets
Trust
Beneficiaries
5. Loan Money to or
Purchase Assets from Estate
Estate
Spousal Lifetime Access Trusts
(“SLATs”)
SLATs
Grantor
Gifts $5.12M
Spousal Lifetime Access Trust
$5.12M
Spouse
Children
Grandchildren
Beneficiaries receive income and principal as needed for health, education,
maintenance and support, with spouse being the primary beneficiary and initial
trustee. Thus, grantor maintains “indirect” access to the trust assets. Trust
property passes – estate tax free – as it passes from one generation to the next
for the maximum period permitted under state law.
Family Limited Liability
Companies (“FLLCs”)
FLLCs
Design:
 Donor transfers assets to LLC in exchange for
voting and non-voting membership interests.
 Donor retains control of the LLC as manager.
 Donor transfers non-voting membership interests
to younger generation (either outright or in trust).
FLLCs
Benefits:
 Transfers ownership while allowing donor to
retain control.
 Leverages gift and estate tax exemption due to
valuation discounts applied to non-voting
membership interests for lack of control and lack
of marketability.
 Provides centralized management of family
assets.
FLLCs
Benefits:
 Provides protection from creditors and protection
from spouses in divorce.
 Permits easy division of assets (such as real
estate) to facilitate annual gifting.
 Flexible – operating agreement can be modified.
 Donor can retain income stream via
management fees paid to manager.
FLLC Flowchart
Family Limited Liability Company
Step 1
Donor
Assets
Step 2
Step 2
1% Voting
Membership Interest
(Control Interest)
99% Non-Voting
Membership Interest
Donor
Donor
Step 3
Gifts of
Membership
Interests to Heirs
or Trusts for Heirs
Grantor Retained Annuity Trusts
(“GRATs”)
GRATs
 A GRAT is an irrevocable trust in which a grantor
transfers property for the benefit of one or more
beneficiaries and retains an annuity interest for a
term of years.
 Each year the GRAT will pay the grantor a fixed
annual annuity, as defined by the terms of the Trust.
GRATs
 The amount of the taxable gift for transfer tax
purposes is the Fair Market Value of the property
transferred minus the value of the grantor’s retained
annuity interest.
 The GRAT may be structured so that the grantor’s
retained annuity’s actuarial value is almost equal to
the value of the property transferred, therefore
resulting in little gift tax consequences.
 At the end of the GRAT term, any remaining property
in the GRAT passes to the remainder beneficiaries
with no further gift tax consequences.
GRATs
$1 million of
Securities
Grantor
(Age 70)
Taxable Gift
Assumed growth rate
§7520 Rate (February ’12)
GRAT
$510,517 of
Securities
______________________
End of Year 1
$510,517 of
Securities
______________________
End of Year 2
______________________
GRAT Remainder
$137,915
$0.08
10%
1.4%
$137,915 of
Securities
Beneficiaries
Intentionally-Defective Grantor
Trusts (“IDGTs”)
IDGTs
An IDGT is an irrevocable trust that is not
included in the grantor’s gross estate.
However, the trust income is taxable to the
grantor.
IDGTs are a powerful estate planning
technique that reduces a grantor’s taxable
estate through asset transfers and the
payment of trust tax liability by the grantor.
IDGTs
The grantor establishes an IDGT and then
loans assets to the trust for an installment
note.
The installment note pays the lowest amount
of interest based on the Applicable Federal
Rate (AFR).
Any appreciation of the trust assets above
the AFR is transferred to the trust
beneficiaries without any additional transfer
taxes.
Low Interest Rate Loan
to IDGT
5. Excess Cash
Flow/Premiums
1. Gifts $1M
Grantor/
Insured
2. Loans $9M
IDGT
3. $9M Note to Grantor
Balloon Payment in 9 Years
6. Death Proceeds
(Income and Estate
Tax Free/Leverages
GST Exemption)
Life Insurance
Company
4. $100,800 annual interest
(Interest Rate 1.12%)
Advantages:
 Value of loan proceeds frozen at 1.12% for nine years (February ’12 Mid-Term AFR).
 Grantor’s estate further reduced by the income taxes paid on behalf of the trust.
 The trust property escapes estate taxation for as long as permitted under state law.
 Possible valuation discounts for promissory note in Grantor’s estate.
Grantor Trust vs.
Non-Grantor Trust
NON-GRANTOR TRUST
GRANTOR TRUST
Year
Beginning
Balance
Taxable
Income
7%
Less:
Taxes at
40%
Ending
Balance
Year
Beginning
Balance
Taxable
Income
7%
Less:
Taxes at
40%
1
$10,000,000
$700,000
$(280,000)
$10,420,000
1
$10,000,000
$700,000
$
2
10,420,000
729,400
(291,760)
10,857,640
2
10,700,000
3
10,857,640
760,035
(304,014)
11,313,661
3
4
11,313,661
791,956
(316,783)
11,788,835
5
11,788,835
825,218
(330,087)
6
12,283,966
859,878
7
12,799,892
8
Ending
Balance
-
$10,700,000
749,000
-
11,449,000
11,449,000
801,430
-
12,250,430
4
12,250,430
857,530
-
13,107,960
12,283,966
5
13,107,960
917,557
-
14,025,517
(343,951)
12,799,892
6
14,025,517
981,786
-
15,007,304
895,992
(358,397)
13,337,488
7
15,007,304
1,050,511
-
16,057,815
13,337,488
933,624
(373,450)
13,897,662
8
16,057,815
1,124,047
-
17,181,862
9
13,897,662
972,836
(389,135)
14,481,364
9
17,181,862
1,202,730
-
18,384,592
10
14,481,364
1,013,695
(405,478)
15,089,581
10
18,384,592
1,286,921
-
19,671,514
Qualified Personal Residence
Trusts (“QPRTs”)
QPRTs
A QPRT is an irrevocable trust to which the
grantor transfers his or her personal
residence or vacation home.
The grantor retains the exclusive use of the
residence for a term of years specified in the
trust instrument.
If the grantor survives the term of the trust,
the residence is either retained in further
trust for or distributed outright to the
grantor’s children.
QPRTs
The transfer of the residence to the QPRT is
a taxable gift by the grantor to the remainder
beneficiaries, determined by reference to the
IRS actuarial tables.
The actual amount of the gift is a function of
the grantor’s age, the value of the residence,
and the term of the trust.
QPRTs
If the grantor survives the term of the QPRT,
no further gift or estate tax will be imposed.
At the end of the term, the grantor will have
the option of paying fair rent for his
continued use of the residence.
If the grantor dies prior to the expiration of
the term, the residence will be included in
the grantor’s estate, but any gift tax
exemption used will be restored.
QPRTs
Residence
Grantor
QPRT
Rent-Free Right of Use of Residence for 15 Years
ASSUMPTIONS:
Grantor’s Age
FMV of Residence
Term of QPRT
FMV in 15 years
(at 5% growth)
After Expiration
of Selected
Term of Years
70
$1,000,000
15 Years
$2,079,000
RESULTS:
Initial Gift
$374,130
FET Savings (35%)
$569,679
§7520 Rate (February ‘12) 1.4%
Pays
Grantor
Rent
Children
or ILIT
Zero Estate Tax Plan
Conventional Estate Planning
Projected Gross Estate
$10,000,000
Credit Shelter
Trust
Estate of Surviving
Spouse or Marital Trust
$3,500,000
$6,500,000
Federal
Estate
Tax
$0
After Tax
Estate
Federal Estate Tax
$5,150,000
$1,350,000
(13.5%)
Distribution to Heirs
After Tax Estate
Credit Shelter Trust
Total
$5,150,000
3,500,000
$8,650,000
Assumes estate tax exemption is $3.5 million and top tax rate is 45%.
Zero Estate Tax Planning
Current Net Estate
$10,000,000
- Less premiums gifted
(600,000)*
Total
$9,400,000
* Using annual exclusion gifts
Credit Shelter
Trust
Estate of Surviving
Spouse or Marital Trust
Irrevocable Life
Insurance Trust
$3,500,000
$5,900,000
$3,000,000
Federal
Estate
Tax
$0
Children
Private Foundation or
Charity
$3,500,000
$2,400,000
Federal
Estate
Tax
$0
Distribution to Heirs and Charity
Private Foundation / Charity
$2,400,000
Estate Tax Exemptions
7,000,000
Life Insurance Trust
3,000,000
Total
$12,400,000
Assumes estate tax exemption is $3.5 million and top tax rate is 45%.
Reviewing Your Estate Plan is
One Resolution You’ll Want to
Keep in 2012
 The increased exemption in 2012 gives you an
unprecedented opportunity to make large gifts to
save on estate taxes.
 The death of a named beneficiary may be reason to
review your plan to ensure that his or her share
passes to the proper beneficiaries in accordance with
your wishes.
Reviewing Your Estate Plan is
One Resolution You’ll Want to
Keep in 2012
 If your family has grown with the addition of
grandchildren, you may wish to make special
provisions for them, such as ensuring that assets left
to minors are done so in trust.
 You may wish to review those individuals whom you
have named as trustees, executors and agents in
financial and health care powers of attorney.
Reviewing Your Estate Plan is
One Resolution You’ll Want to
Keep in 2012
 If any of your beneficiaries has been diagnosed with
a disability, you may wish to review the manner of
disposition to that person. Would disposition in a
special needs trust be appropriate?
 If there has been a marriage or divorce, either by you
or by one of your beneficiaries, you may wish to
revisit the choices you have made in your estate
plan.
Reviewing Your Estate Plan is
One Resolution You’ll Want to
Keep in 2012
 Have your assets experienced significant changes,
such as conversion of real estate or a business
interest, or through inheritance of additional assets?
If so, you may wish to review your plan to make sure
these changes have been taken into consideration.
THE END
THANK YOU