Welcome AZCLDP Members

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Transcript Welcome AZCLDP Members

Sheraton Airport
Tempe, AZ
March 16, 2013
Agenda
• 11:00 – 12:00 - Current Federal Estate Tax Law
and Estate Planning post ATRA
• 12:00 – 12:15 - Questions
• 12:15 – 12:30 - Other Trusts
• 12:30 – 12:45 - Document Automation
• 12:45 – 1:00 - Questions
Current Federal Estate Tax Law
and
Estate Planning
• On January 1, 2013, President Obama signed
into law The American Taxpayer Relief Act of
2012 (“ATRA”), bringing closure to the main
tax aspects of the so-called “fiscal cliff”
negotiations that had been ongoing since the
November elections.
Since January 1, 2013, among its many tax
provisions, ATRA makes permanent the $5.0
million gift, estate, and GST tax exemption
amount that was put in place temporarily for
2011 and 2012, plus inflation adjustments
going forward [the current adjustment for
2013 is $250,000 per person.
For married couples in 2013, the aggregate
exemption will be twice this amount (i.e., $10.5
million)]. Future years can also have similar
inflation adjustments.
The gift tax is still unified with the estate
tax; a unified estate and gift tax exemption
means the $5.25M threshold is applied to
total transfers, whether by gift during
lifetime or by inheritance on death.
There is also an inflation adjustment to
increase the annual gift tax exclusion
from $13,000 to $14,000 per donee
(again, for married couples, the annual
gift exclusion is now double this amount
- $28,000 for 2013).
The 2012 Act also provides for a flat
40% tax rate for any transfers in 2013
and future years that exceed the
exemption amount.
ATRA makes the new laws “permanent”
because there is no sunset provision in
the law that would cause the current
rules to expire. The 2002 law was
scheduled to sunset at the end of 2010.
Similarly, the 2010 extension was
scheduled to sunset at the end of 2012.
But a “permanent” change does not
mean the law will never change.
The word “permanent” really means
“until they change it next time!”
Notably, ATRA also makes permanent the
“portability” concept introduced in the
Tax Relief Act of 2010.
“Portability”
“Portability”
Generally, “portability” allows a surviving spouse to
elect to take advantage of the unused portion of
the estate tax exclusion of his or her predeceased
spouse, thereby providing the surviving spouse with
a larger exclusion amount.
“Portability”
NOTE: The “deceased spousal exclusion amount” is
available to the surviving spouse only if an election
is made on a timely filed estate tax return for the
deceased spouse (even if an estate tax return would
otherwise not be required).
Example
Assume that Husband dies in 2013, leaving $1M to his
daughter and the balance of his estate of $3M to Wife
(no tax is due). An election is made on Husband’s estate
tax return to permit Wife to use Husband’s unused
exemption. Thereafter, Wife’s exemption is now $9.5M
(her $5.25M basic exemption plus the $4.25M of
Husband’s unused exemption), which she may use for
lifetime gifts or for transfers at death.
The biggest argument in support of portability
is that it will prevent married couples from
having to create "costly" estate plans that
contain "complex" trusts.
But not so fast! There are still plenty of
reasons why married couples should consider
Trust planning and why unwed couples may
need it too; portability is really a “get out of
jail card” for those who don't do anything or if
the totally unexpected should occur. There are
a number of reasons for married clients to still
create an estate plan which creates a trust or
trusts after the first death:
PLANNING
• Planning to “lock-in” the full exemption
Planning to “lock-in” the full exemption
Having an exemption trust will protect the full
$5M amount if one spouse dies and the
Democrats are later successful in "rolling-back"
the exemption to $3.5. Portability may also be
lost if the surviving spouse remarries and is later
widowed again.
• Planning to “lock-in” the full exemption
• Planning for appreciation
Planning for appreciation
Funding an “exemption trust” also protects
appreciating assets from estate tax at the
survivor’s death.
• Planning to “lock-in” the full exemption
• Planning for appreciation
• Planning for blended families and/or
“control”
Planning for blended families and/or “control”
For a second/third marriage (or even for a first
marriage), if one or both of the clients is
concerned with the survivor being able to
change the beneficiaries (e.g., remarriage,
separate children, etc.), the irrevocable trust is
still necessary (even when there are no estate
tax issues).
• Planning to “lock-in” the full exemption
• Planning for appreciation
• Planning for blended families and/or
“control”
• Providing creditor protection for the
surviving spouse
Providing creditor protection for the surviving
spouse
Creating an irrevocable trust at the first death
provides asset protection from creditors,
lawsuits and/or Medicaid “spend-down”. In
addition, any assets owned by an irrevocable
trust will be protected from a divorce settlement
if the surviving spouse remarries and then later
divorces.
• Planning to “lock-in” the full exemption
• Planning for appreciation
• Planning for blended families and/or
“control”
• Providing creditor protection for the
surviving spouse
• Planning for state estate taxes
Planning for state estate taxes
Currently, there are 16 states (plus the DC) which impose a
separate state estate tax, so trust planning may be necessary
in order to “double” the state exemption and defer payment
of state estate taxes until the death of the surviving spouse
(so far, no state with an estate tax has adopted the concept of
“portability” for the unused exemption of the first to die).
Even if the client resides in a state currently without a
separate estate tax, that state may subsequently elect to
impose a tax or the survivor could later move to a state which
does have a separate state estate tax (e.g., move to be closer
to children/grandchildren).
• Planning to “lock-in” the full exemption
• Planning for appreciation
• Planning for blended families and/or
“control”
• Providing creditor protection for the
surviving spouse
• Planning for state estate taxes
• Planning for the “generation-skipping tax”
Planning for the “generation-skipping tax”
Portability does not apply to the GST tax, so in
order to fully leverage the GST exemptions of
both spouses for GST trust planning, it will still
be necessary to create a trust at the first
spouse’s death. The so-called “Dynasty Trusts”
are becoming increasingly popular.
• Planning to “lock-in” the full exemption
• Planning for appreciation
• Planning for blended families and/or
“control”
• Providing creditor protection for the
surviving spouse
• Planning for state estate taxes
• Planning for the “generation-skipping tax”
• Planning for same sex or unwed couples
Planning for same sex or unwed couples
Until same sex marriage is recognized by the
federal government, same sex couples will need
to use trust planning in order to be able to take
full advantage of the exemption (state and
federal) at both deaths (and the same goes for
unwed couples).
Problems with “Portability”
•
•
•
•
•
•
•
No planning to “lock-in” the full exemption
No planning for appreciation
No planning for blended families and/or “control”
No creditor protection for the surviving spouse
No planning for state estate taxes
No planning for the “generation-skipping tax”
No planning for same sex or unwed couples
WHAT DOES THIS ALL MEAN?
As most of you know, there are many
“types” of trusts for married couples. The
correct type of trust can depend on a
number of circumstances.
We have prepared a “matrix” of the
different client scenarios with our
recommendations for the appropriate type
of estate planning trusts which may be
appropriate for each scenario. Of course,
this matrix also takes into account the
existence of a separate state tax (when
appropriate).
This “matrix” is one of the referenced
documents in the list of on-line PDF files
which you can download.
However, for today, let’s assume that your
clients reside in Arizona (which has no
separate estate tax) and neither spouse has
an estate over $3.5M.
WHAT IS THE BEST FORM OF TRUST?
THE ANSWER:
A “Disclaimer Trust” OR an “Intentionally
Defective Marital Deduction Trust”
THE ANSWER:
It depends mostly on the amount of
control the surviving spouse should have
over the deceased spouse’s estate
What type of trust should be used if
“control” is NOT an issue?
Why not a simple “probate avoidance
trust”?
With the Probate Avoidance Trust, there
is no flexibility – everything stays under
the survivor’s control and power of
revocation.
The “Disclaimer Trust”:
The “Disclaimer Trust”:
Again, use IF there are no issues of
“control” (e.g., no separate children, etc.).
The “Disclaimer Trust”:
Everything goes to the survivor but the
survivor can, within 9 months, disclaim
any or all of the deceased spouse’s
interest into an irrevocable trust.
The “Disclaimer Trust”:
There may be factors at the time of the
first death which makes the irrevocable
trust worthwhile:
The “Disclaimer Trust”:
“Hit the Lottery”
Creditor Issues
Possible Medicaid needs for the survivor
What type of trust should be used if
“control” is an issue?
What about an “A/B Trust”?
The “A/B Trust”:
The “A/B Trust”:
• “A” Trust is the survivor’s revocable trust
The “A/B Trust”:
• “A” Trust is the survivor’s revocable trust
• “B” Trust is the irrevocable trust
The “A/B Trust”:
• “A” Trust is the survivor’s revocable trust
• “B” Trust is the irrevocable trust
 Must be funded with decedent’s
estate up to the exemption amount
The “A/B Trust”:
• “A” Trust is the survivor’s revocable trust
• “B” Trust is the irrevocable trust
 Funded with decedent’s estate up to
the exemption amount
 Purpose is to keep “B” Trust out of the
survivor’s taxable estate
Problems with the “A/B Trust”:
Problems with the “A/B Trust”:
• “B” Trust is the irrevocable trust
 Funded with decedent’s estate up to
the exemption amount
Problems with the “A/B Trust”:
•“B” Trust is the irrevocable trust
 Funded with decedent’s estate up to
the exemption amount
If control is an issue and the
decedent’s estate exceeds the
exemption, the balance goes to the
survivor
Problems with the “A/B Trust”:
•“B” Trust is the irrevocable trust
 Purpose is to keep “B” Trust out of the
survivor’s taxable estate
Problems with the “A/B Trust”:
•“B” Trust is the irrevocable trust
 Purpose is to keep “B” Trust out of the
survivor’s taxable estate
This will lose the “stepped-up basis”
on the assets in the “B” Trust at the
survivor’s death
The “step-up” means that inherited
property receives a new cost basis equal to
the property's fair market value on the date
of the decedent's death. In other words,
the heirs can sell the inherited assets and
pay no capital gains tax.
Problems with the “A/B Trust”:
•“B” Trust is the irrevocable trust
 Purpose is to keep “B” Trust out of the
survivor’s taxable estate
ONLY ASSETS INCLUDED IN THE TAXABLE
ESTATE ARE ELIGIBLE FOR THE STEPUP
The “Intentionally Defective Marital
Deduction Trust”:
The “Intentionally Defective Marital
Deduction Trust”:
• Creates an irrevocable trust for all of
the decedent spouse’s assets
The “Intentionally Defective Marital
Deduction Trust”:
• Creates an irrevocable trust for all of
the decedent spouse’s assets
SOLVES THE CONTROL ISSUE
The “Intentionally Defective Marital
Deduction Trust”:
• Creates an irrevocable trust for all of
the decedent’s assets
• “Intentionally” designed to be included
in the survivor’s taxable estate
The “Intentionally Defective Marital
Deduction Trust”:
•“Intentionally” designed to be included
in the survivor’s taxable estate
SOLVES THE STEPPED-UP BASIS ISSUE -NOW THE ENTIRE ESTATE RECEIVES A
STEP-UP AT THE SECOND DEATH
The “Intentionally Defective Marital
Deduction Trust”:
• Creates an irrevocable trust for all of
the decedent’s assets
• “Intentionally” designed to be included
in the survivor’s taxable estate
• Has “disclaimer” option to fund
“Exemption Trust” if needed.
The “Intentionally Defective Marital
Deduction Trust”:
•Has “disclaimer” option to fund
“Exemption Trust” if needed.
PROTECTS IF THE CLIENTS HIT THE
LOTTERY!
As mentioned, besides “control”, there
are other advantages to creating an
Irrevocable Trust at the first death:
Other advantages to creating an
Irrevocable Trust at the first death:
• Creditor Protection
Other advantages to creating an
Irrevocable Trust at the first death:
• Creditor Protection
• Medicaid Planning
Other advantages to creating an
Irrevocable Trust at the first death:
• Creditor Protection
• Medicaid Planning
• Protects assets from a divorce if the
survivor remarries
QUESTIONS
15 MINUTES
OTHER REVOCABLE TRUSTS
IRA BENEFICIARY TRUST
IRA BENEFICIARY TRUST
It is now common to designate the revocable
living trust (“RLT”) as the beneficiary of an IRA
(or as the contingent beneficiary if the IRA
owner is married)
IRA BENEFICIARY TRUST
To be a permitted beneficiary, the RLT must
have the proper language to be a “conduit
trust”.
IRA BENEFICIARY TRUST
A “conduit trust” must use the oldest age of the
current beneficiaries for the calculation of the
RMD’s for all of the beneficiaries.
IRA BENEFICIARY TRUST
A “conduit trust” must distribute the RMD’s to
each beneficiary regardless of other
circumstances existing at the time of death
(e.g., disability, creditor issues, divorce, etc.)
IRA BENEFICIARY TRUST
To provide maximum benefits and flexibility,
there is now a new type of trust.
IRA BENEFICIARY TRUST
To provide maximum benefits and flexibility,
there is now a new type of trust:
The IRA Beneficiary Trust
IRA BENEFICIARY TRUST
Features
IRA BENEFICIARY TRUST
Features:
•The RMD for each beneficiary is calculated
on the age of each beneficiary
IRA BENEFICIARY TRUST
Features:
•Up to September 30th of the year following
the IRA owner’s death, an election can be
made to convert a beneficiary’s trust from a
“conduit trust” to a discretionary
“accumulation trust”
IRA BENEFICIARY TRUST
Features:
•If a beneficiary’s trust is converted, the
“potential beneficiaries” of that trust can be
limited to a designated class.
IRA BENEFICIARY TRUST
Features:
•If the IRA owner is married and does not
want the spouse to be able “roll-over” the
IRA (i.e., name new beneficiaries), the Trust
can also be configured to hold the IRA for
the benefit of the spouse.
IRA BENEFICIARY TRUST
•This is an extremely valuable estate
planning tool for any client with IRA assets
over $150,000!
NFA FIREARMS TRUST
NFA FIREARMS TRUST
Often referred to as a “Gun Trust”
NFA FIREARMS TRUST
“NFA” is the “National Firearms Act”
NFA FIREARMS TRUST
Most handguns and rifles are not restricted
NFA FIREARMS TRUST
Those that are, such as automatic weapons,
“short-barreled shotguns, silencers, grenades,
etc., are referred to as “Title II Firearms” or
“restricted firearms”.
NFA FIREARMS TRUST
The Key Benefits of the NFA Firearms Trust are:
NFA FIREARMS TRUST
The Key Benefits of the NFA Firearms Trust are:
After the trust is created, it is not filed with any city, county or state
government entity (other than a copy being sent to the Bureau of Alcohol,
Tobacco, Firearms and Explosives (“BATFE”) with the Application. The trust
and your client’s name do not show up on any government database other
than the tax rolls of the BATFE and this information is protected from most
disclosure requests.
NFA FIREARMS TRUST
The Key Benefits of the NFA Firearms Trust are:
Unlike an application by an individual,
• The Trust is not required to submit fingerprint cards;
• The Trust is not required to submit a photograph; and,
• The Trust is not required to have the chief law enforcement officer
(“CLEO”) approve the Application.
NFA FIREARMS TRUST
The Key Benefits of the NFA Firearms Trust are:
Unlike a corporation, LLC or other entity form,
• Once the trust is created, there are no annual fees;
• There is no requirement for a trust to file annual tax statements; and,
• There are no requirements for annual meetings or reports.
NFA FIREARMS TRUST
The Key Benefits of the NFA Firearms Trust are:
• The Trust may be used to purchase and own as many NFA regulated
(Title II) firearms as desired.
• Multiple individuals can be listed (or added) as the trustees, thus
allowing more than one person to have the legal right to the possession
and use of the firearms and thus protecting family members from
inadvertent (but harshly dealt with) illegal possession of a regulated
weapon.
NFA FIREARMS TRUST
The Key Benefits of the NFA Firearms Trust are:
• The trust protects in the event of incapacity; this protects the
conservator (or other family member) from illegally possessing items
regulated by the National Firearms Act which are not registered to
them.
• The trust also helps to protect the firearms assets after
death. Although, any individually owned firearms will be part of the
“probate estate”, the trust keeps the firearms outside of the probate
process and keeps them private. The executor of the estate and the
beneficiaries will also be protected because the successor trustee has
the control of the firearms with specific provisions within the trust on
how the NFA regulated items should be handled and transferred after
death.
NFA FIREARMS TRUST
The Key Benefits of the NFA Firearms Trust are:
• If the transfer of NFA firearms becomes prohibited in the future, the
trust will continue to protect the Title II items for generations to come.
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