Transcript Planning for the Future – Living Trusts, Estate and Tax

Planning for the Future –
Living Trusts, Estate and
Tax Planning
By
Thomas F. McGuire
Robert I. Ury
Arnstein & Lehr LLP
© 2007 All Rights Reserved
Basic Estate Planning
Why do I need a Will?
Reasons:
• Control over who inherits (relatives,
charities, friends, etc.)
• Control over who administers estate
• Possible reduced costs
• Estate tax planning
• Structuring benefits for minor or
disabled beneficiary
• Designation of a guardian for minor
children
What is a “living trust”?
• You are the grantor/settlor
• You normally act as your own
trustee
• Provides for management of
assets at death or upon
disability
• Substitutes for traditional will
Advantage of Living Trusts
• Avoidance of probate proceedings at
death
• Avoidance of guardianship
proceedings upon disability
• Ease of administration
• Reduced costs of administration
• Privacy and Timing Issues
Creditor Protection???
• Self-settled trust is not normally
protected from creditors
• Domestic protection trusts and
offshore trusts might offer some
protection
• Spendthrift provisions offer
protection to ultimate trust
beneficiaries
Marital Deduction
Planning
“Applicable Exemption Amount”
3,500,000
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
0
20042005
20062008
2009
2010
2011
Exemption
Combining Use of Unlimited
Marital Deduction and Exemption
Amount
• Unlimited marital deduction exists
for property passing to spouse
• Without proper planning, all property
will qualify for marital deduction and
exemption of first spouse will be
wasted
• Through proper planning, you can
double the amount of property
exempt from estate tax
Plan A: All to Spouse or
“I Love You” Plan
• At first death, all
property passes to
surviving spouse
• No tax is paid due
to marital
deduction
• At second death,
all property is
included in gross
estate
Results:
• Exemption of first spouse is wasted
• More estate tax is paid at second
spouse’s death
• Second spouse has total control over
assets – can give assets away to
whomever he or she chooses (i.e.
new spouse upon remarriage)
A Better Plan: Marital
Trust/Family Trust Arrangement
• Amount of
exemption
allocated to
Family Trust
• Amount in
excess of
exemption
allocated to
Marital Trust
Results:
• Property is available to surviving
spouse as needed, but Family Trust
is not taxed at survivor’s death
• Marital trust defers any estate tax
ultimately payable until after both
deaths
• Exemption is doubled
• If desired, deceased spouse retains
ultimate control over distribution
Trust Structure Issues
Long-Term Trusts
Generation-Skipping Trusts
• Makes property available to next
generation but keeps property out of
estate tax base
• Protects beneficiary’s interest from
claims of creditors
• Beneficiary can be trustee and can
have power of appointment
• Limitation – GST Exemption Amount
• “Dynasty” trusts and the Rule
Against Perpetuities
Criteria for Trust Distributions
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Support
Comfort
Health
Education
Best Interests
• Standard of
living
considered?
• Possible use of
incentive
provisions?
• Beneficiary as
own trustee?
Powers of Appointment
• Build flexibility into estate plan
• Can be limited (i.e. descendants, spouses
& charities) or broad (anyone other than
creditors or estate)
• Can be lifetime or testamentary in nature
• Independent trustee can be given power to
create a power in the future – “power to
create a power”
Living Wills and Health Care
Powers of Attorney/Directives
• Allows doctor or
agent to make
health care
decisions
• Includes life
support
decisions
• Supplements
will or trust
Property Powers of Attorney
• Allows agent to manage
financial assets in the event of
disability
• Should be made “durable” in
nature – effective even if legal
determination of disability
• Useful even if living trust is in
place
Advanced Estate
Planning Techniques
Irrevocable Life Insurance
Trusts
• Allows removal of life insurance
from gross estate
• Trust is irrevocable in nature
• Removes “incidents of ownership”
from insured
• Caveat: Three Year Rule
• Also removes insurance proceeds
from second spouse’s estate
What is a “Crummey” notice?
• Allows gift to trust to qualify for
$12,000 per person annual
exclusion (avoids gift of “future
interest”)
• Withdrawal right may be limited
to a window period
• Leverage of GST exemption
possible
Qualified Personal Residence
Trust (“QPRT”)
• Gift of one or two residences to trust for a
term of years
• Gift is based upon actuarial remainder
interest at time of transfer
• Growth in value is removed from estate
• Upon expiration of term, grantor leases
property back from beneficiaries
• If residence sold, converts to a GRAT
arrangement
Grantor Retained Annuity
Trusts (“GRATs”)
• Individual transfers assets to a trust
for a fixed term reserving an annuity
interest
• Gift is valued based upon remainder
interest at time of transfer (“zero
out” GRAT possible)
• If trust can achieve rate of return
greater than IRS rate, tax savings
will be achieved
Family Limited
Partnerships/LLCs
• Discounting may be available for
estate and gift tax purposes –
Caveat: Strangi case
• Retention of control while shifting of
value
• Possible creditor protection
• Centralization of management
• Consolidation of assets
Installment Sales/SCINs
• Can be used to effectuate an estate
“freeze”
• Income tax consequences may be
avoided through sale to intentionally
defective trust
• Must be structured carefully to avoid
IRS challenge
Gifting to Minors
Effective Use of
Annual Gift Tax
Exclusion
Methods of Gifting:
• Outright Gifts
• Direct Payments for Tuition and
Medical Expenses
• Uniform Transfers to Minors Act
Gifts
• Section 2503(c) Trusts
• “Crummey” Trusts
• Section 529 Plans
Section 529 Qualified State
Tuition Programs
• Prepaid Tuition credits
versus Section 529 Plan
Savings Account
• “Qualified Higher
Education Expenses”
• Tax-free if used for
educational purposes
• Subject to tax and penalty
if not used for education
• “Front loading” of gifts
Charitable Giving
Techniques
Methods of Giving:
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Outright gifts
Bequests
Charitable Gift Annuities
Insurance Policies
Charitable Remainder Trusts
Charitable Lead Trusts
Private Charitable Foundations
Retirement Plans/IRAs
Outright Gifts
• Current gift while living
• Can be restricted or
unrestricted
• Current income tax deduction
available
• No capital gains on appreciated
gifts
Bequest
• Gift included in will or trust
• Can be restricted or
unrestricted
• Possible availability of estate
tax charitable deduction
• Opportunity to make a
difference after you’re gone
Charitable Gift Annuities
• Contribution to charity in exchange
for guaranteed payment for life
• Portion of payment coming back is
tax-free
• Immediate income tax deduction
available
• Possible reduction of estate taxes
Insurance Policies
• Name charity as owner and/or
beneficiary of insurance policy
• Tax deduction for policy value
when transferred
• Continuing tax deduction for
premium payments subsequent
to transfer of ownership
Charitable Remainder
Trusts
• Variable (Unitrust) or Fixed
Income (Annuity Trust) retained
for life or term of years
• Charity receives assets upon
expiration of life/term
• Income tax deduction based
upon actuarial value of
remainder
Charitable Lead Trusts
• Charity receives income for
term (up to 20 years)
• Upon expiration of term,
property reverts to donor or
heirs
• Possible income tax deduction
if taxed as grantor trust
IRAs or Retirement
Plans
• Perhaps the most efficient
means of charitable giving
• Avoids both estate tax and
income tax on proceeds at
death
• Owner retains use of funds
while living
Compensation Planning
and Practice
Agreements
Employment Agreements –
Terms to Include
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Scope of professional services
Term of agreement
Salary
Additional Compensation
Additional Benefits (i.e. insurance)
Potential future ownership interest
Expense reimbursements
Restrictive covenants
Other provisions . . . .
Fringe Benefits
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Tax Implications
Substantiation Requirements
Types of Expenses
Group-Term Insurance
Disability Coverage
Medical Coverage
Cafeteria Plans
Flexible Spending Arrangements
Fringe Benefits (cont’d)
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Health Reimbursement Accounts
Health Savings Accounts
Dependent Care Assistance
Fringe Benefit Exclusions
Entity Selection – Choices:
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Partnership
S Corporation
C Corporation
Limited Liability
Company
• Limited Liability
Partnership
Shareholders’ and Partners’
Agreements
• Agreement which defines rights of parties
upon death, disability, retirement and
occurrence of other events
• Can be funded or unfunded
• Purposes
– Protect against ownership by unwanted 3rd
parties
– Provide a market for owner’s interest
– Fix a market value for owner’s interest
– Protect S Corporation election
Types of Agreements
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Redemption
Cross-Purchase
Insurance Funded
Combination
“Wait and See”
Comparison of Structures
Some Provisions to be
Included . . .
• Transfer
prohibition or
restrictions
• Mandatory buy-out
• Right of First
Refusal
• Right of First
Opportunity
• Go-Along Rights
• Lock In Period
• Definition of Events
requiring or
permitting
repurchase
• Purchase price
determination
method
Deferred Compensation Plan
Selection and Administration
Qualified Plans
• Pension plans (“defined benefit”)
• Profit-sharing plans (“defined
contribution”)
• 401(k) Plans
• Tax treatment and plan qualification
requirements
• Keogh Plans for self-employeds
• Affiliated groups/Leased Employees
Individual Retirement
Accounts
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Traditional IRAs
Roth IRAs
Simple IRAs
Simplified
Employee
Pensions (SEPs)
• Non-deductible
IRAs
Other Qualified Plans . . .
• Section 403(b) Plans – generally
available only to educational
organizations and tax-exempts
• Section 457 Plans – maintained
by tax-exempts and State
governmental agencies
Some Qualified Plan Administration
Issues:
• Treatment of life insurance coverage held
in qualified plans
• Treatment of participant plan loans
• Hardship distributions from qualified plans
• Fiduciary Restrictions
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Investment Issues
Self-Dealing Issues
Conflict of Interest Issues
Anti-Assignment Rules
Non-Qualified Deferred
Compensation
Tax Treatment
• Historically, benefits not taxable
until received and non-deductible by
employer until included in
employee’s income – But see IRC
Section 409A
• Plan is unsecured and participant is
a general creditor of employer
• Rights are generally nontransferable
• “Rabbi” trust can be used to fund
employer’s obligations
Use of Insurance as an Asset
Reserve
• Supplemental
Life Insurance
• Split-Dollar Life
Insurance
Arrangements
– Economic
benefit regime?
– Loan regime?
Deferred Compensation
Alternatives
• Cash value life insurance
• Charitable remainder trusts
• Impact of new 15% capital gain and
dividend rate – See Example
Practice Sales versus
Continuation
What factors should I
consider?
Tax Treatment of Non-Qualified
Plans and Section 457 Plans
• Ordinary income treatment when received
• Rollover to an IRA not available (exception
for 457(b) governmental plans)
• Tax-free transfer to an IRA or qualified plan
not allowed
• Distributions from Section 457 plans must
begin at age 70-1/2 or separation from
service
Qualified Plan or IRA Distributions
• Tax treatment of ordinary withdrawals
• 10% early distribution penalty
• 50% late distribution penalty for failure to
distribute MRD
• Post-Death Distributions and Rollovers
• Withholding Requirements
Required Minimum
Distribution Rules
• Lifetime distributions using uniform
table – exception for spouse more
than 10 years younger
• Post-death distributions if death
occurs before required beginning
date
• Post-death distributions if death
occurs after required beginning date
Importance of Designating a
Beneficiary
• Extended payout over
beneficiary’s life expectancy
available
• Maximum five year payout if no
beneficiary named and
participant dies prior to
required beginning date
Example - $1,500,000 IRA
IRA Account Holder Dies at Age 60
5% Growth Assumed
Year
Child, Age
Required
60, named as Minimum
Beneficiary
Distrib.
No
Designated
Beneficiary
Required
Minimum
Distrib.
1
39.8
$37,688
0
$0
2
38.8
$38,819
0
$0
3
37.8
$39,984
0
$0
4
36.8
$41,183
0
$0
5
35.8
$42,419
100.00
$1,688,264
6
34.8
$43,691
7
33.8
$45,002
8
32.8
$46,352
9
31.8 (etc.)
$47,743
Example - Continued
Comparison of Net After-Tax Assets
Year
Child as
Beneficiary
No Designated
Beneficiary
1
$1,020,073
$1,020,073
2
$1,056,119
$1,049,924
3
$1,094,402
$1,082,462
4
$1,133,188
$1,115,125
5
$1,174,158
$1,143,515
. . . .
. . . .
10
$1,394,577
$1,287,483
15
$1,647,712
$1,449,576
20
$1,938,665
$1,632,078
Trusts as Designated
Beneficiaries
• Must be valid under local law
• Beneficiaries must be ascertainable
• Trust must be irrevocable as of
participant’s death
• Plan administrator must receive copy of
trust or alternative documentation
• Life expectancy of oldest beneficiary will
be used! “Look through” rules apply.
Participant Distribution Options
• Joint and survivor annuities –
spousal consent required to vary
• Lump-sum Distributions
• Rollovers
• Annuity contract distributions
Thank You!