Transcript 120928 Planning for a Spouse

Issues Involved in Planning for
a Spouse, Including “Marital Deduction Formulas”
Presented by: Lewis W. Dymond
Planning for a Spouse
• Outright.
– No Protection.
• In Trust.
– Creditor Protection.
– Predator Protection.
– Self Protection.
– Estate Tax Protection.
Marital and Non-Marital Shares
• Why do we do it?
– Fact-based reasons.
• Marital Share - provide for surviving spouse.
• Non-Marital Share - family planning purposes.
– Estate tax and state death tax reasons.
• To maximize use of both spouses’ applicable credit
amount (Unified Credit).
• Marital Share – qualify for marital deduction.
• Non-Marital Share – shelter applicable exclusion
amount.
Marital and Non-Marital Shares
Review of the Options
All to the Marital Share:
– Generally non-taxable estate and not likely to be
a taxable estate at death of survivor.
– Desire to provide for the surviving spouse during
his or her life and then to the residuary
beneficiaries.
– Tax planning can be available by designing the
Marital Share as a QTIP (one lung QTIP).
• Include demand right after 6 months.
• Trust Protector can decant or grant a testamentary
general power of appointment.
Review of the Options
All to Marital Share, with any disclaimed
amounts going to the Non-Marital Share:
– A “wait and see” strategy.
– May have a need to use the applicable credit
amount coupon of first spouse to die.
– Depends on surviving spouse disclaiming to fund
the Non-Marital share (use the coupon).
– Spouse cannot have a limited testamentary
power of appointment in the Bypass Trust.
– $.3M to $3M.
Review of the Options
Stated percentage or fraction to Marital
Share:
– Not tax motivated; fact driven.
– Use where you want the surviving spouse to
have a stated percentage which will qualify for
the marital deduction.
– Balance will usually go directly to the
residuary beneficiaries.
Review of the Options
Clayton Election ($.5M - $7M):
– A “wait and see” strategy.
– Everything allocated to a QTIP; however
anything elected out of QTIP treatment on a
706 allocated to the Non-Marital Share.
– Not a disclaimer:
• May have a testamentary limited power of
appointment.
• Spouse should not make the election on the 706.
Review of the Options
Clayton Election (Caveat):
If no 706 filed:
• All will be in the QTIP.
• QTIP will not be included in the surviving spouse’s
estate.
• Trust Protector may decant or grant testamentary
GPOA.
• Option to give spouse a demand right after 16
months.
Review of the Options
Pecuniary Marital Formula:
– A mandatory funding formula; must fund NonMarital Share.
– Solves for the smallest specific dollar amount to
the Marital Share using date of death values that
will reduce federal estate taxes to the lowest
possible amount.
– Option to allocate a minimum dollar amount to the
Marital Share.
– Option to adjust formula to reduce to lowest
overall death taxes (federal estate and state
death taxes).
Review of the Options
Pecuniary Marital Formula:
− Generally not recommended because funding of
pecuniary amount accelerates recognition of IRD.
− May want to use when you want to guarantee that the
applicable credit amount of first spouse to die will be
used (estates over $2M).
− And there are likely to be no IRD assets.
− Simplicity of calculating and funding.
Review of the Options
Fractional Marital Formula:
– A mandatory funding formula; must fund NonMarital Share.
– Solves for the smallest fractional amount to the
Marital Share using date of death values that
will reduce federal estate taxes to the lowest
amount.
• Numerator = Amount of available exemption amount.
• Denominator = Date of death value of remaining
property.
• No recognition of gain.
Review of Options
Fractional Marital Formula:
– Option to allocate a minimum fractional
amount to the Marital Share.
– Options to adjust formula to reduce to lowest
overall death taxes (2 QTIPs).
– Recommended when you want to guarantee
that the applicable credit amount of first
spouse to die will be used (estates over $2M).
Review of the Options
Credit Shelter Pecuniary:
– A mandatory funding formula; must fund NonMarital Share.
– Solves for the largest pecuniary amount to the
Non-Marital Share, using date of death
values, that can pass estate tax free.
– Option to adjust formula to reduce to lowest
overall death taxes.
Review of the Options
Credit Shelter Pecuniary:
– Best formula for very large estates (> $30M)
where the pecuniary amount can be easily
calculated and satisfied quickly with cash or
easy to value assets.
– Sufficient liquid assets to fund the applicable
credit amount.
Review of the Options
Statutory minimum to Marital Share:
– Not tax motivated.
– Allocates to the Marital Share only what the
spouse would receive if he or she exercised
his or her right to elect against the estate
plan.
– Must make sure that the distribution of the
Marital Share qualifies for satisfaction of the
spousal election.
Review of the Options
Statutory minimum to Marital Share:
– Normally, the Non-Marital Share would go
straight to the residuary beneficiaries.
– Use where there is a concern the spouse will
exercise the spousal election.
Review of the Options
None to the Marital Share, spouse is
disinherited:
– Not tax motivated.
– There is no division into Marital and NonMarital Share.
– Option in WealthDocx to remove spouse from
priority role.
Review of the Options
None to the Marital Share, spouse is
disinherited:
– Spouse can be provided for by means of a
specific pre-residuary distribution (e.g. SNT
for spouse).
– If disinheriting spouse, should have a prenuptial agreement. Otherwise use the
statutory minimum to the marital share.
Planning the Marital Share
Marital Share – qualifying for the Unlimited
Marital Deduction:
– Outright to the surviving spouse.
– General Power of Appointment Trust.
– QTIP Trust.
Planning the Marital Share
• Outright to the spouse.
– Qualifies for the unlimited marital deduction.
– Will be included in the surviving spouse’s
estate; IRC §2033.
– No lifetime protection.
– Does not protect residuary beneficiaries.
Planning the Marital Share
General Power of Appointment Trust:
– All income distributed to spouse.
– Discretionary distribution of principal by
Trustee.
– Spouse can demand all or any portion of
principal at any time.
– Spouse has an unlimited testamentary
general power Included in surviving spouse’s
estate; IRC §2041.
Planning the Marital Share
General Power of Appointment Trust:
– Limited, if any, creditor protection.
– Perhaps some predator protection.
– Limited, if any, self-protection.
– Not a separate taxable entity from surviving
spouse.
Planning the Marital Share
QTIP Trust:
– All income distributed to spouse and spouse
must be sole beneficiary.
– Spouse can demand property be invested for
income.
– Optional discretionary distribution of principal
by Trustee.
– Optional 5 and 5 power.
– Optional limited testamentary power of
appointment.
Planning the Marital Share
QTIP Trust:
– Optionally qualifies for unlimited marital
deduction because spouse does not have a
general power of appointment.
– A separate taxable entity from surviving
spouse.
– Included in surviving spouse’s estate IRC
§2044 only to the extend qualified for marital
deduction.
Planning the Marital Share
QTIP Trust:
– Full trust protection, except for income.
– Protection for residuary beneficiaries.
– Option to give spouse demand right after 16
months.
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•
•
•
Converts to a general power of appointment trust.
No longer a separate taxable entity.
Loss of most creditor, predator and self protection.
Loss of protection for residuary beneficiaries.
Planning the Non-Marital Share
• Non-Marital Share does not qualify for the
Unlimited Marital Deduction
• Generally avoids estate tax on death of
first spouse to die by being limited in
amount to the deceased spouse’s
applicable exclusion amount.
Planning the Non-Marital Share
• Distributed in a manner that will avoid
estate tax on the death of the surviving
spouse:
– Bypass trust for the surviving spouse.
– Skip spouse and go straight to the residuary
beneficiaries.
Planning the Non-Marital Share
• Bypass Trust for the surviving spouse.
– Does not have to qualify for unlimited marital
deduction.
– Must be designed inclusion in the surviving
spouse’s estate; avoid §2041 inclusion.
– Spouse does not have to be sole beneficiary.
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Spouse only.
Spouse and descendants.
Spouse, descendants and named individual(s).
Spouse and named individual(s).
Planning the Non-Marital Share
• Bypass Trust for the surviving spouse.
– All income or discretionary income.
– Optional discretionary principal.
– Optional 5 and 5 power.
– Optional lifetime limited power of
appointment.
– Optional testamentary limited power of
appointment.
– Provides full trust protection.
– Protection for descendants.
Case Study #1
Tom and Cindy Client
• Ages 80 and 78 respectively.
• Married 60 years.
• 3 adult children: Peter, Paul and Mary; all
responsible.
• Total estate $300,000 all owned jointly.
Case Study #1
Design for Tom and Cindy Client
– Issues and considerations?
– Type of revocable living trust?
– Marital formula option?
– Distribution of Marital Share?
– Distribution of Non-Marital Share?
– Distribution of residuary?
Case Study #1
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Case Study #2
Tom and Cindy Client.
• Both age 50.
• Married 26 years.
• 3 children: Peter age 24, Paul age 20; Mary age
15.
• Total estate $500,000.
Case Study #2
Design for Tom and Cindy Client
– Issues and considerations?
– Type of revocable living trust?
– Marital formula option?
– Distribution of Marital Share?
– Distribution of Non-Marital Share?
– Distribution of residuary?
Case Study #2
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Case Study #3
Tom and Cindy Client.
• Both age 50.
• Married 26 years.
• 3 children: Peter age 24, Paul age 20; Mary age
15.
• Total estate $1,500,000.
Case Study #3
Design for Tom and Cindy Client
– Issues and considerations?
– Type of revocable living trust?
– Marital formula option?
– Distribution of Marital Share?
– Distribution of Non-Marital Share?
– Distribution of residuary?
Case Study #3
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Case Study #4
Tom and Cindy Client.
• Ages 60 and 58 respectively.
• Married 35 years.
• 3 children: Peter age 32, Paul age 30; Mary age
27.
• Total estate $8,000,000.
Case Study #4
Design for Tom and Cindy Client
– Issues and considerations?
– Type of revocable living trust?
– Marital formula option?
– Distribution of Marital Share?
– Distribution of Non-Marital Share?
– Distribution of residuary?
Case Study #4
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Case Study #5
Tom and Cindy Client.
• Ages 60 and 38 respectively.
• Married 5 years.
• Tom has 3 children: Peter age 32, Paul age 30;
Mary age 27.
• Cindy has 1 child: Sara age 15.
• Tom’s total estate $3,500,000.
• Cindy’s total estate $500,000.
Case Study #5
Design for Tom and Cindy Client
– Issues and considerations?
– Type of revocable living trust?
– Marital formula option?
– Distribution of Marital Share?
– Distribution of Non-Marital Share?
– Distribution of residuary?
Case Study #5
Design for Tom
Case Study #5
Design for Tom
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Design for Tom
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Design for Tom
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Design for Tom
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Design for Tom
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Design for Tom
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Design for Cindy
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Design for Cindy
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Design for Cindy
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Design for Cindy
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Design for Cindy
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Design for Cindy
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Design for Cindy
Case Study #6
Tom and Cindy Client.
• Ages 60 and 38 respectively.
• Married 5 years.
• Tom has 3 children: Peter age 32, Paul age 30;
Mary age 27.
• Cindy has 1 child: Sara age 15.
• Tom’s total estate $60,000,000.
• Cindy’s total estate $3,000,000.
Case Study #6
Design for Tom and Cindy Client
– Issues and considerations?
– Type of revocable living trust?
– Marital formula option?
– Distribution of Marital Share?
– Distribution of Non-Marital Share?
– Distribution of residuary?
Case Study #6
Design for Tom
Case Study #6
Design for Tom
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Design for Tom
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Design for Tom
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Design for Tom
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Design for Tom
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Design for Tom
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Design for Cindy
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Design for Cindy
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Design for Cindy
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Design for Cindy
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Design for Cindy
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Design for Cindy
Case Study #6
Design for Cindy