Transcript Slide 1

HELTER SHELTER
WHAT TO RECOMMEND FOR MARRIED CLIENTS WHOSE ESTATE PLANNING DOCUMENTS PROVIDE
FOR THE ESTABLISHMENT OF A CREDIT SHELTER TRUST ON THE FIRST DEATH
HOW THESE RULES AND STRATEGIES HAVE CHANGED
A Presentation by:
Alan S. Gassman, J.D., LL.M. and Christopher J. Denicolo, J.D., LL.M.
[email protected]
[email protected]
Thursday, June 16, 2011
1
The attached PowerPoint being used for our presentation makes
use of pages and exhibits that have been contributed in the past
by Professor Jerry Hesch and pages from the outline entitled 2011
Estate Tax Law Changes which is also attached as a separate
enclosure.
2
2009
2010
2011-2012
2013 and
thereafter
Our Best Guess
for Future
Annual Exclusion
Gifts (Don’t Count at
All)
$13,000
$13,000
$13,000 (unless
adjusted to
$14,000)
$13,000 (unless
adjusted to
$14,000)
Same
Tuition and Medical
Direct Payment
Exemption
Unlimited
Like Before
Unlimited
Like Before
Unlimited
Like Before
Unlimited
Like Before
Same
Lifetime Exemption
$1,000,000
$1,000,000
$5,000,000
(+ CPI in 2012)
$1,000,000
Between
$1,000,000 and
$5,000,000
$3,500,000 (less
what was used of
$1,000,000
above)
Unlimited—See
Footnote*
$5,000,000** (less
portion of used
lifetime gifting
exclusion)
$1,000,000 (less
portion of used
lifetimes gifting
exclusion)
Between
$3,500,000 and
$5,000,000
45%
35%
35%
55%
35%
Discounts and
Installment
Sales/GRAT’s, etc.
Available
Available
Available initially (at
least, not sure
about rest of 20112012)
Let’s hope these
are not lost in tax
legislation
compromises.
Who knows?
Portability of First
Dying Spouse’s
$5,000,000
Exemptions
No
No
Yes
Not as presently
legislated.
Will be
continued.
Estate Tax
Exemption
Estate Tax Rate
*Although the default is a $5,000,000 exclusion, with a 35% tax rate, an election can
be made to have no estate tax apply with respect to decedants dying in 2010, but the
income tax “stepped-up” basis is limited for larger estates.
** In addition to the above, the amount that passes estate tax-free ($10,000,000 per
couple) will increase with the cost of living beginning in 2012 in $10,000 increments.
***The State Death Tax Credit still does apply. There is a state death tax deduction in
2010 through 2012, and the State Death Credit would return in 2013.
****Note that exclusion increase does not apply for Non Resident Aliens or future or
already existing Qualified Domestic Trusts (QDOT’s) established for Non Resident
Alien spouses. They still are subject to a $60,000 estate tax exclusion level for assets
subject to US estate tax and need planning as much as ever!
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HELPING CLIENTS DECIDE UPON POSITIVE ACTIONS
Alan’s Odds and Results of Each Scenario
ODDS
RESULT
1. 70% Chance – The $5,000,000
plus CPI Rules will continue
after 2011 and 2012, with
portability.
A. Make the best use of $5,000,000 allowance by gifting and/or
upon death.
B. Consider large gifts to trusts for estate tax and creditor
protection purposes.
C. Simplify family loans, installment sale notes, split dollar
arrangements, family house ownership, and otherwise.
D. Go through the menu of planning techniques that may not have
applied before, and use and adjust as appropriate.
A. Making new gifts to existing or new
trusts that may benefit the grantor’s
spouse and even the grantor.
B. New installment sales using discounts
which, if disallowed, would not cause
estate tax by reason of new exemption
buffer.
C. Qualified Personal Residence Trusts.
D. Trusts to hold houses for children.
2. 10% Chance – The $5,000,000
exemption amount will continue
for death, but the lifetime gifting
allowance will go back down to
.between $1,000,000 and
$3,500,000.
A. Same as above, but with much greater inclination to use a large
portion of the new “temporary” $4,000,000 per person gifting
allowance while it is available.
A. Making gifts to an irrevocable trust that
may benefit the grantor’s spouse, or
possibly even the grantor if formed in
an asset protection state.
5% Chance – The exemption on
death will come down to
$3,500,000 adjusted by CPI and
with portability.
A.
Under this scenario the gift tax exclusion may be reduced to
somewhere between $1,000,000 and $3,500,000.
The strategies discussed above would be more highly desired.
A.
Under the above scenario clients who used
the strategies described above will have no
problems.
10% Chance – The estate tax will
be eliminated.
A.
Clients who die leaving a credit shelter trust may wish that it was
arranged to allow taxation on the death of the surviving spouse.
Therefore, install credit shelter trust language that allows a committee
to give the surviving spouse a power of appointment, or that gives an
independent party the right to make distribution of all credit shelter
trust assets to the spouse. Alternatively consider the Delaware tax
trap.
This is a reason to make sure that the planning done for the
alternative purposes above will not cause extreme family hardship.
A.
These strategies will do no harm under
scenarios 1 - 3, and will work if the federal
estate tax is eliminated in 2013, or
thereafter.
Reduce insurance premiums for policies
that may not be needed after estate tax is
eliminated.
Do not pull the plug on Great-Grandpa yet.
Consider a 9 month disclaim-able late 2012 gift - clients who are
somewhat reluctant to use their new $4,000,000 gifting allowance
might consider a late 2012 transfer to a trust that allows the
spouse to withdraw what is placed into the trust within 9 months
of funding, or to disclaim the right to withdraw in which case a
completed $4,000,000 gift will have occurred.
Clients who are candidates for making $4,000,000 gifts may hemand-haw until late 2012, so this strategy can be mentioned in
2011 so that they know it is available.
A.
3.
4.
B.
B.
5.
5% Chance – Congress and the
President will not agree until
after January 1, 2013 so for at
least a few days, weeks or
months we go back to a
$1,000,000 gift tax exemption
and a $1,000,000 death
exemption, and thereafter one of
the above applies.
A.
B.
EXAMPLES
B.
C.
B.
C.
Pull the plug on Great-Grandpa in
December of 2012.
Accelerate gifts as described in scenario
2 above.
Use flexible trust documents, as
described above, to take into account
that this may happen.
4
PROTECTIVE TRUST LOGISTICAL CHART
During both
spouse’s
lifetimes:
Upon first
death in
2011:
During
surviving
spouse’s
remaining
lifetime:
Upon
second
death:
After
deaths of
both
spouses:
First Dying Spouse’s
Revocable Trust
$5,000,000*
(Adjusted upward for
inflation after 1/1/2011)
Family
(By-Pass)
Generation Skipping Trust
(Not taxed in surviving spouse’s
estate)
Remaining
Assets
QTIP NonGST Trust
(Marital Deduction
Trust that is not
generation skipping)
Surviving spouse
can have the
right to redirect
how assets are
distributed on
second death.
Generation Skipping
Trusts for Children
Benefits children and
grandchildren.
Not estate taxable in their estates.
Surviving Spouse’s
Revocable Trust
Surviving Spouse’s Revocable Trust
(Will include assets owned jointly on first
death)
$5,000,000*
(Adjusted upward after
1/1/2011)
Children’s
Trust (or
outright
distributions)
Benefits children.
Taxable in their estates.
Generation Skipping
Trusts for Children
(Can merge with first dying
spouse’s Generation Skipping
Trusts shown on left)
Benefits children and
grandchildren.
Not estate taxable in their estates.
Remaining
Assets
Children’s
Trust (or
outright
distributions)
Benefits children.
Taxable in their estates.
*Assumes first spouse dies in 2011 and that the surviving spouse dies in a later year when the estate tax exemption is still $5,000,000.
*The Unified Credit Exemption is $5,000,000 in 2011 and 2012, and is scheduled to go back to $1,000,000 in 2013.
5
A married couple might provide for all assets to go to the surviving spouse, or to “lock up” up to $5 million on the first death to
facilitate a “credit shelter trust.”
CREDIT SHELTER
TRUST
SURVIVING SPOUSE
INHERITS ALL ASSETS
– USE PORTABILITY OF
HIS OR HER $5 MILLION
EXEMPTION
1. Uses the first dying spouse’s $5 million Generation
Skipping Tax exemption (the ability to benefit children
without being taxed at their level) – this is lost if
portability is used.
1. No preservation of first dying spouse’s GST
exemption, although a “reverse QTIP” election may be
able to be made in some situations to preserve some
of the first dying spouse’s GST exemption.
2. Assets can increase in value, to hopefully outpace
inflation
2. No CPI or other value increase after first dying spouse’s
death.
3. Better investment opportunities can be channeled to
shelter trust assets.
3. Combined assets will be used to pay personal expenses
and to hold “wasting assets.”
4. Co-Trusteeship can require conservatism.
4. Surviving spouse may lose or give away the assets in
remarriage or otherwise.
5. Can be protected from creditors of the surviving spouse.
5. Not creditor protected.
6. Can borrow money from surviving spouse at the
applicable Federal Rate (presently 2.27% for a 9-year
Note), and it runs a greater rate of return on its own
investment.
6. No ability to leverage with debt or otherwise.
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Primary Reasons to Rely Upon Portability as Opposed to
Full Funding of a Credit Shelter Trust for the Wealthy.
1.
Where property that will be eligible for depreciation or may be sold at ordinary rates will
likely receive a large step up on the death of the surviving spouse. For example, clients owning a $20,000,000
building subject to $15,000,000 of debt may be best served by assuring that the property will receive a stepped up
basis on the surviving spouse’s death, particularly if their family assets are not expected to exceed $10,000,000 in
total.
A valuation freeze mechanism may nevertheless be used to help avoid estate tax risk.
2.
Where the first dying spouse has significant IRA and pension accounts that constitute the
majority of what would be used to fund a Credit Shelter Trust, will the family prefer to have the spousal rollover
minimum distribution rules apply on an annually recalculated basis, with no distributions until the surviving spouse
has passed age 70 ½?
Planners should also take into account that qualified plan and IRA benefits payable to a
credit shelter trust have a net after income tax value that is significantly less than the amounts held under the IRA
or qualified plan. Depending upon the life expectancy of the surviving spouse, contemplated payouts, and
investment return expectations, portability may be a better alternative than qualified plan funding of a credit shelter
trust.
See the attached chart.
3.
foundation?
Do the clients leave everything that would be estate taxable to charity or a charitable
4.
Is there a state inheritance tax situation that would cause payment of taxes on the first
death unless portability is used – discussed later in this outline.
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THREE CHOICES FOR IRA BENEFITS
Surviving Spouse Age 73 and Oldest Child Age 51
CHOICE #1
CHOICE #2
CHOICE #3
Mrs. Client as Beneficiary
Advantages:
1) Ability to roll over Dr. Client’s IRA accounts
income tax-free into her own IRA account and to
take required minimum distributions based upon
her life expectancy, recalculated annually, based
upon the following percentages of the IRA account
for the next five years:
2011: 4.2017%
2012: 4.3668%
2013: 4.5455%
2014: 4.7170%
2015: 4.9261%
The above referenced distribution percentages are
less than what would occur if the IRA account was
payable to Dr. Client’s Revocable Trust.
2) Mrs. Client has the ability to direct the
disposition of the IRA funds upon her death, and
after Mrs. Client’s death, the required minimum
distributions from the IRA funds would be based
upon the life expectancies of her chosen
beneficiaries. The IRA funds would be protected
from the creditors of these beneficiaries if the funds
are paid to trusts for the benefit of such
beneficiaries after Mrs. Client’s death.
Disadvantages:
1) The future value of the IRA would be includable
in Mrs. Client’s estate for federal estate tax
purposes upon her death.
2) The above referenced distribution percentages
are greater than what would occur if the IRA
accounts were disclaimed so that they are payable
to the Client Irrevocable Trust.
Restated and Amended Trust Agreement of
Deceased Client’s Revocable Trust
Advantages:
1) IRA accounts can benefit Mrs. Client without
being subject to federal estate tax in her estate.
2) Mrs. Client cannot access the IRA accounts
above the annual required minimum distribution
without the consent of the other Co-Trustees,
which protects Mrs. Client from any undue
influence.
3) IRA benefits would be protected from the
creditors of Mrs. Client’s children after her death,
except to the extent of any distributions actually
made from the Trust to the children.
Disadvantages:
1) Annual required minimum distributions would be
based upon Mrs. Client’s life expectancy and a
special distribution table that is not recalculated
annually, which would be as follows for the next
five years:
2011: 7.0922%
2012: 7.6336%
2013: 8.2645%
2014: 9.0090%
2015: 9.9009%
The above referenced distribution percentages are
greater than what would occur if either of the two
other alternatives were chosen.
Thus, by using Mrs. Client’s life expectancy to
determine the annual required minimum
distributions, the IRA benefit distributions cannot
be “stretched” out over life expectancies of Mrs.
Client’s children after her death.
2) Mrs. Client will have to forfeit her ability to direct
the disposition of the IRA funds after her death.
The IRA funds will instead pass in separate trusts
for the benefit of Mrs. Client’s children upon her
death.
Irrevocable Trust for Children Only
Advantages:
1) The value of the IRA accounts would not be
includable in Mrs. Client’s estate for federal estate
tax purposes upon her death.
2) Annual required minimum distributions of IRA
benefits would be based upon the life expectancy
of the oldest of Mrs. Client’s children and a special
distribution table that is not recalculated annually,
which would be as follows for the next five years:
2011: 3.0960%
2012: 3.1949%
2013: 3.3003%
2014: 3.4130%
2015: 3.5336%
The above referenced distribution percentages are
optimal from an income tax planning standpoint, as
they are more favorable than the other alternatives
because they result is the lowest annual required
minimum distributions.
3) IRA benefits would be protected from the
creditors of Mrs. Client’s children after her death,
except to the extent of any distributions actually
made from the Trust to the children.
Disadvantages:
1) Mrs. Client cannot benefit from the IRA
accounts.
2) Mrs. Client cannot control the disposition of the
IRA funds upon her death. The IRA funds will
continue to be held pursuant to the terms of the
Trust.
8
The Planner's Idea and Checklist for Helping Clients During
the 2011 and 2012, $5 Million Bump Years
3. Facilitate having Credit Shelter Trust language be flexible to
allow trust assets to be includable in the estate of the surviving
spouse to get an income tax basis step-up.
9
PROTECTIVE TRUST LOGISTICAL CHART
During both
spouse’s
lifetimes:
Upon first
death in
2011:
During
surviving
spouse’s
remaining
lifetime:
Upon
second
death:
After
deaths of
both
spouses:
First Dying Spouse’s
Revocable Trust
$5,000,000*
(Adjusted upward for
inflation after 1/1/2011)
Family
(By-Pass)
Generation Skipping Trust
(Not taxed in surviving spouse’s
estate)
Remaining
Assets
QTIP NonGST Trust
(Marital Deduction
Trust that is not
generation skipping)
Surviving spouse
can have the
right to redirect
how assets are
distributed on
second death.
Generation Skipping
Trusts for Children
Benefits children and
grandchildren.
Not estate taxable in their estates.
Surviving Spouse’s
Revocable Trust
Surviving Spouse’s Revocable Trust
(Will include assets owned jointly on first
death)
$5,000,000*
(Adjusted upward after
1/1/2011)
Children’s
Trust (or
outright
distributions)
Benefits children.
Taxable in their estates.
Generation Skipping
Trusts for Children
(Can merge with first dying
spouse’s Generation Skipping
Trusts shown on left)
Benefits children and
grandchildren.
Not estate taxable in their estates.
Remaining
Assets
Children’s
Trust (or
outright
distributions)
Benefits children.
Taxable in their estates.
*Assumes first spouse dies in 2011 and that the surviving spouse dies in a later year when the estate tax exemption is still $5,000,000.
10
*The Unified Credit Exemption is $5,000,000 in 2011 and 2012, and is scheduled to go back to $1,000,000 in 2013.
Methods of Providing a Stepped-Up Basis on the Surviving Spouse’s Death for Assets That
Would Typically Be Held Under a Credit Shelter Trust to Avoid Estate Tax
CHOICE
1. Outright Marital Devise with
Disclaimer to Credit Shelter Trust
Permitted. In lieu of a devise to a
Credit Shelter Trust, everything is
devised outright to the surviving
spouse, with the spouse having
the ability to disclaim all or a
portion of these assets into the
Credit Shelter Trust.
ADVANTAGES
DISADVANTAGES
1.Easy to
understand and
insert into present
and future trust
documents.
2. Would be
simple to
administer.
3.Allows the
surviving spouse
to decide which
assets he or she
will own outright
and which assets
will be held in
trust for his or her
benefit.
1.In some states this may expose assets
to creditors of the surviving spouse if the
creditors exist when the first dying spouse
passes.
2. Surviving spouse loses his or her
power to appoint how trust assets in the
Trust pass on his or her subsequent
death (to the extent of the assets
disclaimed into the Trust).
3.The surviving spouse may be trustee
only if his or her ability to distribute the
trust assets is limited by an ascertainable
standard.
11
CREDIT SHELTER TRUST ALTERNATIVES FOR CLIENTS WHO WANT FLEXIBILITY IN THEIR
PLANNING
Alternative #1 Outright Marital Devise with Disclaimer to Credit Shelter Trust Permitted.
Under this strategy, the first dying spouse’s trust can provide for an outright devise to the
surviving spouse, and to the extent that the outright devise is disclaimed by the surviving
spouse, the trust assets would pass to a “Disclaimer Shelter Trust.” The Disclaimer Shelter Trust
is essentially a Credit Shelter Trust that would not be subject to federal estate tax on the
surviving spouse’s subsequent death. This technique is described in great detail in BNA portfolio
800-2nd, at Section XII.C.1.
The disclaimed assets would then be subject to a probate, and under a typical estate
plan would “pour over” into the Credit Shelter Trust established on the death of the deceased
spouse. In addition to disclaiming outright devises, the surviving spouse may be able to disclaim
one-half or more of any assets that were jointly owned with the deceased spouse. Life
insurance benefits can work the same way, if the spouse is the named beneficiary and the estate
of the decedent or the Credit Shelter Trust is the alternate beneficiary. IRA benefits can also
work this way, if the spouse is the named beneficiary and the Credit Shelter Trust is the
alternate beneficiary, but the minimum distribution rules under Internal Revenue Code Section
409 and applicable Treasury Regulations must be taken into account in determining whether
Credit Shelter Trust funding is more important than delaying distributions until the year after the
surviving spouse reaches the age 70 1/2. The “stretch trust” techniques that can be used for
Credit Shelter Trusts may become more important for clients who would have otherwise had
sufficient assets to fund a Credit Shelter Trust with non-IRA assets before the exclusion went up
to $5,000,000.
12
Methods of Providing a Stepped-Up Basis on the Surviving Spouse’s Death for Assets That
Would Typically Be Held Under a Credit Shelter Trust to Avoid Estate Tax
CHOICE
2. Special Trustees May Cause
Credit Shelter Trust Assets to be
Transferred to Surviving Spouse.
An independent advisor or
committee will have the power to
cause Credit Shelter Trust assets
to be devised directly to the
surviving spouse to get a stepped
up basis on his or her death.
ADVANTAGES
DISADVANTAGES
1. Easy to
understand and
insert into present
and future trust
documents.
2. Would be
simple to
administer.
1. Giving the surviving spouse outright
ownership of assets can be unwise from
a creditor protection, spendthrift,
remarriage and undue influence
standpoint, and this could result in many
fortunes being lost.
2. Would cause the distributed assets to
be included in the estate of the surviving
spouse, which could be problematic if
portability is not applicable at that time.
3. What fiduciary duties are involved with
monitoring health and circumstances to
know if and when to activate this?
13
CREDIT SHELTER TRUST ALTERNATIVES FOR CLIENTS WHO WANT FLEXIBILITY IN THEIR
PLANNING
Alternative #2 Having Special Trustees Who Can Later Cause Credit Shelter Trust Assets to be
Transferred to Surviving Spouse. As described in the above chart, this strategy is a relatively
simple solution to providing flexibility with respect to the decision of whether to fund a Credit
Shelter Trust or to use portability on the death of the first dying spouse. Language can be added
to clients’ revocable trusts to provide this flexibility on the death of the first dying spouse, and
can also allow the Trustee or Trust Protectors to bestow a general power of appointment on the
surviving spouse to provide for greater flexibility. Sample language is as follows:
In order to provide for possible future tax planning under the XYZ Credit Shelter Trust, if and when formed and funded, I
hereby appoint __________, __________ and __________ as Distribution Advisors, and, by majority vote of them, any
assets held under said Family Trust may be distributed to or for my said spouse, regardless of need, provided that I
request that her interests and the interests of our decedents be carefully considered before any such distribution is made.
Such transfer may be outright to my spouse, or into a separate trust created by the Distribution Advisors which would be
identical to this trust, but may provide my spouse with a testamentary power of appointment exercisable in favor of
creditors of my spouse’s estate, which I am advised may be beneficial from a tax planning standpoint.
Further, said Distribution Advisors shall have the power to provide for my spouse to have a Power of Appointment over
all or a portion of the assets of the XYZ Credit Shelter Trust, exercisable in favor of the creditors of my spouse’s estate, if
they deem this to be appropriate after receiving written advice from a lawyer who is Board Certified in Estate Planning or
Taxation.
If a majority of __________, __________ and __________ are unable to act, then the party that would appoint Trustees in
the event of a vacancy in the office of Trustee under Section _______of this Trust Agreement shall appoint one or more of
a duly licensed lawyer that is Board Certified by the _______________ Bar in Wills, Trusts & Estates, a CPA who has done
work for our family for at least 15 years, or a Licensed Trust Company to serve as Distribution Advisors. Notwithstanding
the previous sentence, in no event can any person or entity be appointed if such person or entity is considered as a
“related or subordinate party” with respect to me or to my said spouse as such term is defined under Internal Revenue
Code Section 672(c).
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REVISED PROTECTIVE TRUST LOGISTICAL CHART SHOWING CLAYTON QTIPS
During both
spouse’s
lifetimes:
First Dying Spouse’s
Revocable Trust
Upon first
death in
2011:
$5,000,000*
During
surviving
spouse’s
remaining
lifetime:
Upon
second
death:
After
deaths of
both
spouses:
(Adjusted upward for inflation after 1/1/2011)
Family
(By-Pass)
Generation
Skipping Trust
QTIP
MECHANISM
(Not taxed in surviving
spouse’s estate)
Surviving spouse
can have the
right to redirect
how assets are
distributed on
second death.
Remaining
Assets
QTIP NonGST Trust
(Marital Deduction
Trust that is not
generation
skipping)
The assets in the Clayton QTIP would
be includable in the surviving
spouse’s gross estate, but the
surviving spouse can use some of his
or her DSUEA, and could make a
“reverse QTIP election” to utilize any
portion of the first dying spouse’s
unused GST exemption.
Generation Skipping
Trusts for Children
Benefits children and
grandchildren.
Not estate taxable in their estates.
Surviving Spouse’s
Revocable Trust
Children’s
Trust (or
outright
distributions)
Benefits children.
Taxable in their estates.
Surviving Spouse’s Revocable Trust
(Will include assets owned jointly on first
death)
$5,000,000*
(Adjusted upward after
1/1/2011)
Generation Skipping
Trusts for Children
(Can merge with first dying
spouse’s Generation Skipping
Trusts shown on left)
Benefits children and
grandchildren.
Not estate taxable in their estates.
Remaining
Assets
Children’s
Trust (or
outright
distributions)
Benefits children.
Taxable in their estates.
*Assumes first spouse dies in 2011 and that the surviving spouse dies in a later year when the estate tax exemption is still $5,000,000.
15
*The Unified Credit Exemption is $5,000,000 in 2011 and 2012, and is scheduled to go back to $1,000,000 in 2013.
Methods of Providing a Stepped-Up Basis on the Surviving Spouse’s Death for Assets That
Would Typically Be Held Under a Credit Shelter Trust to Avoid Estate Tax
CHOICE
ADVANTAGE
DISADVANTAGES
3. Clayton QTIP Arrangement. An
independent committee is given
the power to cause the Credit
Shelter Trust to be a QTIP trust (a
Clayton “QTIP”) so that it will be
subject to federal estate tax on the
surviving spouse’s death without
having to transfer the assets
outright to the surviving spouse.
[AS SHOWN ON THE PREVIOUS
CHART]
1. Works well if
the family is best
off taking the
marital deduction
on the first death,
and expects to
have portability
apply to eliminate
estate tax on the
second death.
1. Not easy to explain this “Clayton QTIP”
system to clients.
2. May require slightly more complicated
drafting than a simple payment
enablement clause as described in
Choice 2.
3. Would cause the QTIP assets to be
included in the estate of the surviving
spouse, which could be problematic if
portability is not applicable at that time.
16
CREDIT SHELTER TRUST ALTERNATIVES FOR CLIENTS WHO WANT FLEXIBILITY
IN THEIR PLANNING
Alternative #3 Clayton QTIP Arrangement. Under prior estate tax law, the IRS would
not permit a QTIP trust to qualify for the federal estate tax marital deduction if the
personal representative of the decedent’s estate (or the Trustee of the decedent’s
revocable trust) had the power to determine whether the trust would meet all of the
requirements of the marital deduction. These requirements, which are unchanged by
the new estate tax law, are basically that all income must be payable to the surviving
spouse, that the surviving spouse be the sole lifetime beneficiary of the trust, and that
the surviving spouse have the power to make the trust assets productive.
After much litigation, the IRS issued Treasury Regulations Section 20.2056(b)-7(d)(3)(i)
which explicitly says that a trust is not required to meet the marital deduction
requirements above, except as to any portion that is to actually qualify for the marital
deduction by the QTIP election filed on the first dying spouse’s estate tax return.
It is prudent that the surviving spouse not be appointed as the personal representative or
Trustee who makes the QTIP election. This is because the power of appointment rules
under Sections 2041 and 2514 may cause the value of the assets in the non-QTIP
portion of the trust to be included in the spouse’s gross estate upon his or her
subsequent death, or the spouse may be deemed to have made a gift to the extent that
assets are not used to fund a QTIP trust.
17
CREDIT SHELTER TRUST ALTERNATIVES FOR CLIENTS WHO WANT FLEXIBILITY IN THEIR PLANNING
Alternative #3 Clayton QTIP Arrangement Continued.
The following is potential language to amend a client’s revocable trust to allow a Credit Shelter Trust to become a
Clayton QTIP with outright disposition rights, in the instance that the family elects to use portability.
I hereby appoint _______________, ________________ and ____________ as Independent Fiduciaries for the purpose of allowing
them to determine whether there should be an alteration of the CLIENT Credit Shelter Trust established under Section 4.02(d) of
this Trust Agreement whereby some or all of such assets may be held as a QTIP Marital Deduction Trust, as separate QTIP Marital
Deduction Trusts, and/or paid, in whole or in part, outright to my spouse for income and estate tax planning purposes in view of
the new estate tax law.
In order to facilitate this, said Independent Fiduciaries shall have the power on a timely filed federal estate tax return
filed with respect to my estate, to designate that all or a portion of the CLIENT Credit Shelter Trust shall qualify as a Qualified
Terminal Interest Property Trust under Internal Revenue Code Section 2056(b)(7) in which case such Trust shall meet the following
requirements, and shall be construed to have the following provisions effective upon my death: (a) the Trustee shall pay all income
to my spouse beginning upon my date of death, no less frequently than annually; (b) the Trust assets shall be used solely for my
spouse during said spouse’s lifetime, with any and all distributions to be made solely to said spouse; and (c) the Trustee shall be
required to keep the Trust assets under such Trust productive, provided that such requirements shall not apply except to the
extent that my Personal Representative, upon the written instructions from the majority of the Independent Fiduciaries, elects for
such Trust to qualify for the federal estate tax marital deduction by making a “Clayton QTIP Election” pursuant to Internal Revenue
Code Section 2056 and Treasury Regulation 20.2056(b)-7)(d)(3)(i). In addition, if determined appropriate by the Independent
Fiduciaries, the Trust assets may be paid in whole or in part outright to my said spouse.
If a majority of __________, __________ and __________ are unable to act, then the party that would appoint
Trustees in the event of a vacancy in the office of Trustee under Section _________ of this Trust Agreement shall appoint one or
more of a duly licensed lawyer that is Board Certified by the Florida Bar in Wills, Trusts & Estates, a CPA who has done work for our
family for at least 15 years, and/or a Licensed Trust Company to serve as Independent Fiduciaries, provided that at all times there
shall be at least two individuals or a Licensed Trust Company serving as Independent Fiduciaries. Notwithstanding the previous
sentence, in no event can any person or entity be appointed if such person or entity is considered as a “related or subordinate
party” with respect to me or to my said spouse as such term is defined under Internal Revenue Code Section 672(c).
18
Methods of Providing a Stepped-Up Basis on the Surviving Spouse’s Death for Assets That
Would Typically Be Held Under a Credit Shelter Trust to Avoid Estate Tax
CHOICE
4. Committee to Provide a Power
of Appointment. Allow a committee
or independent advisor to give the
surviving spouse a power of
appointment all or a portion of the
assets in the Credit Shelter Trust
to creditors of his or her estate, or
a broader appointment power only
exercisable with consent of
appointed nonadverse parties.
ADVANTAGE
1. Allows for
continued
protection of
assets.
DISADVANTAGES
1.Not easy to explain this Choice to
clients.
2. Uncertainty as to whether the law will
allow this strategy without causing
inclusion of all of the Trust assets in the
surviving spouse’s gross estate.
3. The individuals or institutions appointed
to provide the power of appointment
should not be permitted beneficiaries of
the trust and should not be able to grant
any power of appointment to themselves.
The surviving spouse should not need the
consent of the committee to exercise the
power or the power may be deemed
illusory.
19
CREDIT SHELTER TRUST ALTERNATIVES FOR CLIENTS WHO WANT FLEXIBILITY
IN THEIR PLANNING
Alternative #4 Committee to Provide a Power of Appointment. The authors are
concerned that if a couple opts to use portability, surviving spouses will not be as well
protected as if they had funded a Credit Shelter Trust to benefit the surviving spouse for
his or her lifetime. Asking someone who has just lost his or her lifelong spouse to make
a significant financial decision within nine months of death by disclaimer, and to also
give up the power to appoint how the trust assets will pass by power of appointment, is
not an optimal solution. Neither is transferring assets outright to a surviving spouse who
may lose them to creditors, divorce claims, or overly aggressive son and daughter-inlaws an ideal option.
The Clayton QTIP strategy typically works well, but the decision must be made
on the first dying spouse’s estate tax return, which will be due no later than 15 months
after the death of the first spouse, and explaining the mechanism to clients may be
challenging.
The authors therefore favor providing a committee of impartial advisors, who have the
right to give the surviving spouse a power to appoint the trust assets to creditors of his or
her estate. As a result, the surviving spouse will be considered the owner of the assets
under the trust for estate tax and income tax step-up basis purposes, even though the
power given to the surviving spouse may not be exercisable unless he or she has
consent from one or more unrelated parties. If the estate tax is eliminated and a family
wants to receive a stepped-up basis on the death of the surviving spouse, then the
following clause may be used:
20
CREDIT SHELTER TRUST ALTERNATIVES FOR CLIENTS WHO WANT FLEXIBILITY IN
THEIR PLANNING
Alternative #4 Committee to Provide a Power of Appointment Continued
I hereby appoint ____________________, ___________________, and ____________________ as
Independent Fiduciaries for the sole and limited purpose of having the authority to bestow upon
my spouse a power of appointment whereby said spouse may appoint all or a portion of the Trust
assets to creditors of my said spouse’s estate, if deemed appropriate by any two of said
Independent Fiduciaries at any time that the Trust is in existence, exercisable by a written
instrument signed by a majority of the Independent Fiduciaries. The purpose of such power of
appointment would be to allow for an increase in tax basis upon my spouse’s death, if
circumstances arise whereby federal estate tax is less of a concern than capital gains taxes, or
other appropriate circumstances.
The Independent Fiduciaries shall be indemnified and held harmless by the Trustee for any liability
or expense incurred as the result of providing my said spouse with such power of appointment,
and are encouraged to consider whether providing such power would make the trust assets
subject to creditor claims of my spouse, and whether the situs of the trust should appropriately be
transferred to a different state for creditor protection purposes before such power of appointment
is granted.
If a majority of __________, __________ and __________ are unable to act, then the party that
would appoint Trustees in the event of a vacancy in the office of Trustee under Section ________
of this Trust Agreement shall appoint one or more of a duly licensed lawyer that is Board Certified
by the Florida Bar in Wills, Trusts & Estates, a CPA who has done work for our family for at least 15
years, and/or a Licensed Trust Company to serve as Independent Fiduciaries, provided that at all
times there shall be at least two individuals or a Licensed Trust Company serving as Independent
Fiduciaries. Notwithstanding the previous sentence, in no event can any person or entity be
appointed if such person or entity is considered as a “related or subordinate party” with respect to
me or to my said spouse as such term is defined under Internal Revenue Code Section 672(c).
21
Methods of Providing a Stepped-Up Basis on the Surviving Spouse’s Death for Assets That
Would Typically Be Held Under a Credit Shelter Trust to Avoid Estate Tax
CHOICE
5. The Delaware Tax Trap.
Allow
the
surviving
spouse to exercise a
power of appointment that
creates a new trust that
someone else holds a
power of appointment
over which would permit
extension of the existence
of trust arrangements
beyond the initial state
law
rule
against
perpetuities.
ADVANTAGES
DISADVANTAGES
1. Allows for inclusion under 1. A complex area of law.
circumstances presently existing 2. No way to predict whether
under some credit shelter trusts. the law may change in the future
2. Does not require significant with respect to this archaic
drafting changes from how trusts doctrine.
may now be situated.
3. The laws of most states will
presently prevent the exercise of
a power of appointment to
effectively extend the rule
against perpetuities.
IDEA – Will the trust be
moveable to a state that will
permit the Delaware tax trap to
be triggered?
22
CREDIT SHELTER TRUST ALTERNATIVES FOR CLIENTS WHO WANT FLEXIBILITY IN
THEIR PLANNING
Alternative #5 Delaware Tax Trap
In some cases, the Delaware Tax Trap can be used to cause assets under a Credit
Shelter Trust to be considered as owned by the surviving spouse for basis step up and estate
tax inclusion purposes. This will apply only where (1) the spouse holds a limited power to
appoint how assets held under a trust will pass, (2) the spouse exercises the power to create
another power of appointment in another person (which under state law extends the time
period for vesting of the assets subject to the second power of appointment beyond the
period of time permitted for the original trust under the rule against perpetuities), and (4) state
law permits such appointment and extension of vesting period to apply.
The “Delaware Tax Trap”, is the colloquial name for Internal Revenue Code
Sections 2041(a)(3) and 2514(d), which cause the imposition of estate or gift tax when a
person holding a limited power of appointment exercises the power to give another person a
general power of appointment, which can be exercised to postpone the vesting of an interest
in property beyond the Rule Against Perpetuities period under local law.
The law was passed in response to Delaware’s then aggressive Rule Against
Perpetuities trust law, which permitted extension of the duration of generation skipping trusts
beyond the initial Rule Against Perpetuities that existed when a trust had been formed by
“restarting” the Rule Against Perpetuities period upon the exercise of a subsequent power of
appointment. The Rule Against Perpetuities is the name given to state laws which limit the
duration of trusts established under a will or trust.1 Under the common law, this required that
non-charitable trusts terminate within 21 years after the death of every person named as a
beneficiary in the original document upon formation.
23
The Planner's Idea and Checklist for Helping Clients During
the 2011 and 2012, $5 Million Bump Years
4.Assuming the desire for use of a Credit Shelter Trust, evaluate
resituate assets to facilitate full funding of the Credit Shelter Trust
on first death.
24
Bob Burke’s Rule:
For every complex situation there is a
simple answer…and it is the wrong answer.
Complex problems almost always
call for complex solutions.
25
Determining How To Best Allocate Assets As Between A Married Couple
Part I
General Rules:
Typically want each trust funded with at least $3,500,000 worth of assets on death for estate tax planning.
-
May be funded from ½ of tenancy by entireties assets via disclaimer and probate or by life
insurance/pension/IRA assets.
SEE NEXT PAGE FOR SECOND TIER PLANNING
A COMMON SOLUTION - to use a limited partnership or similar mechanisms and have no assets directly in the "high risk" spouse's trust,
half to two-thirds of the assets held as tenants by the entireties, and half to two-thirds of assets directly in the "low risk" spouse's trust.
Copyright © 2011 Gassman, Bates & Associates, P.A.
26
Determining How To Best Allocate Assets As Between A Married Couple
Part II
Subsidiary Entity Techniques:
Limited partnerships can be used to facilitate discounts, for estate tax purposes, and for
charging order protection.
Limited partnerships and LLCs can also be used to provide "firewall protection" from activities
or properties owned.
A COMMON SOLUTION - to use a limited partnership or similar mechanisms and have no assets directly in the "high risk" spouse's trust,
half to two-thirds of the assets held as tenants by the entireties, and half to two-thirds of assets directly in the "low risk" spouse's trust.
Copyright © 2011 Gassman, Bates & Associates, P.A.
27
ESTATE AND ASSET PROTECTION PLANNING FOR THE SINGLE PROFESSIONAL
SINGLE (NONMARRIED)
INDIVIDUAL
Child or Children
529 Plans
UGMA Accounts (Subject to Creditors of the Child)
Child's or Children's Automobiles?
(Who signed for driving priviledges?)
IRA Account
Automobile
401k/Pension Account
HOMESTEAD
Annuity Contracts
Life Insurance
LIVING TRUST
Can deposit wages into a wage account
OFFSHORE
ASSET
PROTECTION
TRUST
GIFTING TRUST
ALASKA ASSET
PROTECTION
TRUST
3%
3%
97%
97%
S Corporation Stock
1%
WAGE
ACCOUNT?
Wages
PROFESSIONAL
PRACTICE
CORPORATION
Long
Term
Lease
PROFESSIONAL
BUILDING AND/OR
EQUIPMENT LLC
99%
REAL ESTATE
FLP
SECURITIES FLP
Brokerage Accounts
Furniture, equipment, accounts receivable
LLC
Copyright © 2011 Gassman, Bates & Associates, P.A.
Building 1
LLC
LLC
Lot 1
Condo 1
28
The Planner's Idea and Checklist for Helping Clients During
the 2011 and 2012, $5 Million Bump Years
a. Are there $5 million worth of assets under each spouse’s revocable
trust?
b. To the extent that a spouse has less than $5 million of assets under
his or her revocable trust, consider having assets being held jointly by
the spouses that can be disclaimed to the Credit Shelter Trust. This
will generally be one-half of assets held jointly by the spouses, except
for 100% of joint accounts that were funded solely by the first dying
spouse?
c. Consider using a joint trust, with each spouse having a full general
power of appointment to facilitate funding of a Credit Shelter Trust with
all joint trust assets on the first death. See Private Letter Rulings
200101021 and 200210051.
d. Consider adding term or other life insurance to make best use of
first dying spouse’s allowance, if high income earner or inheritor
situation indicates need for full funding.
29
Sample Joint Trust Language That Planners Can Incorporate
Into Their Traditional Revocable Trust Documents.
2.01
Reservation of Power. We expressly reserve the right, at any time and from time to time, while
both of us are still living, by instrument in writing signed by both of us and delivered to the Trustee, to alter,
amend, or revoke this trust instrument, either in whole or in part. In addition, while both of us are living,
either of us may terminate this Trust by providing signed written notice to the other of us and to the
Trustee, and in the event of such termination, the Trustee shall deliver the trust assets to us in both of our
names as tenants in common, or, upon the written direction of both of us, to us in both of our names as
tenants by the entireties.
It is understood that upon the death of one of us this Trust shall be irrevocable, and the first
dying spouse will have the power to appoint trust assets pursuant to Section 4.01 hereof.
4.01
Testamentary Power of Appointment in First Dying Spouse. The first to die of us shall have a
Power of Appointment (as defined in Section 1.09 of this Trust Agreement) with respect to all or any
portion of the assets of this Trust, effective upon death, to dispose of remaining Trust property as such
Grantor directs pursuant to the exercise of such Power. This Power of Appointment shall include a power
to appoint such property to creditors of such Grantors’ estate and shall be exercisable alone and in all
events, notwithstanding any provision in this Trust Agreement to the contrary, provided that in order to
exercise this Power of Appointment written notice of such exercise must be given immediately to the other
Grantor in order to be effective, in writing, and must be executed in the presence of two witnesses and a
notary.
30
The Planner's Idea and Checklist for Helping Clients During
the 2011 and 2012, $5 Million Bump Years
e. Wealthier spouse may give less wealthy spouse a power to
appoint sufficient assets under wealthier spouse’s revocable
trust, exercisable on death of less wealthy spouse, to fund a
Credit Shelter Trust with assets held under wealthier surviving
spouse’s own revocable trust.
See Private Letter Ruling
200403094.
31
Sample Language To Fund a Credit Shelter Trust at Less
Wealthier Spouse’s Death with Assets Held Under Wealthier
Spouse’s Living Trust
SAMPLE LANGUAGE FOR WEALTHIER SPOUSE’S LIVING TRUST:
Lifetime Power of Appointment in Mary L. Smith. During my lifetime, and so long as I am married to JOHN B. SMITH, MARY L.
SMITH shall have a lifetime testamentary power of appointment, exercisable by a written instrument executed by her in the presence
of two witnesses and a notary, to be effective upon her death, to appoint an amount in value of Trust assets equal to the excess of (a)
the maximum amount that she may pass without being subject to federal estate tax at the time of her death, and (b) the amount of
her personal assets and the value of any other assets includable in her gross estate, less any assets includable in her gross estate
which qualify for the federal estate tax marital deduction, but in no event more than $2,500,000. I recognize that the maximum
amount that she would be able to pass free of estate tax will be based upon the then applicable estate tax exemption amount, less
lifetime taxable gifts that she will have made. For example, if MARY L. SMITH survives me and has $400,000 in personal assets, we
have a $1,000,000 joint with right of survivorship account, and upon her death I therefore own the entire joint account outright and
inherit $25,000 of the $400,000 in assets that she has under her Will, then if at the time of her death the federal estate tax exemption
is $2,500,000 but she has made a $500,000 taxable gift during her lifetime, then the amount subject to this power will be based upon
$2,500,000 minus the $500,000 lifetime gift minus $375,000 for a total of $1,625,000. All valuation shall be based upon date of death
values. Such power of appointment may be exercisable by her only under a Last Will and Testament or applicable Codicil duly
admitted to probate in a court of competent jurisdiction.
SAMPLE LANGUAGE FOR LESS WEALTHIER SPOUSE’S LAST WILL AND TESTAMENT:
Exercise of Testamentary Power of Appointment. I recognize that I have a testamentary power of appointment provided to me under
the JOHN B. SMITH REVOCABLE TRUST being amended and restated this date, and in the event that I predecease JOHN B.
SMITH, I hereby exercise such testamentary power of appointment, but only to the extent that property under the JOHN B. SMITH
REVOCABLE TRUST that does not exceed the maximum amount that can pass free of estate tax in the matter of my estate after
taking into consideration any and all marital deduction devise, and in no event exceeding the amount of $2,500,000.
The amount so devised shall be devised to the MARY L. SMITH LIVING TRUST, with the residue of my estate as set forth in Section
4.1 of this Last Will and Testament, in order to facilitate funding of the SMITH FAMILY TRUST with the maximum amount that can
pass estate tax free to benefit my said husband without being subject to federal estate tax in his estate.
32