Transcript Slide 1

GASSMAN LAW ASSOCIATES, P.A.
presents
ESTATE PLANNING
FOR 2013
BEYOND THE OBVIOUS
Tuesday, February 5, 2013
5:00 p.m.
Alan S. Gassman, Esq.
[email protected]
Thomas J. Ellwanger, Esq.
[email protected]
Kenneth J. Crotty, Esq.
[email protected]
Gassman Law Associates, P.A.
1245 Court Street
Clearwater, FL 33756
727-442-1200
www.gassmanlawassociates.com
Christopher J. Denicolo, Esq.
[email protected]
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To register please visit:
https://www2.gotomeeting.com/register/933123114 or
email [email protected] or
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[email protected]
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2013 TAX RATES SUMMARY FROM BOOK ENTITLED THE ESSENTIAL PLANNING
GUIDE TO THE 2013 INCOME AND ESTATE TAX INCREASES
Copyright © 2013 Haddon Hall Publishing, LLP
2012
2013
2013 Medicare Tax
2013 Highest Tax
Long Term Capital
Gain
15%
20%
3.8%
23.8%
Short Term
Capital Gain
35%
39.6%
3.8%
43.4%
C Corporation
Dividend Income
15%
20%
3.8%
23.8%
Ordinary Income
35%
39.6%
3.8%
43.4%
Employer: 1.45%
Employee: 2.35%
Total:
3.8%
(The additional .9%
only applies as
shown to the right.)
Additional .9% on
wages exceeding
$200,000 for single
taxpayers and
$250,000 or
married taxpayers.
3.8% total
Employment
Taxes
Employer: 1.45%
Employee: 1.45%
Total:
2.9%
FICA/FUTA Taxes
6.2%
Employer/4.2%
Employee on wages
up to $110,100.
6.2% Employer
6.2% Employee on
wages up to
$113,700.
N/A
12.4% on wages up
to $113,700.
$5,250,000
Exemption
35% Rate
$5,250,000
40% Rate
N/A
40%
Estate Tax
Copyright © 2013 Gassman Law Associates, P.A.
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New Estate Tax Law Summary
2009
2010
2011-2012
2013
What may change.
$13,000
$13,000
$13,000
$14,000
Will remain the same
(with adjustments
for inflation)
Tuition and Medical
Direct Payment
Exemption
Unlimited
Like Before
Unlimited
Like Before
Unlimited
Like Before
Unlimited
Like Before
Will remain the same
Lifetime Exemption
$1,000,000
$1,000,000
2012 - $5,120,000
$5,250,000
Will remain at
$5,250,000
(with adjustments
for inflation)
2013 $5,250,000** (less
portion of used lifetime
gifting exclusion)
$5,250,000
(less portion of
used lifetimes
gifting
exclusion)
Will remain at
$5,250,000
(with adjustments
for inflation)
Annual Exclusion Gifts
(Don’t Count at All)
2013 - $5,250,000
Estate Tax Exemption
Estate Tax Rate
Discounts and
Installment
Sales/GRAT’s, and
Defective Grantor
Trusts as Estate
Planning Tools (I.E.
$3,500,000
(less what was
used of
$1,000,000
above)
Unlimited—See
Footnote*
2012 - $5,120,000
45%
35%
35%
40%
Will remain at 40%
Available
Available
Available
Available
initially (at
least, not sure
about rest of
2013)
Who knows?
No
No
Yes
Yes
Will be continued.
Defective Grantor Trusts may not
automatically be included in the
Grantor’s Gross Estate for Estate
Tax Purposes)
Portability of First
Dying Spouse’s
$5,250,000 Exemptions
*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 decedents 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.
Copyright © 2013 Gassman Law Associates, P.A.
***The State Death Tax Credit still does apply. There is a state death tax deduction in 2010
through 2012, and in 2013 and thereafter as present continues to apply.
****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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PROTECTIVE TRUST LOGISTICAL CHART
During
both
spouse’s
lifetimes:
First Dying Spouse’s
Revocable Trust
Upon first
death in
2013:
During
surviving
spouse’s
remaining
lifetime:
Upon
second
death:
After
deaths of
both
spouses:
$5,250,000*
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)
$5,700,000?*
Children’s
Trust (or
distributions)
Benefits children.
Taxable in their estates.
Generation Skipping
Trusts for Children
(Will 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
distributions)
Benefits children.
Taxable in their estates.
*Assumes first spouse dies in 2013 and that the surviving spouse dies in a later year when the estate tax exemption has gone up to $5,700,000 (based upon 8.57% cumulative inflation). The
estate tax exemption is $5,250,000 for those that die in 2013, and increases with inflation in $10,000 increments.
If the first spouse does not use the entire exemption amount, what remains may be added to the surviving spouse’s allowance under the “portability rules” but will not grow with inflation.
Copyright © 2013 Gassman Law Associates, P.A.
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The Administration’s Fiscal Year 2013 Revenue Proposals
Released by the Department of Treasury February 2012 include
the following:
1. Page 75 – A $3,500,000 estate and generation skipping tax exemption, a
$1,000,000 gift tax exemption, and a 45% top rate that would be effective
January 1, 2013.
2. Page 79 – A new category of “disregarded restrictions” would be ignored in
valuing family controlled entities and would include limitations on a holder’s right
to liquidate an ownership interest.
3. Page 80 – Grantor Retained Annuity Trusts (GRATs) would have a minimum
term of 10 years and a maximum term of the life expectancy of the life of the
annuitant plus 10 years.
The remainder interest of a GRAT would have to have a value of greater than $0.
4. Page 81 – Generation skipping tax exclusion allocated to a trust would
terminate on the 90th anniversary of the creation of the trust. This proposal
would apply to trusts created after enactment and to post enactment additions to
otherwise GST exempt trusts.
5. Page 83 – A Grantor Trust considered as owned by an individual for income tax
purposes would also be considered as part of that individual’s estate for estate tax
purposes, and transfers from such a trust would be considered as gifts from the
Grantor subject to the gift tax.
This would apply with respect to trusts created on or after the date of enactment
and any portion of a pre-enactment trust that receives a contribution on or after
the date of enactment.
Copyright © 2013 Gassman Law Associates, P.A.
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Action Checklist for 2013 Estate and
Entity/Asset Structuring Updatec
1.
Confirm clients’ asset, entity, life insurance, liability insurance,
and family circumstances.
Prepare projections using appropriate spreadsheet or computer
programs so that clients understand that their assets may well
exceed available exemptions based upon historical growth and
the CPI probably being less than inflation. You can read more on
this topic by viewing our Thursday Report from January 24,
2013.
Will portability be enough to avoid estate tax for successful but
not yet wealthy clients?
Copyright © 2013 Gassman Law Associates, P.A.
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EstateView Planning Software
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Copyright © 2013 Gassman Law Associates, P.A.
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EstateView Planning Software
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Copyright © 2013 Gassman Law Associates, P.A.
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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.
Copyright © 2013 Gassman Law Associates, P.A.
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A married couple might provide for all assets to go to the surviving spouse,
or to “lock up” up to $5,250,000 on the first death to facilitate a “credit shelter trust.”
CREDIT
SHELTER TRUST
SURVIVING SPOUSE
INHERITS ALL ASSETS
– USE PORTABILITY
OF HIS OR HER
$5,250,000
EXEMPTION
1. Uses the first dying spouse’s $5,250,000
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 1.07% for a 9year Note), and it runs a greater rate of return on
its own investment.
6. No ability to leverage with debt or otherwise.
Copyright © 2013 Gassman Law Associates, P.A.
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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.
Do the clients leave everything that would be estate taxable to charity or a charitable foundation?
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.
NOTE: Update wills to permit the surviving spouse to require the filing of an estate tax return and the making of a portability
election.
Copyright © 2013 Gassman Law Associates, P.A.
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CHOICE #1
CHOICE #2
CHOICE #3
Mrs. Client as Beneficiary
Advantages:
1) Ability to roll over Dr. Client’s retirement plan
accounts income tax-free into her own retirement plan
account and to take required minimum distributions
based upon her life expectancy, recalculated annually,
based upon the below percentages of the retirement
plan account for the next ten years.
Restated and Amended Trust Agreement of
Deceased Client’s Revocable Trust
Advantages:
1) The retirement plan accounts can benefit Mrs. Client
without being subject to federal estate tax in her
estate.
2) Mrs. Client cannot access the retirement plan
accounts above the annual required minimum
distribution without the consent of the other CoTrustees, which protects Mrs. Client from any undue
influence.
3) The retirement plan 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.
Irrevocable Trust for Children Only
Advantages:
1) The value of the retirement plan accounts would not
be includable in Mrs. Client’s estate for federal estate
tax purposes upon her death.
The above referenced distribution percentages are less
than what would occur if the retirement plan account
was payable to Dr. Client’s Revocable Trust.
2) Mrs. Client has the ability to direct the disposition of
the retirement plan funds upon her death, and after
Mrs. Client’s death, the required minimum distributions
from the retirement plan funds would be based upon
the life expectancies of her chosen beneficiaries. The
retirement plan 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 retirement plan 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 retirement plan
accounts were disclaimed so that they are payable to
the Client Irrevocable Trust.
2012:
2013:
2014:
2015:
2016:
2017:
2018:
2019:
2020:
4.5455%
4.7170%
4.9261%
5.1282%
5.3476%
5.5866%
5.8480%
6.1350%
6.4516%
Copyright © 2013 Gassman Law Associates, P.A.
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 described below for the next ten
years.
The below 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 retirement plan 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 retirement plan funds after her
death. The retirement plan funds will instead pass in
separate trusts for the benefit of Mrs. Client’s children
upon her death.
2012:
2013:
2014:
2015:
2016:
2017:
2018:
2019:
2020:
8.0645%
8.7719%
9.6154%
10.6383%
11.9048%
13.5135%
15.6250%
18.5185%
22.7273%
2) Annual required minimum distributions of retirement
plan 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 described below for the next ten
years.
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) The retirement plan 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 retirement plan
accounts.
2) Mrs. Client cannot control the disposition of the
retirement plan funds upon her death. The retirement
plan funds will continue to be held pursuant to the
terms of the Trust.
2012:
2013:
2014:
2015:
2016:
2017:
2018:
2019:
2020:
3.0120%
3.1056%
3.2051%
3.3113%
3.4247%
3.5461%
3.6765%
3.8168%
3.9683%
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SAMPLE LETTER TO CLIENT IN SECOND MARRIAGE TO
SUGGEST UPDATING WILLS TO REQUIRE FIDUCIARIES TO
MAKE A PORTABILITY ELECTION AFTER THE FIRST DEATH
_________, 2013
Dear Client with Second Marriage and Portability Concerns:
I am sure that you are aware of the new estate tax law, which provides for a$5,250,000 per person exclusion in
2013, and which will hopefully be extended into 2013 and beyond. I am enclosing literature on the new rules.
The law also provides that if one spouse dies and does not use their $5,250,000 exclusion, then the other spouse
has use of any remaining exclusion, but only if a proper estate tax return is filed on the death of the first dying spouse, with a
proper election being made.
Where you have children by separate marriages, it is possible that the child or children of the first dying spouse
will not want to go to the expense or inconvenience of filing an estate tax return and making this election.
We therefore recommend simple changes to your Wills to explicitly permit the surviving spouse or his or her
family to require that this be done.
In addition, we have form language to add to your present Trust to take the new estate tax and possible
elimination of estate tax into account, as described in the attached letter.
Please let us know if you would like us to update your documents, which is a very simple and relatively
inexpensive process. We can also add language to your present Trust to update for changes made since this was signed, and
to take into account the new rules.
I think that it would be advisable for us to get together in person, or at least by phone, to review your assets,
liability and insurance logistics in order to make sure that things are properly balanced. We may be able to simplify what you
have now, or at least prepare to simplify in the future based upon the changes to the estate tax legislation.
I look forward to hearing from you with respect to this.
Best personal regards,
Alan S. Gassman
Copyright © 2013 Gassman Law Associates, P.A.
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Potential Codicil Language To Permit Decedent’s Heirs to
Require and Pay for Portability Election and Form 706 Filing
To
preserve flexibility to opt for portability after the death of the first dying spouse, suggest a
Codicil to the client’s Will providing the surviving spouse with the right to require return
preparation to facilitate portability (the filing of an estate tax return) and to possibly appoint a
special administrator to serve for the purpose of signing the return, and to be compensated by
the surviving spouse.
Treasury
Regulation Section 20.6018-2 allows a special administrator be appointed under
local law to file and sign a federal estate tax return. In a situation where spouses have
separate children, the children or advisors of the first dying spouse may prefer to serve as
personal representatives and to control all aspects of estate administration, but the surviving
spouse can be significantly benefitted by having the first spouse’s estate file an estate tax
return and make a portability election.
Potential
language is as follows:
I authorize my surviving spouse, _________, to appoint a board-certified estate planning lawyer, or a CPA who has done
work for my family for at least 10 years, to serve as Special Administrator of this Last Will and Testament for the purpose of
filing a federal estate tax return in order to assure that the DSUEA (Deceased Spouse Unused Exemption Amount) becomes
available to my said spouse, with the Administrator to be compensated solely by my said spouse, and with any other
expenses reasonably incurred by my personal representatives to accommodate such filing to be reimbursed to my estate.
Said appointment and cooperation need only to apply if my spouse survives me and executes a confirmation that such
expenses will be paid by my said spouse. Any dispute between the Administrator and my personal representative or
representatives shall be resolved by _________________, CPA.”
Copyright © 2013 Gassman Law Associates, P.A.
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Action Checklist for 2013 Estate and
Entity/Asset Structuring Update
2.
Review the terms of the client’s revocable living trust to
maximize credit shelter trust funding.
◦ Evaluate what degree of funding on the first death will be necessary in view of
portability.
◦ Should each spouse have a power of appointment over the revocable trust of
the other to obtain a full step-up of all assets on death? Review issues
associated therewith.
◦ Consider whether to implement a joint trust with full credit shelter trust
funding, and possibly a complete stepped-up basis on all joint assets on the
first dying spouse’s death.
◦ Consider whether to establish a promissory note owed by one spouse to the
other’s revocable trust in order to facilitate credit shelter trust funding. Under
the OID rules, you have to pay interest or report interest, but it washes on a
joint return.
◦ Consider an Alaska community property trust.
◦ 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
spouse’s own revocable trust. See Private Letter Ruling 200403094.
Copyright © 2013 Gassman Law Associates, P.A.
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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.
Copyright © 2013 Gassman Law Associates, P.A.
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Action Checklist for 2013 Estate and
Entity/Asset Structuring Update
3.
Consider strategies to cause a step-up in the income tax basis of assets on the death of a
client.
◦ Determine whether to restructure entities that would cause a valuation discount on death- it
may now be preferable to have no discount and a full stepped-up income tax basis for
appreciated assets.
◦ Consider amending operating agreements and partnership agreements to reduce or remove
the restrictions that generate discounts so that on the death of the grantor the step-up in
basis on these assets will be greater.
◦ Consider distributing assets out of LLCs or partnerships to the members and partners so
gifting trusts established as grantor trusts could possibly get a full step-up in basis on these
assets on the death of the grantor.
◦ Amend revocable trusts to provide that a committee of “independent fiduciaries” could have
the power to bestow a general power of appointment on the surviving spouse to cause a
step-up in basis on assets that might not otherwise receive such a step-up.
◦ Consider reforming irrevocable trusts previously established by the client for estate tax
avoidance purposes to provide the client with a testamentary general power of appointment
or another power over the trust assets that would cause them to be included in his gross
estate for estate tax purposes in order to cause a step-up in income tax basis on the death
of the grantor.
Copyright © 2013 Gassman Law Associates, P.A.
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Action Checklist for 2013 Estate and
Entity/Asset Structuring Update
4. 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.
Copyright © 2013 Gassman Law Associates, P.A.
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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.
Copyright © 2013 Gassman Law Associates, P.A.
ADVANTAGES
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.
DISADVANTAGES
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.
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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 $5,250,000.
Copyright © 2013 Gassman Law Associates, P.A.
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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
ADVANTAGES
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.
1. Easy to
understand
and insert
into present
and future
trust
documents.
2. Would be
simple to
administer.
Copyright © 2013 Gassman Law Associates, P.A.
DISADVANTAGES
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?
24
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).
Copyright © 2013 Gassman Law Associates, P.A.
25
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
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]
Copyright © 2013 Gassman Law Associates, P.A.
ADVANTAGE
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.
DISADVANTAGES
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.
26
REVISED PROTECTIVE TRUST LOGISTICAL CHART WITH CLAYTON QTIP
During both
spouse’s
lifetimes:
First Dying Spouse’s
Revocable Trust
Upon first
death in
2013:
$5,250,000*
During
surviving
spouse’s
remaining
lifetime:
Upon
second
death:
Family
(By-Pass)
Generation
Skipping Trust
Surviving
spouse can
have the right
to redirect how
assets are
distributed on
second death.
After deaths
of both
spouses:
Remaining
Assets
QTIP MECHANISM
(Not taxed in surviving
spouse’s estate)
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)
$5,700,000?*
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 2013 and that the surviving spouse dies in a later year when the estate tax exemption has gone up to $5,700,000 (based upon 8.57%
cumulative inflation). The estate tax exemption is $5,250,000 for those that die in 2013, and increases with inflation in $10,000 increments.
If the first spouse does not use the entire exemption amount, what remains may be added to the surviving spouse’s allowance under the “portability rules” but will not
grow with inflation.
Copyright © 2013 Gassman Law Associates, P.A.
27
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.
Copyright © 2013 Gassman Law Associates, P.A.
28
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).
Copyright © 2013 Gassman Law Associates, P.A.
29
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.
Copyright © 2013 Gassman Law Associates, P.A.
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.
30
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-in-laws 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:
Copyright © 2013 Gassman Law Associates, P.A.
31
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).
Copyright © 2013 Gassman Law Associates, P.A.
32
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.
Copyright © 2013 Gassman Law Associates, P.A.
ADVANTAGES
1. Allows
for
inclusion
under
circumstances
presently existing under
some credit shelter trusts.
2. Does
not
require
significant drafting changes
from how trusts may now
be situated.
WILL NOT WORK IN FLORIDA
DISADVANTAGES
1.
law.
A complex area of
2. No
way
to
predict
whether the law may
change in the future with
respect to this archaic
doctrine.
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?
33
Action Checklist for 2013 Estate and
Entity/Asset Structuring Update
5. Reconsider creditor protection trust planning with the business purpose of funding to complete
a gift to take the assets and future growth out of the grantor’s estate, notwithstanding that the
grantor may be a discretionary beneficiary.
Consider whether to use a trust sitused in an asset protection jurisdiction (such as Nevada,
Alaska, Delaware, Belize or the Cook Islands) to hold assets that presently would only be
protected under charging order rules.
Combine effectiveness of an asset protection trust for credit shelter and protection purposes.
Copyright © 2013 Gassman Law Associates, P.A.
34
1.
Trustee
2.
3.
4.
DYNASTY
WEALTH
PROTECTION
TRUST
5.
6.
7.
Assets gifted to trust
and growth thereon.
Note: Nevada gets a gold star for having a law
that says there cannot be an assumed or an
oral agreement between the Grantor and the
Trustee of a dynasty trust; because of this, the
IRS cannot say that the grantor retains certain
control.
Copyright © 2013 Gassman Law Associates, P.A.
8.
Grantor can replace the Trustee at any time and for any
reason.
Protected from creditors of Grantor and family members.
Can benefit spouse and descendants as needed for health,
education, maintenance and support.
Per Private Letter Ruling 200944002 the Grantor may be a
discretionary beneficiary of the trust and not have it
subject to estate tax in his or her estate. But be very
careful on this! The Trust would need to be formed in an
asset protection jurisdiction and there is no Revenue
Procedure on this.
Should
be
grandfathered
from
future
legislative
restrictions.
May loan money to Grantor.
May own limited partnership or LLC interests that are
managed at arm’s-length by the Grantor.
May be subject to income tax at its own bracket, or the
Grantor may be subject to income tax on the income of the
trust, allowing it to grow income-tax free unless or until
desired otherwise. If the Grantor is a beneficiary it must
remain a disregarded Grantor Trust.
35
Irrevocable Funded Domestic and International Wealth Accumulation Trust Categories:
Where Will Your Client Best Fit?
A
IRREVOCABLE,
COMPLETE GIFT TRUST
SETTLOR NOT A BENEFICIARY
B
Shielded from
future estate
tax of settlor
IRREVOCABLE
COMPLETE GIFT
TRUST
SETTLOR IS A BENEFICIARY
C
Shielded from future
estate tax of settlor –
but in case PLR
200944002 is not
correct – empower a
third party to deprive
the settlor of
distribution rights more
than 3 years before the
settlor dies – IRC §§
2035 & 2036
IRREVOCABLE
INCOMPLETE GIFT
TRUST
Treated as if no gift
occurred for federal estate
and gift tax purposes –
business purpose is wealth
preservation
for
family
members.
A1 Protected from creditors of the settlor, and some but not all of the
creditors of the beneficiary.
Exception Creditors:
• Support obligations: beneficiary’s child, spouse or former spouse (i.e., FL,
CA, NY, NJ)
•Person who has provided services for the protection of the beneficiary’s
interest in the trust (i.e., FL)
•State or U.S. claim empowered by state or federal law (i.e., public support
obligations in CA)
•Some states have more exceptions, (i.e., criminal restitution in CA, or
punitive damages arising from manslaughter or murder in NJ)
•Future legislation – What can they get you on next?
NOTE – May benefit spouse but be careful under IRC 2036. If spouse is
beneficiary cannot toggle off tax defective status unless an adverse party
can approve all distributions to spouse.
B1 Will be subject to estate tax under IRC § 2036 because the
settlor may be seen as retaining benefit by having the trust pay his/her
creditors – Revenue Ruling 2004-64
2. Nevada
A2 Protected from all creditors – subject to 2 year Statute of Limitations
(Much safer – assuming Nevada law applies)
B2 IRC § 2036 should not be an issue if PLR 200944002
C2 Same as A2:
All creditors, 2 yr statute
3. Alaska,
Delaware, and
Wyoming (WY
recently passed
amendments to
Uniform Trust
Code
A3 Delaware has a 4 year Statute of Limitations and exceptions for
divorcing spouse, alimony and child support, as well as for preexisting
torts.
B3 PLR 200944002 indicates that Alaska is fine – but exspouse creditors can get into a trust and may upset the apple
cart under present Alaska law. Only single clients should use
Alaska?
C3 Same as A3: Delaware,
Alaska, Wyoming have 4
year statutes. Delaware
has exceptions for support
obligations and preexisting
torts. Alaska has an
exception only for a
divorcing spouse. Wyoming
has exceptions for child
support, property on an
application for creditor, or
fraudulent transfer.
4. Offshore –
Nevis, Belize,
Cook Islands
A4 Completely protected depending on jurisdiction
1. Most
Domestic
States –
Including
Florida
Alaska has a 4 year Statute of Limitations and an exception only for a
divorcing spouse.
Wyoming has a 4 year Statute of Limitations and exceptions for child
support, property listed on an application to obtain creditor, or for
fraudulent transfers.
NOTE: Must remain defective for income tax purposes – cannot
toggle off except by moving the trust to the United States.
Copyright © 2013 Gassman Law Associates, P.A.
C1 If grantor is beneficiary
there will be no creditor
protection – if grantor is
not beneficiary then see A1
for exceptions
Any creditor may be able to
reach into the trust (unless
the trust flees to another
jurisdiction – don’t forget
the flee clause)
Delaware and Wyoming have more exception creditors and
may be more susceptible under PLR 200944002.
B4 Should be as good as Nevada – Belize has a 1 day statute
C4 Should work fine as in
A4 – no full faith and credit
clause or state law
jurisdiction concerns.
36
Alaska and Delaware Allow Invasion for Child Support Claims
– Is It a 2036(a) Retained Interest to Have the Ability to Have
a Child That Might Be Supported From the Trust?
THE DOCTRINE OF INDEPENDENT LEGAL SIGNIFICANCE
MAY APPLY HERE
WHAT IS IT?
The doctrine provides that where the ability or authority of the grantor to change a trust is so
remote or speculative it will be considered an independent act of legal significance rather than
causing an inclusion in the grantor’s estate under IRC § 2036(a)(2) or IRC § 2038.
EXAMPLES:
•Divorce (Estate of Tully, 528 F.2d 1401; PLR 9141027);
•Failure to support spouse (Ellis v. Comm’r., 51 T.C. 182 (1968);
•Adopting/bearing a child (Revenue Ruling 80-255).
Michael Gordon, The Use of Asset Protection Trusts for Tax Planning Purposes , June 1, 2011.
Copyright © 2013 Gassman Law Associates, P.A.
37
WHAT IF YOU DECIDE NOT TO FORM THE TRUST IN YOUR HOME STATE?
SHOULD I STAY OR SHOULD I GO?
FACTOR
NEVADA
ALASKA
ISLE OF
MAN/JERSEY
(Channel
Island)
NEVIS
BELIZE
Use of Trust
Protectors.
New concept
New concept
Since the 1700s
Normal
Normal
Quality of service.
High
High- time zone
difference
British-style/time
zone difference
Small townusually good.
Mayberry RFD
Allows importation
with statute of
limitations tolling
from inception of
trust at where it
was imported
from?
YES if original
situs has
substantially
similar spendthrift
laws
YES
The Statute of
Elizabeth provides
that fraudulent
transfers should
be void, not
subject to any
limitation period
YES
YES
Toggling off is
possible?
YES
YES
NOT unless there
is one or more
U.S. beneficiaries
NOT unless there
is one or more
U.S. beneficiaries
NOT unless there
is one or more
U.S. beneficiaries
Provides for
contingency fee
payments? Number of
lawyers
YES
YES
About 4,000
attorneys
NO, about 170
attorneys in Isle
of Man, and 150
in Jersey
Most lawyers are
conflicted
NO, about 100
attorneys
Most lawyers are
conflicted
NO, about 150
attorneys
Most lawyers are
conflicted
Rule Against
Perpetuities
365 years
1,000 years
150 years
Does not apply
Abolished
About 10,000
attorneys
Copyright © 2013 Gassman Law Associates, P.A.
38
Fraudulent Conveyances & Statutes of Limitations
for Domestic and Foreign Trusts
Nevada
Alaska
Nevis
Belize
Time Limit
2 years
4 years
2 years
1 day!
Statute
N.R.S. § 166.170
AK ST § 34.40.110
Effect on Known
Preexisting Claims
If a creditor when the transfer is
made, the creditor must
commence the action within 2
years of the transfer OR 6
months after the person
discovers or reasonably should
have discovered the transfer,
whichever is later.
If a person is a creditor before
the settlor’s assets are
transferred to the trust, an
action must commence within 4
years of the transfer OR 1 year
after the transfer is or
reasonably could be discovered,
whichever is later.
Trusts Act –
No fraudulent conveyance
statute.
It is not possible to start a
fraudulent conveyance action in
Belize civil courts in order to
recover the assets of a creditor
protection trust in such foreign
jurisdictions as the U.S.
Effect on Post-Transfer
Fraudulent Claims
If the person becomes a creditor
after the transfer is made, the
creditor must commence the
action within 2 years of the
transfer.
If the person becomes a creditor
subsequent to the transfer into
trust, the action must
commence within 4 years of the
transfer
Nevis International Exempt
Trust Ordinance, 1994 –
Section 24.3
If the person is a creditor when
the transfer is made, an action
must commence before the
expiration of 2 years after the
cause of action arose,
regardless of when the creditor
learned of this. For transfers to
international trusts, the action
must commence no more than 1
year after the date of
establishment or transfer.
A creditor whose claim arose
after the transfer to a settled or
established trust, cannot pursue
the trust, even if within the 2
years.
Copyright © 2013 Gassman Law Associates, P.A.
Belize has repealed provisions
against fraudulent conveyances
so that protection is immediate.
While a trust can be set aside
for reasons such as duress,
fraud, undue influence, or
incapacity of the settlor, it
cannot be set aside for claims
by creditors.
39
Fraudulent Conveyances & Statutes of Limitations
for Domestic and Foreign Trusts
Nevada
Alaska
Nevis
Belize
Other Requirements
A creditor may not bring an
action with respect to transfer
of property to a spendthrift trust
unless a creditor can prove by
clear and convincing evidence
that the transfer of property was
a fraudulent transfer pursuant to
chapter 112 of NRS, or that the
transfer violates a legal
obligation owed to the creditor
under a contract or a valid court
order that is legally enforceable
by that creditor.
Standard is “beyond a
reasonable doubt” that a
transfer was fraudulent as to the
particular creditor.
A creditor must post a bond of
$12,500 to lodge a complaint
against a trust registered in
Nevis
The Court may declare a trust
invalid or unenforceable in
accordance with the terms of
the Trust Act.
Statutory Exception
Creditors
Does not provide for any
Must establish by clear and
convincing evidence that the
settlor’s transfer of property in
trust was made with the intent
to “defraud” that creditor, and
the trust has certain provisions
favoring the settlor.
If the trust is created with a
transfer restriction, the settlor
must sign a sworn affidavit
with statements including – no
pending or threatened court
actions, not in default of child
support payments, etc.
Divorcing spouse – unless
otherwise agreed to in writing
by the parties to a marriage, the
interest in the trust is property
subject to division to the extent
those assets were transferred
after the settlor’s marriage OR
within 30 days before the
settlor’s marriage unless the
settlor gives written notice to
the other party to the marriage
of the transfer
Does not provide for any
Does not provide for any
Note: Out of the 13 states that allow Domestic Asset Protection Trusts, Nevada and Hawaii have a 2 year statute of limitations,
South Dakota and Utah have a 3 year statute of limitations, and all other states have a 4 year statute of limitations.
Copyright © 2013 Gassman Law Associates, P.A.
40
Action Checklist for 2013 Estate and
Entity/Asset Structuring Update
6.
Consider implementing a gifting program for the $14,000 annual
exclusion allowance, plus the $130,000 exemption increase.
Will increased exclusion gifting be done annually, every other
year, or at some other regular frequency to avoid having to file
gift tax returns every year?
Copyright © 2013 Gassman Law Associates, P.A.
41
10 YEAR GIFTING PERIOD – ALLOWING GROWTH THEREAFTER
$14,000 ANNUAL EXCLUSION ALLOWANCE
30% VALUATION DISCOUNT
MOVING MORE VALUE OUT OF TAXABLE
ESTATES BY USING DISCOUNTED
LIMITED PARTNERSHIP OR LLC ANNUAL
GIFTING
Cumulative Value
Year
Reportable Gifting
with 6% Growth
1
$14,000.00
$14,000.00
2
$14,000.00
$28,840.00
3
$14,000.00
$44,570.40
4
$14,000.00
$61,244.62
5
$14,000.00
$78,919.30
6
$14,000.00
$97,654.46
7
$14,000.00
$117,513.73
8
$14,000.00
$138,564.55
9
$14,000.00
$160,878.42
10
$14,000.00
$184,531.13
11
$0.00
$195,603.00
12
$0.00
$207,339.18
13
$0.00
$219,779.53
14
$0.00
$232,966.30
15
$0.00
$246,944.28
16
$0.00
$261,760.93
17
$0.00
$277,466.59
18
$0.00
$294,114.58
19
$0.00
$311,761.46
20
$0.00
$330,467.15
21
$0.00
$350,295.18
22
$0.00
$371,312.89
23
$0.00
$393,591.66
24
$0.00
$417,207.16
25
$0.00
$442,239.59
26
$0.00
$468,773.96
27
$0.00
$496,900.40
28
$0.00
$526,714.43
29
$0.00
$558,317.29
30
$0.00
$591,816.33
Copyright © 2013 Gassman Law Associates, P.A.
Gifting Equivalent Amount
Applying 30% Discount
$20,000.00
$20,000.00
$20,000.00
$20,000.00
$20,000.00
$20,000.00
$20,000.00
$20,000.00
$20,000.00
$20,000.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
Cumulative Value Value Added By Discount
with 6% Growth
Phenomenon
$20,000.00
$6,000.00
$41,200.00
$12,360.00
$63,672.00
$19,101.60
$87,492.32
$26,247.70
$112,741.86
$33,822.56
$139,506.37
$41,851.91
$167,876.75
$50,363.03
$197,949.36
$59,384.81
$229,826.32
$68,947.90
$263,615.90
$79,084.77
$279,432.85
$83,829.86
$296,198.82
$88,859.65
$313,970.75
$94,191.23
$332,809.00
$99,842.70
$352,777.54
$105,833.26
$373,944.19
$112,183.26
$396,380.84
$118,914.25
$420,163.69
$126,049.11
$445,373.51
$133,612.05
$472,095.93
$141,628.78
$500,421.68
$150,126.50
$530,446.98
$159,134.09
$562,273.80
$168,682.14
$596,010.23
$178,803.07
$631,770.84
$189,531.25
$669,677.09
$200,903.13
$709,857.72
$212,957.32
$752,449.18
$225,734.75
$797,596.13
$239,278.84
$845,451.90
$253,635.57
40% Estate Tax
Savings (40% of
Value Added)
$2,400.00
$4,944.00
$7,640.64
$10,499.08
$13,529.02
$16,740.76
$20,145.21
$23,753.92
$27,579.16
$31,633.91
$33,531.94
$35,543.86
$37,676.49
$39,937.08
$42,333.30
$44,873.30
$47,565.70
$50,419.64
$53,444.82
$56,651.51
$60,050.60
$63,653.64
$67,472.86
$71,521.23
$75,812.50
$80,361.25
$85,182.93
$90,293.90
$95,711.54
$101,454.23
42
20 YEAR GIFTING PERIOD – ALLOWING GROWTH THEREAFTER
$14,000 ANNUAL EXCLUSION ALLOWANCE
30% VALUATION DISCOUNT
MOVING MORE VALUE OUT OF TAXABLE
ESTATES BY USING DISCOUNTED
LIMITED PARTNERSHIP OR LLC ANNUAL
GIFTING
Year
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
Reportable Gifting
$14,000.00
$14,000.00
$14,000.00
$14,000.00
$14,000.00
$14,000.00
$14,000.00
$14,000.00
$14,000.00
$14,000.00
$14,000.00
$14,000.00
$14,000.00
$14,000.00
$14,000.00
$14,000.00
$14,000.00
$14,000.00
$14,000.00
$14,000.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
Cumulative Value
with 6% Growth
$14,000.00
$28,840.00
$44,570.40
$61,244.62
$78,919.30
$97,654.46
$117,513.73
$138,564.55
$160,878.42
$184,531.13
$209,603.00
$236,179.18
$264,349.93
$294,210.92
$325,863.58
$359,415.39
$394,980.32
$432,679.14
$472,639.88
$514,998.28
$545,898.17
$578,652.06
$613,371.19
$650,173.46
$689,183.87
$730,534.90
$774,366.99
$820,829.01
$870,078.75
$922,283.48
Copyright © 2013 Gassman Law Associates, P.A.
Gifting Equivalent Amount
Applying 30% Discount
$20,000.00
$20,000.00
$20,000.00
$20,000.00
$20,000.00
$20,000.00
$20,000.00
$20,000.00
$20,000.00
$20,000.00
$20,000.00
$20,000.00
$20,000.00
$20,000.00
$20,000.00
$20,000.00
$20,000.00
$20,000.00
$20,000.00
$20,000.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
Cumulative Value Value Added By Discount
with 6% Growth
Phenomenon
$20,000.00
$6,000.00
$41,200.00
$12,360.00
$63,672.00
$19,101.60
$87,492.32
$26,247.70
$112,741.86
$33,822.56
$139,506.37
$41,851.91
$167,876.75
$50,363.03
$197,949.36
$59,384.81
$229,826.32
$68,947.90
$263,615.90
$79,084.77
$299,432.85
$89,829.86
$337,398.82
$101,219.65
$377,642.75
$113,292.83
$420,301.32
$126,090.40
$465,519.40
$139,655.82
$513,450.56
$154,035.17
$564,257.60
$169,277.28
$618,113.05
$185,433.92
$675,199.83
$202,559.95
$735,711.82
$220,713.55
$779,854.53
$233,956.36
$826,645.81
$247,993.74
$876,244.55
$262,873.37
$928,819.23
$278,645.77
$984,548.38
$295,364.51
$1,043,621.28
$313,086.39
$1,106,238.56
$331,871.57
$1,172,612.87
$351,783.86
$1,242,969.65
$372,890.89
$1,317,547.83
$395,264.35
40% Estate Tax
Savings (40% of
Value Added)
$2,400.00
$4,944.00
$7,640.64
$10,499.08
$13,529.02
$16,740.76
$20,145.21
$23,753.92
$27,579.16
$31,633.91
$35,931.94
$40,487.86
$45,317.13
$50,436.16
$55,862.33
$61,614.07
$67,710.91
$74,173.57
$81,023.98
$88,285.42
$93,582.54
$99,197.50
$105,149.35
$111,458.31
$118,145.81
$125,234.55
$132,748.63
$140,713.54
$149,156.36
$158,105.74
43
10 YEAR GIFTING PERIOD – ALLOWING GROWTH THEREAFTER
$14,000 ANNUAL EXCLUSION ALLOWANCE
30% VALUATION DISCOUNT
MOVING MORE VALUE OUT OF TAXABLE
ESTATES BY USING DISCOUNTED
LIMITED PARTNERSHIP OR LLC ANNUAL
GIFTING
Year
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
Cumulative Value with
Reportable Gifting
6% Growth
$214,000.00
$214,000.00
$14,000.00
$240,840.00
$14,000.00
$269,290.40
$14,000.00
$299,447.82
$14,000.00
$331,414.69
$14,000.00
$365,299.58
$14,000.00
$401,217.55
$14,000.00
$439,290.60
$14,000.00
$479,648.04
$14,000.00
$522,426.92
$0.00
$553,772.54
$0.00
$586,998.89
$0.00
$622,218.82
$0.00
$659,551.95
$0.00
$699,125.07
$0.00
$741,072.57
$0.00
$785,536.93
$0.00
$832,669.14
$0.00
$882,629.29
$0.00
$935,587.05
$0.00
$991,722.27
$0.00
$1,051,225.61
$0.00
$1,114,299.14
$0.00
$1,181,157.09
$0.00
$1,252,026.52
$0.00
$1,327,148.11
$0.00
$1,406,777.00
$0.00
$1,491,183.62
$0.00
$1,580,654.63
$0.00
$1,675,493.91
Copyright © 2013 Gassman Law Associates, P.A.
Gifting Equivalent
Amount Applying 30% Cumulative Value with Value Added By Discount
Discount
6% Growth
Phenomenon
$305,714.29
$305,714.29
$91,714.29
$20,000.00
$344,057.14
$103,217.14
$20,000.00
$384,700.57
$115,410.17
$20,000.00
$427,782.61
$128,334.78
$20,000.00
$473,449.56
$142,034.87
$20,000.00
$521,856.54
$156,556.96
$20,000.00
$573,167.93
$171,950.38
$20,000.00
$627,558.00
$188,267.40
$20,000.00
$685,211.48
$205,563.45
$20,000.00
$746,324.17
$223,897.25
$0.00
$791,103.62
$237,331.09
$0.00
$838,569.84
$251,570.95
$0.00
$888,884.03
$266,665.21
$0.00
$942,217.07
$282,665.12
$0.00
$998,750.10
$299,625.03
$0.00
$1,058,675.10
$317,602.53
$0.00
$1,122,195.61
$336,658.68
$0.00
$1,189,527.35
$356,858.20
$0.00
$1,260,898.99
$378,269.70
$0.00
$1,336,552.93
$400,965.88
$0.00
$1,416,746.10
$425,023.83
$0.00
$1,501,750.87
$450,525.26
$0.00
$1,591,855.92
$477,556.78
$0.00
$1,687,367.27
$506,210.18
$0.00
$1,788,609.31
$536,582.79
$0.00
$1,895,925.87
$568,777.76
$0.00
$2,009,681.42
$602,904.43
$0.00
$2,130,262.31
$639,078.69
$0.00
$2,258,078.05
$677,423.41
$0.00
$2,393,562.73
$718,068.82
40% Estate Tax
Savings (40% of
Value Added)
$36,685.71
$41,286.86
$46,164.07
$51,333.91
$56,813.95
$62,622.78
$68,780.15
$75,306.96
$82,225.38
$89,558.90
$94,932.43
$100,628.38
$106,666.08
$113,066.05
$119,850.01
$127,041.01
$134,663.47
$142,743.28
$151,307.88
$160,386.35
$170,009.53
$180,210.10
$191,022.71
$202,484.07
$214,633.12
$227,511.10
$241,161.77
$255,631.48
$270,969.37
$287,227.53
44
Action Checklist for 2013 Estate and
Entity/Asset Structuring Update
7. Calendar additional gifts once the gift tax statute of limitations has run on
returns filed for large 2011 and 2012 discounted gifts to make use of
remaining credit exemption amounts.
Calendar review of possible exercise of powers of appointment?
Copyright © 2013 Gassman Law Associates, P.A.
45
Action Checklist for 2013 Estate and
Entity/Asset Structuring Update
8. Lock in discounts now on remaining entity interests by installment
sale, GRAT or CLAT transactions, just in case the administration
eliminates discounts.
Copyright © 2013 Gassman Law Associates, P.A.
46
$1,000,000 PROMISSORY NOTE/SCIN/PRIVATE ANNUITY/GRAT ALTERNATIVES
FEBRUARY 2013
CLIENT AGE 73
Alternatives: (Using December 2012 Applicable Federal Rate, January 2013 Applicable
Federal Rate and February 2013 7520 Rate)
<3 Year Interest Only Installment Note @ .21% - Payment = $2,100 per year*
9 Year Interest Only Installment Note @ .87% - Payment = $8,700 per year*
>9 Year Interest Only Installment Note @ 2.31% - Payment = $23,100 per year*
CLIENT
12 Year Interest Only SCIN @ 6.587% - Payment = $65,866 per year*
(AGE 73)
TRUST
(PURCHASER)
Private Annuity Level Annual Payment - Payment = $89,736 per year*
3 Year Level Payment GRAT @ 1.2% - Payment = $339,660 per year*
**3 Year GRAT @ 1.2% - Initial Payment = $280,345 and Increases Annually by 20%
* Notes would have no penalty for prepayment – minimum payments are shown above.
Self-cancelling installment Notes must balloon before life expectancy as measured at
time of Note being made. John Smith’s life expectancy is 12.33 years under IRS tables.
The SCIN calculations above are based on a 12-year note term.
** This GRAT assumes that each annuity payment will increase by 20% each year.
All GRATs assume a taxable gift of approximately $5,000.00 on funding
Note: February 2013 rates for annual compounding are:
Short-Term -- .21%
Mid-Term – 1.01%
Usable through April 30, 2013
Long-Term – 2.52%
47
Action Checklist for 2013 Estate and
Entity/Asset Structuring Update
9.
Consider toggling off the grantor trust status of
some irrevocable trusts so that the income of the
trust will no longer be taxable to the grantor but
instead will be taxable to the beneficiaries of the
trust.
If you are going to toggle off the grantor trust
status of a trust, have the grantor replace the low
basis assets of the trust with high basis assets
before the status of the trust is changed.
Copyright © 2013 Gassman Law Associates, P.A.
48
Action Checklist for 2013 Estate and
Entity/Asset Structuring Update
10.
Elect a November year end for estates and
revocable trusts where possible to have 11 months
of 2013 income not be subject to the 3.8% Medicare
tax and the 39.6% tax bracket, as well as other
2013 tax increases.
Copyright © 2013 Gassman Law Associates, P.A.
49
Action Checklist for 2013 Estate and
Entity/Asset Structuring Update
11.
Reduce life insurance coverages that might not be
necessary due to the increased estate tax exclusion.
Copyright © 2013 Gassman Law Associates, P.A.
50
WHAT TO DO WITH LIFE INSURANCE THAT WAS ACQUIRED TO REPLACE
ESTATE TAX LOSSES: TIME TO DROP THIS COVERAGE OR STOP MAKING
PAYMENTS FOR NOW?
This can be a complicated question. Many clients have purchased second-to-die or individual life
insurance policies, and have placed them under life insurance trusts to facilitate having value to replace the federal
estate tax. No one is able to predict what may happen with the estate tax law in 2013 or thereafter, but if the
exclusions remain at $5,250,000 per person and continue to be adjusted for CPI, we expect many taxpayers will no
longer find it worthwhile to pay premiums in exchange for life insurance death benefits that they will never live to
enjoy.
On the other hand, life insurance proceeds can still be useful to family members, and even if the federal
estate tax disappears or even remains at $5,250,000 per person exclusions, future legislation could always modify
these provisions.
Some clients have flexible permanent life insurance policies, under which they face negligible negative
consequences if they stop making premium payments for a year or two. The insurance carrier can determine what
the financial repercussions will be if the client skips a year or two of payments, so the client can decide whether it is
worthwhile to do so.
Some clients have guaranteed premium products, where notwithstanding a policy’s performance, the
carrier agrees to pay the death benefit as long as all premiums are timely paid. Policyholders should not skip
premium payments on these products, which have been offered by many carriers, including John Hancock, Pacific
Mutual, and ING.
Many life insurance policies have significant surrender charges, and clients are disappointed to find that
when they cash the policies in, they receive much less than they paid in premiums over the years. As a result,
families are often best served by reducing the death benefit of a policy in lieu of terminating it. Then the cash
value existing in the policy can grow, or at least reduce the rate of depletion, to have the best possible expected
future value for the family.
Many life insurance policies have a feature whereby the dividends earned within the policy are applied
to purchase more life coverage, so the death benefit increases gradually each year. A carrier or agency can
forecast what the premiums and/or cash value amounts under the policy will be if the death benefit no longer
increases, by reason of paid up additions being applied to reduce premiums or increase cash values.
Clients whose health has declined since acquiring policies might consider selling them to viatical
organizations, which commonly purchase these though the same licensed agents who sold them to the client in the
first place.
Copyright © 2013 Gassman Law Associates, P.A.
51
BUYING CONVERTIBLE TERM INSURANCE
• You can ask an independent agent who writes for many carriers to have the
client take the physical so that they can get quotes from several carriers.
• You can ask that all results and quotes be confidential and not given to the
bureau that all carriers belong to and share information with. Once a carrier
turns the client down or "rates" the client all other carriers know.
• This is called an "informal application" and then the carriers can each give
informal quotes for term coverage. If the client likes the quote then he or she
can buy it.
• You might spread this among 2 or 3 carriers in case one goes under.
• Sample term rates for "preferred", "standard" and "standard smoker"
individuals at ages 35, 40, 45, 50 and 55 are as follows:
Copyright © 2013 Gassman Law Associates, P.A.
52
BUYING TERM INSURANCE
AGE 30
PREFERRED
MALE
STANDARD
FEMALE
MALE
FEMALE
STANDARD SMOKER
MALE
FEMALE
10 Year Term
$378
$328
$658
$518
$1,548
$1,218
15 Year Term
$458
$398
$768
$688
$1,918
$1,438
20 Year Term
$608
$478
$968
$738
$2,278
$1,638
30 Year Term
$938
$768
$1,518
$1,218
$3,908
$3,018
AGE 35
PREFERRED
MALE
FEMALE
STANDARD
MALE
FEMALE
STANDARD SMOKER
MALE
FEMALE
10 Year Term
$375
$345
$735
$565
$1,685
$1,345
15 Year Term
$515
$415
$915
$805
$2,135
$1,775
20 Year Term
$665
$565
$1,105
$945
$2,885
$2,265
30 Year Term
$1,015
$825
$1,735
$1,375
$4,705
$3,555
Copyright © 2013 Gassman Law Associates, P.A.
53
BUYING TERM INSURANCE
AGE 40
PREFERRED
MALE
STANDARD
FEMALE
MALE
FEMALE
STANDARD SMOKER
MALE
FEMALE
10 Year Term
$505
$435
$925
$785
$2,405
$2,005
15 Year Term
$655
$575
$1,215
$1,035
$3,125
$2,485
20 Year Term
$865
$745
$1,505
$1,255
$4,345
$3,185
30 Year Term
$1,495
$1,135
$2,465
$1,985
$7,175
$5,275
AGE 45
PREFERRED
MALE
FEMALE
STANDARD
MALE
FEMALE
STANDARD SMOKER
MALE
FEMALE
10 Year Term
$805
$705
$1,405
$1,095
$8,935
$3,055
15 Year Term
$1,065
$875
$1,985
$1,445
$5,275
$3,815
20 Year Term
$1,415
$1,105
$2,355
$1,755
$7,195
$4,895
30 Year Term
$2,355
$1,765
$2,845
$2,825
$11,625
$7,555
Copyright © 2013 Gassman Law Associates, P.A.
54
BUYING TERM INSURANCE
AGE 50
PREFERRED
MALE
STANDARD
FEMALE
MALE
FEMALE
STANDARD SMOKER
MALE
FEMALE
10 Year Term
$1,235
$1,025
$2,145
$1,625
$6,435
$4,295
15 Year Term
$1,785
$1,235
$2,805
$2,065
$7,825
$5,725
20 Year Term
$2,225
$1,625
$3,425
$2,715
$10,425
$6,865
30 Year Term
$4,025
$2,645
$6,245
$4,785
$13,719
$10,109
AGE 55
PREFERRED
MALE
STANDARD
FEMALE
MALE
FEMALE
STANDARD SMOKER
MALE
FEMALE
10 Year Term
$2,025
$1,495
$3,315
$2,235
$8,935
$5,905
15 Year Term
$2,895
$1,835
$4,655
$2,985
$12,055
$7,995
20 Year Term
$3,505
$2,465
$5,955
$3,985
$14,875
$9,985
30 Year Term
Not Available
Not available
Not Available
Not Available
Not Available
Not Available
AGE 60
PREFERRED
MALE
FEMALE
STANDARD
MALE
FEMALE
STANDARD SMOKER
MALE
FEMALE
10 Year Term
$3,098
$2,198
$4,808
$3,278
$13,028
$8,308
15 Year Term
$4,488
$3,048
$7,088
$5,218
$17,658
$12,978
20 Year Term
$5,798
$4,078
$9,488
$6,668
$22,048
$15,058
30 Year Term
Not Available
Not Available
Not Available
Not Available
Not Available
Not Available
Copyright © 2013 Gassman Law Associates, P.A.
55
BUYING TERM INSURANCE
AGE 50
PREFERRED
MALE
STANDARD
FEMALE
MALE
FEMALE
STANDARD SMOKER
MALE
FEMALE
10 Year Term
$1,235
$1,025
$2,145
$1,625
$6,435
$4,295
15 Year Term
$1,785
$1,235
$2,805
$2,065
$7,825
$5,725
20 Year Term
$2,225
$1,625
$3,425
$2,715
$10,425
$6,865
30 Year Term
$4,025
$2,645
$6,245
$4,785
$13,719
$10,109
AGE 55
PREFERRED
MALE
STANDARD
FEMALE
MALE
FEMALE
STANDARD SMOKER
MALE
FEMALE
10 Year Term
$2,025
$1,495
$3,315
$2,235
$8,935
$5,905
15 Year Term
$2,895
$1,835
$4,655
$2,985
$12,055
$7,995
20 Year Term
$3,505
$2,465
$5,955
$3,985
$14,875
$9,985
30 Year Term
Not Available
Not available
Not Available
Not Available
Not Available
Not Available
AGE 60
PREFERRED
MALE
FEMALE
STANDARD
MALE
FEMALE
STANDARD SMOKER
MALE
FEMALE
10 Year Term
$3,098
$2,198
$4,808
$3,278
$13,028
$8,308
15 Year Term
$4,488
$3,048
$7,088
$5,218
$17,658
$12,978
20 Year Term
$5,798
$4,078
$9,488
$6,668
$22,048
$15,058
30 Year Term
Not Available
Not Available
Not Available
Not Available
Not Available
Not Available
Copyright © 2013 Gassman Law Associates, P.A.
56
Is Whole Life Insurance a Better Investment than Alternative Portfolios?
Investing surrender value from policy year 20 plus any future
contributions in alternative investment – assumes after tax return
As now projected, assuming cash value plus future
premiums as an investment
(5)
Death
Event Rate
of Return
Going
Forward
(6)
Net Death
Benefit
(7)
Net Death
Benefit
Adjusted to
3.5% Annual
Inflation
(8)
NonGuaranteed
Surrender
Value
(9)
5% rate of
return
(10)
7% Rate of
Return
(11)
9% Rate of
Return
(2)
Joint
Age
(3)
Annual
Outlay
(4)
Total
Contributions Going
Forward
2011/20
62
$134,004
$134,004
624.42%
$970,750
$970,750
$127,960
$134,004
$134,004
$134,004
2012/21
63
$13,643
$147,647
166.41%
$987,451
$952,890
$148,847
$154,347
$157,027
$159,707
2013/22
64
$13,815
$161,462
90.58%
$1,003,386
$934,378
$170,907
$175,880
$181,834
$187,896
2014/23
65
$13,865
$175,327
61.13%
$1,018,623
$915,367
$194,025
$198,539
$208,428
$218,672
2015/24
66
$13,930
$189,257
45.68%
$1,033,225
$895,992
$217,464
$222,395
$236,948
$252,282
2016/25
67
$14,010
$203,267
36.21%
$1,047,251
$876,370
$241,987
$247,525
$267,544
$288,998
2021/30
72
$14,660
$275,107
16.94%
$1,114,468
$780,442
$378,367
$395,231
$457,765
$530,506
2026/35
77
$16,175
$352,372
10.63%
$1,202,959
$704,954
$547,002
$599,635
$730,648
$908,393
2031/40
82
$19,520
$442,197
7.62%
$1,325,107
$649,826
$748,316
$851,422
$1,12,7528
$1,504,454
2036/45
87
$26,505
$558,462
5.85%
$1,485,745
$609,715
$978,654
$1,214,341
$1,713,985
$2,452,427
2041/50
92
$39,820
$729,287
4.57%
$1,670,874
$573,803
$1,230,928
$1,737,114
$2,598,250
$3,974,950
2046/55
97
$95,010
$104,1637
3.27%
$1,860,981
$534,808
$1,535,136
$2,555,250
$3,993,394
$6,476,578
2048/57
99
$13,495
$1,168,037
2.14%
$1,693,591
$453,231
$1,735,007
$2,949,208
$4,706,341
$7,831,384
(1)
Year/
Policy
Year
Copyright © 2013 Gassman Law Associates, P.A.
57
Is Whole Life Insurance a Better Investment than Alternative Portfolios?
Based upon 80% of current dividend rate
projections, otherwise the same as chart 1
Investing surrender value from policy year 20 plus any future
contributions in alternative investment – assumes after tax return
(5)
Death
Event Rate
of Return
Going
Forward
(5a)
Rate of
Return
Assuming
Projected
(6)
Net Death
Benefit
(7)
Net Death
Benefit
Adjusted to
3.5%
Annual
Inflation
(8)
NonGuaranteed
Surrender
Value
(9)
5% rate of
return
(10)
7% Rate of
Return
(2)
Joint
Age
(3)
Annual
Outlay
(4)
Total
Contributions Going
Forward
2011/20
62
$134,004
$134,004
624.42%
624.42%
$970,750
$970,750
$127,960
$134,004
$134,004
2012/21
63
$13,643
$147,647
166.41%
166.41%
$952,890
$952,890
$148,846
$154,347
$157,027
2013/22
64
$13,815
$161,462
90.58%
90.58%
$934,376
$934,376
$170,903
$175,880
$181,834
2014/23
65
$13,865
$175,327
61.13%
61.13%
$915,967
$915,357
$194,014
$198,539
$208,428
2015/24
66
$13,930
$189,257
45.68%
45.68%
$895,967
$895,967
$217,439
$222,395
$236,948
2016/25
67
$14,010
$203,267
36.21%
36.21%
$876,319
$876,319
$241,940
$247,525
$267,544
2021/30
72
$14,660
$275,107
16.89%
16.94%
$1,110,088
$777,375
$374,414
$395,231
$457,765
2026/35
77
$16,175
$352,372
10.48%
10.63%
$1,180,435
$691,754
$529,825
$589,635
$730,648
2031/40
82
$19,520
$442,197
7.37%
7.62%
$1,276,202
$625,843
$708,123
$851,422
$1,127,528
2036/45
87
$26,505
$558,462
5.52%
5.85%
$1,399,751
$574,425
$902,861
$1,214,341
$1,713,985
2041/50
92
$39,820
$729,287
4.15%
4.57%
$1,539,032
$528,527
$1,108,862
$1,737,114
$2,598,250
2046/55
97
$95,010
$104,1637
2.74%
3.27%
$1,679,168
$482,559
$1,399,792
$2,555,250
$3,993,394
2048/57
99
$13,495
$1,168,037
1.44%
2.14%
$1,488,723
$398,405
$1,517,684
$2,949,208
$4,706,341
(1)
Year/
Policy
Year
Copyright © 2013 Gassman Law Associates, P.A.
58
Is Whole Life Insurance a Better Investment than Alternative Portfolios?
Showing initial cash value plus reduced premiums from
carrier projection to facilitate rate of return analysis
Investing surrender value from policy year 20 plus any future
contributions in alternative investment – assumes after tax return
(5)
Death
Event Rate
of Return
Going
Forward
(5a)
Rate of
Return
Assuming
Projected
(6)
Net Death
Benefit
(7)
Net Death
Benefit
Adjusted to
3.5%
Annual
Inflation
(8)
NonGuaranteed
Surrender
Value
(9)
5% rate of
return
(10)
7% Rate of
Return
(2)
Joint
Age
(3)
Annual
Outlay
(4)
Total
Contributions Going
Forward
2011/20
62
$128,274
$128,274
656.78%
324.42%
$970,750
$970,750
$127,960
$128,274
$128,274
2012/21
63
$7,913
$136,187
172.03%
166.41%
$970,750
$936,774
$142,833
$142,601
$145,166
2013/22
64
$8,085
$144,272
93.24%
90.58%
$970,750
$903,987
$158,583
$157,816
$163,413
2014/23
65
$8,135
$152,407
62.84%
61.13%
$970,750
$872,347
$175,083
$173,842
$182,987
2015/24
66
$8,200
$160,607
46.94%
45.68%
$970,750
$841,815
$191,583
$190,734
$203,996
2016/25
67
$8,280
$168,887
37.21%
36.21%
$970,750
$812,351
$208,833
$208,550
$226,555
2021/30
72
$7,752
$210,156
17.44%
16.94%
$970,750
$679,799
$301,368
$311,860
$365,340
2026/35
77
$5,157
$241,362
10.92%
10.63%
$970,750
$568,875
$398,021
$432,803
$548,726
2031/40
82
$4,122
$262,973
7.78%
7.62%
$970,750
$476,051
$486,453
$576,342
$794,589
2036/45
87
$6,757
$268,450
5.91%
5.85%
$970,750
$398,373
$557,748
$763,391
$1,143,269
2041/50
92
$19,570
$358,130
4.47%
4.57%
$970,750
$333,370
$614,853
$1,049,809
$1,681,477
2046/55
97
$74,760
$569,230
2.76%
3.27%
$970,750
$278,974
$683,853
$1,566,161
$2,591,120
2048/57
99
-$4,403
$657,482
2.09%
2.14%
$970,750
$259,787
$739,353
$1,819,577
$3,061,311
(1)
Year/
Policy
Year
Copyright © 2013 Gassman Law Associates, P.A.
59
BUY TERM; INVEST THE REST?
Should a healthy 30 year old non-smoker client buy a universal life insurance
policy or purchase term life insurance and “invest the rest”?
8%
Rate of
Return
Guarante
ed Net
Surrender
Value
NonGuarante
ed Net
Surrender
Value
Savings
at 5% if
Projecti
ons Pan
Out
Savings
at 8% if
Projectio
ns Pan
Out
$5,086
$5,086
$0
$0
$5,086
$5,086
$10,172
$10,426
$10,579
$0
$0
$10,426
$10,579
$5,086
$15,258
$16,034
$16,511
$687
$2,030
$14,004
$14,481
$700
$5,086
$20,344
$21,921
$22,918
$5,202
$7,207
$14,714
$15,711
$5,786
$700
$5,086
$25,430
$28,103
$29,838
$9,836
$12,659
$15,444
$17,179
35
$5,786
$700
$5,086
$30,516
$34,595
$37,311
$15,417
$19,182
$15,413
$18,129
40
$5,786
$700
$5,086
$55,946
$72,256
$84,659
$46,254
$58,721
$13,535
$25,938
45
$5,786
$700
$5,086
$81,376
$120,322
$154,22
9
$78,162
$109,234
$11,088
$44,995
50
$0
$700
-$700
$101,020
$175,847
$250,60
9
$103,473
$166,097
$9,750
$84,512
55
$0
$700
-$700
$97,520
$220,369
$363,79
2
$96,699
$206,321
$14,048
$157,471
59
$0
$700
-$700
$94,720
$264,692
$491,52
8
$79,604
$244,980
$19,712
$246,548
Age
Universa
l Life
Premium
s
Term
Life
Premium
s
Net
Amount
to Invest
Cumulati
ve
Amount
Invested
5% Rate
of
Return
30
$5,786
$700
$5,086
$5.086
31
$5,786
$700
$5,086
32
$5,786
$700
33
$5,786
34
The chart above illustrates a healthy 30 year old non-smoking male investing the annual net premium difference between a 20-Pay universal life
policy and a 30-year term life policy into investments yielding 5% and 8% over 30 years. At an 8% rate of return, the additional assets from
investing the premium difference would be $246,548 after 30 years.
*Note – Term life insurance lapses after age 60 leaving client uninsured.
60
Copyright © 2013 Gassman Law Associates, P.A.
Action Checklist for 2013 Estate and
Entity/Asset Structuring Update
12. Clean-up time:
a.
Forgive or reduce intra-family and inter-trust loans.
(May be best to gift cash to the borrowing entity and let the borrowing entity use that cash to repay the
loan – report a cash gift on the tax return.)
b.
Pay off loans that may have been taken out on life insurance policies that are owned by irrevocable
trusts or family.
(Or is it best to keep a low interest loan or grandfathered split dollar arrangement in place and to use
gifting allowances elsewhere?)
c.
Have children who own life insurance policies on their parents use part of their own $5,250,000
lifetime gifting exclusions to gift such policies to trusts, to preserve policy proceeds from potential
future creditors, divorce, or unwise management or spending.
d.
Fund irrevocable trusts that may buy out remainder interests, purchase existing Grantor Retained
Annuity Trusts (“GRATs”) assets, purchase homes from Qualified Personal Residence Trusts
(“QPRTs”), or otherwise assist in unwinding or unfreezing mechanisms and arrangements now in place.
e.
Make further ballast gifts to irrevocable trusts which owe installment notes and are highly leveraged,
due to reduction in values given the post-2007 economic circumstances.
Copyright © 2013 Gassman Law Associates, P.A.
61
Action Checklist for 2013 Estate and
Entity/Asset Structuring Update
13.Realize that real estate can go up in value again
and plan for ownership of homes in various trust
systems.
Run through the possible financial and tax
implications of real estate values recovering,
particularly for clients with substantially leveraged
real estate- is it time to gift to a Nevada trust?
Copyright © 2013 Gassman Law Associates, P.A.
62
Age of Client
Initial Value of Home
Fractional Discount Assumed
Discounted Value of ½ of Home
QPRT Trust Planning Demonstration
Gift Component (with
respect to each QPRT)
6 Year
QPRT
8 Year
QPRT
10
Year
QPRT
12
Year
QPRT
14
Year
QPRT
16
Year
QPRT
Gift %
73.220%
Value of Gift
$267,619.00
Gift %
64.328%
Value of Gift
$235,118.84
Gift %
55.528%
Value of Gift
$202,954.84
Gift %
46.916%
Value of Gift
$171,477.98
Gift %
38.633%
Value of Gift
$141,203.62
Gift %
30.840%
Value of Gift
$112,720.20
68
$860,000
15.00%
$365,500
Value of ½
of Home at
End of
QPRT Term
Assuming
7% Growth
Estate Tax
on Value
at End of
Term
Assuming
35%
Estate Tax
Rate
Estate Tax
Savings
on ½ of
Home at
End of
QPRT
Estate Tax
Savings
on Entire
Value of
Home at
End of
QPRT
Estate
Tax
Savings
After 16
Years
Assuming
7%
Growth
on ½ of
House
$645,314.05
$225,859.92
$132,193.23
$264,386.96
$350,633.96
$701,267.92
$738,820.06
$258,587.02
$176,295.43
$352,590.85
$362,009.05
$724,018.10
$845,875.08
$296,056.28
$225,022.09
$450,044.17
$373,266.45
$746,532.90
$968,442.38
$338,954.83
$278,937.54
$557,875.08
$384,283.35
$768,566.70
$1,108,769.68
$388,069.39
$338,648.12
$677,296.25
$394,879.38
$789,758.76
$1,269,430.41
$444,300.64
$404,848.70
$809,697.15
$404,848.57
$809,697.15
Probability of Death Before Certain Age
Current Age 68
2 years (70) 4.18%
6 years (74) 14.31%
4 years (72) 8.92%
8 years (76) 20.45%
10 years (78) 27.33%
15 years (83) 47.24%
Estate Tax
Savings After
16 Years
Assuming
7% Growth
on Entire
House
20 years (88) 68.53%
Copyright © 2013 Gassman Law Associates, P.A.
63
Child’s Homestead Irrevocable Trust
A trust that can own a home used by a child to benefit the spouse and descendants;
- can qualify for the State Homestead Exemption and 3% cap
- can be considered as owned by the Child for income tax purposes to qualify for
the $250,000 income tax exemption on sale
- can be controlled by the Trustee and used for the benefit of various family
members
- will insulate family members from liabilities associated with ownership of the
home
Other Spouse =
Trustee
Trust assets can be applied for the health, education,
maintenance and support of the Trustee-Spouse and
children.
GRANTOR
SPOUSE
Gift
CHILD’S
HOMESTEAD
IRREVOCABLE
TRUST
Home and Other Assets
One or more children may reside in the house to
qualify for the Florida Tax Homestead Exemption.
For income tax purposes, the Trust can be considered
as owned by the child who lives in the house so that
the house can be sold income tax free to the extent
of up to $250,000 in appreciation.
The Trust will not be subject to creditor claims of any
family member unless (1) the transfer to the Trust by
the Grantor Spouse is a “fraudulent transfer,” or (2)
the child has a right to withdraw more than the gift
tax exclusion amount in any calendar year.
NOTE – The Trust must be appropriately drafted,
funded, and administered to achieve the above
results.
Copyright © 2013 Gassman Law Associates, P.A.
64
COMPARISON OF METHODS TO PURCHASE HOMES FOR THE CHILDREN
$250,000
Exemption on
Sale of Home
$50,000
Homestead
Exemption and
3% Per Year Cap
on Valuation
Divorce
Control
Notes
Father and Mother
loan money to the
child. Child
purchases and
owns home.
Child gets income
tax exemption.
Child gets
homestead
exemption and cap.
Loan will be repaid
to parents. Equity
may be subject to
claim by spouse if
this is not waived
by Prenuptial
Agreement.
Child controls the
house. However,
we may be able to
call the Note to
force a sale.
Note: Child gets
equity above Note.
Father and Mother
own the home and
the child lives in
the house.
No.
Generally no.
However, it may be
possible to obtain
these with a 99year lease.
Better protected.
Father and Mother
control.
Via Child Funded
Homestead Bypass
Trust.
Child gets income
tax exemption.
Child gets
homestead
exemption and cap.
Better protected.
Mother would be
Trustee of the Trust
and would retain
control.
Note: Creditors
may be able to get
into the Trust. It
may be possible for
Mother to transfer
the house to the
child’s individual
name in the event
of a Creditor issue.
Direct Client
Funded Homestead
Bypass Trust.
No
Child gets
homestead
exemption and cap.
Better protected.
Mother would be
Trustee of the Trust
and would retain
control.
Note: The
$250,000
exemption is lost,
but no creditor of
the child should be
able to get the
assets.
One-half purchased
by child and onehalf owned by
Father and Mother.
One-half.
One-half.
One-half, better
protected.
Each controls onehalf.
Copyright © 2013 Gassman Law Associates, P.A.
65
Limited Liability Trust –
Asset Protection Trust
Trust Company in proper jurisdiction = Trustee or CoTrustee
ASSET
PROTECTION
TRUST
Mother & Father
as contributors
Rental Home(s)
Copyright © 2013 Gassman Law Associates, P.A.
-Benefits mother, father and children.
-May be disregarded for income tax purposes.
-No tax filing requirements if a domestic asset
protection trust jurisdiction is used.
-May need to have subsidiary management
trust owned 100% by asset protection trust to
hold title, to allow parents to have
management powers (preferably one parent
who does not have other exposed assets).
66
Action Checklist for 2013 Estate and
Entity/Asset Structuring Update
14.
Adjust rental arrangements.
◦ Increase or decrease rent to take into account the 3.8% Medicare tax,
7% sales tax, and passive loss rules.
◦ Consider combining real estate with business operations by having
separate companies under the same tax identity to attempt to
eliminate sales tax and the 3.8% Medicare tax.
◦ Be sure that lease agreements have appropriate provisions to help
insulate the landlord from potential liability caused by tenant usage.
Copyright © 2013 Gassman Law Associates, P.A.
67
Action Checklist for 2013 Estate and
Entity/Asset Structuring Update
15.
Also re-evaluate year-end wages and dividend situation.
◦ Wages are now subject to the 6.2% employee share, plus the 1.45% employee
Medicare share, and an extra 0.9% Medicare tax for high earners.
◦ Keep in mind the IRS’ recent victories in David E. Watson, P.C., 7414 F. Supp.
2d 954 (S.D. Iowa 2010) and JD & Assocs., Ltd., Case No. 3:04-cv-59 (D.N.D.
2006) for unreasonable compensation and S corporation dividend situations.
◦ Are we protecting the wages of the head of household for creditor protection
purposes?
◦ Dividends paid to tenancy by the entireties owners will be protected from
creditors of one individual spouse who might be sued.
◦ Is there an employment agreement in place that properly verifies wages to the
extent needed under Florida Statute Section 222?
◦ Place equipment or rental property under an LLC partially owned by children to
have income under the children’s brackets.
◦ Review pension law opportunities in view of a 39.6% income tax and a 3.8%
Medicare tax that may be reduced by pension contributions.
◦ Make children work, and put them on the payroll. The same may apply for inlaws and other family members. Children or other family members could use
their compensation to fund insurance trusts that own life insurance policies on
the client, if the client’s gift tax annual exclusion is insufficient to fully fund
insurance policies.
◦ Are there family or others who would be best served by having independent
contractor relationships with S corporations that would compensate them?
Review independent contractor rules and liability insulation advantages.
Copyright © 2013 Gassman Law Associates, P.A.
68
Action Checklist for 2013 Estate and
Entity/Asset Structuring Update
16.
Consider charitable giving.
◦ Make sure the clients understand the opportunities offered by a
charitable lead annuity trust.
◦ Is the client over 70 ½ with an IRA? Consider the $100,000 (or less)
direct charitable transfer opportunity.
◦ Show the client charitable lead annuity trust or unitrust numbers. (See
the next two slides for sample charitable lead annuity trust numbers.)
◦ Show the client charitable remainder trust numbers?
Copyright © 2013 Gassman Law Associates, P.A.
69
PROFESSOR HESCH’S COMMENTS
Fixed Term Charitable Lead Annuity Trust Example– How to Take Advantage of Financial
Leverage After the Client’s Death
If an 80 year old client establishes a 20-year, “Zeroed Out” Charitable Lead Annuity Trust with a
$10,000,000 contribution, then over $15,000,000 in assets will remain in the CLAT for Client’s
descendants, free of estate tax.
This example assumes a Section 7520 rate of 1.0% (the January 2013 Section 7520 rate) and an
annual return of 7% on trust assets.
Upon Client’s death, nothing is included in his estate, even if he dies during the annuity term.
Therefore, if Client dies during year 10 of the 20 year Fixed Term CLAT, then there is still 10 years
of financial leverage that will occur after his death.
This can yield remarkable results for Client’s descendants, as indicated by the chart on the
following slide.
Copyright © 2013 Gassman Law Associates, P.A.
70
20 YEAR CHARITABLE LEAD ANNUITY TRUST -- $10,000,000 Contribution, "Zeroed-Out"
Assuming a 1.0% Interest Rate (the January 2013 Section 7520 rate)
Year
Contribution to Trust
Trust Earnings at 7% Annual
Return
Annual Annuity Payment to
Charity
Trust Balance
2013
$10,000,000
$700,000.00
($554,151.71)
$10,145,848.29
2014
$
-
$710,209.38
($554,151.71)
$10,301,905.96
2015
$
-
$721,133.42
($554,151.71)
$10,468,887.67
2016
$
-
$732,822.14
($554,151.71)
$10,647,558.09
2017
$
-
$745,329.07
($554,151.71)
$10,838,735.45
2018
$
-
$758,711.48
($554,151.71)
$11,043,295.22
2019
$
-
$773,030.67
($554,151.71)
$11,262,174.18
2020
$
-
$788,352.19
($554,151.71)
$11,496,374.66
2021
$
-
$804,746.23
($554,151.71)
$11,746,969.18
2022
$
-
$822,287.84
($554,151.71)
$12,015,105.31
2023
$
-
$841,057.37
($554,151.71)
$12,302,010.97
2024
$
-
$861,140.77
($554,151.71)
$12,609,000.03
2025
$
-
$882,630.00
($554,151.71)
$12,937,478.32
2026
$
-
$905,623.48
($554,151.71)
$13,288,950.09
2027
$
-
$930,226.51
($554,151.71)
$13,665,024.89
2028
$
-
$956,551.74
($554,151.71)
$14,067,424.92
2029
$
-
$984,719.74
($554,151.71)
$14,497,992.96
2030
$
-
$1,014,859.51
($554,151.71)
$14,958,700.75
2031
$
-
$1,047,109.05
($554,151.71)
$15,451,658.10
2032
$
-
$1,081,616.07
($554,151.71)
$15,979,122.45
Amount Passing to Descendants After Expiration of Annuity Term:
Copyright © 2013 Gassman Law Associates, P.A.
$15,979,122.45
71
Action Checklist for 2013 Estate and
Entity/Asset Structuring Update
17.
Good reasons for Floridians to get divorced:
◦ Each spouse could have a separate creditor protection
homestead.
◦ Each spouse could become the head of household for wage
exemption purposes for creditor protection as long as they
each support someone else in their household- thus a reason
to date after the divorce.
◦ Under the 2013 Medicare tax rules, a married couple will be
responsible for the 3.8% tax on all investment income to the
extent that their taxable income exceeds $250,000. This
threshold is $200,000 per person for an unmarried couple, so
a $400,000 effective threshold can apply.
◦ Each spouse can remarry an individual who has large net
operating losses and then give that person a salary to absorb
the net operating losses while sharing the income.
◦ Have your present spouse use their entire $5,250,000 gifting
allowance on the children and then divorce them and marry a
new spouse with a full $5,250,000 allowance and assure life
expectancy.
Copyright © 2013 Gassman Law Associates, P.A.
72
WHERE DOES THE TRUST FIT IN LOGISTICALLY?
ESTATE AND ASSET PROTECTION PLANNING FOR THE SINGLE PROFESSIONAL
Child or Children
SINGLE
(NONMARRIED)
INVIDIDUAL
529 Plans
UGMA Accounts (Subject to Creditors of the Child)
Child’s or Children’s Automobiles?
(Who signed for driving privileges?)
IRA Account
Automobile
401k/Pension Account
Annuity Contracts
Life Insurance
Can deposit into a wage account.
Offshore Trust
Company, as
Trustee or CoTrustee
HOMESTEAD
LIVING
TRUST
Nevada Trust
Company, as CoTrustee
OFFSHORE
ASSET
PROTECTION
TRUST
GIFTING
TRUST
NEVADA
ASSET
PROTECTION
TRUST
Parent, Trustee
TRUST
FORMED BY
CHILD
WITH
EXCESS
ASSETS
3%
3%
97%
99%
97%
S Corporation
Stock
1%
WAGE
ACCOUNT?
Wages
PROFESSIONAL
PRACTICE
CORPORATION
Furniture, equipment, accounts
receivable
Long
Term
Lease
PROFESSIONAL
BUILDING
AND/OR
EQUIPMENT
LLC
SECURITIES
FLP
REAL ESTATE
FLP
Brokerage
Accounts
LLC
Copyright © 2013 Gassman Law Associates, P.A.
1
Building 1
LLC
LLC
Lot 1
Condo
73
Determining Best How To Allocate Assets As Between A Married Couple
Part I
General Rules:
-Typically want each trust funded with at least $5,250,000 worth of assets on death for estate tax planning.
- May be funded from ½ of tenancy by the entireties assets via disclaimer and probate or by life insurance/pension/IRA assets.
Wife could be Trustee
Trustee other
if Husband is sole
Wife
Husband
than Husband
grantor (or vice
or Wife
versa)
Protected
life
insurance
and annuity
contracts
“owned by
the
insured.”
Husband’s
Revocable
Trust
Wife’s
Revocable
Trust
Gifting Trust
(Irrevocable)
Lifetime ByPass Trust
(Irrevocable)
FLORIDA TBE
(Tenancy by the
Entireties)
1. Only exposed to creditors 1. Safe from creditors of
1. Assets held directly by
if both spouses owe the
husband but exposed to
revocable trust are subject
creditor, if one spouse
creditors of wife (Maintain
to husband’s creditor
dies and the surviving
large umbrella liability
claims.
spouse has a creditor,
insurance coverage to
2. Direct ownership of limited
the spouses divorce, or
protect these assets.)
partnership or LLC not in
state law or the state of 2. On wife’s death, can be held
TBE may have charging
residence changes.
under a protective trust,
order protection
2. On death of one spouse,
which will continue to be
(meaning that if a
surviving spouse may
safe from creditors of
creditor obtains a lien
disclaim up to ½ (if no
husband, subsequent
on the limited
creditor is pursuing the
spouses, and “future new
partnership or LLC, the
deceased spouse) to fund
family.”
husband cannot receive
By-Pass Trust on first
monies from the limited
death.
partnership or LLC
without the creditor
being paid).
SEE NEXT PAGE FOR SECOND TIER PLANNING
1. Safe from creditors
of both spouses.
2. If divorce occurs,
should not be
subject to rules for
division of
property between
spouses.
3. May be controlled
by the
“entrepreneurial
spouse” by using a
Family Limited
Partnership.
1. Safe from the
creditors of the
Grantor’s spouse.
2. If funded by one
spouse, may benefit
other spouse and
children during the
lifetime of both
spouses.
3. Otherwise can be
identical to gifting
trust pictured to the
left.
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 the
assets directly in the “low risk” spouse’s trust.
Copyright © 2013 Gassman Law Associates, P.A.
74
Determining Best How To Allocate Assets As Between A Married Couple
Part II
Subsidiary Entity Techniques:
-Limited partnerships and LLCs can be used to facilitate discounts, for estate tax purposes, and for charging order protection.
Wife could be Trustee
-Limited partnerships and LLCs can also be used to provide “firewall protection” from activities or properties owned.
if Husband is sole
Husband
Wife
Trustee other
grantor (or vice
than Husband
versa)
or Wife
Husband’s
Revocable
Trust
Wife’s
Revocable
Trust
FLORIDA TBE
(Tenancy by the
Entireties)
1. Only exposed to creditors 1.
1. Assets held directly by
if both spouses owe the
revocable trust are subject
creditor, if one spouse
to husband’s creditor
dies and the surviving
claims.
spouse has a creditor,
2. Direct ownership of limited
the spouses divorce, or
partnership or LLC not in
state law or the state of 2.
TBE may have charging
residence changes.
order protection
2. On death of one spouse,
(meaning that if a
surviving spouse may
creditor obtains a lien
disclaim up to ½ (if no
on the limited
creditor is pursuing the
partnership or LLC, the
deceased spouse) to fund
husband cannot receive
By-Pass Trust on first
monies from the limited
death.
partnership or LLC
without the creditor
96%
97%
3%
1%
being paid).
SECOND
TIER
PLANNING:
FLP
Lifetime ByPass Trust
(Irrevocable)
Gifting Trust
(Irrevocable)
Safe from creditors of
husband but exposed to
creditors of wife (Maintain
large umbrella liability
insurance coverage to
protect these assets.)
On wife’s death, can be held
under a protective trust,
which will continue to be
safe from creditors of
husband, subsequent
spouses, and “future new
family.”
1. Safe from creditors
of both spouses.
2. If divorce occurs,
should not be
subject to rules for
division of
property between
spouses.
3. May be controlled
by the
“entrepreneurial
spouse” by using a
Family Limited
Partnership.
1. Safe from the
creditors of the
Grantor’s spouse.
2. If funded by one
spouse, may benefit
other spouse and
children during the
lifetime of both
spouses.
3. Otherwise can be
identical to gifting
trust pictured to the
left.
100%
Husband,
Manager
3%
FLP
LLC
FIREWAL
L LLC
Leveraged
Investment
Property or
activity
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 the assets directly in the “low risk” spouse’s
Copyright © 2013 Gassman Law Associates, P.A.
75
trust.
Author Biographies
Alan S. Gassman, J.D., LL.M. is a practicing lawyer and author based in Clearwater, Florida. Mr. Gassman is the founder of the
firm Gassman Law Associates, P.A., which focuses on the representation of physicians, high net worth individuals, and business
owners in estate planning, taxation, and business and personal matters. He is the lead author on Bloomberg BNA’s Estate Tax
Planning and 2011 and 2012, Creditor Protection for Florida Physicians, Gassman & Markham on Florida and Federal Asset
Protection Law, A Practical Guide to Kickback and Self-Referral Laws for Florida Physicians, The Florida Physician Advertising
Handbook and The Florida Guide to Prescription, Controlled Substance and Pain Medicine Laws, among others. Mr. Gassman is a
frequent speaker for continuing education programs, publishes regularly for Bloomberg BNA Tax & Accounting, Estates and Trusts
Magazine, Estate Planning Magazine and Leimberg Estate Planning Network (LISI). He holds a law degree and a Masters of Law
degree (LL.M.) in Taxation from the University of Florida, and a business degree from Rollins College. Mr. Gassman is board
certified by the Florida Bar Association in Estate Planning and Trust Law, and has the Accredited Estate Planner designation for the
National Association of Estate Planners & Councils. Mr. Gassman’s email is [email protected].
Thomas J. Ellwanger, J.D., is a lawyer practicing at the Clearwater, Florida firm of Gassman Law Associates, P.A. Mr. Ellwanger
received his B.A. in 1970 from Northwestern University and his J.D. with honors in 1974 from the University of Florida College of
Law. His practice areas include estate planning, trust and estate administration, personal tax planning and charitable tax planning.
Mr. Ellwanger is a member of the American College of Trusts and Estates Council (ACTEC). His email address is
[email protected]
Kenneth J. Crotty, J.D., LL.M. is a partner at the Clearwater, Florida firm of Gassman Law Associates, P.A., where he practices in
the areas of estate tax and trust planning, taxation, physician representation, and corporate and business law. Mr. Crotty has coauthored several handbooks that have been published in BNA Tax & Accounting, Estate Planning, Steve Leimberg’s Estate Planning
and Asset Protection Planning Newsletter, Estate Planning magazine, and Practical Tax Strategies. Mr. Crotty is also the author of
the Limited Liability Company Chapter of the Florida Bar’s Florida Small Business Practice, Seventh Edition. He, Alan Gassman,
and Chrisopher Denicolo are the co-authors of the BNA book “Estate Tax Planning in 2011 & 2012”. His email address is
[email protected].
Christopher Denicolo, J.D., LL.M. is a partner at the Clearwater, Florida law firm of Gassman Law Associates, P.A., where he
practices in the areas of estate tax and trust planning, taxation, physician representation, and corporate and business law. He has
co-authored several handbooks that have been featured in Bloomberg BNA Tax & Accounting, Steve Leimberg’s Estate Planning
and Asset Protection Planning Newsletter, and the Florida Bar Journal. He is also the author o the Federal Income Taxation of the
Business Entity Chapter of the Florida Bar’s Small Business Practice, Seventh Edition. Mr. Denicolo received his B.A. and B.S.
degrees from Florida State University, his J.D. from Stetson University College of Law, and his LL.M. (Estate Planning) from the
University of Miami. His email address is [email protected]
Copyright © 2013 Gassman Law Associates, P.A.
76
GASSMAN LAW ASSOCIATES, P.A.
presents
ESTATE PLANNING
FOR 2013
BEYOND THE OBVIOUS
Tuesday, February 5, 2013
5:00 p.m.
Alan S. Gassman, Esq.
[email protected]
Thomas J. Ellwanger, Esq.
[email protected]
Kenneth J. Crotty, Esq.
[email protected]
Gassman Law Associates, P.A.
1245 Court Street
Clearwater, FL 33756
727-442-1200
www.gassmanlawassociates.com
Christopher J. Denicolo, Esq.
[email protected]
77