CHAPTER 16 Estate Planning: Concepts and Strategies Chapter 16: Estate Strategies1

CHAPTER 16

Estate Planning: Concepts and

Strategies

Chapter 16: Estate Strategies 1

INTRODUCTION

Major Objectives of Estate Planning:

Preserve the assets accumulated Develop strategies for passing them on to beneficiaries Minimize estate taxes

Basic estate plan includes four documents:

Will Living Trust Financial Power of Attorney Health Care Power of Attorney

This chapter is divided into three parts:

Estate Tax Reduction Strategies Estate Preservation and Distribution Rules Miscellaneous Estate Planning Techniques


ESTATE TAX REDUCTION STRATEGIES INTRODUCTION

Major objective of estate planning is to eliminate, or significantly reduce, potential estate tax

MARITAL DEDUCTION Property passing to a spouse is generally free from federal

estate or gift taxes because of unlimited marital deduction

If spouse is unconditional beneficiary, life insurance proceeds also qualify as marital deduction property

For most families estate planning is essential because significant estate taxes might become due upon death of second spouse

Example I:Mr. Becker leaves his $5.5 million estate outright to his wife Betty


ESTATE TAX REDUCTION STRATEGIES MARITAL DEDUCTION (Contd.)

Example II:Mr. Becker leaves $5 million to his wife and remaining $500,000 to his children

Example III:Mr. Becker owns $7 million estate. Betty has a negligible estate. He leaves his entire estate to Betty.

These examples illustrate that:

Consequences of leaving large estate to surviving spouse should be carefully weighed

It might be better to leave assets in a trust and completely avoid paying estate taxes


ESTATE TAX REDUCTION STRATEGIES JOINT OWNERSHIP: Key Advantages

If property is held jointly with right of survivorship, upon death surviving joint owner automatically owns the property without necessity of probate

Property held jointly by married couples cannot be taken away in settlement of debt

If a person is sole owner of out of state vacation home, the will must be probated in two states. Joint ownership would eliminate this requirement.

Joint ownership can be used to shift income to a family member in a lower tax bracket

Joint property can be used to achieve special objectives. If a mother wants to gift $13,000 (2012) to her daughter, but still wants to use the money, she can place it in a joint bank account in both names


ESTATE TAX REDUCTION STRATEGIES JOINT OWNERSHIP: Key Disadvantages

The survivor could end up with an estate exceeding $5.12 million (2012), resulting in higher estate taxes

Where all properties are jointly owned and there is no will, if both spouses die in an accident, the entire property would be distributed according to rigid laws of intestate succession

An important problem associated with joint ownership of highly appreciated assets involves both federal income and estate taxes

Example: John and Betty Jones bought a house for $30,000 in 1966 and held it jointly until John died in January 2012, when the house was worth $200,000


ESTATE TAX REDUCTION STRATEGIES JOINT OWNERSHIP: Key Disadvantages (Contd.)

Joint tenancy does not provide complete control over the asset because order of deaths can significantly change the outcome

Unmarried joint tenants can increase estate tax liability for their heirs

Planning Strategies:

Option 1: One spouse holds the property only in his/her name, and transfers to the other via a will

Option 2: The property is split down the middle during the individuals’ lifetimes. Each spouse then leaves his or her estate in trust to the children with an income interest to the other spouse. The result is a total avoidance of estate taxes upon both deaths.


ESTATE TAX REDUCTION STRATEGIES LIFETIME GIFTS

An Overview Gift Tax Calculation Planning Ideas Involving Gifts

Annual Exclusion Special Property Gifting via a Trust Gifts to Charity

Disadvantages of Gifts Estate With and Without Lifetime Gifts Conclusion


ESTATE TAX REDUCTION STRATEGIESTRUSTS Estate Taxes and Trusts

Key Issues Bypass Trust Power of Appointment Trust Marital Trust QTIP Trust Estate Trust Life Insurance Trust Charitable Trust Charitable Remainder Annuity Trust Charitable Remainder Unitrust Charitable Lead Trust Pooled Income Fund

Irrevocable Gift TrustChapter 16: Estate Strategies 9

TRUSTS AND TAXES

Table 16-1 Trusts and Taxes


USE OF BYPASS TRUST


TestamentaryNo estate taxes on first death; minimized or eliminated at second death

QTIP MARITAL TRUST

Figure 16-1

QTIP Marital Trust


Marital TrustDecedent controls assets even after deathUsed if surviving spouse unable to handle own affairsSurviving spouse has control over assets

A-B Living Trust Utilizing a QTIP Marital Trust

Figure 16-2

A-B Living Trust


Trust controls distribution of assetsIncome paid out to spouse at least annuallyQualify for unlimited marital deductionDecedent controls ultimate distribution to beneficiaries at death of second

Comparative Features of Key Trusts

Table 16-3 Comparative Features of Key Trusts


Irrevocable Life Insurance Trust

Figure 16-3 The Irrevocable Life Insurance Trust


Life Insurance TrustTo shelter life proceeds must give up ownership

As long as die after three years this might work

Charitable Trusts

Charitable Trust These trusts involve distribution of income and the assets of the

trust

Charitable Remainder Annuity Trust Annual payments to beneficiaries

Lifetime but no longer than 20 years Distribution of assets to charity at the end Included in estate but get the charity deduction

Charitable Remainder Unitrust Beneficiaries get a variable income Future contributions are permitted

Charitable Lead Trust Income to the charity Remainder to beneficiaries

• Irrevocable Gift Trust


Charitable Remainder Trust Figure 16-4 Charitable Remainder Trust


SOPHISTICATED TAX REDUCTION STRATEGIESFAMILY LIMITED PARTNERSHIPS

Advantages

A person can discount gifts of limited partnership interests One can freeze the value of property by passing future

appreciation to the intended beneficiaries One can reduce his/her gross estate without giving up control of

the underlying property held by the FLP A person can reduce gross estate and protect property from

creditors and non-family ownership An FLP can result in substantial savings in taxes

Disadvantages

An FLP is not for everyone -- counsel must ensure that the FLP has a legitimate business purpose


SOPHISTICATED TAX REDUCTION STRATEGIES WEALTH REPLACEMENT TRUST

Replaces Gifted Assets Covers Estate Taxes

SPRINKLING TRUSTS CRUMMEY TRUST GENERATION SKIPPING TRANSFER TAX DYNASTY TRUSTS LEVERAGING GSTT

EXEMPTION SPLIT DOLLAR ARRANGEMENT DISCLAIMERChapter 16: Estate Strategies 19

SOPHISTICATED TAX REDUCTION STRATEGIES

• GENERATION SKIPPING TRANSFER TAX– To stop huge transfers

• Everyone entitled to transfer total of 1.1 without GSTT

• GSTT tax is max of estate tax– Slows the transfer beyond

generation of one’s children


SOPHISTICATED TAX REDUCTION STRATEGIES

GRANTOR RETAINED ANNUITY TRUST AND

GRANTOR RETAINED UNITRUST An Overview Key Advantages

QUALIFIED PERSONAL RESIDENCE TRUST


GRANTOR RETAINED ANNUITY TRUST

Figure 16-7 Grantor Retained Annuity Trust


QUALIFIED PERSONAL RESIDENCE TRUST

Figure 16-8 Qualified

Personal Residence Trust


Transfer home while retaining right to live in the home rent free for X years

If die within X years, gift tax of the remainder assetIf live beyond, the asset will be included in the estate

Miscellaneous Estate Planning Issues• Basis rules for gifts and estate distributions

– Gift• The basis is the basis the donor had in the asset

– The original cost at which they paid for it– Death

• The basis is the market value on the date of death or within 90 days• I purchased stock for $10,000 twenty years ago. It is now worth

$300,000.– If I gift it, the donee will not pay any taxes until they sell.

• The capital gains will be the market price – 10,000– If I die and the heir receives it, my estate will pay taxes on the 300,000.– The heir would only pay taxes if they sold and then only the difference

between the market price and 300,000


Documents

CHAPTER 16 Estate Planning: Concepts and Strategies Chapter 16: Estate Strategies1