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ECONOMIC TURMOIL PLANNINGECONOMIC TURMOIL PLANNING
RXRXTAKING STEPS TO TAKE CONTROLTAKING STEPS TO TAKE CONTROL
Janice A. Forgays, J.D., CLUJanice A. Forgays, J.D., CLU(Advanced Underwriter - June, 2009) (Advanced Underwriter - June, 2009)
CRN201009-125315
For education purposes only. Not for use with general public.
For Education Purposes Only. Not for Use with the General Public.
The information contained in this presentation is not written or intended to be interpreted as specific legal or tax advice and may not be relied on for purposes of avoiding any federal tax penalties. Neither MassMutual nor any of its employees or representatives are authorized to give legal or tax advice. Individuals are encouraged to seek the guidance of their own legal or tax counsel. Any individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.
Disclosure
For Education Purposes Only. Not for Use with the General Public.
ECONOMIC TURMOIL PLANNING
Changes in Economic Conditions
Creates Opportunities to Meet With Clients
WHY?
Asset values may have changed
Low interest rate environment
For Education Purposes Only. Not for Use with the General Public.
STEPS TO TAKE
1. Will Review
2. Trust Review
3. Estate Planning
4. Gift Planning
5. Charitable Giving
6. Sales to Intentionally Defective Grantor Trusts
7. Grantor Retained Annuity Trusts
8. Split Dollar Loan Treatment
*PLRs cannot be relied upon as precedent by anyone other than the taxpayer requesting the letter
For Education Purposes Only. Not for Use with the General Public.
WILL REVIEW
CLIENTS: Married with 2 adult children
INTENT: Treat children equally
WILL PROVISIONS: Commercial Real Estate to Child 1
Stock Portfolio to Child 2
PROBLEM: Stock portfolio value down 50%
STRATEGY: Review and rebalance will bequests*
*Should be reviewed regularly – provides good opportunity to meet with client
For Education Purposes Only. Not for Use with the General Public.
TRUST REVIEW
“A/B” or Credit Shelter/Marital Deduction Planning
“A” or Marital Deduction Trust
“B” or Credit Shelter (By-pass) Trust
CLIENTS: Married couple where 1st spouse dies –
$3.5 million (estate tax credit equivalent) to “B” trust for benefit of family –
Remainder to “A” trust for spouse
PROBLEM: Trust assets devalued – all assets to “B” Trust – disinherit spouse
STRATEGY: Life insurance for benefit of spouse
For Education Purposes Only. Not for Use with the General Public.
ESTATE PLANNING
State of the Estate Tax
Current Law: Estate tax replaced by capital gains tax in 2010 only
& no step up in basis
* in 2011 $1million estate tax credit/ 55% top tax rate
Estate Tax Proposals in Congress Senate 722 - freeze ’09 ($3.5 million/45% top rate) & reunification of gift and estate tax
exemptions at $3.5 million
House 2032 - $2 million credit/55% top tax rate
House 436 – freeze ’09 and limit FLP Valuation Discounts
For Education Purposes Only. Not for Use with the General Public.
ESTATE PLANNING
State of the Estate Tax
No proposals to eliminate estate tax
Freeze ’09 price tag = $238 billion over 10 years (per Congressional Budget Office)
For Education Purposes Only. Not for Use with the General Public.
ESTATE PLANNING
Goes beyond planning for the estate tax….
CLIENT: Has special needs child
INTENT: Provide for child without diminishing family lifestyle
PROBLEM: Support costs are depleting family wealth
STRATEGY: Special needs trust funded with life insurance on parent(s) for benefit of special needs child
For Education Purposes Only. Not for Use with the General Public.
GIFT PLANNING
Gift Tax Exclusion/Exemption
Gift Tax Annual Exclusion (per year/per donee) $13,000
Gift Tax Annual Exclusion (Sec. 2513 split with spouse) $26,000
Gift Tax Lifetime Exemption* $1,000,000
* No longer a “unified credit” with the estate tax credit of $3.5 million
For Education Purposes Only. Not for Use with the General Public.
GIFT PLANNING
Review client’s gifting programs
Advantageous to gift devalued assets = lower gift tax
Removes assets from client’s taxable estate
Removes future appreciation
Benefits child without gift tax
For Education Purposes Only. Not for Use with the General Public.
CHARITABLE GIVING
In 2008:
According to the National Philanthropic Trust – 2/3 of charities experienced drops in giving
Tactical Philanthropy Advisor reports that charitable giving in the US suffered the largest percentage drop on record
For Education Purposes Only. Not for Use with the General Public.
CHARITABLE GIVING
Make gifts in will (can amend will as circumstances change)
Adopt charitable giving strategy:
Charitable gift annuities
Charitable remainder trusts
For Education Purposes Only. Not for Use with the General Public.
CHARITABLE GIVING
CLIENT: Executive making large annual gifts to her law school
INTENT: Continue to support her law school
PROBLEM: Salary is frozen and retirement accounts diminished
STRATEGY: Maximize charitable contribution using life insurance owned by school – client gifts cash annually to pay premiums – deducts charitable gift OR use charitable remainder trust to provide income to client (may be used to supplement retirement) with trust remainder to law school
For Education Purposes Only. Not for Use with the General Public.
SALE TO INTENTIONALLY DEFECTIVE TRUST (IDIT/IDGIT)
Leveraged Wealth Transfer Tool
IDIT = “Intentionally defective irrevocable trust” or “Grantor Trust”
Example: trust income used to pay premiums Is no tax on sale of property between IDIT and Grantor – considered sale to self
for income tax purposes (Revenue Ruling 85-13) All trust income/loss taxed to Grantor Seller does not pay tax on gain (if any) Interest payments not taxed to Grantor (payments to self)
For Education Purposes Only. Not for Use with the General Public.
INTEREST RATES
APPLICABLE FEDERAL RATES (AFR)September 2009
IRC 1274(d) rates apply to loans sales (IDITs/Split Dollar Loans) Demand or short term (up to 3 years) 0.84% Mid-term (from 3 up to 9 years) 2.87% Long-term (9 or more years) 4.38%
IRC 7520 rate applies to GRATs and CRTs 120% of Federal mid-term rate
For Education Purposes Only. Not for Use with the General Public.
SALE TO INTENTIONALLY DEFECTIVE GRANTOR TRUST
Leveraged Wealth Transfer Tool
CLIENT: Has property worth $1,000,000
INTENT: Remove property from taxable estate without gift tax
STRATEGY: IDIT
Property Value: $1,000,000
Income @ 5%/ growth @ 3%
Balloon Note 5%/15 years
Annual Payments $ 50,000
Value in 15 Years (in Trust) $1,840,000
Minus Balloon Payment to Grantor $1,000,000
Net Transfer in Trust to Beneficiaries/Out of Estate $ 840,000
For Education Purposes Only. Not for Use with the General Public.
GRANTOR RETAINED ANNUITY TRUSTS (GRATS)
Leveraged Wealth Transfer Tool
Parent transfers devalued property to GRAT
Pays gift tax on lowered property value
Trust pays parent fixed amount each year for set number of years – trust remainder to children
Market recovery transfers to children at end of trust term without additional gift tax
If parent dies w/i trust term – trust assets in taxable estate
RULE: The lower the Section 7520 rate the greater the remainder interest in trust for beneficiaries
For Education Purposes Only. Not for Use with the General Public.
GRANTOR RETAINED ANNUITY TRUSTS
QPRT = Qualified Personal Residence Trust
Type of GRAT used for personal residences
Used to leverage market recovery on depressed value homes
For Education Purposes Only. Not for Use with the General Public.
GRANTOR RETAINED ANNUITY TRUST
Leveraged Wealth Transfer Tool
CLIENT: owns devalued stock portfolio
PROBLEM: Needs supplemental retirement income and remove assets from estate
STRATEGY: Gift stock portfolio to GRAT
Removes market recovery from taxable estate at end of trust term
Gift to trust taxed at initial transfer into GRAT
GRAT income stream used to supplement retirement income
For Education Purposes Only. Not for Use with the General Public.
GRANTOR RETAINED ANNUITY TRUSTS
Obama Administration’s 2010 Revenue Proposals
Limit use of short term GRATs (used to minimize chance of death and estate inclusion of trust assets during trust term)
Imposes minimum GRAT term of 10 years
NO BILL YET so still time….so still time….
For Education Purposes Only. Not for Use with the General Public.
SPLIT DOLLAR LOAN TREATMENT
Replaced equity split dollar (after Final Split Dollar regulations)
Employer makes premium loans to employee
Interest rate = AFR
Employee benefits from low interest rate environment
Employee entitled to policy equity in excess of premium loans plus interest
NOTE: Split dollar loans may also be made between family members or to an Irrevocable Life Insurance Trust
For Education Purposes Only. Not for Use with the General Public.
SPLIT DOLLAR LOAN TREATMENT
CLIENT: Has estate tax liability & only 1 child
PROBLEM: Needs to fund life insurance policy sufficient to pay the estate tax in an ILIT (Only 1 Crummey beneficiary)
STRATEGY: Client makes split dollar loans to ILIT for premiums
no taxable gifts
death benefit minus loans + interest out of client’s estate & may be used to pay estate tax
For Education Purposes Only. Not for Use with the General Public.
©2009 Massachusetts Mutual Life Insurance Company, Springfield, MA. All rights reserved. www.massmutual.com. MassMutual Financial Group is a marketing name for Massachusetts Mutual Life Insurance Company (MassMutual) and its affiliated companies and sales representatives
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