ILITs, SLATs, GRATs, and Other Four-Letter Words

Presented by:

Julius H. Giarmarco, J.D., LL.M.Giarmarco, Mullins & Horton, P.C.

101 W. Big Beaver Road, 10th FloorTroy, Michigan 48084

(248) 457-7200jhg@disinherit-irs.comwww.disinherit-irs.com

The federal estate tax is only vulnerable to lifetime gifting.

And there are generally three types of gifts you can make: Gifts of life insurance. Gifts that shift or reduce value. Gifts to charity.

Introduction

Increased estate, gift and GST tax exemptions. Lower estate, gift and GST tax rates.

Estate, Gift and Generation-Skipping Tax Exemptions

YearEstate Tax Exemption

Gift Tax Exemption

Estate/Gift Tax Rate GST Exemption

Annual Gift Tax Exclusion

2012 $5.12 million $5.12 million 35% $5.12 million $13,000

2013 $1 Million $1 million 55% $1 million $13,000

Under current tax law, surviving spouses of decedents who die in 2011 or 2012 may use the unused federal estate and gift tax exemptions of their deceased spouse.

1. Pay for your grandchildren’s education. Tuition paid directly to an educational organization is exempt from gift tax.

2. Pay your grandchildren’s medical bills. Medical bills paid directly to the provider are exempt from gift tax.

3. Gift cash. Up to $13,000 ($26,000 for couples) per recipient can be gifted without gift tax each year.

4. For people with more than $5.12 million in assets, start gifting it before 12/31/2012.

Four Basic Techniques to Minimize Your

Estate Tax Liability

Can you afford to give it all away?Is spousal access important?Outright or in trust?Dynasty trust and GST exemption.Leveraging the gifts – FLLCs – discounts

are still alive!May not be here after 2012 – sunset.

Use of $5.12 Million Gift Tax Exemption

1.Dynasty Trusts.2.Irrevocable Life Insurance Trusts

(ILITs). 3.Spousal Lifetime Access Trusts

(SLATs).4.Family Limited Liability Companies

(FLLCs).

Eight Advanced Techniques to Minimize Your

Estate Tax Liability

5.Grantor Retained Annuity Trusts (GRATs).

6.Intentionally Defective Grantor Trusts (IDGTs).

7.Qualified Personal Residence Trusts (QPRTs).

8.Zero Estate Tax Plans.

Eight Advanced Techniques to Minimize Your

Estate Tax Liability

Dynasty Trust – Overview of Technique

Dynasty Trust

Discretionary Distributionsto Children for Life

Discretionary Distributions to Grandchildren for Life

Discretionary Distributionsto Great-Grandchildren

for Life

Future Generations

Grantor

Advantages•Creditor protection•Divorce protection•Estate tax protection•Dispositive plan protection•Spendthrift protection•Consolidation of capital

No transfer tax paid.

No transfer tax paid.

No transfer tax paid.

No transfer tax paid.

Dynasty Trust vs.35% Estate Tax Every 30 Years

$1 MillionAfter-Tax Growth

Value of Dynasty Trust After 120

Years

Value of Property if No Trust

3.00% $34,710,987 $6,196,128

4.00% $110,662,561 $19,753,959

5.00% $348,911,561 $62,282,970

6.00% $1,088,187,748 $194,248,314

7.00% $3,357,788,383 $599,386,213

8.00% $10,252,992,943 $1,830,223,321

9.00% $30,987,015,749 $5,531,375,980

10.00% $92,709,068,818 $16,549,148,216

Irrevocable Life Insurance Trusts (“ILITs”)

Life insurance trusts remain a key planning tool.

Increased exemptions provide additional opportunities.

An ILIT will typically be designed as both a grantor trust and a generation-skipping trust.

ILITs

Structure of the ILIT

ILITs

Grantor Trust Trust Beneficiaries

1. Gift 2. Crummey Letter

6. Distribute Assets

Life Insurance Company

Estate

3. Pay Premiums 4. Pay Death Proceeds

5. Loan Money to or Purchase Assets from Estate

Spousal Lifetime Access Trusts (“SLATs”)

SLATs

GrantorGifts $5.12M

Spousal Lifetime Access Trust$5.12M

GrandchildrenChildrenSpouse

Beneficiaries receive income and principal as needed for health, education, maintenance and support, with spouse being the primary beneficiary and initial trustee. Thus, grantor maintains “indirect” access to the trust assets. Trust property passes – estate tax free – as it passes from one generation to the next for the maximum period permitted under state law.

Family Limited Liability Companies (“FLLCs”)

Design: Donor transfers assets to LLC in exchange for

voting and non-voting membership interests.

Donor retains control of the LLC as manager.

Donor transfers non-voting membership interests to younger generation (either outright or in trust).

FLLCs

Benefits: Transfers ownership while allowing donor to

retain control. Leverages gift and estate tax exemption due to

valuation discounts applied to non-voting membership interests for lack of control and lack of marketability.

Provides centralized management of family assets.

FLLCs

Benefits: Provides protection from creditors and protection

from spouses in divorce. Permits easy division of assets (such as real

estate) to facilitate annual gifting. Flexible – operating agreement can be modified. Donor can retain income stream via

management fees paid to manager.

FLLCs

FLLC Flowchart

Family Limited Liability Company

Donor

Donor Donor

1% VotingMembership Interest

(Control Interest)

99% Non-VotingMembership Interest

Gifts of Membership Interests to Heirs or Trusts for Heirs

Step 1

AssetsStep 2 Step 2

Step 3

Grantor Retained Annuity Trusts (“GRATs”)

A GRAT is an irrevocable trust in which a grantor transfers property for the benefit of one or more beneficiaries and retains an annuity interest for a term of years.

Each year the GRAT will pay the grantor a fixed annual annuity, as defined by the terms of the Trust.

GRATs

The amount of the taxable gift for transfer tax purposes is the Fair Market Value of the property transferred minus the value of the grantor’s retained annuity interest.

The GRAT may be structured so that the grantor’s retained annuity’s actuarial value is almost equal to the value of the property transferred, therefore resulting in little gift tax consequences.

At the end of the GRAT term, any remaining property in the GRAT passes to the remainder beneficiaries with no further gift tax consequences.

GRATs

GRATs

Grantor(Age 70)

GRAT

______________________End of Year 1

______________________End of Year 2

______________________GRAT Remainder

$137,915

Beneficiaries

$1 million of Securities

$510,517 of Securities

$510,517 of Securities

$137,915 of Securities

Taxable Gift $0.08Assumed growth rate 10%§7520 Rate (February ’12) 1.4%

Intentionally-Defective Grantor Trusts (“IDGTs”)

An IDGT is an irrevocable trust that is not included in the grantor’s gross estate.

However, the trust income is taxable to the grantor.

IDGTs are a powerful estate planning technique that reduces a grantor’s taxable estate through asset transfers and the payment of trust tax liability by the grantor.

IDGTs

The grantor establishes an IDGT and then loans assets to the trust for an installment note.

The installment note pays the lowest amount of interest based on the Applicable Federal Rate (AFR).

Any appreciation of the trust assets above the AFR is transferred to the trust beneficiaries without any additional transfer taxes.

IDGTs

Low Interest Rate Loan to IDGT

Grantor/Insured

IDGTLife Insurance

Company

1. Gifts $1M

2. Loans $9M

5. Excess Cash Flow/Premiums

6. Death Proceeds (Income and Estate Tax Free/Leverages GST Exemption)3. $9M Note to Grantor

Balloon Payment in 9 Years

4. $100,800 annual interest (Interest Rate 1.12%)

Advantages:

Value of loan proceeds frozen at 1.12% for nine years (February ’12 Mid-Term AFR).

Grantor’s estate further reduced by the income taxes paid on behalf of the trust.

The trust property escapes estate taxation for as long as permitted under state law.

Possible valuation discounts for promissory note in Grantor’s estate.

Grantor Trust vs. Non-Grantor Trust

NON-GRANTOR TRUST GRANTOR TRUST

YearBeginning Balance

Taxable Income

7%

Less: Taxes at

40%Ending Balance Year

Beginning Balance

Taxable Income

7%

Less: Taxes at

40%Ending Balance

1 $10,000,000 $700,000 $(280,000) $10,420,000 1 $10,000,000 $700,000 $ - $10,700,000

2 10,420,000 729,400 (291,760) 10,857,640 2 10,700,000 749,000 - 11,449,000

3 10,857,640 760,035 (304,014) 11,313,661 3 11,449,000 801,430 - 12,250,430

4 11,313,661 791,956 (316,783) 11,788,835 4 12,250,430 857,530 - 13,107,960

5 11,788,835 825,218 (330,087) 12,283,966 5 13,107,960 917,557 - 14,025,517

6 12,283,966 859,878 (343,951) 12,799,892 6 14,025,517 981,786 - 15,007,304

7 12,799,892 895,992 (358,397) 13,337,488 7 15,007,304 1,050,511 - 16,057,815

8 13,337,488 933,624 (373,450) 13,897,662 8 16,057,815 1,124,047 - 17,181,862

9 13,897,662 972,836 (389,135) 14,481,364 9 17,181,862 1,202,730 - 18,384,592

10 14,481,364 1,013,695 (405,478) 15,089,581 10 18,384,592 1,286,921 - 19,671,514

Qualified Personal Residence Trusts (“QPRTs”)

A QPRT is an irrevocable trust to which the grantor transfers his or her personal residence or vacation home.

The grantor retains the exclusive use of the residence for a term of years specified in the trust instrument.

If the grantor survives the term of the trust, the residence is either retained in further trust for or distributed outright to the grantor’s children.

QPRTs

The transfer of the residence to the QPRT is a taxable gift by the grantor to the remainder beneficiaries, determined by reference to the IRS actuarial tables.

The actual amount of the gift is a function of the grantor’s age, the value of the residence, and the term of the trust.

QPRTs

If the grantor survives the term of the QPRT, no further gift or estate tax will be imposed.

At the end of the term, the grantor will have the option of paying fair rent for his continued use of the residence.

If the grantor dies prior to the expiration of the term, the residence will be included in the grantor’s estate, but any gift tax exemption used will be restored.

QPRTs

Grantor QPRT

Residence

Rent-Free Right of Use of Residence for 15 Years

Childrenor ILIT

After Expiration of Selected

Term of YearsGrantor’s Age 70FMV of Residence $1,000,000Term of QPRT 15 YearsFMV in 15 years (at 5% growth) $2,079,000

Initial Gift $374,130FET Savings (35%) $569,679§7520 Rate (February ‘12) 1.4%

QPRTs

ASSUMPTIONS:

RESULTS:Grantor

Pays

Rent

Zero Estate Tax Plan

Projected Gross Estate $10,000,000

Estate of Surviving Spouse or Marital Trust

$6,500,000

After Tax Estate

$5,150,000

Federal Estate Tax

$1,350,000(13.5%)

Credit Shelter Trust

$3,500,000

Distribution to HeirsAfter Tax Estate $5,150,000Credit Shelter Trust 3,500,000Total $8,650,000

FederalEstate

Tax$0

Conventional Estate Planning

Assumes estate tax exemption is $3.5 million and top tax rate is 45%.

Current Net Estate $10,000,000

- Less premiums gifted (600,000)*

Total $9,400,000

* Using annual exclusion gifts

Estate of Surviving Spouse or Marital Trust

$5,900,000

Private Foundation or Charity

$2,400,000

Distribution to Heirs and CharityPrivate Foundation / Charity $2,400,000Estate Tax Exemptions 7,000,000Life Insurance Trust 3,000,000Total $12,400,000

Credit Shelter Trust

$3,500,000

Irrevocable Life Insurance Trust

$3,000,000

FederalEstate

Tax$0

FederalEstate

Tax$0

Children

$3,500,000

Zero Estate Tax Planning

Assumes estate tax exemption is $3.5 million and top tax rate is 45%.

The increased exemption in 2012 gives you an unprecedented opportunity to make large gifts to save on estate taxes.

The death of a named beneficiary may be reason to review your plan to ensure that his or her share passes to the proper beneficiaries in accordance with your wishes.

Reviewing Your Estate Plan is One Resolution You’ll Want to

Keep in 2012

If your family has grown with the addition of grandchildren, you may wish to make special provisions for them, such as ensuring that assets left to minors are done so in trust.

You may wish to review those individuals whom you have named as trustees, executors and agents in financial and health care powers of attorney.

Reviewing Your Estate Plan is One Resolution You’ll Want to

Keep in 2012

If any of your beneficiaries has been diagnosed with a disability, you may wish to review the manner of disposition to that person. Would disposition in a special needs trust be appropriate?

If there has been a marriage or divorce, either by you or by one of your beneficiaries, you may wish to revisit the choices you have made in your estate plan.

Reviewing Your Estate Plan is One Resolution You’ll Want to

Keep in 2012

Have your assets experienced significant changes, such as conversion of real estate or a business interest, or through inheritance of additional assets? If so, you may wish to review your plan to make sure these changes have been taken into consideration.

Reviewing Your Estate Plan is One Resolution You’ll Want to

Keep in 2012

THE END

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