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Estate Planning

Estate Planning

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Estate Planning

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  1. Estate Planning Virtual Session 3 – 3 Powers of appointments Marital and split-interest trusts Intra-family business transfers Planning for non-traditional families Estate Planning - Session 3 of 3

  2. Power of Appointment A power of appointment is a right given by a donor in a will or in a trust for a holder of the power to transfer the title of the donor’s property. • Donor- is the person who gives the power of appointment to a donee, who is the holder of the power. • The holder of a power- is not given the title of the donor’s property, but has the right to transfer a portion of the property to himself or to someone else. • Trustee- holds legal title to property and carries out directives in the trust document. Estate Planning - Session 3 of 3

  3. Holder’s Authority The holder of the POA can invade or consume trust corpus, and can demand trust income from the trustee. The holder may choose: • Who should receive the trust property • When income or principal should be distributed • What amounts should be distributed to the beneficiaries Estate Planning - Session 3 of 3

  4. General POA Holder can choose anyone to receive the donor’s property including the: • Holder • Holder’s creditors • Holder’s estate, or • Creditors of the holder’s estate Estate Planning - Session 3 of 3

  5. Special or Limited Power Usually a holder cannot receive the donor’s property and may only appoint the property to others. A holder cannot: • Appoint property to himself • Appoint property to his creditors • Use the property for his estate • Appoint the property to creditors of his estate Estate Planning - Session 3 of 3

  6. Limited Powers Holder may appoint trust property to himself only with: • The donor’s consent • The consent of remaining trust beneficiaries who have an “adverse interest” in the transaction. • An ascertainable standard. This permits the holder to use trust income and principal for himself and still have a limited power. Estate Planning - Session 3 of 3

  7. Ascertainable Standard The holder can appoint trust income and corpus to himself or others for health, education, maintenance and support (HEMS) • Health: medical, dental, hospital and nursing expenses, and expenses of invalidism • Education: expenses for college, vocational schools and professional education • Support: in reasonable comfort or an accustomed manner of living Q&A in 2 slides Estate Planning - Session 3 of 3

  8. Identify an Ascertainable Standard An ascertainable standard can be written into the trust document in any combination of HEMS. Not an ascertainable standard: • The holder can exercise the power for his welfare, comfort or well-being. Q&A next slide Estate Planning - Session 3 of 3

  9. Taxation of Limited Powers Gift Tax • There is no gift tax liability for transferring property to others when the limited power is exercised, released or has lapsed. Estate Tax • Limited powers are not included in the holder’s gross estate. Q & A Estate Planning - Session 3 of 3

  10. Use of General Powers During Lifetime: • Exercise power: Holder appoints property to himself or others • Release power: Holder gives up the right to appoint property Gift tax: • FMV of property - annual exclusion, offset by the unified credit Estate tax: • Gifted property is removed from the holder’s estate Estate Planning - Session 3 of 3

  11. Lapse of a General POA • The POA was not exercised within a given period of time or within the holder’s lifetime. • When a POA lapses, a gift is made to the remaindermen in the trust. • This gift is taxable if the lapsed amount exceeds the greater of $5,000 or 5% of the value of the trust corpus. Estate Planning - Session 3 of 3

  12. Example- Taxable Lapse Dad transfers $30,000 into an irrevocable trust for his children, Bruce and Dawn, and allows them to withdraw $15,000 each within 30 days. • If Bruce and Dawn let their withdrawal rights lapse, they have made gifts to each other of $15,000 • Only the lapsed amount that exceeds the greater of $5,000 or 5% of the trust corpus is taxed, or $10,000. ($15,000 - $5,000 = $10,000) Estate Planning - Session 3 of 3

  13. 5 x 5 Power • Holder is given a non-cumulative right to make annual withdrawals from the trust, which is limited to the greater of $5,000 or 5% of the value of the trust corpus. • Crummey powers are often limited to a 5 x 5 power. • Purpose of a 5 x 5 power: It protects the holder from making a taxable gift if the holder lets his withdrawal right lapse. Estate Planning - Session 3 of 3

  14. Lapse with a 5 x 5 Mom transfers $30,000 into an irrevocable trust for her children Mark and Leah and allows them to withdraw the greater of $5,000 or 5% of the trust corpus within 30 days. • Mark and Leah can only withdraw $5,000 • They let their withdrawal rights lapse • No taxable gifts are made because Mark and Leah cannot withdraw more than $5,000 Estate Planning - Session 3 of 3

  15. Estate Tax with a 5 x 5 Power 5 x 5 Power is Exercised or Released at death: • Only the greater of $5,000 or 5% of the value of the assets subject to the power is included in the holder’s gross estate. • Amounts included in the holder’s estate avoids probate Estate Planning - Session 3 of 3

  16. General POA at Death Holder can dispose of assets subject to the power in their will: • The value of the assets subject to the general POA at the holder’s date of death will be included in their gross estate. • The value of lapsed property that could have been withdrawn since the trust was established, is included in the holder’s gross estate. • General POA property included in the holder’s estate avoids probate. Q & A in 2 slides Estate Planning - Session 3 of 3

  17. POA and Estate Tax Summary: • General POAs are included in the holder’s estate • 5 x 5 powers are included in the holder’s estate • Limited powers are notincluded in the holder’s estate Q & A next slide Estate Planning - Session 3 of 3

  18. Estate Tax • The estate tax has been reinstated in 2011 • Estate tax planning may involve using strategies and trusts to avoid or delay paying estate taxes Q & A Estate Planning - Session 3 of 3

  19. Estate Tax Return $ 6 million Gross Estate Minus: expenses, debts, taxes, losses Adjusted Gross Estate Minus: marital deduction charitable deduction Taxable Estate Plus: Adjusted Taxable Gifts Tentative Tax Base Tentative Tax (compute tax) Minus: Gift tax paid or payable (credit) Estate Tax Payable before Credits Estate tax unified credit Federal Estate Tax payable - $ 6 million 0 - 1,730,800 $ 0 Estate Planning - Session 3 of 3

  20. Surviving Spouse’s Estate Tax $ 6 million - $ 0 $ 6 million $6 million $2,080,800 1,730,800 $ 350,000 Gross Estate Adjusted Gross EstateMinus: marital deduction Taxable Estate Plus:Adjusted Taxable Gifts Tentative Tax Base Tentative Tax (compute tax) Estate Tax Payable before Credits Estate tax unified credit Federal Estate Tax payable - Estate Planning - Session 3 of 3

  21. Estate Tax Equalization Husband and wife: $ 3 million each Gross Estate Adjusted Gross EstateMinus: marital deduction Taxable Estate Tentative Tax(35% tax bracket) Estate tax unified credit Federal Estate Tax payable Combined estate tax = $0 $ 3 million - $ zero $ 3 million $ 1,030,800 - 1,730,800 $ 0 Estate Planning - Session 3 of 3

  22. Comparison of Estate Taxes $6 Million Estate: Estate Tax Without Estate Equalization: $350,000 Estate Tax With Estate Equalization: $0 Savings: $350,000 Estate Planning - Session 3 of 3

  23. By-Pass Trust A By-Pass trust is also known as a: • Credit shelter trust • Family trust • “B” trust Estate Planning - Session 3 of 3

  24. Creating a By-Pass Trust Decedent spouse determines the trust beneficiaries when the trust is created • Surviving Spouse • Children Trust is funded with property solely owned by the decedent Estate Planning - Session 3 of 3

  25. Termination of By-Pass Trust • Spouse’s right to income ends at death • Trust corpus is divided into equal trust shares for beneficiaries, or distributed outright to them Estate Planning - Session 3 of 3

  26. Purpose of a By-Pass Trust • Avoids “over-qualifying” the decedent spouse’s estate for the marital deduction, by utilizing the decedent’s maximum unified credit. • Allows the surviving spouse to obtain income as needed. • Trust assets are not included in the surviving spouse’s estate at death. Estate Planning - Session 3 of 3

  27. Funding the By-Pass Trust • Established during life: Inter-vivos revocable trust • Established at death: Testamentary By-Pass trust • Typically funded with “exemption equivalent” amount ($5 million)

  28. Using the Unified Credit Gross Estate Adjusted Gross EstateMinus: marital deduction Taxable Estate Tentative Tax (compute tax) Estate tax unified credit Federal Estate Tax payable $ 5 million - $ zero $ 5 million $ 1,730,800 - 1,730,800 $ 0 Q&A in 2 slides Estate Planning - Session 3 of 3

  29. Spousal Income in a “B” Trust • The surviving spouse can obtain income “as needed” from the trustee • The income interest is a terminable interest (TIP) • The decedent spouse cannot receive a marital deduction on his estate tax return Q & A next slide Estate Planning - Session 3 of 3

  30. Surviving Spouse’s Estate • Property “by-passes” inclusion in the surviving spouse’s estate. • Spouse can be given a limited power of appointment with an ascertainable standard (HEMS) to receive distributions from trust income and corpus. • Spouse can exercise a limited power of appointment to distribute assets to the beneficiaries. • Spouse can be given a 5 x 5 power of appointment over trust corpus. Q & A Estate Planning - Session 3 of 3

  31. Marital Deduction- Wills Marital deduction is available for property given outright to a surviving spouse through a will: • Fractional shares of Tenancy-in-Common property • Community property • Property transferred through intestacy • Property transferred according to a will contest • Elective share amounts • Dower or curtesy • Simultaneous death with a presumption-of-survivorship clause in the will • Bequest is conditional upon the spouse surviving longer than 6 months after the decedent’s death Estate Planning - Session 3 of 3

  32. Marital Deduction- Contracts Marital deduction is available in the decedent’s estate when the surviving spouse is the beneficiary of contracts: • Life insurance policy • Joint and survivor annuity (private or commercial) • Pension • IRA • Charitable gift annuity • Nuptial agreement Estate Planning - Session 3 of 3

  33. Marital Deduction- Property • Property held with a spouse as JTWROS (50%) • Property held as Tenancy by the Entirety (50%) • Life estate bequeathed to a spouse and the executor makes a Q-TIP election • Life estate bequeathed to a spouse which passes to her estate at death Estate Planning - Session 3 of 3

  34. Marital Deduction- Trusts • Spouse is given a general power of appointment over property in trust • Remainder interests are given to a spouse • Income interest is given to a spouse in a charitable remainder trust Estate Planning - Session 3 of 3

  35. Marital Trusts Marital trusts can be created as: • Funded revocable trusts • Testamentary trusts created by a will • Stand-by trusts funded at death Estate Planning - Session 3 of 3

  36. Power of Appointment Trust Purpose: Surviving spouse has access to income and corpus for life • Surviving spouse has a general power of appointment over trust corpus- exercisable during life and/or at death. • Surviving spouse must receive all income which is paid at least annually- no accumulation of income in the trust. • Surviving spouse determines the beneficiaries of the trust assets at death through a general power of appointment in the will. • Trust property is included in the surviving spouse’s estate. Estate Planning - Session 3 of 3

  37. A and B Trust Surviving Spouse: • Has the right to all income and corpus from the A trust and income if needed from the By-Pass trust • Only the property from the A trust is included in the surviving spouse’s estate Decedent Spouse: • A marital deduction is available for the A trust • The unified credit is used for the By-Pass trust • The estate tax liability is zero Estate Planning - Session 3 of 3

  38. Taxation of an A and B Trust Gross Estate Adjusted Gross Estate Minus: marital deduction Taxable Estate Tentative Tax (compute tax) Estate tax unified credit Federal Estate Tax payable $ 8 million • $ 3 million $ 5 million $ 1,730,800 • 1,730,800 $0 Estate Planning - Session 3 of 3

  39. Q-TIP Trust Q-TIP trusts are established when the decedent spouse wants to: • Provide the beneficiary spouse with income for life • Receive an estate tax marital deduction • Give trust corpus to children from a previous marriage Estate Planning - Session 3 of 3

  40. Q-TIP Provisions • The spouse must receive alltrust income annually The spouse may receive distributions of corpus at the trustee’s discretion • Corpus passes to remainder beneficiaries designated by the decedent, at the beneficiary spouse’s death This is a terminable interest trust • Qualifies the decedent’s estate for the marital deduction Executor elects Q-TIP treatment on Form 706 Estate Planning - Session 3 of 3

  41. Beneficiary Spouse’s Estate • Trust property is included in the beneficiary spouse’s gross estate at death. Marital deduction was taken in the decedent spouse’s estate. • Couple’s combined estate tax may be higher. • Spouse’s executor can seek reimbursement for estate taxes paid by the spouse from trust beneficiaries. • Spouse may be given a 5 x 5 POA to invade trust corpus. Q & A in 2 slides Estate Planning - Session 3 of 3

  42. Taxation of an A, B, Q-TIP Trust Spouse’s Estate: • A Trust- $3 million • Q-TIP Trust- $4 million • B Trust- $5 million Gross Estate Adjusted Gross Estate Minus: marital deduction Taxable Estate Tentative Tax (compute tax) Estate tax unified credit Federal Estate Tax payable $ 12 million - $ 7 million $ 5 million $ 1,730,800 - 1,730,800 $0 Q & A next slide Estate Planning - Session 3 of 3

  43. Surviving Spouse’s Taxable Estate Gross Estate Adjusted Gross Estate Minus: marital deduction Taxable Estate Tentative Tax (compute tax) Estate tax unified credit Federal Estate Tax payable $ 7 million $ 7 million - $ zero $ 7 million $ 2,430,800 - 1,730,800 $ 700,000 Q & A Estate Planning - Session 3 of 3

  44. Estate Trust Purpose of an Estate Trust: • To qualify the property for a marital deduction in the decedent’s estate. • Use if the beneficiary spouse has substantial wealth and does not need the trust income or corpus. Estate Planning - Session 3 of 3

  45. Estate Trust Characteristics • Fund the trust with assets the decedent does not want sold, or assets not likely to appreciate. • Trust income accumulates but the trustee may distribute income or corpus, if needed. • Surviving spouse can determine beneficiaries of the trust in their will. • Trust corpus and accumulated income are included in the spouse’s estate at death. Estate Planning - Session 3 of 3

  46. Qualified Domestic Order Trust The purpose of a Q-DOT trust: • To give the decedent a marital deduction for property passing to a non-citizen spouse. • To ensure that the decedent’s assets will not leave the U.S. without being taxed. Estate Planning - Session 3 of 3

  47. Characteristics of a QDOT The QDOT permits a marital deduction if: • The trustee is a U.S. citizen or bank with a domestic presence who distributes all income annually to the non-citizen spouse for life. • The trustees withhold estate taxes from distributions of corpus that are not subject to an ascertainable standard. • Estate taxes are withheld from distributions to heirs when the non-citizen spouse dies. • The non-citizen spouse can use a unified credit to offset their estate tax liability. Estate Planning - Session 3 of 3

  48. Qualified Disclaimer A disclaimer is a written refusal to accept a gift or a bequest. • The disclaimed property passes back to the donor or to the decedent’s estate and is transferred directly to a different recipient. • The person who disclaims the property does not make a gift to the recipient. • Property must be disclaimed within 9 months and the donee must not take possession of the property. Estate Planning - Session 3 of 3

  49. Disclaimers at Death • Property is left to the surviving spouse in the decedent’s will. • The surviving spouse disclaims enough property to match the exemption equivalent amount. Now the decedent’s unified credit can be used to offset their taxable estate. • Disclaimed property reverts back to the decedent’s estate. • No marital deduction is available for the disclaimed property. Estate Planning - Session 3 of 3

  50. Disclaimer Trust Purpose of a Disclaimer Trust: Allows the surviving spouse to determine what portion of a decedent’s estate should be transferred into a trust or should pass through the will. • Trust is usually established by a clause in the decedent’s will, or the trust can be established in advance. • Disclaimed assets go through probate since they pass through the will into the trust. Q & A in 2 slides Estate Planning - Session 3 of 3