chapter 16
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CHAPTER 16. Estate Planning: Concepts and Strategies. 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 - PowerPoint PPT PresentationTRANSCRIPT
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
Chapter 16: Estate Strategies 2
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
Chapter 16: Estate Strategies 3
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
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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
Chapter 16: Estate Strategies 5
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
Chapter 16: Estate Strategies 6
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.
Chapter 16: Estate Strategies 7
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
Chapter 16: Estate Strategies 8
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
Chapter 16: Estate Strategies 10
USE OF BYPASS TRUST
Chapter 16: Estate Strategies 11
TestamentaryNo estate taxes on first death; minimized or eliminated at second death
QTIP MARITAL TRUST
Figure 16-1
QTIP Marital Trust
Chapter 16: Estate Strategies 12
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
Chapter 16: Estate Strategies 13
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
Chapter 16: Estate Strategies 14
Irrevocable Life Insurance Trust
Figure 16-3 The Irrevocable Life Insurance Trust
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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
Chapter 16: Estate Strategies 16
Charitable Remainder Trust Figure 16-4 Charitable Remainder Trust
Chapter 16: Estate Strategies 17
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
Chapter 16: Estate Strategies 18
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
Chapter 16: Estate Strategies 20
SOPHISTICATED TAX REDUCTION STRATEGIES
GRANTOR RETAINED ANNUITY TRUST AND
GRANTOR RETAINED UNITRUST An Overview Key Advantages
QUALIFIED PERSONAL RESIDENCE TRUST
Chapter 16: Estate Strategies 21
GRANTOR RETAINED ANNUITY TRUST
Figure 16-7 Grantor Retained Annuity Trust
Chapter 16: Estate Strategies 22
QUALIFIED PERSONAL RESIDENCE TRUST
Figure 16-8 Qualified
Personal Residence Trust
Chapter 16: Estate Strategies 23
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
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