Advanced Estate Planning -- Life Insurance Trusts and Charitable

Planning

Presented By:Richard J. Shapiro, J.D.

and

Mindy Menke, J.D.Blustein, Shapiro, Rich & Barone, LLP

www.mid-hudsonlaw.com

The Objectives Of Using Life Insurance:

Liquidity – funds available when needed

Leverage – the biggest bang for the buck

Estate Tax Funding

Compounding the ProblemShould Not Be Part of the Plan

Estate Tax Funding

$2.5 Million Estate

+

$1,000,000 Life Ins. Policy

=

$3.5 Million Taxable Estate

With

$801,060 Estate Tax Due (in 2008)

vs

$301,340 ET due if Life Ins. Outside of Estate

Estate Tax Funding

The $1,000,000 Life Policy

Should be Held Outside of the Estate

Estate Tax Funding

With or without a trust, we can get money out of the estate.

Annual Exclusion Gifts Taxable Gifts (Unified Credit) Leveraging life insurance

– Cash Value vs. Death Benefit

Irrevocable Giving

The Objectives:

Exclusion From Taxable Estate

Control of Distributions

Protection From Creditors

Irrevocable Life Insurance Trust

Established During Life Three Parties

– Trustmakers (Grantor)– Beneficiaries– Trustee T r u s t

Irrevocable Life Insurance Trust

Irrevocable Life Insurance Trust

During Lifetime

•Establishes Trust•Trustee Acquires Policies (or the Grantor makes Gifts of Policies)•Makes Gifts for Premiums

ILIT

Crummey Rules forPresent Interest GiftsTrustee

Irrevocable Life Insurance Trust

During Lifetime

Pays Premiums

ILIT

Insurance Policy

Trustee•Establishes Trust•Trustee Acquires Policies (or the Grantor makes Gifts of Policies)•Makes Gifts for Premiums

Upon Death

Pays Death BenefitProperty Passes to

Estate

Makes Loans

Sell Assets

Insurance Policy

ILIT

Estate

Deceased

Irrevocable Life Insurance Trust

Trustee

During Settlement

PropertySubject toEstate Tax

Income &

Property

ILIT Estate

Irrevocable Life Insurance Trust

Trustee

NotSubject toEstate Tax

Power of Appointment– Crummey vs. Commissioner

Present Interest Gifts– Cristofani vs. Commissioner

Contingent Beneficiaries

IRS

Cristofani vs. Commissioner

Contingent Beneficiaries– Children

Robert - Sarah - Donald

– Children’s children Robert’s - Bobby, Sue & Doug Sarah’s - Tom, Troy & Trent Donald’s - Chris

– Estate Exclusion– Creditor Protection– Trust Protector– Income taxation – to whom?– “Crummey” powers– Control of Distributions - standards

Trust Document Drafting Some Important Issues:

Charitable Planning Basics Charitable Deductions

Amount you give to charity entitles you to an income tax deduction

Write off up to 50% of your AGI Example:

– Made $80,000 this year– Contribute $20,000 to 501(c)(3) organization– Pay income tax on $60,000

Charitable Planning Basics Charitable Deductions

Donate appreciated assets Stock you bought for $5,000 but now is

worth $20,000 If you do anything else with that stock, it is

only worth $16,723 ($3,277 less) Capital gain taxes of 21.85% of $15,000 Contribute: tax deduction for $20,000

Charitable Planning Basics Split Interest Gift Trusts

Form a Trust - an agreement One party gets the Income for a term - a

defined period of time The other party gets the assets later - the

RemainderWealth is like an orchard you’ve built up over a

lifetime. Taxes take the trees. When the trees are gone, no more apples!

Charitable Remainder Trusts

Charitable Remainder Trusts – You keep the apples for life, and the charity gets

the trees when you die– Use some of the apples to replace the orchard for

your kids

Charitable Remainder Trust

Donate an asset to the Trust highly appreciated asset works best

Sell and reinvest proceeds (diversified for safety and at higher rate of return)

Keep income (some tax-free) for life Use excess income to buy tax free insurance

policy in “ILIT” At death everything goes tax-free!

Charitable Remainder Trust

John &

Mary

Charitable Remainder Trust

John &

Mary

Asset placed in Trust

CRTIncomeTrust

Charitable Remainder Trust

John &

Mary

Income for life

CRTIncomeTrust

Charitable Remainder Trust

John &

Mary,Deceased

501(c)(3) Charity Receives remainder

CRTIncomeTrust

Charitable Remainder Trust

John &

Mary,Deceased

501(c)(3) Charity Receives remainder

CRTIncomeTrust

The transaction is a gift to the

end Beneficiary, subject to the

retained right to income for a number of

years.

Charitable Remainder Trust

What good is a CRT? Provide future benefit to charity of choice Take profits: Liquidate appreciated asset

without paying capital gain taxes Diversify client’s investments Current income tax deduction Removes asset from taxable estate

Charitable Remainder Trust

Bank Stock worth $3,000,000Basis $100,000

Increase Income Current income:

– dividend 2.5% $75,000 ----------------------------------------------------------------------------------------------------------------------------------------------------

– Transfer to CRT, sell stock,

– reinvest, take 7% per year $210,000

Increase of $135,000Bonus! Up to $105,000 for 6 years is income tax

free!

Charitable Remainder Trust

Bank Stock worth $3,000,000Basis $100,000

Avoid Capital Gain Tax/Increase Income Sell as is, lose 21.85% of $2.9M gain

lost $633,650; balance of $2,366,350 invested at 7% return

$165,644 -----------------------------------------------------------------------------------------------------------------------------------------------------

Using CRT, sell stock, no capital gain tax– reinvest full $3M at 7% $210,000

Increase per year of $44,356

Charitable Remainder Trust

Bank Stock worth $3,000,000Also avoid Estate Tax

$3M >> $2,344,500 after Cap Gain tax $655,500 Death: Federal and State estate taxes $284,050To IRS from original $3M: $939,550To Heirs from original $3M: $2,060,450

-----------------------------------------------------------------------------------------------------------------------------------------------------

Using CRT & investing some of the extra $37,450 into a guaranteed $3,000,000 2nd to Die Life Insurance Policy held in an ILIT

To Charity at Death $3,000,000To Heirs at Death $3,000,000TO IRS: $0

Charitable Remainder Trust PLUS

John &

Mary

Income for life

Asset placed in Trust

Charitable Remainder

Trust

Charitable Remainder Trust PLUS

John &

Mary

Income for life

Asset placed in Trust

Charitable Remainder

Trust

From extra income, invest Gifts into Trust

Life Insurance

Trust

Family Receives $3,000,000

Charity Receives $3,000,000

No Death Taxes!!

Charitable Remainder Trust PLUS

John &

Mary

Income for life

Asset placed in Trust

Charitable Remainder

Trust

From extra income, invest small Gifts into Trust

Life Insurance

Trust

CRT Variations: NIMCRUT

John &

Mary,Deceased

501(c)(3) Charity Receives remainder

CRTIncomeTrust

More flexibility on distributions vs. pushing growth inside the CRT

John &

Mary

Another twist Charitable Lead Trust

ZERO-OUT your estate taxes At death, from Living Trust, place part of

estate in the CLT Income for a few years goes to Charity After those years, property to kids

Let charity “pick the apples” for a few years, then the kids get the trees

Another twist Charitable Lead Trust

John &

Mary

Asset placed in Trust

Charitable LeadTrust

Another twist Charitable Lead Trust

John &

Mary

Income

Charitable LeadTrust

Another twist Charitable Lead Trust

John &

Mary

Children Receive Remaining assets

Charitable LeadTrust

Basic Estate Tax Planning

John’s Death

Mary’s Death

IRS Supermarket

Children Family Trust plus Mary’s coupon, tax free;

Estate Taxes on all over that

Family Trust

(coupon)

Mary’s Living Trust

Marital Trust

John’s RLTMary’s

Living Trust

Children

Charitable Lead Trust

Basic Estate Tax Planning plus a

Testamentary CLT

Family Trust

IRS Supermarket

Mary’s RLTMarital Trust

Mary’s RLTJohn’s RLT

Social Capital

How to use our Social Capital Government: 1/4 gets to end user Private charity: 90% + to end user

Which makes more sense?

Who has paid enough?“So you’ve made $20 million in your lifetime. After

you paid income taxes, your net worth is $13.2 million.

“After your children pay estate taxes upon your death, it will be worth $6.33 million.

“After your grandchildren pay estate taxes on the death of your children, it will be worth $3,401,400.

“Your estate will be worth only 17% of its original value after only two generations of taxation.”

Barry Kaye, Save a Fortune on Your Estate Taxes

Advanced Estate Planning -- Life Insurance Trusts and Charitable

Planning

Presented By:Richard J. Shapiro, J.D.

and

Mindy Menke, J.D.Blustein, Shapiro, Rich & Barone, LLP

www.mid-hudsonlaw.com