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STRATEGIC ESTATE PLANNING
I. Strategic Estate Planning a. Taxable Estate
II. Revocable Trusts
a. Living Trusts - Power of Appointment Trusts III. Irrevocable Trusts - Gifting
a. Annual Donor Gift exemption - $14k IV. Charitably Inclined Trusts V. Generation Skipping Trusts VI. Designating Beneficiaries and Powers
a. Designating Beneficiaries and making Distributions VII. Potential Legal Problems
Why Estate Planning? Because U.S. Laws and Taxes impact your affairs. They affect the ownership and distribution of your assets and the guardianship of your minors. You have the choice of preparing a private legal document, a Trust, which expresses your wishes, or, you may allow the state(s) to direct your personal affairs for you.
All assets, property, trusts (you control), Qualified retirement plans and Life insurance (owned by the decedent or payable to his Estate). An unlimited marital deduction allows the living spouse to receive all of their spouse's assets without incurring any Estate taxes. To remove assets from your taxable Estate you must give up both control and the right to receive personal benefit (incidence of ownership 3 years prior to death). Estates are Federally taxed up to 40%.
b. Trusts - Private Legal documents
Established by a Grantor/Trustor managed by a Trustee/Executor for benefit of Beneficiaries. Assets held in the Trust are distributed by the Trustee (who must comply with the directives of the Trust). Additionally, specific bequests, provisions for children and special needs (for minors and older adults) can be identified. Trusts avoid Probate (court) and beneficiaries receive a step-up in tax basis.
c. Revocable & Irrevocable Trusts
Revocable Trusts provide the Grantor/Trustor the right to revoke the trust / change the Beneficiaries.
Irrevocable Trusts are trusts which the Grantor/Trustor relinquishes property/assets, the ability to amend, alter, reassign Beneficiaries or terminate the trust - gifting away assets to the trust.
d. Gifting and Charitably Inclined
Removing assets from the Estate of the Donor. Donating to a public or private cause and receiving tax credits.
Estates over $5 million (2011) and $5.43 million (2015) must plan to use the unlimited marital deduction or you may pay Federal and State Estate taxes. Spouses should file IRS 706 and elect portability to use deceased spouse's DSUE (deceased spousal unused exclusion) which doubles the exclusion to $10 million (2011) and $10.86 million (2015).
A Trust for a Single individual. You the Grantor/Trustor establish a Trust with a Power of Appointment clause, managed by your designated Trustee for the benefit of your assigned Beneficiaries. You will fund the Trust with your assets thereby bypassing Probate and other court hearings. One Federal Estate Exemption of $5.43 million (20145).
b. A/B Living Trusts - Marital Bypass Trusts
A/B Trust are for Married couples:
A/B Living Trust details.
c. A/B/C Living Trusts - Qualified Terminable Interest in Property (QTIP)
A/B/Q Trust are for Married couples establishing three Trusts A, B & C:
A/B/C Living Trust details.
d. QDOT - Qualified Domestic Trusts
Non-citizens of the U.S. must plan in order to take advantage of the Federal Estate Tax Exemption.
e. Other Trusts
Secular Trusts - Funded to protect non-Qualified deferred compensation benefits.
Land Trust - Managed by a Corporate Trustee in order to maintain anonymity.
Asset Protection Trust - Assets are held offshore protecting them against possible litigation / lawsuits.
QFOB - Qualified Family-Owned Business
Repealed by Congress for the years 2004-09.
Personal Holding Companies, LLCs & LLPs - Assets are held in a legal structure which may provide beneficial valuation discounts of property/assets.
Each American Taxpayer receives a Unified Gift Tax Exemption of $2.172 million (2015, 40% x $5.43M) and an annual Gift exemption $14k (2015). There is an unlimited gift exemption for the payment of Medical care, Educational expenses and to Charities.
A $14k (2015) annual gift exemption is given to all taxpayers. You may gift to as many donees as you choose.
Greater than a $14k Gift: Everyone receives a Federal Estate Tax Exemption which generates a Unified Tax Credit of $2.172 million (2015, 40% x $5.43M). When you gift in excess of $14k (2015) you begin to use that Tax Credit. You may benefit by reducing the tax liability to your Estate.
b. Gifts to Minors
Donations to the following "structures" qualifies for the annual Gift tax exemption:
Gifts to Minors details.
c. Disability Trusts
Funded for the benefit of a disabled individual under the age of 65 years old:
Disability Trusts.
d. Private Annuities
Annuities created by non-Insurance companies. Assets/property are exchanged for a stream of income:
Private Annuities details.
e. Irrevocable Life Insurance Trusts (ILIT)
Survivorship Trusts are used to transfer the value of an Estate:
Irrevocable Life Insurance Trust details.
f. Grantor Retained Trusts:
Grantor Retained Trusts details.
g. Family Limited Partnerships (FLP):
Family Limited Partnership details.
h. Private Family (Charitable) Foundations (PFF):
Private Family Foundation details.
i. 2031(c) - Donated Qualified Conservation Easement
Completed gift of property for conservation - a tax exclusion credit up to $500,000 is generated.
j. Structured Gifts:
Structured Gifts details.
k. Defective Trusts
Completed gifts where the income of the Trust is taxed to the Grantor/Trustor - an intentional tax strategy to reduce the Grantor's taxable estate.
If you are charitably inclined, there are some benefits, which accrue to you. (1) You are empowered by gifting to a worthy cause. (2) You receive an income tax deduction (present value of the current income tax deduction, up to 50% of your AGI for public charities and up to 30% for private charities). (3) You may receive either income or the remainder from the gift:
Charitable Trusts details.
Generation Skipping Transfer Tax (GSTT) is an additional tax, which you may incur when gifting to a "skipped person" - two or more generations separated:
Generation Skipping Trusts details.
All Trusts should include a clause giving the Trustee the right to update the Trust to comply with tax law changes. Spendthrift and Discretionary distribution clauses can also be included.
Designations can be made to a named beneficiary, equally among beneficiaries (per capita), or distributed by representation (per stripes):
1. Gifting now - may reduce the tax impact on your Estate and allows you to enjoy your gift now.
2. Lump sum - a single payment of a gift.
3. Installments - income payments are made over a certain time interval or upon attainment of certain ages / occasions.
4. Assets in the Trust - leaving assets in a Trust may serve many purposes: irresponsible beneficiaries, protection from creditors/spouse, incentive for beneficiaries to work, beneficiary doesn't need money, minors & adults with special needs, and disinheriting relatives.
b. IRA Rollover Beneficiary
Primary beneficiary is your spouse:
Your spouse is entitled to an unlimited marital exemption. Your spouse may take the IRA in one of two fashions:
1. IRA rollover retitled in the spouse's name with all the rules that pertain to an IRA, or
2. As a beneficiary: a) a distribution over a 5 year period, or b) a distribution over the life of the spouse.
Primary beneficiary other than your spouse:
Beneficiaries can take 1) Lump sum distribution and pay income taxes on their distribution, or
2a) a distribution over a 5 year period, or 2b) a distribution over their lifetime - reducing the taxes they pay.
Your ability to "stretch out" your forced distributions after 70.5 by designating a younger Primary beneficiary, the designation must be made before 70.5. Your spouse may also choose disclaimer rights as beneficiary freeing the second beneficiary.
c. Trust Designations
Certificate of Trust - Shortened version of a Trust. Admitting a Certificate of Trust to a fiduciary or court will satisfying their need for the existence of your Trust and inform them of the guardianship of minors while keeping the details of your Trust private.
Contingent Trusts - Triggered by the Grantors/Trustors physical, mental or emotional incapacity.
Pour over Wills / Trusts - Collects forgotten assets outside of your Trust and places them inside of your Trust after Probate.
d. Powers of Appointment
Durable Power of Asset Management - Designates your powers during an incapacity to another. It has a broader and more accountable range of powers than a Power of Attorney. In all cases, as long as you retain the capacity to make and express decisions for yourself, your consent must be obtained.
Durable Power of Health Care - Designates your powers during an incapacity to another. It has a broader and more accountable range of powers than a Living Will / "pull the plug" clause which are simply directives to your physicians. In all cases as long as you retain the capacity to make and express decisions for yourself, your consent must be obtained.
e. Spendthrift provision
A clause which protects the beneficiary from exhausting the funds in the trust faster than the Grantor intended.
f. Disclaimers
Refusal by a potential beneficiary of a bequest (example: stretch IRAs, ILITs, etc.).
g. Amendments & Codicils
Changes to your Trust are made by amendment and/or codicil.
What can you expect?
a. Potential Problems with Gifts:
Potential Problems with Gifts details.
b. Taxes
Decedent's final income tax return IRS 1040 must be filed for the last year of their life. Monies transferred to a decedent's Estate/Trust if held and/or income is generated and/or distributed IRS 1041 must be filed. An Estate tax return IRS 706 must be filed if their estate exceeds the liftime exclusion amount. Gift tax returns IRS 709 must be filed in years gifts exceed $14k (2015) IRS 709. Income in Respect to a Decedent (IRD) is the income a decedent would have received - instead it is reported on the tax return of the person that received the income, if taxes are paid on IRD a credit may be available so as not to double tax the income.
c. Without a Will
Property is distributed "intestate" by a court appointed Administrator; usually allowances are made for the spouse and the children. A Will does not help you in the event of incapacity or with the control of your minors.
d. Simple Reciprocal Will
Will You the Grantor/Trustor name the Executor. Your Will should coordinate with all other documents which direct the distribution of property/assets. Costs of probate, recognition of changing State law, identification of an Executor, how debts & taxes will be paid, bequests of personal property, real estate, a residuary clause (to catch all non-mentioned property), powers of Health care and Assets (fiduciary), and finally signed & witnessed make up a standard Will. Your Estate passes through probate where the property/assets are retitled. A Will has no control over any disposition of property outside of probate.
e. Probate - Public Court process
Initiated in the County of the decedent's legal residence at death. Settles inventory & appraisal of property/assets, payment of taxes & creditors, and the formal transfer of property from decedent to heirs. The Court issues an order "admitting the will to probate" and appoints an Administrator (if there is no Executor). Cost of administration, funeral expenses, debt & taxes, and all other claims are handled through the court. Interested (contesting) parties must file a "demand for prior notice". The purpose of probate is to retitle assets, verify the authenticity of the will, pay debts and distribute assets accordingly. It is a process of public record, which typically costs between 3-8% of the Estate's gross value and takes between 9-24 months. Probate may take place in each state that property is owned.
f. Other Legal Issues
Community Property State - All property / assets acquired during the marriage is divided equally. Surviving spouse receives a step up in tax basis.
Common Law - Survivor receives step up on newly acquired property/assets.
Testamentary Trust - A Trust which is embedded in a Will and activated during probate.
Power of Appointment - Designation to another to make legal decisions for you - may stipulate "releases" and "lapses". May "spring" into effect under designated situations.
Power of Attorney (POA) - Without one you will need a Conservator appointed in a court proceeding. Specific powers to delegate authority, it should include: "This POA shall not be affected by my subsequent disability or incapacity, or by the passage of time." Springing POA is effective upon a disability (physical, mental and/or emotional).
Conservatorship and Guardianship - A Court hearing is needed to appoint a guardian for a minor or a disabled (physical, mental and/or emotional) adult. The court will control the property/assets in the event of an incapacity (yours or a disabled adult) until good health or legal age (for a minor).
Is it time to take advantage of Opportunities?