Planning for the Future – Living Trusts, Estate and Tax Planning By Thomas F McGuire Robert I Ury Arnstein & Lehr LLP © 2007 All Rights Reserved Basic Estate Planning Why I need a Will? Reasons: • Control over who inherits (relatives, charities, friends, etc.) • Control over who administers estate • Possible reduced costs • Estate tax planning • Structuring benefits for minor or disabled beneficiary • Designation of a guardian for minor children What is a “living trust”? • You are the grantor/settlor • You normally act as your own trustee • Provides for management of assets at death or upon disability • Substitutes for traditional will Advantage of Living Trusts • Avoidance of probate proceedings at death • Avoidance of guardianship proceedings upon disability • Ease of administration • Reduced costs of administration • Privacy and Timing Issues Creditor Protection??? • Self-settled trust is not normally protected from creditors • Domestic protection trusts and offshore trusts might offer some protection • Spendthrift provisions offer protection to ultimate trust beneficiaries Marital Deduction Planning “Applicable Exemption Amount” 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 20042005 20062008 2009 2010 2011 Exemption Combining Use of Unlimited Marital Deduction and Exemption Amount • Unlimited marital deduction exists for property passing to spouse • Without proper planning, all property will qualify for marital deduction and exemption of first spouse will be wasted • Through proper planning, you can double the amount of property exempt from estate tax Plan A: All to Spouse or “I Love You” Plan • At first death, all property passes to surviving spouse • No tax is paid due to marital deduction • At second death, all property is included in gross estate Some Qualified Plan Administration Issues: • Treatment of life insurance coverage held in qualified plans • Treatment of participant plan loans • Hardship distributions from qualified plans • Fiduciary Restrictions – – – – Investment Issues Self-Dealing Issues Conflict of Interest Issues Anti-Assignment Rules Non-Qualified Deferred Compensation Tax Treatment • Historically, benefits not taxable until received and non-deductible by employer until included in employee’s income – But see IRC Section 409A • Plan is unsecured and participant is a general creditor of employer • Rights are generally non-transferable • “Rabbi” trust can be used to fund employer’s obligations Use of Insurance as an Asset Reserve • Supplemental Life Insurance • Split-Dollar Life Insurance Arrangements – Economic benefit regime? – Loan regime? Deferred Compensation Alternatives • Cash value life insurance • Charitable remainder trusts • Impact of new 15% capital gain and dividend rate – See Example Practice Sales versus Continuation What factors should I consider? Tax Treatment of Non-Qualified Plans and Section 457 Plans • Ordinary income treatment when received • Rollover to an IRA not available (exception for 457(b) governmental plans) • Tax-free transfer to an IRA or qualified plan not allowed • Distributions from Section 457 plans must begin at age 70-1/2 or separation from service Qualified Plan or IRA Distributions • Tax treatment of ordinary withdrawals • 10% early distribution penalty • 50% late distribution penalty for failure to distribute MRD • Post-Death Distributions and Rollovers • Withholding Requirements Required Minimum Distribution Rules • Lifetime distributions using uniform table – exception for spouse more than 10 years younger • Post-death distributions if death occurs before required beginning date • Post-death distributions if death occurs after required beginning date Importance of Designating a Beneficiary • Extended payout over beneficiary’s life expectancy available • Maximum five year payout if no beneficiary named and participant dies prior to required beginning date Example - $1,500,000 IRA IRA Account Holder Dies at Age 60 5% Growth Assumed Year Child, Age Required 60, named as Minimum Beneficiary Distrib No Designated Required Minimum Distrib 39.8 $37,688 Beneficiary 38.8 $38,819 $0 37.8 $39,984 $0 36.8 $41,183 $0 35.8 $42,419 100.00 $1,688,264 34.8 $43,691 33.8 $45,002 32.8 $46,352 31.8 (etc.) $47,743 $0 Example - Continued Comparison of Net After-Tax Assets Year Child as Beneficiary $1,020,073 No Designated Beneficiary $1,020,073 $1,056,119 $1,049,924 $1,094,402 $1,082,462 $1,133,188 $1,115,125 $1,174,158 $1,143,515 10 $1,394,577 $1,287,483 15 $1,647,712 $1,449,576 20 $1,938,665 $1,632,078 Trusts as Designated Beneficiaries • Must be valid under local law • Beneficiaries must be ascertainable • Trust must be irrevocable as of participant’s death • Plan administrator must receive copy of trust or alternative documentation • Life expectancy of oldest beneficiary will be used! “Look through” rules apply Participant Distribution Options • Joint and survivor annuities – spousal consent required to vary • Lump-sum Distributions • Rollovers • Annuity contract distributions Thank You! [...]... Immediate income tax deduction available • Possible reduction of estate taxes Insurance Policies • Name charity as owner and/ or beneficiary of insurance policy • Tax deduction for policy value when transferred • Continuing tax deduction for premium payments subsequent to transfer of ownership Charitable Remainder Trusts • Variable (Unitrust) or Fixed Income (Annuity Trust) retained for life or term... greater than IRS rate, tax savings will be achieved Family Limited Partnerships/LLCs • Discounting may be available for estate and gift tax purposes – Caveat: Strangi case • Retention of control while shifting of value • Possible creditor protection • Centralization of management • Consolidation of assets Installment Sales/SCINs • Can be used to effectuate an estate “freeze” • Income tax consequences may... Beneficiary can be trustee and can have power of appointment • Limitation – GST Exemption Amount • “Dynasty” trusts and the Rule Against Perpetuities Criteria for Trust Distributions • • • • • Support Comfort Health Education Best Interests • Standard of living considered? • Possible use of incentive provisions? • Beneficiary as own trustee? Powers of Appointment • Build flexibility into estate plan • Can be... Current income tax deduction available • No capital gains on appreciated gifts Bequest • Gift included in will or trust • Can be restricted or unrestricted • Possible availability of estate tax charitable deduction • Opportunity to make a difference after you’re gone Charitable Gift Annuities • Contribution to charity in exchange for guaranteed payment for life • Portion of payment coming back is tax- free... Annual Gift Tax Exclusion Methods of Gifting: • Outright Gifts • Direct Payments for Tuition and Medical Expenses • Uniform Transfers to Minors Act Gifts • Section 2503(c) Trusts • “Crummey” Trusts • Section 529 Plans Section 529 Qualified State Tuition Programs • Prepaid Tuition credits versus Section 529 Plan Savings Account • “Qualified Higher Education Expenses” • Tax- free if used for educational... needed, but Family Trust is not taxed at survivor’s death • Marital trust defers any estate tax ultimately payable until after both deaths • Exemption is doubled • If desired, deceased spouse retains ultimate control over distribution Trust Structure Issues Long-Term Trusts Generation-Skipping Trusts • Makes property available to next generation but keeps property out of estate tax base • Protects beneficiary’s... Build flexibility into estate plan • Can be limited (i.e descendants, spouses & charities) or broad (anyone other than creditors or estate) • Can be lifetime or testamentary in nature • Independent trustee can be given power to create a power in the future – “power to create a power” Living Wills and Health Care Powers of Attorney/Directives • Allows doctor or agent to make health care decisions • Includes... Powers of Attorney • Allows agent to manage financial assets in the event of disability • Should be made “durable” in nature – effective even if legal determination of disability • Useful even if living trust is in place Advanced Estate Planning Techniques Irrevocable Life Insurance Trusts • Allows removal of life insurance from gross estate • Trust is irrevocable in nature • Removes “incidents of... removes insurance proceeds from second spouse’s estate What is a “Crummey” notice? • Allows gift to trust to qualify for $12,000 per person annual exclusion (avoids gift of future interest”) • Withdrawal right may be limited to a window period • Leverage of GST exemption possible Qualified Personal Residence Trust (“QPRT”) • Gift of one or two residences to trust for a term of years • Gift is based upon... State Tuition Programs • Prepaid Tuition credits versus Section 529 Plan Savings Account • “Qualified Higher Education Expenses” • Tax- free if used for educational purposes • Subject to tax and penalty if not used for education • “Front loading” of gifts Charitable Giving Techniques Methods of Giving: • • • • • • • • Outright gifts Bequests Charitable Gift Annuities Insurance Policies Charitable Remainder ...Basic Estate Planning Why I need a Will? Reasons: • Control over who inherits (relatives, charities, friends, etc.) • Control over who administers estate • Possible reduced costs • Estate tax planning. .. Marital Deduction and Exemption Amount • Unlimited marital deduction exists for property passing to spouse • Without proper planning, all property will qualify for marital deduction and exemption... proper planning, you can double the amount of property exempt from estate tax Plan A: All to Spouse or “I Love You” Plan • At first death, all property passes to surviving spouse • No tax is