WEALTH TRANSFER STRATEGIES FOR FAMILIES DECEMBER 13, 2018

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1 WEALTH TRANSFER STRATEGIES FOR FAMILIES DECEMBER 13, 2018

2 To Receive CPE Credit Participate in entire webinar Answer polls when they are provided If you are viewing this webinar in a group Complete group attendance form with Title & date of live webinar Your company name Your printed name, signature & address All group attendance sheets must be submitted to training@bkd.com within 24 hours of live webinar Answer polls when they are provided If all eligibility requirements are met, each participant will be ed their CPE certificate within 15 business days of live webinar

3 Our Presenters Holly Pantzer, CPA BKD Family Office Partner Susan Jones, JD BKD Family Office Partner

4 Wealth Transfer Planning Basics

5 Property Ownership Fundamental issue when evaluating current or potential estate & wealth transfer plans is asset ownership There are three ways in which property may be owned 1) Individual ownership

6 Property Ownership 2) Title by contract Owner typically has full control during life; property transfers automatically at death to designated beneficiaries If beneficiary is not named, contract will have fallback beneficiary (may be estate or spouse)

7 Property Ownership 3) Joint ownership Right of survivorship Each party owns 100 percent of property; at death, property automatically passes to surviving joint owner(s) Tenancy by entirety Only in some states JTWROS for spouses with additional protections for real property

8 Property Ownership 3) Joint ownership Tenancy in common Each party owns specific percentage of property; fractional interest can be transferred & does not automatically transfer to surviving owners at death

9 Property Ownership 3) Joint ownership Community property Each spouse has ownership rights in community property as set by specific state laws (nine states only) Property acquired in a community property state does not automatically convert to noncommunity property when moving to a separate property state

10 Unified Transfer Tax System Estate tax: transfers by reason of death Gift tax: transfers during life Generation-skipping transfer tax (GSTT): transfers to skip persons

11 Estate Tax Levied on net value of property owned &/or controlled by decedent at death Property is valued at fair market value Alternate valuation date election may be available

12 Gift Tax Transfers to a donee, of property transferred beyond dominion & control of donor, for less than full & adequate consideration in money or money s worth Donor is responsible for filing gift tax return & paying the gift tax

13 GST Tax Key definitions Transferor Skip person Three types Direct skip Taxable termination Taxable distribution

14 Typical Estate Plan Basic planning documents Powers of attorney Living will declarations Health care powers of attorney Revocable trust (living trust) Two-trust plan (A/B trusts)

15 Wills Basic function is to provide specific guidance on Who will inherit property When & how beneficiaries will inherit property Who will be in charge of administering the estate

16 Wills Used to name guardians for minor children Only assets owned individually Could include contract assets without named beneficiary Estates that rely on a will for asset disposition are subject to probate at decedent s death

17 Revocable Trusts Assets will not be subject to probate Disregarded for tax purposes during life Provides for lifetime administration of trust-owned assets in the event a grantor is incapacitated or otherwise unable to manage his/her own assets

18 Marital Deduction Deduction from decedent s estate for full value of property passing from decedent to his/her surviving spouse Coordinated use of the estate tax exemption & marital deduction is the foundation of a typical estate tax plan, i.e., a bypass trust plan or A/B trust planning

19 Bypass Trust/Marital Trust Planning Amount up to decedent s remaining estate tax exemption amount will fund nonmarital trust A spouse &/or children may be beneficiaries & provisions regarding income & principal distributions may be customized

20 Bypass Trust/Marital Trust Planning All remaining assets go to surviving spouse, either outright or using a special type of trust that will qualify for the marital deduction If a trust is used, the spouse must be the sole beneficiary & annual income distributions are required

21 Bypass Trust Included in gross estate of surviving spouse? Basis adjustment at death of surviving spouse? Bypass Trust No No Marital Trust Yes Yes

22 Challenge in Wealth Transfer Planning Value of the gross estate shall be determined by including the value at the time of death Basis of property in the hands of the person acquiring the property from a decedent shall be the fair market value of the property at the date of the decedent s death

23 The Goal Reduce estate tax exposure Manage the step-up in basis High-basis assets = wealth transfer strategies Low-basis assets = tax deferral strategies

24 Key Provisions of the Tax Cuts and Jobs Act (TJCA)

25 Key Provisions of TCJA for Families Reduced Tax Rates Increased Standard Deduction Limited Itemized Deductions Created Qualified Opportunity Zones Doubled Lifetime Exemption

26 Reduced Individual Income Tax Rates Click here for printable version of all individual brackets Plus 3.8 percent net investment income tax on unearned income when modified adjusted gross income exceeds $200,000 ($250,000) Expires after December 31, 2025

27 Fiduciary & Kiddie Tax Income Tax Rates 2018 Bracket^ Rate $0 $2,550 10% $2,551 $9,150 24% $9,151 $12,500 35% More than $12,500 37% ^Expires after December 31, 2025, & reverts back to amounts provided prior to January 1, 2018, except amounts would continue to be indexed for inflation using chained measurement of the consumer price index where applicable

28 Doubled Lifetime Exemption Previous Law New Law Estate tax Gift tax Generation-skipping transfer tax 40% rate with $5.6 million basic exclusion amount per taxpayer 40% rate with $5.6 million basic exclusion amount per taxpayer; $15,000 annual exclusion 40% rate with $5.6 million basic exclusion amount per taxpayer 40% rate with $11.18 million basic exclusion amount per taxpayer 40% rate with $11.18 million basic exclusion amount per taxpayer; $15,000 annual exclusion 40% rate with $11.18 million basic exclusion amount per taxpayer ^Expires after December 31, 2025, & reverts back to amounts provided prior to January 1, 2018, except amounts would continue to be indexed for inflation using chained measurement of the consumer price index where applicable (1) Exclusion amount adjusted for inflation annually

29 Wealth Transfer Strategies After the TCJA

30 Strategies for Those More than $22.36 Million Lifetime gifting Sales to intentionally defective grantor trusts (IDGTs) Split interest gifts Grantor retained trust (GRAT) Charitable remainder trust (CRAT, CRUT)

31 Benefits of Lifetime Gifting Uses annual exclusion amount Certain payments made for education & medical expenses not deemed gifts Future appreciation is outside of estate

32 Lifetime Gifting with Dynasty Trusts Parent contributes assets to trust PARENT DYNASTY TRUST CHILDREN GRAND- CHILDREN FUTURE GENERATIONS Trust makes distributions to future generations Not subject to estate & GST tax

33 Benefits of Dynasty Trusts Assets pass to future generations transfer tax free Asset protection, i.e., spendthrift, creditors, ex-spouses, etc. Trust beneficiaries may receive additional distributions if needed subject to ascertainable standard

34 Benefits of Dynasty Trusts Donor can customize trust to Permit distributions to purchase a house, etc. Withhold distributions under specific circumstances Beneficiaries may have limited power of appointment to leave to specific heirs or charity upon their deaths

35 Other Considerations for Dynasty Trusts Annual income tax return must be filed for the trust Best practice to name corporate trustee for continuity Trust protectors often named Some states have rules against perpetuities May need to establish trust in another state

36 Intentionally Defective Grantor Trust (IDGT) Step 1: gift & sale of assets to IDGT Grantor IDGT Beneficiaries Step 2: installment note(s) Step 3: discretionary distribution of income & principal during lifetime of beneficiaries; outside of beneficiary s estate

37 Good IDGT Candidates Property expected to generate sufficient cash flow to make note payments Rapidly appreciating property Closely held stock Family limited partnership (FLP) interests

38 IDGT with FLP FLP Step 1: form & contribute assets to FLP Step 2: gift & sale of assets to IDGT Step 4: discretionary distribution of income & principal during lifetime of beneficiaries; outside of beneficiary s estate Parent IDGT Children Step 3: installment note(s)

39 Other Considerations for IDGTs Gift tax return should be filed to report both sale & gift Separate tax return generally does not need to be filed for the IDGT IDGT must be administered strictly according to terms

40 Other Considerations for IDGTs If property inside IDGT doesn t generate sufficient income to cover the note payments, trust assets must be distributed to the grantor Minority &/or marketability discounts can be taken when determining sales price/gift value

41 Grantor Retained Annuity Trust (GRAT) Step 1: transfer of assets Grantor Step 2: annuity payments over a fixed term GRAT Step 3: residual, if any, passes to children at the end of the term Children/ Remainder Beneficiaries

42 Good GRAT Candidates High-growth or high-yield investment portfolios Commercial real estate Closely held stock FLP interests

43 Other Considerations for GRATs Annuity payment isn t taxable but grantor pays tax on trust s income during the GRAT period Can be structured to produce a gift with a value close to zero (useful when grantor has utilized lifetime exclusion amount or doesn t wish to make taxable gifts)

44 Other Considerations for GRATs If grantor dies during the annuity period, assets will generally be included in the grantor s estate (subject to limitations) As a result, not ideal for GST planning

45 Other Considerations for GRATs Gift tax return should be filed to report gift Separate tax return generally does not need to be filed for the GRAT GRAT must be administered strictly according to terms

46 Charitable Remainder Annuity Trust (CRAT) Step 1: contribution Step 3: remainder Grantor Trust Charity Step 2: distributions

47 Considerations for CRATs Similar to a GRAT (primary difference is remainder beneficiary) Evaluate as part of post-tcja charitable strategy May allow tax-efficient diversification of low basis assets Lifetime income tax deduction while removing assets from gross estate

48 Strategies for Those Under $22.36 Million Evaluate assets that will be included in the estate Swap property in IDGTs Unwind or eliminate strategies to leverage exemption

49 Wealth Transfer Planning Is Complex Time horizon Spending Inflation Size of the estate Tax attributes, e.g., NOLs Income tax character of assets & expected realization of gain/loss Sources of income State of residence of grantor & beneficiary

50 Closing Comments Holly Pantzer, CPA BKD Family Office Partner Indianapolis, IN Susan Jones, JD BKD Family Office Partner St. Louis, MO

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52 BKD, LLP is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: The information contained in these slides is presented by professionals for your information only & is not to be considered as legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor or legal counsel before acting on any matters covered

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54 Holly Pantzer Susan Jones