Table of Contents. Important Information About This Book Preface and Acknowledgements Table of Principal Cases and IRS Pronouncements

Transcription

1 Important Information About This Book Preface and Acknowledgements Table of Principal Cases and IRS Pronouncements xxv xxvii xxix CHAPTER 1: Working with Clients 1 A. The Faces of Estate Planning 1 B. The Stages of Life and Estate Planning 3 C. Developing Clients 4 D. Identifying the Client 5 E. The Engagement Letter 5 Exhibit 1.1 Sample Engagement Letter 7 F. The Non-Engagement Letter 9 Exhibit 1.2 Sample Non-Engagement Letter 10 G. Preparing for the Client Interview 11 H. Conducting the Client Interview 11 Exhibit 1.3 Sample Estate Planning Questionnaire (Basic: Unmarried Individual) 13 Exercise 1-1 A Sample Client Interview 21 Exercise 1-2 A Client Interview Simulation 28 I. The Client Balance Sheet and Document Summary 28 Exhibit 1.4 Sample Client Balance Sheet 29 Exhibit 1.5 Sample Client Document Summary 30 J. Client Competence 31 K. Conflicts of Interest 32 xi

2 xii 1. Married Couples 32 Exhibit 1.6 Sample Joint Representation Letter 32 Exercise 1-3 Joint Representation of Spouses Elderly Clients 35 Exercise 1-4 The Elderly Client and the Role of Relatives Overlapping Representation 35 Exercise 1-5 Representation of Members of a Family Business The Attorney as Beneficiary 36 People v. Berge 37 Question 42 L. Execution and the Completion/Termination Letter 43 Exhibit 1.7 Sample Disengagement Letter 44 Exercise 1-6 Getting Your Feet Wet 45 Exhibit 1.8 Sample Will Execution Checklist 46 Exercise 1-7 A Will Execution Ceremony Simulation 48 Exercise 1-8 Custody of the Will 49 M. Reference Materials 49 CHAPTER 2: A Review of the Fundamentals of Drafting Wills 57 A. Describing the Recipients of Property Basic Definitions Complications 59 Exercise 2-1 Stepchildren and Adopted Individuals 60 Exercise 2-2 Afterborn Individuals 61 Exercise 2-3 Art Descendants Survival and Lapse of Gifts 64 Exercise 2-4 Lapse Provisions 65 B. Describing the Property Plain Meaning, Mistakes, and Ambiguity Ademption and Accessions Digital Assets 67 C. The Division of Property Strict Per Stirpes or English Per Stirpes Modern Per Stirpes or American Per Stirpes or Per Capita with Representation Uniform Probate Code Per Capita at Each Generation (Referred to as By Representation in the UPC) Drafting Abatement and Apportionment 71 Practice Pointer Spousal Protections Trusts 72 D. Will Substitutes 72

3 xiii E. Execution Formalities 73 F. Drafting Style 74 G. Case Study 2-1 The Last Will and Testament of Alice Goodwin Smith 75 Exercise 2-5 A Simulated Client Interview 79 Exercise 2-6 Review of Ms. Smith s Will 79 Exercise 2-7 Codicil Practice 79 Exercise 2-8 The Disposition of Ms. Smith s Estate 79 Exercise 2-9 Apportionment of Estate Taxes 80 H. Reference Materials 80 CHAPTER 3: The Young Adult 85 A. Why Plan? 85 B. Intestate Succession 86 C. Nonprobate Transfers Bank Accounts Securities Accounts Automobiles Clothing, Personal Effects, and Home Furnishings Retirement Accounts and Life Insurance Policies Real Estate 89 D. Small Estate Proceedings 90 E. Selection of Fiduciaries 90 F. Planning for Youthful Incapacity Conservatorships Revocable Trusts General Durable Power of Attorney Medical Durable Power of Attorney and Living Wills Organ and Tissue Donations Final Arrangements Instructions and Client Letter of Instruction 94 G. Using Form Documents (Part I) Description of the Testator Revocation of Prior Wills Statement Concerning Family Payment of Debts and Expenses Tangible Personal Property Disposition Specific Bequests and Residuary Bequests Designation of Fiduciaries Waiver of Fiduciary Bonding Fiduciary Powers and Responsibilities Spendthrift Clauses Saving Clauses Apportionment of Estate Taxes Survivorship Applicable Law 99

4 xiv 15. Definitions Self-Proving Affidavit 99 Exercise 3-1 Assessing the Notarized Will 100 H. Case Study 3-1 Sarah Martin 100 Exhibit 3.1 Designation of Beneficiary 101 I. Reference Materials 102 CHAPTER 4: The Wealthy Young Adult Contemplating Marriage 109 A. Preserving Family Wealth Dissolution of Marriage Freedom of Disposition Fundamental Principles 110 B. Marital Agreements 111 Susan Lee FLAHERTY v. Jerald Charles FLAHERTY 113 C. Irrevocable Trusts 114 In re Marriage of Guinn 115 Question 118 D. Conditional Bequests 119 E. The Impact of Dissolution of Marriage on Estate Planning Documents 119 F. Using Form Documents (Part II) Know Your Source Use the Right Form Understand the Form Strive for Uniformity Automate 122 G. Case Study 4-1 Ronald Horton Brown 123 H. Reference Materials 125 CHAPTER 5: The Young Married Couple (Without Children) 131 A. Why Plan? 131 B. Intestate Succession 131 C. Nonprobate Transfers Bank and Securities Accounts Automobiles Clothing, Personal Effects, and Home Furnishings Retirement Accounts and Life Insurance Real Estate 135

5 xv D. Spousal Protections 135 E. Federal Wealth Transfer Tax Considerations (Part I) Full Utilization of the Applicable Exclusion Amount The Formula Clause and Nonspousal Share Titling of Property The DSUE Amount s Impact on Planning Strategies 140 F. Using Form Documents (Part III) 140 G. Planning for Pets 141 Pet Trust 142 H. Case Study 5-1 Paul and Linda Davis (Part I) 143 I. Reference Materials 145 CHAPTER 6: Unmarried Couples 149 A. Lifestyle Considerations 149 B. The State and Federal Law Implications of Marriage 150 C. Substitute Measures Ownership of Real Estate Financial Accounts Beneficiary Designations Wills and Will Contracts Revocable Trusts Palimony Domestic Partnership, Relationship or Cohabitation Agreements 155 D. Gay and Lesbian Couples Same-Sex Marriage, Civil Unions, and Other Relationship Recognition Planning After Windsor 157 Rev. Rul Questions Special Planning Measures 166 E. Conflicts of Interest 167 F. Case Study 6-1 Elizabeth Green and Cindy Jones 167 CHAPTER 7: The Married Couple (with Young Children) 173 A. Another Stage of Life 173 B. The Selection and Nomination of Protectors Personal Representatives or Executors Final Arrangements Representative and Client Letter of Instruction Guardians 177

6 xvi 4. Conservators Trustees 179 C. Dealing with Life Insurance and Retirement Plans 181 D. The Contingent Trust 182 E. Case Study 7-1 Paul and Linda Davis (Part II) 185 F. Reference Materials 188 CHAPTER 8: Gifts from Grandparents 193 A. The Transferor s Concerns in Intergenerational Wealth Transfers 193 B. Selecting the Form of the Gift Outright Gifts Direct Educational and Medical Gifts Custodial Accounts Section 529 Programs Coverdell Education Savings Accounts Section 2503(c) Trusts The Testamentary Trust 203 Exhibit The Inter Vivos Irrevocable Trust Life Insurance Trusts Dynasty Trusts 209 C. Federal Wealth Transfer Tax Considerations (Part II) The Generation-Skipping Transfer Tax (GSTT) Lapses of a General Power of Appointment and Crummey Crummey After Cristofani 211 Estate of Cristofani v. Commissioner of Internal Revenue Valuation Discounts Below-Market Loans Grantor Trust Income Tax Rules 221 Rev. Rul D. Specialized Tax Planning Structures GRATs and GRUTs Qualified Personal Residence Trusts 227 E. Using Form Documents (Part IV) Description of the Settlor and the Initial Trustee Description of the Trust Property Name of the Trust Information Statement 228 Exercise 8-1 Anticipating Changes in Marital Status Statement Concerning Revocability 228

7 xvii 6. Distribution Schemes Identity of Trustee, Successor Trustees Trustee Powers and Responsibilities; Exculpatory Clauses Spendthrift Clauses Saving Clause Applicable Law Trust Protector Definitions General Provisions 233 F. Case Study 8-1 Paul and Linda Davis (Part III) 233 G. Reference Materials 235 CHAPTER 9: Remarriage (with Children) 243 A. Common Scenarios 243 B. Pitfalls of the Unplanned Estate Intestate Succession Elective Share Omitted Spouse Property Division and Maintenance on Dissolution of Marriage I Love You Wills Guardianship and Custody of Stepchildren 246 C. Planning Measures Remaining Unmarried: Cohabitation Marital Agreements Lifetime Gifts The QTIP Trust 248 Exercise 9-1 Drafting Invasion of Principal Powers 250 Exercise 9-2 The QTIP s Unfairness 250 D. Case Study 9-1 John Roberts and Alice Turley 250 E. Reference Materials 251 CHAPTER 10: Migratory Married Couples 255 A. State Law Considerations Domicile Wills Trusts Ancillary Probate Community Property State Estate, Inheritance, and Succession Taxes 260

8 xviii B. International Wills 260 Exercise 10-1 Comparing the UPC and UIWA Execution Formalities 261 C. Foreign Property Holdings Foreign Law Issues U.S. Income Tax Issues U.S. Federal Wealth Transfer Tax Issues 264 D. The Alien Spouse 264 Exercise 10-2 QDOT Language 265 E. Case Study 10-1 Eric and Tatiana Osborn 265 F. Reference Materials 266 CHAPTER 11: The Wealthy Married Couple 269 A. The Taxation Factor 269 B. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Act) and American Taxpayer Relief Act of 2012 (ATRA) 270 C. The Deceased Spousal Unused Exclusion (DSUE) Amount An Overview of Marital Estate Tax Planning Before the DSUE Amount Computation of the DSUE Amount 273 Question The DSUE Amount s Impact on Marital Estate Planning 278 D. Form of Marital Gift, Formula Clauses, and Funding Alternatives Form of Gift 282 Exercise 11-1 Marital Deduction Qualifying Language 285 Exercise 11-2 More Marital Deduction Qualifying Language 285 Exercise 11-3 Unproductive Property 286 Exercise 11-4 Payment of Taxes The Amount of the Bequest 289 Exercise 11-5 Disclaimer Wills 291 Exercise 11-6 Survival Periods 292 Exercise 11-7 Equalization Clauses 292 Example Fixing the Marital Share in an Appreciating Estate 294 Example Diminishing the Family Share in a Declining Estate 295 Question 295

9 xix 3. Funding the Marital Share 297 Rev. Proc Exercise 11-8 Marital Share Funding Language 300 Exercise 11-9 Marital Share Funding and Rev. Proc Exercise Selecting a Funding Method 304 Exercise Drafting the Marital Deduction Language 304 Exercise A Common Problem 304 Exercise Reverse QTIP Trusts 306 Question Special Community Property Considerations State Estate, Inheritance, and Succession Taxes 308 E. The Vision for Succession or Cashing Out 308 F. Buy-Sell Agreements 309 G. Grantor-Retained Annuity Trusts and Grantor-Retained Unitrusts 311 H. Recapitalizations and Valuation Freezes 311 I. Valuation Discounts 312 Exercise Disposition Alternatives for a Family Business 312 J. Life Insurance 314 Exercise ILIT Language 316 Exercise More ILIT Language 317 K. Special Considerations for Agriculture 317 Exercise Qualifying for Special Valuation 318 L. Case Study 11-1 Paul and Erika Dutton 318 M. Reference Materials 320 CHAPTER 12: Asset Protection and Retirement Planning 329 A. Planning for Wealth Accumulations from Services 329 B. Basic Asset Protection Choice of Professional Services Entity Insurance Titling of Assets 330 Exercise 12-1 Dissolution of Marriage Implications Accumulation of Exempt Assets 331 C. More Advanced Asset Protection Options Family Limited Partnerships and Limited Liability Companies Inter Vivos QTIP Trusts 335

10 xx D. Other Advanced Asset Protection Options Domestic Asset Protection Trusts 336 Private Letter Ruling Foreign Asset Protection Trusts Expatriation Fraudulent Conveyance Law in Action An Example 341 In re Gary E. Krause, Debtor. United States of America, Plaintiff-Appellee v. Gary E. Krause; Richard L. Krause, Defendants, and Linda S. Parks, Intervenor-Appellee v. Drake Krause; Rick Krause, Intervenors-Appellants. 342 E. Tax Planning for Retirement Plan Assets Outright Beneficiary Designations of Humans Are Simplest It Is Preferable That a Marital Trust Pay Income Taxes on the RMD Rather Than a Family Trust Don t Fund a Pecuniary Bequest with Retirement Assets Designate a Beneficiary and Avoid Designating an Estate as a Retirement Plan Beneficiary A Trust May Provide Designated Beneficiaries A Spousal Trust as a Beneficiary Requires Special Marital Deduction Planning Charitable Bequests of Retirement Plan Assets May Be Useful Roth IRA Conversions Are More Accessible for Wealthy Individuals 353 Exercise 12-2 Postmortem Retirement Benefit Planning Options 354 Rev. Rul F. Case Study 12-1 John and Susan Able 362 G. Reference Materials 363 CHAPTER 13: The Generation-Skipping Trust and Other Wealth Perpetuation Measures 369 A. The Rule Against Perpetuities Seeking Absolute Freedom USRAP 371 Exercise 13-1 Saving Clauses and USRAP 371 Exercise 13-2 Extending the Measuring Lives 373 Exercise 13-3 Other Concerns 373 B. The Generation-Skipping Transfer Tax The General Application of the GSTT The GSTT Exemption 375

11 xxi 3. GSTT Drafting Issues 376 Exercise 13-4 GSTT Basics 378 C. Beneficiary Conduct Trustee Discretion 380 Exercise 13-5 Discretionary Distribution Language Holdback Clauses 381 Exercise 13-6 Holdback Events Incentive Clauses Spendthrift Clauses 382 D. Drafting for the Unpredictable Merger or Termination of Trusts Trust Protectors Decanting Powers Powers of Appointment 385 Practice Pointer 386 Exercise 13-7 Evaluating a Power of Appointment 386 E. Organizing the Family to Create and Perpetuate Wealth Family Mission Statements 386 Exercise 13-8 Mission Statement Family Offices Family Trust Companies 388 F. Case Study 13-1 Paul and Linda Davis (Part IV) 388 G. Reference Materials 389 CHAPTER 14: Charitable Gifts 397 A. Weighing Client Objectives 397 B. Outright Testamentary Bequests 398 Exercise 14-1 Evaluating Testamentary Charitable Gift Language 400 C. Outright Lifetime Gifts Remainder Interests in a Personal Residence or Farm Undivided Outright Interests in Property 402 Exercise 14-2 Gifting a Personal Residence 403 D. Lifetime Split-Interest Gifts Contributions of Remainders Contributions of Income Interests Gift Annuities 408 E. Testamentary Split-Interest Gifts 409 F. Conservation Contributions Qualified Conservation Contributions Qualified Conservation Easements 410 G. Private Foundations 410 H. Donor-Advised Funds 411

12 xxii I. Case Study 14-1 Paul and Linda Davis (Part V) 412 J. Reference Materials 412 CHAPTER 15: Planning for Incapacity 417 A. Alternatives Conservatorship and Guardianship General Durable Power of Attorney Medical Durable Care Directive and Living Will Revocable Trust 418 B. Revocable Trust The Continuing Debate Advantages of the Revocable Trust Disadvantages of the Revocable Trust Mechanics 423 C. Long-Term Care Alternatives Family Members Home Health Care Independent and Assisted Living Skilled Nursing Facility Hospice Care 429 D. Financing Long-Term Care Private Income and Savings Long-Term Care Insurance Accelerated Death Benefits and Viatical Settlements Reverse Mortgages Medicare and Medicaid 432 E. Public Assistance Issues Scenario #1 Third-Party Supplemental Needs Trusts for Contingent Disability or Long-Term Care of a Beneficiary Scenario #2 Third-Party Supplemental Needs Trusts for a Beneficiary with Known or Expected Disability or Long-Term Care Requirements 435 Exercise 15-1 Paul and Linda Davis (Part VI) Scenario #3 First-Party (Self-Settled) Trusts by a Known Beneficiary Scenario #4 Other First-Party Dispositions to Qualify for Assistance 437 F. Case Study 15-1 Janice Green 439 G. Reference Materials 440

13 xxiii CHAPTER 16: Federal Wealth Transfer Tax Principles and Planning Strategies 447 A. An Overview of the Federal Wealth Transfer Taxes A Brief Overview A Summary of the Gift Tax A Summary of the Estate Tax 450 Rev. Rul Question A Summary of the Generation-Skipping Transfer Tax 462 B. Planning Strategies and Techniques General Planning Strategies 465 Technique 1 Creating Discounts by Gifts of Property 466 Rev. Rul Technical Advice Memorandum Technique 2 Creating Discounts by Transferring Assets to Restrictive Entities 473 Technique 3 Outright Gift of Appreciating Property 474 Technique 4 Asset Freeze Structures 475 Technique 4.1 The Self-Canceling Installment Note (SCIN) 475 Technique 4.2 The Private Annuity 476 Technique 4.3 Sale to a Defective Grantor Trust 476 Technique 4.4 Entity Freeze 477 Technique 5 Regular Use of the Annual Gift Exclusion, Gift Splitting, and Educational/Medical Gift Exclusion 478 Technique 6 Creating Gift Tax Deductions with Retained Interests 479 Walton v. Commissioner of Internal Revenue 481 Technique 7 Creating Gift Tax and Income Tax Deductions with Charitable Gifts 488 Technique 8 Avoiding Estate Tax Inclusive Strings. 489 Technique 9 Avoiding General Powers of Appointment 490 Technique 10 Ownership of Life Insurance 490 Technique 11 Use of Disclaimers 491 Technique 12 Below-Market Loans Planning After ATRA 492 Exercise 16-1 Planning After ATRA 498 C. Reference Materials 499

14 xxiv CHAPTER 17: Probate and an Estate Tax Return 501 A. The Estate Administration Process Who Is the Client? Is Administration Necessary? Postmortem Activities Preceding the Appointment of a Personal Representative Selecting a Form of Administration 504 Exhibit 17.1 Sample Letters Testamentary 506 Rev. Rul An Overview of Administration 508 Exhibit 17.2 Sample Estate Inventory 510 Exhibit 17.3 Sample Notice to Creditors 515 B. Case Study 17-1 The Estate of Alice Goodwin Smith 516 C. Case Study 17-2 The Estate of Alice Goodwin Smith (continued) 522 D. Reference Materials 522 Index 525