Gregory W. Sampson Looper Reed & McGraw, P.C

Transcription

1 Gregory W. Sampson Looper Reed & McGraw, P.C Looper Reed & McGraw, P.C. The information contained herein is subject to change without notice

2 Basic Estate & Gift Tax Planning Current $5.25 Million Exemption amount (unified credit) and tax rate (45%) is unified for: Gift Tax on lifetime transfers (require gift tax return for year of gift) and Estate Tax on transfers at death (requires estate tax return if aggregate gifts and remaining taxable estate exceeds exclusion amount). Separately applies to the Generation Skipping Transfer Tax for gifts that benefit skip persons (more than a generation below the transferor), top tax rate is flat rate. 2

3 Current Estate & Gift Tax Structure (and recent history preceding it) Year Estate/GST Exemption Lifetime Gift Exemption Annual Exclusion Rate 2001 $675,000 $675,000 $10,000 55% $1,000,000 $1,000,000 $11,000 50% / 49% $1,500,000 $1,000,000 $11,000 48% / 47% $2,000,000 $1,000,000 $12,000 46% /45% / 45% 2009 $3,500,000 $1,000,000 $13,000 45% 2010 Basis step-up with no estate tax or $5 Million exemption $1,000,000 $13, $5,000,000 $5,000,000 *$13,000 35% 2012 *$5,120,000 *$5,120,000 *$13,000 35% *$5,250,000 *$5,250,000 *$14,000 45% *Indexed for Inflation 3

4 Impact on Prior Planning Significant change in landscape for estates under $5 Million. Non-tax factors become more prominent in planning. Consider benefits of Bypass Trust versus stepped up basis with portability. Consider current funding provisions for testamentary trusts based on previous lower exclusion amounts. Consider impact of tax apportionment clause on various assets anticipated to be held at death (such as retirement plans and life insurance). Consider and provide flexibility for future tax due to increase in assets or possible later reduction in lifetime exclusion amount by Congress. 4

5 Basic Estate Tax Planning Transfers to Maximize Use of Available Exemptions Testamentary Planning Testamentary Exclusion Gifts Up to $5.25 Million o Outright Gifts to Descendants/Others o Bypass Trusts o Marital Trust Bequests with Partial QTIP Election Marital Deduction Bequests for Excess Unused Exemption is portable to Surviving Spouse 5

6 Basic Gift Tax Planning Transfers to Maximize Use of Available Exemptions Lifetime Gift Planning Lifetime Exclusion Gifts - Utilize available tax free gifting opportunities. o $14,000 annual exclusion gifts per donee ($28,000 combined for a married couple), commonly used for: Life Insurance Trust gifts for premiums 529 Plan Gifts for Education other gifts in trust or outright to descendants o Direct Tuition and Medical Expense Gifts o $5.25 Million lifetime exemption per donor ($10.5 Million combined for spouses) available for gifts beyond exclusions o Transfers future appreciation estate and gift tax free, but transfers donor s basis too. 6

7 Portability Transferring the Exclusion What is Portability? The Deceased Spousal Unused Exclusion Amount (DSUEA) is the exclusion amount available at the surviving spouse s death that is not used when the first spouse dies. This is said to be portable because it can be passed to the surviving spouse. Limitations: o Applies to Estate/Gift Tax Exemption NOT GST Tax Exemption o Multiple Spouse Transfer Restrictions: DSUEA only passes from last deceased spouse, so death of a spouse after remarriage can create problems. Advantages Does not require trusts and allows stepped-up basis in assets remaining at death of second spouse. Must File 706 Estate Tax Return to claim DSUEA, even if not a taxable estate.. 7

8 Bypass Trust Planning Bypass Trust Planning Advantages Protection from uncertainties of portability (increased assets, remarriage, and future change in law). Consider Disclaimer Trust alternative for moderate size estates Tax Related Considerations GST Exemption is not portable, but can allocate GST exemption to Bypass Trust Future appreciation passes estate tax free (but no basis stepup) regardless of taxability of surviving spouse s estate. Non-tax Advantages Control ultimate distribution of assets (2nd spouse inheritance) Separate property insulation from beneficiary divorce Spendthrift creditor protection Management of assets 8

9 Enhanced Planning Larger Estates Discounted and leveraged gifting techniques such as ILITs, FLPs and GRATs can minimize the estate and maximize tax savings for those estates exceeding the Exemption Dynasty Trusts for RAP period to extend benefits for multiple generations can maximize use of the exemption from Generation Skipping Transfer Tax. 9

10 Coordinating the Estate Plan: Non-testamentary Transfer Devices Traps for the unwary when planning with assets that avoid probate JTROS, POD/TOD, Retirement Plans, IRAs, Annuities, and Life Insurance o can cause under funding of testamentary trusts o unintentional disproportionate distributions among family o potential interference with tax apportionment clause of Will JTROS Accounts o Presumption of equal ownership without contribution evidence can cause creditor access concerns as to joint tenant o Community property and spousal rights interference o Frequent incorrect account set-up o Gift occurs upon withdrawal by joint tenant for themselves 10

11 Coordinating the Estate Plan: Non-testamentary Transfer Devices Traps for the unwary when planning with assets that avoid probate (cont d) Annuities o Can interfere with Medicaid qualification (unless qualified Medicaid annuity ) o Potential withdrawal fees and restrictions on access for cash needs o ordinary income treatment on portion of distributions that exceeds original investment, instead of capital gain treatment Revocable Lifetime Trust Planning Partially unfunded Trusts do not accomplish probate avoidance Funding of Trusts with homestead should include notice to lender, notice to insurer, and renewal of homestead exemption for property taxes Good solution for out-of-state real property (and timeshares) 11

12 Coordinating the Estate Plan: Tax Deferral Planning Financial advantages of tax deferred savings in retirement plans and IRAs versus estate tax planning. Income in Respect of a Decedent (IRD) can accelerate income tax due if non-designated beneficiary (e.g. estate or trust) is recipient. o Double tax may apply estate and income tax - if the estate is subject to estate tax. o Coordinate tax and debt apportionment clause to avoid accelerating income in forced distribution to pay taxes or expenses Will should prohibit payment of expenses or taxes from retirement plans and IRAs if possible. o Gifts of income deferred benefits to charities can avoid income tax 12

13 Coordinating the Estate Plan: Tax Deferral Planning Financial advantages of tax deferred savings in retirement plans and IRAs versus estate tax planning. Coordinating with Testamentary Trusts under a Will or Living Trust. o Retirement Benefits cannot be transferred to a revocable trust in participant s lifetime without triggering distribution income tax. o Large retirement plan accounts and IRAs will miss funding Bypass Trust if beneficiary designation not coordinated with trust planning. Special rollover rights for surviving spouses defers to age 701/2 Best to have trusts as alternate beneficiaries Minimum required distributions (MRD) to trust/beneficiary will begin year after death of decedent o Testamentary Trusts should have stretch provisions to use life expectancy of trust beneficiary for retirement benefits. o Funds are depleting, so avoid distribution to Bypass Trust if other assets can fund more efficiently. 13

14 Coordinating the Estate Plan: Tax Deferral Planning Financial advantages of tax deferred savings in retirement plans and IRAs versus estate tax planning. Spousal Rights and Community Property Interests. o Surviving Spouse usually has a community property interest in IRAs in Texas that can be claimed upon the participant s death and can be claimed by the deceased non-participant spouse s estate. Draft to avoid non-participant spouse s interest in his/her Will. Draft participant s Beneficiary Designation and/or Will to avoid fraud on the spouse claim or reimbursement claim. o Review QDRO in divorce decree for rights of former spouse. o Review any prenuptial or post nuptial agreement. Consider when distributions should be taken and tax incurred. o Later years tax rate or income may not be less than current. o Balance remaining at death may be subject to estate tax too. o Consider Roth conversion benefits and timing. 14

15 Coordinating the Estate Plan: Disability / Long Term Care Planning 15 Medicaid Qualification Issues Carefully consider impact before selling or moving out of the homestead as it may become a countable resource. Homestead placed in revocable living trust will become a countable resource. Gifts to reduce estate may cause delay and penalties for qualifying if made within 5 years prior to qualification date. o Premium gifts to an ILIT is such a gift that can affect qualification of both the donor, and the donee (with respect to withdrawal rights). Beware of annuities that are not Medicaid qualified as they are countable resources with sometimes limited fund access. o Note restrictions on Medicaid annuities and that the state must be primary beneficiary. Timeshares can be trouble to gift or sell, have ongoing cost burdens and may cause disqualification as a countable resource. Special Needs Trust provisions may be necessary in Wills and trusts for benefits passing to one who may need to qualify for Medicaid or other means tested benefits.

16 Coordinating the Estate Plan: Disability / Long Term Care Planning Disability planning with Powers of Attorney and Advance Directives. Carefully consider agent appointments and powers, particularly in second marriage or blended family situations. o Name multiple successors whom you trust. o Clarify shared powers if joint agents appointed If desired, specify gift powers (and any restrictions) and powers to create or fund revocable lifetime trusts. Consider appointing person to review and hold agent accountable if principal is incapacitated. Do companion Declaration of Guardian Guardian trumps Power of Attorney. 16

17 Coordinating the Estate Plan: Special Issues Blended Families -Remarriage after death of a spouse or divorce in retirement years is more common and raises special issues for consideration. Consider premarital agreement or post marital partition agreement. Consider impact of marriage on DSUEA. Consider trusts to preserve assets for children but give spouse access and control as trustee, if desired, and consider trustee removal and replacement powers and other checks and balances. o Consider DSUEA transfer and capital gains issues. o Consider IRAs or retirement plans passing in stretch trusts. Consider statutory spousal rights and coordination with dispositive provisions and consider election against such rights. Consider impact of testamentary limited powers of appointment for flexibility in planning and extent of restrictions and possible trust protector appointment. 17

18 Coordinating the Estate Plan: Special Issues Family Business Assets and Farm Succession. Families with closely held businesses and farms (especially if illiquid) need to consider transition in connection with retirement, not upon death. Discuss openly and early who will carry on the farm or business and plan for sale if it is not to continue in the family. Consider buy-sell agreement terms for businesses, especially if a child is an owner or employee, and address liquidity for funding a buyout, such as with life insurance. Consider management agreement or forming LLC for farm or ranch property to uniformly manage undivided interests and restrict transfers (LLC or Limited partnership can provide some asset protection and avoid partition). Consider Revocable Trust for management or to hold out-of-state property to avoid ancillary probate. Develop clear law practice transition plans. 18

19 Coordinating the Estate Plan: Special Issues Life Insurance and Irrevocable Life Insurance Trusts (ILITs). Families with significant life insurance assets or with ILITs need to consider some issues that can impact their retirement years and the success of transfer plans. Consider an ILIT if life insurance may cause your estate to be taxable. Life insurance owned by a decedent is includible in his or her estate. Note that it is irrevocable, and that: o Each gift to an ILIT should be of separate property of the sole insured grantor. Can partition gifts for this purpose. o Notices of withdrawal rights shoulc be given (Crummey Letters). o Grantor/insured cannot have access to trust assets, and cannot take loans from the policies. Spouses may have a community property interest in a policy that is funded during the marriage, and transfer of that to another might be a gift at death or constitute a claim of the spouse or the spouse s estate. Trustees of ILITs should have policies reviewed regularly (e.g. in-force illustration) to be sure it is performing properly and is sufficiently funded to last as planned. This is a fiduciary duty. 19

20 Gregory W. Sampson Looper Reed & McGraw, P.C Looper Reed & McGraw, P.C. The information contained herein is subject to change without notice