Charitable giving issues and how to integrate with larger estate plans

Transcription

1 ESTATE & TAX PLANNING FOR ESTATES UNDER THE $10 MILLION EXEMPTION AMOUNT First Run Broadcast: December 10, :00 p.m. E.T./12:00 p.m. C.T./11:00 a.m. M.T./10:00 a.m. P.T. (60 minutes) Planning for individual clients with estates of less than $5 million or couples with less than $10 million has changed dramatically after enactment of the $5 million/$10 million federal estate and gift tax exemption. But planning hasn t gone away it s become more complicated, requiring more time talking to and counseling clients. Clients still need to plan for either portability or the use of a credit shelter trust. They are still significant income tax issues that impact a client s plans, including the new 3.8% tax on net investment income which has scuttled many well laid plans. There is planning to preserve assets from rapid depletion by claimants. And as clients live longer, there is the overriding need to plan for disability or incompetence, long-term care as they grow older. This program will provide you with a practical guide to the new and complicated world of planning and counseling clients with estates under the federal estate tax exemption amount. Estate and trust planning issues for single clients with estates less than $5 million and married couples of less than $10 million Continuing viability of trusts for distributions of property, cost and income tax savings Portability v. credit shelter trusts which best depending on the circumstances? Planning for disability, incompetency and long-term care as clients live longer Estate and trust impact of the new 3.8% tax on net investment income Asset protection planning shielding real estate and other assets from claimants Planning issues with blended families children from previous and current marries, exspouses Charitable giving issues and how to integrate with larger estate plans Speaker: Missia H. Vaselaney is a partner in the Cleveland office of Taft, Stettinius & Hollister, LLP, where her practice focuses on estate planning for individuals and businesses. She also represents clients before federal and state taxing authorities. Ms. Vaselaney is a member of the American Institute of Certified Public Accountants and has been a member of the Steering Committee for AICPA s National Advanced Estate Planning Conference since Ms. Vaselaney received her B.A. from the University of Dayton and her J.D. from the Cleveland-Marshall College of Law.

2 VT Bar Association Continuing Legal Education Registration Form Please complete all of the requested information, print this application, and fax with credit info or mail it with payment to: Vermont Bar Association, PO Box 100, Montpelier, VT Fax: (802) PLEASE USE ONE REGISTRATION FORM PER PERSON. First Name Middle Initial Last Name Firm/Organization Address City State ZIP Code Phone # Fax # Address Estate & Tax Planning for Estates under the $10 Million Exemption Amount Teleseminar December 10, :00PM 2:00PM 1.0 MCLE GENERAL CREDITS VBA Members $75 Non-VBA Members $115 NO REFUNDS AFTER December 3, 2015 PAYMENT METHOD: Check enclosed (made payable to Vermont Bar Association) Amount: Credit Card (American Express, Discover, Visa or Mastercard) Credit Card # Exp. Date Cardholder:

3 Vermont Bar Association CERTIFICATE OF ATTENDANCE Please note: This form is for your records in the event you are audited Sponsor: Vermont Bar Association Date: December 10, 2015 Seminar Title: Location: Credits: Program Minutes: Estate & Tax Planning for Estates under the $10 Million Exemption Amount Teleseminar - LIVE 1.0 MCLE General Credit 60 General Luncheon addresses, business meetings, receptions are not to be included in the computation of credit. This form denotes full attendance. If you arrive late or leave prior to the program ending time, it is your responsibility to adjust CLE hours accordingly.

4 PROFESSIONAL EDUCATION BROADCAST NETWORK Speaker Contact Information ESTATE & TAX PLANNING FOR ESTATES UNDER THE $10 MILLION EXEMPTION AMOUNT Jeremiah "Jere" W. Doyle, IV BNY Mellon Wealth Management (o) (617) Missia H. Vaselaney Taft Stettinius & Hollister LLP - Cleveland, Ohio (o) (216) mvaselaney@taftlaw.com

5 A. WHERE WE ARE NOW Picking Up the Pieces Missia H. Vaselaney, Esq. David E. Kauffman, Esq. Taft Stettinius & Hollister LLP 200 Public Square, Suite 3500 Cleveland, Ohio (216) Current Gift and Estate Tax Environment The following are highlights of the tax provisions of the American Taxpayer Relief Act of 2012 (ATRA). a. The estate, gift, and GST tax provisions of 2012 remain in effect including the $5 million indexed estate, gift and GST exemption. (Currently indexed to $5,430,000, but hereinafter referred to as $5,000,000. ) b. Top Marginal Rate of 40%. The top estate, gift, and GST tax rate is increased to 40%. c. Portability is made permanent. d. Top Income Tax Rate of 39.6%. The income tax provisions of the 2001 Act are extended except that the top income tax bracket for individuals is increased to 39.6% for taxable income in excess of $450,000 for married individuals filing joint returns, $425,000 for heads of households, and $400,000 for unmarried. e. Capital Gains and Qualified Dividends. The rates on long-term capital gains and qualified dividends are adjusted by adding new 15% and 20% brackets. The top rate is increased to 20% for high income taxpayers to whom the 39.6% tax rate applies. f. Alternative Minimum Tax. Permanent alternative minimum tax relief is enacted by providing revised exemption amounts that are indexed for inflation. There will no longer be the need for the annual AMT patch. 2. Estate and Gift Planning Techniques that Still Work a. Charitable Trusts b. Qualified Personal Residence Trusts (QPRTS)

6 Page 2 of 15 c. Family Limited Liability Companies (LLCs) d. Annual Gifting e. Gifting Trusts/Spousal Lifetime Access Trusts (SLATS) f. Irrevocable Life Insurance Trusts (ILITs) 3. What Works But may not Work in the Near Future a. Discounts The current Administration has included rules in its proposed budget that would limit the discounts on transfers of interests in family controlled entities. Many techniques currently in use rely heavily on these discounts and any limitation on them would drastically increase the tax burden on a family owned business. b. Perpetual Trusts It has been suggested that the Internal Revenue Code be revised to prohibit the allocation of the GST exemption to a trust that does not have a required ending date that is either (1) 21 years after the death of lives in being; (2) 90 years after creation; or (3) the death of the last living beneficiary who is no more than two generations younger than the grantor. Perpetual trusts created before any revisions to the Code would be unaffected. c. Grantor Retained Annuity Trusts (GRATS) The 2012 Budget Proposal suggests that the tax law be changed to require a minimum GRAT term of ten years, which would make GRATs less likely to be successful for older taxpayers due to the requirement of surviving the trust term. Several recent legislative proposals have called for GRATs to be structured to produce a minimum gift, perhaps as high as 10% of the value of the assets transferred to the GRAT. Still other legislation has proposed that all grantor trusts be included in the grantor s estate. B. STATE OF THE ESTATE PLANNING PROFESSION WHERE WE ARE WITH THE HIGHER FEDERAL ESTATE TAX EXEMPTIONS, LOWER RATES, AND THE REPEAL OF THE OHIO ESTATE TAX

7 Page 3 of Non-Tax Reasons Why Estate Planning is Still Essential The Golden Age of Trusts was Long Before there was an Estate Tax. a. Probate Avoidance Clients almost always express the desire to avoid probate. They see the disadvantages as cost, delay, and the fact that their affairs will be a matter of public record. Funding the revocable living trust during life may be necessary in order for the plan to satisfy the clients estate planning objectives and avoid probate. 1. Funding has traditionally been the responsibility of the client, though expecting a client to fund his or her trust may be unrealistic. 2. An asset typically becomes trust property when its legal title is changed to reflect the transfer to the trustees. (a) Once transferred, the legal owner should be similar to the following example: John Doe or his successor as Trustee of the John Doe Trust dated April 15, 1999, as may be amended hereafter. (b) Generally, all of the grantor s assets should be reviewed to determine what should be transferred to the trust. (1) Real estate (2) Motor vehicles/watercrafts (3) Bank accounts (4) Investment accounts (5) Individually held stocks and bonds (6) Closely held business interests (7) Personal property (8) Savings bonds, etc. (c) (d) Beneficiary designations on life insurance, qualified plans, and IRAs should also be reviewed and probably revised to coordinate with the trust document. Other advantages of avoiding probate can include avoiding creditor claims and the spousal elective share. b. Trusts for Disability Planning 1. How will disability be defined?

8 Page 4 of 15 The concern is with mental incapacity or physical infirmity so severe as to preclude the grantor from adequately managing his or her financial affairs. a. Who will determine whether the definition has been met? (1) Physicians; (2) Family members; or (3) A combination of physicians and family members. b. What happens to the trust assets during disability? (1) How will the assets be managed? (2) Will the grantor s obligations and debts be paid? (3) Will the grantor s business affairs continue as he or she would have liked? 2. A grantor has unlimited options for instructing trustees to use trust assets during disability. Common instructions include using trust assets for the grantor s needs: a. Only; b. First, and then, if there are sufficient assets, the spouse s needs; c. First, and then, if there are sufficient assets, the spouse s needs, then other beneficiaries needs, in that order; d. First, the spouse s needs and other beneficiaries needs, based solely on needs; and e. Beneficiaries needs, based solely on need. c. Distributing Assets to Heirs at Appropriate Times 1. Minor children cannot legally own property. One of the following methods, in most states, must be used to hold property for minors: (a) (b) (c) (d) Uniform Gifts to Minors Act or Uniform Transfers to Minors Act accounts; Irrevocable trusts; Section 2503(c) trusts; or A court appointed custodian through a probate proceeding

9 Page 5 of Standard Will provisions require that upon the death of the testator s spouse, the estate will be divided equally among the children. (a) (b) (c) This ledger-type mentality creates a brick wall between minor children. One child s assets cannot be used to provide for another child with greater financial needs. Instead of creating separate trusts, clients may prefer that their assets be distributed to a common trust for the benefit of the children. The intent of the common trust is to use the family s financial resources for the children based upon their individual needs rather than financial equality. A well-designed common trust should contain several key provisions. (1) State that the children s needs are more important than equal distributions; (2) Explicitly allow the trustee to financially assist the guardians; (3) Allow advancements to children for extraordinary opportunities if trust assets are sufficient to provide for the other children s needs; (4) Reflect the grantor s decision as to when the common trust will end. (d) The common trust may be designed to end any number of ways, including when the youngest child reaches: (1) When the youngest child reaches an age determined by the client; or (2) When the youngest child completes college, or a designated age, whichever occurs first. (e) The common trust may be designed to continue as separate shares. The beneficiary may even serve as his or her own trustee if the trust is properly drafted. 3. Trust Distribution Options (a) One option is to distribute all assets immediately, free of trust. Of course, all control over these assets is lost

10 Page 6 of 15 (b) Another option is to keep the property in trust, but give the children whatever they want whenever they want it. (1) Some estate planners call this a convenience trust because the assets are left in trust for the beneficiary s convenience. (2) If the beneficiary leaves the assets in trust, they will likely be considered separate property and be safe from claims by the beneficiary s divorcing spouse. (3) The assets may be subject to the beneficiary s other creditors depending on how the trust is structured. (c) A third option is to make multiple distributions based on the beneficiary s age or the amount of time that has passed since the grantor s death. (1) Ten percent upon creation, 20% at age 30, 50% at age 35 and the balance at age 40. (2) Ten percent upon creation, 20% after five years, 50% after 10 years and the balance 15 years after the grantor s death. (d) Another option is to make no mandatory lifetime distributions, but the beneficiary is entitled to distributions for needs, including health, education, maintenance and support. (1) Because the assets remain in trust, they are generally protected from the beneficiary s creditors. (2) Some estate planners call this a protective trust. (3) The trustees can be given liberal discretion to provide for the beneficiary s needs or to allow the beneficiary access for extraordinary expenses deemed to be in the beneficiary s best interests. (e) A trust may also be set up to give the Trustee the authority to determine how and when assets should be distributed to the beneficiaries. (1) This is typically called a Discretionary Trust. (2) The Trustee is given absolute discretion as to when income and principal are distributed to a beneficiary

11 Page 7 of 15 (f) Beneficiaries with physical, mental or emotional disabilities may have significantly greater financial needs than other beneficiaries and require special planning. (1) A special needs beneficiary may need constant assistance, special education or extensive medical care. (2) It may be necessary to structure a separate trust to allow the special needs beneficiary to qualify for federal or state programs. These trusts are commonly referred to as special needs trusts. (g) Other special circumstances (1) Spendthrift (2) Substance Abuse (3) Gambling (4) Sudden acquisition of wealth problems d. Distributing Assets to the Appropriate Parties Bloodline Trusts The old saying, We can pick our friends, but we can t pick our family, is particularly applicable in the case of sons- and daughters-in-law. With 50% of all marriages and 60% of second marriages ending in divorce, this is not an uncommon estate planning problem. A bloodline trust is designed to keep wealth in the family. 1. Consider a bloodline trust when your child or his/her spouse is: (a) (b) (c) (d) (e) A spendthrift and/or poor money manager. Has difficulty holding a job. Has an addiction such as alcoholism, drugs or gambling. Has children from a previous marriage. Or where the client is just worried that the in-law may remarry if his or her child would die first. 2. Benefits of a bloodline trust

12 Page 8 of 15 (a) (b) (c) (d) Trust assets can be used only for descendants your children s or grandchildren s health, education, maintenance or support. Trust assets may never be available to a son- or daughterin-law, either during the marriage or in a divorce. Sometimes bloodline trusts are structured to provide a life interest to an in-law, but will stay in the bloodline when the in-law dies. Trust assets are protected from your child s (or his/her spouse s) creditors. The trust may terminate at your child s death, and the remaining principal can be paid to your child s descendants. e. Blended Family Issues 2. Tax Planning 1 Not utilizing trust planning in a remarriage situation is almost guaranteeing that the surviving spouse s family will be unjustly enriched. 2. Should QTIP style trusts be used in these situations, even if not needed for tax purposes? 3. Should the plan separate the families at the first spouse s death or tie them together until the surviving spouse dies? a. Credit-Shelter Trust: A Credit-Shelter trust may still be a necessary planning tool. An analysis of the client s situation must be made to determine if portability or a credit-shelter trust is the best option. b. Future appreciation: An analysis of the client s future projected net worth should be completed to determine if it will likely exceed the applicable exclusion amount(s). c. Portability ATRA made permanent the portability of any unused applicable exclusion amount for a surviving spouse of a decedent if the decedent s executor makes an election on a timely filed estate tax return. The unused exclusion amount is referred to as the deceased spousal unused exclusion amount or DSUE amount. The surviving spouse can use the DSUE amount either for gifts during life or for estate tax purposes at death. An

13 Page 9 of 15 individual can only use the DSUE amount from his or her last deceased spouse.. 1. A careful analysis of the client s situation is necessary in determining whether to rely solely on portability. (a) Reasons for Using Portability: (1) A first marriage to a competent spouse or no children existing by prior marriage of either spouse, (2) There are assets that would be difficult to administer in a trust. (3) Inequitable Wealth Allocation. Previously, if a client owned most of the marital assets, in order to utilize the estate exemption amount of the lesswealthy spouse, the client would have to retitle assets into the name of the less wealthy spouse. With portability, these transfers can be avoided if the client is willing to rely on portability to take advantage of the less wealthy spouse s exclusion amount if he or she should die first. (4) Qualified Retirement Plans. A client may leave the retirement and IRA benefits directly to the surviving spouse and rely on portability to be able to utilize the deceased spouse s unused estate tax exclusion amount at the surviving spouse s subsequent death. (5) As a post-mortem planning technique if no prior planning is completed. (b) Reasons for Using Trusts Even with Portability (and not rely on portability): (1) Growth in the assets is not excluded from the gross estate of the surviving spouse; (2) The unused exclusion from a particular predeceased spouse will be lost if the surviving spouse remarries and survives his or her next spouse; (3) There is no portability of the GST exemption;

14 Page 10 of 15 (4) There is no statute of limitations on the values used for portability whereas the statute of limitations does run on values if a bypass trust is funded at the first spouse s death; (5) Trust can be funded with discounted and/or hard to value assets; (6) Asset protection; (7) Professional management of assets can be required; and (8) No restrictions on the transfer of assets by the surviving spouse with portability. In a second marriage situation, assets that are left outright to the surviving spouse may be given to persons other than the first decedent-spouse s descendants. 2. Possible Compromise It is possible to leave the surviving spouse with the option of whether to rely on portability. A plan could be drafted to allow a surviving spouse to disclaim an outright bequest with a provision that the disclaimed assets pass to a bypass trust. Or, assets could be left to a QTIPable trust. Portability would be used if a full QTIP election is made (and the first deceased spouse s GST exemption could be used by making a reverse QTIP election under 2653(a)(3)). A bypass trust approach would be used if a partial QTIP election is made with a Clayton provision. d. Annual Gifting Program: A long term annual gifting program can effectively reduce future transfer taxes. A trust may be used to allocate GST exemptions or to protect family members. The gifting can be leveraged by using insurance or discount techniques. 3. Irrevocable Trusts a. SLATs (Spousal Lifetime Access Trusts) A client may wish to make gifts in a way that his/her spouse can retain use of the assets if needed. A popular way of using the increased gift exemption may be for a client to make gifts to a spousal lifetime access trust for the benefit of his/her spouse and children

15 Page 11 of 15 (1) The trust may be for the benefit of the client s spouse and children, but still not be included in the spouse s estate for estate tax purposes. (a) Beneficiaries (1) Spouse as a discretionary beneficiary with children as secondary beneficiaries; (2) Spouse could have a 5 or 5 annual withdrawal power; (3) Spouse could have a limited power of appointment exercisable at death or in life. Provide that no distributions can be made that would satisfy the donor s legal obligation of support. (b) Trustees (2) Other Issues (1) Spouse can serve as trustee if distributions to the spouse are limited to HEMS. (2) A trust protector can be given the discretion to add the donor of the trust at some time in the future. There should be no implied agreement with the protector as to how the power may be exercised. (a) Reciprocal Trust Issues: If drafting trusts for both spouses, avoid the reciprocal trust issue by initially making only one spouse a beneficiary. (b) Drafting for Divorce or Spouse Predeceasing: Include language providing a benefit only while the donee spouse is living and married to the grantor. (1) The trust may include an agreement that the gift will be taken into consideration in any divorce property settlement. (2) Life insurance on the donee-spouse can be acquired in case the donee-spouse dies before the grantor. b. Gifting Trusts (including Dynasty Gifting Trusts)

16 Page 12 of 15 (1) Irrevocable Trusts established to pass wealth from generation to generation without incurring transfer taxes such as estate and gift tax. (2) May be funded with annual gifts equal to annual gifting exclusion. (2) In Ohio, one can elect to opt-out of the Rule Against Perpetuities. (3) GST exemption allocated to assets gifted to the trust will make the trust corpus exempt from future transfer taxes to the extent there is a zero inclusion ratio. (4) The trust s operation is controlled by the trustee who is appointed by the grantor. C. IS THERE STILL A PLACE FOR LIFE INSURANCE IN YOUR CLIENT S ESTATE PLAN? 1. Inheritance Equalization a. Where the client wants one child to receive the entire business or real estate interest and liquid assets are not sufficient to equalize distributions. b. Second Marriage situations. ILIT in lieu of QTIP, especially if second spouse is significantly younger. c. Second Marriage situations. ILIT for children to provide anti-hovering dollars to children. 2. Business Buy-Sell Agreements 3. Income Replacement for Income that would have been Earned by the Decedent 4. Provide for the Income Tax Liability that will Ultimately be Due on Large Qualified Plans and/or IRAs. 5. Leverage Annual Gifting and GST Exemption. A client can allocate the GST exemption to annual premium payments. The total GST exemption allocated is then the premium paid and not the death benefit. This technique can create a trust that may be transfer tax exempt for generations to come

17 Page 13 of Cover Debt, Including Charitable Pledges of Decedent or Provide Security in Case an Outstanding Note is Called upon Death. D. ASSET PROTECTION PLANNING: THE OHIO LEGACY TRUST ACT (OHIO REVISED CODE CHAPTER 5816) 1. The traditional rule in the United States has been that a grantor of a self-settled asset protection trust could not protect his assets from creditors with a trust that the grantor formed himself or herself. 2. Ohio s new legislation repeals the rule against self-settled trusts. 3. A domestic asset protection trust is a self-settled irrevocable spendthrift trust. The grantor can be an income and principal beneficiary of the trust. After the transfers to the trust pass the statutory time period, the property held in the trust is protected from the claims of future creditors. 4. The transfer to the trust must be a qualified disposition: a. At least one qualified trustee (a person living in Ohio or Trust Company). b. Ohio law must govern the trust instrument. c. The trust must be irrevocable. d. The trust must contain a Spendthrift clause. 5. Fraudulent Transfers Transfers to a Legacy Trust must not be fraudulent. A transfer is fraudulent if the debtor made the transfer with the intent to hinder, delay or defraud creditors. a. Signs of Fraud 1. Concealed Transfer 2. Absence of post-transfer solvency 3. Transfer for less than real value 4. Transfers to spouse or children 5. Transfer during pendency of litigation 6. Transfer after claim arose

18 Page 14 of 15 b. How to avoid fraudulent transfers 1. Disclose the Transfer Legislation creates new personal property recording law in Ohio. Revised Code and create optional recording for any transfer. One should file a notice of transfer with the county recorder. The filing is a public record that constitutes constructive notice. 2. Retain Solvency One must be careful to not move so much of client s wealth that they are effectively impoverished. The attorney/advisor should make sure there are enough assets to cover daily living expenses. Also, if the assets left outside of the trust are not subject to creditor claims because they are exempt (regardless of how valuable they might be), that could be an indication that a fraudulent transfer has taken place. c. Statute of Limitations: 18 months 1. Future creditors must bring a cause of action against or involving any property that is the subject of a qualified disposition or is otherwise held by or for any trustee as part of a legacy trust, or against any trustee of a legacy trust within 18 months of the challenged transfer of assets to the Ohio Legacy Trust. R.C. 5816(B)(1) 2. Existing Creditors are required to bring an action by the later of (1) 18 months after the establishment of the Trust, or (2) 6 months after the establishment of the Trust could have been reasonably discovered by the creditor if the creditor has filed suit or makes a written demand for payment within three years after the establishment of the trust. 3. Burden of Proof is on the creditor to prove by clear and convincing evidence that the transfer to the Ohio Legacy Trust was fraudulent. d. English Rule regarding attorney fees: The losing party in fraudulent transfer dispute pays the other side s legal fees. 6. Exception for Creditors An exception creditor is a creditor who can make a claim against the trust assets. In Ohio, the only exception creditors are a Pre-Transfer Spouse and claims for

19 Page 15 of 15 Child Support. This fact creates an opportunity for pre-marital planning. Also, some states deem personal injury victims to be exception creditors; however, Ohio does not. 7. Retained Powers of Grantor: The Ohio Legacy Trust Act Permits the Grantor to Retain the Following Powers: a. Power to veto distributions; b. Limited Testamentary power of appointment; c. Right to receive income; d. Right to receive distributions from a CRT or GRAT; e. Power to invade up to 5% of trust principal annually; f. Right to receive discretionary distributions of income and principal; g. Right to remove and replace a trustee or advisor/protector; h. Right to use trust assets; i. Ability to be reimbursed for income taxes created by Trust income; and j. Discretion of Trustee to pay transfer taxes associated with Trust. E. CONCLUSION

20 Tax Planning Picking Up the Pieces

21 Current Gifts and Estate Tax Environment 1) Estate, Gift, and GST exemption of $5,000,000; 2) The top estate, gift, and generation-skipping transfer tax rate is 40%; 3) Portability is made permanent; 4) Top Income Tax Rate of 39.6%; 5) The top capital gains rate is increased to 20% for high income taxpayers; and 6) Permanent alternative minimum tax relief is enacted.

22 Estate and Gift Planning Techniques that Still Work a. Charitable Trusts b. Qualified Personal Residence Trusts (QPRTs) c. Family Limited Liability Companies (LLCs) d. Annual Gifting e. Gifting Trusts/ Spousal Lifetime Access Trusts (SLATs) f. Irrevocable Life Insurance Trusts (ILITs)

23 What works but may not work in the near future a. Discounts b. Perpetual Trusts c. Grantor Retained Annuity Trusts (GRATs)

24 STATE OF THE ESTATE PLANNING PROFESSION Non-Tax Reasons Why Estate Planning is Still Essential The Golden Age of Trusts was Long Before there was an Estate Tax.

25 Probate Avoidance a. Delay b. Public c. Cost d. Contests

26 Probate Avoidance Funding the revocable living trust during life may be necessary in order for the plan to satisfy the client s estate planning objectives and avoid probate. Funding has traditionally been the responsibility of the client, though expecting a client to fund his or her trust may be unrealistic.

27 Probate Avoidance An asset typically becomes trust property when its legal title is changed to reflect the transfer to the trustees. Once transferred, the legal owner should be similar to the following example. John Doe and Jane Doe, trustees, or their successors in trust, under the John Doe living trust dated April 15, 1999, and any amendments thereto.

28 Trusts for Disability Planning The concern is with mental incapacity or physical infirmity so severe as to preclude the maker from adequately managing his or her financial affairs.

29 Trust for Disability Planning Who will determine whether the definition has been met? 1) Physicians; 2) Family members; or 3) A combination of physicians and family members.

30 Trust for Disability Planning What happens to the trust assets during disability? 1) How will the assets be managed? 2) Will the Settlor s obligations and debts be paid? 3) Will the Settlor s business affairs continue as he or she would have liked?

31 Trusts for Disability Planning Common instructions include use trust assets for the Settlor s needs: a. Only; b. First, and then, if there are sufficient assets, the spouse s needs; c. First, and then, if there are sufficient assets, the spouse s needs, then other beneficiaries needs, in that order. d. First, the spouse s needs and other beneficiaries needs, based solely on needs; and e. Beneficiaries needs, based solely on need.

32 Distributing assets to heirs at appropriate times

33 Common Trust a) State that children s needs are more important than equal distributors; b) Explicitly allow the trustee to financially assist the guardians; c) Allow advancements to children for extraordinary opportunities if trust assets are sufficient to provide for the other children s needs; d) Reflect the Settlor s decision as to when the common trust will end.

34 Trust Distribution Options 1. Outright Distribution 2. Convenience Trust 3. Staggered Distributions 4. Protective Trust or Lifetime Trust 5. Discretionary Trust 6. Special Needs Trust

35 Other special circumstances Spendthrift Substance Abuse Gambling Sudden acquisition of wealth problems

36 Bloodline Trusts 50% of all marriages and 60% of second marriages end in divorce A bloodline trust is designed to keep wealth in the family, protecting your children and their descendants.

37 Bloodline Trust Consider a bloodline trust when your child or his/her spouse is: a) A spendthrift and /or poor money manager. b) Has difficulty holding a job. c) Has an addiction such as alcoholism, drugs or gambling. d) Has children from a previous marriage.

38 Bloodline Trust Benefits of a Bloodline Trust a) Trust assets can be used only for descendants your children s or grandchildren s health, education, maintenance, or support. b) Trust assets are never available to a son- or daughter-inlaw, either during the marriage or in a divorce. c) Trust assets are protected from your child s (or his/her spouse s) creditors. d) The trust may terminate at your child s death, and the remaining principal can be paid to your child s descendants.

39 Tax Planning A Credit-Shelter trust may still be a necessary planning tool. An analysis of the client s situation must be made to determine if portability or a credit-shelter trust is the best option.

40 Portability ATRA made permanent the portability of any unused applicable exclusion amount for a surviving spouse of a decedent if the decedent s executor makes an election on a timely filed estate tax return. The unused exclusion amount is referred to as the deceased spousal unused exclusion amount. ( DSUE amount. ) The surviving spouse can use the DSUE amount either for gifts during life or for estate tax purposes at death. An individual can only use the DSUE amount from his or her last deceased spouse.

41 Portability a) Reasons for Using Portability: 1) A first marriage to a competent spouse or no children existing by prior marriage of either spouse, 2) There are assets that would be difficult to administer in a trust 3) Inequitable Wealth Allocation. 4) Qualified Retirement Plans. 5) As a post-mortem planning technique if no prior planning is completed.

42 Reasons for Using Trusts Even With Portability (and not rely on portability): 1) Growth in the assets are not excluded from the gross estate of the surviving spouse, 2) The unused exclusion from a particular predeceased spouse will be lost if the surviving spouse remarries and survives his or her next spouse. 3) There is no portability of the GST exemption, 4) There is no statute of limitations on the values used for portability 5) Trust can be funded with discounted and/or hard value assets, 6) Asset Protection 7) Professional management of assets can be required, and 8) No restrictions on the transfer of assets by the surviving spouse with portability.

43 Possible Compromise: Portability A plan could be drafted to allow a surviving spouse to disclaim an outright bequest with a provision that the disclaimed assets pass to a bypass trust.

44 SLATs (Spousal Lifetime Access Trusts) A client may wish to make gifts in a way that his/her spouse can retain use of the assets if needed. A popular way of using the increased gift exemption may be for a client to make gifts to a spousal lifetime access trust for the benefit of his/her spouse and children.

45 SLATS Beneficiaries 1) Spouse as a discretionary beneficiary. Children as secondary beneficiaries. 2) Spouse could have a 5 or 5 annual withdrawal power 3) Spouse could have limited power of appointment exercisable at death or in life.

46 SLATS Trustees 1) Spouse can serve as trustee if distributions to the spouse are limited to HEMS. 2) A trust protector can be given the discretion to add the donor of the trust at some time in the future.

47 SLATS Other Issues a) Reciprocal Trust Issues b) Drafting for Divorce or Spouse Predeceasing: Include language providing a benefit only while the donee spouse is living and married to the grantor.

48 Gifting Trusts 1) Irrevocable Trusts established to pass wealth from generation to generation without incurring transfer taxes. 2) May be funded with annual gifts equal to annual gifting exclusion. 3) In Ohio can elect to pot-out of the Rule Against Perpetuities 4) GST exemption allocated to assets gifted to the trust will make the trust corpus exempt ratio.

49 Life Insurance Trusts 1) Inheritance Equalization 2) Business Buy-Sell Agreements 3) Income replacement 4) Allow Settlor to control insurance proceeds after death 5) Leverage annual gifting and GST exemption

50 Asset Protection Planning: Ohio s Legacy Trust ORC et seq. Ohio s new legislation repeals the rule against self-settled trusts. A domestic asset protection trust is a self-settled irrevocable spendthrift trust. The settlor can be an income and principal beneficiary of the trust. After the transfers to the trust pass the statutory time period, the property held in the trust is protected from the claims of future creditors.

51 The transfer to the trust must be a qualified disposition: a) At least one qualified trustee (Person living in Ohio or Trust Company) b) Ohio law must govern the trust instrument c) The trust must be irrevocable d) The trust must contain a Spendthrift clause

52 Fraudulent Transfers Badges of Fraud a) Concealed Transfer b) Absence of post-transfer solvency c) Transfer for less than real value d) Transfers to spouse or children e) Transfer during pendency of litigation f) Transfer after claim arose

53 How to Avoid Fraudulent Transfers Disclose the Transfer Retain Solvency

54 Statute of Limitations Future creditors must bring a cause of action within 18 months of the challenged transfer of assets Existing Creditors are required to bring an action by the later of (1) 18 months after the establishment of the Trust, or (2) 6 months after the establishment of the Trust could have been reasonably discovered by the creditor if the creditor has filed suit or makes a written demand for payment within three years after the establishment of the trust. Burden of Proof is on the creditor to prove by clear and convincing evidence that the transfer to the Ohio Legacy Trust was fraudulent. English Rule regarding attorney fees

55 Exception Creditors In Ohio, the only exception creditors are a Pre- Transfer Spouse and claims for Child Support

56 Thank you Missia H. Vaselaney, Esq. Taft Stettinius & Hollister LLP 200 Public Square, Suite 3500 Cleveland, OH