About the Editors... vii Table of Chapters...ix...xi Acknowledgments... xli Chapter 1 Introduction...1 Definitions...2 Estate Planning...2 Q 1.1 What is legal and tax planning for private clients?...2 Assets...3 Q 1.2 What are assets?...3 Transferring Assets...4 Q 1.3 How do individuals transfer assets?...4 The Role of a Trust in Estate Planning...5 Q 1.4 What is the trust and how does it figure in estate planning?...5 Types of Trusts...6 Q 1.5 What are the different types of trusts?...6 Transfer Taxes... 7 Q 1.6 What are transfer taxes?...7 Techniques for Transfer Tax Reduction...8 Q 1.7 What are the most common techniques for reducing transfer taxes?...8 Incapacity...9 Q 1.8 Q 1.9 What is planning for incapacity?...9 How can assets be protected from creditors?...9 Cross-Border Implications...10 Q 1.10 What estate planning issues arise for non-u.s. persons, non-u.s. assets and U.S. citizens residing abroad?...10 xi
Private Clients Legal & Tax Planning AB 2016 Chapter 2 Ownership, Title and Transfer of Assets...11 Forms of Individual Ownership Defined...12 Individual Ownership...12 Q 2.1 What are the different forms by which an individual may own assets during their life, and how do assets held in each manner pass at death?...12 Q 2.1.1 What is Individual Ownership?...12 Joint Tenancy with Right of Survivorship...13 Q 2.1.2 What is Joint Tenancy with Right of Survivorship?...13 Tenancy by the Entirety...15 Q 2.1.3 What is Tenancy by the Entirety?...15 Tenants in Common...16 Q 2.1.4 What is Tenants in Common?...16 In Trust for/payable or Transfer on Death...17 Q 2.1.5 What is In trust for/payable on Death/Transfer on Death?...17 Minor s Account...18 Q 2.1.6 What is Minors account: UTMA/UGMA?...18 Beneficiary Designation...19 Q 2.1.7 What is a Beneficiary Designation?...19 Forms of Ownership by an Entity...19 Q 2.2 How are assets treated when they are owned by an entity rather than an individual?...19 Q 2.2.1 How are assets held in a trust treated?...19 Q 2.2.2 How are assets held in a corporation or limited liability company treated?...20 Q 2.2.3 How are assets held in a partnership treated?...20 Ownership in Community Property States...20 Q 2.3 How is ownership of assets treated in a community property state?...20 xii
Chapter 3 The Will...21 Purpose and General Considerations...22 Q 3.1 What is a will?...22 Q 3.1.1 Is a will a necessary part of a person s estate plan?...24 Q 3.1.2 Are there types of assets that cannot pass by will?...25 Q 3.1.3 Should a settlor of a lifetime trust also make out a will?...25 Q 3.1.4 Should a testator ever have more than one will?...26 Q 3.1.5 How may a testator revoke or amend a will?...26 Q 3.1.6 When should a testator change an existing will?...27 Q 3.1.7 Should a testator hire a lawyer to draft a will?...27 Q 3.1.8 How should a testator prepare for a meeting with a lawyer to discuss drafting a will?...28 Legal Requirements and Execution Formalities...29 Q 3.2 What are the legal requirements of a will?...29 Q 3.2.1 What are the execution formalities?...29 Common Provisions for Passing Probate Property...30 Q 3.3 What types of provisions does a will contain for passing a testator s probate property?...30 Q 3.3.1 How may a testator bequeath tangible personal property?...31 Q 3.3.2 How may a testator devise real property?...33 Q 3.3.3 Do any special considerations apply when a testator devises real property located in a state that is not his or her domicile?...35 Q 3.3.4 How may a testator provide a cash legacy to a beneficiary?...35 Q 3.3.5 How may a testator dispose of the residuary estate?...36 Q 3.3.6 How may a testator provide for a surviving spouse?...36 Q 3.3.7 May a testator disinherit a surviving spouse?...37 Q 3.3.8 How does a testator s divorce typically affect the provisions of an existing will?...38 Q 3.3.9 How may a testator provide for his or her children?...39 Q 3.3.10 Does a testamentary trust have any disadvantages compared to a lifetime trust?...41 Q 3.3.11 How does a testator provide for a surviving pet?...42 Selection and Duties of an Executor...43 Q 3.4 Who may a testator select to be an executor?...43 Q 3.4.1 What are the duties of an executor?...44 xiii
Private Clients Legal & Tax Planning AB 2016 Q 3.4.2 Q 3.4.3 May a person or institution selected as an executor refuse to serve?...44 Is an executor paid for his or her service to the estate?...45 Selection and Duties of a Guardian for Minor Children...45 Q 3.5 Who may a testator select to be a guardian for his or her minor children?...45 Q 3.5.1 What are the duties of a guardian?...47 Probate and Administration...49 Q 3.6 What is probate?...49 Q 3.6.1 If so desired, can a person structure his or her estate to avoid probate altogether?...50 Q 3.6.2 What is estate administration?...52 Q 3.6.3 How long does an estate administration last?...54 Q 3.6.4 Is an estate administration expensive?...55 Disclaiming an Interest in Testator s Estate... 56 Q 3.7 Can a beneficiary disclaim his or her interest in a testator s estate?...56 Q 3.7.1 What is a qualified disclaimer?...56 Q 3.7.2 Why would a beneficiary disclaim an interest in a testator s estate?...56 Chapter 4 The Trust...59 Creating a Trust...60 Q 4.1 Q 4.2 How is a trust created?...60 Must a settlor s intention to create a trust be in writing?...60 Types of Trusts...61 Q 4.3 Q 4.4 What are the forms of trusts?...61 What type of property may be transferred to a trust?...61 Beneficiaries...62 Q 4.5 Who may be beneficiaries of a trust?...62 Trust Purposes...63 Q 4.6 For what purposes may a trust be established?...63 xiv
Duties of the Trustee...63 Q 4.7 What duties does a trustee have?...63 Q 4.7.1 What is an example of a trustee s breaching the duty of loyalty?...64 Q 4.7.2 What is involved with the trustee s duty to exercise reasonable care and skill?...64 Q 4.7.3 What is the duty of impartiality?...64 Q 4.7.4 What are other important trustee duties?...65 Powers of the Trustee...66 Q 4.8 What are the trustee s powers in connection with the trust property?...66 Rights of the Beneficiaries...66 Q 4.9 What are a beneficiary s rights if a trustee breaches a duty?...66 Taxation of Trusts...67 Q 4.10 Q 4.11 Q 4.12 How are trusts taxed for income tax purposes?...67 What are the general income tax rules for irrevocable trusts?...67 What deductions are allowed for trusts?...68 Calculation of Trust Income... 68 Q 4.13 Q 4.14 How is trust income calculated?...68 What is Distributable Net Income (DNI)?...69 Powers of Appointment...69 Q 4.15 Q 4.16 Q 4.17 What is a power of appointment?...69 What is a general power of appointment?...70 What is a limited power of appointment...70 Grantor Trusts...71 Q 4.18 What is a grantor trust?...71 Duration of a Trust...73 Q 4.19 For how long can a trust continue?...73 Changes in Trustee Duties...74 Q 4.20 What modern changes have been made by some states to the trustee s duties?...74 xv
Private Clients Legal & Tax Planning AB 2016 Chapter 5 The Estate Tax...77 Historical Development...78 Q 5.1 How did the estate tax come into being?...78 Definition...79 Q 5.2 What is the estate tax?...79 Value of Includible and Excludible Property...79 Q 5.3 Q 5.4 Q 5.5 What property is included in the decedent s gross estate?...79 What property is generally excluded from the gross estate?...80 What is the fair market value of property?...80 Federal Estate Tax Calculation...80 Q 5.6 How is the federal tax on estates calculated?...80 Deductions...81 Q 5.7 What deductions are available to reduce the estate tax?...81 Q 5.7.1 What is the so-called marital deduction?...81 Q 5.7.2 What is the charitable deduction?...81 Q 5.7.3 What is the state death tax deduction?...81 Exclusion Amount...82 Q 5.8 What is the applicable gift and estate tax exclusion amount and the applicable credit amount? What is the top tax rate?...82 Sample Computations...83 Q 5.9 Q 5.10 How exactly is the federal estate tax computed?...83 How is the estate tax reported?...86 Treatment of Joint Property...86 Q 5.11 Q 5.12 Q 5.13 How is joint property includible in the taxable estate?...86 May a surviving spouse use a predeceased spouse s unused exclusion from estate tax?...87 Will a same-sex spouse be considered a surviving spouse for purposes of the marital deduction and DSUE for estate tax purposes?...88 Alternate Valuation...89 Q 5.14 What is alternate valuation and when is it used?...89 State Estate Taxes...89 Q 5.15 What estate taxes are levied by the individual states?...89 xvi
Chapter 6 The Gift Tax...93 General Considerations...94 Q 6.1 What constitutes a gift?...94 Q 6.1.1 What types of property are subject to the gift tax?...94 Q 6.1.2 Who pays the gift tax?...94 Q 6.1.3 Are all gifts taxable?...95 Q 6.1.4 Are there state gift taxes?...95 Nontaxable Gifts and Deductions...95 Q 6.2 What types of gifts are nontaxable or deductible?...95 Q 6.2.1 What is an annual exclusion gift?...95 Q 6.2.2 Is there a limit to the number of annual exclusion gifts a donor can make during his or her lifetime?...96 Q 6.2.3 What if the gift exceeds the amount of the annual exclusion?...97 Q 6.2.4 Do gifts to a trust qualify for the annual exclusion?...98 Q 6.2.5 Are payments of a donee s medical expenses and school tuition nontaxable?...99 Q 6.2.6 What is the marital deduction?...99 Q 6.2.7 Are gifts to charities deductible?...100 Q 6.2.8 Are gifts to political organizations nontaxable?...100 Q 6.2.9 Are gifts by nonresident noncitizens taxable?...101 Gift Tax Exemption and Rate Brackets...101 Q 6.3 What is the current gift tax exemption?...101 Q 6.3.1 Is there any relation between the gift tax and estate tax exemption?...101 Q 6.3.2 What is the rate of gift tax?...102 Q 6.3.3 Are there advantages to making lifetime gifts instead of testamentary bequests?...102 Q 6.3.4 Are there possible disadvantages to making lifetime gifts instead of testamentary bequests?...105 Reporting of Gifts and Computation of the Gift Tax...106 Q 6.4 How does a donor report taxable gifts?...106 Q 6.4.1 How is the gift tax computed?...106 Q 6.4.2 What is gift-splitting by spouses?...108 Q 6.4.3 How are non-cash gifts valued?...109 Q 6.4.4 Is there a statute of limitations for assessment of the gift tax?...109 xvii
Private Clients Legal & Tax Planning AB 2016 Select Gift Tax Considerations...110 Q 6.5 When is a gift by check complete?...110 Q 6.5.1 When is a gift of shares of stock complete?...110 Q 6.5.2 When is a gift of real estate complete?...110 Q 6.5.3 Is a taxable gift made upon creation of a tenancy with a donee?...110 Q 6.5.4 Is a taxable gift made upon creation of a joint bank account with a donee?...111 Q 6.5.5 Is the gratuitous transfer of a partial interest in property a taxable gift?...112 Q 6.5.6 Can a donor retain powers over a gift?...112 Q 6.5.7 Is an indirect gratuitous transfer of property a taxable gift?...113 Q 6.5.8 Does a power of appointment implicate the gift tax?...114 Q 6.5.9 Gifts made within the three years preceding the donor s death...117 Chapter 7 The Generation-Skipping Transfer Tax...121 Definition...122 Q 7.1 What is the Generation-Skipping Transfer Tax?...122 Lifetime Exemption...123 Q 7.2 Is there a federal exemption for the GST tax, like exemptions for gift and estate taxes described in prior chapters?...123 Includible Transfers...124 Q 7.3 What transfers are subject to GST tax and what are grandfathered trusts?...124 Excludible Transfers...125 Q 7.4 Are certain transfers excluded from being subject to GST tax?...125 Determining the Generation of Transferor and Transferee...126 Q 7.5 How do you know what generation someone is in?...126 Q 7.5.1 Who is the transferor?...127 Q 7.5.2 Can the transferor ever change?...127 Q 7.5.3 What if spouses split gifts?...128 Q 7.5.4 What is a skip person?...128 Q 7.5.5 What is a non-skip person?...128 xviii
Determining Generation Within Families...128 Q 7.6 How do you assign generations within families?...128 Q 7.6.1 Who is considered a family member?...128 Q 7.6.2 Generational assignment within families...129 Predeceased Ancestor Rule...130 Q 7.6.3 What is the predeceased ancestor exception?...130 Determining Generation Outside of Families...131 Individuals...131 Q 7.7 How do you assign generations outside of these family relationships?...131 Entities...132 Q 7.8 How do you assign generational levels when property is being transferred to a trust or other entity, rather than outright to an individual?...132 Interest in Property or Trust...132 Q 7.9 What is an interest in property or an interest in trust?...132 Types of GST Transfers...133 Q 7.10 What are the three types of generation-skipping taxable transfers?...133 Direct Skip...133 Q 7.10.1 What is a direct skip?...133 Taxable Termmination...134 Q 7.10.2 What is a taxable termination?...134 Taxable Distribution...136 Q 7.10.3 What is a taxable distribution?...136 Calculating the GST Tax...137 Q 7.11 How is the GST Tax Calculated?...137 Q 7.11.1 What is the applicable fraction?...137 Q 7.11.2 What is the inclusion ratio?...138 Q 7.11.3 What is the applicable rate?...139 Q 7.11.4 What is the taxable amount?...139 xix
Private Clients Legal & Tax Planning AB 2016 Allocation of the GST Tax Exemption...139 Voluntary Allocation...139 Q 7.12 How do you voluntarily allocate GST tax exemption to a transfer?...139 Automatic Allocation...140 Q 7.13 What is the automatic allocation of GST tax exemption?...140 Late Allocation...142 Q 7.14 What is a late allocation of GST tax exemption?...142 Estate Tax Inclusion Period (ETIP)...143 Q 7.15 What is the estate tax inclusion period, or ETIP, and how does it affect the allocation of GST tax exemption?...143 Qualified Severance...144 Q 7.16 What is a qualified severance?...144 Reverse QTIP Election...145 Q 7.17 What is the reverse QTIP election?...145 Delaware Tax Trap...145 Q 7.18 What is the Delaware tax trap, and why are you mentioning it in this chapter on GST?...145 Chapter 8 Life Insurance...147 Definitions and Insurance Categories...148 Q 8.1 What is life insurance?...148 Q 8.1.1 What is term life insurance?...148 Q 8.1.2 What is permanent life insurance and how does it differ from term coverage?...148 Q 8.1.3 What is Premium Financed Life Insurance?...149 Q 8.1.4 What is Private Placement Life Insurance?...149 Taxation...150 Q 8.2 Are life insurance policies subject to income tax during the life of the insured?...150 Q 8.2.1 How is life insurance taxed at the death of the insured?...150 xx
Life Insurance Trust...151 Q 8.3 What is a life insurance trust and what is its role in estate planning?...151 Q 8.3.1 How are life insurance trusts used as a part of a gifting plan?...151 Q 8.3.2 May life insurance trusts be created for both existing and new policies?...151 Q 8.3.3 How is an existing insurance policy transferred by the insured to a life insurance trust treated?...151 Q 8.3.4 Why is it significant that the ownership of a life insurance trust is not attributed to the insured?...152 Q 8.3.5 Can the gifts to the life insurance trust be designed to qualify for the annual exclusion?...152 Q 8.3.6 Can the terms of a life insurance trust be changed after it is created?...153 Q 8.3.7 What happens at the death of the insured?...153 Q 8.3.8 What are the income tax issues with life insurance trusts?...153 Chapter 9 Retirement Accounts...155 Leila E. Dal Pos In General...156 Q 9.1 What types of retirement plans exist?...156 Qualified Retirement Plan...156 Q 9.2 What is a Qualified Retirement Plan?...156 Defined Benefit Plan...157 Q 9.3 What is a Defined Benefit Plan?...157 Types of Defined Contribution Plans...157 Q 9.4 What is a Defined Contribution Plan?...157 Q 9.4.1 What is an Employee Stock Ownership Plan (ESOP)?...157 Q 9.4.2 What is a Keogh plan?...158 Q 9.4.3 What is a 403(b) plan?...158 Q 9.4.4 What is a pension plan?...158 Q 9.4.5 What is a profit-sharing plan?...158 IRAs...158 Q 9.5 What is an Individual Retirement Account (IRA)?...158 Q 9.5.1 What is a Traditional IRA?...158 xxi
Private Clients Legal & Tax Planning AB 2016 Q 9.5.2 Q 9.5.3 What is a Roth IRA?...159 What are SEP-IRA and SIMPLE IRA?...159 Benefits of a Retirement Plan...159 Q 9.6 What are the Primary Benefits of a retirement plan?...159 Early Withdrawal Penalties...159 Q 9.7 Is there a penalty for early withdrawals from a retirement plan?...159 Q 9.7.1 Are there exceptions to the 10% early withdrawal penalty?...160 Taxation on Distributions...161 Q 9.8 How are retirement plan distributions income taxed?...161 Minimum Required Distribution Rules...161 Q 9.9 What are the minimum required distribution rules during the lifetime of the participant?...161 Q 9.10 What are the Minimum Required Distribution rules after the death of the participant?...161 Q 9.10.1 What is the Designated Beneficiary of a retirement account?...162 Q 9.10.2 What if the Designated Beneficiary is the surviving spouse?...162 Q 9.10.3 What if the Designated Beneficiary is not the surviving spouse?...162 Q 9.10.4 How does a trust qualify as a Designated Beneficiary?...164 Additional Types of Trusts...165 Q 9.11 What additional kinds of trusts are there?...165 Q 9.11.1 What is a conduit trust?...165 Q 9.11.2 What is an accumulation trust?...165 Q 9.12 What if the plan requires a faster payout than the law allows?...166 Spousal Rights...166 Q 9.13 Does a participant s spouse have unique rights over the participant s retirement account?...166 Spousal Planning Options...166 Q 9.14 What planning options are available for spouses?...166 A Trust As Beneficiary...168 Q 9.15 In what situations should a trust be named as beneficiary of a qualified retirement plan or IRA?...168 xxii
Portability...169 Q 9.16 What is portability?...169 Q 9.16.1 How does portability impact estate planning using retirement benefits?...169 Qualifying As a QTIP Trust...170 Q 9.17 How does a trust for the benefit of a surviving spouse qualify as a QTIP Trust when it owns retirement assets?...170 Income Tax Implications...171 Q 9.18 Q 9.19 What is the income tax on retirement assets paid to a trust?...171 Are there ways to minimize trust income taxes?...171 Charitable Giving...173 Q 9.20 Is it beneficial to name a charity as beneficiary of a retirement account?...173 Q 9.21 What options are available to a participant who would like to make charitable gifts after the participant s death?...173 Q 9.22 What common planning options are available for participants who wish to make lifetime gifts of retirement assets to charity?...174 Q 9.22.1 What are qualified charitable distributions (QCD)?...175 Chapter 10 QPRTs, GRATs and Other Irrevocable Inter Vivos Trusts in Tax Planning...179 In General...180 Q 10.1 What are inter vivos trusts and how are they used for tax planning?...180 Types of Inter Vivos Trusts...181 Q 10.2 What kinds of specialized inter vivos trusts are set up by individuals for tax-planning purposes during their lifetimes?...181 Minor s Trust...182 Q 10.3 What is a minor s trust?...182 Crummey Trust...182 Q 10.4 What is a Crummey trust?...182 xxiii
Private Clients Legal & Tax Planning AB 2016 QPRTs...184 Q 10.5 What is a Qualified Personal Residence Trust (QPRT)?...184 Q 10.5.1 What are the tax-planning advantages of a QPRT?...184 Q 10.5.2 What are the requirements for a QPRT?...185 Q 10.5.3 How is a QPRT treated for estate tax purposes?...186 Q 10.5.4 What happens if the property is sold during the QPRT term?...187 Q 10.5.5 How are carrying costs covered during the QPRT term?...187 GRATs and GRUTs...188 Q 10.6 What are grantor retained annuity trusts (GRATs) and grantor retained unitrusts (GRUTs)?...188 Q 10.6.1 What is the purpose of a GRAT?...189 Q 10.6.2 What are the tax-planning advantages of a GRAT?...190 Generation-Skipping Trust...191 Q 10.7 What is a generation-skipping trust?...191 Dynasty Trust...192 Q 10.8 What is a Dynasty Trust?...192 Chapter 11 Marital Deduction and Other Tax-Qualified Trusts...197 Marital Deduction...198 Definition and Benefits...198 Q 11.1 What is the marital deduction and how does it affect tax planning?...198 Q 11.1.1 What are the benefits of deferring estate taxes?...199 Requirements...200 Q 11.1.2 Q 11.1.3 Q 11.1.4 Q 11.1.5 What is required in order for an interest to qualify for the unlimited estate tax marital deduction?...200 Who qualifies as a surviving spouse?...200 What does the requirement that the property pass to the surviving spouse mean?...200 What is the special rule for limited survivorship restriction?...201 Nondeductible Terminable Interest Rule...201 Q 11.1.6 What is a terminable interest? What is a nondeductible terminable interest?...201 xxiv
Exceptions...202 Q 11.1.7 Q 11.1.8 Q 11.1.9 Q 11.1.10 What is the general power of appointment trust exception to the nondeductible terminable interest rule?...202 What is the exception to the nondeductible terminable interest rule for a legal life estate with a general power of appointment?...203 What is the exception to the nondeductible terminable interest rule for a life insurance or annuity payment coupled with a general power of appointment?...203 What is the exception to the nondeductible terminable interest rule for estate trusts?...204 Qualified Terminable Interest Property Trust...204 Q 11.2 What is the exception to the nondeductible terminable interest rule for Qualified Terminable Interest Property?...204 Q 11.2.1 May a legal life estate qualify for QTIP treatment?...205 Q 11.2.2 What is the federal government s administrative position on whether an affirmative election is necessary in order for a trust to qualify for QTIP treatment?...205 Q 11.2.3 What is a protective election in the context of a QTIP election?...206 Q 11.2.4 What amount of estate tax is attributable to a QTIP trust?...206 Portability of Unused Exclusion...206 Q 11.3 What is portability?...206 Requirements...207 Q 11.3.1 Q 11.3.2 Q 11.3.3 What are the requirements for portability?...207 What is a protective election in the context of a portability election?...208 What are the relaxed requirements for a complete and properly prepared return and when do they apply?...208 Most Recently Deceased Spouse Rule...209 Q 11.3.4 Q 11.3.5 Q 11.3.6 What amount of unused exemption is a surviving spouse permitted to use?...209 At what point in time is the most recently deceased spouse determined?...210 Are gifts utilizing DSUE amounts from multiple deceased spouses ever permitted?...210 xxv
Private Clients Legal & Tax Planning AB 2016 Computing the DSUE Amount...210 Q 11.3.7 Q 11.3.8 Q 11.3.9 How must the DSUE amount available be computed?...210 When may the surviving spouse use the DSUE amount after the deceased spouse s death?...211 When does the DSUE amount apply in determining the surviving spouse s exclusion amount?...211 Application to Nonresident/Noncitizens...212 Q 11.3.10 How do the portability rules apply to nonresidents who are not citizens?...212 Planning Suggestions...212 Q 11.3.11 Q 11.3.12 How can portability be used in planning?...212 What are the advantages of portability?...213 Application to Credit Shelter Trusts...213 Q 11.3.13 What are the advantages of credit shelter trust planning?...213 Qualified Domestic Trust...214 Q 11.4 How are transfers to foreign spouses treated for federal gift and estate tax purposes?...214 Requirements and Timing...214 Q 11.4.1 Q 11.4.2 Q 11.4.3 What are the requirements for a QDOT?...214 How are transfers to a QDOT after the decedent s death treated?...215 When should a protective assignment to a QDOT be made?...215 How to Make the QDOT Protective Election...216 Q 11.4.4 How is the QDOT protective election made?...216 Taxable/Nontaxable Events During QDOT Existence...216 Q 11.4.5 What are some of the taxable and nontaxable events during the existence of a QDOT?...216 Impact of Becoming a Citizen...217 Q 11.4.6 What is the effect on the QDOT estate tax when the survivor becomes a U.S. citizen?...217 Computing the Estate Tax...217 Q 11.4.7 How is the estate tax imposed on the QDOT computed?...217 xxvi
Small Business Trusts...218 Subchapter S Corporation...218 Q 11.5 What is a Subchapter S corporation?...218 Qualified Subchapter S Trust...219 Q 11.5.1 What is a Qualified Subchapter S Trust (QSST)?...219 Electing Small Business Trust...220 Q 11.5.2 What is an Electing Small Business Trust (ESBT)?...220 Chapter 12 Asset Protection, Special Needs and Directed Trusts...223 Self-Settled Asset Protection Trust...224 Q 12.1 Can a settlor establish a trust naming the settlor as a beneficiary?...224 Q 12.1.1 Can a settlor protect trust assets from his or her future creditors?...224 Spendthrift Trust...226 Q 12.2 Can a settlor prevent a profligate beneficiary from squandering trust assets?...226 Q 12.2.1 How should a spendthrift trust be structured to achieve maximum protection of trust assets from creditors?...227 Q 12.2.2 Can a settlor create a fully discretionary spendthrift trust but still provide guidance regarding distributions?...228 Q 12.2.3 Does a fully discretionary spendthrift trust always protect a beneficiary s interest from creditors?...230 Spray Trust...230 Q 12.3 Can a settlor ensure that a particular beneficiary receives greater support from a trust than another beneficiary?...230 Q 12.3.1 How are spray trusts typically used?...231 Q 12.3.2 Are there any advantages to using a spray trust?...232 Q 12.3.3 Are there any disadvantages to using a spray trust?...232 Special/Supplemental Needs Trust...233 Q 12.4 Can a settlor provide financial support to a disabled beneficiary while preserving the beneficiary s eligibility for means-tested government benefits?...233 xxvii
Private Clients Legal & Tax Planning AB 2016 Q 12.4.1 Q 12.4.2 Q 12.4.3 Q 12.4.4 Who may establish a special needs trust?...233 How are special needs trusts typically funded?...234 What types of distributions can be made from a special needs trust without jeopardizing the disabled beneficiary s SSI and/or Medicaid eligibility?...235 What happens to a special needs trust when the disabled beneficiary dies?...235 Directed Trust...236 Q 12.5 Can a settlor divide trustee responsibility among two or more individuals or institutions to allow for specialized roles?...236 Q 12.5.1 Why might a settlor prefer to use a directed trust?...237 Q 12.5.2 What are the specialized roles created by a directed trust?...237 Q 12.5.3 What are the responsibilities of the administrative trustee?...238 Q 12.5.4 What are the responsibilities of the investment adviser?...238 Q 12.5.5 What are the responsibilities of the distribution advisor?...239 Q 12.5.6 What are the responsibilities of the trust protector?...240 Blind Trust...240 Q 12.6 Can a specialized trust be used to shield a settlor from accusations of insider trading or conflict of interest?...240 Q 12.6.1 Who must be blind in the context of a self-settled blind trust used by a corporate insider?...241 Nominee Trust...242 Q 12.7 Can a specialized trust be used to conceal the identity of a real property owner?...242 Q 12.7.1 Is there any other reason to use a nominee trust?...242 Chapter 13 Charitable Giving...245 Charitable Gifts...246 Tax Treatment Cash...246 Q 13.1 What is the tax treatment of gifts to charitable organizations?...246 Tax Treatment Appreciated Property...247 Q 13.2 What is the tax treatment for gifts of appreciated property to tax-exempt organizations?...247 xxviii
Charitable Gift Annuity...248 Q 13.3 What is a charitable gift annuity?...248 Split-Interest Gifts...248 Q 13.4 What are split-interest gifts?...248 Charitable Remainder Trusts...249 Q 13.5 What is a charitable remainder trust?...249 CRAT...249 Q 13.5.1 What is a charitable remainder annuity trust?...249 CRUT...250 Q 13.5.2 What is a charitable remainder unitrust trust?...250 Charitable Lead Trusts...252 Q 13.6 What is a charitable lead trust?...252 CLAT...253 Q 13.6.1 What is a charitable lead annuity trust (CLAT)?...253 CLUT...253 Q 13.6.2 What is a charitable lead unitrust (CLUT)?...253 Pooled Income Fund...254 Q 13.7 What is a pooled income fund?...254 Chapter 14 Private Foundations...255 Definition...257 Q 14.1 What is a private foundation?...257 Q 14.1.1 Why are the rules governing private foundations so complicated?...257 Disqualified Persons...258 Q 14.2 Who are disqualified persons in the context of private foundations?...258 Self-Dealing...259 Q 14.3 Are self-dealing transactions with disqualified persons allowed?...259 xxix
Private Clients Legal & Tax Planning AB 2016 Penalty...260 Q 14.3.1 What is the penalty for self-dealing?...260 Examples of Self-Dealing...260 Q 14.4 What are examples of prohibited self-dealing transactions?...260 Sale, Exchange, or Leasing of Property...260 Q 14.4.1 What restrictions are there on the sale, exchange, or leasing of property?...260 Lending of Money or Other Extension of Credit...261 Q 14.4.2 What restrictions are there on the lending of money or other extension of credit?...261 Furnishing of Goods, Services, or Facilities...262 Q 14.4.3 What restrictions are there on the furnishing of goods, services, or facilities?...262 Payments of Compensation or Expenses...262 Q 14.4.4 What restrictions are there on paying compensation or expenses?...262 Other Transfer or Use of the Income or Assets of a Private Foundation...265 Q 14.4.5 What restrictions are there on other transfers or use of the income or assets of a private foundation?...265 Payments to Government Officials...265 Q 14.4.6 What restrictions are there on payments to government officials?...265 Exceptions for Corporate Charities...266 Q 14.4.7 Are there exceptions to the self-dealing rules for corporate charities?...266 Distribution Requirements...266 Q 14.5 What are the distribution requirements for a private foundation?...266 Permissible Distributions...268 Q 14.6 What kinds of distributions are permitted for charitable purposes from a private foundation?...268 Grants to Organizations...268 Q 14.6.1 What kinds of grants to organizations are permitted?...268 xxx
Grants to Individuals...272 Q 14.6.2 What kinds of grants to individuals are permitted?...272 Expenditures for Non-Charitable Purposes...273 Q 14.6.3 Is any expenditure for non-charitable purposes permitted?...273 Influencing Legislation...273 Q 14.6.4 May a charitable foundation spend money to influence legislation?...273 Influencing Elections and Carrying on Voter Registration Drives...274 Q 14.6.5 What restrictions are there on trying to influence elections or carry on voter registration drives?...274 Penalties...275 Q 14.6.6 What are the penalties for violating these restrictions?...275 Excess Business Holdings...275 Q 14.7 What are excess business holdings?...275 Jeopardizing Investments...276 Q 14.8 What are jeopardizing investments?...276 Federal Income Tax Liability...279 Q 14.9 Is a private foundation subject to federal income tax?...279 Federal Filing and Publicity Requirements...280 Q 14.9.1 What federal tax return filing and publicity requirements apply to private foundations?...280 Private Foundations Versus Public Charities...281 Q 14.10 What is a public charity?...281 Q 14.10.1 How does a public charity differ from a private foundation?...282 Private Foundations Versus Donor-Advised Funds...283 Q 14.11 What is a donor-advised fund?...283 Q 14.11.1 How does a donor-advised fund differ from a private foundation?...285 Appendix 14A IRS Sample Conflict of Interest Policy...289 xxxi
Private Clients Legal & Tax Planning AB 2016 Chapter 15 Family Limited Partnerships, Loans and Other Intra-Family Transactions...295 Family Limited Partnerships...296 Q 15.1 What is a family limited partnership?...296 Tax Advantages of FLPs...297 Q 15.1.1 Q 15.1.2 Q 15.1.3 What are the tax planning advantages of FLPs?...297 What steps should be taken in order to maximize the potential estate and gift tax benefits of FLPs?...297 Why is the tax planning associated with family arrangements like FLPs so complex?...298 Protocols to Be Followed...300 Q 15.1.4 What protocols should be followed for existing and new FLPs?...300 Intra-Family Loan...300 Q 15.2 What is an intra-family loan?...300 Tax Advantages...301 Q 15.2.1 What are the tax planning advantages of an intra-family loan?...301 Other Advantages...302 Q 15.2.2 Are there nontax reasons for making family loans?...302 Sale of Asset for Promissory Note...303 Q 15.3 What is the sale of an asset to a grantor trust for a promissory note?...303 Q 15.3.1 Does the IRS approve of sales to grantor trusts?...304 How Structured...305 Q 15.3.2 Q 15.3.3 What is the typical structure of a grantor trust used in a sale transaction?...305 How is the promissory note structured in a sale transaction?...305 Income Tax Consequences...306 Q 15.3.4 What are the income tax consequences of a sale to a grantor trust?...306 xxxii
Gift Tax Consequences...307 Q 15.3.5 What are the gift tax consequences of a sale to a grantor trust?...307 Estate Tax Consequences...307 Q 15.3.6 What are the estate tax consequences of a sale to a grantor trust?...307 Generation-Skipping Transfer Tax Consequences...308 Q 15.3.7 What are the generation-skipping transfer tax consequences of a sale to a grantor trust?...308 Appendix 15A Family FLP Decision Tree for New and Existing Entities...311 Appendix 15B Sale to Grantor Trust In Exchange for Balloon Promissory Note...313 Chapter 16 Valuation of Assets...315 Valuation Standard... 316 Q 16.1 What is the standard for determining the value of property for gift and estate tax purposes?...316 Determining Fair Market Value... 316 Q 16.2 How is fair market value determined for easily valued property?...316 Appraisals...317 Q 16.3 Q 16.4 Q 16.5 What about more difficult to value property?...317 Is an appraisal always necessary for difficult to value property? What are the consequences of failure to get a qualified appraisal?...319 What might be needed in addition to an appraisal?...319 Valuation Discounts...320 Q 16.6 Q 16.7 Q 16.8 Q 16.9 Q 16.10 Q 16.11 What are valuation discounts?...320 Does a similar discount apply to minority interests in businesses?...321 What are discounts for lack of marketability?...322 Are there other discounts that may be applicable?...322 Do valuation discounts apply to family limited partnerships?...323 What level of discounts can I get?...323 xxxiii
Private Clients Legal & Tax Planning AB 2016 Attorney s Role...324 Q 16.12 What is the attorney s role in the appraisal process?...324 Chapter 17 Marital and Family Issues...327 Spousal Rights...328 Q 17.1 What rights and claims does one spouse have against the assets of the other spouse?...328 Common Law States...328 Q 17.1.1 Q 17.1.2 What are the rights of a spouse against the other spouse during the marriage and on divorce in a common law state?...328 What are the rights of a surviving spouse against the estate of the other spouse in a common law state?...329 Community Property States...330 Q 17.1.3 What are the rights of one spouse against the assets of the other during the marriage, in divorce and on death in community property states?...330 Rights of Children...331 Q 17.1.4 What are the rights of children against the estates of their parents at death?...331 Marital Agreements...331 Q 17.1.5 Q 17.1.6 Q 17.1.7 Q 17.1.8 What is the purpose of a premarital agreement?...331 What are the requirements of a valid marital agreement?...332 What are other types and purposes of marital and cohabitation agreements?...333 What role do premarital and postmarital, domestic and living together agreements have in estate planning?...333 Blended Family Issues...334 Q 17.2 What are blended families and what issues do they face in their estate planning matters?...334 Q 17.2.1 What are some important considerations for blended families to consider with respect to their estate planning?...334 Q 17.2.2 What do blended families need to consider when thinking about the DSUE, and how should drafting address it?...335 xxxiv
Q 17.2.3 What is an independent trustee, and what value does an independent trustee bring to the estate planning for a blended family?...336 Impact of Marriage, Divorce or Birth of a Child...337 Q 17.3 How does marriage, divorce or the birth or adoption of children affect the validity of estate planning documents?...337 Same-Sex Couples Considerations...338 Q 17.3.1 What special considerations are there for same-sex couples in estate planning matters?...338 Chapter 18 International Issues...341 In General...342 Q 18.1 Q 18.2 How are U.S. persons taxed on foreign income and assets?...342 How are non-u.s. persons taxed by the United States?...343 Defining U.S. Person and Non-U.S. Person...343 Q 18.3 Who is a U.S. person and who is a non-u.s. person?...343 Definition of a U.S. Person...344 U.S. Citizens...344 Q 18.3.1 Who is a U.S. citizen?...344 U.S. Residents...344 Q 18.3.2 Who is a U.S. resident?...344 Definition of a Non-U.S. Person...347 Q 18.4 How are non-u.s. persons subject to U.S. income tax?...347 Determining U.S. Source Income...347 Q 18.4.1 Q 18.4.2 What is U.S. source income for U.S. income tax purposes?...347 What is not U.S. source income for U.S. income tax purposes?...348 Impact of Tax Treaties...348 Q 18.4.3 How do treaties affect taxation of U.S. source income?...348 U.S. Estate, Gift and Generation-Skipping Transfer Taxes...349 Q 18.5 How are non-u.s. persons subject to U.S. estate, gift and generation-skipping transfer tax?...349 xxxv
Private Clients Legal & Tax Planning AB 2016 U.S. Situs Assets...349 Q 18.5.1 What are U.S. situs assets subject to U.S. estate tax for non-u.s. persons?...349 Computing Estate Tax...350 Q 18.5.2 How is the U.S. estate tax computed for non-u.s. persons?...350 Gift Tax...351 Q 18.5.3 How is the U.S. gift tax imposed for non-u.s. persons?...351 Generation-Skipping Transfer Tax...352 Q 18.5.4 How is the U.S. generation-skipping transfer tax imposed for non-u.s. persons?...352 U.S. Trust Versus Foreign Trust...353 Q 18.6 What is the difference between a U.S. trust and a foreign trust?...353 Foreign Trusts...354 Q 18.7 How does the United States tax a foreign trust and its beneficiaries?...354 Q 18.7.1 What is a foreign grantor trust and how is it taxed?...354 Q 18.7.2 What is a foreign non-grantor trust and how is it taxed?...355 Foreign Corporations...357 Q 18.8 How is the income of foreign corporations owned by U.S. persons taxed?...357 Q 18.8.1 What is a Controlled Foreign Corporation and how is it taxed?...357 Q 18.8.2 What is a Passive Foreign Investment Company and how is it taxed?...357 Reporting of Foreign Assets, Trusts and Transactions...358 Q 18.9 What reports must U.S. persons file regarding their foreign assets, trusts and transactions?...358 Expatriation...360 Q 18.10 What is expatriation and what are the tax consequences?...360 Q18.10.1 Who is a Covered Expatriate?...360 Q 18.10.2 What are the tax consequences to being a Covered Expatriate?...361 Q 18.10.3 What are the consequences of giving up a green card?...362 xxxvi
Chapter 19 Transfers to the Non-U.S. Citizen Spouse...363 In General...364 Q 19.1 How Are Bequests to a Non-U.S. Citizen Spouse Taxed?...364 Qualified Domestic Trust...365 How Created...365 Q 19.2 How is a Qualified Domestic Trust created?...365 QDT Requirements...366 Q 19.3 What are requirements for a valid Qualified Domestic Trust?...366 Tax Treatment of QDT...366 Q 19.4 What is the tax treatment of a Qualified Domestic Trust?...366 Computing the QDT Tax...367 Q 19.5 How is the QDT tax computed?...367 Special Circumstances...367 Q 19.6 Q 19.7 What happens if the surviving spouse becomes a U.S. citizen?...367 How are gifts to a non-u.s. citizen spouse treated?...368 Jointly Held Property...368 Q 19.8 How is property held jointly with a non-u.s. citizen spouse treated?...368 Chapter 20 Incapacity...371 Incapacity Generally...372 Q 20.1 How is incapacity defined?...372 Q 20.1.1 Why is it advisable to plan for incapacity?...372 Q 20.1.2 How does a person properly plan for incapacity?...373 Durable Power of Attorney...373 Q 20.2 What is a durable power of attorney and its general requirements?...373 Q 20.2.1 Where is a durable power of attorney effective?...374 Q 20.2.2 What powers does a principal typically grant an agent under a durable power of attorney?...374 Q 20.2.3 Can a principal grant estate planning powers to an agent under a durable power of attorney?...374 xxxvii
Private Clients Legal & Tax Planning AB 2016 Q 20.2.4 Q 20.2.5 Q 20.2.6 Q 20.2.7 Can a principal name more than one agent under a durable power of attorney?...376 What criteria are useful in selecting an agent under a durable power of attorney?...376 What advantages and disadvantages pertain to using a durable power of attorney?...377 Is a durable power of attorney available that is effective only if the principal becomes incapacitated?...377 Revocable Trust...378 Q 20.3 What is a revocable trust and its general requirements?...378 Q 20.3.1 How is a revocable trust useful for planning for incapacity?...378 Q 20.3.2 What is a standby revocable trust?...378 Q 20.3.3 Is using a revocable trust preferable to using a durable power of attorney to plan for incapacity?...379 Living Will...380 Q 20.4 What is a living will and its general requirements?...380 Q 20.4.1 What medical treatments are addressed in a living will?...380 Q 20.4.2 When do the provisions of a living will become operative?...381 Q 20.4.3 Why is it useful to have a living will?...381 Q 20.4.4 Should a person execute more than one living will if he or she moves to or spends significant time in another state?...382 Healthcare Proxy/Durable Power of Attorney for Healthcare...382 Q 20.5 What is a healthcare proxy and its general requirements?...382 Q 20.5.1 What powers does a principal typically grant to an agent under a healthcare proxy?...383 Q 20.5.2 What criteria are useful in selecting an agent under a healthcare proxy?...383 Q 20.5.3 Is it advisable to name a co-agent under a healthcare proxy?...383 Q 20.5.4 Can a person use a healthcare proxy to provide for organ donation?...384 Guardianship...384 Q 20.6 What is a guardianship?...384 Q 20.6.1 Is a guardianship ever preferable to incapacity planning?...384 xxxviii
Q 20.6.2 Q 20.6.3 Q 20.6.4 Who may be appointed as a guardian?...385 What are the duties and powers of a guardian?...385 Does the guardian have the ward s estate planning powers?...386 Chapter 21 Effectively Managing the Estate Planning Team...389 The Estate Planning Team...390 The Client...390 Q 21.1 Who is in charge of the estate planning team?...390 The EP Attorney...391 Q 21.2 What is the role of the estate planning attorney?...391 Other Attorneys...391 Q 21.3 What other attorneys are involved in the estate planning process?...391 The Accountant...392 Q 21.4 What is the role of the accountant?...392 Bankers...392 Q 21.5 What role do bankers play in estate planning?...392 Trust Officers...393 Q 21.6 What is the role of the trust officer?...393 Family Office...393 Q 21.7 What is a family office?...393 Private Trust Company...394 Q 21.8 What is a private trust company?...394 The Appraiser...395 Q 21.9 What is the role of the appraiser?...395 Appendix A Form 706...397 xxxix