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HOW TO ADVISE YOUR CLIENTS UNDER
THE NEW ESTATE TAX LAW
A Presentation by:
Alan S. Gassman, J.D., LL.M.
[email protected]
Monday, February 7, 2011
Powerpoint presentation and other materials prepared by:
Alan S. Gassman, J.D., LL.M., Jerome M. Hesch, J.D., MBA,
Kenneth J. Crotty, J.D., LL.M. and Christopher J. Denicolo, J.D., LL.M.
2009
2010
2011-2012
2013 and
thereafter
$13,000
$13,000
$13,000 (unless
adjusted to $14,000)
$13,000 (unless
adjusted to
$14,000)
Tuition and Medical
Direct Payment
Exemption
Unlimited
Like Before
Unlimited
Like Before
Unlimited
Like Before
Unlimited
Like Before
Lifetime Exemption
$1,000,000
$1,000,000
$5,000,000
(+ CPI in 2012)
$1,000,000
$3,500,000 (less
what is used of
$1,000,000
exemption above)
Unlimited—see
footnote*
$5,000,000** (less
portion of used
lifetime gifting
exemption)
$1,000,000 (less
portion of used
gifting
exemption?)
45%
35%*
35%
55%
Available
Available
Available initially (at
least, not sure about
rest of 2011-2012)
????
No
No
Yes
Not as presently
legislated.
Annual Exclusion Gifts
(Don’t Count at All)
Estate Tax Exemption
Estate Tax Rate
Discounts and
Installment
Sales/GRAT’s, etc.
Portability of First Dying
Spouse’s $5,000,000
Exemptions
*Although the default is a $5,000,000 exemption, with a 35% tax rate, an election can be made to have no estate tax apply with respect to
decedents dying in 2010, but the income tax “stepped-up” basis is limited for larger estates.
**In addition to the above, the amount that passes estate tax free ($10,000,000 per couple) will increase with the cost of living beginning in
2012 in $10,000 increments.
2

Applies January 1, 2010 to December 31, 2012.

Allows up to $5 million per person to pass estate tax free.

Lifetime gifting exemption raised to $5 million for 2011 and 2012.

The above items are to be adjusted for inflation beginning in 2012!

Estate tax scheduled to go back to 2001 $1 million gifting and death exemptions and rates on January 1, 2013!

Estate tax rates cut to 35%.

Retroactivity for 2010 estates, with the option to elect out of the estate tax and instead be under the limited carryover basis regime.

Portability of the $5,000,000 Estate Tax Exemption on the first dying spouse, if such spouse dies in 2011 or 2012.

Elimination of carryover basis regime (unless an election is made to have no estate tax and for the carryover basis regime apply with
respect to a 2010 estate) .

The State Death Tax Deduction continues to apply to estates of decedents dying in 2010, 2011 or 2012, instead of the State Death Tax
Credit.

Taxation of nonresident non-citizens (NRNCs) and Qualified Domestic Trusts (QDOT’S) is unchanged – only a $60,000 exemption for
NRNCs, and QDOTs are still subject to estate tax as if the assets thereof were included in the estate of the first dying spouse with
allowance for all applicable credits of the first dying spouse (unless the surviving spouse becomes a U.S. citizen before his or her
subsequent death).
3
According to Forbes Magazine, the number of Americans
and their net worth as of January 2009 was as follows:
$1 Billion
$5 Million
$1 Million
$500,000
357
840,000
6,700,000
11,300,000
This doesn’t take into account the value of principal
residences, life insurance, or increases of approximately
26% in 2009 and approximately
13% in 2010 in the S&P 500.
4
PROTECTIVE TRUST LOGISTICAL CHART
During both
spouse’s
lifetimes:
Upon first
death in
2011:
During
surviving
spouse’s
remaining
lifetime:
Upon
second
death:
After
deaths of
both
spouses:
First Dying Spouse’s
Revocable Trust
$5,000,000*
(Adjusted upward for
inflation after 1/1/2011)
Family
(By-Pass)
Generation Skipping Trust
(Not taxed in surviving spouse’s
estate)
Remaining
Assets
QTIP NonGST Trust
(Marital Deduction
Trust that is not
generation skipping)
Surviving spouse
can have the
right to redirect
how assets as
distributed on
second death.
Generation Skipping
Trusts for Children
Benefits children and
grandchildren.
Not estate taxable in their estates.
Surviving Spouse’s
Revocable Trust
Surviving Spouse’s Revocable Trust
(Will include assets owned jointly on first
death)
$5,000,000*
(Adjusted upward after
1/1/2011)
Children’s
Trust (or
distributions)
Benefits children.
Taxable in their estates.
Generation Skipping
Trusts for Children
(Will merge with first dying
spouse’s Generation Skipping
Trusts shown on left)
Benefits children and
grandchildren.
Not estate taxable in their estates.
Remaining
Assets
Children’s
Trust (or
distributions)
Benefits children.
Taxable in their estates.
*Assumes first spouse dies in 2011 and that the surviving spouse dies in a later year when the estate tax exemption is still $5,000,000.
*The Unified Credit Exemption is $5,000,000 in 2011 and 2012, and is scheduled to go back to $1,000,000 in 2013.
5
Gifting Allowances
Gifting of up to $13,000 per person per year still does not need
to be reported or cause use of the lifetime gifting exemption.
Discounts with respect to use of limited partnerships, LLCs, and
other vehicles were not changed.
In addition there continues to be an unlimited gifting allowance
for medical and educational expenses paid directly to medical
providers, facilities and for tuition education institutions under
Internal Revenue Code Section 2503(e).
6
Lifetime Reportable
Gifting Exemption
Since 2001, each person has had the ability to gift up to $1,000,000 during
his or her lifetime, above and beyond the $13,000 per year per person
allowance described above. Use of the $1,000,000 exemption causes a
reduction in the amount that can pass estate tax free on a dollar for dollar
basis.
The gifting exemption for 2011 and 2012 has been increased to
$5,000,000! This will allow many clients to shift income-producing assets
to their children so that the children will be subject to income tax at lower
rates than the parents would have. This may permit the children to gift
the assets back to the parents if and when ever mutually agreed.
The parents may retain constructive control of the gifted assets by using
limited partnerships, irrevocable trusts, and interrelated structures.
It may be possible to establish asset protection trusts which are outside
of the estate of the donor, yet may be used for the benefit of the donor if
there are hard times ahead. These will become popular and are not
difficult to establish.
7
The Clawback Question
 Assume that a taxpayer utilizes his entire $5,000,000 lifetime gifting exemption to
make a $5,000,000 gift in 2011 free of gift tax.
 Further assume that the taxpayer later dies in 2013 when the estate tax
exemption has decreased to $1,000,000, and the estate tax rate has increased
to 55%.
 Will the taxpayer have to pay estate tax based upon $4,000,000 of the
$5,000,000 gift that he made in 2011?
 Although many commentators have expressed concern about a risk of this
“exemption clawback,” the language of the Internal Revenue Code (and the
relevant legislative history) indicates that any taxable gifts made by a taxpayer
during his lifetime should not be subject to estate tax in the year of the taxpayer’s
death.
•
See Section 2001 (g), as enacted by the new law, and Section 2001(b)(2) as it existed
immediately prior to the enactment of EGTRRA in 2001.
•
See also Joint Committee on Taxation, General Explanation of the Tax Reform Act of
1976, pages 527-528 (December 29, 1976).
8
The $5,000,000 Per Person Death Passage
Exemption Will Now Be “Portable” If Both Spouses
Die After 12/31/2010, or Thereafter If Extended
Under prior estate tax law, the first dying spouse had to
establish a trust or pass the $3,500,000 worth of assets
directly to non spouse beneficiaries (and/or in non spousal
trusts) in order to preserve use of the first dying spouse’s
allowance. Under the new law, a surviving spouse will be
able to use whatever portion of the allowance was not used
by the first dying spouse. For example, if the first dying
spouse leaves $1,000,000 outright to the children and the
rest to the surviving spouse, then depending upon
circumstances the surviving spouse may be able to leave
$9,000,000 without estate tax on the second death,
assuming that this law continues after 2012.
9
THE $5,000,000 LIFETIME GIFT AND ESTATE TAX ALLOWANCES
WILL BE ADJUSTED FOR CHANGES IN THE CONSUMER PRICE
INDEX BEGINNING 2012 BASED UPON ALL CHANGES IN THE
INDEX OCCURING AFTER 1/1/2011. THE PORTABILITY
EXEMPTION (DSUEA) WILL NOT INCREASE WITH CPI AFTER
THE DEATH OF THE FIRST DYING SPOUSE. THE GOVERNMENT
USES THE CPI FOR ALL URBAN CUSTOMERS, AS PUBLISHED
BY THE UNITED STATES DEPARTMENT OF LABOR.
10
For Individuals Who Die or Died in 2010
A.
Unless elect out as described below, subject to federal estate tax based upon a $5,000,000 death
exemption and a 35% estate tax rate.
Must file estate tax return if gross assets exceed $5,000,000.
The $5,000,000 exemption reduced for prior use of $1,000,000 lifetime gifting exemption.
B.
Can elect to instead be subject to original 2010 carryover basis rules. File election later of: (i) 9
months after the date of death; or (ii) 9 months after December 17, 2010, which is Saturday,
September 17, 2011, and allocate up to $1,300,000 ($4,300,000 if married) for date of death basis
increases, and pay no estate tax.
C.
Example – John Smith dies unmarried with a $6,000,000 net estate. The estate can pay $350,000
in estate tax and receive a full step-up, or may alternatively elect to limit basis step-up to
$1,300,000, and pay no estate tax.
NOTE – Disclaimers of assets that were transferred on the death of a decedent that are normally limited
to 9 months will be permitted through September 17, 2011 where the decedent died 2010 but before
December 18, 2010.
11
Professor Hesch’s ExampleCarryover Basis for an Individual Who Died in 2010?
Senior died in 2010 owning a commercial office building, the only asset includible in his estate.
Value:
$14,000,000
Land
$40,000,000
Building
$54,000,000
Mortgage:
($44,000,000)
Equity:
$10,000,000
_______________________________________________________________________________
History - Acquired in 1984 for $20,000,000
Allocated $4,000,000 to Land
Allocated $16,000,000 to Building
Depreciated $16,000,000
Current Adjusted Tax Basis $4,000,000
_______________________________________________________________________________
If the property is sold for $54,000,000, $16,000,000 of the gain will be ordinary income, and
$34,000,000 of the gain will be capital gain.
_______________________________________________________________________________
From a tax savings standpoint, is it better for Senior’s estate to be subject to
the estate tax and receive a stepped-up basis on the building, or to elect to
have no estate tax apply and receive a carryover basis?
12
TO DIE OR NOT TO DIE IN 2010 –
THAT WAS THE QUESTION
Is it better to have an unlimited exemption in 2010 or is it better to afford
the surviving spouse the opportunity to “port” the deceased spouse’s
unused estate tax exemption if the decedent dies in 2011?
The tax law will sometimes make people do things that they normally
would not have done, including timing of death. Several commentators
have expressed warnings that large discontinuities between estate tax
laws provide incentive to change the timing of death, which causes a
phenomenon that is termed “death elasticity.”
United States Representative Cynthia Lummis (R-WY) has said that
some of her Wyoming constituents were so worried about the
reinstatement of federal estate taxes that they planned to discontinue
dialysis and other life extending medical treatments so that they could
die before December 31, 2010.
13
The 2010 GST Transfer Opportunity for December 2010
[News Item – Discussion of Allocation of GST Exemption Where A Zero
Percent GST Gift Was Made In 2010 To A GST Exempt Trust]
The following was drafted in December to explain this opportunity:
There is a lot of confusion on the GST opportunity for 2010.
It allows use of what remains of the client’s $1,000,000 unified credit without using GST exemption for “full skip”
transactions.
Past the $1,000,000 a gift tax is incurred, which many people do not understand, and most people will not want to pay.
It does not have to be to a “grandchildren only” trust. It can be to a 529 Plan or UGMA account for a grandchild or
grandchildren, but the brokerage world has a hard time filling out forms and having these completed by 12/31.
The following is a memo that goes into some detail on this, a sample Letter of Agreement to facilitate 2010 gifting is
attached.
We welcome any questions on this.
----------------------------------------------------------------------------------------------------------------------------------------------------------------The Memo:
Congress has recently passed legislation that raises the estate tax exemption to $5,000,000 per person on January 1,
2011. In addition, the lifetime gift tax exemption and the generation skipping transfer (“GST”) exemption will also be
$5,000,000 per person on January 1, 2011.
14
The 2010 GST Transfer Opportunity Continued
GST tax generally applies to gifts to grandchildren and more remote descendants. When a donor makes a gift to grandchildren, the
donor normally allocates some of his or her GST exemption to the gift so that the gift is not subject to GST tax. This allocation uses
some of the donor’s lifetime GST exemption. This allocation is similar to the allocation of a donor’s lifetime gift tax exemption to
“taxable gifts” to avoid the actual payment of gift tax on the gifts.
A planning opportunity exists prior to January 1, 2011 for donors who would like to make gifts to or for grandchildren. Until the end of
2010, the GST tax rate is 0% instead of 35%. If a donor makes a gift to grandchildren before the end of the year, the gift may utilize
some of the donor’s lifetime gift tax exemption. In 2010, the donor may elect to have the gift be subject to GST tax and no GST tax
will actually be due because the tax rate is 0%. This will save the $5,000,000 GST exemption for later use by the donor.
For example, if a donor makes a gift of $500,000 to a trust or a 529 Plan for grandchildren and has already used his annual exclusion
for the grandchildren, the gift would use $500,000 of the donor’s lifetime gift tax exemption, but none of the donor’s GST exemption if
the gift is made before the end of 2010. An example 529 Plan transaction document is attached.
If the gift is made during 2010, the donor does not need to use any of his or her GST exemption because no GST tax is due on the
transfer ($500,000 x 0% = $0). This allows the donor to keep the $500,000 of unallocated GST exemption for future use, without
having to pay $175,000 ($500,000 x 35% = $175,000) in GST tax if the gift was made in 2011 and no GST exemption was allocated.
Therefore, this donor would be able to transfer $500,000 more on death to a trust that could benefit his child or children and not be
subject to estate tax at the level of the child or children. This is the advantage of preserving GST exemption while making gifts to
grandchildren that might otherwise have become subject to a tax at the level of the child.
If the gift was made on or after January 1, 2011, $500,000 of the donor’s GST exemption would be allocated to the gift to avoid the
imposition of GST tax. This allocation would reduce the remaining GST exemption of the donor to $4,500,000 ($5,000,000 $500,000 = $4,500,000) assuming that none of the donor’s GST exemption had been used on prior gifts. If the donor did not want to
allocate GST exemption, the gift would be subject to GST tax at a 35% rate and the donor would need to pay $175,000 ($500,000 x
35% = $175,000).
15
Single Person with $15,000,000 Estate Tax and Lifetime Gifting Allowance
Without 2010 $500,000 Grandchild Gift
With 2010 $500,000 Grandchild Gift
$15,000,000
$10,000,000
$15,000,000
$5,000,000
Taxed in
Children’s
Estate When
They Die
Not Taxed in
Children’s
Estate When
They Die
CHILDREN AND GRANDCHILDREN
$9,500,000
$5,000,000
Taxed in
Children’s
Estate When
They Die
Not Taxed in
Children’s
Estate When
They Die
CHILDREN AND GRANDCHILDREN
Taxed in Children's Estate: $10,000,000
Taxed in Children's Estate: $9,500,000
Not Taxed in Children's Estate: $5,000,000
Not Taxed in Children's Estate: $5,000,000
$500,000
Not Taxed in
Children’s
Estate When
They Die
GRANDCHILDREN
Passing to Grandchildren: $500,000
Net result – less assets passing that would
become subject to federal estate tax on the death
of children.
Net result – More value passing to grandchildren without being
subject to generation skipping tax or tax at the children’s level.
16
WHAT IF THE CLIENT ADDED TO A GST EXEMPT
TRUST IN 2010 TO TRY TO TAKE ADVANTAGE OF
THE ZERO GST TAX RULE?
If a client made a GST transfer to a GST-exempt irrevocable trust that only
benefits grandchildren and more remote descendants, and the client did not
allocate GST exemption to the trust, then the client may have unintentionally
caused the trust to not be 100% GST exempt.
17
DISCUSSION OF ASSETS ADDED TO GST EXEMPT
TRUSTS DURING THE YEAR 2010
2009
2010
Grantor establishes and funds Trust with $100,000 gift.
Grantor $100,000 Gift
Grantor allocates $100,000 of
GST exemption with respect to
this gift. After the gift, the Trust
is 100% GST exempt
($100,000 of GST exemption
allocated; $100,000 of assets
at time of 2009 gift).
Grantor gifts assets to Trust to take advantage of 0%
GST tax rate.
Grantor $200,000 Gift
IRREVOCABLE TRUST
FOR GRANDCHILDREN
AND THEIR
DESCENDANTS ONLY
(a "Skip Person" Trust)
Grantor does not allocate any GST
exemption with respect to this gift.
No GST tax results because the
GST tax rate is 0% in 2010.
However, the Trust is now only 1/3
GST exempt ($100,000 GST
exemption allocated, $300,000 total
assets in the Trust at time of 2010
gift), assuming no growth in
$100,000 gift to the Trust in 2009.
IRREVOCABLE TRUST
FOR GRANDCHILDREN
AND THEIR
DESCENDANTS ONLY
(a "Skip Person" Trust)
18
DISCUSSION OF ASSETS ADDED TO GST EXEMPT
TRUSTS DURING THE YEAR 2010 – PAGE 2
2011
Trust makes distributions to Grandchild and Great-Grandchild.
$10,000 Distribution to Grandchild
Trust distributes $10,000 each to Grandchild and
to Great-Grandchild.
The entire $10,000 distribution to Grandchild is
GST tax-free despite Grantor's 2010 Gift to the
Trust because of the "move down" rule under IRC
Section 2653(a). All future distributions to
Grandchild will also be free of GST tax.
IRREVOCABLE TRUST
FOR GRANDCHILDREN
AND THEIR
DESCENDANTS ONLY
(a "Skip Person" Trust)
$10,000 Distribution to Grandchild
Of the $10,000 distribution to Great-Grandchild,
$6,667 will be subject to GST tax, and $3,333 will
be GST tax-free. This is because the Grantor did
not allocate GST exemption with respect to his
2010 transfer to the Trust.
SOLUTION: Allocate GST exemption to 2010 Gift to Trust, which would cause the Grantor have
wasted the 2010 GST tax planning opportunity but would spare the incurrence of GST tax.
Another option to consider is a qualified severance under IRC Section 2642 and the Regulations
thereunder.
19
New Vocabulary
 Basic Exclusion Amount
•
The $5,000,000 exclusion for estate tax, as increased with the CPI beginning in
2012.
 DSUEA
•
The Deceased Spousal Unused Exclusion Amount – the amount of the
taxpayer’s most recently deceased spouse’s Basic Exclusion Amount not used by
him or her, assuming that he or she dies after December 31, 2010.
 Applicable Exclusion Amount
•
The sum of (1) the Basic Exclusion Amount plus (2) the Deceased Spousal Unused
Exclusion Amount.
NOTE- Before the new estate tax law, the Applicable Exclusion Amount was not
specifically defined, but was listed for the applicable years, and was described in
relation to the unified credit which operated to shield an estate from tax.
 Porting and Ported
• “Porting” means the act of transferring a portability allowance to a
surviving spouse by estate tax return election.
• When the porting is completed the exclusion has been “ported”.
20
Selected Deadlines
Tax Filing Deadlines:
1. For estates of decedents dying after December 31, 2009 but before January 1, 2011:
Unless an estate elects out of the Estate Tax System to have no estate tax apply, the estate
tax return must be filed by the later of: (i) 9 months after the date of death; or (ii) 9 months
after December 17, 2010, which is Saturday, September 17, 2011. The Monday thereafter is
September 19, 2011.
2. Disclaimers:
Qualified Disclaimers with respect to property received by reason of the death of a decedent
in 2010 must be may be filed by the later of : (i) 9 months after the date of death; or (ii) 9
months after December 17, 2010, which is Saturday, September 17, 2011. The disclaimer
will be “qualified “for tax purposes assuming that state law permits a disclaimer later than 9
months from the date of death.
3. GST Allocations:
Generation Skipping Tax allocation returns for transfers in trust or otherwise made after
December 31, 2009 and before December 17, 2010 can be made within 9 months after
December 17, 2010, which is Saturday, September 17, 2011. We now know that transfers
made to GST exempt trusts in 2010 can be GST exempt if sufficient GST exemption is
allocated to the transfer.
4. Portability Estate Tax Return and Election
The estate of a first dying spouse must file an estate tax return and affirmatively elect to have
portability apply, notwithstanding whether the first dying spouse would have had a taxable
estate.
21
 Clients can make significant gifts under the new $5,000,000
lifetime allowance, even if the gifting allowance goes down to
$1,000,000 in 2013.
 These gifts can be to trusts that benefit the spouse and
descendants (“dynasty trusts”).
Many clients already have these types of trusts in place.
 Clients can transfer income-producing assets to children who
have a lower income tax rates.
 Review current planning with advisers to maximize the
advantages of this legislation.
22
MRS. $7,000,000 NET WORTH
Before Planning
After Planning
Mrs.
$7,000,000
Net Worth
Mrs.
$7,000,000
Net Worth
Mrs.
$7,000,000
Net Worth
Revocable
Trust
Mrs.
$7,000,000
Net Worth
Revocable
Trust
Gifting Trust
97.5%
Expected tax:
$2,000,000 x 35%
= $700,000
2.5%
FLP
$7,000,000
x 97.5% x
.65 =
$4,436,250
$7,000,000
x 2.5% x
.65 =
$113,750
Expected tax $0.
23
MRS. $7,000,000 FROZEN
Mrs.
$7,000,000
Net Worth
Mrs.
$7,000,000
Net Worth
Revocable
Trust
$4,413,000
Note
Gifting Trust
Forget everything to the left and simply marry
someone who will predecease her and not leave her
assets? :)
96.5% LP
.5% GP
$7,000,000 worth of assets
2% LP
.5% GP
$200,000
Seed Capital
FLP
$7,000,000
x 97.5% x
.65 =
$4,436,250
$7,000,000
x 2.5% x
.65 =
$113,750
Gift trust purchased 97% LP interest for 97% x
$7,000,000 x .65 = $4,413,500.
9 year $4,413,500 interest-only Note payable at
1.53% interest = $67,526.55 per year.
Note guaranteed by children.
24
GRAT/PROMISSORY NOTE/SCIN/PRIVATE ANNUITY ALTERNATIVES
FEBRUARY 2011
CLIENT AGE 70
25
The “Estate Tax Proof” $15,000,000 Family
Husband
Wife
Wife's
Revocable
Trust
Husband's
Revocable
Trust
49%
Children's
Trust
2%
49%
FAMILY
LIMITED
PARTNERSHIP
On first death 49% x $15,000,000 x .65 = $4,777,500.
All fits into Credit Shelter Trust
26
More About Portability
1. Spouse must be a U.S. citizen or resident.
2. No minimum term of marriage or anti-manipulation provisions.
3. Usable by the surviving spouse upon death, and probably for lifetime, but does not provide a GST exemption increase.
Interestingly, the new Code provision does not directly address whether the surviving spouse may use the DSUEA to
make lifetime gifts free of gift tax. However, the applicable Joint Committee on Taxation Report specifically provides that a
surviving spouse may use his or her DSUEA “for lifetime gifts or for transfers at death.”
So, if the surviving spouse dies with a $10,000,000 Applicable Exclusion Amount and wants to maximize benefits without
the children being taxed, he or she can only leave $5,000,000 to a GST Trust for children and grandchildren, and the
remaining $5,000,000 would have to be used on a Non-GST basis, and will thus be expected to be taxed at the children’s
levels.
4. Unlike the surviving spouse’s own estate tax exemption, the DSUEA is NOT adjusted for inflation after the first death.
5. If surviving spouse (“Client”) remarries then
a. If new spouse dies before Client, Client will have the DSUEA only of the new spouse.
b. If Client dies before new spouse, new spouse can only receive up to $5,000,000 of the first dying spouse’s
DSUEA but may use the rest in a Credit Shelter Trust.
6. The first dying spouse must file an estate tax return, even if not up to the taxable exclusion amount ($5,000,000) and
the statute of limitations on the ability of the IRS to challenge the DSUEA amount begins to run only after the surviving
spouse has filed an estate tax return.
IMPORTANT – Provide in the Will or Trust that the fiduciaries are required to file an estate tax return for the first dying
spouse, if requested by the surviving spouse, and have the surviving spouse be responsible for the costs thereof. Agree
upon a personal representative or special administrator for this.
7. These rules sunset after 2012.
27
A married couple might provide for all assets to go to the surviving spouse, or to “lock up” up to $5 million on the first death to
facilitate a “credit shelter trust.”
CREDIT SHELTER
TRUST
SURVIVING SPOUSE
INHERITS ALL ASSETS
– USE PORTABILITY OF
HIS OR HER $5 MILLION
EXEMPTION
1. Uses the first dying spouse’s $5 million Generation
Skipping Tax exemption (the ability to benefit children
without being taxed at their level) – this is lost if
portability is used.
1. No preservation of first dying spouse’s GST
exemption, although a “reverse QTIP” election may be
able to be made in some situations to preserve some
of the first dying spouse’s GST exemption.
2. Assets can increase in value, to hopefully outpace
inflation
2. No CPI or other value increase after first dying spouse’s
death.
3. Better investment opportunities can be channeled to
shelter trust assets.
3. Combined assets will be used to pay personal expenses
and to hold “wasting assets.”
4. Co-Trusteeship can require conservatism.
4. Surviving spouse may lose or give away the assets in
remarriage or otherwise.
5. Can be protected from creditors of the surviving spouse.
5. Not creditor protected.
6. Can borrow money from surviving spouse at the
applicable Federal Rate (presently 1.53% for a 9-year
Note), and it runs a greater rate of return on its own
investment.
6. No ability to leverage with debt or otherwise.
28
Demonstrating the Fact that the $5,000,000 Generation
Skipping Tax Exemption is Not Portable.
Use of Credit Shelter Trust to avoid estate tax
and GST tax.
First
Deceased
Spouse
Second
Dying
Spouse
Portability Explanation
First
Deceased
Spouse
All
Assets
Second
Dying
Spouse
$5,000,000
Credit Shelter
GST Exempt
Trust
GST and Estate
Tax Exempt
On
Second
death:
Total GST and
Estate Tax
Protected Amount
$10,000,000
Non GST –
Non Estate
Tax Protected
Share
$5,000,000
GST Estate
Tax Proof
Share
Estate Tax
Exempt but not
GST Exempt
$5,000,000 Share
from Portability (will
have to be subject to
estate tax at level of
children or will be
subject to GST tax).
Non GST –
Non Estate
Tax Protected
Share
The above assumes no growth – the $5,000,000 exemption, but not the
portability allowance, is to increase with the CPI index increases after
January 1, 2011, beginning January 1, 2012.
29
Potential Effects of Inflation on the Estate
Tax Exemption (Assuming 2.56% Annual
Inflation and 5% Investment Performance)
Year
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
Basic Estate Tax
Exclusion Amount
$5,000,000
$5,000,000
$5,000,000
$5,000,000
$5,000,000
$5,000,000
$5,000,000
$5,000,000
$5,000,000
$5,000,000
$5,000,000
$5,000,000
$5,000,000
$5,000,000
$5,000,000
$5,000,000
$5,000,000
$5,000,000
$5,000,000
$5,000,000
Added Inflation
Adjustment
(Rounded to
Nearest $10,000)
$0
$130,000
$260,000
$390,000
$530,000
$670,000
$820,000
$970,000
$1,120,000
$1,280,000
$1,440,000
$1,600,000
$1,770,000
$1,950,000
$2,120,000
$2,310,000
$2,490,000
$2,680,000
$2,880,000
$3,080,000
Possible Credit
Total Applicable
Shelter Trust
Real Value of $5,000,000 in
Exclusion Amount Outperformance-5%
Year in 2011 Dollars,
Adjusted for
Annual Growth
Assuming 2.56% Annual
Inflation
Assumption
Inflation
$5,000,000.00
$5,000,000.00
$5,000,000
$5,130,000.00
$5,250,000.00
$4,875,195.01
$5,260,000.00
$5,512,500.00
$4,753,505.27
$5,390,000.00
$5,788,125.00
$4,634,853.04
$5,530,000.00
$6,077,531.25
$4,519,162.48
$5,670,000.00
$6,381,407.81
$4,406,359.67
$5,820,000.00
$6,700,478.20
$4,296,372.53
$5,970,000.00
$7,035,502.11
$4,189,130.78
$6,120,000.00
$7,387,277.22
$4,084,565.90
$6,280,000.00
$7,756,641.08
$3,982,611.05
$6,440,000.00
$8,144,473.13
$3,883,201.11
$6,600,000.00
$8,551,696.79
$3,786,272.53
$6,770,000.00
$8,979,281.63
$3,691,763.39
$6,950,000.00
$9,428,245.71
$3,599,613.29
$7,120,000.00
$9,899,658.00
$3,509,763.34
$7,310,000.00
$10,394,640.90
$3,422,156.15
$7,490,000.00
$10,914,372.94
$3,336,735.71
$7,680,000.00
$11,460,091.59
$3,253,447.46
$7,880,000.00
$12,033,096.17
$3,172,238.16
$8,080,000.00
$12,634,750.98
$3,093,055.93
**Note the above chart assumes annual increase in the applicable CPI of 2.56% per year and that the current estate tax law
is extended indefinitely for 2013 and beyond.
30
Potential Effects of Inflation on the Estate
Tax Exemption (Assuming 5% Annual
Inflation and 7% Investment Performance)
Year
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
Basic Estate Tax
Exclusion Amount
$5,000,000
$5,000,000
$5,000,000
$5,000,000
$5,000,000
$5,000,000
$5,000,000
$5,000,000
$5,000,000
$5,000,000
$5,000,000
$5,000,000
$5,000,000
$5,000,000
$5,000,000
$5,000,000
$5,000,000
$5,000,000
$5,000,000
$5,000,000
Added Inflation Adjustment Total Applicable Exclusion Possible Credit Shelter
(Rounded to Nearest
Amount Adjusted for
Trust Outperformance$10,000)
Inflation
7% Growth Assumption
$0
$5,000,000.00
$5,000,000.00
$250,000
$5,250,000.00
$5,350,000.00
$510,000
$5,510,000.00
$5,724,500.00
$790,000
$5,790,000.00
$6,125,215.00
$1,080,000
$6,080,000.00
$6,553,980.05
$1,380,000
$6,380,000.00
$7,012,758.65
$1,700,000
$6,700,000.00
$7,503,651.76
$2,040,000
$7,040,000.00
$8,028,907.38
$2,390,000
$7,390,000.00
$8,590,930.90
$2,760,000
$7,760,000.00
$9,192,296.06
$3,140,000
$8,140,000.00
$9,835,756.79
$3,550,000
$8,550,000.00
$10,524,259.76
$3,980,000
$8,980,000.00
$11,260,957.94
$4,430,000
$9,430,000.00
$12,049,225.00
$4,900,000
$9,900,000.00
$12,892,670.75
$5,390,000
$10,390,000.00
$13,795,157.70
$5,910,000
$10,910,000.00
$14,760,818.74
$6,460,000
$11,460,000.00
$15,794,076.05
$7,030,000
$12,030,000.00
$16,899,661.38
$7,630,000
$12,630,000.00
$18,082,637.68
Real Value of $5,000,000 in Year in
2011 Dollars, Assuming 5% Annual
Inflation
$5,000,000
$4,761,904.76
$4,535,147.39
$4,319,187.99
$4,113,512.37
$3,917,630.83
$3,731,076.98
$3,553,406.65
$3,384,196.81
$3,223,044.58
$3,069,566.27
$2,923,396.45
$2,784,187.09
$2,651,606.75
$2,525,339.76
$2,405,085.49
$2,290,557.61
$2,181,483.44
$2,077,603.27
$1,978,669.79
**Note the above chart assumes annual increase in the applicable CPI of 5%
per year and that the current estate tax law is extended indefinitely for 2013 and
beyond.
31
Assume $9 million per spouse in present assets and $25 million total value on second death.
PORTABILITY
BYPASS TRUST USE
Both Alive
Both Alive
HUSBAND
WIFE
$9,000,000
$9,000,000
After Death of Husband
HUSBAND
HUSBAND
$9,000,000
WIFE
$9,000,000
After Death of Husband
WIFE
HUSBAND
$18,000,000
All passes to surviving spouse.
Surviving spouse can lose all assets to future
spouse, creditors, or by making mistakes.
WIFE
$13,000,000
BYPASS
TRUST
$5,000,000
Can be used for health, education, and maintenance of wife.
Creditor proof and divorce proof.
Can be invested and not spent.
After Death of Surviving Spouse
After Death of Surviving Spouse- Assume that more of surviving spouse's
assets were spent and bypass trust was permitted to grow.
WIFE
$25,000,000
(Estate tax: $15 million x 35% = $5,250,000 )
BYPASS
TRUST
$10,000,000
WIFE
Estate tax on $15 million.
($10 million x 35% = $3,500,000)
32
Even More About Portability!!
Example:
Mabel dies before her husband John and leaves him a $4,500,000 DSUEA
because she gifted $500,000 during her lifetime. John has never gifted and
therefore now has a $9,500,000 Applicable Exclusion Amount.
John remarries Greta who has used $2,000,000 of her gifting exemption.
If John dies first he can leave up to $4,500,000 in a Credit Shelter Trust for Greta
and/or for his descendants, and Greta can still have his entire $5,000,000 DSUEA.
If Greta dies first John will be limited to a $7,000,000 applicable exclusion amount
on death, unless he remarries and the new spouse dies first, in which event the
new spouse’s DSUEA will apply.
Key question on first date “How large is your applicable exclusion amount?”
33
POEMS ABOUT PORTABILITY
Aunt Portabello had real agility
And married old Fungus for his portability
Poor Uncle Clyde
After Aunt Mildred died
He lost her $5 million portability
By marrying Matilda
Who had other bountiful utility
After his funeral she gifted $5 mill
To her lovely children
And then married Bill
And survived him to leave her children another $5 million still Because Matilda’s predeceased husband Phil
Provided financial fertility
If she had had $25 million
Matilda had a QTIP to absorb her portability
She would have also then married and survived both Clyde
And wanted that of Clyde, but then she accidentally died
and William
So Uncle Clyde was limited to $5 million
She also liked Mel
And although an active octogenarian
Who had a large NOL
Did not want to support a woman
But under Code Section 382
So resisted remarryin’
It did not transfer well.
Until along came Lolita Nard
Who really needed a Green Card
So he married sweet Lolita
But then died, so that her QDOT was even sweetah
But despite all elation
Portability will not index with inflation.
And after 2012 may not even be in our nation.
Marriage and mortality is complicated enough
Without Congress giving us all this new stuff.
34
Methods of Providing a Stepped-Up Basis on the Surviving Spouse’s Death for Assets That
Would Typically Be Held Under a Credit Shelter Trust to Avoid Estate Tax
CHOICE
ADVANTAGES
DISADVANTAGES
1. An independent advisor or committee will have the
power to cause Credit Shelter Trust assets to be
devised directly to the surviving spouse to get a
stepped up basis on his or her death.
1. Easy to understand
and insert into present
and future trust
documents.
1.Giving the surviving spouse outright ownership of assets
can be unwise from a creditor protection, spendthrift,
remarriage and undue influence standpoint, and this could
result in many fortunes being lost.
2. Would cause the distributed assets to be included in the
estate of the surviving spouse, which could be problematic
if portability is not applicable at that time.
2. An independent committee is given the power to
cause the Credit Shelter Trust to be a QTIP trust (a
Clayton “QTIP”) so that it will be subject to federal
estate tax on the surviving spouse’s death without
having to transfer the assets out to the surviving
spouse.
1. Works well if the
family is best off with
taking the marital
deduction on the first
death, and expects to
have portability apply to
eliminate estate tax on
the second death.
2. Allows for continued
protection of assets.
1. Not easy to explain this “Clayton QTIP” system to
clients.
2. May require slightly more complicated drafting than a
simple payment enablement clause as described in
Choice 1.
3. Would cause the QTIP assets to be included in the
estate of the surviving spouse, which could be problematic
if portability is not applicable at that time.
3. In lieu of a devise to a Credit Shelter Trust,
everything is devised outright to the surviving spouse,
with the spouse having the ability to disclaim all or a
portion of the assets into the Credit Shelter Trust.
1. Easy to understand
and insert into present
and future trust
documents.
2. Would be simple to
administer.
1. In some states this may expose assets to creditors of
the surviving spouse if the creditors exist when the first
dying spouse passes.
2. Surviving spouse loses his or her power to appoint how
the assets in the Trust pass on his or her subsequent
death (to the extent of the assets disclaimed into the
Trust).
1. Allow a committee or independent advisor to give
the surviving spouse a power to appoint all or a portion
of the assets in the Credit Shelter Trust to creditors of
her estate, or a broader appointment power only
exercisable with consent of appointed non adverse
parties.
1. Allows for continued
protection of assets
1. Not easy to explain this choice to clients.
2. Uncertainty as to whether the law will allow this strategy
without causing inclusion of all of the Trust assets in the
surviving spouse’s gross estate.
35
Potential Codicil Language To Permit Decedent’s Heirs to
Require and Pay for Portability Election and Form 706 Filing



To preserve flexibility to opt for portability after the death of the first dying spouse, suggest a
Codicil to the client’s Will providing the surviving spouse with the right to require return preparation
to facilitate portability (the filing of an estate tax return) and to possibly appoint a special
administrator to serve for the purpose of signing the return, and to be compensated by the
surviving spouse.
Treasury Regulation Section 20.6018-2 allows a special administrator be appointed under local
law to file and sign a federal estate tax return. In a situation where spouses have separate
children, the children or advisors of the first dying spouse may prefer to serve as personal
representatives and to control all aspects of estate administration, but the surviving spouse can be
significantly benefitted by having the first spouse’s estate file an estate tax return and make a
portability election.
Potential language is as follows:
I authorize my surviving spouse, _________, to appoint a board-certified estate planning lawyer, or a CPA who
has done work for my family for at least 10 years, to serve as Special Administrator of this Last Will and
Testament for the purpose of filing a federal estate tax return in order to assure that the DSUEA (Deceased
Spouse Unused Exemption Amount) becomes available to my said spouse, with the Administrator to be
compensated solely by my said spouse, and with any other expenses reasonably incurred by my personal
representatives to accommodate such filing to be reimbursed to my estate. Said appointment and cooperation
need only to apply if my spouse survives me and executes a confirmation that such expenses will be paid by my
said spouse. Any dispute between the Administrator and my personal representative or representatives shall be
resolved by _________________, CPA.”
36
Potential Language to Amend Clients’ Revocable Trust to Allow for
Credit Shelter Trust to Instead be a Clayton QTIP with Outright
Disposition Rights in Case Family Prefers to Use Portability
POTENTIAL LANGUAGE FOR AMENDMENT TO TRUST AGREEMENT
I hereby appoint ___________________, __________________ and _______________ as Independent
Fiduciaries for the purpose of determining whether, upon the event of my death, all Trust assets may be
payable outright to my spouse, in view of the new estate tax law.
In order to facilitate this, I understand that the Smith Family Trust that would be established under Section 4.02
___ of this Trust Agreement shall be amended such that the Trustee of such Trust, with the consent of a
majority of the Independent Fiduciaries, may pay all assets under such Trust and/or under the QTIP Trust that
would be established under Article ____ of this Trust Agreement to my spouse, at any time and for any reason.
Further, such Smith Family Trust (a) shall pay all income to my spouse, (b) shall be used solely for my spouse
during said spouse’s lifetime, with any and all distributions to be made solely to said spouse, and that (c) the
Trustee shall be required to keep the Trust assets under such Trust productive, provided that such
requirements shall not apply except to the extent that my Personal Representative, upon the instructions from
the majority of the Independent Fiduciaries, elects for such Trust to qualify for the federal estate tax marital
deduction by making a “Clayton QTIP Election” pursuant to Internal Revenue Code Section 2056 and Treasury
Regulation 20.2056(b)-7(d)(3)(i).
The above shall apply so that if a “Clayton QTIP Election” is not made, then the Family Trust and QTIP Trust
described above shall operate as if this Trust Amendment had not been implemented.
37
REVISED PROTECTIVE TRUST LOGISTICAL CHART SHOWING CLAYTON Q-TIPS
During both
spouse’s
lifetimes:
First Dying Spouse’s
Revocable Trust
Upon first
death in
2011:
$5,000,000*
During
surviving
spouse’s
remaining
lifetime:
Upon
second
death:
After
deaths of
both
spouses:
Remaining
Assets
(Adjusted upward for inflation after 1/1/2011)
Family
(By-Pass)
Generation
Skipping Trust
(Not taxed in surviving
spouse’s estate)
Surviving spouse
can have the
right to redirect
how assets as
distributed on
second death.
Possible Clayton
QTIP which would
qualify for the
estate tax marital
deduction.
QTIP NonGST Trust
(Marital Deduction
Trust that is not
generation
skipping)
The assets in the Clayton QTIP would be
includable in the surviving spouse’s gross
estate, but the surviving spouse can use
some of his or her DSUEA, and could
make a “reverse QTIP election” to utilize
any portion of the first dying spouse’s
unused GST exemption.
Generation Skipping
Trusts for Children
Benefits children and
grandchildren.
Not estate taxable in their estates.
Surviving Spouse’s
Revocable Trust
Children’s
Trust (or
distributions)
Benefits children.
Taxable in their estates.
Surviving Spouse’s Revocable Trust
(Will include assets owned jointly on first
death)
$5,000,000*
(Adjusted upward after
1/1/2011)
Generation Skipping
Trusts for Children
(Will merge with first dying
spouse’s Generation Skipping
Trusts shown on left)
Benefits children and
grandchildren.
Not estate taxable in their estates.
Remaining
Assets
Children’s
Trust (or
distributions)
Benefits children.
Taxable in their estates.
*Assumes first spouse dies in 2011 and that the surviving spouse dies in a later year when the estate tax exemption is still $5,000,000.
*The Unified Credit Exemption is $5,000,000 in 2011 and 2012, and is scheduled to go back to $1,000,000 in 2013.
38
1. Grantor can replace the Trustee at any time and for
any reason.
2. Protected from creditors of Grantor and family
Trustee
members.
3. Can benefit spouse and descendants as needed for
health, education and maintenance.
4. Per Private Letter Ruling 200944002 the Grantor may
be a discretionary beneficiary of the trust and not
DYNASTY
have it subject to estate tax in his or her estate. But
be very careful on this! The Trust would need to be
WEALTH
formed in an asset protection jurisdiction and there is
PROTECTION
no revenue procedure on this.
5.
Should be grandfathered from future legislative
TRUST
restrictions.
6. May loan money to Grantor.
7. May own limited partnership or LLC interests that are
managed at arms length by the Grantor.
Assets gifted to trust and growth thereon.
8. May be subject to income tax at its own bracket, or
the Grantor may be subject to income tax on the
income of the trust, allowing it to grow income-tax free
unless or until desired otherwise. If the Grantor is a
beneficiary it must remain a disregarded Grantor
Trust.
39
Multiple Grantor Trusts allow for significant flexibility.
Each Irrevocable Grantor Trust is “Defective” for income tax purposes but may be “toggled off”
separately from the others
Wife as Trustee
CLIENT
Age 55
Irrevocable
Grantor
Trust #1
Married with $15,000,000
net worth in 2011 (before
planning).
For spouse (age 56) and
common new child and
future descendants.
Earns $500,000 a year
more than family is
spending.
Spouse can receive
benefits only when
authorized by an “adverse
party” beneficiary (a
common descendant) to
allow for toggling off.
In second marriage – 2
children by prior marriage.
1 child in present
marriage.
Wife as Trustee
Irrevocable
Grantor
Trust #2
Same as defective grantor
trust #1, but formed in
asset protection trust
jurisdiction with Grantor is
discretionary beneficiary –
wife loses beneficial
interest upon divorce.
Child as Trustee
Irrevocable
Grantor
Trust #3
Child as Trustee
Irrevocable
Grantor
Trust #4
For children of prior
marriage.
For children of prior
marriage.
Divisible into separate
Trusts for each separate
child of the first marriage
at the discretion of
replaceable Trustee.
Grantor is discretionary
beneficiary
Divisible into separate
Trusts for each separate
child of the first marriage
at the discretion of
replaceable Trustee.
**Each Trust receives $1,000,000 gift in 2011.
40
HUSBAND
WIFE
Wife is Trustee
HUSBAND'S
REVOCABLE
TRUST
DYNASTY
TRUST
WIFE'S
REVOCABLE
TRUST
Other Assets ?
99% LP
1% GP
FAMILY
LIMITED
PARTNERSHIP
**Gift to Dynasty Trust may
be based upon 65% of 99%
of $5,000,000, after taking
discounts into account.
$3,217,500
1. Investments controlled by Husband as
GP of Limited Partnership.
2. Husband can replace the Trustee of the
Dynasty Trust.
3. Dynasty Trust can be used for spouse
and descendants as needed for health,
education and maintenance.
4. Dynasty Trust can loan money to family
members.
5.Dynasty Trust should be exempt from
estate tax, creditor claims, and divorce
claims of both spouses and descendants.
$5,000,000 in assets
Husband has $1,782,500 of his
$5,000,000 exemption remaining.
41
42
Same as bottom of page 1, but using discounted Limited Partnership interests for gifting.
USE OF EXEMPTION:
$5,000,000 x 65% = $3,250,000/spouse
HUSBAND'S
DYNASTY
TRUST
HUSBAND'S
REVOCABLE
TRUST
$5,000,000 NOW
$7,000,000 LATER
WIFE'S
DYNASTY
TRUST
WIFE'S
REVOCABLE
TRUST
$5,000,000 NOW
$7,000,000 LATER
99% LP
1%
99% LP
$14,000,000 - $3,500,000 = $10,500,000
$10,500,000 x 35% - $3,675,000
$4,900,000 - $3,675,000 = $1,225,000
Further Savings: $1,225,000
$14,000,000 - $3,500,000 = $10,500,000
$10,500,000 x 45% - $4,725,000
$6,300,000 - $4,725,000= $1,575,000
Further Savings: $1,575,000
1% GP
FLP
$5,000,000 NOW
$8,000,000 LATER
FLP
$5,000,000 NOW
$8,000,000 LATER
43
TYPICAL YEAR-END 2010 ESTATE TAX PLANNING UPDATE
FOR “OVER $10,000,000” MARRIED COUPLE OWED $11,500,000 IN NOTES
HUSBAND
WIFE
529
PLANS
Homestead
$650,000
HUSBAND’S
REVOCABLE
TRUST
IRREVOCABLE
TRUSTS FOR
DESCENDANTS
Other assets $20,000,000
May owe parents
$11,500,000 in notes
shown on the right
(Will the transfer of a
note to a limited
partnership and/or a
QTIP Trust trigger
income tax when the
note is a defective
grantor trust installment
sale note?)
.5% GP
1.1% LP
.5% GP - 2011
1.1% LP – 2011
1% + 2.7% = 3.8%
total in 2011
WIFE’S
REVOCABLE
TRUST
.5% GP
97.90% (96.8%
LP in 2011)
PROMISSORY
NOTES LIMITED
PARTNERSHIP
$6,500,000 Promissory Note
$6,500,000 x .984 x 65% = $4,157,400
Homestead
$650,000
$4,807,400
LIFETIME QTIP TRUST
QTIP pays all of its
income to Wife, plus
amounts as she needs for
health, education and
maintenance.
$5,000,000 Promissory
Note
(Fair market value of Note may
be worth less than $5,000,000.)
44
QPRT Trust Planning Demonstration
Gift Component (with
respect to each QPRT)
6
Year
QPRT
8
Year
QPRT
10
Year
QPRT
12
Year
QPRT
14
Year
QPRT
16
Year
QPRT
Gift %
73.220%
Value of Gift
$267,619.00
Gift %
64.328%
Value of Gift
$235,118.84
Gift %
55.528%
Value of Gift
$202,954.84
Gift %
46.916%
Value of Gift
$171,477.98
Gift %
38.633%
Value of Gift
$141,203.62
Gift %
30.840%
Value of Gift
$112,720.20
Probability of Death Before Certain Age
Current Age 68
2 years (70)
4.18%
6 years (74)
4 years (72)
8.92%
8 years (76)
Age of Client
Initial Value of Home
Fractional Discount Assumed
Discounted Value of ½ of Home
68
$860,000
15.00%
$365,500
Estate Tax
SavingsAfter
16 Years
Assuming
7% Growth
on ½ of
House
Estate Tax
Savings
After 16
Years
Assuming
7% Growth
on Entire
House
Value of ½ of
Home at End
of QPRT
Term
Assuming
7% Growth
Estate Tax
on Value at
End of Term
Assuming
35% Estate
Tax Rate
Estate Tax
Savings on
½ of Home
at End of
QPRT
Estate Tax
Savings on
Entire Value
of Home at
End of
QPRT
$645,314.05
$225,859.92
$132,193.23
$264,386.96
$350,633.96
$701,267.92
$738,820.06
$258,587.02
$176,295.43
$352,590.85
$362,009.05
$724,018.10
$845,875.08
$296,056.28
$225,022.09
$450,044.17
$373,266.45
$746,532.90
$968,442.38
$338,954.83
$278,937.54
$557,875.08
$384,283.35
$768,566.70
$1,108,769.68
$388,069.39
$338,648.12
$677,296.25
$394,879.38
$789,758.76
$1,269,430.41
$444,300.64
$404,848.7
$809,697.15
$404,848.57
$809,697.15
14.31%
20.45%
10 years (78)
15 years (83)
27.33%
47.24%
20 years (88)
68.53%
45
COMPARISON OF METHODS TO PURCHASE HOMES FOR THE CHILDREN
$250,000 Exemption
on Sale of Home
$50,000 Homestead
Exemption and 3%
Per Year Cap on
Valuation
Divorce
Control
Notes
Father and Mother loan
money to the child.
Child purchases and
owns home.
Child gets income tax
exemption.
Child gets homestead
exemption and cap.
Loan will be repaid to
parents. Equity may be
subject to claim by
spouse if this is not
waived by Prenuptial
Agreement.
Child controls the
house. However, we
may be able to call the
Note to force a sale.
Note: Child gets equity
above Note.
Father and Mother own
the home and the child
lives in the house.
No.
Generally no.
However, it may be
possible to obtain these
with a 99-year lease.
Better protected.
Father and Mother
control.
Via Child Funded
Homestead Bypass
Trust
Child gets income tax
exemption.
Child gets homestead
exemption and cap.
Better protected.
Mother would be
Trustee of the Trust
and would retain
control.
Note: Credits may be
able to get into the
Trust. It may be
possible for Mother to
transfer the house to
the child’s individual
name in the event of a
Creditor issue.
Direct Client Funded
Homestead Bypass
Trust.
No
Child gets homestead
exemption and cap.
Better protected.
Mother would be
Trustee of the Trust
and would retain
control.
Note: The $250,000
exemption is lost, but
no creditor of the child
should be able to get
the assets.
One-half.
One-half.
One-half, better
protected.
Each controls one-half.
One-half purchased by
child and one-half
owned by Father and
Mother
46
A trust that can own a home used by a child to benefit the spouse and descendants;
- can qualify for the State Homestead Exemption and 3% cap
- can be considered as owned by the Child for income tax purposes to qualify for the $250,000 income tax exemption
on sale
- can be controlled by the Trustee and used for the benefit of various family members
- will insulate family members from liabilities associated with ownership of the home
Other Spouse = Trustee
Trust assets can be applied for the health, education,
and maintenance of the Trustee-Spouse and children.
GRANTOR
SPOUSE
Seed Capital Gift
(downpayment on homestead
CHILD'S
HOMESTEAD
IRREVOCABLE
TRUST
to be used by child)
Home and Other Assets
One or more children may reside in the house to qualify
it for the Florida Tax Homestead Exemption.
For income tax purposes, the Trust can be considered
as owned by the child who lives in the house so that the
house can be sold income tax free to the extent of up to
$250,000 in appreciation.
The Trust will not be subject to creditor claims of any family member
unless (1) the transfer to the Trust by the Grantor Spouse is a
"fraudulent transfer," or (2) the child has a right to withdraw
more than the gift tax exclusion amount in any calendar year.
NOTE - The Trust must be appropriately drafted, funded, and
administered to achieve the above results.
47
48
49
50
51
PROFESSOR HESCH’S COMMENTS
New Estate Tax Law, Same Estate Planning Techniques
Techniques have not changed because of the new law— only the priority of the applicable techniques has
changed
For clients with a certain level of wealth (depending on the age of the client at the time of the gift), an
outright gift to a grantor trust may be all that is necessary to significantly reduce a client’s estate tax
exposure.
The grantor trust status of the trust requires the grantor to pay the income taxes associated with the trust’s
income, which depletes the grantor’s taxable estate and allows the assets of the trust to essentially grow
tax-free.
A low cash value, high death benefit or term life insurance policy with a decreasing death benefit can be
used to cover any estate taxes that would result from the grantor dying prematurely, before the grantor
trust status of the trust has fully depleted the grantor’s taxable estate.
If an outright gift to a grantor trust does not eliminate the grantor’s taxable estate, then other estate
planning strategies should be considered, such as GRATs, Installment Sales to Grantor Trusts and
Charitable Lead Annuity Trusts.
52
PAGE 1 OF PROFESSOR HESCH’S ILLUSTRATION
Senior
Before Tax
Planning
$49,000,000 in Investment Assets
These examples assume that
Senior is age 56 in 2011, has
$500,000 per year in living
costs, annual inflation is 1%, and
that Senior’s annual earnings
are equal to 5.45% of his
Investment Assets (i.e., the
balance of assets in his gross
estate). The estate tax rate is
assumed to be 35%, and Senior
and his Spouse are assumed to
have not used any of their
$10,000,000 combined lifetime
gifting exemption.
Total of Senior’s Assets After Gifts
$35,666,667.00
Pre-Discounted Value of Gifts
$13,333,333.00
Senior’s Total Investment Assets Before Gift
$49,000,000.00
Projected Living Costs
Projected Lifetime Earnings
Pre Discounted Value
Earnings
$162,914,03.07
Tax on Earnings
($75,425,261.34)
Projected Balance of Gross Estate in 2050
$112,045,625.06
Estate Taxes if Senior Dies in 2050
($35,715,968.77)
Balance
Year
($24,443,186.68)
Tax on Earnings
$76,329,656.29
Living Costs
Balance in Gross Estate
$49,000,000.00
2011
$13,333,333.00
$2,670,500.00
$1,117,604.25
$500,000.00
$50,052,895.75
2012
-
$2,727,882.82
$1,141,618.96
$505,000.00
$51,134,159.61
2013
-
$2,786,811.70
$1,294,474.03
$510,050.00
$52,116,447.27
2014
-
$2,840,346.38
$1,319,340.89
$515,150.50
$53,122,302.26
2015
-
$2,895,165.47
$1,344,804.36
$520,302.01
$54,152,361.36
2020
-
$3,189,777.02
$1,481,651.43
$546,842.64
$59,689,301.68
2025
-
$3,522,145.68
$1,636,036.67
$574,737.11
$65,937,898.09
2030
-
$3,897,713.46
$1,810,487.90
$604,054.48
$73,000,849.19
2035
-
$4,322,743.88
$2,007,914.53
$634,867.32
$80,996,363.42
2040
-
$4,804,448.00
$2,231,666.10
$667,251.94
$90,060,539.13
2045
-
$5,351,129.92
$2,485,599.85
$701,288.49
$100,350,111.75
2050
-
$5,972,354.72
$2,774,158.77
$737,061.25
$112,045,625.06
End Result
Senior
The Result of
No Tax
Planning
Balance in Gross
Estate
Estate Taxes
Balance Passing to Descendants
Plan Balance After Estate Taxes
$112,045,625.06
($35,715,968.77)
$76,329,656.29
$76,329,656.29
53
PAGE 2 OF PROFESSOR HESCH’S ILLUSTRATION
RESULTS OF A $10,000,000 OUTRIGHT GIFT TO IRREVOCABLE GRANTOR
TRUST SPLIT WITH SPOUSE
SENIOR
AFTER TAX PLANNING
$10,000,000 Outright Gift, Valued to Account for a 25%
valuation Discount (Pre-Discount Value of $13,333,333)
No Gift Tax Incurred On Gift Because Gift Is Split With Spouse
to Use their Combined
$10,000,000 Lifetime Gifting Exemption
IRREVOCABLE GRANTOR
TRUST
$49,000,000 in Investment Assets
Total of Senior's Assets After Gifts
Pre-Discounted Value of Gifts
Senior's Total Investment Assets Before
Gifts
Present Value of Gift
Gift Tax
Projected Living Costs
Projected Lifetime
Earnings
Tax on Earnings
Tax on Grantor Trust Earnings
Projected Balance of Gross Estate in
2050
Estate Taxes if Senior Dies in 2050
Balance
$35,666,667.00
$13,333,333.00
$49,000,000.00
($13,333,333.00)
$0.00
($24,443,186.68)
$68,868,720.37
($29,951,870.09)
($45,473,391.24)
$666,939.36
($233,428.78)
$433,510.58
Pre-Discounted Value of Gifts
Cumulative Earnings on Trust Assets
Projected Balance of Trust Assets in 2050
$13,333,333.00
$97,865,354.00
$111,198,687.00
These examples assume that Senior is age 56 in 2011, has $500,000
per year in living costs, annual inflation is 1%, and that Senior's annual
earnings are equal to 5.45% of his Investment Assets (i.e., the
balance of assets in his gross estate) and the Trust's annual earnings
are equal to 5.45% of Trust Assets. The estate tax rate is assumed to
be 35%, and Senior and his Spouse are assumed to have not used
any of their $10,000,000 combined lifetime gifting exemption, except
with respect to the $10,000,000 outright gift indicated above.
54
PAGE 3 OF PROFESSOR HESCH’S ILLUSTRATION
RESULTS OF A $10,000,000 OUTRIGHT GIFT TO IRREVOCABLE GRANTOR
TRUST SPLIT WITH SPOUSE
SENIOR
IRREVOCABLE
GRANTOR TRUST
AS A RESULT OF TAX
PLANNING
Balance in Gross Estate
Estate Taxes
Balance Passing to Descendants
$666,939.36
($233,428.78)
$433,510.58
Plan Balance After Estate Taxes
Savings From Making
$10,000,000 Gift:
Pre-Discounted Value of Gifts
Cummulative Earnings on Trust Assets
Projected Balance of Trust Assets in
2050
$13,333,333.00
$97,865,35.00
$111,198,687.00
$111,632,197.58
$35,302,541.30
55
PAGE 4 OF PROFESSOR HESCH’S ILLUSTRATION
DEMONSTRATING SPREADSHEET RESULTS FOR SENIOR AFTER OUTRIGHT
GIFT OF $10,000,000 BASED UPON ASSUMPTIONS
SHOWN ON ILLUSTRATION PAGE 2 (POWERPOINT PAGE 54)
Year
Gifts
Trust Value
Trust Earnings
Tax on Trust Earnings
Client Earnings
Tax on Client’s
Earnings
Living Costs
Client Net Worth
$35,666,666.00
2011
$13,333,333.00
$14,060,000.00
$726,667.00
$304,109.99
$1,943,833.35
$813,494.26
$500,000.00
$35,992,896.10
2012
-
$14,826,270.00
$766,270.00
$320,683.99
$1,961,612.84
$820,934.97
$505,000.00
$36,307,889.98
2013
-
$15,634,301.00
$808,032.00
$375,330.72
$1,978,780.00
$919,143.31
$510,050.00
$36,482,145.95
2014
-
$17,384,878.00
$898,507.00
$395,786.25
$1,996,658.27
$927,447.77
$520,302.01
$36,767,483.41
2015
-
$17,384,878.00
$898,507.00
$417,356.60
$1,996,658.27
$930,778.03
$520,302.01
$36,767,483.41
2020
-
$22,667,549.00
$1,171,533.00
$544,177.03
$2,018,244.13
$937,474.40
$546,842.64
$37,021,752.51
2025
-
$29,555,444.00
$1,527,522.00
$709,533.86
$1,994,623.92
$926,502.81
$574,737.11
$36,382,454.16
2030
-
$38,536,335.00
$1,991,683.00
$925,136.99
$1,906,029.96
$885,350.91
$604,054.48
$34,464,514.31
2035
-
$50,246,212.00
$2,596,888.00
$1,206,254.55
$1,725,855.72
$801,659.98
$634,867.32
$30,750,151.28
2040
-
$65,514,322.00
$3,385,994.00
$1,572,794.15
$1,418,545.14
$658,871.95
$667,251.94
$24,546,217.56
2045
-
$85,421,888.00
$4,414,882.00
$2,050,712.62
$936,248.06
$434,887.23
$701,288.49
$14,928,223.28
2050
-
$111,378,686.00
$5,576,414.00
$2,673,854.22
$215,940.91
$100,304.55
$737,061.25
$666,939.36
56
PAGE 5 OF PROFESSOR HESCH’S ILLUSTRATION
SHOWING GROWTH UNDER IRREVOCABLE GRANTOR TRUST –
ASSUMPTIONS FROM PAGE 2 (POWERPOINT PAGE 54)
Year
Balance
Year
Gifts
Earnings
Balance
$13,333,333.00
$726,667.00
$14,060,000.00
$35,666,667.00
2011
$35,992,896.10
2011
2012
$36,307,889.98
2012
-
$766,270.00
$14,826,270.00
2013
$36,482,145.95
2013
-
$808,032.00
$15,634,301.00
2014
$36,635,931.51
2014
-
$852,069.00
$16,486,371.00
2015
$36,767,483.41
2015
-
$898,507.00
$17,384,878.00
2020
$37,021,752.51
2020
-
$1,171,533.00
$22,667,549.00
2025
$36,382,454.16
2025
-
$1,527,522.00
$29,555,444.00
2030
$34,464,514.31
2030
-
$1,991,683.00
$38,536,335.00
2035
$30,750,151.28
2035
-
$2,596,888.00
$50,246,212.00
2040
$24,546,217.56
2040
-
$3,385,994.00
$65,514,322.00
2045
$14,928,223.28
2045
-
$4,414,882.00
$85,421,888.00
2050
$666,939.36
2050
-
$5,576,414.00
$111,378,686.00
57
PROFESSOR HESCH’S COMMENTS CONTINUED
Fixed Term Charitable Lead Annuity Trust Example– How to Take Advantage of Financial Leverage
After the Client’s Death
If an 80 year old client establishes a 20-year, “Zeroed Out” Charitable Lead Annuity Trust with a
$10,000,000 contribution, then over $14,000,000 in assets will remain in the CLAT for Client’s
descendants, free of estate tax.
This example assumes a Section 7520 rate of 1.8% (the December 2010 Section 7520 rate) and an
annual return of 7% on trust assets.
Upon Client’s death, nothing is included in his estate, even if he dies during the annuity term.
Therefore, if Client dies during year 10 of the 20 year Fixed Term CLAT, then there is still 10 years of
financial leverage that will occur after his death.
This can yield remarkable results for Client’s descendants, as indicated by the chart on the following slide.
58
20 YEAR CHARITABLE LEAD ANNUITY TRUST -- $10,000,000 Contribution, "Zeroed-Out“
Therefore no gift tax is paid and no gift exemption is used to fund the trust – anything remaining after the 20 annual payments to charity can pass to the
Grantor’s children. Assumes a 25% discount on assets contributed (a “real value” of $13,333,333.33 contributed).
Assuming a 1.8% Interest Rate (the December 2010 Section 7520 rate)
Year
Contribution to Trust
Trust Earnings at 7% Annual
Return
Annual Annuity Payment to
Charity
Trust Balance
2011
$10,000,000
$700,000.00
($599,826.05)
$10,100,173.95
2012
$
-
$707,012.18
($599,826.05)
$10,207,360.08
2013
$
-
$714,515.21
($599,826.05)
$10,322,049.23
2014
$
-
$722,543.45
($599,826.05)
$10,444,766.63
2015
$
-
$731,133.66
($599,826.05)
$10,576,074.24
2016
$
-
$740,325.20
($599,826.05)
$10,716,573.39
2017
$
-
$750,160.14
($599,826.05)
$10,866,907.48
2018
$
-
$760,683.52
($599,826.05)
$11,027,764.95
2019
$
-
$771,943.55
($599,826.05)
$11,199,882.45
2020
$
-
$783,991.77
($599,826.05)
$11,384,048.17
2021
$
-
$796,883.37
($599,826.05)
$11,581,105.49
2022
$
-
$810,677.38
($599,826.05)
$11,791,956.82
2023
$
-
$825,436.98
($599,826.05)
$12,017,567.75
2024
$
-
$841,229.74
($599,826.05)
$12,258,971.44
2025
$
-
$858,128.00
($599,826.05)
$12,517,273.39
2026
$
-
$876,209.14
($599,826.05)
$12,793,656.48
2027
$
-
$895,555.95
($599,826.05)
$13,089,386.39
2028
$
-
$916,257.05
($599,826.05)
$13,405,817.38
2029
$
-
$938,407.22
($599,826.05)
$13,744,398.55
2030
$
-
$962,107.90
($599,826.05)
$14,106,680.40
Amount Passing to Descendants After Expiration of Annuity Term:
$14,106,680.40
59
SPEAKER BIOGRAPHIES:
Jerome M. Hesch, J.D., MBA practices law in Miami, Florida and is Of Counsel to the Carlton Fields Law Firm. He is also the Director of the
Notre Dame Tax & Estate Planning Institute and has published numerous articles, several Tax Management Portfolios, and co-authored a law school casebook
on Federal Income Taxation, now in its third edition. He has appeared for groups such as the AICPA, the University of Miami Heckerling Institute on Estate
Planning, the University of Southern California Tax Institute and the New York University Institute on Federal Taxation. He has participated in several bar
association projects, such as the Drafting Committee for the Florida Revised Uniform Partnership Act and preparing the ABA’s comments on the IRS’s proposed
private annuity regulations. He received his BA and MBA degrees from the University of Michigan and a JD degree from the University of Buffalo Law School.
He was with the Office of Chief Counsel, Internal Revenue Service, Washington, D.C. from 1970 to 1975, and was a full-time law professor from 1975 to 1994.
He is currently an adjunct professor of law at the Florida International University and the University of Miami law schools.
Alan S. Gassman, J.D., LL.M. is an attorney practicing in Clearwater, Florida with the firm of Gassman, Bates & Associates, P.A. Mr.
Gassman’s primary practice focus over the past 25 years has been the representation of high net worth individuals, physicians and business owners in estate
planning, taxation, and business and personal asset structuring.
In 2009 and 2010 Mr. Gassman authored and co-authored the following published articles. “Creditor Rights Under Private Annuities and
Grantor-Retained Annuity Trusts in Florida”, The Florida Bar Journal, July/August, 2009. “Unconventional Uses of 529 Plans Should Not Be Ignored By
Taxpayers and Their Advisors”, BNA Tax & Accounting, March 11, 2010. “Don’t Overlook the Benefits - Tax and Otherwise - of Private Operating Foundations”
Estates, Gifts and Trusts Journal, 11/12/2009. “After Olmstead: Will a Multiple-member LLC Continue to Have Charging Order Protection?”, The Florida Bar
Journal, December 2010. “Recent Adventures in Florida Tenancy By The Entirety - Important Developments” Leimberg Information Systems, Inc., June 18,
2009. “One Good Reason Not To Do A Roth IRA Conversion”, Leimberg Information Systems, Inc., September 11, 2010. “Mistakes Doctors Make Managing
Their Practices and Investments”, Leimberg Information Systems, Inc., May 20, 2009.
In 2010 Mr. Gassman presented the following Webinars for professionals; Interesting Interest; Minimum and Maximum Interest Rates for IntraFamily Transactions and Applications of the OID Rules to Intra-Family Debt Obligations, BNA Tax & Accounting with Professor Jerry Hesch, August 18, 2009,
Individual and Group Medical Practices: Tax, Health Law, and Creditor Protection Planning, BNA Tax & Accounting, March 2, 2010.
Mr. Gassman can be contacted at [email protected], or by phone at 727-442-1200. The Gassman, Bates & Associates, P.A.
website is www.gassmanbateslawgroup.com.
Kenneth J. Crotty, J.D., LL.M. is a partner at the Clearwater, Florida law firm of Gassman, Bates & Associates, P.A., where he practices in the
areas of estate tax and trust planning, taxation, physician representation, and corporate and business law. His e-mail address is [email protected]
Christopher J. Denicolo, J.D., LL.M. is an associate at the Clearwater, Florida law firm of Gassman, Bates & Associates, P.A., where he
practices in the areas of estate tax and trust planning, taxation, physician representation, and corporate and business law. His e-mail address is
[email protected]
60
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