ESSENTIAL ESTATE PLANNING
Friday, July 19, 2013
11:10 am – 11:40 am
Alan S. Gassman, J.D., LL.M.
agassman@gassmanpa.com
TO VIEW THIS WEBINAR PLEASE VISIT:
www.gassmanlawassociates.com/webinars/
Copyright © 2013 Gassman Law Associates, P.A.
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TO VIEW THIS WEBINAR PLEASE VISIT:
www.gassmanlawassociates.com/webinars/
Copyright © 2013 Gassman Law Associates, P.A.
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Amputee awarded $30M
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Jurors say a mom who lost her fingers and feet deserves that much.
By Justin George and Colleen Jenkins
Published May 26, 2007
_______________________________________________________________________
TAMPA – Sally Lucia, a mother of three who lost her fingers and feet after complications of tummy tuck surgery, deserves $30-million, a jury in a malpractice
suit said Friday.
But it will be up to Hillsborough Circuit Judge Gregory P. Holder to sort out how much of that is owed by a former Tampa doctor and a hospital.
Defense attorneys predicted that Lucia, 47, would get somewhere between $12-million and $16-million, while her own attorneys declined to name figures.
Holder must now make sense of the jury’s parceling out of blame and the impact of Florida’s “Good Samaritan” law. That is expected to begin Wednesday.
Four women on the jury wouldn’t leave the courtroom without seeing Lucia privately and telling her they did everything they could to ensure justice was served.
Afterward, teary-eyed, they declined to comment.
Lucia said the verdict left her “overwhelmed, but in a good way.” She said she was glad the trail was finally over.
Jurors assigned Memorial Hospital 40 percent blame. Dr. George Haedicke 20 percent blame and Dr. Charles McLaughlin 40 percent blame. McLaughlin
reached a settlement for an undisclosed amount and was not on trial.
While Lucia viewed the verdict as a win, so did the attorney representing Haedicke.
While finding fault, jurors said Haedicke did not act with reckless disregard, which could give him immunity under the state’s “Good Samaritan” law.
The law protects emergency room doctors seeing patients in emergencies from malpractice judgments as long as a jury finds they didn’t act recklessly.
An hour before jurors reached their verdict, they told Holder they were deadlocked. The trail had taken three weeks. They had deliberated 17 hours. He
ordered them to keep talking.
Lucia’s troubles culminated on Super Bowl Sunday 2001 when an ambulance carried her to Memorial Hospital in Tampa. She had undergone a tummy tuck 20
days earlier to repair abdominal muscle damage from three caesarean sections. Blood and fluid had collected in her wound. Her fingers were blue.
Her surgeon was out of town. Hospital staff called Haedicke, the on-call surgeon who was playing at a park with his children.
During closing arguments Wednesday, attorneys quibbled about what happened once doctor and patient met.
$116M is awarded in stroke suit
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By TIMES STAFF WRITER
Published September 30, 2006
_______________________________________________________________________
TAMPA – A jury on Friday awarded a $116-million medical malpractice verdict to the family of a Tampa man who attorneys argued
became a paraplegic after an unlicensed hospital worker misdiagnosed a stroke as sinusitis.
On Aug. 9, 2000, All Navarro, now 50, of Tampa went to University Community Hospital Carrollwood campus with nausea, double
vision, headaches and an unsteady gate. He was sent home with the diagnosis of sinusitis, attorney Steve Yerrid said, and went on
to suffer severe brain swelling. Twenty hours after his initial diagnosis, Navarro was back in the emergency room, getting treated for
a stroke.
Yerrid said the decision was the largest jury award in a malpractice suit in Florida history. Punitive damages are expected to be
considered on Tuesday.
Navarro, a former pro basketball player from the Philippines, came to the United States in the 1990s. His wife Marilyn, 52, and son,
Scottie, 10, are named as claimants in the jury verdict, Yerrid said.
UCH officials could not be reached for comment late Friday.
Doctors in lawsuit now suing attorneys
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By Carrie Weimar
Published March 7, 2007
_____________________________________________________________________
TAMPA – They got hammered with a record-breaking $217-million verdict for misdiagnosing a patient who suffered a stroke.
Now the doctors who were the target of that high-profile lawsuit are hoping to turn the tables. They’re suing their attorneys.
Among the doctors’ chief complaints: The attorneys turned town settlement offers of $1-million and $3-million, a fraction of the final judgment.
“This case should have never gone to trial,” said Dr. Frank Winkles, who is representing Franklin, Favata & Hulls physicians group and Carrollwood Emergency
Physicians.
“It should have settled. Those doctors were just hung out to dry,” Winkles said.
The other doctor involved in the case, Michael Austin, is represented by Tampa attorney Barry Cohen, who said the lawsuit spoke for itself.
“The allegations are pretty clear,” Cohen said.
The lawyers named in the suit, filed March 2 in Hillsborough Circuit Court, did not return telephone calls seeking comment.
The lawyers are Louis J. LaCava and Victor Guzman, who work for a West Palm Beach firm that also has a Tampa branch. Also named is Brian Stokes, who is
with the Unger Law Group, which is based in Orlando.
The disagreement stems from a medical malpractice case decided by a Tampa jury in October.
Allan Navarro, a former pro basketball player in the Philippines, went to the University Community Hospital Carrollwood emergency room August 9, 2000,
complaining of nausea, headache, dizziness and double vision.
He was sent home five hours later with a painkiller prescription and a diagnosis of sinusitis.
No one realized Navarro was having a stroke. He returned to the hospital with more severe symptoms the next morning and underwent surgery hours later to
relieve brain swelling. He ended up in a coma for three months and emerged from it permanently disabled.
Before his illness, Navarro was a machine operator earning just above minimum wage. Now he is confined to bed or must use a wheelchair.
Navarro’s attorney sued. Testimony revealed that an unlicensed physician’s assistant initially examined Navarro, and Austin based his diagnosis on that exam.
Doctor kills self after malpractice verdict
Lawrence Grey, who specialized in vasectomy reversals, had been ordered to pay a former patient $1-million.
By Bill Coats
Published May 4, 2006
_______________________________________________________________________
TAMPA – On Friday afternoon, Dr. Lawrence Grey listened in a Hillsborough County courtroom as a jury announced its verdict: He should pay a former
patient $1-million.
Late Friday night, Grey’s wife found him dead in the $2-million Bayshore Boulevard home, hanging in a bedroom closet from a yellow nylon rope.
Grey’s apparent suicide left lawyers in the malpractice case reeling.
Jeffery Hunter, the Tampa lawyer who represented Grey, heard about the death Saturday night after a family outing.
“I was shocked,” Hunter said Wednesday “I still am.”
Timothy Moran, the Jacksonville lawyer who represented the former patient, learned of Grey’s death Wednesday from a Times reporter.
“I never intended for something like this to happen,” Moran said. “I blame his insurance company for not doing the right thing.”
Moran said he offered to settle the case for $250,000, the limit of Grey’s insurance coverage, and later for $175,000 but was turned down.
If the jury’s verdict of $1,005,000 stands, Grey’s business will be liable for $755,000.
Hunter wouldn’t comment on the settlement decisions. He said he intends to ask for a new trial. If denied, he plans to appeal.
Grey, a 51-year old urologist, specialized in microsurgery that reversed vasectomies, restoring his patients’ abilities to father children.
Grey marketed himself online as the Vas Doctor. That’s a reference to the vas deferens, the narrow tube through which sperm travels from the testicles,
and which a surgeon snips in a vasectomy.
Grey used laser tools and techniques that he developed, he told the Tampa Bay Business Journal in a profile three years ago.
“The microbeam is strictly my own creation,” Grey said in the profile. “The laser beam gives you a cleaner, more precise cut with less damage to tissue.
Hunter said Grey recently was performing 400 to 450 vasectomy reversals a year.
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“It wasn’t raining when Noah built the ark.”
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FLORIDA RESIDENTS- LEARNING HOW TO PROTECT YOUR ASSETS IN TWO MINUTES 9
CREDITOR EXEMPT ASSETS
ASSETS THAT ARE DIFFICULT FOR A
CREDITOR TO OBTAIN
ASSETS EXPOSED TO CREDITORS
Homestead
-Up to half acre if within city limits.
-May be immune from fraudulent transfer
statute.
IRA
-Includes ROTH, Rollover, and Voluntary
IRAs, but possibly not inherited IRAs.
401(k)
-Maximize these!
Limited partnership and similar entity
interests.
Individual money and brokerage
accounts.
Foreign trusts and companies.
Joint assets where both spouses owe
money.
Foreign bank accounts.
One-half of any joint assets not TBE
where one spouse owes money.
Permanent Life Insurance
-Must be owned by insured.
Note – foreign entities are very rarely
recommended and must be reported to
IRS -
Personal physical assets, including car,
except for $4,000 exemption ($1,000 if
homestead exemption is claimed in
bankruptcy).
Annuity Contracts
Vocabulary:
EXEMPT ASSET – An asset that a creditor cannot reach by reason of Florida law – protects
Florida residents.
CHARGING ORDER PROTECTION – The creditor of a partner in a limited partnership,
limited liability limited partnership, or properly drafted LLC can only receive distributions as
and when they would be paid to the partner.
FRAUDULENT TRANSFER - Defined as a transfer made for the purpose of avoiding a
creditor. Florida has a 4 year reach back statute on fraudulent transfers. A fraudulent
transfer into the homestead may not be set aside unless the debtor is in bankruptcy. It takes
3 creditors of a debtor who has 12 or more creditors to force a bankruptcy.
Upon filing a Chapter 7 Bankruptcy, an individual debtor may be able to cancel all debts
owed and keep exempt assets, subject to certain exemptions.
Annuities and life insurance policies are not always good investments, and can be subject to
sales charges and administrative fees.
There is a lot more to know- but this chart may be a good first step.
Wages of Head-of-Household
Wage Accounts (for six months only)
Tenancy by the Entireties (joint where
only one spouse is obligated)
- Must be properly and specially titled –
joint with right of survivorship may not
qualify.
529 College Savings Plans
ASSET PROTECTION DEFINITIONS
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To understand the subject of asset protection, you must speak the language. The following vocabulary and definitions will provide you with a basic
understanding of the fundamental concepts which make up the “art and science” of Florida creditor protection planning.
Debtor - A party who owes money.
Creditor - A party who is owed money by the debtor.
Judgment - A court order establishing that a debtor owes money to a creditor. The existence of a judgment is almost always necessary before a
creditor can seize a debtor’s property.
Plaintiff - A party suing to get a judgment against a defendant.
Defendant - A party being sued by a plaintiff.
Exempt Assets - Assets that are protected from seizure under the creditor laws. A debtor will be able to keep these assets notwithstanding that a
creditor may have a judgment against the
Non-Exempt Assets - Assets of a debtor that are subject to creditor claims.
Fraudulent Transfer - As explained in Chapter 14, this is the name given to a transfer of assets from a creditor available status to a creditor nonavailable status if a primary purpose was to avoid known creditors. Under federal and state law, such transfers may be set aside if the assets are within
the jurisdiction of an applicable court making such a finding. Outside of Bankruptcy Court, Florida has a statute of limitations on the ability of a
creditor to set aside a fraudulent transfer, which in many cases runs 4 years after the applicable transfer. This does not apply under Florida law to a
transfer of assets to homestead. Under bankruptcy law, however, a discharge of debt can be denied if there has been a fraudulent transfer made within
one year of the bankruptcy filing. Also, the homestead exemption may be limited to $136,875, if there has been a “fraudulent transfer” to homestead
within 10 years of filing bankruptcy. There is also a 10 year set aside rule for “fraudulent transfers to asset protection trusts and similar arrangements”
under the 2005 Bankruptcy Act. Oftentimes, clients will be advised to make transfers in exchange for receiving full value to avoid the fraudulent
transfer rules while still making the resulting arrangement more creditor protective than it would have been.
Preferential Transfer - A transfer that may be set aside under state or bankruptcy law, such as a transfer made to any party within 90 days of filing a
bankruptcy, or a transfer made to an “insider” within one year of filing the bankruptcy. See also Florida Statute §726 (providing a two year look back
on transfers).
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ASSET PROTECTION DEFINITIONS
Charging Order - A creditor with a judgment cannot reach into a properly structured limited partnership or LLC arrangement, where the
debtor does not own the entire entity. Instead, the creditor receives a “charging order” from the court, whereby if and when distributions are
made from the entity, the pro rata share of the debtor would be paid to the creditor. There is nothing in the law that allows a court order that
a distribution be made. Therefore, someone having a judgment against a debtor whose sole asset is a part ownership interest in a limited
partnership or an LLC may have limited leverage to obtain cash or monies from the debtor, although the debtor will also have difficulty
receiving distributions when a charging order is in place. This will often result in settlement, or the possibility of the creditor trying to force
the debtor into bankruptcy.
Firewall Protection - The concept that the shareholder of a corporation or limited partner in a limited partnership will not be liable for
liabilities incurred by the entity. This is why many companies put the more hazardous activities under a separate subsidiary.
Limited Liability Partnerships, Limited Partnerships, Limited Liability Limited Partnerships, Limited Liability Companies,
Professional Limited Liability Companies, and Partnerships of the above Entities - The names given to various legal entities which
have different effects as to firewall, tax, and charging order versus asset seizure protection. Be cautious as to which entity you choose
because they do not all offer the same protection. For example, the creditor of a partner in a Florida limited liability partnership (LLP) can
seize the partnership interests, and is not limited to receiving a charging order, but the creditor of a partner in a Florida limited partnership
(LP) or a limited liability limited partnership (LLLP) will be limited to the charging order remedy. It is important not to confuse these
entities, but this commonly occurs, even among well-meaning lawyers.
Staying Out of Bankruptcy - Many debtors will prefer to stay out of bankruptcy, so it is important for someone with an imminent judgment
to understand how this can be achieved. Generally, it takes three creditors to force an individual into bankruptcy, if that individual has at
least 12 creditors.
Bankruptcy - A federal process whereby every debtor has the right to file in the bankruptcy court, generally under Chapter 7,
Chapter 11, or Chapter 13. Many lawyers say that this is like having the debtor “swim in a fish bowl” because there must be full
disclosure of all documentation and information upon filing.
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ASSET PROTECTION DEFINITIONS
Joint and Several Liability - The concept that individuals who participate in a negligent or improper act will be totally liable for all
damages imposed to the extent that the other “co-defendants” do not pay their fair share. There are limitations on joint and several liability
pursuant to Florida Statute Section 768.81.
Vicarious Liability- The concept that an employer is generally responsible for liabilities incurred by an employee acting within the scope of
the employee’s duties. The Greek term for this phenomenon is “respondeat superior.”
Under this concept, parents may be responsible for the driving activities of their nannies or errand runners, and doctors may be responsible
for unforeseen actions by employees who might aggressively try to help people using prescription scripts, giving medical advice, and/or
driving automobiles.
Secured Interest - The concept whereby a creditor can record a mortgage or lien on assets whereby that creditor would be entitled to
repossess the assets and sell them at auction to satisfy a debt owed to the creditor. Real estate is liened by the recording of a proper
mortgage, and non-real estate assets may be liened by recording UCC-1 Financing Statements based upon appropriately drafted security
and/or pledge agreements. If a friendly debtor has a secured interest in a particular asset, then another debtor would have to pay the friendly
secured debtor before they would be able to seize the asset secured. This is why doctors will often give the bank with a mortgage on
business real estate a lien against medical practice assets, so that a malpractice claimant would have to pay the bank off or take other steps
before seizing medical practice assets.
Marshaling of Assets - Whereby a party having a lien against assets may be forced to sacrifice their position if there are plenty of other
assets that it has access to, to satisfy the obligation of the debtor. Over-secured creditor issues may also arise.
Asset Protection Trust - A trust arrangement whereby creditors of the grantor may not have access – which is contrary to Florida and basic
common law that if the grantor could receive any benefit whatsoever, then creditors may receive all assets.
Bad Faith - The malpractice insurance carrier has an obligation to settle any claim within the limits of coverage of the physician, if
reasonably possible. The failure of an insurance carrier to settle within policy limits can result in the carrier being responsible for an “excess
verdict.” When this occurs, the plaintiff’s lawyer will often settle with the defendant by receiving an assignment of the defendant’s right to
pursue the insurance carrier for the excess amount.
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ASSET PROTECTION DEFINITIONS
If the malpractice carrier believes it has a 90% chance winning at trial and a 10% chance of losing with a verdict well over policy limits, then
it may make good economic sense for the carrier to take the chance, but not from the point of view of the physician. If the carrier takes the
chance then if it has acted in bad faith it will be responsible for any excess verdict. Private legal counsel is commonly hired to encourage the
carrier to settle within policy limits, and a physician should almost never encourage a carrier not to settle or be without private representation
when the carrier or its lawyer recommends private representation! Fortunately, most verdicts exceeding coverage limits result in the
physician assigning their bad faith claim to the plaintiff in exchange for a total release, particularly where the physician is otherwise
judgment proof.
Automobile Liability – The owner of a motor vehicle in Florida is liable for operation of the vehicle by another driver, except that if the
other driver has insurance then the owner’s exposure may be limited to $300,000 per incident. If the driver has $500,000 of liability
insurance, then the owner may not have liability exposure, unless the owner was negligent in allowing the driver to use the vehicle.
Sovereign Liability - The concept whereby an individual working for a governmental agency and the agency itself has limited liability,
presently being $250,000 per incident. This applies to a physician working full time for public hospitals, medical schools, and the Veteran’s
Administration.
Successor Liability - When a corporation has a liability and a “successor corporation” has identical or similar ownership, identity,
customers, employees and/or general identity, a judge may find the new company responsible for the liabilities of the old company, even if
there was a legitimate bankruptcy of the old company before the new company was formed and operational.
Reverse Veil Piercing - When a court unwinds transfers made to entities where the transferor is a debtor that had control over the entity, and
used the entity to disguise personal assets to keep them beyond the reach of personal creditors.
Concealment - Under the doctrine of concealment an asset “given away” but actually held for the original transferor will be considered as
continually owned by the original transferor, notwithstanding title. Concealing assets puts the debtor at risk for losing a bankruptcy
discharge.
How to Stop Worrying and Start Living- A book written by the late Dale Carnegie, which includes phenomenal advice on how to counsel for
and live with concerns about what may happen in the future, what can be done about these potential future problems, and how to handle
oneself and others in a logical, sequential, and effective manner.
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UNDERSTANDING YOUR LIABILITY INSURANCE COVERAGE
The vast majority of carriers will only issue a $250,000 policy on your home, a $250,000 policy on your driving, and a
$250,000 policy on your vacation home.
A separate “umbrella carrier” or “carriers” will then issue separate policies for above $250,000, as shown in the example
below. Sometimes one carrier will write two or more of the below described policies, but often there will be 3 or more carriers
involved and coordination can be a challenge:
$5,000,000
Umbrella Policy #1
$5,000,000
Covers claims for home at
$300,000 and for cars at
$250,000.
$251,000
$250,000
Must be “drop-down”
umbrella if home policy is
issued by Citizens or a
comparable state agency
that does not cover liabilities
from pools, pets, or other
notable exceptions.
Policy #1 –
Homeowners
$0
Umbrella Policy #2
May need a separate umbrella
for out-of-state vacation home,
large boats or other items.
$301,000
Policy #2 – $300,000
Vacation
Home
$0
Policy #3 –
Car Driver
and Owner
Policy
Policy #4 Big Boat at
Vacation
Home
UMBRELLA INSURANCE COVERAGE
Re:
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UMBRELLA LIABILITY INSURANCE COVERAGE
Dear ________________:
As part of our planning I wanted to reiterate the importance of having an appropriately coordinated and “gap free” liability and
casualty insurance program.
I am enclosing a sample letter that some clients use to help assure that they have coverage for common gaps or mistakes made in
structuring liability insurance. If you would like assistance in completing this type of letter, please let me know.
The rest of this letter is about umbrella liability insurance coverage. We believe that it is very important to have appropriate limits of
liability on automobile and homeowner insurance policies. Typically, the automobile and homeowner policies will be at $500,000 coverage, and then
there will be excess coverage under what is called a "personal umbrella policy.“
The personal umbrella policy is used in combination with homeowners and auto policies to cover most clients' needs. If it is a true
"umbrella" it will provide excess limits above and beyond your primary insurance coverage (such as homeowners, automobile or boat policy), and
will also provide coverage for situations excluded or not addressed by underlying coverages. Each individual insurance company will have its own
requirement for limits that you must have on your primary policies. You will want to be careful to assure that these policies are coordinated with
your umbrella coverage.
Umbrella limits start at $1,000,000 and can go over $10,000,000. Pricing for these policies are based primarily on the number of
houses and vehicles to be insured, with each additional $1,000,000 of coverage being less expensive than the preceding. In your situation I would
probably have $___________________ of umbrella liability insurance. Also, I would consider placing much of your brokerage account and other
assets under a family limited partnership to further insulate you for creditor protection purposes.
Another coverage that is often underutilized by clients is called "uninsured motorist coverage." If you are in an automobile accident
caused by someone who does not have enough coverage to pay for your damages, you can pursue your own insurance company to the extent of
your "uninsured motorist" coverage. We encourage clients to see what it costs to have $500,000 or more in uninsured motorist coverage to help
compensate for catastrophic accidents that can happen.
Some carriers, including citizens and carriers who have assumed policies from citizens do not provide liability coverage for pool and
pet or animal related liabilities. In this event the Umbrella liability coverage may or may not apply. This is something that should be discussed with
the insurance agency or carrier that provides liability coverage.
If we can provide you with any further information or with assistance concerning your insurances, please let us know.
Very truly yours,
Alan S. Gassman
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Dear Liability Insurance Agency and/or Carrier:
I recently met with my estate planning lawyer and wanted to make sure of the following:
1.
Please confirm that we have Personal Liability Umbrella insurance covering our automobiles, boats, recreational vehicles, and all properties owned. I would like
quotes on the following coverage limits, $1,000,000, $3,000,000 and $5,000,000, with and without Uninsured Motorist coverage.
2.
Please confirm that we are covered for animal liability under our primary homeowners insurance and confirm that the Liability Umbrella would also extend to
animal liability. We have been told that the primary homeowners may exclude animal liability and that some Liability Umbrella policies will not provide coverage when the primary
homeowners insurance excludes same.
3.
Please confirm that we are covered for pool related accidents occurring on our property and also confirm that the Personal Liability Umbrella policy will also
extend coverage to pool related accidents.
4.
Can you please confirm that we are covered for cars being driven by _____________________.
5.
Can you please confirm that we are covered for the investment property that we own at ______________________________. It is titled under the name of
______________________________?
6.
Can you please confirm that we are covered for our ______________________________ boat, which is ______ foot long and is normally stored at
______________________________. The horsepower is ______________.
Are we also covered for trailering the boat with our trailer?
Also, can you please confirm that we are covered for our waverunner/jet ski which is a _________________ with horsepower of _________________. It is stored at
________________________.
7.
You do not handle the coverage for our vacation ______________________________ in ______________________________ or our vacation
____________________________ in ______________________________. Is our potential liability relating to the use of these properties covered under our umbrella, or do we
have to obtain a separate umbrella for these properties?
Our ______________________________ and _____________________________ are stored and used up in our ______________________________
______________________________.
8.
______________________________ drives the car owned by ______________________________ both for personal purposes and with respect to the
______________________________ business.
We assume our coverage includes business driving both by
______________________________ and by
______________________________ who occasionally drive the car for the business.
9.
Can you please confirm that we are covered for our motorcycle being driven by ___________.
10.
Is there anything not mentioned above that comes to mind that we should be aware of?
Please send our lawyer, Alan S. Gassman, a copy of your response to this letter, which has been generated as a part of our estate planning. Alan's email address is
AGassman@gassmanpa.com and his street address is 1245 Court Street, Suite 102, Clearwater, Florida 33746. His fax number is (727) 443-5829. Please send us a copy of
your response as well.
If you have any further suggestions with respect to our coverages please let us know. Thank you very much for your assistance herewith.
Best personal regards,
CLIENT
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New Estate Tax Law Summary
2009
2010
2011-2012
2013
What may change.
$13,000
$13,000
$13,000
$14,000
Will remain the same
(with adjustments for
inflation)
Tuition and Medical Direct
Payment Exemption
Unlimited
Like Before
Unlimited
Like Before
Unlimited
Like Before
Unlimited
Like Before
Will remain the same
Lifetime Exemption
$1,000,000
$1,000,000
2012 - $5,120,000
$5,250,000
Will remain at
$5,250,000
(with adjustments for
inflation)
(less portion of used
lifetime gifting exclusion)
$5,250,000 (less
portion of used
lifetimes gifting
exclusion)
Will remain at
$5,250,000
(with adjustments for
inflation)
Annual Exclusion Gifts
(Don’t Count at All)
2013 - $5,250,000
Estate Tax Exemption
Estate Tax Rate
Discounts and Installment
Sales/GRAT’s, and Defective
Grantor Trusts as Estate
Planning Tools (I.E. Defective
$3,500,000 (less
what was used of
$1,000,000 above)
Unlimited—See
Footnote*
2012 - $5,120,000
45%
35%
35%
40%
Will remain at 40%
Available
Available
Available
Available initially
(at least, not sure
about rest of
2013)
Who knows?
No
No
Yes
Yes
Will be continued.
2013 - $5,250,000**
Grantor Trusts may not automatically be
included in the Grantor’s Gross Estate for
Estate Tax Purposes)
Portability of First Dying
Spouse’s $5,250,000
Exemptions
*Although the default is a $5,000,000 exclusion, 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.
***The State Death Tax Credit still does apply. There is a state death tax deduction in 2010
through 2012, and in 2013 and thereafter as present continues to apply.
****Note that exclusion increase does not apply for Non Resident Aliens or future or already
existing Qualified Domestic Trusts (QDOT’s) established for Non Resident Alien spouses. They
still are subject to a $60,000 estate tax exclusion level for assets subject to US estate tax and
need planning as much as ever!
PROTECTIVE TRUST LOGISTICAL CHART
During both
spouse’s
lifetimes:
First Dying Spouse’s
Revocable Trust (or possibly a Joint Revocable
Trust, if specially designed)
Upon first
death in
2013:
During
surviving
spouse’s
remaining
lifetime:
Upon
second
death:
After
deaths of
both
spouses:
$5,250,000*
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 are
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)
$5,700,000?*
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 2013 and that the surviving spouse dies in a later year when the estate tax exemption has gone up to $5,700,000 (based upon 8.57% cumulative inflation). The estate tax exemption is
$5,250,000 for those that die in 2013, and increases with inflation in $10,000 increments.
If the first spouse does not use the entire exemption amount, what remains may be added to the surviving spouse’s allowance under the “portability rules” but will not grow with inflation.
18
Credit Shelter Trusts vs. Relying on Exemption Portability
A married couple might provide for all assets to go to the surviving spouse,
or to “lock up” up to $5,250,000 on the first death to facilitate a “credit shelter trust.”
CREDIT SHELTER
TRUST
SURVIVING SPOUSE
INHERITS ALL ASSETS –
USE PORTABILITY OF HIS
OR HER $5,250,000
EXEMPTION
1. Uses the first dying spouse’s $5,250,000 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 1.07% 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.
19
20
Estate Tax to IRS $17,424,581
21
Estate Tax to IRS $4,261,162
22
Estate Tax to IRS $273,810
23
Lifetime Gifts $6,704,991
Life Ins. Trust (ILIT) Surviving
Spouse $5,000,000
Estate Tax to IRS $482,158
Total Passed to Family $61,472,884
HAROLD AND CLAUDIA SANDERS
TRUST LOGISTICAL CHART
24
25
To download a FREE beta copy of the software
please visit:
http://goo.gl/xjKK8
We welcome all questions, comments and
suggestions.
26
BUYING TERM INSURANCE
AGE 30
PREFERRED
MALE
STANDARD
FEMALE
MALE
FEMALE
STANDARD SMOKER
MALE
FEMALE
10 Year Term
$378
$328
$658
$518
$1,548
$1,218
15 Year Term
$458
$398
$768
$688
$1,918
$1,438
20 Year Term
$608
$478
$968
$738
$2,278
$1,638
30 Year Term
$938
$768
$1,518
$1,218
$3,908
$3,018
AGE 35
PREFERRED
MALE
FEMALE
STANDARD
MALE
FEMALE
STANDARD SMOKER
MALE
FEMALE
10 Year Term
$375
$345
$735
$565
$1,685
$1,345
15 Year Term
$515
$415
$915
$805
$2,135
$1,775
20 Year Term
$665
$565
$1,105
$945
$2,885
$2,265
30 Year Term
$1,015
$825
$1,735
$1,375
$4,705
$3,555
27
BUYING TERM INSURANCE
AGE 40
PREFERRED
MALE
STANDARD
FEMALE
MALE
FEMALE
STANDARD SMOKER
MALE
FEMALE
10 Year Term
$505
$435
$925
$785
$2,405
$2,005
15 Year Term
$655
$575
$1,215
$1,035
$3,125
$2,485
20 Year Term
$865
$745
$1,505
$1,255
$4,345
$3,185
30 Year Term
$1,495
$1,135
$2,465
$1,985
$7,175
$5,275
AGE 45
PREFERRED
MALE
FEMALE
STANDARD
MALE
FEMALE
STANDARD SMOKER
MALE
FEMALE
10 Year Term
$805
$705
$1,405
$1,095
$8,935
$3,055
15 Year Term
$1,065
$875
$1,985
$1,445
$5,275
$3,815
20 Year Term
$1,415
$1,105
$2,355
$1,755
$7,195
$4,895
30 Year Term
$2,355
$1,765
$2,845
$2,825
$11,625
$7,555
28
BUYING TERM INSURANCE
AGE 50
PREFERRED
MALE
STANDARD
FEMALE
MALE
FEMALE
STANDARD SMOKER
MALE
FEMALE
10 Year Term
$1,235
$1,025
$2,145
$1,625
$6,435
$4,295
15 Year Term
$1,785
$1,235
$2,805
$2,065
$7,825
$5,725
20 Year Term
$2,225
$1,625
$3,425
$2,715
$10,425
$6,865
30 Year Term
$4,025
$2,645
$6,245
$4,785
$13,719
$10,109
AGE 55
PREFERRED
MALE
STANDARD
FEMALE
MALE
FEMALE
STANDARD SMOKER
MALE
FEMALE
10 Year Term
$2,025
$1,495
$3,315
$2,235
$8,935
$5,905
15 Year Term
$2,895
$1,835
$4,655
$2,985
$12,055
$7,995
20 Year Term
$3,505
$2,465
$5,955
$3,985
$14,875
$9,985
30 Year Term
Not Available
Not available
Not Available
Not Available
Not Available
Not Available
AGE 60
PREFERRED
MALE
FEMALE
STANDARD
MALE
FEMALE
STANDARD SMOKER
MALE
FEMALE
10 Year Term
$3,098
$2,198
$4,808
$3,278
$13,028
$8,308
15 Year Term
$4,488
$3,048
$7,088
$5,218
$17,658
$12,978
20 Year Term
$5,798
$4,078
$9,488
$6,668
$22,048
$15,058
30 Year Term
Not Available
Not Available
Not Available
Not Available
Not Available
Not Available
Primary Reasons to Rely Upon Portability as Opposed to
Full Funding of a Credit Shelter Trust for the Wealthy.
29
1.
Where property that will be eligible for depreciation or may be sold at ordinary rates will likely receive a
large step up on the death of the surviving spouse. For example, clients owning a $20,000,000 building subject to
$15,000,000 of debt may be best served by assuring that the property will receive a stepped up basis on the surviving
spouse’s death, particularly if their family assets are not expected to exceed $10,000,000 in total.
A valuation freeze mechanism may nevertheless be used to help avoid estate tax risk.
2.
Where the first dying spouse has significant IRA and pension accounts that constitute the majority of what
would be used to fund a Credit Shelter Trust, will the family prefer to have the spousal rollover minimum distribution
rules apply on an annually recalculated basis, with no distributions until the surviving spouse has passed age 70 ½?
Planners should also take into account that qualified plan and IRA benefits payable to a credit shelter trust
have a net after income tax value that is significantly less than the amounts held under the IRA or qualified plan.
Depending upon the life expectancy of the surviving spouse, contemplated payouts, and investment return
expectations, portability may be a better alternative than qualified plan funding of a credit shelter trust.
See the attached chart.
3.
Do the clients leave everything that would be estate taxable to charity or a charitable foundation?
4.
Is there a state inheritance tax situation that would cause payment of taxes on the first death unless
portability is used – discussed later in this outline.
NOTE: Update wills to permit the surviving spouse to require the filing of an estate tax return and the making of a
portability election.
Credit Shelter Trusts vs. Relying on Exemption
Portability
A married couple might provide for all assets to go to the surviving spouse,
or to “lock up” up to $5,250,000 on the first death to facilitate a “credit shelter trust.”
CREDIT SHELTER
TRUST
SURVIVING SPOUSE
INHERITS ALL ASSETS –
USE PORTABILITY OF HIS
OR HER $5,250,000
EXEMPTION
1. Uses the first dying spouse’s $5,250,000 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 0.87% 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.
30
Three Choices for Retirement Plan Benefits – May Be Best to Have This Spread 31
Among Two of the Choices – Client Age 75 and Oldest Child Age 50
CHOICE #1
Mrs. Client as Beneficiary
Advantages:
1) Ability to roll over Dr. Client’s retirement plan accounts
income tax-free into her own retirement plan account and to
take required minimum distributions based upon her life
expectancy, recalculated annually, based upon the below
percentages of the retirement plan account for the next ten
years.
The above referenced distribution percentages are less than
what would occur if the retirement plan account was payable
to Dr. Client’s Revocable Trust.
2) Mrs. Client has the ability to direct the disposition of the
retirement plan funds upon her death, and after Mrs. Client’s
death, the required minimum distributions from the
retirement plan funds would be based upon the life
expectancies of her chosen beneficiaries. The retirement
plan funds would be protected from the creditors of these
beneficiaries if the funds are paid to trusts for the benefit of
such beneficiaries after Mrs. Client’s death.
Disadvantages:
1) The future value of the retirement plan would be
includable in Mrs. Client’s estate for federal estate tax
purposes upon her death.
CHOICE #2
Restated and Amended Trust Agreement of Deceased
Client’s Revocable Trust
Advantages:
1) The retirement plan accounts can benefit Mrs. Client
without being subject to federal estate tax in her estate.
2) Mrs. Client cannot access the retirement plan accounts
above the annual required minimum distribution without the
consent of the other Co-Trustees, which protects Mrs. Client
from any undue influence.
3) The retirement plan benefits would be protected from the
creditors of Mrs. Client’s children after her death, except to
the extent of any distributions actually made from the Trust
to the children.
2) The above referenced distribution percentages are
greater than what would occur if the retirement plan
accounts were disclaimed so that they are payable to the
Client ‘sIrrevocable Trust.
Disadvantages:
1) Annual required minimum distributions would be based
upon Mrs. Client’s life expectancy and a special distribution
table that is not recalculated annually, which would be as
described below for the next ten years.
The below referenced distribution percentages are greater
than what would occur if either of the two other alternatives
were chosen.
Thus, by using Mrs. Client’s life expectancy to determine the
annual required minimum distributions, the retirement plan
benefit distributions cannot be “stretched” out over life
expectancies of Mrs. Client’s children after her death.
2) Mrs. Client will have to forfeit her ability to direct the
disposition of the retirement plan funds after her death. The
retirement plan funds will instead pass in separate trusts for
the benefit of Mrs. Client’s children upon her death.
2012: 4.5455%
2013: 4.7170%
2014: 4.9261%
2015: 5.1282%
2016: 5.3476%
2017: 5.5866%
2018: 5.8480%
2019: 6.1350%
2020: 6.4516%
2012:
2013:
2014:
2015:
2016:
2017:
2018:
2019:
2020:
8.0645%
8.7719%
9.6154%
10.6383%
11.9048%
13.5135%
15.6250%
18.5185%
22.7273%
CHOICE #3
Irrevocable Trust for Children Only
Advantages:
1) The value of the retirement plan accounts would not be
includable in Mrs. Client’s estate for federal estate tax
purposes upon her death.
2) Annual required minimum distributions of retirement plan
benefits would be based upon the life expectancy of the
oldest of Mrs. Client’s children and a special distribution
table that is not recalculated annually, which would be as
described below for the next ten years.
The above referenced distribution percentages are optimal
from an income tax planning standpoint, as they are more
favorable than the other alternatives because they result is
the lowest annual required minimum distributions.
3) The retirement plan benefits would be protected from the
creditors of Mrs. Client’s children after her death, except to
the extent of any distributions actually made from the Trust
to the children.
Disadvantages:
1) Mrs. Client cannot benefit from the retirement plan
accounts.
2) Mrs. Client cannot control the disposition of the retirement
plan funds upon her death. The retirement plan funds will
continue to be held pursuant to the terms of the Trust.
2012:
2013:
2014:
2015:
2016:
2017:
2018:
2019:
2020:
3.0120%
3.1056%
3.2051%
3.3113%
3.4247%
3.5461%
3.6765%
3.8168%
3.9683%
32
CREDIT SHELTER TRUST ALTERNATIVES FOR
CLIENTS WHO WANT FLEXIBILITY IN THEIR PLANNING
Committee to Provide a Power of Appointment. The authors are concerned that if a couple
opts to use portability, surviving spouses will not be as well protected as if they had funded a
Credit Shelter Trust to benefit the surviving spouse for his or her lifetime. Asking someone
who has just lost his or her lifelong spouse to make a significant financial decision within nine
months of death by disclaimer, and to also give up the power to appoint how the trust assets
will pass by power of appointment, is not an optimal solution. Neither is transferring assets
outright to a surviving spouse who may lose them to creditors, divorce claims, or overly
aggressive son and daughter-in-laws an ideal option.
The Clayton QTIP strategy typically works well, but the decision must be made on
the first dying spouse’s estate tax return, which will be due no later than 15 months after the
death of the first spouse, and explaining the mechanism to clients may be challenging.
The authors therefore favor providing a committee of impartial advisors, who have the right to
give the surviving spouse a power to appoint the trust assets to creditors of his or her estate.
As a result, the surviving spouse will be considered the owner of the assets under the trust
for estate tax and income tax step-up basis purposes, even though the power given to the
surviving spouse may not be exercisable unless he or she has consent from one or more
unrelated parties. If the estate tax is eliminated and a family wants to receive a stepped-up
basis on the death of the surviving spouse, then the following clause may be used:
Determining Best How To Allocate Assets As Between A Married Couple
33
Part I
General Rules:
-Typically want each trust funded with at least $5,250,000 worth of assets on death for estate tax planning.
Wife could be Trustee if
- May be funded from ½ of tenancy by the entireties assets via disclaimer and probate or by life insurance/pension/IRA
assets.
Trustee other than
Husband is sole grantor
Wife
Husband
Husband or Wife
(or vice versa)
Protected life
insurance and
annuity
contracts
“owned by the
insured.”
1.
2.
Husband’s
Revocable
Trust
1.
Assets held directly by
revocable trust are subject to
husband’s creditor claims.
Direct ownership of limited
partnership or LLC not in TBE
may have charging order
protection (meaning that if a
2.
creditor obtains a lien on the
limited partnership or LLC,
the husband cannot receive
monies from the limited
partnership or LLC without
the creditor being paid).
Wife’s
Revocable
Trust
Gifting Trust
(Irrevocable)
Lifetime ByPass Trust
(Irrevocable)
FLORIDA TBE
(Tenancy by the
Entireties)
Only exposed to creditors if
1.
both spouses owe the
creditor, if one spouse dies
and the surviving spouse
has a creditor, the spouses
divorce, or state law or the 2.
state of residence changes.
On death of one spouse,
surviving spouse may disclaim
up to ½ (if no creditor is
pursuing the deceased
spouse) to fund By-Pass Trust
on first death.
Safe from creditors of husband
but exposed to creditors of wife
(Maintain large umbrella liability
insurance coverage to protect
these assets.)
On wife’s death, can be held
under a protective trust,
which will continue to be safe
from creditors of husband,
subsequent spouses, and
“future new family.”
1.
2.
3.
Safe from creditors of
both spouses.
If divorce occurs,
should not be subject
to rules for division of
property between
spouses.
May be controlled by
the “entrepreneurial
spouse” by using a
Family Limited
Partnership.
1.
2.
3.
Safe from the creditors
of the Grantor’s spouse.
If funded by one spouse,
may benefit other spouse
and children during the
lifetime of both spouses.
Otherwise can be identical
to gifting trust pictured to
the left.
SEE NEXT PAGE FOR SECOND TIER PLANNING
A COMMON SOLUTION - to use a limited partnership or similar mechanisms and have no assets directly in the “high risk” spouse’s
trust, half to two-thirds of the assets held as tenants by the entireties, and half to two-thirds of the assets directly in the “low risk”
spouse’s trust.
Determining Best How To Allocate Assets As Between A Married Couple
34
Part II
Subsidiary Entity Techniques:
-Limited partnerships and LLCs can be used to facilitate discounts, for estate tax purposes, and for charging order protection.
Wife could be Trustee if
-Limited partnerships and LLCs can also be used to provide “firewall protection” from activities or properties owned.
Husband is sole grantor
Husband
Wife
Trustee other than
(or vice versa)
Husband or Wife
Husband’s
Revocable
Trust
1.
2.
1.
Assets held directly by
revocable trust are subject to
husband’s creditor claims.
Direct ownership of limited
partnership or LLC not in TBE
may have charging order
protection (meaning that if a
creditor obtains a lien on the 2.
limited partnership or LLC,
the husband cannot receive
monies from the limited
partnership or LLC without
the creditor being paid).
97%
SECOND TIER
PLANNING:
FLP
Wife’s
Revocable
Trust
FLORIDA TBE
(Tenancy by the
Entireties)
Only exposed to creditors if
1.
both spouses owe the
creditor, if one spouse dies
and the surviving spouse
has a creditor, the spouses
divorce, or state law or the 2.
state of residence changes.
On death of one spouse,
surviving spouse may disclaim
up to ½ (if no creditor is
pursuing the deceased
spouse) to fund By-Pass Trust
on first death.
3%
1%
Safe from creditors of husband
but exposed to creditors of wife
(Maintain large umbrella liability
insurance coverage to protect
these assets.)
On wife’s death, can be held
under a protective trust,
which will continue to be safe
from creditors of husband,
subsequent spouses, and
“future new family.”
96%
Lifetime By-Pass
Trust
(Irrevocable)
Gifting Trust
(Irrevocable)
1.
2.
3.
Safe from creditors of
both spouses.
If divorce occurs,
should not be subject
to rules for division of
property between
spouses.
May be controlled by
the “entrepreneurial
spouse” by using a
Family Limited
Partnership.
1.
2.
3.
Safe from the creditors
of the Grantor’s spouse.
If funded by one spouse,
may benefit other spouse
and children during the
lifetime of both spouses.
Otherwise can be identical
to gifting trust pictured to
the left.
100%
Husband,
Manager
3%
FLP
LLC
FIREWALL
LLC
Leveraged
Investment
Property or activity
A COMMON SOLUTION - to use a limited partnership or similar mechanisms and have no assets directly in the “high risk” spouse’s trust, half to two-thirds of
the assets held as tenants by the entireties, and half to two-thirds of the assets directly in the “low risk” spouse’s trust.
DO NOT FORGET ANNUAL GIFTING – IT IS NOW
$14,000 PER YEAR, PER DONEE PLUS
THE CPI EXEMPTION INCREASE
35
Consider implementing a gifting program for the $14,000 annual exclusion
allowance, plus the $130,000 exemption increase.
Will increased exclusion gifting be done annually, every other year, or at some
other regular frequency to avoid having to file gift tax returns every year?
Calendar additional gifts once the gift tax statute of limitations has run on
returns filed for large 2011 and 2012 discounted gifts to make use of remaining
credit exemption amounts.
Calendar review of possible exercise of powers of appointment?
THE JACK BOGGS RULE:
Is it better to gift every year and file a gift tax return or every other year or every
third year – the cost of a gift tax return vs. the cost of losing the time value of
money.
10 YEAR GIFTING PERIOD – ALLOWING GROWTH THEREAFTER
36
MOVING MORE VALUE OUT OF TAXABLE $14,000 ANNUAL EXCLUSION ALLOWANCE
ESTATES BY USING DISCOUNTED LIMITED
30% VALUATION DISCOUNT
PARTNERSHIP OR LLC ANNUAL GIFTING
Year
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
Reportable Gifting
$14,000.00
$14,000.00
$14,000.00
$14,000.00
$14,000.00
$14,000.00
$14,000.00
$14,000.00
$14,000.00
$14,000.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
Cumulative Value
with 6% Growth
$14,000.00
$28,840.00
$44,570.40
$61,244.62
$78,919.30
$97,654.46
$117,513.73
$138,564.55
$160,878.42
$184,531.13
$195,603.00
$207,339.18
$219,779.53
$232,966.30
$246,944.28
$261,760.93
$277,466.59
$294,114.58
$311,761.46
$330,467.15
$350,295.18
$371,312.89
$393,591.66
$417,207.16
$442,239.59
$468,773.96
$496,900.40
$526,714.43
$558,317.29
$591,816.33
Gifting Equivalent Amount
Applying 30% Discount
$20,000.00
$20,000.00
$20,000.00
$20,000.00
$20,000.00
$20,000.00
$20,000.00
$20,000.00
$20,000.00
$20,000.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
Cumulative Value Value Added By Discount
with 6% Growth
Phenomenon
$20,000.00
$6,000.00
$41,200.00
$12,360.00
$63,672.00
$19,101.60
$87,492.32
$26,247.70
$112,741.86
$33,822.56
$139,506.37
$41,851.91
$167,876.75
$50,363.03
$197,949.36
$59,384.81
$229,826.32
$68,947.90
$263,615.90
$79,084.77
$279,432.85
$83,829.86
$296,198.82
$88,859.65
$313,970.75
$94,191.23
$332,809.00
$99,842.70
$352,777.54
$105,833.26
$373,944.19
$112,183.26
$396,380.84
$118,914.25
$420,163.69
$126,049.11
$445,373.51
$133,612.05
$472,095.93
$141,628.78
$500,421.68
$150,126.50
$530,446.98
$159,134.09
$562,273.80
$168,682.14
$596,010.23
$178,803.07
$631,770.84
$189,531.25
$669,677.09
$200,903.13
$709,857.72
$212,957.32
$752,449.18
$225,734.75
$797,596.13
$239,278.84
$845,451.90
$253,635.57
40% Estate Tax
Savings (40% of
Value Added)
$2,400.00
$4,944.00
$7,640.64
$10,499.08
$13,529.02
$16,740.76
$20,145.21
$23,753.92
$27,579.16
$31,633.91
$33,531.94
$35,543.86
$37,676.49
$39,937.08
$42,333.30
$44,873.30
$47,565.70
$50,419.64
$53,444.82
$56,651.51
$60,050.60
$63,653.64
$67,472.86
$71,521.23
$75,812.50
$80,361.25
$85,182.93
$90,293.90
$95,711.54
$101,454.23
$1,000,000 PROMISSORY NOTE/SCIN/PRIVATE ANNUITY/GRAT
ALTERNATIVES | MAY 2013
CLIENT AGE 73
Alternatives: (Using May 2013 Applicable Federal Rates and 7520 Rate)
<3 Year Interest Only Installment Note @ .20% - Payment = $2,000 per year*
9 Year Interest Only Installment Note @ 1.00% - Payment = $10,000 per year*
>9 Year Interest Only Installment Note @ 2.60% - Payment = $26,000 per year*
CLIENT
12 Year Interest Only SCIN @ 6.587% - Payment = $65,866 per year*
TRUST
(PURCHASER)
(AGE 73)
Private Annuity Level Annual Payment - Payment = $89,736 per year*
3 Year Level Payment GRAT @ 1.2% - Payment = $339,660 per year*
**3 Year GRAT @ 1.2% - Initial Payment = $280,345 and Increases Annually by 20%
* Notes would have no penalty for prepayment – minimum payments are shown above.
Self-cancelling installment Notes must balloon before life expectancy as measured at time of Note
being made. Client’s life expectancy is 12.33 years under IRS tables.
The SCIN calculations above are based on a 12-year note term.
** This GRAT assumes that each annuity payment will increase by 20% each year.
All GRATs assume a taxable gift of approximately $5,000.00 on funding
Note: May 2013 rates for annual compounding are:
Short-Term -- .20%
Mid-Term – 1.00%
Usable through July 31, 2013
Long-Term – 2.62%
37
38
Limited Liability Trust –
Asset Protection Trust
39
BETTER THAN AN LLC TO HOLD INVESTMENT PROPERTY IF LIABILITY INSURANCE
COVERAGE AND RATES WILL BE BENEFICIAL
SUCH A TRUST MAY ALSO QUALIFY UNDER AN INDIVIDUAL UMBRELLA POLICY, WHEREAS
AN LLC MAY NOT
Trust Company in proper jurisdiction = Trustee or Co-Trustee
Mother & Father
as contributors
ASSET
PROTECTION
TRUST
Rental Home(s)
-Benefits mother, father and children.
-May be disregarded for income tax purposes.
-No tax filing requirements if a domestic asset
protection trust jurisdiction is used.
-May need to have subsidiary management trust
owned 100% by asset protection trust to hold title, to
allow parents to have management powers
(preferably one parent who does not have other
exposed assets).
Child’s Homestead Irrevocable Trust
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,
maintenance and support of the Trustee-Spouse and children.
GRANTOR
SPOUSE
Gift
CHILD’S
HOMESTEAD
IRREVOCABLE
TRUST
Home and Other Assets
One or more children may reside in the house to qualify 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.
40
41
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
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.
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: Creditors 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 purchased
by child and one-half
owned by Father and
Mother.
One-half.
One-half.
One-half, better
protected.
Each controls onehalf.
Father and Mother
loan money to the
child. Child
purchases and owns
home.
Father and Mother
own the home and the
child lives in the
house.
Age of Client
Initial Value of Home
Fractional Discount Assumed
Discounted Value of ½ of Home
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)
68
$860,000
15.00%
$365,500
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
Estate Tax
Savings
After 16
Years
Assuming
7% Growth
on ½ of
House
$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
$404,848.70
$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%
Estate Tax
Savings After
16 Years
Assuming 7%
Growth on
Entire House
42
Dynasty Wealth Protection Trust
1.
2.
Trustee
3.
4.
DYNASTY
WEALTH
PROTECTION
TRUST
5.
6.
7.
Assets gifted to trust and
growth thereon.
Note: Nevada gets a gold star for having a law
that says there cannot be an assumed or an oral
agreement between the Grantor and the Trustee
of a dynasty trust; because of this, the IRS cannot
say that the grantor retains certain control.
8.
43
Grantor can replace the Trustee at any time and for
any reason.
Protected from creditors of Grantor and family
members.
Can benefit spouse and descendants as needed for
health, education and maintenance.
Per Private Letter Ruling 200944002 the Grantor
may be a discretionary beneficiary of the trust and
not have it subject to estate tax in his or her estate.
But be very careful on this! The Trust would need to
be formed in an asset protection jurisdiction and
there is no Revenue Procedure on this.
Should be grandfathered from future legislative
restrictions.
May loan money to Grantor.
May own limited partnership or LLC interests that are
managed at arm’s-length by the Grantor.
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.
Irrevocable Funded Domestic and International Wealth Accumulation 44
Trust Categories: Where Will Your Client Best Fit?
A
IRREVOCABLE,
COMPLETE GIFT TRUST
SETTLOR NOT A BENEFICIARY
B
Shielded from
future estate
tax of settlor
IRREVOCABLE
COMPLETE GIFT
TRUST
SETTLOR IS A BENEFICIARY
C
Shielded from future estate
tax of settlor – but in case
PLR 200944002 is not
correct – empower a third
party to deprive the settlor
of distribution rights more
than 3 years before the
settlor dies – IRC §§ 2035
& 2036
IRREVOCABLE
INCOMPLETE GIFT TRUST
Treated as if no gift occurred
for federal estate and gift tax
purposes – business purpose is
wealth preservation for family
members.
A1 Protected from creditors of the settlor, and some but not all of the creditors of the
beneficiary.
Exception Creditors:
• Support obligations: beneficiary’s child, spouse or former spouse (i.e., FL, CA, NY,
NJ)
•Person who has provided services for the protection of the beneficiary’s interest in
the trust (i.e., FL)
•State or U.S. claim empowered by state or federal law (i.e., public support obligations
in CA)
•Some states have more exceptions, (i.e., criminal restitution in CA, or punitive
damages arising from manslaughter or murder in NJ)
•Future legislation – What can they get you on next?
NOTE – May benefit spouse but be careful under IRC 2036. If spouse is beneficiary
cannot toggle off tax defective status unless an adverse party can approve all
distributions to spouse.
B1 Will be subject to estate tax under IRC § 2036 because the settlor
may be seen as retaining benefit by having the trust pay his/her
creditors – Revenue Ruling 2004-64
2. Nevada
A2 Protected from all creditors – subject to 2 year Statute of Limitations
(Much safer – assuming Nevada law applies)
B2 IRC § 2036 should not be an issue if PLR 200944002
C2 Same as A2:
All creditors, 2 yr statute
3. Alaska,
Delaware, and
Wyoming (WY
recently passed
amendments to
Uniform Trust
Code
A3 Delaware has a 4 year Statute of Limitations and exceptions for divorcing spouse,
alimony and child support, as well as for preexisting torts.
B3 PLR 200944002 indicates that Alaska is fine – but ex-spouse
creditors can get into a trust and may upset the apple cart under present
Alaska law. Only single clients should use Alaska?
C3 Same as A3: Delaware,
Alaska, Wyoming have 4 year
statutes. Delaware has
exceptions for support
obligations and preexisting
torts. Alaska has an exception
only for a divorcing spouse.
Wyoming has exceptions for
child support, property on an
application for creditor, or
fraudulent transfer.
4. Offshore –
Nevis, Belize,
Cook Islands
A4 Completely protected depending on jurisdiction
1. Most Domestic
States –
Including Florida
Alaska has a 4 year Statute of Limitations and an exception only for a divorcing
spouse.
Any creditor may be able to
reach into the trust (unless the
trust flees to another jurisdiction
– don’t forget the flee clause)
Delaware and Wyoming have more exception creditors and may be
more susceptible under PLR 200944002.
Wyoming has a 4 year Statute of Limitations and exceptions for child support,
property listed on an application to obtain creditor, or for fraudulent transfers.
NOTE: Must remain defective for income tax purposes – cannot toggle off
except by moving the trust to the United States.
C1 If grantor is beneficiary
there will be no creditor
protection – if grantor is not
beneficiary then see A1 for
exceptions
B4 Should be as good as Nevada – Belize has a 1 day statute
C4 Should work fine as in A4 –
no full faith and credit clause or
state law jurisdiction concerns.
WHAT IF YOU DECIDE NOT TO FORM THE TRUST IN YOUR HOME 45
STATE? SHOULD I STAY OR SHOULD I GO?
FACTOR
NEVADA
ALASKA
ISLE OF
MAN/JERSEY
(Channel Island)
NEVIS
BELIZE
Use of Trust
Protectors.
New concept
New concept
Since the 1700s
Normal
Normal
Quality of service.
High
High- time zone
difference
British-style/time
zone difference
Small town- usually
good.
Mayberry RFD
Allows importation
with statute of
limitations tolling
from inception of
trust at where it was
imported from?
YES if original situs
has substantially
similar spendthrift
laws
YES
The Statute of
Elizabeth provides
that fraudulent
transfers should be
void, not subject to
any limitation period
YES
YES
Toggling off is
possible?
YES
YES
NOT unless there is
one or more U.S.
beneficiaries
NOT unless there is
one or more U.S.
beneficiaries
NOT unless there is
one or more U.S.
beneficiaries
Provides for
contingency fee
payments? - Number
of lawyers
YES
YES
About 4,000
attorneys
NO, about 170
attorneys in Isle of
Man, and 150 in
Jersey
Most lawyers are
conflicted
NO, about 100
attorneys
Most lawyers are
conflicted
NO, about 150
attorneys
Most lawyers are
conflicted
Rule Against
Perpetuities
365 years
1,000 years
150 years
Does not apply
Abolished
About 10,000
attorneys
Example of a Husband/Wife Dynasty
Trust Arrangement
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
$5,000,000 in assets
Husband has $1,782,500 of his
$5,000,000 exemption remaining.
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.
46
Defective Grantor Trusts & Disregarded Entities Illustrated47
Flowchart Summarizing Private Letter Ruling 200439028
PLANNING FOR A DYNASTY TRUST WHERE THE SPOUSE OF THE
48
SETTLOR/CONTRIBUTOR IS A BENEFICIARY - SPECIAL CONSIDERATIONS
1.
The settlor’s spouse may be a trustee of the trust. As with all irrevocable trusts, administration should be well documented and according
to the trust document.
2.
The settlor’s spouse can have the right to receive amounts as reasonably needed for health, education, maintenance, and support. It is best
to provide that any such distributions for the spouse will be made only after taking into account the spouse’s other assets and resources.
Otherwise, consider whether the spouse might be considered to be gifting to the trust if he or she had the right to receive distributions and
did not take them.
Alternatively, limit distributions to the spouse by requiring an independent fiduciary to approve them.
3.
Marital Deduction Savings Clause - The settlor’s spouse may be the beneficiary of an outright disposition or General Power of Appointment
Marital Trust provision to be funded if total contributions to the trust would otherwise cause gift tax responsibility. Do not use a QTIP trust
for this because of the harsh regulations requiring a marital deduction election to be filed for a lifetime QTIP trust gift.
4.
Typically the trust will be disregarded for income tax purposes, so that the settlor can pay the income tax attributable to the trust’s income.
In case the settlor may want to “toggle off” defective grantor trust status (such as by reserving the right to replace trust assets with assets
of equal value, and then releasing that right) an adverse party (another substantive beneficiary under the trust) must have the right to
approve any distributions to the spouse.
Otherwise the trust will be a defective grantor trust under Internal Revenue Code Section 677, and the settlor will not be able to toggle that
off (except by getting divorced!).
5.
The settlor’s spouse may choose to “split the gift” on a gift tax return, which is permitted notwithstanding that the spouse is a beneficiary,
so long as it is very unlikely that the spouse will need to receive benefits for health, education, maintenance and support when taking into
account the spouse’s other assets and resources. See Private Letter Ruling 200345038, William H. Robertson vs. Commissioner, 26 TC 246
(1956), and BNA Portfolios 822-2nd: Estate, Gift and Generation-Skipping Tax Returns and Audits, Section IX.M, and 826-2nd: Life
Insurance, Section II.F.
6.
What if the assets used to fund the trust had recently been owned jointly by the settlor and the spouse, or were owned by the spouse and
transferred to the settlor, who then transferred them to the trust? Under the Step Transaction Doctrine, the assets and the economic risk
associated therewith should be owned and held exclusively by the settlor for a reasonable period of time. In case the IRS argues that the
contribution to the trust was really made by the settlor’s spouse (in which event the settlor’s spouse may be subject to federal estate tax
under Internal Revenue Code Section 2036(a)(1) - retained life interests), it may be important to have trust language which provides that any
trust assets considered as transferred to the trust by the spouse beneficiary will be considered to be held in a separate subtrust of which
the spouse will not be a beneficiary.
49
PLANNING FOR A DYNASTY TRUST WHERE THE SPOUSE OF THE
SETTLOR/CONTRIBUTOR IS A BENEFICIARY - SPECIAL CONSIDERATIONS
7.
Should the surviving spouse be given a limited power of appointment to direct how trust assets will pass? The grantor cannot be given this power if a
completed gift to the trust is desired, but the spouse can. However, the power should not be exercisable in favor of her personally, her creditors, her estate,
or creditors of her estate.
At what point should the power of appointment exist and/or be terminated?
(a)
Immediately upon inception of the trust until the death of the surviving spouse?
(b)
Only after the death of the settlor until the death of the surviving spouse?
(c)
Only unless or until the parties are divorced or either party has a child who is not a beneficiary under the trust?
What would prevent the beneficiary spouse from exercising his or her power of appointment to fund a trust for the donor spouse to allow the ability to
receive amounts as needed for health education and maintenance – assuming that there is no pre-existing agreement or obligation for this to happen.
8.
Should there be a divorce clause?
Typically where the drafting lawyer is representing both spouses this can be discussed and a joint representation letter can be put into place. It is likely that
the judge will consider the trust assets to be for the benefit of the beneficiary spouse, but this will vary from state to state and judge to judge.
If the settlor’s spouse is not a client then consider a clause that will provide that, upon divorce, the beneficiary spouse is no longer a beneficiary, trustee or
otherwise entitled under the document.
9.
If the trust also provides for health, education, maintenance and support or other payments to descendants, how will the trust be protected from a
descendant’s support claims or other items for which state law permits penetration of a trust?
If the trust’s primary beneficiary is your spouse, but your children can reach into it, do you have to worry that one of your children is going to have a nasty
divorce and the ex-spouse of a child is going to be able to reach into this trust?
Consider whether there should be a Flee (Cuba) Clause in the trust, or whether the trust should name an independent trust protector or trust protectors with
the ability to remove descendant beneficiaries and/or the ability to move the situs of the trust to an appropriately protective jurisdiction.
Action Checklist for 2013 Estate and Entity/Asset Structuring Update
50
Review the terms of the client’s revocable living trust to maximize credit shelter trust funding.
Evaluate what degree of funding on the first death will be necessary in view of portability.
Should each spouse have a power of appointment over the revocable trust of the other to obtain a
full step-up of all assets on death? Review issues associated therewith.
Consider whether to implement a joint trust with full credit shelter trust funding, and possibly a
complete stepped-up basis on all joint assets on the first dying spouse’s death.
Consider whether to establish a promissory note owed by one spouse to the other’s revocable trust
in order to facilitate credit shelter trust funding. Under the OID rules, you have to pay interest or
report interest, but it washes on a joint return.
Consider an Alaska community property trust.
Wealthier spouse may give less wealthy spouse a power to appoint sufficient assets under wealthier
spouse’s revocable trust, exercisable on death of less wealthy spouse, to fund a Credit Shelter Trust
with assets held under wealthier spouse’s own revocable trust. See Private Letter Ruling
200403094.
Action Checklist for 2013 Estate and Entity/Asset Structuring Update
51
Consider strategies to cause a step-up in the income tax basis of assets on the death of a client.
Determine whether to restructure entities that would cause a valuation discount on death- it may now
be preferable to have no discount and a full stepped-up income tax basis for appreciated assets.
Consider amending operating agreements and partnership agreements to reduce or remove the
restrictions that generate discounts so that on the death of the grantor the step-up in basis on these
assets will be greater.
Consider distributing assets out of LLCs or partnerships to the members and partners so gifting trusts
established as grantor trusts could possibly get a full step-up in basis on these assets on the death of the
grantor.
Amend revocable trusts to provide that a committee of “independent fiduciaries” could have the power
to bestow a general power of appointment on the surviving spouse to cause a step-up in basis on assets
that might not otherwise receive such a step-up.
Consider reforming irrevocable trusts previously established by the client for estate tax avoidance
purposes to provide the client with a testamentary general power of appointment or another power
over the trust assets that would cause them to be included in his gross estate for estate tax purposes in
order to cause a step-up in income tax basis on the death of the grantor.
Action Checklist for 2013 Estate and Entity/Asset Structuring Update 52
Facilitate having Credit Shelter Trust language be flexible to allow trust assets to be
includable in the estate of the surviving spouse to get an income tax basis step-up.
Reconsider creditor protection trust planning with the business purpose of funding to
complete a gift to take the assets and future growth out of the grantor’s estate,
notwithstanding that the grantor may be a discretionary beneficiary.
Consider whether to use a trust sitused in an asset protection jurisdiction (such as Nevada,
Alaska, Delaware, Belize or the Cook Islands) to hold assets that presently would only be
protected under charging order rules.
Combine effectiveness of an asset protection trust for credit shelter and protection purposes.
Consider implementing a gifting program for the $14,000 annual exclusion
allowance, plus the $130,000 exemption increase.
Will increased exclusion gifting be done annually, every other year, or at some other
regular frequency to avoid having to file gift tax returns every year?
Action Checklist for 2013 Estate and Entity/Asset Structuring Update 53
Calendar additional gifts once the gift tax statute of limitations has run on returns filed for
large 2011 and 2012 discounted gifts to make use of remaining credit exemption
amounts.
Calendar review of possible exercise of powers of appointment?
Considering Offshore or Domestic Creditor Protection Trusts
SHOULD I STAY OR SHOULD I GO?
FACTOR
NEVADA
Asset protection law –
Statute of Limitations
See Page 46
Strong/2 years – BUT
full faith and credit
issue
Approximate minimal
cost to open trust and
annual fees.
Risk of theft.
Use of subsidiary
entities permittedsettlor can be Manager
of entity.
Reputation with US
courts.
Commonality of use of
Swiss or Bermuda
depositories.
54
ALASKA
ISLE OF
MAN/JERSEY
(Channel Island)
NEVIS
BELIZE
Strong/4 years – BUT
full faith and credit
issue
No statutory limitation
on fraudulent transfer
– unless import law of
jurisdiction of a CoTrustee
Strong/2 years
Strong/1 day statute!
$700 fee to register;
$1,100 - $2,300 per
year thereafter
$250 to open
$1,500 per year
thereafter
$750 to open
$3,000 per year
thereafter
$1,600 to open
$1,600 - $3,300 per
year thereafter
$1,750 min to open
$2,500-$5,000 per
year thereafter
depending on value of
trust
Very low.
Very low.
Should be very low.
Low, if you use a safe
trust company.
Not sure.
YES
YES
YES
YES
YES
Does the judge know
European history?
Does the judge like
Four Seasons Hotels
or Alexander Hamilton
(born there).
Has the judge read
SEC v. Banner Fund
International, or like
barrier reefs?
Does the judge
gamble?
New concept
Does the judge like
cruises?
Not common
Common in these
islands for centuries
Common
Common
Considering Offshore or Domestic Creditor Protection Trusts
SHOULD I STAY OR SHOULD I GO?
FACTOR
NEVADA
ALASKA
ISLE OF
MAN/JERSEY
(Channel Island)
NEVIS
55
BELIZE
Use of Trust
Protectors.
New concept
New concept
Since the 1700s
Normal
Normal
Quality of service.
High
High- time zone
difference
British-style/time
zone difference
Small town- usually
good.
Mayberry RFD
Allows importation
with statute of
limitations tolling
from inception of
trust at where it was
imported from?
YES if original situs
has substantially
similar spendthrift
laws
YES
The Statute of
Elizabeth provides
that fraudulent
transfers should be
void, not subject to
any limitation period
YES
YES
Toggling off is
possible?
YES
YES
NOT unless there is
one or more U.S.
beneficiaries
NOT unless there is
one or more U.S.
beneficiaries
NOT unless there is
one or more U.S.
beneficiaries
Provides for
contingency fee
payments? - Number
of lawyers
YES
YES
About 4,000
attorneys
NO, about 170
attorneys in Isle of
Man, and 150 in
Jersey
Most lawyers are
conflicted
NO, about 100
attorneys
Most lawyers are
conflicted
NO, about 150
attorneys
Most lawyers are
conflicted
Rule Against
Perpetuities
365 years
1,000 years
150 years
Does not apply
Abolished
About 10,000
attorneys
A Matter of Opinion – Reasonable Minds Will Differ
HOUSE OF BRICKS/HOUSE OF STICKS/SOAP ON A ROPE
HOUSE OF STRAW
FORGET IT
SOAP ON A ROPE
(PRISON)
HOUSE OF BRICKS
HOUSE OF STICKS
Offshore trust in a top
offshore jurisdiction?
Domestic in a top
domestic jurisdiction?
Trustee controlled
Most assets under an LLC
or partnership controlled
by client.
Client as co-trustee
and/or loosely managed
LLC or partnership
Small percentage of
personal assets
50% of personal assets
The majority of assets
Business purpose
besides creditor
protection
Creditor protection is the
sole purpose
Creditor protection is the
primary purpose and last
minute/domestic
No benefits paid or
derived by settlor
Occasional benefits in
unexpected situations or
expected future
retirement benefits
Significant continuing
benefits
Debit card
Fully reported for all tax
and disclosure purposes
Reasonable attempts to
comply with reporting
purposes
Haphazard reporting
Intentional non-reporting
Intentional failure to
report income
Intentional nonreporting
Disclosure on financial
statements and
otherwise
No one is misled over
the arrangement
No one is intentionally
misled over the
arrangement
Has intentionally misled
creditors (may be a
crime)
Has intentionally misled
a court or the Internal
Revenue Service
56
OFFSHORE TRUST –
TICKING TIME BOMBS

Not reporting the trust and trust activities on a Form 3520, upon inception, Form
3520A each year thereafter, TD F 90-22.1 (FBAR) forms annually, and compliance
with FATCA (Foreign Account Tax Compliance Act) reporting requirements.

Not reporting trust income or not reporting income that goes into the trust.

Being dishonest with any potential creditor, the IRS or any taxing authority with
respect to the trust or its underlying operations.

Not reporting the funding of the trust as a completed gift for gift tax purposes if the
grantor has not retained a power with respect to the trust that would cause its
funding to be an incomplete gift (such as the testamentary power to appoint trust
assets) even if the trust will be subject to estate tax by reason of such power.

Failure to provide that upon death, any marital deduction devise must override any
discretionary power of the trustee or trust protectors to deprive the grantor’s spouse
of sole lifetime beneficiary/QTIP trust or outright payment rights.

Getting the trust assets stolen by the trustee.

Being dishonest with any court with respect to the trust or its operations.
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58
Do Domestic Asset
Protection Trusts Work?

Nevada, Alaska and Delaware have asset protection trust statutes.
But the Full Faith and Credit Clause of the U.S. Constitution provides
that a judgment issued by the court in one state will be respected by
the court in other states.

There are many questions regarding the effectiveness of domestic
APTs. The case law is not yet fully developed on the question of
whether the law of a foreign jurisdiction will apply for the
determination of whether a creditor protection trust will shield trust
assets from creditors of the grantor who is also a beneficiary.
◦
◦
Hanson v. Denckla, 357 U.S. 235 1958 – the law of the state where the
trust administration occurs will be determinative.
In re Portnoy, 201 B.R. 685 (Bankr. S.D.N.Y. 1996) and In re Brooks, 217
B.R. 98 (Bankr. D. Conn. 1998) – assets placed in offshore APTs were not
excluded from the debtor’s Bankruptcy estates.
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Avoid Theft

It is vital that clients utilize reputable trust companies and structures
that assure that the assets they place under an APT will not be stolen.

Sometimes two trust companies from different jurisdictions will serve
as Co-Trustees under the trust agreement, or a lawyer or other
fiduciary may serve so that two signatures and collusion would be
required before monies held in an offshore account could ever be
stolen.

Some jurisdictions, like the Isle of Man and Jersey in the Channel
Islands allow for the law of a co-trustee’s jurisdiction to apply.
◦
There are many well funded and reputable trust companies in the Isle of
Man and Jersey willing to serve as managing Co-Trustee of APT formed
under the laws of a more recognized APT jurisdiction.
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“It wasn’t raining when Noah built the ark.”
QUESTIONS FOR YOU
BEFORE WE GET STARTED
61
1. Are your clients getting the best estate plan you can put together for them?
Or is it just the same old form time after time built on a low budget?
2. Do your clients understand what they need to know to appreciate the plan you design
for them?
Or are you rushed through a free consult to try to land them in an economy plus estate
plan?
3. Do you have a clear understanding f the client’s assets, liabilities, titling, income,
plans and aspirations?
4. Have you run the numbers on estate tax and capital gains tax exposures, taking the
time value of money into account?
What about the Medicare 3.8% tax?
5. Are you also planning for the client’s parents as to inheritances that might be
received, or assistance that may be needed?
QUESTIONS FOR YOU
BEFORE WE GET STARTED
62
6. Have you taken into account the possibility of an ugly divorce, incapacity, law suits
against each person involved?
7. Have you looked at creditor protection for each person in the plan and after each
event in the plan?
TBE might work great, but not after one spouse dies.
Inheritances might pass in a creditor proof manner to an irrevocable trust, but what if a
beneficiary’s ex-spouse or the parent of a beneficiary’s child tries to invade the trust
which is permitted under Florida Statute Section 736.0503 (exception creditors).
8. Have you coordinated with the other professionals on the team, including the CPA,
financial planners, liability insurance people and others?
9. Have you made sure that the client has plenty of insurance for life, health, casualty,
disability and umbrella coverage and that gaps are plugged?
QUESTIONS FOR YOU
BEFORE WE GET STARTED
63
10. Have you covered the common mistakes, like:
a.
Joint accounts that are not TBE.
b.
Joint assets that are not TBE.
c.
Operating Agreements with provisions that obliterate an S election or charging
order protection.
d.
Thinking that revocable trusts shield from creditors or Medicaid.
e.
Thinking that S corporations do not shield from liability.
f.
Thinking that professional practices have to be owned by licensed
professionals (except dentists, optometrists, chiropractors and lawyers).
g.
Thinking that you cannot get a full step-up for joint assets owned by a married
couple or underone spouse’s revocable trust?
QUESTIONS FOR YOU
BEFORE WE GET STARTED
h.
Thinking that the client has charging order protection when they do not.
i.
Thinking that charging order protection is great protection.
j.
The always forgotten beneficiary designation.
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k.
Titling mistakes - a great reason to have a family limited partnership or an LLC
and then put the right things in it.
l.
Do not put a liability causing asset into an LLC or family limited
partnership that has other valuable assets - watch the capital call and indemnification
provisions.
m.
How do you prevent an offshore depository or even a U.S. depository from
stealing or being the next Bernie Madoff?
n.
Is the client being overcharged or churned in their investments? Do they know
what their investment costs are?
QUESTIONS FOR YOU
BEFORE WE GET STARTED
o.
TBE is not a panacea or paregoric.
The repairman who fell down because he was scared by the joint dog.
The motorcycle rider killed by the dog.
p.
Liability, liability, liability
How are we situated if Grandpa gives son half ownership of the car and then
backs it up over a neighbor?
You are responsible for anything your partners do.
You are responsible for anything your employees do.
Most dangerously of all, you are responsible for anything you do.
The $41 million dollar tick.
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QUESTIONS FOR YOU
BEFORE WE GET STARTED
66
11. Using special techniques for special clients, like:
a.
Annuities and life insurance private placement.
b.
Stretch IRA’s.
c.
QPRT’s.
d.
GRAT’s.
e.
Installment sales and private annuity sales.
The missed Self-Cancelling Installment Note or Private Annuity opportunity.
Being assertive and not beating around the bush with clients who have serious
illnesses.
f.
FLP’s.
QUESTIONS FOR YOU
BEFORE WE GET STARTED
g.
Out of state trusts
h.
Offshore trusts
i.
Lifetime QPRT’s
j.
Irrevocable Life Insurance Trusts
k.
The right type of Buy-Sell Agreement
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12. Are you customizing trust documents like you would customize your own?
Special Clauses for Trust Agreements
Not all trusts are created equal.
While the trust agreements that we typically prepare for clients have a number of clauses that give instructions to
trustees on how and when to determine what income, support, and principal payments should be made to beneficiaries, different
clients have different views and preferences. Here is a list of questions and approaches that can be considered in trust design and
implementation.
1.
Whether to let the beneficiary of a particular trust have a voice as co-trustee or the ability to replace any
acting trustee with a licensed trust company or other trustworthy trustee or advisor.
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2.
Whether to require that the beneficiary would have a prenuptial agreement or a postnuptial agreement before being able to inherit from a trust or to receive any significant benefits or to have control.
3.
Whether there should be a monthly or annual distribution amount guideline that would be
presumed to be the maximum that a person should receive, the minimum that a person should receive, or a
provision that gives a minimum and a maximum that can be changed with the Consumer Price Index.
4.
Whether young beneficiaries should be required to finish a four year degree, a postundergraduate degree, work full time, have a profession, or be a full time homemaker with children before being
able to receive any significant benefits.
5.
Whether a beneficiary should have an “incentive clause” where the trust would pay
minimal benefits except to match W-2 or other professional or entrepreneurial earnings or pay an hourly rate
based upon actual hours worked by the beneficiary in any notable endeavor.
6.
Whether individuals who may have tendencies towards alcoholism, drug abuse, gambling
problems, or other addictions should have separate guidelines and standards.
7.
Whether any spouse or a long time spouse should have the ability to be:
(a)
Added as a beneficiary after a certain number of years of consecutive marriage;
(b)
To serve as a trustee for the benefit of descendants if that spouse will not be a beneficiary
(or if he or she will).
8.
Whether the beneficiary should have the power to appoint some portion of the assets upon
death to a class of persons, or entities, which can include your descendants, or certain qualified charitable
organizations.
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9.
Whether the beneficiary should have a power to appoint some portion of the assets upon
death to a trust that could benefit the long term spouse and would then eventually be devised to the descendants
upon his or her death, or upon his or her re-marriage.
10.
Whether a beneficiary will be able to receive a percentage or other specified portion of the
trust assets for use in business, or entrepreneurial endeavors if the Trustee deems appropriate.
11.
Whether a Trust Protector Committee should be appointed, with the power to change the
trust language or to direct the trustees as to certain matters or parameters. This is also known as a “King
Solomon Clause.”
16. Following up for review.
Buy/Sell Agreement Arrangements
70
Chapter 24 of the book entitled “Creditor Protection for Florida Physicians: A Comprehensive Handbook for Physicians and
Their Advisors” by Alan S. Gassman, Esq. provides an in-depth discussion of Buy/Sell Agreement Arrangements. Below
please find Chapter 24.
Buy/Sell Agreements are an essential component of creditor protection and wealth conservation planning for anyone who has partners or fellow shareholders in a significant practice or
investment company.
This is discussed in Chapter 25 (“The Biggest Mistakes Doctors Make”) under the category of Failure of Multiple Physician-Owned Practices to Have Appropriate Buy-Sell and/or
Shareholder Agreements in Place.
Creditors can be prevented from taking over ownership of corporate interests, or may be bought out at a relatively low value, if Shareholder or Operating Agreements and ownership
certificates are appropriately handled.
The design and implementation of Buy/Sell Agreements can also have a very significant impact upon creditor and wealth preservation planning, and we commonly see significant
mistakes made in the design and drafting of such agreements and with respect to the ownership and maintenance of life insurance and disability buy-out insurance that has been
purchased with hard earned money.
There are several different kinds of Buy/Sell Agreements for physician practices and investment arrangements, and these are commonly set forth in a “Shareholder Agreement”,
“Buy/Sell Agreement”, or an “Operating Agreement”. The terminology of the name or names of agreements that provide buy-in and buy-out arrangements vary significantly, and
important provisions associated therewith may be found under corporate by-laws, employment agreements, severance pay agreements, and other legal documents.
A Logical Guide to Selecting a Buy/Sell Agreement Arrangements
“A Logical Guide to Selecting a Buy/Sell Agreement Arrangement: Traditional Choices are Not Always the Best” written by Alan S. Gassman, Copyright © 2009
1.
Entity Redemption Arrangements. The company owns the life insurance policy and is the beneficiary thereof. Upon receipt of the life insurance proceeds, the company is to use
such proceeds to buy out the deceased owner.
Will there be enough money to (a) buy out the deceased owner and (b) have the deceased owner released from any and all guarantees and obligations associated with the business?
(a) If it is not practical to have the deceased owner released for contractual or other reasons, should the part of the life insurance proceeds that would otherwise be kept by the
company as key man insurance be escrowed pending satisfaction or releases of any and all guarantees that the deceased owner may have responsibility for.
(b) How can the deceased owner’s family be sure that the monies received from the life insurance policy will actually be used to satisfy contractual buy-out agreements?
Buy/Sell Agreement Arrangements
71
(c) What if the company claims that for some reason the agreement is not enforceable or that there are claims against the deceased owner that offset what would be paid to him or
her?
(d) What if the company has a major creditor claim against it (what if the deceased owner died in a car accident that he or she caused while driving a company vehicle and the
company is now being sued by others who died in the accident?)
(e) What if the company goes into bankruptcy and the family of the deceased owner becomes just another creditor in a bankruptcy proceeding?
(f)
2.
For income tax purposes the remaining shareholders do not get a stepped up basis for the stock purchased. The stock simply becomes treasury stock.
Cross Purchase Agreements can be considered to avoid the above potential problems.
Each owner may own the policy or policies on the other owners. Thus the policy proceeds should be protected from creditors of the company.
Also, each purchasing shareholder will get a tax basis in the purchased stock equal to the purchase price thereof.
(a) However, policy proceeds will not be protected from creditors of the surviving owner who would receive policy proceeds.
(b) Also, contractual disputes could result in the surviving owner using the funds for other purposes while litigating over the obligation to pay and becoming insolvent.
(c) Further if there are more than 2 shareholders, then on the death of one owner the policies owned on the others would need to be transferred to rebalance between them, thus
causing issues under the transfer for value rules. For example, if there are 4 equal shareholders there have to be 4 polices each owned 1/3rd each by each 3 shareholders on the fourth,
and if one leaves the company the remaining 3 policies have to be readjusted as to ownership. Under the transfer for value rules this could cause the proceeds of a life insurance
policy to be subject to income tax when the insured person dies.
3.
Hybrids of the Above Types of Agreements.
Consider a Trusteed Corporate or Cross-Purchase Agreement. Under these arrangements the owner and beneficiary of the policy can be a trust company, a law firm, or another trusted
institution as trustee for the benefit of the company in a Trusteed Redemption arrangement, or for the benefit of the other shareholder or shareholders in a Trusteed Cross-Purchase
arrangement. The trust agreement can require that the policy proceeds be held safely until sale and used solely for redemption or cross-purchase purposes. This at least assures the
surviving family that the life insurance proceeds will not be absconded with.
Generally for tax purposes the policy needs to be considered as owned and payable to the company in a redemption arrangement, or to the surviving owner or owners in a crosspurchase agreement. Could a state court or a bankruptcy court override the trust agreement where there are creditors of the entity in a redemption arrangement, or creditors of the
remaining shareholders in a cross-purchase arrangement?
Buy/Sell Agreement Arrangements
72
There would be a purchase price tax basis for the other shareholders if the Trustee is appropriately characterized as an agent for the other shareholders.
4.
The Optimal Solution: Use of a Related Partnership to Facilitate Purchase.
Because of the above concerns, oftentimes a separate limited partnership or limited liability company is established to own and facilitate the life insurance buy-out arrangement.
This entity will be taxed as a partnership to avoid the transfer for value rules that would otherwise be problematic if there are more than 2 owners and shifts of ownership in the policy
would apply if there was a redemption arrangement.
The transfer for value rules do not apply when there is a reapportionment of entitlement to the proceeds of life insurance for use in a Buy/Sell arrangement between partners under a
federal tax partnership. The partnership may have an additional investment besides the life insurance to help assure that it is recognized as a partnership for federal income tax
purposes.
If the separate partnership is purchasing the interest in the entity on behalf of its surviving partners, who are the surviving owners of the operating entity, then a creditor of the company
would have no claim against the policy proceeds, and a creditor of an individual “partner” in the partnership entity might have a claim against the member or partnership interest of the
individual partner, but this would not permit the creditor to reach into the partnership to have a claim against the policy proceeds if appropriate charging order protection applies.
The above strategy was blessed by the IRS in Private Letter Ruling 200747002, which discussed having term insurance held under an LLC taxed as a partnership to facilitate the BuySell arrangement. Under this Private Letter Ruling the manager of the LLC was a trust company that was required to use monies contributed to the LLC to purchase and maintain life
insurance to fund a separate cross-purchased Buy-Sell agreement between three related shareholders. It would be possible to have permanent life insurance and to have special
allocations of entitlement as to policy values under an LLC/partnership agreement. See The Advanced Tax Planner Volume 5, Issue #1 May-June 2008 at www.zelllaw.com and the ING
publication entitled Buy-Sell Planning Using Life Insurance/Buy-Sell Arrangements Using a General Partnership.