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Estate Planning
Keeping More for Your Family
Presented by
Dennis L. Thomas CPA ABV JD LL.M.-Taxation
Strothman and Company
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STROTHMAN ESTATE
PLANNING TEAM
• Judge Learned Hand; “Any one may so arrange
his affairs that his taxes shall be as low as
possible; he is not bound to choose that
pattern which will best pay the Treasury; there
is not even a patriotic duty to increase one’s
taxes.”
Gregory v. Helvering, 69 F;2d 809, 810 (2d Cir. 1934)
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ESTATE PLANNING PHILOSOPHY
• Control
• Retain cash flow to maintain accustomed
manner of living
• Minimize taxes
• Incorporate charitable goals
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AGENDA
I.
II.
III.
IV.
V.
VI.
VII.
VIII.
IX.
X.
XI.
Introductions
Estate Planning Process
Essential Estate Planning Documents
Revocable Trusts
Kentucky Inheritance Tax
Federal, Gift and Generation Skipping Transfer Tax
Irrevocable Trusts (Break)
Bypass Trusts vs. Portability
Valuation Planning
Tax Basis Adjustments
Questions
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GOALS
What do we want to accomplish with Estate
Planning?
– Give our loved ones peace of mind
– Keep our loved ones out of court (to the extent
possible)
– Prevent disputes among our loved ones
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ESSENTIAL ESTATE
PLANNING DOCUMENTS!
Four Documents:
Last Will and
Testament
Power of
Attorney
Revocable Trust
Healthcare
Directive
-Living Will
-Healthcare Surrogate
-HIPPA Release
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LAST WILL AND TESTAMENT
• A legal declaration by which you (the
testator):
Name another person (the executor) to manage
your estate; and
Direct the transfer of your assets at your death
• Why “Essential”?
If you don’t have a Will, your assets will not be
distributed according to your wishes, but
according to Kentucky law.
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LAST WILL AND TESTAMENT
Formalities for a Kentucky Will to be valid:
Must be at least 18 years of age
Must be of sound mind
Must be wholly in the testator’s own handwriting
or signed in the presence of two witnesses who
also sign in the presence of the testator and each
other
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GENERAL POWER OF ATTORNEY
• Written permission to represent you or act on
your behalf
• Generally for dealing with your finances
• “Durable” power of attorney = Not affected or
made invalid by the maker’s incapacity
• “Springing” power of attorney = Takes effect
only after the maker’s incapacity
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GENERAL POWER OF ATTORNEY
• Why “essential”?
– Without a power of attorney, court approval is
required for anyone else to act on your behalf and
perform most financial tasks
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HEALTH CARE POWER OF
ATTORNEY
• Authorization of another (a health care
surrogate) to make health care decisions for
you when you no longer have decisional
capacity
• Why “essential”?
If you don’t name a health care surrogate, no one
can act on your behalf with regard to health care
decisions
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AUTHORIZATION FOR DISCLOSURE OF
PROTECTED HEALTH INFORMATION
• HIPAA – major penalties for sharing health
information
• Names the individuals with whom doctors and
hospitals can share your health information
• Why “essential”?
– Without this authorization, doctors and hospitals
are prevented from sharing your health
information with anyone
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LIVING WILL
• A set of written instructions that specifies
what you want to have happen medically if
you are no longer capable of making decisions
– Directs withholding of life support, medicine,
drugs, nutrition, and hydration if attending
physician and one other physician determine that
(1) you are permanently unconscious or (2) you
have a terminal condition
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LIVING WILL
• Why “essential”?
Without a living will, a hospital generally will not
remove life support
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THE “ESSENTIAL” ESTATE
PLANNING
At the minimum,
Execute the 4
essential
documents
Conduct a
family
meeting
The
Essentials:
Organize your
affairs
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TRUSTS
• What is a Revocable Trust?
• Benefits of revocable trusts:
Avoid probate
Confidentiality
Simplifies asset management if disability
No estate and gift tax savings
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PROBATE
What is Probate?
A court-supervised, legal process
The validity of a Will is determined
The executor is appointed
The court oversees the gathering of assets, the
payment of creditors, and the distribution of
property to beneficiaries
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PROBATE
• How do you avoid probate?
Revocable Trust
Deeds – Joint with right of survivorship
Revocable Trust
Bank Accounts – Jointly owned or titled as paid on
death accounts (POD)
IRA, Annuities and Life Insurance naming a
designated beneficiary that survives the decedent
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FIDUCIARY ROLES
EXECUTOR
ADVISORY
COMMITTEE
HIPAA
REPRESENTATIVE
HEALTH CARE
SURROGATE
GUARDIAN
TRUSTEE
POWER OF
ATTORNEY
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KENTUCKY INHERITANCE TAX
Repeal of Kentucky Estate Tax - ATRA
 Federal Estate tax – Credit for State death taxes
vs.
 Federal Estate tax – Deduction for State death
taxes
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KENTUCKY INHERITANCE TAX
 Class A Exempt Beneficiaries
1.
2.
3.
4.
Spouse
Children (blood, step or adopted as infant)
Grandchildren(blood, step or adopted as infant)
Sibling (whole or half)
 Certain nonprofit organizations are exempt
under KRS 140.060
 Gifting in contemplation of death
 No gift tax
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KENTUCKY INHERITANCE TAX


Class B beneficiaries include:
1. Niece/Nephew (blood)
2. Daughter-in-law/Son-in-law
3. Aunt/Uncle
4. Great Grandchild
Class C beneficiaries include any beneficiary not in
Class A or Class B or is not exempt under KRS
140.060.
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KENTUCKY INHERITANCE TAX
Inheritance Amount
Over
Class B Beneficiary
Rates
Class C Beneficiary
Rates
500
0%
6%
$ 1,000
4%
6%
$ 10,000
5%
8%
$ 20,000
6%
10%
$ 30,000
8%
12%
$ 45,000
10%
14%
$ 60,000
12%
16%
$100,000
14%
16%
$200,000
16%
16%
$
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FEDERAL ESTATE, GIFT AND
GENERATION SKIPPING TRANSFER TAX
• Unlimited marital deduction – 1981
• Recent U.S. Supreme Court case of United
States v. Windsor 133 S. Ct. 2675 (2013)
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CURRENT DEVELOPMENTS
FEDERAL ESTATE, GIFT AND
GENERATION SKIPPING TRANSFER TAX
Annual exclusion gifts at $14,000 per donee from each
donor for 2013 and 2014 tax year
TAX YEAR
ANNUAL GIFT EXCLUSION
1979 – 2001
$10,000
2002 – 2005
$11,000
2006 – 2008
$12,000
2009 - 2012
$13,000
2013 -2015 (est.)
$14,000
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CURRENT DEVELOPMENTS
FEDERAL ESTATE, GIFT AND
GENERATION SKIPPING TRANSFER TAX
EXEMPTION AND RATES AFTER AMERICAN TAXPAYER RELIEF
ACT OF 2012 (ATRA)
TYPE OF
TAX
2014 EXEMPTION
AMOUNT *
TAX
RATES
ESTATE TAX
$5,340,0000
40%
GIFT TAX
$5,340,0000
40%
GENERATION
SKIPPING TRANSFER
TAX (GSTT)
$5,340,0000
40%
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EXEMPTION COMPARISON
Gift Tax Exemption
2013
2012
*2010
2009
2006
Estate Tax Exemption
2004
2003
2002
2001
2000
1999
1998
1997
1987
A
M
O
U
N
T
5,500,000
5,000,000
4,500,000
4,000,000
3,500,000
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
-
YEAR
GST Tax Exemption
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IRREVOCABLE GIFT TRUST
Assets generally estate tax exempt
Annual exclusion gifts – “Crummey
Withdrawal Rights”
Use of the gift tax exemption
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LEVERAGING THE EXEMPTION
Irrevocable Life Insurance Trust
Initial Gift Life Insurance
Cash Value:
Husband
Annual Gift of Premium
Payment
Irrevocable
Life Insurance
Trust
Beneficiary:
Wife, Then
Children
Wife, Trustee
Notices to
Crummey
Beneficiaries
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IRREVOCABLE GIFT TRUST
Dynasty Trusts
– Use of the GST tax exemption
– Rule against perpetuities repealed in Kentucky
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TAXATION OF TRUSTS
Grantor
Trusts
Electing
Small
Business
INCOME TAX
IMPLICATIONS
Complex
and
Simple
Trusts
Qualified
Subchapter
S Trusts
(QSST)
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Trust Tax Rates After American
Taxpayer Relief Act of 2012 (ATRA)
If taxable income is:
The tax rate is:
Not over $2,450
15%
$2,451 - $5,700
25%
$5,701 - $8,750
28%
$8,751 - $11,950
33%
$11,951 and up
39.6%*
Note that Long-term capital gain rates were increased to 20%
*Plus a 3.8% Medicare surtax on unearned income exceeding the top tax
bracket
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TRUST TAX PLANNING
ESTATE TAX EFFECTIVE
NO
NO
YES
NO
REVOCABLE TRUST
INCOME TAX
EFFECTIVE
IDGT
NO
YES
YES
YES
“CLIFFORD” TRUST
TESTAMENTARY TRUST
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IRREVOCABLE GIFT TRUST
• Nontax benefits of using a Dynasty Trust
– Creditor protection issues
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BYPASS TRUST PLANNING
•
•
•
•
What is a Bypass Trust?
What is the planning strategy?
How is the planning strategy implemented?
Assets funding a Bypass Trust are:
 Not subject to estate tax
 Generally held in trust for the life of the surviving
spouse and benefits the children and
grandchildren at the death of the surviving spouse
 Potentially subject to higher income and capital
gains tax rates
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BYPASS TRUST PLANNING
Last Will and Testament
• Executor = Spouse
Provision to leave personal property by memorandum, then to Spouse, if
living and if not, then to children.
• Residue distributed to Revocable Trust
Wife’s Estate
mirrors
Husband’s
Revocable Trust
Fund A for Spouse outright in fee
and free of trust
Fund B in trust for Spouse’s benefit
(currently equal to $5,250,000
less any prior gifts)
Distributes to Children
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BYPASS TRUST PLANNING
Last Will and Testament
• Executor = Spouse
Provision to leave personal property by memorandum, then to Spouse, if
living and if not, then to children.
• Residue distributed to Revocable Trust
Wife’s Estate
mirrors
Husband’s
Revocable Trust
Fund A for Spouse outright in fee
and free of trust (or in trust)
Fund B in trust for Spouse’s benefit
(currently equal to $5,250,000
less any prior gifts)
Distributes to Children
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PORTABILITY
Allows surviving spouse to use unused
exemption of deceased spouse
Must file a Federal estate tax return at the
death of the first spouse to claim use of the
decedent’s unused portion
Appreciating assets in surviving spouse’s
estate vs. Bypass Trust where the appreciation
of assets outside the surviving spouse’s estate
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PORTABILITY
ASSETS
Wife
Husband
EXEMPTION AMOUNT
Tax on assets above
combined exemption
amounts
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TRUST DECANTING
A. Evaluate trustee’s power to decant
 Must have the power to distribute principal
B. Evaluate trustee’s duties in connection with decanting
C. Determine the applicable law
 Differences between old and new trust must be
permitted under Kentucky statute
D. Address trustee’s risk
 Can be minimized by obtaining a release or
consent from the beneficiaries
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FAMILY COMPANIES/VALUATION
PLANNING
CHOICE OF ENTITY
CORPORATION
PARTNERSHIP
LIMITED LIABILITY COMPANY (LLC)
(Incorporated)
(Agreement)
(Organized)
C Corporation
General
Sole Proprietorship
S Corporation
Limited
Partnership
C Corporation
S Corporation
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FAMILY COMPANIES/VALUATION
PLANNING
 Types of LLC membership interest
1) Voting or Participating
2) Non-voting or Non-participating
 Things to consider when forming a new LLC
1) Ownership structure
2) Management
3) Business Purpose
4) Assets
5) Potential gifting to the next generation
6) Tax Status of Entity
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FAMILY COMPANIES/VALUATION
PLANNING
 Valuation discounts applied to transfers of nonvoting/non-participating interests in an entity:
A. Lack of Marketability
B. Lack of Control
 Fractional interest discounts available on
transfers of interest in assets such as:
A. Real Estate
B. Note Receivable
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ADJUSTMENTS TO BASIS
EVENT/ASSET
TYPE
ADJUSTED/
NOT ADJUSTED
HOW BASIS IS
DETERMINED FOR SALE
PURPOSES
Fair Market Value (FMV) At
Date of Decedent’s Death
Death
Adjusted
Gift
Lesser of FMV (at the time
Not Adjusted (unless gift tax paid) of the gift) or Donor’s Tax
Basis*
IRA,401(k), Annuity
and Installment
Sales
Not Adjusted
Carryover Basis of Decedent
N/A (Note: no estate tax either
Life Insurance
Adjusted to Death Benefit/Not
Taxable*
if owned by a child of the
decedent or an irrevocable
trust)
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ADJUSTMENTS TO BASIS
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DEDUCTIBILITY OF MEDICAL
EXPENSES
• “Qualified Long Term Services” are considered
medical expenses and are deductible for
income tax purposes. (IRC§7702B)
• The portion of care attributable to medical
care is the only portion deductible when the
principle reason for care is not medical.
(Treas. Reg. §1.213-1(e)(1)(v).
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DEDUCTIBILITY OF MEDICAL
EXPENSES
Personal
Care
Nursing
Home
Assisted
Living
FACILITIES
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DEDUCTIBILITY OF NURSING
HOME EXPENSES
Since the primary purpose of a nursing home
is to provide medical care, the entire cost is
tax deductible as a medical expense.
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DEDUCTIBILITY OF ASSISTED
LIVING EXPENSES
 A licensed health care practitioner has to
certify that the resident is unable to perform
at least 2 out of 6 of the activities of daily
living OR that they require substantial
supervision to protect their health and safety
due to severe cognitive decline.
 Obtain a statement from the licensed health
care professional at least once every 12
months.
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CURRENT DEVELOPMENTS
DEDUCTIBILITY OF MEDICAL
EXPENSES
• Deductible when medical expenses exceed the
following:
– 7.5% of AGI (in 2012)
– 10% of AGI if the taxpayer is under 65 (starting in
2013)
– 10% of AGI for every taxpayer (starting in 2016)
• Care provided by non-medical personnel is
deductible when it is for a person with dementia
needing 24 hour care. (Estate of Baral)
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ESTATE PLAN FLOW CHART
JOE TAXPAYER
WILL
JANE TAXPAYER
WILL
REVOCABLE
TRUST
REVOCABLE
TRUST
THE TAXPAYER FAMILY
IRREVOCABLE TRUST
Disclaimer
FAMILY TRUST
GIFT
INCOME
RESIDUE
CHILDREN
CHILD’S ESTATE
GRANDCHILDREN
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DENNIS L. THOMAS CPA ABV JD LL.M.-TAXATION
Partner
Strothman and Company
Certified Public Accountants and Advisors
1600 Waterfront Plaza 325 W. Main Street
Louisville, KY 40202
502.585.1600
dthomas@strothman.com
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