Advanced Estate Planning

(1)

Advanced Estate Planning

October 7, 2014

Presented by

Gregory E. Lambourne, Esq. Brown & Streza LLP – Irvine, CA

Review of Basic Estate Planning

• Health Care Directives

• Powers of Attorney

• The Probate Process

• Last Will and Testament

• Living (Revocable) Trust

• Private Estate & Trust Administration

(2)

Advanced Estate Planning

KEY GOALS:

• Reduce Taxable Estate

• Avoid Gift, Estate, and GST Taxes

• Growth/Appreciation Outside Taxable Estate

• Control of Use & Distribution After Transfers

• Provide Multi-Generational Support

• Asset Protection for Beneficiaries

Advanced Estate Planning

Taxable Estate

Transfer Taxes (Gift, Estate, GST)

Non‐Taxable Estate

Assets

(3)

Advanced Estate Planning

Taxable Estate

Assets Assets

Taxable Transfers 40% Tax Rate

Advanced Estate Planning

Taxable Estate

Assets Assets

Taxable Transfers

Exempt Transfers

(4)

Other “Excess” Assets

Taxable Estate

(Gift, Estate, GST)

Brokerage & Retirement

Personal Residence Cars & Personal Property

Checking & Savings You & Your Living Trust

Necessary Assets

Sample of Advanced EP Strategies

• Annual Exclusion Gifts

• Health and Education Exclusion Gifts

• Lifetime Exemption Gifts

• Custodial Accounts for Minors

• Qualified 529 Tuition Plans

• Intra-Family Loans

• Irrevocable Life Insurance Trusts

• Installment Sale to Irrevocable Trust

• Family Limited Partnerships

• Private Annuities

• Grantor Retained Income Trusts

• Qualified Personal Residence Trusts

… and much more!

(5)

Annual Exclusion Gifts

• Tax-free $14,000 per beneficiary per spouse per year

• Non-taxable and no reporting required

• Does not reduce “lifetime gift tax exemption”

• Must be a “present” interest, not a future benefit

• Best strategy for long-term gift giving

• Powerful when combined with other tools

Up to $14k Annually Per Beneficiary

Taxable Estate

Transfer Taxes (Gift, Estate, GST)

Independent Trust & Trustee

Checking & Savings

Annual Exemption

Gift You & Your

Living Trust

Necessary Assets

(6)

Health & Education Exclusion Gifts

 Unlimited exclusion for health and education gifts

 In addition to annual exclusion

 Does not reduce lifetime gift tax exemption

 Must be paid directly to provider

 Includes prepaying non-refundable tuition

 Includes prepaid health insurance or costs

Taxable Estate

Provider

Checking & Savings

Health & Education Exemption

Gift Unlimited Amount

Payments to Providers for Beneficiary Health and

Education Services You & Your

Living Trust

Necessary Assets

(7)

Lifetime Exemption Gifts

• Up to $5.34 million lifetime exemption per taxpayer

• Over and above the $14,000 annual exclusion

• Requires allocation by filing gift tax return

• GST tax exemption automatic where applicable

• Spouses can elect “gift splitting” exemption allocation

• Allows a wealthy person to transfer up to $10.68M.

Taxable Estate

You & Your Living Trust

Checking & Savings

Lifetime Exemption

Gift Up to $5.34M each,

or $10.68M for a couple

Necessary Assets

(8)

Custodial Accounts for Minors

• Account opened for benefit of minor child

• Parent or other may serve as custodian for the account

• Simple to establish, simply by titling:

“Parent, as custodian for Child under

CA Uniform Transfers to Minors Act”

• Counts as completed gift for gift and estate tax purposes

• Income reported by child, part of child’s estate

• Accessible by child at age 18 unless donor elects age 21

Up to $14k annually

Taxable Estate

Checking & Savings

Annual Exemption

Gift

Custodial Account for

Minors

Necessary Assets

(9)

Qualified 529 Tuition Plans

• Account established for payment of education expenses

• Qualifies for annual exclusion even though a future interest

• May contribute up to 5 years worth of annual exclusion at once

• Contributions must be in cash

• All income tax exempt and qualified education distributions exempt

• Account “owner” and “beneficiary” can be changed

• Not considered an asset of the student for financial aid purposes

• Is considered an asset of the parent if parent is the “owner”

Taxable Estate

Checking & Savings

Annual Exemption

Gift

Qualified 529 Tuition Plan

Necessary Assets

Annual Exclusions $14,000 per Lump up to 5 years worth

CA max $350k per

(10)

Intra-Family Loans

• Actual loan with obligation to repay is not a taxable “gift”

• Interest free loan is taxable gift of the foregone interest

• Certain narrow but useful exceptions ($10k, $100k)

• IRS “applicable federal rate” (AFR) is the minimum interest

• AFR usually much lower than market rates

• Non-taxable gift requires annual interest charges

• Powerful when combined with other tools

Taxable Estate

Checking & Savings

Family

Loan Principal & Interest

Necessary Assets

(11)

Irrevocable Life Insurance Trusts

• You establish an irrevocable trust with independent trustee

• Trust purchases life insurance on your life

• You transfer annual amounts to cover premium payments

• Trust gives beneficiaries right of withdrawal for 30 days, then lapses

• Right of withdrawal makes gift of future interest a present gift

• Requires timely notice of contributions to make the right legitimate

• Requires trust hold cash until withdrawal rights expire

• Insurance proceeds not included in your taxable estate

Taxable Estate

Annual Exclusion

Annual Gift + Right of Withdrawal

Checking & Savings

Necessary Assets

Other “Excess” Assets ^Gift

(12)

Installment Sale to Irrevocable Trust

• You sell undervalued / appreciable assets to irrevocable trust

• You take a long-term promissory note paying AFR as payment

• No gain recognition if a “grantor trust” for tax purposes

• Grantor trust if right to swap assets of fair market value

• If not a grantor trust, gains spread out over note payments

• Future appreciation takes place outside taxable estate

• Can use a self-cancelling note if premium interest rate paid

Taxable Estate

Checking & Savings

Independent Trust & Trustee

Lifetime Exemption

Gift Up to $10.68M Combined

FMV Sale

Necessary Assets

(13)

Family Limited Partnerships

• You form a limited partnership with 1% voting, 99% nonvoting shares

• You contribute appreciated assets with no tax effect

• You own all the shares the transfer is disregarded for tax purposes

• Important to document non-tax purposes of limited partnership

• After “seasoning” period, you gift all or part of the non-voting shares

• The gift of non-voting interest gets a valuation discounts (15-40%)

• Discount for lack of control and marketability of nonvoting shares

• You continue to control investments and non-tax distributions

• Effectively transfers 99% of value at a discount with no loss of control

• Powerful in conjunction with annual gifting and installment sales

99% Other “Excess” Assets

Checking & Savings

1% Voting Shares

Taxable Estate

You & Your Living Trust Non‐Taxable

No Tax on Exchange

100% Owned

Investment LLC Independent

Trust & Trustee

(14)

99% Non‐Voting

Shares Other “Excess” Assets

(Gift, Estate, GST)

Checking & Savings

1% Voting Shares Taxable Estate

No Tax on Exchange

100% Owned Investment LLC

Non‐Taxable Swap

Checking & Savings

1% Voting Shares Taxable Estate

No Tax on Exchange

100% Owned Investment LLC

Non‐Taxable Swap

Annual & Lifetime Gifts

99%

(15)

Private Annuities

• Similar to sale using an installment note

• Assets sold in exchange for an annuity payment

• Must abide Section 7520 rate (120% of AFR) when calculating

• Annuity can be secured or unsecured by the payor

• If secured, gain recognized over each annuity payment

• If unsecured, proposed regulation is to recognize gain immediately

• Annuity terminates upon death, unlike promissory note

• Removes asset and future appreciation from taxable estate

Taxable Estate

Checking & Savings

Independent Trust & Trustee

Lifetime Exemption

Gift Up to $10.68M Combined

FMV Sale

Necessary Assets

Private Annuity

(16)

Grantor Retained Income Trusts

• You establish and fund an irrevocable trust

• You retain an income interest in the trust for a certain term

• Income interest is an annuity or unitrust (annual percentage) amount

• After the term, all assets pass to the remainder beneficiaries

• Present value of the remainder interest is the taxable gift

• Larger retained interest reduces the amount of the taxable gift

• All appreciation is removed from your estate

• If you pass away during term, assets included in taxable estate

Taxable Estate

Checking & Savings

Lifetime Exemption

Partial

Gift Assets after Term Ends

GRIT

Income During Trust Term

Necessary Assets

(17)

Qualified Personal Residence Trusts

• You establish an irrevocable trust and contribute your residence

• You retain the right to occupy the property during a certain term

• After term, the property passes to the remainder beneficiaries

• Present value of the remainder interest is the taxable gift

• All residence appreciation is removed from your estate

• Longer retained use term reduces the amount of the taxable gift

• But longer retained term increases chance of dying within term

• If you die during the term, the assets are included in taxable estate

• If you outlive the term, the home ownership passes to your heirs

• You must pay fair market rent to avoid inclusion in your taxable estate

• Rent payments reduce your taxable estate, but require careful planning

Use During Trust Term

Taxable Estate

Qualified Personal Residence Trust

Irrevocable Residence after Term Ends Qualified

Interest

Partial Gift

FMV Rent after Term Ends You & Your

Living Trust

Checking & Savings

Necessary Assets

(18)

Charitable Trusts

• You create an irrevocable trust with a split interest for charity

• Charitable Remainder Trust = YOU retain income for certain term

• Charitable Lead Trust = CHARITY receives income for certain term

• Income interest is an annuity or unitrust (annual percentage) amount

• Present value of non-charitable benefit is the taxable gift

• Can be “zeroed out” by making charitable gift equal to present value

• Good testamentary estate tax elimination strategy, if assets appreciate

• Good way to leave children additional amounts above exemption

Taxable Estate

Checking & Savings

Charitable Remainder

Trust

Assets after Term Ends Income During Trust Term

Qualified Interest + Charitable Deduction

Partial Gift

Necessary Assets

(19)

Charitable Gift Annuities

• Part gift to a charity and part purchase of an annuity

• Amount transferred over the annuity present value is the charity gift

• Gift value is deductible from income, gift, and estate taxes

• Because part sale, capital gain recognized for non-gift portion

• Can elect to have gain recognized over the annuity payments

• Payments part excluded (return of principal)

• Rest of payment is part gains and part ordinary income

• Charity obligation to pay annuity even if exceeds original gift

• Can be secured by charity endowment, if agreed

Taxable Estate

Checking & Savings

Charitable Deduction

Gift

Annuity Purchase

Necessary Assets

Charitable Annuity

Preferred Charity

(20)

Private Foundations

• You create a corporation or trust for charitable purposes

• The entity applies for 501(c)(3) tax exemption

• You contribute property and receive a tax deduction

• Deduction of fair market value of cash and marketable securities

• Deduction limited to basis for other property

• Deduction limited to 30% of AGI for cash, 20% for other property

• Can carry-over excess deduction for up to 5 years

• Requires annual IRS Form 990-PF filings

• Must pay 2% income tax on investment income

• Extensive regulations and prohibitions against self-dealing, etc.

Taxable Estate

Checking & Savings

Private Foundation

LIMITED Charitable Deduction

Gift

Necessary Assets

(21)

Donor Advised Funds

• You establish a private account with a public charity

• You “recommend” investments and distributions

• Public charity approves and manages investments and distributions

• Public charity “owns” the account, so you get full tax deductions

• Simple and no administration or reporting requirements for you

• Public charity charges small fee for administration

• Same restrictions as private foundation against self-dealing, etc.

Taxable Estate

Checking & Savings

FULL Charitable Deduction

Gift

Necessary Assets

Donor Advised Fund

Investment and Charitable Distribution

“Recommendations”

(22)

Supporting Organizations

• You create corporation or trust to support specified charities

• Applies for 501(c)(3) tax exemption as “supporting organization”

• Must have certain ties and/or involvement of supported charities

• Treated as public charity for tax deduction purposes

• You can more directly influence investment and distributions

• More flexible than donor advised fund and private foundation

• Same restrictions as private foundation against self-dealing, etc.

Taxable Estate

Checking & Savings

Gift

Necessary Assets

Supporting Organization

FULL Charitable Deduction

(23)

Advanced Estate Planning

Advanced Estate Planning

October 7, 2014

Review of Basic Estate Planning

• Health Care Directives

• Powers of Attorney

• The Probate Process

• Last Will and Testament

• Living (Revocable) Trust

• Private Estate & Trust Administration

Advanced Estate Planning

KEY GOALS:

• Reduce Taxable Estate

• Avoid Gift, Estate, and GST Taxes

• Growth/Appreciation Outside Taxable Estate

• Control of Use & Distribution After Transfers

• Provide Multi-Generational Support

• Asset Protection for Beneficiaries

Advanced Estate Planning

Advanced Estate Planning

Advanced Estate Planning

Sample of Advanced EP Strategies

… and much more!

Annual Exclusion Gifts

• Tax-free $14,000 per beneficiary per spouse per year

• Non-taxable and no reporting required

• Does not reduce “lifetime gift tax exemption”

• Must be a “present” interest, not a future benefit

• Best strategy for long-term gift giving

• Powerful when combined with other tools

Health & Education Exclusion Gifts

 Unlimited exclusion for health and education gifts

 In addition to annual exclusion

 Does not reduce lifetime gift tax exemption

 Must be paid directly to provider

 Includes prepaying non-refundable tuition

 Includes prepaid health insurance or costs

Lifetime Exemption Gifts

• Up to $5.34 million lifetime exemption per taxpayer

• Over and above the $14,000 annual exclusion

• Requires allocation by filing gift tax return

• GST tax exemption automatic where applicable

• Spouses can elect “gift splitting” exemption allocation

• Allows a wealthy person to transfer up to $10.68M.

Custodial Accounts for Minors

• Account opened for benefit of minor child

• Parent or other may serve as custodian for the account

• Simple to establish, simply by titling:

“Parent, as custodian for Child under

CA Uniform Transfers to Minors Act”

• Counts as completed gift for gift and estate tax purposes

• Income reported by child, part of child’s estate

• Accessible by child at age 18 unless donor elects age 21

Qualified 529 Tuition Plans

Intra-Family Loans

• Actual loan with obligation to repay is not a taxable “gift”

• Interest free loan is taxable gift of the foregone interest

• Certain narrow but useful exceptions ($10k, $100k)

• IRS “applicable federal rate” (AFR) is the minimum interest

• AFR usually much lower than market rates

• Non-taxable gift requires annual interest charges

• Powerful when combined with other tools

Irrevocable Life Insurance Trusts

Installment Sale to Irrevocable Trust

Family Limited Partnerships

Private Annuities

Grantor Retained Income Trusts

Qualified Personal Residence Trusts

Charitable Trusts

Charitable Gift Annuities

Private Foundations

Donor Advised Funds

Supporting Organizations

Questions?