Planning for the future –living trusts, estate and tax planning

Planning for the Future –
Living Trusts, Estate and
Tax Planning
By
Thomas F. McGuire
Robert I. Ury
Arnstein & Lehr LLP
© 2007 All Rights Reserved


Basic Estate Planning
Why do I need a Will?


Reasons:
• Control over who inherits (relatives,
charities, friends, etc.)
• Control over who administers estate
• Possible reduced costs
• Estate tax planning
• Structuring benefits for minor or
disabled beneficiary
• Designation of a guardian for minor
children


What is a “living trust”?
• You are the grantor/settlor
• You normally act as your own
trustee
• Provides for management of assets

at death or upon disability
• Substitutes for traditional will


Advantage of Living Trusts
• Avoidance of probate proceedings at
death
• Avoidance of guardianship
proceedings upon disability
• Ease of administration
• Reduced costs of administration
• Privacy and Timing Issues


Creditor Protection???
• Self-settled trust is not normally
protected from creditors
• Domestic protection trusts and
offshore trusts might offer some
protection
• Spendthrift provisions offer
protection to ultimate trust
beneficiaries


Marital Deduction
Planning


“Applicable Exemption Amount”

3,500,000
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
20042005

20062008

2009

2010

2011

0
Exemption


Combining Use of Unlimited
Marital Deduction and Exemption
Amount
• Unlimited marital deduction exists
for property passing to spouse
• Without proper planning, all property
will qualify for marital deduction and
exemption of first spouse will be
wasted

• Through proper planning, you can
double the amount of property
exempt from estate tax


Plan A: All to Spouse or
“I Love You” Plan
• At first death, all
property passes to
surviving spouse
• No tax is paid due
to marital
deduction
• At second death,
all property is
included in gross
estate


Results:
• Exemption of first spouse is wasted
• More estate tax is paid at second
spouse’s death
• Second spouse has total control over
assets – can give assets away to
whomever he or she chooses (i.e.
new spouse upon remarriage)


A Better Plan: Marital

Trust/Family Trust Arrangement
• Amount of
exemption
allocated to
Family Trust
• Amount in
excess of
exemption
allocated to
Marital Trust


Results:
• Property is available to surviving
spouse as needed, but Family Trust
is not taxed at survivor’s death
• Marital trust defers any estate tax
ultimately payable until after both
deaths
• Exemption is doubled
• If desired, deceased spouse retains
ultimate control over distribution


Trust Structure Issues
Long-Term Trusts


Generation-Skipping Trusts
• Makes property available to next

generation but keeps property out of
estate tax base
• Protects beneficiary’s interest from
claims of creditors
• Beneficiary can be trustee and can
have power of appointment
• Limitation – GST Exemption Amount
• “Dynasty” trusts and the Rule Against
Perpetuities


Criteria for Trust Distributions
•
•
•
•
•

Support
Comfort
Health
Education
Best Interests

• Standard of
living
considered?
• Possible use of
incentive
provisions?

• Beneficiary as
own trustee?


Powers of Appointment
• Build flexibility into estate plan
• Can be limited (i.e. descendants, spouses
& charities) or broad (anyone other than
creditors or estate)
• Can be lifetime or testamentary in nature
• Independent trustee can be given power to
create a power in the future – “power to
create a power”


Living Wills and Health Care
Powers of Attorney/Directives
• Allows doctor or
agent to make
health care
decisions
• Includes life
support
decisions
• Supplements
will or trust


Property Powers of Attorney
• Allows agent to manage financial

assets in the event of disability
• Should be made “durable” in nature –
effective even if legal
determination of disability
• Useful even if living trust is in place


Advanced Estate
Planning Techniques


Irrevocable Life Insurance
Trusts
• Allows removal of life insurance
from gross estate
• Trust is irrevocable in nature
• Removes “incidents of ownership”
from insured
• Caveat: Three Year Rule
• Also removes insurance proceeds
from second spouse’s estate


What is a “Crummey” notice?
• Allows gift to trust to qualify for
$12,000 per person annual exclusion
(avoids gift of “future interest”)
• Withdrawal right may be limited to a
window period
• Leverage of GST exemption possible

Qualified Personal Residence
Trust (“QPRT”)
• Gift of one or two residences to trust for a
term of years
• Gift is based upon actuarial remainder
interest at time of transfer
• Growth in value is removed from estate
• Upon expiration of term, grantor leases
property back from beneficiaries
• If residence sold, converts to a GRAT
arrangement


Grantor Retained Annuity
Trusts (“GRATs”)
• Individual transfers assets to a trust
for a fixed term reserving an annuity
interest
• Gift is valued based upon remainder
interest at time of transfer (“zero
out” GRAT possible)
• If trust can achieve rate of return
greater than IRS rate, tax savings
will be achieved


Family Limited
Partnerships/LLCs

• Discounting may be available for
estate and gift tax purposes –
Caveat: Strangi case
• Retention of control while shifting of
value
• Possible creditor protection
• Centralization of management
• Consolidation of assets