Estate Planning

1
Estate Planning

• Virtual Session 3 3
• Powers of appointments
• Marital and split-interest trusts
• Intra-family business transfers
• Planning for non-traditional families

2
Power of Appointment

• A power of appointment is a right given by a
  donor in a will or in a trust for a holder of the
  power to transfer the title of the donors
  property.
• Donor- is the person who gives the power of
  appointment to a donee, who is the holder of the
  power.
• The holder of a power- is not given the title of
  the donors property, but has the right to
  transfer a portion of the property to himself or
  to someone else.
• Trustee- holds legal title to property and
  carries out directives in the trust document.

3
Holders Authority

• The holder of the POA can invade or consume trust
  corpus, and can demand trust income from the
  trustee.
• The holder may choose
• Who should receive the trust property
• When income or principal should be distributed
• What amounts should be distributed to the
  beneficiaries

4
General POA

• Holder can choose anyone to receive the donors
  property including the
• Holder
• Holders creditors
• Holders estate, or
• Creditors of the holders estate

5
Special or Limited Power

• Usually a holder cannot receive the donors
  property and may only appoint the property to
  others.
• A holder cannot
• Appoint property to himself
• Appoint property to his creditors
• Use the property for his estate
• Appoint the property to creditors of his estate

6
Limited Powers

• Holder may appoint trust property to himself only
  with
• The donors consent
• The consent of remaining trust beneficiaries who
  have an adverse interest in the transaction.
• An ascertainable standard. This permits the
  holder to use trust income and principal for
  himself and still have a limited power.

7
Ascertainable Standard

• The holder can appoint trust income and corpus to
  himself or others for health, education,
  maintenance and support (HEMS)
• Health medical, dental, hospital and nursing
  expenses, and expenses of invalidism
• Education expenses for college, vocational
  schools and professional education
• Support in reasonable comfort or an accustomed
  manner of living

QA in 2 slides
8
Identify an Ascertainable Standard

• An ascertainable standard can be written into the
  trust document in any combination of HEMS.
• Not an ascertainable standard
• The holder can exercise the power for his
  welfare, comfort or well-being.

QA next slide
9
Taxation of Limited Powers

• Gift Tax
• There is no gift tax liability for transferring
  property to others when the limited power is
  exercised, released or has lapsed.
• Estate Tax
• Limited powers are not included in the holders
  gross estate.

Q A
10
Use of General Powers

• During Lifetime
• Exercise power Holder appoints property to
  himself or others
• Release power Holder gives up the right to
  appoint property
• Gift tax
• FMV of property - annual exclusion, offset by the
  unified credit
• Estate tax
  
• Gifted property is removed from the holders
  estate

11
Lapse of a General POA

• The POA was not exercised within a given period
  of time or within the holders lifetime.
• When a POA lapses, a gift is made to the
  remaindermen in the trust.
• This gift is taxable if the lapsed amount exceeds
  the greater of 5,000 or 5 of the value of the
  trust corpus.

12
Example- Taxable Lapse

• Dad transfers 30,000 into an irrevocable trust
  for his children, Bruce and Dawn, and allows them
  to withdraw 15,000 each within 30 days.
• If Bruce and Dawn let their withdrawal rights
  lapse, they have made gifts to each other of
  15,000
• Only the lapsed amount that exceeds the greater
  of 5,000 or 5 of the trust corpus is taxed, or
  10,000. (15,000 - 5,000 10,000)

13
5 x 5 Power

• Holder is given a non-cumulative right to make
  annual withdrawals from the trust, which is
  limited to the greater of 5,000 or 5 of the
  value of the trust corpus.
• Crummey powers are often limited to a 5 x 5
  power.
• Purpose of a 5 x 5 power It protects the holder
  from making a taxable gift if the holder lets his
  withdrawal right lapse.

14
Lapse with a 5 x 5

• Mom transfers 30,000 into an irrevocable trust
  for her children Mark and Leah and allows them to
  withdraw the greater of 5,000 or 5 of the trust
  corpus within 30 days.
• Mark and Leah can only withdraw 5,000
• They let their withdrawal rights lapse
• No taxable gifts are made because Mark and Leah
  cannot withdraw more than 5,000

15
Estate Tax with a 5 x 5 Power

• 5 x 5 Power is Exercised or Released at death
• Only the greater of 5,000 or 5 of the value of
  the assets subject to the power is included in
  the holders gross estate.
• Amounts included in the holders estate avoids
  probate

16
General POA at Death

• Holder can dispose of assets subject to the power
  in their will
• The value of the assets subject to the general
  POA at the holders date of death will be
  included in their gross estate.
• The value of lapsed property that could have been
  withdrawn since the trust was established, is
  included in the holders gross estate.
• General POA property included in the holders
  estate avoids probate.

Q A in 2 slides
17
POA and Estate Tax

• Summary
• General POAs are included in the holders estate
• 5 x 5 powers are included in the holders estate
• Limited powers are not included in the holders
  estate

Q A next slide
18
Estate Tax

• The estate tax has been reinstated in 2011
• Estate tax planning may involve using strategies
  and trusts to avoid or delay paying estate taxes

Q A
19
Estate Tax Return

• Gross Estate
• Minus expenses, debts, taxes, losses
• Adjusted Gross Estate
• Minus marital deduction
• charitable deduction
• Taxable Estate
• Plus Adjusted Taxable Gifts
• Tentative Tax Base
• Tentative Tax (compute tax)
• Minus Gift tax paid or payable (credit)
• Estate Tax Payable before Credits
  
• Estate tax unified credit
• Federal Estate Tax payable

6 million
- 6 million
0
- 1,730,800
0
20
Surviving Spouses Estate Tax
6 million - 0 6 million 6 million
2,080,800 1,730,800 350,000

• Gross Estate
  
• Adjusted Gross Estate
  Minus marital
  deduction
• Taxable Estate
• Plus Adjusted Taxable Gifts
• Tentative Tax Base
  
• Tentative Tax (compute tax)
• Estate Tax Payable before Credits
  
• Estate tax unified credit
• Federal Estate Tax payable
  

-
21
Estate Tax Equalization
Husband and wife 3 million each

• Gross Estate
  
• Adjusted Gross Estate
  Minus marital
  deduction
• Taxable Estate
• Tentative Tax (35 tax bracket)
• Estate tax unified credit
• Federal Estate Tax payable
• Combined estate tax 0

3 million
- zero 3 million 1,030,800 -
1,730,800 0
22
Comparison of Estate Taxes

• 6 Million Estate
• Estate Tax Without Estate Equalization 350,000
• Estate Tax With Estate Equalization 0
• Savings 350,000

23
By-Pass Trust

• A By-Pass trust is also known as a
• Credit shelter trust
• Family trust
• B trust

24
Creating a By-Pass Trust

• Decedent spouse determines the trust
  beneficiaries when the trust is created
• Surviving Spouse
• Children
• Trust is funded with property solely owned by the
  decedent

25
Termination of By-Pass Trust

• Spouses right to income ends at death
• Trust corpus is divided into equal trust shares
  for beneficiaries, or distributed outright to them

26
Purpose of a By-Pass Trust

• Avoids over-qualifying the decedent spouses
  estate for the marital deduction, by utilizing
  the decedents maximum unified credit.
• Allows the surviving spouse to obtain income as
  needed.
• Trust assets are not included in the surviving
  spouses estate at death.

27
Funding the By-Pass Trust

• Established during life Inter-vivos revocable
  trust
• Established at death Testamentary By-Pass trust
• Typically funded with exemption equivalent
  amount (5 million)

28
Using the Unified Credit
5 million - zero 5 million 1,730,800 -
1,730,800 0

• Gross Estate
• Adjusted Gross Estate
  Minus marital
  deduction
• Taxable Estate
• Tentative Tax (compute tax)
• Estate tax unified credit
• Federal Estate Tax payable

QA in 2 slides
29
Spousal Income in a B Trust

• The surviving spouse can obtain income as
  needed from the trustee
• The income interest is a terminable interest
  (TIP)
• The decedent spouse cannot receive a marital
  deduction on his estate tax return

Q A next slide
30
Surviving Spouses Estate

• Property by-passes inclusion in the surviving
  spouses estate.
• Spouse can be given a limited power of
  appointment with an ascertainable standard (HEMS)
  to receive distributions from trust income and
  corpus.
• Spouse can exercise a limited power of
  appointment to distribute assets to the
  beneficiaries.
• Spouse can be given a 5 x 5 power of appointment
  over trust corpus.

Q A
31
Marital Deduction- Wills

• Marital deduction is available for property given
  outright to a surviving spouse through a will
• Fractional shares of Tenancy-in-Common property
• Community property
• Property transferred through intestacy
• Property transferred according to a will contest
• Elective share amounts
• Dower or curtesy
• Simultaneous death with a presumption-of-survivors
  hip clause in the will
• Bequest is conditional upon the spouse surviving
  longer than 6 months after the decedents death

32
Marital Deduction- Contracts

• Marital deduction is available in the decedents
  estate when the surviving spouse is the
  beneficiary of contracts
• Life insurance policy
• Joint and survivor annuity (private or
  commercial)
• Pension
• IRA
• Charitable gift annuity
• Nuptial agreement

33
Marital Deduction- Property

• Property held with a spouse as JTWROS (50)
• Property held as Tenancy by the Entirety (50)
• Life estate bequeathed to a spouse and the
  executor makes a Q-TIP election
• Life estate bequeathed to a spouse which passes
  to her estate at death

34
Marital Deduction- Trusts

• Spouse is given a general power of appointment
  over property in trust
• Remainder interests are given to a spouse
• Income interest is given to a spouse in a
  charitable remainder trust

35
Marital Trusts

• Marital trusts can be created as
• Funded revocable trusts
• Testamentary trusts created by a will
• Stand-by trusts funded at death

36
Power of Appointment Trust

• Purpose Surviving spouse has access to income
  and corpus for life
• Surviving spouse has a general power of
  appointment over trust corpus- exercisable during
  life and/or at death.
• Surviving spouse must receive all income which is
  paid at least annually- no accumulation of income
  in the trust.
• Surviving spouse determines the beneficiaries of
  the trust assets at death through a general power
  of appointment in the will.
• Trust property is included in the surviving
  spouses estate.

37
A and B Trust

• Surviving Spouse
• Has the right to all income and corpus from the A
  trust and income if needed from the By-Pass trust
• Only the property from the A trust is included in
  the surviving spouses estate
• Decedent Spouse
• A marital deduction is available for the A trust
• The unified credit is used for the By-Pass trust
• The estate tax liability is zero

38
Taxation of an A and B Trust
Gross Estate
Adjusted Gross Estate
Minus
marital deduction Taxable
Estate

Tentative Tax (compute tax) Estate tax unified
credit Federal Estate Tax payable

• 8 million
• 3 million
• 5 million
• 1,730,800
• 1,730,800
• 0

39
Q-TIP Trust

• Q-TIP trusts are established when the decedent
  spouse wants to
• Provide the beneficiary spouse with income for
  life
• Receive an estate tax marital deduction
• Give trust corpus to children from a previous
  marriage

40
Q-TIP Provisions

• The spouse must receive all trust income annually
  
• The spouse may receive distributions
  of
• corpus at the trustees discretion
• Corpus passes to remainder beneficiaries
  designated by the decedent, at the beneficiary
  spouses death
• This is a terminable interest trust
• Qualifies the decedents estate for the marital
  deduction
• Executor elects Q-TIP treatment on Form
  706

41
Beneficiary Spouses Estate

• Trust property is included in the beneficiary
  spouses gross estate at death.
• Marital deduction was taken in the
  decedent
• spouses estate.
• Couples combined estate tax may be higher.
• Spouses executor can seek reimbursement for
  estate taxes paid by the spouse from trust
  beneficiaries.
• Spouse may be given a 5 x 5 POA to invade trust
  corpus.

Q A in 2 slides
42
Taxation of an A, B, Q-TIP Trust

• Spouses Estate
• A Trust- 3 million
• Q-TIP Trust- 4 million
• B Trust- 5 million
• Gross Estate
• Adjusted Gross Estate
  
• Minus marital deduction
• Taxable Estate
  
• Tentative Tax (compute tax)
• Estate tax unified credit
• Federal Estate Tax payable

12 million
- 7 million 5 million 1,730,800 -
1,730,800 0
Q A next slide
43
Surviving Spouses Taxable Estate

• Gross Estate
  
• Adjusted Gross Estate
• Minus marital deduction
• Taxable Estate
  
• 
  
• Tentative Tax (compute tax)
• Estate tax unified credit
• Federal Estate Tax payable

7 million 7 million - zero 7 million
2,430,800 - 1,730,800 700,000
Q A
44
Estate Trust

• Purpose of an Estate Trust
• To qualify the property for a marital deduction
  in the decedents estate.
• Use if the beneficiary spouse has substantial
  wealth and does not need the trust income or
  corpus.

45
Estate Trust Characteristics

• Fund the trust with assets the decedent does not
  want sold, or assets not likely to appreciate.
• Trust income accumulates but the trustee may
  distribute income or corpus, if needed.
• Surviving spouse can determine beneficiaries of
  the trust in their will.
• Trust corpus and accumulated income are included
  in the spouses estate at death.

46
Qualified Domestic Order Trust

• The purpose of a Q-DOT trust
• To give the decedent a marital deduction for
  property passing to a non-citizen spouse.
• To ensure that the decedents assets will not
  leave the U.S. without being taxed.

47
Characteristics of a QDOT

• The QDOT permits a marital deduction if
• The trustee is a U.S. citizen or bank with a
  domestic presence who distributes all income
  annually to the non-citizen spouse for life.
• The trustees withhold estate taxes from
  distributions of corpus that are not subject to
  an ascertainable standard.
• Estate taxes are withheld from distributions to
  heirs when the non-citizen spouse dies.
• The non-citizen spouse can use a unified credit
  to offset their estate tax liability.

48
Qualified Disclaimer

• A disclaimer is a written refusal to accept a
  gift or a bequest.
• The disclaimed property passes back to the donor
  or to the decedents estate and is transferred
  directly to a different recipient.
• The person who disclaims the property does not
  make a gift to the recipient.
• Property must be disclaimed within 9 months and
  the donee must not take possession of the
  property.

49
Disclaimers at Death

• Property is left to the surviving spouse in the
  decedents will.
• The surviving spouse disclaims enough property to
  match the exemption equivalent amount. Now the
  decedents unified credit can be used to offset
  their taxable estate.
• Disclaimed property reverts back to the
  decedents estate.
• No marital deduction is available for the
  disclaimed property.

50
Disclaimer Trust

• Purpose of a Disclaimer Trust
• Allows the surviving spouse to determine what
  portion of a decedents estate should be
  transferred into a trust or should pass through
  the will.
• Trust is usually established by a clause in the
  decedents will, or the trust can be established
  in advance.
• Disclaimed assets go through probate since they
  pass through the will into the trust.

Q A in 2 slides
51
Spouses Interest in a Disclaimer Trust

• Spouse receives a life income from the disclaimed
  property transferred into the trust.
• The life income is a terminable interest, so the
  trust assets are not included in the spouses
  estate.
• Spouse cannot invade the trust corpus unless
  given an ascertainable standard.

Q A next slide
52
Marital Objectives

• Couple wants
• To minimize their total estate tax liability for
  their combined estates- Estate equalization
• Surviving spouse to receive all income annually-
  A or Q-TIP
• Surviving spouse to receive income if needed- B
  or Estate Trust
• Decedent spouse to receive a marital deduction-
  A, Q-TIP, Estate Trust, outright gift to spouse
• Surviving spouse to choose trust beneficiaries- A
  or Estate Trust
• Surviving spouse to determine what portion of the
  decedents estate to transfer into a trust to use
  the decedents unified credit- Disclaimer trust
• Surviving spouse to access trust income for
  health, education, maintenance and support
  without including the assets in their estate-
  Ascertainable standard

Q A
53
Intra-Family Business Transfers

• Business owners need to arrange for the
  disposition of their business in the event they
  become disabled, retire or die.
• Options include
• Having family members or key employees continue
  to run the business
• Selling the business to family members or to 3rd
  parties
• Liquidating the business by selling off assets

54
Buy-Sell Agreements

• Stock redemption plans- used by corporations
• Cross purchase agreements- used by individual
  business owners
• Life insurance proceeds are paid to the
  corporation or to the remaining business owners
  to buy the deceaseds closely held stock or
  partnership interest.
• The buy-sell agreement values the business when
  the policies are purchased.
• Freezes the estate tax value of the business.
• Guarantees a future market and sale price for the
  decedents closely held stock

55
Installment Sale

• Purpose To sell the business to a family member
  or a 3rd party and provide a secured income for
  the seller.
• The promissory installment note is secured, and
  does not require a set sale price.
• Buyer does not need a down payment and payment
  amounts can vary. Payments can be skipped or
  spread out over several years.
• At least one payment must be made to the owner
  after the taxable year in which the sale occurs.
• The PV of any outstanding installment payments is
  included in the sellers gross estate.

56
SCIN

• Purpose A SCIN partially or fully cancels the
  installment note before the note matures.
• The seller can cancel the installment note in the
  will. The unpaid balance of the note is not
  included in the sellers gross estate.
• The seller can cancel the entire note at once,
  which is subject to capital gains and gift taxes.
  
• Example Basis of business 100,000 sold for
  800,000. Capital gain is reported on 700,000
  and 687,000 is subject to gift taxes.
• A seller can cancel the note in increments of
  13,000 per year per buyer to avoid or reduce
  taxable gifts.

57
Private Annuity

• Purpose A seller receives a fixed annuity
  income stream for life and removes the business
  or property from their gross estate.
• Payments from the sale are structured as an
  annuity and are unsecured.
• Single life annuity remaining payments are not
  included in the sellers estate.
• Joint and survivor annuity Payments continue
  for two lives. The PV of the survivors future
  annuity payments is included in the sellers
  estate, but a marital deduction is available to
  offset the tax.
• Buyer beware if the buyer dies before the
  seller, the buyers estate must make payments to
  the seller for life. If the seller outlives
  their calculated life expectancy, the buyer must
  continue to pay the seller.

58
Intra-family Loan

• An intra-family loan is not a gift since the loan
  is expected to be paid back to the lender with
  interest.
• The lender is taxed on the interest payments
  received which may be deducted by the borrower.
• The lender can forgive up to the annual exclusion
  amount of the loan payments and interest each
  year without incurring a gift tax.
• The outstanding value of the promissory note is
  included in the lenders estate at death.

59
Sale Leaseback

• Purpose To provide income to family members
  when the owners wealth is tied up in the family
  business.
• Business owner sells business property to an
  adult child then leases it back.
• Owner receives a lump sum payment or installment
  payments from the child and continues to use the
  property in the business.
• Owner deducts monthly lease payments made to the
  child as a business expense.
• Lease payments are taxed in the childs lower tax
  bracket.
• Business property is removed from the business
  owners estate.

60
Gift Leaseback

• A gift leaseback is similar to a sale leaseback,
  but since the property is not sold, no cash
  payments are made to the owner.
• Owner gifts property into an irrevocable trust
  then leases the property back.
• Owner receives business deductions for the lease
  payments made to the trust.
• Trustee distributes lease payments to family
  beneficiaries in lower tax brackets.
• Business property is removed from the owners
  estate.

61
Family Limited Partnership

• Purpose FLPs permit parents, as general
  partners, to control their investments such as
  cash, stocks or real estate, and transfer
  ownership to family members to reduce the value
  of their estates.
• General partners can control the assets with only
  2 ownership of partnership interests.
• General partners are compensated for services
  rendered and receive profits based on their
  percentage of ownership in the FLP.
• Family members are limited partners and have no
  management control, even if they own the
  remaining 98 of partnership interests.

62
Gifting FLP Interests

• Income shifting occurs when partnership interests
  are gifted to family members in lower tax
  brackets.
• Gift taxes on transfers to limited partners are
  reduced by two discounts
• Minority discount
• Lack of marketability discount
• Discounts leverage the general partners annual
  exclusions.
• Gift splitting by parents who are general
  partners further reduces the gift tax on
  transfers of partnership interests.

63
Estate Taxation of FLPs

• FLP- The general partners estate tax is based on
  the value of the partnership interests owned at
  death.
• Irrevocable Trusts- Grantors who retain any
  control over distributions to beneficiaries will
  have the FMV of the trust assets included in
  their gross estate.

64
Estate Freezes

• Purpose Allows business owners to retain much of
  the present value and control of their business,
  and some source of revenue, while the growth and
  future appreciation is shifted to the next
  generation.
• A freeze assures the business remains in the
  family at minimum transfer tax costs.
• Estate freezes apply to installment sales of
  property, SCINs, private annuities, preferred
  stock recapitalizations, GRATs, QPRTs, FLPs and
  buy-sell agreements.

65
Chapter 14

• Chapter 14 ensures the proper taxation of partial
  interest gifts that are made to family members
  for less than FMV.
• Chapter 14 does not apply to
• - Sales to family members
• - Gifts to unrelated parties
• - A transfer of the entire
  business or property interest to family members
• - Partial interest bequests made
  to family members at the owners death

66
IRC Section 2701

• IRC 2701 refers to the partial transfer of
  corporate or partnership interests to family
  members.
• A business owner with a taxable estate may wish
  to transfer some, not all, of his closely held
  stock to his children to
• Reduce the value of his gross estate
• Freeze the value of the remaining shares in his
  estate
• Allow his children to benefit from the stocks
  future appreciation
• Receive some income while retaining control of
  his business
• Solution- A preferred stock recapitalization

67
Qualified Payments

• Qualified payments are payments that are fixed
  in time and amount.
• Transfers made under Chapter 14 need a qualified
  payment so that the gift is based on the FMV of
  the gifted shares minus the annual exclusion
  minus any discounts.
• Without a qualified payment
• A partial interest gift is taxed based on the FMV
  of the closely held business.
• The donor has a retained interest of zero.

68
Preferred Stock Recapitalization

• The owner recapitalizes his stock into voting
  preferred and non-voting common, and gifts the
  non-voting common to his children.
• The owner keeps cumulative preferred shares. This
  gives the owner a qualified payment since he
  has the right to receive dividends at a fixed par
  value.
• The value of the gift of common stock is the
  stocks FMV reduced by annual exclusions and
  applicable discounts.

69
Example- Preferred Stock Recapitalization

• A business owner has a company worth 1 million.
  After recapitalizing the stock, he gifts 400,000
  of his non-voting common stock to his two
  children, keeping 600,000 of cumulative
  preferred shares.
• Gift tax The owner has a qualified payment. The
  gift tax value is 200,000 for each child minus
  an annual exclusion and discounts.
• Estate tax The business may be valued at 3
  million, but only the original 600,000 of
  retained preferred stock is included in the
  owners gross estate.

70
Qualified Interest Trusts

• Removes the assets and future appreciation from
  the grantors estate
• Transfers assets to family members at a low gift
  tax value
• Grantor retains a stream of income for a number
  of years

71
Grantor Retained Trust

• Grantor receives trust income for a term of years
  
• The remainder interest in the trust is gifted to
  family beneficiaries at a reduced gift tax value
• When the grantors interest ends the corpus,
  accumulated appreciation, and undistributed
  income passes to beneficiaries tax-free

72
Estate Tax

• The asset is removed from the grantors gross
  estate if the grantor outlives the income term
• If the grantor does not survive the income term,
  then a portion of the trust is included in the
  grantors estate

73
Example of a GRT

• A grantor, age 62, transfers 4 million into a
  trust today and names his 2 children the
  remainder beneficiaries. The grantor will receive
  income for 10 years.
• In 10 years when the FMV of the trust has grown
  to 6 million the beneficiaries will receive the
  trust corpus and appreciation gift-tax free. The
  value of the trust is not included in the
  grantors estate.

74
Qualified Interests

• Grantor retained trusts are subject to Chapter 14
  since they are partial interest gifts made to
  family members.
• Qualified payments
• Annuity payment- The grantor has the right to
  receive a fixed amount of trust income annually
  for a term of years
• Unitrust payment- The grantor has the right to
  receive a fixed percentage of the property each
  year, revalued annually

75
GRAT

• Grantor receives a fixed annuity payment until
  the term ends.
• Example Grantor transfers 1 million into a
  trust that retains a 5 income stream. The
  grantor will receive a fixed income payout of
  50,000 annually.
• Additional funds cannot be added to the trust to
  provide more income for the grantor.
• GRATs are preferable for assets that are
  difficult to value, such as closely held stock or
  real estate that is expected to appreciate in
  value.

76
GRAT Example

• A grantor transfers 1 million into a two-year
  GRAT. The interest rate used to value the annuity
  is 3.2 but suppose the trust actually earns 10
  a year. The grantor is paid 524,136 in each of
  the next two years.
• The balance in the trust, which is based on the
  appreciation of the earnings over the interest,
  is 109,313. This amount is transferred to the
  remainder beneficiaries free of gift and estate
  taxes.

77
Funding a GRAT

• Fund with assets likely to outperform the federal
  Section 7520 rate used to value the grantors
  annuity payout.
• Any appreciation that exceeds the total annuity
  payout is transferred tax-free to the
  beneficiaries when the grantors income interest
  ends.
• GRATs should be funded when asset values are low,
  which reduces the gift tax and gives
  beneficiaries greater upside potential for future
  appreciation.
• A longer payout term for the grantor or a higher
  annuity payout for a shorter term, results in a
  lower taxable gift of the remainder interest.

78
GRUT

• Grantor retains a payment right of a fixed
  percentage of the value of the trust property,
  determined annually, for a fixed period of years.
  
• Additional funds can be added to the trust to
  provide more income.
• Example Grantor transfers 1 million into a
  trust that retains a 6 income stream. The
  initial payout to the grantor is 60,000. The
  next years payout is equal to 6 of the value of
  the assets within the trust. This payout amount
  could be more or less than 60,000 depending on
  how the invested assets perform.

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GRIT

• A GRIT distributes all of the trusts income to a
  grantor for a number of years, and then
  distributes the trusts remainder interest to
  beneficiaries.
• Assets transferred into GRITs with family
  beneficiaries are taxed at FMV for gift tax
  purposes, not at the PV of the trusts remainder
  interest.
• A grantor who dies before the income term has
  ended will include the FMV of the trust corpus in
  their gross estate.

80
Use of GRITs

• GRITs are typically limited to transfers of a
  personal residence or certain tangible property,
  when the grantor wants to retain use of the
  property for a period of time.
• GRITs are used for split-interest trusts with
  non-family members such as friends, life
  partners, and nieces and nephews, which retains
  its favorable gift tax treatment.

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Qualified Personal Residence Trust

• A QPRT holds a persons residence, allowing
  couples or individuals to live in the house
  rent-free for a fixed period of time.
• A home transferred into a QPRT is taxed at the PV
  of the homes remainder interest, rather than at
  its FMV.
• At the end of the term, the home passes gift-tax
  free to the beneficiaries and is removed from the
  grantors estate.
• If the grantor dies before the residence term
  ends, the FMV of the home is included in the
  grantors estate.

Q A in 2 slides
82
Characteristics of a QPRT

• Grantors can have two homes subject to a QPRT, a
  primary residence and a vacation home, or a
  fractional interest in either.
• A home subject to a mortgage can be transferred
  into the trust.
• Grantors must continue to pay property taxes and
  home maintenance expenses.
• Grantors can continue to live in the home after
  the term ends by paying rent to the trust.

Q A next slide
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QPRT as a Freeze Technique

• A QPRT allows the grantor to freeze the value
  of the home when it is placed in trust, and pass
  along any future appreciation to trust
  beneficiaries.
• A beneficiarys basis in the home is the
  grantors original basis increased by a portion
  of any gift taxes paid.

Q A
84
Non-traditional Families

• Non-traditional couples need written agreements,
  legal documents and expert advice to handle
  property, tax, and domestic issues that are
  unique to their situations.
• The federal government does not recognize
  same-sex relationships or provide government
  benefits to partners.
• States often do not recognize civil unions or
  domestic partnership legislation passed in other
  states.

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Estate Planning for Non-traditional Families

• Comprehensive estate plans include
• Legal documents such as wills, durable powers of
  attorney and health care proxies
• Property ownership plans that include JTWROS,
  tenancy in common, POD and TOD accounts
• Trusts such as funded revocable trusts, GRITs and
  charitable remainder trusts
• Domestic partnership agreements
• Life insurance policies to pay for estate
  administrative expenses and taxes, and to fund
  testamentary bequests
• Long-term care and disability insurance

86
Wills

• Wills can bequeath personal and real property to
  whomever the testator chooses.
• Partners cannot take an elective share against
  the will if property is not bequeathed to them.
• Appoint guardians and contingent guardians for
  minor children and address custody arrangements
  in the will.
• Partners should make testamentary bequests rather
  than lifetime gifts to safeguard their property
  interests against a deteriorating relationship.

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Durable Powers of Attorney

• Without a durable power of attorney
• Probate courts will appoint a guardian and a
  conservator to care for a partner and their
  property.
• The law presumes that biological family members
  have the right to make business and personal care
  decisions for an incompetent person.
• Without a health care proxy
• Unmarried couples do not have the same legal
  rights to visit their partner in a hospital as
  married couples do.

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Benefits

• There are no joint government benefits such as
  Medicare or Medicaid coverage for un-married
  couples.
• Non-spouses cannot receive Social Security
  retirement, survivor or disability benefits on
  their partners account.
• Not all pension plans allow for a non-spousal
  beneficiary, but IRA owners can name their
  partners as beneficiaries.

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Trusts in Non-traditional Relationships

• Partners should consider setting up separate
  trusts to
• Protect their interests
• Control their property
• Provide for their partners
• Address the legal, tax, financial and personal
  aspects of a couples unique living arrangements

90
Gifts of Property- JTWROS

• JTWROS
• Guarantees equal ownership regardless of the
  amount contributed
• Estate tax value is based on the amount
  contributed
• Surviving tenant is the sole owner with exclusive
  use and control
• The entire property is subject to creditor claims

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Tenancy in Common

• Each partner retains lifetime and testamentary
  control over their separate property.
• Owners can buy out the other partner, and sell or
  gift their property to others.

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Home Ownership

• Partners who share primary residences or vacation
  homes can attribute ownership to the partner in
  the highest tax bracket to take advantage of
  mortgage interest and property tax deductions.
• Couples who own two homes should own each one
  separately, to use the 250,000 capital gains tax
  exclusion when a home is sold.
• Partners should be named on homeowners policies
  and property and liability policies to ensure
  they are both covered in a loss.

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Record Keeping

• Accurate and complete records must be kept to
  show the extent that each partner contributed to
  property interests and financial assets such as
• Purchases of real property
• Mortgage payments
• Savings and investment accounts
• Personal property items

94
Children From Another Relationship

• Remarriage issues
• Child custody
• Child support payments
• Planning for combined families
• Adoption
• Planning for the death of one or both natural
  parents

Q A in 2 slides
95
Planning for Divorced Parents

• Divorced parents should create new wills to
• Coordinate personal and financial guardians to
  care for their children in the event of their
  deaths.
• To provide their current spouse with assets equal
  to their states elective share amount.
• To avoid having property pass to a former spouse,
  or go through partial intestacy.

Q A next slide
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Considerations for Divorced Parents

• QTIP trusts- assign assets to different
  beneficiaries and protect children from a
  previous marriage.
• Sprinkle trusts- make discretionary distributions
  according to beneficiary needs.
• Life insurance policies and ILITs- can provide
  additional financial support to minor children
  upon a parents death.

Q A
97
Thank You!

• This completes the Boston University Virtual
  Review Sessions.
• We wish you great success on taking the CFP
  Certification Examination!