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Estate Planning Virtual Session 3 3 Powers of appointments Marital and split-interest trusts Intra-family business transfers Planning for non-traditional families – PowerPoint PPT presentation

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Title: Estate Planning

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

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
  • Donor- is the person who gives the power of
    appointment to a donee, who is the holder of the
  • 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.

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

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

Special or Limited Power
  • Usually a holder cannot receive the donors
    property and may only appoint the property to
  • 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

Limited Powers
  • Holder may appoint trust property to himself only
  • 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.

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
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
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.

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

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.

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
  • 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)

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
  • Purpose of a 5 x 5 power It protects the holder
    from making a taxable gift if the holder lets his
    withdrawal right lapse.

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

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

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
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

Q A next slide
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

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
- 1,730,800
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
  • 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

Estate Tax Equalization
Husband and wife 3 million each
  • Gross Estate
  • Adjusted Gross Estate
    Minus marital
  • 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
Comparison of Estate Taxes
  • 6 Million Estate
  • Estate Tax Without Estate Equalization 350,000
  • Estate Tax With Estate Equalization 0
  • Savings 350,000

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

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

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

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
  • Trust assets are not included in the surviving
    spouses estate at death.

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

Using the Unified Credit
5 million - zero 5 million 1,730,800 -
1,730,800 0
  • Gross Estate
  • Adjusted Gross Estate
    Minus marital
  • Taxable Estate
  • Tentative Tax (compute tax)
  • Estate tax unified credit
  • Federal Estate Tax payable

QA in 2 slides
Spousal Income in a B Trust
  • The surviving spouse can obtain income as
    needed from the trustee
  • The income interest is a terminable interest
  • The decedent spouse cannot receive a marital
    deduction on his estate tax return

Q A next slide
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
  • Spouse can exercise a limited power of
    appointment to distribute assets to the
  • Spouse can be given a 5 x 5 power of appointment
    over trust corpus.

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

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
  • Pension
  • IRA
  • Charitable gift annuity
  • Nuptial agreement

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

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

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

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.

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

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

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

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

Q-TIP Provisions
  • The spouse must receive all trust income annually
  • The spouse may receive distributions
  • 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
  • Executor elects Q-TIP treatment on Form

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

Q A in 2 slides
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
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
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

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.

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.

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.

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

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.

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
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
  • Spouse cannot invade the trust corpus unless
    given an ascertainable standard.

Q A next slide
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

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
  • Liquidating the business by selling off assets

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

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.

  • 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.

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.

Intra-family Loan
  • An intra-family loan is not a gift since the loan
    is expected to be paid back to the lender with
  • 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.

Sale Leaseback
  • Purpose To provide income to family members
    when the owners wealth is tied up in the family
  • 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
  • Business property is removed from the business
    owners estate.

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

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.

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

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

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
  • 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.

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

IRC Section 2701
  • IRC 2701 refers to the partial transfer of
    corporate or partnership interests to family
  • 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
  • Allow his children to benefit from the stocks
    future appreciation
  • Receive some income while retaining control of
    his business
  • Solution- A preferred stock recapitalization

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.

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
  • The value of the gift of common stock is the
    stocks FMV reduced by annual exclusions and
    applicable discounts.

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.

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

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

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

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.

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

  • 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

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

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
  • GRATs should be funded when asset values are low,
    which reduces the gift tax and gives
    beneficiaries greater upside potential for future
  • 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.

  • 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.

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

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.

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
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
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
  • A beneficiarys basis in the home is the
    grantors original basis increased by a portion
    of any gift taxes paid.

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

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

  • 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.

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
  • 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.

  • There are no joint government benefits such as
    Medicare or Medicaid coverage for un-married
  • 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.

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

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

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.

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.

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

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

Q A in 2 slides
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
  • 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
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.

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