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Estate Planning Acadient

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					Estate Planning

      Session 1 of 3

          Wills
         Trusts
 Planning for Incapacity
   Property Interests
    Transfer Methods



       Estate Planning – 1 of 3
      Estate Planning Advice
• Only estate planning attorneys can practice estate
  planning and give estate planning advice.

• Financial planners recognize estate planning issues
  affecting their clients, then work with attorneys to
  resolve them.




                       Estate Planning – 1 of 3
     Estate Planning Process
• Estate Planning is a process for preserving and
  distributing a person’s assets according to their
  objectives.

• Definition of an estate: The rights, titles or interests
  that a person has in their property

• Common objectives: protect, grow and distribute
  assets while minimizing costs and taxes




                       Estate Planning – 1 of 3
                         Wills
• Wills allow the testator to control the passing of
  property interests to others.

• Property transfers are regulated by state law, not
  federal law. In the absence of a will, property is
  distributed according to state laws of intestacy.

• Contracts supersede state laws.
  Example: nuptial agreements




                       Estate Planning – 1 of 3
Legal Requirements for Wills
Any person over the age of 18 can make a will. To
  execute a will, you need “testamentary capacity” or
  the will is invalid.

Testamentary capacity:
   • Testator must know he’s executing a will
   • Testator must be aware of what assets he owns
   • Testator must know and remember his relationship
     to his beneficiaries




                      Estate Planning – 1 of 3
      Invalid Will Provisions
Provisions in a will can be invalidated due to:

   • Fraud
   • The testator is subject to “undue influence” by
     someone benefiting from the will
   • Mistakes in will clauses
   • The will is not properly executed- signed and
     witnessed according to state statutes




                      Estate Planning – 1 of 3
               Types of Wills

• Mutual will- a will made in agreement with another
  person to dispose of certain property interests

• Reciprocal will- each person’s will designates that all
  property be distributed to the other person

• Holographic will- handwritten will

• Nuncupative will- oral will




                       Estate Planning – 1 of 3
              Pour-over Will
Designates the decedent’s trust to receive property left
  outside the trust.

• A trust must be created before death

• Property will avoid intestacy

• Property will not avoid probate




                       Estate Planning – 1 of 3
                  Will Terms
• Codicil- a separate document added to an existing will
  to address minor changes

• Residuary clause- directs the remainder of a
  decedent’s estate to a specific person or a trust to
  avoid partial intestacy




                       Estate Planning – 1 of 3
    Per Capita & Per Stirpes
• Per Capita- descendants receive equal shares

• Per Stirpes- descendants may receive unequal shares

Children: A, B, C
C’s children: X and Z
C dies

Per Capita: A, B, X, Z = ¼ share
Per Stirpes: A & B = 1/3 share
             X & Z = split C’s 1/3 share for 1/6 each


                        Estate Planning – 1 of 3
              Revoking a Will
A testator can intentionally revoke a will.

Wills can be revoked by remarriage or divorce in some
  states. This may cause partial intestacy for the
  property designated to the ex-spouse.




                        Estate Planning – 1 of 3
      Avoiding Will Contests
Will contests are initiated through the probate
  courts.

• Pretermitted heir- a spouse or child not named in the
  will.

• Elective share statute- wills cannot disinherit a spouse.
  The spouse is permitted to take a percentage of the
  decedent’s estate in lieu of property left to them in the
  will.



           Q&A in 2
            slides


                       Estate Planning – 1 of 3
                     Intestacy
State law determines the beneficiaries for property
  in the absence of a will or will substitutes.

• Minor children receive equal shares of their parent’s
  property and take ownership at their state’s age of
  majority.

• Community property states- all property in intestacy
  passes to the surviving spouse.

• A decedent’s estate gets a marital deduction for the
  percentage of property the surviving spouse receives
  through intestacy.

          Q&A Next
           Slide


                       Estate Planning – 1 of 3
          Incapacity Planning
An incapacitated person is unable to make or
  communicate responsible decisions regarding
  their:

•   Health
•   Medical care
•   Personal care
•   Property
•   Legal and financial affairs.




            Q&A

                         Estate Planning – 1 of 3
         Powers of Attorney
A principal gives authority to an agent to make business,
   financial and/or legal decisions on the principal’s
   behalf.

Powers of Attorney over property:

• Non-durable POA- ceases when the principal becomes
  incapacitated or dies
• Durable POA - the agent can represent the principal
  before and after incapacity occurs.
• Springing durable POA- the agent cannot act until
  physicians certify that the principal is mentally
  incompetent



                       Estate Planning – 1 of 3
Advantages of a Durable POA
• A Power of Attorney can be used without the stigma of
  a declaration of incompetency

• The agent may only exercise those powers expressly
  contained in the document




                      Estate Planning – 1 of 3
           Agent’s Authority
The agent can:

• Transfer the principal’s property into a trust

• Run the principal’s business

• Buy or sell assets

• Make gifts




                       Estate Planning – 1 of 3
Disadvantages of a Durable POA
• Agent cannot exercise a power that is not included in
  the document

• The POA is binding when executed

• The POA may not be recognized by banks or brokerage
  firms

• The POA cannot be used after death to dispose of
  property omitted from a will




                      Estate Planning – 1 of 3
         POA for Health Care
• Health care proxy- grants an agent the power to make
  health care decisions for the principal

• Principal can restrict the agent’s authority

• Living wills are not Powers of Attorneys and are not
  recognized in all states




                       Estate Planning – 1 of 3
                Standby Trust
Is used to manage a person’s assets if they become
   incapacitated.

3 parties to a trust:

• Grantor- creates a trust by transferring the legal title
  of the property to the Trustee
• Trustee- manages trust property for the beneficiary
• Beneficiary- has equitable title to trust property

In a stand-by trust, the grantor is the Trustee and
   beneficiary


                        Estate Planning – 1 of 3
      Funded Stand-by Trust
Grantor is Trustee and beneficiary

• Grantor transfers all property into the trust and
  manages it.
• If grantor becomes incompetent, a successor trustee
  can manage trust assets without delay.
• Financial institutions will recognize trustee’s authority
  to manage grantor’s property.
• Trustee can continue to manage assets after grantor’s
  death.



           Q&A in 2
            slides


                       Estate Planning – 1 of 3
   Unfunded Stand-by Trust
Agent of a durable Power of Attorney transfers grantor’s
  property into trust.

• Trustee manages assets for the grantor/beneficiary.
• Financial institutions may not honor the POA.
• Possible delays and costs associated with transferring
  property to the trust.




          Q&A Next
           Slide


                      Estate Planning – 1 of 3
                  Fiduciaries
Fiduciaries have the authority to perform special acts or
   duties for others. They can make decisions, carry out
   directives and manage a person’s property or affairs.

• Fiduciaries must perform their duties with utmost care
  and loyalty towards the beneficiaries.

• Fiduciaries can be sued for breach of fiduciary duties in
  civil court and in criminal court.




           Q&A

                       Estate Planning – 1 of 3
         Types of Fiduciaries
• Executor- is a decedent’s personal representative
  named in the will. The executor admits the will to
  probate, collects the decedent’s assets, determines
  asset values and distributes the assets to heirs with
  court supervision.

• Trustee- manages trust property for beneficiaries

• Guardian- protects the ward’s property interests and
  oversees their personal care




                       Estate Planning – 1 of 3
               Guardianship
A court-supervised arrangement to provide for an
   incompetent person’s care and to manage their
   property, in the absence of planning.

Types of Guardianships:
• Guardianship of the person- provides for the ward’s
  personal care
• Guardianship of the estate- manages the ward’s
  property and financial affairs
• Plenary guardianship- manages both property and
  personal care for the ward




                      Estate Planning – 1 of 3
         Special Needs Trust
Disabled individuals who receive Social Security Disability
   Insurance (SSDI), Supplemental Security Income
   (SSI) and/or Medicaid need to maintain these cash
   benefits and the medical insurance they provide.

• Income distributions from other trusts to disabled
  beneficiaries that exceed the government’s income cap
  for these programs adversely affect benefit amounts.

• Special needs trusts preserve eligibility for government
  benefits and pay for extra services that are not
  covered by public assistance programs.

           Q&A in 2
            slides


                       Estate Planning – 1 of 3
Benefits of Special Needs Trusts
Cover extra services:
• Medical expenses not covered by Medicaid
• Supplemental attendant and custodial care
• Additional therapies
• Respite care for family caregivers

Pay for:
• Telephones
• Computers and internet access
• Cable TV
• Basic household furnishings
• Travel and a companion
          Q&A Next
           Slide


                     Estate Planning – 1 of 3
          Medicaid Planning
Medicaid is a joint federal and state entitlement program
  that pays for medical assistance to certain aged,
  disabled, and blind individuals, and provides benefits
  to families with low income and resources.

• Individuals cannot have more than $2,000 in countable
  assets when applying for Medicaid long-term care
  services.
• There is a 5-year “look back” penalty period for assets
  transferred to trusts, individuals or charities. States
  withhold Medicaid payments for nursing home care for
  a number of months, depending on the value of the
  property transferred.
           Q&A

                       Estate Planning – 1 of 3
          Property Interests
Sole Ownership:

• Owner has complete lifetime and testamentary control
  over property

• Income produced by the property is taxable to the
  owner

• The FMV of the property is included in the owner’s
  gross estate and probate estate




                      Estate Planning – 1 of 3
                     JTWROS
• Two or more joint tenants share equal ownership

• Property passes by Operation of Law

• Property avoids probate

• Income from the property or the proceeds of a sale
  must be split equally, or a gift is made to the other
  joint tenants




                       Estate Planning – 1 of 3
  Disadvantages of JTWROS
• Property can be terminated by one JT without the
  consent of other JT to form a Tenancy-in-Common.

• Creditors can reach a joint tenant’s interest.




                       Estate Planning – 1 of 3
      JTWROS with Spouses


• 50% of the FMV of the property is included in the
  decedent spouse’s estate.

• The property in the decedent’s estate will get a marital
  deduction to offset an estate tax.




                       Estate Planning – 1 of 3
        JTWROS Estate Tax
Gross Estate- 50% of JTWROS property
   Minus: expenses, debts, taxes, losses

Adjusted Gross Estate
  Minus: marital deduction- 50% of JTWROS property

Taxable Estate = 0
  Step-up Basis for Spouses
The surviving spouse’s basis is not stepped-up to FMV

Husband and wife bought a home for $40,000. Each has
  an original basis of $20,000.

• At husband’s death the FMV of the home is $200,000
  so $100,000 is included in his gross estate.
• Wife inherits ½ of the home ($100,000) but her
  original basis is not stepped-up.
• If she sells the home today her new basis is $120,000
  and $80,000 is subject to capital gains tax before
  applying the exclusion.


                      Estate Planning – 1 of 3
 Disadvantages of JTWROS with
           Spouses
• If one spouse becomes incompetent, the other spouse
  does not have total access to the property without a
  durable POA or guardianship.



• Decedent’s estate is “over-qualified” for the marital
  deduction. Decedent cannot use his unified credit to
  offset an estate tax. This may cause higher estate
  taxes at the surviving spouse’s death.




                       Estate Planning – 1 of 3
          Marital Deduction
Gross Estate- 50% of JTWROS property
   Minus: expenses, debts, taxes, losses

Adjusted Gross Estate
  Minus: marital deduction- 50% of JTWROS property

Taxable Estate = 0

Estate tax unified credit- not used

Federal Estate Tax payable = 0
Basis Rules for Non-spouses
Property can be held as JTWROS with non-spouses.

• The amount included in a JT’s gross estate is based on
  their proportional contribution when the property was
  acquired



• The amount in the gross estate gets a complete step-
  up in basis at the decedent’s death.




                      Estate Planning – 1 of 3
Stepped-up Basis Example 1
A mother buys property and titles it JTWROS with her
  son.

• The FMV of the property is included in her gross estate
  at death since she paid for it.

• The son will receive a full step-up in basis for the FMV
  of the property.

• Mother made a gift of 50% of the FMV of the property
  when she titled the deed JTWROS



                       Estate Planning – 1 of 3
    Step-up Basis Example 2
Jim and Bob buy land together for $100,000. Jim pays
   $80,000 and Bob pays $20,000.

• At Jim’s death the FMV of the property is $200,000.
  Therefore 80% or $160,000 is included in Jim’s gross
  estate.

• Bob will inherit Jim’s property worth $160,000.

• Bob will add the $160,000 to his original basis of
  $20,000 for a new basis of $180,000.

           Q&A in 2
            slides


                       Estate Planning – 1 of 3
     Tenancy by the Entirety
Property owned by a husband and wife
• The property passes to the surviving spouse by
  Operation of Law.
• 50% of the property is included in the decedent’s gross
  estate, which gets a marital deduction and a step-up in
  basis.
• A spouse must have the consent of the other spouse to
  terminate ownership or convert the title to sole
  ownership or a Tenancy in Common.
• Property cannot be attached by creditors to satisfy
  individual debts, but property may be attached by the
  couple’s joint creditors.

          Q&A Next
           Slide


                      Estate Planning – 1 of 3
         Tenancy in Common
• Owners can have unequal ownership.
• Each tenant owns a separate, fractional interest which
  is included in the decedent’s estate.
• Property interests can be sold, gifted, or transferred at
  death, and income is based on ownership share.
• Property interests pass through a will.
• Property goes through probate.
• Gifts occur if other property is converted to a Tenancy
  in Common or if income is divided disproportionately.




           Q&A

                       Estate Planning – 1 of 3
    Community Property States
•   Texas
•   Louisiana
•   Nevada
•   New Mexico
•   Alaska

Quasi-Community Property States:
• California
• Idaho
• Arizona
• Washington
• Wisconsin


                  Estate Planning – 1 of 3
Community Property Interests
• Income earned by spouses after marriage

• Income earned by one spouse after marriage

• Separate property commingled with community
  property assets

• Property acquired during marriage but titled in one
  spouse’s name

• Appreciation of separately owned property due to the
  contributions of the non-owner spouse


                      Estate Planning – 1 of 3
    Not Community Property
• Property owned by spouses prior to marriage

• Income earned on the spouse’s separately owned
  assets

• Separate property used to acquire other property
  during marriage

• Property received as a gift for one spouse

• Property inherited by one spouse

• Spousal agreements- property acquired after marriage
  can become separate property



                      Estate Planning – 1 of 3
  Characteristics of Community
            Property
• Each spouse has a vested interest in one-half of the
  property acquired during marriage, which is divided
  equally at divorce or death.

• A Will is needed to bequeath property to a spouse or a
  3rd party, or the property goes through intestacy.

• Community property outside a trust goes through
  probate.




                      Estate Planning – 1 of 3
     Estate Tax for Community
             Property
• 50% of community property is included in the
  decedent’s gross estate and receives a marital
  deduction if bequeathed to the surviving spouse.

• 100% of the property gets stepped-up to FMV at the
  spouse’s death.




                      Estate Planning – 1 of 3
           Step-Up in Basis
The surviving spouse’s basis is stepped-up to FMV

Husband and wife bought a home for $100,000.
  Home is worth $800,000 at wife’s death.

• $400,000 is included in wife’s gross estate
• Husband inherits ½ of home worth $400,000
• Husband’s original basis of $50,000 is stepped-
  up to $400,000
• Husband owns 100% of home with a new basis
  of $800,000



                    Estate Planning – 1 of 3
               Moving Rules
I.   The character of the property acquired in a
     community or a quasi-community property state does
     not change when a married couple moves to a
     common law state.

Example: A couple sells a home in Nevada and buys a
   new home in NY with proceeds from the sale. The
   property is community property in NY.

II. The character of the property acquired in a common-
     law state does not change when a married couple
     moves to a community property state.

Example: A couple sells a home in Vermont. The sale
   proceeds are separate property. When they move to
   Texas and buy a new home, it is not community
   property.


                      Estate Planning – 1 of 3
 Quasi-Community Property
• Property initially acquired by spouses in a common law
  state that is treated as community property when the
  couple moves to certain community property states:
  California, Arizona, Idaho, Washington, and Wisconsin.

• Quasi-Community Property is an exception to the
  moving rule.




                      Estate Planning – 1 of 3
   Moving to Quasi-Community
        Property States
Property acquired in a common law state is treated as
   community property if:

The property could have been classified as “community
  property” when it was originally acquired.

*Look back to see how the property was initially
  acquired.




          Q&A in 2
           slides


                      Estate Planning – 1 of 3
                “Look Back”
Will property from a common law state become
  community property when the couple moves to a
  quasi-community property state?

Yes:
If property was acquired after marriage

No:
After marriage, property was acquired as:
• a gift
• an inheritance
    Quasi-Community Property
            Example 1
A married couple bought a home in NH and years later
  they sold their home and moved to CA.

Their NH home would have been “community” property if
  it had been originally acquired in CA.

Therefore, when the couple moves to CA and buys a new
  home, their new home is community property.




          Q&A Next
           Slide


                     Estate Planning – 1 of 3
    Quasi-Community Property
            Example 2
A home was originally bought in Maine with money
   inherited by the wife.

The couple sold their Maine home and moved to CA
  where they bought a new home.

The Maine home would not have been considered
  “community” property if it had been initially acquired
  in CA.

Therefore, the home remains the wife’s separate
  property when they move to CA.
           Q&A

                       Estate Planning – 1 of 3
        Receive a Life Estate
You have the right to possess or enjoy property or derive
  income from the property while you are alive.

You may receive:

• A gift of a life estate in real property

• All of the income from a trust for life




                        Estate Planning – 1 of 3
Consequences of Receiving a Life
           Estate
• The donor or grantor determines the remainder
  beneficiary of the life estate. Since you, the life tenant,
  cannot determine the remainderman or have access to
  the remainder interest, the value of the life estate is
  not included in your gross estate at death.

• You cannot be forced out of a life estate in real
  property regardless of the remainder beneficiary’s
  misfortunes.

• The life tenant must pay all property taxes and
  insurance, or the remainder beneficiary can sue.



                        Estate Planning – 1 of 3
         Create a Life Estate
You may create:

• A life estate in your home. You have the right to live
  there until your death.

• A life estate in a trust. You gave yourself the right to
  receive all of the income from the trust while you are
  alive.




                       Estate Planning – 1 of 3
 Gift Taxes with Life Estates
• A person who creates a life estate will choose the
  remainder beneficiary.

• The creator makes a gift of the remainder interest in
  property or trust to the beneficiary.

• The value of the gift is the present value (PV) of the
  remainder interest.




                       Estate Planning – 1 of 3
   PV of Remainder Interest
Mother creates a life estate in her home with daughter as
  remainderman.

• Gift tax value- Present Value of the remainder interest
  gifted to the daughter.

• Date of gift- the date the property title is changed.

• Future interest gift- may be subject to gift taxes.
      Determining Income and
        Remainder Interests
Paul and Rose transfer $150,000 into a trust today for
  Paul’s father Ted, age 72, and their daughter Sue.
  Income will be distributed annually to Ted for the rest
  of his life. When Ted dies, Sue will receive the income
  interest and trust corpus.

What is the value of the income interest and the
  remainder interest if the interest rate is 9.6%?

Valuation Table for:     SINGLE LIFE 9.6%
Age      Annuity           Life Estate Remainder
72       6.2356            .59862       .40138


                       Estate Planning – 1 of 3
      Split Interest Example
Valuation Table for:     SINGLE LIFE 9.6%
Age       Annuity          Life Estate Remainder
72        6.2356           .59862      .40138

The PV of Ted’s income interest:
   $150,000 x .59862 = $89,793

The remainder interest gift to Sue:
1. Multiply the remainder factor .40138 x $150,000 =
  $60,207
2. Subtract the income interest of $89,793 from
  $150,000 = $60,207



                       Estate Planning – 1 of 3
   Estate Tax for Life Estates
Life tenant creates a life estate for himself:

• IRS Section 2036- The FMV of the property or trust
  will be included in the life tenant’s gross estate at
  death.

• The remainder beneficiary will receive a step-up in
  basis to FMV at the life tenant’s death.




           Q&A in 2
            slides


                        Estate Planning – 1 of 3
                Term Interests
You may receive an estate for a term of years:

• You are given the right to use the property or to
  receive the trust income until the term ends.



• If you die before the term is up, your will can appoint
  another person to use the property, or receive the
  income from the trust until your term ends.




          Q&A Next
           Slide


                       Estate Planning – 1 of 3
Vested and Contingent Interests
A beneficiary may have a vested or contingent interest in
   property.

• Vested interest- your right to receive the remainder
  interest is fixed and absolute. If you die before you
  receive the remainder interest, the property passes to
  a new beneficiary, as determined by your will.

• Contingent interest- your right to receive the
  property depends on the happening of a specific event.
  Example: Remainderman must outlive the income
  beneficiary.

          Q&A

                      Estate Planning – 1 of 3
                     Probate
Probate is the process of proving the will in court.

• Personal property is probated in the decedent’s state
  of domicile.

• Real property is probated in the state where it’s
  located (situs) which may subject the property to
  ancillary probate.

• Ancillary probate- property owned in a different state
  is probated in the other state.



                       Estate Planning – 1 of 3
      Advantages of Probate
• A court supervised distribution of property to heirs

• Protects creditors by ensuring that estate debts are
  paid

• Bars future creditor claims against the estate

• Documents the title and the transfer of property to
  others




                       Estate Planning – 1 of 3
    Disadvantages of Probate
• Delay in probating the estate- typically 9 months to 2
  years

• Costs- attorney and court fees, and the executor fee if
  not waived

•   A public proceeding- privacy issues




                       Estate Planning – 1 of 3
              Probate Property
Property transferred via a will is subject to probate:

•   Solely owned personal or real property

•   Tenancy-in-Common

•   Community property

•   Property passing from the will into a testamentary trust

•   Property transferred by a pour-over will into a trust

•   Life insurance policy owned by the decedent who was not the
    insured




                           Estate Planning – 1 of 3
      More Probate Property
Property not transferred by will that is subject to
  probate:

• Intestate property

• Life insurance policy proceeds or annuities payable to
  the decedent’s estate

• Homestead and exempt property allowances




                       Estate Planning – 1 of 3
           Operation of Law
• Right of Survivorship- JTWROS or Tenancy by the
  Entirety
• Joint bank accounts
• Government Savings Bonds: co-ownership
• Life Estates
• POD accounts- Totten trusts and gifts causa mortis
• TOD accounts
• General powers of appointment exercised or released
  by will at death




          Q&A in 2
           slides


                     Estate Planning – 1 of 3
        Transfers by Contract
Contracts avoid probate if payable to named
  beneficiaries

•   Life insurance proceeds
•   Pension plans and IRAs
•   Annuities with named joint annuitants
•   Buy/Sell agreements
•   Nuptial agreements




           Q&A Next
            Slide


                       Estate Planning – 1 of 3
                      Trusts
Avoids probate:

• Funded revocable trusts
• Irrevocable trusts
• Property in trust avoids ancillary probate

Does not avoid probate:

• Unfunded revocable trust
• Testamentary trust


           Q&A

                       Estate Planning – 1 of 3
       Introduction to Trusts
Trust- a legal entity that holds property

Types of trusts:
   • Inter vivos- established while the grantor is alive
     and takes effect immediately

   • Revocable- may be funded or un-funded

   • Irrevocable- must be funded to legally exist

   • Testamentary- created through a will



                       Estate Planning – 1 of 3
Beneficiary Interests in Trusts
• Present interest- an immediate and unrestricted use
  of the trust property

• Future interest- use or ownership of trust property is
  postponed

• Remainder interest- is a future interest that goes
  into effect after a beneficiary’s present interest has
  ended

• Reversionary interest- property reverts back to the
  grantor after a beneficiary’s interest has ended


                       Estate Planning – 1 of 3
What Trusts Can Accomplish
• Control who manages the trust property, who benefits
  from the property, and when the property gets
  distributed
• Provide income to one beneficiary and trust corpus to
  another beneficiary
• Reduce a person’s estate, gift or income tax liability, or
  freeze the value of an estate if appreciating property is
  transferred to others
• Provide for the care of dependent beneficiaries
• Provide for the grantor’s care if incompetency occurs
• Provide for the management of assets in other states




                       Estate Planning – 1 of 3
Advantages of Revocable Trusts
   • Provides privacy in the administration of your
     affairs

   • Used for incapacity planning

   • Can have professional management of trust assets

   • Funded trusts avoid probate and ancillary probate
     for out of state property

• Reduces the potential for a will contest or an election
  against the will


                       Estate Planning – 1 of 3
Disadvantages of Revocable Trusts
   Costs associated with establishing the trust:

   •   Attorney fees
   •   Transfer costs
   •   Trustee fees

 Revocable trusts offer no creditor protection




                        Estate Planning – 1 of 3
Taxation of Revocable Trusts
• Income tax neutral- trust income is taxed to the
  grantor

• Gift tax- no gift tax because transfers into trust are
  not completed gifts

• Estate tax- trust assets are taxed at FMV in the
  grantor’s estate




                      Estate Planning – 1 of 3
          Irrevocable Trusts
• Grantor retains no control over trust assets and cannot
  change the terms of the trust

• Trust assets avoid probate

• Rule against perpetuities- trusts cannot last longer
  than 21 years and 9 months after the death of the last
  beneficiary




                      Estate Planning – 1 of 3
Income Taxation of Irrevocable
           Trusts
Non-grantor trusts:
• Income that is not distributed is taxed to the trust
• Distributions made to trust beneficiaries are taxed to
  the beneficiary

Grantor trusts:
• Income that is not distributed is taxed to the grantor




                      Estate Planning – 1 of 3
              Grantor Trusts
Grantor is taxed on trust income if:

• Trust income is paid or may be paid to the grantor or
  the grantor’s spouse
• Trust income can accumulate for future distributions to
  the grantor or the spouse
• Trust income can be used to pay for life insurance
  premiums on the grantor or the spouse’s life
• Trust income is used to discharge a grantor’s legal
  obligation




                      Estate Planning – 1 of 3
   More Grantor Trust Rules
• Grantor retains a reversionary interest > 5% in the
  trust income or corpus

• Grantor or spouse has the power to control beneficial
  enjoyment of trust principal or income

• Grantor can dispose of trust corpus at less than its full
  value

• Grantor can borrow from the trust without proper
  interest payments and security



                       Estate Planning – 1 of 3
         Gift and Estate Tax
Irrevocable Trusts:

   • Gift tax- applies to most property transfers into
     the trust. The trust takes the donor’s basis in the
     transferred property.

   • Estate tax- trust assets are not included in the
     grantor’s estate if the grantor does not retain any
     interest or control over them.




                       Estate Planning – 1 of 3
               Simple Trusts
• All trust income- interest and dividends- must be
  distributed to the beneficiaries in the year the income
  is earned

• The Trustee cannot distribute trust corpus or make any
  charitable gifts

• The trust is a separate tax entity but pays no income
  taxes




                       Estate Planning – 1 of 3
             Complex Trust
• Can accumulate income, distribute corpus, and
  make gifts to charities.
• Is a separate tax entity that deducts distributed
  income and pays tax on the income retained.
• Accumulated income becomes undistributed net
  income (UNI), and may be subject to additional
  taxes to the beneficiary in later years when it’s
  distributed.
• Accumulated income in non-grantor trusts is
  taxed at 35% for amounts over $11,650 in 2012.
• Tax-exempt interest accumulated in the trust is
  fully taxable as income to the trust. It retains its
  tax-exempt status only if it is distributed to the
  beneficiaries.


                     Estate Planning – 1 of 3
   Distributable Net Income
DNI ensures that a trust receives a deduction for the
  amounts distributed to the beneficiary, so that the
  distribution is not taxed twice.

Example: A trust earns $10,000 in income and
  distributes $6,000 to a beneficiary.

The trust gets a deduction for the $6,000 distributed and
  the trust is taxed on the remaining $4,000.




          Q&A in 2
           slides


                       Estate Planning – 1 of 3
               DNI- Beneficiary
DNI limits the amount of trust income the beneficiary is
  required to report.

The deduction the trust takes for a distribution is equal
  to:
• The lesser amount actually distributed to the
  beneficiary, or the DNI

Example: A trust earns $10,000 in income and distributes
  $12,000 to a beneficiary. The first $10,000 is considered to
  be income, and the remaining $2,000 is considered to be a
  tax-free distribution of corpus. The trust will deduct the
  $10,000 distributed to the beneficiary which avoids taxation.
  The beneficiary is only taxed on the $10,000 not the full
  $12,000 distributed from the trust.

            Q&A in 2
             slides


                         Estate Planning – 1 of 3
  Estate Planning Session 2 of 3
             Preview
In this session we will focus on gifting strategies and the
   steps involved in the gift tax calculation. Marital
   deduction requirements, charitable transfers and life
   insurance planning will be discussed in conjunction
   with gift tax strategies.

Modules to complete before the July 5th virtual classroom
  session:
• Gifting
• Charitable Giving
• Trusts




                        Estate Planning – 1 of 3
                  Thank You!
See you at the next session!

Estate Planning
Session 2 of 3

Thursday, July 5th 2012
7:00pm to 9:00pm (Eastern Standard Time)

Login information will be mailed to you in the coming
  week.




                      Estate Planning – 1 of 3

				
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