Estate Planning Lecture

					Estate Planning What is estate planning? 1/20/06 2/1/06 What kind of powers make a gift incomplete? Power to revoke – Incomplete gift. In CA be careful because if silent the default rule is that the trust is revocable. Power to change beneficiaries – Incomplete (too much dominion and control)

ANNUAL EXCLUSION IS NOW $12,000 per year, per donee. 2/3/06 Remember 2036, 2037, and 2038 powers. If you retain testamentary power to change beneficiaries, that is probably prohibitive 2038 power. Generation Skipping Transfer Tax: Can be gift or testamentary transfer. Generally I die, give to kid (taxed there) then he dies and gives to his kid (taxed there). What if set up a trust at death that income goes to my kid and remainder goes to his kid. When the fist kid dies there is nothing in his estate because his life interest is extinguished. Basically the stuff goes to the grandkid and is only taxed once, the first death. This issue brought in the generation skipping transfer tax. 2/8/06 Generation Skipping Transfer Tax This is in addition to the regular estate and gift tax. The additional tax is the top rate available. Right now that is 46%. Step 1 – Is there a skip person Step 2 – Is there a generation skipping transfer Step 3 – Compute the tax Who is a skip person? § 2613 defines a skip person – A natural person assigned to a generation which is two or more generations below that of the transferor. How do we define generations? Divide it up into family and non-family. The code considers family only lineal descendants of Grandparents. Now who is a skip person in your family? Anyone two or more generations below you.

Your spouse is always in the same generation as the transferor, regardless of age. And your spouses grandparents lineal descendents are family. Your spouses children are always one generation below, thus not within the GST range, but your spouses grandchildren are family and are skip people. If your kid dies but has a child, then that child slides up a generation. For un-related children, age is looked at. People that are 12.5 years younger than me are considered in my generation. Then it goes by 25 year blocks. So someone within 37.5 years younger than you is either in your generation or one generation below you, thus no GST. So let’s say there is a skip person, now we need to find a generation skipping transfer. There are three kinds of generation skipping transfers. 1) Taxable distribution 2) Taxable termination 3) Direct Skip A direct skip is the simplest. If I made a transfer to someone two or more generations below, then I have made a direct skip. Taxable termination is typically a transfer in trust, and occurs when there is a transfer where there are no longer any non-skip people alive. When the non-skip interests in a trust have terminated, then it will trigger a generation skipping transfer. What about a trust that has an independent trustee and the trustee has discretion to make distributions to skip people. That is a taxable distribution and triggers the tax. The taxable distribution or termination can occur years after the initial donor makes his transfer. It still triggers the tax. GST = Taxable amount X Applicable Rate The standard exclusions apply, medical/tuition, or annual, etc. There is also an additional lifetime $2,000,000 GST exclusion. How do you figure all this out? The applicable rate is: Inclusion Ratio X 46% The Inclusion Ratio is: 1 – The Applicable Fraction The Applicable Fraction is: The GST Exclusion / The Value Of the Property at the time of transfer from donor Example. Popovich makes a direct skip transfer to his grandchild of $2,000,000.

So now figure out the numbers. The value of the property is $2 million, the GST exclusion is $2 million. The applicable fraction is 1. The Inclusion ration is 1 - 1 = 0. 0 X 46% is 0, so that is the applicable rate. No tax. You must elect to take your GST exclusion. If you set up a trust with income to child and remainder to grandkid. When the child dies then there is a taxable termination. But you have to elect to take what amount of your exclusion at the time the trust is set up. 2/10/06 What is a small estate? For a married couple it is an estate of $2 million or less. This is because of the unified credit. If we have an estate of $2,000,000, that will trigger a tax of $785,800. But that is the amount of the unified credit so no tax paid. If husband and wife each own $1 million. When husband dies wife gets it all with no tax because of marital deduction. The wife then has $2 million. So the $2 million is the combined value of husband and wife estate. Every time he says will he also means revocable living trust. A will should: Dispose to who you want, In the appropriate manner, Who will administer the estate,

Most common disposition is all to spouse if spouse is still living. Also can be a QTIP or a GPA trust. The administer of the estate can be anyone who is a resident of the US or a domestic corporation. Executor should be someone who can trust, can take care of things, respond to letters and phone calls. What about the lawyer as an executor? In CA the lawyer who drafts the docs can not serve as executor. There are fees for the executor and if the surviving spouse is the executor, they may want to waive the fee because the fee is income. Who takes care of the kids? Factors of guardian. Age, philosophy on child rearing, would this person want the children, financial well being, and make sure you tell them. 2/15/06 How do minors receive property? They don’t get it outright. There is either a custodian of the estate or a custodian of the property appointed. Can also set up a trust. Can set one up at life, or set one up that becomes active at death of testator.

What kind of trusts can you set up for thee kids. Three kids, ages four, seven and ten. 2/17/06 Durable Power of Attorney – Giving someone else power to make decisions on your behalf. Advance Healthcare Directive – Keep me alive or don’t keep me alive. 2/22/06 IN 2001 CA passed legislation that brought into effect the advance healthcare directive. This is both instruction to physicians as well as nominating a surrogate (someone to make healthcare decisions for you). What if you have an instruction that says “don’t keep me alive,” but the surrogate you have named says keep this person alive? The instructions that you give trump the surrogate. When Husband dies and gives everything to the Wife, it is all eligible for the marital deduction. But how much marital deduction do you want to take and in what form are you going to take it? Let’s say H has 500K and W has 500K. When H dies his money goes to W and now wife has 1M. No tax because all marital deduction. When W dies and all money goes to kids and there is no deduction. Taxable estate of 1 million. Total tax is 345,800, but W has a unified credit of 780,800. No tax liability. But H never used his unified credit. In this case it did not matter, but in other cases it may. Now let’s say H and W have 2M each. When H dies again his 2M goes to W. W has 4 M total. When W dies all 4M is in the taxable estate. Tax of 1.7M, use up the credit and liability is 920K. This is owed to the govt. The money is due to the govt. within 9 months. If H and W each had 3M for a total of 6M, then when H dies and then W dies, the liability will be much larger. In the second example, the H could have given his 2M directly to the kids. That would have no tax because unified credit would cancel it out. Then when the W dies her 2M goes to the kids and also no tax. Can also put 2M in a trust that does not qualify as a terminable interest. 2/24/06 H dies and now put his 2M in trust. We want the trust to not qualify as a marital deduction because we want to use the unified credit for it. The problem is that wife does not have control of this money, if she has complete control then it will be in her estate, and we don’t want that. This is called a Bypass Trust. Let’s say the H and W have 3 million each at this point. The H’s will should say siphon off 2 million into a Bypass Trust. No marital deduction for that amount. The rest should go to the W. The amount that is going to the W can go outright. The amount going to the W can also go in a

QTIP trust, or a GPA trust. However, when there is a marital amount that is held in trust we have to watch out for the terminable interest rule. Can also say all money too W, but if she disclaims any of it, that amount goes into the Bypass Trust. How do we draft the will? We don’t want to say put $2M in the trust because we don’t know what the unified credit will be when you die. Also don’t know how much you will have left (you may have used it up with gifts during your lifetime). We use a formula instead. 3/1/06 Talking about an A – B trust. The A goes to the wife either outright or in trust, and the B is the bypass trust. It goes to the Kids but provides Wife with some control. We need a formula clause to determine how much goes in A and how much in B. We generally want B to maximize the unified credit. The values are determined at the date of death for the purposes of taxes. There can also be a date of distribution. There can be a problem if the assets change value from the time of death to the time of distribution. One option is to use a date of death valuation for funding purposes. If things change in value you want the highly appreciating assets in the B trust and the other ones in the A trust. This is because the B trust is already given to the kids, the A trust will be valued again at the Wife’s death. Unfortunately you can not do this. The rule is that you actually have to fund the marital deduction trust, the A trust, with as much distribution value as you claim it should be. Or you can apportion it fairly. Another problem is that full utilization of the formula clause may put aside too much in the B trust. Wife may need that money. 3/3/06 Back to scenario with H and W having 3 million each. H dies and some goes to W in “A” format. Can be a trust or just outright. The rest goes into a “B” trust to the kids. The point is to use unified credit of H. For the “B” Trust, you do not want it to qualify for the marital deduction. We want it to bypass the wife’s estate. But we do want the B trust to benefit the W. So we need to be careful about what powers the W has over the trust. Another issue is what actual assets are in each trust. Typically the will has an amount of assets not the specific assets listed. We probably want the good appreciating assets in the B trust because the ones in the A trust are going to be taxed again when the W dies. As far as the B trust, what if we say income to wife for life and remainder to kids. That is a terminable interest so no marital deduction and when she dies nothing will be in her estate.

How much power can we give the W over the corpus. Can give her full power because that will be a GPA. But if she can get at the corpus by virtue of an ascertainable standard limited to health, education or maintenance then that will not be a GPA by definition of the code. So what rights can we give her: 1) Income for life 2) Invade trust by means of ascertainable standard 3) Unrestricted distribution of principle as long as W there is an independent trustee 4) Right to withdraw principle up to $5,000 or 5% of the trust value each year (keep in mind that if she has this power she will die with a GPA over 5% of the trust and that amount will be included in the estate) 5) Special power of appointment 3/8/06 The “A” piece, if you want maximum benefits to the wife, then it will be outright or a GPA trust, probably not a QTIP. The B piece. We can give the wife: 1) Income for life 2) Invade Principal with ascertainable standard (health, education, maintenance, but not comfort) 3) Independent trustee, this person can have unrestricted distribution discretion. But must make sure W can never be trustee 4) Wife can have right to withdraw up to $5000 or 5% of the trust (which ever is greater) each year 5) Special power of appointment to wife. She can appoint all of the trust to anyone except to herself, her estate, her creditors, or the creditors of her estate. Chapter 6 – Avoiding Probate What is probate? Probate is court supervised distribution of the assets. The reason for this is to orderly distribute the assets. 3/22/06 Project: We are to draft an estate plan. We can draft wills, we can draft a revocable living trust. We are also to prepare a memo to Popovich. This is a work memo, it does not have to be fancy. The estimate of the transfer tax liability is as it is now, before we do a plan. Back To Material Avoiding Probate: Probate rules are set out in statutes. Probate proceedings typically start when someone dies. Probate has nothing to do with avoiding estate taxes. Can avoid probate with joint tenancy, with life insurance, etc. 3/24/06

Once notice is given, people have a set amount of time to bring a claim against a decedent. This means any claim. The statutory time period is 4 months. Probate can take as little as 6 months. It can also take years. If there is a named beneficiary of a pension plan that will go by contract to the beneficiary and avoid probate. 3/29/06 Why avoid probate? Cost, Time/Control, Privacy Probate costs – Statutory costs. The executor (or administrator if intestate) and the lawyer gets that fee. That fee is paid twice. The fee can be waived if the executor is the main beneficiary, because the fee is income that is taxable. What about a revocable living trust? There is a trustee that is doing the executor duties. Basically the same things happen that go on in probate. On the upside, the costs can be less if done very efficiently. There is no statutory fee. There is usually a clause that provides for a reasonable fee to the trustee. It is more costly to draft a revocable living trust. Because you have to draft wills in addition to the trust. You also have to transfer all the property to the trust. Probate has a 4 month creditor period. Revocable living trust does not have a court proceeding. If you have property in other states, and you die with a will, then something called ancillary probate will have to be opened up. Attorney in that state and court in that state will have to get involved. If there is a revocable living trust then the trustee has the power to distribute it. Can also have a built in durable power of attorney that says the trustee takes over at death or incapacitation. 3/31/06 Husband dies with 3 million, we want 2 million to go in the bypass trust. The other one million goes to the wife in some form of marital deduction. It can go outright, or in trust (QTIP or (b)5). When wife dies her property will go via will. What about with a revocable living trust? While they are alive all property must be put into the revocable living trust. The trustees are typically the husband and wife. Let’s say husband dies. At his death the trust document will probably say at the death of the first spouse the trust is divided up and the deceased spouses share is distributed as follows: into an A/B trust. The wife’s property is going to stay in her own revocable living trust. Classic 3 trust approach, or 2 trust if the A portion goes outright into the wife’s revocable living trust. The wife as the trustee will have the power to do all this stuff.

In order for the revocable living trust, it must be funded. This means all the assets must be transferred into the trust. Title must be changed. What if you miss something? You must also make a will for the husband and wife, and the trust will be the beneficiary of the will. This is called a pour-over will because anything that is left out is poured into the trust via probate. 4/5/06 Use your name not your ID number on the project. Every time you draft a revocable living trust you are going to draft a pourover will for the husband and wife. If you leave something out of a revocable living trust, you can make a Hegstat petition. This petitions the court to take that property in the trust and to avoid probate because the intent of the testator was to put that property in the trust. 4/7/06 Be careful in states other than CA, there may be transfer taxes with transferring property into trust, there may also be reassessment of property taxes. Also watch out for due on transfer clause in loans. Parties to a life insurance contract – 4/19/06

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