Estate Planning Keeping More for Your Family

2. Estate PlanningKeeping More for Your Family Presented by Dennis L. Thomas CPA ABV JD LL.M.-Taxation Strothman and Company

3. STROTHMAN ESTATE PLANNING TEAM • Judge Learned Hand; “Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.” Gregory v. Helvering, 69 F;2d 809, 810 (2d Cir. 1934)

4. ESTATE PLANNING PHILOSOPHY • Control • Retain cash flow to maintain accustomed manner of living • Minimize taxes • Incorporate charitable goals

5. AGENDA • Introductions • Estate Planning Process • Essential Estate Planning Documents • Revocable Trusts • Kentucky Inheritance Tax • Federal, Gift and Generation Skipping Transfer Tax • Irrevocable Trusts (Break) • Bypass Trusts vs. Portability • Valuation Planning • Tax Basis Adjustments • Questions

6. GOALS What do we want to accomplish with Estate Planning? • Give our loved ones peace of mind • Keep our loved ones out of court (to the extent possible) • Prevent disputes among our loved ones

7. ESSENTIAL ESTATE PLANNING DOCUMENTS! Four Documents:

8. LAST WILL AND TESTAMENT • A legal declaration by which you (the testator): • Name another person (the executor) to manage your estate; and • Direct the transfer of your assets at your death • Why “Essential”? • If you don’t have a Will, your assets will not be distributed according to your wishes, but according to Kentucky law.

9. LAST WILL AND TESTAMENT Formalities for a Kentucky Will to be valid: • Must be at least 18 years of age • Must be of sound mind • Must be wholly in the testator’s own handwriting or signed in the presence of two witnesses who also sign in the presence of the testator and each other

10. GENERAL POWER OF ATTORNEY • Written permission to represent you or act on your behalf • Generally for dealing with your finances • “Durable” power of attorney = Not affected or made invalid by the maker’s incapacity • “Springing” power of attorney = Takes effect only after the maker’s incapacity

11. GENERAL POWER OF ATTORNEY • Why “essential”? • Without a power of attorney, court approval is required for anyone else to act on your behalf and perform most financial tasks

12. HEALTH CARE POWER OF ATTORNEY • Authorization of another (a health care surrogate) to make health care decisions for you when you no longer have decisional capacity • Why “essential”? • If you don’t name a health care surrogate, no one can act on your behalf with regard to health care decisions

13. AUTHORIZATION FOR DISCLOSURE OF PROTECTED HEALTH INFORMATION • HIPAA – major penalties for sharing health information • Names the individuals with whom doctors and hospitals can share your health information • Why “essential”? • Without this authorization, doctors and hospitals are prevented from sharing your health information with anyone

14. LIVING WILL • A set of written instructions that specifies what you want to have happen medically if you are no longer capable of making decisions • Directs withholding of life support, medicine, drugs, nutrition, and hydration if attending physician and one other physician determine that (1) you are permanently unconscious or (2) you have a terminal condition

15. LIVING WILL • Why “essential”? • Without a living will, a hospital generally will not remove life support

16. THE “ESSENTIAL” ESTATE PLANNING

17. TRUSTS • What is a Revocable Trust? • Benefits of revocable trusts: • Avoid probate • Confidentiality • Simplifies asset management if disability • No estate and gift tax savings

18. PROBATE What is Probate? • A court-supervised, legal process • The validity of a Will is determined • The executor is appointed • The court oversees the gathering of assets, the payment of creditors, and the distribution of property to beneficiaries

19. PROBATE • How do you avoid probate? • Revocable Trust • Deeds – Joint with right of survivorship • Revocable Trust • Bank Accounts – Jointly owned or titled as paid on death accounts (POD) • IRA, Annuities and Life Insurance naming a designated beneficiary that survives the decedent

20. FIDUCIARY ROLES

21. KENTUCKY INHERITANCE TAX • Repeal of Kentucky Estate Tax - ATRA • Federal Estate tax – Credit for State death taxes vs. • Federal Estate tax – Deduction for State death taxes

22. KENTUCKY INHERITANCE TAX • Class A Exempt Beneficiaries • Spouse • Children (blood, step or adopted as infant) • Grandchildren(blood, step or adopted as infant) • Sibling (whole or half) • Certain nonprofit organizations are exempt under KRS 140.060 • Gifting in contemplation of death • No gift tax

23. KENTUCKY INHERITANCE TAX • Class B beneficiaries include: • Niece/Nephew (blood) • Daughter-in-law/Son-in-law • Aunt/Uncle • Great Grandchild • Class C beneficiaries include any beneficiary not in Class A or Class B or is not exempt under KRS 140.060.

24. KENTUCKY INHERITANCE TAX

25. FEDERAL ESTATE, GIFT AND GENERATION SKIPPING TRANSFER TAX • Unlimited marital deduction – 1981 • Recent U.S. Supreme Court case of United States v. Windsor 133 S. Ct. 2675 (2013)

26. CURRENT DEVELOPMENTS FEDERAL ESTATE, GIFT AND GENERATION SKIPPING TRANSFER TAX Annual exclusion gifts at $14,000 per donee from each donor for 2013 and 2014 tax year

27. CURRENT DEVELOPMENTS FEDERAL ESTATE, GIFT AND GENERATION SKIPPING TRANSFER TAX EXEMPTION AND RATES AFTER AMERICAN TAXPAYER RELIEF ACT OF 2012 (ATRA)

28. EXEMPTION COMPARISON

29. IRREVOCABLE GIFT TRUST • Assets generally estate tax exempt • Annual exclusion gifts – “Crummey Withdrawal Rights” • Use of the gift tax exemption

30. LEVERAGING THE EXEMPTION Irrevocable Life Insurance Trust Irrevocable Life Insurance Trust Wife, Trustee Husband Initial Gift Life InsuranceCash Value: Beneficiary: Wife, Then Children Annual Gift of Premium Payment Notices to Crummey Beneficiaries

31. IRREVOCABLE GIFT TRUST • Dynasty Trusts • Use of the GST tax exemption • Rule against perpetuities repealed in Kentucky

32. TAXATION OF TRUSTS

33. Trust Tax Rates After American Taxpayer Relief Act of 2012 (ATRA) • Note that Long-term capital gain rates were increased to 20% • *Plus a 3.8% Medicare surtax on unearned income exceeding the top tax bracket

34. TRUST TAX PLANNING

35. IRREVOCABLE GIFT TRUST • Nontax benefits of using a Dynasty Trust • Creditor protection issues

36. BYPASS TRUST PLANNING • What is a Bypass Trust? • What is the planning strategy? • How is the planning strategy implemented? • Assets funding a Bypass Trust are: • Not subject to estate tax • Generally held in trust for the life of the surviving spouse and benefits the children and grandchildren at the death of the surviving spouse • Potentially subject to higher income and capital gains tax rates

37. BYPASS TRUST PLANNING • Last Will and Testament • Executor = SpouseProvision to leave personal property by memorandum, then to Spouse, if living and if not, then to children. • Residue distributed to Revocable Trust Wife’s Estate mirrors Husband’s Revocable Trust Fund A for Spouse outright in fee and free of trust Fund B in trust for Spouse’s benefit (currently equal to $5,250,000 less any prior gifts) Distributes to Children

38. BYPASS TRUST PLANNING • Last Will and Testament • Executor = SpouseProvision to leave personal property by memorandum, then to Spouse, if living and if not, then to children. • Residue distributed to Revocable Trust Wife’s Estate mirrors Husband’s Revocable Trust Fund with the use of a disclaimer Fund with remaining assets Fund A for Spouse outright in fee and free of trust (or in trust) Fund B in trust for Spouse’s benefit (currently equal to $5,250,000 less any prior gifts) Distributes to Children

39. PORTABILITY • Allows surviving spouse to use unused exemption of deceased spouse • Must file a Federal estate tax return at the death of the first spouse to claim use of the decedent’s unused portion • Appreciating assets in surviving spouse’s estate vs. Bypass Trust where the appreciation of assets outside the surviving spouse’s estate

40. PORTABILITY ASSETS Wife Husband EXEMPTION AMOUNT Tax on assets above combined exemption amounts Children

41. TRUST DECANTING • Evaluate trustee’s power to decant • Must have the power to distribute principal • Evaluate trustee’s duties in connection with decanting • Determine the applicable law • Differences between old and new trust must be permitted under Kentucky statute • Address trustee’s risk • Can be minimized by obtaining a release or consent from the beneficiaries

42. FAMILY COMPANIES/VALUATION PLANNING CHOICE OF ENTITY

43. FAMILY COMPANIES/VALUATION PLANNING • Types of LLC membership interest • Voting or Participating • Non-voting or Non-participating • Things to consider when forming a new LLC • Ownership structure • Management • Business Purpose • Assets • Potential gifting to the next generation • Tax Status of Entity

44. FAMILY COMPANIES/VALUATION PLANNING • Valuation discounts applied to transfers of non-voting/non-participating interests in an entity: • Lack of Marketability • Lack of Control • Fractional interest discounts available on transfers of interest in assets such as: • Real Estate • Note Receivable

45. ADJUSTMENTS TO BASIS

46. ADJUSTMENTS TO BASIS

47. DEDUCTIBILITY OF MEDICAL EXPENSES • “Qualified Long Term Services” are considered medical expenses and are deductible for income tax purposes. (IRC§7702B) • The portion of care attributable to medical care is the only portion deductible when the principle reason for care is not medical. (Treas. Reg. §1.213-1(e)(1)(v).

48. DEDUCTIBILITY OF MEDICAL EXPENSES

49. DEDUCTIBILITY OF NURSING HOME EXPENSES Since the primary purpose of a nursing home is to provide medical care, the entire cost is tax deductible as a medical expense.

50. DEDUCTIBILITY OF ASSISTED LIVING EXPENSES • A licensed health care practitioner has to certify that the resident is unable to perform at least 2 out of 6 of the activities of daily living OR that they require substantial supervision to protect their health and safety due to severe cognitive decline. • Obtain a statement from the licensed health care professional at least once every 12 months.