Linda Hayes, JD, LL.M.

1. Wealth Transfer Planning Linda Hayes, JD, LL.M.

2. What We Will Cover • Overview of Federal Transfer Tax System • Significance of forms of Title • Gifting • Grantor Retained Interest Trust Strategies • GRATs & QPRTs • Non Trust Strategies • SCINs and Private Annuities • Advanced Trust Strategies • ILITs and Sales to IDGTs

3. Overview of United States Transfer Tax System • Three Types of Transfer Taxes • Gift Tax • Estate Tax • Generation Skipping Transfer Tax • The type and amount of tax imposed depends on: • Relationship of transferor to the US Time of the transfer (lifetime or testamentary) • Type of property • Fair market value of property Identity of transferee/recipient (e.g. charity, spouse or other related or unrelated person)

4. Transfer Tax Exclusions & Deductions • Gift Tax • Exclusions • Lifetime Gifting Exclusion • Annual Exclusion • Tuition and Medical Expenses • Gift Splitting • Deductions • Marital Deduction • Charitable Deduction

5. Transfer Tax Exclusions & Deductions • Estate Tax • Exclusions • Estate Exemption • Qualified Conservation Easement • Deductions • Marital Deduction • Direct to spouse • In trust for spouse • QTIP/GPA/Estate Trust/QDOT • Charitable Deduction • Administrative Expenses

6. Tax Rates and Exemption Amounts

7. Using the Unified Credit Amount Effectively

8. Gifting • Forms of Title • Asset Selection • Traditional Gifting Strategies

9. Forms of Title • Joint Tenancy with Rights of Survivorship • Community Property • Community Property with Rights of Survivorship • Funded Revocable Trust • Custodial Accounts

10. Asset Selection for Gifting • Assets to Give • High growth assets • High income yield assets • High basis assets • Assets Not to Give • Assets with FMV < Basis • Income from an asset without the principal

11. Traditional Gifting Strategies • Outright Gifts • Custodial Accounts – UTMAs and UGMAs • 529 Plans • Gifts in Trust • 2503(c) Trusts • Crummey Trusts • GST Trusts

12. Outright Gifts • Description • Property transferred to donee’s own name • Advantages • Simple • Generally qualifies for annual exclusion • Disadvantages • Intended donee may be a minor • Subject to claims of donee’s creditors

13. Custodial Accounts • Description • Minor is legal owner but transactions conducted by a custodian • Advantages • Simple • Generally qualifies for the annual exclusion • Disadvantages • Minor receives complete control over the assets at a certain age (18, 21 or 25 depending on state law) • Subject to claims of donee’s creditors • Assets includible in donor’s estate if donor is custodian and dies before minor reaches age of majority

14. 529 Accounts • Description • Income tax deferred account set up for a beneficiary to pay for the costs of higher education • Advantages • Control over assets • Qualifies for the annual exclusion • Can prefund up to five years • Income tax avoidance if funds used for education • Flexibility – can change beneficiary • Asset protection • Disadvantages • Limited investment options

15. Gifts in Trust • Description • Donor transfers property to a trustee to hold for the benefit of a another person • Advantages • Flexibility - can be drafted to meet donor’s goals and reinforce values • Assets do not have to be distributed at a certain age • Disadvantages • In general, gifts in trust do not qualify for the annual exclusion • Irrevocable • Additional costs to administer

16. 2503(c) Trusts • Description • Discretionary income and principal distributions until beneficiary reaches age 21 • Trust terminates when beneficiary turns 21 unless extended by the beneficiary • Qualifies for the annual exclusion • Advantages • Statutory • Qualifies for annual exclusion • Disadvantages • Not as flexible as other trusts • Irrevocable

17. Crummey Trusts • Description • General rule is gifts in trust do not qualify for the annual exclusion because they are not gifts of a “present interest” • Transfers considered a “present interest” if the beneficiary has the right to withdraw the contribution (the Crummey withdrawal power) • Advantages • Qualifies for the annual exclusion • Flexibility in trust terms • Disadvantages • Irrevocable • Administrative requirements – Crummey Letters must be sent

18. Generation Skipping Trusts • Description • Trust created for the benefit of grandchildren, designed to use GST exemption • Advantages • Prevents application of estate tax at one generation below donor • Creditor protection • Can be drafted as a Crummey Trust to use annual exclusions • Disadvantages • Irrevocable • Flexibility requires careful drafting because of the length of the trust (e.g., use of trust protector)

19. Benefits and Role of Trusts • Revocable Living Trusts - Purposes • Manage & protect assets • Provide continuity in management at death • Avoid delays and costs of probate • Control how and when assets distributed • Ensure privacy and confidentiality • Irrevocable Trusts - Purposes • Protect assets through generations • Control how & when assets are distributed • Ensure privacy and confidentiality • Reduce estate and gift taxes through annual and lifetime exemptions • Transferring appreciation

20. Basic Estate Plan • Will • Durable Power of Attorney (Financial Matters) • Health Care Power of Attorney (Health Care Proxy) • Living Will (Optional) • Revocable Living Trust (Depending on Assets and Residency)

21. Grantor Trusts • Definition • Grantor retained rights or powers over trust sufficient enough to be taxed on the trust income • FOR INCOME TAX PURPOSES ONLY • Examples: Living Trust, GRAT, IDGT • Income Taxation • Grantor subject to tax on all income; receives benefit of all deductions • No separate tax return required • Powers Causing Grantor Status • Power of Substitution • Power to borrow without security • Power of trustee to distribute to grantor’s spouse • Power to Revoke

22. Income Tax Benefit of Grantor Trusts

23. Grantor Retained Annuity Trusts(GRATs)

24. Grantor Retained Annuity Trust (GRAT) • Description • Irrevocable trust • Grantor transfers property and retains right to receive a fixed payment based on initial FMV of property transferred to trust • Value of remainder interest is a current gift • Can do a “Walton GRAT” making the gift zero • Purpose • Reduce estate and gift tax • Transfer appreciation over 7520 rate (set each month by IRS)

25. Grantor Retained Annuity Trust (GRAT) • Advantages • “Zeroed out” GRAT results in no gift • Simple to explain, understand, and execute • Disadvantages • Irrevocable • Grantor trust – income taxed to Grantor • GRAT assets must outperform the Section 7520 Rate • Grandchildren cannot be beneficiaries • Timing and amount of annuity payments inflexible • Investment Choices • Highly appreciating assets are best • Concentrated assets – distributions can be “in kind” • Hard to value assets can be used but need appraisal upon contribution and distribution

26. Qualified Personal Residence Trusts(QPRTs)

27. Qualified Personal Residence Trust (QPRT) • Description • Irrevocable trust • Grantor transfers a personal residence • Grantor retains the right to use the property for the term • At end of term, title passes to remainder beneficiary • Value of remainder interest is a current gift • Grantor must maintain property • Purpose • Reduce estate and gift tax • Transfer appreciation • Asset protection

28. Qualified Personal Residence Trust (QPRT) • Advantages • Effective way to keep trophy house in the family • May have some asset protection benefits • Reduction of estate and gift tax • Disadvantages • If Grantor dies during the term, included in Grantor’s estate • Cannot be transferred to grandchildren • After term, Grantor must pay fair market value rent • Investment Choices • None - however, if residence sold during trust term, the QPRT converts to a GRAT

29. Non-Traditional Strategies • Self-Canceling Installment Notes (SCINs) • Private Annuities

30. Self-CancelingInstallment Notes(SCINs)

31. Self-Canceling Installment Notes (SCINs) • Description • Installment sale of an appreciated asset between family members or unrelated parties • Recognition of gain is spread out over a term of years • Obligation under the installment note automatically ceases upon the death of the seller • Cancellation provision must be “bargained for” • Purpose • Transfer appreciation in an asset • Reduce estate and gift tax • Provide income stream to seller for life

32. Self-Canceling Installment Notes (SCINs) • Advantages • If seller dies before note is paid off, the unpaid balance is not subject to estate or gift tax • Seller keeps an income stream for life • Disadvantages • IRS attack – part sale/part gift • Cancellation provision must be bargained for resulting in above market sales price or higher rate of interest • Seller cannot keep control over property sold

33. Private Annuities(PAs)

34. Private Annuity • Description • Sale of property from one family member to another or unrelated third parties • Consideration for sale is purchaser’s (obligor’s) unsecured promise to payments to seller (annuitant) • Must make specific, periodic payment to the seller (annuitant) for the seller’s lifetime • Purpose • Transfer of property from one generation to the next without using lifetime gifting exemption in family context • Getting income stream from non-income producing asset in third-party unrelated context

35. Private Annuity • Advantages • Does not use any of seller’s (annuitant’s) lifetime gifting exemption • Provides income stream to annuitant; taxes prorated per payment • Reduces annuitant’s potential estate tax liability • Annuity can be “deferred” or back-loaded • Disadvantages • Obligor may not have ability to make payments if annuitant lives long • Must be unsecured • If annuitant dies soon, obligor has negative income tax consequences • On 10/17/06, IRS issued proposed regs that would require immediate recognition of income! May be the death knell. • Investment Choices • Real property • Assets expected to appreciate in value • Assets that can be discounted

36. Irrevocable Life Insurance Trusts(ILITs)

37. Irrevocable Life Insurance Trust (ILIT) • Description • Irrevocable grantor or non grantor trust designed to purchase and hold insurance on life of one or more persons • Purpose • To exclude life insurance proceeds from insured’s estate because insured has no “incidents of ownership” • May be used as “wealth replacement” vehicle

38. Irrevocable Life Insurance Trusts (ILITs) • Advantages • Excluded from insured’s estate • Giving Crummey powers to numerous ILIT beneficiaries can absorb large portion of gift tax • Disadvantages • Insured cannot act as trustee • Premium payments made directly by insured are a gift • Payment of Gift Tax can be avoided • Investment Choices • Trust owns life insurance policy or policies • Policies generally invest in mutual funds

39. Common Misconceptions • Creation of Joint Tenancy Account will remove at least a portion of the account from the estate of individual who creates the account. • Once a Revocable Living Trust is created, your estate plan is complete. • If primary beneficiary of insurance policy dies, and no secondary beneficiary is named, proceeds will go directly to insured’s children or other family members. • Revocable Living Trusts cannot be named as beneficiary of employee benefit plans, IRAs or 401(k) plans.

40. Common Misconceptions • If two unmarried individuals make unequal contributions to purchase of real property, there are no gift tax consequences. • Assets held in joint tenancy form of title can never be divided. • If the combined estates of husband and wife are less than tax exempt amount (currently $4,000,000), joint tenancy is an appropriate method for holding title to assets.

41. Planning “Landmines” • Charitable Planning • Always make sure property held long term (i.e., one year or more) • Is the intended charity is a public charity or private foundation? • Private foundation – most donations limited to client’s basis in the gifted property • Is thereal property being gifted is mortgaged, could have part gift/part sale • Gifts of Stock • How, when was stock acquired (beware disqualifying dispositions)? • If property bring gifted is < than FMV, sell the asset, give the cash • Family Dynamics • Always understand the family dynamics. Some strategies are clearly inappropriate for families with problematic dynamics (e.g., QPRT) • Understand dynamics not only of client’s lineal descendants, but their spouses as well.