WOMEN MANAGING THE FARM:
ESTATE PLANNING
AND ESTATE TAX ISSUES
Shon C. Robben
Arthur-Green, LLP
801 Poyntz Avenue
Manhatta...
Estate Planning Objectives
1.

2.

3.

Ensure Assets Pass to Intended Parties
(Family, Charity, etc.)
Minimize Costs
•
Pro...
Estate Planning Objectives
4. Care for Minors
•
•

Designate Guardians
Manage assets until minors reach desired age

5. Tr...
What is Probate?
Court supervised procedure which oversees the
collection and distribution of all your property and the
pa...
What is Probate?
Public Procedure:
•

All probate documents become part of public record

•

Records include an inventory ...
Forms of Ownership
1.

Sole Ownership
•

•

2.

This will cause assets to be distributed under intestate succession
or wil...
Forms of Ownership
4.

Ownership in Trust
•
•
•

5.

Property will be distributed as provided in Trust document
Avoids Pro...
Options for Avoiding Probate




Joint Tenancy
Beneficiary Designations-life insurance,
retirement accounts
POD-TOD Ass...
Options for Avoiding Probate


Revocable Living Trust






Definition: legal instrument created during your life
unde...
Options for Avoiding Probate


Revocable Living Trust (cont.)


Living trust does not go through probate



Trust asse...
Advantages of Will & Trust


Avoid Distribution under Intestate Succession
– Kansas Intestacy Laws







Spouse Only...
Advantages of Will & Trust


Minor Children



Can designate guardian for minor children
Defer distributions to minors ...
Advantages of Will & Trust





Authorize Sale of Assets and Payment of
Expenses
Authorize Continuation of Business
Tax...
Types of Wills and Trusts
Wills
 Basic Will – Spouse then Children (Adults)
 Will with Trust for Minor Children or Speci...
Types of Wills and Trusts


Credit Shelter Trust





QTIP Trust








Benefits persons with disabilities
Trust...
QTIP Trust- Second Marriage
Example:
Sue has $1,000,000 in her trust. She
has children from her first marriage, but
is now...
QTIP Trust- Second Marriage
Sue’s Trust
$1,000,000

Ted’s Trust
$250,000

QTIP Trust
$1,000,000

-Ted-income for life
-Pri...
Additional Estate Planning Tools
1. Financial Powers of Attorney
•
•

Durable Financial Power of Attorney
Homestead Power ...
Distribution Alternatives
Farming & Non-Farming Beneficiaries
Distribution of estate among farming and nonfarming children...
Distribution Alternatives
Farming & Non-Farming Beneficiaries
1st Right. Allow farming children first right to buy
farm la...
Buy/Sell Agreements & Other
Provisions
1. Provisions can be placed in Will or Trust
documents providing the farming childr...
Buy/Sell Agreements & Other
Provisions
2. Require land to be leased to farming child for
fair market value
3. Hold farm as...
Buy/Sell Agreements & Other
Provisions
5.

In corporations, partnerships or Limited Liability
Companies, the buy/sell prov...
Planning with Life Insurance




Jim and Sue’s Assets
Farm Land
$1,000,000
J&S LLC
$1,372,000
Cash & Investments $ 200,...
Federal Estate Tax
• The information provided hereafter represents

the Federal estate tax law based upon the
American Tax...
Federal Estate Tax
Charitable and Marital Deductions

• Unlimited charitable deduction
• Unlimited marital deduction
• Dec...
Prior Estate Tax Exclusions
& Rates (2001 - 2012)
Year

Estate Exclusion
Amount

Maximum Marginal Estate
Tax Rate

2001-20...
Federal Estate & Gift Tax Exemptions
(2012 ATRA)

2013

Estate Tax
Exemption
$5,250,000

Gift Tax
Exemption
$5,250,000

20...
Maximum Estate & Gift Tax Rates
(2012 ATRA)

2011-2012

35%

2013 – and thereafter

40%
Generation Skipping Transfer
Tax Exemptions and Rates
(2012 ATRA)

Exemption

Maximum Rate

2013

$5,250,000

40%

2014

$...
“Portability” Between Spouses
(2012 ATRA)
• Allows surviving spouse to take advantage of unused

portion of predeceased sp...
“Portability” Between Spouses
(2012 ATRA)
Example #1
Husband dies in 2013 with $3,000,000 Estate
• Leaves entire $3,000,00...
“Portability” Between Spouses
(2012 ATRA)
Wife’s Federal
Estate Tax
Exclusion
$5,250,000

Husband
$3,000,000
Estate Tax Re...
“Portability” Between Spouses
(2012 ATRA)

Example #2
•
•
•
•
•

Wife dies in January 2013 with $1,000,000 Estate
Leaves e...
“Portability” Between Spouses
(2012 ATRA)
• Estate Tax Returns were filed within 9 months of each

death and portability e...
“Portability” Between Spouses
(2012 ATRA)
Husband’s Federal
Estate Tax
Exclusion
$5,250,000

Wife
$2,000,000
Estate Tax Re...
Kansas Estate Tax
Kansas Estate Tax
•
•

No Kansas Estate or Inheritance Tax after
2009
Repealed effective January 1, 2010
Income Tax Basis Law
Decedent owns the following assets at death in 2012

Decedent’s Cost

Fair Market Value on
Date of De...
Lifetime Gifting








Joe owns 500 acres of land he paid $100,000 for and is worth $1,500,000 and
wants to gift t...
Planning Without
Estate Tax Concerns
(Federal Estate Tax 2014)

Planning for estates where assets are less than the
federa...
Planning Without
Estate Tax Concerns
(Federal Estate Tax 2014)

One Trust
• John and Mary execute one trust that will bene...
Planning Without
Estate Tax Concerns
(Federal Estate Tax 2014)

John & Mary
$1,900,000

Surviving Spouse
$1,900,000

Child...
Planning with Estate
Tax Concerns – 1 Trust
(Federal Estate Tax 2014)

John and Mary Own:
House & Land
Bank Accts
Mutual F...
Planning with Estate
Tax Concerns – 1 Trust
(Federal Estate Tax 2014)

John & Mary
$6,300,000

Surviving Spouse
$6,300,000...
Planning with Estate
Tax Concerns – 2 Trusts
(Federal Estate Tax 2014)

John’s Trust - $3,150,000
John Dies in Jan. 2014
•...
Planning with Estate
Tax Concerns – 2 Trusts
(Federal Estate Tax 2014)
John’s Trust
$3,150,000

Mary’s Trust
$3,150,000

J...
Reasons To Use 2 Trust Plan
• Assets in credit shelter trust can be directed to children

of couple and not to a new spous...
Benefit of 2 Trusts
(Removing Growth from Estate)
John and Mary’s Total Assets

$10,240,000

• Set up one trust to use por...
Benefit of 2 Trusts
(Removing Growth from Estate)
One Trust Example
John & Mary
$10,240,000
John Dies 2012

Mary’s Trust @...
Benefit of 2 Trusts
(Removing Growth from Estate)
John’s Trust $5,120,000

Mary’s Trust $5,120,000

John Dies 2012

Mary D...
Benefit of 2 Trusts
(Removing Growth from Estate)
John’s Trust
$5,120,000

Mary’s Trust
$5,120,000
Mary Dies at end
of 201...
Use Value Rules
Federal Estate Tax
1.

Allows use of alternate special valuation
instead of fair market value to determine...
Use Value – Basic Requirements


U.S. Citizenship.



U.S. Real Property owned by decedent or a
closely held family busi...
Use Value – Basic Requirements


Decedent must have been using real
property for special use (farming, trade, or
business...
Use Value Appraisal
(For Federal Estate Tax)
(2012 Land Value Calculation)

Average Pasture Rent

$22 per acre

Average Ta...
Use Value Appraisal
(Jim’s Assets)
Jim’s Assets
Fair Market Value

Land Use Value for Federal Estate Tax

3000 Acres of
Pa...
Use Value Appraisal - 2012
Jim
Estate-with use value
Estate-without use value

$4,960,000
$6,000,0000

Federal Exclusion

...
Use Value – Recapture
1.

Property must be used in family business for
10 years.

2.

Qualified heir must materially parti...
Generation Skipping Transfer Tax




Reduce Estate Taxes by skipping a generation of
heirs
Prior to 1976, could make suc...
Two Types of GST Transfers:




Direct Skip: Parent bypasses his/her children
and gives asset directly to grandchildren ...
Generation Skipping Transfers
Direct Skip


Example No. 1:


Bob has assets worth $5,000,000. He has 1 son,
Bill, who is...
Generation Skipping Transfers
GST Trust


Example No. 2:


Bob is 85 and has 1 child, Samantha. Bob’s
assets are worth $...
Generation Skipping Transfers
GST Trust


Solution:


Bob’s trust states at his death all of his assets are
to remain in...
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Robben estate planning

  1. 1. WOMEN MANAGING THE FARM: ESTATE PLANNING AND ESTATE TAX ISSUES Shon C. Robben Arthur-Green, LLP 801 Poyntz Avenue Manhattan, Kansas 66502 785-537-1345 785-537-7874 fax robben@arthur-green.com www.arthur-green.com February 13, 2014
  2. 2. Estate Planning Objectives 1. 2. 3. Ensure Assets Pass to Intended Parties (Family, Charity, etc.) Minimize Costs • Probate Expenses • Estate Taxes • Income Taxes- Stepped up basis Pass Assets as Quickly as Possible to Beneficiaries • Avoid delays with probate
  3. 3. Estate Planning Objectives 4. Care for Minors • • Designate Guardians Manage assets until minors reach desired age 5. Transfer Family Business to Maintain Continuity 6. Plan for Long Term Care Expenses
  4. 4. What is Probate? Court supervised procedure which oversees the collection and distribution of all your property and the payment of all your debts Expensive: • Substantial court costs and attorneys fees to have a will and testamentary trust probated • Attorneys fees can range from $2,000 up to 3% of your estate • In almost every case the fees for probate exceed the costs for using a nonprobate transfer
  5. 5. What is Probate? Public Procedure: • All probate documents become part of public record • Records include an inventory of the estate assets and persons to whom the assets are distributed Lengthy Process: • 6 months to several years before procedure is complete • Court supervised and numerous procedures have to be followed
  6. 6. Forms of Ownership 1. Sole Ownership • • 2. This will cause assets to be distributed under intestate succession or will of decedent Probate needed Tenants in Common • • • 3. Decedents’ share of asset will be distributed in the same manner as sole ownership Probate needed Creditors of owner can only attach that owner’s interest Joint Tenants With Right of Survivorship • • • This property will be distributed outside will or trust to surviving joint tenant No probate needed Creditors of any owner can attach asset.
  7. 7. Forms of Ownership 4. Ownership in Trust • • • 5. Property will be distributed as provided in Trust document Avoids Probate Can be protected from creditors of beneficiaries, except Grantor in most cases. Life Insurance, pensions and IRA’s • • • 6. have named beneficiaries Creditors of beneficiaries cannot attach while owner is alive Avoids Probate Transfer on Death Asset • • • Creditors of beneficiaries cannot attach while owner is alive Avoids Probate Subject to Medicaid recovery
  8. 8. Options for Avoiding Probate    Joint Tenancy Beneficiary Designations-life insurance, retirement accounts POD-TOD Assets    Distribution Options limited-may not reach desired beneficiaries No minor beneficiary options Lifetime Gifts   May not be made in time Gifts carry donor’s basis to donee
  9. 9. Options for Avoiding Probate  Revocable Living Trust    Definition: legal instrument created during your life under which the trust owns your property and provides for its management and disposition during your lifetime and after your death In the event you become disabled or incapacitated, the trust allows your successor trustee to step in and use trust assets to provide for your welfare and benefit After death, the trust provides for the distribution of your assets
  10. 10. Options for Avoiding Probate  Revocable Living Trust (cont.)  Living trust does not go through probate   Trust assets and beneficiaries are kept private   Less expensive to administer Less time to administer and distribute assets Can carry out complex distributions with a living trust  Provide for minor children  Provide for spouse and children in second marriage  Deal with distribution alternatives and contingencies
  11. 11. Advantages of Will & Trust  Avoid Distribution under Intestate Succession – Kansas Intestacy Laws     Spouse Only-all to spouse Spouse and Children-½ to spouse and ½ to children Children Only- all to children Can designate recipient of assets
  12. 12. Advantages of Will & Trust  Minor Children   Can designate guardian for minor children Defer distributions to minors until desired age Hold in Trust  Discretionary Distribution   Choosing Personal Representative   Will – Executor Trust – Successor Trustee
  13. 13. Advantages of Will & Trust    Authorize Sale of Assets and Payment of Expenses Authorize Continuation of Business Tax Saving Opportunities   Use estate tax exemptions; generation skipping Probate Avoidance – Trust Only
  14. 14. Types of Wills and Trusts Wills  Basic Will – Spouse then Children (Adults)  Will with Trust for Minor Children or Special Needs  Pour-over Will  Tax-Saving Will – Creates Testamentary Credit Shelter Trust or QTIP Trust Trusts  Joint Living Trust      Main goal is to avoid probate Surviving spouse has full control and access to assets Include age restrictions for minors Can use both estate tax exemptions with portability Allows management of assets if disabled
  15. 15. Types of Wills and Trusts  Credit Shelter Trust    QTIP Trust      Benefits persons with disabilities Trust only supplements public benefits ILIT    Avoids Probate Lets first spouse to die designate who receives assets after death of surviving spouse Popular with 2nd marriages Special Needs/Supplemental Care Trusts   Avoids Probate Uses decedent’s estate tax exemption Owns life insurance policy Keeps life insurance out of taxable estate Medicaid Trusts
  16. 16. QTIP Trust- Second Marriage Example: Sue has $1,000,000 in her trust. She has children from her first marriage, but is now married to Ted. Ted only has $250,000 in assets. Sue wants Ted to have right to use her assets during his lifetime, but wants to ensure unused assets pass to her children.
  17. 17. QTIP Trust- Second Marriage Sue’s Trust $1,000,000 Ted’s Trust $250,000 QTIP Trust $1,000,000 -Ted-income for life -Principal if needed for health, maintenance or support (optional) -At Ted’s death assets pass to Sue’s children Sue’s Children $1,000,000 Ted’s Children $250,000
  18. 18. Additional Estate Planning Tools 1. Financial Powers of Attorney • • Durable Financial Power of Attorney Homestead Power of Attorney 2. Health Care Directives • • • • Medical Power of Attorney HIPAA Authorization (Health Insurance Portability and Accountability Act of 1996) Living Will Do Not Resuscitate Order
  19. 19. Distribution Alternatives Farming & Non-Farming Beneficiaries Distribution of estate among farming and nonfarming children. (fair v. equal) 1. Distribute farming assets to child who is farming. Start with livestock and equipment, then home place or land most important to the operation. 2. Distribute to non-farming children the nonfarming assets. 3. Are there enough other assets for “fair?”
  20. 20. Distribution Alternatives Farming & Non-Farming Beneficiaries 1st Right. Allow farming children first right to buy farm land, livestock, equipment or to lease land after parents’ death for an extended period of time. Children selling their share may be able to sell tax free with step up in basis. No Forced Partnership. Leave separate farms to separate children instead of putting all children on each deed.
  21. 21. Buy/Sell Agreements & Other Provisions 1. Provisions can be placed in Will or Trust documents providing the farming children the option to purchase farm assets. (a) Option to purchase land or livestock and equipment at either of the following values: (i) Appraised value at death (ii) Value set in will or trust (b) Payments can be made over a fixed period of time (c) Farming child can purchase life insurance on parents and use funds to purchase assets.
  22. 22. Buy/Sell Agreements & Other Provisions 2. Require land to be leased to farming child for fair market value 3. Hold farm assets in trust FBO all children, but allow farming child to continue to farm 4. Transfer farm to family LLC (c) Allow farm child to manage/control entity (b) Restrict ownership to family members
  23. 23. Buy/Sell Agreements & Other Provisions 5. In corporations, partnerships or Limited Liability Companies, the buy/sell provisions can be in documents establishing the entity or by separate agreement (a) Can require buy out if person leaves business or dies (b) Can fix price annually or do it by appraised value (c) Can use life insurance to provide funding
  24. 24. Planning with Life Insurance    Jim and Sue’s Assets Farm Land $1,000,000 J&S LLC $1,372,000 Cash & Investments $ 200,000 $2,572,000 Two Children Bob who is a farmer Mary is not a farmer Jim and Sue can purchase a second to die policy which pays on the death of the survivor. Mary could be owner and beneficiary of the policy. The amount would depend on cost of insurance and how much they want Mary to have. One idea would be to purchase a $1,000,000 policy for Mary, and then leave all land and LLC to Bob and life insurance, cash and investments to Mary. Another idea would be for Bob to own the policy and be beneficiary, and then have a buy-out provision in the trust for him to buy Mary’s share of the farm. The parents can determine Mary’s share, and set a value if they wish to do so.
  25. 25. Federal Estate Tax • The information provided hereafter represents the Federal estate tax law based upon the American Taxpayer Relief Act of 2012 (ATRA). • ATRA contains no sunset provision, but is always subject to change by an act of Congress.
  26. 26. Federal Estate Tax Charitable and Marital Deductions • Unlimited charitable deduction • Unlimited marital deduction • Decedent must be married • Survived by spouse • Spouse must be a U.S. citizen • Qualified Domestic Trust (QDOT)
  27. 27. Prior Estate Tax Exclusions & Rates (2001 - 2012) Year Estate Exclusion Amount Maximum Marginal Estate Tax Rate 2001-2003 $1,000,000 55% - 49% 2004-2005 $1,500,000 48% - 47% 2006-2008 $2,000,000 46% - 45% 2009 $3,500,000 45% 2010 $0 or $5,000,000 0% or 35% 2011 $5,000,000 35% 2012 $5,120,000 35%
  28. 28. Federal Estate & Gift Tax Exemptions (2012 ATRA) 2013 Estate Tax Exemption $5,250,000 Gift Tax Exemption $5,250,000 2014 2015 and thereafter $5,340,000 $5,000,000 $5,340,000 $5,000,000 Indexed for inflation from 2011 Indexed for inflation from 2011  The exemption is indexed for inflation increasing by $10,000 annual increments and based on $5,000,000 exemption in 2011.  2014 Annual gift tax exclusion $14,000 per donee per year indexed for inflation.
  29. 29. Maximum Estate & Gift Tax Rates (2012 ATRA) 2011-2012 35% 2013 – and thereafter 40%
  30. 30. Generation Skipping Transfer Tax Exemptions and Rates (2012 ATRA) Exemption Maximum Rate 2013 $5,250,000 40% 2014 $5,340,000 40% 2015 and thereafter $5,000,000 40% Indexed for inflation from 2011
  31. 31. “Portability” Between Spouses (2012 ATRA) • Allows surviving spouse to take advantage of unused portion of predeceased spouse’s estate tax exclusion • If more than one predeceased spouse limited to lesser of the current exemption ($5,340,000 in 2014) or unused exclusion of last such deceased spouse • Election made on timely filed estate tax return
  32. 32. “Portability” Between Spouses (2012 ATRA) Example #1 Husband dies in 2013 with $3,000,000 Estate • Leaves entire $3,000,000 to children from prior marriage • Estate Tax Return filed within 9 months of Husband’s death and portability election made • Wife’s exclusion amount becomes $7,500,000 • Wife’s Original Exclusion $5,250,000 Unused Exclusion of Husband Total Exclusion $2,250,000 $7,500,000
  33. 33. “Portability” Between Spouses (2012 ATRA) Wife’s Federal Estate Tax Exclusion $5,250,000 Husband $3,000,000 Estate Tax Return filed for Husband within 9 months Children From Prior Marriage $3,000,000 $2,250,000 unused by Husband Available Gift/Estate Tax Exclusion For Wife $7,500,000
  34. 34. “Portability” Between Spouses (2012 ATRA) Example #2 • • • • • Wife dies in January 2013 with $1,000,000 Estate Leaves entire $1,000,000 to children from prior marriage Taxpayer remarries March 2013 New wife dies in November 2013 with $2,000,000 Estate Leaves entire $2,000,000 to children from prior marriage
  35. 35. “Portability” Between Spouses (2012 ATRA) • Estate Tax Returns were filed within 9 months of each death and portability elections made • Limited to lesser of $5,250,000 or unused exclusion of last deceased spouse • Husband’s exclusion amount is $8,500,000 rather than $9,500,000 for 2013 Husband’s Original Exclusion Unused Exclusion of Last Wife $5,250,000 $3,250,000 $8,500,000
  36. 36. “Portability” Between Spouses (2012 ATRA) Husband’s Federal Estate Tax Exclusion $5,250,000 Wife $2,000,000 Estate Tax Return filed within 9 months Children From Prior Marriage $2,000,000 $3,250,000 unused by last wife Available Gift/Estate Tax Exclusion For Husband $8,500,000
  37. 37. Kansas Estate Tax Kansas Estate Tax • • No Kansas Estate or Inheritance Tax after 2009 Repealed effective January 1, 2010
  38. 38. Income Tax Basis Law Decedent owns the following assets at death in 2012 Decedent’s Cost Fair Market Value on Date of Death and New Income Tax Basis Land $200,000 $900,000 Stock $100,000 $800,000 CD’s $100,000 $100,000 No capital gains if sold by heirs following death for value used in the estate.
  39. 39. Lifetime Gifting       Joe owns 500 acres of land he paid $100,000 for and is worth $1,500,000 and wants to gift to his five children in 2013. He is married to Sue who consents to the gift. $1,500,000 gifted in 2013 Joe and Sue agree to split gifts. ($70,000) = (5 x $14,000 for Joe) use annual exclusion for each child ($70,000) = (5 x $14,000 for Sue) use annual exclusion for each child $1,360,000 gift left ($680,000) $5,250,000 less $680,000=$4,570,000 lifetime gift exemption left for Joe ($680,000) $5,250,000 less $680,000=$4,570,000 lifetime gift exemption left for Sue 0 tax Joe and Sue will each have $4,570,000 of estate tax exemption left Basis to children in land is Joe’s basis $100,000
  40. 40. Planning Without Estate Tax Concerns (Federal Estate Tax 2014) Planning for estates where assets are less than the federal estate tax exemption of $5,340,000 in 2014 Example #1 John and Mary own: House Mutual Funds/Stocks Savings Farm Total $250,000 $200,000 $150,000 $1,300,000 $1,900,000
  41. 41. Planning Without Estate Tax Concerns (Federal Estate Tax 2014) One Trust • John and Mary execute one trust that will benefit the surviving spouse • On the death of the survivor of John and Mary, the trust will distribute assets as directed by the trust  This planning allows for easy distribution of assets when no estate tax planning is needed. Surviving spouse may change ultimate distribution of assets, if they so desire, including distribution to a new spouse.  If one Trust is used, you must keep track of the Federal Estate Tax exemption in the future to be sure it remains higher than assets in the one trust. You also need to monitor the Kansas law in case Kansas enacts a new estate tax law.  Any chance surviving spouse’s assets will exceed $5,340,000? File estate tax return just in case.
  42. 42. Planning Without Estate Tax Concerns (Federal Estate Tax 2014) John & Mary $1,900,000 Surviving Spouse $1,900,000 Children $1,900,000 Federal Estate Tax $0
  43. 43. Planning with Estate Tax Concerns – 1 Trust (Federal Estate Tax 2014) John and Mary Own: House & Land Bank Accts Mutual Funds/Stocks Livestock Machinery & Equipment $600,000 $450,000 $1,450,000 $1,100,000 Farm Ground Total $2,700,000 $6,300,000
  44. 44. Planning with Estate Tax Concerns – 1 Trust (Federal Estate Tax 2014) John & Mary $6,300,000 Surviving Spouse $6,300,000 File Estate Tax Return and make portability election. If not, face estate tax of up to $384,000 Federal Estate Tax $0 Children $6,300,000
  45. 45. Planning with Estate Tax Concerns – 2 Trusts (Federal Estate Tax 2014) John’s Trust - $3,150,000 John Dies in Jan. 2014 • • • • Estate - $3,150,000 Federal Exemption - $5,340,000 Federal Estate Tax --$0 Principal stays in trust with income to Mary for lifetime. Mary can access principal for health, education, maintenance and support Mary’s Trust - $3,150,000 Mary Dies in Nov. 2014 • • • Estate - $3,150,000 Federal Exemption - $5,340,000 Federal Estate Tax --$0 * Both trusts are under $5,340,000 Federal Estate Tax Exemption * Unused exemption of John can be used by Mary if federal estate tax return is filed for John and election is made
  46. 46. Planning with Estate Tax Concerns – 2 Trusts (Federal Estate Tax 2014) John’s Trust $3,150,000 Mary’s Trust $3,150,000 John Dies John’s Trust $3,150,000 Mary’s Trust $3,150,000 • Income to Mary • Principal for HEMS • Mary as Trustee Federal Estate Tax $0 Mary Dies Children $6,300,000
  47. 47. Reasons To Use 2 Trust Plan • Assets in credit shelter trust can be directed to children of couple and not to a new spouse • Appreciation of assets in credit shelter trust; avoid estate taxation at death of surviving spouse • Creditor protection from claims against surviving spouse
  48. 48. Benefit of 2 Trusts (Removing Growth from Estate) John and Mary’s Total Assets $10,240,000 • Set up one trust to use portability • John Dies in 2012  All assets pass to Mary • Assets increase in value 10% in 2013 • Mary dies at end of 2013 with $11,264,000 in her estate • Combined exemption - $10,370,000 ($5,120,000 + $5,250,000) • Estate Tax is $357,600
  49. 49. Benefit of 2 Trusts (Removing Growth from Estate) One Trust Example John & Mary $10,240,000 John Dies 2012 Mary’s Trust @ Death $11,264,000 $10,370,000 Exemption Mary Dies 2013 Children $10,906,400
  50. 50. Benefit of 2 Trusts (Removing Growth from Estate) John’s Trust $5,120,000 Mary’s Trust $5,120,000 John Dies 2012 Mary Dies end of 2013 • • • • • • Estate $5,120,000 • Federal Exemption $5,120,000 • Federal Estate Tax $0 • Income to Mary for Life Principal for HEMS 2013 – Assets grow to $5,632,000 Estate $5,632,000 Federal Exemption $5,250,000 Estate Tax $152,800 Kids Receive John’s Trust $5,632,000 Mary’s Trust $5,479,200 Total $11,111,200 * Avoided estate tax on growth in John’s Trust – saved $204,800
  51. 51. Benefit of 2 Trusts (Removing Growth from Estate) John’s Trust $5,120,000 Mary’s Trust $5,120,000 Mary Dies at end of 2013 John Dies John’s Trust at end of 2013 - $5,632,000 Mary’s Trust $5,632,000 • Income to Mary • Principal for HEMS •Mary as Trustee Federal Estate Tax $0 Children $11,111,200 Federal Estate Tax $152,800
  52. 52. Use Value Rules Federal Estate Tax 1. Allows use of alternate special valuation instead of fair market value to determine value of farm or real property used in family business. 2. Limited to reduction amount of $1,040,000 for 2012. *2013 limitation - $1,070,000 *2014 limitation - $1,090,000
  53. 53. Use Value – Basic Requirements  U.S. Citizenship.  U.S. Real Property owned by decedent or a closely held family business.  Real estate must pass to qualified heir (ancestors, spouse, lineal descendants, lineal descendants of spouse or parent, spouse of a lineal descendant of descendant's parents or lineal descendants).
  54. 54. Use Value – Basic Requirements  Decedent must have been using real property for special use (farming, trade, or business) at death.  Special use for 5 out of 8 previous years.  Value of special use real and personal property must be 50% or more of gross estate.  Special use real estate must be 25% or more of gross estate.
  55. 55. Use Value Appraisal (For Federal Estate Tax) (2012 Land Value Calculation) Average Pasture Rent $22 per acre Average Taxes $2 per acre Est. Average Federal Farm Credit Interest Rate 5.15 percent (2012) Land Value ($22-$2)/.0515 = $388 per acre
  56. 56. Use Value Appraisal (Jim’s Assets) Jim’s Assets Fair Market Value Land Use Value for Federal Estate Tax 3000 Acres of Pasture at $1,500 $4,500,000 3000 Acres of Pasture at ($1,164,000) but limited reduction of $1,040,000 $ 3,460,000 400 Cows at $1000 $ 400,000 400 Cows at $1000 $ 400,000 Equipment $ 800,000 Equipment $ 800,000 Certificates of Deposit $ 300,000 Certificates of Deposit $ 300,000 TOTAL $6,000,000 ESTATE TOTAL $4,960,000
  57. 57. Use Value Appraisal - 2012 Jim Estate-with use value Estate-without use value $4,960,000 $6,000,0000 Federal Exclusion $5,120,000 Federal Tax $0 Estate Tax Without Using Use Value $308, 000 Note: Basis in land is $3,460,000 since use value appraisal is used
  58. 58. Use Value – Recapture 1. Property must be used in family business for 10 years. 2. Qualified heir must materially participate in business for 8 of 10 years. 3. If fail continued use, tax savings is recaptured.
  59. 59. Generation Skipping Transfer Tax   Reduce Estate Taxes by skipping a generation of heirs Prior to 1976, could make such transfers without limits and completely skip a generation of estate tax
  60. 60. Two Types of GST Transfers:   Direct Skip: Parent bypasses his/her children and gives asset directly to grandchildren or a trust for their benefit GST Trust: Parent places assets in trust which pays income to child for life, then remainder passes to grandchildren after the child is deceased
  61. 61. Generation Skipping Transfers Direct Skip  Example No. 1:  Bob has assets worth $5,000,000. He has 1 son, Bill, who is single. Bill’s net worth is $7,000,000. Bob doesn’t want his assets subject to estate tax in Bill’s estate. Bob’s trust leaves all of his assets directly to Bill’s children at Bob’s death.
  62. 62. Generation Skipping Transfers GST Trust  Example No. 2:  Bob is 85 and has 1 child, Samantha. Bob’s assets are worth $5,000,000. Samantha’s husband is a spendthrift and Bob doesn’t want Samantha’s husband wasting away Bob’s assets after his death.
  63. 63. Generation Skipping Transfers GST Trust  Solution:  Bob’s trust states at his death all of his assets are to remain in trust for Samantha’s lifetime. Samantha is entitled to income from the trust for her lifetime and principal if needed for health, maintenance and support. The trust has a spendthrift provision protecting it from creditors. At Samantha’s death the trust assets pass to her children at age 30.

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