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2013 estate planning_seminar


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2013 estate planning_seminar

  1. 1. Estate Planning Seminar Simplifying Your Estate Plan October 22, 2013 Presented by Dana B. Perry • Gregory D. Willett • Ryan Barry • Leah M. McElmoyl © 2013 Chambliss, Bahner & Stophel, P.C. All Rights Reserved. Chambliss, Bahner & Stophel, P.C. Liberty Tower • 605 Chestnut Street, Suite 1700 • Chattanooga, TN 37450
  2. 2. Today's Topics • An Opportunity to Simplify Your Estate Plan – Resulting from: – "Permanency" of Federal Gift and Estate Tax Exemption ($5 million +) – "Portability" of unused Federal Gift and Estate Tax Exemption to surviving spouse – Elimination of Tennessee Gift Tax – Phase-out of Tennessee Inheritance Tax 2
  3. 3. Today's Topics • Changing the Unchangeable – Modifying irrevocable trusts – Techniques used to modify or terminate irrevocable trusts • Trust modification agreements • Nonjudicial settlement agreements • Decantations – Tax implication and other consequences of trust modification or decantation 3
  4. 4. Principles of Estate, Inheritance & Gift Taxation 4
  5. 5. Transfers Exempt from Tax Due to the Value of the Transfer • Lifetime transfers: – Annual Exclusion: When value transferred to a beneficiary during a calendar year is less than the annual gift tax exclusion amount (federal annual gift exclusion amount is currently $14,000 per donee) – Amount in Excess of Annual Exclusion: Use of Federal Unified Credit during life for amounts in excess of annual exclusion 5
  6. 6. Transfers Exempt from Tax Due to the Value of the Transfer • Transfers at death: – When value transferred is less than the decedent's remaining Unified Credit amount (Federal Unified Credit amount is currently $5.25 million(2013)) – may be increased if a predeceased spouse did not fully utilize his/her exemption • NOTE: The Tennessee Inheritance Tax exclusion is currently only $1.25 million, but it is set to increase over the next few years ($2 million in 2014, $5 million in 2015, and repealed in 2016). 6
  7. 7. Transfers Exempt from Tax Due to Recipient of Transfer • Exempt Recipients: – Spouse (outright and qualified marital trust) – Charity – Medical care provider for the care of another – Educational Institution for the education of another 7
  8. 8. History and the Current State of the Federal Estate & Gift Tax Structure 8
  9. 9. Federal Estate, Gift & GenerationSkipping Transfer Tax Exemption History 6,000,000 5,000,000 4,000,000 Estate 3,000,000 Gift GST 2,000,000 1,000,000 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 9
  10. 10. Maximum Federal Estate, Gift & GST Tax Rate History Maximum Federal Estate and Gift Tax Rate 60% 50% 40% 30% Max Rate 20% 10% 0% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 10
  11. 11. Recent Progression of Federal Estate & Gift Tax Exemption • 2011: A $5.0 million Unified Credit amount that can be used during life, at death, or in combination • 2012: Inflation adjustment increased the Unified Credit increased to $5.12 million • 2013 and beyond: $5.0 million Unified Credit made "permanent" and adjusted for inflation for 2013 there was a $130,000 increase to $5.25 million 11
  12. 12. 12
  13. 13. Portability of Unused Unified Credit • Pre-2010: For deaths occurring prior to 2010, each spouse's Federal Unified Credit was not portable – "use it or lose it" • 2010 – 2012: For deaths occurring in 2010 – 2012, the Unified Credit was "portable" between spouses – a decedent's unused Unified Credit can pass to his or her surviving spouse • 2013 and after: For deaths occurring in 2013 and beyond, portability of the Unified Credit has been made "permanent" – can result in a surviving spouse having up to $10.5 million Unified Credit 13
  14. 14. Portability of Unified Credit Example: Husband has assets of $4 million and wife has assets of $8 million. At husband's death in 2013, husband's estate applies $4 million of his $5.25 million Unified Credit to his assets, files a federal estate tax return (Form 706), and the remaining $1.25 million passes to wife. At wife's death, her Unified Credit will total $6.5 million (her $5.25 million plus husband's unused $1.25 million). 14
  15. 15. Portability of Unified Credit • Caveats: – Can not accumulate Unified Credit amounts from multiple deceased spouses – but can "spend-down" deceased spouse's exemption through lifetime gifts first, before using your exemption – Does not apply to generation-skipping transfer ("GST") tax exemption 15
  16. 16. History and Current Status of Tennessee Inheritance & Gift Tax Structure 16
  17. 17. Tennessee Inheritance and Gift Tax Exemption History Inheritance Tax Exemption $6,000,000 $5,000,000 $4,000,000 $3,000,000 Exemption $2,000,000 $1,000,000 $- 17
  18. 18. Tennessee Inheritance Tax Rates Tennessee Inheritance Tax Rates 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% Rate 4.0% 3.0% 2.0% 1.0% 0.0% < $40,000 $40,000 - $240,000 $240,000 - $440,000 > $440,000 18
  19. 19. Tennessee Gift Tax 2013 and Forward • Tennessee repealed its gift tax, retroactive to January 1, 2012 – NOTE: Gifts within 3 years of death are included in a decedent's taxable estate for Tennessee inheritance tax purposes – legislation is pending to repeal this law 19
  20. 20. Tennessee Inheritance Tax Exemption 2013 and Forward • Tennessee is phasing out its inheritance tax by increasing the exemption amount: – 2013 - $1.25 million – 2014 - $2 million – 2015 - $5 million – 2016 and after – complete repeal of Tennessee inheritance tax 20
  21. 21. Tennessee Inheritance Tax Exemption Tax Trap for 2012 - 2015 • Tennessee Inheritance Tax Exemption – For 2012 to 2015, overfunding a "Credit Shelter Trust" under a Last Will by using Federal Unified Credit can trigger unexpected Tennessee Inheritance Tax on death of the first spouse – Overfunding can be solved with a formula clause in creating a trust - and through the use of a Tennessee Gap Trust 21
  22. 22. How We Previously Planned Around Taxes 22
  23. 23. Gifting • Heavy focus on use of various gifting techniques to reduce the value of one's estate: – Annual per donee exclusion gifts – Gifts for medical and educational expenses – Gifts and sales of assets expected to appreciate – estate freeze techniques 23
  24. 24. Complicated Estate Plans • Last Wills: Incorporated multiple levels of trusts – $1.25 million (2013) - Credit Shelter Trust (for family) – $4.0 million (2013) - Tennessee Gap Trust (for spouse) – >$5.25 million (2013) – Outright or in a Marital Trust for surviving spouse 24
  25. 25. Complex Estate Plans • Segregation of Assets: Ensure both spouses utilize their Federal Unified Credit and Tennessee exemption amounts – "portability" of exemption had not been an option • Goal: Delay taxes to the extent possible • Irrevocable Life Insurance Trusts: Designed to help fund payment of estate/inheritance taxes 25
  26. 26. Gifts to Descendants or Trusts • Make large outright gifts to children and grandchildren – Use the Federal Unified Credit while available, including a deceased spouse's exemption, if available – Move future appreciation on gifted assets out of the taxable estate – Tennessee gift tax no longer an issue on the transfer – maybe an issue if grantor dies within 3 years of gift (legislation pending) • Create multi-generational "dynasty" trusts to avoid future estate and inheritance tax on those assets – can last up to 360 years in Tennessee 26
  27. 27. Spousal Lifetime Access Trusts ("SLATs") • Irrevocable trust for the benefit of spouse • Details … – Trustee: During spouse's lifetime, an independent party may serve as trustee or the spouse may serve as trustee (alone or with a co-trustee) – Distributions: Income and principal to spouse under an ascertainable standard (health, education, maintenance and support) – Spouse's death: At spouse's death, the assets remaining in the trust may pass to the children and/or grandchildren without incurring any tax (assuming GST tax exemption was properly allocated to trust contributions). Spouse may also have a limited power of appointment. 27
  28. 28. Simplification of Estate Plans 28
  29. 29. Fewer Estates are Taxable • The "permanency" of portability and the $5 million Unified Credit ($5.25 for 2013) places estates under $10 million outside of estate tax issues ($10.5 million for 2013) • Tennessee is phasing out its inheritance tax completely by 2016 • CONCLUSION: Most estates no longer need complex planning for the sole purpose of tax avoidance 29
  30. 30. Simplifying Last Wills • Fewer last wills need complex trust planning for the purpose of tax avoidance – eliminate the 3 trust approach • Consider drafting new last wills that focus on how you want your property to pass instead of how to avoid taxes – Will likely result in removing many of the trusts from your last will 30
  31. 31. Simplifying Last Wills • Example: Husband and wife have less than $10 million in their combined estate: – Last Will: • All outright to spouse; • If spouse is deceased, in equal shares (outright or in trust to children) – Estate Tax Return: Would require filing of estate tax return on first spouse to die to elect portability of Unified Credit – Estate and Inheritance Tax: No tax due if surviving spouse dies after 2015 31
  32. 32. Pros and Cons of Simplification • Advantages: – Simple – No need to retitle assets • Disadvantages: – No control of assets distributed outright to surviving spouse – Remarriage, creditor protection, increase in value of assets? • Alternatives: – Instead of outright distribution to spouse, consider use of Marital Trust for the surviving spouse – may require retitling of assets on death of first spouse to die 32
  33. 33. Reasons Other Than Taxes to Use Trusts Under Your Plan • Although deemed permanent, the current rules on portability and the Unified Credit could change – Example: Obama proposed reduction of unified credit to $3.5 million • Trusts, if drafted properly, provide creditor protection for the beneficiaries thereof (think divorce, lawsuits, etc.) • Trusts delay large inheritances to young beneficiaries so they may mature first • Portability doesn't extend to multi-generational trusts (GST exemption) 33
  34. 34. Changing the Unchangeable Modification of Irrevocable Trusts 34
  35. 35. Techniques 35
  36. 36. Ways to Modify Irrevocable Trusts • Modification and Amendment: Irrevocable trusts are actually not "irrevocable." Instead, there are several ways to amend or terminate such trusts under the Tennessee Uniform Trust Code: – Non-judicial settlement agreement – Trust modification – Trust decantation • Qualified Beneficiaries of the Trust: These are the primary and secondary beneficiaries of the trust and are generally involved in these processes 36
  37. 37. Non-Judicial Settlement Agreements • Purpose: To address nonmaterial matters involving a trust – agreement cannot violate a material purpose of the trust and must include provisions that could be approved by a court – generally can not alter an income or principal interest • Parties: Trustees and qualified beneficiaries – note that settlor is not a required party • Court Involvement: None 37
  38. 38. Non-Judicial Settlement Agreements • Examples: • Interpretation of trust terms • Approval of trustee's accounting • Direct trustee to refrain from or perform a specific action • Resignation or appointment of a trustee – note that removing a trustee (unless provided in the trust agreement) can not be achieved by a nonjudicial settlement agreement, but would require a court action – unless trustee elects to resign • Transfer of trust's place of administration 38
  39. 39. Trust Modification - Generally Settlor is Alive • Purpose: To modify or terminate a trust even if those actions are inconsistent with a material purpose of the trust, provided that settlor does not object and certain tax attributes are not violated • Parties: Trustee with the consent of the qualified beneficiaries – 60-day prior written notice must be given to settlor • Court Involvement: Only if qualified beneficiaries don't consent, or settlor objects 39
  40. 40. Trust Modification – Generally Settlor is Deceased • Purpose: To modify or terminate a trust so long as those actions are consistent with a material purpose of the trust, provided certain tax attributes are not violated • Parties: Qualified beneficiaries – trustee is not mentioned as a required party • Court Involvement: Required • When Used: – When NJSA is not an option – material, nonadministrative changes – When qualified beneficiaries to an NJSA can't agree 40
  41. 41. Trust Modification – Unintended Consequences • Purposes: To modify the administrative or dispositive provisions of a trust if due to circumstances not anticipated by the settlor, modification or termination of the trust furthers the purposes of the trust • Parties: Settlor, Trustee, and beneficiaries • Court Involvement: Required • Examples: – Unanticipated economic change to beneficiary – Incapacity of beneficiary 41
  42. 42. Trust Modification – Cy pres • Purposes: To achieve the settlor's purpose for a charitable trust and modify or terminate a trust fulfill the settlor's charitable intent • Parties: Trustee, beneficiaries, and settlor, if possible • Court Involvement: Required • Examples: – Named charity in a charitable trust ceases to exist and leaves no successor-in-interest – Timing for distributions to the named charity are uneconomical or ineffective 42
  43. 43. Trust Modification – Termination of Uneconomical Trusts • Purpose: To terminate small trusts (less than $100,000 in assets) that are no longer economical to maintain • Parties: Trustee and qualified beneficiaries • Court Involvement: Possible - if necessary to modify or terminate a trust, or to replace a trustee, if the court determines that the value of the trust is insufficient to justify the cost • Beneficiaries on Termination: Must take into account current and remainder beneficiaries 43
  44. 44. Trust Modification – Other Reasons • Purposes: – Reformation to correct a mistake – Modification to achieve settlor's tax objectives • Parties: Trustee, qualified beneficiaries and settlor, if available • Court Involvement: Required • Beneficiaries on Termination: Must take into account current and remainder beneficiaries 44
  45. 45. Trust Decantation • Purpose: The trustee's ability to transfer assets from an existing trust to a separate trust for the same beneficiary – can be a new trust created by the trustee or an existing trust • Parties: Trustee acting unilaterally to carry out discretion granted to trustee under trust agreement – beneficiary • Court Involvement: None • When to Use: Often used when an NJSA or modification will not work due to lack of consent from one or more of the qualified beneficiaries 45
  46. 46. Trust Decantation • Requirements to Decant: – Trustee must have power to invade principal for a beneficiary of the trust – Trustee exercises the power in favor of a new trust for the beneficiary – Trustee can not through the decantation reduce a beneficiary's fixed income interest – Decantation must be made in writing (notarized) and can not extend the perpetuities period of the original trust – Beneficiary can be granted a power of appointment over the assets in the new trust – New trust can not violate certain tax attributes of the original trust 46
  47. 47. Tax Implications and Other Consequences 47
  48. 48. Income Tax • Grantor Trusts: Consider whether modification will change the grantor status of the trust. • Uncertainties as to Decanting: There are several open issues regarding income tax treatment of second trust. – Is distributable net income carried out to the second trust? – Does distribution of appreciated assets to the second trust cause any part to recognize capital gain? 48
  49. 49. Gift and Estate Tax • Beneficiary Consent: Beneficiary must be careful not to consent to a modification that results in a transfer of all or some of his beneficial interest to another beneficiary. • Example: If a trust provides for mandatory income distribution to Dad with the remainder distributed to Child at Dad's death, Dad's consent to a modification making the distribution of income discretionary could be considered a taxable gift. • Settlor's Consent: Settlor's consent to a modification is not a retained power over the trust to render it includable in his estate. 49
  50. 50. Generation-Skipping Transfer ("GST") Tax • Always consider the character of the trust for GST tax purposes prior to modification or decantation. • A trust modification or decantation may not: – Shift a beneficial interest in the trust to any beneficiary who occupies a lower generation than the person(s) who held the beneficial interest previously; or – Extend the permissible period for the rule against perpetuities that applies to the trust.* *See Treas. Reg. § 26.2601-1(b)(4)(i)(D)(1). 50
  51. 51. Creditor Protection • Consider whether a beneficiary's consent to a trust modification or decantation will cause the trust to lose creditor protection. – Example: Grantor and Beneficiary wish to enter into a trust modification agreement to extend the term of a trust (which is currently set to distribute outright to Beneficiary at age 25) to last for the Beneficiary's lifetime. Beneficiary's creditors might argue that the trust is essentially a "self-settled" trust after the Beneficiary attains age 25, and therefore, is not protected from Beneficiary's creditors after age 25. – Solution: Use a trust decantation instead and avoid the need to obtain Beneficiary's consent. 51
  52. 52. 52
  53. 53. Pet Trusts • Authorized by statute • Trust can continue for the life of the pet, or the last of several pets to die – but trust may not be enforced for more than 90 years • Trust can be enforced by the trustee, trust protector, or a person authorized by the court • Court can determine whether amount in trust is excessive • Excessive funds distributed to successor's estate 53
  54. 54. Questions? Dana B. Perry (423) 757-0228 Gregory D. Willett (423) 757-0224 Ryan Barry (423) 757-0247 Leah M. McElmoyl (423) 757-0294 54
  55. 55. Disclaimer This presentation is provided with the understanding that the presenters are not rendering legal advice or services. Laws are constantly changing, and each federal law, state law, and regulation should be checked by legal counsel for the most current version. We make no claims, promises, or guarantees about the accuracy, completeness, or adequacy of the information contained in this presentation. Do not act upon this information without seeking the advice of an attorney. This outline is intended to be informational. It does not provide legal advice. Neither your attendance nor the presenters answering a specific audience member question creates an attorney-client relationship. 55