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Currently the Advisor on Asset Protection on the Steven Kay's Show, Jim Mulder has been a guest on the show several times. These broadcasts can be accessed on the web or by clicking the associated link below:
| I. WHAT IS ESTATE PLANNING? |
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A. Preparation of a Will for both husband
and wife and other related
documents (trusts, guardian designations, and powers of
attorney)
B. Estate and gift tax planning
C. Income tax planning
for each estate and for family members, now and
later
D. Life insurance and employee benefit planning
E. Other considerations
(e.g., family business, buy-sell agreements, living
will)
| II. WHAT ARE SOME PRINCIPAL
OBJECTIVES OF ESTATE PLANNING? |
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A. Minimize state and federal taxes on your estate
B. Minimize the probate
and administrative costs connected with your
estate
C. Assure distribution
of your estate so your spouse, children, charity,
etc., are provided for as you wish
D. Assure that there
is liquidity in the estate adequate to pay expenses
associated with settling your estate
E. Avoid confusion and litigation during an estate’s
administration by
setting forth clear and binding
instructions
A. A will is a legal document
that you make which provides for the
settlement of the probate estate after your death.
1. The probate estate
is all property that you own and that does
not pass pursuant to an agreement,
contract, or by operation of
law.
a) If the you have an ownership interest in any life
insurance
policies, employee benefit plans,
joint tenancy with right
of survivorship properties, or trusts, these items
are considered part of your estate for federal estate
and gift
tax purposes (i.e., subject to transfer tax at death
or
earlier, if given away), but are not part of your probate
estate since ownership of this property is not transferred
by Will but, for example, by a beneficiary designation,
or
automatically by law.
2. If you are
married, your estate consists of one-half of the
community property of you and your spouse plus any
separate
property you may own.
a) Community
property is all property acquired by either
spouse during the marriage except for that acquired
by
one of them by gift or by devise or descent (i.e.,
inherited).
b) Separate property is all property acquired before
marriage
(or while unmarried) and any property acquired by
gift or
by devise or descent (i.e., inherited).
c) Unless altered
by a pre-marital or marital agreement, all
income from separate property is community property.
d) If community
property and separate property are commingled, it will
all be presumed community property.
B. In a Will you, the Testator, may determine:
1. To whom the property
should be distributed (family, friends, and
charities).
2. How the estate should be distributed (i.e.,
outright or in trust,
etc.).
3. Who will supervise
the distribution process and take charge of
paying debts and taxes and transferring the property
(Independent Executor).
4. Other important
matters (such as when and under what circumstances the Estate
shall be distributed).
C. With a Will the
Testator can plan so as to minimize estate and income
taxes, and thereby increase the property passing
to the beneficiaries
(and decrease the property passing to Uncle Sam).D.
With a Will the Testator can be certain that his
or her property will pass
according to his or her plan (and not the plan provided
by Texas law
for persons who die without Wills).
E. With a Will the Testator
can make special provisions for family needs,
such as trusts for loved ones that can be protected
from their spouses
and their creditors, or for minors
or those unable to handle property.
You can also make special gifts to
family members, friends or charities.
F. A duly executed Will must be signed by the
Testator. The Testator
must be 18 years old (or married, or in the
armed forces.) The will
must be signed by the Testator and two attesting
witnesses who sign
in the Testator’s presence. A
witness should not be a beneficiary.
G. Texas recognizes
holographic (handwritten, unwitnessed) wills
if they
are “wholly in the handwriting of the Testator” and
signed by the
Testator.
Holographic
wills often lead to confusion
and litigation and
should generally be avoided.
H. Competency - did the Testator have sufficient
capacity to:
1. Understand the
nature of the act he or she was
doing? (i.e., he
or she was writing a will)
2. Know the nature and character of his or her property?
3. Know the natural objects of his or her bounty?
4. Understand the disposition he or she was making?
| IV. WHAT HAPPENS IF THERE
IS NO WILL? |
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A. The State of Texas has written a Will
for those without
one! This “Will”
is sometimes
referred to as
the Statutes
of Descent and
Distribution
or
the Intestacy Laws.
1. If the Decedent
was married and had children when he or she
died, his
or her property
will be distributed
by the probate
court
pursuant to Texas law as follows:
a) His or her one-half (½) of
the community
property passes:
(i) to his
or her spouse if
the deceased
spouse is not
survived by descendants or all
of those descendants re
also descendants
of the surviving
spouse; or
(ii) to
his or
her descendants if the deceased spouse had descendants
who were not also the descendants of the surviving
spouse. In the second case, the surviving
spouse keeps
only the surviving spouse’s one-half (½)
of the community
property
and the other
one-half
(½)
passes to the
descendants;
typically, the
children of the
Decedent, the
stepchildren of the surviving spouse.
b) Only one-third (1/3) of the Decedent’s
separate
property
personalty
(cash, securities,
personal
effects),
if he or
she
had any, will pass to his or her spouse and only
a life
estate
(a right
to use
during
lifetime
but no
right to
dispose) in one-third (1/3) of the Decedent’s
separate
property
real estate
will pass
to his or her
spouse. The
remainder of his or her separate property
will pass to his
or her children. Very few
Texas residents who have
been
married
a long
time have
any separate
property
due to
commingling.
c) Thus, the
spouse may receive very little of the
deceased
spouse’s
property, especially
if there
are children
of a
prior
marriage,
and may have financial
difficulties because
of this.
2. If the Decedent
is single when he or she dies,
his or her property
will be distributed
by the probate court
pursuant to Texas law
as
follows:
a) If the Decedent
has any children (or grandchildren),
all of
his
or her property
will
pass
equally
to his or her
surviving
children, or all to the survivor of them if only
one of them
survives
him; provided
that, a deceased
child’s
share
passes
to his
or her
surviving
children.
b) If the Decedent
has no children
(or grandchildren), his or
her property will pass
as follows:
(1) One-half (½) to his or
her mother and one-half (½)
to his or her father, if
they both survive him;
or
(2) One-half
(½)
to his or her surviving parent,
if only
one
parent
survives him,
and the other
one-half (½)
equally to his or her brothers and sisters (or
their
descendants);
or
(3) If neither parent survives him,
equally to his or her brothers and sisters (or their
descendants).
B. If the Decedent dies without a
Will, the court will appoint someone to
handle the estate (time-consuming, cumbersome and expensive).
1. The person appointed
(Administrator) is entitled to receive compensation for so
acting (expensive).
2. The Administrator
must seek prior permission from the court
before entering into transactions with the Estate property,
including routine transactions like paying utility
bills and
distributing money to the spouse and children for their
support
(cumbersome).
3. Generally an
attorney must be retained to advise the
Administrator and to prepare the many documents required
(expensive).
4. The Administrator
must account to the court for each and every receipt and
disbursement and must file an accounting, each year
while handling the estate, which is usually prepared
by the
attorney (time-consuming, cumbersome and expensive).
C. If the Decedent
dies without a Will and any minor (under age 18) is
entitled to property from the estate, a Guardianship
for the minor’s
Estate may need to be created in the Probate Court
(expensive,
time-consuming and cumbersome). This is true even if
the minor is
the Decedent’s child and the spouse (who is the minor’s
parent)
survives. Further, if the minor is the Decedent’s
child and the spouse
predeceased the Decedent, in addition to
appointing a Guardian of the
minor’s estate, the court will appoint a person
called a Guardian of the
Person to take care of the child (could be
a friend, relative or stranger)
based upon what the court thinks is best.
1. The Guardian of
the Estate is entitled to compensation for being
in charge of the minor’s property (expensive).
2. The Guardian
must seek prior permission from the probate court
for each transaction involving the minor’s property,
including
such routine transactions as paying
for school expenses and
buying food and clothing for the minor (cumbersome).
3. Generally, an attorney must be retained
to advise the Guardian and to prepare the many documents
that are required to be filed with the court (expensive).
4. The Guardian
must account to the court for each and every
receipt and disbursement and must file an annual accounting
report, which is usually prepared by the attorney (time consuming,
cumbersome and expensive).
5. No matter how
immature or ill equipped to handle the property,
when the minor reaches age 18, all of the property must
be
turned over to him or her.
6. All of the foregoing is true even if the minor’s
own parent is
appointed as Guardian of his or her Estate.
| V. HOW CAN HAVING A WILL
AVOID THESE PROBLEMS? |
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A. A Will can provide
for an Independent Executor (trustworthy person) to
administer the Estate free from court supervision (minimal
expense). If
such person is a family member, compensation is usually
not
necessary, as determined by the provisions of the Will.
B. A Will can provide
for the spouse in a manner which will insure
financial security and reduce taxes.
C. A Will can provide
a trust for any child or grandchild or other loved one
entitled to property under the Will which can protect
the property from
attachment by the beneficiary’s creditors or spouse
and can prevent
commingling.
1. In the Will the
Testator can appoint a Trustee (trustworthy
person) to manage the property for such child or
grandchild or
incompetent person, free from court supervision (minimal
expense). The Trustee can be the child’s own
parent or a
relative. If necessary, a bank can be appointed
Trustee;
however, banks are entitled to fees for so acting
(may be
inefficient for a small estate, but can be useful
if neutrality is
important).
2. A Will can provide
for distributions from the trust of income and
principal (if income is insufficient) to the child or
incompetent
person during the term of the trust pursuant to a
definite
distribution standard such as health, support, maintenance
or
education.
3. When the child reaches the age that
the Testator has specified,
he or she can be appointed sole trustee for his or
her trust to
manage and distribute as he or she determines.
| VI. WHEN SHOULD A WILL
BE CHANGED? |
|
A. If the marital status has changed.
B. If the Testator has moved from one state to another.
C. If the size of the
estate has changed significantly, for example, by the
receipt of a large gift or inheritance.
D. If someone in the family dies or a new family
member is born.
E. If the executor and/or trustee has died or moved
away.
F. If the tax laws have changed significantly.
G. If the Testator has
changed his or her mind about the persons who
should be beneficiaries, executors, trustees or guardians
or about the
manner in which he or she wants to dispose of his
or her property.
H. If the Testator has
started a new business or made changes in the
structure of an existing business.
I. You should review
your estate plan in your will frequently to ensure it
meets your needs.
| VII. BASIC FEDERAL ESTATE
AND GIFT TAX CONSIDERATIONS |
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A. The Federal Estate
and Gift Tax is a tax imposed on the transfer of
property - either during lifetime or at death.
The tax is assessed
against and paid by the person making the transfer
(or his or her
estate). The beneficiary of the gift does not pay the
transfer tax, and
the gift itself is not included in the beneficiary’s
income
tax return. Of
course, if
the gifted
property produces
any income
for the beneficiary,
that income is taxed to the beneficiary.
B. Due to the Economic
Recovery Tax Act of 1981 (ERTA), all property
which is given to a spouse
who is a U. S. citizen, either
by gift during
lifetime or by Will upon death, passes to the spouse
tax-free because it
qualifies for what is termed the
unlimited marital deduction. This
property can be given to the spouse
outright or in one of several types
of trusts, the most common of which is the qualified
terminal interest
property (or “QTIP”) trust.
C. ERTA also increased
the exemption equivalent amount (now called the
applicable exclusion amount, which is the amount of
property that can
be transferred to anyone without paying
a transfer tax). This amount
is now $1,000,000 for the year 2003. Until a person
transfers more
than the applicable exclusion amount, no
estate or gift tax will be paid.
D. The Economic Growth and Tax Relief
Reconciliation Act of 2001
(EGTRRA), includes significant estate and gift
tax relief. A few of the
major changes are summarized here. The Bill gradually
increases the
amount that is exempt from estate tax from the
current $1,000,000 to
$3.5 million, between 2003 and 2009. For 2010 the estate
tax is
repealed. However, for 2011, the repeal is repealed
and we go back to
2003 where the applicable exclusion amount will remain
at $1 million.
Below is a table showing the increase in applicable
exclusion amount
and reduction in the maximum estate tax rate.
Year |
Estate Exemption |
Top Estate
Rate |
2003 |
$1 million |
49% |
2004 |
$1.5 million |
48% |
2005 |
$1.5 million |
47% |
2006 |
$2 million |
46% |
2007 |
$2 million |
45% |
2008 |
$2 million |
45% |
2009 |
$3.5 million |
45% |
2010 |
Estate Tax repealed |
35% (Gift tax) |
2011 |
$1 million |
55% |
E. In the Will the Testator can
shelter the applicable exclusion amount in
a bypass trust for the benefit of the spouse and avoid taxation
of the
property in a bypass trust on the spouse’s death (saves
estate tax of
$345,800 on $1,000,000).
F. The annual gift tax exclusion is
now $11,000. Each donor can give up
to $11,000 of property each year to each person he or she
wants to
without incurring any gift tax (assuming a present interest
gift, such as
an outright gift). Spouses who split gifts can give $22,000
a year to
each person. The Taxpayer Relief Act of 1997 now provides
that the annual exclusion for gifts will be indexed annually
for inflation,
beginning in 1999, but only at such time as when the additions
will
equal $1,000. Thus, it just increased from $10,000 to $11,000
in
2002.
G. Impact of Recent Tax Laws on Estate
Planning and Administration
1. Income tax rates for estates,
trusts and individuals have been
modified.
2. All trusts, and estates after 2 years from death,
must be on a
calendar year for income tax purposes.
3. Trusts and estates must now make estimated payments.
4. The new “Kiddie Tax” taxes
the excess of $1,400 of unearned
income of a child under the age of 14 at his or her
parents’ marginal rate.
5. The generation-skipping transfer
tax, designed to tax property
in each generation even if the gift itself skips
a generation, has
been made “simpler.” In fact it is a very
complex portion of the
Internal Revenue Code and baffles most practitioners,
not to
mention laymen.
6. Trust income tax brackets have
been squeezed such that any
taxable income over $8,450 is taxed 39.6%.
7. The Taxpayer Relief Act of
1997 provides that the $750,000
ceiling on special use valuation of farm and business
assets, the
$1,000,000 generation-skipping transfer tax exemption,
and
the $1,000,000 ceiling on the value of a closely-held
business
eligible for the special low interest rate (discussed
below), will be
indexed annually for inflation, beginning in 1999.
8. The Taxpayer Relief Act of
1997 repealed the Excess Accumulation and Distribution
Taxes. The 15% excise tax on
excess accumulations in and excess distributions from
IRAs and
retirement plans is repealed, effective December 31,
1996.
A. Universal (or Durable) Power of Attorney
1. This is a document which
empowers another person (agent or
attorney-in-fact) to act for the principal on his
or her behalf.
For example, the attorney-in-fact can sell property
for the
principal, sign contracts for the principal, cash
certificates of
deposit for the principal, transfer bank accounts,
i.e., do
anything for the principal that he or she could do
for himself or
herself.
2. A person can execute
this document now to be effective immediately or only
in the event he or she becomes disabled or
unable to act for any reason. Because a properly
drawn durable
power of attorney is effective even after the principal
becomes
incompetent, the opening of a guardianship for
the incompetent
person may be avoided.
3. The person appointed
should be someone trustworthy, such as
the spouse or child, because the powers are so
broad.
4. Note that in some instances
a bank, a stock transfer agent or a
title company does not accept a power of attorney.
The more
specifically it is drafted with respect to a particular
transaction,
the more likely it is to be accepted.
5. Recent Legislation
a) In 1993 the Texas
Legislature enacted the Durable Power
of Attorney Act which provides for a statutory
form in
which you can designate your agents to act on your
behalf
under such a durable power of attorney and you
can elect
whether the power of attorney will become effective
upon
signing or if it will be a “springing” power
of attorney
that will become effective
upon your incapacity.
The statutory
durable power of attorney that we have
attached hereto
for your use is finding much more
favor with financial
institutions than the previous attorney-drafted
powers of
attorneys.
b) However, a statutory
durable power of attorney is not as
good as an attorney-drafted
power of attorney with
respect to providing for estate planning that
could be
done by your agent in the event of your
incapacity.
Consequently, signing both types of
documents often warrants a “belt and suspenders” approach.
In this way
you can use the statutory
form to deal with third parties
such as banks, savings and loans and brokerage
houses
and use the attorney-drafted, more expansive
form to
deal with your estate planning opportunities
that may not
be apparent at the time of an incapacity but could
arise
subsequent to an incapacity.
6. Medical Power of
Attorney, formerly Durable Power of Attorney
for Health Care. Texas law now permits an adult
to designate an
agent in a durable power of attorney for health
care to make
decisions on behalf of the
adult.
Certain persons, notably the
principal’s health
care provider,
may not act as the
agent or as one of
the two witnesses to
execution of the power of attorney. Also, the power
of attorney
is not automatically revoked upon the
appointment of a
guardian. The probate court, however, must give consideration
to the preferences of the principal in determining
whether or not
to revoke the authority of
the agent during the guardianship.
The Act includes an acceptable form for a durable
power of
attorney for health care.
The power of attorney becomes effective upon
certification by
the attending physician that the principal
lacks capacity to make
health care decisions. However, treatment may not
be given or
withheld if the principal objects. Also,
the act requires the
principal’s attending physician
to attempt to make reasonable
efforts to inform the principal of
the treatment or its withdrawal.
Further, the agent is directed to make decisions
in accordance
with his or her understanding of the
principal’s
wishes, including
religious and moral
beliefs or, in the
absence of such knowledge,
in accordance with the agent’s assessment of the principal’s
best
interests. The
agent cannot consent
to commitment in
a mental
facility, electro-convulsive treatment,
psychosurgery, abortion,
or the omission of care intended
for the principal’s
comfort.
The power of attorney,
once executed, is effective
indefinitely unless
revoked in accordance with the terms of the Act.
The principal’s health care or residential care
provider
and employees (unless a
relative) are excluded
from acting as agent
under a durable power of attorney for health care.
B. Homestead Laws
1. At
the death of a spouse, the homestead, whether it
is the separate property of the deceased
or community property, is not
partitioned among the beneficiaries of the decedent’s
Estate, as
long as the surviving
spouse or the guardian
of the deceased’s
minor children uses and occupies it as a residence.
2. The homestead right can be waived by an agreement
in writing
and signed by both spouses,
for example, in a prenuptial
or
postnuptial agreement.
C. Lifetime Trusts (Living Trusts) - Revocable
Management Trusts and
Irrevocable Trusts
1. A revocable management
trust is an arrangement whereby a
person (the grantor) transfers property
to a Trustee who will
hold and manage the property for the benefit of
the beneficiary,
usually the person himself or
herself.
2. The grantor can modify the
terms of the revocable management
trust, and, usually, the trust itself can be
terminated.
3. For federal income and estate tax purposes,
the property placed
in such trusts usually is treated as being
owned outright by the
grantor. Thus, the creation of a revocable trust
is not a method
of avoiding income or estate
tax.
4. Revocable management
trusts are useful for management and
investment. They may avoid the necessity of a
guardianship in
the event of disability. They are useful
in the case of out of state
real estate because probate proceedings in those
states may be
avoided.
5. Living trusts incorporate
all of the benefits of the revocable
management trust described above and
usually employ all of the
estate planning techniques needed to
minimize the estate tax
liabilities and by their very nature,
minimize or do away with
probate costs connected with an estate.
They can do all of the
things that a will can do with minor
exceptions regarding some
income tax provisions that an estate
has that a living trust does
not have. Upon the death of each spouse,
his or her respective
share of the trust becomes irrevocable.
More on living trusts
below.6. Irrevocable trusts, by their
very name, cannot be changed. Often
they are useful in insurance planning
to attempt to avoid
taxation of the proceeds of an insurance
policy in the estate of
either spouse. Generally the purpose
of such trusts is to save
income and/or estate taxes.
D. Special Trusts for Children
1. Although the recent changes
in the Internal Revenue Code
relating to the income taxation of trusts have
had a significant
impact on estate planning, there are still some
useful trusts for
the benefit of people other than the grantor.
2. “2503(c)” trusts
are permitted under that section
of the Internal
Revenue Code
for children
under the age
of 21. Income
and
principal can be distributed at the Trustee’s
discretion.
3. A “Crummey” trust
is a
popular form of trust
used
to accumulate substantial
property over
time, with
no gift tax
consequences,
to
be used for a child’s college education or to provide “start-up” funds
to a child upon his or her reaching a specified age.
E.
Beneficiary
Designations for
Life Insurance
Policies and Employee
Benefit Plans
1. It is vitally important
to coordinate any life insurance policies
and employee benefit
plans with the overall
dispositive scheme
of the estate.
2. If the beneficiaries
of a life insurance policy or
of an employee
benefit plan
are different
from the beneficiaries
under the Will,
careful consideration needs to be given to the
allocation of
death taxes among the
beneficiaries and special
provisions
should be included in the will specifying which
properties
and
gifts are to
bear such taxes.
F. Characterization of
your bank accounts and
investment accounts
1. It is also vitally important to ensure
that all of your bank
accounts and investment accounts
are “tenants in common” and
not joint tenants with right of survivorship.
2. If your accounts are
not specifically established or converted to
tenants in common accounts, as between a husband
and wife,
or as between a single parent and a child, your will
or living trust
will not govern those funds and they can
totally circumvent the
estate planning that you are trying to accomplish
through your
will or living trust. Many people
do not know whether their
accounts are tenants in common or joint tenants
with right of
survivorship. You should
determine what they are and
have
them converted to tenants in common accounts.
G. Uniform Transfer to Minors Act
1. Under the Texas Uniform
Transfer to Minors Act property can be
given to a custodian for the benefit
of a person under the age of
21. The custodian acts much like a Trustee, with
the statute
serving as the trust agreement.
2. The relationship terminates when
the child reaches 21 whether
or not the child is sufficiently mature to handle
the property on
his or her own. Contrast this with
trusts, which can be set up for
much longer periods. Consequently, transfers
under the
Uniform Transfer to Minors Act are generally
relatively small.
H. Living Will
1. Under the Natural Death
Act, a person can control certain
decisions relating to life-sustaining
procedures in the event of a
terminal condition. The living will is also called
a Directive to
Physicians.
2. The 1999 legislature
made significant changes to
the Act, which greatly expanded its original scope.
For example, it is now
possible to designate another
person to make the decision to
remove life-sustaining equipment.
In addition, the Directive to
Physicians does not have
to be in the form set out in the statute.
Also new is the possibility
of indicating a patient’s
desires by a
non-written
communication
in the presence of the attending
physician and two disinterested witnesses. Further,
you can
provide
for the
cessation
or initiation
of life-sustaining
equipment under 2 conditions:
(1) if you need
life support and a
doctor certifies
that you have less
than 6 months to
live, do you
want to die soon and
peacefully without life-support
or do you
want
to be
kept
alive
as long
as possible
and
(2)
if you
have an
irreversible condition, no matter how long you
have to live (I call
this the Christopher
Reeve situation), do
you want to die soon
and peacefully without life-support or do you
want to be kept
alive as
long as possible.
I.
Prenuptial
and Postnuptial Agreements
1. Unless otherwise
agreed upon in writing all
income received
during
marriage
is community property.
2. Under recent changes
in Texas law, spouses, or
those about to be married, can agree that the income
from a spouse’s
separate
property
will be the
separate
property
of that spouse.
3. These agreements are
also useful to identify
the property that
each spouse brings
to the marriage. Careful
record keeping is
essential to preserving the
separate character
of such property.
4. These
agreements
can also cover any
number of other areas,
such as homestead rights, guardianship priority,
the character of
compensation
earned by
each spouse, income
taxes, etc.
5. Precautions should
be taken to ensure that
each spouse is fully
informed as to
the legal consequences of such an agreement.
Independent counsel is
essential. The burden of
proof is on the
spouse attempting
to rely on the validity
of the agreement.
J. Declaration of Appointment of Guardian for
Children in the Event of
Death
1. In 1995 the Texas
Legislature enacted
a new statute whereby
you can sign a Declaration
of Appointment of Guardian
for your
children in the
event of your death,
which is witnessed
by two (2)
people who are at least fourteen (14) and is
notarized by a
notary and
this will effectuate
an appointment
of guardian for
any of your minor children. This does not need
to be a part of
your will and,
indeed, is a separate
document from your
will.
K. Appointment of Agent to Control Disposition
of Remains
1.
Texas
law now provides
for you to designate
someone in a
writing signed by you and acknowledged before
a notary as to
whom you desire
to have as your
agent to make
the
arrangements for the disposition of your remains,
including the
right to make
special directions.
2. This appointment becomes
effective only upon death
and can be
revoked by you. It further authorizes the cemetery
organization
or crematory
or funeral director,
etcetera to rely
on the representations
of your agent in making the arrangements
for
the disposition of your remains.
3. This is relatively
important in that many
people attempt to make
a provision in their
will for the disposition
of their remains, and
while it is legally effective under this
statute, the will is often
times in a safe deposit
box and not easily accessible
and the
arrangements for the disposition of your remains
needs to be done relatively quickly
after your death.
A. The Revocable Grantor Trust, popularly
known as the Living Trust is
fast becoming the vehicle of choice for Americans
who want to
maximize available advantages
for structuring their Estate.
B. With a Living Trust, the title to your
property is transferred to the trust,
so that your beneficiaries
can easily receive your assets,
and will not
have to go through Probate Court proceedings.
Probate is completely
eliminated.
C. A Living Trust is a private
document, the size and distribution
of your
estate remains confidential and not a matter
of public record.
D. A Living Trust prevents a will
contest. In Probate Court, anyone
can
easily contest a will. Since your are dead, you
can’t
tell a jury why you
disinherited
someone. With
a Living Trust
your wishes are
carried out
without interference.
E. A Living Trust avoids joint tenancy
problems.
Joint Tenancy, is a
method of avoiding
Probate, where upon the death of one co-owner,
the survivor becomes
the full owner of the
property. If you place
your
child on your
property as a Joint Tenant
with you:
1. As
an owner,
your child
has the
power to
interfere with
your
decision to sell or refinance the
property.
2. If your child should go
through
a divorce, the other spouse
can claim an interest
in the property.
3. If your child should owe
taxes, the tax collector may
take
your property to satisfy their tax obligation.
4. If your child should be found liable
in any
lawsuit, your
property
may be sold to pay the
judgment.
F. With a Living
Trust, probate is entirely
avoided and there is no
exposure of
your assets
to the debts
or liabilities of
your child.
G. A
Living Trust avoids
a Guardianship.
If you ever
become
incapacitated,
the Probate Court
will appoint a
Guardian to manage
your property,
and your estate
will be required
to pay attorney
fees,
court fees and costs for the Guardianship
each
year. With a Living
Trust, your Trustee
can manage your property
if you are unable to
handle your affairs, and there are no court fees
or involvement.
| X. FAMILY LIMITED PARTNERSHIPS |
|
A. The family limited
partnership (“FLP”)
and Charitable Family Limited
Partnership (“CFLP”)
are sophisticated estate planning
devices. By
transferring
income-producing
capital assets (e.g., rental
property or
securities) into an FLP, the value of
the assets
can be discounted up to
forty percent or more
based on factors such as the lack of
marketability of
or minority interest in the partnership
shares. Gifting
fractionalized
FLP interests in
the assets can
be an effective
way to
make maximum use of an individual’s $1,000,000
federal transfer tax
applicable exclusion
amount during life.
B. In a limited
partnership, personal liability for
acts of the partnership
can be imposed on the
general
but not the limited partners.
The
general partners have
management control
over the partnership
while
the limited partners
do not.
C.
The
Internal
Revenue Code recognizes
the validity of
FLPs where
certain requirements are met,
including that limited partners receive a
legitimate ownership interest
in their shares and
that general partners
receive reasonable
compensation for their services.
D. Consider the
following example:
A husband and wife
own rental
property and
publicly traded stock with
a fair market value
of $3
million
and a income
tax basis
of $500,000.
Their other assets
total
$2 million. They have three children. Their business
appraiser
determines
that the value
of the rental
property and
stock portfolio
in
the FLP they have
created would be
discounted by 40
percent. The
couple transfers
the property into
the FLP and gifts
small limited
partnership interests in the FLP to their children,
as limited partners,
not exceeding
$22,000 per
child. The
parents are
general partners
and therefore retain total
control over the investment
and distributions from
the Family
Limited
Partnership.
| |
$3,000,000 |
net value of rental property |
| |
x60% |
after application of 40% discount |
| |
$2,100,000 |
current fair market value of FLP LESS |
| |
$100,000 |
current fair market value of gifts to children
($60,000/.6) |
| |
$2,000,000 |
Remaining value of FLP in parents’ estate Estate Tax Results if parents both died in 2003 (assuming no appreciation of couple’s property) |
| With no FLP (Bypass Trust used): |
| |
$5,000,000 |
-
net value of estate at 2nd spouse’s death |
| |
-1,360,000 |
-
federal estate tax |
| |
$3,640,000 |
- net to children |
| With FLP: |
|
| |
$4,000,000 |
- net value of estate at 2nd spouse’s death |
| |
-870,000 |
- federal estate tax |
| |
$4,130,000 |
- net to children (including undiscounted value of FLP) |
Thus a $490,000 reduction in estate tax is achieved with an FLP in this scenario. |
E. In addition to estate tax advantages,
an FLP can result in income tax
advantages during the parents’ lives. The income attributable
to the
FLP shares of the over age 14 children will be taxed in the
children’s
rather than the parents’ bracket.
F. The estate tax savings described above
can be totally eliminated if the
FLP is a CFLP. Additionally, significant income taxes can
be eliminated
if any of the rental property or stocks are sold in a CFLP.
For instance,
if all of the property in the Family Limited Partnership
were sold before
death and all of the gain were long term capital gain, an
income tax of
$500,000 would result. If a CFLP were used the tax liability
would only be $10,000.
| XI. NEW MINIMUM DISTRIBUTION
RULES FOR IRAs |
|
A. On January
11, 2001, the Service issued new IRA distribution rules in
REG-13047700 and REG-13048100. These new rules completely
replace the former methods for determining IRA minimum
distributions. They will have great impact on everyone
with an IRA and
all professional advisors who have clients with IRAs.
The rules for IRA
distributions are currently based on 1987 proposed regulations.
These
regulations have produced a very complex system. A virtually
infinite
number of combinations are possible for an IRA owner
and his or her
designated beneficiary. There are calculation methods
based on the
decision to recalculate one or both expectancies, and
the minimum
distribution requirement varies with the age of both
the owner and the designated beneficiary. This existing
complexity leads to confusion,
uncertainty and a lack of compliance. When a system becomes
very
complex, the potential for CPAs and account owners to
make errors in
calculating distributions is obvious. Thus, the Service
has issued a new
set of rules that completely replace and greatly simplify
the existing
IRA Distribution Rules. The new rules will be optional
for the year 2001
and mandatory for the year 2002.
B. There are
several specific goals for the new rules. First, a simple
uniform table is used for all employees. Regardless of
the age of a
designated beneficiary, IRA owners will use the same
table. The age of
the beneficiary will not make any difference, except
for a spouse who
is more than 10 years younger than the account owner.
Second, there
will be no decision to recalculate or not recalculate
life expectancy.
With the 1987 proposed regulation method, the potential
for
recalculating or not recalculating for both the owner
and the
designated beneficiary created possible four different
options. Even
with sophisticated software, it was difficult to make
rational
comparisons of the benefits and detriments of the different
options.
Thus, the new single table uses recalculation for the
account owner to
calculate the minimum distribution. Third, it is now
possible to change
the beneficiary at any time. Under the current rules,
changing a
beneficiary can lead to larger distributions, but never
smaller
distributions, even if the new beneficiary has a longer
life expectancy.
The new system will allow complete freedom to select
designated
beneficiaries, with no impact on the minimum distribution
requirement. Fourth, the beneficiary will be determined
by the end of
the year following the death of the owner. This provision
allows for
disclaimers and cashing out of some beneficiaries. The “Stretch
IRA” may then be available for the
remaining beneficiaries. Fifth, the
distributions at death will generally be permitted over
the remaining
expectancy of the owner or the expectancy of a designated
beneficiary,
whichever period of time is greater. This new method
will generally
reduce required distributions for the vast majority of
IRA owners and
beneficiaries.
C. Under the previous Minimum Distribution
Rules, if your spouse was not
the beneficiary of your IRA, you were required to use
the minimum
distribution table known as “MDIB”. This
table shows the expectancy of
an account owner and a designated beneficiary
10 years younger than
the account owner. It is in effect the largest expectancy
or
denominator that may be used in a fraction to determine
the minimum
distribution and produces the lowest possible minimum
distributions.
The Service chose to apply this concept not just for
IRA owners with
non-spouses as designated beneficiaries, but rather for
all IRA owners.Regardless of the beneficiary, the MDIB
table may now be used.
However, there is one favorable exception - a spouse
10 years younger
than the owner will entitle the IRA owner to the use
of a calculated
lower minimum distribution amount. The new distribution
rules are
set forth in the proposed regulations under Sec. 1.401(a)(9)-5
Required Minimum Distributions From Defined Contribution
Plans. In
this Article, all references to regulations will be taken
from the
proposed regulations in REG-13047700 and REG-13048100.
D. Under Sec. 1.401(a)(9)-5, Par.
A-3(a), the determination requires first a
calculation of “the account balance as of the last
valuation date in the
calendar year immediately preceding that
distribution.” This
end of
year balance is then multiplied times
a fraction. The numerator of the
fraction is one and the denominator for IRA owners is
the “applicable
distribution period (determined under A-4 of this section).” This
distribution is of course limited to the “vested
account balance” as of
the date for the distribution.
E. For example,
Jane IRA was born October 15, 1931. She becomes 70 ½ on
April 15, 2002 and her required beginning date (RBD) is
therefore April 1, 2003. If the value of the IRA on December
31, 2001 is
$25,300, then based on her age of 71 during calendar
year 2002, her
minimum distribution may be calculated. The distribution
is $25,300
times one divided by her expectancy under the table in
Par. A-4(a)(2),
or 25.3 years. Thus the calculation is $25,300 times
one divided by
25.3 or $1,000. This minimum distribution amount must
be paid by
April 1, 2003. Thereafter, minimum distributions must
be paid by the
end of each year. In each succeeding year, the life expectancy
calculated under Par. A-4(a)(2) will decrease and the
percent of the
year end balance to be distributed will then increase.
F. Unlike the
1987 proposed regulations, the recalculation-MDIB method
in the new rules will mean that IRAs are never exhausted.
Even at ages
over 115, the divisor will be 1.8. Thus, it is nearly
certain that all IRAs
will have a residuum that may be distributed to a designated
beneficiary. The lower level of required distributions
will enable the
IRAs of most individuals to increase in value during
the period for
distributions. That is, unless the person lives well
into their mid to late
90’s, the value when they pass away will exceed
the value at age 70.
G. There are
three major goals that the Service reached with this new
system. First, it eliminates the use of different tables
for different
individuals - the same MDIB table is used for
virtually all IRA owners.
Second, it eliminates the use of the designated beneficiary’s
age to
calculate the withdrawal. Therefore,
changing the beneficiary to a different
person, a trust or a charity will have
no impact on the
withdrawal schedule. Third, it eliminates the very confusing
decision
whether to select recalculation or no recalculation.
H. Mortality
Tables, Penalties, Excess Distributions, and Multiple IRAs
The mortality tables are determined based on tables V and
VI of Reg. Sec.
1.72-9. These tables were effective July 1, 1986
and are based on
1983 actuarial data. While the tables are somewhat dated,
the decision
was made not to change to newer tables. The current
tables are not
based on the entire population, but rather on a selected
group that
purchased annuities. In addition, using the MDIB table
results in a
lower payout. However, under Reg. Sec. 1.401(a)(9)-5,
Par. A-6(b) the
Service may update the tables at a future time if that
is deemed appropriate.
I. Another suggestion
by commentators was that future minimum
distribution requirements should be reduced if a person
exceeds the
minimum distribution for a given year. However, in Reg.
Sec.
1.401(a)(9)-5, Par. A-2, the Service stated “No
credit will be given in
subsequent calendar years for such
excess distribution.” The
excess
distribution does reduce
the end of year value for
calculating future
distributions, but it was deemed too complex to allow
any carry
forwards of excess distributions.
J. If an IRA
owner does not take the required minimum distribution, then
under Reg. Sec. 54.4974-2, Par. A-1, there is an excise
tax of 50% of
the required minimum distribution. This is
consistent with the prior
50% excise tax rule.
K. What if the
individual has more than one IRA? Under Reg. Sec. 1.408-
8, Par. A-9, if there are two or more IRAs, the
minimum distribution
will be calculated separately for each IRA. However,
the total
distribution may be taken from any one of the individual
IRAs. If the
IRA owner also has a 403(b) plan or a Roth IRA, those
distribution
requirements must be calculated separately and withdrawn
from those
respective plans.
L. Designated
Beneficiaries is another area that was simplified. There
are specific rules that will apply to four types of designated
beneficiaries.
These beneficiaries could include the surviving spouse,
a non-spouse
individual, a trust or a charity. For nearly all married
couples, the
surviving spouse will be the designated beneficiary.
Under Reg. Sec.
1.408-8, Par. A-5(a), a surviving spouse “may elect
in the manner
described in Par. (b)
of this A-5 to treat
the spouse’s
entire interest as
a beneficiary in an
individual’s
IRA (or the remaining
part of such interest if distribution
thereof has commenced
to the spouse) as the
spouse’s own IRA.” The
election is made by
the surviving spouse
redesignating the account
in the name of the surviving
spouse as IRA
owner. If a spouse is the designated beneficiary and
decides not to roll
the IRA over into his or her own IRA, then
there is a distribution to the
spouse by using the age of the spouse in the year after
the IRA owner’s
death. For subsequent years, “the applicable
distribution period is
reduced by one for each calendar
year.” In
effect, this means
the spouse would have a
distribution schedule
following the former “no
recalculation” method. See Reg. Sec. 1.401(a)(9)-5
Par. A-5(c)(2). For
a non-spouse designated
beneficiary, a similar
payout method will be
used. The expectancy will be the age in the year following
the year of
the IRA owner’s death. Once again,
the applicable distribution period
will be reduced by one for
each calendar year. For example,
a child age
50 the year after the death of the IRA owner has an applicable
distribution period of 33.1. The distribution at age
50 would be the
end of year IRA value for the prior year
times 1/33.1. The next year,
the fraction will be 1/32.1. Each following year, the
denominator will
be reduced by one until the fraction eventually
becomes 1/1 and the
entire balance is distributed to the beneficiary.
M. If there
is no designated beneficiary, then the distribution method
will again follow the “reduced by one for each calendar
year” method.
However, it will
use the life expectancy
of the IRA owner
as of the year
of his or her death as the applicable distribution period.
See Reg. Sec.
1.401(a)(9)-5 Par. A-5(c)(3). If a class
is designated as a beneficiary,
such as the donor’s children, then under Reg. Sec.
1.401(a)(9)-5 Par.
A-7(a), the designated
beneficiary with the shortest
life expectancy will
be used for the calculation. All of the beneficiaries
of the class will
receive the same distribution, based
upon the age of the oldest
beneficiary the year after the demise of the IRA owner.
However, if a
basis for separate shares can be established,
then each child will be
able to use his or her own life expectancy.
N. In some circumstances,
a trust will be the designated beneficiary of a
plan. Can the formula use the ages of the
trust recipients to calculate
distributions for a stretch IRA? This is permissible
under Reg. Sec.
1.401(a)(9)-4 Par. A-5(b) if the trust meets
several requirements. The
trust must be a valid trust under state law, must be
irrevocable upon
the death of the IRA owner, the beneficiaries
must be identifiable and
the appropriate documentation must be given to the plan
administrator.
O. A new requirement
mandates reporting of minimum IRA distributions
by trustees and custodians. Under Reg. Sec. 1.408-8,
Par. A-10, the trustee of an IRA must report the required
distribution. The IRS will
issue the forms and instructions for such reporting at
a later date.
P. Planning Strategies
1. These proposed
regulations are a wonderful and commendable effort at simplification
of tax law. Nearly all individuals will use
the new MDIB schedule. IRA owners may now change
beneficiaries with no consequence to minimum distribution
schedules. Given the lower rates of withdrawal required,
it is
also virtually certain that most individuals will have
an increase
in the IRA principal at the time they pass away.
2. Since
the distributions start at about 4%, most IRA owners
will earn 6% to 9% and thus accumulate excess income during
their
70’s. Only in later years when the payouts increase
will
all income
and
some of the
IRA principal
be distributed.
For
example, an IRA owner earning 7% will not start to invade
principal until age 85. For an 8% earnings rate, the
invasion
starts at age 87. A person
earning 9% will not start
to invade
principal until age 89. Thus, the vast majority of individuals
will
have from 40% to 80% more value
in their IRA when they pass
away then they do at age 70 ½. Many persons with
$100,000
at
age 70 ½ will
pass away at age
90 with over $150,000
in their IRA.
3.
This
new
set of rules
may be used
during the
year 2001 and
thus allows several charitable planning options. An
individual
may now designate a charity for a percentage of his
or her IRA.
When the person passes away the
charity will receive that
percentage in cash and the children may then use the
balance
for Stretch IRAs.
4. Alternatively, individuals
may choose to select a charitable
trust
for a surviving spouse or a charitable trust for children
for part
or all of their IRA. Since the
trust is tax exempt, upon the
demise of the IRA owner, the distribution may be made
to the
charitable trust and any balance of the
IRA can still be used for
Stretch IRAs for children or other family members.
The major
advantage of the CRT for children is the
opportunity to pay out
mostly capital gain, even though the trust is funded
with an IRA.
IRA Distribution Table
Prop. Reg. Sec. 1.401(a)(9)-5, Par. A-4(a)(2).
|
|
|
70 |
26.2 |
3.8168% |
71 |
25.3 |
3.9526% |
72 |
24.4 |
4.0984% |
73 |
23.5 |
4.2553% |
74 |
22.7 |
4.4053% |
75 |
21.8 |
4.5872% |
76 |
20.9 |
4.7847% |
77 |
20.1 |
4.9751% |
78 |
19.2 |
5.2083% |
79 |
18.4 |
5.4348% |
80 |
17.6 |
5.6818% |
81 |
16.8 |
5.9524% |
82 |
16.0 |
6.2500% |
83 |
15.3 |
6.5359% |
84 |
14.5 |
6.8966% |
85 |
13.8 |
7.2464% |
86 |
13.1 |
7.6336% |
87 |
12.4 |
8.0645% |
88 |
11.8 |
8.4746% |
89 |
11.1 |
9.0090% |
90 |
10.5 |
9.5238% |
91 |
9.9 |
10.1010% |
92 |
9.4 |
10.6383% |
93 |
8.8 |
11.3636% |
94 |
8.3 |
12.0482% |
95 |
7.8 |
12.8205% |
96 |
7.3 |
13.6986% |
97 |
6.9 |
14.4928% |
98 |
6.5 |
15.3846% |
99 |
6.1 |
16.3934% |
100 |
5.7 |
17.5439% |
101 |
5.3 |
18.8679% |
102 |
5.0 |
20.0000% |
103 |
4.7 |
21.2766% |
| |
