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

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

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

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

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

6. Tax Rates and Exemption Amounts Estate & GST Rate Estate & GST Exclusion/ Exemption Gift Tax Rate Gift Tax Exemption 200448%$1,500,00048%$1,000,000 2005471,500,000471,000,000 2006462,000,000461,000,000 2007452,000,000451,000,000 2008452,000,000451,000,000 2009453,500,000451,000,000 20100Repealed351,000,000 2011551,000,000551,000,000

7. Using the Unified Credit Amount Effectively

8. Gifting Forms of Title Asset Selection Traditional Gifting Strategies

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

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

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

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

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

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

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

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

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

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

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

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

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

22. Income Tax Benefit of Grantor Trusts Non GrantorGrantor Trust Trust Assets at End of Year 1$1,000,000 Basis of Assets$0 Capital Gains Realized$1,000,000 Ordinary Income Earned$50,000 Capital Gains Taxed to Trust (15%)($150,000)- Ordinary Income Taxed to Trust (35%)($17,500)- Capital Gains Taxed to Grantor (15%)-($150,000) Ordinary Income Taxed to Grantor (35%)-($17,500) Trust Assets at End of Year 2$882,500$1,050,000 Additional Assets to Heirs$167,500 Estate Tax Savings (46%)$77,050

23. Grantor Retained Annuity Trusts (GRATs)

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

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

26. Qualified Personal Residence Trusts (QPRTs)

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

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

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

30. Self-Canceling Installment Notes (SCINs)

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

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

33. Private Annuities (PAs)

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

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

36. Irrevocable Life Insurance Trusts (ILITs)

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

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

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

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

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