PowerPoint - Gassman Law Associates, PA

Report
Decanting – A New Look at an Old
Friend
Diana S.C. Zeydel
Greenberg Traurig, LLP
333 S.E. 2nd Avenue
Miami, FL 33131
305-579-0575
[email protected]
GREENBERG TRAURIG, LLP | ATTORNEYS AT LAW | WWW.GTLAW.COM
©2013 Greenberg Traurig, LLP. All rights reserved.
New Estate Tax Law Summary
2009
2010
2011-2012
2013
2014
$13,000
$13,000
$13,000
$14,000 (unless
adjusted )
$14,000
Tuition and Medical
Direct Payment
Exemption
Unlimited
Like Before
Unlimited
Like Before
Unlimited
Like Before
Unlimited
Like Before
Unlimited
Like Before
Lifetime Exemption
$1,000,000
$1,000,000
2011 - $5,000,000
$5,250,000
$5,340,000
(less portion of used
lifetime gifting exclusion)
$5,250,000
(less portion of
used lifetime
gifting exclusion)
$5,340,000
(less portion of
used lifetime
gifting exclusion)
Annual Exclusion Gifts
(Don’t Count at All)
2012 - $5,120,000
Estate Tax Exemption
$3,500,000 (less
what was used of
$1,000,000 above)
Unlimited
45%
35%
35%
40%
40%
Discounts and Installment
Sales/GRAT’s, etc.
Available
Available
Available
Available
Available
Portability of First Dying
Spouse’s $5,120,000
Exemptions
No
No
Yes
Yes
Yes
Estate Tax Rate
2011 - $5,000,000
2012 - $5,120,000**
2
2013 TAX RATES SUMMARY FROM BOOK ENTITLED THE ESSENTIAL PLANNING
GUIDE TO THE 2013 INCOME AND ESTATE TAX INCREASES
Copyright © 2012 Haddon Hall Publishing, LLP
2012
2013
2013 Medicare Tax
2014 Highest Tax
Long Term Capital
Gain
15%
20%
3.8%
23.8%
Short Term Capital
Gain
35%
39.6%
3.8%
43.4%
C Corporation
Dividend Income
15%
39.6%
3.8%
43.4%
Ordinary Income
35%
39.6%
3.8%
43.4%
Employer: 1.45%
Employee: 2.35%
Total:
3.8%
(The additional .9%
only applies as shown
to the right.)
Additional .9% on
wages exceeding
$200,000 for single
taxpayers and
$250,000 or married
taxpayers.
3.8% total
Employment Taxes
Employer: 1.45%
Employee: 1.45%
Total:
2.9%
FICA/FUTA Taxes
6.2% Employer/4.2%
Employee on wages
up to $110,100.
6.2% Employer
6.2% Employee on
wages up to
$113,700.
N/A
6.2% Employer
6.2% Employee on
wages up to
$117,000.
$5,120,000
Exemption
35% Rate
$5,340,000
40% Rate
N/A
$5,340,000
40% Rate
Estate Tax
3
PROTECTIVE TRUST LOGISTICAL CHART
During both
spouse’s
lifetimes:
First Dying Spouse’s
Revocable Trust
Upon first
death in
2014:
During
surviving
spouse’s
remaining
lifetime:
Upon second
death:
After deaths
of both
spouses:
$5,340,000*
Family
(By-Pass)
Generation Skipping Trust
(Not taxed in surviving spouse’s estate)
Remaining Assets
QTIP Non-GST
Trust
(Marital Deduction Trust that is not
generation skipping)
Surviving spouse
can have the right to
redirect how assets
are distributed on
second death.
Generation Skipping
Trusts for Children
Surviving Spouse’s
Revocable Trust
Surviving Spouse’s Revocable Trust
(Will include assets owned jointly on first death)
$5,800,000?*
Children’s Trust
(or distributions)
Generation Skipping
Trusts for Children
(Will merge with first dying spouse’s Generation Skipping
Trusts shown on left)
Benefits children and grandchildren.
Not estate taxable in their estates.
Benefits children.
Taxable in their estates.
Benefits children and grandchildren.
Not estate taxable in their estates.
Remaining Assets
Children’s Trust
(or distributions)
Benefits children.
Taxable in their estates.
*Assumes first spouse dies in 2014 and that the surviving spouse dies in a later year when the estate tax exemption has gone up to $5,800,000 (based upon 8.57% cumulative inflation). The estate tax exemption is $5,340,000 for those that die
in 2014, and increases with inflation in $10,000 increments.
If the first spouse does not use the entire exemption amount, what remains may be added to the surviving spouse’s allowance under the “portability rules” but will not grow with inflation.
4
About our Presenter – Diana Zeydel
Diana S.C. Zeydel is a shareholder of the law firm of Greenberg Traurig, P.A., in Miami, Florida, and a member of the Florida, New York
and Alaska Bars. She is a member of the Board of Regents and immediate past Chair of the Estate & Gift Tax Committee of the American
College of Trust and Estate Counsel. She is a member of the Executive Council of the Real Property, Probate and Trust Law Section of the
Florida Bar and an ACTEC liaison to the Section. Diana is a frequent lecturer on a variety of estate planning topics. She has authored and
co-authored several recent articles, including “Portability or No: The Death of the Credit Shelter Trust,” Journal of Taxation, May 2013;
“Imposition of the 3.8% Medicare Tax on Estates and Trusts,” Estate Planning, April 2013; “Congress Finally Gives Us a Permanent
Estate Tax Law,” Journal of Taxation, February 2013; “Tricks and Traps of Planning and Reporting Generation Skipping Transfers,” 47th
Annual Heckerling Institute on Estate Planning, 2013; “New Portability Temp. Regs. Ease Burden on Small Estates, Offer Planning for
Large Ones,” Journal of Taxation, October 2012; “When Is a Gift to a Trust Complete: Did CCA 201208026 Get It Right?” Journal of
Taxation, September 2012; “Turner II and Family Partnerships: Avoiding Problems and Securing Opportunity,” Journal of Taxation, July
2012; “Developing Law on Changing Irrevocable Trusts: Staying Out of the Danger Zone,” Real Property, Trust and Estate Law Journal,
Spring 2012; “An Analysis of the Tax Effects of Decanting,” Real Property, Trust and Estate Law Journal, Spring 2012; Comments
submitted by ACTEC in response to Notice 2011-101 on Decanting, April 2012; Comments submitted by ACTEC in response to Notice
2011-82 on Guidance on Electing Portability of the DSUE Amount,” October 2011; Contributor to A Practical Guide to Estate Planning,
Chapter 2 Irrevocable Trusts, 2011; “Estate Planning After the 2010 Tax Relief Act: Big Changes, But Still No Certainty,” Journal of
Taxation, February 2011; “The Impossible Has Happened: No Federal Estate Tax, No GST Tax, and Carryover Basis for 2010” Journal of
Taxation, February 2010; “Tax Effects of Decanting – Obtaining and Preserving the Benefits,” Journal of Taxation, November 2009;
“Estate Planning in a Low Interest Rate Environment” Estate Planning, July 2009; “Directed Trusts: The Statutory Approaches to
Authority and Liability,” Estate Planning, September 2008; “How to Create and Administer a Successful Irrevocable Life Insurance Trust”
and “A Complete Tax Guide for Irrevocable Life Insurance Trusts,” Estate Planning, June/July 2007; “Gift Splitting - A Boondoggle or a
Bad Idea? A Comprehensive Look at the Rules,” Journal of Taxation, June 2007; “Deemed Allocations of GST Exemption to Lifetime
Transfers” and “Handling Affirmative and Deemed Allocations of GST Exemption,” Estate Planning, February/March 2007; “Estate
Planning for Noncitizens and Nonresident Aliens: What Were Those Rules Again?” Journal of Taxation, January 2007; “GRATs vs.
Installment Sales to IDGTs: Which is the Panacea or Are They Both Pandemics?” 41st Annual Heckerling Institute on Estate Planning,
2007; and “What Estate Planners Need to Know about the New Pension Protection Act,” Journal of Taxation, October 2006. Diana
received her LL.M. in Taxation from New York University School of Law (1993), her J.D. from Yale Law School (1986), and her B.A.,
summa cum laude, from Yale University (1982), where she was elected to Phi Beta Kappa.
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5
Introduction to Decanting
>
What is decanting?
>
EPTL 10-6.6: The first decanting statute
–
Motivation for act
–
Legislative history statements: declaratory of the
common law
–
Basic requirements of original statute
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6
Decanting Statutes
> Alaska, Arizona, Delaware, Florida, Illinois, Indiana,
Kentucky, Michigan, Missouri, New Hampshire, New
York, Nevada, North Carolina, Ohio, South Dakota,
Tennessee, Texas, Virginia, Wyoming
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7
Common Law
> Cases:
– Phipps, 142 Fla. 782 (1940)
 “The general rule gleaned from the foregoing and
other cases of similar import is that the power
vested in a trustee to create an estate in fee
includes the power to create or appoint any estate
less than a fee unless the donor clearly indicates a
contrary intent.”
– Estate of Spencer, 232 NW 2d 491 (Iowa
1975)
– Wiedenmayer v. Johnson, 106 NJ Super
(1969)
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Wiedenmayer
> “The son's ‘best interests' is not defined in
his father's trust indenture. The expression is
not limited to a finding that distribution
must be to the son's best ‘pecuniary’
interests. His best interests might be served
without regard to his personal financial gain.
They may be served by the peace of mind,
already much disturbed by matrimonial
problems, divorce and the consequences
thereof, which the new trust, rather than the
old contingencies provided for in his father's
trust indenture, will engender.”
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9
Wiedenmayer
> “Of what avail is it to rest one's ‘best
interests' on a purely financial basis,
and without regard to the effect
upon a man's mind, heart and soul, if
the end result would produce a
wealthier man, but a sufferer from
mental anguish?”
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10
Morse v. Kraft – Massachusetts Supreme Court
> Court cited Phipps but appeared more inclined to rely
on Wiedenmayer
> Court relied on fundamental principle that in
interpreting a trust the intent of the settlor is
paramount
> The court focused on the authority to distribute “for
the benefit of” as evidence of the settlor’s intent that
the trustee have authority to distribute in further trust
> The court admitted affidavits of the settlor,
attorney/draftsperson and the trustee
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11
Morse v. Kraft
> The court indicated that a more recent trust
instrument without express decanting authority may
create a negative inference
> Declined, as requested in the Boston Bar Association
amicus brief, to recognize an inherent power of
trustees of irrevocable trusts to exercise their
distribution authority by distributing property in
further trust, irrespective of the language of the trust
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12
In re Kross – Nassau County Surrogate’s Court
> Decanting under EPTL 10-6.6(j)(1)
– Original Trust settled by beneficiary’s grandparents
– Beneficiary was special needs and the purpose of the
decanting was to preserve eligibility for government
benefits
– Wholly discretionary trust until age 21, at 21 mandatory
income quarterly, principal at 25, 30 and 35
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13
In re Kross
> Attorney General’s arguments
– Trustees had no authority to decant because the
beneficiary would be entitled to mandatory payments in
the future
 Court disagrees
– Decanted trust is self-settled
 Decanting Notice sent May 1, 2012, beneficiary attained
21 on May 7, 2012
 On May 2, beneficiary’s father consented on behalf of the
beneficiary to the decanting
• Trust instrument provided that parent or guardian who is
not a trustee may act on behalf of the beneficiary
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14
In re Kross
> Court holds as follows:
– Trustees are an authorized trustees
– Trustees complied with the statute
– Consent by parent was effective to shorten the 30-day
notice period
– Decanting was effective May 2, 2012, prior to the
beneficiary attaining age 21
– The appointed trust is an effective third party special
needs trust
– No requirement for a payback provision in the
appointed trust
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15
Reasons to Decant
–
Correct a drafting error
–
Avoid an adverse tax effect such as qualifying
“fixing” a trust so it can be a qualified subchapter
S trust
–
Extend the time or event when a trust will end
–
Add or eliminate a spendthrift provision
–
Change the situs of a trust
–
Avoid a state or local tax
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16
Reasons to Decant
– Grant a presently exercisable or later exercisable
power of appointment
 PLR 200243026
• Discretionary power to invade for care, support,
maintenance, education, advancement of life and
comfortable living
 Rev. Rul. 75-550
• Calculating value of life estate under 2013
• Include “estimated amount of all possible invasions” for
the benefit of others
– Make a trust a grantor trust or reverse
– Dividing one trust into separate trusts for asset
protection or separate share reasons
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17
Tax Concerns
> Income Tax
> Gift Tax
> Estate Tax
> GST Tax
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18
Conclusion
> Decanting provides an opportunity to change the
terms of an existing trust
> Can preserve or even enhance the tax benefits
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19
To register for one of the seminars please email Janine Gunyan at [email protected]
20
To view this webinar please email Mark Carrington at [email protected] or
Alan Gassman at [email protected]
21
Planning with Self-Cancelling Installment Notes and
Private Annuities: Don’t Get Burned
Wednesday, November 20, 2013
12:30 – 2:00 p.m.
Professor Jerry Hesch, Lawrence Katzenstein, Edward P.
Wojnaroski, Jr., Alan S. Gassman, J.D., LL.M. and
Kenneth J. Crotty, J.D., LL.M.
To register for this event please visit:
http://www.bna.com/planning-selfcancellinginstallment-w17179878865/
For discount information please email
[email protected]
22
MORE THAN ONE WAY TO SCIN A GRAT? (The “SCGRAT”)
WHAT IF THERE IS NOT TIME TO APPRAISE THE UNDERLYING ASSETS
AND ENTITY DISCOUNTS BEFORE COMPLETING A SELF-CANCELLING
INSTALLMENT NOTE TRANSACTION?
GRAT provides that first
$400,000 worth of assets
remain in GRAT and any
excess from initial
contribution will be payable
over 5 annual installments of
excess amount plus the 7520
Rate.
GRAT
Can benefit spouse and
descendants after 5 years of
payments to Grantor.
100%
CLIENT/GRANTOR
SCIN
$1,500,000
Step 1 – Client places assets in LLC owned by client and receives back a SelfCancelling Installment Note.
Step 2 – Client gifts 100% ownership in the LLC to the GRAT.
Step 3 – A valuation firm values the assets under the LLC and actuarial tables
are used to determine the SCIN value.
Step 4 – The excess of asset value over the SCIN value is the GRAT
contribution amount.
Step 5 – The GRAT may provide for holding assets equal to $400,000, and
distributing back 5 annual payments based upon any excess over $400,000.
$2,000,000 - $1,500,000 = $500,000 . $500,000 - $400,000 = $100,000.
$100,000/5 = $20,000
Step 6 – If the IRS determines that the valuation assumptions used are
incorrect, any excess value will pass back to the Grantor over 5 annual
payments, and will qualify for the estate tax marital deduction if the grantor
dies during the first 5 years survived by a spouse.
LLC
Cash $500,000
Assets estimated to be
worth $2,000,000
($500,000 in cash plus
$1,500,000 in Grandpa’s
LLC interest (90%))
90%
Grandpa, 10%
GRANDPA
LLC
$1,928,571 in assets
($1,928,571 x .9 x .7 =
$1,500,000)
23
SCIN vs. PRIVATE ANNUITY vs. GRAT
SCIN
PRIVATE ANNUITY GRAT
Can be valued based upon
standard life expectancy tables, if
taxpayer has better than 50%
chance of living one year.
Must pass the “probability of
exhaustion test” (significant
minimum value held under trust
and/or by guarantors).
This is being contested by the IRS.
Safe, under Treasury Regulation
Sections 20.2031-7(d); 20.7520-3(b)
Safe, under Internal Revenue Code
Section 2702(a)(2)(B); 20.75203(b).
No.
No, if structured as a Walton-style
GRAT.
Must make annual payments.
Probably, interest only until it
balloons.
Yes.
Not until it balloons.
Yes- According to Treasury
Regulation Section 1.75203(b)(2)(i); 20.7520-3(b)(2)(i);
25.7520-3(b)(2)(I), but is the IRS’s
position under the Regulation
incorrect? – See Katzenstein,
Turning the Tables: When do the
IRS Actuarial Tables Not Apply?,
Thirty-Seventh Univ.of Miami Inst.
On Est. Planning, Ch. 3 (2003).
No- The Kite case allowed no
payments for the first 9 years.
Subject to probability of exhaustion
test.
Probably not- as in the Kite case.
Explainable to the client.
Yes.
Yes.
Income tax imposed upon death.
Possibly not, but IRS may not agree.
(See Zaritsky, Tax Planning for
Family Wealth Transfers §12.04[h],
(4th ed. 2002))
No.
Compatible with defective grantor
trust.
Payments must include principal.
Yes.
Yes, it is a Grantor Trust.
Equal or increasing payments would
represent income and principal
conceptually.
Slightly more complicated.
No- but on death, there is a negative
estate tax impact.
24
SCIN vs. PRIVATE ANNUITY vs. GRAT
(Continued)
Stepped up basis on death of seller
if assets are sold or transferred to
individuals or non-grantor trusts.
Stepped up basis if assets are sold
or transferred to grantor trusts.
Possible usury issues for older
taxpayer.
Are Payment Rights Creditor
Protected?
SCIN
PRIVATE ANNUITY GRAT
Only to the extent of payments
made before the death of the seller.
The purchaser only gets basis to the
extent of payment actually made.
Yes, hopefully. (See Blattmachr,
Gans and Jacobson, Income Tax
Effects of Termination of Grantor
Trust Status by Reason of the
Grantor’s Death, Journal of
Taxation, September 2002)
Yes, unless the risk premium is
applied to the note principal.
Generally not, but can be held by
family limited partnership or other
entities that provide charging order
or creditor protection.
Only to the extent of payments
made before the death of the seller.
The purchaser only gets basis to the
extent of payment actually made.
Yes, hopefully. (See Blattmachr,
Gans and Jacobson, Income Tax
Effects of Termination of Grantor
Trust Status by Reason of the
Grantor’s Death, Journal of
Taxation, September 2002)
No.
Non-applicable– GRATs do not
involve sales of assets.
Yes, in several states.
Yes, in several states.
Yes, hopefully. Depending upon
structuring.
No.
25
26
27
SCENARIO: SAMPLE DATA
Visualization over 20 Year Time Span
Harland Sanders Life Expectancy is 9.2 Years
Claudia Sanders Life Expectancy is 19 Years
HAROLD AND CLAUDIA SANDERS
Today
Residence
GIFTING TRUST(S)
Value
$0
Investments
$750,000
$6,500,000
Annual Growth
Annual Additions
Rate 3.03%
$50,000
Annual Growth Rate
Annual Gifts
10.98%less 15% fees
$56,000 (adj for inflation)
ILIT - HARLAND
ILIT - CLAUDIA
ILIT - SURVIVORSHIP
Death Benefit
Death Benefit
Death Benefit
Annual Growth Rate
$100,000
$100,000
$100,000
Annual Premium
Annual Premium
Annual Premium
$5,000
$5,000
$5,000
10.98% less 15% fees
CLAUDIA SANDERS
1st
Residence
Upon
$850,000
Death
Annual
Growth
(in Year 10)
Rate 3.03%
Upon 2nd
Death
(in Year 25)
Investments
$4,000,000
BY PASS TRUST GIFTING TRUST(S)
Value
Initial funding upon
$914,316
first death - $3,500,000
Annual Gifts
Annual Additions Annual Growth Rate
$50,000
ILIT - CLAUDIA
ILIT - SURVIVORSHIP
Death Benefit
Death Benefit
Death Benefit
$28,000 (adj for inflation)
$100,000
$100,000
$100,000
Annual Growth Rate
Annual Growth Rate
Annual Growth Rate
Annual Premium
Annual Premium
10.98% less 15% fees
10.98% less 15% fees
10.98% less 15% fees
$5,000
$5,000
10.98%less 15% fees
CLAUDIA'S ESTATE
Residence
Investments
Exclusion/Portability
$850,000
$16,000,000
($10,000,000)
Net Taxable Estate: $6,850,000
ILIT - HARLAND
TOTAL PASSED TO BENEFICIARIES
Claudia's Trust
Bypass Trust
Gifting Trust
ILIT - Harland
ILIT - Claudia
ILIT - Survivorship
TOTAL:
$4,110,000
$6,589,000
$2,356,246
$230,000
$100,000
$100,000
$13,485,246
ESTATE TAX
$2,740,000
28
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©2013 Greenberg Traurig, LLP. All rights reserved.
29
30
31
SAVINGS AFTER 21 YEARS WITH DISCOUNTED GIFT, LOW INTEREST NOTE, AND GRANTOR PAYS
INCOME TAX IS $5,112,565
32
SAVINGS AFTER 21 YEARS WITH NO DISCOUNT IS $3,888,882. DISCOUNTING SAVED IS
$1,223,683.
33
SAVINGS AFTER 21 YEARS WITH TRUST PAYING INCOME TAX IS $2,903,932.
SAVINGS FROM GRANTOR PAYING INCOME TAX IS $2,208,633.
34
SAVINGS USING A 20 YEAR SCIN IF THE CLIENT DIES IN YEAR SEVEN IS $2,686,697.
35

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