2012 estate planning seminar

© 2012 Chambliss, Bahner & Stophel, P.C. All Rights Reserved

The Year of the GiftWhat's So Special About 2012?

Chambliss, Bahner & Stophel, P.C.1000 Tallan Building, Two Union Square

Chattanooga, TN 37402(423) 756-3000

www.cbslawfirm.com

Estate Planning Seminar

© 2011 Chambliss, Bahner & Stophel, P.C.All Rights Reserved

September 12, 2012

http://www.cbslawfirm.com/

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Today's Speakers

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Dana Perry• Dana focuses her practice on estate planning, elder law and

special needs trust planning– Certified as an Elder Law Specialist (CELA) by the Tennessee

Commission on Continuing Legal Education and Specialization– Accredited Attorney, Department of Veterans Affairs– Listed in 2011 Mid South Super Lawyers for Estate Planning and

Probate and Top 50 Women Lawyers– Listed in The Best Lawyers in America for elder law and trusts and

estates– Martindale-Hubbell AV® Peer Review Rated – Licensed to practice in Tennessee and Georgia

• Dana received her BA from the University of the South (Sewanee), and her law degree from Vanderbilt University

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Greg Willett

• Greg focuses his practice on estate planning, probate and estate administration, and taxation – Chattanooga Estate Planning Council, Member and former Director– Chattanooga Tax Practitioners, Member and former Director– Listed in The Best Lawyers in America for trusts and estates– Martindale-Hubbell AV® Peer Review Rated – Southern Adventist University, past member Board of Trustees – Southern Adventist University School of Business and Management,

former Adjunct Faculty

– Licensed to practice in Tennessee • Greg received his law degree from Washington & Lee University,

and graduated, cum laude, from Southern Adventist University with a BBA in accounting and business management.

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Mark Addison

• Mark works in the areas of estate planning, estate and trust administration, taxation, elder law, special needs and conservatorships– Academy of Special Needs Planners, Member– Accredited Attorney, Department of Veterans Affairs – Chattanooga Estate Planning Council, Member– Chattanooga Tax Practitioners, Member – National Academy of Elder Law Attorneys, Member– Licensed to practice in Georgia, Tennessee, North Carolina &

South Carolina • Mark received his law degree from Wake Forest University

and his undergraduate degree, cum laude, from Southern Adventist University

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Ryan Barry• Ryan focuses his practice on estate planning and elder law

– Knoxville Estate Planning Council Scholar

– Chancellors Award, Top Collegiate Scholar, 2011

– Order of the Coif

– Phi Beta Kappa

– Judge Louis K. Matherne Scholar

– W. Hugh Overcash Tax Law Scholar

– William J. Brennan Legal Research Scholar

– Licensed to practice in Tennessee and Georgia

• Ryan was the valedictorian of his undergraduate class at the University of the South (Sewanee) where he received his BS and BA and he was also valedictorian of his law school class at the University of Tennessee College of Law

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Today's Topics

• Principles of estate and gift taxation

• Recent changes to the Federal estate and gift tax structure

• Tennessee inheritance and gift tax structure

• Pending changes for 2013

• Planning opportunities and pitfalls


Principles of Estate &Gift Taxation

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Transfer Principles

• "Transfers" (gifts during life or at death) above certain exemption amounts are subject to tax

– This tax is a transfer tax - not an income tax

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Transfer Principles

– Generally transfers are not taxed as income to the recipient• Exceptions:

– Individual retirement accounts

– Qualified retirement plans

– Other assets treated as "income in respect of decedent"

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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 $13,000)

– Use of Unified Credit during Life • Transfers at Death: When value transferred is less than the

decedents remaining Unified Credit amount (Federal Unified Credit amount is currently $5.12 million)

NOTE: Prior to 2012, the Tennessee annual gift exclusion amount could differ from the Federal annual exclusion amount. The Tennessee inheritance tax exclusion is currently only $1 million but will increase over the next several years.

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Transfers Exempt from Tax due toRecipient of Transfer

• Transfers to spouse (outright and marital trust)

• Transfers to charity

• Transfers directly to medical care provider for another

• Transfers to educational institution for another

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Federal Estate & Gift Tax: An Integrated System

• Utilizes a Unified Credit approach (for 2012 the Unified Credit = $5.12 million/per donor/decedent)

• Annual gift tax exclusion amount for 2012 is $13,000/per donor/per donee

• For lifetime gifts, only amounts in excess of annual exclusion will trigger use of Unified Credit amount

• Generation Skipping Credit of $5.12 million for 2012 (no portability)

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Federal Estate & Gift Tax: An Integrated System

• All of Unified Credit must be used before tax is required to be paid

• Tax rate for estates, gifts and GST Transfers for 2012 = 35% (down from a maximum 55% in 2006)


Recent Changes to the Federal Estate & Gift Tax Structure

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Federal Estate, Gift & GSTTax Exemption History

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

1997 2000 2003 2006 2009 2012

Estate

Gift

GST

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Source: http://www.irs.gov/pub/irs-soi/10esesttaxsnap.pdf

Number of Federal EstateReturns Filed - 2001 to 2010

http://www.irs.gov/pub/irs-soi/10esesttaxsnap.pdf

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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: Unless Congress passes new legislation – Reverts back to 2003 level of $1 million

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Portability of Unused Unified Credit

• For deaths occurring in 2010 - 2012, Unified Credit is "portable" between spouses – a decedent's unused Unified Credit can pass to his or her surviving spouse

• 2012 exemption levels enable surviving spouse to have up to $10.24 million Unified Credit

• Portability will not be available starting in 2013 unless new legislation is passed

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Portability of Unified Credit

Example:

Husband has assets of $4 million and wife has assets of $8 million. At husband's death in 2012, husband's estate applies $4 million of his $5.12 million exemption to his assets and the remaining $1.12 million exemption passes to wife. At wife's death, her exemption will total $6.24 million (her $5.12 million plus husband's unused $1.12 million).

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Portability of Unified Credit

• Caveats: Can not accumulate Unified Credit amounts from multiple deceased spouses

• Does not apply to generation-skipping transfer (GST) tax exemption

• Portability will not be available in 2013 and after unless tax law changes


Tennessee Inheritance &Gift Tax Structure

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TN Gift Tax 2012 and Forward

• Tennessee repealed its gift tax, retroactive to January 1, 2012

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TN Inheritance Tax Exemption2012 and Forward

• Tennessee is phasing out its inheritance tax: – 2012 - $1 million

– 2013 - $1.25 million

– 2014 - $2 million

– 2015 - $5 million

– 2016 and after – complete repeal of Tennessee inheritance tax

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TN Inheritance Tax Rates

• Assets over the applicable exemption amount for the year of death are taxed at the following rates:

• 5.5% for the first $40,000;

• 6.5% for the next $200,000;

• 7.5% for the next $200,000; and

• 9.5% for all amounts thereafter.

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TN Inheritance Tax ExemptionTax Trap for 2012 - 2015

• Tennessee Inheritance Tax Exemption– For 2012 to 2015, overfunding a "Credit Shelter Trust"

under a Last Will by using Federal exemption 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

• $1 million (2012) - Credit Shelter Trust (for family)• $4.12 million (2012) - TN Gap Trust (for spouse)• >$5.12 million (2012) – Outright or in trust to spouse

– For 2013 and beyond – formula may need to be revised or reversed if Tennessee Inheritance Tax Exemption becomes more than the Federal Unified Credit

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Pending Changes for 2013

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If No Change in Tax Law

• 2013 and beyond: If Congress fails to act by year end, Federal Unified Credit reverts back to $1 million effective January 1, 2013

• Result: Potential loss of $4.12 million in Unified Credit per person if proper estate planning is not completed prior to year-end.

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Obama Administration Proposal

• 2013 and beyond: – Reinstate a $3.5 million Unified Credit of which

$1 million can be applied to lifetime gifts – Make portability of Unified Credit permanent– Top estate and gift tax rate increased to 45%

• Result: $1.62 million reduction in total Unified Credit per individual. $4.12 million reduction in amount that can be applied to lifetime gifts. 10% increase in estate and gift tax rate.

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Romney Campaign Proposal

• 2013 and beyond:

– Eliminate estate tax altogether

– Details on implementation forthcoming

• Result: No transfer tax.

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Why 2012 Is An Opportunity

• Under either the current tax law effective January 1, 2013 or the Obama administration proposal, the estate and gift tax Unified Credit will be reduced and the tax rate increased

• Now is the time to consider gifting to lock-in the use of the current $5.12 million Unified Credit

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Evaluating the 2012 Opportunity – Estate Tax versus Capital Gains Tax

• Estate Tax (Death in 2013):

Assets ($500K basis) $5,000,000

less: Unified Credit ($1,000,000)

Net Taxable Estate $4,000,000

Estate Tax (55%) ($2,200,000)

Net Assets to Heirs $2,800,000

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• Capital Gains Tax (Gifted in 2012 and Sold in 2013):

Assets $5,000,000

less: Carryover Basis ($500,000)

Net Capital Gain $4,500,000

Capital Gain Tax (20%) ($900,000)

Net Assets $4,100,000

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• Net Tax Savings for Gift:

Estate Tax Avoided $2,200,000

less:

Capital Gains Tax Paid ($900,000)

Net Tax Savings $1,300,000

Caveat: For smaller estates which will be covered by the Unified Credit, delaying gifts till death may reduce or eliminate capital gains tax as assets receive a step-up in basis to date of death value.

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Who Should Consider Gifts in 2012?

• Couple with total assets of :– Less than $1 million: Probably not,

since it is unlikely that the survivor's estate will pay any Federal or TN estate or inheritance tax;

– Less then $3.5 million but more than $1 million: Maybe, depending on life expectancy (will surviving spouse live to 2016 and beyond and remain in Tennessee) and lifestyle needs

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• Couple with total assets of :

– Less than $7 million but more than $3.5 million: Probably, depending on life expectancy (will surviving spouse live to 2016 and beyond and remain in Tennessee) and lifestyle needs

– More than $7 million: Yes

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• Note: Use of Unified Credit in 2012 for lifetime gifts will reduce amount available at death.

• Example: Husband makes a $5 million dollar gift to an irrevocable trust for wife and children in 2012. Husband then dies in 2013 after the Unified Credit has decreased to $1 million. Husband fully utilized his $1 million Unified Credit through the $5 million gift made in 2012. Hence, all of the husband's remaining assets (not passing to charity) will be subject to estate tax.


Planning Opportunities and Pitfalls

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Outright Gifts to Descendants

• 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 your taxable estate

– Tennessee gift tax no longer an issue

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Irrevocable Dynasty Trusts

• Create multi-generational "dynasty" trusts to avoid future estate and inheritance tax on those assets

Grantor with Three Children(Gift of $5,120,000)

Irrevocable Dynasty Trusts – Up to 360 Years in Tennessee

Separate Trusts for each Grandchild

- Terms: Same as trust for children.

- Grandchild's death: Assets pass into separate trusts for grandchild's descendants

- At Grandchild's Death: Continues in trust for grandchild's descendants under the same terms.

Separate Trusts for each Child (3)- Income and Principal: Trustee has discretion to distribute

income and principal for heath care, education, maintenance and support ("HEMS") of the child

- At child's death: – Limited power of appointment that allows child to

direct assets to their descendants or to a trust for their spouse

– If limited power not exercised by child, then assets pass into separate trusts for child's descendants

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Life Insurance Trusts

• Leverage gifts by using gifted funds to purchase life insurance in irrevocable trusts

• Fully fund existing insurance trust to cover future premium payments

• If grantor funds premium payment split-dollar loans, consider forgiving indebtedness

Life Insurance TrustGrantor

Large gift to Trust(Ex: $5,120,000)

Grantor's Death - $0 Estate TaxPolicy death benefit pays out to the trust

Gift to Children Outright or in Separate TrustsDeath benefit paid out to children outright or in separate trusts for their

benefit. Proceeds pass tax free so long as unified credit and GST exemption was used to shelter the initial $5,120,000 gift to the trust.

Life Insurance Trust Terms

Insurance: Trust owns and is the beneficiary of a large life insurance policy on the life of the grantor.

Income and principal: Income and principal from the trust may also be used for spouse and descendants' benefit. However, no such distributions are

anticipated; rather $5,120,000 is used to pay annual premiums (or a one-time premium) on the life insurance policy.

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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.

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• Caveat 1: Control and Benefit Issues

– Minimal control/benefit during life

– Loss of control/benefit at death or divorce

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• Caveat 2: Reciprocal Trust Doctrine

– If both spouses wish to execute SLATs for each other, beware of the reciprocal trust doctrine

– Avoid this issue by incorporating differences into the documents – beneficiaries, income and principal distribution terms, powers of appointment, etc.

Spousal Lifetime Access Trusts

Grantor with Two Children

Terms of SLAT• Trustee: Spouse or an independent party may serve as trustee

• Income and Principal: Trustee has discretion to distribute income and principal for heath care, maintenance, support and education of the spouse for the spouse's lifetime

• Grantor's powers: NONE. The trust is irrevocable and grantor retains no control over or benefit from the trust assets.

Large gift to SLAT(Ex: $5,120,000)

Spouse's Death - $0 Estate Tax

Separate Trusts for each Child

• Income and Principal: May distribute for HEMS of child

• At child's death: Assets pass to separate trusts for child's descendants

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Trust Funding Options - Timing

• Nominally Funded Trust – Fund Some Now – Add More Later– Nominally fund an irrevocable trust designed

as a Dynasty Trust or SLAT

– Establish brokerage account, etc. for trust

– If 2013 exemption will not be increased by year-end, transfer additional assets to trust before year-end

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Trust Funding Options - Timing

• Revocable Trust That Can Be Made Irrevocable– Fully fund a revocable trust designed as

a Dynasty Trust or SLAT with $5.12 million

– If 2013 exemption is not increased by December 31, 2012, release power to revoke trust and convert it to an irrevocable trust

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Trust Funding Options - Assets Valuation Discounts

• Take advantage of valuation discounts on closely-held businesses - lack of marketability and transferability discounts

• Take advantage of depressed real estate values to gift such assets now

• Use of discounted assets leverages use of Unified Credit

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Leverage Low Interest Rates

• Leverage currently low interest rates

• Options to remove appreciation (but not underlying assets) from grantor's estate

– Grantor retained annuity trust

– Charitable lead annuity trust

Creation of a Grantor Retained Annuity Trust ("GRAT")

Grantor

$1 million of assets to GRAT. Value for gift tax purposes = $0.13

Two years annuity payment of $507,511 per year = $1,015,022

Terms of Trust 1) During Annuity Term (2 years): During the annuity term, the annuity payments to the grantor are

the only payments made from the trust.

2) If Grantor dies before end of Annuity Term: The annuity will be paid to a marital trust for Grantor's spouse, if living. If spouse is not living, the annuity will be paid to Grantor's children (see below).

3) Distribution at end of Annuity Term:

- Division into Separate Shares for Grantor's Children

- Income and Principal: To Grantor's children for HEMS. Principal may also be distributed for emergencies or nonrecurring needs. - Termination of Trust at Child's Death: Child has a GPOA under which he may distribute his remaining funds as he determines.

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Assumptions2 Year Flat Annuity

Pre-discounted FMV: $1,000,000Discounted FMV: $1,000,000Section 7520 Rate (Sept.'12): 1.0%Income Earned by Trust: 4.0%Annual Growth of Principal: 8.0%Term: 2 yearsPercentage Payout/Yr: 50.75111 % of initial contributionTaxable Gift Value: $0.13

YearBeginning Principal

4.00%AnnualIncome

8.00%AnnualGrowth

AnnualPayment Remainder

1 $1,000,000.00 $41,600.00 $80,000.00 $507,511.10 $614,088.90

2 $614,088.90 $25,546.10 $49,127.11 $507,511.10 $181,251.01

Summary $1,000,000.00 $67,146.10 $129,127.11 $1,015,022.20 $181,251.01

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Pitfalls

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Funding Family Trust with Federal Exemption

• Using funding formulas in a Will tied to the Federal exemption

– Larger gift than anticipated due to increase in exemption - put a cap on the amount - dollar amount or percentage of estate

– Trigger Tennessee inheritance tax

– Should not be an issue after 2015

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Relying on Portability

• Relying on Federal "portability" of exemption amount is dangerous– Estate remains open for audit purposes– Portability could expire in the future– May waste Tennessee inheritance tax exemption if die

prior to 2016– Use of portability does not remove appreciation on

assets from survivor's estate– Unused Unified Credit is not indexed for inflation– No creditor protection attaches to unused Unified Credit

as is available for the creation of a testamentary trust

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New 3.8% Tax under Affordable Care Act

• Estates and trusts are subject to Medicare contribution tax for each tax year equal to 3.8% of the lesser of:

• The estate's or trust's undistributed net investment income for the tax year, or

• The excess of the estate's or trust's AGI over the dollar amount at which the highest tax bracket for trusts begins (currently $11,300)

– In addition to all other taxes normally imposed

• To Avoid: Distribute all or most of the income from the trust or estate annually

• New law may also apply to individuals with AGI of $200,000 (individuals) or $250,000 (filing jointly)

Source: http://www.schwabe.com/showarticle.aspx?Show=12149

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Timing Your Planning

• Each of the techniques mentioned herein involve multiple moving parts. As such, individuals interested in pursuing these planning options should try to get in contact with their attorney as soon as possible to start the planning process.

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Robert M. "Mark" [email protected]

(423) 757-0266

Dana B. [email protected]

(423) 757-0228

Gregory D. [email protected]

(423) 757-0224

Ryan [email protected]

(423) 757-0247

Questions?

mailto:[email protected]




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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.

2012 estate planning seminar

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