Chambliss 2014 Estate Planning Seminar.pptx

© 2014 Chambliss, Bahner & Stophel, P.C. All Rights Reserved.

Chambliss, Bahner & Stophel, P.C.Liberty Tower • 605 Chestnut Street, Suite 1700 • Chattanooga, TN 37450

chamblisslaw.com

Estate Planning Seminar

Tennessee: The New Trust Haven

New Opportunities for Tax Planning and Asset Protection

October 7 & 8, 2014

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Today's Topics• Taxes:

– Current Tennessee and Federal estate, inheritance and gift taxes

– Portability of Federal estate tax exemption from a deceased spouse to a surviving spouse

– Estate tax planning versus income tax planning when making portability election

• Probate– Planning to Avoid Probate

– Trusts centered on probate issues• Revocable Trusts

• Tenancy by the Entirety Trust

• Tennessee Community Property Trust

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Today's Topics

• Creditor Protection– LLC's versus trusts

– Tennessee Investment Services Trusts

– Spousal Lifetime Access Trust

• Case Studies

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Principles of Estate, Inheritance& Gift Taxation

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Gifts Exempt from Tax Due to the Value of the Gift

• Gifts During Donor's Lifetime: – Annual Exclusion: When value of gift to a

beneficiary during a calendar year is less than the annual gift tax exclusion amount (federal annual gift exclusion amount is currently $14,000 per donee)

– Amount in Excess of Annual Exclusion: Use of Federal Unified Credit during life for gift amounts in excess of annual exclusion

– Tennessee Donors: No gift tax – repealed effective January 1, 2012

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Gifts Exempt from Tax Due to the Value of the Gift

• Gifts at Donor's Death: – Unified Credit/Exemption: When value transferred

is less than the deceased donor's remaining Unified Credit amount (Federal Unified Credit amount is currently $5.34 million(2014)) – may be increased if a predeceased spouse did not fully utilize his/her exemption

• NOTE: The Tennessee Inheritance Tax exclusion is currently only $2 million, but it is set to increase to $5 million in 2015 and then it is repealed in 2016.

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Gifts Exempt from Tax Due toRecipient of the Gift

• Exempt Recipients:– Spouse (outright and qualified marital trust)

– Charity

– Medical care provider for the care of another

– Educational institution for the tuition of another • Section 529 Plans don't qualify as exempt recipients

and therefore require the use of the donor's annual gift tax exclusion

• Gifts to Section 529 Plans can be front-loaded – 5 years contributions made in 1 year and then prorated over next 4 years

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History and the Current State of the Federal Estate &

Gift Tax Structure

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Federal Estate, Gift & Generation-Skipping Transfer

Tax Exemption History

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Maximum Federal Estate, Gift & GST Tax Rate History

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Recent Progression of Federal Estate & Gift Tax Exemption

• 2011: $5 million Unified Credit amount that can be used during life, at death, or in combination

• 2012: Inflation adjustment increased the Unified Credit to $5.12 million

• 2013: $5 million Unified Credit "permanent" and adjusted for inflation to $5.25 million

• 2014 and beyond: Inflation adjustment increased the Unified Credit to $5.34 million

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Portability of Unused Unified Credit

• Pre-2010: For deaths occurring prior to 2010, each spouse's Federal Unified Credit was not portable – "use it or lose it" – reason for allocating ownership of property between spouses and avoiding jointly-held property

• 2013 and after: For deaths occurring in 2010 and beyond, portability of the Unified Credit has been made "permanent" – can result in a surviving spouse having up to $10.68 million (2014) Unified Credit – potentially reduces the need for allocation ownership between spouses

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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 2014, husband's estate applies $4.0 million of his $5.34 million Unified Credit to his assets, files a federal estate tax return (Form 706), and the remaining $1.34 million passes to wife. At wife's death, her Unified Credit will total $6.68 million (her $5.34 million plus husband's unused $1.34 million).

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Portability of Unified Credit

• Caveats: – Must file a Form 706 at death of first spouse in

order to claim portability

– Can not accumulate Unified Credit amounts from multiple deceased spouses – but can "spend-down" deceased spouse's exemption through lifetime gifts first, before using your exemption

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

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Portability of Unused Unified Credit

• Retroactive Portability - Rev. Proc. 2014-18: Simplified method to obtain extension of time to make the Portability Election for decedent who died in 2011, 2012 and 2013 survived by a spouse– Form 706 must be filed on or before 12/31/2014

– If claiming refund for estate taxes originally paid, claim for refund must be filed by 10/14/2014

– State at top: "Filed pursuant to Rev. Proc. 2014-18 to elect portability under §2010(c)(5)(A)”

– Use for same-sex couples

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History and Current Status of Tennessee Inheritance &

Gift Tax Structure

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Tennessee Inheritance and Gift Tax Exemption History

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Tennessee Inheritance Tax Rates

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Tennessee Gift Tax 2014 and Forward

• Tennessee repealed its gift tax, retroactive to January 1, 2012 – NOTE: Gifts within 3 years of death are included in

a decedent's taxable estate for Tennessee inheritance tax purposes

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Tennessee Inheritance Tax Exemption 2014 and Forward

• Tennessee is phasing out its inheritance tax by increasing the exemption amount: – 2014 - $2 million

– 2015 - $5 million

– 2016 and after – complete repeal of Tennessee inheritance tax

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Tennessee Inheritance Tax Exemption Tax Trap for

2012 - 2015• Tennessee Inheritance Tax Exemption

– For 2012 to 2015, overfunding a "Credit Shelter Trust" under a Last Will by using Federal Unified Credit can trigger unexpected Tennessee Inheritance Tax on death of the first spouse• Example: Decedent dies in 2014 and his Last Will directs

the creation of a Credit Shelter Trust with the Federal Unified Credit Amount ($5.34 million). The funding of this trust will exceed the decedent's TN inheritance tax exemption amount ($2 million) by $3.34 million resulting in TN inheritance tax of $305,700.

– Overfunding can be solved with a formula clause in creating a trust - and through the use of a Tennessee Gap Trust

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Shift in Focus for Non-Taxable Estates:

Income Tax, Probate vs. Non-probate, Creditor Protection

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Income Tax Planning

• Preserving Step Up in Income Tax Cost Basis– Gifts made during life result in recipient having a

"carry-over" basis equal to the donor's basis

– Gifts made at death receive a "step up" in basis to FMV as of date of death

– Plan with portability of Federal Unified Credit to the surviving spouse so that transfers made are INCLUDED in taxable estate at surviving spouse's death to preserve step up in basis, thereby reducing capitals gains tax on a future sale of the property

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Income Tax Planning

• Methods: Give assets to surviving spouse outright or in Marital Trust – or grant surviving spouse a general power of appointment over Non-Marital trust assets at death

• Issue: Property held jointly by spouses in non-community property states (like TN) receives only one-half (1/2) step up in basis at death of first spouse to die – residents of community property states receive a full step up in basis at death of first spouse to die

• Solution: Tennessee Community Property Trust – discussed later

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Probate vs. Non-Probate Planning

• Primary Estate Planning Document: 2 Options– Probate Option: Last Will

• Upon testator's death, Petition for Probate filed with county of decedent's residence AND any county/state where decedent owned real property

• Executor is granted Letters Testamentary, giving executor authority to gather decedent's assets, pay debts and expenses, handle administration, and distribute assets to beneficiaries

• 4 month creditor claims period (TN) – notice by publication required

• Last Will becomes public record

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Probate vs. Non-Probate Planning

– Non-Probate Option: Revocable Trust Agreement ("RTA") and Pour-over Will • Upon testator's death, successor trustee takes

ownership/control of all assets titled to the RTA, pays debts and expenses, handles administration of the estate/trust and distributes assets to beneficiaries

• Only avoid probate IF ALL assets transferred to RTA prior to death

• More work and expense up-front re: retitling assets and changing beneficiaries

• Ongoing effort – when acquire new assets, must title to the RTA

• Terms of trust generally remain private/not a matter of public record

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Creditor Protection

• Planning During Life:– Tenants by the Entirety property

– Trusts created for asset protection (TIST, SLAT, etc.)

– Allocation of assets to one spouse's sole name

• Planning after Death: Lifetime trusts for children to protect inheritance from child's creditors.– Child in high risk profession (i.e. physician)

– Child with multiple marriages

– Child with substance abuse or mental health issues

– Special Needs Child/Beneficiary

– Spendthrift Child

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Creditor Protection• Dynasty Trusts

– Separate Lifetime Trusts for Children

– Child has a Limited Power of Appointment (LPOA) at death over remaining assets to:• Any one or more of grantor's descendants;

• Marital Trust for child's spouse, which later passes to any one or more of grantor's descendants or charity;

– If LPOA is not exercise, Trust divides among child's descendants, per stirpes, and continued in trust

– Trust protector can grant child a general power of appointment for income tax basis step up on assets

– Trust can last up to 360 years in Tennessee

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Creditor Protection

• Update re: Beneficiary (i.e. inherited) IRAs:– 2014 U.S. Supreme Court case1 held that funds in

an IRA that Chapter 7 (bankruptcy) debtor had inherited from her late mother were NOT "retirement funds" that are exempt from creditors in a bankruptcy proceeding

– Result: Mother's IRA funds were NOT protected from daughter's creditors

– Solution: Make beneficiary of IRA a lifetime Trust for Daughter drafted as a "see-through" or "conduit" trust

1 Clark v. Rameker, 573 U.S. ____, 134 S.Ct. 2242 (June 12, 2014)

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Types of Revocable Trusts In Tennessee

• Generic Revocable Trusts – Individual or Joint RTAs

• Tenancy by the Entirety Trust• Tennessee Community Property Trusts

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Generic Revocable Trust

• Purposes:– Management of assets during life

– Avoidance of probate process on death

• Grantor(s): Can be an individual trust or a joint trust created with spouse

• Advantages: – Can provide management of assets during incapacity

– Avoid the need for probate entirely. NOTE: It is imperative that all assets be titled correctly!

– RTA's are private documents and generally not a matter of public record

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Generic Revocable Trust

• Disadvantages– Does not provide creditor protection during

grantor's lifetime

– Creditor claim period is full 1 year following grantor's death

– Work on the front end to properly retitle and maintain assets in name of RTA

– Probate may still necessary if assets not properly titled

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Tenancy by Entirety Trust

• Purposes: – Management of assets during life


– Provided creditor protection for tenancy by the entirety (TBE) property

• Grantors: Must be created by a husband and wife

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• Creditor Protection Issue– Creditor's may only attach to survivorship interest

on tenancy by entirety property • Results in "wait and see"

– Transferring assets out of TBE status and into individual Revocable Trusts or Joint Revocable Trust severs the creditor protection

– Solution …

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• Tenancy by Entirety Trust– Implemented in Tennessee in 2014

– Assets transferred to TBE Trust maintain creditor protection typically extended to TBE property

• Advantages:– Same as for Generic Revocable Trust

– Maintains creditor protection enjoyed by husband and wife in TBE property

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• Disadvantages:– Same as for Generic Revocable Trust

– No full basis step up like TN Community Property Trust

• Important Requirement– Only TBE property may be transferred to TBE Trust.

As such, either: • Hold property as TBE first, then transfer to trust

• Put TBE cash into trust and let it purchase assets

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Tennessee Community Property Trust

• Purposes: – Management of assets during life


– Provide full basis step up in assets held in trust on death of first grantor to die

• Grantors: Must be created by a husband and wife

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• Step-up in Basis Issue– With regular Generic Joint RTA, only ½ of the assets

receive a step-up in basis at the death of the first spouse to die. Other ½ receive a step-up at the death of the second spouse to die

– Solution …

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• Tennessee Community Property Trust– When drafted properly, anticipated that all of the

assets receive a full step-up in basis at each death – acceptance by IRS unclear

– Must have qualified trustee (resident TN or company licensed to act as fiduciary therein)

– Does not maintain TBE creditor protection

– Suited best for low basis real estate, stocks, or similar assets where creditor protection is not necessary

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• Advantages:– Same as for Generic Revocable Trust

– Anticipates a full basis step up on death of first spouse to die

• Disadvantages:– Same as for Generic Revocable Trust

– No enhanced creditor protection like TBE Trust

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Irrevocable Creditor Protection Trusts

• LLC versus Trust• Tennessee Investment Services Trust• Irrevocable Dynasty Trusts• Life Insurance Trusts• Spousal Lifetime Access Trust

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Creditor Protection from LLC

• Bomb containment unit

• Price for Protection:

- Franchise tax of 0.25% of the greater of net worth or real and tangible property in

TN. The minimum tax is $100.

- Excise tax of 6.5% of Tennessee taxable income

Liability

External Assets

External Assets

Exte

rnal A

ssetsExt

ern

al A

ssets

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Creditor Protection from Trusts

• Bomb shelter

• No Franchise or Excise Tax:

- Exception Business Trust

• Added Benefit: Also serves as bomb containment unit (like an LLC)

$$$$$$$$$$$$$$$$$$

Trust Assets$$$$$$$$$$$$$$$

$$$

Liability

Liability

Lia

bility

Lia

bilit

y

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Which Trusts give Protection?

• NOT Revocable Trusts – Exception: TBE Trusts

• Irrevocable Trusts– Tennessee Investment Services Trust

– Irrevocable Dynasty Trusts

– Life Insurance Trusts

– Spousal Lifetime Access Trusts

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Tennessee Investment Services Trusts ("TIST")

(a.k.a. Asset Protection Trusts)

• AGAINST THE NORM: Typically, self-settled trusts do not result in creditor protection. TISTs are the exception to the rule.

• Basics

The Tennessee Investment Services Act of 2007 allows a person to transfer assets to an irrevocable trust which, if the trust complies with the provisions of the Act, will both:

• Allow for distributions to be made to the transferor;

and

• Protect the trust assets from the claims of the transferor's creditors after a 2 year period.

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• Important Considerations– Appointment of a "qualified trustee"

• Best to be a non-subordinate and non-related party. Must be a resident of Tennessee or an entity subject to supervision by the TN Department of Financial Institutions.

– The Trustee must arrange for custody in Tennessee of some or all of the trust assets and must materially participate in the administration of the trust.

– Typically, these trusts are not designed to remove assets from an individual's estate; rather they are for creditor protection purposes only.

– Generally set up as "full discretion" trusts (i.e. trustee may make distributions as he sees fit).

– We recommend these trusts be viewed as a vehicle for protection of "rainy day" assets for clients with high risk professions or funds that can be set aside for such a time.

Tennessee Asset Protection Trusts

Tennessee Investment Services Trusts ("TIST")

(a.k.a. Asset Protection Trusts)

Basic TIST Formation Diagram

Qualified Affidavit

InvestmentServices

Trust(Protection after 2 years)

QualifiedTrustee

Trust Investment

Advisor

Income/Principal to Grantor for Life. Roll to lifetime trusts for spouse/kids after death

(continuity of creditor protection).

Due Diligence Inquiry

Transferor

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• Basics– Create irrevocable trusts for each child (or

desired beneficiary). Each trust will provide for the benefit of the named individual therein.

– Funded either through annual exclusion gifts (requires a Crummey Power) or through lifetime use of Unified Credit.

– Multi-generation dynasty trusts: Variation that provides the benefits of an irrevocable trust across multiple generations.

Irrevocable Dynasty Trusts

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• Advantages– Removes value of the gifted assets and any appreciation on

the gifted assets from the donor's taxable estate.

– Provides creditor protection for the beneficiary of the trust while simultaneously providing for his benefit.

• Disadvantages– Loss of step-up in basis on gifted assets (but see trust

protector provision)

– Donor must give up control of gifted assets.

– Time/expense of trust administration.

Irrevocable Dynasty Trusts

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Life Insurance Trusts ("ILIT")

• Basics– Irrevocable Trust is the owner and beneficiary of a life

insurance policy on the client's life. – Client will contribute to trust at least annually.

Contributions typically will be covered by the annual exclusion of $14,000 per year per beneficiary (requires a Crummey Power).

– Contributions are in turn used to pay the premiums on the life insurance policy.

– Upon the client's death, the proceeds of the policy pay into the trust and are distributed according to the trust's terms.

– Consider second-to-die policy (cheaper premiums but spouse preferably not named as trustee).

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Life Insurance Trusts ("ILIT")

• Advantages (of a Proper ILIT)– Death benefit of the life insurance policy is excluded

from donor's taxable estate.– If properly handled on the front end, death benefit is

GST Exempt as well.– May roll ILIT proceeds over into an Irrevocable Trust (or

Dynasty Trust). – Creditor protection is in place from beginning

• Disadvantages– Donor must give up control of gifted assets.

– Time/expense of trust administration

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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).

– New Development. Spouse may also have a limited power of appointment . This power may be exercised to leave assets to grantor spouse in QTIP Trust.

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• Irrevocable Trust for the Benefit of Spouse– Funding: With annual exclusion gifts (requires Crummey

Power) or large unified credit gift.

– 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 for health, education, maintenance and support.

– Spouse's death: At spouse's death, the assets remaining in the trust may pass to your desired beneficiaries (children, etc.) w/o 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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• Advantages– Assets gifted to SLAT and any appreciation on

such assets are removed from donor's taxable estate and spouse's taxable estate.

– Creditor protection for spouse while simultaneously providing for the spouse's benefit.

– Creditor protection for donor in that the assets no longer belong to him but he indirectly benefits from them since the SLAT is set up to benefit the spouse.

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• Disadvantages– Control and Benefit Issues

• Donor loses direct control and direct benefit of the assets during life. The only indirect control retained is through the spouse.

• In the event of a divorce or separation, assets belong to the spouse!

– If both spouses wish to execute SLATs for each other, the reciprocal trust doctrine may cause issues.

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Case Study #1

• Single person with less than $1 million in assets– Last Will Plan

• Consider POD/Beneficiary Designations

• Consider Trust for Beneficiaries

• Plan for Muniment of Title

– Revocable Trust Plan• Property in Multiple States?

• Need/Desire for Privacy?

• Client wants to plan to avoid probate of any kind?

• (Last Will v. Revocable Trust);• #2 – Married couple, less than $5 million

with no highly-appreciated assets (Last Will v. TBE Trust, and Marital Trust v. Outright Gift to spouse, and lifetime trust for children);

• #3 – Married couple, more than $10 million – make this the case study with all of the pieces in it. My concern is that this type of case study is going to be overwhelming for laymen (laywomen).

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Case Study #2

• Married couple with more than $1 million but less than $5 million in assets (with no highly-appreciated assets)

– Last Will versus TBE Trust

– Marital Trust versus Outright Gift to Spouse

– Lifetime Trust for Children • Especially useful if minor children are involved

• If don’t desire lifetime, consider Trustee’s discretion as to termination date

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Case Study #3

• Married couple with more than $10 million in assets – Question 1: Trust Plan or Last Will Plan?

• Probate Issue

• Privacy Issue

– Question 2: If Trust Plan, which type? • TBE Trust

• Community Property Trust

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Case Study #3

– Question 3: Irrevocable Trust Component? • ILIT

• APT

• SLAT

• Dynasty Trust

– Question 4: Post-Death Considerations• Make sure to file a timely Form 706 (portability)

• At first death, make sure remaining spouse’s plan still leads to most favorable result

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Gregory D. [email protected]

(423) 757-0224

Dana B. [email protected]

(423) 757-0228

Leah M. [email protected]

(423) 757-0294

Ryan [email protected]

(423) 757-0247

Questions?

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Greg Willett

• Greg focuses his practice on estate planning, probate and estate administration, and taxation

– Chattanooga Estate Planning Council

– Chattanooga Tax Practitioners

– Best Lawyers in America, Trusts and Estates

– Martindale-Hubbell® AV® Preeminent™ Peer Review Rated

– Southern Adventist University, past member Board of Trustees

– Southern Adventist University School of Business and Management, former Adjunct Faculty

– Chattanooga State Community College, Paralegal Advisory Committee, past Member

– 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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Dana Perry

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

• 25+ years experience in the field

• Certified as an Elder Law Specialist (CELA) by the Tennessee Commission on Continuing Legal Education and Specialization

• Licensed to practice in Tennessee and Georgia

• Accredited Attorney, Department of Veterans Affairs

• The Best Lawyers in America (Elder Law & Trusts and Estates); Mid-South Super Lawyers (Estate Planning and Probate; Elder Law)

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Leah McElmoyl

• Leah McElmoyl is a member of the firm's business and estate planning groups.

– Senior Editor of the Alabama Law Review

– Licensed to practice in Tennessee and Alabama

– Member of the Chattanooga Tax Practitioners

• Leah received her BS in Agricultural Business and Economics from Auburn University, and her law degree from The University of Alabama School of Law.

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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

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.

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Chambliss 2014 Estate Planning Seminar.pptx

Presentations & Public Speaking

Transcript of Chambliss 2014 Estate Planning Seminar.pptx