SESSION ONE – ESTATE PLANNING NOTES

SESSION 1 – Topics: Revocable Living Trust including Sub-Trusts for the Marital Deduction and for the Estate Tax Exemption – including Generation Skipping Sub-Trusts for the Children and Grandchildren- Discuss the Estate Tax in general and the basic concepts to reduce its impact.

• Estate Tax in General –

1. Formula – 40% of the Fair Market Value of all assets of a decedent above the Federal Estate Tax Exemption.
2. What’s included in the calculation – everything – real and personal property – tangible and intangible property – life insurance proceeds –
3. Reported on Form 706 by the estate 9 months after the death of the decedent.
4. Federal Estate Tax exemption is currently $12,060,000 per decedent, so $24,120,000 for a married couple. Indexed for inflation. Always subject to change by Congress.
   1. Can be used during lifetime on a Gift Tax Return (Form 709) by making lifetime transfers.
   2. Any remaining Exemption at death is used on an Estate Tax Return. (Form 706)
5. Annual Exclusion Gifts- Gifts made annually to any Donee valued at $16,000 or less does not use any of the Estate Tax Exemption.

• Common Strategies used to Save on Estate Taxes –

1. Marital Deduction – any assets passing from a decedent to a surviving spouse qualifies for a Marital Deduction which allows all Estate Tax to be postponed until both spouses are deceased.
   1. The Marital Deduction can be used with respects to certain transfers in trust for the benefit of the spouse. Does not need to be an outright gift or transfer.
   2. Appreciation in value of the assets in the hands of the surviving spouse are also subject to Estate Taxes at the death of the spouse.
   3. Not a reduction in tax tool – it is a deferral of tax tool.

1. Removing Appreciation in value of assets out of the estate (using your Exemption while you are alive rather than saving it for death).
   1. Better to give assets away now at their low values rather than retain them until death and have them taxed at the appreciated value.
   2. The key is looking for ways to remove assets from the estate now, but yet retaining an economic benefit over the assets.
   3. Accomplished by making lifetime gifts now, using your Exemption, and placing them into a Trust where family members still enjoy an economic benefit over the assets, yet the assets will not be included in either the donor spouse’s estate or the donee spouse’s estate.
   4. If you use your Exemption while you are alive, Congress cannot take it away if the law is subsequently changed.

1. Looking for ways to “leverage” (bargain shop) your Exemption during life. In other words, look for ways to spend a $1 of exemption, but remove $1.50 from the estate.
   1. Leverage can be achieved by taking advantage of discounts in a Family Limited Partnership
   2. Leverage can also be achieved by using “split interest trusts” where the client retains an interest in the trust and only uses gift exemption on the present value of the remainder interest.

1. Look for ways to make gifts to family members creditor protected. Two factors must be present to create creditor protection:
   1. First the trust must become Irrevocable at some point.
   2. Second, the trust cannot be created for yourself. Must be created by you for the benefit of someone else.

1. The Revocable ABC Trust accomplishes the goals above –

1. Characteristics while both spouses are alive:
   1. Trust remains fully revocable and amendable
   2. No need to file a separate income tax return
   3. No annual reporting or recording fees.
   4. No tax consequences to move assets into the trust or out of the trust.
   5. Property transferred to the trust retains its character as community property or sole and separate property.
   6. Both spouses are the Trustors (the creators of the trust) and the Trustees (the managers of the trust)

1. Characteristics at the death of the first spouse – one spouse is still alive. No estate taxes no matter how large the estate is.
   1. Trust splits into three separate sub-trusts to achieve the objectives outlined above.
   2. A Trust – stands for “Alive”- this represents the surviving spouse’s community property half of the trust – remains a revocable trust. No estate taxes on this trust until the death of the surviving spouse. This is her community half and is not taxed until her death.
   3. B Trust – stands for “Buried”- this represents the deceased spouse of community property, not to exceed the Federal exemption amount (currently $11,700,000) This Trust is Irrevocable. This trust is subject to estate taxes now, but the taxes are zero and “sheltered” by the deceased spouse estate tax exemption.
   4. C Trust – This is the ‘overflow trust” and represents the deceased spouse half of the community property above the estate tax exemption amount. This trust only comes into existence if the combined estates of both spouses exceed $23m (two estate tax exemptions). This trust is irrevocable and qualifies for the marital deduction. All estate taxes are postponed until the death of the surviving spouse.
   5. The surviving spouse can be the trustee over all three trusts. But it is very common for the spouse to want a co-trustee to serve.
   6. All community property assets receive a new stepped-up cost basis at the death of the first spouse regardless of which trust the assets are allocated to.

1. Characteristics of an A Trust – the Survivor’s Trust –

1. Revocable.
2. Spouse is entitled to all income and principle.
3. Spouse can name any remainder beneficiary in the world to inherit.
4. Subject to estate taxes when the survivor dies. (but get use of survivor’s $11m exemption).
5. All assets receive a stepped-up cost basis when spouse dies.

1. Characteristics of a B Trust – the Decedent’s Trust or the “Credit Shelter Trust” –

1. Irrevocable.
2. Spouse may have flexible access to income or principle or could be restricted access.
3. Spouse can be the Trustee but may want a Co-Trustee.
4. At Spouse’s death, could have the Power to Appoint (name beneficiaries) to anyone in the world, or could be restricted to only descendants, spouses of descendants or charities.
5. Subject to estate tax when first spouse dies – as such, not subject to estate tax again when the second spouse dies.
6. Receives a stepped-up cost basis at the death of the first spouse but does not receive a 2nd step up in basis when the surviving spouse dies.
7. Could be created as a “stand alone trust” instead of a “sub-trust” – if created as a “stand alone trust”, can be funded during lifetime using one spouse’s gift exemption. Any gift exemption used during life reduces the estate exemption at death. But using the gift exemption now:
   1. Makes is so Congress cannot take it away.
   2. Plus, all of the future appreciation of the assets during the lifetime of the surviving spouse also escapes estate taxes.

1. Characteristics of a C Trust – This is the overflow trust, funded with the deceased spouse’s community property half in excess of the estate exemption amount funded into the B trust.

1. Irrevocable.
2. Spouse receives all income for life. Cannot be restricted.
3. Spouse can also receive flexible invasion of principal rights, or the rights could be limited or restricted.
4. Spouse can be the Trustee but may want a C-Trustee.
5. At Spouse’s death, could have the Power to Appoint (name beneficiaries) to anyone in the world, or could be restricted to only descendants, spouses of descendants or charities.
6. Subject to estate taxes when the Surviving Spouse dies but receive the benefit of the Surviving Spouse’s $11m exemption amount.
7. Receives another stepped up cost basis at Surviving Spouse’s death.