Estate Planning - World Banksiteresources.worldbank.org/1818SOCIETY/Resources/2015_estate_tax... ·...

Estate Planning Deborah Cohn, Esq.

Paley Rothman 4800 Hampden Lane, 6th Floor

Bethesda, MD 20814 301-656-7603

www.paleyrothman.com

1818 Society - January 20, 2015

http://www.paleyrothman.com/

•Preservation of assets in case of incapacity; •Assuring that your property passes to the people or institutions you choose after your death; •Establishing the timing for the distribution of property after your death; •Appointing the right people to handle your estate, liquidate your trust, take care of minor children; •Naming people you trust to make financial and/or medical decisions for you if you become incapacitated; •Eliminating, minimizing, or deferring estate taxes; •Minimizing the cost of estate administration.

What are the Objectives of Estate Planning?

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•Last Will and Testament (requires Probate) •Revocable Trust (no Probate) •Durable Financial Power of Attorney (avoids Guardianship) •Advance Medical Directives

Durable Health Care Power of Attorney (avoids Guardianship)

Living Will HIPAA Medical Records Release

Estate Planning Documents


Requires Probate Avoids Probate

•Will •Intestacy •Beneficiary designation “To my Estate”

•Trusts •Joint Ownership •Beneficiary designations naming Individuals or charities

What Triggers Probate?

•Court Supervision of Executor

•Requires inventories and accountings

•Requires notification to creditors

•May Involve Additional Expenses and Delays

•Will Becomes Public Record; Publicity May Be

Undesirable

The State court process by which a Will is proven valid;

assets of a decedent are marshaled; debts are paid;

creditors are notified; and ultimately assets are distributed

to heirs or beneficiaries.

What does Probate Involve?


Assets Subject to Probate

•Certain separately owned assets •Excludes assets passing by beneficiary designation •Excludes jointly owned assets with right of survivorship (including tenants by entirety assets) •Includes decedent’s share of tenant in common assets


•State statutes govern asset distribution •No tax planning; Higher administration expenses (primarily bonding) •No choice in appointment of fiduciaries •Highest risk of property going to the State •Risk that heir locator service identifies unknown possible heirs

Pitfalls of Intestacy


Planning for a Small Estate

•“The cost of arranging my financial affairs seems too expensive. Are there simple solutions?” •Consider a “do it yourself” will from the internet? •Consider greater reliance on joint property with a spouse and beneficiary designations?

• Payable on death or transfer on death accounts • “In trust for” accounts – UTMA accounts • Joint accounts with children introduce complexities

•“Simple solutions” have drawbacks


Revocable Trust – Will Alternative

•Revocable trust can minimize assets passing through probate •Probate type assets transferred to revocable trust during life do not pass through probate •Revocable trust and will can each include similar tax savings provisions


Will/Revocable Trust Comparison

•Both achieve tax planning •State law determines whether administration processes are similar or different and whether probate or revocable trusts are preferable - VA, MD, DC, FL? •Trust involves filing fewer papers with court •Pacing of administration may differ slightly •Both can require filing tax returns – the major driver of administration expenses


•Revocable Trust Minimizes Probate (probate fees)

•No Court Supervision – may/may not be a benefit

•Assures Confidentiality

•Avoids Court Guardianship

•Avoids Out of State Probate

•As with Will, Can Minimize Administration Expenses

•As with Will, Can Minimize Taxes if Properly Designed

•Good Asset Management Vehicle

Benefits of Revocable Trust

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What is a Revocable Trust?

•Written agreement or declaration between a grantor and a

trustee whereby property is transferred to a trustee for the

benefit of a beneficiary

•Has three players: grantor, beneficiary, trustee

•Key concept: separates legal title from beneficial interest

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Trustee

Grantor Beneficiary

SINGLE

TRUST

Assets

Revocable Trust/Living Trust Diagrams

Separate Trust

Husband + Wife

Husband Husband +

Wife

Wife

Husband Assets

Wife + Husband

Wife Wife +

Husband

Husband

Wife

Revocable Trust/Living Trust Diagrams

A. During Life

Grantor = Trustee = Beneficiary

B. In Case of Incapacity

Successor trustee manages assets for the benefit of the incapacitated grantor (works like Power of Attorney)

C. Upon death Successor trustee pays debts and taxes & distributes assets held in the trust to the beneficiaries named in the trust without court probate (works like a Will)

Joe

Joe Joe $

Jane

Joe Joe

$

Jane

Joe Jane

$

Three Uses for Revocable Trust

•Investment Accounts

•Bank accounts; money market accounts/ certificates of

deposit (once matured)

•Real Property

•Life Insurance

•Tangible Personal Property (art, car, furniture, jewelry)

•Promissory notes

•Entity interests (LLCs, partnerships)

What Can Be Transferred to Trust?


•Intestacy

•Wills

•Revocable trusts

•Joint ownership (with survivorship feature)

•Beneficiary designations

Asset Distribution Techniques


Estate & Gift Taxes


•Estate Tax: IRS imposes a tax on transfers at death of non-exempt assets exceeding the applicable exemption, regardless of how transfer takes place. •Gift Tax: IRS imposes a tax on lifetime gifts exceeding annual exlusion.

What are Estate Taxes and Gift Taxes?


•Taxed on worldwide assets but large exemption •Federal estate tax exemption is $5,430,000 in 2015 •Exemption increases annually for inflation •Tax rate on excess: 40%

Increased Estate Tax Exemption

for Citizens and Residents

Estate Tax on Non-Resident

•Taxed only on US situs assets (explained later), but ….

•Only $60,000 exemption

State Estate Taxes

•Varies state by state

•Virginia: no state estate tax

•Maryland: increasing gradually to federal exemption in 2019

•2015 $1,500,000

•DC: Currently, $1,000,000 exemption Future increases

depend on DC revenue

Portability of Federal Exemption

•What is “portability”: Preservation of first spouse’s unused federal exemption for surviving spouse •Allows increased emphasis on capital gains tax planning (basis adjustment available for many assets when passing through estate) •Reduces need to move assets between spouses – less need for predeceasing spouse to take optimum advantage of estate tax exemption

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Portability on State Level

•Maryland exemption becomes portable in 2019 •DC exemption – depends on future law •Without portability, the predeceasing spouse’s exemption is lost if not used

Gift Tax Exclusion

•$14,000 annual exclusion per recipient (other than spouse) •Married couples (US citizens or permanent residents) can “gift split”: one spouse gives up to $28,000 to recipient, sheltering gift using annual exclusions of both spouses •Unlimited gifts to US citizen spouse – status of recipient controls •Expanded annual exclusion for gifts to non-citizen spouse --$147,000 in 2015; increased annually for inflation

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Lifetime Gift Tax Exemption

•For US citizen or permanent resident: taxable gifts up to lifetime cumulative total of $5,430,000 (increased for inflation) can be protected from gift tax •Use of gift tax exemption during life reduces dollar for dollar estate tax exemption available to estate •Unified federal gift/estate tax system •Watch basis adjustments •Most states – no gift tax; big planning opportunity

•For U. S. citizens and U. S. Residents all worldwide assets, less debts and expenses including:

• Personal property, bank accounts, brokerage accounts, investments, real estate, life insurance, present value of survivor annuities, pension and retirement assets

•For non-Residents all U.S. assets, excluding:

• U.S. Bank accounts • Life insurance proceeds • World Bank Pension

What is your Taxable Estate?

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•Domicile Test: physical presence and intent to remain in the US •Many G-IV visa holders are non-residents for income tax purposes but residents for estate tax purposes!! •Domicile depends upon intent – facts and circumstances

Are You a Resident or a Non-Resident?

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• Length of stay in US vs. other countries

•Location of residence and other assets

•Status of other family members

•Integration into US society

•Motivation

•Retirement plans

•Estate plan

•Immigration status

•Cemetery plots!

Domicile Facts and Circumstances


Traditional Estate Tax Strategy

•Traditional goal: maximize use of first spouse’s state and federal estate tax exemptions •Pass assets equal to exemption to non-marital deduction trust for surviving spouse •Key: do not use marital deduction for these assets

Marital deduction Non-marital deduction Image courtesy of Keerati at FreeDigitalPhotos.net

Estate

Look at status of surviving spouse (not decedent’s status)!

U.S. Citizen •Unlimited marital deduction delays tax until death of surviving spouse. •Avoid marital deduction trap; use non-marital deduction trust (bypass trust).

Non-U.S. Citizen •No marital deduction allowed, estate tax due within 9 months of deceased spouse’s death, unless assets are transferred to Qualified Domestic Trust.

Marital Deduction

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Non-Marital Deduction Trust

•Trust for spouse (or others); does not rely on estate tax marital deduction •Trust assets “bypass” surviving spouse’s taxable estate •Not taxed in first spouse’s estate due to estate tax exemption •Not taxed in survivor’s estate – not owned by spouse •No income tax basis adjustment in survivor’s estate

Marital Deduction QTIP Trust

•Trust for US citizen spouse relying on marital deduction •Not taxed in first spouse’s estate - unlimited marital deduction •Included in survivor’s estate •Gets basis adjustment in both estates •Better capital gains tax results for children

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QDOT Marital Deduction Trust

•Trust for non-citizen spouse using quasi-marital deduction •Only quasi-marital deduction until spouse becomes US citizen •Income distributions create no estate tax •Principal distributions create estate tax; apply first spouse’s “ported” unused exemption to shelter distributions from tax •Gives spouse time to become US citizen; then disband QDOT features (technical requirements)

Current Planning

•With larger federal estate tax exemption and high income tax rates, may emphasize income tax planning •Seek second basis adjustment in survivor’s estate •Greater reliance on marital deduction if surviving spouse is, or can easily become, US citizen •Pass assets outright to spouse or to marital deduction trust for spouse – marital deduction may not be trap for unwary

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Marital QTIP Trust

•QTIP Trust creates flexibility •Spouse must get all income each year •Spouse is only trust beneficiary during lifetime •Discretionary distribution of principal •Key: Executor must make QTIP election on estate tax return to get marital deduction

QTIP Trust

•Executor can make partial QTIP election •“Elected” part of QTIP gets marital deduction and second basis adjustment •“Non-elected” part of QTIP uses estate tax exemption – only one basis adjustment •Maryland, not DC, allows inconsistent state/federal election to defer Maryland estate tax until survivor’s estate

Upshot

•Older estate plans • may no longer produce optimum tax results • may no longer achieve personal goals for family

•Review existing planning every five years or upon significant changes –

• divorce or death of spouse • marriage of children • birth of grandchildren • change in assets • change in health status

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What to Do Upon Death of Spouse

•Care for emotional needs first •No need to rush •Plan ahead - spouse will want some separate funds – funeral expense; living expenses •Contact attorney before taking financial action

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Estate Administration Takes Time

•Moving too quickly creates mistakes! •“Disclaimer” based plans have special risks •Create flexibility but….. •Disclaimer will not work as intended if spouse uses or takes control of assets to be disclaimed prior to making the disclaimer

Basic Parts of Administration

•Executor or trustee gets control of assets •Pay off creditors (including tax authority) •Appraise assets; prepare estate tax return, fiduciary return and final income tax return •Transfer title of assets controlled by fiduciary •Beneficiary designation assets – only beneficiary is involved •Jointly owned assets pass automatically to surviving joint owner (JTWROS or T/E assets) – but may want to disclaim part

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Questions?

Deborah Cohn

Principal, Paley Rothman

[email protected]

301-951-9341

www.paleyrothman.com

mailto:[email protected]

http://www.paleyrothman.com/

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