ESTATE TREK: THE NEXT GENERATION OF OUR ESTATEVIEW PLANNING SOFTWARE

Wednesday, May 22, 20135:00 p.m.

Alan S. Gassman, Esq.agassman@gassmanpa.com

Kenneth J. Crotty, Esq.ken@gassmanpa.com

Copyright © 2013 Gassman Law Associates, P.A.

To download the software please email agassman@gassmanpa.com or visit:http://goo.gl/xjKK8

Christopher J. Denicolo, Esq.christopher@gassmanpa.com

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SCENARIO: SAMPLE DATAVisualization over 20 Year Time Span

Harland Sanders Life Expectancy is 9.2 YearsClaudia Sanders Life Expectancy is 19 Years

Today

Upon 1st

Death(in Year 10)

GIFTING TRUST(S)Value$0

Annual Gifts

$56,000 (adj for inflation)

Annual Growth Rate

10.98% less 15% fees

ILIT - HARLAND      

Death Benefit

$100,000

Annual Premium

$5,000

ILIT - CLAUDIA      

Death Benefit

$100,000

Annual Premium

$5,000

HAROLD AND CLAUDIA SANDERSResidence     Investments

$750,000     $6,500,000

Annual Growth Annual Additions Annual Growth Rate

Rate 3.03% $50,000 10.98%less 15% fees

ILIT - SURVIVORSHIP      

Death Benefit

$100,000

Annual Premium

$5,000

CLAUDIA SANDERSResidence     Investments

$850,000     $4,000,000

Annual Growth Annual Additions Annual Growth Rate

Rate 3.03% $50,000 10.98%less 15% fees

BY PASS TRUSTInitial funding upon

first death - $3,500,000

      

Annual Growth Rate

10.98% less 15% fees

GIFTING TRUST(S)Value

$914,316 Annual Gifts

$28,000 (adj for inflation)

Annual Growth Rate

10.98% less 15% fees

ILIT - HARLAND      

Death Benefit

$100,000

Annual Growth Rate

10.98% less 15% fees

ILIT - CLAUDIA      

Death Benefit

$100,000

Annual Premium

$5,000

ILIT - SURVIVORSHIP      

Death Benefit

$100,000

Annual Premium

$5,000

Upon 2nd Death(in Year 25)

CLAUDIA'S ESTATEResidence Investments Exclusion/Portability

$850,000 $16,000,000 ($10,000,000)

Net Taxable Estate: $6,850,000

TOTAL PASSED TO BENEFICIARIES      Claudia's Trust $4,110,000  Bypass Trust $6,589,000  Gifting Trust $2,356,246  ILIT - Harland $230,000  ILIT - Claudia $100,000  ILIT - Survivorship $100,000     TOTAL:   $13,485,246      

ESTATE TAX$2,740,000

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MULTI-DIMENSIONAL FEDERAL ESTATE TAX AND ESTATE PLANNING CLIENT PROJECTION, ILLUSTRATION, AND EXPLANATION SYSTEM

PRESENTED BY BOB E. SMITH

SMITH LAW ASSOCIATES, ATTORNEYS AT LAW

TABLE OF CONTENTS FOR CLIENT ILLUSTRATION MEMORANDUM DRAFTING SYSTEM

MODULE 1 - NO PLANNING. ALL ASSETS DIRECTLY TO SURVIVING SPOUSE.MODULE 2 - USE OF A BYPASS TRUST.MODULE 3 - USE OF ANNUAL GIFTING WITHIN $14,000 PER YEAR, PER PERSON EXCLUSION.MODULE 4 - USE OF ANNUAL GIFTING PLUS A REPORTABLE GIFTING EXCEEDING $14,000 PER PERSON, PER YEAR IN ONE SELECTED YEAR BY ONE OR BOTH SPOUSES.

Prepared for Review by Harland Sanders and Claudia Sanders.

NOTE: This explanation and attached projections are in rough draft form, and have not been tailored to the individual situation of the clients. They are provided for illustration purposes only, and do not constitute a complete or necessarily accurate depiction of the present or expected future situation. We nevertheless believe this explanation and the attached explanatory charts are useful to facilitate an understanding of the estate tax system and how it can affect Harland and Claudia's family.

INTRODUCTION TO FEDERAL ESTATE TAX SYSTEM

Presently there is a federal estate tax imposed on the death of an individual, to the extent that assets left at death do not qualify for the federal estate tax marital or charitable deductions. Assets that are gifted away during an individual's lifetime are not subject to federal estate tax.

The present federal estate tax allowance is $5,250,000. This allowance will be increased annually in proportion to increases in the Consumer Price Index, in increments of $10,000. However, the allowance will be reduced to the extent of gifts that exceed or do not qualify for the $14,000 per year, per donee gift tax exclusion.

SAMPLE PROGRAM GENERATED EXPLANATION MEMO

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This illustration demonstrates how assets may be held after the death of one spouse for the benefit of the surviving spouse in a Bypass Trust that can make use of the first dying spouse's $5,250,000 (and growing) allowance to shield assets from federal estate tax on the surviving spouse's death.

ILLUSTRATION 1 - NO PLANNING

Across the top of the page, we show Harland and Claudia having a residence worth $750,000 and investments worth $5,000,000 , with expected growth at 3.03% per year for the residence and a net growth of 9.48% for investments ( 10.98% - 1.5% in expenses).

We also assume that during Harland and Claudia's joint lifetimes, they could add $50,000 per year (increased annually with inflation) to their investment assets, and then after one spouse dies, the surviving spouse will withdraw $150,000 from their investment assets.

This first illustration assumes no use of annual gifting, nor of life insurance trusts. Life insurance is therefore shown to be subject to federal estate tax on the second death.

On the top right hand side of the chart, we show the primary categories of trusts that can be used for gifting assets to avoid estate tax.

The first is a Gifting Trust that can receive annual gifts based upon $14,000 per year, per beneficiary, or more with the use of discounts (more on this later).

To the right of the gifting trust, we are showing a life insurance trust that could own life insurance on Harland's life and could pass estate tax free to his surviving heirs, with the yearly premiums worth the cash value of the policy to be considered as gifts.

To the right of that, we show a life insurance trust that could own life insurance on Claudia's life and then another life insurance trust that could hold a survivorship or "second to die" policy that does not pay a benefit until the death of both Harland and Claudia.

In the second row, we show all assets to the surviving spouse, or into trusts that are considered as owned by the surviving spouse, and are thus subject to federal estate tax on the second death.

SAMPLE PROGRAM GENERATED EXPLANATION MEMO

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Many couples will allow this to occur, and there is an estate tax portability allowance which enables the surviving spouse to use both his or her $5,250,000 (minus prior taxable gifting) allowance, plus CPI increases to such allowance, plus whatever the first dying spouse had remaining of his or her estate tax exemption that was not used on his or her death.

It is important to note that the portability allowance does not increase with inflation. Further, the portability allowance may be lost or reduced in the event of a second marriage, if the surviving spouse remarries to someone with a smaller or no estate tax exemption, and the new spouse is the first to die.

For purposes of this illustration, we are showing that the surviving spouse will therefore have a total exemption of $10,500,000 ( $5,250,000 + $5,250,000 , with $ of that growing at our estimated Consumer Price Index increase of 2.96% per year).

This illustration also provides values after the first death, and after 25 years of growth, the gifting trust will be worth $3,159,622, the life insurance trust will be worth $2,195,634, and the $ will be worth $ , for a total of $ .

We then show Claudia dying 15 years later ( 25 years from now), and having $25,532,720 worth of assets subject to federal estate tax on the bottom left hand side.

The total estate taxable assets of $25,532,720 minus the allowance of $10,500,000 leaves $15,032,720 subject to federal estate tax. Assuming a 40% estate tax rate, the estate tax would be $6,013,088 , and is normally owed 9 months after the surviving spouse's date of death, although payment plans can currently be obtained for large closely held businesses or actively managed real estate situations.

ILLUSTRATION 2- BYPASS TRUST

On page 2 of the illustrations, we show the funding of a Bypass Trust on the first death. In this illustration, the surviving spouse's estate tax exclusion is used to the extent of $4,000,000 by the funding of the Bypass Trust shown in the second column, on Harland's death in 2023.

Harland's remaining $1,250,000 of exemption becomes available to Claudia under the portability rules, as shown on the bottom left hand side.

SAMPLE PROGRAM GENERATED EXPLANATION MEMO

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Under this scenario, the Bypass Trust grows to $9,326,690, based upon the 9.48% net rate of return assumption, and will not be subject to federal estate tax on the second death.

This saves $3,730,676 in federal estate tax, and if Claudia were to remarry and her new husband died before her, making full use of his estate tax exemption, the loss of the portability allowance would cost the family another $500,000 in federal estate tax. This scenario can be avoided by making use of $1,250,000 of Harland's estate tax exemption on his death.

ILLUSTRATION 3- ANNUAL GIFTING

In addition to the use of the Bypass Trust described above, we show the use of annual gifting on page 3, based upon Harland and Claudia transferring $14,000 per child, per year. This amount includes our projections of the increases in annual gifting that will be in accordance with increases in the CPI. Annual gifting is also evaluated on an annual basis, and increases are in increments of $1,000.

The combined savings from the annual gifting for both Harland and Claudia is $852,352, as shown at the bottom left hand side.

In the middle right, we see that the gift trust will have $_________ worth of assets that will pass estate tax free on the second death.

ILLUSTRATION 4- EXCESS GIFTING

Here we are showing an additional $2,500,000 that could be gifted to the gift trust this year, which would use $2,500,000 of Harland's allowance.

This gift would generate additional estate tax savings of $1,800,000, as shown on Illustration 4, because the growth on the $2,500,000 excess gift escapes federal estate tax.

SAMPLE PROGRAM GENERATED EXPLANATION MEMO

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ILLUSTRATION 5- Discounted Gifting

The gifting illustration described on page 5 assumes that gifting will be cash or assets that have no discount future. It is possible that valuation discounts can apply when certain ownership interests are transferred. For example, 10% of a company or limited partnership holding $1,000,000 worth of assets may be worth significantly less than $100,000 when valuation discounts are taken into consideration.

In Illustration 5, we are assuming that discounts of 35% of value can apply. For example, if Harland and Claudia were to place $1,000,000 worth of assets into a family limited liability company or limited partnership and gift a 10% interest, then this would transfer $153,846 worth of assets out of their estates for estate tax purposes.

The savings from the discount feature, based upon $56,000 a year of gifting while Harland and Claudia are both alive, and then $28,000 per year of gifting during Claudia's remaining lifetime. (TBD)

ILLUSTRATION 6- LIFE INSURANCE TRUST

Illustration 6 shows the use of a life insurance trust, with $1,000,000 in life insurance on Harland's life held in an irrevocable life insurance trust to benefit Claudia and the children without being subject to federal estate tax on Claudia's subsequent death.

The transfer of $125,000 in cash value, plus $75,000 a year of premiums into the life insurance trust are gifts which use Harland's allowance. Since Claudia is a beneficiary of this trust, it can be important that she not contribute monies to it.

Please note that this strategy may or may not save estate taxes, depending on whether Harland dies before or after his life expectancy, and what rate of growth may be expected on monies that would otherwise be placed under the gift trust and invested in assets that might outperform a life insurance policy.

SAMPLE PROGRAM GENERATED EXPLANATION MEMO