Monday, December 20, 2010 A Webinar by: Alan S. Gassman, J.D., LL.M. [email protected] Prepared...

Monday, December 20, 2010

A Webinar by:Alan S. Gassman, J.D., [email protected]

Prepared by Alan S. Gassman, J.D., LL.M., Kenneth J. Crotty, J.D., LL.M. and Christopher J. Denicolo, J.D., LL.M.

Copyright © 2010

mailto:[email protected]

Applies January 1, 2011 to December 31, 2012. Allows up to $5 million per person to pass

estate tax free. Lifetime gifting exemption raised to $5 million. The above items are to be adjusted for inflation

beginning in 2012! Estate tax scheduled to go back to 2001 $1

million gifting and death exemptions January 1, 2013!

Estate tax rates cut to 35%. Optional retroactivity for 2010 estates.

Copyright © 2010 Gassman, Bates & Associates, P.A. 2

The below terms of extension expire on December 31, 2012, at which time the exemption for death goes down to $1,000,000 and the estate tax rate goes back up to 55%, being the same terms as would have applied for January 1, 2011 had the new law not been enacted. It will take agreement between the House, the Senate and the President to override this.


People who die in 2011 and 2012 can pass up to $5,000,000 estate tax free. The $5,000,000 is reduced by any lifetime gifting (above the $13,000 per year per person level) from prior years. This goes back to $1,000,000 on January 1, 2013.

The estate tax rate has been reduced from 45% (in 2009) to 35% for people who die in 2011 and 2012. It goes back up to 55% for people who die in 2013.


Gifting of up to $13,000 per person per year still does not need to be reported or cause use of the lifetime gifting exemption. Discounts with respect to use of limited partnerships, LLCs, and other vehicles were not changed.


Since 2001, each person has had the ability to gift up to $1,000,000 during his or her lifetime, above and beyond the $13,000 per year per person allowance described above. Use of the $1,000,000 exemption causes a reduction in the amount that can pass estate tax free on a dollar for dollar basis.

The gifting exemption for 2011 and 2012 has been increased to $5,000,000! This is a remarkable change. This will allow many clients to shift income-producing assets to their children so that the children will be subject to income tax at lower rates than the parents would have. This may permit the children to gift the assets back to the parents if and when ever mutually agreed.

The parents may retain constructive control of the gifted assets by using limited partnerships, irrevocable trusts, and interrelated structures.

It may be possible to establish asset protection trusts which are outside of the estate of the donor, yet may be used for the benefit of the donor if there are hard times ahead. These will become popular and are not difficult to establish.


Under prior estate tax law, the first dying spouse had to establish a trust or pass the $3,500,000 worth of assets directly to children in order to preserve use of the first dying spouse’s allowance. Under the new law, a surviving spouse will apparently be able to use whatever portion of the allowance that was not used by the first dying spouse. For example, if the first dying spouse leaves $1,000,000 outright to the children and the rest to the surviving spouse, then depending upon circumstances the surviving spouse may be able to leave $9,000,000 without estate tax on the second death, assuming that this law continues after 2012.


People who died in 2010 can decide whether to be treated as if:

(a) There was a $5,000,000 exemption level, or

(b) There was no estate tax but they can only “step-up” the income tax basis of inherited assets by $1,300,000 (and possibly by another $3,000,000 as to assets passing to or in trust for a surviving spouse).

All taxpayers who died in 2010 are presumed to have selected the $5,000,000 estate tax system, unless they make an affirmative election otherwise under forms to be provided in the future by the IRS.

Clients who died in 2010 with estates below $5,000,000 need not do anything, and receive a “stepped-up income tax basis” on all assets that pass by death.


2009 2010 2011-2012 2013 and thereafter

Gifts that don’t count at all.

$13,000 $13,000 $13,000 (unless adjusted to $14,000)

$13,000 (unless adjusted to $14,000)

Educational and Medical

Unlimited Unlimited Unlimited Unlimited

Other Lifetime Gifts

$1,000,000 $1,000,000 $5,000,000 $1,000,000

Estate Tax Exemption

$3,500,000 (less what is used of

$1,000,000 exemption

above)

Unlimited (but income tax

stepped-up basis is limited for

large estates)

$5,000,000 (less portion of used lifetime gifting

exemption)

$1,000,000 (less portion of used

gifting exemption?)

Estate Tax Rate 45% 0% 35% 55%

Discounts and Installment Sales/GRAT’s, etc.

Available Available Available initially (at least, not

sure about rest of 2011-2012)

????

*In addition to the above, the amount that passes estate tax free ($10,000,000 per couple) will increase with the cost of living beginning in 2012 in $10,000 increments.11

Clients can make significant gifts under the new $5 million lifetime allowance, even if the gifting allowance goes down to $1 million in 2013.

These gifts can be to trusts that benefit the spouse and descendants (“dynasty trusts”).Many clients already have these types of trusts in place.

Clients can transfer income-producing assets to children who have a lower income tax rates.

Review current planning with advisers to maximize the advantages of this legislation.



* Better investment opportunities can be channeled to bypass trust assets. * Assets will pay personal expenses.

* Co-Trusteeship can require conservatism. * Gifting of $13,000 per person will come from personal assets.

* Can be protected from creditors of the surviving spouse. * Holds "wasting assets"

* Can borrow money from surviving spouse at the applicable Federal Rate * Loans to family members who may not be able to repay.(presently 1.5% for a 9-year note), and it runs a greater rate of return on its own investments. * Nursing home expenditures.

Better to segregate.

A married couple might provide for all assets to go to the surviving spouse, or to "lock up" up to $5 million on the first death to facilitate a "credit bypass trust."

SURVIVING SPOUSE INHERITS ALL ASSETS- USE

PORTABILITY OF HIS OR HER $5 MILLION EXEMPTION

CREDIT BYPASS TRUST

14

PORTABILITY BYPASS TRUST USEBoth Alive Both Alive

$9,000,000 $9,000,000 $9,000,000 $9,000,000

After Death of Husband After Death of Husband

$18,000,000 $13,000,000

All passes to surviving spouse.Surviving spouse can lose all assets to futurespouse, creditors, or by making mistakes.

$5,000,000

Can be used for health, education, and maintenance of wife.Creditor proof and divorce proof.Can be invested and not spent.

After Death of Surviving Spouse After Death of Surviving Spouse- Assume that more of surviving spouse's assets were spent and bypass trust was permitted to grow.

$25,000,000 $10,000,000 Estate tax on $15 million.(Estate tax: $15 million x 35% = $5,250,000 ) ($10 million x 35% = $3,500,000)

Assume $9 million per spouse in present assets and $25 million total value on second death.

HUSBAND WIFE HUSBAND WIFE

HUSBAND WIFE WIFE

WIFE BYPASS TRUST

BYPASS TRUST

HUSBAND

WIFE

During bothspouses'lifetimes:

Upon firstdeathin2009:

Duringsurvivingspouse'sremaininglifetime:

Upon (Passes Estate secondTax Free) death:

Afterdeathsofbothspouses:

Benefits children and grandchildren. Benefits children. Not estate taxable in their estates. Taxable in their estates.

Family(By-Pass)

Generation Skipping Trust(Not taxed in surviving spouse's estate)

QTIP Non-GST Trust

(Marital Deduction Trust that is not generation

skipping)

Generation Skipping TrustsFor Children

Children's Trusts (or

distributions)

First DyingSpouse's Revocable Trust

Remaining Assets$3,500,000*

Life Insurance Trust(Irrevocable and Owns Life

Insurance on First Dying Spouse)

Held for Surviving Spouse & Children

May be Generation Skipping to be held as Separate Trusts

for Children

Surviving spouse can have the right to

redirect how assets are distributed on

second death.

Benefits children and grandchildren. Benefits children. Not estate taxable in their estates. Taxable in their estates.

Surviving Spouse's Revocable Trust(Will include assets owned jointly on first death)

$3,500,000* Remaining Assets

Generation Skipping Trusts For Children

(will merge with first dying spouse's Generation Skipping Trusts shown on left)

Children's Trusts (or

distributions)

SurvivingSpouse's Revocable Trust

PROTECTIVE TRUST LOGISTICAL CHART WITH LIFE INSURANCE

•Assumes first spouse dies in 2011 and that the surviving spouse dies in a later year when the estate tax exemption is still $5,000,000.

•The Unified Credit Exemption is $5,000,000 in 2011 and 2012, and is scheduled to go back to $1,000,000 in 2013.

Copyright © 2010 Gassman, Bates & Associates, P.A.

$5,000,000

15

$5,000,000*


Trustee

Assets gifted to trust and growth thereon.

DYNASTY ASSET PROTECTION TRUST

1. Grantor can replace the Trustee at any time and for any reason.2. Protected from creditors of Grantor and family members.3. Can benefit spouse and descendants as needed for health, education and maintenance.4. Should be grandfathered from future legislative restrictions.5. May loan money to Grantor.6. May own limited partnership or LLC interests that are managed at arms length by the Grantor.7. May be subject to income tax at its own bracket, or the Grantor may be subject to income tax on the income of the trust, allowing it to grow income-tax free unless or until desired otherwise.


Wife is Trustee

Other Assets ?

99% LP1% GP

**Gift to Dynasty Trust maybe based upon 65% of 99%of $5,000,000, after takingdiscounts into account.

$3,217,500$5,000,000 in assets

Husband has $1,782,500 of his$5,000,000 exemption remaining.

HUSBAND WIFE

WIFE'S REVOCABLE

TRUST

HUSBAND'S REVOCABLE

TRUST

FAMILY LIMITED

PARTNERSHIP

DYNASTY TRUST

1. Investments controlled by Husband as GP of Limited Partnership.2. Husband can replace the Trustee of the Dynasty Trust.3. Dynasty Trust can be used for spouse and descendants as needed for health, education and maintenance.4. Dynasty Trust can loan money to family members.5.Dynasty Trust should be exempt from estate tax, creditor claims, and divorce claims of both spouses and descendants.


Same as bottom of page 1, but using discounted Limited Partnership interests for gifting.

USE OF EXEMPTION:$5,000,000 x 65% = $3,250,000/spouse

$14,000,000 - $3,500,000 = $10,500,000$10,500,000 x 35% - $3,675,000$4,900,000 - $3,675,000 = $1,225,000Further Savings: $1,225,000

$5,000,000 NOW $5,000,000 NOW $14,000,000 - $3,500,000 = $10,500,000$7,000,000 LATER $7,000,000 LATER $10,500,000 x 45% - $4,725,000

$6,300,000 - $4,725,000= $1,575,00099% LP 99% LP Further Savings: $1,575,000

1% 1% GP

$5,000,000 NOW $5,000,000 NOW$8,000,000 LATER $8,000,000 LATER

HUSBAND'S REVOCABLE

TRUST

HUSBAND'S DYNASTY

TRUST

FLP

WIFE'S REVOCABLE

TRUST

WIFE'S DYNASTY

TRUST

FLP


CHART #1 2011

$2,000,000 Promissory Note6 1/4 % Interest - 10 annual interest only payments

1% GP 99% LP

Other Assets

* Client can be discretionary beneficiaryof Alaskan, Delaware, or Offshore AssetProtection Gift Trust.

Fast Appreciating Asset

Replaceable Trustee

$3,000,000 Present ValueFast Appreciating Asset (10% per year)

Gifted Assets$300,000

Note worth 2/3of Value of

CLIENT GIFTING TRUST

FROZEN ASSETLIMITED

PARTNERSHIP


CHART #2 2021

$2,000,000 Promissory Note

1% GP 99% LP

Other Assets worth 99% x $5,768,9265,711,237$

Note Payments have grown to $778,123Interest @ $125,000/yrappreciating @ 6% 1,647,599$ * Client can be discretionary beneficiary1% GP Distributions of Alaskan, Delaware, or Offshore Assetappreciating @ 6% 20,123 Protection Gift Trust.Promissory Note 2,000,000$ Total 3,667,722$ Value of Gifting Trust

99% LP Interest 5,711,237$ Gifted Assets 778,123$

6,489,359$ Less $2,000,000 Note (2,000,000)$ Net Value 4,489,359$

5,768,926$ Assets after Annual Distributions (10% Growth)*

* Assuming assets in Partnership grow at 10% per year for 10 years, $5,768,926 is value of partnershipafter 10 years. The client derives $1,250,000 in "interest" during the 10 years, $12,626 in partnership distributionsand is still owed $2,000,000. Client has therefore received $3,262,626, plus growth, and the "real value" of the assets in theGifting Trust have grown to $4,489,359.

Replaceable Trustee

Assets at End of 10 year Period

Gifted Assets$300,000


FROZEN ASSETLIMITED PARTNERSHIP


CHART #3 2021 1/2

1% FLP Distribution$57,689

Other Assets Value of Gifting Trust99% FLP Distribution 5,711,237$

Note Payments Less Balloon Payment (2,000,000)$ Interest @ $125,000/yr Gifted Assets 778,123$ appreciating @ 6% 1,647,599$ 4,489,360$

1% GP Distributions 20,123appreciating @ 6% * Client can be discretionary beneficiaryBalloon Payment 2,000,000$ of Alaskan, Delaware, or Offshore AssetTotal 3,725,411$ Protection Gift Trust.

Replaceable Trustee


Monday, December 20, 2010 A Webinar by: Alan S. Gassman, J.D., LL.M. [email protected] Prepared...

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