WEALTH TRANSFER STRATEGIES FOR FAMILIES DECEMBER 13, … · estate & wealth transfer plans is...

W E A LT H T R A N S F E R S T R AT E G I E S F O R FA M I L I E S D E C E M B E R 1 3 , 2 0 1 8

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Our Presenters

Susan Jones, JDBKD Family Office Partner

Holly Pantzer, CPABKD Family Office Partner

Wealth Transfer Planning Basics

• Fundamental issue when evaluating current or potential estate & wealth transfer plans is asset ownership

• There are three ways in which property may be owned1) Individual ownership

Property Ownership

2) Title by contract

Owner typically has full control during life; property transfers automatically at death to designated beneficiaries

If beneficiary is not named, contract will have fallback beneficiary (may be estate or spouse)

Property Ownership

3) Joint ownership Right of survivorship

• Each party owns 100 percent of property; at death, property automatically passes to surviving joint owner(s)

Tenancy by entirety

• Only in some states – JTWROS for spouses with additional protections for real property

Property Ownership

3) Joint ownership Tenancy in common

• Each party owns specific percentage of property; fractional interest can be transferred & does not automatically transfer to surviving owners at death

Property Ownership

3) Joint ownership Community property

• Each spouse has ownership rights in community property as set by specific state laws (nine states only)

• Property acquired in a community property state does not automatically convert to noncommunity property when moving to a separate property state

Property Ownership

• Estate tax: transfers by reason of death• Gift tax: transfers during life• Generation-skipping transfer tax (GSTT): transfers to skip

persons

Unified Transfer Tax System

• Levied on net value of property owned &/or controlled by decedent at death

• Property is valued at fair market value• Alternate valuation date election may be available

Estate Tax

• Transfers to a donee, of property transferred beyond dominion & control of donor, for less than full & adequate consideration in money or money’s worth

• Donor is responsible for filing gift tax return & paying the gift tax

Gift Tax

• Key definitions Transferor Skip person

• Three types Direct skip Taxable termination Taxable distribution

GST Tax

• Basic planning documents Powers of attorney Living will declarations Health care powers of

attorney

• Revocable trust (living trust)• Two-trust plan (A/B trusts)

Typical Estate Plan

• Basic function is to provide specific guidance on Who will inherit property When & how beneficiaries will inherit property Who will be in charge of administering the estate

Wills

• Used to name guardians for minor children• Only assets owned individually Could include contract assets without named beneficiary

• Estates that rely on a will for asset disposition are subject to probate at decedent’s death

Wills

• Assets will not be subject to probate• Disregarded for tax purposes during life• Provides for lifetime administration of trust-owned assets in

the event a grantor is incapacitated or otherwise unable to manage his/her own assets

Revocable Trusts

• Deduction from decedent’s estate for full value of property passing from decedent to his/her surviving spouse

• Coordinated use of the estate tax exemption & marital deduction is the foundation of a typical estate tax plan, i.e., a “bypass trust” plan or “A/B trust” planning

Marital Deduction

• Amount up to decedent’s remaining estate tax exemption amount will fund nonmarital trust

• A spouse &/or children may be beneficiaries & provisions regarding income & principal distributions may be customized

Bypass Trust/Marital Trust Planning

• All remaining assets go to surviving spouse, either outright or using a special type of trust that will qualify for the marital deduction

• If a trust is used, the spouse must be the sole beneficiary & annual income distributions are required

Bypass Trust/Marital Trust Planning

Bypass TrustBypass Trust Marital Trust

Included in gross estate of surviving spouse?

No Yes

Basis adjustment at death of surviving spouse?

No Yes

• Value of the gross estate shall be determined by including … the value at the time of death

• Basis of property in the hands of the person acquiring the property from a decedent … shall be the fair market value of the property at the date of the decedent’s death

Challenge in Wealth Transfer Planning

• Reduce estate tax exposure• Manage the “step-up” in basis High-basis assets = wealth transfer strategies Low-basis assets = tax deferral strategies

The Goal

Key Provisions of the Tax Cuts and Jobs Act (TJCA)

Key Provisions of TCJA for Families

Reduced Tax Rates

Increased Standard

Deduction

Limited Itemized

Deductions

Created Qualified

Opportunity Zones

Doubled Lifetime

Exemption

Reduced Individual Income Tax Rates

Click here for printable version of all individual

brackets

• Plus 3.8 percent net investment income tax on unearned income when modified adjusted gross income exceeds $200,000 ($250,000)

• Expires after December 31, 2025

Fiduciary & “Kiddie Tax” Income Tax Rates2018 Bracket^ Rate

$0–$2,550 10%

$2,551–$9,150 24%$9,151–$12,500 35%

More than $12,500 37%

^Expires after December 31, 2025, & reverts back to amounts provided prior to January 1, 2018, except amounts would continue to be indexed for inflation using chained measurement of the consumer price index where applicable

Doubled Lifetime ExemptionPrevious Law New Law

Estate tax 40% rate with $5.6 million basic exclusion amount per taxpayer

40% rate with $11.18million basic exclusion amount per taxpayer

Gift tax 40% rate with $5.6 millionbasic exclusion amount per taxpayer; $15,000 annual exclusion

40% rate with $11.18 million basic exclusion amount per taxpayer; $15,000 annual exclusion

Generation-skipping transfer tax

40% rate with $5.6 million basic exclusion amount per taxpayer

40% rate with $11.18 million basic exclusion amount per taxpayer

^Expires after December 31, 2025, & reverts back to amounts provided prior to January 1, 2018, except amounts would continue to be indexed for inflation using chained measurement of the consumer price index where applicable(1)Exclusion amount adjusted for inflation annually

Wealth Transfer Strategies After the TCJA

• Lifetime gifting• Sales to intentionally defective grantor trusts (IDGTs)• Split interest gifts Grantor retained trust (GRAT) Charitable remainder trust (CRAT, CRUT)

Strategies for Those More than $22.36 Million

• Uses annual exclusion amount • Certain payments made for education & medical expenses

not deemed “gifts”• Future appreciation is outside of estate

Benefits of Lifetime Gifting

Lifetime Gifting with Dynasty Trusts

PARENT FUTURE GENERATIONS

› Trust makes distributions to future generations

› Not subject to estate & GST tax

DYNASTY TRUST CHILDREN GRAND-

CHILDREN

› Parent contributes assets to trust

• Assets pass to future generations transfer tax free• Asset protection, i.e., spendthrift, creditors, ex-spouses,

etc.• Trust beneficiaries may receive additional distributions if

needed subject to ascertainable standard

Benefits of Dynasty Trusts

• Donor can customize trust to Permit distributions to purchase a house, etc. Withhold distributions under specific circumstances

• Beneficiaries may have limited power of appointment to leave to specific heirs or charity upon their deaths

Benefits of Dynasty Trusts

• Annual income tax return must be filed for the trust• Best practice to name corporate trustee for continuity• Trust protectors often named • Some states have “rules against perpetuities” May need to establish trust in another state

Other Considerations for Dynasty Trusts

Intentionally Defective Grantor Trust (IDGT)

Beneficiaries

Step 1: gift & sale of assets to IDGT

Step 2: installment note(s)

Step 3: discretionary distribution of income & principal during lifetime of beneficiaries; outside of beneficiary’s estate

IDGTGrantor

• Property expected to generate sufficient cash flow to make note payments

• Rapidly appreciating property • Closely held stock• Family limited partnership (FLP) interests

Good IDGT Candidates

IDGT with FLP

Children

Step 2: gift & sale of assets to IDGT

Step 3: installment note(s)

Step 4: discretionary distribution of income & principal during lifetime of beneficiaries; outside of beneficiary’s estate

IDGTParent

FLP

Step 1: form & contribute assets to FLP

• Gift tax return should be filed to report both sale & gift • Separate tax return generally does not need to be filed for

the IDGT• IDGT must be administered strictly according to terms

Other Considerations for IDGTs

• If property inside IDGT doesn’t generate sufficient income to cover the note payments, trust assets must be distributed to the grantor

• Minority &/or marketability discounts can be taken when determining sales price/gift value

Other Considerations for IDGTs

Grantor Retained Annuity Trust (GRAT)

Children/ Remainder

Beneficiaries

Step 1: transfer of assets

Step 2: annuity payments over a fixed term

Step 3: residual, if any, passes to children at the end of the term

GRATGrantor

• High-growth or high-yield investment portfolios • Commercial real estate• Closely held stock • FLP interests

Good GRAT Candidates

• Annuity payment isn’t taxable but grantor pays tax on trust’s income during the GRAT period

• Can be structured to produce a gift with a value close to zero (useful when grantor has utilized lifetime exclusion amount or doesn’t wish to make taxable gifts)

Other Considerations for GRATs

• If grantor dies during the annuity period, assets will generally be included in the grantor’s estate (subject to limitations)

• As a result, not ideal for GST planning

Other Considerations for GRATs

• Gift tax return should be filed to report gift • Separate tax return generally does not need to be filed

for the GRAT• GRAT must be administered strictly according to terms

Other Considerations for GRATs

Charitable Remainder Annuity Trust (CRAT)

CharityTrustGrantor

Step 1: contribution

Step 2: distributions

Step 3: remainder

• Similar to a GRAT (primary difference is remainder beneficiary)

• Evaluate as part of post-TCJA charitable strategy May allow tax-efficient diversification of low basis assets Lifetime income tax deduction while removing assets from

gross estate

Considerations for CRATs

• Evaluate assets that will be included in the estate• Swap property in IDGTs• Unwind or eliminate strategies to leverage exemption

Strategies for Those Under $22.36 Million

• Time horizon• Spending• Inflation• Size of the estate• Tax attributes, e.g., NOLs

• Income tax character of assets & expected realization of gain/loss

• Sources of income• State of residence of

grantor & beneficiary

Wealth Transfer Planning Is Complex

Closing Comments

Susan Jones, JDBKD Family Office Partner

St. Louis, MO

Holly Pantzer, CPABKD Family Office Partner

Indianapolis, IN

The information contained in these slides is presented by professionals for your information only & is not to be considered as legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor or legal counsel before acting on any matters covered

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CPE Credit

Holly Pantzer | 317.383.4045 | hpantzer@bkd.com

Susan Jones | 314.236.5221 | swjones@bkd.com