Dan Borst Power Point Presentation 2015 Tax Symposium

November 2015Dan Borst

2015 Estate & Gift Tax Landscape

© 2015 Warner Norcross & Judd LLP. All rights reserved

• Federal Estate Tax = a tax on property transferred from deceased persons to their heirs

• Levied only on the portion of an estate’s value that exceeds the exemption level = $5.43 million in 2015 (potentially $10.86 million per married couple)

• Exemption reduced by lifetime gifts

• Assets passing to charity or US spouse exempted



$8,000,000 Gross Estate $80,000 Administration Expenses $120,000 Charitable Gifts

$7,800,000 Taxable Estate Directed to Children

$5,430,000 2015 Exclusion Amount(assumes no lifetime gifts)

$2,370,000 Amount Taxed x40% $948,000 Tax Due = 12% overall tax

rate

Example:



• Who pays?

2015 - $5M exemptions – Roughly 2 of every 1,000 estates (0.2%)

1976 - $60,000 exemption – Roughly 80 of every 1,000 estates (7.65%)2001 - $675,000 exemption – Roughly 20 of every 1,000 estates (2.14%)2008 - $2M exemption – Roughly 7 of every 1,000 estates (0.68%)



• Average effective rate in 2013 = 16.6%

• The tax will generate about $246 billion over 2016 – 2025

• This is less than the 1% of Federal revenue over this period but more than the federal government will spend on the Food and Drug Administration, the Centers for Disease Control & Prevention, and the Environmental Protection Agency combined



Long-term Care Planning• 12.5% Americans now over 65• 20% expected to be over 65 by 2030

Estate planning for the 99.8%


Medicaid Eligibility$2,000 of countable assets plus excluded assets:

One homestead and land (up to $552,000 in equity)

One vehicle Household furniture & furnishings

Prepaid funeral contract



Spectrum of Planning• Durable Power of Attorney• Written contracts before entering nursing care• Convert countable assets to excluded property• Create testamentary trusts for surviving spouse• Ladybird Deeds• Divest assets and purchase commercial annuity• Create Irrevocable Income Only Trust



Property taxes For long-held properties which have a taxable value substantially less than the state equalized value, the uncapping of the property taxes can make continued ownership for heirs unaffordable (For example, a cottage on Lake Michigan might have $7,500 in property taxes now and $25,000 after uncapping)



Transferring residence/cottage to children

1. Leaving Residence in Parent’s Name Alone2. Outright Conveyance to Children Now3. Place Residence in joint name with Children4. Convey to Parent’s Revocable Living Trust5. Deed to Children Now but

Parent Retains Life Estate6. Execute Ladybird Deed Conveying Property to

Children at Death if Parent Still Owns Property and Has Not Changed Deed


Portability (or Deceased Spousal Unused Exclusion Amount “DSUEA”)• The ability of a surviving spouse to add the

unused amount of a deceased spouse’s estate and gift tax exclusion amount to the surviving spouse’s estate and gift tax exclusion amount. The combined amount is available to shelter the surviving spouse’s lifetime and testamentary transfers

Portability

• First applicable to decedents who died after December 31, 2010 and made “permanent” in 2012

• Does not apply to federal generation-skipping transfer tax

• Election is made on a timely filed estate tax return (Treas. Regs. SS 20-2010-2T(a)(2) and (7)(i))

• A surviving spouse can use the DSUEAs of multiple spouses through lifetime gifting but for testamentary transfers, can only use the DSUEA of the “last deceased spouse” who died while married to the surviving spouse (Treas. Regs S 20-2011T(d)(5))

• Facilitates simple plans where 1 spouse distributes property outright to the survivor(through joint tenancy, beneficiary designations, outright gifts under Wills or Trusts)


Portability

a. Simpler to Implement• No more dividing assets between spouses

under traditional A/B planning• No setting up new separate accounts• Assets can remain jointly owned

b. Easier to Administer • No need for surviving spouse to administer

on-going credit shelter and/or marital trustc. More flexibility

• Surviving spouse has freedom to address changes in circumstances and is not encumbered with withdraw rights or power of appointment


Portability: Advantages


d. Second Basis Adjustment • Step up in basis for assets owned by surviving spouse

at date of death• Example: Peter dies in 2015 with an estate of $3

million. $3 million funds a credit shelter trust for wife Nancy. His DSUEA is $2.43 million ($5.43M - $3M = $2.43M) Peter’s personal representative makes a portability election. Nancy dies years later with an $8 million estate and exclusion amount is $6 million. Credit shelter trust is $3.8 million. Nancy’s combined exemption is $8.43 million. There is no estate tax but $800,000 of growth in credit shelter does not receive second basis adjustment.

– Note that the benefit of this second basis adjustment can vary:- is the asset likely to be sold or held?- if sold, what will the resulting capital gain be to the new owner?- the asset’s value may go down between the death of the first spouse and second resulting in a step-down in basis

Portability: Advantages


a. Previous second marriage • Trusts for the benefit of the surviving spouse

can assure assets eventually go to children from a prior marriage

b. Future second marriage • A surviving spouse may remarry and direct

assets to new spouse or step-children. • Also may forfeit DSUEA of first spouse if that

goes unused and surviving spouse survives new spouse who uses his DSUEA for benefit of his children leaving surviving spouse with a smaller exclusion amount

Portability: Disadvantages


c. Management • Trusts provide management and control of property for

surviving spouse (or children). May have concerns about a spouse’s diminishing capacity, susceptibility to undue influence, problems with mental illness, or substance abuse

d. Asset Protection • Assets left outright to surviving spouse exposes the

assets of the decedent spouse to the creditors of the surviving spouse.

• The best form of trust for creditor protection is a credit trust with a spendthrift provision and/or discretionary distribution standard where the surviving spouse does not serve as sole trustee



e. Growth Potentially Exposed• The surviving spouse’s own exclusion amount

and the DSUEA may not be enough to shelter assets from estate tax because the DSUEA is not indexed for inflation.

• Assets in a credit shelter trust including growth remain outside of the surviving spouse’s gross estate



• Example: Peter dies in 2015 with an estate of $3 million. $3 million funds a credit shelter trust for wife Nancy. His DSUEA is $2.43 million ($5.43M - $3M = $2.43M) Peter’s personal representative makes a portability election. Nancy dies years later with an $8 million estate and exclusion amount is $6 million. From time of Peter’s death to Nancy’s death, assets in credit shelter trust doubled in value to $6 million. There is no estate tax. $3 million of growth does not receive second basis adjustment, but there would have been an estate tax of $1.028 million ($14M - $11.43M = $2.57M x 40%) if Peter and Nancy had relied on portability alone.



f. Discounts• An estate may be ineligible for entity

discounts if assets pass outright to surviving spouse. Consider the difference in value between a 60% interest in a family business passing outright to a surviving spouse versus having a 30% interest passing to a credit shelter trust and the surviving spouse owning 30% outright.



• There is a downside to discounts. Individuals with assets below the exclusion amount may want to take steps to undo prior planning strategies designed to reduce the taxable estate in order to maximize the step-up in basis.

Discounts: Counterpoint


• Example: Andrew and his wife Betty have combined assets of $5 million. To reduce his taxable estate, Andrew previously made lifetime gifts of closely held stock to Betty and their children and now owns 49%. At death, Andrew’s 49% block of stock will take into account discounts for lack of control and lack of marketability. These discounts will reduce the stepped-up basis in the stock. Andrew may want to reacquire 2% of the stock from Betty to eliminate these discounts so that his family will receive a higher stepped-up basis at his death.

Discounts: Counterpoint


g. Dynasty Trusts• Portability is available only for estate and gift

tax purposes, not generation-skipping transfer tax exemptions. If clients want to maximize the amount they can give to dynasty trusts to benefit children and grandchildren, they should utilize credit trust planning or QTIP trust planning that allows elections for GST planning.



Case Study

Husband’s separate property: $2.5 millionWife’s separate property: $1.0 millionJoint property: $4.25 million(including $1 million cottage and $700,000 residence)What additional information do you need to know?


Case Study

Credit and Marital Trust PlanningADVANTAGES DISADVANTAGES


Case Study

Joint Trust PlanningADVANTAGES DISADVANTAGES


Case Study

Spouse’s Trust PlanningADVANTAGES DISADVANTAGES


• For clients who want asset protection and portability planning, a spouse’s QTIP trust may be best. The “all income” requirement of a QTIP trust is less desirable (because at a minimum, the income interest is susceptible to claims of creditors of surviving spouse) than discretionary distributions standard but does offer some credit protection and will offer (likely) the second basis adjustment for income tax purposes at the death of the surviving spouse

• Revenue Procedure 2001 – 38 issue

Case Study

Documents

Dan Borst Power Point Presentation 2015 Tax Symposium