Estate Planning Outline 2019 PDF

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Estate Planning Outline — Streng available before 5 on Tuesday before exam

CHAPTER 1: Estate Planning and Professional Advising What is Estate Planning Professional Responsibilities / Ethical Issues of an Estate Planner How Long do an Estate Planner’s Obligations Last Determining the Fee for Estate Planning Services Deduction of Estate Planning Fees - §212 Legal Tasks that are the Responsibility of the Lawyer

9 9 10 10 10 10 11

CHAPTER 2: Federal Transfer Tax Structure Federal Transfer Taxes Federal Estate Tax Overview Determining Estate Tax liability

12 12 12 12 13

Structural Alternatives to the Estate Tax Valuation of Property for Estate Tax Purposes Effect of State Property and Inheritance Laws Conflicts of Law

16 17 17 17

Federal Income Tax Issues: Change in Basis Summary Valuation for Purposes of Calculating the Gross Estate Valuation of Remainder and Reversionary Interests

18 19 20 20

Reporting Requirements

20

CHAPTER 3: PROPERTY TRANSFERS MADE THROUGH ESTATES AND TRUSTS 21 Objective: address basic issues involved in planning for the mechanical aspects of transferring property after the death of a client. 21 General Intro 21 Last Will and Testament: remember, must be thinking about transfer of property 21 Provisions to Consider Including 21 Exordium Clause 21 Identification of family members and other beneficiaries 21 Payment of Debts 21 Payment of Death Taxes 22 Essential requirements in death tax planning context: 23 1

Maximizing Marital Deduction Payment of estate tax when most assets are held in trust Disposition of Tangible Personal Property

23 23 24

Disposition of Residential Real Estate Power of Appointment Specific Bequests and the Residuary Estate Management and Disposition of Assets Transferred to Testamentary Trusts

24 24 24 25

Appointment of Executor / Trustee Administrative Powers Common Disaster Provision Testimonium Clause

25 26 26 27

Attestation Clause No-Contest Clause Joint and Mutual Will Ancillary Documents Durable Power of Attorney Revocable Trust Appointment of a Guardian Living Will / Directive to Physicians Medical Power of Attorney Anatomical Gifts Federal Income Tax Status of Decedent’s Probate Estate

27 27 27 27 28 28 28 28 28 28 29

CHAPTER 4: TRUST STRUCTURING ALTERNATIVES General Purposes of Trusts Methods of Trust Creation under the TPC §112.001

29 29 29

Possible Purposes of a Trust Types of Trusts Testamentary Intervivos Revocable Trusts § 645 Tax Election Intervivos Irrevocable Trusts

29 29 30 30 31 31

CHAPTER 5: IRREVOCABLE TRUSTS Importance of awareness of state law principles Federal Tax Planning Objectives Basic Estate Tax Code Provisions (will be explored further later)

2

32 32 32 32

Retention of Beneficial Enjoyment by Trust Grantor Resulting in Inclusion in Gross Estate §2036(a)(1) – the entire amount is included 33 Effect of State Creditors’ Rights Laws on Inclusion in Gross Estate 33 §2036(a)2) & §2038: Retention of Beneficial Powers by Trust Grantor 34 Power to affect timing of trust distributions: 34 Power limited by an Ascertainable standard: 34 Power over trust administration matters: 34 Power to remove trustee: 34 2036(b) and the Byrum Case: Ownership of Closely Held Business Interests 34 3 Year Pre-Death Rule §2035(a)(2) 35 CHAPTER 6: FEDERAL INCOME TAX AND TRUSTS Trust Income Distribution Planning Issues Income and Principal Trust Structuring Issues When does a trust’s status as a separate taxpayer begin? Simple Trusts Complex Trusts Multiple Tiers Distribution Concept

35 35 35 35 36 36 37

Separate Share Rule Income Distributions Made “In-Kind” Summary Specific Bequests

37 37 38 39

Distribution of Previously Accumulated Income: Throwback Rules Multiple Trusts

39 40

CHAPTER 7: LIFETIME GIFT PLANNING What Constitutes a Gift? When is a Gift Completed Use of a “Defective Trust”

40 40 41 42

Choosing Specific Types of Property for Making Gifts Annual Gift Tax Exclusion Crummey powers and income tax liability Gift Splitting Between Spouses

43 43 44 45

Gift Tax Marital Deduction Gifts made w/in 3 Years of Death

45 45

CHAPTER 8: SPECIAL TYPES OF GIFTS Gifts to Minors Implications of a parent being a custodian under a Transfers to Minors Act: 3

45 45 46

Minor’s Present Interest Trust – allows for annual exclusion The Following are Other Special Gifts Not Necessarily Related to Minors Educational or Medical Expense Payments College Tuition Plans Net Gifts Net Gift Tax Considerations Ways of structuring/valuing a gift: Income Tax Implications of Net Gifts Net Gifts to a Grantor Trust Rather than an Individual Other Gift Planning Options Family Debt Forgiveness Arrangements CHAPTER 9: POWERS OF APPOINTMENT Powers of Appointment §2041

46 47 47 47 47 47 47 48 48 48 48 49 49

General Power of Appointment §2041 Power Exercisable Only in Conjunction w/ Another Not a General PoA Ascertainable Standard Releases, Lapse and the 5 & 5 Exception

49 50 51 51

Life Cycle of a PoA Tax Issues and Powers of Appointment Effect of Holder of Power Appointment’s Incapacity Misc. PLs and RRs

53 53 54 54

CHAPTER 10: SPOUSAL TRANSFERS §2056: Bequests to Surviving Spouse

54 54

Marital Transfers and Deduction Fundamentals 55 Determining Net Amount of Marital Deduction 55 Payment of Administration Expenses 55 Effect of Encumbrances (ie mortgage), Management and Transmission Expenses on the Marital Deduction 55 Alternative Methods for Completing Transfers of Martial Gifts 56 Terminable Interest Rule 56 More Exceptions to the Rule that Terminable Interest do not Qualify for the Marital Deduction 57 Life Estate / Power of Appointment Trust 57 Life Insurance Payments to Surviving Spouse 58 QTIP - for a good explanation of how it works see ch. 10 p. 65 under “statutory scheme” 58 QTIP Trust as IRA Proceeds Beneficiary 59 4

Stub Income Problem and the Marital Deduction 60 Marital Deduction Eligibility for a Texas Homestead & QTIP 61 Effect of the Election to Treat Property as QTIP and what Happens when it is not made 62 Use of a Savings Clause to Protect Against Drafting Errors and Ensure QTIP Election 62 Who Pays the Estate Tax on Marital Deduction Property when SS Dies. 63 Deciding Whether to Make a QTIP Election 63 Effect on QTIP of Lifetime Transfers by Spouse of Income of Remainder Interest 64 Disclaimer Trusts 64 Charitable Remainder Trusts 65 Estate Trust 65 Marital Deduction Formula Clauses 65 Also Consider: 66 Strategy: Make Use of Unified Credit First 66 Marital Deduction Amount Retroactive to Point of Death 66 Gain realized between death and distribution: specific amount vs. fractional 67 Allocating Assets Between Marital Deduction and Family Trusts 67 Funding Marital and Non-Marital Gifts w/ Specific Assets 68 Marital Deduction and Non-Citizens 68 CHAPTER 11: GST and DYNASTY TRUSTS §2601: A tax is hereby imposed on every generation skipping transfer Defining What Constitutes a Generation Skipping Transfer §2611: a generation skipping transfer means: Defining Skip Persons GST and Bifurcated Interests: life estate and remainder Possible Exclusions GST Exemption Annual Donee Exclusion – limitations Reverse QTIP Election GST Computation Allocation of the GST Exemption: Inclusion Ration Concept Allocation of GST Exemption for Indirect Skips

68 68 68 68 69 69 69 70 70 70 70 71 71

Income Tax Deduction for GST Tax Trusts Exempt from the GSTT Exercise or Non-Exercise of General PoA in Grandfathered Trust

71 71 71

CHAPTER 12: JOINTLY OWNED PROPERTY 5

72

§2040: Joint Interests Gross estate includes the value of all property: If the joint tenants are not spouses: If the joint tenants are spouses: Possible Estate Tax Implications of Passing Property by JTROS Estate Planning Objectives w/ Joint Property Local Property Law Requirements

72 72 72 72 72 72 73

Rights of Spouses and Creditors 73 Gift Tax On the Creation of Joint Tenancies 73 **note – Streng thinks the parent could take the whole deduction in this case for the mortgage interest and taxes paid on the property. 74 Defining Consideration Provided by Joint Tenant 74 Community Property 75 Examples of Community vs. Separate Property Characterizations 76 Lifetime Gifts and Retained Interests – Income from Property 76 Widow’s Forced Election 76 Streng Says Widow’s Election is Not a Good Idea 77 CHAPTER 13: LIFE INSURANCE Basics - §2042 More on §2042 §2042(1) §2042(2) – incidents of ownership that require inclusion Types of Life Insurance Income Tax Considerations Employer provided group term insurance “Life Insurance” for Estate Tax Purposes Lifetime Gratuitous Transfers of Life Insurance Policies Structuring Disbursement Options for the Receipt of Policy Proceeds Alternative Types of Life Insurance Trusts – Irrevocable Trusts

77 78 78 78 78 79 79 80 81 81 82 82

Split Dollar Life Insurance Gift & Estate Tax & Split Dollar Insurance Life Insurance Purchased w/ Community Funds Consider these situations

83 84 85 85

Irrevocable Life Insurance Trust Planning Insurance on someone else’s life Viatical Settlement Arrangements

86 86 86

6

CHAPTER 14: Annuities and Employment Related Benefits Income Tax Considerations Income Tax and Paid Up Annuity Whipsawing the system; a deduction w/ no inclusion Basis considerations: Required minimum distribution: Distribution Rules Federal Estate Taxation of Annuity Value Transferring Plan Benefits at Death

86 86 87 87 87 88 88 89 89

Federal Law Trumps State Law w/ Respect to Beneficiary Designations State Law Regulation of Annuities Qualified Retirement Benefit Plans Spousal Participation Rights in Qualified Retirement Benefit Plans

90 90 90 90

Payments After Death Community Property Law Applications Shit from T&W about who gets what under ERISA QDRO

91 91 93 94

Non-qualified Executive Compensation Arrangements Estate tax planning: Incentive Stock Options: Non-qualified Stock Options:

97 97 98 98

IRAs IRA rollovers to charity Roth IRA Death Only Benefit Plans Gift Tax Exposure Possible Gross Income Inclusion

98 100 100 100 101 101

CHAPTER 15: NON-DONATIVE PROPERTY TRANSFER ARRANGEMENTS 101 Alternate Methods of Inter-Family Transfers 101 Objective 101 Installment Sales 101 Intra-Family Installment Sales — § 453 101 Income tax planning considerations: 101 Self-Canceling Installment Note 102 Summary of SCIN

103 7

Gift and Sale w/ Leaseback Tax Free Exchanges w/ Family Members - 1031 Private Annuities - § 72 Summary Based on What Streng Said About Private Annuities 2006 Proposal to Restrict Open Transaction Treatment Prior “Closed Transaction” Controversies Shortened Life Expectancies and Dispensing w/ Actuarial Tables

104 105 105 105 106 106 106

Grantor Retained Annuity Trust - GRAT PLR 20001013 Zeroed-Out GRAT Qualified Personal Residence Trust (QPRT) — 2702(a)(3)(A)(ii)

107 108 108 109

Streng’s Commentary on 2702 and Personal Residence Trusts

110

CHAPTER 16: CHARITABLE GIFT TRANSFERS

110

Tax Effectiveness of Charitable Gifts p.3 §2055 Charitable Transfers §2522 Charitable and Similar Gifts Tax Planning Motivations for Charitable Gifts

111 111 111 111

Identifying a Qualifying Charity How it works Fundamental Strategy Limitations on Charitable Gifts

112 112 112 113

Documenting the Value of the Gift Specific Types of Charitable Gifts Gifts of “Vertically” Divided Interests in Property Charitable Gifts of Easements Gifts of Corporate Stock to a Private Foundation Gift and Redemption of Closely Held Corporate Stock Gift of Life Insurance Policy Gift of Life Insurance Policy ---- with Grant’s notes while I was on the phone Charitable Gift Annuity Charitable Remainder Gifts Remainder Trusts: 170(f)(2)(A) specifies that for Remainder Annuity Trusts: CRUT Pooled Income Funds Personal Residence Defective Charitable Remainder Trusts

113 113 115 115 116 116 116 116 117 117 117 118 118 118 119 119

8

Charitable Lead Trusts

119

CHAPTER 18: FAMILY BUSINESS OWNERSHIP — RESTRUCTURINGS AND RELATED MATTERS 119

Introductory Thoughts by Streng ● Disincentives created by repeal of estate tax in 2010: o Streng thinks eliminating the tax entirely in 2010 and have it come back strong -in 2011 is a bad way to further reduce estate taxes; gives people bad incentives. - IE granny dies in Dec. ’09, keep her on life support until after Jan. 1st in order to take advantage of no estate tax o Congress structured the phase out of the estate tax this way b/c the sunset provision bringing the tax back in 2011 was the only way to get the tax repealed without having to disclose the revenue reduction that would result from the elimination of the tax. o Something must happen in ’09. Streng’s observations about the estate tax ● Conflict between rich and super rich o At what point should the rich be affected by the estate tax? ● Death tax – nickname for estate tax o Streng thinks estate tax is a fundamental aspect of transfer taxation b/c must consider implications of taxes on (1) earnings; (2) savings and investment; and (3) gratuitous wealth transfers. o People argue it is double taxation b/c the donor was taxed on the assets at some point and then the assets are taxed again at death.

CHAPTER 1: Estate Planning and Professional Advising ● What is Estate Planning o the process by which the client plans the accumulation, management, conservation, and disposition of his estate so that he and his beneficiaries will derive the maximum benefit during lifetime and after his death. o Must understand client’s: 1. financial situation 2. family situation 3. estate planning objectives o Parties involved in estate planning (may present conflicts for lawyer) - Accountants - Life insurance agents - Banks / Trustees - Financial planners 9

● Professional Responsibilities / Ethical Issues of an Estate Planner o Lawyer does not owe client a duty to perform legal tasks incidental to estate planning: 1. that are inapplicable to client’s estate because of its size or nature; 2. that client designates as being performed by another lawyer; 3. that lawyer and client agree are not to be performed provided the lawyer explains the consequences of not performing them. o Rule 1.1 – duty of competence o Rule 1.2 – duty of diligence o Rule 1.4 – duty to communicate o Rule 1.6 – duty of confidentiality o Rule 1.7 – conflicts of interest - husband and wife - children from prior marriage - separate vs. community property - forms of transfer (ie trust vs. outright gift) - disinheritance provisions o Determine whether firm is responsible for updating client on changes in the law o Rule 1.5 - fee arrangements o Circular 230 – PR rules promulgated by the Treasury ● How Long do an Estate Planner’s Obligations Last o Important to determine b/c of changes in the law that affect the client’s estate plan; is attorney obligated to inform client of these changes? o Important to determine at outset of the relationship what the expectations are and continually follow-up w/ the client periodically and especially when changes in the law occur. Lawyer should update client of changes. o May suggest keeping the documents in the lawyer’s safety deposit box; this may create a conflict / ethical situation ● Determining the Fee for Estate Planning Services o Hourly o Minimum fee basis o Based on informal guidelines – implements antitrust concerns o Value billing ● Deduction of Estate Planning Fees - §212 o Expenses for production and collection of income and for management, conservation and maintenance of wealth are deductible from income taxes as well as determination, collection and refund of any tax paid. o Therefore attorney must itemize time spent so as to determine which portion of his fee is deductible for the client. Merians - note 2% haircut; no deduction until expenses are more than 2% of AGI

10

i)

ii)

§67(a) miscellaneous itemized deductions for the taxable year only allowed to the extent the aggregate of the deductions exceeds 2% of AGI 2% haircut applies to investment advisory fees paid by a trustee except for costs which are paid or incurred in connection w/ the administration of the estate or trust and which would not have been incurred if the property were not held in such trust or estate. §67(e)(1). Costs exempt from the 2% floor are those that would be uncommon for an individual to incur

● Legal Tasks that are the Responsibility of the Lawyer o Data gathering and determination of client objectives - info about family: identities, ages, relationships of immediate family and collateral relatives - info about legal relationships and unusual family matters - info about location, identity and value of assets - info about ownership and title arrangements of assets - info regarding community or separate ownership of property - info about existing will, mutual will or present estate planning arrangements see 1.07 on p. 8 of chapter 1 - info about desired disposition of assets during life and after death as well as any fiduciary or guardianship issues o Formulating a recommended plan - consider domicile and its effects on estate planning including ancillary jurisdiction for out of state property - consider marital property laws - consider tax consequences - consider guardianship laws and issues - consider incapacity and payment of debts of estate o Implementation of plan - prepare necessary documents including wills, trusts, deeds, PoAs, and business documents - supervise execution of documents to ensure they satisfy required formalities - see to proper transfer of assets - prepare reports where necessary o Assembling the client’s factual info - consider how to elicit honest and complete answers - cooperate w/ other advisors to ensure results consistent w. client’s estate planning objectives o Understanding property transfer process - primary method of transfer is the will; non-probate methods include: - insurance policies - retirement plans - lifetime trusts o Keeping the estate plan current 11

- keep track of changes in estate and tax laws o Consideration of deductibility of estate planning costs from federal income taxes - Merins Ch.1 p. 25: deductibility of estate planning costs: allocation is the point in issue and therefore the attorney should carefully itemize what amounts of time are spent on tax advice - Knight  Ch. 1 p. 28: investment advisory fees paid by a trust are only deductible to the extent they exceed 2% of the trust’s AGI. 2% rule does not apply to expenses incurred that would not have been incurred if the property were not held in a trust.

CHAPTER 2: Federal Transfer Tax Structure ● Federal Transfer Taxes o 3 types: - estate - gift - GST o Unification of gift & estate tax: the gift and estate taxes are unified and have a progressive structure whereby transfers during life accumulate on a progressive rate scale that increases as the amount of lifetime gifts increases with the final transfer being at death. Depending on the cumulative total of these taxes an estate tax may be owed if the exemption is exceeded o Federal income tax implications: - Subchapter J: relating to income taxation of decedent’s estates, trusts and beneficiaries. - Income tax basis provisions. § 1014 step up basis at death - Whether gifts and bequests constitute gross income to the recipients. Not included § 102. o State death tax implications: depend...