Estate Planning Strategies for Changing Tax Rules

Preparing for the Sunset:
Unique Estate Planning Opportunities
at the E d of an E
t th End f Era
John F. Hussell, IV Staci N. Criswell
304.357.9966 304.357.9906
john.hussell@dinsmore.com staci.criswell@dinsmore.com

© 2012 DINSMORE & SHOHL | LEGAL COUNSEL | www.dinsmore.com

Current Tax Climate
2009 2010 2011 2012 2013

Estate Tax
$3.5 million $5 million $5 million $5,120,0001 $1 million
Exemption

Max. Estate
45 percent 35 percent 35 percent 35 percent 55 percent
Tax Rate

Gift Tax
$1 million $1 million $5 million $5,120,0001 $1 million
Exemption

Max. G Tax
. Gift
45 percent
t 35 percent
t 35 percent
t 35 percent
t 55 percent
t
Rate

GST Tax $1 million indexed
$3.5 million $5 million $5 million $5,120,0001 for inflation from
Exemption 1997

Max. GST
45 percent 0 percent 35 percent 35 percent 55 percent
Tax Rate
1 The gift, estate, and GST tax exemptions were increased by a COLA of $120 000 Rev Proc. 2011-52, §3 29
gift estate $120,000. Rev. Proc 2011-52 §3.29.


Use It or Lose It:
How Utilize h $5 12 Milli U ifi d C di
H to U ili the $5.12 Million Unified Credit
Planning for Married Couples:
Gift to Spousal Lifetime Access Trust (SLAT)
Secondary Objective in Making Large Gifts is Retaining Access
(“just in case”)
Giving Access to Spouse Is Often Tantamount to Retaining Access
Beware of Reciprocal Trust Doctrine
Gift to Inter Vivos QTIP
f Q
Potential Qualified Disclaimer
Spouse’s Decision to Disclaim Can Wait for up to 9 months
Allows Time to Determine Where Tax Laws Are Heading


Use It or Lose It:
Planning for Single Clients:
g g
Grantor Dynasty Trusts
Defer Transfer Taxes for Multiple Generations
Grantor Pays Income Taxes Without Making
Additional Taxable Gifts to Trust
Forgiveness of Past Loans
Very Simple and Popular Technique
Simple to Do and Confers on a Prior Transfer
the Gift Treatment if the Gift Tax Exemption
Had Not Been Smaller


Use It or Lose It:
Qualified Personal Residence Trusts (QPRTs)
QPRTs Are More Effective When the Section 7520
Rate Is High
Unlike GRAT,
U lik a GRAT a QPRT cannot be “zeroed-out”
tb “ d t”
The Unavoidable Remainder (Gift) Value Can Be
Transferred in a QPRT More Easily When the Gift Tax
Q yW G
Exemption Is High


Use It or Lose It:
 Four Considerations for Making Exclusion Gifts
Choose the Assets Given Carefully and if Possible Use
Discounted Assets
Use f Formula All ti Clause or Defined Value
U of F l Allocation Cl D fi d V l
Clause
Make the Gift to a “Grantor Trust”
G G
Plan for Financial Reversals


Estate Planning at the Crossroads:
The F
Th Future of T T h i
f Top Techniques
General Explanations
p
of the
Administration’s Fiscal Year 2013
d st at o s sca ea 0 3
Revenue Proposals

Department of the Treasury
February 2012
y

This document is available online at:
http://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2013.pdf


Estate Planning at the Crossroads:
The F
Th Future of T T h i
f Top Techniques
 On February 13, 2012 the Department of Treasury released the
y , p y
General Explanations of the Administration's Fiscal Year 2013
Revenue Proposals (the “Greenbook”). The 2013 Greenbook
included many proposals articulated in prior years – namelynamely,
modifying the rules on valuation discounts, requiring a
minimum term for GRATs, and limiting the duration of GST
tax-exempt trusts. In addition, the 2013 Greenbook seeks to
incorporate the grantor trust rules into the transfer tax system.


Modify Rules on Valuation Discounts

 Frequently used with closely-held business, FLPs and LLCs
q y y ,
 Lack of Marketability (inability to quickly convert the
business holding to cash)
 Lack of Control or Minority Interest (if less than a controlling
interest)
 Built-In Gains (when valuing a corporation using net asset
value method)


(continued)
( i d)
 Ranges we have seen
g
Lack of Marketability – 15% to 45%
Lack of Control – 10% to 40%
Excess of 35% Combined - Inviting an Audit
 President Obama’s 2013 “Green Book” Proposal – Will make
it more diffi lt if not i
difficult, t impossible, t claim valuation
ibl to l i l ti
discounts, particularly in family situations


(continued)
( i d)
 The proposal would create a category of “disregarded
p p g y g
discounts” that would be ignored in valuing an interest in a
family-controlled entity transferred to a member of the family,
if,
if after the transfer, the restriction will lapse or may be
transfer
removed by the transferor or the tranferor’s family
 Disregarded restrictions would include restrictions on
liquidation of an interest that are measured against standards
prescribed in Treasury regulations, not against default state law
 Disregarded restrictions would also include limitations on a
transferee’s ability to be admitted as a full partner or other
holder of an equity interest


Require a Minimum Term for Grantor
Retained A
R i d Annuity Trusts (GRATs)
i T (GRAT )
 Risk-free* way of transferring wealth free from transfer taxes
y g
 7520 Rate
 Hope that trust assets produce a return in excess of the 7520
rate
 *Only risk is no tax-free transfer if grantor dies during annuity
term (still no worse off)


Retained A
i T (GRAT )
Children’s 2-Year Zeroed-Out GRATs
Trust
T t
1st Traditional
GRAT Ends

2011 2012
2010
GRAT 2 GRAT 3
GRAT
G A 1
Yr 1 Yr 2


Retained A
i T (GRAT )
This proposal would require, in effect, some
downside risk in the use of GRATs by imposing the
requirement have a minimum term of ten years and a
maximum term of the life expectancy of the annuitant
plus ten years
The proposal also would include a requirement that
the remainder interest have a value greater than zero
at the time the interest is created and would prohibit
t th ti th i t ti t d d ld hibit
any decrease in the annuity during the GRAT term


Limit Duration of Generation-Skipping
Transfer (GST) T Exemption
T f Tax E i
This proposal would provide that on the 90th
anniversary of the creation of a trust, the GST
exclusion allocated to the trust would terminate
This would be achieved by increasing the inclusion
ratio of the trust to one, thereby rendering no part of
the trust exempt from GST tax


Coordinate Certain Income and Transfer Tax
Rules A li bl
R l Applicable to Grantor Trusts
G T
To the extent that the income tax rules treat a grantor
of a trust as an owner of the trust, the proposal would
(1) include the assets of that trust in the gross estate
of that grantor for estate tax purposes (2) subject to
gift tax any distribution from the trust to one or more
beneficiaries d i th
b fi i i during the grantor’s life, and (3) subject
t ’ lif d bj t
to gift tax the remaining trust assets at any time
during the grantor s life if the grantor ceases to be an
grantor’s
owner of the trust for income tax purposes


Our Team
 John Hussell – Office Managing Partner Kelli Harrah – Secretary
j h h
john.hussell@dinsmore.com
ll@di kelli.harrah@dinsmore.com
 Staci Criswell – Partner
 staci.criswell@dinsmore.com Susan Burgess – Secretary
 J.E. White, Jr. – Partner susan.burgess@dinsmore.com
 j hi @di
je.white@dinsmore.com Debbie Martin Secretary
D bbi M i – S
 Joshua Rogers – Associate debbie.martin@dinsmore.com
 joshua.rogers@dinsmore.com
Terri Rubenstein - Secretary
 Andrew Ellis – Associate
 andrew.ellis@dinsmore.com
d lli @di terri.rubenstein@dinsmore.com
terri rubenstein@dinsmore com
 Katherine Mullins – Associate Kim Sigman - Secretary
 katherine.mullins@dinsmore.com kim.sigman@dinsmore.com
 Larissa McCoy – Paralegal
 l i
larissa.mccoy@dinsmore.com
@di
 Natalie Taylor – Paralegal
 natalie.taylor@dinsmore.com


Estate Planning Strategies for Changing Tax Rules

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