5 Million Dollar Strategies – Exclusions and Planning by George Mentz JD MBA CWM

With less than 3 weeks before the Estate and Gift Tax rates change, Americans are speedily transferring assets so as to benefit from the existing tax fairness rules.

There are 2 key objectives in wealth management. There are rules and then there is strategy. The purpose must be effectively intertwined with the laws on the books, and then mixed with the products and services available. And, it all must be documented effectively.

This all makes you think about the options available under the “so called” 5 million dollar exclusion. Here are examples:

1. Gift money to a trust and use a trust department while creating trust documents that have various provisions such as “spend thrift” or education, welfare, and living sustainability clauses.
2. Gift cash to multiple 529 plans to benefit several if not dozens of heirs for educational purposes.
3. Move stock or member interests in small to medium companies to heirs.
4. Create a dynasty trust with a wide array of beneficiaries who are descendants of children or relatives.
5. Buy homes or apartments for loved ones. Have the homes in trust where they are sustained & can’t be encumbered or legally attacked.
6. Set up UGMA or UTMA accounts for grandchildren, nieces, nephews and so forth.
7. Move income producing assets into your children’s name so as to capture a better tax rate.
8. Donate appreciated assets or stock to your children and have them move to a tax free state such as Texas and capture the low capital gains rate before year end.
9. Sell a business for stock, and immediately gift the stock to heirs or loved ones.
10. Borrow the money against your assets such as stock or real estate, and gift it to loved ones.
11. Release loans to family members as a gift.
12. Fund a major insurance trust immediately with a single premium policy.
13. If you demand that family behave and receive a lot of money later, create trust where beneficiaries only receive a portion of the money until they turn 35 or 45 years old.

*It is generally best to consult with a Chartered Wealth Manager and then use a licensed attorney who specializes in your county or state with trusts and wills. Moreover, it is advisable to consider using a lawyer or trust department to manage your estate, trusts and wills. Trust departments offer a lot of services to evaluate and can manage the assets of a trust while also paying bills, insurance, managing successions, and even running a business.

The TJSL Thomas Jefferson School of Law has an LLM program in international tax and finance.  To enroll or tell your staff about the program, view here: www.llmprogram.org

About the Author: Dr. George Mentz is a world recognized consultant and award winning professor who has authored several revolutionary books. Prof. Mentz, an international lawyer, has been a keynote speaker globally in Asia, Arabia, USA, Mexico, Switzerland, and in the West Indies. Mentz can be contacted for speaking engagements at www.gmentz.com or www.managementconsultant.us or www.selfhelpbook.org  Mentz is a licensed attorney and CWM Chartered Wealth Manager who resides in Colorado Springs Colorado USA
*No tax, insurance, investment or legal advice provided herein. Please consult with a licensed professional in your jurisdiction before making any important financial or legal decision.

Estate Planning 2012 – Do I Need to Worry? Is there a Strategy Going Forward? by George Mentz, Esq.

You may think estate planning is just for the wealthy. If your assets are worth $1,000,000 or more, estate planning is still a pending and delicate issue. With most assets such as homes and stocks devalued at the moment, those prices and valuations may move up quickly in the coming months and years. You may not also be familiar with your spouse’s net worth or pending inheritances either.

With the tax changes for 2011 and 2012, you may not need to worry so much about estate taxation because of the 5 million that an individual can leave without estate taxes while the spousal exemption is still in force, but it will keep changing and taxes will probably go back up soon. Presently, the old trusts may or may not be needed depending on your net worth, spouse, health, children and other dynamics, so this is one of the most dynamic times in history for a review of estate planning documents.

Tax Year Tax Rate Exemption Equivalent
2009 45% $3,500,000
2010 N/A or 35% N/A or $5,000,000
2011 35% $5,000,000
2012 35% $5,120,000
2013 55% $1,000,000

The worst problem is that there is no guarantee that any large exemption will be available anytime in the near future.

Adding up the value of your assets can be an eye-opening experience. By the time you account for your home, investments, company value, retirement savings and life insurance policies you own, you may find your estate will end up in the taxable category.

The strategy that must be evaluated by yourself or your parent(s) is whether to use the large exemption NOW and make large gifts of your holdings to your loved ones in the short term.

By giving now, you can fund:
1. Pre-Fund Education of children and grandchildren
2. Home purchases or rental real estate in a low market for children.
3. Give away assets such as stock to loved ones.
4. Move large gifts of family stock to your children.

Further, it is always a good time for you or your clients to review:

1. Durable Power of Attorney
2. Wills
3. Medical Directives
4. Any Trusts (Some may want to be voided and replaced)
5. LLCs and Company Stock (operating agreements)
6. State Tax issues
7. Guardianship designations
8. Whether a professional trustee should be involved
9. Checking all of your designations and beneficiaries of your insurance, annuities, or other non-probated assets.
10. Document preservation.

The last challenge is document preservation. Make sure your important documents are: with a reputable or safe law firm, with a reputable trust department, in a bank deposit box that somebody knows about, or preserved in another type of lock box service that will notify your loved ones about your intentions.

All Rights Reserved – No legal advice is intended herein. Please consult with a qualified or licensed professional in your jurisdiction before making any important decision.

The business owner who supports his parent, or an adult family member, may be missing an opportunity to lower his tax burden. In the context of a properly established insurance funded buy-sell agreement, small business clients have an opportunity to provide an adult family member with a fixed income while also protecting the client’s interest in the business and avoiding adverse tax consequences.

Read the analysis by our experts Robert Bloink and William Byrnes located at AdvisorFX Journal The Planning Opportunity Presented When a Client Supports a Parent

After reading the analysis, we invite your questions and comments by posting them below, or by calling the Panel of Experts.

In December of last year, President Obama turned the standard estate plan upside down when he signed the Tax Relief Act of 2010. In addition to a record $5 million applicable exclusion amount and continued 35% top rate, the estate tax included a brand new concept that may force your clients to re-evaluate their estate plan.

That concept is the Deceased Spouse Unused Exclusion Amount (DSUEA). Advisor’s Journal covered the DSUEA shortly after the concept was introduced [Does the New Estate Tax Make the Bypass Trust Obsolete? (CC-10-122)]. In that article, we concluded that the DSUEA not only makes bypass trusts unnecessary, but may even hurt an estate’s beneficiaries by reducing the basis of assets they receive from the bypass trust. We hinted at one solution to the bypass trust problem—disclaimers. Here we’ll discuss a particular solution to the bypass trust problem, the so-called “A-B Bypass Trust.”

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of the new estate tax in Advisor’s Journal, see IRS Finally Issues Guidance on 2010 Estate Tax (CC 11-160), Does the New Estate Tax Make the Bypass Trust Obsolete? (CC-10-122), & Obama Tax Agreement Passed by House (CC 10-117).

For in-depth analysis of the estate tax, see Advisor’s Main Library: Estate, Gift and GST Taxes

When an estate is facing a liquidity crisis, why not tap the family limited partnership (FLP) for cash? After all, the decedent was a partner in the partnership and the partnership can make distributions to the estate, which is now a partner in the FLP.

No so fast. Although an FLP may look like a prime source of cash for paying an estate tax bill, the move can come back to bite the estate in a big way. Done the wrong way, it could jeopardize the valuation discounts and estate planning objectives your clients and their estate planning professionals worked so hard to secure.

The IRS is perpetually on the lookout for new weapons to use against FLPs, but Section 2036 of the Internal Revenue Code has been the IRS’s weapon of choice against FLPs over the past decade.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of family limited partnerships in Advisor’s Journal, see Use Charitable Giving to Enhance Family Business Succession Planning (CC 10-76) and
Practical Succession Planning for the Family-Owned Business (CC 08-22).

For in-depth analysis of family limited partnerships, see Advisor’s Main Library: FF—Family Limited Partnership.

The 37th Annual Notre Dame Tax and Estate Planning Institute will take place on September 15-16, 2011, in South Bend, Indiana at the Century Center. If you have an interest in estate planning including issues regarding federal estate and gift taxes this conference is for you. Hosted by one of the foremost expert attorneys in the area, Institute Director, Professor Jerome M. Hesch, has invited a number of distinguished guests who will discuss relevant estate planning issues surrounding the practice today.

The program  includes highlights in 2011 that are new to the format this year:

With increased exemptions, the need for estate planning for the moderately wealthy will decrease. Recognizing this trend, the 2011 Institute will add topics that go beyond gift and estate tax savings. It is intended that these add-ons will introduce topics that can create new planning opportunities and thus new business for your practice. These special features will include income tax planning ideas that estate planning professionals can introduce to their individual clients and using variations of traditional estate planning techniques for income tax planning for corporations. The Institute will also address the tax and state law issues relating to early termination of trusts, interpretation of ambiguous trust language and amending trust terms by reformation or decanting. Another focus will be communicating charitable planning techniques to encourage charitable giving that will also accomplish the individual’s other objectives. As part of the communication focus, sessions will cover the mathematics of estate planning and using financial projections as part of the evaluation and communication process. [1]

For those attendees desiring certification of attendance at the program, the Institute will issue certificates of attendance. The program will afford up to 17.00 actual hours of continuing education, including 1.00 hour of ethics. Each continuing education accrediting agency determines the number of hours it will accept for accreditation.

Wealth managers are welcome to attend. There is a fee for registration. For additional information on the event please visit click here. If you have any other questions about the Institute, please contact Dawn Boulac at (574) 631-2616 or dboulac@nd.edu.

“Founded in 1869, the Notre Dame Law School is the oldest Roman Catholic law school in the nation. Embracing equally the wealth of its heritage and a calling to address the needs of the contemporary world, Notre Dame Law School brings together centuries of Catholic intellectual and moral tradition, the historic methods and principles of the common law, and a thorough engagement with the reality of today’s legislative, regulatory, and global legal environment. At Notre Dame Law School, students and faculty of diverse backgrounds, experiences, and commitments are encouraged to cultivate both the life of the mind and the wisdom of the heart, to pursue their studies with a passion for the truth, and to dedicate their professional and personal lives to serve the good of all the human family.” [2]

[2] Notre Dame.  See About the Law School. http://law.nd.edu/about/. Last Accessed 8/07/2011.

Trusts offer your clients asset protection and tax benefits, giving them the power to say how and when their cash and property are distributed. They also offer a mechanism for putting the decision-making process in the hands of someone other than the grantor—the power of appointment (POA).

But for all their flexibility, powers of appointment also have the tendency to throw estate plans off track, resulting in unplanned-for tax liability and unforeseen results.

Although a person who has a general power of appointment over property isn’t said to own the property, if they die holding the POA, their gross estate can include the value of that property. And that’s where the dispute in Estate of Chancellor v. Comm’r, T.C. Memo 2011-172 (2011) begins.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of the estate tax in Advisor’s Journal, see More States Moving to Estate Tax Repeal (CC 11-121) & Does the New Estate Tax Make the Bypass Trust Obsolete? (CC-10-122).

For in-depth analysis of the estate tax, see Advisor’s Main Library: A—Federal Estate Tax General.

Why is this Topic Important to Wealth Managers? This blogticle presents discussion on international estate planning considerations for non-resident aliens generally. We have provided this information for wealth managers with international clients who may have estate tax issues to contend with.

A now deceased individual who at the time of death was neither a resident nor citizen of the United States may nonetheless be subject to U.S. estate tax if at the time of death he or she owned property in the United States. In such a case, although the U.S. estate tax is applicable, only property located in the United States is includable in the gross estate and subject to tax.

An important distinction is made between who is subject to income tax and estate tax. For estate tax purposes, a nonresident alien is a person who is neither a domiciliary nor a citizen of the United States. Thus, an alien who dwells in the United States, but whose domicile remains elsewhere, is classed as a nonresident alien.[1]

Domicile here is used in the traditional sense. In other words, domicile generally requires presence and an intention to remain permanently.

For example, consider a decedent who lived in the United States six years before he died. However, he always intended to return to his native Netherlands, the location of his family and close friends, at the earliest opportunity. This man’s domicile was the Netherlands and therefore he had died a nonresident alien and was not subject to the traditional citizen or resident alien estate tax regime.[2]

The gross estate of a nonresident alien includes that part of his property which is situated in the United States at the time of his death.[3] For purposes of determining what property is situated in the United States, any property which the decedent has transferred, by trust or otherwise, which would be taxable within the provisions of Code §§2035 through 2038 (relating to termination of certain property interests within three years of death, transfers with retained life estate or to take effect at death, and revocable transfers), is deemed situated in the United States if it was so situated either at the time of the transfer or at the time of death.[4]

For a decedent who at the time of death was a nonresident alien, property is considered located in the United States if it falls into any of the categories listed below:

• Real property located in the United States.
• Tangible personal property located in the United States. This includes clothing, jewelry, automobiles, furniture or currency. Works of art imported into the United States solely for public exhibition purposes are not included.
• A debt obligation of a citizen or resident of the United States, a domestic partnership or corporation or other entity, any domestic estate or trust, the United States, a state or a political subdivision of a state or the District of Columbia.
• Shares of stock issued by domestic corporations, regardless of the physical location of stock certificates.[5]

When considering inbound international estate planning issues one question that should be addressed is if the decedent is a citizen or resident of one of the several countries with which the United States has an estate tax convention (treaty). This is because provisions of the applicable treaty may override the normally applicable Internal Revenue Code provisions. The United States is a party to estate or gift tax treaties with the following countries: Australia, Austria, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands, Norway, Republic of South Africa, Switzerland, and the United Kingdom.

One final but very important point to note is that proceeds of insurance on a nonresident alien’s life are not includible in his gross estate.[6]This is true even though the proceeds are paid to a resident beneficiary.

For additional information on this subject see AMAFX: U.S. Estate and Gift Tax Consequences for Non-U.S. Citizens.

Tomorrow’s blogticle will discuss the qualified domestic trust.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

[2] See Est. of Jan Willem Nienhuys, 17 T.C. 1149 (1952).

[3] IRC §2103.

[4] IRC §2104(b).

[5] Treas. Regs. §20.2104.

[6] IRC §2105(a).

Why is this Topic Important to Wealth Managers? The IRS recently released proposed regulations relating to the exclusion from gross income of discharge of indebtedness income of a grantor trust or an entity that is disregarded as an entity separate from its owner. Further, the proposed regulations provide rules regarding the term “taxpayer” for purposes of applying the existing law to discharge of indebtedness income of a grantor trust or a disregarded entity. The proposed regulations thus generally affect wealth managers who have clients/”taxpayers”” who “own” grantor trusts, or disregarded entities.

Generally speaking section 61(a)(12) of the Internal Revenue Code (the Code) provides that income from the discharge of indebtedness is includable in gross income. However, such income may be excludable from gross income under section 108 in certain circumstances.

The proposed regulations provide that, for purposes of applying section 108(a)(1)(A) and (B) to discharge of indebtedness income of a grantor trust or a disregarded entity, the term taxpayer, as used in section 108(a)(1) and (d)(1) through (3), refers to the owner(s) of the grantor trust or disregarded entity. The proposed regulations thus have income tax implications to “owners” of grantor trusts with regards to discharge of indebtedness.

The proposed regulations further provide that grantor trusts and disregarded entities themselves will not be considered owners for this purpose. The regulations will therefore cause those “owners” of grantor trusts and disregarded entities to realize income through the discharge of indebtedness.

Lastly, the proposed regulations provide that, in the case of a partnership, the owner rules apply at the partner level to the partners of the partnership to whom the discharge of indebtedness income is allocable.

Proposed Regulation Application Example:

If a partnership holds an interest in a grantor trust or disregarded entity, the applicability of section 108(a)(1)(A) and (B) to discharge of indebtedness income of the grantor trust or disregarded entity is tested by looking to the partners to whom the income is allocable. If any partner is itself a grantor trust or disregarded entity, the applicability of section 108(a)(1)(A) and (B) is determined by looking through such grantor trust or disregarded entity to the ultimate owner(s) of such partner.

Grantor Trust “Owners”

A grantor who retains certain interests in a trust he creates may be treated as the “owner” of all or part of the trust and thus taxed on the income of the trust in proportion to his ownership. There are five categories of interests for which the IRC gives detailed limits as to the amount of control the grantor may have without being taxed on the trust income. These categories are: reversionary interests, power to control beneficial enjoyment, administrative powers, power to revoke, and income for benefit of grantor. [1]

Generally, a grantor will be treated as the owner of any portion of a trust in which he has a reversionary interest in either the corpus or the income, if, as of the date of inception of that portion of the trust, the value of such interest exceeds 5% of the value of the trust.[2]

If the trust income is (or, in the discretion of the grantor or a nonadverse party, or both, may be) distributed or held for the benefit of the grantor or his spouse, he will be treated as the owner of it. [3]

Moreover, if the trust income is (or, in the discretion of the grantor or a nonadverse party, or both, may be) distributed or held for the benefit of the grantor or his spouse, he will be treated as the owner of it. [1]

For a detailed discussion on the taxation of grantor trusts see Tax Facts: What is a grantor trust? How is a grantor trust taxed?

For more information on the discharge of indebtedness in general see Tax Facts: What are the tax consequences of a discharge of indebtedness?

Tomorrow blogticle will continue to address issues surrounding the private wealth management practice.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

[2] IRC Sec. 673(a).

[3] IRC Sec. 677(a).

Clients often want to use Qualified Terminal Interest Property trusts (QTIPs) to segregate certain funds to care for a surviving spouse, while retaining some measure of control over the ultimate disposition of the funds—whether they will be distributed to children or a charity. But navigating the QTIP rules as client’s circumstances change down the road can be treacherous, with the tiniest misstep eliminating any transfer tax benefit of the trust.

A recent IRS private letter ruling (PLR 201117005) provides us with a good reminder of the QTIP rules and an example of creative QTIP planning that provides the surviving spouse with adequate lifetime income while giving the grantor (and the surviving spouse) a degree of post-death control over disposition of the trust assets.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber)

For a graphic illustration of the QTIP trust, see the Concepts Illustrated practice aid at G—Credit Shelter Trust and QTIP Trust.

For coverage of QTIPs and other techniques useful in estate planning for blended families, see the Advisor’s Journal article Estate Planning for Blended Families (CC 07-16).

For in-depth analysis of marital deduction planning, see Advisor’s Main Library: G—The Marital Deduction.