jzmacudeledu Director of Trust Management Minor Instructor Probate Legal process of transferring asset from deceased person ownership to beneficiary ownership Trusts Tax efficient Structure created to control wealth during life or after death to defer and minimize taxes protect w ID: 1029784
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1. Estate PlanningJennifer Zelvin McCloskey | jzmac@udel.eduDirector of Trust Management Minor | Instructor
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3. Probate – Legal process of transferring asset from deceased person ownership to beneficiary ownershipTrusts – Tax efficient Structure created to control wealth during life or after death to defer and minimize taxes, protect wealth, avoid probate, create generational wealth. Separation between legal and equitable ownership.
4. Taxes1. estate – transfer tax after death ($12M per person)2. Income – tax imposed on all income from whatever source derived (26 USC Section 61)3. Gift – tax imposed upon donor for gifts over $15k annually
5. PROBATE – applies only to probate assetsAll Tangible personal property and real estate owned solely or as tenants in commonSolely (severally) owned assets – own aloneTenancy in common – fractional ownership in common with another
6. PROBATE triggersWill or no will (Testate or intestate)often avoided because it is time consuming, public, costly, and subject to creditor claimsavoided through trusts, pod/tod, beneficiary designations, jointly owned assets (JTWROS)
7. Non-probate assetsjoint tenancy with right of survivorship (JTWROS) (operation of law)By contract (retirement vehicle or any designated beneficiary)trust assets
8. EXAMPLE # 1: what is subject to probate if H dies?ASSETOWNERAMOUNTCashJTWROS$20,000Brokerage AcctJTWROS$270,000Husband 401K (Bene=wife)H$400,000Husband IRA (Bene = wife)H$30,000Wife 401(k) (Bene = Husband)W$175,000Husband Life InsuranceH$400,000Wife Life InsuranceW$400,000Family homeH$200,000
9. EXAMPLE # 2: what is subject to probate if H dies?ASSETOWNERAMOUNTCashJTWROS$20,000Brokerage AcctJTWROS$270,000Husband 401K (Bene=wife)H$400,000Husband IRA (Bene = wife)H$30,000Wife 401(k) (Bene = Husband)W$175,000Husband Life InsuranceW$400,000Wife Life InsuranceH$400,000Family homeJTWROS$200,000
10. Typical estate plan financial planner see wills – document that directs final disposition of property owned at the time of death. Validity linked to proper executiondurable power of attorney – authorizes another (agent) to act on behalf of person signing (principal)living will/advance healthcare directive – authorizes healthcare agent and end of life decisions
11. Gift taxes annual exclusion gifts: de minimus $15,000 per person annually. Can “gift split” if married (double the gift to each bene) with spousal consent legislative grace – bday, holidays, graduation etc.
12. Gift taxes annual exclusion qualifications:1. present interest (gift into trust with crummey powers)2. outright giftcrummey – reasonable period to withdraw if not exercised gift remains in trust
13. Present v. future interestpresent interestbene has immediate right to enjoy or access giftFuture interestbeneficiary has a delayed right/expectancy upon the natural termination of the present interest
14. Tax-exempt giftsqualified medical and educational transfersbehavioral taxation – unlimited payments directly to institution on behalf of another – tax freeno gift tax and deductible to donor in addition to annual exclusion gifts
15. estate taxapplicable credit (unified gift and estate tax credit) = $12m per person – sunset 2025cannot gift split
16. income tax considerationsbasis – step-up or inherited basisbasis steps up to fmv at dod or alternative valuation date (election by executor and valued as of 6 months after dod)when estate tax credit is high makes sense to allow benes to inherit assets at higher stepped-up basis rather than making lifetime gifts to trust
17. example – stepped up basispaid $500 for stock with a current market value of $2,000Gift stock to child, he assumes same cost basis or carry over basis. They sell then they are taxed on $1,500 in capital gain (long or short term)but if child inherits stock at your death the cost basis of the stock is $2,000. They sell – no Tax consequence
18. final tax consideration – generation skipping transfer tax (GST) – the dupont, rockafeller, getty taximposed on transfers to two or more generations below grantor/donor or for unrelated individuals those 37.5 years younger than donorpredeceased parent exception – step into parent’s generationFLAT TAX – 40%
19. The Gross Estate for estate tax calculationsProperty owned by decedentlife insurance owned by decedentjoint tenancy propertyjoint and survivor annuitiesretained life interests retained power to amend/revokereversionary interestgift tax paid within 3 years of de4ath general power of appointment
20. Not included in GrossAssets transferred to irrevocable trustassets gifted inter vivosdecedent’s interest in a life annuitydecedent holds limited power of appointment in trust assets
21. life insurance owned by decedent ifhas power to change benehas power to surrender for cash valuehas power to borrow against valueshas power to pledge or assign policyhas power to revoke any assignment
22. 3-year rulegeneral rule: inter vivos gift by decedent during life not included in gross estate exception: if made within 3 years of death gift is included if it is (a) life insurance; (b) retained interest; (c) gift taxes paid
23. Estate tax calculationgross estate minusfuneral expenses, estate admin expenses, debts, taxes, mortgages, medical expenses, liens, casualty and theft loss = adjusted gross estate Taxable Estate CalculationAdjusted Gross Estate minusstate death taxes, marital and charitable deductions = taxable estate
24. TRUSTSPurposes for using trustsProfessional management by trusteesminimize and defer taxation (irrevocable only)creditor protectionprevent asset waste (spendthrift)split equitable interest between multiple generationscharitable purposes
25. Types of trustssimple complexrevocableirrevocableinter vivos (during life)testamentary (at death embedded into a will)grantor non-grantor
26. Simple trustmust distribute all income annuallyno principal distributionsno charitable deductionstrust income is taxed to beneficiary (K1)No accumulated incomepersonal exemption is $300no standard deduction
27. Complex trustsall trusts that are not simpletrust income can be accumulated If distributed, trust income is taxed to beneficiarybeneficiary income tax exposure is limited to distributable net income (dni)allows for possibility for beneficiary to receive distributions tax freeExemption = $100 and no standard deduction
28. Revocable trustsall revocable trusts are grantor trustsgrantor pay income tax on the trustgrantor can amend or revoke at any timewill substitute not a tax planning trustirrevocable upon death of grantor
29. Revocable trustsadvantages: control retained, grantor can continue to manage assets, can continue pos- mortem, avoids probatedisadvantages: attorneys fees, cost of transferring assets, risk of probate if assets are not transferred
30. irrevocable trustsgrantor relinquishes control over trust property and management and retains little to no rights to change trustused for high level sophisticated tax planning (gift, income and estate tax planning)
31. Gift tax exposure for trustswhen assets are transferred by grantor it is typically via gift transferrevocable trusts and grantor trusts – no gift tax because the gift is not completedirrevocable trust – if gift is in excess of unified exemptions gift tax may be due because gift is completed
32. estate tax rules for transfers to trustsassets transferred to revocable trust are includable in grantor’s gross estateassets transferred to irrevocable trust are not unless grantor has a retained interest or other sufficient level of controlLife insurance transferred into a trust within 3 years of the grantor’s death is includable in the estate
33. Grantor truststaxes paid by grantor covered under special rules of the iRCused where grantor is looking to make incompleted gifts to trust
34. grantor retained trustgrantor retained annuity trust (GRAT)grantor retained unitrust (grut)qualified personal residence trust (qprt)grat – grantor retains a fixed annuity stream of income and remainder passes to beneficiary. No additional contributions. Used for hard to value assets, low basis assets expected to appreciate, grantor wants bene to receive appreciation, fixed stream of income
35. non-grantor truststrust structure is separate taxpayer. Most irrevocable trust are non-grantorvariety of sophisticated planning techniques like credit shelter trusts, marital trusts, slat, crt, etc.
36. Planning techniques useful for financial plannersintra-family loans to support business transactions with market interest ratesbelow market interest rate risks: interest may be deemed a gift by the lender and income paid in interest may be deemed income to lender by irs
37. Planning techniques useful for financial plannersbargain sale or part gift/part sale transaction: property is sold below market value. Irs deems difference between fmv and transfer price to be a gift
38. Planning techniques useful for financial plannersflp and llc: family limited partnership (flp) or limited liability company (llc) owner can gift limited partnership interests or llc membership units to family members while retaining gp interest or controlling membership units in llc. Allows future appreciation of assets to be transferred out of owner’s estateutilizes unified credit and annual exclusion for transfers
39. Planning techniques useful for financial plannersbuy-sell agreement: contract predetermining disposition of business assets when business owner dies, retires or become disabled
40. qualified disclaimersbeneficiary can disclaim an asset and allow it to pass to another beneficiarymust be irrevocable, in writing, and done within 9 months of the transferdisclaiming person cannot receive any benefit whatsoever from the asset and cannot have control