Preparing for the Sunset - Unique Estate Planning Opportunities at the End of an Era

Preparing for the Sunset:Preparing for the Sunset:Unique Estate Planning Opportunities t th E d f Eat the End of an Era

John F. Hussell, IV Staci N. Criswell304.357.9966 304.357.9906304.357.9966 [email protected] [email protected]

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

Current Tax Climate2009 20102009

Estate Tax Exemption $3.5 million

2010

$5 million

2011

$5 million

2012

$5,120,0001

2013

$1 millionExemption

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

Gift Tax Exemption $1 million

Max. Gift Tax 45 t

$1 million

35 t

$5 million

35 t

$5,120,0001

35 t

$1 million

55 t. GRate 45 percent

GST Tax Exemption $3.5 million

35 percent

$5 million

35 percent

$5 million

35 percent

$5,120,0001

55 percent

$1 million indexed for inflation from

1997

Max. GSTTax Rate 45 percent 0 percent 35 percent 35 percent 55 percent

1 The gift estate and GST tax exemptions were increased by a COLA of $120 000 Rev Proc 2011-52 §3 29


The gift, estate, and GST tax exemptions were increased by a COLA of $120,000. Rev. Proc. 2011-52, §3.29.

Use It or Lose It:H U ili h $5 12 Milli U ifi d C diHow to Utilize the $5.12 Million Unified CreditPlanning 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 AccessBeware of Reciprocal Trust Doctrine

Gift to Inter Vivos QTIPf QPotential Qualified DisclaimerSpouse’s Decision to Disclaim Can Wait for up to 9 monthsAllows Time to Determine Where Tax Laws Are HeadingAllows Time to Determine Where Tax Laws Are Heading


Use It or Lose It:H U ili h $5 12 Milli U ifi d C diHow to Utilize the $5.12 Million Unified Credit

Planning for Single Clients:g gGrantor Dynasty TrustsDefer Transfer Taxes for Multiple GenerationsGrantor Pays Income Taxes Without Making

Additional Taxable Gifts to TrustForgiveness of Past LoansForgiveness of Past LoansVery Simple and Popular TechniqueSimple to Do and Confers on a Prior TransferSimple 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:H U ili h $5 12 Milli U ifi d C diHow to Utilize the $5.12 Million Unified CreditQualified Personal Residence Trusts (QPRTs)QPRTs Are More Effective When the Section 7520

Rate Is HighU lik GRAT QPRT t b “ d t”Unlike a GRAT, a QPRT cannot be “zeroed-out”The Unavoidable Remainder (Gift) Value Can Be

Transferred in a QPRT More Easily When the Gift Tax Q y W GExemption Is High


Use It or Lose It:H U ili h $5 12 Milli U ifi d C diHow to Utilize the $5.12 Million Unified CreditFour Considerations for Making Exclusion GiftsChoose the Assets Given Carefully and if Possible Use

Discounted AssetsU f F l All ti Cl D fi d V lUse of Formula Allocation Clause or Defined Value

ClauseMake the Gift to a “Grantor Trust”G GPlan for Financial Reversals


Estate Planning at the Crossroads:Th F f T T h iThe Future of Top Techniques

General Explanations pof the

Administration’s Fiscal Year 2013d st at o s sca ea 0 3Revenue Proposals

Department of the TreasuryFebruary 2012y

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


Estate Planning at the Crossroads:Th F f T T h iThe Future of Top Techniques

On February 13, 2012 the Department of Treasury released they , p yGeneral Explanations of the Administration's Fiscal Year 2013Revenue Proposals (the “Greenbook”). The 2013 Greenbookincluded many proposals articulated in prior years namelyincluded many proposals articulated in prior years – namely,modifying the rules on valuation discounts, requiring aminimum term for GRATs, and limiting the duration of GSTtax-exempt trusts. In addition, the 2013 Greenbook seeks toincorporate the grantor trust rules into the transfer tax system.


Modify Rules on Valuation DiscountsModify Rules on Valuation Discounts

Frequently used with closely-held business, FLPs and LLCsq 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 assetBuilt-In Gains (when valuing a corporation using net asset

value method)


Modify Rules on Valuation Discounts ( i d)(continued)

Ranges we have seengLack 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 makeit diffi lt if t i ibl t l i l tiit more difficult, if not impossible, to claim valuationdiscounts, particularly in family situations


Modify Rules on Valuation Discounts ( i d)(continued)

The proposal would create a category of “disregarded p p g y gdiscounts” that would be ignored in valuing an interest in a family-controlled entity transferred to a member of the family, if after the transfer the restriction will lapse or may beif, after the transfer, the restriction will lapse or may be 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 aDisregarded 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 R i d A i T (GRAT )Retained Annuity Trusts (GRATs)

Risk-free* way of transferring wealth free from transfer taxesy g7520 RateHope 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)term (still no worse off)



2-Year Zeroed-Out GRATsChildren’sT t

1st Traditional GRAT Ends

Trust

2010G A 1

2011GRAT 2

2012GRAT 3GRAT 1 GRAT 2

Yr 1GRAT 3

Yr 2



This proposal would require, in effect, someThis 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 yearsThe proposal also would include a requirement that

the remainder interest have a value greater than zero t th ti th i t t i t d d ld hibitat the time the interest is created and would prohibit

any decrease in the annuity during the GRAT term


Limit Duration of Generation-Skipping T f (GST) T E iTransfer (GST) Tax Exemption

This proposal would provide that on the 90thThis proposal would provide that on the 90anniversary of the creation of a trust, the GSTexclusion allocated to the trust would terminateThis 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 R l A li bl G TRules Applicable to Grantor Trusts

To the extent that the income tax rules treat a grantorTo 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 b fi i i d i th t ’ lif d (3) bj tbeneficiaries during the grantor’s life, and (3) subject to gift tax the remaining trust assets at any time during the grantor’s life if the grantor ceases to be anduring the grantor s life if the grantor ceases to be an owner of the trust for income tax purposes


Our TeamOur Team John Hussell – Office Managing Partner j h h ll@di

Kelli Harrah – Secretary [email protected]

Staci Criswell – Partner [email protected]

J.E. White, Jr. – Partner j hi @di

[email protected] Burgess – Secretary

[email protected] bbi M i S [email protected]

Joshua Rogers – Associate [email protected]

Andrew Ellis – Associated lli @di

Debbie Martin – [email protected]

Terri Rubenstein - Secretaryterri rubenstein@dinsmore com [email protected]

Katherine Mullins – Associate [email protected]

Larissa McCoy – Paralegall i @di

[email protected] Sigman - Secretary

[email protected]

[email protected] Natalie Taylor – Paralegal [email protected]
