Seven Tax-Advantaged Estate Planning Techniques

1 Seven Tax-Advantaged Estate Planning TechniquesThursday November 9, 2017 Sarah You Might Not Know (But Should)Presented in Partnership with ACC-NortheastSeven Tax-Advantaged Estate Planning Estate gifting to Family with Stock Options and Pre-Acquisition Leveraged Planning with Retirement Accounts and Deferred Planning1. Your Core Estate PlanTax- advantaged Estate Planning technique #1 Determining GoalsEstate Planning starts with determining your goals, which may include the following: Providing for the financial security of a Surviving Spouse Creating trusts for your descendants that ensure their financial well being and financial protection (from creditors and others) Reducing federal and state Estate and gift taxes Optimizing income-tax characteristics of retirement assets left to family members Leveraging gift and Estate tax exemptions to make lifetime transfers Fulfilling charitable objectivesCore Documents Health Care Proxy/Living Will Durable Power of Attorney for Financial Affairs Will Revocable TrustCurrent Transfer Tax RegimeFEDERAL 2017 2018 Giftand Estate Tax Exemption Amount$5,490,000$5,600,000 Maximum Gift and EstateTax Rate40%40%GST Tax Exemption Amount$5,490,000$5,600,000 Annual GiftTax Exclusion$14,000$15,000 Additional Points.

2 Provisions allow the second-to-die spouse to use any unused federal Estate tax (but not state Estate tax or GST tax) exemption of the first-to-die exemptions are adjusted for inflation each year. The Massachusetts Estate tax exemption is not. MASSACHUSETTS 2017 2018 Estate Tax Exemption Amount$1,000,000$1,000,000 Maximum EstateTax Rate16%16%Basic Estate Plan for a Married Couple Living in MassachusettsHusband s EstateHusband s TrustWife s EstateWife s TrustRetirement Assets to Designated BeneficiariesWifeOutright or in Trust for DescendantsMarital Trust(Remainder)Family Trust($1,000,000)$4,490,000 Subject to MA Estate tax only upon Wife s deathRemainderSubject to MA and federal Estate tax upon Wife s deathRetirement Assets to Designated Beneficiaries(Husband Dies First in 2017)Balance of AssetsAll AssetsNo Estate tax on 1st deathTangible personal propertyTangible personal propertyBalance of AssetsAll assets over $1M subject to MA Estate taxAll assets over $ subject to federal Estate tax= at Husband s death= at Wife s death2.

3 Life InsuranceTax- advantaged Estate Planning technique #2 Irrevocable Life Insurance Trust ( ILIT ) If a Life Insurance Policy is owned by the insured, the proceeds will be taxable to the insured s Estate . Proceeds will escape Estate taxation if ownership of the policy is transferred to an ILIT, and the insured lives for at least three years after the transfer. No three year requirement if new policy is purchased by an ILIT (which will be both the owner and beneficiary of the policy) Annual exclusion gifts can be used to pay premiums3. Lifetime GiftingTax- advantaged Estate Planning technique #3 Benefits of Lifetime GivingHowever they are made, lifetime gifts serve at least two important purposes: They benefit your family nowThey ultimately reduce your Estate tax liability, since any future appreciation on the gifted amount is removed from your Estate Free Lifetime GiftsIn addition to using your Federal Gift Tax Exemption to make lifetime gifts, the tax code allows several free types of gifts, in the sense that they do not cost any of our exemption amounts: Annual Exclusion Gifts You may give $14,000 (increasing to $15,000 for 2018) every year to an unlimited number of people.

4 These gifts can be made directly, in trust, or into 529 plan accounts to pay for higher education expenses (note that 529 plan accounts grow income tax-free over time).Education and Medical Expenses There is an unlimited exclusion from gift tax for: Tuition payments (but not room & board) paid directly to an educational institution; and Medical expenses, including medical insurance premiums, paid directly to the medical provider. Because of the unlimited exclusion for direct tuition payments, consider making tuition payments directly and using 529 plan assets to fund only room and board of Making Gifts During Life or at Death in TrustDonorChildGrandchildGreat-Grandchil dDonor s TrustChildGrandchildGreat-GrandchildEsta te/Gift TaxEstate/Gift TaxEstate/Gift TaxEstate/Gift Tax No Estate Tax No Estate TaxOutright DistributionContinuing Exempt TrustsPLUS creditor protectionDonorLifetime Planning Opportunities in the Current EnvironmentLifetime Giving Using Federal Gift Tax Exemptions: Each individual may give away up to $ million (increasing to $ million in 2018), gift tax free, during his or her lifetime.

5 Note that to the extent gift tax exemption is used up, there is a corresponding reduction in remaining Estate tax exemption. A married couple may give away up to $ million (increasing to $ million in 2018). No State Gift Tax (except Connecticut) If the gifted assets appreciate between the gift and the donor s death, all that appreciation will be out of the donor s taxable Planning with Stock OptionsTax- advantaged Estate Planning technique #4 Nonqualified Stock Options Vested but unexercised stock options are included in your Estate for Estate tax purposes. Transfer vested options (outright or in trust) when their value is low (if company s stock plan allows transfer) If transferee later exercises the options, the transferor still pays the attendant income tax (essentially an additional tax-free gift to the transferee).5. Pre-IPO and Pre-Acquisition Leveraged Gift and Estate Tax Planning StrategiesTax- advantaged Estate Planning technique #5 Grantor TrustsA Pre-IPO or Pre-Acquisition gift can be supercharged by making the gift to a: Grantor Retained Annuity Trust (GRAT); or Intentionally Defective Grantor Trust (IDGT)A GRAT allows a Donor to pass the appreciation on some portion of his or her assets to his or her children (or other beneficiaries), without using any lifetime gift tax exemption.

6 The Donor retains the current value of the assets for his or her own use. An IDGT is a trust that is designed to be complete for gift and Estate tax purposes, but defective for income tax purposes. This means that assets held by the IDGT are excluded from Donor s Estate for Estate tax purposes, but taxed to the Donor during his or life for income tax purposes. Grantor Retained Annuity Trust ( GRAT )GRATD onorYOUR CHILDREN(outright or in trust)NO GIFT TAXA ssets expected to appreciateAnnuity Payment Year 2 Annuity Payment Year 1 RemainderNO GIFT TAXC haracteristics of a GRAT:1. A GRAT is an irrevocable trust for a fixed term, generally between 2 and 10 years, funded by During the GRAT term, the GRAT makes annuity payments back to you at a rate designed to return the entire value of your original contribution to you, plus statutory interest. Because you will receive back from the GRAT everything you originally contributed, plus interest, there is no gift upon funding the At the expiration of the GRAT term, if the GRAT assets have appreciated at a higher rate than the statutory interest rate which is more likely in a low interest rate environment the remaining trust property will be paid to your chosen beneficiaries, again free of gift tax.

7 Advantages: No gift tax cost If the GRAT assets appreciate at a higher rate than the statutory interest rate, you may transfer significant assets to children and others at no gift tax cost. Estate tax savings Any appreciation on the GRAT assets in excess of the statutory rate of interest is removed from your taxable Estate . Limited risk If the assets do not appreciate, you have not wasted any gift tax exemption. Furthermore, if you die during the GRAT term, the GRAT assets are included in your Estate as if the GRAT was never funded, but no other adverse tax consequences. Limitation: May not allocate GST tax exemption until end of term. Sale to an Intentionally Defective Grantor Trust Grantor TrustDonorYOUR DESCENDANTS (outright or in trust)Interest Payment Year 1NO GIFT TAXR emainderNO GIFT TAXNO INCOME TAXA ssetsPromissory noteInterest Payment Year 2 Payment of PrincipalGift of seed money (10%)Advantages: Gift tax savings The only taxable gift by you is of the 10% seed money.

8 Estate tax savings The value of the asset sold to the trust is frozen at its current value, plus statutory interest. No capital gains or income tax as a result of the sale or the payments on the note. You may allocate GST tax exemption initially (which allows for leveraging!). The applicable statutory interest rate for midterm loans is lower than the rate applicable to GRATs. Limitation: Somewhat riskier than a GRAT (due to valuation risk and no IRS guidance). If the assets do not appreciate at a rate greater than the statutory interest rate, the trust is nevertheless obligated to repay the note in full. Steps in the sale:1. You create an irrevocable grantor trust for the benefit of your family. The trust contains provisions that make you the owner (a grantor trust) for income tax You make a taxable gift of seed money to the trust (generally 10% of the value of the assets sold to the trust).

9 3. You sell assets expected to appreciate to the trust in return for a term promissory note. This step is a sale, not a gift, so no gift tax is due. Furthermore, because the trust is a grantor trust, you are treated as having made a sale to yourself, and the sale does not produce capital gains The trust makes annual payments of interest to you. Again, because the trust is a grantor trust, the interest payments do not result in income tax. Principal may be paid in installments, or in a balloon payment at the end of the term. 5. At the end of the term, if the assets have appreciated at a higher rate than the statutory interest rate on the note which is more likely in a low interest rate environment the remaining property stays in the trust for the family s Retirement Accounts and Deferred CompensationTax- advantaged Estate Planning technique #6 Deferring Income Tax on Retirement Benefitsand Deferred Compensation after your Death Subject to both Estate and income tax (Income in Respect of Decedent) Do not name your Estate as the beneficiary of your Qualified Retirement Plan or Individual Retirement Account To defer income tax on Retirement benefits for as long as possible, name.

10 Individuals Specially designed Look Through Trusts (which can be incorporated into a Revocable Trust) Charity To defer income on other Deferred Compensation for as long as possible, name Surviving Spouse (Marital Deduction), or eliminate the income tax by naming one or more Charities Review Beneficiary Designations! (or better yet, have your Estate Planning attorney review them)Deferred Compensation Planning Can defer income taxes by distributing to a surviving spouse Can eliminate income and Estate taxes by using these assets to satisfy charitable bequests7. Charitable PlanningTax- advantaged Estate Planning technique #7 Use Retirement Benefits to SatisfyCharitable Intentions To the extent possible, assets subject to IRD should be used to satisfy charitable bequests before assets that are not subject to income tax are used. If a charity is named as beneficiary of a retirement account, no income taxes will be assessed to the charity, and the owner's Estate receives an Estate tax charitable deduction for the entire value of the giftIncome Tax advantaged Lifetime Giving Opportunity: Lifetime Qualified Charitable Distributions from IRAs: Persons age 70 and older can donate their Required Minimum Distribution (RMD) directly to charity (up to $100,000 limitation), thereby avoiding inclusion of the RMD amount in adjusted gross income Note: The check must be made payable directly to the charitable entityCharitable Remainder Trust (CRT) Can be funded during your life, or at your death.