Revocable Living Trust

hoffmankimcolorAs Georgia based attorneys, we are very comfortable with the Will-based Estate plan.  Georgia probate courts are friendly and easy to work with, and Georgia law allows a Testator to waive the requirements of a bond, inventory and reporting to the court.  We cannot overlook the importance of a Revocable Living Trust, however, for those clients with out of state assets or where avoidance of probate is simply a desirable goal.

A Revocable Living Trust is, as its name implies, revocable or amendable at will by the Grantor, and living, which means it is funded and used during the lifetime of the Grantor as opposed to solely at death like a Will.  Generally, the Grantor funds the Living Trust with all of his or her assets, and the Grantor is generally the sole Trustee and the primary beneficiary of the Trust.  Though this all sounds somewhat circular, the Trust provides a very legitimate legal solution:  having the trust own all of your assets means you do not need a legal process to change title to those assets upon your passing.

For states like Florida, the Revocable Living Trust is a common estate planning document simply to avoid the probate process.  There, unlike Georgia, courts require the Personal Representative to post a bond, an inventory of the decedent’s assets must be provided to the court, and various accountings are also required to be filed.  The result is a generally a significantly more expensive and time-consuming probate process than in Georgia.   The Living Trust is not just for Florida residents though.  A Georgia resident owning a vacation condo in Florida will be subject to Florida’s probate process at death.  Thus, not only will the Estate be subject to Georgia probate proceedings, but it will need to file ancillary probate proceedings in Florida too.  This rule is applicable to ownership of assets in any other state, not just Florida, as each individual state has their own laws about transferring title at death.  Having a Living Trust own your out of state assets forecloses the necessity of multiple probate proceedings.

Another significant advantage to the Living Trust based Estate Plan is privacy.  Despite Georgia’s ‘friendly’ probate laws, the original Will must still be filed with the Court and it becomes public record.  This means anyone can review the terms of your Will at death.  In addition, all of your heirs at law are entitled to notice of the filing of the Will and a copy thereof.  For those that prefer their bequests remain private, or who perhaps have made an uneven distribution among their beneficiaries, the Living Trust may be a better choice.  A Living Trust can even help avoid a Will contest where certain heirs may be left out of an inheritance.

Revocable Living Trusts can also be significantly beneficial to a Grantor who becomes incapacitated.  Incapacity proceedings are becoming some of the most common probate court proceedings as people live longer but do not necessarily have all of their faculties.  When you form and fund a Living Trust, you name a successor Trustee to take over management of the Trust assets upon either your death or incapacity, again, entirely skipping the court process for doing so.  This provides a seamless, and immediate, transition of control from you to someone else in the event you can no longer manage your affairs.  And, it is a person of your choosing.  Your Trust document can even be very specific as to who and how you are determined to be incapacitated, thus giving you a great amount of control even where you would no longer have the ability to have such control.

The key to an effective Living Trust is fully funding the trust.  Funding the trust is legally transferring title to all of your assets to the Trustee of the Trust.  There are no tax consequences to such transfer as the trust is revocable, the IRS ‘looks through’ the trust and treats the assets as though they were still yours for income and transfer tax purposes.  Funding is accomplished by changing the title on bank accounts and investment accounts and recording deeds to real property.  Your attorney should go through specific funding instructions with you after a detailed analysis of your assets.

Finally,  a Living Trust will contain all of the testamentary decisions and dispositions of a Will, including trusts as needed for the surviving spouse and descendants, charitable bequests and other gifts you want made upon your passing.

For more information regarding this or any other estate planning concern, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com, call us at 404-255-7400 or send us an email.

Russ Thornton Interviews Kim Hoipkemier

Kim New

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The New Tax Law: Does Your Estate Plan Need to be Updated?

Congress passed the American Taxpayer Relief Act of 2012 (the 2012 Tax Act) in the final hours of 2012.  The 2012 Tax Act means big changes for gifts, trusts and estates tax laws from what was scheduled to occur without any congressional action – something better known as the Fiscal Cliff.

We now have a permanent estate and gift tax exemption amount of $5,000,000, adjusted for inflation annually beginning in 2010.  We also have permanent portability, or the availability of a surviving spouse to use the deceased spouse’s estate tax exemption in certain circumstances.  The estate tax rate is set at 40%, and our annual gift tax exemption amount was raised to $14,000.  In addition, there were a number of changes to the taxation of trusts.

With the new changes in the tax law in place, and some of them “permanent,” does your estate plan need to be revisited?

The most popular estate plan for decades for married couples has been the bypass trust/marital trust or A/B trust combination to ensure the most advantageous tax situation.  With more than $10 million in assets exempt from estate tax, the concern over estate taxes has been all but taken off the table.  These trusts are still fantastic vehicles in an estate plan for reasons other than just tax savings, but it may be a good time to revisit your documents and make sure the trusts or other planning techniques fit your situation.

Dig out the copies of your current estate plan, and review these questions below.  If anything is of concern or may just need a second glance, give us a call.

  1. Is your estate large enough to trigger federal estate taxes?
  2. Does your plan distribute your property outright or in trust?  Do you know why?
  3. Does the plan name the appropriate individuals or entities to make distribution, investment or other important decisions?
  4. Is there a relationship among your beneficiaries that could cause a conflict with the decision maker you appoint?
  5. Are you recently married or divorced?
  6. Is either spouse a non-U.S. citizen?
  7. Are your charitable intentions, if any, properly reflected?
  8. Are your assets properly protected in the case of creditors, judgments or divorce?
  9. Do you have the proper powers of attorney in place in the event of disability or incapacity?  Does the document name your desired agent?
  10. Is your plan just out of date?

For more information regarding estate planning, business law or tax controversy and  compliance, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com or call us at 404-255-7400.

In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose.  The information contained herein is provided “as is” for general guidance on matters of interest only.  Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services.  Before making any decision or taking any action, you should consult a competent professional advisor.

What the New Tax Law Means to You

As you probably know, Congress avoided the so-called fiscal cliff by passing – at the 12th hour –the American Taxpayer Relief Act of 2012 (the 2012 Tax Act), signed into law by the President on January 2, 2013. The 2012 Tax Act makes several important revisions to the tax code that will affect estate planning for the foreseeable future. What follows is a brief description of some of these revisions – and their impact:

  • The federal gift, estate and generation-skipping transfer tax provisions were made permanent as of December 31, 2012. This is great news for all Americans; for more than ten years, we have been planning with uncertainty under legislation that contained built in expiration dates. And while “permanent” in Washington only means that this is the law until Congress decides to change it, at least we now have more certainty with which to plan.
  • The federal gift and estate tax exemptions will remain at $5 million per person, adjusted annually for inflation. In 2012, the exemption (with the adjustment) was $5,120,000. The amount for 2013 is expected to be $5,250,000. This means that the opportunity to transfer large amounts during lifetime or at death remains. So if you did not take advantage of this in 2011 or 2012, you can still do so – and there are advantages to doing so sooner rather than later. Also, with the amount tied to inflation, you can expect to be able to transfer even more each year in the future.
  • The generation-skipping transfer (GST) tax exemption also remains at the same level as the gift and estate tax exemption ($5 million, adjusted for inflation). This tax, which is in addition to the federal estate tax, is imposed on amounts that are transferred (by gift or at your death) to grandchildren and others who are more than 37.5 years younger than you; in other words, transfers that “skip” a generation. Having this exemption be “permanent” allows you to take advantage of planning that will greatly benefit future generations.
  • Married couples can take advantage of these higher exemptions and, with proper planning, transfer up to $10+ million through lifetime gifting and at death.
  • The tax rate on estates larger than the exempt amounts increased from 35% to 40%.
  • The “portability” provision was also made permanent. This allows the unused exemption of the first spouse to die to transfer to the surviving spouse, without having to set up a trust specifically for this purpose. However, there are still many benefits to proper estate planning using trusts, especially for those who want to ensure that their estate tax exemption will be fully utilized by the surviving spouse.
  • Separate from the new tax law, the amount for annual tax-free gifts has increased from $13,000 to $14,000, meaning you can give up to $14,000 per beneficiary, per year ($28,000 for a married couple) free of federal gift,  estate and GST tax – in addition to the $5 million gift, estate, and GST tax exemptions. By making annual tax-free transfers while you are alive, you can transfer significant wealth to your children, grandchildren and other beneficiaries, thereby reducing your taxable estate and removing future appreciation on assets you transfer. And, you can significantly enhance this lifetime giving strategy by transferring interests in a limited liability company or similar entity because these assets have a reduced value for transfer tax purposes, allowing you to transfer more free of tax.  Gifting to Family Trusts allows the tremendous advantage of gifting to one destination, while using the annual gift exclusions for all of your descendants.

For most Americans, the 2012 Tax Act has removed the emphasis on planning for worst case scenarios and put it back on the real reasons we need to do estate planning: taking care of ourselves and our families the way we want. This includes:

  • Protecting you, your family, and your assets in the event of incapacity;
  • Ensuring your assets are distributed the way you want;
  • Protecting your legacy from irresponsible spending, a child’s creditors, and from being part of a child’s divorce proceedings;
  • Providing for a loved one with special needs without losing valuable government benefits; and
  • Helping protect assets from creditors and frivolous lawsuits; and from estate depletion to fund nursing home costs.

For those with estates less than the $5.25 million exemption amount, trusts should still provide much valued asset protection.  However, those who are less concerned about asset protection may want to review options for unwinding previous transactions to the extent possible and, at a minimum, review their estate plan to ensure proper income tax planning (see below).

For those with larger estates, ample opportunities remain to transfer large amounts tax free to future generations, but it is critical that professional planning begins as soon as possible. With Congress looking for more ways to increase revenue, many reliable estate planning strategies may soon be restricted or eliminated.   REVENUE RAISING PROPOSALS INCLUDE 1) LIMITING THE BENEFITS OF GRANTOR TRUSTS, 2) LIMITING THE DURATION OF ALLOCATION OF GST EXEMPTION, 3) IMPOSING A MINIMUM 10 YEAR TERM FOR GRANTOR RETAINED ANNUITY TRUSTS (“GRATS”), AND 4) REDUCING THE AVAILABILITY OF ENTITY BASED VALUATION DISCOUNTS.  These are all tools that can reduce your estate tax exposure but that may not be available much longer.  Thus, it is best to put these strategies into place now so that they are more likely to be grandfathered from future law changes.

Further, as is well publicized, the 2012 Tax Act included several income tax rate increases on those earning more than $400,000 ($450,000 for married couples filing jointly).  Combined with the two additional income tax rate increases resulting from the healthcare bill, income tax planning for individuals is obviously now more important than ever.

What hasn’t been as publicized is that trusts (only those trusts not taxed as grantor trusts) and estates will be subject to these new taxes and higher tax rates on income above $11,950.   Proper income tax/distribution planning for trusts and estates will be essential going forward to minimize these burdensome tax increases.

Income tax basis planning will also be more important.  Many trusts hold highly appreciated, low tax basis assets. Reverse DGT transactions – purchasing low basis assets back from grantor trusts – can be used to obtain a step up in basis at death.  Trusts may be able to be amended and/or restated to allow a Trust Protector to identify low basis assets and take certain actions that would cause them to get a step up in tax basis at your death.   For assets not already in trust, Alaska Community Property Trusts can be utilized to get a double step up in tax basis at both spouse’s deaths.

The good news is that if you have been sitting on the sidelines, waiting to see what Congress would do, the wait is over.  We have increased certainty with “permanent” laws and you can have some comfort that the rules won’t drastically shift from year to year.  Unfortunately, for those of you with larger estates, planning techniques that can be utilized to reduce estate tax exposure are still on the chopping block – so don’t wait to plan.  For all clients, income tax planning, including income tax basis planning, should be a focus this year.  As always, the ultimate goals of estate planning, including protecting family assets and providing for loved ones, do not change.  Make sure you have a good plan to meet these goals. Schedule an appointment today by calling us at (404) 255-7400.

In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose.  The information contained herein is provided “as is” for general guidance on matters of interest only.  Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services.  Before making any decision or taking any action, you should consult a competent professional advisor.

Federal Estate Tax Planning

In order to keep the estate tax burden from continually growing in your estate with further appreciation, you may want to do what many other clients have done: introduce some discounting and freezing techniques to your overall estate plan.  Gifting is also important, as each individual can make annual and lifetime gifts tax-free and decrease the size of his or her estate.

A popular freeze technique is where a client’s interest in limited liability companies, corporations, partnerships or real estate (the “Property”) is sold to a defective grantor trust (DGT) in exchange for an installment note. The beneficiaries of the DGT will be the client’s children and their descendants.  It is called a “defective” trust because the trust is a grantor trust, meaning the IRS ignores it for income tax purposes, but not for estate tax purposes (i.e., the grantor trust is “defective” for income tax purposes).

A DGT allows the value of the assets in such trust to be removed from your estates for estate tax purposes; however, the trust and any transaction(s) between the grantor (you) and the trust is disregarded for income tax purposes. For example, you would still pay income taxes on taxable income of the DGT.  This is a good tax result.  Your assets are being used to cover tax liabilities attributable to a DGT. This “tax haircut” is, in essence, gifting (paying someone else’s tax liability), but the IRS does not interpret this activity as gifting.

Your interest in the Property will be sold to the DGT in return for an installment note payable to you.  This will “freeze” the entire value of the Property; for estate tax purposes the unpaid balance of the installment note remains in your taxable estate, while the Property is not.  An income stream is generated for you from the DGT via payments on the installment note.  The payments from the DGT to you are ignored by the IRS since the payments are coming from a grantor trust.  The only “leakage” is the unusually small interest rate we are able to put on the promissory note to you. As discussed, payments on the installment note are typically interest only but we can work with that number based on the income and cash flow generated by the LLC property.  However, keep in mind that it is advisable to pay the interest yearly as the IRS may frown upon a balloon note with the interest and principal payable at the end of the term of the note.

The sale to the DGT allows you to not only freeze the value of the Property in your taxable estate, but to also reduce the size of your taxable estate based on the income taxes paid by you for the DGT’s income taxes, again, the “tax haircut”.  Also, you are able to take advantage of significant discounting in valuing the fractional LLC interests being sold to the DGT.

The non-voting membership interest in the LLC would be partially gifted and partially sold to the DGT in exchange for an installment note.  This way you freeze most of the value of the LLC in your taxable estate, but retain control of the LLC via your continued ownership of the voting membership interest. The underlying property in the LLC would need to be appraised.  The fees for these appraisals can vary depending on the appraiser.  Once those appraisals are received, the non-voting membership interest of the LLC would be valued.  After the non-voting membership interest is valued, we would use this number to determine the sale price for the non-voting membership interest.

For more information regarding estate planning, business law or tax controversy and  compliance, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com or call us at 404-255-7400.

 

In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose.  The information contained herein is provided “as is” for general guidance on matters of interest only.  Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services.  Before making any decision or taking any action, you should consult a competent professional advisor.

Musings from the CEO

In my last column, I discussed the current fate of estate and gift tax law.  The emphasis is on the prospective most significant increase in tax rates and lowering of individual exemptions that we have seen in our lifetime.  For those individuals with large estates, this creates a sense of urgency for estate planning to be done between now and the end of 2012.

Today, I’d like to bring it down a notch and discuss more traditional estate planning concepts that apply to a broader cross section of individuals/clients.

I am a firm believer in trusts, hence the moniker a “trust and estate lawyer”!  For the vast majority of our clients that means leaving their estates to their spouse, but directly to trusts that are created by their Wills.  These trusts are most often controlled by, and for the benefit of, the surviving spouse.  When property eventually goes to children, we believe that in most cases it is far more beneficial to have trusts created for your children, regardless of age, that will last for their lifetime.

If the document creating the trust (Will or trust agreement) is properly drafted, your spouse or child can be the trustee of his or her trust, effectively exerting all of the control over assets that they would have had if they inherited property outright.  However, the estate tax savings for future generations, the potential avoidance of generation skipping tax, the income tax flexibility, the protection from creditors, the protection from divorce, the preservation in the family, and the avoidance of probate are some of the reasons that it is desirable to allow the property to flow from generation to generation in trusts, as long as there are any significant assets worth protecting.

The 2010 tax law introduced the concept of “portability”.  This simply means that if one spouse dies and his or her estate does not use all of their estate tax exemption, the remaining unused portion can be carried over to the surviving spouse to be used in that estate.  There are numerous limitations and weaknesses in relying on portability, and we suggest that clients continue to have Wills that leave property to surviving spouses in trust(s), generally a combination of a Credit Shelter Trust and a QTIP Marital Trust.

Life insurance trusts are very common in many estate plans.  It almost always seems to be a good idea to get life insurance out of estates now.  As we get older, our clients acquire a lot of insurance for estate liquidity purposes.  If we maintain insurability, it is always good to have these policies reviewed to make sure that you are allocating resources as prudently as possible.  There may be situations where it would be prudent to prepay premiums.

Another method of reducing an otherwise taxable estate would be to consider a Roth conversion of a traditional IRA as a technique to get taxes out of a taxable estate, in a situation that would otherwise involve an asset (the traditional IRA) that will be subject to both income taxes and estate taxes upon the death of the owner.

Clients with more modest estates need to combine estate planning with Medicaid planning.  What can be done to protect assets if one of the spouses has to go into a nursing home?  First of all, both spouses should have a current Health Care Directive as a necessary part of their estate planning documents.  Considerations should be made to move investments to the name of the healthier spouse.  The healthier spouse’s Will can create a special needs trust in the event that he or she predeceases the spouse with health and living assistance concerns.

A part of estate planning should consider the need for long term care insurance.  The sweet spot to acquire long term care insurance seems to be when a couple is still in their 50’s.

The couple can consider a lifetime QTIP Marital Trust.  This would combine estate tax planning with Medicaid planning.  The lifetime QTIP is a method to protect the home in the event of Medicaid stepping in.  We also have a technique referred to as an Irrevocable Income Only Trust (IIOT) which can be established to start the five year look back rule for Medicaid.  Finally, once a spouse is moved to a nursing home, continued planning should be done for the independent spouse.

Besides Wills that create trusts for the surviving spouse and lifetime trusts for descendants, the Irrevocable Life Insurance Trust to remove life insurance proceeds from anyone’s taxable estate, the Health Care Directive, and any “special” trusts created for Medicaid planning, everyone should have a comprehensive General Power of Attorney.  These power of attorney forms should be “durable” so that the document remains in force after disability or incapacity.  In Georgia, these documents can be drafted so that they do not spring into effect until they are needed.

Remember that the more you plan, the more you save and the smoother the probate process will be for your loved ones.  The old adage is that “…we haven’t got an estate tax, what we have is, you pay an estate tax if you want to; if you don’t want to, you don’t have to.”

If you have any questions about estate planning, please contact Hoffman & Associates at (404) 255-7400.