Estate Tax Planning

As of January 1, 2018, the estate tax exemption will be $5,600,000. This is all thanks to the American Taxpayer Relief Act, the resolution of the tax issues of the “Fiscal Cliff” by Congress and the President. This amount is now permanent (until they change their mind again) and will be indexed for inflation.

Therefore, the first and most important point is if you believe your net worth will likely be under $5,450,000 when you are gone, you do not need to worry about the estate tax. You do not need to read any of the below unless you are curious.

Portability of unused exemption. The Act allows the executor of a deceased spouse’s estate to transfer any unused estate or generation-skipping transfer tax exemption to the surviving spouse. Hence, a couple who both die in 2018 will have a combined $11,200,000 estate tax exemption. The executor of the estate of the deceased spouse must file an estate tax return to elect to pass along the unused exemption to the surviving spouse. Such return must be filed even if the estate of the deceased spouse is under $5,600,000. Therefore, we believe, to be safe, every estate of a spouse who dies and has over $1,000,000 in assets should consider filing an estate tax return just to be safe, to make sure the surviving spouse can use all the remaining exemption of the deceased spouse. You never know.

Hence, if your estate is over $5,600,000 you should consider the following:

Family Partnerships and Fractional Interest Discounts


What is a family partnership?
What are the advantages?
What are the disadvantages?
How does the family partnership work?
Who are the partners?
Who controls the family partnership?
What determines the discount in value?
What is the Disadvantage Relating to Capital Gains?
What determines the value of the partnership interest?
How does the family partnership discourage creditors?
How is the partnership taxed?
Is the family partnership flexible?
What does the IRS think of all this?
Why not use a co-ownership of fractional interests (a tenancy-in-common) instead?
Limited partnership versus general partnership?
What assets are appropriate for the family partnership?
Do some income tax traps exist?
Do the property taxes change on real estate?
How does the family partnership relate to my living trust?
Why act now?
How Can I Find Out More?

What is a family partnership?

A “Family Partnership” is an entity you set up to maximize the wealth you pass on to your heirs instead of to the IRS or your creditors. The partners are typically family members or family trusts. The family partnership presents amazing planning opportunities.

What are the advantages?

– You can reduce estate taxes by as much as 35 percent or more.

– You can erect at least a significant hurdle for future creditors.

– You have more flexibility to change your mind than in co-ownerships, trusts, or corporations.

What are the disadvantages?

– The amount of the discount remains (or may actually be created) as capital gain that will be triggered upon a subsequent sale of the assets.

– Fees to set up: our fees and appraisal fees.

– Annual cost of preparation of partnership income tax return.

How does the family partnership work?

You typically would transfer some asset(s) to a partnership you form. The partnership, and not you, would then own the asset(s). You instead would own percentage interests in the family partnership. You would then give at least a 1 percent unit to each of your family members. The units could not be sold or otherwise transferred. Outsiders could not purchase or otherwise acquire units without the consent of all family partners.

There are two key factors:

(1) You, as managing partner, may own as little as 1 percent of the partnership units but still control the management of the partnership assets. On the other hand, your family members may own as much as 99 percent of the units but have no control.

(2) The total of the value of all partnership units is less than the total value of the underlying partnership assets. This occurs because an outsider would not pay you 100 cents on the dollar for a partnership unit.

A primary benefit of the family partnership is you can reduce your taxable estate and so reduce the estate taxes your family pays when you are gone. This is done by your carrying out a “planned gifting” program to divest yourself of partnership units by giving them to your family members over time. This will reduce your estate subject to the estate tax, but you, as managing partner, will still control the partnership and its assets.

For gift tax purposes, a partnership unit you give to a family member will be valued after deducting the discounts discussed below. These discounts make gifting a partnership interest more attractive because more value can be passed out of your estate at a lower gift tax cost.

Who are the partners?

You, as trustee of your living trust, are usually the managing partner of the family partnership and each of your children (or the trustee of a trust for them) is a partner.

Who controls the family partnership?

You are generally the managing partner and so you manage and control the family partnership. As managing partner you decide whether to buy or sell assets and whether to make distributions, especially cash, to the partners. However, you can have anyone else be the general partner if you want to divest yourself of management responsibilities.

What determines the discount in value?

The primary advantage of a family partnership is a 1 percent interest in a family partnership is not worth 1 percent of the partnership assets. Thus, the unit you give to a child during your life (or that passes to them at your death) is not worth what you would think is its full value. The reason is “the sum of the parts does not equal the value of the whole.”

The key is how we define “fair market value.” The fair market value of an asset that is gifted during life or passed at death is how much a willing buyer would pay a willing seller. Let us say I put a $300,000 piece of property into a partnership with me owning 80 percent and my children owning 20 percent. The property cannot be sold unless a majority of partners agree. I probably will get most of the partnership income as compensation for my services in managing the property. Moreover, the property may be tied up until the partnership dissolves in 30 years.

I offer to sell you 20 percent out of my 80 percent. Would you pay me $60,000 (20 percent of $300,000) to be a partner with me and my children? You simply would not. Your $60,000 would likely be tied up for years. Would you pay me $1,000? Sure! You would willingly tie up $1,000 to get hopefully $60,000 and more in the future. Hence, the “fair market value” of the 20 percent partnership interest lies somewhere between $1,000 and $60,000.

Studies show that your “average” buyer would be willing to buy and your “average” seller would be willing to sell a 20 percent partnership interest in a $300,000 partnership for about $39,000. This is an $21,000 or 35 percent discount. That is the key.

You can give to your family members a 20 percent interest in a $300,000 family partnership during life or at death and it only uses $39,000 (instead of $60,000) of your gift or estate tax exemption. When you pass away your 80 interest is valued for estate value purposes with the discount at $156,000, instead of the undiscounted value of $240,000. This is a value discount of $84,000!

What is the Disadvantage Relating to Capital Gains?

The discount, however, is a two-edged sword. If we use the example just shown, the $156,000 discounted value becomes the income tax basis of the 80 percent interest. If your children have the partnership sell its $300,000 in assets, the 80 percent interest you had owned would generate $84,000 in capital gain and probably generate about $21,000 in federal and state income taxes. The estate taxes saved are more, about $40,000. Therefore, if your beneficiaries are likely to sell the partnership assets right after you are gone, the partnership may not be so desirable. On the other hand, if the assets will be held and not sold, the result can be absolutely marvelous.

What determines the value of the partnership interest?

First, the assets of the family partnership are valued. Any real estate must be appraised. Next, a business appraiser determines the value of the units of the family partnership. That determination boils down to the business appraiser giving his or her opinion on the discount discussed above. That percentage discount is actually the sum of several: (a) lack of marketability, (b) minority interest, and possibly (c) others, such as limited voting rights. A discount of at least 35 percent appears to be the standard.

How does the family partnership discourage creditors?

Unless the family partnership is set up when current debts are causing serious problems, the family partnership may protect family assets from creditors. The reason is if a creditor obtains a judgment against you, the creditors can generally only seize cash or assets distributed out of the partnership. This is called a “charging order.” You can choose as managing partner to not distribute partnership profits, and so the creditor with a charging order has the unpleasant result of having to pay income tax on profits the creditor is not currently receiving.

The creditors cannot seize assets of the family partnership, unless it is dissolved. Of course, the partnership is structured so it is dissolved only with the consent of all the partners.

However, please note that the California courts are the most liberal at allowing a creditor to seize a partnership interest. I personally do not believe one should create a family partnership solely for asset protection purposes. However, such protection, as it is, is an advantage of a family partnership. Therefore, assets in a family partnership, in general, are protected from creditors.

How is the partnership taxed?

The family partnership itself is not subject to federal income tax. Each partner reports his or her proportionate share of partnership income or loss. Therefore, if the partnership’s income comes from capital, such as rental real estate, and not services, you can split income with your family members and take advantage of their possibly lower marginal income tax rates.

Is the family partnership flexible?

The family partnership is much more flexible than a trust or a even a corporation. The partners can at any time amend the terms of the partnership or dissolve the partnership. You are not locked into a predetermined course of action developed before knowledge of changing facts and circumstances.

What does the IRS think of all this?

The IRS obviously is not too happy about the family partnership. The IRS has fought the large valuation discounts. However, they constantly lose in court when the discount claimed is not excessive , and so the IRS is beginning to soften its negotiating position in estate and gift tax audits of the family partnership.

Why not use a co-ownership of fractional interests (a tenancy-in-common) instead?

Instead of a family partnership, you could hold assets with your children as co-owners as what is called “tenants-in-common.” As tenants-in-common, you would each literally own an undivided piece of the asset. In some situations, the tenancy-in-common may more easily avoid a “change in ownership” under Proposition 13 with its increase in property taxes. However, most times the family partnership may be structured to avoid such an increase.

A tenancy-in-common generally is not as desirable as a family partnership because the IRS contends the “minority” and “lack of marketability” discounts are not as large in a tenancy-in-common. In addition, the deeds involved in annual gifting are burdensome. Also, you cannot control the entire asset; all the co-owners have to agree to do anything. In addition, the co-tenancy provides no creditor protection. However, we have had a number of families choose to go this way.

Limited partnership versus general partnership?

There are two types of partnerships: general and limited. The advantages of a limited partnership are (1) your heirs, the limited partners, have no say in management, and (2) it is harder for creditors to get at a limited partnership interest. On other hand, the advantage of a general partnership is that it does not have to pay the $800 per year state franchise tax that a limited partnership incurs for the right to exist in California.

What assets are appropriate for the family partnership?

The most common assets put into a family partnership are the following:

– real estate;

– other partnership interests (limited or general);

– corporate stock (in a “C”, not an “S” corporation); however, you should not be general partner if the stock is closely held; and

– cash.

The family partnership is not appropriate for the following:

– your home;

– life insurance (an irrevocable trust is best); and

– retirement plans (IRA’s, etc.).

Do some income tax traps exist?

Some transfers to a family partnership would trigger income and so are traps for the unwary. Some of these traps include the following:

– transferring more than 50 percent of the interests of another partnership to the family partnership may cause a “taxable termination” of the other partnership; or

– transferring an asset that has liabilities in excess of its income tax basis will trigger income, most likely capital gain.

Another trap is if the partnership dissolves within five years, you must be careful as to which partner receives appreciated property that had been contributed to the partnership.

Do the property taxes change on real estate?

If you transfer California real estate to the family partnership, you must be careful so as not to trigger a “change in ownership” under Proposition 13 and so increase the property taxes. We can avoid such with proper planning.

How does the family partnership relate to my living trust?

You should generally hold title to your assets as trustee of your living trust. This includes your interests in the family partnership.

Why act now?

If you transfer assets now to the partnership, you can get more assets into the partnership than if you wait and the same assets increase in value in the future. In addition, the IRS has been successful in voiding a valuation discount on a property transferred a short time before death.

Insurance Trusts


The Need for Life Insurance
Who Needs a Life Insurance Trust?
Without Life Insurance Trust – With Life Insurance Trust
Why Use a Life Insurance Trust?
Could Not My Spouse Own My Insurance Instead of Using a Trust?
Could Not My Heirs Own My Insurance Instead of Using a Trust?
Are There Other Reasons Why the Trust Should Be the Beneficiary of the Policy?
Can I Transfer My Existing Policies to the Trust?
Can I Make Changes to the Trust?
How Does a Life Insurance Trust Work?
Who Can Be Beneficiaries of the Insurance Trust?
Can I Be My Own Trustee?
Where Does the Trustee Get the Money to Purchase the Insurance?
What are the Disadvantages of Life Insurance Trusts
What If I Believe Life Insurance Is Not The Greatest Investment?
How Can I Find Out More?

The Need for Life Insurance

When a person passes away, the survivors need a source of funds to pay for last medical bills, funeral costs, support for the survivors, and often estate taxes. However, many people may have substantial wealth in illiquid assets, such as closely-held businesses, their home or other real estate. Under current tax law, if a person’s net estate exceeds the estate tax exclusion (unlimited in 2010 under present law, but then back down to $1,000,000 in 2011), estate taxes (federal and state) must be paid. We will assume the $1,000,000 estate tax exemption is in effect under the examples below. The estate taxes are very expensive – they start at 41% and quickly go up to 49%, depending on the size of the estate.

In addition, these estate taxes are due nine months after death – in cash. This can devastate many estates (especially those with small businesses or other illiquid assets). Such assets must often be liquidated instead of being preserved for the heirs.

On the other hand, to avoid forced sales, people often buy life insurance. However, if the insured owns the policy, the proceeds themselves will be subject to estate taxes. The net proceeds, after payment of estate taxes, will often only be half of the proceeds paid under the policy. For example, a $500,000 policy owned by the insured will often generate a $210,000 estate tax attributable solely to the insurance proceeds. Thus, only $290,000 of the proceeds will be available to the beneficiaries.

Surprisingly, through the use of a relatively simple and properly drafted life insurance trust, the insurance proceeds will not be subject to estate taxes. The full proceeds will be available to the beneficiaries, free of both estate and income taxes.

Who Needs a Life Insurance Trust?

If you are single and have a net worth over $1,000,000 (including life insurance proceeds upon death), or if you are married and have a net worth over $2.0 million (again, including life insurance), you should seriously consider a life insurance trust. Let us consider an example:

Let us say you are single, with a total net worth of $1,000,000. In addition, you own a $500,000 life insurance policy – a total estate of $1,500,000. Without a life insurance trust, the $500,000 of life insurance would be included in your taxable estate – and your estate would have to pay $210,000 in estate taxes.

On the other hand, if your $500,000 policy were instead owned by your life insurance trust, the $500,000 in insurance would not be included in your estate. Because your other assets would equal the $1,000,000 estate tax exemption($1,500,000 in 2003 and 2004, back down to $1,000,000 in 2011), no estate taxes would be due. That means that $210,000 would go to your beneficiaries, instead of to Uncle Sam.

Without Life Insurance Trust – With Life Insurance Trust

$1,000,000 Net Worth $1,000,000 Net Worth
500,000 Insurance you own 500,000 Insurance you own
$1,500,000 Net Estate $1,000,000 Net Estate
210,000 Federal Estate Taxes 00 Federal Estate Taxes
$1,290,000 Balance $1,000,000 Balance
00 Insurance Trust 500,000 Insurance Trust
$1,290,000 Assets to Beneficiaries $1,500,000 Assets to Beneficiaries

Why Use a Life Insurance Trust?

There are several very good reasons for using a life insurance trust. First, by purchasing the insurance through a life insurance trust, as you have seen, it is excluded from your taxable estate. Hence, the proceeds, which are already free from probate and income taxes, will also be free from estate taxes. Second, life insurance proceeds are available immediately, even if you die tomorrow. Therefore, you would not have to worry about your estate having to be quickly liquidated at fire sale prices to pay estate taxes.

Could Not My Spouse Own My Insurance Instead of Using a Trust?

You could, but if your spouse dies first, the cash (or termination) value of the policy would be included in his or her taxable estate. Even if your spouse survives you, when your spouse subsequently dies, any remaining insurance proceeds would be included in his or her estate. Thus, life insurance you own only worsens the estate tax problem. By using a life insurance trust, the insurance proceeds are kept out of both spouses’ estates.

Could Not My Heirs Own My Insurance Instead of Using a Trust?

If you made one or all of your heirs the owners of the policy, you would be taking many risks. If you have several heirs, it is cumbersome to make gifts to all and then for all of them to get together to pay the insurance premiums. However, if you only name one heir for simplicity’s sake, you risk that one heir refusing to share the proceeds with the others when you die. Also, sharing the proceeds very well could be a taxable gift on his or her part. Furthermore, before you die, if your heirs own the policy, they could cash it in any time and frustrate the purpose of the policy – to pay the estate taxes.

Probably worst of all, if your heir had financial problems, such as an IRS problem or a bankruptcy, the insurance would be seized by his or her creditors. You probably trust this person now, but you never know what problems may crop up later.

On the other hand, an insurance trust is a safer alternative. You would still name the same one or more heirs as the trustee(s) to take out the policy and run the trust (generally the same as the successor trustee(s) under your living trust). However, the trustees would have a duty to act properly and could not change who would get the money in the end. Moreover, if any trustee had financial problems, their creditors could not touch the insurance trust assets. Therefore, the insurance trust allows you to better assure that your intent is carried out.

Are There Other Reasons Why the Trust Should Be the Beneficiary of the Policy?

Yes. Besides keeping control of the proceeds, you prevent a possible conservatorship or guardianship if one of your trust beneficiaries is incompetent or a minor when you die. Generally, an insurance company will not pay proceeds directly to an incompetent or minor, insisting instead on court supervision. If your trust is the insurance beneficiary, the trustee will receive the proceeds and provide for this person’s care for as long as needed.

Can I Transfer My Existing Policies to the Trust?

Yes, but if you die within three years of the date of the transfer, the insurance proceeds will still be included in your gross estate, despite the trust. There may also be gift tax consequences. However, it is usually best to go ahead and make the transfer now. If you have existing policies, we will be happy to discuss this with you.

Can I Make Changes to the Trust?

Unfortunately, once the trust is signed, you cannot make any changes. The trust is irrevocable. Therefore, it is very important that you understand the trust, and make sure that it is exactly what you want before you sign it.

>How Does a Life Insurance Trust Work?

A life insurance trust has three components. First, you are the grantor (also called the settlor or trustor) and create the trust. Second, there is the insurance trust itself, which is managed by the trustee you select. Third, there are the beneficiaries you select who will receive the trust assets when you are gone.

With a new policy, the trustee applies for the life insurance policy. You are the insured, and the trust is the owner of the policy. Also, you may assign an existing policy to the trust. In either case, you give the money to the trust to make the premiums. (This is discussed in more detail below.)

The trust is the beneficiary of the policy. After your death, the trustee will collect the proceeds and distribute them as you have instructed in the trust instrument. The following illustrates the above:

Grantor

Cash for Insurance

——->

Trust

(Insurance Policy)

Insurance Proceeds

——->

Beneficiaries

Who Can Be Beneficiaries of the Insurance Trust?

Most people name their children, but you can name anyone you wish, as a beneficiary of your insurance trust. The funds can be used to pay estate taxes or for other purposes – for example, you may want to provide for your children’s or grandchildren’s education.

Can I Be My Own Trustee?

Not if you want the tax advantages mentioned above. If you are the trustee, the trust is taxed by the estate tax. You must name another person as trustee. The trustee can be anyone you choose, such as an heir, a friend, or a professional trustee.

Where Does the Trustee Get the Money to Purchase the Insurance?

The trustee gets the money from you, but in a special way. If you give the money directly to the insurance company, it could be subject to a gift tax. You also want to make sure you avoid any “incidents of ownership.” So here is what you can do:

Each year, you can gift up to $11,000 to each beneficiary of your trust with no gift tax. (If you are married, you and your spouse together can gift up to $22,000 per beneficiary.) However, instead of making the gift directly to the beneficiaries, you give it to the trustee. The trustee then notifies each trust beneficiary that a gift has been received on his or her behalf and, unless he or she elects to withdraw the gift now, the trustee will invest the funds – by paying the premium on the insurance policy. Of course, for this to work properly, the beneficiaries must understand not to withdraw the gift now but to wait for the insurance proceeds.

>What are the Disadvantages of Life Insurance Trusts?

The only disadvantage of a life insurance trust is that you cannot personally own the policy. If you want the tax advantages of a life insurance trust, you cannot have any “incidents of ownership” of the policy. The tax laws define “incidents of ownership” as:

1. the right to have the proceeds made payable to your estate;

2. the power to change the beneficiary;

3. the power to surrender or cancel the policy;

4. the power to assign the policy;

5. the power to revoke an assignment;

6. the power to pledge the policy for a loan;

7. the power to borrow against the surrender value of the policy;

8. the power to veto a change in beneficiary or an assignment or cancellation of the policy; or

9. the existence of a reversionary interest in the policy or its proceeds that immediately before death exceeds 5 percent of the value of the policy.

Because the life insurance trust will own the policy, all of these rights and powers will be owned by the trust itself and controlled by the trustee you have selected, instead of you. Because of this, the proceeds will not be included in your estate for tax purposes.

However, although you do not own the policy, the proceeds will still be distributed as you wish. When the trust is established, you will state in the trust how the proceeds are to be distributed when they are received after your death. The trustee you select must follow these instructions. According to your desires, the trustee can use the proceeds to purchase assets from your living trust to provide cash to pay taxes. Alternatively, the trustee can be directed to hold the funds and disburse them to the beneficiaries you have selected for their support. (In contrast, if your children are the direct beneficiaries of your insurance, you cannot control how they use the proceeds.)

Although you do lose some rights in the policy, if the trust is properly drafted according to your desires, such loss is far outweighed by the tremendous tax savings.

What If I Believe Life Insurance Is Not The Greatest Investment?

We are not investment advisers. However, at a time early in our careers we thought permanent life insurance was a less than good investment. We now have completely changed our minds because of our experiences with clients. Because life insurance in an insurance trust pays out free of both income and estate taxes, it must be seriously considered as the best investment for many people as far as the net dollars in the end that will go to the heirs. This is something we would be glad to discuss with you.

Notwithstanding, we do not sell insurance. However, if you would like us to, we can refer you to life insurance advisers.

Charitable Trusts


Who should consider a Charitable Remainder Trust?
What is a Charitable Remainder Trust?
What is the potential downside of a CRT?
With a CRT, am I giving the Asset to the charity now?
What are my options on the payout amount?
What will determine my income tax deduction?
Does the CRT itself pay income tax?
How am I taxed on the annual distributions from the CRT?
How about the estate tax?
How may it pay to give it away?
What about my heirs though?
May my heirs receive the payout after I am gone?
What assets most often trigger the need for a CRT?
Who can be the Trustee of the CRT?
May I retain some control?
How Can I Find Out More?

Who should consider a Charitable Remainder Trust?

  1. If you want to or must sell a capital asset, such as real estate or stock, and will incur a large capital gain and so pay a large amount of income tax;

  2. You have already named or are considering naming your favorite charity(ies) to receive a significant amount under your living trust or will; or

  3. You have no children and do not know to whom to give your estate.

What is a Charitable Remainder Trust?

It is a trust you set up typically during life to which you transfer an asset or assets. You retain the right to receive back from the trust a payout equal to a set percentage of the trust value or set dollar amount each year. You typically will receive the percentage or amount each year for the rest of your life.

What are the benefits of a Charitable Remainder Trust?

Charitable Remainder Trust (”CRT”) has the following general benefits:

  1. Your appreciated asset can be sold, and you pay no income tax on the capital gain. You, therefore, have the whole amount working for you the rest of your life without income taxes having been taken out of the principal in the first place. In particular, you can rid yourself of a burdensome asset, such as an apartment building, without being taxed on capital gain.

  2. Often the cash flow is higher from the investments in the CRT than you were receiving before the transfer to and sale by the CRT.

  3. You receive an income tax deduction, which reduces your income taxes.

  4. The CRT generally effectively escapes estate tax after you are gone.

  5. You select the trustee of the CRT. With careful planning, you may even name yourself as the trustee of the CRT. Between your having a good CPA and a good financial planner, you then should have no trouble in administering the CRT.

  6. You have the satisfaction of benefiting a needy cause. Also, if you wish to disclose your creation of the CRT, the charity would surely publicize your generosity.

What is the potential downside of a CRT?

The only real downside of a CRT is that it is irrevocable. Other than receiving the annual payout, you cannot get the principal back. In addition, when you are gone the assets go to the charity(ies) you have named, instead of to your heirs, such as your children. Therefore, it is important to be very careful in setting up the CRT, and you should not put all your assets in to a CRT.

However, if you create a CRT and live past a certain point, your family will be better off. This results because you will have saved up and invested so much more because of your extra cash flow from the CRT that such cash invested will far exceed the amount your heirs would have received if you had sold the asset. Furthermore, if you are concerned about an early death, you can protect your heirs through life insurance paid for out of your extra cash flow from the CRT as discussed below.

With a CRT, am I giving the Asset to the charity now?

No. The charity has nothing to do with the CRT until you pass away. The one exception is if you choose the charity as the trustee of the CRT to administer it for you.

What are my options on the payout amount?

There are two basic types of charitable remainder trusts: the charitable remainder unitrust (”unitrust”) and the charitable remainder annuity trust (”annuity trust”). The annuity trust must pay you, at least annually, a fixed dollar amount equal to at least 5% of the original fair market value of the assets you contributed to the CRT. The annuity trust payments remains the same despite the CRT’s asset values going up or down in the future. For example, if you were to put $300,000 in an 8 percent annuity trust, it would pay you a fixed $24,000 per year (before taxes).

The more popular of the two types is the unitrust. It instead pays you a fixed percentage, at least 5%, of the fair market value of the trust assets. That value is in turn recomputed each year. Therefore, although the annual payout percentage remains fixed, the actual payout per year varies with the trust ’s total asset value. the unitrust is more popular because the payment rises with any inflation in the value of the unitrust’s assets. For example, if you were to put in $300,000 in an 8% unitrust, it would pay you $24,000 the first year. If the assets had gone up to $350,000 by the beginning of the second year, the unitrust would pay you $28,000 the second year (8% of 350,000).

Another variation of the unitrust is a version that only pays you the ordinary income the CRT receives from its investments. Therefore, the unitrust could invest in growth stocks early on and pay you little income you may want to do so if you are working now and in a high tax bracket. Later when you retire and are in a lower tax bracket, the CRT (remember you can be the trustee) can then shift the assets from the growth stocks to high ordinary income investments, such as bonds and deeds of trust. With the CRT having grown in value over the years, your annual income would be higher than if you had not postponed the income.

Notwithstanding, in the 1997 Tax Act, Congress added another limitation. The present value of the remainder interest that will eventually go to charity must at least equal 10 percent value of the charitable trust assets. When we plan a charitable trust for you we will make sure we consider such limitation.

What will determine my income tax deduction?

If you set up a CRT, you will almost surely receive a deduction on your federal and state income tax returns. The deduction equals the fair market value of the charitable remainder interest. The valuation of the remainder to charity is made at the time the trust is established and is equal to the actuarially determined present value of assets that are likely to go to charity at the termination of the trust, and the payout percentage you decide to receive from the CRT.

Therefore, the older you are or the lower the CRT payout percentage is the higher the resulting value of the charitable remainder interest, and so the higher is the income tax deduction. For example, if a 65 year old person puts $300,000 into an 8 percent unitrust the income tax deduction would be about $101,211, and so with a 34.7% tax bracket saves $35,120 in income taxes.

However, this deduction has the same limitations as regular charitable deductions. For example, the deduction you can take in one year arising out of contribution of appreciated property is limited to 30% of your adjusted gross income. Any excess deduction, however, may be carried forward to the following five years.

Does the CRT itself pay income tax?

The most important attribute of the CRT for most donors is that it pays no tax on its income. In particular, and most importantly, it pays no income tax on capital gains from the sale of an asset. For example, you would transfer an appreciated asset to the CRT, usually an asset that is throwing off a small return. The CRT would sell the asset pay no income tax on the sale, and reinvest all the proceeds in higher paying investments. Moreover, just as the CRT incurs no income tax liability on the gain realized from the sale of the appreciated property, you would pay no income tax on such gain.

How am I taxed on the annual distributions from the CRT?

Although the CRT is not taxed on its earnings, you are taxed on the distributions you receive from the CRT. Such taxation is somewhat of a flow-through of the income received by, but not taxed to, the CRT. These distributions would be taxable as follows:

– First , as ordinary income,

– Second, as capital gain,

– Third, as other income (such as tax exempt income, and

– Last, as a tax-free distribution of CRT principal.

The amount of these items is the amount for the current year plus any such amounts that the CRT has not previously distributed to you.

How about the estate tax?

The next major aspect of the CRT is estate and gift taxation. In fact, charitable estate planning often focuses in this area. If you and your spouse are the only beneficiaries of the CRT, the value of the CRT assets is effectively excluded from your estate for estate tax purposes, and so escapes estate tax.

On the other hand, if the CRT itself provides benefits for any other individuals, such as your children, then the result may differ somewhat and so should be considered in the analysis.

How may it pay to give it away?

May we take the example of some stock you purchased several years ago for $30,000 that is now worth $300,000. If you sell the stock you will have $270,000 in capital gain. Your federal and state income taxes on a $270,000 gain would be, let us say 34.7%. You, thus, would pay $93,690 in income taxes on the sale, and this would leave you with only $206,310. If you then invested the $206,310 and received a 9 percent return, you would receive $18,568 in income each year – $12,125 after taxes.

On the other hand, if you put the stock in a CRT that pays an 8 percent return, with the CRT itself earning 9 percent on its investments, you would receive $24,000 in the first year – $15,672 after taxes. This is $3,547 more in after tax dollars than if you had sold the $300,000 asset.

What about my heirs though?

When you (and your spouse) are gone, the CRT assets go then to the charity(ies) you have named and not to your heirs. You may not like that, and your heirs especially may not like that. However, there are two alternative ways to solve the problem, so it will actually “pay to give away”:

The first way is for you to invest outside the CRT your tax savings from the income tax deduction. Under the example above, the IRS rules provide that $35,120 in taxes is saved on a $300,000 CRT. You would also then personally save and invest the extra cash flow you receive because of having the CRT as opposed to a sale by you. In other words, you would still spend the $12,125 per year you would have had after taxes if you had sold the $300,000 asset and paid the income tax on the capital gain.

Therefore, under the example above you would save a minimum of $3,547 in extra cash each year. With the assumptions above, these amounts you invest outside of the CRT would compound and grow to $278,614 at the end of a 65-year old’s life expectancy. This is $72,304 more than the mere $206, 310 as you would have had left for your heirs if you had sold and then spent the same $12,125 per year in cash.

However, the risk in the first alternative is you may pass away before the end of your life expectancy. If you die early, you will not have had time to save and invest the extra cash flow, and so it will not have grown to equal the $206,310 from a straight sale.

This then leads to the second alternative. The tool makes sure that your heirs receive at least as much as or more than what they would have received if you had not transferred the property to the CRT. Instead of investing tax savings and the $3,547 in extra cash flow each year yourself, you would instead give such amounts to the trustee of yet another trust, a life insurance trust – many times called a “wealth replacement trust”. The trustee of the insurance trust, usually a child or sibling of yours, would take out a life insurance policy on your life. The trustee uses the cash from the tax savings and the extra cash flow from the CRT each year to pay insurance premiums. Typically, those amounts will buy a life insurance policy that pays as much or even more when you are gone (the $278, 614 under our example).

On your death the policy proceeds are paid to the insurance trust and then distributed to the insurance trust beneficiaries. There are then two great tax advantages of the insurance. First, proceeds are free from income tax. Second, and even more dramatically, the proceeds go to your heirs free from the estate tax. This happens because the life insurance trust, and not you, owns the policy. Therefore, the life insurance trust can transfer a substantial amount (life insurance proceeds) to your heirs without being subject to estate tax.

The result is even more spectacular when you consider what would have happened to the $206,310 left after a sale by you, without the CRT. That amount would be taxed by the estate tax. Therefore, your heirs would have been left with only $121,723 after estate tax ($206,310 minus $84,587, assuming $1,000,000 in other assets), compared to at least $278,614 in that case of a CRT with a life insurance trust.

Please note that if you find you are uninsurable, the odds are still good with the first alternative that your heirs will be at least as well off as in a sale.

The combined effect of the above is you receive the same income as if you had sold the asset, and your heirs receive at least as much or probably more when you are gone. It may pay to give away.

May my heirs receive the payout after I am gone?

Yes, but it is not as advantageous. Naming your heirs to receive the payout after you are gone for their lives creates some gift tax and estate tax problems and decreases the income tax deduction. It is generally better to protect the heirs through the insurance trust described above. In addition, the 10 percent charitable remainder value requirement from the 1997 Tax Act may hinder forming a trust for children. Notwithstanding, we will consider all option if you have us prepare a formal plan for you.

What assets most often trigger the need for a CRT?

Those that have appreciated quite a bit since you acquired them. They typically include stocks, bonds, mutual funds, and real estate. Real estate is particularly popular because a CRT is the only way to sell real estate and get out of the burden of having to continue to manage it without paying taxes on capital gains. The best real properties for a CRT are those with little or no debt on them.

Who can be the Trustee of the CRT?

The choices include the following:

– you, with careful planning and administration,

– a child, close family member, friend, or trusted advisor of yours,

– the charity, in many cases, or,

– a trust company.

The trustee invests the CRT assets, distributes the payout to you, files the annual tax returns for the CRT, and in general runs the CRT. The trustee has full power to change the CRT assets.

May I retain some control?

As just stated, you may retain control if you serve as the trustee. In addition, you may have the power to change the trustee any time. You may retain the power to change the charity who receives the CRT assets when you are gone.

Conclusion

The CRT is a “win-win” tool for all involved. Most importantly, you win by avoiding income tax on the gain from the sale of the property, avoiding estate tax on the property, receiving a larger cash flow from the CRT, and receiving an income tax deduction. You heirs win in that they either most likely or surely (your choice) will receive at least the same inheritance as if you had not done the CRT. The charity wins when the CRT is ultimately distributed. Society in general is benefited by the work of the charity. Everyone wins.

IRA’s and the Estate Tax


I. Introduction – Distribute as little as the law requires and allow for tax free compounding

1. Goal: Maximize the amount of dollars after taxes arising out of your retirement plans and going to your children or other beneficiaries.

2. Assumptions: You will not need to take out more than the minimum distributions for your support. The estate tax exemption is $1,000,000 (the year 2011 and beyond).

3. Key Principle: Otherwise taxable investments compound tax-free in a retirement plan, and so we want to delay distribution as long as the IRS allows.

Bottom Line:

How much child has from $300,000 IRA after income taxes when child passes away

Old Rules

$1,610,766

New Rules

$2,157,299

4. Importance:

a. Minimum Distributions: The IRS will make you begin taking distributions from your IRA in the year you reach age 70 ½ or at the latest by April 1st of the following year. In general, if you do not need the money, you want to delay distributions as long as possible to allow the tax-free build-up inside the IRA of otherwise taxable investments.

b. Beneficiary: After you die, the IRS will force the distribution of your IRA. The question is over what period of time? Again, we want to delay distribution as long as is possible to allow the tax-free buildup.

c. Significant Asset: Increasingly more significant in overall net worth of individuals.

d. Complex Issues: Best way to distribute during life and after death, complex mix of income tax, estate tax, and non-tax issues.

5. Most Important and Frequently Forgotten – What Does the Plan Say?: Terms of the plan agreement control benefits. May be inflexible or may be supplemented.

6. Other Factors:

a. >Financial Needs.

b. Health of You and Your Spouse/Child.

II. Minimum Distribution Requirements – Definitions:

1. Required Beginning Date (”RBD”):

a. IRA’s and Qualified Plan Where More than 5% Owner of Business: April 1st of the calendar year following the calendar year in which owner attains age 70 1/2. Example: John Single turns age 70 on October 8, 2010. He turns age 70 ½ on April 8, 2011. His Required Beginning Date is April 1, 2012.

b. Qualified Plan Where Less than 5% Owner: Later of above or the year of retirement from the company.

2. Designated Beneficiary: A person (or a beneficiary of an irrevocable trust) who is the beneficiary of the IRA and then can be used as a “measuring life” in determining a joint life expectancy. For example, the life expectancy of a 70 year old is 16 years. On the other hand, the joint life expectancy of a 70 year old and a 60 year old (in other words, how many years until we expect both to be deceased) is 26.2 years.

3. Required Minimum Distribution: When you reach your RBD (remember that means “required beginning date”), your IRA must be:

a. Entirely distributed to you (and you get hammered with income taxes); or

b. Distributed to you in annual installments paid over a period no greater than:

i. Your life expectancy;

ii. The joint life expectancy of you and a “designated beneficiary.”

4. Distribution Year: A year in which you must take an RMD, a Required Minimum Distribution. The year in which you turn age 70 ½ is the first Distribution Year. However, you can defer taking the first RMD until the RBD, April 1st of the second distribution year. Normally it is good to defer income taxes. Nevertheless, you then get taxed on both the first and second year distributions in the second year. Example, John Single must take two distributions in 2012, and the second distribution may be taxed in a higher income tax bracket. However, the benefit of tax-free compounding in the IRA may offset the extra income tax cost of waiting.

5.Excise Tax: Failure to take the RMD in any year results in an excise tax equal to 50 percent of the shortfall between the amount, if any, distributed and the RMD. (IRS may waive penalty if a reasonable error.) For example, if John Single’s RMD for the first Distribution Year is $10,000 but he fails to take a distribution, the Excise Tax would be $5,000.

6.Repeal of 15% Additional Estate Tax on Excess Accumulations and Excess Distributions Excise Tax: In the 1997 Kevin Staker Full Employment Act, I mean, excuse me, the 1997 Taxpayer Relief Act, Congress repealed the 15 percent additional estate tax on “excess retirement accumulations” and the 15 percent Excess Distributions Excise Tax.

6.New Distribution Rules– 2001: In January 2001, one of the last acts of President Clinton was to liberalize the minimum distritbution rules. In the past, we had to worry extensively about who the beneficiary of the IRA was. Now, during life we use the life expectancy of the participant and an imaginary person 10 years younger This is called the “MDIB” rule. However, if you are so fortunate as to have a spouse more than 10 years younger than you, you use that longer joint life expectancy.

III. Optimizing Distributions:

 

The Bottom Line: Designated Beneficiary and Calculation Method

Type of Participant

Designated Beneficiary (”DB”)

Calculation

Method

Single Person

Individual(s) or Irrevocable Trust

MDIB Rule

Single Person

Estate (no beneficiary, do not do this! name a beneficiary)

MDIB Rule

Single Person

Charity

MDIB Rule

Married with all children with this spouse – no need to use IRA to use estate tax exemption

Spouse

MDIB Rule

Same but IRA needs to use estate tax exemption

Irrevocable Trust for benefit of spouse – not a QTIP trust

Same

Married with children of prior marriage – IRA not needed to use estate tax exemption

Irrevocable Trust for benefit of Spouse – a QTIP Trust

Same

Same but IRA needed to use estate tax exemption

Irrevocable Trust for benefit of spouse – not a QTIP Trust

Same

1. Calculating the RMD is mathematically simple: divide the IRA balance by a life expectancy factor. That is the question: which life expectancy factor results from the method used.

2.Death of Participant Prior to Required Beginning Date:

a. Not a qualified “designated beneficiary”: None, estate, charity,living trust – All IRA must be distributed by December 31st of fifth anniversary of participant’s death.

b. Qualified “designated beneficiary” (not spouse): Child, Other Individual, or Irrevocable Trust: Distributed over life expectancy of (oldest) beneficiary.

c. Spouse as Beneficiary: Spouse may rollover into IRA or may receive distributions over life expectancy. Almost always will rollover.

3.Death of Participant After Required Beginning Date:

a. Same as above. However, if using joint life expectancy with Designated Beneficiary, distributed over joint life expectancy (unless using recalculation method as to life of participant or DB).

4.Trust as Beneficiary – Underlying Beneficiaries as “Designated Beneficiaries”: On January 26, 1999, the IRS issued REG-209463-82, 1999-4 I.R.B., which amends the Proposed Regulations under IRC section 401(a)(9). For a trust now to qualify as a Designated Beneficiary:

a. Valid under state law (or would be but for the fact it has no corpus);

b. is or becomes irrevocable upon the death of the participant;

c. trust beneficiaries identifiable from the trust instrument; and

d. the IRA custodian/issuer or plan administrator is provided with either of the following and the participant must agree to provide a copy of any future amendment:

i. a copy of the trust; or

ii. a certified list of trust beneficiaries, including all contingent beneficiaries, with a description of the portion to which they are entitled and any conditions on their entitlement.

Therefore, a living trust or a sub-trust formed under it at death, may qualify as a Designated Beneficiary. Thus, a bypass, “B,” exemption, decedent’s, or whatever it is called trust, that receives the first assets of a deceased spouse up to his or her estate tax exemption (2009=$3,500,000), may receive the retirement benefits.

Note: either (1) the final updated trust instrument or (2) a final certification of trust beneficiaries must be provided to the plan administrator within nine months of death of the participant.

IV: Generation-Skipping


You have a living trust. Your trust avoids a probate or a conservatorship. If you are a couple, it also eliminates all capital gain on community property and can double your estate tax exemptions to $10,500,000 in 2013 and beyond adjusted for inflation.

However, if you over $5,250,000 in assets if you are single or over $10,500,000 if you are married, your living trust is really a plan to make your grandchildren pay unnecessary estate taxes at the death of your children. Please consider the following:

With its 40 percent rate, after 2012 the estate tax is one of the most expensive taxes. However, the government imposes it on each generation. When you pass away and leave everything to your children, your estate must pay estate taxes. However, when your children pass away, the estate tax is imposed again before anything goes to your grandchildren, even though the property was already taxed when you died.

Let us assume the following: Your child has a net worth of $1,000,000. He or she inherits $500,000 outright from you, and his or her net worth increases to $1,500,000. If he or she had died without the inheritance, his or her estate would have had zero estate tax to pay on $1,000,000 because we will assume the estate tax exemption will have gone down to $1,000,000. However, the following results at the death of your child with the inheritance from you, assuming the exemption is only $1,000,000:

Outright Trust Distribution to Child
Item Amount
Child’s Own Assets $1,000,000
Inheritance from You $500,000
Total Taxable Estate of Child $1,500,000
Estate Taxes Paid by Your Grandchildren $210,000

The key reason why your grandchildren had to pay such estate taxes on your child’s death is because your child had absolute theoretical control over the $500,000 inheritance from you.

On the other hand, please consider the following:

Instead of having the $500,000 go outright to your child you would change your trust to say the $500,000 goes to a trust controlled by your child. Your child would be the trustee of the trust and so control its investments as if he or she owned it outright. Your child as trustee would decide when and how much to distribute out of the trust to himself or herself. Your child would have the power at his or her death to decide how his or her trust would be distributed among his or her children, outright or still in trust.

The only powers your child would lack would be the powers to wildly speculate, waste, or give away to non-family members the assets. However, these are things you would not want your child to do anyway.

Your child’s trust would be irrevocable. Hence, it would have the added advantages of being free from his or her creditors, his or her spouse in a divorce, or anyone else trying to seize it.

Consequently when your child passes away, the following would result:

Child Holds Inheritance in Generation Skipping Trust
Item Amount
Child’s Own Assets $1,000,000
$500,000 Inheritance from You Held in Trust. Amount Taxable by Child’s Estate Tax $0
Total Taxable Estate of Child $1,000,000
Estate Taxes Paid by Your Grandchildren $0

Therefore, through merely adding this additional provision in your living trust you will have saved your child’s children $210,000.

Notwithstanding, this trust for your child has tremendous potential for estate tax avoidance. With proper planning the wealthy could avoid estate tax for many generations. Therefore, Congress placed a limit on the use of generation-skipping trusts by imposing a generation-skipping transfer tax (”GST tax”). The GST tax is imposed on the trust when each generation dies, just as if each generation had received their inheritance outright and paid estate taxes on it. Unfortunately, the GST tax is a very expensive tax–a flat rate of 55 percent. Furthermore, the GST tax is in addition to estate taxes, which can also be as high as 55 percent.

Nevertheless, Congress has given everyone an exemption from the GST tax.($5,250,000 in 2013) Hence, a couple can presently shelter up to $10,500,000 in generation-skipping trusts free of the GST tax. If properly drafted, the generation-skipping tax exemptions can enable you to create a family “dynasty” trust to last for up to 100 years or more estate tax free! Depending on the size of your children’s estates, the generation-skipping trust can often save your descendants hundreds of thousands, and maybe millions, of dollars in estate taxes.

We typically only charge only an additional $300 to add this provision to your new living trust or to the restatement of your existing living trust we otherwise are preparing for you..

V. IRA’s and the Estate Tax:

1. Typical Estate Plan for Husband and Wife with over $1,000,000 in Assets: They have a living trust, commonly called an “A-B Trust.” Upon the death of the first spouse, an amount of his or her assets up to the estate exemption (unlimited in 2010 but then back down to $1,000,000 in 2011) is placed into the “B” trust (we call it the “Exemption” trust it is also commonly called the “decedent’s” or “bypass” trust). For our examples below, we will assume a $1,000,000 estate tax exemption.The balance of the assets typically go into the “A” trust (we call it the “Survivor’s” Trust). No estate tax is paid at the death of the first spouse. The Exemption “B” trust is never subject to estate tax. If the Survivor’s “A” trust exceeds the estate tax exemption at the death of the surviving spouse, only the amount in excess of the exemption is subject to estate tax. Thus, the A-B Trust effectively doubles the estate tax exemption to $2.0 million and can save up to $435,000 or even more in estate taxes at the death of the surviving spouse.

2. The Problem: Retirement plan benefits, such as an IRA, cannot be owned by a living trust (being the beneficiary, however, we will discuss in a moment). If such benefits were distributed out to the living trust, they would be taxed by the income tax and possibly even penalty excise taxes. On the other hand, retirement benefits are included in your estate subject to estate taxes. Therefore, an IRA may be subject to estate tax upon the passing of the surviving spouse.

3. Example: For example, suppose Husband and Wife have $1,000,000 in assets in their living trust and another $1,000,000 in the IRA of Husband. Assume Husband dies before Wife and Wife is the sole beneficiary of Husband’s IRA, as is the common plan, and so rolls over Husband’s IRA into her own spousal rollover IRA. Wife, therefore, may only put Husband’s half of the living trust assets in the B trust (see paragraph 1 above); Wife cannot include Husband’s share of the IRA because it is not part of the living trust. Therefore, when Wife passes away the unspent IRA is entirely and absolutely controlled by her in her spousal rollover IRA, thus will be included in her taxable estate, and so will be subject to estate taxes. The following diagram illustrates this problem of IRA’s and other retirement plans:

Living Trust – $1,000,000

Home, Savings, and Other Assets

 

Husband’s IRA’s – $>1,000,000

Husband’s Community Property Half – $500>,000

Wife’s Community Property Half – $500,000

Husband’s Community Property Half – $500,000

Wife’s Community Property Half – $500,000

 

$500,000

 

$500,000

 

Husband Passes Away

 

$1,000,000

Exemption (”B”) Trust – $500,000

Wife is Beneficiary

$500,000Survivor’s (”A”) Trust and the $1,000,000 IRA = $1,500,000

Wife Controls Both

$500,000 Passes Free of Estate Taxes

 

Wife Passes Away

$1,500,000 minus Estate Taxes of $210,000 = $1,290,000

Total to Trust Beneficiaries

$1,790,000

4. Solution: The solution is to position as much as possible of the Husband’s half of the IRA so it is not included in the Wife’s taxable estate when she passes away. We do this by designating the Exemption “B” Trust as the beneficiary of enough of the Husband’s community property half of the IRA so as to use up the balance of the Husband’s estate tax exemption left over after the Husband’s living trust assets go into the Exemption “B” trust.

Until late January, 1998, the IRS required us to set up a separate irrevocable trust now as the beneficiary. However, in late January, 1998, the IRS changed its rules and now allows us to name the Exemption “B” trust as a beneficiary of part of the Husband’s IRA or other retirement plan. (Prop. Reg. § 1.401(a)(9)-1, Q&A D-5, D-6 and D-7; Reg-209463-82.)The IRS further liberalized the rules in January 2001. The following illustrates the solution:

 

Living Trust – $1,000,000

Home, Savings, and Other Assets

 

Husband’s IRA’s – $1,000,000

Husband’s Community Property Half – $500,000

Wife’s Community Property Half – $500,000

 

Wife’s Community Property Half – $500,000

Husband’s Community Property Half – $500,000

 

$500,000

 

$500,000

 

Husband Passes Away

 

$500,000

 

$500,000

Exemption (”B”) Trust – $500,000

Irrevocable Trust – Wife is Beneficiary

$500,000 Survivor’s (”A”) Trust and Wife’s $500,000 Rollover IRA = $1,000,000 –

Wife Controls

$500,000 Also Added to Exemption “B” Trust formed at death of Husband – Beneficiary of Husband’s Half of IRA’s

Wife is Beneficiary

$500,000 Escapes Estate Taxes

 

$1,000,000 Escapes Estate Taxes

$500,000 Escapes Estate Taxes

Total to Trust Beneficiaries

$2,000,000

The Exemption “B” trust escapes estate tax when the Wife dies because she did not create it and cannot change who ends up with its assets when she is gone. The Wife should not want to do any of those things. On the other hand, the Wife can be, and usually is, the trustee and sole beneficiary of the Exemption “B” trust, and so she gives up no real control or enjoyment of the IRA or other retirement benefit.

5. Why is Keeping the Funds in the IRA or Other Retirement Plan so Powerful? The IRA or other retirement plan benefit has a feature of astounding power that we want to preserve. The longer assets remain in the plan, the longer they can continue to grow tax-free. Investments that are otherwise taxable, such as stocks, corporate or U. S. government bonds, and mutual funds of the same, increase with dividends, interest, and capital gains tax-free.

That is why traditionally the Wife is the beneficiary of the IRA or other retirement plan. She can do a tax-free rollover into her own spousal rollover IRA. However, after age 70 ½ she must begin taking minimum distributions of the rollover IRA, but they are taken out over many years. That period of time typically can stretch out over 26.2 years if she names her child(ren) as the IRA beneficiary.

On the other hand, the Exemption “B” trust as IRA beneficiary may take out its part of the IRA over an average of 19.8 years. This occurs because it is treated as if it were the Wife for purposes of avoiding the 50 percent IRS penalty. Hence, we can avoid estate taxes on the IRA going into the irrevocable trust, and the distributions stretch out over a period to time almost as long as with the Wife as beneficiary (19.8 versus 26.2 years).

6. Downside: The only real downside is our fee to advise you and handle the paperwork on properly making the Exemption “B” trust a beneficiary of the retirement plan. However, saving up to at least $435,000 in estate taxes makes the fee look pretty insignificant.

7. Other Details: The IRS requires that certain requirements be met, such as informing the IRA custodian or retirement plan administrator regarding the Exemption “B” trust beneficiaries. We will assist you with such details.

>8. Additional Use of Exemption Trust: Another use of the Exemption “B” trust as retirement plan beneficiary is if the Husband has children from a prior marriage or other beneficiaries he would like to receive the retirement benefits after the Wife is gone. Under the traditional planning, if the Husband dies first, the Wife rolls over the entire retirement plan benefit into her rollover IRA. When she dies, her children or her family members usually get the IRA, and the Husband’s family gets nothing. The Exemption “B” trust allows us to achieve two normally disparate goals: first, have the IRA available to support the Wife for her lifetime, and second, get whatever is left over to the Husband’s children or family.

9. Conclusion: The Exemption “B” trust as the IRA or other retirement plan beneficiary can be a great tool. It can reduce or eliminate estate taxes in the case of large ($200,000+) retirement plan benefits. At the same time, it can preserve the powerful tax-free compounding of such benefits.