Jerry Rhinehart, CIC, CLU, ChFC, RHU
Panama City, FL
Estate Planning Techniques: Gifts, Estate Planning Techniques: Gifts, Trusts and Life InsuranceTrusts and Life Insurance
To understand the importance of Estate Planning and the various options available.
To be familiar with the usual misconceptions, or “Myths”,
of Estate Planning.
To know the law and advantages of gifting.
Learning Objectives
1
To understand the application, benefits and use of various trusts in Estate Planning.
Living Trust
Charitable Remainder Trust
Testamentary Trust
Learning Objectives
1
Please note the
DISCLAIMER
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The impact of The impact of the Federal the Federal Estate TaxEstate Tax
3
The Judge The Judge said...said...
High Federal Estate Tax (FET)
The Cost of Doing Nothing vs.
The Cost/Time/Aggravation of Doing it Right!
3
Know This Regarding FET...
$5,000,000 (2011 & 2012)
35%
Payable in 9 MonthsPayable in Cash!
High Federal Estate Tax (FET)
The Cost of Doing Nothing vs.
The Cost/Time/Aggravation of Doing it Right!
3
High Probate Cost
Delays in Settlement
The Importance of
Estate Planning
4
Some “famous people” have done a good job of estate
planning and some...
4
Name Gross EstateTotal
Settlement Cost Net EstatePercent ofShrinkage
W. C. Fields $884,640 323,793 554,887 37%Clark Gable 2,806,526 1,101,038 1,705,488 30%Walt Disney 23,004,851 6,811,943 16,192,908 30%Marilyn Monroe 819,176 448,750 370,426 55%Elvis Presley 10,165,434 7,374,635 2,790,799 73%J. D. Rockefeller, Jr. 160,598,182 24,965,954 (1) 135,632,630 16%
(1) Most of the estate went to the Rockefeller Brothers Fund, Inc.
Estates of Well-Known People
4
Elvis Aaron Presley — 1936-1977 Would you have “wasted your
time” calling on Elvis for his estate planning?
Did Elvis (or his manager) do a “good job” of estate planning?
73% erosion of his “stuff”.
Seven years delay in settlement.
Dan Duncan (Houston, TX) – Died March, 2010. He was listed as #74 on Forbes Wealthiest (@$9 Billion). Married, 4 adult
kids. Supposedly had used various Trusts and Charitable techniques to avoid greater than $2 Billion in taxes.
George Steinbrenner (“The Boss”) – World Series Win - 2000
High Federal Estate Tax (FET)
The Cost of Doing Nothing vs.
The Cost/Time/Aggravation of Doing it Right!
3
High Probate Cost
Delays in Settlement
Low (or no) FET
Reduced (or no) Probate Prompt Settlement
Possible liquidity problems for loved ones!
3
Ample cash flow to pay taxes, debts, and
provide an income for the life of your spouse!
The Cost of Doing Nothing vs.
The Cost/Time/Aggravation of Doing it Right!
Tough decisions to be made by loved-ones — probably not trained for such a task...
3
Pre-determined decisions that treat loved-ones,
benefi- ciaries, charities, employees, etc., based exactly on your wishes!
The Cost of Doing Nothing vs.
The Cost/Time/Aggravation of Doing it Right!
Basic Truths in Estate Planning
You cannot die without a will!
Basic Truths in Estate Planning
Just what is a will?
What are the advantages of a will?
How does a will work?
Is it the only “legal document” most people need? 6
Basic Truths in Estate Planning
You cannot die without a will!
Everybody has an Estate Plan!
5
Estate Planning “Myths” Myths Concerning a Will
(or no will)
Allows me to avoids probate
Will save me estate taxes
My loved ones will be treated equally
I told my kids how to distribute my possessions …
My business is very successful…
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5
Estate Planning “Myths” Myths Concerning a Will
(or no will)
“I’m not rich” (life insurance)
“Stuff” For Estate CalculationDescription Fair Market Value Debt
House 1,500,000 (200,000)
Mutual Funds 1,000,000 - 0 -
Real Estate 2,000,000 (500,000)
Q-Plans 1,000,000 - 0 -
TOTAL 5,500,000 (700,000)
5,500,000
-700,000
4,800,00
0
“Stuff” For Estate CalculationNet Estate: 4,800,000
Personal Life Insurance (Owned): 1,000,000
Group Life Insurance 100,000
Travel Accident 100,000
Total Life Insurance 1,200,000
“Stuff” For Estate Calculation
Non-Life Insurance “Stuff”4,800,000
Life Insurance “Stuff” 1,200,000
Total 6,000,000Less Year 2012 “Freebie” -5,000,000
Total Subject to FET 1,000,000
FET Owed (@35%) 350,000
5
Estate Planning “Myths” Myths Concerning a Will
(or no will)
“I’m not rich” (life insurance)
“I’ll worry about it later”
5
Estate Planning “Myths” Myths Concerning a Will
(or no will)
“I’m not rich” (life insurance)
“I’ll worry about it later”
“I don’t have to do anything to get the tax breaks that are available”
“The sale would give the Robbies cash to pay off an estate tax bill of about $47 million.”
U.S. Today - March 24, 1993 7
$5,000,000 Exemption (2011 & 2012)
35% FET rate (2011 & 2012 / (per person)
Possible 5% probate expense
FET due in 9 months (exceptions exist)
CASH – The IRS wants it!
7 years – possible delays
7
What About a Liquidity Problem?
“The Great Garage Sale”
“The Dreaded Discount Buyer”
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Personal Property
RealEstate
BusinessFarm
LifeInsurance
Death TaxesAccounting FeesAppraiser’s Fees
Probate FeesLegal Fees
Executor’s Fee
Balance to Heirs
For Your“Stuff”
CashPensions
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$100,000$300,000
CashResidenceMutualsQ-PlansBusiness
A View of Your “Stuff” - 2012
$4,000,000$1,000,000
$250,000
$5,650,000
IRS Hose
Who Are Your Heirs?
Mary - daughter
John - son
Will - son
Will, Jr. - G-sonChurch
University
Hospital
LOVESara (CPA)
Barry (atty)
OTHER HATE
IRS
Dreaded Discount Buyer
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The News...
• You’re alive
• You have an Estate Plan
• Correctable
Good News Q-Plans
(401k)
$1,000,000
2 - Good Deals
2 - Bad Deals
Bad News Ugly News9 Months
35% - 50%
Cash
Dreaded Discount Buyer
40% (-400K)
600K
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Why Give Away Your “Stuff”?
Reduce current estate size / tax
Enjoyment of the donor
Fund life insurance trust
Gifts to a charity / individuals
Future appreciation to another
What if You Can Not Prove Your Cost Basis?
The IRS rules state that without proof
of basis — then your basis is ZERO! (Thus ALL gain!)
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You Sell the stock
You Give the stock away during your lifetimeThe stock is Transferred at your death
Intel, Inc.Basis - $1,000
FMV - $10,000
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Intel, Inc.Basis - $1,000
FMV - $10,000
You Sell the stock -
10,000 - 1,000 = 9,000 x 15% Capital Gains Tax -- $1,350 Tax
Intel, Inc.Basis - $1,000
FMV - $10,000You Give away the stock (during
your life time)
10,000 - 1,000 = 9,000 x 15% Capital Gains Tax -- $1,350 Tax to Seller
The stock is Transferred to another person at your death
10,000 - 10,000 (step-up-in basis) = - 0 - No Tax to the Seller
Basis - $1,000
FMV - $10,000
Intel, Inc.
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An unlimited amount can be given to a college or medical facility for the benefit of anyone!
Three year rule
Excess gifts — $13,000 maximum / “completed gift” (present interest)
An unlimited amount can be gifted between husband / wife
Parties of a Trust
Trustee
Grantor
Beneficiaries
Bank
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Irrevocable Life Insurance Trust (ILIT)
Why is this Trust beneficial for a husband and wife that have an Estate Tax problem?
How does an ILIT work?
Irrevocable Life Insurance Trust in Action
Grantor Trust Trust Beneficiarie
s
Crummey Withdrawal Notice
Annual Gifts
Premium
Paid
Insurance Company
Death Benefit
Grantor’s Estate
Provides Estate Liquidity
Assets Distributed
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What does it do?
What does it NOT do?
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Why would someone give away their “stuff” to a
charity?
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FMV in Estate
Pay tax on the sale of the asset
May not produce adequate income
Expense to maintain asset
Managing the asset
What about “basis”?
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You Sell the stock
You Give the stock away during your lifetimeThe stock is Transferred at your death
Intel, Inc.Basis - $1,000
FMV - $10,000
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You Sell the stock
You Give the stock away during your lifetimeThe stock is Transferred at your death
Intel, Inc.Basis - $1,000
FMV - $10,000
Bill (58) and Barb (56)
Florida property - FMV @ $5,000,000
Basis @ $500,000
Sale - 15% (2012) Capital Gains Tax on $4.5 million or $675,000
In addition to the Capital Gains Tax, what are some other potential financial issues that Bill and Barb might be concerned about?
Gift
Gift
Charitable Remainder Trust
Mom and Dad Low Basis “Stuff” Low Income “Stuff” “Stuff” FET
Trustee(s) Receives Income Tax Deduction
Sell Asset(s) Pays Income Pays No Tax
Wealth Replacement Trust - Life Insurance -
Mom & Dad
CRT
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How Does a CRT Work?
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Competent attorney
Form your own qualified charity or foundation
Name Trustee(s)
Gift assets (unlimited amount)
Take tax deduction
How Does a CRT Work?
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CRT sells asset
CRT pays no tax!
CRT pays life income to grantors @5% - 8% (monthly / annually)
Income taxable to recipient
Wealth Replacement Trust (ILIT)
How Does a CRT Work?
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Trust applies for life insurance (replace lost inheritance)
Mom / Dad make $$ gift to ILIT for the benefit of kids - $13,000 maximum per
year
CRT terminates income to Mom / Dad at last death
Heirs receive ILIT proceeds
Two Types of CRT Pay-out
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Unitrust (CRUT)
- $70,000 / $98,000
Annuity Trust (CRAT)
- $70,000 / $70,000
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Testamentary Trust
An absolute must for parents (single or a couple) who
have minor children
Questions:
Would a life insurance company pay life proceeds to a minor(s)?
Would a court allow money to be paid to a minor(s)
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Testamentary Trust
An absolute must for parents (single or a couple) who
have minor children
How can parents be assured of have their life insurance proceeds (and other assets) pass properly to their minor children?
Testamentary Trust attached to a Will with a designated Guardian(s)
Estate Planning Estate Planning Techniques:Techniques:
Gifts, Trusts andGifts, Trusts and
Life InsuranceLife Insurance
Jerry RhinehartJerry Rhinehart
Panama City, FLPanama City, FL
[email protected]@comcast.net