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ESTATE TREK: THE NEXT GENERATION OF
OUR ESTATEVIEW PLANNING
SOFTWARE
Wednesday, May 22, 2013
5:00 p.m.
Alan S. Gassman, Esq.
[email protected]
Kenneth J. Crotty, Esq.
[email protected]
Christopher J. Denicolo, Esq.
[email protected]
To download the software please email [email protected] or visit:
http://goo.gl/xjKK8
Copyright © 2013 Gassman Law Associates, P.A.
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SCENARIO: SAMPLE DATA
Visualization over 20 Year Time Span
Harland Sanders Life Expectancy is 9.2 Years
Claudia Sanders Life Expectancy is 19 Years
HAROLD AND CLAUDIA SANDERS
Today
Residence
GIFTING TRUST(S)
Value
$0
Investments
$750,000
$6,500,000
Annual Growth
Annual Additions
Rate 3.03%
$50,000
Annual Growth Rate
Annual Gifts
10.98%less 15% fees
$56,000 (adj for inflation)
ILIT - HARLAND
ILIT - CLAUDIA
ILIT - SURVIVORSHIP
Death Benefit
Death Benefit
Death Benefit
Annual Growth Rate
$100,000
$100,000
$100,000
Annual Premium
Annual Premium
Annual Premium
$5,000
$5,000
$5,000
10.98% less 15% fees
CLAUDIA SANDERS
1st
Residence
Upon
$850,000
Death
Annual
Growth
(in Year 10)
Rate 3.03%
Upon 2nd
Death
(in Year 25)
Investments
$4,000,000
BY PASS TRUST GIFTING TRUST(S)
Value
Initial funding upon
$914,316
first death - $3,500,000
Annual Gifts
Annual Additions Annual Growth Rate
$50,000
ILIT - CLAUDIA
ILIT - SURVIVORSHIP
Death Benefit
Death Benefit
Death Benefit
$28,000 (adj for inflation)
$100,000
$100,000
$100,000
Annual Growth Rate
Annual Growth Rate
Annual Growth Rate
Annual Premium
Annual Premium
10.98% less 15% fees
10.98% less 15% fees
10.98% less 15% fees
$5,000
$5,000
10.98%less 15% fees
CLAUDIA'S ESTATE
Residence
Investments
Exclusion/Portability
$850,000
$16,000,000
($10,000,000)
Net Taxable Estate: $6,850,000
ILIT - HARLAND
TOTAL PASSED TO BENEFICIARIES
Claudia's Trust
Bypass Trust
Gifting Trust
ILIT - Harland
ILIT - Claudia
ILIT - Survivorship
TOTAL:
$4,110,000
$6,589,000
$2,356,246
$230,000
$100,000
$100,000
$13,485,246
ESTATE TAX
$2,740,000
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SAMPLE PROGRAM GENERATED EXPLANATION MEMO
MULTI-DIMENSIONAL FEDERAL ESTATE TAX AND ESTATE PLANNING CLIENT PROJECTION, ILLUSTRATION,
AND EXPLANATION SYSTEM
PRESENTED BY BOB E. SMITH
SMITH LAW ASSOCIATES, ATTORNEYS AT LAW
TABLE OF CONTENTS FOR CLIENT ILLUSTRATION MEMORANDUM DRAFTING SYSTEM
MODULE 1 - NO PLANNING. ALL ASSETS DIRECTLY TO SURVIVING SPOUSE.
MODULE 2 - USE OF A BYPASS TRUST.
MODULE 3 - USE OF ANNUAL GIFTING WITHIN $14,000 PER YEAR, PER PERSON EXCLUSION.
MODULE 4 - USE OF ANNUAL GIFTING PLUS A REPORTABLE GIFTING EXCEEDING $14,000 PER PERSON, PER
YEAR IN ONE SELECTED YEAR BY ONE OR BOTH SPOUSES.
Prepared for Review by Harland Sanders and Claudia Sanders.
NOTE: This explanation and attached projections are in rough draft form, and have not been tailored to the
individual situation of the clients. They are provided for illustration purposes only, and do not constitute a
complete or necessarily accurate depiction of the present or expected future situation. We nevertheless
believe this explanation and the attached explanatory charts are useful to facilitate an understanding of the
estate tax system and how it can affect Harland and Claudia's family.
INTRODUCTION TO FEDERAL ESTATE TAX SYSTEM
Presently there is a federal estate tax imposed on the death of an individual, to the extent that assets left at
death do not qualify for the federal estate tax marital or charitable deductions. Assets that are gifted away
during an individual's lifetime are not subject to federal estate tax.
The present federal estate tax allowance is $5,250,000. This allowance will be increased annually in
proportion to increases in the Consumer Price Index, in increments of $10,000. However, the allowance will
be reduced to the extent of gifts that exceed or do not qualify for the $14,000 per year, per donee gift tax
exclusion.
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SAMPLE PROGRAM GENERATED EXPLANATION MEMO
This illustration demonstrates how assets may be held after the death of one spouse for the benefit of
the surviving spouse in a Bypass Trust that can make use of the first dying spouse's $5,250,000 (and
growing) allowance to shield assets from federal estate tax on the surviving spouse's death.
ILLUSTRATION 1 - NO PLANNING
Across the top of the page, we show Harland and Claudia having a residence worth $750,000 and
investments worth $5,000,000 , with expected growth at 3.03% per year for the residence and a net
growth of 9.48% for investments ( 10.98% - 1.5% in expenses).
We also assume that during Harland and Claudia's joint lifetimes, they could add $50,000 per year
(increased annually with inflation) to their investment assets, and then after one spouse dies, the
surviving spouse will withdraw $150,000 from their investment assets.
This first illustration assumes no use of annual gifting, nor of life insurance trusts. Life insurance is
therefore shown to be subject to federal estate tax on the second death.
On the top right hand side of the chart, we show the primary categories of trusts that can be used for
gifting assets to avoid estate tax.
The first is a Gifting Trust that can receive annual gifts based upon $14,000 per year, per beneficiary, or
more with the use of discounts (more on this later).
To the right of the gifting trust, we are showing a life insurance trust that could own life insurance on
Harland's life and could pass estate tax free to his surviving heirs, with the yearly premiums worth the
cash value of the policy to be considered as gifts.
To the right of that, we show a life insurance trust that could own life insurance on Claudia's life and
then another life insurance trust that could hold a survivorship or "second to die" policy that does not
pay a benefit until the death of both Harland and Claudia.
In the second row, we show all assets to the surviving spouse, or into trusts that are considered as
owned by the surviving spouse, and are thus subject to federal estate tax on the second death.
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SAMPLE PROGRAM GENERATED EXPLANATION MEMO
Many couples will allow this to occur, and there is an estate tax portability allowance which enables the
surviving spouse to use both his or her $5,250,000 (minus prior taxable gifting) allowance, plus CPI
increases to such allowance, plus whatever the first dying spouse had remaining of his or her estate tax
exemption that was not used on his or her death.
It is important to note that the portability allowance does not increase with inflation. Further, the
portability allowance may be lost or reduced in the event of a second marriage, if the surviving spouse
remarries to someone with a smaller or no estate tax exemption, and the new spouse is the first to die.
For purposes of this illustration, we are showing that the surviving spouse will therefore have a total
exemption of $10,500,000 ( $5,250,000 + $5,250,000 , with $
of that growing at our estimated
Consumer Price Index increase of 2.96% per year).
This illustration also provides values after the first death, and after 25 years of growth, the gifting trust
will be worth $3,159,622, the life insurance trust will be worth $2,195,634, and the $
will
be worth $
, for a total of $
.
We then show Claudia dying 15 years later ( 25 years from now), and having $25,532,720 worth of
assets subject to federal estate tax on the bottom left hand side.
The total estate taxable assets of $25,532,720 minus the allowance of $10,500,000 leaves $15,032,720
subject to federal estate tax. Assuming a 40% estate tax rate, the estate tax would be $6,013,088 , and is
normally owed 9 months after the surviving spouse's date of death, although payment plans can
currently be obtained for large closely held businesses or actively managed real estate situations.
ILLUSTRATION 2- BYPASS TRUST
On page 2 of the illustrations, we show the funding of a Bypass Trust on the first death. In this
illustration, the surviving spouse's estate tax exclusion is used to the extent of $4,000,000 by the
funding of the Bypass Trust shown in the second column, on Harland's death in 2023.
Harland's remaining $1,250,000 of exemption becomes available to Claudia under the portability rules,
as shown on the bottom left hand side.
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SAMPLE PROGRAM GENERATED EXPLANATION MEMO
Under this scenario, the Bypass Trust grows to $9,326,690, based upon the 9.48% net rate of return
assumption, and will not be subject to federal estate tax on the second death.
This saves $3,730,676 in federal estate tax, and if Claudia were to remarry and her new husband died
before her, making full use of his estate tax exemption, the loss of the portability allowance would cost
the family another $500,000 in federal estate tax. This scenario can be avoided by making use of
$1,250,000 of Harland's estate tax exemption on his death.
ILLUSTRATION 3- ANNUAL GIFTING
In addition to the use of the Bypass Trust described above, we show the use of annual gifting on page 3,
based upon Harland and Claudia transferring $14,000 per child, per year. This amount includes our
projections of the increases in annual gifting that will be in accordance with increases in the CPI. Annual
gifting is also evaluated on an annual basis, and increases are in increments of $1,000.
The combined savings from the annual gifting for both Harland and Claudia is $852,352, as shown at the
bottom left hand side.
In the middle right, we see that the gift trust will have $_________ worth of assets that will pass estate
tax free on the second death.
ILLUSTRATION 4- EXCESS GIFTING
Here we are showing an additional $2,500,000 that could be gifted to the gift trust this year, which
would use $2,500,000 of Harland's allowance.
This gift would generate additional estate tax savings of $1,800,000, as shown on Illustration 4, because
the growth on the $2,500,000 excess gift escapes federal estate tax.
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SAMPLE PROGRAM GENERATED EXPLANATION MEMO
ILLUSTRATION 5- Discounted Gifting
The gifting illustration described on page 5 assumes that gifting will be cash or assets that have no
discount future. It is possible that valuation discounts can apply when certain ownership interests are
transferred. For example, 10% of a company or limited partnership holding $1,000,000 worth of assets
may be worth significantly less than $100,000 when valuation discounts are taken into consideration.
In Illustration 5, we are assuming that discounts of 35% of value can apply. For example, if Harland and
Claudia were to place $1,000,000 worth of assets into a family limited liability company or limited
partnership and gift a 10% interest, then this would transfer $153,846 worth of assets out of their
estates for estate tax purposes.
The savings from the discount feature, based upon $56,000 a year of gifting while Harland and Claudia
are both alive, and then $28,000 per year of gifting during Claudia's remaining lifetime. (TBD)
ILLUSTRATION 6- LIFE INSURANCE TRUST
Illustration 6 shows the use of a life insurance trust, with $1,000,000 in life insurance on Harland's life
held in an irrevocable life insurance trust to benefit Claudia and the children without being subject to
federal estate tax on Claudia's subsequent death.
The transfer of $125,000 in cash value, plus $75,000 a year of premiums into the life insurance trust are
gifts which use Harland's allowance. Since Claudia is a beneficiary of this trust, it can be important that
she not contribute monies to it.
Please note that this strategy may or may not save estate taxes, depending on whether Harland dies
before or after his life expectancy, and what rate of growth may be expected on monies that would
otherwise be placed under the gift trust and invested in assets that might outperform a life insurance
policy.
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