Wills, Trusts & Estates
Select the topic below to read more.
General Estate Planning –
The term Estate Planning typically describes a method by which an individual’s personal and business affairs are handled during life, management of affairs in furtherance of distribution to beneficiaries at death. Various vehicles can be used to accomplish many estate planning goals, from the simple to complex. For some, an estate plan can also consider estate and gift tax planning. The Law Office of Fernando M. Giachino, P.A. can offer assistance for all aspects of an individual’s estate planning needs.
Last Will and Testament –
Having a Will allows an individual to designate the beneficiaries of assets upon death. A Will can also serve to appoint guardians to care for any minor children, appoint the proper person or corporate fiduciary to settle affairs, and manage payment of debts existing at death, including tax obligations. Without at least a Will to act as a guide, the disposition of assets could be left to the default law which may, or may not, match one’s intentions.
Revocable or Living Trusts –
In some circumstances, a Trust can be a useful tool to accomplish estate planning goals. Much like a Will, a Trust can designate beneficiaries of assets upon your death, appoint proper persons to settle affairs, and manage payment of debts existing at death, including tax obligations. However a Trust can also offer advantages, which include management of the Trust assets during life (during periods of incapacity), along with probate avoidance if proper steps are taken to fund the Trust. Once signed, in order to fund a Trust, a transfer of ownership of assets is made to the Trust, while retaining full control of the property (until disability or death). In addition, Trusts can help with efficiency as well as ensure privacy during post death administration.
Durable Powers of Attorney –
Powers of Attorney play an invaluable role in any estate plan, whether or not a Trust is utilized. These documents help manage those assets and affairs outside of the scope of a Trust. A power of attorney allows the appointment of a Trusted person to handle general legal and financial matters on one’s behalf. The appointed person (agent or attorney in fact) is authorized to act on one’s behalf to take care of important matters, from paying bills, to consulting with advisors, managing investments, and managing tax related issues. These powers are effective from the minute they are signed, and remain effective even if one becomes unable to handle his or her affairs due to illness or incapacity (this aspect resulting in the term “Durable” power of attorney). However, once there is a determination of incapacity by a court, this document normally has no effect. The determination of incapacity is usually made in conjunction with a Guardianship proceeding.
Health Care Surrogate Designations and Living Wills –
The Health Care Surrogate Designation allows the designation of someone to be a representative, or agent, in the event there is an inability to make or communicate decisions about all aspects of health care, and if well prepared, will include language satisfying the Health Insurance Portability and Accountability Act (HIPAA) giving the designee the all-important access to medical records for full flexibility in making health care decisions. Florida law also allows one to make this designation effective immediately, and not dependent on a determination of incapacity. A healthcare agent is a person who is entrusted to make medical decisions. Choosing an agent is an important decision, and should be well-thought out.
A living will may be used along with a health care surrogate designation. A Living Will is a document that provides instructions regarding end-of-life care. They allow one to make predetermined choices about life support and help prevent confusion about the type of care wanted in the event of a persistent vegetative state, an end stage condition, or a terminal condition.
Estate Planning for High Net Worth Individuals –
For those individuals who have accumulated more significant assets during life, the additional challenge of estate taxes may arise needing more planning. Where appropriate, our law firm can assist more affluent individuals and families with more sophisticated technics as discussed in more detail below.
Estate and Gift Tax Planning –
The federal government imposes taxes on gratuitous transfers of property made during lifetime (gifts) or at death (bequests/devises) that exceed certain exemption limits. Gift taxes are imposed on transfers during lifetime that exceed the exemption limits, and estate taxes are imposed on transfers at death that exceed the exemption limits.
The gift and estate tax exemptions were $5 million in 2011. The exemptions are indexed for inflation, resulting in exemptions of $5.12 million for 2012, $5.25 million for 2013, $5.34 million for 2014, $5.43 million for 2015, and $5.45 million for 2016. An individual can transfer property with value up to the exemption amount either during lifetime or at death without paying any transfer tax. In other words, any portion of the exemption used during lifetime reduces the amount of exemption available at death for estate tax purposes. For example, if you made a lifetime taxable gift of $2 million in 2013, your remaining exemption amount that could be used by your estate at your death would be $3.45 million ($5.45 million 2016 inflation adjusted exemption, less the $2 million lifetime gift).
Transfers between spouses and to certain Trusts for spouses, made during lifetime or at death, may be made without the imposition of any tax. These transfers also do not use any exemption. This is known as the “unlimited marital deduction.”
The $5 million inflation adjusted estate tax exemption is “portable” between spouses beginning 2011 so that a surviving spouse may take advantage of a deceased spouse’s unused exemption amount (DSUEA) through lifetime gifts by the surviving spouse, or at the surviving spouse’s later death. This means that no transfer tax is assessed on estates up to $5.45 million for individuals and $10.9 million for married couples, assuming no lifetime gifts other than annual exclusion gifts or certain transfers for educational or medical expenses were previously made.
Annual Exclusion Gifts –
Certain gifts are not applied toward the exemptions discussed above, such as “annual exclusion” gifts and direct payments to medical or education providers, and can be made completely tax-free.
As of 2016, any U.S. citizen may give up to S 14,000 each year to as many persons as they wish gift tax free. Clients typically consider making maximum annual exclusion gifts to their children, grandchildren and spouses of the same. In general, it is better to make these gifts at the beginning of each year rather than at year’s end. As to gifts to minors, there are many possible ways of making these gifts, such as outright, into custodial accounts, “Crummey” Trusts, 2503(c) Trusts, and 529 educational accounts. If properly structured, there should be no gift tax on these gifts; nor should these gifts use up any of the client’s unified credit against estate taxes.
Medical/Tuition Exclusion Gifts –
In addition, clients may pay for anyone’s medical or tuition expenses directly to the service provider without incurring any gift tax or use of their unified credit. If properly structured, any such medical or tuition payments should not reduce the $14,000 amount available to be given to the same person by an individual each year.
Any lifetime gifts, other than annual exclusion and tuition/medical gifts discussed above, will reduce the applicable exclusion amount available to reduce estate taxes at the donor’s passing. The primary advantage of lifetime gifting is that any appreciation on the gifted property between the date of gift and the date of the donor’s death will not generally be subject to federal or state estate tax. The primary disadvantage of lifetime gifts is that the donee’s income tax basis in the property will be the same as the donor’s basis in the property, instead of such property receiving a “stepped-up” basis at the donor’s death. Gifts of appreciating high basis property can be most beneficial to the donee and the donor’s estate.
Irrevocable Life Insurance Trusts –
An irrevocable life insurance Trust, or ILIT for short, is a common way to avoid payment of estate taxes of life insurance proceeds at death. An ILIT is a type of irrevocable Trust that is specifically designed to hold and own life insurance policies. Once the ILIT has been set up, the owner of the policy transfers ownership of the life policy to the Trustee of the ILIT (or, more preferably, an ILIT is created, then a new policy is purchased through the policy). Once the transfer occurs, the owner will have given up all incidents of ownership over the policy, thereby avoiding the inclusion of the proceeds upon the death of the owner (provided the owner survives for a period of 3 years from the date of transfer of an existing policy; this 3 year rule is not an issue with newly issued policies purchased through an ILIT). The ILIT holds title to the policy, and ultimately the proceeds. The ILIT will be designated as the primary beneficiary of the policy in question. Thus, after death of the insured, the insurance proceeds would be deposited into the ILIT and held in Trust for the benefit of the predetermined beneficiaries (oftentimes a surviving spouse for life, with the balance distributed to the children, or even held in further Trust, depending on your preference).
Aside from the estate tax savings, an ILIT can provide the family of a decedent with a quick source of cash to pay an estate tax bill while at the same time not increasing the overall size of the estate. Another benefit of the ILIT is that if the proceeds are held in Trust for the surviving spouse (instead of going directly to your spouse) the proceeds will avoid estate taxation upon the surviving spouse’s death. If you are so inclined, the proceeds can be held in further Trust for the ultimate beneficiaries, which would most likely also avoid estate taxes.
Qualified Personal Residence Trust (“QPRT”) –
A QPRT is designed to hold a principal or vacation residence of the donor subject to a retained term of years interest (the “Retention Term”) in the donor. This vehicle allows an individual the ability to transfer such property at a great discount, freeze its value for estate tax purposes, and still continue to enjoy its use. Because the remaining beneficiaries must wait until the end of the term to benefit from the transfer, the present value of the gift (i.e., the remainder interest in the residence) is substantially lower than the value of the residence. The longer the Retention Term and the younger the donor, the lower the gift tax value. If the donor survives the Retention Term, the full value of the residence plus all future appreciation thereon is not included in the donor’s estate since it was gifted at a substantially lower gift tax value. If the donor does not survive the Retention Term, then the full value of the residence as of the donor’s date of death will be included in the donor’s taxable estate.
Family Owned Entity (e.g. Family Limited Partnership “FLP” or Family Limited Liability Company “FLLC”) –
Historically, FLP’s and FLLC’s have been effectively used by estate planners for several years. These entities can assist clients in achieving a number of goals, including, for example, creating a business succession plan for family members, avoiding ancillary probate proceedings in jurisdictions where the taxpayer may currently own real property in his or her individual name, pooling family assets in order to achieve administrative economies of scale, providing some measure of asset protection for business assets, as well as protection for younger family members (from unsophistication, judgment creditors, or even divorce, through use of buy-sell/partnership agreements). These entities are often formed to facilitate the transfer of family owned operating businesses or investment assets such as real estate or marketable securities to younger generations at reduced values for gift and estate tax purposes. Under the right circumstances, family owned entities can result in significant gift and estate tax savings because of the valuation “discounts” associated with the ownership of interests in closely held business entities. Case law in the area of gift and estate taxation of family owned entities is constantly changing, and the likelihood of estate or gift tax benefits associated with ownership of interest in them should be reviewed closely.
Grantor Retained Annuity Trusts (“GRATs”) and Grantor Retained Unitrusts (“GRlTs”) –
Grantor Retained Annuity Trusts (“GRATs”) and Grantor Retained Unitrusts (“GRUTs”) are very similar to QPRTs except that there are no limitations on the type of assets which can be transferred to a GRAT or GRUT. The grantor makes a gift of assets to the GRAT/GRUT and retains the right to certain payments for a specified number of years chosen by the grantor (the “Retention Term”). In the case of a GRAT, the grantor receives the same payment each year. In the case of a GRUT, the grantor receives an amount that is re-determined each year according to a fixed percentage of the market value of the Trust assets in that year. At the end of the Retention Term, the property in the GRAT/GRUT passes to the beneficiaries specified by the grantor at the time of Trust creation. Like a QPRT, because the beneficiaries must wait until the end of the term to benefit from the transfer, the present value of the gift to the GRAT/GRUT is substantially lower than the value of the assets. The longer the Retention Term and the younger the grantor, the lower the gift tax value. If the grantor survives the Retention Term, the full value of the assets plus all future appreciation thereon is not included in the grantor’s estate since it was gifted at a substantially lower gift tax value. If the grantor does not survive the Retention Term, then part or all (depending upon the terms of the GRAT/GRUT) of the value of the assets as of the grantor’s date of death will be included in the grantor’s taxable estate.
As with the QPRT, if the grantor survives the Retention Term, any appreciation on the GRAT assets after the date the GRAT is funded will pass to the grantor’s remainder beneficiaries free of gift or estate tax. GRATs can be particularly beneficial if funded with a rapidly appreciating asset that has a significant income stream.
Charitable Planning – Outright Gifts to Charity, Charitable Remainder Trusts (“CRTs”) and Charitable Lead Trusts (“CLTs”) –
The easiest way to make charitable gifts is by outright gifts to charity. If a grantor does this during the grantor’s lifetime, the grantor should receive a current income tax deduction (subject to certain limitations which the grantor should review with the grantor’s accountant prior to making any gifts) and the asset should be removed from the grantor’s taxable estate.
Charitable Remainder Trusts (“CRTs”) are very similar to GRATs and GRUTs except that the “Retention Term” selected by the grantor is generally the grantor’s lifetime and/or the grantor’s spouse’s lifetime. At the end of the Retention Term, the remaining CRT property passes to charity. The grantor of a CRT determines the amount to contribute to the CRT, the amount or percentage to be paid to themselves, the length of the Retention Term, and the charitable beneficiaries who are to receive the CRT assets after the non-charitable payments stop. The portion of the CRT assets deemed passing to charity should be deductible by the grantor (subject to limitations) in the year that the CRT is funded and none of the CRT assets should be subject to estate tax at the grantor’s death. CRTs may also be structured so that the payments during the Retention Term are made to the grantor’s children or grandchildren, however, there are additional gift, estate and generation-skipping transfer tax implications which must be carefully considered before establishing this type of CRT.
If an individual client would like to combine a current gift to charity with a future gift to children/grandchildren, that individual may want to consider a Charitable Lead Trust (“CLT”). Charitable Lead Trusts are also very similar to GRATs and GRUTs except that the payment during the “Retention Term” goes to charity rather than to the grantor of the CLT and the tax benefits are not lost in the event the grantor dies during the Retention Term. At the end of the Retention Term, the then remaining CLT property passes to the individual’s children/grandchildren or other named non-charitable beneficiaries. The grantor of the CLT determines the amount to contribute to the CLT, the amount to be paid to charity, the number of years that the charitable payments will be made, and the non-charitable beneficiaries who are to receive the CLT assets after the charitable payments stop. It is only the portion of the CLT assets deemed passing to the noncharitable beneficiaries that are subject to gift tax. Generally, there is no income tax deduction allowed for any part of a gift to a CLT.
Planning with Retirement Benefits –
More and more people are holding the bulk of their wealth in qualified plans and individual retirement accounts (IRAs). Although most plan participants know that these vehicles provide income tax-free growth for assets held in them, few participants understand the rules for plan distributions. With proper planning, participants can make the most of this income tax benefit and even pass some of that benefit on to their beneficiaries.
Transfers to Intentionally Defective Irrevocable Grantor Trusts (“IDGT”) –
The basic concept represented here contemplates expected appreciating assets contributed to a Trust for the benefit of descendants (or other beneficiaries), that will perform in excess of the applicable federal interest rate (“AFR”). This can be accomplished by a sale of assets to a Trust or the making of a loan to a Trust, in exchange for a promissory note bearing interest at the then AFR rate. The promissory note, as well as any payments on the note, would be part of your taxable estate, but the return generated on assets in the Trust occurs outside of your estate, resulting in a removal of that “spread” from your estate. The primary potential advantages of this technique are that (a) there is no gift tax on funding if the transfer of assets to the Trust because it is for adequate consideration, (b) no capital gains tax on the transfer of assets to the Trust, and (c) appreciation of assets transferred to the Trust after the date of transfer, if any, would be removed from your taxable estate. Be mindful that if the assets transferred to such a Trust do not appreciate in excess of the AFR, then the Trust will not be an effective estate reduction tool.
Generation-Skipping Transfer (“GST”) Tax.
Generation skipping planning brings the most benefit should your children be expected to have their own estate tax issues to deal with. The Generation-Skipping Transfer (“GST”) Tax is a tax on transfers to grandchildren or more remote descendants (“Generation Skipping Transfers”). The GST Tax is in addition to any estate or gift tax imposed upon a transfer to a grandchild or more remote descendant (“Grandchild”). The rate of tax is a flat rate equal to the highest marginal estate/gift tax rate in the year of the transfer. For 2016, the GST Tax rate is a flat 40%, however, each transferor (“Grandparent”) may exempt $5,000,000 (adjusted for inflation) of generation-skipping transfers from the GST Tax (“GST Exemption”). Depending upon how the transfer is made, the GST Tax may be imposed upon the amount the Grandchild receives after the payment of the GST Tax (resulting in a lower GST Tax) or upon the amount the Grandchild receives before the payment of the GST Tax (resulting in a higher GST Tax).
As a result of the GST Tax rules, outright transfers to Grandchildren or to a Trust for the benefit of children and Grandchildren are generally only tax beneficial if such transfers are within the GST Exemption amount. Consequently, couples will often create an estate plan that places property in an amount equal to the GST Exemption in a lifetime Trust for children and, at the death of the child, the remaining Trust property passes outright or continues in Trust for the Grandchildren (“GST Trust”). Any excess property will generally pass outright to children at the Grandparent’s death absent a non-tax reason for placing the excess in Trust. Under an estate plan such as this, at the death of the Grandparent, there will be an estate tax owed on all of the Grandparent’s assets. However, at the child’s death, the GST Trust, at its then value (including appreciation, if any), will pass to the Grandchildren without being subject to estate or GST Tax at the child’s death. Thus, a GST Trust may result in a tax benefit to the Grandchildren (it will have no tax benefit to the Grandparents or the children) if the child would have an estate tax due at child’s death on all or part of the GST Trust if it had been left to the child outright. To the extent the GST Trust pays out assets to the child during the child’s lifetime, the benefit of the GST Exemption as to these distributed assets is lost.
Private Annuity –
Another planning strategy is the private annuity. The grantor contributes assets to a family member in a younger generation, or to a Trust for the benefit of younger generations, in exchange for a fixed-dollar annuity paid for a specified period of time or for the grantor’s lifetime. The grantor can enter into a private-annuity transaction with no gift-tax cost if the present value of the annuity equals the contribution. Any appreciation of Trust assets exceeding the annuity payments returned to the grantor passes to the remainder beneficiaries free of gift or estate tax. If the annuity contract is exchanged for property other than money, consideration should be given to possible recognition of the entire gain or loss at the time of the exchange.
Intra-Family Asset Sales or Loans –
The grantor sells or lends assets to a family member in a younger generation, or to a Trust for the benefit of younger generations, in exchange for a promissory note bearing interest at a federally determined rate. The grantor can enter into a sale or loan with no gift-tax cost if the value of the promissory note equals the value of the sold/loaned assets and if the promissory note bears an interest rate sufficient to avoid an imputed gift. Any appreciation of the sold/loaned assets exceeding the interest rate passes to the holders free of gift or estate tax. The transaction itself, or the grantor’s death during the term of the promissory note, may trigger capital gains or other income-tax consequences in certain circumstances.
 This amount is adjusted for inflation by the Department of Treasury annually.
Probate is the formal legal process that appoints a Personal Representative who is responsible for the administration of the estate by settling the debts of a decedent, protecting and conserving assets before distribution, then seeing to the distribution of a decedent’s assets to the appropriate beneficiaries (intended or otherwise). If a decedent leaves ownership of assets in various states, there is the possibility of multiple probate administrations to see to proper distributions. Because the laws of each state vary, it is a good idea to consult an attorney to determine whether a probate proceeding is necessary, and what documents must be prepared. Most often probate proceedings are neither expensive nor prolonged, which may be contrary to many claims of attorneys and other advisors selling living Trust and other products. A proper consultation with an estate planning attorney can help decide the most advantageous course to follow. Each situation is unique and should be treated as such.
The basic job of administration and accounting for assets must be done whether the estate is handled by an executor in probate or whether probate is avoided because all assets were transferred to a living Trust during lifetime or jointly owned. In planning your estate, more important than minimizing probate is minimizing the real issues that can make probate difficult, such as lawsuits by heirs. If a Trust was utilized, similar issues will arise during administration. Further, if a continuing Trust is intended to be formed the benefit of a surviving spouse or descendants (children or grandchildren), additional work will be necessary.
Trusts in an on-going administration are designed to distinguish between income and principal. Many Trusts, especially older ones, provide for income to be distributed to one person at one time and principal to be distributed to that same person a different time or to another person. For example, many Trusts for a surviving spouse provide that all income must be paid to the spouse, but provide for payments of principal (the underlying assets) to the spouse only in limited circumstances, such as a medical emergency. At the surviving spouse’s death, the remaining principal may be paid to the decedent’s children, to charity, or to other beneficiaries. Income payments and principal distributions can be made in cash, or at the Trustee’s discretion, by distributing securities as well as cash.
Unless a chosen Trustee has financial experience, he or she should seek professional advice regarding the investment of Trust assets. In addition to investing for good investment results, the fiduciary should invest within what is common known as the “prudent investor rule.” A skilled investment advisor can help the fiduciary decide how to invest, what assets to sell to produce cash for expenses, taxes or outright gifts of cash, and how to minimize income and capital gains taxes. Simply maintaining the investments that the decedent owned will not be a defense if an heir claims you did not invest wisely or violated the law governing Trust investments. In all events, it is important to have a written investment policy statement stating what investment goals are being pursued.
During the period of administration, a Trustee must provide an annual accounting and for income tax purposes an annual income tax statement (called a Schedule K-1) to each beneficiary who is taxable on any income earned by the Trust. The Trustee also must file an income tax return for the Trust annually (called a Form 1041). The Trustee can be held personally liable for interest and penalties if the income tax return is not filed and the tax paid by the due date, generally April 15th.
Estate and Gift Tax Return Preparation Services
During any estate planning representation or during any estate administration, should the need arise, the Law Office of Fernando M. Giachino, P.A. offers tax return preparation services, which includes assistance with the United States Gift (and Generation Skipping Transfer) Tax Return Form 709 as well as the United States Estate (and Generation-Skipping Transfer) Tax Return, Form 706. Our office also works closely with income tax advisors in their preparation of personal as well as fiduciary income tax returns (Forms 1040 and 1041).