Using The Unified Credit and the Credit Shelter Trust

1
Using The Unified Credit and the Credit Shelter
TrustILITs

• Kevin Patrick Flood
• Captain, JAGC, USNR, Retired
• Jacksonville, Florida
• Kpflood_at_floodlaw.com

2
Introduction

• Basic Tax Planning
• Unified Credit
• Unlimited Marital Deduction
• US Citizen
• Survived by the Spouse
• Pass From the Decedent
• Included in Decedents Gross Estate
• Will Be Included in Spouses Gross Estate

3
Planning for the Unified Credit

• Use 1,500,000 Unified Credit Exemption of Both
  Spouses
• Avoids Estate Tax at Second Death

4
Tax Act 2000
5
Its really a tax credit!
6
Example
Assume a client owns the following assets and
dies in 2005. Husband Wife Home (jointly
held) 650,000 325,000
325,000 SGLI (payable to spouse)
250,000 Comm. Life insurance (owned by husband
and payable to spouse) 675,000 IRA (owned by
husband) 250,000 Marketable
securities (a) Husband
300,000 (b) Wife
250.000 1,800,000 575,00 Total Combined
Estates 2,375,000
7
Husband - Dies First

• No Plan Estate Plan
• Gross Estate 1,800,000
  1,800,000
• Marital Deduction (1,800,000)
  (925,000) ins
• Taxable Estate -0- 875,000
• Tentative Tax -0- 297,050
• Unified Credit (555,800) (555,800)
• Net Estate Tax Paid -0-
  -0-
• Tax 750,000 248,300
• plus 39 of 125,000 48,750
• 297,050

8
With Use of Bypass Trust Husband (dies
first)    Marital Share or Trust By-Pass
Trust 925,000 (insurance) 875,000
(taxed) Totals 1,800,000
9
Wife Dies Second

• No Plan Estate Plan
• Inherited from Husband 1,800,000 925,000
  ins
• Wifes Estate 575,000 575,000
• Taxable Estate 2,375,000 1,500,000
• Tentative Tax 964,550 555,800
• Unified Credit (555,800) (555,800)
• Net Estate Tax Paid 408,750 -0-

10
With Use of Bypass Trust Husband (dies
first)    Marital Share or Trust By-Pass
Trust 925,000 875,000 (taxed) At
Death of Wife Children 1,500,,000  
925,000 From Husband 575,000 Wifes
Estate 1,500,000 To Children
11
Without Use of Bypass Trust Husband (dies
first) At husband's death, his 1,800,000
estate passes to his wife. No tax is due
because of the unlimited marital deduction
for bequests to a spouse. Wife (dies
second) At wife's death, her gross estate is
2,375,000, consisting of 1,800,000
inherited from her Husband and her estate
of 575,000. She has only her unified
credit. An estate tax of 408,750 is due
upon her death.    Children FEDERAL ESTATE TAX
DUE IS 408,750
12
With Use of Bypass Trust Husband (dies
first)    Marital Share or Trust By-Pass
Trust 925,000 875,000 (taxed) At
Death of Wife Children 2,375,000 FEDERAL
ESTATE TAX DUE IS -0-  
875,000 As Beneficiaries of the Bypass Trust
tax already Paid!! Plus growth!!!
925,000 From Husband 575,000 Wifes
Estate 1,500,000 To Children
13
Bypass Trust

• Typically Held As a Single Trust
• Income To Spouse Issue
• MESH Principal
• 5 X 5 Power
• Limited Power to Appoint
• Payment of Expenses and Taxes

14
Making a Bypass Trust Acceptable to the Spouse

• Income Beneficiary
• Trustee
• 5 5 Power
• Ascertainable Standards
• Maintenance
• Education
• Support
• Health

15
Funding the Credit Shelter Trust

• Pecuniary
• Formula
• Disclaimer

16
What is a disclaimer?

• A disclaimer (or renunciation) is an unequivocal
  refusal to accept an interest in, or power over,
  property to which one is other wise entitled by
  inter vivos (lifetime) or testamentary transfer
  or operation of law.

17
What happens when property is disclaimed?

• A disclaimed interest in property passes
  generally as if the disclaimant had predeceased
  the attempt to transfer the property to him or
  her. (IRC 2518(a))

18
Statutory Requirements The IRC 2518 Qualified
Disclaimer

• Irrevocable and Unqualified
• In Writing
• 9 months
• Accept No Interest
• Pass Without Direction

19
Irrevocable and Unqualified

• Relinquish, Unreservedly, Any and All Control or
  Right She May Have in the Property
• Disclaimer Should Contain Language Stating That
  It Is Irrevocable and Not Subject to
  Qualifications and Conditions

20
In Writing

• Identify the Interest Disclaimed
• Signed
• Disclaimant
• Legal Representative

21
Received Within 9 Months

• After the date the interest was created, or
• After the disclaimant attains age 21.
• Delivered to
• The transferor
• Legal Representative
• Holder of Legal Title
• Executor

22
Starting the Disclaimer Clock

• Gift Date gift was made.
• Testamentary Date of death.
• Life Estate and Remainder Both begin with the
  date of the original transfer

23
No Acceptance of Benefits

• Acts Consistent With Ownership
• Using
• Accepting Income
• Directing Others
• Accepting Consideration
• Exercise of Power of Appointment

24
Not Considered Acceptance

• Merely Taking Delivery of Title.
• Local Law Vesting of Title Upon Death.
• Continued Use of JTWROS Property.
• Actions As a Fiduciary.

25
Pass Without Direction

• Either to Spouse or
• Another
• Without direction of the spouse.

26
Exceptions for Spouse

• A Surviving Spouse Can Validly Disclaim an
  Outright Bequest If the Property Will Pass to a
  Trust Over Which the Surviving Spouse Holds No
  Power of Appointment.
• Exceptions She May Exercise Such Powers If They
  Are Limited by Either
• Ascertainable Standards, and/or
• 5 5 Powers.
• Treas. Reg. 25-2518-2(e)

27
Disclaimers Not Recognized By Local Law

• Failed Disclaimer Under Local Law, Still
  Recognized Under IRC 2518 If
• Written
• Timely (9 Months), and
• No Acceptance of Benefits.
• IRC 2518(c)(3)

28
Disclaimers of Joint Tenancy Interests

• Current regulations provide that "a qualified
  disclaimer under section 2518(a) of an interest
  or any portion of an interest in joint tenancy or
  tenancy by the entirety must be made no later
  than 9 months after the transfer creating the
  tenancy."
• (Treas. Reg. 25.2518-2(c)(4)).

29
Disclaimer to Fund the Bypass Trust

• A Will May Contain "Disclaimer" Provisions
  Designed to Fund a Credit Shelter Trust.
• Funds the Credit Shelter Trust Only to the Extent
  That the Surviving Spouse Chooses.

30
Disclaimer Bypass Trust Husband At husband's
death, his 1,800,000 estate (dies first)
passes to his wife. To Wife
Wife At wife's death, her estate is
1,500,000 (dies second) 925,000 from Husband
and her 575,000. No Estate Tax due upon
her death.    1,500,000 875,000
Children 2,375,000
Wife Disclaims dont give me 875,000 Terms
of will or Beneficiary Designation give it to
ByPass Trust
ByPass or Credit Shelter Trust
31
Conclusion
Effective
Local Law Not Controlling
Works With Joint Property
Preserves Unified Credit
32
ILITs

• Irrevocable Life Insurance Trust
• Often used to provide funds to assist executor
  in payment of estate taxes.
• Life insurance held in ILIT not includable in
  insureds estate if all conditions met.
• Insured has no incidents of ownership

33
ILITs

• Annual premiums qualify for gift tax exclusion if
  less than 10,000
• Use Crummey demand powers to make present
  interest watch 5x5 powers.
• Complex area of planning need to draft carefully
  and work closely with insurance professional

34
Crummey Powers

• Beneficiaries have unrestricted right to demand
  their share for a limited time each year
  present interest
• Can be funded with any property but most often
  life insurance is used
• Example Kohlsaat case 18 beneficiaries and no
  prior understanding of their expected refusal to
  make demand!
• IRS really doesnt like this scheme
  but keeps losing in Tax Court!

35
ILITs
Grantor
Cash to Fund Premiums
Premiums
Insurance Co.
ILIT
Death Benefit
Loan to Executor?
Discretionary Support Distributions
Final Distribution
Surviving Spouse
Children