“The Estate Planner” – September/October 2014
Within this issue:
– The Real Price Of Giving ¨C Charitable Donations Inside A No-Estate-Tax Atmosphere
– Could An Exchange Help Cover LTC Insurance Charges?
– Family Conferences Help Ensure Estate Planning Success
– Estate Planning Warning Sign ¨C Your Will Leaves Something To Your Existence Partner
– Excerpt from Family Conferences Help Ensure Estate Planning Success:
You?ˉve spent numerous hrs dealing with your advisors to create an estate plan that gives for the family, protects your company and satisfies your charitable goals. Now it?ˉs time for you to use it shelves and be done with it, right? Wrong. Unless of course you communicate your plan ?a and also the concepts behind it ?a for your family and also to your executors, trustees, guardians and agents, your plan’s in danger.
Please see full newsletter below for more information.
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As the federal gift and estate tax exemption con-
tinues to climb, the number of people subject to
estate taxes is shrinking. What does this mean for
There’s a common misconception that taxes are
the driving force behind most charitable donations.
Reduce the tax bite, the theory goes, and charitable
giving will decline. In fact, the opposite is usually true.
It’s tempting to argue that reducing estate taxes is
a disincentive to philanthropy if you focus on the
“cost” of a charitable gift.
In 2014, for example, the top federal gift and estate
tax rate is 40%. If you’re subject to estate taxes,
every $1 million you leave to charity reduces the
amount available to your heirs by $600,000. But if
your estate is nontaxable, a $1 million donation
reduces the amount available to your heirs by
$1 million. In other words, the cost of your gift
has increased from $600,000 to $1 million.
If giving becomes more “expensive,” it seems logi-
cal that doing so would decline. As the following
example shows, however, this isn’t the way most
people approach charitable giving.
More to go around
People who are charitably inclined generally don’t
consider the cost of giving. It’s more common to
determine the after-tax amount they wish their heirs
to receive and leave the excess, if any, to charity.
Take Bill and Margaret, whose estate is worth
$10 million. They created their estate plan in 2003,
when the exemption amount was $1 million and
the top tax rate was 49%. Their goal was to leave
at least $2.5 million after estate taxes to each of
their two children and the remainder to charity.
They leave $9 million ($4.5 million each) to their
children and $1 million to charity. If
Bill and Margaret were to die in 2003,
each child would inherit $2,812,500
after federal estate taxes and before
any state estate taxes or administra-
Fast-forward to 2014: Bill and Margaret’s
estate is still worth $10 million, but the
exemption amount is now $5.34 million
($10.68 million for married couples),
so their estate is no longer taxable. If
they leave their plan as is, each child
would receive $4.5 million and the
same $1 million gift will go to charity.
Alternatively, Bill and Margaret could
The true cost of giving
Charitable donations in a no-estate-tax environment
People who are charitably
inclined generally don’t
consider the cost of giving.
3reduce the amount they leave the children to, say,
$4 million each. That’s still significantly more than
their original goal, but now they can double their
charitable gift to $2 million.
Rise of the CRT
Lower gift and estate taxes may increase interest
in charitable remainder trusts (CRTs). A lifetime
CRT, for example, allows you to accelerate charita-
ble gifts you’d otherwise make at death and enjoy
substantial income tax benefits in the process.
A CRT provides an income stream to you or other
beneficiaries over a specified term, after which
the remaining assets are transferred to a qualified
charity. Payouts are based on a fixed percentage
(between 5% and 50%) of the trust assets’ initial
value (a charitable remainder annuity trust) or its
value recalculated annually (a charitable remain-
der unitrust). Contributions constitute taxable
gifts to your noncharitable beneficiaries (other
than yourself), but are shielded from tax by your
unused exclusion amount.
When you establish a CRT, you enjoy a charitable
deduction equal to the present value of the charity’s
remainder interest. Because a CRT is tax-exempt,
it’s an ideal vehicle for receiving highly appreciated
assets, which the trustee can sell tax-free and reinvest
in income-producing assets. The trust assets grow
on a tax-free basis and the beneficiaries enjoy steady
income from the trust, a portion of which may be
taxed at favorable capital gains rates.
The right balance
If you’re charitably inclined, review your estate
plan in light of recent law changes. Your advisor
can help ensure that your plan strikes the right
balance between philanthropy and providing for
your family. D
A charitable remainder trust’s (CRT’s) exempt status enables it to provide significant tax benefits.
(See main article.) But those benefits come at the cost of flexibility. Payouts are limited to a fixed
amount or percentage, regardless of hardship or need, and the charity’s remainder interest generally
must be at least 10% of the trust’s initial value.
If taxes are less of a concern, a nonqualified CRT provides greater flexibility to provide for your family
while leaving something for charity. These trusts offer little in the way of income, gift and estate tax
advantages, but they need not comply with the requirements for a qualified CRT. That means they can
distribute any amount of income and principal to your beneficiaries, in the trustee’s discretion.
Typically, nonqualified CRTs are established at
death to take advantage of the stepped-up basis
rules — the value of the initial contribution is
stepped up to its fair market value, erasing any
appreciation that might trigger capital gains
taxes. It’s advisable to distribute at least all
of the trust’s current income to avoid a steep
income tax bill. Currently, trusts are subject to
income taxes at the highest rate (39.6%), as
well as the 3.8% net investment income tax, to
the extent their income exceeds $12,150.
Nonqualified CRTs offer greater flexibility
Family meetings help ensure
estate planning success
You’ve spent countless hours working with your
advisors to design an estate plan that provides for
your family, protects your business and satisfies
your charitable goals. Now it’s time to put it on
a shelf and forget about it, right? Wrong. Unless
you communicate your plan — and the principles
behind it — to your family and to your executors,
trustees, guardians and agents, your plan is at risk.
By holding one or more family meetings, you can
help ensure that your representatives understand
and accept their responsibilities and that your
loved ones understand your reasons for distribut-
ing your wealth in the manner you’ve chosen. Lack
of communication leaves the people affected by
your plan in the dark, inviting misunderstandings,
hurt feelings and conflict.
Whom should you invite?
Invite your spouse, children and other family
members who’ll be affected by your plan (either
by their inclusion or exclusion). You should
also invite any nonfamily members you’ll ask to
serve as executors, trustees, agents or guardians
of minor children.
It’s a good idea to include key advisors, for two
reasons: First, they can help answer questions
about how your plan works. And second, creating
an opportunity for your family, representatives
and advisors to get to know one another will help
build trust and improve the chances that your
plan will operate smoothly when the time comes.
What should you discuss?
For starters, you should review the key documents
that make up your plan and let everyone know
where they’re located. In addition, provide an over-
view of the estate planning decisions you’ve made
so far and — most important — the reasoning
Many people simply divide their assets equally
among their heirs. But in estate planning, equal
isn’t necessarily fair. For example, let’s suppose
Mike has adult children from a previous marriage
and younger children from his current marriage.
Mike put his older children through college years
ago and now they’re gainfully employed and finan-
Family meetings are particularly
valuable when a family business
5Fairness would dictate that Mike’s estate plan favor
his younger children, who’ll need the money for
tuition and living expenses. But Mike’s older children
may not see it that way unless he explains it to
them. A family meeting provides an opportunity
for that discussion.
Other issues to discuss include charitable giving,
the treatment of assets with special significance —
such as vacation homes or family heirlooms —
and decisions about which family members are
chosen to be guardians, executors and so on.
Is there a business involved?
Family meetings are particularly valuable when
a family business is involved. It may seem fair to
provide a greater share to family members who
work in the business.
But what if most of your wealth is tied up in the
business? How do you provide for family members
who don’t work in the business while still reward-
ing the “sweat equity” of those who do?
One option is to divide ownership equally but to
use voting and nonvoting stock to give manage-
ment control to family members who work in the
business. Another option is to leave the business
to those who work in it and use life insurance to
create an inheritance for other family members.
Whatever the solution, the best way to avoid con-
flict and resentment is to discuss the issue with all
interested parties and get their input.
Talk about it now
Estate planning may require you to make some
tough decisions about how your wealth will be dis-
tributed. Often, the easiest way to avoid misunder-
standings, hurt feelings or conflict is to explain your
reasons in person — and family meetings provide
an opportunity to do just that. After all, once your
plan is implemented, it will be too late. D
Could an exchange help
cover LTC insurance costs?
No estate plan is complete without considering
long-term care (LTC) expenses and how to pay for
them. Consider the fact that the current median
rate for a private nursing home is $87,600, accord-
ing to the Genworth 2014 Cost of Care Survey.
LTC insurance is certainly an option. But these
policies can be expensive, too — particularly if you
wait to buy one at retirement age. If funding an
LTC insurance premium is a potential problem,
consider using a total or partial tax-free exchange of
an existing life insurance policy or annuity contract.
Reviewing the history
For many years, Internal Revenue Code Section 1035
has permitted taxpayers to exchange one life insurance
policy for another, one annuity contract for another,
or a life insurance policy for an annuity contract with-
out recognizing any taxable gain. (Sec. 1035 doesn’t
6permit an exchange of an annuity
contract for a life insurance policy.)
In the late 1990s, the U.S. Tax
Court approved partial tax-free
exchanges, finding that these
exchanges satisfy the requirements
of Sec. 1035. A partial exchange
might involve using a portion of an
annuity’s balance or a life insurance
policy’s cash value to fund a new
contract or policy. In order for the
transaction to be tax-free, the exchange must involve
a direct transfer of funds from one carrier to another.
The Pension Protection Act of 2006 expanded
Sec. 1035 to include LTC policies. So now it’s pos-
sible to make a total or partial tax-free exchange
of a life insurance policy or annuity contract
for an LTC policy (as well as one LTC policy for
another). Keep in mind that, to avoid negative
tax consequences after making a partial exchange
of an annuity contract for an LTC policy, you
must wait at least 180 days before taking any
distributions from the annuity.
Funding LTC costs
A tax-free exchange provides a source of funds for
LTC coverage and offers significant tax benefits.
Ordinarily, if the value of a life insurance policy
or annuity contract exceeds your basis, lifetime
distributions include a combination of taxable gain
and nontaxable return of basis. A tax-free exchange
allows you to defer taxable gain and, to the extent
the gain is absorbed by LTC insurance premiums,
eliminate it permanently. Consider this example:
Jessica, age 75, is concerned about possible LTC
expenses and plans to buy an LTC insurance policy
with a premium of $10,000 per year. She owns a
nonqualified annuity (that is, an annuity that’s not
part of a qualified retirement plan) with a value of
$250,000 and a basis of $150,000, and Jessica wishes
to use a portion of the annuity funds to pay the
LTC premiums. Under the annuity tax rules, dis-
tributions are treated as “income first.” In other
words, the first $100,000 she withdraws will be fully
taxable and then any additional withdrawals will
be treated as a nontaxable return of basis.
To avoid taxable gain, Jessica uses partial tax-free
exchanges to fund the $10,000 annual premium pay-
ments. In an exchange, each distribution includes
taxable gain and basis in the same proportions as the
annuity: In this case, the gain is ($100,000/$250,000) ×
$10,000 = $4,000. Thus, each partial exchange used to
pay LTC premiums permanently eliminates $4,000 in
Partial tax-free exchanges can work well for stand-
alone LTC policies, which generally require annual
premium payments and prohibit prepayment.
Another option is a policy that combines the ben-
efits of LTC coverage with the benefits of a life
insurance policy or an annuity.
Typically, with these “combo policies,” the death
or annuity benefits are reduced to the extent the
policy pays for LTC expenses. Often, premiums
A tax-free exchange allows you
to defer taxable gain and, to
the extent the gain is absorbed
by LTC insurance premiums,
eliminate it permanently.
7This publication is distributed with the understanding that the author, publisher and distributor are not rendering legal, accounting or other professional advice or opinions on specific facts or matters, and accordingly assume no liability whatsoever in connection with its use. ©2014 ESTso14
Estate Planning Red Flag
Your will leaves everything to your life partner
There are many benefits to marriage, including some significant estate planning advantages.
Nevertheless, for a variety of reasons, many couples — both opposite-sex and same-sex — choose not
to marry. It’s common for unmarried partners to leave all or most of their wealth to each other in
their wills. But this can result in a significant estate tax liability.
If you and your life partner are affluent enough to make gift and estate taxes an issue — that is, if your
wealth exceeds the gift and estate tax exemption amount (currently, $5.34 million) — you may enjoy
significant tax benefits with a little extra planning.
Unlike married couples, who can take advantage of the marital deduction, unmarried partners can’t
transfer unlimited amounts to each other tax-free. To reduce their estate tax bills, they must take
some additional steps. One option is to make lifetime gifts within the annual gift tax exclusion (cur-
rently, $14,000 per year per recipient). If you start making regular annual gifts early enough, you can
transfer a significant amount of wealth tax-free.
Another technique — which is available only to unrelated persons — is the grantor retained income
trust (GRIT): You transfer some or all of your assets to an irrevocable trust, reserving the right to
receive the trust’s income during its term.
At the end of the term, the assets are trans-
ferred to your partner. If you die before the
end of the trust term, however, the assets
will be included in your estate. That is,
they’ll revert to you.
When you contribute assets to a GRIT, you
make a taxable gift to your partner. But the
amount of the gift for federal tax purposes is
deeply discounted by subtracting the actuarial
value of your reserved income and reversion-
ary interests from the value of the assets.
on these policies can be paid in a lump sum, in
which case a total tax-free exchange of an existing
life insurance policy or annuity contract may be
In an exchange for a combo policy, any gains used
to fund LTC premiums will permanently avoid
tax. But gains that become part of the policy’s cash
value or are used to fund annuity payments may
eventually be taxed.
Offsetting LTC expenses
A key estate planning objective is preserving your
wealth for your loved ones. LTC costs can quickly
deplete your funds, thus allowing less wealth to
pass to heirs. LTC insurance can help offset those
costs, and using a tax-free exchange may be an
option to help fund LTC premiums. Before taking
action, however, consult your financial advisor to
determine whether this strategy is right for you. D
Experience. Responsiveness. Value.
The Chair of the Trusts and Estates Department is responsible for the content of The Estate Planner. The material is intended for
educational purposes only and is not legal advice. You should consult with an attorney for advice concerning your particular situation.
While the material in The Estate Planner is based on information believed to be reliable, no warranty is given as to its accuracy or completeness. Concepts
are current as of the publication date and are subject to change without notice.
IRS Circular 230 Notice: We are required to advise you no person or entity may use any tax advice in this communication or any attachment to (i) avoid
any penalty under federal tax law or (ii) promote, market or recommend any purchase, investment or other action.
At Shumaker, we understand that when selecting a law
firm for estate planning and related services, most clients
are looking for:
A high level of quality, sophistication, and experience.
A creative and imaginative approach that focuses on
finding solutions, not problems.
Accessible attorneys who give clients priority
treatment and extraordinary service.
Effectiveness at a fair price.
Since 1925, Shumaker has met the expectations of clients that
require this level of service. Our firm offers a comprehensive
package of quality, experience, value and responsiveness with
an uncompromising commitment to servicing the legal needs
of every client. That’s been our tradition and remains our
constant goal. This is what sets us apart.
Estate planning is a complex task that often involves related
areas of law, as well as various types of financial services. Our
clients frequently face complicated real estate, tax, corporate
and pension planning issues that significantly impact their
estate plans. So our attorneys work with accountants, financial
planners and other advisors to develop and implement
strategies that help achieve our clients’ diverse goals.
Shumaker has extensive experience in estate planning
and related areas, such as business succession, insurance,
asset protection and charitable giving planning. The skills
of our estate planners and their ability to draw upon the
expertise of specialists in other departments — as well as
other professionals — ensure that each of our clients has a
comprehensive, effective estate plan tailored to his or her
particular needs and wishes.
We welcome the opportunity to discuss your situation and provide the
services required to help you achieve your estate planning goals.
Please call us today and let us know how we can be of assistance.
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