Strategies & Benefits of Estate Planning

Stand Together - Strategies & Benefits of Estate Planning

May 21, 2019

Glenn G. Fox, Esq., Baker & McKenzie LLP, 452 Fifth Avenue, New York, NY 10018 [email protected]; www.bakermckenzie.com; Tel. 212-626-4689 Overview

1 Wills 3-5 2 Revocable Trusts 6-8 3 Irrevocable Trusts 9-10 4 Life Insurance 11 5 Closely Held Companies 12 6 Marital Contracts 13 7 Charitable Planning Vehicles 14-21 Wills

Why Execute a Will? Choice of beneficiaries: . Laws of intestacy are the default if no Will . To whom can I leave my estate? . Spouse’s elective share . Use of testamentary trusts (trusts created in will): . Special assets . Handicapped children . Second marriage . Tax planning . Charitable Beneficiaries . Contingent Beneficiaries

Why Execute a Will (Cont’d.)? Choice of Fiduciaries: . Executor(-rix); Administrator(-rix); Trustee: . Who are they? . What do they do? . How are they paid? . Choice of reducing administrative costs, i.e., no bond Choice of Minor Childrens’ Guardians: . Impact of death . Divorce considerations . Special needs of guardians or children Choice of lower taxes. © 2019 Baker & McKenzie LLP 4 Wills

Why Avoid Passing Assets on Death by Will? Probate Process: . Probate proceeding must be commenced in court to validate a Will and empower executor . Court fees can be high . Disinherited “heirs” have right to appear in court proceeding to challenge WIll . Will is a public document – anyone can get copy from court so no privacy . Assets of the estate are “frozen” until Will is admitted to probate How to Avoid Probate: . Jointly held real property or joint accounts (e.g., joint tenants with rights of survivorship) – but note the assets will be subject to creditor claims of joint owner . Property that passes by beneficiary designation (e.g., life insurance, retirement accounts, “in trust for” accounts, etc.) . Property held in trust (discussed below)

– Can be especially useful for Beneficiaries . Avoiding Probate Trustee . Planning for Estate/Inheritance/Gift Tax purposes Distribution . Addressing forced heirship rules Custody . Addressing asset protection/creditor concerns Trust Invest . Protection from claims of descendants’ spouses Mgr. . Holding business assets for non-active children Distribution . Special needs planning Assets Mgr. . Second marriages

How to Avoid Probate with Revocable Trust: . Establish revocable trust during lifetime . Settlor is beneficiary and trustee of revocable trust while alive . Transfer all assets to trust while alive (assets not transferred must pass by Will or intestacy . Upon death trust provides for intended beneficiaries and successor trustee and there is no “freezing” of assets . Court intervention not needed to appoint successor trustee . Still need a Will to account for assets not in trust and to appoint guardian . Will “pours” assets into revocable trust

Other uses for Revocable Trusts Avoiding Ancillary Probate: . Probate proceeding will be necessary in each state (or country) where assets are located . To avoid probate in states other than state of primary resident transfer assets to revocable trust Managing Assets of Elderly or Disabled Person: . Assets are placed in trust with a third party trustee . Settlor can still revoke trust . Avoids need for a Power of Attorney

Estate Tax/Gift Tax Planning: . Use of $11.4 million unified credit . Leveraged gifts - GRATs, IDGTs, QPRITs . Irrevocable Life Insurance Trusts (ILITs) . Annual exclusion gift trusts ($15,000 annual exclusion) . Lifetime Marital Trusts – Qualified Terminable Interest Property (QTIP) Trust . Spousal Limited Access Trust (SLAT)

Charitable Planning: . 100% charitable trust . Charitable remainder trust (CRAT or CRUT) . Charitable lead trust (CLAT or CLUT) Asset Protection Planning: . Domestic self-settled asset protection trust (only permitted in certain states like DE, AK, SD, NV, OH and WY) . Offshore self-settled asset protection trust . Asset protection trust settled for third party

Advantages Liquidity for business succession planning or estate tax liabilities Tax advantaged in many jurisdictions, but not all . Investments grow free of income tax . Loans against policy value . Death benefits may be tax-free of income/death tax to recipients . Deductions for payment of premiums . Asset / creditor protection . Avoidance of probate / forced heirship

Combine with irrevocable trusts to avoid estate tax (ILIT)

. Types – corporations, partnerships, limited liability companies . Valuation discounting for tax purposes – . Discounts are permitted for (1) lack of marketability and (2) lack of control (minority interest/non-voting interest) . Separate discounts for each of the above . Discounts can be anywhere from 15% to 40%, depending upon nature and dynamics of business/underlying assets . Easier to achieve discount for company with operating business than for holding company

. Marital law very overlooked area in wealth planning . Community property major issue in some U.S. states . Common law marriage in some U.S. states . Marital contract or prenuptial agreement to address death and divorce . Postnuptial agreements are permitted in many jurisdictions . Agreement should be drafted in accordance with law where couple will reside (not where they marry) . May need to anticipate where couple will move in the future . Irrevocable trust established by parents may avoid need for prenup . Avoid signing prenup too close to wedding date . Each party must have their own lawyer . All assets must be disclosed in prenup

Choosing Charitable Planning Vehicle (as proposed by JCF)

. Financial Need of donor and heirs: do they need income as well as tax savings? . Time Horizon: Make the gift now or after lifetime? . Control: How much control of grant-making and investments? . Privacy vs. Recognition: Does donor want to be under the radar? . Flexibility: Does donor need a flexible vehicle? . Charitable Impact: How does donor define desired impact and scale? . Fundraising: Does donor need to/want to solicit funds from others?

How to Give Property to Charity and Retain Income Interest

Gift After $5M 7% Charitable 15 Year Donor Remainder Term Charitable Age 60 Annuity Trust Remainderman $1M 15 Year Term $5M FIT Charit. $350k per year for Ded. 15 years Donor

How to Get Property to the Children Transfer-Tax-Free Income Beneficiary Ultimate Donor Gift Beneficiary $5M 7% Charitable Lead $5M Parents Annuity Trust Children $5M 20 Year Term FGT Charit. $7M to Charity Ded. ($350k per year)

Gift Tax: $ -0-

No 2% tax on net Less detailed “50% charities” investment reporting for charitable income or requirements contribution regulatory excise than private purposes tax foundations

No minimum Eligible to make Distributions or limited lobbying termination tax expenditures

Public Charity Donor Advised Fund (DAF) Compared to Private Foundation (PF)

Cash Donations: . DAF – Deduction limitation on cash contribution in any year is equal to no more than 60% of the donor’s adjusted gross income (AGI). . PF - Cash gifts to PFs can be deducted up to 30% of AGI with 5 year carry forward.

Appreciated Property: . DAF - Deduction limitations on gifts of appreciated property (securities) are 30% of AGI. Deductible at fair market value on the gift date. . PF – Deduction limitation on appreciated property (securities) is 20% for gifts to private foundations. In addition, gifts of appreciated property to a PF are generally deductible only at basis, not at fair market value. An exception exists for gifts of “qualified appreciated stock.”

© 2019 Baker & McKenzie LLP 18 Action Comparison Prepared by JCF DAF PF Required Annual Minimum Payout NY Funder is Responsible for Administration NY Direct Grant Awards to Individuals NY Generational Continuity YY Low-cost YN Pay Salaries (family members) NY Protect Privacy (no public disclosure) YN Can hold more than 20% of closely held business YN

Which donors would prefer to use a DAF? . Donors who want to support their charities without spending time on the recordkeeping and administration . Donors who have highly appreciated securities and are concerned about the capital gains tax . Donors who want to gift shares in their fund (i.e. hedge funds) without having to redeem at the time the gift is made . Donors who may want to contribute complex assets such as privately held corporations and real estate . Donors who seek privacy and may wish to be anonymous with some or all of their giving . Donors who want to involve children or grandchildren in charitable giving as a way of transmitting their values, and continuing their legacy of philanthropy . Donors who want to leave money to multiple charities

Which donors would prefer to use a PF? . Donors who want more control over operations of charity . Donors who do not want to give all assets to charitable causes in one year . Donors who have highly appreciated securities and are concerned about the capital gains tax . Donors who seek notoriety as part of their giving. . Donors who want to involve children or grandchildren in charitable giving as a way of transmitting their values, and continuing their legacy of philanthropy. . Donors who want to leave money to multiple charities . Donors who want to fund projects on a targeted basis with for profit and non-profit partners

• The Questions pane on the Control Panel is where attendees can submit questions • Type your question in the text box & click Send to submit it to the organizer

• Glenn G. Fox • Partner, Baker & McKenzie LLP • Email: [email protected] • Phone: 212.626.4100 • Mark McConnell • Vice President, Planned Giving; Stand Together • Email: [email protected] • Phone: 571.290.7338 • Jack Thurman • Managing Partner, BKD Family Office • Email: [email protected] • Phone: 417.866.5822

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