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| ESTATE PLANNING TOOLS Estate Planning and Financial Planning are related. Financial Planning’s goal is to make the most of assets to allow for the desired plans and wishes of individuals concerning their retirement and other goals. Estate planning is done before death to maximize the desires of the individual in distributing his or her assets upon death and to minimize the impact of taxes on the estate assets. If
offered by the Credit Union, a member or family member may consult with a financial planner
that is affiliated with their credit union and in some instances may be able to
participate in financial planning with a Credit Union offering those services
through a Credit Union Service Organization (CUSO) even though the person is not
a member of that credit union; or through another outside company that is
affiliated with the credit union. OTHER
ESTATE PLANNING TECHNIQUES ARE: a.
Disclaimers b.
Family
Limited Partnership (FLP) c.
Freezing
Techniques – Corporations Partnerships d.
Gifts e.
Generation
Skipping Transfers (GST) f.
Installment
Sales and Self Canceling Installment Notes (SCINs) g.
Interest
free and below market loan rates h.
Life
Insurance i.
Non-U.S.
persons (planning for) j.
Power of
appointments k.
Private
annuity l.
Sale
(gift – lease back) DISCLAIM
OWNERSHIP OF PROPERTY
– a person can disclaim ownership of property.
Benefits are that the property
passes as if the disclaimant had predeceased the donor. Concerns:
Donee unable to control disposition of property; Tax
Advantages allows for post mortem tax planning: Caveat:
Donee can not derive any
benefits from the gifted property and must disclaim within nine months of
property passing. FAMILY
LIMITED PARTNERSHIP (FLP) This
is a partnership between family members. Allows
for the passing of property of family members at discounted evaluations.
Concerns:
Local costs associated with the creation and registration of the FLP.
Tax Advantages:
Reduction of transfer and income taxes since the appreciation of the
underlying property has been transferred out of the taxable estate.
Caveat: The partnership is
formalized with a written agreement and funded.
This requires competent legal counsel, tax advice and upfront costs. FREEZING
TECHNIQUES – CORPORATION PARTNERSHIP. In this estate planning
technique, the owner of property attempts to freeze the present value of that
property and give away future growth. Benefits:
Although the original owners of the enterprise retain much of the
present value and control, future appreciation is shifted to the next
generation. Concerns: If not
properly planned and operated, maximum tax benefits will not be realized.
Tax Advantages:
Reduce the amount of gift and death taxes paid.
Caveat: After the applicable entity is created or altered, either a
corporation or a partnership, the enterprise is transferred to the entity and
discounted portions of the entity are gifted to family members.
This will require competent legal counsel and tax advice as well as
consultation with a financial planner.
GIFTS Gifts
are a gratuitous transfer of property. Benefit:
Gifts reduce value of the estate subject to death taxes; remove appreciation
from the estate. Concerns:
Loss of control over property; Tax
Advantages: Proper use of the $10,000 annual exclusion; unlimited
medical and educational exclusion; unlimited marital deduction; and the then
current life time exclusion will significantly reduce death taxes assessed.
Caveat:
Gifts can be outright, in trust or made in accordance with applicable
Uniform Gift/Transfer to Minor’s Act. Again,
competent, qualified legal, tax and financial planning consultations are
recommended. GENERATION
SKIPPING – TRANSFER (GST) A
GST is a transfer to a person who is two or more generations below the donor
(such is a gift from a grandparent to a grandchild) and requires special
consideration. Benefits: Gifts can be
made to skip a generation for a special reason i.e., if the needs of more
immediate family members have already been met, a GST
can help a more needy class of descendants.
Concerns:
If the gifts are not properly structured or exceed the lifetime (at
this writing) $1,000,000 exemption, a 55% GST tax (in addition to the other estate taxes) is
assessed. Tax
Advantages: The use of the $1,000,000 exemption will allow the donor
to skip a person and save federal gift estate taxation at the intermediate
level. Process: Property can
be transferred by gift or request, either outright or in trust. INSTALLMENT
SALES AND SELF CANCELLING INSTALLMENT NOTES (SCINs) SCINs
are a sales procedure which allows a purchaser to spread out payments over a
period of time and a seller to spread or defer taxable gain to a more
advantageous time. Benefits: Produces
flexibility to both the purchaser and the seller; removes appreciation of the
assets from the taxable estate. Concerns:
Installment sales – the taxable estate will include the present
value of any installments due at the seller’s death. Tax Advantages:
Taxable gain is prorated over the payment period of SCINs since the
balance of the note is cancelled at the death of the seller, there is nothing to
include in the estate. Process:
An appropriate sales agreement must be drafted. INTEREST FREE AND BELOW MARKET RATE LOANSIn
this situation a loan is made either interest free or at a lower rate than the
then current market rate. Benefits: Typically, an incentive loan can be made to a key non-owner
employee or a loan can be made from a parent to child.
Concerns: Family
or work relationships may be strained if the debtor fails to make timely
payments. Tax Advantages: There
are few tax advantages. Process:
Local counsel should be consulted to insure that the transaction
constitutes a bona fide debt. LIFE INSURANCELife
insurance is a contract that provides cash at the time of the death of the
insured. Benefits: Life
insurance proceeds provide needed cash to support family members, pay taxes,
fund charitable gifts and buy or continue family businesses.
Concerns:
Whether premiums payments can be structured to take into account
other financial obligations; remove all of the proceeds from the taxable estate.
Tax Advantages: A property purchased and owned (such as by an irrevocable
life insurance trust) life insurance proceeds will pass to the beneficiaries
free of death and income taxes. Process:
The clients should contact their life insurance agent for analysis of
their current and projected financial needs. NON-U.S.
PERSONS (PLANNING FOR) In this situation property passing to and from non- U.S. Persons is taxed differently than property passing to and from U.S. persons. Benefits: Avoiding unnecessary income and transfer taxes. Concerns: Potential loss of control of property if it leaves the U.S.; possible loss of unlimited marital deductions for estate tax purposes. Tax Advantages: Depends on the status of each individual (i.e., resident, non-resident). Process: A fairly complex planning area requires the advice of expert legal estate planner. POWER OF
APPOINTMENT A right given in a Will, Trust or other instrument allowing the recipient of the power to determine who will receive property at a future time. Benefits: Allows family to redistribute wealth if the needs of certain family members change. Concerns: Not knowing how the holder of the power will exercise the power in the future. Tax Advantages: If properly drafted, it will not be taxed at the death of the holder. Process: Local counsel should incorporate appropriate language in the instrument. PRIVATE ANNUITY Private annuity is an arrangement between two parties (neither of whom is an insurance company) in which one party is obligated to pay an annuity to the other party in exchange for property. Benefits: Reduces the taxable estate while providing a lifetime income stream to an individual and/or spouse. Concerns: Loss of ownership of property; ability of party to make lifetime payments. Tax Advantages: An individual can “spread” capital gains over years and remove property from an estate without incurring gift taxes. Process: Local counsel and tax advisor should be consulted to ensure that the agreement is drafted properly. SALES (GIFT) LEASE
BACK Is a situation where one party gives (or sells) property to the other party and then leases it back. Benefits: Can provide additional cash flow; remove the assets in the taxable estate or shift income to a lower tax bracket. Concerns: Loss of control of the assets; realization of gain in the case of a sale. Tax advantage: Reducing income and estate taxes. Process: To ensure that the transaction is arm’s length and bona fide, local counsel should be consulted. Ó 2000 James
W. Pearson, Jr., All Rights Reserved FOR
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