Advanced Estate Planning Topics Who needs advanced estate

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Advanced Estate Planning Topics • Who needs advanced estate planning? • What are the

Advanced Estate Planning Topics • Who needs advanced estate planning? • What are the applicable taxes and rates? • What estate planning techniques are available to avoid or minimize taxes?

Who Needs Advanced Estate Planning? • Individuals with net worth exceeding $11. 58 million

Who Needs Advanced Estate Planning? • Individuals with net worth exceeding $11. 58 million in 2020 • A married couple with net worth exceeding $23. 16 million in 2020 • Individuals who desire to leave assets to charity • Individuals and business owners who would like to protect assets from creditors, ex-spouses and children's spouses

What are the Applicable Taxes and Rates for 2020? Tax Type When Applicable Tax

What are the Applicable Taxes and Rates for 2020? Tax Type When Applicable Tax Rate Federal Gift Tax Applies to gifts made during your lifetime 40% on amounts in excess of $11. 58 million, above the annual exclusion amount including all prior taxable gifts ($15, 000 person in 2020) and not covered by one of the other limited exclusions Federal Estate Tax Applies to assets transferred at time of death for estates above $11. 58 million, including lifetime taxable gifts 40% on amounts in excess of $11. 58 million Generation Skipping Tax Applies to transfers made to someone more than one generation below you 40% on amounts in excess of $11. 58 million Tax is in addition to gift and estate taxes State Estate and Inheritance Tax Applies to those inheriting from your Rates, exemptions and deductions vary from estate and generally applies to all estates state to state

Estate Planning Techniques to Avoid or Minimize Taxes • • Marital Descendant Charitable Asset

Estate Planning Techniques to Avoid or Minimize Taxes • • Marital Descendant Charitable Asset protection/creditor protection

Marital Planning • • • Particularly necessary if you have concerns about: • Asset

Marital Planning • • • Particularly necessary if you have concerns about: • Asset management for surviving spouse • Long-term care for surviving spouse • Spouses with significantly different net worth • Prior marriages • Children from different marriages Any property which passes directly to a spouse (during life or at death) is not subject to the gift or estate tax Property which passes by trust for a spouse may not be subject to gift or estate tax

Marital Planning: Bypass (Credit Shelter) Trust • Allows married couples to use each spouse’s

Marital Planning: Bypass (Credit Shelter) Trust • Allows married couples to use each spouse’s applicable exemption ($11. 58 million in 2020) • Created at the death of the first spouse by will or revocable trust • Funded up to amount equal to the applicable exemption ($11. 58 million in 2020) • Terms of trust may benefit surviving spouse

Marital Planning: Bypass (Credit Shelter) Trust The assets remaining in the credit shelter trust

Marital Planning: Bypass (Credit Shelter) Trust The assets remaining in the credit shelter trust at the death of the surviving spouse are not considered part of the survivor's taxable estate because the surviving spouse has limited control over the distribution of the trust assets.

Marital Planning: Bypass (Credit Shelter) Trust Husband’s estate Wife’s estate Husband’s death Children’s access

Marital Planning: Bypass (Credit Shelter) Trust Husband’s estate Wife’s estate Husband’s death Children’s access to income and principal limited per access to the trust Wife’s death Credit Shelter Trust created by husband Limited access to income and principal during wife’s life Wife’s estate (now consists of her own assets and those not in the Credit Shelter Trust) No estate tax due at husband’s death Estate tax (if any) due at wife’s death Remaining assets to children Second husband or others as she directs

Marital Planning: Portability • At death of first spouse, allows the transfer of his/her

Marital Planning: Portability • At death of first spouse, allows the transfer of his/her unused estate tax exemption amount to the surviving spouse, who can then add it to his/her own exemption • Reduces federal estate tax exposure on second spouse's death • Portability must be elected by the estate of the first spouse • Federal estate tax return required to be filed • Can be "lost" if surviving spouse survives a later spouse

Marital Planning: Qualified Terminable Interest Property Trust (QTIP) • • Marital deduction applied to

Marital Planning: Qualified Terminable Interest Property Trust (QTIP) • • Marital deduction applied to transfers to surviving spouse in trust (avoids gift and estate tax) Surviving spouse receives all trust income for life Limited power for surviving spouse over trust assets Donor may direct the trust principal at surviving spouse's death Taxed at death of surviving spouse Lifetime or testamentary Useful in subsequent marriages to ensure assets pass to children from prior marriage Protects assets from creditors of surviving spouse

Marital Planning: QTIP Trust Husband’s estate Wife’s estate Husband’s death QTIP Trust for benefit

Marital Planning: QTIP Trust Husband’s estate Wife’s estate Husband’s death QTIP Trust for benefit of wife for life Wife’s death Estate tax (if any) due at wife’s death on wife’s estate and QTIP Trust Remaining assets to children Wife’s estate (now consists of her own assets and those not in the QTIP Trust) No estate tax due at husband’s death Access to all income and principal limited Second husband or others as she directs

Descendant Planning • Use of gifts, some of which can be completely “tax-free” •

Descendant Planning • Use of gifts, some of which can be completely “tax-free” • Other techniques are not “tax-free” but minimize the amount which is subject to tax • Gifts which are subject to payment of gift tax can still be useful in estate planning

Descendant Planning: Gifting Exclusions 2020 annual gifting exclusion: $15, 000 person ($30, 000 if

Descendant Planning: Gifting Exclusions 2020 annual gifting exclusion: $15, 000 person ($30, 000 if you and your spouse make the gift together) 529 college savings plans: $75, 000 ($150, 000 if made with spouse) reported over five-year period Direct payments: To educational (tuition) or medical institutions for another person No limit on amount donor can give No limit on number of people to whom direct payments can be made

Descendant Planning: Generation-Skipping Tax (GST) GST: Tax assessed on property passing to a generation

Descendant Planning: Generation-Skipping Tax (GST) GST: Tax assessed on property passing to a generation that is two or more levels below the generation of the person who is making the transfer (e. g. grandparent to grandchild) Purpose: Makes certain that taxes are paid at each generational level and cannot be bypassed through the use of a trust or by making a transfer directly to remote generation Tax due: Only when skip persons receive aggregate amounts in excess of the transferor’s GST exemption of $11. 58 million

Descendant Planning: GST • Type of irrevocable trust is designed to eliminate estate taxes

Descendant Planning: GST • Type of irrevocable trust is designed to eliminate estate taxes at each generational level and continue for many generations • Primary objective is to protect assets from gift, estate and GST taxes • Preserves wealth for multiple generations because estate taxes are not assessed each time the property is passed from generation to generation

Descendant Planning: Irrevocable Life Insurance Trust (ILIT) • Life insurance owned by an ILIT

Descendant Planning: Irrevocable Life Insurance Trust (ILIT) • Life insurance owned by an ILIT is not subject to estate tax • ILIT assists in "making up" the money used to pay estate tax • Beneficiaries get more of their inheritance than they otherwise would without it

Descendant Planning: ILIT No ILIT Total Assets: $15 million Less exemption: -$11. 58 million

Descendant Planning: ILIT No ILIT Total Assets: $15 million Less exemption: -$11. 58 million Estate tax exposure: $3. 42 million Estate tax at 40%: $1. 368 million ($3. 42 million x 40%) Estate tax at 40%: $1. 368 million ($3. 42 million x 40%) ILIT in place $2 million policy • Not subject to federal estate tax • Replaces the $1. 368 million in federal estate tax paid • Provides estate beneficiaries with "additional" $632, 000 Estate beneficiaries receive $2, 000 (minus insurance premiums paid) less than if you had set up an ILIT and it had purchased an insurance policy

Descendant Planning: Qualified Personal Residence Trust (QRPT) • • Irrevocable trust to hold your

Descendant Planning: Qualified Personal Residence Trust (QRPT) • • Irrevocable trust to hold your residence You reserve the right to live in the residence rent-free for a term After term expires, you vacate property and the remainder interest passes to specified beneficiaries If you survive the term, ownership of the residence passes to the trust beneficiaries without imposition of additional gift tax • The value of your gift to the trust is reduced by the actuarial value of the rights reserved by you • The appreciation during the term will pass to your beneficiaries outside of your taxable estate • If you do not vacate the property at the end of the term you must pay fair market rent to the new owners (which gets more money out of your estate and for your QPRT beneficiaries)

Descendant Planning: Grantor Retained Annuity Trust (GRAT) • Allows you to retain a fixed

Descendant Planning: Grantor Retained Annuity Trust (GRAT) • Allows you to retain a fixed annuity payment from the transferred property for a fixed period of time • Based on the value of the retained annuity payments there may be little or no gift tax imposed at the time it is established • Remainder passes to designated trust beneficiaries without additional gift tax at the end of the term of the trust • Permits excess appreciation to pass without use of your gift tax credit • Often used for assets expected to appreciate greatly

Descendant Planning: GRAT Facts Term: 5 years GRAT property: x = $100 IRS-Assumed Growth

Descendant Planning: GRAT Facts Term: 5 years GRAT property: x = $100 IRS-Assumed Growth Rate: 2. 0% Actual Growth Rate: 10% Yearly Annuity Payout: $21 GRAT Example Year 1: x = $110 – $21 = $89 Year 2: x = $ 98 – $21 = $77 Year 3: x = $ 85 – $21 = $64 Year 4: x = $ 70 – $21 = $49 Year 5: x = $ 54 – $21 = $33 (to successor trusts for beneficiaries)

Descendant Planning: Installment Sales to Intentionally Defective Grantor Trust (IDGT) • A sale between

Descendant Planning: Installment Sales to Intentionally Defective Grantor Trust (IDGT) • A sale between you and an irrevocable trust of appreciating or appreciated assets • The trust is "intentionally defective" for income tax purposes meaning you, individually, are responsible for all income taxes generated in the trust • Despite the income tax being paid by you, the assets of the trust are excluded from your estate for federal estate tax purposes

IDGT: Sale to Intentionally Defective Grantor Trust Gift of cash to Trust uses cash

IDGT: Sale to Intentionally Defective Grantor Trust Gift of cash to Trust uses cash to make down payment Balance of Trust after note is paid Sale of asset to Trust Client IDGT Trust issues promissory note for balance due; annual payments of interest and principal to client Beneficiaries

Descendant Planning: Family Limited Partnership (FLP) Family Limited Partnership General partner 1% Units transferred

Descendant Planning: Family Limited Partnership (FLP) Family Limited Partnership General partner 1% Units transferred to family member at discount FLP 99% Family members (limited partners) own up to 99% of FLP • • A business entity that permits you to transfer ownership of family business to the next generation FLP is owned by a general and limited partner • The general partner: LLC • Gifts of limited partner interests at discount • Control retained • IRS often challenges

Descendant Planning: Private Annuities • • • Transfer of property to a junior family

Descendant Planning: Private Annuities • • • Transfer of property to a junior family member in exchange for private annuity of periodic fixed payments The property being transferred, but for the private annuity, would be subject to gift or estate tax Use of annuity makes the transfer a sale, removing the asset from gift and estate taxes You transfer property to recipient Recipient gives you periodic income payments in return for the property Children receive property outside your taxable estate

Charitable Planning • Fully deductible for gift and estate tax purposes • Potentially deductible

Charitable Planning • Fully deductible for gift and estate tax purposes • Potentially deductible for income tax purposes • Various types of charitable planning techniques: • Donor-advised funds • Private foundations • Split interests • Charitable remainder trust • Charitable lead trust

Charitable Planning: Donor Advised Fund (DAF) • • • Gift to community foundation Immediate

Charitable Planning: Donor Advised Fund (DAF) • • • Gift to community foundation Immediate gift deduction You retain the right to "advise" how fund should be used Simple to establish Cannot be used to satisfy personal charitable pledges As donor, you make a gift to a donor-advised fund with a charitable organization Donor-advised fund established in your name You advise which charities receive gifted funds

Charitable Planning: Private Foundation • Entity set up by individuals or family for charitable,

Charitable Planning: Private Foundation • Entity set up by individuals or family for charitable, religious or educational purposes • Funded by a single source (individual, family or business); does not generally solicit funds from the public • Not subject to estate and gift tax • Required to spend annually a certain amount of money or property for charitable purposes, including grants to other charitable organizations

Charitable Planning: Charitable Remainder Trust (CRT) • • Can benefit a charity while providing

Charitable Planning: Charitable Remainder Trust (CRT) • • Can benefit a charity while providing you with an income stream Remainder of property passes to charity Avoids immediate capital gains upon sale of gifted property Actual charitable beneficiary is subject to change You transfer assets to the CRT makes distributions of income to you for term of years or life Charity receives the remaining trust property at end of term

Charitable Planning: Charitable Lead Trust (CLT) • • • Established to benefit a charity

Charitable Planning: Charitable Lead Trust (CLT) • • • Established to benefit a charity for a specified period of time Combines your desire to leave assets to charity with your desire to save on estate and gift tax Reduces the taxes otherwise due on your estate Charity receives income (the lead) for the specified time Your trust beneficiaries receive the remaining trust principal when the time period ends You transfer property to CLT makes fixed payments to charity during trust term Remaining trust principal to trust beneficiaries when trust ends tax free Charity receives payments

Asset Protection Planning Wealth is subject to liabilities and creditors. Some techniques to protect

Asset Protection Planning Wealth is subject to liabilities and creditors. Some techniques to protect wealth from third-party claims: • Joint ownership with spouse • Corporate ownership • First-party asset protection trusts

Asset Protection Planning: Joint Ownership with Spouse • Generally, liability against one spouse cannot

Asset Protection Planning: Joint Ownership with Spouse • Generally, liability against one spouse cannot be collected from joint marital assets • Transferring assets to the other spouse may in certain instances protect assets • Must not be done in anticipation of litigation

Asset Protection Planning: Corporate Ownership • Protects your personal assets from business-related claims •

Asset Protection Planning: Corporate Ownership • Protects your personal assets from business-related claims • Business property is owned by separate legal entity. Personal assets are not exposed to business claims so long as corporate formalities are followed: • Filing proper forms with your state government • Reporting and filing income tax returns for the corporate entity • Updating corporate records and books regularly

Asset Protection Planning: First-Party Asset Protection Trust • A vehicle for holding an individual's

Asset Protection Planning: First-Party Asset Protection Trust • A vehicle for holding an individual's assets to shield them from creditors • Provides for distributions to you, but distributions only occur at an independent trustee's discretion

Advanced Estate Planning: Summary • Consider your long-term desires and your net worth •

Advanced Estate Planning: Summary • Consider your long-term desires and your net worth • Consider to whom you would like to leave your assets and what control you would like to have over them upon your death • Talk with your financial advisor and attorney to better understand what options best suit your needs

Federated Hermes, Inc. does not provide investment, tax, or legal advice. The information presented

Federated Hermes, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual's personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice. 37942 (4/20) Federated Securities Corp. © 2020 Federated Hermes, Inc.