Category Archives: Estate Planning

Benefits of Moving to Florida From a high-tax State

I recently stumbled across an article that articulates the basic thesis of The Florida Domicile Handbook; and this article touches base on many of the things that are explained in-depth in The Florida Domicile Handbook.

Some of these advantages include:
• No Income tax
• An Array of Asset Protection
• Healthy Real Estate Market
• Homestead Exemption
• No State Estate Tax

One of the key takeaways from this article and the book is that the process of declaring domicile in Florida can make your life more enjoyable all across the board. The weather provides year-round access to the outdoors and endless opportunity for recreation, the vibrant wildlife and beautiful scenery can be found no where else in the world and the tax codes help keep a little more money in your pocket. Click here to read the article, and pick up your copy of The Florida Domicile Handbook for a step by step guide of your move to paradise.

 

Advantages of an Intentionally Defective Grantor Irrevocable Trust

Joseph and Ann Sullivan had been to an attorney who recommended that they use a grantor retained annuity trust to reduce their estate in order to pass a valuable piece of income-producing commercial real estate to their daughter, Becka. They were hesitant about the attorney’s plan because, if they died during the term of the trust, the trust would terminate. The property would be back in their estates and they would not accomplish their goal. In addition, they would not be able to include generation-skipping provisions in the trust with a grantor retained annuity trust, so the property would be subject to another layer of tax in Becka’s estate.

The grantor retained annuity trust would not address their concerns. A better solution was available through the use of an intentionally defective grantor irrevocable trust. Not only would this trust allow them to transfer any future appreciation to their daughter (effectively freezing the value of the real estate in their estate), but also the plan would take effect immediately. As a result, they would have a way to substantially leverage their generation-skipping exemption and the trust would provide an opportunity for additional significant planning benefits.

One of the primary goals of any good estate plan is to reduce your exposure to taxes while leveraging your gift, estate and generation-skipping tax exemptions.

Grantor retained annuity trusts (GRATs) hold assets and pay income to you as the grantor for a specified term. At the end of the term, the assets pass to your children or selected beneficiaries. Because you retain a right to income from the GRAT, as long as the assets’ growth exceeds the income payment, you are able to leverage your giving ability by discounting the value of the gift assets—thereby reducing any taxes due on the gift.

Another type of grantor trust that provides an opportunity for leveraging and receiving tax benefits, while keeping the trust property out of your estate, is the intentionally defective grantor irrevocable trust (IDGIT).

As part of the Internal Revenue Code since 1954, grantor trust rules stipulate that, if a trust document contains certain provisions, the trust’s income will be taxed to the trust’s creator—the grantor—rather than to the trust itself. Congress devised the rules thinking no sensible taxpayer would want to pay a trust’s tax bill, especially because individual tax rates at that time were higher than trust tax rates and the grantor cannot be a beneficiary of a grantor trust. But now, income tax rates are much lower than they were in 1954 and, thus, for someone focused more on estate taxes, a grantor trust, an IDGIT, can substantially increase the wealth passed to heirs.

IDGIT Basics

An IDGIT is simply a type of irrevocable trust drafted to trigger the grantor trust rules and force the grantor, rather than the trust, to pay income tax on trust income. That’s the “intentionally defective” part. Assets are moved into and become owned by the trust. The positive result is that those assets, and their future appreciation, are outside the grantor’s taxable estate. Paying the income tax on the trust’s annual earnings further reduces the grantor’s estate while netting another benefit: 100 percent of the earnings can accumulate inside the IDGIT, to the advantage of the trust beneficiaries, who are typically the grantor’s children.

Because the IRS requires that the grantor pay the trust’s tax, that payment is a legal obligation, not a gift, so no gift tax applies. In effect, value is shifted to the trust beneficiaries at the grantor’s income tax rate. This is preferable to having the IDGIT or its beneficiaries pay the income tax while leaving value in the grantor’s estate that would later be subject to estate tax.

Drafting the trust to be defective (so that it triggers the grantor trust rules) is a simple matter for a knowledgeable attorney. One way to do this is to provide that trust principal or income may be distributed to the grantor’s spouse. This arrangement has no estate or gift tax significance, but it automatically makes the trust a grantor trust.

Another way to accomplish this is to specify that the grantor retains the power to reacquire the trust corpus by substituting other property of equivalent value or by giving someone other than the grantor or current beneficiary of the trust the power to expand the class of beneficiaries. Such power is sometimes given to the grantor’s accountant or attorney and, even though the power may never be exercised, the grantor trust rules are triggered.

A good attorney will also provide an element of control by making it possible to “turn off” the grantor trust status, in case paying tax for the IDGIT becomes a financial burden for the grantor. This can sometimes be accomplished by giving a power holder (such as the accountant or attorney in the previous example), the right to renounce the power.

Selling Assets to an IDGIT

A grantor can transfer assets into an IDGIT by either gift or sale. Making a gift consumes the grantor’s various exemptions, but, if the grantor sells an asset to the IDGIT, there is no gift and therefore no gift tax. Furthermore, there is no recognition of gain and, thus, no capital gains tax when assets are sold to an IDGIT. For tax purposes, selling an asset to an IDGIT is the same as selling an asset to oneself: no tax.

If you have highly appreciated assets you would like to remove from your estate, you could possibly avoid all capital gains taxes as well as gift taxes by selling the assets to an IDGIT that you create. To leverage the transaction, the IDGIT could pay for the assets in the form of an installment note, payable over several years. The Internal Revenue Code allows you to charge a relatively low rate of interest on the installment note. This is a decided advantage, as it enables an IDGIT that is earning a market rate of return to invest the cash flow in excess of the low-interest note payments so that it can accumulate and grow and eventually be used to pay back the note principal. Also, because of the grantor trust rules, you do not have to recognize the interest on the note. So, there is no tax deduction for the trust and there is no taxable income for you, the grantor, for interest payments on the note from the trust. However, you are still liable for taxes on the income earned by the IDGIT, including any income earned by property sold to the trust.

The excess income over the note payments may be high enough to allow you to further leverage the value of the IDGIT through the purchase of insurance or some other growth vehicle. In addition, because the grantor pays the income taxes on trust income, the trust’s return is enhanced for the beneficiaries of the trust. Best of all, the payment of income taxes by the grantor is not considered a gift for transfer purposes.

To qualify for charging a low interest rate (such as the federal mid-term rate), the note will usually be written to last from three to nine years (referred to as a “mid-term” note as it is neither short-term nor long-term). Also, it should be properly documented with reasonable terms. It is a good idea to have separate representation of the grantor and the IDGIT, including actual negotiation of the terms of sale.

GRAT Versus IDGIT

In many respects, a sale of assets on an installment note to an IDGIT is similar to a gift of assets to a GRAT. In a GRAT, the present value of the annuity payments to the grantor reduces the amount of the taxable gift, but the annuity payments, if not fully consumed, return value to the grantor’s estate. In an installment-note sale to an IDGIT, principal and interest on the note are paid back to the grantor over time and this also returns value to the grantor’s estate. However, when structured properly, using the following techniques, this repayment can be a substantially reduced amount. This, in turn, leaves more for heirs.

The Seed Gift

To help support the installment note and the viability of the strategy, it is advisable for the grantor to make a small seed gift to the IDGIT. It is generally recommended that this gift be at least 10 percent of the value of the assets to be sold. The seed property is important because the trust needs to have a measure of independence from the grantor. Also, it should not appear that the income distributed from the property sold to the trust is the sole source of funds being used to service the entire note. If the seed gift is too small, the IRS may treat the sale as a gift (not a desired result).

Sale of a Discounted Asset

The benefit of the IDGIT strategy can be further enhanced if the grantor utilizes the valuation discounts that are available for certain assets including shares in a corporation, units in a limited liability company or family limited partnership interests. Nonvoting shares, limited liability company units or limited partnership interests are given or sold to an IDGIT at their value as determined by a valuation professional. Generally, the fair market value of such interests is adjusted downward from their pro rata value of the underlying assets of the business entity. This is due to valuation discounts resulting from either lack of control, lack of marketability, or both—relative to those interests. If the interests are sold to an IDGIT, the valuation adjustment reduces the principal amount of the note while increasing the effective yield to the trust from the true value of the underlying assets.

Leverage with Life Insurance

The real power of this strategy comes when the trustee of the IDGIT uses the excess income created in the IDGIT to purchase life insurance. The income earned by the IDGIT over and above the amount needed to pay the installment note can go toward life insurance premiums on the life of the grantor, a beneficiary or some other relative. The premium payments will not result in gift taxes because the premiums are paid from trust income. The amount of insurance purchased can be substantial and can significantly increase the value of the trust assets that will eventually pass to the beneficiaries.

For example, Molly and Rick Crall (ages 70 and 66, respectively) were made aware of the fact that the anticipated excess income on the assets in their IDGIT would support a premium of $125,000 ($200,000 – $75,000) without the extra cash flow achieved through discounting or $155,000 ($200,000 – $45,000) with discounting. The smaller premium amount would be sufficient to fund a second-to-die insurance policy with a death benefit of approximately $6 million and the larger a death benefit of approximately $8.5 million, on Rick and Molly Crall (based on good health ratings and current assumptions of interest, mortality and expenses). On the death of the couple, the entire death benefit plus the value of the assets in the trust, including any direct gifts, would be available for the beneficiaries and exempt from both estate and GST tax.

Even without the discounted-sale approach, if Rick and Molly died immediately after repayment of the note at the end of year nine, the IDGIT would hold assets with underlying values in excess of $7.7 million ($1,400,000 appreciation on real estate + $390,000 seed capital and appreciation on seed capital + $6,000,000 insurance), 30 times the amount originally given as seed money to the trust and upon which the GST election was based. In other words, the $7.7 million is available for multiple generations with no further gift, estate or GST taxes, and only $250,000 of Rick and Molly’s combined $10.68 million GST tax exemption (as of 2014) was used. If Rick and Molly were to use the discounted sale approach, the total value transferred is substantially higher at more than $11.2 million.

Planning Risks

The income tax consequences of the premature death of the grantor are unknown. If the grantor dies while the installment note remains unpaid, the grantor’s estate may owe income taxes on any unrecognized gain in the transferred assets. The premise is that the IDGIT is no longer a grantor (defective) trust at the time of the grantor’s death. Therefore, the grantor’s estate would be taxed on the gain attributable to the unpaid portion of the note. On the other hand, it can also be argued that the grantor’s death should not be treated as a taxable event and the tax basis in the transferred assets would be carried over to the trust or its beneficiaries in the event of a subsequent sale. Whether gain should be recognized upon a grantor’s death is an unresolved issue at this point. However, in many instances the prospect of income taxation will not be significant to the beneficiaries of the IDGIT. In any event, if the beneficiaries sell assets, they would be subject to capital gains tax.

Another possibility is that the note will be considered what is called income in respect of a decedent, in which case the recipient of the note payments is subject to income tax on the remaining payments. Thus, like a GRAT, the note term should not extend beyond the grantor’s life expectancy; if it does, adverse tax consequences may apply. It is also possible that the grantor’s death will have no adverse income tax consequences. This is an unsettled area of the law.

Living your Second Life in a Florida Home

Looking forward to retirement? Maybe you’re a seasonal visitor or like me, spend the summer up north. If you haven’t decided on where to retire, let me tell you why Florida should be your choice.

First of all, buying a house in Florida is extremely affordable right now. A friend recently told me that his realtor found a home in foreclosure that they bought for $250,000. It was valued at $1.2 million just four years ago! Donald Trump bought a Palm Beach estate for $41 million and put it up for sale at $125 million. You can find out how to leverage a relationship with a realtor in my book, The Florida Domicile Handbook. Plus, I explain your options with financing and homeowner’s insurance.

Florida’s homestead asset protection laws are great for retirees who are planning to declare Florida as their domicile. I give more detailed information on homestead and tax exemptions in the Florida Domicile Handbook.

Take for example the elderly mother who wants to give her home to her children upon passing. She put her home in a QPRT (Qualified Personal Residence Trust), thereby lowering the gift and estate taxes. Now, she still gets to live in that same house until she dies, paying only a minimum rent and with the real estate value of her home going up.

Another reason why Florida offers the best active senior lifestyle is the health care choices. In addition to world class facilities like the Cleveland Clinic and Mayo Clinic, Florida has many top rated hospitals and assisted living facilities. This is not to say that Florida specializes in senior care only. Medical facilities and health care providers in the state are known for medical advancements in cancer care and pharmacology among other fields.

Florida does give retirees the second (and, in all probability, the best) life that they have always wanted. In Chapter 11 of my book, you can read about all the comprehensive healthcare options available to seniors.

The Florida Domicile Handbook will also give you a step-by-step guide on how to establish a Florida domicile with a few helpful Q & A’s about changing homesteads to guide you through a smooth transition.

Protecting your assets in Florida

I read an interesting article online called “Dynasty trusts let wealthy beat the taxman” that explained why a dynasty trust is becoming more popular and wanted to share it with you.

In the article, author Elizabeth Ody, explains that “A dynasty trust funded with $10 million from a couple today could be worth as much as $184 million in 50 years, assuming no intergenerational transfer taxes and a 6 percent annual return, and before subtracting any federal income or capital-gains taxes paid on the trust’s investment returns. By comparison, assets not placed in a trust and taxed twice as an estate in that period could be worth $39 million at the end of 50 years, assuming a $1 million exemption and 55 percent top rate.”

This is a significant benefit to consider and should not be overlooked when you’re preparing your estate plan.

Many families in Florida have turned to funding dynasty trusts as a way to keep assets within the family. This type of trust has no expiration date, and assets (such as cash and stocks) can be passed on to multiple generations while increasing in value.

A dynasty trust essentially holds assets in trust without transfer of ownership to a beneficiary. Instead, future generations receive distributions from assets within the trust. The trust allows assets to grow safely and for tax purposes, assets remain valued at the amount they were worth when the trust was originally created, and for as long as they stay in the trust. Appreciation on those assets is exempt from estate taxes.

Protection provided by the dynasty or the “generation-skipping” trust is absolute so that future creditors of current or future family members cannot touch it. In Florida, an Irrevocable Life Insurance Trust (ILIT) can be designed as a dynasty trust. The ILIT allows proceeds to reach future generations and is not limited to the generation immediately following the grantor. Plus, each beneficiary will avoid being levied a tax.

Proper estate planning is vital to any family: not solely for millionaires. If you have assets that you want to protect or ensure the inheritance of your life’s accomplishments, then Florida law provides such protection through vehicles like the ILIT at generally less tax impositions compared to other states.

In my book, the Florida Domicile Handbook, you can find more information on these benefits of trusts.

But I’m certain you’ll find the reasoning is undeniable. Florida domicile offers one the most sensible asset protection destinations in the United States today. To find out more about Florida’s tax haven status, purchase a copy of the Florida Domicile Handbook.

The Importance of Trust Funds

There was a time when trust funds were only used by wealthy Americans who wanted to secure their assets and pass them on safely to their heirs. Today, setting up a trust fund has become recommended financial planning for those who want protection from creditors, predators, and divorce.

Take for example the case of the Lumpkin siblings of Columbus, Ohio. The remainder of their deceased father’s estate has not yet been divided between the siblings 11 years after his death. There have been losses to the estate because of the unresolved feud which has escalated and caught state-wide media interest.

The law requires that all state representatives arrive at a unanimous decision on matters of the remainder of Lumpkin Jr.’s estate. Unfortunately, this is a very bad idea for this family as the siblings apparently could not see eye to eye. This drama has dragged on for years, causing significant losses to the estate and has branched out into personal conflicts and lawsuits from both sides.

Most people have heard of trusts, but they do not understand what they do and usually think they are tools for rich people. The truth is that trusts are not complicated and can be useful for virtually everyone.

There are two basic types of trusts, the revocable (living) trust (RLT) and irrevocable trusts (IRT) and depending upon your goals, you may want to use one or both types.

There are four primary purposes for forming and funding a RLT –

1. avoid probate,

2. take care of your wishes in the event you become incapacitated and cannot manage your own affairs,

3. take advantage of certain tax benefits, and

4. protect your loved ones in a way they cannot do for themselves.

Irrevocable trusts have various uses and, depending upon your specific goal(s), have various names and acronyms. For example, the Charitable Remainder Trust (CRT) is an irrevocable trust that can provide many benefits to you and your family while you are alive and take care of any charitable intent you have when you are gone.

Irrevocable trusts sound ominous because of the word “irrevocable,” but a properly structured irrevocable trust can provide for changes in the future through the use of a trust “protector.” A trust protector is someone named in your trust that you, as the “grantor,” can give the power to make specific changes in the future. The trust protector cannot be the grantor (you), the trustee or the beneficiary(ies).

You can learn more about the different kinds of trust funds in chapter 4 of  The Florida Domicile Handbook.

The Repeal of the Estate Tax

The hot issue over in Ohio right now is the repeal of estate tax by 2013. There are those who want estate tax removed and there are others who want it retained.

An estate or inheritance tax is levied on an heir’s inherited assets if the value exceeds a threshold set by the state. In Ohio’s case, the exclusion limit is set at $338,833.

A coalition, called Protect Ohio’s Communities, contends that the estate tax constitutes a significant portion of the state’s budget. Repealing estate tax will adversely affect community services. Further, to make up for the lost budget, some other area will only be taxed or existing taxes will be raised.

On the other hand, Sen. Grendell supports the repeal of the estate tax in Ohio. To quote, it is “socialist and un-American.” He maintains that taxing estates has caused residents to move to Florida. And since this tax is dependent on deaths, the annual amount cannot be consistent hence should not be relied on to fund community services and expenses.

The House bill 153 for the repeal of the estate tax is now being considered by the Senate.

The battle continues in Ohio, while Florida continues to enjoy freedom from a separate state estate tax. The Economic Growth and Tax Relief Reconciliation Act of 2001 ensured that a separate estate tax would not be levied on Floridians without voter approval. When the Act went into effect, Florida opted not have another form of taxation to replace it.

Ohio, like a handful of states, is waking up to the reality that reducing taxes is a way to create jobs and keep people from moving to other states like Florida which are much more tax friendly. Ohio and the rest of the “rust belt” states need to focus on what is best for their residents. In my opinion, they should start by reducing taxes and the size of government. If they don’t more people will flock to states like Texas and Florida where the burdens imposed by government are much less severe.

To learn more about Florida’s taxation (or freedom from it), read Chapter 2 of the Florida Domicile Handbook.

Derek Jeter’s Tampa Mansion

American Baseball League player, Derek Jeter who plays shortstop for the New York Yankees has changed the landscape, if not the skyline of Tampa, Florida. A year after they started building, the biggest home in Hillsborough County is completed.

Jeter has long planned this project, buying adjacent lands in Davis Islands since 2005. The mansion, built in an English Manor style and situated near the water, cost $7.7 million.

With seven bedrooms and nine baths, the 30,000 square feet domicile sits on three lots in the Bahama Circle. It has two 3-car garages, a swimming pool that overlooks the ocean, a billiards room and a memorabilia room. Of course, it also comes with a small pier. All this to be protected from the public eye with a 6-foot privacy fence.

The Yankee reportedly made $21 million last year, so the $7.7 million mega mansion should be covered. Jeter also has another smaller house in Avila. Smaller because it is only 4,000 square foot and only cost him a mere $1 million. It is situated in Avila Golf and Country Club, north Tampa.

Aside from his homes in Florida, Jeter’s other assets include homes in Marlboro, New Jersey, Greenwood Lake, New York and a Trump World Tower apartment in Manhattan – the latter being currently in the market.

Jeter has claimed Florida residency, hence his exemption from state income tax. Although he works in New York, his residency and majority of assets are in Florida. Since 1994, Jeter has maintained a Tampa residence when he first started out with the Yankees.

Back in 2007, Jeter was hounded by New York tax officials. The issue was his failure to pay taxes between the years 2001 to 2003. His apartment purchase in the Manhattan Trump World Tower and an $8,000 monthly rental in Long Island brought him under tax scrutiny.

This new mega mansion in Tampa will help prove his intent and slide the scale in favor of Florida domicile. Assuming Jeter has filed a declaration of Domicile in Florida, his homestead will be under the vast umbrella of the asset protection laws of Florida.

Read all about Florida Homestead laws and protection in Chapter 3 of the Florida Domicile Handbook.

Documentary Stamp Tax

Documentary stamps are imposed on documents drawn to serve as promissory notes, mortgages, security agreements and other written agreements to pay money. In a real estate transaction, deeds are attached with actual stamps to show that the said document has paid its due to the county. Cash payments are not levied with this kind of tax. Basic amount of the doc stamp tax is 35 cents per $100 while documents that transfer an interest in real property are charged 70 cents per $100 or any portion thereof. Transfer of interest in real property documents include warranty deeds, quit claim deeds and contracts or agreements for a deed among others. For bigger loan amounts, tax is flat rated at $2,450. That is the maximum amount of expenditure for documentary stamp tax.

To illustrate, for a promissory note of $40,000 which is eligible for the basic documentary stamp tax of 35 cents per $100 the computation would be as follows:

Tax = $0.35 × ($40,000/$100) = $140

For a transfer of interest on a $1 million parcel of Florida real estate, 70 cents per $100 in documentary stamp tax will be paid. Calculation of tax will be as follows:

Tax = $0.70 × ($1,000,000/$100) = $7,000

For more information on documentary stamp tax and other related topics, grab your copy of “Florida Domicile Handbook” or subscribe to our blog at http://floridadomicileman.wordpress.com/.

Don’t Write a Check to a Charity

A charitable remainder trust (CRT) is an irrevocable trust that allows you to make a charitable contribution and diversify your assets without paying immediate income tax while retaining an income stream.

Grantors typically transfer property, usually appreciated stock or appreciated real estate, but other assets can also be contributed. The donor of the property typically designates himself or herself as trustee. The donor and spouse generally are the income beneficiaries of the CRT for their lifetimes. This allows the donor-beneficiary to retain control of and receive income from the contributed assets.

Once transferred into the CRT, the assets are often free from the claims of creditors. Upon the death of the income beneficiaries, any assets left in the CRT are distributed to one or more charities designated by you as grantor.

Read more about the benefits of a Charitable Remainder Trust and other wealth preservation strategies in 2nd Edition of The Florida Domicile Handbook.