Annapolis, Maryland Wills, Trusts & Estate Planning

Your Estate Plan Needs a Review Under New Tax Act - Annapolis Estate Planning

You can now pass more wealth onto heirs free of federal estate tax, and there are new opportunities for trusts and gifting to further reduce income taxes.

The new tax law was a gift to wealthy Americans, but taking advantage of the changes requires a review of everyone’s estate plan, according to Forbes’ recent article, “Trusts In The Age Of Trump: Time To Re-Engineer Your Estate Plan.” With the federal estate tax exemption now at a little more than $11 million per person, a couple could leave $22 million to their heirs with no estate or gift tax due. More aggressive wealth planning techniques could allow the transfer of even more money tax free: as much as $250 million, through the use of an irrevocable dynasty trust.

Ask your estate planning attorney about this.  You should also have him or her review your current estate plan for booby traps immediately. This is because you may need to redo or scrap your plan.  It is especially important, if you live in one of the 15 states that have estate and/or inheritance taxes at much lower levels of wealth than the federal government.

A common mistake is a will that establishes a trust linked to an outdated federal and/or state exemption amount. An old will that leaves the "exemption amount" in a trust for children from the first marriage and the rest to the current wife means the kids' trust would get everything and his wife nothing. In a state like New York, that exempts only $5.25 million from its own estate tax, accidentally leaving the rest to the kids will incur a large state estate-tax bill.

It would be easy to change the will or perhaps to not have any trusts because now there is the "portability" of exemptions between spouses. Prior to 2011, the wills of affluent couples typically created what's known as a "credit shelter" or "bypass" trust. When the first spouse (assume it's the husband) died, an amount equal to his estate-tax exemption went into a trust for his wife and kids. She would have access to trust income and, if necessary, principal.  However, his exemption wouldn't be wasted. When the wife died, the trust assets wouldn't be part of her estate. Now, with portability, any unused portion of the husband's exemption passes to his widow, provided the executor of the husband's estate files a tax return electing portability.

Avoiding capital gains tax may be a reason to skip a trust. When someone dies, the assets in his or her estate (including real estate, collectibles, stocks and mutual funds that aren't held in a retirement account) get a step-up in basis to their current value. That means heirs can sell immediately without owing capital gains tax. If the husband's assets are left directly to his wife, they get one step-up at his death and another at hers.  However, assets in a traditional credit shelter trust don’t get that second step-up at her death.

When you review your estate plan with your attorney, ask about these types of trusts. If there are assets held in an irrevocable trust of one spouse that have grown since the spouse’s death, they can be distributed to the surviving spouse. If the surviving spouse holds them until they pass, there will be yet another step up. Your estate planning attorney will be able to help you take advantage of the new tax law.

Reference: Forbes (February 13, 2018) “Trusts In The Age Of Trump: Time To Re-Engineer Your Estate Plan”

Holden & Campbell, LLC – Annapolis Estate Planning Attorneys

Big Transactions Made by Garmin Heir Involving GRATs - Annapolis Estate Planning

The second largest owner beneficial owner of Garmin stock, son of the founder of the company, has made some hefty transactions this fall, totaling more than $19 million.

Jonathan Burrell, whose father is Gary Burrell, founder of Garmin International, has ownership of more than 27 million shares of the company, as reported in filings with the SEC dated September 13. A large portion of that stock is held through various family trusts, and Jonathan Burrell is a trustee for many of these trusts.

The Kansas City Business Journal’s recent report, “Founder's son moves more than $19M in Garmin stock,” says that in September, Burrell made four insider transactions: On Sept. 1 he moved 844,800 shares from several grantor-retained annuity trusts (GRATs) created by his mother, Judith Burrell, into her revocable trust. He’s a co-trustee for both of those trusts.

Burrell sold 127,000 shares on September 11 from the grantor-retained annuity trusts (GRAT) for a total value of $6.64 million. A day later, he sold another 127,000 shares. Finally, on September 13, Burrell sold another 126,000 shares. That adds up to a total of about $19.83 million in stock.

The grantor-retained annuity trusts—or “GRATs”—are an estate planning tool used to retain the right to get back assets over time.

Estate planning attorneys will tell you that the assets that are put in will appreciate rapidly, and the more appreciation there is, the more will pass through free of estate and gift tax to beneficiaries. A liquidation of assets within the GRAT could be due to an investment decision to sell that particular stock and isn’t necessary for the trust itself.

The term for Burrell’s GRATs isn’t given, but once the annuity term ends, the remaining assets can be distributed free of gift taxes.  However, in the event that the donor doesn’t survive the annuity term, some of the assets would be subject to the estate tax. In some instances, a shareholder might create multiple short-term GRATs of about two to eight years to close as many as possible. More than 10 million shares are in the GRATs established by Judith Burrell, according to the SEC filing.

Gary Burrell is quiet about his role as a philanthropist, but he has donated large amounts–more than $50 million one year–to charitable organizations. There are several charitable lead annuity trusts that hold 8.7 million Garmin shares. These are structured to distribute funds to charities for a specific amount of time and then, if the investment returns are better over time, the remainder will pass to beneficiaries free of any taxes.

Speak with an estate planning attorney to see if GRATs might be useful for your estate planning.

Reference: Kansas City Business Journal (September 25, 2017) “Founder's son moves more than $19M in Garmin stock”

Holden & Campbell - Annapolis Estate Planning Attorneys

What is a Grantor Retained Annuity Trust? – Annapolis Estate Planning

A GRAT can make sense for some estate plans, even in when the estate will not need to pay estate taxes.

First, a basic definition: a Grantor Retained Annuity Trust , known as a GRAT, is created by a “grantor” who transfers assets to the GRAT for a specific period of time. A recent article in AccountingWeb, “The Beauty of Grantor Retained Annuity Trusts,” notes that the GRAT, which often contains stock or closely-held business interests, typically holds assets for a specific period of time, which is usually between five and ten years. A GRAT could also be set up for a shorter time period, like two years.

The language of the GRAT will be written, in many instances, to provide that a parent retains the right to receive back, in the form of annual fixed payments (an annuity), 100% of the initial fair market value of the assets transferred to the GRAT.

The grantor will also receive a rate of return on those assets based upon the IRS-prescribed interest rate, which is called the “7520 rate,” after the Internal Revenue Code Section 7520. Section 7520  specifies the way in which this rate is to be calculated. For example, the IRS’s 7520 rate for November 2016 is 1.6%.

An excellent feature of a GRAT is that any asset remaining in the GRAT at the end of the trust’s term will pass to the named beneficiaries without any additional gift tax. The named beneficiaries in many cases will be the grantor’s children. This type of GRAT is often called a “zeroed-out GRAT” because it doesn’t end up with the grantor making a taxable gift due to the retention of an annuity equal to 100% of the assets contributed to the GRAT.

To illustrate this further, the stock of a family business is placed into a GRAT for a term of ten years, and the value of that stock is $500,000. (Note: if you put the stock of an S corporation into a GRAT, you are required to refile the S-election under the QSub rules.) The term of the GRAT is 10 years, and the 7520 rate is 1.6%. Based on these assumptions, you would pay the grantor $50,000 a year, plus 1.6% in interest.

What the GRAT does is freeze the asset—so in ten years, after the GRAT has zeroed out, the appreciated value would remain in the GRAT and pass to the beneficiaries, gift-tax free.

There is a risk associated with the GRAT that needs to be factored into the decision to use it: if the grantor dies during the term of the GRAT, the assets stay in the grantor’s taxable estate and the amount does not avoid any gift taxes.

This simply means that each person has to make an informed decision about whether or not a GRAT could be useful for removing assets from an estate. An experienced estate planning attorney who is familiar with GRATS and their pros and cons, will help you determine if a GRAT is right for you.

Reference: AccountingWeb (November 18, 2016) “The Beauty of Grantor Retained Annuity Trusts”

Holden & Campbell – Annapolis Estate Planning Attorneys

Protect Your Business with Estate Planning – Annapolis Estate Planning

Between taxes and ex-spouses, you'll want to do an estate plan to protect your business or it may pass soon after you do.

It's amazing how quickly a business can get picked to pieces after the death of an owner. With the use of good estate planning, according to The Huffington Post article, "5 Things Estate Planning Can Do for You and Your Business," you can protect your business and your legacy. Otherwise, your business is at the mercy of government taxes, co-owners and even family members who will stake their claims.

Use estate planning to avoid unfortunate events and to prevent seizure and depreciation of the business assets. This can decrease the stress and hassles that occur immediately after you die. Here are some good estate planning ideas to help protect your business.

1. More options for your business. Solid estate planning gives you the option of buy-sell agreement. If your business has one or more co-owners, this agreement ensures that upon the death of any owner, the interest of the deceased is automatically purchased by the other owner(s). The beneficiaries of the deceased owner, such as the spouse, children, or other family member won't unintentionally become owners. This strategy can alleviate some stress in an already stressful situation, immediately after the death of an owner or part owner of a business.
2. Guarantee the longevity of your business. Sole proprietors, small businesses, and big companies all want to pass their enterprises to future generations to keep their legacies alive. Estate planning can ensure the longevity of your business with a business transition plan.
3. Minimize taxes. A business owner can transfer business assets to his or her children and retain a source of income by establishing a grantor retained annuity trust (GRAT). This will help make sure that when business assets grow over time, the appreciation in equity and value of your business will not be hit with huge tax bills.
4. Succession planning for your business. Good estate planning will ensure that your business is preserved and operating the way you'd want it to run. Any issues in the transfer of management and ownership when you're gone are conducted effectively with wise estate planning.
5. Start your planning now. Yes, now. It can take years to develop a succession plan. While doing so, you will develop a long-range view for your business, which may yield valuable information for the business's continued growth. It will also provide you with peace of mind if legacy planning has always been a goal for your business.

Reference: Huffington Post (March 31, 2016) "5 Things Estate Planning Can Do for You and Your Business"

Holden & Campbell – Annapolis, Maryland Estate Planning Attorneys