February 2000 - Recent Estate Planning Developments First Quarter of 2000

The Change of the Millennium
No New Federal Legislation - Good News or Bad News
A "Checklist" for Evaluation of Your Estate Planning
Estate Planning Techniques Which You Should Consider
David G. Shaftel
2000 © All Rights Reserved
A Summary Provided by the: Law Offices of David G. Shaftel, PC

Also, Exciting Information About: Gifting to Qualified State Tuition Programs and the Alaska Community Foundation.
We have waited to publish our Newsletter in order to make sure that we could report to you any last minute federal estate planning legislative changes. Many were discussed. The most highly publicized was the proposal for the 10 year phasing out of the Federal Gift and Estate Taxes. This legislation was actually passed by both houses of the Republican legislature. However, it turned out to be a political impossibility; President Clinton vetoed the bill as he had promised. As a result, there was no federal tax legislation enacted in 1999 which significantly affects estate planning.
Will the Federal Gift and Estate Taxes be repealed in the near future? The "street talk" among the experts is that it would take both a Republican President and Republican control of both Houses of Congress before such legislation would be successful. In response to the attempted repeal, the Treasury Department issued a statement pointing out that in 1997, the Estate, Gift and Generation-Skipping Transfer Taxes generated revenues of $24 billion, for an administrative cost of $100 million. Therefore, these taxes are very cost effective, and raise substantial revenue. So, perhaps the bad news is that there is a significant revenue reason to maintain these taxes.
The good news is that no federal tax legislation means that the Treasury Department's "wish list," which would eliminate various planning techniques, was again ignored by Congress. As we have previously discussed, the Treasury Department wants to eliminate non-business discounts when interests of family limited partnerships or family limited liability companies are transferred from one generation to another. Also, Treasury desires to eliminate qualified personal residence trusts, and the full basis adjustment for community property. None of these provisions were enacted. Therefore, the use of these techniques during the upcoming year should remain viable and will probably be "grandfathered" if these techniques are completed before future legislation, if any, is enacted. The Clinton Administration has renewed this list in its year 2000 budget proposal released this month.
It is important to periodically review your estate planning and make sure that fundamental implementation tasks have been accomplished and maintained. It is equally important to consider the need for changes in the managers of your estate plan (personal representatives and trustees) and your dispositive plan. Let's review these matters:
1. Approximate Equal Division of Assets Between Spouses. This division of assets maximizes your ability to take advantage of both spouses' applicable credit amounts (presently $675,000), GST exclusion amounts (presently $1,010,000), and the progressive tax rates. Sometimes, business or other reasons override such equalization.
2. Funding of Revocable Trusts. Many of you have decided to use revocable trusts in order to avoid probate, deal better with incapacity, obtain privacy, and better organize your assets. To obtain these and the other benefits of revocable trusts, it is necessary to transfer all of your assets to the trusts.
3. Proper Implementation of Annual Exclusion Gifting. Many of you have formed life insurance trusts, children's trusts, grandchildren's trusts, perpetual trusts, or other types of trusts to which you make annual gifts. Often these trusts are designed so that annual exclusion gifts ($10,000 or less) to the trusts qualify as gift-tax free. However, certain steps need to be accomplished in order to qualify for this tax free gifting. Gift letters need to be signed, contributions need to be held in the trust's accounts for 45 days, and notice letters need to be signed by beneficiaries.
4. Life Insurance and Life Insurance Trusts. The best way to keep life insurance proceeds from being taxed is to have the policies owned by an irrevocable life insurance trust. Do you have policies which have not been transferred to such a trust? Ownership of policies by your spouse or corporation will generally not avoid the proceeds from being taxed.
5. Managerial Changes. Have you reviewed your choices of personal representatives, trustees, and guardians? Should there be changes?
6. Dispositive Changes. Have you reviewed your dispositive plan for your children and grandchildren? Is it still appropriate? Have you considered using the new perpetual trust approach which has proven to be very popular?
7. Dealing With Incapacity. If you are using wills as your primary estate planning vehicle, your durable powers of attorney should be kept "fresh." This means they should be renewed approximately every two years.
8. Living Wills and Health Care Proxies. Many people desire to indicate their intention regarding their health care if, in the future, they suffer from a terminal illness.
9. IRA and Qualified Plan Interests. These interests are often very significant family assets. It is important to carefully plan who should be the "designated beneficiaries" of these interests. This choice will determine how long the assets can grow tax-free before having to be distributed. Various "designated beneficiary" choices need to be analyzed: surviving spouse, bypass trust, marital trust, children, grandchildren, or charities.
10. Gift Tax Returns. Many of our clients have used estate planning techniques which have produced gifts greater than annual exclusion amounts ($10,000 per donee). This gifting requires the filing of appropriate federal gift tax returns by April 15th of the following year. Such filing satisfies your reporting requirements, and also, if done appropriately, begins the three year statue of limitations period during which the IRS may challenge the value of the gift. If you have done such gifting, have you directed that such returns be prepared and filed?
11. Generation-Skipping Transfer Tax Exemption Allocation. The Federal GST Tax applies when you create trusts or make gifts which skip a generation. For example, gifts or trusts which you make for the benefit for your grandchildren or great-grandchildren. Each person may exempt such gifts from taxation up to a total amount of $1,010,000. However, in order to accomplish such exemption, it is often necessary to file a Federal Gift Tax return which expressly allocates a portion of your exemption amount to the gift or trust. If you have made such gifts or created such trusts, have you directed that Federal Gift Tax returns be prepared and GST Exemption be allocated?
Our staff would be happy to review with you the status of your estate planning in regard to the above-listed matters, and any other subjects.
The federal transfer taxes (gift, estate, and generation-skipping taxes) can be minimized by good planning. Conversely, a lack of planning is penalized severely with additional unnecessary taxes. A variety of planning techniques are available. It may be time for you to add necessary techniques to your family's estate plan. The following should be considered:
1. Annual Exclusion Gifting. Each person may gift up to $10,000 every year to as many persons as the donor desires. In addition, these gifts may be made to various kinds of trusts, if the trusts are appropriately drafted. Many of the techniques described below are for the implementation of annual exclusion gifting.
2. Applicable Credit Gifting. In addition to the annual exclusion gifting, each person may transfer an amount protected by the applicable credit over the person's lifetime or at the person's death. For the year 2000, the applicable credit amount is $675,000. There is a major advantage to using this credit during your lifetime, rather than waiting until you die. If you gift amounts during your lifetime, then the growth of these amounts will not be included in your estate and taxed at your death. This growth may be very substantial. Many of the techniques described below may be used for the implementation of applicable credit gifting.
3. Family Limited Liability Companies. These entities are used for creditor protection and discounted gifting, and the grantor may retain control. These entities are used for both annual exclusion gifting and applicable credit gifting.
4. Children's Trusts and Grandchildren's Trusts. These are popular vehicles for annual exclusion gifting and applicable credit gifting.
5. Qualified Personal Residence Trusts. These trusts are used for leveraged gifting of up to three family residences while retaining the use of such residences for the period you desire. Gifts to these trusts use a portion of your applicable credit amount.
6. Grantor Retained Income Trusts. This type of trust may be used for leveraged gifting of income producing property to nieces and nephews and non-family members. Gifts to these trusts use a portion of your applicable credit amount.
7. A Perpetual Trust Plan. This new popular dispositive plan provides creditor protection for your children, grandchildren, and descendants, while avoiding future gift, estate, and GST taxes on exempt assets. This plan provides your beneficiaries with flexibility and substantial control. Perpetual trusts are usually created during your lifetime. You may make lifetime annual exclusion gifts and applicable credit gifts to the trusts. Then at your death, all or a portion of your remaining assets pourover to the perpetual trust.
8. Alaska's New Self-Settled Spendthrift Trust. These new trusts were authorized by the Alaska legislature beginning in 1997. They are designed to provide both creditor protection and the ability for the donor to create a trust, contribute assets to the trust, be a discretionary beneficiary, and yet not have the assets included and taxed in the donor's estate when the donor dies. Both annual exclusion gifts and applicable credit gifts may be made to such trusts.
9. Electing Alaska Community Property. Through the use of a community property trust or a joint revocable trust, you can avoid unnecessary income taxes when property is sold after the death of the first spouse.
10. Qualified Family Owned Business Interests. If your family owns more than 50% of a business entity which will be continued after your death by family members, then you may qualify for an additional estate tax deduction. In the year 2000, this additional deduction may be as large as $625,000. If you think you may qualify for this deduction, then it is important that certain additional provisions be added to your wills or revocable trusts.
11. Buy-Sell Agreements. Often family members or the family and unrelated persons will own business or investment entities, such as corporations, partnerships, or limited liability companies. Usually, it is very desirable to have buy-sell agreements which limit the transfer of these interests, and provide for fair and reasonable purchases of interests upon specific events, such as death, incapacity, insolvency, divorce, and similar events. The existence of a well written buy-sell agreement will often avoid lengthy and costly litigation.
12. Estate Freeze Techniques. Various techniques are available to "freeze" the value of family business interests which you own, so that most of the growth of these interests goes to the next generation.
13. Charitable Giving. The Federal Gift and Estate Taxes both provide for a 100% deduction for charitable contributions. In addition, charitable contributions during your lifetime will often qualify for a significant federal income tax deduction. There are various methods for accomplishing these contributions.
  • Outright Contributions to the charity involved.
  • Charitable Remainder Trusts. A method for you to obtain a larger amount of annual income from the sale of appreciated assets. For example, you contribute appreciated assets (e.g., stock) to this tax-exempt trust. The trust sells the stock, and then pays you income for life, with the remainder going to the charity of your choice.
  • Charitable Lead Trusts. A method to transfer significant assets to your children or grandchildren for a very small gift amount, by first providing for annual distributions to charities for a period of time.
  • Donor Advised Funds. Your own "private foundation," without all of the administrative technicalities and expenses. This popular technique allows you to create a family fund at a public charity. Your family determines the annual distributions to be made from the fund to the charities which you desire to support. (See the discussion of the Alaska Community Foundation, below).
We are available to discuss any of the above estate planning approaches with you. When you so desire, our staff will assist you in implementing new appropriate techniques.
This is an excellent method for an older generation to set aside funds for their children's or grandchildren's education. The bottom line of this approach is that it is a way to make five annual exclusion gifts (5 x $10,000) for education of a designated beneficiary (e.g., a grandchild) right now (instead of over five years). The funds will grow tax-free, and will be excluded from your gross estate if you live for a period of five years. When the funds are distributed for the education expenses of the designated beneficiary, the principal is income tax free, and the income portion will be taxed to the designated beneficiary, who will probably be in a very low income tax bracket. Pending legislation would even eliminate this income tax liability for the beneficiary.
To take advantage of this "up-front annual exclusion gifting" technique, you must use a Qualified State Tuition Program. Alaska has pending legislation to enact such a program.
The Purpose of a Community Foundation. The Alaska Community Foundation is a private nonprofit organization which is tax exempt under §501(c)(3) of the Internal Revenue Code. Its mission is to meet the Alaska community's charitable needs by providing a vehicle for many different donors to exercise their varied charitable interests at minimum costs and with maximum convenience. Funds which you create with the Community Foundation do not require separate tax-exempt status; they benefit from the umbrella tax-exempt status given to the Community Foundation by the Internal Revenue Service. Gifts to the Community Foundation may be in the form of cash, publicly-traded securities, closely-held stock, real property, and personal property. They may be conveyed, during your lifetime as outright gifts, or upon your death through your estate planning. There are no set-up costs to creating a fund with the Alaska Community Foundation. Once a fund is established, however, an annual administrative fee is assessed. This small administrative fee is used to offset the costs of administering the funds. Any excess amounts are granted back to the community by the Foundation.
The Alaska Community Foundation is a highly cost-effective, simplified alternative to creating an independent private foundation or charitable trust. The Alaska Community Foundation is free of the costs and regulations imposed by the IRS on private foundations. Further, the Community Foundation is treated as a public charity, and therefore offers the maximum tax deductions for charitable gifts.
Donors may choose the types of funds which they desire to create with the Community Foundation:
  • Unrestricted Fund. This type of fund allows the Alaska Community Foundation to allocate the donor's gift to support the unmet or future charitable needs of the Alaska community.
  • Field of Interest Fund. Donors who create a field of interest fund name the cause or issue which they desire to support.
  • Donor Advised Fund. Your family annually advises the Alaska Community Foundation about how distributions should be made. While ultimate authority for such distributions must remain with the Community Foundation's Board, it takes the family's recommendations very seriously.
  • Scholarship Funds. These are a rapidly growing and popular segment of many community foundations. Donors may design the type of fund they desire.
  • Designated Funds. Some donors may wish to benefit certain specific charities. They may have more than one charity that they wish to permanently benefit, or they may want to ensure the preservation of an endowment fund.
Some donors may wish to use various estate planning techniques which will combine benefits to their family with charitable giving. These techniques include charitable remainder trusts, charitable lead trusts, gift annuities, and others.
The Alaska Community Foundation is Now Operating. A group of Alaskans have donated their time for the past several years to form the Alaska Community Foundation. All of the technical organizational work and filings have been accomplished. The Foundation is a nonprofit corporation, with IRS tax exempt status. Very recently, the foundation received a grant from the David and Lucille Packard Foundation for the year 2000. Therefore, the Alaska Community Foundation is now ready to assist you in the long term charitable gift giving which you desire. You may contact the foundation at:
Alaska Community Foundation
Attn: Tristan Fackler, Executive Administrator
700 G Street
P.O. Box 100360, ATO 1950
Anchorage, Alaska 99501
Tel: (907) 265-6044 Fax: (907) 265-6122
We hope the above information is helpful to you. We remain available to help you maintain your estate plan and to add appropriate new techniques when you so desire. If you would like to meet with one of our staff to discuss any of the above subjects, please call.