Jerry Rhinehart, CIC, CLU, ChFC, RHU

Panama City, FL

Estate Planning Techniques: Gifts, Estate Planning Techniques: Gifts, Trusts and Life InsuranceTrusts and Life Insurance

To understand the importance of Estate Planning and the various options available.

To be familiar with the usual misconceptions, or “Myths”,

of Estate Planning.

To know the law and advantages of gifting.

Learning Objectives

1

To understand the application, benefits and use of various trusts in Estate Planning.

Living Trust

Charitable Remainder Trust

Testamentary Trust

Learning Objectives

1

Please note the

DISCLAIMER

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2

The impact of The impact of the Federal the Federal Estate TaxEstate Tax

3

The Judge The Judge said...said...

High Federal Estate Tax (FET)

The Cost of Doing Nothing vs.

The Cost/Time/Aggravation of Doing it Right!

3

Know This Regarding FET...

$5,000,000 (2011 & 2012)

35%

Payable in 9 MonthsPayable in Cash!

High Federal Estate Tax (FET)

The Cost of Doing Nothing vs.

The Cost/Time/Aggravation of Doing it Right!

3

High Probate Cost

Delays in Settlement

The Importance of

Estate Planning

4

Some “famous people” have done a good job of estate

planning and some...

4

Name Gross EstateTotal

Settlement Cost Net EstatePercent ofShrinkage

W. C. Fields $884,640 323,793 554,887 37%Clark Gable 2,806,526 1,101,038 1,705,488 30%Walt Disney 23,004,851 6,811,943 16,192,908 30%Marilyn Monroe 819,176 448,750 370,426 55%Elvis Presley 10,165,434 7,374,635 2,790,799 73%J. D. Rockefeller, Jr. 160,598,182 24,965,954 (1) 135,632,630 16%

(1) Most of the estate went to the Rockefeller Brothers Fund, Inc.

Estates of Well-Known People

4

Elvis Aaron Presley — 1936-1977 Would you have “wasted your

time” calling on Elvis for his estate planning?

Did Elvis (or his manager) do a “good job” of estate planning?

73% erosion of his “stuff”.

Seven years delay in settlement.

Dan Duncan (Houston, TX) – Died March, 2010. He was listed as #74 on Forbes Wealthiest (@$9 Billion). Married, 4 adult

kids. Supposedly had used various Trusts and Charitable techniques to avoid greater than $2 Billion in taxes.

George Steinbrenner (“The Boss”) – World Series Win - 2000

High Federal Estate Tax (FET)

The Cost of Doing Nothing vs.

The Cost/Time/Aggravation of Doing it Right!

3

High Probate Cost

Delays in Settlement

Low (or no) FET

Reduced (or no) Probate Prompt Settlement

Possible liquidity problems for loved ones!

3

Ample cash flow to pay taxes, debts, and

provide an income for the life of your spouse!

The Cost of Doing Nothing vs.

The Cost/Time/Aggravation of Doing it Right!

Tough decisions to be made by loved-ones — probably not trained for such a task...

3

Pre-determined decisions that treat loved-ones,

benefi- ciaries, charities, employees, etc., based exactly on your wishes!

The Cost of Doing Nothing vs.

The Cost/Time/Aggravation of Doing it Right!

Basic Truths in Estate Planning

You cannot die without a will!

Basic Truths in Estate Planning

Just what is a will?

What are the advantages of a will?

How does a will work?

Is it the only “legal document” most people need? 6

Basic Truths in Estate Planning

You cannot die without a will!

Everybody has an Estate Plan!

5

Estate Planning “Myths” Myths Concerning a Will

(or no will)

Allows me to avoids probate

Will save me estate taxes

My loved ones will be treated equally

I told my kids how to distribute my possessions …

My business is very successful…

5

5

Estate Planning “Myths” Myths Concerning a Will

(or no will)

“I’m not rich” (life insurance)

“Stuff” For Estate CalculationDescription Fair Market Value Debt

House 1,500,000 (200,000)

Mutual Funds 1,000,000 - 0 -

Real Estate 2,000,000 (500,000)

Q-Plans 1,000,000 - 0 -

TOTAL 5,500,000 (700,000)

5,500,000

-700,000

4,800,00

0

“Stuff” For Estate CalculationNet Estate: 4,800,000

Personal Life Insurance (Owned): 1,000,000

Group Life Insurance 100,000

Travel Accident 100,000

Total Life Insurance 1,200,000

“Stuff” For Estate Calculation

Non-Life Insurance “Stuff”4,800,000

Life Insurance “Stuff” 1,200,000

Total 6,000,000Less Year 2012 “Freebie” -5,000,000

Total Subject to FET 1,000,000

FET Owed (@35%) 350,000

5

Estate Planning “Myths” Myths Concerning a Will

(or no will)

“I’m not rich” (life insurance)

“I’ll worry about it later”

5

Estate Planning “Myths” Myths Concerning a Will

(or no will)

“I’m not rich” (life insurance)

“I’ll worry about it later”

“I don’t have to do anything to get the tax breaks that are available”

“The sale would give the Robbies cash to pay off an estate tax bill of about $47 million.”

U.S. Today - March 24, 1993 7

$5,000,000 Exemption (2011 & 2012)

35% FET rate (2011 & 2012 / (per person)

Possible 5% probate expense

FET due in 9 months (exceptions exist)

CASH – The IRS wants it!

7 years – possible delays

7

What About a Liquidity Problem?

“The Great Garage Sale”

“The Dreaded Discount Buyer”

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Personal Property

RealEstate

BusinessFarm

LifeInsurance

Death TaxesAccounting FeesAppraiser’s Fees

Probate FeesLegal Fees

Executor’s Fee

Balance to Heirs

For Your“Stuff”

CashPensions

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$100,000$300,000

CashResidenceMutualsQ-PlansBusiness

A View of Your “Stuff” - 2012

$4,000,000$1,000,000

$250,000

$5,650,000

IRS Hose

Who Are Your Heirs?

Mary - daughter

John - son

Will - son

Will, Jr. - G-sonChurch

University

Hospital

LOVESara (CPA)

Barry (atty)

OTHER HATE

IRS

Dreaded Discount Buyer

9

The News...

• You’re alive

• You have an Estate Plan

• Correctable

Good News Q-Plans

(401k)

$1,000,000

2 - Good Deals

2 - Bad Deals

Bad News Ugly News9 Months

35% - 50%

Cash

Dreaded Discount Buyer

40% (-400K)

600K

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Why Give Away Your “Stuff”?

Reduce current estate size / tax

Enjoyment of the donor

Fund life insurance trust

Gifts to a charity / individuals

Future appreciation to another

What if You Can Not Prove Your Cost Basis?

The IRS rules state that without proof

of basis — then your basis is ZERO! (Thus ALL gain!)

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You Sell the stock

You Give the stock away during your lifetimeThe stock is Transferred at your death

Intel, Inc.Basis - $1,000

FMV - $10,000

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Intel, Inc.Basis - $1,000

FMV - $10,000

You Sell the stock -

10,000 - 1,000 = 9,000 x 15% Capital Gains Tax -- $1,350 Tax

Intel, Inc.Basis - $1,000

FMV - $10,000You Give away the stock (during

your life time)

10,000 - 1,000 = 9,000 x 15% Capital Gains Tax -- $1,350 Tax to Seller

The stock is Transferred to another person at your death

10,000 - 10,000 (step-up-in basis) = - 0 - No Tax to the Seller

Basis - $1,000

FMV - $10,000

Intel, Inc.

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An unlimited amount can be given to a college or medical facility for the benefit of anyone!

Three year rule

Excess gifts — $13,000 maximum / “completed gift” (present interest)

An unlimited amount can be gifted between husband / wife

Parties of a Trust

Trustee

Grantor

Beneficiaries

Bank

13

Irrevocable Life Insurance Trust (ILIT)

Why is this Trust beneficial for a husband and wife that have an Estate Tax problem?

How does an ILIT work?

Irrevocable Life Insurance Trust in Action

Grantor Trust Trust Beneficiarie

s

Crummey Withdrawal Notice

Annual Gifts

Premium

Paid

Insurance Company

Death Benefit

Grantor’s Estate

Provides Estate Liquidity

Assets Distributed

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What does it do?

What does it NOT do?

15

Why would someone give away their “stuff” to a

charity?

17

FMV in Estate

Pay tax on the sale of the asset

May not produce adequate income

Expense to maintain asset

Managing the asset

What about “basis”?

17

You Sell the stock

You Give the stock away during your lifetimeThe stock is Transferred at your death

Intel, Inc.Basis - $1,000

FMV - $10,000

12

You Sell the stock

You Give the stock away during your lifetimeThe stock is Transferred at your death

Intel, Inc.Basis - $1,000

FMV - $10,000

Bill (58) and Barb (56)

Florida property - FMV @ $5,000,000

Basis @ $500,000

Sale - 15% (2012) Capital Gains Tax on $4.5 million or $675,000

In addition to the Capital Gains Tax, what are some other potential financial issues that Bill and Barb might be concerned about?

Gift

Gift

Charitable Remainder Trust

Mom and Dad Low Basis “Stuff” Low Income “Stuff” “Stuff” FET

Trustee(s) Receives Income Tax Deduction

Sell Asset(s) Pays Income Pays No Tax

Wealth Replacement Trust - Life Insurance -

Mom & Dad

CRT

18

How Does a CRT Work?

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Competent attorney

Form your own qualified charity or foundation

Name Trustee(s)

Gift assets (unlimited amount)

Take tax deduction

How Does a CRT Work?

19

CRT sells asset

CRT pays no tax!

CRT pays life income to grantors @5% - 8% (monthly / annually)

Income taxable to recipient

Wealth Replacement Trust (ILIT)

How Does a CRT Work?

19

Trust applies for life insurance (replace lost inheritance)

Mom / Dad make $$ gift to ILIT for the benefit of kids - $13,000 maximum per

year

CRT terminates income to Mom / Dad at last death

Heirs receive ILIT proceeds

Two Types of CRT Pay-out

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Unitrust (CRUT)

- $70,000 / $98,000

Annuity Trust (CRAT)

- $70,000 / $70,000

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Testamentary Trust

An absolute must for parents (single or a couple) who

have minor children

Questions:

Would a life insurance company pay life proceeds to a minor(s)?

Would a court allow money to be paid to a minor(s)

25

Testamentary Trust

An absolute must for parents (single or a couple) who

have minor children

How can parents be assured of have their life insurance proceeds (and other assets) pass properly to their minor children?

Testamentary Trust attached to a Will with a designated Guardian(s)

Estate Planning Estate Planning Techniques:Techniques:

Gifts, Trusts andGifts, Trusts and

Life InsuranceLife Insurance

Jerry RhinehartJerry Rhinehart

Panama City, FLPanama City, FL

jerhinehart@comcast.netjerhinehart@comcast.net