Tennessee Estate Planning Law : Tennessee Estate Planning Lawyer & Attorney : Bryan Howard : Howard & Mobley Law Firm : Nashville, Chattanooga, Memphis

Recently, a client told me “as is so often the case second marriages, the value of the wife’s estate that she can leave her children will vary significantly depending on whether she predeceases her husband.” My client’s observation is so accurate. I have encountered this dilemma when working with other clients, but had not understood that this problem affects numerous second marriages.

My client’s husband is very wealthy and plans to make a generous bequest to her in his Will. Furthermore, they jointly own a valuable house.

If her husband dies first, she will own the house and will receive the bequest from her husband’s Will. If she dies first, she will have neither the house nor the bequest.

She is comfortable with the amount that she will be able to leave her children if she survives her husband. However, she is concerned that the inheritance for her children will be insufficient if she predeceases her husband.

The solution that I proposed works as follows:

The couple establishes an irrevocable life insurance trust (“ILIT”) that will buy a last to die insurance policy on the lives of the husband and wife. If the wife dies first, her children will be the beneficiaries of the ILIT. If the husband dies first, his children will be the beneficiaries of the ILIT.
The parties agreed to split the premium payments during their joint lives. The will of the first to die will make a bequest to the trust that is sufficient to pay premiums during the period of survivorship.

The “Switch ILIT” solved my client’s dilemma of making sure that her children will be well provided for regardless of whether she predeceases her husband.
 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

529 Accounts allow a family to set aside funds for the education of their children or grandchildren without having to pay income tax on the earnings of the plan. These accounts work well for the great majority of families. However, I often discourage my clients from establishing 529 accounts.

In order to avoid paying income tax on the earnings of the 529 account, the funds in the account must be used to pay for expenses of attending college. Tuition accounts for the largest portion of these expenses.

Federal and state gift tax laws allow individuals to pay tuition for another individual without such payment being considered a taxable gift. Tuition payments allow parents and grandparents to reduce the amount of their estate that will be subject to estate taxes upon their death.

Assume that a wealthy grandparent makes gifts to a 529 account for the benefit of a grandchild. Gifts by the grandparent to the 529 account are considered taxable gifts. Generally, the grandparent uses the $13,000 per year annual gift tax exclusion when making gifts to a 529 account.

When the grandchild attends college, the 529 account will be used to pay for the grandchild’s college expenses. The net result of the above example is that the grandparent “lost” the opportunity to make tax-free gifts of the grandchild’s tuition.

If the annual exclusion gifts to the 529 account had instead been made to a traditional brokerage account for the grandchild, the grandparent could have paid tuition without utilizing the funds in the brokerage account. The grandparent’s taxable estate would be reduced and the grandchild would have funds that could be used to make a down payment on a house or to supplement the child’s cash flow when entering the work force.

It is true that income taxes would have been paid on the earnings of the traditional brokerage account. However, this income tax cost does not offset the estate tax savings from being able to make a tax-free gift of tuition expenses. Furthermore, 529 accounts have internal fees and are restricted as to investment choices. These fees and investment limitations somewhat dilute the income tax savings associated with 529 accounts.

Affluent families should evaluate the overall tax ramifications before funding a 529 account to fund a child or grandchild’s college education.

For more information on 529 accounts, you can visit this link.
 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

My clients often want to make changes to an irrevocable life insurance trust (“ILIT”). Fortunately, there are at least 6 methods for making changes to an ILIT.

I recently worked with a business owner who used 4 different techniques to restructure a series of ILITs that he established over a 25 year period. Two of the ILITs owned insurance on his life. Two other ILITs owned last-to-die policies insuring the business owner and his wife.

The first step was to create two new ILITs. The wife is a beneficiary of the new Family Trust which now owns the single life policies. The other new ILIT was designed as a Dynasty Trust and now owns the last-to-die policies, as well as one single life policy.

Next, the wife exercised a power to appoint the assets of one ILIT to the Dynasty Trust. The trustee of another ILIT used the leapfrog power of TCA Section 35-15-816(27) to distribute its policy to the Family Trust.

The trustee of a third ILIT merged that trust into the Dynasty Trust pursuant to TCA Section 35-15-417. Finally, the trustee of the fourth ILIT sold its policy to the Dynasty Trust, which was structured as a grantor trust in order to avoid potential income tax issues associated with this sale.

I would have preferred to use the same technique for moving all 4 of the old ILITs into the Family Trust and the Dynasty Trust. However, different techniques were required due to the specific wording of the trusts, and other factors including tax consequences. Even though it was complicated, the business owner accomplished his goals and several generations of his family will benefit from these changes.

Incidentally, the two techniques that we did not use were: (i) amending the trust pursuant to TCA Section 35-15-411; and (ii) buying a new policy, which was not a viable alternative due to the age of the policies involved and health changes that have occurred.

See the enclosed article (PDF) for more detail on these techniques.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

If you are planning to buy a new home, you might want to know about Joint Purchase Trusts. These trusts can provide significant estate tax savings.

One of my clients named John asked me whether he or his children should buy a vacation home that will cost $900,000. I recommended that John and his children establish a Joint Purchase Trust.

John will contribute $630,000 (70%) to the Trust and his children will contribute the remaining $270,000 (30%). John’s children have the ability to fund this investment due to prior gifts they have received from John and his parents.

John will have the use of the home for his lifetime and will pay all taxes, insurance and maintenance costs. With John’s permission, his children will also be able to use the home.

John can sell the home if he chooses. If the home is sold, the Trust would either purchase another home or other investments.

Upon John’s death, the trust will terminate, and the home will belong to his children. Nothing will be included in John’s estate for estate tax purposes.

Neither the $630,000 paid by John nor the appreciation of the home will ever be subject to estate or gift tax. This will be a substantial estate tax savings as compared to John buying the home in his name.

A Joint Purchase Trust can also be established by married couples. The husband and wife would retain the right to live in the home until the death of the survivor.

I do not recommend these trusts if you plan to borrow money to buy the home or to use the home as collateral for a home equity line of credit.
 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

If one of your parents is alive, you should consider asking your parent to give you any inheritance that you will receive in a beneficiary-controlled trust.

A properly designed beneficiary-controlled trust can provide protection from creditors, including divorced spouses, and from estate taxes upon your death. When discussing this matter with your parents, blame your attorney for raising the issue.

At my suggestion, one of my clients persuaded his mother to amend her Will to leave his future inheritance in a trust controlled by my client. The amendment did not affect the bequests to my client’s siblings. His mother died last year and the trust has been funded with approximately $800,000. My client is currently distributing cash from the trust to his son, who recently lost his job. This is not a taxable gift by my client. My client's son is in a low income tax bracket, which significantly reduces the income taxes payable with respect to the trust’s income.

The ability to divert income to a child without losing control of the assets is one of the many benefits from receiving your inheritance in a trust.

• Email This
• Print
• Comments
• Trackbacks
• Share Link