Three Estate Planning Topics You Can't Miss
Notes from the 46th Annual Heckerling Institute on Estate Planning
The Heckerling Institute, presented by the University of Miami School of Law, is one of the nation’s leading conferences for estate planners. The presenters are among the leading experts in estate planning, many of whom are often involved in the precedent – setting cases that are discussed. Many of them frequently get “up close and personal” with the IRS!
I have selected a few topics from the week-long conference that may be of interest to you: Portability, ILITs and FLPs.
Portability: Each person has an amount that they can exclude from estate taxes when they die. The 2010 Tax Act increased this amount to $5,000,000. The Act also provided that, for someone dying in 2011 or 2012, a surviving spouse could use any of that $5m that their spouse did not use. In other words, the unused portion is “portable!”
Before portability, anyone dying with an estate less than the exclusion amount would not have to file an Estate Tax Return, Form 706. However, a return must be filed in order to take advantage of any unused exclusion. The experts do not expect any new tax law to be passed during 2012. This means that, for 2013, the $5m exclusion amount could return to the $1m amount effective in 2001.
So, if you have a decedent with an estate < $5m who was married, then you should consider whether the costs of filing the Form 706, including appraisal and accounting fees, are worth the additional exclusion for the surviving spouse. We can help you with these considerations. The Form 706 is due nine months from the date of death.
ILITS: This is the shorthand term for Irrevocable Life Insurance Trusts. It is a common planning tool used to purchase Life Insurance to provide funds for your heirs, but that is not in your estate.
Lee J. Slavutin of New York gave a presentation with important advice to the Trustees of these trusts. He pointed out that the Trustee has a fiduciary responsibility to the beneficiaries of the trust and that this includes:
- Confirming the owner and beneficiaries of each policy
- Monitoring the continued strength of the life insurance company
- Reviewing the terms of the policy to verify that it is still suitable
- Reviewing the health of the insured to determine if premiums could be reduced
- Verifying that the policy will still last for the life of the insured
It is too common for these ILITs to be formed, the policies purchased and the premiums paid each year without much other consideration. So, if you are a Trustee, Insured or Beneficiary of an ILIT, please take time to consider these suggestions. Lee J. Slavutin provided a great checklist for Life Insurance planning. Click here to view.
FLPs: This is the shorthand term for Family Limited Partnerships. This, too, is a common planning tool, and includes, for my discussion, Family Limited Liability Companies (FLLCs). The typical plan is to put assets into a Limited Partnership or Limited Liability Company, then make gifts of LP or LLC interests to family members, using a discount of the value. There was not a lot of new information from recent cases, but I want to review the steps that are important to avoid trouble with the IRS:
- Form the entity and contribute the property into it, then wait some time before making the gifts
- Operate the FLP as a valid business: have a separate bank account, keep books and records, do not comingle with personal assets, have partner meetings, including the children when they are old enough
- Make partnership distributions pro rata, not all to the parents
- Do not make the FLP Operating Agreement so restrictive that the children really do not have any current benefit of ownership
If you form a FLP and then immediately make gifts to your children, the IRS can claim that you made gifts of the underlying property in the FLP, not FLP interests. This is significant, because you would lose the benefit of any minority interest discounts taken in valuing the gifts. If you wait to make the gifts, then the FLP has been subject to market risk, i.e. the assets in the FLP may have changed in value based on the economy.
If you treat the FLP as your own personal assets, then the IRS and the courts will most likely do that as well. So once it is in the FLP, if you are the managing partner, don’t forget that you have a fiduciary responsibility to your other partners!
Would you like additional information about estate planning? Contact me at
McGee.Lorren@warrenaverett.com or 850-435-7400 if you have any questions or wish to discuss a particular topic in more detail.