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trusts and estates outline part 1 - Fall 2003 - Schwartz

trusts and estates outline part 1 - Fall 2003 - Schwartz -...

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Trusts and Estates Outline Professor Schwartz Fall, 2003 I. MYTHS Myth 1 barb2right Estate planning involves nothing more than the drafting of a simple will. NO such thing as a simple will. EXAMPLE 1: H dies and leaves everything to W (700K) in the year 2001. W already has assets of 2 million on her own. Property law permits marital deductions where gifts pass free and clear of gift taxes. There is no estate tax for W because of the marital deduction. Now, suppose W dies leaving H’s assets and W’s assets. W will now be subject to estate taxes in a higher bracket. This could be avoided by giving W a trust – she would have outright ownership and would not have to pass through an estate tax. EXAMPLE 2: H has 10 million dollars and wants to give something to his children. H may say, “the money given to C should not exceed the payment that qualifies for tax, residual to W.” The amount that qualifies for tax varies and changes with the law so the amount left to C and residual to W, will vary, depending on what year H dies. In 2110, there will be no estate tax and therefore C takes all and W gets the hole in the bagel. Result is you should check all the existing wills and trusts laws to ensure surviving spouse is not done in. NO such thing as a simple will. The will must be probated, and probate results in disruption because it can be challenged. Alternatives to Probate head2right Outright gifts head2right Inter vivos gifts (irrevocable, revocable, trusts for minors, GRAT, CRAT) head2right Joint ownership head2right Power of attorney head2right Contract (Prenuptial agreement) head2right Family limited partnership Why Trusts are Created head2right Successive generations of beneficiaries head2right Second spouse can get it head2right Beneficiary may not be capable of handing Myth 2 barb2right It does not pay to make living gifts. Since 1976, there is a uniform system where gift and estate taxes are identical . There is an aggregation concept ( to determine the tax bracket the estate falls into, we will add on all the taxable living gifts you made in your lifetime with credit for gift tax
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already paid), where there is an exemption for either tax for 675K (Annual Exclusion – now it is 1 million). The issue here is that your not going to fall into a lower bracket even though you get credit or the lifetime exemption – they aggregate you into the higher bracket. Reasons NOT to Make an Irrevocable Living Gift head2right It will use up the lifetime exclusion. EXAMPLE: X gives away 675K in a gift in 2000. In 2001, X dies and has 675K in his estate. Since X already used up his gift tax, the other 675K will be aggregated to X’s estate tax bracket and he will have to pay tax on the estate at that higher bracket. head2right There is a carry-over basis for gifts and a step up in basis for estate tax at death.
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