Charitable Giving

Charitable Giving after the Tax Cut and Jobs Act of 2017

Under the new tax act, the standard deduction has been raised to $24,000 for a married couple.  As such, many taxpayers will not reach this deduction threshold thereby losing the tax benefits of charitable giving. Experts estimate that the raise in the standard deduction will lower charitable giving by more than 13$ billion per year. 

Although this change may affect standard charitable giving, charitable gifting has shifted to other methods that still provide advantageous tax benefits. One popular way to donate post Act is the gifting of the required minimum distribution (RMD) from an IRA.  Donating this RMD can allow one to gift an appreciable asset and avoid the tax on the appreciation. Another method of charitable giving that has gained popularity is the Donor Advised Fund.  Donor advised funds (DAF) allow one to reduce tax burdens after a windfall situation by taking the immediate tax deduction when you make a donation to your DAF.  Also, contributions of appreciable assets to a DAF can eliminate capital gains under certain guidelines. 

If you wish to make a charitable donation, the attorneys of Morris Law Group can help you structure an effective charitable plan.   

Gift Away- IRS proposed regulations removes concerns for clawback

Proposed regulations issued by the IRS on November 23rd of this year cleared up one of the main concerns to gift givers after the Trump Tax cuts of 2017.  The doubled estate tax and gift tax exemption will face no claw-back when these rules expire at the end of 2025.  This proposed regulation eliminates some of the unease that individuals may felt at the possibility of later having to pay taxes on past giving.  This is of significant importance due to the huge jump in the estate tax exemption for $5.49 Million in 2017 to $11.18 in 2018, which could have created massive back payments. 

This ruling also applies to the generation skipping transfer exemption as well as the estate tax exemption.  While estate planning attorneys may have had language advising of the possibility of a claw-back, this regulation eliminates any doubt that gifting your full current exemption will cause a headache in 2026.  If you are interested in learning more about the new proposed regulations, please feel free to reach out to the experienced attorneys of Morris Law Group. 

Reminder – Due Date for Federal Gift Tax Returns Approaching

Reminder – Due Date for Federal Gift Tax Returns Approaching

The purpose of this post is to advise you that you may be required to file a Federal gift tax return (IRS Form 709). If you made a gift during 2018, the below summary may be critical to your tax planning. 

The due date for a 2018 gift tax return is April 15, 2019, the same due date as your 2018 individual income tax return. This date can be extended by extending the time to file your individual income tax return using Form 4868 or Form 2350. This due date can also be extended by filing a Form 8892 to request an automatic 6-month extension if you do not request an extension for your individual income tax return. However, neither of these methods will extend the time to pay gift or GST taxes due.

Outright Gifts of Cash or Property

All gifts of cash or property (in excess of $15,000) to an individual other than a spouse requires a gift tax return. As a result of the gift, your lifetime estate and gift tax exemption will be reduced by the value of the gift that exceeds the $15,000. However, no gift tax will be due with the return unless you have fully used your lifetime estate and gift tax exemption. 

Gifts of Cash or Property in Trust

When you gift cash or property to a trust, including a life insurance policy or premium payments to be made on a life insurance policy, you are making a gift to the trust’s beneficiaries. If the gift to the trust’s beneficiaries does not exceed $15,000 per beneficiary, and Crummey notices are properly used, a gift tax return may not be required unless the trust is structured as a generation-skipping transfer (“GST”) tax trust. If a gift is made to a GST trust, it may be advisable to allocate the donor’s GST exemption to the trust. While this allocation is automatic, it is advisable to either opt out of the automatic allocation rules for record-keeping purposes, or, file a return showing the allocation of the GST Exemption. If a gift to a trust exceeds $15,000 per beneficiary, a gift tax return is required to be filed.

Most CPA’s are willing and able to prepare gift tax returns. However, many prefer not to due to the complex rules that apply to the allocation of GST exemption and other special disclosures. Due to such complexities, we prefer to review all gift tax returns prepared by our client’s accountants to ensure they align with your estate planning goals.

If you have gifted cash or property in excess of the filing threshold during 2018, please do not hesitate to contact our office should you need assistance with the preparation or review of a gift tax return. 

Irrevocable Life Insurance Trusts (ILITs) in the Current Environment

Irrevocable Life Insurance Trusts (ILITs) have always been a strong planning technique for the inevitable estate tax. However, due to periodic increases in the federal estate tax exemption over the last two decades, the estate tax is no longer a concern for most United States residents.

The current federal exemption is $11.18 Million per person ($22.36 Million for a married couple) leaving almost 99.9% of US individuals without the worry of a federal estate tax upon death. Thus, very few individuals feel the need to form an ILIT to own their life insurance for estate tax purposes.

Although ILITs may no longer be deemed necessary by many individuals for estate tax purposes, we still strongly believe that ILITs be utilized for asset protection purposes, as life insurance policies are not always protected from creditors. Rather, the creditor protection of a life insurance policy is state specific and determined by the state statute in which the insured resides. Life insurance policies are protected from creditors in Florida, however, there are many states in which they are not. Thus, if you reside in a state where life insurance policies are not statutorily protected, an ILIT may be essential in order to protect the policy from creditors.      

Additionally, an ILIT provides  enhanced asset protection to the beneficiary of a life insurance policy, as the death benefit will pass to the beneficiary in a trust rather than outright. While the assets remain in the irrevocable trust (assuming the terms are sufficient), they will be protected from creditors. Alternatively, if the death benefit is distributed outright to a beneficiary, such amount may be obtainable by that beneficiary’s creditors.      

Please do not hesitate to contact Morris Law Group should you have any questions about establishing an ILIT.   

§199A Update

As discussed in previous posts, one of the most complicated yet compelling provisions of the recently enacted tax reform is the addition of §199A to the Internal Revenue Code.

As a brief background, §199A provides a deduction for business owners of pass-through entities (non-corporations). Subject to certain thresholds and exceptions, §199A permits such pass-through business owners to deduct up to 20% of their qualified business income.

Naturally, many taxpayers (through their advisors) have begun utilizing extra deductions by transferring interest in their businesses to non-grantor trusts. Since each non-grantor trust is a separate tax-paying entity, it may (subject to limitations) qualify for its own deduction under §199A.

As expected, the IRS has responded to such planning by issuing proposed regulations. Some of the proposed limitations are as follows:

• The IRS will aggregate trusts if i) they have the same grantor; ii) they have substantially the same beneficiaries; and iii) the principal purpose of the trust is to avoid income tax.
• Trusts formed with a significant purpose of receiving a §199A deduction, will not be respected under §199A. 
• When calculating taxable income of a trust for §199A purposes, it will include amounts that the trust has already distributed to beneficiaries.  

Please stay tuned for updates regarding the proposed regulations. However, in the interim, please do not hesitate to contact Morris Law Group should you have any questions about the new §199A.   

Florida Domicile

This blog has provided much content on the benefits of establishing residency or domicile in Florida. However, this post will focus on the actual procedure for establishing domicile in Florida, in order to obtain such benefits.

As a whole, to establish domicile in Florida, two requirements must be satisfied: (1) abandonment of your previous domicile (and moving to a Florida residence); and (2) intent to change domicile. The first requirement is straightforward as you simply move from your old state to a new residence in Florida. The second required is more complex, since there is no single item that can prove this intent. Rather, intent can be evidenced by specific factors or steps, many of which are described below.

• Filing a Declaration of Domicile and Citizenship form in Court in county of new residence;
• Register to vote in Florida;
• Sale or renting of home in previous state;
• Obtain Florida driver's license and register automobiles in Florida;
• File for Homestead;
• Use of Florida address to conduct business and personal correspondence;
• Update estate planning documents to be governed by Florida law;
• Transfer bank and other financial accounts to Florida;
• Join local religious or spiritual organizations; and
• Relocate personal possessions to new Florida residence. 

It is important to note that the items on the aforementioned list are not mandatory, rather they are primary factors that help prove intent to establish Florida domicile, in the event such residency ever comes into question. Furthermore, please do not hesitate to contact Morris Law Group should you have any questions about establishing domicile in Florida.   

Charging Orders

As has been discussed previously on this blog, multi-member LLC’s offer a strong form of asset protection since the underlying assets cannot be attached by an individual member’s personal creditors. Specifically, the sole remedy available to such a creditor would be to obtain a charging order against the member’s LLC interest and only be paid if the LLC distributes assets to that member.

A charging order is essentially the right to receive a distribution when (and if) a distribution is ever made. Thus, a creditor will only receive assets if a distribution is made to the member. The charging order does not provide the creditor access to the LLC’s underlying assets, nor does it provide any voting rights in the LLC. The ultimate purpose of the charging order (and the purpose of keeping assets in multi-member LLC’s) is to force a creditor into a reduced settlement.     

Please do not hesitate to contact Morris Law Group should you have any questions about charging orders and the protection they offer. 

183 Day Residency Test

The United States is a country that taxes all citizens and residents on their worldwide income. However, in order to be deemed a US resident for tax purposes (notwithstanding an income tax treaty), one must either have a green card or satisfy the “substantial presence test.”

The substantial presence test is a cause of confusion for many, since most people mistakenly believe that as long as they remain in the US for less than “six months and a day,” (183 days), they will not be treated as a US resident for tax purposes. Unfortunately, they are mistaken because the 183 day test calculates residency status by utilizing a weighted formula outlined below:

      1) 100% of the days in which you were present in the US during the current year; plus

      2) 1/3 of the days in which you were present in the US during the preceding year; plus

      3) 1/6 of the days in which you were present in the US during the second preceding year.

Thus, if you are a non-citizen who spends exactly 183 days in the US for three consecutive years, you will eventually be taxed in the US on your worldwide income. Pursuant to the weighted calculation, the highest number of days you can spend in the US for three consecutive years without being deemed a resident for tax purposes is 122. For example:

     2017: 122 days * 1 = 122 days; plus

     2016: 122 days * 1/3 = 40.67 days; plus

     2015: 122 days * 1/6 = 20.33 days.

In this example, the total weighted days for 2017 is 183 (122 + 40.67 + 20.33), and would not lead one to be deemed a US resident for tax purposes. 

Please do not hesitate to contact Morris Law Group should you have any questions about the confusing 183 day residency test.  

Spousal Lifetime Access Trust (SLAT)

As discussed many times in this publication, the newly enacted tax plan has provided some additional planning opportunities for high net worth individuals due to the doubling of the estate and gift tax exemption. Specifically, under the new tax regime, the estate and gift exemption has been increased to $11,180,000 per person (for 2018) with slight annual adjustments moving forward.

A strong planning technique available for individuals to utilize this increased exemption is through a Spousal Lifetime Access Trust (SLAT). A SLAT is an irrevocable trust for the benefit of a grantor’s spouse (and descendants), with the spouse serving as Trustee.

Since the grantor’s spouse is both a trustee and beneficiary, the spouse may access the assets within the irrevocable trust should the need arise. Thus a SLAT enables a grantor to remove assets from his or her estate yet still retain some control and access to the funds via his or her spouse.

Please do not hesitate to contact Morris Law Group should you have any questions about Spousal Lifetime Access Trusts. 

Sale to Defective Trust

A common estate planning technique for high net worth individuals is a Sale to a Defective Trust.

In general, a “defective grantor trust,” (now more simply known as a “grantor trust”) is a trust that is disregarded for income tax purposes. Thus, all of the trusts income, deductions, etc. are treated as though they are received by (or paid by) the grantor. Furthermore, although the trust is disregarded for income tax purposes, it is respected for estate and gift tax purposes, thereby enabling a grantor to transfer assets outside of his or her estate without any income tax consequences.

The sale/transaction works as follows:

Step 1: Grantor establishes an irrevocable trust with his or her spouse and/or other family members as beneficiaries.

Step 2: Grantor gifts and sells assets to the trust established under step 1 in exchange for a promissory note with the required minimum interest payments set out by the IRS. 

The result at the end of the transaction is twofold. First, for estate tax purposes, all future appreciation of the assets gifted and sold to the trust will grow outside of the grantor’s estate. Second, for income tax purposes, the grantor does not need to recognize any income tax on the sale, since the sale to a grantor trust for income tax purposes, is deemed to be a sale to the grantor himself. Furthermore, all income from the trust will be taxed at the grantor’s individual tax rate rather than the rate for trusts. This is important since the highest income tax rate for individuals (37%) kicks in at income over $500,000, whereas the highest income tax rate for trusts (also 37%) kicks in at only $12,500.      

The end result is that all assets transferred to the trust will be successfully removed from the grantor’s estate. Additionally, since the grantor’s spouse is a Trustee and beneficiary of the Trust, such spouse may access the trust’s assets should the need arise.

Homestead Updates

As discussed in previous Wealth Preservationist posts, one of the most significant forms of asset protection offered in Florida is the Homestead protection. 

As a matter of background, your homestead is defined as your primary place of residence (assuming you are a permanent resident of Florida). Furthermore, homestead is limited to up to one-half acre within a municipality and up to 160 contiguous acres outside a municipality. If you have more than 1 home in Florida, you can only declare one of the properties as your Homestead property.

Although this seems like a very strong protection tool, there are three scenarios in which the Homestead Protection will not prevail, IRS tax liens, mechanic’s liens associated with maintenance or construction of the specific homestead property, and liens related to mortgages and Home Owners Association dues. These classes of creditors can attack your Homestead property and force a sale to satisfy a judgement.  

In a recent case (Dejesus v. A.M.J.R.K. Corp.) the Florida District Court of Appeals provided some clarity on the issue of ownership of a homestead. The main issue of the case was whether the beneficial homeowner could receive Homestead protection of a residence owned in a corporation. The court concluded that in order for a property to receive Florida’s homestead protection, it must be owned by a natural person. Furthermore, the court came to this conclusion even though the beneficial homeowner was the sole shareholder of the corporation.

This decision in Dejesus further clarifies the understanding that a business entity cannot qualify for homestead protection. In order to receive such protection, a property must be owned by an individual or a land trust. 

Please do not hesitate to contact Morris Law Group should you have any questions about Florida’s Homestead protection. 

Annual Report Reminder

Every business entity organized in Florida must file an annual report with the Florida Department of State by May 1^st each year. This filing is mandatory for all business entities that wish to maintain an active status, even if no changes were made to the entity. The purpose of the annual report is to update and/or confirm the records of Florida’s Division of Corporations. Additionally, the responsibility to file falls solely upon the entity’s representative since Florida’s Division of Corporations is not required to send a reminder regarding the deadline. 

If you are a member of Morris Law Group’s Generational Planning Solutions (“GPS”) program then please disregard this notice as the filing of the annual report has already been addressed. If you are not a member of our GPS program and would like to find out more information, please contact our office today! http://www.law-morris.com/gps

The annual report can only be filed through Sunbiz, Florida’s Department of State, Division of Corporations (Sunbiz.Org). The option to file the annual report is prominently listed on the website’s homepage. In order to file the report, all you need is the Document ID Number (which can be found on Sunbiz), a valid email address and payment of the fee.

The fees for the annual report vary based on entity classification, and are as follows for 2018:

1) For a Profit Corporation: $150.00

2) For a Non-Profit Corporation: $61.25

3) For an LLC: $138.75

4) For an LP or LLLP: $500.00       

Florida’s Division of Corporations will impose a penalty of $400 for an annual report that is filed after the May 1^st deadline; however, the penalty does not apply to non-profit corporations. Furthermore, this $400 late fee cannot be waived or abated.

The failure to file an annual report by the third Friday of September will result in the administrative dissolution or revocation of the business entity. Such administratively dissolved or revoked entities must then apply for restatement and pay additional fees in order to regain active status in Florida. Therefore, if you are an individual who has formed, or maintains a business entity in Florida, 

Gift Tax Return - Reminder

The purpose of this post is to advise you that you may be required to file a Federal gift tax return (IRS Form 709). If you made a gift during 2017, the below summary may be critical to your tax planning.  

The due date for a 2017 gift tax return is April 17, 2018, the same due date as your 2017 individual income tax return. This date can be extended by extending the time to file your individual income tax return using Form 4868 or Form 2350. This due date can also be extended by filing a Form 8892 to request an automatic 6-month extension if you do not request an extension for your individual income tax return. However, neither of these methods will extend the time to pay gift or GST taxes due.

Outright Gifts of Cash or Property

All gifts of cash or property (in excess of $14,000) to an individual other than a spouse require a gift tax return. As a result of the gift, your lifetime estate and gift tax exemption will be reduced by the value of the gift that exceeds the $14,000. However, no gift tax will be due with the return unless you have fully used your lifetime estate and gift tax exemption.  

Gifts of Cash or Property in Trust

When you gift cash or property to a trust, including a life insurance policy or premium payments to be made on a life insurance policy, you are making a gift to the trust=s beneficiaries. If the gift to the trust=s beneficiaries does not exceed $14,000 per beneficiary, and Crummey notices are properly used, a gift tax return may not be required unless the trust is structured as a generation-skipping transfer (AGST@) tax trust. If a gift is made to a GST trust, it may be advisable to allocate the donor=s GST exemption to the trust. While this allocation is automatic, it is advisable to either opt out of the automatic allocation rules for record keeping purposes, or, file a return showing the allocation of the GST Exemption. If a gift to a trust exceeds $14,000 per beneficiary, a gift tax return is required to be filed.

Most CPA’s are willing and able to prepare gift tax returns. However, many prefer not to due to the complex rules that apply to the allocation of GST exemption and other special disclosures. Due to such complexities, we prefer to review all gift tax returns prepared by our client’s accountants to ensure they align with your estate planning goals.

If you have gifted cash or property in excess of the filing threshold during 2017, please do not hesitate to contact our office should you need assistance with the preparation or review of a gift tax return. 

Recent Updates for DAPT Planning

As referenced in previous posts, Domestic Asset Protection Trusts (“DAPTs”) are an extremely efficient estate planning and asset protection technique. To recap, a DAPT provides protection from creditors who exist after the creation and funding of the trust, and such creditors cannot attach the assets of the trust so long as the trust terms are consistent with a state’s DAPT Act. 

Since only a limited number of states have passed laws which make DAPTs effective, it is common for individuals from other states to establish DAPTs in such jurisdictions. Further, the Grantor of a DAPT need not be a resident of the state in which the DAPT is situated as long as the Trustee is within the jurisdiction. However, there has been much debate as to how/why a DAPT can protect a Grantor who is not a resident of the state in which the DAPT is situated. This question is relevant for Floridians as Florida does not currently have a DAPT statute and therefore residents must seek such trusts in other states.

This debate was further addressed by a very recent case (Toni 1 Trust v. Wacker). This case involved a claim that arose (and was litigated) in Montana. After judgment was entered against the defendant, the defendant attempted to fraudulently convey the assets to a DAPT situated in Alaska. Further, the defendant specifically chose to establish the DAPT in Alaska since the Alaska DAPT statute has a two year statute of limitations on creditors. Simply put, the defendant attempted to hide behind this statute of limitations, because two years had passed since the claim arose. Ultimately, the court ruled that the plaintiff can attach the assets of the Alaska DAPT. 

We don’t believe that this case poses a threat to Floridians who wish to establish a DAPT in another state. Specifically, in this case, the defendant clearly engaged in a fraudulent transfer and the sole purpose was to set up a DAPT to hide assets from an existing creditor. Furthermore, this case is consistent with our opinion and understanding that a DAPT will provide the necessary protection from creditors who exist after the creation and funding of the trust.  

Please do not hesitate to contact Morris Law Group if you wish to learn more about DAPTs or believe that it is the right planning technique for you.    

The New §199A

One of the most complicated yet compelling provisions of the recently enacted tax reform is the addition of §199A to the Internal Revenue Code. §199A provides a deduction for business owners of pass-through entities (non-corporations). Subject to the thresholds and exceptions described below, §199A permits such pass-through business owners to deduct up to 20% of their qualified business income.

The income phase-out thresholds for the deduction begin at $315,000 for joint filers and $157,000 for single filers. Thus, a married pass-through business owner who has taxable pass-through business income below $315,000, may deduct 20% of such pass-through income. If income exceeds $315,000 but falls below $415,000 (207,500 for a single filer), the deduction begins to gradually phase out.

However, once taxable pass-through income reaches $415,000 (207,500 for a single filer), the deduction will depend on whether or not the business is a “specified service business.” A specified service business is defined as any business with income from services including but not limited to health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services and any other business where the principal asset is the reputation or skill of one or more employees.

Unfortunately, the limitations are even more stringent when applied to specified service businesses. For a taxpayer who owns a specified service business, once the taxpayer’s taxable income reaches the threshold of $415,000 ($207,500 if not filing jointly), there is no deduction permitted at all.

Please do not hesitate to contact Morris Law Group should you have any questions regarding the newly enacted §199A and the creative planning techniques available to properly prepare and adhere to it.  

Split Dollar Life Insurance and the New Tax Plan

Split dollar life insurance is an extremely effective estate planning technique that this blog has discussed in the past. 

As a brief recap, split dollar life insurance is a strategy in which an individual can utilize a series of separate annual loans in order to make premium payments for his or her life insurance policies.

It is especially useful for those individuals who would like to have their life insurance policies owned in an irrevocable trust, yet do not have the necessary annual exclusion amount available ($15,000 per year per beneficiary) to pay the full premium amount. Thus, the purpose of such arrangements are to reduce the tax consequences of paying large premiums on policies owned by irrevocable life insurance trusts.

A drawback of split dollar arrangements is that each year the loans continue to increase, thus becoming a burden as many years pass.

Under the new tax regime, the lifetime estate and gift tax exemption has been doubled to $11,200,000 (as indexed for inflation in 2018). This increased exemption may remove the need for many individuals to have such arrangements and provides the flexibility to terminate them.

By using a portion of the newly increased exemption, the insured could terminate the split dollar arrangement utilizing cash gifts to the trust which owns the policy in order to repay the amounts owed to the premium provider. 

Please do not hesitate to contact Morris Law Group if you have any questions about split dollar life insurance or the newly enacted tax plan.   

Standard Deductions Under the New Tax Plan

For many years, the standard deduction was a tax benefit rarely utilized by moderate to high net worth taxpayers, simply because their itemized deductions outweighed the standard deduction.

This will change significantly under the new tax plan, since the new plan has doubled the standard deduction to the following figures:

• For married couple filing jointly: $24,000;
• For heads of household: $18,000; and
• For Single Individuals: $12,000.

In addition to the doubled standard deduction, the new tax bill has eliminated many of the popular itemized deductions, leaving only the following:

1. Deduction for charitable contributions;
2. Deduction for payment of state and local taxes (limited to $10,000);
3. Home mortgage interest expense deduction (up to $750,000);
4. Deduction for medical expenses not covered by insurance (capped at 7.5% of AGI);
5. Deduction for interest expense incurred in connection with investment income; and
6. Deduction for casualty losses in a federally declared disaster area. 

New Tax Brackets

Now that tax overhaul is nearly a month old, it is important for taxpayers to understand the new plan. The new tax bill has a significant effect on most Americans at its most basic level, the individual income tax. It is extremely important for all taxpayers to be aware of their tax bracket, which may have changed this year. Please see the charts below for a list of the new tax rates and brackets.

Below is a list of the tax rates associated with specific income brackets resulting from the newly enacted tax reform:

Rate	Single	Married
10%	$0-$9,525	0$-$19,050
12%	$9,526-$38,700	$19,051-$77,400
22%	$38,701-$82,500	$77,401-$165,001
24%	$82,501-$157,500	$165,001-$315,000
32%	$157,501-$200,000	$315,001-$400,000
35%	$200,001-$500,000	$401,000-$600,000
37%	Over $500,000	Over $600,000

In comparison, below is a list of the tax rates associated with specific income brackets prior to the 2018 tax reform:

Rate	Single	Married
10%	$0-$9,525	0$-$19,050
15%	$9,526-$38,700	$19,051-$77,400
25%	$38,701-$93,700	$77,401-$156,150
28%	$93,701-$195,450	$156,151-$237,950
33%	$195,451-$424,950	$237,951-$424,950
35%	$424,951-$426,700	$424,951-$480,050
39.60%	Over $426,700	Over $480,000

Please do not hesitate to contact Morris Law Group should you have any questions about the new tax brackets or the new plan in general. 

Qualified Personal Residence Trust (QPRT)

As part of the continued theme of planning for the inevitable estate tax, a helpful technique is planning through a Qualified Personal Residence Trust.

A QPRT is a trust to which you, as grantor, may transfer your residence and retain the ability to use the residence for a certain term of years.  During that term of years, you would continue to pay the expenses of the residence (e.g., mortgage, insurance, and property taxes), and get any available income tax deductions with respect to those payments.  At the end of the selected term, the residence would pass by gift in a manner you would provide in the trust instrument.

The advantage of a QPRT is that, for gift tax purposes, you can deduct from the value of the gift the value of your retained use of the residence for the chosen term of years.  This will substantially reduce the amount of the gift. The ultimate value of the taxable gift will be based on the term of the trust, your age, and the interest rate (set by the I.R.S.) in effect for the month of the transfer.

After the initial term of the trust has expired, you would no longer have the retained right to reside in the residence, and the residence will pass in trust for the benefit of your spouse.  Your spouse can then live in the residence for the remainder of his or her life.  Upon the death of your spouse, the home will pass to the remainder beneficiaries as designated in the trust instrument.  However, you may rent the property from the beneficiaries at fair market value. A benefit of these rental payments to you and the beneficiaries is that it would further reduce your gross estate without adverse estate or gift tax consequences, although the rent may be taxable income to the trust.

There are, however, some disadvantages to a QPRT.  Typically assets transferred on the death of an individual are entitled to a "step-up" in basis to the asset's fair market value on the date of death.  The effect of this basis step-up is to eliminate any taxable gain on the property, thereby resulting in substantial income tax savings.  This "step-up" is lost if your residence is transferred to a QPRT and you survive the initial retained term.  However, if you die during the trust term, the transaction is treated for estate tax purposes as if it had never occurred, thereby removing the potential benefit. In that case, the costs of the transaction would be the cost of setting up the trust and any trust administrative expenses.

Domestic Asset Protection Trusts

For most high net worth individuals, the main estate planning vehicle for an efficient  transfer of wealth upon death is through use of a revocable trust. However, although efficient from a wealth transfer and disability planning perspective, a revocable trust does not afford any asset protection to the grantor.

Asset protection during a grantor’s lifetime is often accomplished through complex entity structures (multi-member LLC’s or LLLPs) or through irrevocable trusts. However, clients are often apprehensive to transfer too much wealth to an irrevocable trust since they lose all benefit to the transferred assets, and the transfer will most likely require a gift tax return and result in a reduction the grantor’s estate tax exemption amount.   

However, there is a type of irrevocable trust that 1) protects the assets during the lifetime of the grantor; 2) provides for the efficient transfer of wealth; and 3) permits the grantor to be an active beneficiary. This specific estate planning technique is through the use of a Domestic Asset Protection Trust (DAPT).

A DAPT is an irrevocable trust established under the laws of one of the limited number of jurisdictions that permit a grantor of a trust to be a discretionary beneficiary and still protect the trust assets from the grantor’s creditors. We generally recommend the formation of a DAPT pursuant to Nevada law since it offers enhanced privacy and it is the only state that does not have any special classes of creditors that can pierce through a DAPT.

Once executed, all assets can be assigned to the DAPT, including financial accounts, real property, interests in closely held businesses, etc. Additionally, all future accounts should be titled in the name of the trust. However, it is important to note that the Trustee of the trust must be a resident (individual or corporation), of the trust’s jurisdiction.

Please do not hesitate to contact Morris Law Group if you believe that a DAPT will better accomplish your combined estate planning and asset protection goals.