Table of Contents Cover Acknowledgments J Winston Busby, Esq., LLM Stewart Welch III, Accredited Estate Planner, Certified Financial Planner® Introduction CHAPTER 1: Tax Cuts and Jobs Act of 2017 Ordinary Income Tax Rates Capital Gains Tax Rates and Qualified Dividends Educational Provisions Business and Corporate Tax Relief Estate, Gift, and Generation Skipping Transfers Dangers of Relying on Portability Limitations on Deductions CHAPTER 2: Estate Planning What Is Estate Planning? The Benefits of Estate Planning The Nightmares of Poor Planning The Myths of Estate Planning Guidelines for Successful Estate Planning CHAPTER 3: The Estate Tax System Determining Your Estate Net Worth Your Estate Tax Picture Your Future Estate Overview of Estate Planning Strategies CHAPTER 4: Investment Strategies for Maximizing Estate Growth Growth Strategy with a Safety Net® Prioritizing Your Investment Dollars Retirement Planning: Choosing the Best Investment Environments Roth Conversions Some Final Thoughts on Investing CHAPTER 5: Retirement Planning: Living Your Dream Your Retirement Requirements Best Retirement Strategies Reverse Mortgages Social Security Strategies Customizing Your Health Care Plan CHAPTER 6: You Don't Have a Will? Big Trouble! Property Transfers at Death Transfers via Probate Direct Transfers by Title Other Methods of Property Ownership Choosing the Best Methods of Ownership Setting Estate Planning Goals CHAPTER 7: Where There's a Will, There's Your Way! What Is a Will? Types of Wills Advantages and Disadvantages of Wills Intelligent Decisions Concerning Your Will's Basic Provisions Executing Your Will Where to Store Your Will Other Important Documents Working with Your Attorney When to Review Your Estate Plan CHAPTER 8: Using Trusts in Your Estate Plan The Credit Shelter Trust Will Disclaimers Marital Trusts Spendthrift Trust Standby Trust Other Trusts CHAPTER 9: Understanding the Living Trust Advantages of Living Trusts Disadvantages of Living Trusts How a Living Trust Operates Transferring Property into Your Living Trust Types of Property Likely to Be Transferred Living Trust Myths Transacting Business with Your Trust CHAPTER 10: Using Insurance in Your Estate Plan Life Insurance Using Life Insurance to Replace Income How Much Life Insurance Do You Need? What Type of Life Insurance Is Best for You? Insurance on a Homemaker Insurance on Adult Children How to Get the Best Deal on Term Life Insurance What Type of Life Insurance Is Best for Estate Liquidity? The Irrevocable Life Insurance Trust Getting Your Life Insurance into Your Trust Using Life Insurance to Leverage Your Estate About Your Cash Values CHAPTER 11: Smart Strategies for Gifting Assets to Family Members The Annual Gift Tax Exclusion Unintended Gifts Filing a Gift Tax Return The Lifetime Applicable Exclusion Amount Outright Gifts When the Donee Is a Minor Other Tax Free Gifts Family Gifts Utilizing Trusts Grantor Retained Annuity Trust Grantor Retained Unitrust Qualified Personal Residence Trust Taking Advantage of Generation Skipping Transfers Sales to Family Members Loans to Family Members Sales to Intentionally Defective Grantor Trusts The Legacy Trust CHAPTER 12: Strategic Planning with Charities Outright Gifts to Charities Testamentary Gifts to Charities Gifts Using Charitable Trusts Using Your Charitable Trust for Retirement Planning The Private Foundation CHAPTER 13: Family Limited Partnerships General Structure of the Family Limited Partnership Family Limited Partnership Rules CHAPTER 14: Succession Planning for the Family Business or Farm Special Estate Tax Benefits for Farmers and Closely Held Business Owners Valuing Your Business or Farm Succession or Sale? Succession Planning: Keeping the Family Business in the Family Maximizing Your Business's Value through a Sale Structuring Your Buy Sell Agreement Types of Buy Sell Agreements Funding the Buy Sell Agreement One Final Strategy—The Employee Stock Ownership Plan CHAPTER 15: Asset Protection Strategies The Concept of Fraudulent Transfers A Word about Jointly Held Property Retirement Plans Life Insurance Using Trusts to Protect Assets Using Limited Liability Entities to Protect Assets Use of Multiple Limited Liability Entities Foreign Asset Protection Trusts Domestic Asset Protection Trusts CHAPTER 16: Personal Business Planning Issues Choosing the Right Entity for Your Business Closing Thoughts Importance of a Business Plan EPILOGUE: Dealing with Parents and Their Money APPENDIX A: Professional Advisers APPENDIX B: Estate Planning Terms APPENDIX C: IRS Life Expectancy Table About the Authors Stewart H Welch, III, AEP®, CFP® J Winston Busby Index End User License Agreement List of Tables Chapter TABLE 1.1 Schedule of Individual Income Tax Rates TABLE 1.2 2018 Tax Relief Act Applicable Exclusion Amount Chapter TABLE 3.1 Applicable Federal Gift and Estate Tax Exemption Amounts TABLE 3.2 Federal Gift and Estate Tax Rate Table (Tentative Tax) TABLE 3.3 Applicable Federal Gift and Estate Tax Credit and Exclusion Amounts TABLE 3.4 The Future Value of Your Estate Chapter TABLE 4.1 Initial Safety Net TABLE 4.2 Growth Strategy with a Safety Net® TABLE 4.3 Retirement Portfolio Equity (Stock) Allocation Guidelines Based on TABLE 4.4 The Power of Retirement Plan Investing TABLE 4.5 Phase Out of Deductibility of Traditional IRA and Roth IRA Contribu Chapter TABLE 5.1 Social Security Benefits Estimate (2018 estimate) TABLE 5.2 Social Security Benefits Based on Claiming Age Chapter 10 TABLE 10.1 $1 Million Term Life Insurance for Male, Age 50 TABLE 10.2 $1 Million Life Insurance Premium Comparison for Male, Age 50 Chapter 11 TABLE 11.1 Applicable Exclusion Amount Increases (2005–2018) TABLE 11.2 Benefits Comparison of GRAT versus GRUT Chapter 12 TABLE 12.1 Survivorship Life Insurance List of Illustrations Chapter Figure 4.1 Growth Strategy with a Safety Net® Chapter Figure 8.1 Simple Will Figure 8.2 Credit Shelter Trust Will Figure 8.3 Simple Will with Disclaimer Credit Shelter Trust Option Figure 8.4 Two Trust Will Utilizing a General Power of Appointment Trust and a Figure 8.5 Two Trust Will Utilizing a QTIP Trust and a Credit Shelter Trust Chapter 10 Figure 10.1 Millhouse Estate Plan without Irrevocable Life Insurance Trust Figure 10.2 Millhouse Estate Plan with Irrevocable Life Insurance Trust Look for these and other titles from J.K LasserTM—Practical Guides for All Your Financial Needs J.K Lasser's Small Business Taxes by Barbara Weltman J.K Lasser's 1001 Deductions and Tax Breaks by Barbara Weltman J.K Lasser's Your Income Tax J.K Lasser's Your Income Tax (Professional Edition) J.K LASSER’S® NEW RULES FOR ESTATE, RETIREMENT, AND TAX PLANNING Sixth Edition Stewart H Welch III, AEPđ, CFPđ J Winston Busby, ESQ., LLM Copyright â 2019 by John Wiley & Sons, Inc All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey The Fifth Edition of Estate and Tax Planning was published by John Wiley & Sons, Inc in 2014 Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750 8400, fax (978) 646 8600, or on the Web at www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748 6011, fax (201) 748 6008, or online at http://www.wiley.com/go/permissions Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose No warranty may be created or extended by sales representatives or written sales materials The advice and strategies contained herein may not be suitable for your situation Y ou should consult with a professional where appropriate Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762 2974, outside the United States at (317) 572 3993 or fax (317) 572 4002 Wiley publishes in a variety of print and electronic formats and by print on demand Some material included with standard print versions of this book may not be included in e books or in print on demand If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com For more information about Wiley products, visit www.wiley.com Library of Congress Cataloging in Publication Data is Available: ISBN 978 119 55913 (paperback) ISBN 978 119 55911 (ePDF) ISBN 978 119 55908 (ePub) Cover Design: Wiley Irrevocable life insurance trust, 270–271 disadvantages of, 168–170 using to protect assets, 270–271 Irrevocable life insurance trust, 166–170 Irrevocable trusts, 89, 305 Issue, 305 Joint dynasty trust, 173 Jointly held property, protecting from creditor claims, 267 Joint tenancy with survivorship rights, 305 Joint tenants with right of survivorship (JTWRS), 85–86 advantages of, 85 disadvantages of, 85–86 Joint will, 305 Lawsuits, threat of, xvii Legacy, 305 Legacy trusts, 208–217, 306 different needs of children, 213 disadvantages of, 214 distributions, 211 Family Council, 215 for funding education of grandchildren, 214 generation skipping transfers, 216–217 incentive provision, 215–216 length of, 210 mandatory provisions, 216 trustee, 211–212 umbrella trust, 213 Letter of instruction, 113–115 Life estates, 88, 306 Life expectancy table (IRS), 309–312 Life insurance, 51–52, 153–172, 269–270 on adult children, 161 amount needed, 157–160, 163–164 basics, 154 best deal on, 161–162 cash values, 173–174 dynasty planning without trust, 173 joint dynasty trust, 173 cash value insurance, 155–156 survivorship life, 156 universal life, 156 variable life, 156 whole life, 155–156 existing, moving into trust, 167–170 on homemaker, 161 irrevocable life insurance trust, 166–170 disadvantages of, 168–170 leveraging estate with, 170–172 amount needed, 171–172 term insurance, 171 protecting from creditor claims, 269–270 term insurance, 154 type needed, 160 using for estate liquidity, 163–165 using to replace income, 156–157 warnings about, 162 credit life insurance, 162 financial strength, 162 mortgage life insurance, 162 Limited liability companies (LLCs), 246–247, 290–292 advantages, 291 best fit, 292 disadvantages, 291 single member, 292–293 advantages, 292 best fit, 293 disadvantages, 292 Limited liability entities, using to protect assets, 271–275 multiple, 274–275 Living trusts, 139–152, 306 advantages of, 139–141 disadvantages of, 141–142 myths, 150–152 setting up, 142–145 funded vs unfunded, 143 incompetence provision, 144 number of, 144 revocable vs irrevocable, 143 trustee, choosing, 143 wills, 144–145 transacting business with, 152 transferring property into, 145–150 annuities, 149 bank accounts and money market accounts, 148 brokerage accounts, 148 IRAs and other retirement accounts, 149 jointly held property, 150 life and disability insurance, 149 property having no title, 150 real estate, 147–148 stock certificates and bonds, 148 vehicles, motorcycles, and boats, 149 trustee, choosing, 143 Living wills, 112–113, 306 Long term care (LTC) insurance, 174–177 estate planning benefits of, 177–178 Malpractice insurance, 265 Marital deduction, 306 Marital trusts, 132–136, 306 general power of appointment trust, 132–133 qualified domestic trust (QDOT), 136 qualified terminable interest property (QTIP) trust, 133–136 Medicare, 75–78 original, 76–77 Part A, 75 Part B, 76 Part C (Medicare Advantage), 76–78 Part D, 76 Minor, 306 Mortgage life insurance, 162 Net investment income (NII), 3.8 percent tax on, 10–11 Nominee partnership, 145 Noncontest clause, 306 Nuncupative will, 306 Ordinary income tax rates, 2, Parents' estates, 297–298 Payment on death (POD) account, 89 Per capita, 306 Perpetuities clause, 110 Personal business planning issues, 281–296 business plan, importance of, 295–296 corporations, 286–293 C corporation, 287–288 limited liability companies (LLCs), 290–292 S corporation, 289–290 general partnership, 284–285 advantages, 284 best fit, 285 disadvantages, 284–285 rules, regulations, and procedures following, 293–295 corporate veil, piercing, 293 doing business in multiple states, 293–294 multiple entities, use of, 294–295 personal service providers, 294 sole propietorship, 282–283 advantages, 283 best fit, 283 disadvantages, 283 Personal investment accounts, 49–50, 53 Personal property, 306 Per stirpes, 306 Pooled income funds, 228–229 advantages, 228 disadvantages, 228–229 Portability, 306 Power of appointment, 306 Power of attorney, 111–112, 307 Primary beneficiary, 307 Private foundations, 230–233 advantages, 231 disadvantages, 231–233 Probate, 81–83, 307 advantage of, 83 disadvantages of, 83 Probate property, 307 Professional advisers, 299–301 Property ownership, methods of, 84–91 choosing best methods of, 90–91 community property, 88 fee simple ownership, 84–91 joint tenants with right of survivorship (JTWRS), 85–86 life estates, 88 revocable living trusts, 89 tenants in common, 87 Qualified domestic trust (QDOT), 136, 307 Qualified personal residence trust (QPRT), 197–198 death during term of, 201 setting up, 198–199 tax treatment, 199 Qualified terminable interest property (QTIP) trust, 133–136, 307 Real property, 307 Remarriage provision, 130 Residue, 307 Retirement planning, 43–53 health care plan, customizing, 75–78 Medicare, 75–78 investing, power of, 44 life insurance, 51–52 magnifying the power of, 48–49 personal investment accounts, 49–50, 53 requirements, 56–61 assumptions, 56–59 income, sources of, 59–60 portfolio withdrawal rate, 60–61 reverse mortgages, 63, 67–70 vs annuity, 68–69 as safety net, 69 Social Security strategies, 70–75 benefits based on claiming age, 71 converting to Roth IRA, 74–75 paying off debt, 74 postponing benefits, 73–74 62/70 strategy, 72 taxation of benefits, 72–73 widow/widower strategy, 72 strategies, best, 61–67 tax deferred investment programs, 50–51 Retirement plans, protecting from creditor claims, 267–269 Reverse mortgages, 63, 67–70 vs annuity, 68–69 as safety net, 69 Revocable living trusts, 89 Revocable trust, 307 Roth conversions, 46–47, 75 Roth IRAs, 45–46, 74–75 gifting, 184–185 as incentive provision in legacy trust, 215–216 Rule against perpetuities, 307 S corporation, 289–290 advantages, 289 best fit, 289–290 disadvantages, 289 Settlor, 307 Simultaneous death clause, 109–110 Social Security benefits, 60, 63–64, 70–75 delaying, 63 estimate (2018), 60 strategies, 70–75 benefits based on claiming age, 71 converting to Roth IRA, 74–75 paying off debt, 74 postponing benefits, 73–74 62/70 strategy, 72 taxation of benefits, 72–73 widow/widower strategy, 72 Sole propietorship, 282–283 advantages, 283 best fit, 283 disadvantages, 283 Spendthrift provision, 110, 307 Spendthrift trusts, 136–137 Sprinkle provision, 307 Stepped up cost basis, 307 Stocks, dividend paying, 65–66 Survivorship life insurance, 156, 164–165, 172 Taxable estate, 308 Tax Cuts and Jobs Act (TCJA) of 2017, 1–13 business and corporate tax relief, 5–6 corporate tax rate changes, Pass through income deduction under 199A, capital gains tax rates and qualified, educational provisions, 2–4 education IRA, 2–4 section 529 plans, estate, gift, and generation skipping transfers, 6–8 estate planning issues, 7–8 planning considerations, 9–10 planning with portability, limitations on deductions alimony payments deduction, 12 changes to standard deduction, 11 charitable deductions, 12 deduction for state and local taxes, 12 miscellaneous itemized deductions, 13 mortgage interest deduction, 12 pease limitation, 13 net investment income (NII), 3.8 percent tax on, 10–11 ordinary income tax rates, 2, Tax deferred investment programs, 50–51 Tax planning, 15 Tenancy by the entirety, 267 Tenants in common, 87 advantages of, 87 disadvantages of, 87 Term life insurance, 154, 164, 171 Testamentary trust, 308 Testator, 308 Three bucket strategy for managing income taxes, 65 Trusts, 308 2503(b), 187 2503(c), 187–188 charitable, gifts using, 223–230 charitable remainder annuity trust (CRAT), 224–226 charitable remainder unitrust (CRUT), 226–227 using for retirement planning, 227–230 credit shelter, 126–130 domestic asset protection trusts (DAPTs), 277–279 family gifts utilizing, 195 foreign asset protection, 275–277 basics of, 276–277 grantor retained annuity trust (GRAT), 195–198 grantor retained unitrust (GRUT), 197, 198 intentionally defective grantor trusts (IDGTs), 208 irrevocable, 89 irrevocable life insurance trust, 166–170, 270–271 disadvantages of, 168–170 using to protect assets, 270–271 joint dynasty, 173 legacy, 208–217 different needs of children, 213 disadvantages of, 214 distributions, 211 Family Council, 215 for funding education of grandchildren, 214 generation skipping transfers, 216–217 incentive provision, 215–216 length of, 210 mandatory provisions, 216 trustee, 211–212 umbrella trust, 213 living, 139–141 advantages of, 139–141 disadvantages of, 141–142 myths, 150–152 setting up, 142–145 transacting business with, 152 transferring property into, 145–150 marital, 132–136 general power of appointment trust, 132–133 qualified domestic trust (QDOT), 136 qualified terminable interest property (QTIP) trust, 133–136 minors, 101–103 qualified personal residence trust (QPRT), 197–201 death during term of, 201 setting up, 198–199 tax treatment, 199 revocable living trusts, 89 spendthrift, 136–137 standby, 137 Trustees, 104–105, 143, 308 of living trust, 143 powers of, 107–109 Two bucket strategy for managing income taxes, 65 Umbrella trust, 213 Unified credit, 308 Uniform gifts/transfers to minors act, 308 Unlimited marital deduction, 308 Wills, xvi, 79–92, 126–130, 144–145, 308 advantages and disadvantages of, 95–97 attorneys, working with, 115–121 basic provisions of, 97–110 executors, 103–104 guardians, 109 minors' trusts, 101–103 opening declaration, 97–98 payment of debts and funeral expenses, 97–98 perpetuities clause, 110 personal items, 98–99 residence(s), 99 residuary estate, division of, 99–100 simultaneous death clause, 109–110 spendthrift provision, 110 taxes, 100 in terrorem clause, 101 trustee powers, 107–109 trustees, 104–105 credit shelter trust wills, 126–130 defined, 93 direct transfers by title, 84–88 beneficiary designations, 89–90 community property, 88 fee simple ownership, 84–85 irrevocable, 89 joint tenants with right of survivorship (JTWRS), 85–86 life estates, 88 payment on death (POD) account, 89 revocable living trusts, 89 tenants in common, 87 estate planning goals, 91–92 estate plan, reviewing, 121–123 executing, 110–111 intestacy, 79–80 and living trusts, 144–145 other important documents, 111–115 letter of instruction, 113–115 living wills, advance medical directives, and health care powers, 112–113 power of attorney, 111–112 property ownership, choosing best methods of, 90–91 property transfers at death, 80 storing, 111 transfers via probate, 81–83 types of, 93 holographic, 94 joint, 94 oral (nuncupative), 94 simple, 94–95 testamentary trust, 95 WILEY END USER LICENSE AGREEMENT Go to www.wiley.com/go/eula to access Wiley’s ebook EULA ... could in the area of estate, retirement, and tax planning Tax laws change, creating new opportunities and challenges regarding wealth accumulation and estate planning The Tax Cuts and Jobs Act of... throw their hands up and focus on trying to pay their bills rather than planning for long term events like estate, retirement, and tax planning I own a fee only investment management and financial... Barbara Weltman J.K Lasser's Your Income Tax J.K Lasser's Your Income Tax (Professional Edition) J.K LASSER’S® NEW RULES FOR ESTATE, RETIREMENT, AND TAX PLANNING Sixth Edition Stewart H Welch III,