Hi everyone, I'm Sam Donaldson from the Georgia State University College of Law, and this session is about contemporary estate planning paradigms for married couples. It's fair to say that how we do planning for married couples has changed substantially over the course of this century so far. An estate plan that made sense for a married couple back in 1999 or 2000 probably has no resemblance at all to what a good plan would look like for a similarly situated married couple today. So just as our definitions and conventions of marriage have been changing, so too has the tax planning that we've been doing for married couples. So in this session we're going to try and get a handle on how we should be doing planning, not just for the very high net worth married couples, but even for married couples of relatively small and medium-sized estates. We'll see if we can identify some basic templates we can use depending upon the amount of wealth that is at the table so that we can have some flexible plans that are in place so no matter what happens with any changes in the law, as long as the couple stick to the non-tax aspects of their plan, they won't have to make any changes at all. Apologize in advance for the single people that are watching this broadcast by talking exclusively about married couples in this hour. You might get the impression that only married people count and that single people don't. Of course that's not the case, but it is true that planning for single people just isn't all that interesting. I mean if you're a single person with high net worth, well you're not trying hard enough in your dating profile, right? You should be using a dollar sign as your profile pic. You'll find a spouse, not a problem. But even the planning for those that are resolutely intent on staying single isn't all that difficult. I mean if you have a taxable estate, well we'll look at some combination of life insurance or charitable giving. We can zero out your estate or get it to the point where you don't have to worry about much transfer tax at all pretty readily. But when it's a married couple, it's obviously a little bit more difficult and frankly I'm a little bit more sympathetic being a married person myself to planning for married people. I guess from my perspective, if you manage to shuffle off this mortal coil never having been married, never losing control over the remote, never really having to understand what real sacrifice is about, having your way all the time, I'm kind of fine with you paying a little bit of tax on your way out as the fee for having all that autonomy for your entire life. But for those of us who wear one of these and we know what real compromise is about, we're a sympathetic group. We need planning. So how would we do planning for a married couple today? Well let's start by refreshing our recollection about the different environmental factors that are in play modernly in advising couples. Let's start first by taking a look at the income tax that applies. This first table here shows you current tax rates on ordinary income. Now the numbers that are specifically listed on here are adjusted each year for inflation. This particular rate table is the one that was used back in 2018. Why look back that far? Well if you'll remember 2018 was the first year in which the Tax Cuts and Jobs Act took effect. So it was the first year in which we had had progressive rates that went from a low of 10 percent to a high of what at the time had been 39.6 but is now more modernly a 37 percent rate. I like this particular table because it shows you what the tax rates were prior to the enactment of the Tax Cuts and Jobs Act. Those are the numbers over on the left dark shaded side and then the numbers that you get under the Tax Cuts and Jobs Act. And not only do you see that the what four or five highest tax brackets all see a reduction, in fact six of the seven brackets receive a reduction in the rate, notice that the rate thresholds particularly at the higher level are also significantly higher. So the Tax Cuts and Jobs Act was, especially for very high income earners, very much an income tax break. But you still have a 37 percent bracket that applies to ordinary income. By the time you layer on applicable state income tax and when you take into account that for many high income individuals a lot of ordinary income can consist of net investment income items like interest and royalties and rental income if they're not actively involved in managing the rental property, well then you could be looking at an additional 3.8 percent because of that net investment income surcharge. So between federal and state income tax rates, depending upon where you live, where your clients are, it's not unusual to be talking about a total marginal tax rate that could be well north of 45 percent, still a very high number. Now as we know the rates that are applicable for dividends and capital gains are of course subject to a preferential rate of tax and sure enough under the Tax Cuts and Jobs Act, well Congress could afford to change the tax brackets for ordinary income but it couldn't really afford to make any changes to the rates applicable to dividend and capital gain income and so that's why you see not only are the brackets the same but you'll notice that within just a few hundred dollars here and there even the rate thresholds never changed. It's still the case that a married couple has to have nearly a half a million dollars of taxable income before they find themselves in that highest 23.8 percent bracket on their dividend and capital gain income. Also included on this chart are the tax rates applicable to trusts and estates. Just as a quick aside, it gives you further proof why it is that trusts taxed as separate taxable entities and estates are not at all favored taxpayers for holding investment assets. If we are going to place investment assets into a trust, this is why we almost always prefer that that trust be structured as a so-called grantor trust so that that passive investment income can be taxed to the individual grantor rather than separately to the trust. Chances are if we can tax that income to the grantor, we're going to pay less in total federal and state income tax than if the trust itself is a separate taxable entity. True, in some cases we're deliberately creating a trust treated as a separate entity because we're trying to achieve a particular purpose like perhaps avoiding application of state income tax by taking an individual who resides in a high state income tax state, parking those assets into say a Delaware trust or a South Dakota trust or a Nevada trust where the trust income would not be subject to state tax. For that strategy to work, we can't have it taxed as a grantor trust where all the income comes back to the grantor residing in the high income tax state. But unless we're trying to achieve a specific objective like that, we want our trust generally speaking to be treated as a grantor trust for income tax purposes. But the bottom line takeaway here is that although the Tax Cuts and Jobs Act represents a reduction overall in the amount of tax, at least in the case of ordinary income, if not so much with dividends and capital gains, income tax can remain a very significant bite that many clients have to face. Now contrast that with the situation that we get under federal wealth transfer taxes. This table shows you what the so-called basic exclusion amount has been throughout the past decade. Remember the basic exclusion amount is the total amount of wealth that you can transfer for either gift or estate tax purposes before you have to worry about the imposition of federal wealth transfer tax. While at the start of this past decade it was at five million dollars adjusted for inflation, one of the signature features of the Tax Cuts and Jobs Act was to effectively double that exclusion. Instead of doing five million dollars adjusted for post-2011 inflation, it was changed to ten million dollars adjusted for post-2011 inflation. Although we also changed the way in which the year-to-year inflation adjustments were made so that they'd be a little bit more modest than what they were under the older rules. That's why for the last three years we've had a basic exclusion amount in the eight-figure range, and of course for this year the applicable exclusion amount or the basic exclusion amount is 11.58 million. Each person gets an 11.58 million dollar exclusion, which means that a married couple between them enjoys a total exclusion of 23.16 million. That means that a decent number of the clients with whom you're working don't currently have a transfer tax problem because they don't have a combined estate in excess of 23.16 million, and remember these numbers continue to adjust upward for inflation. So the transfer tax has become less significant and certainly in the past few years has become very insignificant for many even high net worth married couples. Now before we move on we should pause here to note that under current law this basic exclusion amount is scheduled to revert back to five million dollars adjusted for post-2011 inflation come 2026. If congress takes no action between now and the start of 2026, then that's right in congress's wheelhouse doing nothing. Well then when we wake up in 2026 we go back to having a five million dollar exclusion adjusted for post-2011 inflation, but we'll also go back to using the old inflation adjustment mechanism instead of the current chained cpi adjustments that we're making from year to year. So if you want to assume that we have the same general inflation that we've had over the past 10 years between now and 2026, many people are saying at least for discussion's sake let's assume that in 2026 we'd be looking at an exclusion that might be around about six and a half million. Probably not exactly six and a half million, it might be a little bit more or a little bit less, but for discussion purposes that's probably a decent estimate with which to work. So again if congress does nothing in 2025 we will have an exclusion amount that was probably close to 13 million dollars per person, but then in 2026 it could shrink down to about six and a half million dollars per person. That can be a pretty significant change. Now we had some regulations that were finalized at the tail end of last year that make clear that if you take advantage of the higher exclusion amount through taxable gifts during your lifetime, if the exclusion amount drops between the date of the gift and the date of your death, you don't have to worry about what we used to call the problem of clawback where you now have to pay a state tax on that prior taxable gift. In other words if I have a client today make a gift of 10 million dollars when the basic exclusion amount is 11.58, my client isn't going to pay any gift tax and I don't have to worry that if my client's exemption amount drops to six and a half million in 2026 and the client dies that year that now all of a sudden we have to pay a state tax on the three and a half million dollars by which the 10 million dollar gift back in 2020 exceeds the six and a half million dollar exclusion applicable at death. The anti-clawback regulations as they're known make clear that as long as you had enough basic exclusion amount to cover your gift at the time you will not have to worry about paying additional gift tax or a state tax if that basic exclusion amount later drops. That's what creates the expression of use it or lose it. If you're anticipating that the exclusion amount will go down perhaps as soon as 2021, your client might be well advised to hurry up and take advantage of an 11.58 or since we're talking here about married couples maybe have a married couple make a 23 million dollar gift if you're thinking there's a chance that the combined exclusion next year or sometime prior to 2026 could drop down to perhaps 13 million or maybe even less depending upon the results of the election and how subsequent laws might change. There's one other big environmental factor that affects how we do the planning for married couples and that's something that we call the portability election. Before we get to that let's recap what we've talked about so far. Remember we're learning that income tax is the big game right now because I mean if you just take a look at this basic comparison over the years when we first started this century the first year of this century was 2001. I don't care how you count it the first year of the century was 2001. It was not the year 2000. You had transfer tax rates that were progressive starting as low as 37 percent and going as high as 55 percent but you also had fairly significant income tax brackets although they were less on the capital gain and dividend income than what we have today. Back in 2001 when you only had a one million dollar exemption per person two million dollars per married couple and you quickly had estate tax rates of 55 percent that could apply once your taxable estate was north of a few million dollars it made sense for an estate plan to focus almost exclusively on minimizing if not outright avoiding transfer tax. In fact the very popular mantra that estate planners had back in 2001 is do whatever you have to do to reduce the estate tax bite because the estate tax bite is bigger than the income tax bite. The estate tax bite will happen nine months after the death of the surviving spouse whereas the income tax bite isn't going to happen until a subsequent beneficiary sells the asset which could be many years down the road. So when comparing do I care more about a 55 percent tax imposed nine months after death or do I care more about a 20 percent tax that's going to be imposed at some point long into the future it's kind of a no-brainer. You focused on the transfer tax and so planners were recommending strategies under which we didn't care so much about getting a step up in basis for income tax purposes because we willingly said we're happy to pay more in income tax later if it means we're going to get an even bigger savings up front on the estate tax side of things. But now focus down at the bottom of the slide there where we take a look at what happens under the law today. Now sure if I'm just comparing tax rates it looks like the estate tax is still more significant because instead of having progressive tax rates we now have a flat 40 percent transfer tax for federal purposes and that applies for both gift and estate tax purposes. The capital gains rate is a little bit higher 23.8 percent than it was at the beginning of this century but if I was just looking at the rates I might say well a 40 percent transfer tax outweighs a 23.8 percent capital gains tax maybe I should still focus on the estate tax. Now but remember here's the thing that 40 percent tax only applies on everything north of the basic exclusion amount and so in the case of a married couple we're only talking about paying estate tax 40 percent on everything in excess of 23.16 million dollars right. On the other hand with the income tax we're looking at paying 23.8 percent tax on everything north of basis. Well here's the thing every one of your married couple clients has a 23 million dollar in change exclusion but very few of your high net worth clients have 23 million dollars worth of basis. When you run the numbers you actually find in many cases that the transfer tax exposure is significantly less than the income tax exposure and as we just talked about for your married couples that have a combined net worth that doesn't exceed 23.16 million well for crying out loud they don't have a transfer tax exposure at all. In their case it's all about the income tax and has nothing to do with transfer tax. So you can see just from this simple chart how the main values that we had in doing planning back in 2001 focused almost myopically on the transfer tax but nowadays the income tax is really the big dog the one that we have to pay attention to in a lot of our planning. All right as promised let's talk a little bit now about the portability election because that's the other big change that's happened just within the past decade. This of course came to us under the Tax Relief and Unemployment Insurance Reauthorization and Job Creation Act which is easy to remember because it had the helpful acronym CHIRURGICA. Under CHIRURGICA passed at the end of 2010 we had this rule that was effective come 2011 that to the extent one spouse does not fully utilize his or her basic exclusion amount the unused exclusion could port over to the surviving spouse and so ever since 2011 we now define the applicable exclusion amount for transfer tax purposes in the case of a surviving spouse as the sum of the 11.58 million dollar basic exclusion amount and whatever unused exclusion the spouse was unable to utilize. So let's take a simple example let's suppose that we have husband and husband. Let's suppose we have the old teddy bear husband and the young hottie husband. Well let's kill off the old teddy bear first right I mean the diet catches up to you at some point. Old teddy bear dies and let's say before dying he executes a will that says I leave everything to my spouse. Well because of that that means that the deceased spouse's estate can take an unlimited marital deduction for the assets that are transferring over to the surviving spouse. That means that the deceased spouse's taxable estate is reduced to zero and none of the 11.58 million dollar exclusion gets used. So therefore that 11.58 million dollar exclusion of the dead spouse can port over to the surviving spouse. The surviving spouse can add that to his already existing 11.58 million dollar exclusion and bam that's where you get the 23.16 million dollar exclusion that the surviving spouse can have. Right it's a pretty nice little advantage if you're able if you're able to utilize it. Now the statute importantly indicates that you only get to use the last deceased spouse's unused exclusion. So if our surviving spouse goes out and marries someone else and outlives that second spouse, well the applicable exclusion amount is the surviving spouse's basic exclusion amount plus whatever is the unused exclusion of the second spouse. If we don't hurry up and make a gift using the first spouse's unused exclusion then that first unused exclusion is effectively wasted. And let's state that again even though the statute says that you only get to use the exclusion of your last deceased spouse. Regulations talking about the portability election make clear that if for example our surviving spouse had made a 10 million dollar gift to a boyfriend let's say, well then in that case that 10 million dollar gift is deemed to come first from the dead spouse's unused exclusion before the surviving spouse touches his own exclusion. Well if that's the case what happens if you make a 10 million dollar gift using your first spouse's unused exclusion. But then later you meet and marry somebody else and you outlive that somebody else, but that somebody else had already used up all of their exclusion in gifts to nieces and nephews and other beneficiaries. Well under the statute your de-sue amount drops to zero because there was no unused exclusion from your surviving spouse. How does that affect the fact that you made a $10 million gift using the other spouse's exclusion? Do you now have to pay gift tax? Well, luckily the regulations say, well, tell you what, if you hurry up and utilize your first spouse's exclusion before the second spouse dies, well, then we'll let you have not only the first spouse's unused exclusion, but you can also have whatever unused exclusion there may be from the second spouse. Now, isn't that a killer? The statute says you only get the unused exclusion of the last deceased spouse. But if you do it right, if you hurry up and make a gift of the first spouse's unused exclusion before your new spouse dies, then you can effectively multiply the number of exclusions you can apply from all of your spice that you've had over the course of your lifetime. So I guess one mantra here is pretty clear. As long as you adopt the mantra of marry, kill, gift, marry, kill, gift, as long as you're always doing it in that order so that you can hurry up and make a gift before your next spouse drops, you can effectively multiply the number of exclusions that are in play. It's pretty extraordinary, but it's a nice, wonderful, flexible tool. Prior to 2011, we didn't have a mechanism by which you could take the unused exclusion of one spouse and pour it over to the other. The only thing that you could do was to create something that we used to call, or still do call, the credit shelter trust, which is also known as an exemption trust, or a bypass trust, or an AB trust, or a family trust. There are more street nicknames for this than there is for cocaine. But the point is that before there was the portability exclusion, the only thing that we could do would be to create a trust that maybe was for the benefit of the surviving spouse, but which did not qualify for the marital deduction. If I could stow away $11.58 million worth of assets into that trust, I could utilize the first spouse's $11.58 million exclusion. And then if the assets inside of that trust could grow like jiffy pop popcorn from $11.58 to maybe $13 million, or $15 million, or $20 million by the time the surviving spouse dies, I don't have to pay any transfer tax because all of those assets are sheltered by the first spouse's exclusion. We didn't have a simpler mechanism by which we could just take the $11.58 million that the first spouse forgot to use and just add it to the exclusion amount given to the surviving spouse. With portability, we have a very flexible and very significant planning tool. Now, an important limitation that we always have to remind people about whenever we talk about portability, you only get to port over the unused exclusion of a deceased spouse if you timely file a federal estate tax return following the death of that spouse. So, if the first spouse dies, we have either nine or 15 months, depending upon whether you file an extension request, to hurry up and file an estate tax return, even if one is not otherwise required. Because that's the only way that you are allowed to port over the unused exclusion. So, even if you're only dealing with a married couple with a very modest estate, if you still want to make a portability election just to be safe, the only way you can do it is to file a federal estate tax return. And luckily, there's a simplified procedure if everything is effectively going to the surviving spouse anyway, where effectively you're filing a very shorthand form 706, largely just to indicate you're making the portability election. If you're late in making the election, you can't do portability. But the good news is, there is some guidance whereby if it's still only been within the first two years after the death of a spouse, there's still time to be able to make that portability election. But you got to do something. It doesn't happen automatically. So, what's the world we live in now? We live in a world where income tax is very significant. Transfer tax is not really all that significant, although there's some risk that it could become significant again. It's scheduled to become significant again in 2026. But depending on the results of the election, it might happen sooner. And we have this portability weapon that's at our disposal in addition to the traditional credit shelter or bypass trust. In that kind of environment, what planning makes sense for a married couple? Well, here's one way that I think you can approach it. If I have a married couple come into my office for some estate planning, the first thing is that I make sure they're in the right place because I'm a law professor working in a law school. What do they do at C&E? They should go see my wife. She's a lawyer. They should go see a real estate planning lawyer and not just one who plays one from an ivory tower. But hypothetically, if I was dealing with clients who came into my office, the first thing I would try to find out from this married couple is what's the total amount of net worth that we're talking about? Because depending upon the amount of net worth that's in play, that's going to affect the recommendations that I'm going to give to that couple. Specifically, if I find out that the combined net worth, and that's everything, that's separate property and community property minus all debts, I don't care in whose name the debts are, I don't care in whose name the assets are, put everything into one big bucket as you see here. If the combined estate between husband and wife is not more than one basic exclusion amount, in other words, this year, not more than $11.58 million, then I'm going to put them into what I call bucket number one. Now, we used to say that this was small, medium, and large instead of one, two, and three, but nobody likes being told that they're in the small bucket. It almost sounds like you were carrying around the L on your forehead, right? So, we'll just say bucket number one for our own thinking. But let's think about it. These are people for whom transfer tax is not at all an issue. If you think about it, there is no real transfer tax planning here at all. Even if you are completely asleep at the wheel, at the death of the first spouse, the surviving spouse has an $11.58 million exclusion. If they only have $8 million worth of combined wealth, we don't need the exclusion of both spice. It's fine if we just have the surviving spouse's exclusion, which gives us all kinds of freedom to be able to plan that we otherwise wouldn't have. On the other hand, if my married couple has more than one basic exclusion amount worth of combined net worth, but not more than two, well, here I have to do some modicum of transfer tax planning. Not a whole lot. It doesn't have to be all that difficult, but I at least got to do something. Because if I don't do anything and I just have the first spouse leave everything to the surviving spouse and I don't make some use of the first spouse's exclusion, when the surviving spouse dies with, let's say, $20 million worth of wealth, the surviving spouse only has an $11.58 million exclusion. That means we're going to be paying 40% transfer tax on over $8 million worth of wealth when we didn't have to. Our clients that are in bucket number two, I have to utilize both spouses' exclusion amounts, but I still have a lot of flexibility in how exactly I go about doing that. Finally, bucket number three, that's where our whales sit. Where our clients have more than two exclusion amounts worth of combined wealth, well, I definitely have to use both spouses' exclusion amounts and I probably need to look at engaging in even more sophisticated transfer tax planning. Quite frankly, in the course of the last decade, it's in bucket three where we see the least amount of change because these people had taxable estates before. They continue to have taxable estates. The strategies that we were using 10 years ago for these couples, we're going to continue using for these couples to the extent they're comfortable with them and work so they don't have as much change. Where everything has dramatically changed has been back over in bucket one and bucket two. There, the planning looks fundamentally different. Most of our time here, we're going to focus on what happens in bucket one and bucket two, not because bucket three isn't important, but because there hasn't been as much change with what's happened in bucket three over the last several years. All right, let's start with the tax planning that we would do for married couples who don't have a combined net worth in excess of one basic exclusion amount. How are we supposed to do our planning here? Well, here, I think we can use a basic three-part planning template. The first part of this three-part planning template, as you see here, is labeled a simple question and that's trust or no trust. The exact wording of this, it kind of depends on what's the dominant model for death time wealth transfers where you work. It turns out that the states vary quite a bit and practices can even vary within a state. In some communities where you might be working, the dominant document that is used to affect wealth transfer at death is a will. That is, each spouse executes a will that in many cases simply leaves everything outright to the survivor and if the survivor does not survive, then things are going to go equally to their kids or to all of the kids or perhaps to other beneficiaries if there aren't any children that are there. In other communities where you may be working, the dominant document that is used to affect death time transfers is not a will but is instead the so-called revocable living trust. And maybe that's because you're working in a jurisdiction where probate is considered to be more expensive than it is in other jurisdictions or than what your client thinks it should be. If most of your clients are using living trusts as opposed to wills, well then the question is not trust or no trust because of course you already have a trust that's in play. The question to ask instead is when the first spouse dies, should some portion of that living trust now become irrevocable? The typical living trust that has both spouses as grantors usually provides that when the first spouse kicks it, half of the trust becomes irrevocable and holds on to the property of that deceased spouse while the other half of the trust remains wholly revocable because it's owned entirely by the surviving spouse who's still alive. If that's the dominant form that's applicable in your community, then the question is okay when the first spouse dies, do we really need to have half of the trust go irrevocable or should we keep the entire trust wholly revocable and thus wholly capturable by the surviving spouse? Alternatively, if you're in a jurisdiction where wills are the dominant thing, well you know there's going to be a will, then the question becomes well should it be a trust or no trust? Prior to the past few years, prior to the five million dollar exclusion coming into place, if I was working with a married couple that say had seven million dollars worth of combined wealth and they had a taxable estate, I wouldn't let them have this choice. I'd say I'm sorry but you have to use a credit shelter trust. It's the only arrow that we have in our quiver. We have to somehow take advantage of the first spouse's exclusion but now that we're dealing with an 11.58 million dollar exclusion per spouse so that transfer tax is not at all a thing, they don't have to use a trust if they don't want to anymore. If they're very comfortable with the spouse, whoever the survivor may be, having full control and discretion over the assets, well but if I'm using a will, I don't need to transfer anything in trust. I can give it outright to the surviving spouse or if I'm using a revocable living trust, I don't have to have half of the trust become irrevocable. The trust can stay wholly revocable by the surviving spouse, right? But on the other hand, if I have some concerns about the spouse's ability or other issues that could come into play after I'm dead, well maybe I want to create a trust, right? I mean we often think of this as the three C's. There's issues of capacity, there's issues of creditors, and there's issues of control. If I'm worried that my surviving spouse might lack the capacity to be able to manage the assets, then maybe I prefer that the assets be placed into a trust for the benefit of my spouse so that I can pick somebody or some entity with which I'm comfortable to make all the right financial decisions. Secondly, if I'm worried that my surviving spouse may have some creditors and if I just give the assets outright or if I make them wholly accessible to the spouse in the living trust, that might mean that the creditors of that spouse could reach in and get those assets. Well then maybe I want to create a trust over which my spouse doesn't have that ready access. My spouse can be a beneficiary but unless distributions are made to my spouse, creditors can't get at those assets. Or alternatively, maybe I'm just a control freak, right? I mean think about the second marriage situation where one spouse comes in with their own kids, another spouse comes in with their own kids. It's like Mike and Carol Brady out of the Brady Bunch, right? Any of you old enough to remember the Brady Bunch where Mike comes into the marriage with his three boys and Carol comes into the marriage with her three girls? Well one night Mike is drawing architecture plans down in his den and he thinks to himself, you know, if I just leave everything outright to my wife Carol, I'm worried that she's going to use all of my money to fix Cindy's lisp. And while I like my stepdaughter and everything, I'm kind of worried that she might favor her daughters over my sons. So the only way that I can make sure that my sons can still have some wealth, I mean, you know, Greg, my oldest, I'm not so worried about him because I half suspect he's sleeping with my wife Carol. Google that if you don't get that joke. My youngest, Bobby, he's going to work a long time. He can make the money. But Peter, my middle son Peter, have you seen the poor kid? Looks like he got hit by a bus three weeks ago. He can't say pork chops and applesauce without his voice totally cracking up. The only way this kid's not going to get routinely left swiped on Tinder or Grindr, I don't care, is if he can use a dollar sign as his profile pic, right? I have to make sure that some of my wealth is going to the benefit of my son Peter. Well how can I do that? If I give the money outright, Carol might not spend it on him or make sure that he gets it. But if I place it into a trust that Carol can have access to but she can't control, I can make sure that when Carol dies, whatever's still inside of that trust can go to the benefit of my son Peter and my other sons as well. So because I want control, I might choose a trust. And think, why is it called a trust? Because it supplies what's missing in the relationship. If you trust your spouse to provide for your children, you don't need a trust. But if you don't exactly trust that your spouse is going to look out for your beneficiaries or do things the way that you've agreed, you have this vehicle called trust. It supplies the missing link in the relationship. Well in those situations, I'll still use a trust. But if I don't have one of those situations, I don't have to have a trust. That's the beauty of planning in bucket number one now. We don't have to force a trust on clients who otherwise wouldn't have a need for it and wouldn't be especially comfortable having the assets inside of the trust. It can be too much complexity for some clients and they don't really need it if they don't want it sitting over there in bucket number one. Now the second part of our planning template for the married couples, regardless of what the couples have to say about the trust or no trust, we absolutely positively have to make sure that all of the assets in that trust get a step up in basis. The failure to get a step up in basis for everything on the death of the surviving spouse legally creates a new class of beneficiary called plaintiff because they're going to wonder why if your sole job was to make sure that we were doing tax planning here for these clients, why didn't you make sure you got that step up in basis when you could? The good news is we've got three different ways that we can make sure everything, not just the stuff that the spouse owns outright, but that everything gets a step up in basis. First of all, if we decided to just make an outright gift of everything to the surviving spouse so that the spouse dies as the legal owner of all the property, or if alternatively we draft our living trust so that when the first spouse dies, none of it is irrevocable, so all of it is revocable and thus owned by the surviving spouse, well then automatically because the spouse owns those assets, when that surviving spouse dies, those assets get a step up in basis. So if I'm very comfortable with the spouse having outright control during life, I can rest easy because automatically I know I'm going to get the step up in basis for income tax purposes. But what if I want to use a trust because I'm concerned about capacity, I'm concerned about creditors, I'm concerned about control? Does that mean I can't get a step up? No. In fact, I think we've settled on there's a couple of different ways that we can make sure we still get the step up in basis. The first of these is to give the surviving spouse somewhere in that trust document, perhaps buried deep in the boilerplate provisions of the trust, but a provision that gives the surviving spouse a testamentary power to appoint all or any portion of the trust corpus to the creditors of the surviving spouse's estate. We'll say that again. A testamentary power, that means a power that is exercisable at depth under a will to be able to designate which of the surviving spouse's creditors, if any, can get all or some portion of the trust assets. Well, let's back up and think this through. Who are the creditors of the surviving spouse's estate? Macy's? Am I overshooting? Tarjay? Jacques Pinet? What are the odds that a surviving spouse is going to execute a power to give trust assets to the creditors of that spouse's estate? Well, it's got to be infinitesimally small, right? Good. That's exactly what we want. You see, we want the spouse to die holding this power. We just don't want the spouse to exercise the power. Now, if you're wondering what are the technical gymnastics here, well, let's talk about a couple of different Internal Revenue Code provisions and explain why we're doing this and what's at stake. This is the hot erotic talk portion of the talk because now we're moving into code sections. Woo-hoo! Stop and have a cigarette if you have to and come back and hit play again. We'll still be here waiting for you if you need to, but brace yourselves. This is going to get steamy. All right. We start under Section 2041b of the Internal Revenue Code. 2041b is the definition of what is a general power of appointment and 2041b says you have a general power of appointment over property. If you have a power that you can appoint property in favor of yourself, your estate, your creditors, or the creditors of your estate. Well, if I give the spouse a power to appoint the property to the spouse, many spice are going to take advantage of that power. Likewise, if I give a power to appoint to the estate, that's effectively saying, hey, you choose who gets the remainder when you die rather than letting me choose. Well, again, if the whole reason we're creating a trust is because we don't want a spouse to have that kind of power, I don't want to use that. But to the creditors of the spouse's estate, that's the one that seems least likely to be exercised, right? But now go back to the code. Under Section 2041a, if you die holding a general power of appointment over property, then that property is included in your gross estate for federal estate tax purposes. Because as far as the estate tax is concerned, you're still the deemed owner of that property because you have the power to use that property for your benefit by appointing it to the creditors of your estate, for example. Well, right now you might be thinking, well, Sam, hold on here. Do we have a bad internet connection or did I miss a part here in this virtual presentation? Are you really saying that we want to cause gross estate inclusion here? Well, remember we're talking about a bucket one married couple where the combined estate is not more than the surviving spouse's exclusion amount. So by definition, this is not a married couple where you will pay federal estate tax, even if everything is included in the surviving spouse's gross estate. So why are we doing gross estate inclusion? Here's where it gets good. Under section 1014, 1014 is the code provision that talks about the step-up in basis. Section 1014 B9, it's an easy citation to remember. It's not malignant, it's B9. Under section 1014 B9, you get a step-up in basis for any property included in your gross estate for estate tax purposes, even if you don't pay estate tax on it. Put differently, gross estate inclusion gives you an income tax step-up in basis. Well, hello. If I can cause gross estate inclusion of all of the trust assets and the surviving spouse's gross estate, I'm not going to pay any estate tax because again, this is a bucket one married couple. But causing gross estate inclusion is my ticket to getting a step-up in basis for income tax purposes. And moila, as they taught me on the one day of French before I transferred to Spanish, I've got myself a nice step-up in basis, even though I was using an irrevocable trust. Now, the problem with this particular approach, right, is that some of your clients are going to say, I'm still not very comfortable with even giving my spouse a power exercisable only at death and even then only in favor of the creditors of the estate, right? And this is oftentimes where your client's imagination can start to run wild because they start to say, you know, my biggest concern is that my spouse is going to go out there and find somebody who is better than me, someone who's going to bring to the table all of the things that I never had, hair, discernible abs, right? I mean, he doesn't have to be all Channing Tatum and everything, but at least he's got to have enough of a body that he doesn't feel like he has to wear a sweater vest just to give a speech because he doesn't want people looking at that flabby mole infested pasty white stretch mark riddled thing that flaps in a breeze whenever we hang out at a swimming pool at a friend's house, right? Someone who's handy around the house and does things around the house without having to be asked to do them because he's naturally in tune to the needs of the household, right? If you're worried, I'm worried that my spouse is going to go find this better 2.0 version of me out there and then I know what's going to happen. Oh Fabio over there. He's going to make a loan to my spouse and then my spouse is going to execute a promissory note in favor of Fabio and then you know what's going to happen when my spouse is dying of ecstasy in the arms of Fabio. He will be lovingly guiding her hand as she executes the document by which she appoints all of the property inside of this trust that I created to Fabio as a creditor of her estate to repay the loan that he owes to her. Yeah. Thanks, but no thanks. I'm not going to do that. If that's your client's biggest concern, well one there's marriage therapy and two you might remind the kid you might remind the client. This is why you have kids, right? I mean kids are useful because they are the watchdog of the estate, right? Who is the taker in default under this trust? If the spouse does not exercise that power of appointment. Well, it's going to be the children because the trust is going to say to the extent there's anything left inside this trust and it hasn't been appointed to the spouse's creditors. Then it's going to go to the kids. Well when the kids see that their inheritance, right? They don't see it as your property. They see it as their inheritance when their inheritance is going to go over to the boy toy who's what six months older than they are. Oh, they're going to run not walk to the court of applicable jurisdiction with every snowball in their arsenal that they can think of to try to get the transaction set aside. Lack of bona fide substance over form, sham transaction. They'll say step transaction that doesn't apply but it sounds good. They'll throw everything that they can to convince the court do what the grantor intended when the trust was created and let don't let that happen. This is why you have kids let them do their job. Can we be honest? It's just us on a webcast here. Kids are their most useful nine months before they're born and nine months after you die. It's just the in-between part that you're trying to get through on a day-to-day basis, but keep your eyes on the prize. They're going to be the guardians of your estate. So let them have that job this power of appointment thing can work. All right, if I can't convince you the power of appointment doesn't work. How about the good old-fashioned Q-tip trust? Remember when Q-tip trusts were a big thing back in the day Q-tip trusts were the only way that we could create a trust that could qualify for the marital deduction while still retaining some degree of control over who would get the remainder. Under section 2044 of the code the assets of a Q-tip trust are included in the surviving spouse's gross estate. At the time 2044 was created. That was the price that we paid in order to be able to get a marital deduction up front for all of the assets going in to that Q-tip trust. Well now that 2044 gross estate inclusion that becomes our ticket to a step up in basis under section 1014 B9. Thanks to 1014 B9. Remember all we have to have is gross estate inclusion and we get a step up in basis. So if your client doesn't want to do a power of appointment for whatever reason the good old-fashioned Q-tip trust works very well in this regard. In fact, many individuals are using Q-tip trust not because they want a marital deduction at the front end for transfer tax purposes. Again, these are bucket one couples. Transfer tax is not an issue. They're doing Q-tip trust because they want that step up in basis for everything inside of that trust when the surviving spouse dies. It's a great technique. It can work very well. So the point is we got lots of ways in which we can make sure there's that complete step up in basis on the death of the surviving spouse. Okay, last part of the planning template in bucket number one is entitled protective portability election. Remember how we talked about how you have to make a timely portability election in order to take the unused exclusion of one spouse and port it over to the other? Well, we want to do that here. And I know you're thinking, well Sam, you've already been stressing for so long now about how this is bucket one and there is no transfer tax. So why do you care about giving the surviving spouse an extra exclusion when the surviving spouse already has a big enough exclusion to be able to cover everything? And I guess I make the recommendation for the same reason why I carry an umbrella because then that way I make sure it never rains, right? I mean, the one time you don't do a portability election for a bucket one married couple, you have reduced the surviving spouse's odds of hitting Powerball from 1 in 400 million to about 1 in 3, right? I mean, knowing your luck, isn't the surviving spouse suddenly going to come into this huge surge in wealth and the beneficiaries are going to say, gosh, it sure would have been nice to have the other parents exclusion too, but it got wasted because you couldn't be bothered to make a portability election. So I just know how karma works and because of that, if I make sure I do the portability election, I ensure that these clients stay of modest means and I'll never have to worry about it. But in the very unlikely event that they suddenly have a taxable estate again, at least I've preserved that exclusion and if I can port over 11 million dollars, that means it's 4.4 million less risk in a state tax that could be due somewhere down the road. So for that peace of mind, I'll go ahead and do that portability election. All right, let's talk about planning for bucket two clients. Remember, these are the clients that have more than 11.58 million in 2020 dollars, but not more than two basic exclusion amounts, not more than 23.16 million. So let's use 15 million as the size of our married couple here. Again, we have to utilize both spouses exclusion because one spouse alone does not have enough exclusion to be able to cover the entire 15 million dollar estate. And generally speaking, we're going to have two options here, right? We have the old-fashioned credit shelter trust that we talked about before, or we have the portability election. When portability first came out, I and a bunch of other commentators sort of looked at it and said, well, this is nice, but most people are still going to use the old-fashioned credit shelter trust and they're not really going to use the portability election. Portability is just a safety net for people who never bothered to go see an estate planning advisor before they die. And that's maybe somewhat still true, but the fact is now that we've had it for a while, we're able to identify a handful of situations in which portability is not just a backup. In fact, it's better than a credit shelter trust. So here's the thing. Sometimes a credit shelter trust is better than a portability election, but sometimes portability is better than a credit shelter trust. Let's walk through this very basically. When is the credit shelter trust better? Well, if I'm expecting that between the death of the first spouse and the death of the surviving spouse, assets are going to significantly appreciate that I'm better off with a credit shelter trust because if I can take $11 million and stuff it into one of these credit shelter trusts, allocate the first spouse's exclusion to that. As we talked about before, that $11 million can grow to $15, $20, $30 million. And when the surviving spouse dies, we're not going to pay a dime of transfer tax. On the other hand, if I just give those assets outright to the surviving spouse or don't have a credit shelter trust and I just use the portability election, well, then what ports over is an $11 million exclusion. But if the $11 million worth of assets grows and grows and grows, here's the thing. The DSU amount, the unused exclusion amount, does not grow for inflation. It does not grow to match the value of the assets. It stays static. So if I'm expecting a very rapid appreciation in assets to the point where they're in danger of becoming a bucket three couple by the time the surviving spouse dies, well, then I'll wish that I'd had the credit shelter trust because whatever I can grow that $11 million to, I don't pay any tax on. Whereas if I just leave $11 million of exclusion, it stays at $11. Sure, the spouse's own exclusion goes up, but that unused exclusion amount stays fixed. So I'll want to use a credit shelter trust there. The other situation where a credit shelter trust works better is if I'm trying to make use of the generation skipping transfer tax exemption. We haven't talked much about generation skipping transfer tax here. And that's because portability is only available for estate and gift taxes. It's not a generation skipping transfer tax device. You can't port over unused GST exemption to a surviving spouse. So if your couple is engaged in what we often call dynasty trust planning, where they're providing more for grandchildren and more remote descendants than they are for children, because they're trying to utilize that generation skipping transfer tax exemption, and portability isn't going to work very well, you need the credit shelter trust in order to be able to allocate the first spouse's unused GST exemption to those assets. But there's also a handful of situations in which portability is better. Number one, some assets don't play very well in a credit shelter trust, you hate to put a home in a credit shelter trust, because you lose the benefit of the $250,000 exclusion of capital gain on a subsequent sale of the house while the surviving spouse is alive. You hate to put an IRA or a retirement plan in a credit shelter trust because those beneficiaries have a very short five year payout window. Whereas if I can name the spouse as the beneficiary of that retirement plan or IRA, I can still even under current law get a lifetime stretch out. So I'm deferring the income tax, and I'm paying year to year less because I'm not squishing all of that income into a shorter period, thus squirting it up into the higher brackets. That was more graphic metaphor than what I intended. But you get the point there, right? So if I can use portability, I can just name the surviving spouse as the beneficiary, I still get my income tax stretch out, I still get my income tax deferral. But I'm not losing out because it's not like I'm wasting the exemption, the exemption amount can carry over. So when the bulk of the estate assets are assets that don't play well in a credit shelter trust, portability is a great alternative. Portability also works really well if I'm expecting that the surviving spouse isn't going to live very long. A credit shelter trust works when I've got time to let those assets cook inside of that trust. But if the spouse is just going to turn right around and die immediately after the first spouse dies, I don't get any cook time. And if I don't get any cook time, I've introduced all this complexity of the credit shelter trust and it didn't work out. So in those cases, I might prefer the portability election. The other situation where portability makes more sense, remember how we've talked about modernly, basis step up matters more than transfer tax. You know, run the numbers because here's the thing, assets inside of a credit shelter trust don't get a step up in basis when the surviving spouse dies. When you're choosing a credit shelter trust, it's because you're choosing that the transfer tax is the bigger threat than the income tax. But if you run the numbers and you go to find out that the income tax is the thing that matters more, well, then you'd rather have the portability election because if I can get those assets outright to the spouse or into a trust that is deemed owned by the spouse and not into a credit shelter trust, those assets will get a step up in basis when the surviving spouse dies. So here's the thing, depending upon a few variables, how old, when the first client will die, how much longer the surviving spouse will live, what kind of assets they'll have when the first spouse dies, what the income tax laws are like at that time, and what the transfer tax laws are like at that time. If my clients can confidently answer those five questions, well, then I can tell them which of those tools to use. But here's the other thing. If my clients in pretty good health can confidently answer those five questions, they may not lack the capacity to sign documents, right? Because nobody knows when they're going to die. Nobody knows how much longer the surviving spouse is going to live. And nobody can predict what the income and transfer tax laws are going to be like at any point in the future. We're lucky if we even know what they are today, right? So how can I build a plan here in bucket number two, that makes sure that they can use whichever one is the right choice, but not force them into an early decision when we don't know the answer to all that information? Well, here's our basic template. Start by having the same conversation with them that you would have with bucket one clients. If transfer tax was not a thing, would you prefer just to give everything outright to the spouse? Or if you're using a living trust, would you prefer that the trust remain wholly revocable? Or do you want some portion to be in an irrevocable trust? If the clients say that they're perfectly comfortable with an outright gift or with keeping a living trust wholly revocable, then our plan is this. We'll go ahead and leave everything outright to the surviving spouse or have the first spouse's trust dump into the survivor's trust. But then have a provision that says that to the extent the surviving spouse disclaims that gift, the disclaimed assets pour over into a credit shelter trust. You see what I'm doing there? I can wait until the death of the first spouse before making the decision between portability or credit shelter trust. And at that point, I'll already know when the first spouse dies and I'll have better information as to how much longer the surviving spouse is going to live and what the income and transfer tax laws are going to look like over the short term. Based on that, I can make the right decision. And if I decide that a credit shelter trust is the right way to go, then I can have the surviving spouse disclaim the gift and automatically by operation of this instrument that was drafted many years ago, the assets pour over into a credit shelter trust and there you go. Alternatively, if I decide that portability is the right way to go, then I don't do a disclaimer at all. Have the spouse eagerly accept the gift. I file a estate tax return after the death of the first spouse showing everything going to the surviving spouse. That gives us a full marital deduction. Taxable estate is zero and the unused exclusion ports over automatically to the spouse. The nice thing about this is we don't have to choose between credit shelter trust or portability until after the first spouse dies and we have better information. On the other hand, if the clients decide, oh, we're definitely doing a trust, then the answer here is to do something called a Clayton Q-tip. A Clayton Q-tip is just like a regular Q-tip trust, all of the income payable, at least annually to the spouse. Then when the spouse dies, it goes however the first spouse chooses with just one proviso and it says that to the extent the executor of the deceased spouse's estate chooses unelected assets, assets which do not find their way into that Clayton Q-tip will automatically pour over into a credit shelter trust. Now, the Clayton case is a case out of the Fifth Circuit from many years ago that said, well, that still works. You can do that with a Q-tip, but the real advantage of it is not because we're still getting a marital deduction at the front end. It's because again, we're giving flexibility. If we decide a credit shelter trust is the way to go, then we don't make a Q-tip election on $11.58 million worth of assets and automatically those unelected assets go into a credit shelter trust. But if we decide portability is the way to go, then we put everything into the Q-tip trust, we make a Q-tip election on everything going inside of that trust, and there you go. We have a full marital deduction, taxable estate is zero, and we can pour over the unused exclusion. So the simple point here is that I can get all kinds of flexibility, and the nice part about this plan is I really don't care what happens to the exemption amount. I really don't care what happens to income tax laws. As long as they're still comfortable with the spouse being a beneficiary and then letting the first spouse decide what happens to that wealth afterward, this plan works regardless of the estate and income tax laws at the time of death because we can always choose the plan that's optimal at that time. Pretty sweet deal, right? Bucket number three, as I indicated before, nothing's really changed here. You're going to continue to use the same strategies that you always were. So valuation, discount planning, doing things like the short-term GRATs or the long-term GRATs or the installment sales to defective grantor trust using family limited partnerships and LLCs. All of those strategies that you've been doing for very high net worth individuals, you'll continue to do again. Charitable planning continues to have a very big role here. You can get some tremendous tax advantages while at the same time doing some very meaningful philanthropic work that can really change lives. All of that that you were doing before you're going to continue doing. About the only thing that's different now is we still want to make sure that we're not transferring assets in a closely held business to kids or other family members who aren't going to materially participate because if you give S-Corporation stock or a partnership interest to a kid who's not going to materially participate all of that flow-through income is going to be subject to the 3.8% net investment income surcharge because if the kid doesn't materially participate, it's passive income and therefore potentially subject to that 3.8%. So if I want to benefit a kid who's not going to actively participate in the business, well, then I do it through a grantor trust for the benefit of that child. The income can still be taxed to me. I'm actively involved in the business. The 3.8% surcharge isn't going to apply and I can still be providing for that child. So this is how we're doing planning. I think now for married couples. I hope this session was helpful in outlining the major tax considerations that are in play at least while we have the laws as we have them and probably for the foreseeable future. Thanks very much for your attention.

estate planning

married couples

contemporary paradigms

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wealth transfer taxes

high net worth

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compromise in marriage