Advice Needed - Estate Planning

[goGators]

Hi all,
I would like to get your advice on our estate planning ideas before we meet with an estate lawyer. In the diagrams below, ACC = Accumulation trust, BP = By Pass/Credit Shelter trust, CRUM = Crummey trust, IRA = tax deferred account, ROTH = Roth IRA account, and TAX = Taxable account (brokerage/bank).

We have 2 daughters and live in Massachusetts which has a $1M estate tax exemption. While we are both living, we would like to put the Annual Gift Tax Exclusion amount to Crummey trusts as shown below. We assume this will help to reduce our state estate tax.



When one of us dies, the deceased person's IRA and Roth will be rolled over to the accounts of the surviving spouse. $1M from the deceased person's taxable account will be placed into a Bypass trust to shelter the $1M state estate tax exemption. If the taxable account has less $1M then some money from the Roth will be used to fund the difference. If the taxable account has more than $1M, then the remainder can be transferred to the surviving spouse account to get the step-up basis



When the 2nd spouse dies, the deceased person IRA will be rolled over to the children's inherited IRAs. A see-thru accumulation trust will be created to receive distribution(s) from the Roth account. Taxable account will be transferred to the children accounts to get the step-up basis.



If both of us die at the same time, then



Do these make sense to you? At the end, there will be at least 1 accumulation trust, 1 by-pass trusts, and 2 crummey trusts which could cause massive headache during tax time. Is there a way to consolidate them into fewer trusts?

Thank you for your time.

Edited: to remove unnecessary bypass trust after death of 2nd spouse as pointed out by @Joey Jo Jo Jr below. Also remove all bypass trusts in the case when both parents die at the same time.

[Joey Jo Jo Jr]

Be prepared for heads to explode over your plan, as even revocable trusts tend to agitate people over here, though I must say I can’t follow the charts and I’m an estate planner. But assuming I followed the narrative, it seems rational to me subject to a couple of possible exceptions.

One, there is no point to funding a bypass trust at the second spouse’s death unless he or she had remarried after the first spouses death, or unless you were leaving everything in further trust regardless and your bypass trust contained the desired terms (I usually call such trust a family trust). But it looks like you planned for outright distributions at the second spouse’s death.

Two, fortunately I don’t have to deal with a state estate tax, but I’d be curious if folks make Crummey gifts just to reduce the state estate tax unless there is also potential federal estate tax exposure. Is there a chance you could move to a state that doesn’t have an estate tax? Would certainly be one less thing to keep up with if you could eliminate the annual gifts and crummey 1041s. Alternately, you might consider setting up a SLAT for benefit of a spouse and make crummey and perhaps even reportable gifts to that. Does not require a 1041 until spouse dies under Fed law, and I would assume Mass law. Note dual SLATs is tricky due to reciprocal trust doctrine.

[Hebell]

Dear OP, my husband and I had the types of setup you describe when we lived in Maryland with its (then) low threshold on estate taxes.

We found that with the change in federal law, and the portability exemption, and when we moved to Florida, that we no longer needed bypass trusts. (Our daughter also was old enough to finally get the contents of her crummy trust. It was kind of nice to see that all play out)

I was surprised to see anyone still needed this type of structure. I had no idea Massachusetts had kept the estate tax threshold so low...

[goGators]

One, there is no point to funding a bypass trust at the second spouse’s death

Thank you! I removed the unnecessary bypass trust in my original post.

Is there a chance you could move to a state that doesn’t have an estate tax?

Yes, that's a possibility. New Hampshire is just 1 hour drive away.

Alternately, you might consider setting up a SLAT for benefit of a spouse and make crummey and perhaps even reportable gifts to that. Does not require a 1041 until spouse dies under Fed law, and I would assume Mass law. Note dual SLATs is tricky due to reciprocal trust doctrine.

This is an excellent suggestion. However, a significant (60%+) portion of our estate is expected to be in the Roth accounts, we will need to weight between the 16% MA estate tax and the loss of tax free growth and distribution of Roth accounts (when the money is withdrawn and put in the SLATs which have a 20% capital gain + 3.8% NIIT and 37% income taxes).

[bsteiner]

Be prepared for heads to explode over your plan, ..., though I must say I can’t follow the charts and I’m an estate planner. But assuming I followed the narrative, it seems rational to me subject to a couple of possible exceptions.

... fortunately I don’t have to deal with a state estate tax, but I’d be curious if folks make Crummey gifts just to reduce the state estate tax unless there is also potential federal estate tax exposure. ...

Most don't, but apparently some do. If it's just for annual exclusion gifts, perhaps the original poster might be willing to make them outright, even though that would throw them into the recipients' estate and expose them to the recipient's creditors and spouses, and give up the opportunity to shift more wealth by having grantor trusts on which he/she would pay the income tax.

... the 16% MA estate tax ...

16% is only on the amount above about $10 million.

[TomatoTomahto]

Be prepared for heads to explode over your plan, ..., though I must say I can’t follow the charts and I’m an estate planner. But assuming I followed the narrative, it seems rational to me subject to a couple of possible exceptions.

... fortunately I don’t have to deal with a state estate tax, but I’d be curious if folks make Crummey gifts just to reduce the state estate tax unless there is also potential federal estate tax exposure. ...

Most don't, but apparently some do. If it's just for annual exclusion gifts, perhaps the original poster might be willing to make them outright, even though that would throw them into the recipients' estate and expose them to the recipient's creditors and spouses, and give up the opportunity to shift more wealth by having grantor trusts on which he/she would pay the income tax.

... the 16% MA estate tax ...

16% is only on the amount above about $10 million.

True, but iirc it starts taxing every dollar above $40,001 once your estate goes over $1M. I love MA, but . . .

[TomatoTomahto]

OP, we are also in MA. I have 4 children, 2 with my DW. I asked our attorney for a flow chart as it gets complicated. As our carpenter discovered, I can understand a picture much better than words; that’s especially the case with legalese.

Fwiw, we have been gifting to all 4 children ($128k) and hope to live long enough to have it move the needle.

[Lee_WSP]

Dealing with a state estate tax is an added complication.

Will your children live and die in Massachussetts? If not, you don't really need to do anything other than children's trusts for your children. Bypass trusts for each other. You can even have your wills/trusts direct that the resulting children's trusts shall be combined on the second death or simultaneous death.

As for your tax deferred accounts, if your children are old enough to be trusted with them, it's a lot easier to simply name them as contingent beneficiaries 50/50.

The Roth can go into the children's trust as there are no tax complications there.

[goGators]

...Will your children live and die in Massachussetts? If not, you don't really need to do anything other than children's trusts for your children. Bypass trusts for each other.

The Roth can go into the children's trust as there are no tax complications there.

Thanks Lee for your advice. Our children might not live in Mass when they grow up. I'm confused about the "Bypass trusts for each other.". Are they for state or federal estate tax exemption? Is SLAT, as suggested by @ Joey Jo Jo Jr above a type of bypass trust? Also, to put Roth into the children's trust then the trust should be see-thru, correct?

[Lee_WSP]

...Will your children live and die in Massachussetts? If not, you don't really need to do anything other than children's trusts for your children. Bypass trusts for each other.

The Roth can go into the children's trust as there are no tax complications there.

Thanks Lee for your advice. Our children might not live in Mass when they grow up. I'm confused about the "Bypass trusts for each other.". Are they for state or federal estate tax exemption? Is SLAT, as suggested by @ Joey Jo Jo Jr above a type of bypass trust? Also, to put Roth into the children's trust then the trust should be see-thru, correct?

You'd want bypass trusts for the first to die to capture the state tax exemption. Other than that, you've more or less got a relatively straightforward estate.

I need to review his comment on slats before I comment.

Edit
I'm not sure that a slat helps avoid the state tax.

[Joey Jo Jo Jr]

...Will your children live and die in Massachussetts? If not, you don't really need to do anything other than children's trusts for your children. Bypass trusts for each other.

The Roth can go into the children's trust as there are no tax complications there.

Thanks Lee for your advice. Our children might not live in Mass when they grow up. I'm confused about the "Bypass trusts for each other.". Are they for state or federal estate tax exemption? Is SLAT, as suggested by @ Joey Jo Jo Jr above a type of bypass trust? Also, to put Roth into the children's trust then the trust should be see-thru, correct?

Your bypass trust would be designed to shelter the MA exemption at the first spouse’s death. It could also be used to do the same with the federal exemption, but with portability of the federal exemption people generally rely on portability and the opportunity to get another basis adjustment at second spouse’s death. However, if second estate will suffer a high enough amount of estate tax then it can make sense to shelter the federal exemption at the first spouse’s death. It’s a bit of a guessing game, so one technique is to fund the bypass trust with the full federal exemption, but make it “QTIPable” so that the trustee can elect the marital deduction on part or all of the bypass trust in order rely on portability if that looks better at the time of death.

I wouldn’t call the SLAT a bypass trust. It’s an irrevocable trust established and funded while both spouse’s are alive and designed to not be included in the taxable estate of either spouse. A popular recent use is for one spouse (or possibly both but note my prior caveat) to go ahead and use their entire lifetime exemption on the assumption that it’s not going to be much smaller for the foreseeable future (while your ~$12M SLAT doubles, triples, etcetera and remains outside of your taxable estate). It also provides creditor protection because not self-settled and qualifies as a grantor trust so no 1041 and you can use your other assets to pay the SLAT’s tax burden. But in your case I was just thinking it could be used to accept Crummey gifts (or larger) if you might prefer that to (or in addition to) gifting to your children or trusts for their benefit.

[Lee_WSP]

...Will your children live and die in Massachussetts? If not, you don't really need to do anything other than children's trusts for your children. Bypass trusts for each other.

The Roth can go into the children's trust as there are no tax complications there.

Thanks Lee for your advice. Our children might not live in Mass when they grow up. I'm confused about the "Bypass trusts for each other.". Are they for state or federal estate tax exemption? Is SLAT, as suggested by @ Joey Jo Jo Jr above a type of bypass trust? Also, to put Roth into the children's trust then the trust should be see-thru, correct?

Your bypass trust would be designed to shelter the MA exemption at the first spouse’s death. It could also be used to do the same with the federal exemption, but with portability of the federal exemption people generally rely on portability and the opportunity to get another basis adjustment at second spouse’s death. However, if second estate will suffer a high enough amount of estate tax then it can make sense to shelter the federal exemption at the first spouse’s death. It’s a bit of a guessing game, so one technique is to fund the bypass trust with the full federal exemption, but make it “QTIPable” so that the trustee can elect the marital deduction on part or all of the bypass trust in order rely on portability if that looks better at the time of death.

I wouldn’t call the SLAT a bypass trust. It’s an irrevocable trust established and funded while both spouse’s are alive and designed to not be included in the taxable estate of either spouse. A popular recent use is for one spouse (or possibly both but note my prior caveat) to go ahead and use their entire lifetime exemption on the assumption that it’s not going to be much smaller for the foreseeable future (while your ~$12M SLAT doubles, triples, etcetera and remains outside of your taxable estate). It also provides creditor protection because not self-settled and qualifies as a grantor trust so no 1041 and you can use your other assets to pay the SLAT’s tax burden. But in your case I was just thinking it could be used to accept Crummey gifts (or larger) if you might prefer that to (or in addition to) gifting to your children or trusts for their benefit.

A slat is very complicated. It's a lot easier to make a crummey trust for your spouse. But IMO it seems like overkill for Massachusetts. But I don't practice there.