Estate Planning Advisor The Documents That Every 18-year-old (Or Any - - PDF document

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Estate Planning Advisor

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2 The Three Keys to Successful Business Succession Planning 3 Cross-Border Estate Planning for Canadians Residing in the United States 4 The Basics of Charitable Remainder Trusts—Part Two As your “adult” children are heading off to college or your young adult children are graduating from college, in addition to all the paperwork that they (and you!) are filling out, they should be signing some estate planning documents that plan for incapacity. Once your children reach age 18, you no longer have any legal authority to make financial and healthcare decisions for them (in some cases this occurs at age 15)—even though you are providing for them financially. There are three basic documents that every adult should have: a durable financial power of attorney, a healthcare power of attorney (or the person’s state’s version of that form), and a HIPAA waiver. A durable financial power of attorney allows you to appoint a person to manage your financial affairs if you become incapacitated. If your 18-year-

• ld son is in an accident and needs

temporary help managing his financial affairs because he is incapacitated, you do not have the legal right to take any actions on his behalf. You would have to petition the court to be appointed by a judge as the person who has the legal authority to manage his finances. This can be a time-consuming and costly process. With a durable financial power of attorney, the court process can be avoided. The power of attorney sometimes requires a doctor’s letter stating that your son is incapacitated. A durable healthcare power of attorney allows you to appoint a person to make healthcare decisions for you if you cannot communicate with your

• doctors. The agent can consent to

treatments for you or make decisions

• n where a person who does not

have capacity lives. Oregon’s form of healthcare power of attorney is called an “advance directive.” It has two purposes: to appoint someone to make healthcare decisions and to provide instruction on tube feeding and life

• support. Your young adult may find

it difficult to provide instruction on tube feeding and life support. But the advance directive should still be signed to appoint a healthcare representative. The other document that should be signed is a HIPAA waiver, which authorizes healthcare providers to release medical information to a person named in the financial power

• f attorney or the healthcare power of

attorney. It can be difficult to think about your children’s being in an accident or having a health issue that makes them legally incapacitated. But many of our clients have needed these documents to help their young adult children in many situations—including during international travel. Without these documents in place, it can be more difficult for parents to help their sons and daughters. It is like insurance: you hope you never have to use it, but it is there if you need it.

The Documents That Every 18-year-old (Or Any Adult, For That Matter!) Should Have In Place

by June Wiyrick Flores

june.wiyrickflores@millernash.com 503.205.2408

The Three Keys to Successful Business Succession Planning

Estate Planning Advisor | miller nash graham & dunn llp | 2 As baby boomers approach retirement age, the question begs to be asked: What happens to the businesses they own and operate? Studies suggest that as many as two-thirds of all small and midsize businesses are owned by boomers who plan to exit their companies within the next decade. Yet fewer than one in five is prepared and has a written succession or exit

• plan. While retirement typically is

the impetus for a business owner’s exit,

• ther

unforeseen events

• r

circumstances—such as an illness

• r an accident—could precipitate a
• departure. In any instance, a business
• wner generally wants to maximize

the organization’s value, minimize this tax burden, and contain risk. Three important steps can help accomplish that.

Start Early

A succession plan should ideally be a part of a business plan. If it’s not, then a plan should be in place no fewer than three to five years before a planned exit from the business. Begin by considering a series of questions about future needs and desires, including:

• When do you want to exit?
• How much money will you need to

exit?

• To whom do you want to transfer

the business?

• How much is your business really

worth today?

• Do you have a strategy to increase

the value of your business between now and your target exit date?

• Do you know how to structure a sale
• r transfer to a family member or

key employees to reap the greatest benefit?

• Do you have contingency plans to

enable your business to continue and provide for your family if you are unable to do so yourself? Once you know the answers to those questions—or at least to most of them— you’re well on your way to making a successful exit. If you’re having trouble coming up with the answers, however, you could find yourself making a hasty exit without gaining the maximum value from your years of dedication.

Consult an Adviser

The tried-and-true techniques that brought you business success—such as learning from mistakes, developing a strategy based on experience, and simple trial and error—do not apply when developing an exit strategy. You’ll sell or transfer your business only once, so it’s important to make the most of the opportunity. That’s why you should consider consulting an adviser who specializes in business succession

• planning. Advisers have the experience

that others don’t; they draw on what they have seen and learned while

• bserving the failures and successes
• f other business owners in similar
• situations. An experienced adviser can

help a business owner develop a plan that makes the most of the transition and help avoid costly mistakes.

Put It in Writing

As with any other business plan or deal, a succession plan needs to be put in writing to ensure that it is carried out as desired. The plan should include specific recommendations for the sale or transfer of the business, such as the desired buyer or receiver of the business, as well as the desired structure of the transaction. Ensure that your exit plan includes a checklist that provides a step-by-step plan of action to assist with implementation and monitoring. To keep your plan

• n course, the checklist should detail

each action that must be taken, the individual or entity responsible, and a due date for the action item. Owning and operating a business requires a significant investment of time and

• energy. Protect the investment, and

take the necessary steps to optimize your exit and leave the business—and its continuation—on your own terms. A version of this article was previously published by The Daily Journal of Commerce.

by William S. Manne

bill.manne@millernash.com 503.205.2584

“The tried-and-true techniques that brought you business success—such as learning from mistakes, developing a strategy based on experience, and simple trial and error—do not apply when developing an exit

• strategy. ”

Estate Planning Advisor | miller nash graham & dunn llp | 3

Introduction

Few countries enjoy the close, friendly relationship enjoyed by Canada and the United States. We seem so alike that Canadians often move to the United States to work, play, and invest, but often without giving a second thought to the income, gift, and estate tax implications of their moves. What should Canadian citizens residing in the United States know about cross- border estate planning?

The assets of Canadian citizens residing in the United States could be subject to double taxation

Canada taxes the gain on citizens’ capital assets at the time of the gift or death, while the United States taxes the fair market value of citizens’ and residents’ assets at the time of the gift

• r upon death. For Canadian citizens

residing in the United States, these laws could result in double taxation when Canadian capital gains taxes and American estate taxes are due on the same assets at the time of gifting

• r at death, if not for a treaty between

Canada and the United States. The Canada-U.S. Income Tax Treaty may offer relief for double taxation The Canada-U.S. Income Tax Treaty is the first tax treaty covering U.S. estate tax between the United States and a country that does not impose an estate or inheritance tax. The Treaty tax credits include:

• Unified credit available up to

$5,450,000 to U.S. citizens and residents, but available to Canadian citizens in proportion to U.S. assets

• nly. For example, if 50 percent of

a Canadian’s assets were located in the United States, only 50 percent

• f the credit would be available

($2,725,000).

• Marital estate tax credit for marital

transfers to Canadian citizens equal to the lesser of the prorated unified credit ($13,000 under U.S. law or $5,450,000 under the Treaty) and the assessed estate tax that would

• therwise be imposed on the mari-

tal transfer. The decedent must be either a U.S. citizen or a res- ident of the United States or Canada, the surviving spouse must be a resident of either country, and if both spouses were U.S. residents,

• ne or both must be Canadian citi-

zens.

• Foreign tax credit to be claimed by

the executor of the estate and used for U.S. federal and state estate tax up to the amount imposed under Canadian law.

• Relief for estates worth less than

$1.2 million excluding U.S. real property held directly or indirectly by Canadians.

• Registered

retirement savings plans and registered retirement income fund accounts that are treated by the United States as taxable brokerage accounts and by Canada as qualified retire- ment plans. Canadians may elect deferral of undistributed funds to avoid income tax on these accounts while residing in the United States. Canadians who take income out of these accounts while residing in the United States will be taxed on that income. Marital deductions and joint ownership with rights of survivorship depend on which spouse is a U.S. citizen Any U.S. assets held jointly with rights of survivorship are included in the estate at full value when the deceased joint owner is not a U.S. citizen (if the joint owners are U.S. citizens, only the portion of the deceased joint owner is includable in the taxable estate of the deceased joint

• wner). Additionally, unlimited marital

deductions are allowed for U.S. citizen spouses, regardless of residence, but

Cross-Border Estate Planning for Canadians Residing in the United States

by Kay Abramowitz

kay.abramowitz@millernash.com 503.205.2336

Estate Planning Advisor | miller nash graham & dunn llp | 3

(continued on page 5)

Estate Planning Advisor | miller nash graham & dunn llp | 4

by A. Paul Firuz

paul.firuz@millernash.com 206.777.7443

The Basics of Charitable Remainder Trusts—Part Two

This article is the second piece of a two-part installment on Charitable Remainder Trusts (“CRTs”). CRTs are irrevocable, split-interest trusts that are ideal for certain philanthropic clients, and are increasingly popular in this climate of ever-rising real estate values. The previous segment covered general principles applicable to all or most CRTs; below in this second installment, we will review many of the most popular types of CRTs and explore their distinguishing characteristics.

Types of CRTs

There are two core types of CRTs: the Charitable Remainder Annuity Trust (“CRAT”), which pays a fixed sum based

• n the initial fair market value of trust

assets, and the Charitable Remainder Unitrust (“CRUT”), which pays a fixed percentage based on the changing value of trust assets from year to year. Both trusts require distributions to be made to noncharitable beneficiaries at least annually. Both trusts also require that the value of the remainder interest at the time the CRT is created be at least 10 percent of the initial fair market value of the property contributed. The difference between the trusts lies in the character of these distributions: an annuity trust can be relied on to pay the same amount per period throughout the term of the trust, while a unitrust’s distributions will fluctuate based on the trust’s performance. The distinctions between annuity trusts and unitrusts may help clients achieve different goals. The annuity trust’s static and dependable distributions make CRATs a better

• ption for assets that are difficult or

expensive to value, such as stock in a closely held corporation. A unitrust would require revaluing those assets every year in order to determine distribution amounts, while a CRAT, because its distribution scheme is based

• n the initial value of trust assets, does

not require annual valuations. On the flip side, clients looking to capitalize

• n increases in the value of trust assets

will benefit from the variable unitrust approach, which will yield higher distributions as the annual fair market value of the trust’s assets increases.

CRATs

A CRAT distributes a specific amount each year, and the amount to be distributed is based on the initial fair market value of all trust property. One

• f the major advantages of the CRAT

is that its distributions are static: the donor knows exactly how much the trust will distribute each year during the term of the trust, and this amount is fixed in the trust agreement. The amount to be distributed must be not less than 5 percent nor greater than 50 percent of the fair market value of the trust’s initial assets. No additional assets may be added to a CRAT once it is created and funded. Because a CRAT’s required distribution is fixed upon creation, the value of these distributions will be eroded over time by deflation and will not increase with the assets’ appreciation.

CRUTs

CRUTs are unitrusts, meaning that the distribution is a fixed percentage

• f the net fair market value of the

trust’s assets valued annually. The fixed percentage to be distributed must be not less than 5 percent nor greater than 50 percent of the trust’s assets in a given year, and a CRUT’s distributions will vary with the fair market value of the trust’s assets year by year. Assets must be revalued annually to determine the distribution amount, and if assets appreciate, the required distribution increases; conversely, if assets depreciate, the required distribution decreases.

NIMCRUTs

Net Income with Makeup Charitable Remainder Unitrusts (“NIMCRUTs”) differ from other CRTs in that they do not allow invasion of the trust’s principal Estate Planning Advisor | miller nash graham & dunn llp | 4

(continued on page 5)

Estate Planning Advisor | miller nash llp | 7 Estate Planning Advisor | miller nash graham & dunn llp | 5 to meet distribution requirements. Until years in which sufficient income exists, “makeup accounts” are maintained for beneficiaries, with the idea that they will eventually receive the income that would have been due to them in the lean years. Thus, NIMCRUTs are a good option when a donor wants a CRT that will not make distributions in years when no income is earned, and also wants deficiencies The Basics of Charitable Remainder Trusts—Part Two | Continued from page 4 there is no marital deduction from the gross estate if the surviving spouse is a non-U.S. citizen, unless the property is held in a qualified domestic trust. Canadian citizens residing in the United States must pay U.S. gift taxes Because the Treaty does not apply to lifetime gifts, gift taxes for Canadian citizens living in the United States or

• wning property in the United States

are based on U.S. and state law. There are three exemptions: (1) an unlimited marital deduction for gifts to a U.S. citizen spouse; (2) an annual exclusion in income distribution from past years to be made up in later years.

Flip CRUTs

A Flip CRUT can in some cases

• ffer the best of both a CRUT and a

NIMCRUT, and is a good option for a donor intending to sell property through a CRT. Using a straight CRUT risks that the trust will not sell Cross-Border Estate Planning for Canadians Residing in the United States | Continued from page 3

• f up to $147,000 to non-U.S. citizen

spouses (but no marital deduction); and (3) an annual exclusion of up to $14,000 for any other donees. Canadian citizens residing in Oregon must pay state estate tax Oregon imposes an estate tax on resident decedents and nonresident decedents with interest in real property located in Oregon or with tangible personal property located in Oregon. For Oregon residents, the tax is based

• n the gross estate multiplied by a

ratio of Oregon assets (not including intangible personal property taxed by another state or country) to gross assets. For non-Oregon residents, the tax is based on the gross estate multiplied by a ratio of Oregon assets (not including any intangible personal property) to gross assets.

Conclusion

Canadian citizens and U.S. citizens married to Canadians residing in the United States should carefully plan their estates to minimize double taxation. the asset and will need to distribute a portion of the asset in order to meet its distribution requirement. A Flip CRUT allows the donor to establish a trust that starts as a NIMCRUT and does not require distribution until income is actually earned, and then converts to a straight CRUT upon either a fixed date

• r a fixed event (e.g., sale of a piece of

property).

Estate Planning Advisor™ is published by Miller Nash Graham & Dunn LLP. This newsletter should not be construed as legal opinion

• n any specific facts or circumstances. The articles are intended for general informational purposes only, and you are urged to

consult a lawyer concerning your own situation and any specific legal questions you may have. To be added to any of our newsletter or event mailing lists or to submit feedback, questions, address changes, and article ideas, contact Client Services at 503.205.2367 or at clientservices@millernash.com.

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