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Table of Contents The Estate Planning Checklist

Encyclopedia of Estate Planning I

Chapter 1 The Estate Planning Checklist

Introduction ................................................................................................................................ 1-1

I. Ethical Considerations .......................................................................................................... 1-1

A. Competency of Attorney ................................................................................................... 1-2 B. Competency of Client........................................................................................................ 1-2 C. Conflicts of Interest ........................................................................................................... 1-4 1. Between Spouses .......................................................................................................... 1-4 2. Between Attorney and Client ........................................................................................ 1-5

II. Gathering Information ........................................................................................................ 1-6

A. Personal Information ......................................................................................................... 1-6 B. Assets Owned Directly ...................................................................................................... 1-7 C. Assets Owned Indirectly ................................................................................................... 1-7 . D. Expectancies...................................................................................................................... 1-8 E. Liabilities ........................................................................................................................... 1-8 F. Estate Planning Objectives ................................................................................................ 1-8

III. Interpreting the Information and Formulating a Plan ................................................... 1-9

A. Dispository Scheme and Related Considerations ............................................................. 1-9 1. Who Gets What ............................................................................................................. 1-9 2. Dishinheriting Close Relatives ..................................................................................... 1-9 3. Limitations on Testamentary Gifts ............................................................................. 1-10 4. Choosing Fiduciaries .................................................................................................. 1-11 5. Defining Terms ........................................................................................................... 1-11 6. Allocating the Tax Burden and Expenses ................................................................... 1-12 B. Minimizing Taxes ........................................................................................................... 1-12 C. Avoiding Probate............................................................................................................. 1-13 D. Issues Relating to Incapacity ........................................................................................... 1-13

IV. Implementing the Estate Plan ......................................................................................... 1-14

A. Educating Your Clients ................................................................................................... 1-14 B. Preparing Documents ...................................................................................................... 1-14 C. Conveying Property......................................................................................................... 1-15 D. "Final" Contact with the Client ....................................................................................... 1-15


Encyclopedia of Estate Planning II

Chapter 2 The Will

Introduction ................................................................................................................................ 2-1

I. Intestate Succession ............................................................................................................... 2-2

II. Functions of a Will .............................................................................................................. 2-2

A. Passing of Property ........................................................................................................... 2-2 1. Generally ....................................................................................................................... 2-2 2. Rules of Construction .................................................................................................... 2-3 3. Limitations on Property Controlled by a Will .............................................................. 2.-3 4. Disinheriting .................................................................................................................. 2-4 B. Giving Instructions and Exercising Powers ........................................................................ 2-4 1. Burial Instructions ........................................................................................................ 2-4 2. Nomination of Fiduciaries ........................................................................................... 2-5 3. Exercising of Powers ................................................................................................... 2-5 4. Tax Apportionment and Elections ............................................................................... 2-5 C. Testamentary Trusts ............................................................................................................ 2-5

III. Allowances, Creditors Claims and Elective Share .......................................................... 2-6

A. Allowances ......................................................................................................................... 2-6 B. Creditors’ Claims ................................................................................................................ 2-6 C. Elective Share ...................................................................................................................... 2-7 IV. Implementing the Estate Plan ........................................................................................... 2-7

A. Execution .......................................................................................................................... 2-7 1. §560:2-501 Who May Make a Will .............................................................................. 2-7 2. §560:2-502 Execution ................................................................................................... 2-8 3. §560:2-503 Writings Intended as Wills ......................................................................... 2-8 4. §560:2-504 Self-proved Will ......................................................................................... 2-9 5. §560:2-505 Who May Witness ...................................................................................... 2-9 6. §560:2-506 Choice of Law as to Execution .................................................................. 2-9 B. Revocation ......................................................................................................................... 2-9 1. §560:2-507 Revocation by Writing or by act ................................................................ 2-9 2. §560:2-508 Recovatoin by Homicide or Divorce; No revocation by other changes of circumstances ................................................. 2-10 3. §560:2-509 Revival of Revoked Will ......................................................................... 2-10 C. Incorporation of Other Documents ................................................................................. 2-10 1. §560:2-510 Incorporation by Reference ...................................................................... 2-10 2. §560:2-512 Events of Independent Significance ......................................................... 2-10 3. §560:2-513 Separate Writing Identifying Devise of Tangible Property ..................... 2-11 D. Contracts Concerning Succession (§560:2-514) ............................................................. 2-11 V. After the Will Signing Ceremony ...................................................................................... 2-11 A. Copies.............................................................................................................................. 2-11 B. Delivery of Will on Death of Testator ........................................................................... 2-12


Encyclopedia of Estate Planning III

VI. How Can the Will be Changed ......................................................................................... 2-12 A. By Codicil or by Writing on the Will ............................................................................. 2-12 B. Advantages of Codicils ................................................................................................... 2-12 C. Disadvantages of Codicils ............................................................................................... 2-13 VII. Ptofessional Responsibility and Malpractice ................................................................. 2-14 A. Safekeeping of the Will................................................................................................... 2-14 B. Supervision of the Execution Ceremony ......................................................................... 2-15 C. Must a Lawyer Contact a Client if Circumstances Change ............................................ 2-15 D. Exit or Closing Letters .................................................................................................... 2-16 Conclusion ................................................................................................................................ 2-16


Encyclopedia of Estate Planning IV

Chapter 3 Will Substitutes

Introduction ................................................................................................................................ 3-1

Scope............................................................................................................................................ 3-2

I. Joint Tenancy and Tenancy by the Entirety ........................................................................ 3-2

II. Contractual Arrangements with Beneficiary Designation ............................................... 3-3

A. Life Insurance ................................................................................................................... 3-3 B. Employee Benefit Plans .................................................................................................... 3-4 C. Individual Retirement Plans .............................................................................................. 3-4 D. United States Government Savings Bonds with Payable on Death Designation .............. 3-4 E. Transfer on Death Security Registration ........................................................................... 3-5 .

III. Trusts ................................................................................................................................... 3-6

A. Irrevocable Trusts ............................................................................................................. 3-6 B. Revocable Trusts ............................................................................................................... 3-8 1. Trustee Bank Accounts .............................................................................................. 3-10 2. Custodial Trusts ......................................................................................................... 3-11 C. Land Trusts ...................................................................................................................... 3-12

IV. Gifting ................................................................................................................................ 3-13

A. Deeds ............................................................................................................................... 3-14 B. Gifting Via a Power of Attorney ..................................................................................... 3-15 C. Gifts Causa Mortis .......................................................................................................... 3-16 D. Gifts to Particular Types of Individuals or Institutions................................................... 3-17 1. Children...................................................................................................................... 3-17 2. Charitable Institutions ................................................................................................ 3-17 Conclusion ................................................................................................................................ 3-17


Encyclopedia of Estate Planning V

Chapter 4 Income Taxes

Introduction ................................................................................................................................ 4-1

Scope............................................................................................................................................ 4-1

I. Choice of Entity and Tax Rates ............................................................................................ 4-1

A. Individuals, Estates and Trusts........................................................................................... 4-1 B. Traditional C Corporations................................................................................................. 4-3 C. Partnerships ........................................................................................................................ 4-4 D. S Corporations.................................................................................................................... 4-5 E. Limited Liability Companies and Limited Liability Partnerships ...................................... 4-6 II. Capital Gains and Ordinary Income ................................................................................. 4-6

III. Income Taxation of Trusts and Estates ............................................................................ 4-8

A. Introduction ................................................................................................................... 4-8 B. Computing the Tax ............................................................................................................. 4-8 1. Deductions .................................................................................................................... 4-9 A. Personal Exemption for Trusts and Estates ........................................................................ 4-9 B. Charitable Contributions ................................................................................................... 4-9 C. Losses ................................................................................................................................ 4-9 D. Depreciation, Depletion and Amortization ..................................................................... 4-10 E. ........................................................................................................................................ 4-10 C. Distributable Net Income ................................................................................................. 4-10 D. Simple Trusts Distinguished from Complex Trusts ......................................................... 4-10 1. Taxation of Simple Trusts ........................................................................................... 4-11 2. Taxation of Complex Trusts and Estates .................................................................... 4-12 E. Property Distributions ...................................................................................................... 4-13 1. Basis of Trust and Estate Assets ................................................................................. 4-13 2. In-Kind Distributions .................................................................................................. 4-13 F. 65-Day Rule ...................................................................................................................... 4-14 H. Estimated Taxes ............................................................................................................... 4-14 IV. Income in Respect of a Decendent ("IRD") ................................................................... 4-14

V. Specific Rules Concerning Real Estate Transactions ..................................................... 4-15 A. Sale of Personal Residence .............................................................................................. 4-15 B. Deductibility of Interest Expense ..................................................................................... 4-16 1. Qualified Residential Interest ..................................................................................... 4-16 2. Relationship to Section 280A and the Changing Equation for Second Homes .......... 4-16 C. Depreciation Rules ........................................................................................................... 4-16 1. Residential and Commercial Real Property ................................................................ 4-17 2. Additional Improvements to Real Property ................................................................ 4-17


Encyclopedia of Estate Planning VI

3. Placed in Service ......................................................................................................... 4-17 4. Leaseholds................................................................................................................... 4-18 5. Construction Period Interest ....................................................................................... 4-18 D. Installment Sales .............................................................................................................. 4-18 1. Background ................................................................................................................. 4-18 2. Nondealer Sales of Real Property ............................................................................... 4-19 3. Dealer Sales of Real Property ..................................................................................... 4-19 E. Section 1031 Like-Kind Exchange ................................................................................... 4-20 1. Introduction ................................................................................................................. 4-20 2. Starker and Pre-Regulation Exchanges ...................................................................... 4-21 3. Exchanges Under the Regulations .............................................................................. 4-21 4. Exchange Value .......................................................................................................... 4-23 5. Boot ............................................................................................................................. 4-23 6. Basis ............................................................................................................................ 4-24 F. At-Risk Rules.................................................................................................................... 4-24 G. Passive Losses .................................................................................................................. 4-25 1. Passive Activity .......................................................................................................... 4-25 2. Material Participation.................................................................................................. 4-26 3. Rental Activity ............................................................................................................ 4-27 4. Real Estate Operators .................................................................................................. 4-27 5. How the Limitation Works ......................................................................................... 4-28 6. Special Rule for "Active" Real Estate Rental Losses ................................................. 4-29 7. Treatment of Suspended Passive Activity Losses or Tax Credits .............................. 4-29

H. Qualified Rehabilitation Expenditures ............................................................................. 4-30 I. Low-Income Housing Credits .......................................................................................... 4-30

VI. Alternative Minimum Tax ............................................................................................... 4-31

A. Introduction ...................................................................................................................... 4-31 B. How the AMT Works ....................................................................................................... 4-31

VII. Year-End Tax Planning .................................................................................................. 4-32

A. Accelerating Interest Expense .......................................................................................... 4-32 B. Restructuring Debt ........................................................................................................... 4-32 C. Qualified Residence Interest on Second Home ................................................................ 4-32 D. Active Participation for Rental Properties ....................................................................... 4-33 E. Individual Retirement Accounts ....................................................................................... 4-33 F. Medical Expenses and Other Itemized Deductions .......................................................... 4-33 G. Withholding of Taxes........................................................................................................ 4-33 H. Capital Losses ................................................................................................................... 4-33 I. Generating Investment Home ............................................................................................ 4-33 J. Reviewing the Status of Passive Activities ....................................................................... 4-34 K. Performing an Alternative Minimum Tax Review .......................................................... 4-34 L. Sheltering Passive Income ................................................................................................ 4-34 M. Triggering Suspended Passive Losses .............................................................................. 4-34


Encyclopedia of Estate Planning VII

Chapter 5 Estate and Gift Taxes

I. Introduction ........................................................................................................................... 5-1

A. Scope ................................................................................................................................. 5-1 B. Brief History ...................................................................................................................... 5-2 C. 2001 Act ............................................................................................................................ 5-3 D. State Taxes ........................................................................................................................ 5-5 II. Estate Taxation ..................................................................................................................... 5-6 A. Gross Estate...................................................................................................................... 5-6 1. Section 2033.................................................................................................................. 5-6 2. Section 2034.................................................................................................................. 5-7 3. Section 2035 ................................................................................................................. 5-7 4. Section 2036 ................................................................................................................. 5-8 a. Subsection 2036(a) .............................................................................................. 5-8 b. Subsection 2036(b) ............................................................................................. 5-9 5. Section 2037 Transfers Taking Effect at Death .......................................................... 5-10 6. Section 2038 Revocable Transfers .............................................................................. 5-10 7. Section 2039 Annuities .............................................................................................. 5-10 8. Section 2040 Joint Interests ......................................................................................... 5-11 9. Section 2041 Powers of Appointment ......................................................................... 5-12 10. Section 2042 Proceeds of Life Insurance .................................................................. 5-12 11. Section 2043 Transfers for insufficent Consideration ............................................... 5-12 12. Section 2044 Certain Property for Which Marital Deduction was Previously Taken5-13 13. Section 2031, 2032 and 2032A Valuation ................................................................. 5-13 B. Deductions ....................................................................................................................... 5-13 1. Section 2053 Expenses, Indebtedness, and Taxes ....................................................... 5-13 2. Section 2054 Losses .................................................................................................... 5-14 3. Section 2055 Transfer for Public, Charitable, and Religious Uses ............................. 5-14 4. Section 2056 Bequests, Etc., To Surviving Spouse .................................................... 5-14 5. Section 2056A Qualified Domestic Trusts .................................................................. 5-16 6. Section 2058 State Death Taxes .................................................................................. 5-16 C. Calculating the Estate Tax ............................................................................................... 5-16 D. Credits ............................................................................................................................. 5-17 1. Section 2010 Unified Credit Against Estate Tax ........................................................ 5-17 2. Other Credits ............................................................................................................... 5-17 III. Gift Taxation ...................................................................................................................... 5-17 A. Transfers Subject to Taxation ......................................................................................... 5-18 1. Co-owned Property ...................................................................................................... 5-19 2. General Powers of Appointment ................................................................................. 5-20 3.Crummey Powers ......................................................................................................... 5-20 4. Disclaimers .................................................................................................................. 5-20 5. Marital Deduction ........................................................................................................ 5-21 B. Calculating the Gift Tax Payable .................................................................................... 5-21 1. Section 2503 Annual Gift Tax Exclusion .................................................................... 5-21


Encyclopedia of Estate Planning VIII

a. Subsection 2503(c) ............................................................................................ 5-22 b. Subsection 2503 (e)........................................................................................... 5-22 2. Deductions ................................................................................................................... 5-22 3. Inclusion of Prior Taxable Gifts and Application of Rates ......................................... 5-22 4. The Unified Credit ....................................................................................................... 5-23 5. Gift Splitting ................................................................................................................ 5-23 IV. I.R.C. Chapter 13- Generation Skipping Transfer Taxation ........................................ 5-24 1. Section 2701 ................................................................................................................ 5-24 2. Section 2702 ................................................................................................................ 5-25 3. Section 2703 ................................................................................................................ 5-25 4. Section 2704 ................................................................................................................ 5-26 VIIII. Why Gifts Save Taxes ................................................................................................... 5-26 A. Lifetime Gratuitous Transfer of Wealth ......................................................................... 5-26 1. Annual Exclusion ........................................................................................................ 5-26 2. Post-Gift Appreciation ................................................................................................ 5-26 3. Post-Gift Income ......................................................................................................... 5-27 4. Tax-Free “Transfers” of Taxes .................................................................................... 5-27 5. Use it Before you Lose it. ............................................................................................ 5-28 6. Discounts ..................................................................................................................... 5-28 7. Payments for the use of Gifted Property ..................................................................... 5-28 8. Practical Aspect ........................................................................................................... 5-29 9. Sculpt the Estate .......................................................................................................... 5-29 10. Avoid State Taxes ..................................................................................................... 5-29 11. Calculation Favors Gifts ............................................................................................ 5-29


Encyclopedia of Estate Planning IX

Chapter 6 Generation – Skipping Transfer Taxes

Introduction ................................................................................................................................ 6-1

History of Chapter 13 ................................................................................................................ 6-1

Philosophy Behind Chapter 13 .................................................................................................... 6-2

Purpose of this Chapter ................................................................................................................ 6-2

I. Outline of Chapter 13............................................................................................................. 6-3

A. Effective Date ................................................................................................................... 6-3

B. Definitions ......................................................................................................................... 6-3 1. Transferor ...................................................................................................................... 6-3 2. Skip Person ................................................................................................................... 6-4 3. Generation Assignment ................................................................................................. 6-5 a. Lineal Descendants of Transferor’s Grandparents ................................................... 6-5 b. All Others ................................................................................................................. 6-6 4. Taxable Transfers.......................................................................................................... 6-6 a. Direct Skips .............................................................................................................. 6-6 b. Taxable Terminations .............................................................................................. 6-7 c. Taxable Distributions ............................................................................................... 6-8 C. Statutory Exemption and Exclusions ............................................................................... 6-9 1. The Exemption ......................................................................................................................... 6-9 2. Annual Exclusion and Qualified Transfer Exclusion .............................................................. 6-9 a. The Annual Exclusion ............................................................................................................ 6-10 b. Qualified Transfers ................................................................................................................ 6-11 D. Computing the Generation-Skipping Transfer Tax .............................................................. 6-12 1. Taxable Amount..................................................................................................................... 6-12 2. Applicable Rate ...................................................................................................................... 6-13 a. Inclusion Ratio ....................................................................................................................... 6-13 b. Applicable Fraction ................................................................................................................ 6-13 3. Putting it all Together ............................................................................................................ 6-13 a. Computing the Tax on a Direct Skip...................................................................................... 6-13 b. Computing the Tax on a Taxable Distribution ...................................................................... 6-14 c. Computing the Tax on a Taxable Termination ...................................................................... 6-15 E. Liability for Generation-Skipping Transfer Tax ................................................................... 6-15 II. Strategies for Minimizing Generation-Skipping Transfer Taxes................................... 6-16 A. Avoiding Generation-Skipping Transfers ............................................................................. 6-16 1. Adcantages of Gift Tax Over Generation-Skipping Transfer Tax ......................................... 6-16 a. Gifts are Tax-Exclusive .......................................................................................................... 6-16 b. Gifts can be Subject to Lower Tax Rates............................................................................... 6-17 c. Additional Exemptions........................................................................................................... 6-18 2. Advantages of Estate Tax Over Generation-Skipping Transfer Tax ..................................... 6-18 a. Credit for Property Previously Taxed .................................................................................... 6-18


Encyclopedia of Estate Planning X

b. Additional Exemptions .......................................................................................................... 6-18 B. Taking Maximum Advantage of Statutory Exemptions ....................................................... 6-19 1. The Exemption ....................................................................................................................... 6-19 a. Allocation ............................................................................................................................... 6-19 b. Coordinating use of Exemption by Married Couples ............................................................ 6-21 c. Appreciation and Income Shelter ........................................................................................... 6-22 2. The Annual Exclusion............................................................................................................ 6-23 3. Qualified Transfers ................................................................................................................ 6-24 Conclusion ................................................................................................................................ 6-24


Encyclopedia of Estate Planning XI

Chapter 7

The Estate Tax Marital Deduction

Introduction ................................................................................................................................ 7-1

Scope............................................................................................................................................ 7-1

I. Overview of the Marital Deduction ..................................................................................... 7-2

A. Unlimited Estate and Gift Tax Deduction......................................................................... 7-2 B. Basic Requirements ........................................................................................................... 7-2 1. The Recipient of the Property Must Be A U.S. Citizen Surviving Spouse .................. 7-2 2. The Property Must Pass From the Deceased Spouse .................................................... 7-3 3. The Property Must Not Be A Non-Deductible Terminable Interest ............................. 7-3 C. Types of Transfers Which Qualify For the Marital Deduction ......................................... 7-4 1. Outright Distributions ................................................................................................... 7-4 2. Code Section 2056(B)(5)Trusts .................................................................................... 7-4 a. Requirements of Code Section 2056(B)(5) .............................................................. 7-5 b. Uses of the Section 2056(B)(5) Trust ...................................................................... 7-6 3. Qualified Terminable Interest Property ("QTIP") Trusts ............................................. 7-7 a. Terminable Interests ................................................................................................. 7-7 b. Requirements of Code Section 2056(b)(7) .............................................................. 7-7 c. The QTIP Election ................................................................................................... 7-8 d. Section 2044 and the Duty of Consistency .............................................................. 7-9 e. Uses of the QTIP Trust .......................................................................................... 7-10 4. Charitable Remainder Trusts ...................................................................................... 7-10 a. Marital Deduction Allowed .................................................................................... 7-10 b. Inter Vivos Charitable Remainder Trusts .............................................................. 7-11 c. Testamentary Charitable Remainder Trusts ........................................................... 7-11

II. Limitations on the Marital Deduction ............................................................................. 7-11

A. Limitations for A Non-Citizen Spouse ........................................................................... 7-11 1. Rationale ..................................................................................................................... 7-12 2. QDOT Requirements .................................................................................................. 7-12 3. QDOT Estate Tax ...................................................................................................... 7-13 a. Imposition of 2056A(B) Tax ................................................................................. 7-13 b. Hardship Exception ............................................................................................... 7-14 c. Payment of the Tax ............................................................................................... 7-14 4. Selected Issues for Citizen/Non-Citizen Couples ....................................................... 7-14 a. Surviving Spouse Becomes A Citizen ................................................................... 7-14 b. Gifts to Spouse ....................................................................................................... 7-15 c. Treaty Protection .................................................................................................... 7-15 B. Survivorship ................................................................................................................ 7-16 D. Disclaimers and the Marital Deduction ...................................................................... 7-16


Encyclopedia of Estate Planning XII

1. Disclaiming Jointly Held Property......................................................................... 7-17 E. The Marital Deduction and the Generation Skipping Tax Exclusion ......................... 7-17 1. General Rule for Marital Trusts ............................................................................. 7-18 2. Special Rule for QTIPS ......................................................................................... 7-18 III. Considerations in Funding the Marital Deduction ....................................................... 7-19 A. Pecuniary Formulas..................................................................................................... 7-19 1. DNI, IRD and Pecuniary Marital Formulas ........................................................... 7-20 2. True Worth Pecuniary ............................................................................................ 7-20 a. Date of Distribution Value ............................................................................... 7-21 b. Advantages ....................................................................................................... 7-21 c. Disadvantages .................................................................................................. 7-21 1) Capital Gain ................................................................................................ 7-21 2) Revaluation ................................................................................................. 7-22 3. Fairly Representative Pecuniary Formula .............................................................. 7-22 a. Basis Used as Value .......................................................................................... 7-22 b. Advantages ........................................................................................................ 7-23 1) No Gain or Loss ........................................................................................... 7-23 2) Effect on DNI .............................................................................................. 7-23 c. Disadvantages ................................................................................................... 7-23 1) Marital Bequest Not Frozen ........................................................................ 7-23 2) Revaluation .................................................................................................. 7-24 3) Flexibility to Select Assets .......................................................................... 7-24 4. Minimum Worth Pecuniary Formula ...................................................................... 7-24 a. Value is Lesser of Basis or Date of Distribution ................................................ 7-24 b. Advantages ......................................................................................................... 7-25 1) No Gain on Funding ..................................................................................... 7-25 2) Flexibility...................................................................................................... 7-25 c. Disadvantages .................................................................................................... 7-25 1) Marital Bequest Not Frozen ......................................................................... 7-25 2) Flexibility ...................................................................................................... 7-25 5. Reverse Pecuniary Provision .................................................................................. 7-26 B. Fractional Formula Marital Clauses ............................................................................. 7-26 1. Net Residue Vs. Gross Residue .............................................................................. 7-27 2. Pro Rata Division ................................................................................................... 7-27 a. Advantages ......................................................................................................... 7-27 b. Disadvantages .................................................................................................... 7-28 3. Pick and Choose Fractional Share .......................................................................... 7-28


Encyclopedia of Estate Planning XIII

Chapter 8

Transfers to Children

Introduction ................................................................................................................................ 8-1

Scope............................................................................................................................................ 8-1

I. Reasons for Making Transfers to Children ........................................................................ 8-2

A. Income Tax Savings and the "Kiddie Tax" ....................................................................... 8-2 1. Background .................................................................................................................. 8-2 2. The “Kiddie Tax” ......................................................................................................... 8-3 a. Operation of the Kiddie Tax .................................................................................... 8-3 b. Computation of Tax ................................................................................................. 8-4 c. Parents’ Election ...................................................................................................... 8-4 d. other Factors and Considerations Regarding Kiddie Tax ....................................... 8-5 e. Planning Devices ..................................................................................................... 8-5 B. Estate and Gift Tax Considerations .................................................................................... 8-6 1. The Annual Exclusion ................................................................................................... 8-6 2. Unrestricted Rights to Immediate Use .......................................................................... 8-7 3. I.R.C. §2503(B) ............................................................................................................. 8-7 a. In General .................................................................................................................. 8-7 b. Requirements for I.R.C §2503(B) ............................................................................. 8-8 c. Payments of Tuition and Medical Expenses of Children ........................................ 8-10 C. Generation Skipping Benefits ........................................................................................... 8-10 II. Outright Gifts to Children ................................................................................................. 8-11

III. Hawaii uniform Transfers to Minors Act ...................................................................... 8-11

A. Background ..................................................................................................................... 8-11 B. Tax Aspects of UTMA ................................................................................................... 8-12 1. Estate Tax .................................................................................................................... 8-12 2. Gift Tax and Income Tax ............................................................................................ 8-12 IV. Hawaii Uniform Custodial Trust Act ............................................................................. 8-12 A. Background ...................................................................................................................... 8-12 B. Custodial Trustee’s Duties and Powers ............................................................................ 8-13 C. Liabilities to a Third Person/Parties ................................................................................. 8-14 D. Expenses, Compensation, and Bond ................................................................................ 8-15 V. I.R.C. § 2503(c) Trust ........................................................................................................ 8-15 A. Requirements of I.R.C. §2503 (c) Trust ........................................................................... 8-15 B. Advantages and Disadvantages ........................................................................................ 8-16


Encyclopedia of Estate Planning XIV

VI. Crummey Trusts ............................................................................................................... 8-17 A. Overview .......................................................................................................................... 8-17 B. Advantages ....................................................................................................................... 8-19 C. Hanging Powers ............................................................................................................... 8-19 D. Estate and Gift Tax Consequences................................................................................... 8-19 E. Gift Tax Consequences of Lapse ...................................................................................... 8-19 F. Estate Tax Consequences of Lapse................................................................................... 8-20 G. Income Tax Consequences of Withdrawal Rights ........................................................... 8-20 H. Planning Tips ................................................................................................................... 8-21 VII. Educational Transfers .................................................................................................... 8-21 I. Section 529 Plans .............................................................................................................. 8-21 1. Benefits ......................................................................................................................... 8-21 2. Drawbacks..................................................................................................................... 8-22 J. Coverdell Education Savings Accounts ............................................................................. 8-22 K. Direct Tuition Payments ................................................................................................... 8-23 Conclusion ................................................................................................................................ 8-23


Encyclopedia of Estate Planning XV

Chapter 9 Charitable Contributions

Introduction ................................................................................................................................ 9-1 I. Charitable Contribution Defined ......................................................................................... 9-1 A. Donative Intent and Receipt of Consideration ................................................................... 9-3 1. Voluntary Transfers ...................................................................................................... 9-3 2. Donative Intent.............................................................................................................. 9-3 3. Consideration ............................................................................................................... 9-3 4. Dual Character Payments .............................................................................................. 9-4 5. Personal Expenses ......................................................................................................... 9-4 6. Application of the General Rules in Specific Areas ..................................................... 9-5 a. Dues.......................................................................................................................... 9-5 b. Fund-Raising Events ................................................................................................ 9-5 c. Tuition ...................................................................................................................... 9-7 B. Contributions of Services ................................................................................................... 9-8 1. Out-of-Pocket Expenses................................................................................................ 9-8 2. Uniforms ....................................................................................................................... 9-9 3. Travel, Meals and Lodging ........................................................................................... 9-9 a. Away from Home .................................................................................................... 9-9 b. At Home .................................................................................................................. 9-9 4. Conventions ............................................................................................................... 9-10 5. Self-Created Works of Art or Literature .................................................................... 9-11 C. Completed Gift Requirement .......................................................................................... 9-11 1. Delivery....................................................................................................................... 9-11 2. Relinquishment of Dominion and Control ................................................................. 9-12 3. Certain Dispositions of Stock Donated to Charity ..................................................... 9-12 4. Donations of Stock in Liquidating Corporation......................................................... 9-12 II. Qualifying Donees ............................................................................................................. 9-13 A. Qualifying Organizations Defined .................................................................................. 9-13 1. Notice Requirement ................................................................................................. 9-13 2. Service List of Qualified Organizations .................................................................. 9-14 B. United States and Political Subdivisions ...................................................................... 9-14 C. Charitable Organizations .............................................................................................. 9-14 D. Private Foundations ...................................................................................................... 9-15 E. Notable Nonqualified Organizations ............................................................................ 9-16 F. Disqualification of Charitable Organizations ............................................................... 9-16 1. Racial Discrimination and Other Public Policy Violations ..................................... 9-16 2. Communist-Controlled Organizations ..................................................................... 9-17 3. Influencing Legislation ............................................................................................ 9-17 4. Participation or Intervention in Political Campaigns ............................................... 9-17


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5. Prohibited Transactions ........................................................................................... 9-17 G. Prohibition of Gifts to Individuals and Exceptions....................................................... 9-18 1. Control Over Funds by Qualified Organization....................................................... 9-18 2. Expenses Incident to Services .................................................................................. 9-18 3. Qualified Trusts ....................................................................................................... 9-18 4. Cost of Maintaining Student in Private Home ......................................................... 9-19 H. Earmarked Donations.................................................................................................... 9-19 1. Individuals ............................................................................................................... 9-19 2. Influencing Legislation ............................................................................................ 9-19 3. Foreign Charities ...................................................................................................... 9-20 III. Amount of Deduction: General Rules .......................................................................... 9-20 A. Donations of Future Interests and Income Interests ..................................................... 9-20 B. Donations of Use of Property ....................................................................................... 9-20 C. Nondeductibility of Appraisal Fees .............................................................................. 9-21 D. Contribution of Third Party Services ............................................................................ 9-21 IV. Fair Market Value of Donated Property ....................................................................... 9-21 A. The Appropriate Market ............................................................................................... 9-22 B. Cost or Selling Price ..................................................................................................... 9-22 C. Comparable Properties .................................................................................................. 9-22 D. Expert Opinion and Appraisals ..................................................................................... 9-22 V. Gifts of Appreciated Property: Reduction Rules .......................................................... 9-23 A. Ordinary Income Property ............................................................................................ 9-23 B. Tangible Personal Property ........................................................................................... 9-24 C. Contributions to Private Foundations ........................................................................... 9-25 1. Private Nonoperating Foundation Defined .............................................................. 9-25 2. Qualified Appreciated Stock .................................................................................... 9-26 D. Allocations of Basis Rules for Contributions of Partial Interests in Property .............. 9-26 VI. Charitable Deduction Ceilings: Percentage Limitations ............................................ 9-27 A. Contribution Base ......................................................................................................... 9-27 B. Fifty Percent Organizations Defined ............................................................................ 9-27 C. Percentage Limitations for Contributions to Fifty Percent Organizations.................... 9-28 1. Thirty Percent Capital Gain Property ...................................................................... 9-29 2. Deductible Amount for Thirty Percent Capital Gain Property ................................ 9-30 3. Election to Reduce Contributions of Thirty Percent Capital Gain Property ............ 9-30 D. Contributions to Thirty Percent Organizations ............................................................. 9-31 1. Thirty Percent Organizations Defined ..................................................................... 9-31 2. Application of Percentage Limitations .................................................................... 9-31 3. Contributions of Capital Gain Property ................................................................... 9-32 E. Carryovers of Excess Contributions ............................................................................. 9-32


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1. Fifty Percent Organizations ..................................................................................... 9-32 2. Thirty Percent Organizations ................................................................................... 9-33 3. Effect of Net Operating Loss Carryover .................................................................. 9-33 4. Joint and Separate Returns ....................................................................................... 9-34 VII. Bargain Sales to Charity ............................................................................................... 9-34 A. Basis Allocation Rules .................................................................................................. 9-35 B. Effect of Appreciated Property Reduction Rules .......................................................... 9-36 C. Encumbered Property.................................................................................................... 9-36 1. Installment Sales of Encumbered Property .............................................................. 9-37 2. Reduction for Interest ............................................................................................... 9-37 D. Charitable Gift Annuities .............................................................................................. 9-38 VIII. Gifts of Future Interests in Trust ................................................................................ 9-38 IX. Gifts of Partial Interests Not in Trust............................................................................ 9-43 A. Donor's Entire Interest .................................................................................................. 9-43 B. Undivided Interests ....................................................................................................... 9-43 C. Partial Interest Which Would be Deductible if Transferred in Trust............................ 9-45 D. Contribution of Remainder Interest in Personal Residence or Farm ............................ 9-45 E. Qualified Conservation Contribution ............................................................................ 9-46 1. Qualified Real Property Interest .............................................................................. 9-46 2. Qualified Organizations ........................................................................................... 9-47 3. Conservation Purposes ............................................................................................. 9-47 X. Future Interests in Tangible Personal Property ............................................................ 9-47 A. Future Interest ................................................................................................................. 9-48 B. Tangible Personal Property ............................................................................................. 9-48 C. Related Persons ............................................................................................................... 9-48 XI. Gifts of Income Interest .................................................................................................. 9-49 XII. Year in Which Charitable Contribution is Deductible .............................................. 9-49 A. Actual Payment Requirement ......................................................................................... 9-49 1. Delivery by Mail ...................................................................................................... 9-49 2. Payment by Check ................................................................................................... 9-50 B. Pledges and Promissory Notes ........................................................................................ 9-50 C. Cancellation of Indebtedness ........................................................................................ 9-50 D. Conditional Gifts ........................................................................................................... 9-50 1. Conditions Precedent ............................................................................................... 9-50 2. Conditions Subsequent............................................................................................. 9-51 E. Option at Bargain Price ................................................................................................. 9-51


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XIII. Substantiation of Charitable Deductions ................................................................... 9-51 A. Burden of Proof ............................................................................................................... 9-51 B. Documentation and Record Keeping for Cash Contributions ......................................... 9-51 C. Documentation and Record Keeping for Contributions .................................................. 9-52 D. Documentation and Record Keeping for Contributions of Non-Cash Property ............. 9-52 1. Requirements Applicable to All Non-Cash Contributions ...................................... 9-52

2. Requirements Applicable to Aggregate Claimed Deductions for Non-Cash Contributions in Excess of $500 .............................................................................. 9-54

3. Contributions of Property Other than Publicly Traded Securities Having a Claimed Value Exceeding $5,000 ............................................................................ 9-54 E. Appraisal Requirements .................................................................................................. 9-57 XIV. Estate and Gift Tax Charitable Deductions ............................................................... 9-57 A. Requirement of Transfer from Donor ............................................................................. 9-58 1. Conditional and Contingent Transfers ..................................................................... 9-58 2. Gifts Subject to a Power .......................................................................................... 9-58 3. Property Included in Gross Estate............................................................................ 9-59 4. Property Must Be Transferred from Decedent......................................................... 9-59 B. Permissible Recipients .................................................................................................... 9-60 C. Qualified Split Interest Transfers .................................................................................... 9-61 D. Amount of Deduction...................................................................................................... 9-63


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Chapter 10 Planning for Clients with Business Interests

Introduction .............................................................................................................................. 10-1

I. Nature of Entity ................................................................................................................... 10-1

A. Sole Proprietorships ........................................................................................................ 10-2 1. Advantages ................................................................................................................. 10-2 a. Ease of Operation .................................................................................................. 10-2 b. Single Income Tax ................................................................................................ 10-2 c. Flow-Through of Losses ....................................................................................... 10-2 2. Disadvantages ............................................................................................................ 10-2 a. Unlimited Liability ................................................................................................ 10-2 b. No Business Continuity Upon Death of Owner .................................................... 10-2 B. Partnerships .................................................................................................................... 10-3 1. Advantages ................................................................................................................. 10-3 a. Simplest Form of Ownership Between 2 or More Owners ................................... 10-3 b. Single Tax ............................................................................................................. 10-3 c. Flow-Through of Losses ....................................................................................... 10-3 2. Disadvantages ............................................................................................................. 10-3 a. Unlimited Liability ................................................................................................ 10-3 b. Dissolution of Partnership Upon Death of a Partner ............................................ 10-3 C. Corporations .................................................................................................................... 10-4 1. Advantages ................................................................................................................. 10-4 a. Limited Liability ................................................................................................... 10-4 b. Ease of Transferability .......................................................................................... 10-4 c. Centralized Management ...................................................................................... 10-4 d. Perpetual Duration ................................................................................................ 10-4 e. Fringe Benefits for Employees.............................................................................. 10-5 2. Disadvantages ............................................................................................................ 10-5 a. Double Tax Unless Protection of S Status is Elected ........................................... 10-5 b. Additional Costs for Set Up and Maintenance ..................................................... 10-5 c. Additional Insurance for Workers Compensation and TDI .................................. 10-5 D. Limited Liability Company ............................................................................................. 10-5 1. Advantages ................................................................................................................. 10-6 2. Disadvantages ............................................................................................................ 10-6 E. Limited Liability Partnerships ........................................................................................ 10-6 II. Life Transfers .................................................................................................................... 10-6

III. Buy Sell Agreements ........................................................................................................ 10-7

A. Definition ........................................................................................................................ 10-7 1. Buy Out Mechanism .................................................................................................. 10-7 2. Benefits to Shareholder .............................................................................................. 10-7 3. Minority Interests ....................................................................................................... 10-7


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4. Funding ...................................................................................................................... 10-7 5. Valuation of Business ................................................................................................ 10-8 6. Flexibility ................................................................................................................... 10-8 7. Distribution ................................................................................................................ 10-8 8. Control ....................................................................................................................... 10-8 9. Preserves Subchapter S Election ................................................................................ 10-8 B. Cross Purchase Agreement.............................................................................................. 10-9 1. Funding of Buy-Sell Agreement ................................................................................ 10-9 2. Tax Consequences ................................................................................................... 10-10 a. To the Purchasing Shareholder ........................................................................... 10-10 b. To the Estates of the Deceased Shareholder ....................................................... 10-10 3. Advantages ............................................................................................................... 10-10 4. Disadvantages .......................................................................................................... 10-10 C. Corporate Redemption Agreement................................................................................ 10-11 1. Tax Consequences to the Corporation ..................................................................... 10-11 2. Tax Consequences to Surviving Shareholders ......................................................... 10-11 3. Tax Consequences to the Decedent's Estate ........................................................... 10-12 4. Advantages of a Corprate Redemption Agreement ................................................. 10-12 5. Disadvantages of a Corporate Redemption Agreement ........................................... 10-13 IV. Estate Planning For Subchapter S Corporations ........................................................ 10-13 A. Statutory Requirements ................................................................................................. 10-13 1. One Class of Stock ................................................................................................... 10-13 2. 100 Shareholders ...................................................................................................... 10-14 3. Pass Through ............................................................................................................ 10-14 B. Types of Trusts as Permissible Shareholders ................................................................. 10-14 1. Grantor Trusts .......................................................................................................... 10-15 2. Code Section 678 Trusts .......................................................................................... 10-15 3. Qualified Subchapter S Trust (QSST Trusts) .......................................................... 10-15 4. Estate as a Shareholder ............................................................................................ 10-16 5. Electing Small Business Trust (ESBT) .................................................................... 10-16 C. Alternative Life Time Transfers .................................................................................... 10-16 1. Gifting Corporate Stock ........................................................................................... 10-16 2. Creation of Voting Trusts ........................................................................................ 10-16 3. Issue Non-Voting Stock ........................................................................................... 10-16 V. Estate Planning Using a Family Limited Partnership .................................................. 10-17 VI. Valuing a Closely Held Business ................................................................................... 10-18

A. Valuation Formulas ...................................................................................................... 10-18 1. Willing Buyer and Willing Seller .......................................................................... 10-18 2. IRS Guidelines ....................................................................................................... 10-19 a. Treasury Regulations ....................................................................................... 10-19 b. Internal Revenue Rulings ................................................................................. 10-19


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3. Book Value ............................................................................................................. 10-20 4. Asset Valuation at Fair Market Value .................................................................... 10-20 5. Earnings Capitalization ........................................................................................... 10-20 B. Discounts ....................................................................................................................... 10-21 1. Discount for Nonmarketability ............................................................................... 10-21

2. Minority Discounts ................................................................................................. 10-21 3. Premimums ............................................................................................................. 10-22 4. Family Attribution Rules ........................................................................................ 10-22

C. Effect of Buy Sell Agreements on Valuation ................................................................ 10-22 1. Ascertainable Price .................................................................................................. 10-22 2. Obligation to Sell at Death ................................................................................................... 10-22 3. Restrictions During Lifetime ............................................................................................... 10-23 4. In Effect at Death ................................................................................................................. 10-23 5. Bono Fide Business Arrangement ....................................................................................... 10-23 6. Code Section 2703 ............................................................................................................... 10-23 D. Revaluation Agreements ..................................................................................................... 10-24

VI. Statutory Provisions Regarding Payment of Estate Taxes .......................................... 10-24

A. Redemption of Stock in a Closely Held Corporation to Provide Liquidity to Pay the Estate Tax ..................................................................................................... 10-24

1. Dividend Treatment Under Code Section 301 ..................................................................... 10-24 2. The “Not Essentially Equivalent to a Dividend” Exception ................................................ 10-25 3. The “Substantially Disproportionate Redemption” Exception ............................................ 10-25 4. The “Conplete Redemption” Exception ............................................................................... 10-25 5. Code Section 303 Exception ................................................................................................ 10-25 a. 35 % Test ............................................................................................................................. 10-26 b. Stock Included in Gross Estate ............................................................................................ 10-26 c. Timing of Redemption ......................................................................................................... 10-26 B. Special Use Valuation Under Code Section 2032A ............................................................ 10-26 1. General Rule and Definitional Terms .................................................................................. 10-27 2. Fifty-Percent (50%) Test...................................................................................................... 10-27 3. Material Participation Test ................................................................................................... 10-27 4. Recapture ............................................................................................................................. 10-27 C. Ectension of Time to Pay Estate Taxes Under Code Section 6166 .................................... 10-28 1. General Rule ........................................................................................................................ 10-28 2. Thirty-Five Percent (35%) Test ........................................................................................... 10-28 3. Carrying on a Trade or Business .......................................................................................... 10-28

Conclusion .............................................................................................................................. 10-29

A. Know the Client ............................................................................................................ 10-29 B. Know the Client's Business ........................................................................................... 10-29 C. Know the Client's Objectives ........................................................................................ 10-29 D. Evaluate the Client's Business Structure ....................................................................... 10-29 E. Listen to the Client ........................................................................................................ 10-30


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Chapter 11 Co-Ownership of Property

Introduction .............................................................................................................................. 11-1

Scope.......................................................................................................................................... 11-1

I. Creation of Co-Ownership ................................................................................................. 11-3

II. Advantages of Each Type of Co-Ownership .................................................................... 11-4 A. Tenancy In Common ....................................................................................................... 11-4 B. Joint Tenancy .................................................................................................................. 11-5 C. Tenancy by the Entirety .................................................................................................. 11-6 III. Disadvantages of Each Type of Co-Ownership ............................................................. 11-8

A. Tenancy in Commom ...................................................................................................... 11-8 B. Joint Tenancy .................................................................................................................. 11-9 C. Tenancy by the Entirety ................................................................................................ 11-10 IV. Estate and Death Tax Consequences ............................................................................ 11-11 A. Tenancy in Common ..................................................................................................... 11-11 B. Joint Tenancy ................................................................................................................ 11-12 C. Tenancy by the Entirety ................................................................................................ 11-14 V. Gift Tax Consequences .................................................................................................... 11-15 A. Tenancy in Common ..................................................................................................... 11-15 B. Joint Tenancy ................................................................................................................ 11-16 C. Tenancy by the Entirety ................................................................................................ 11-17 VI. Income Tax Consequences ............................................................................................. 11-18 VII. Tax Consequences to the Survivor .............................................................................. 11-20 VIII. Co-Ownership of Personal Property ......................................................................... 11-21

A. Bank Account ............................................................................................................... 11-21 B. Series E and Series H Savings Bonds .......................................................................... 11-22

1. Income Tax Consequences ..................................................................................... 11-22 2. Gift Tax Consequences .......................................................................................... 11-23 3. Estate Tax Conseqences .......................................................................................... 11-23 C. Safe Deposit Boxes ....................................................................................................... 11-24 D. Securities and Securities Accounts ............................................................................... 11-24 1. Income Tax Consequences ...................................................................................... 11-25


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2. Gift Tax Consequences ............................................................................................ 11-26 3. Estate Tax Consequneces ......................................................................................... 11-27 IX. Co-Ownership Among Family Members X. Co-Ownership Between Non-Family Members XI. Co-Ownership With Non-U.S. Citizens XII. Elective Share/Augmentated Estate/Reciprocal Beneficiary Conclusion


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Chapter 12 Estate Planning for Employees Benefits

Introduction ............................................................................................................................ 12-1

I. Minimum Required Distribution Rules ............................................................................ 12-1

A. Minimum Required Distribution Rules........................................................................... 12-3 B. Lifetime Distribution Rules ............................................................................................. 12-8 1. Distributions to P on and After P’s RBD ................................................................... 12-8 2. Distributions After P’s Death..................................................................................... 12-9 II. Who Should be the Beneficiary? ...................................................................................... 12-9 A. Naming Participant’s Spouse as the DB ......................................................................... 12-9 B. Naming a Trust as Beneficiary ...................................................................................... 12-10 1. “See-Through Trust” ................................................................................................ 12-10 2. Individual Retirement Trust (§408(A), IRC) ........................................................... 12-15 III. Marital Matters .............................................................................................................. 12-19 A. Estate Tax ............................................................................................................................ 12-19 B. Income Tax .......................................................................................................................... 12-19 C. Spousal Rollowers ............................................................................................................... 12-19 D. Qualified Domestic Relations Orders (QROS) and IRA Split-Ups .................................... 12-25


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Chapter 13 Protecting Assets

Introduction ............................................................................................................................ 13-1

I. Avoidable Transfers ............................................................................................................ 13-1

A. The Power to Avoid Fraudulent Conveyances and Transfers Under Hawaii Law ......... 13-2 B. The Bankruptcy Trustee's Power To Avoid Fraudulent Transfers .................................. 13-4

C. The Bankruptcy Trustee's Powers As A Hypothetical Perfect Creditor: "The Strong Arm Clause" [Section 544(A)] ................................................................... 13-5

D. The Bankruptcy Trustee's Power to Avoid Preferential Transfers (Section 547) ........... 13-6 E. Practical Suggestions--How to Avoid Making an Avoidable Transfer ........................... 13-7 II. Tenancy By The Entireties ................................................................................................ 13-8 A. Theoretical Basis and Definition ..................................................................................... 13-8 B. Limitations on the Effectiveness of the Tenancy by the Entirety ................................... 13-9 C. Types of Property Which May Be Held By the Entirety .............................................. 13-10 D. Status of Entireties Property In Bankruptcy ................................................................. 13-11

E. Practical Suggestions -- Tenancy By the Entireties May Be the Best Reason To Get Married or To Become A Reciprocal Beneficiary ........................................................ 13-11

III. Spenthrift Trusts ............................................................................................................ 13-12 A. Definiton ....................................................................................................................... 13-12 B. Validity of Spendthrift Trusts Under Hawaii Law ........................................................ 13-12 C. Limitations on Effectiveness -- Self-Settled Spendthrift Trusts ................................... 13-13 D. Effectiveness of Spendthrift Trusts In Bankruptcy ....................................................... 13-14 E. Practical Suggestions -- Carefully Constructed Spendthrift Trust May Work .............. 13-14 F. Spendthrift Trust Protection In Other States ................................................................. 13-16

1. Protection of Spendthrift Trusts From the Beneficiaries' Creditors In Other States.......................................................................................................... 13-16

2. Protection of Spendthrift Trusts From the Creditor of The Settlor In Other States........................................................................................................... 13-18

G. Offshore Trusts ............................................................................................................. 13-20 IV. Other Legal Entities ....................................................................................................... 13-22 A. Corporations .................................................................................................................. 13-22 B. Limited Partnerships ..................................................................................................... 13-23 C. Limited Liability Partnerships and Limited Liability Companies ................................ 13-24 1. Limited Liability Partnerships .................................................................................. 13-24 2. Limited Liability Companies .................................................................................... 13-26


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V. Exemptions ....................................................................................................................... 13-28 A. Introduction ................................................................................................................... 13-28 B. Source of Exemptions ................................................................................................... 13-29 C. The Homestead Exemption ........................................................................................... 13-29 1. Bankruptcy Code ...................................................................................................... 13-29 2. Under Hawaii Law .................................................................................................... 13-30 D. Pension And Similar Plans ............................................................................................ 13-30 1. In Bankruptcy............................................................................................................ 13-30 2. ERISA Plans As Spendthrift Trusts .......................................................................... 13-31 3. Under Hawaii Law .................................................................................................... 13-32 4. Preemption Of The Hawaii Exemption..................................................................... 13-32 E. Life Insurance ................................................................................................................ 13-33 1. In Bankruptcy............................................................................................................ 13-33 2. Under Hawaii Law .................................................................................................... 13-33 F. Limitations On The Planned Use Of Exemptions ......................................................... 13-34 Conclusion .............................................................................................................................. 13-36


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Chapter 14 Impact of Divorce on Estate Planning

Introduction ............................................................................................................................ 14-1

I. Overview of Divorce Law ................................................................................................... 14-2

A. What's at Stake ................................................................................................................ 14-2 B. State Law Controls .......................................................................................................... 14-2 C. Hawaii Divorce Law General .......................................................................................... 14-2 D. Property Division ............................................................................................................ 14-4 1. Marital Separate Property ........................................................................................... 14-5 2. Marital Partnership Property is Divided into Five Categories .................................... 14-5 3. Application of the Marital Partnership Model ............................................................ 14-6 4. Equitable Deviation .................................................................................................... 14-6 E. Security for Payment of Obligations ................................................................................ 14-9 F. Timing............................................................................................................................... 14-9 1. Property Valuation Date(s) ........................................................................................ 14-10 2. Social Security Benefits ............................................................................................. 14-10 3. Residences.................................................................................................................. 14-10 4. Tax Returns ................................................................................................................ 14-10 II. Effect of Prior Divorce on Existing Plans ...................................................................... 14-11 A. Has the Client Secured the Full Benefits of His/Her Divorce ....................................... 14-11 1. Real Property ............................................................................................................ 14-11 2. Insurance Polices ...................................................................................................... 14-11 a. Your Client (or the Client's Children) as Beneficiary(ies) ................................... 14-11 b. Your Client as Policy Owner ............................................................................... 14-12 c. Your Client as Policy Beneficiary Designator ..................................................... 14-12 3. Retirement Plan Beneficiary Designations ................................................................ 14-12 5. Other Benefits ............................................................................................................ 14-12 B. Does the Client Still Have Any Divorce-Related Obligations ........................................ 14-13 C. Are There Any Other "Loose Ends" ............................................................................... 14-13 1. Power of Attorney ...................................................................................................... 14-13 2. Property Insurance ..................................................................................................... 14-13 D. Suggestions .................................................................................................................... 14-13 III. Is Your Client Getting Divorced .................................................................................... 14-14 IV. Possible Conflicts of Interest in Representing Both Spouses...................................... 14-14 V. Effect of Future Divorce on Existing Plans ................................................................... 14-15 VI. "Pre-Divorce" Estate Planning ..................................................................................... 14-15


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A. General .......................................................................................................................... 14-15 B. Jointly Held Property .................................................................................................... 14-15 C. New Will ....................................................................................................................... 14-16 D. Use of a Trust ................................................................................................................ 14-16 E. Abatement Upon Death ................................................................................................. 14-16 VII. Suggestions to Improve Changes of Keeping Preperty in the Event of Divorce ..... 14-16 A. Identify and Segregate "Separate" Property .................................................................. 14-16 B. If a Transfer of Separate Property is Made to Joint Names or to Other Spouse ........... 14-16

C. Suggestions Regarding Transfers of Property to A Client's Children and Their Spouse ........................................................................................................................... 14-18

VIII. Premarital Agreements ............................................................................................... 14-19 A. Creation ......................................................................................................................... 14-19 B. Enforceability ................................................................................................................ 14-19 C. Other Suggestions ......................................................................................................... 14-19 IX. Postmarital Agreements ................................................................................................. 14-20


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Chapter 15 Life Insurance

Introduction ............................................................................................................................ 15-1

Scope.......................................................................................................................................... 15-1

I. Life Insurance in General ................................................................................................... 15-2

A. Definitions ....................................................................................................................... 15-2 B. Types of Life Insurance Policies ..................................................................................... 15-3 1. Term Insurance .......................................................................................................... 15-3 2. Policies with Cash Value ........................................................................................... 15-4 3. Whole Life Policies.................................................................................................... 15-5 4. Universal Life ........................................................................................................... 15-5 5. Variable Life .............................................................................................................. 15-6 6. Blended Rate Policies ................................................................................................ 15-6 7. Other Life Insurance Features .................................................................................... 15-6 a. Joint Life or Second to Die Policies ...................................................................... 15-6 b. Waiver of Premium ............................................................................................... 15-7 c. Policy Dividends .................................................................................................... 15-7 8. Selecting an Insurance Company ........................................................................................... 15-8 9. Summary ................................................................................................................................ 15-8 II. Estate Planning Uses of Insurance Products ................................................................... 15-8 A. Business Uses .................................................................................................................. 15-8 B. Replacement of Income Stream .................................................................................... 15-12 C. Estate Liquidity ............................................................................................................. 15-13 III. Estate Tax Ramifications of Life Insurance ................................................................. 15-13 A. I.R.C Section 2042 ........................................................................................................ 15-13 1. Payable to the Executor ........................................................................................... 15-14 2. Payable to Other Beneficiaries ................................................................................. 15-15 B. Transfers in Contemplation to Death ............................................................................ 15-17 1. Decedents Dying After December 31, 1981 ............................................................ 15-18 2. Protective Measures ................................................................................................. 15-20 C. The Irrevocable Life Insurance Trust ............................................................................ 15-20 D. Use of the Proceeds of the Policy to Provide Estate Liquidity ..................................... 15-21 E. Protective Measures ...................................................................................................... 15-24 F. Fall Back Marital Deduction ........................................................................................ 15-25


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Chapter 16

Social Security and SSI

Introduction ............................................................................................................................ 16-1

Overview ................................................................................................................................... 16-1

I. Social Security...................................................................................................................... 16-2

A. What it is and How it is Funded ...................................................................................... 16-2 B. Qualifying For Benefits ................................................................................................... 16-3 1. Earning Credits .......................................................................................................... 16-4 2. Becoming "Insured" for Benefits ............................................................................... 16-4 3. Benefits for "Fully Insured or "Currently Insured" Worker ...................................... 16-5 4. Determining Credits ................................................................................................... 16-6 C. Retirement Benefits ......................................................................................................... 16-6 1. Retirement Age ........................................................................................................... 16-6 2. Entitlement and Benefits ............................................................................................. 16-8 a. Working and Receiving Retirement Benefits ("Excess Earnings") ....................... 16-9 b. Receipt of Pension Benefits ................................................................................... 16-9 c. Travel or Work Outside the United States ............................................................. 16-9 3. Age-72 Benefits ........................................................................................................... 16-9 D. Disability Benefits........................................................................................................... 16-10 1. Credits Required for Insured Status ........................................................................... 16-10 2. Determination of Disability ....................................................................................... 16-11 3. Benefit Period ............................................................................................................ 16-12 4. Benefit Amounts ........................................................................................................ 16-12 5. Miscellaneous ............................................................................................................ 16-12 E. Retirement & Disability Benefits for Spouses & Children ............................................ 16-12 1. Benefits for Spouses and Divorced Spouses .............................................................. 16-13 2. Children's Benefits ..................................................................................................... 16-15 F. Survivor's Benefits ........................................................................................................... 16-17 1. Spouse's Benefits ....................................................................................................... 16-17 2. Children's Benefits ..................................................................................................... 16-18 3. Parent's Benefits ......................................................................................................... 16-18 4. Lump-Sum Benefit..................................................................................................... 16-19 II. Supplemental Security Income ....................................................................................... 16-19 A. General Requirement ................................................................................................... 16-19 B. Income and Exclusions.................................................................................................. 16-20 C. Deemed Income............................................................................................................. 16-22 D. Resources and Exclusions ............................................................................................. 16-23 1. Custodial Assets ........................................................................................................ 16-24 2. Burial Funds .............................................................................................................. 16-25 3. Real Property Not a Home ........................................................................................ 16-25


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4. Home ......................................................................................................................... 16-25 5. Household Goods and Personal Effects .................................................................... 16-26 6. Automobile ............................................................................................................... 16-26 7. Life Insurance ........................................................................................................... 16-27 8. Essential Property ..................................................................................................... 16-27 9. Resources Used in a Plan for Self-Support ............................................................... 16-27 E. Transfer of Resources for Less than Fair Market Value ............................................... 16-28 F. Deemed Resources......................................................................................................... 16-28 G. Impact of Trusts ............................................................................................................. 16-29 H. Computing Benefits ....................................................................................................... 16-29 III. Estate Planning Considerations ..................................................................................... 16-30


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Chapter 17 Medicare & Medicaid


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Chapter 18 Planning For Incapacity

Introduction ............................................................................................................................ 18-1

I. Incapacity ............................................................................................................................. 18-1

A. Definitions ....................................................................................................................... 18-1 B. Ways To Establish Incapacity ......................................................................................... 18-2 C. The Attorney's Role ......................................................................................................... 18-2 D. A Test of Legal Competency ......................................................................................... 18-3 II. Providing Management ..................................................................................................... 18-4 A. Guardianships.................................................................................................................. 18-5 1. Guardian Of The Person ............................................................................................ 18-5 2. Guardian Of The Property ......................................................................................... 18-5 3. Disadvantages To Guardianship ................................................................................ 18-5 B. Powers Of Attorney ......................................................................................................... 18-6 1. Durable General Power Of Attorney ......................................................................... 18-6 2. Special Power of Attorney ......................................................................................... 18-6 3. Disadvantages Of A Power Of Attorney ................................................................... 18-7 C. Revocable Living Trusts ................................................................................................. 18-7 D. Buy-Sell Agreements ...................................................................................................... 18-8 III. Use Of Advance Health Care Directives ........................................................................ 18-8 A. The Patient Self-Determination Act ................................................................................ 18-8 B. Living Wills................................................................................................................... 18-10 1. Advance Health-Care Directive ................................................................................ 18-10 a. Durable Power of Attorney for Health Care ......................................................... 18-10 b. Instructions for Health Care .................................................................................. 18-12 c. Donation of Organs at Death................................................................................. 18-12 d. Designation of Primary Physician ........................................................................ 18-12 3. Revocation of Advance Health-Care Directives ....................................................... 18-12 4. Surrogate Decision-Making ...................................................................................... 18-13 5. Statutory Damages for Non-Compliance .................................................................. 18-14 6. Advance Mental Health-Care Directive .................................................................... 18-14 IV. Financing Long-Term Care ............................................................................................. 18-14 Appendix 18-A ........................................................................................................................ 18-17


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Chapter 19 Estate Planning For Non-US Citizens

Introduction ............................................................................................................................ 19-1

I. Tax Treaties ......................................................................................................................... 19-1

II. Definitions ............................................................................................................................ 19-3 III. Estate And Gift Transfers By Aliens ............................................................................... 19-4 A. Unified Tax Credit .......................................................................................................... 19-4 B. Annual Exclusion ............................................................................................................ 19-5 C. Tax Rates ......................................................................................................................... 19-5 D. Property Taxed ................................................................................................................ 19-5 E. Deductions ....................................................................................................................... 19-5 IV. Situs of Property Taxed .................................................................................................... 19-7 V. Transfers to Non U.S. Citizens Spouses ........................................................................... 19-9 VI. Qualified Domestic Trusts .............................................................................................. 19-10 A. Statutory Requirements ................................................................................................. 19-11 1. Trustee....................................................................................................................... 19-11 2. Trust Distributions .................................................................................................... 19-11 3. Election ..................................................................................................................... 19-12 4. Regulations ............................................................................................................... 19-12 B. I.R.C. Sec.2056(D)(2) Requirements ............................................................................ 19-13 C. Nontaxable Distributions to the Non-Citizen Surviving Spouse .................................. 19-13 D. Taxable Distributions .................................................................................................... 19-14 E. Basis of Property Distributed From a QDT ................................................................... 19-14 F. Taxation of the QDT ...................................................................................................... 19-15 1. Calculation of Tax ..................................................................................................... 19-15 2. Effect on Surviving Spouse’s Estate ......................................................................... 19-16 3. Due Date for Tax ...................................................................................................... 19-18 a. Tax on Distributions ............................................................................................. 19-18 b. Tax Imposed by Death of Non-citizen Surviving Spouse ................................... 19-18 c. Tax Imposed by Failure of QDT to Meet Requirements ..................................... 19-18 d. Liability for Tax ................................................................................................... 19-18 VII. Postmortem Planning ................................................................................................... 19-18 A. Non-citizen Spouse Becomes U.S. Citizen .................................................................... 19-19


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1. Surviving Spouse is U.S. Resident at All Times Following Death of Decedent Spouse ...................................................................................................... 19-19 2. Surviving Spouse was not U.S. Resident at All Times Following Death of Decedent Spouse ....................................................................................... 19-20 3. Making of Elections ................................................................................................. 19-21 B. Creation of QDT After Decedent Spouse’s Death ......................................................... 19-21 1. Who Can Create a Postmortem QDT........................................................................ 19-21 2. Income Tax Consequences ....................................................................................... 19-22 3. Gift Tax Consequences ............................................................................................. 19-22 4. Reform a Marital Deduction Trust to a QDT ............................................................ 19-22


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