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Buildup Equity Retirement Trust (BERT) A Buildup Equity Retirement Trust (BERT) is an irrevocable trust in which a Donor-Spouse makes gifts to a Donee-Spouse utilizing the annual gifting exemption rather than the unlimited marital deduction. The benefits that can be obtained from this trust are the following:
2. The assets are exempt from estate tax upon the death of both spouses. 3. A “nest egg” is provided for the Donee-Spouse, over which he/she has control. 4. Upon the death of the Donee-Spouse, the assets are distributed to children and/or other loved ones gift tax, income tax and estate tax free. 5. The assets within the trust are protected from the claims of creditors of both the donor and Donee-Spouse. Gifting to a Spouse There are several ways to make gifts to a spouse. Most gifting techniques between spouses require that the assets be included in the Donee-Spouse’s estate at his or her death. However, there are techniques to keep the gifts free from estate tax liability. Gifts to spouses include the following:
pursuant to the unlimited marital deduction. These gifts may be made outright or in trust. If made in trust, the spouse must receive the income stream from these gifts and the gifts must be included in the Donee-Spouse’s estate. 2. Gifts to spouses who are not United States citizens are limited to $133,000 (2009 figures, as indexed) per year. They may be given in the same manner as gifts to citizen spouses. 3. Annual exclusion gifts in the amount of $13,000 (2009 figures, as indexed). These gifts must be a gift of a present interest to qualify for this exclusion. For citizen spouses, it makes no sense to use this exclusion, as the Donor-Spouse may make unlimited gifts pursuant to the marital deduction, unless they are given to special trusts, as further defined below. Non-citizen spouses are not entitled to this annual exclusion gifting. 4. Gifts to irrevocable life insurance trusts. A spouse may be named as a beneficiary of an irrevocable life insurance trust (ILIT). Gifts of either the annual exclusion amount or of a donor’s lifetime unified credit exemption equivalent amount may be used in making gifts to the spouse. However, to keep the gifts out of the Donee-Spouse’s estate, a goal we generally wish to accomplish, care must be taken to insure that if the annual exclusion gifting is used, that two rules are followed: 1) the gift is deemed a present interest gift and 2) that the gift does not to violate the 5 and 5 rule. These two requirements are further defined in the next gifting strategy. 5. Gifts to a BERT. In this trust, we use the Donor-Spouse’s annual gifting exclusion to place a gift into an irrevocable trust he/she has created for his or her spouse. We must carefully follow two rules if we use gifts of the donor’s annual exclusion amount, the present interest rule and the 5 and 5 rule. We insure it is a gift of a present interest by allowing the Donee-Spouse a temporary withdrawal right over the property contributed to the trust. In essence, the trustee of the trust must notify the Donee- Spouse that a gift has been made and that the Donee-Spouse has a certain limited period of time in which to withdraw the gift. If the gift is not withdrawn in that time period, the trust assets (including the gift) can only be distributed pursuant to the terms of the trust. With annual exclusion gifts placed in trust, Section 2514(e) of the Internal Revenue Code causes a portion of the trust assets to be included in the Donee-Spouse’s estate if the annual exclusion amount is greater than $5000 per year or 5 percent of the trust property. Generally, with BERT: The WONDER TRUST™, our goal is to completely keep all of the trust assets free from estate tax liability upon both the Donor-Spouse and Donee-Spouse’s death, and thus we take care that the gifts to the trust are no greater than $5000 per year or that the gift, up to the maximum annual gifting exclusion for that year, does not exceed 5 percent of the trust assets. An Overview of the Buildup Equity Retirement Trust Let’s assume a husband wants to make gifts to his wife that she can use if needed, but are excluded from both of their estates when determining estate tax liability. He creates an irrevocable trust naming his wife as the beneficiary of the trust during her lifetime. Distributions may be made by the trustee of the trust for the wife’s health, education, maintenance and support. Upon her death, the then remaining proceeds are to be distributed to their children, equally. He must follow the present interest gift rule and the 5 and 5 rule, as defined above, if he is making gifts of the annual exclusion amount. The Trustee of a BERT Generally, anyone the Trustmaker (the Donor-Spouse) wants other than himself or herself. Trustee options include the following:
distributions of principal are for the four ascertainable standards of health, education, maintenance and support. 2. The Donee-Spouse may be a cotrustee with another person or entity. This gives greater control over the assets by the donor than just having the Donee-Spouse serve alone. 3. The Donee-Spouse need not be named as a trustee. Other individuals (or individual) and/or a corporate fiduciary may be named as trustee. BERT can work very effectively as a retirement account. It is a wonderful way to create a nest egg or rainy day account. It differs from a qualified retirement plan and has the following disadvantages compared to a qualified plan:
2. Income taxes must be paid on the income generated within the trust. The advantages that a BERT has over a qualified plan are the following:
rules of IRAs, 401(k)s, 403(b)s, etc. A BERT Trust does not require:
b. Penalties for not withdrawing enough. c. Required minimum distributions at certain ages. d. Mandatory elections.
interests, corporate stock, etc. Only qualified plans cannot be owned by a BERT. 3. An administrator need not be required to oversee the plan. 4. The assets in a BERT are not subject to estate taxation at either the donor or the donee’s deaths. Qualified retirement plans are subject to both income and estate taxes, and are often the worst assets to have in one’s estate due to the brutal erosion by both income and estate tax. The Allocation of Income Taxes on BERT Income At the time of the creation of the BERT, the Trustmaker (Donor-Spouse) decides who should pay the income taxes on this trust. It is important to have a conversation with the Donor- Spouse about how the income within the trust should be taxed, as the donor has two options.
the Internal Revenue Code. A non-grantor trust requires the following:
b. The trust must file a trust tax return every year evidencing the income generated within the trust. c. The trust may pay more income tax than require from an individual, as trust rates are generally higher than individual rates. 2. The Donor-Spouse could elect to have the trust drafted as a “grantor trust” as that is defined in Sections 671 through 678 or the Internal Revenue Code. A grantor trust results in the following:
generated within the BERT. Thus the tax liability is shifted from the trust to the Donor-Spouse. b. The trust need only file an informational tax return annually. c. The assets within the trust grow tax-free because the grantor is paying the taxes. This often proves to be an incredible benefit for the trust as the earnings are able to grow without being subject to tax, and it can be viewed as an additional gift to the trust that is not subject to gift tax liability. The assets within BERT are generally protected from the claims of creditors. This is so for the following potential claims:
2. Claims asserted against the Donee-Spouse. 3. Claims asserted against the remainder beneficiaries (i.e. children) depending upon the drafting of the document regarding the limitation on the access these beneficiaries have to the assets within the trust. The assets may not be protected if the conveyance to the trust was made with the intent to defraud creditors. All states have a form of statute regarding conveyances with the intent to defraud creditors, and care must be taken to avoid transfers resulting in a violation of these statutes. In addition to the creditor protection, the Donee-Spouse and the remainder beneficiaries may have protection from failed marriages. If a beneficiary is going through a divorce, the assets within the trust will not be subject to court division between the divorcing parties. Drafting Flexibility of the BERT The provisions of the BERT can be very flexible, and need not comply with the requirements of the unlimited marital deduction rules. In essence a Donor-Spouse may place requirements in the trust for just about anything that is not illegal or against public policy. The unlimited marital deduction rules require the following:
2. The Donee-Spouse must be allowed to convert non-income producing assets into income producing assets. 3. The trust must last the lifetime of the Donee-Spouse. 4. The remaining assets in the trust at the time of the Donee-Spouse’s death must be included in his or her estate for estate tax purposes.
Spouse get divorced or separated. The trust assets would then flow for the benefit of the beneficiaries named when the spouse’s interest ends. 2. The Donee-Spouse’s interest may terminate upon a remarriage after the donor’s death. 3. Distributions to future beneficiaries (ie: children) can also include flexible instructions based upon the wishes of the donor. The generation skipping transfer tax (GST) exemption may be used if the Donor-Spouse wishes to keep the assets creditor protected, failed marriage protected and free from estate taxation for future generations. However, the Donor-Spouse must comply with certain requirement to ensure a proper allocation of this exemption, and should do the following:
wherein it reports the gift. 2. The gift reported on the gift tax return should then be allocated to the donor’s GST exemption. of the Donee-Spouse, some of the donor’s GST exemption may be wasted. The Slow and Steady Growth of a BERT is Powerful This strategy is often suggested to clients of modest wealth as well as to clients who have a high net worth. If a gift of the annual exclusion amount is not made to a person in any given year, it is forever given up, and one cannot thereafter make the gift without a gift tax consequence. Thus annual exclusion gifts are “use them or lose them” opportunities. Over time, annual exclusion gifts can grow remarkably, particularly if the income tax liability is deflected to the donor pursuant to the provisions of a grantor trust. Assume a donor creates a BERT as a grantor trust and every year funds the maximum annual exclusion gift, within the 5 and 5 rules, using two different rates of growth as examples. The following are the projected amounts in the BERT at different year intervals: 6 % Growth Rate 8% Growth Rate 10% Growth Rate Year 5 $ 29,877 Year 5 $ 31,679 Year 5 $ 33,578 Year 10 $ 69,858 Year 10 $ 78,227 Year 10 $ 87,656 Year 20 $ 211,735 Year 20 $ 279,854 Year 20 $ 365,751 Year 30 $ 543,948 Year 30 $ 791,930 Year 30 $ 1,159,038 Year 35 $ 799,629 Year 35 $1,239,637 Year 35 $ 1,947,229 If the donor lives thirty years after the creation of the BERT, at 10% growth rate, he or she will have created more than a million dollars exempt from estate taxes, over and above the exemption Congress gives to everyone. If the donor’s estate tax bracket is 50%, he or she will have saved one half of those amounts from estate taxation. If the donor only lives five years from the date the BERT was created, he or she would have saved one half of the five- year amounts stated above from taxation. Please contact our office or view the attached files to learn more about the BERT Trust. |
GONNELLA & MAJORS, PC
Attorneys and Counselors at Law
Attorneys in Our Office Carol H. Gonnella, J.D. M. Jason Majors, J.D., LL.M. Stephen P. Adamson, Jr., J.D. David I. Beckett, J.D., LL.M. |
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| Gonnella & Majors, PC ▪ 575 South Willow Street ▪ P.O. Box 1226 ▪ Jackson, WY ▪ 83001 Phone (307) 733-5890 ▪ Facsimile (307) 734-0544 ▪ www.wyomingestatelaw.com Disclaimer: Wyoming Rule of Professional Conduct 7.3(b), requires a notification that this is an advertisement. The Wyoming State Bar does not certify any lawyer as a specialist or expert. Anyone considering a lawyer should independently investigate the lawyer’s credentials and ability, and not rely upon advertisement or self– proclaimed expertise. |