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“ Current Tax Legislation and Estate Planning Practices” San Diego Paralegal Association Daniel K. Printz, Esq. June 3, 2009
Applicable Taxes <ul><li>Advanced estate planning focuses primarily on reducing transfer taxes and income taxes. </li></ul...
<ul><li>The gift tax applies to transfers made during life </li></ul><ul><li>The estate tax applies to transfers at death,...
Famous Last Words <ul><li>“Go away.  I feel fine.” </li></ul><ul><ul><li>H. G. Wells, writer </li></ul></ul>
Generation–Skipping Transfer Tax <ul><li>The GSTT is a one-rate tax equal to the highest applicable estate tax rate, and i...
Tonight’s Topics <ul><li>Current Estate Tax law </li></ul><ul><li>Pending Estate Tax law </li></ul><ul><li>Recommended Act...
Current Law <ul><li>Economic Growth and Tax Relief Reconciliation Act of 2001 (&quot;EGTRRA&quot;)   </li></ul><ul><li>The...
<ul><li>Year   Estate Tax Exemption   Top Tax Rate </li></ul><ul><li>2001    $675,000 60 </li></ul><ul><li>2002  $1,000,00...
S.AMDT. 873 TO S.CON.RES. 13  <ul><li>The  Estate Tax Cut Amendment  decreases the maximum federal tax on estates to 35% a...
Determining the Estate Tax <ul><li>Upon death, the decedent's gross estate includes the then current fair market value of ...
Famous Last Words <ul><li>“Don’t let it end like this.  Tell them I said something!” </li></ul><ul><ul><li>Pancho Villa </...
H.R. 205  <ul><li>Death Tax Repeal Act of 2009 </li></ul><ul><li>Introduced: 01.06.2009 [House] </li></ul><ul><li>Sponsor:...
H.R. 205, Repeal Unlikely <ul><li>Charles Rangel (D-N.Y.), the head of Ways and Means, told reporters in March that estate...
Now is the time to strike! <ul><li>Paralegals may be involved in bringing clients back to the office. </li></ul><ul><li>Re...
Recommended Actions <ul><li>Gifting </li></ul><ul><li>GRATs </li></ul><ul><li>Selling </li></ul><ul><li>Minority Discounts...
Gifting <ul><li>Historically low IRS interest rates continue their downward trend.  </li></ul><ul><ul><li>Grantor Retained...
Gifting – the Gift Tax <ul><li>A donor can give assets with unlimited values to spouses who are U.S. citizens and to quali...
Gifting - Grantor Retained Annuity Trusts <ul><li>GRATs allow a business owner (the “donor”) to transfer closely held stoc...
Gifting - GRATs may be limited! <ul><li>Under the Obama plan, GRATs less than 10 years in duration would be prohibited, me...
Selling <ul><li>Take advantage of low capital gains rate – dropping since 2003, now at 15% for folks in the higher tax bra...
Minority Interests <ul><li>The value of a decedent’s estate can be significantly reduced depending upon how a person’s ass...
Minority Interests - H.R. 436 <ul><li>Congress is considering legislation to limit the use of minority interest discounts ...
Minority Interests - H.R. 436 <ul><li>The new rule would eliminate the “minority discount” in determining the value of a m...
Famous Last Words <ul><li>“It’s not that I’m afraid of death.  I just don’t want to be there when it happens.” </li></ul><...
Our Old Standby Trusts Still Work <ul><li>A-B Trusts (preserving both spouses’ estate tax exemptions) </li></ul><ul><li>A-...
The A-B-C Trust <ul><li>Trust A (aka the Survivor's Trust) contains the surviving settlor's assets only.  </li></ul><ul><l...
ABC – the Marital “C” subtrust <ul><li>The most common type of marital trust is the &quot;qualified terminable interest pr...
A-B-C Diagram
Famous Last Words <ul><li>“I should never have switched from Scotch to Martinis.” </li></ul><ul><ul><li>Humphrey Bogart, a...
If AB & ABC work, why go beyond the basics? <ul><li>Revocable trusts cannot eliminate estate taxes for unmarried individua...
Difficulties Educating Clients: Being Selfless <ul><li>Clients themselves don’t benefit directly from estate planning (fin...
Difficulties Educating Clients: Uncomfortable Choices <ul><li>Qualified Personal Residence Trust -- requires client to giv...
Working with CPAs <ul><li>Very important to work with highly qualified CPAs </li></ul><ul><li>Look for experience with pos...
Don’t forget Non-tax goals! <ul><li>Revocable living trusts can accomplish most of a client’s non-tax objectives.  </li></...
Famous Last Words <ul><li>“I’ve had a hell of a lot of fun and I’ve enjoyed every minute of it.” </li></ul><ul><ul><li>Err...
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Current Tax Legislation And Estate Planning Practices

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Overview of pending tax legislation, as presented in speech to the San Diego Paralegal Association

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Transcript of "Current Tax Legislation And Estate Planning Practices"

  1. 1. “ Current Tax Legislation and Estate Planning Practices” San Diego Paralegal Association Daniel K. Printz, Esq. June 3, 2009
  2. 2. Applicable Taxes <ul><li>Advanced estate planning focuses primarily on reducing transfer taxes and income taxes. </li></ul><ul><li>Under current federal law, there are three taxes that are imposed on the transfer of assets: </li></ul><ul><ul><li>the gift tax </li></ul></ul><ul><ul><li>the estate tax, and </li></ul></ul><ul><ul><li>the generation-skipping transfer tax (&quot;GSTT&quot;). </li></ul></ul><ul><li>In  addition to the transfer taxes that may apply, income tax can also reduce transfers. </li></ul>
  3. 3. <ul><li>The gift tax applies to transfers made during life </li></ul><ul><li>The estate tax applies to transfers at death, and </li></ul><ul><li>The generation-skipping transfer tax applies to transfers during life or at death that skip the children's generation and pass to &quot;skip persons&quot;, usually grandchildren, etc. </li></ul>
  4. 4. Famous Last Words <ul><li>“Go away. I feel fine.” </li></ul><ul><ul><li>H. G. Wells, writer </li></ul></ul>
  5. 5. Generation–Skipping Transfer Tax <ul><li>The GSTT is a one-rate tax equal to the highest applicable estate tax rate, and it applies in addition to any applicable gift or estate tax. </li></ul><ul><li>Estate taxes paid are deducted before computing the GSTT, but combination of the estate tax and the GSTT can result in a combined rate of over 70%. </li></ul><ul><li>Each donor or decedent has a GST exemption, which can be used for transfers either during life or at death. </li></ul>
  6. 6. Tonight’s Topics <ul><li>Current Estate Tax law </li></ul><ul><li>Pending Estate Tax law </li></ul><ul><li>Recommended Actions </li></ul><ul><li>Current Opportunities </li></ul>
  7. 7. Current Law <ul><li>Economic Growth and Tax Relief Reconciliation Act of 2001 (&quot;EGTRRA&quot;) </li></ul><ul><li>The estate tax is a tax on the transfer of assets to a person’s heirs. Currently, the maximum federal tax is 45% and only estates of up to $3.5 million are exempt. The tax is currently set to expire in 2010, but return in 2011 with a $1 million exemption and a maximum tax rate of 60% </li></ul>
  8. 8. <ul><li>Year Estate Tax Exemption Top Tax Rate </li></ul><ul><li>2001  $675,000 60 </li></ul><ul><li>2002  $1,000,000 50 </li></ul><ul><li>2003  $1,000,000 49 </li></ul><ul><li>2004 $1,500,000 48 </li></ul><ul><li>2005  $1,500,000 47 </li></ul><ul><li>2006  $2,000,000 46 </li></ul><ul><li>2007  $2,000,000 45 </li></ul><ul><li>2008  $2,000,000 45 </li></ul><ul><li>2009  $3,500,000 45 </li></ul><ul><li>2010  Repealed </li></ul><ul><li>2011  $1,000,000 60 </li></ul>
  9. 9. S.AMDT. 873 TO S.CON.RES. 13 <ul><li>The Estate Tax Cut Amendment decreases the maximum federal tax on estates to 35% and exempts estates of up to $5 million per individual from the tax. This amount is indexed for inflation. </li></ul>
  10. 10. Determining the Estate Tax <ul><li>Upon death, the decedent's gross estate includes the then current fair market value of all property interests held by the decedent at the time of his or her death, whether passing by operation of law (such as joint tenancy assets), by operation of contract (such as insurance proceeds), or by operation of probate laws. </li></ul><ul><li>There are deductions for debts, administrative expenses, qualified transfers to spouses, and transfers to qualified charities. </li></ul><ul><li>The net amount is the taxable estate .  To the extent the applicable exclusion has not be utilized for lifetime gifts, it will be applied to the taxable estate. The estate tax is paid out of the taxable assets, so the amount of the estate tax itself is actually included in the computation of the tax. </li></ul><ul><li>Amount to pay = Tentative Tax less the Unified Credit </li></ul>
  11. 11. Famous Last Words <ul><li>“Don’t let it end like this. Tell them I said something!” </li></ul><ul><ul><li>Pancho Villa </li></ul></ul>
  12. 12. H.R. 205 <ul><li>Death Tax Repeal Act of 2009 </li></ul><ul><li>Introduced: 01.06.2009 [House] </li></ul><ul><li>Sponsor: Rep. Mac Thornberry [R-TX] </li></ul><ul><li>The Death Tax Repeal Act would eliminate the estate tax from the federal tax code. </li></ul>
  13. 13. H.R. 205, Repeal Unlikely <ul><li>Charles Rangel (D-N.Y.), the head of Ways and Means, told reporters in March that estate tax is not even on his Committee's agenda. </li></ul><ul><li>According to the March 26 BNA Daily Tax Report, there are House members that are concerned that a permanent extension of a $3.5 million exemption amount would lose too many tax dollars in these hard times. </li></ul>
  14. 14. Now is the time to strike! <ul><li>Paralegals may be involved in bringing clients back to the office. </li></ul><ul><li>Remember to inform, not advise. </li></ul><ul><li>A(n almost) Perfect Storm. </li></ul><ul><ul><li>Low taxes </li></ul></ul><ul><ul><li>Low interest rates </li></ul></ul><ul><ul><li>Low valuations </li></ul></ul>
  15. 15. Recommended Actions <ul><li>Gifting </li></ul><ul><li>GRATs </li></ul><ul><li>Selling </li></ul><ul><li>Minority Discounts </li></ul>
  16. 16. Gifting <ul><li>Historically low IRS interest rates continue their downward trend. </li></ul><ul><ul><li>Grantor Retained Annuity Trusts (“GRATs”), </li></ul></ul><ul><ul><li>Sales of interests in a closely held business to Grantor Trusts </li></ul></ul><ul><ul><li>simple low-interest loans to family members. </li></ul></ul>
  17. 17. Gifting – the Gift Tax <ul><li>A donor can give assets with unlimited values to spouses who are U.S. citizens and to qualified charities. </li></ul><ul><li>In 2009, gifts totaling up to $13,000 can be made to any number of individuals in each calendar year. ($26,000 per couple to indiv., or $52,000 per couple to couple) </li></ul><ul><li>&quot;Taxable gifts&quot; are all gifts other than those that qualify for the (a) unlimited marital deduction, (b) charitable deduction, or (c) $13,000 annual exclusion. </li></ul><ul><li>NOTE – Currently $1M gift exemption (if assets are 50% lower than they were a year ago – check with CPA this may have expired at end of year) </li></ul><ul><li>Bring clients in - check real property holdings, investment accounts </li></ul><ul><li>These properties will rebound, by making the gift while value is low, you’ll have doubled the amount you could transfer at minimal taxes. </li></ul>
  18. 18. Gifting - Grantor Retained Annuity Trusts <ul><li>GRATs allow a business owner (the “donor”) to transfer closely held stock, real estate, or resalable securities to a GRAT for a minimum of 2 years. If the donor receives an annuity from the GRAT, the transferred asset or at least its appreciate, will pass to donor’s family at the end of the GRAT term at a reduced value and is removed from the donor’s estate. </li></ul><ul><li>The asset is reduced for gift tax purposes because of the retained annuity. Obviously, the greater the annuity and the longer the GRAT term, the greater the reduction in value of the transferred asset. It is possible to zero-out, or eliminate, the gift tax. </li></ul><ul><li>One catch – the donor needs to survive the term of the GRAT. Thus, an 80-year old donor would not choose a 20-year GRAT. In fact, regardless of age, many donors choose 2-year GRATS to capture any savings possible, and them simply do repeated 2-year GRATS with the same assets (“rolling GRATs”). </li></ul>
  19. 19. Gifting - GRATs may be limited! <ul><li>Under the Obama plan, GRATs less than 10 years in duration would be prohibited, meaning the donor must live 10 years to remove the asset from the donor’s estate. </li></ul><ul><li>A separate proposal in Congress would not tinker with the length of the GRAT, but would require a minimum gift imposed upon the donor (perhaps 10% of the transferred asset), thus eliminating the zeroed-out GRAT. </li></ul>
  20. 20. Selling <ul><li>Take advantage of low capital gains rate – dropping since 2003, now at 15% for folks in the higher tax brackets </li></ul><ul><li>If client has sale planned, tell them to move it up! </li></ul>
  21. 21. Minority Interests <ul><li>The value of a decedent’s estate can be significantly reduced depending upon how a person’s assets are owned at death. </li></ul><ul><li>Make inter-vivos gifts of portions of the asset. Think “Family Limited Partnerships.” </li></ul><ul><li>The value of the asset is discounted due to “lack of marketability” and “minority interest” discounts. </li></ul><ul><li>Work with an experienced CPA firm. </li></ul>
  22. 22. Minority Interests - H.R. 436 <ul><li>Congress is considering legislation to limit the use of minority interest discounts for lack of control in valuing business interests transferred between family members. </li></ul><ul><li>The Certain Estate Tax Relief Act of 2009, provides new valuation rules for purposes of the federal estate tax and gift tax. </li></ul>
  23. 23. Minority Interests - H.R. 436 <ul><li>The new rule would eliminate the “minority discount” in determining the value of a minority interest in a business entity not traded on an established financial market when the transferee and his or her family members “control” the entity. </li></ul><ul><li>The proposed legislation would also eliminate valuation discounts for certain closely held entities to the extent of their non-business or passive assets. </li></ul>
  24. 24. Famous Last Words <ul><li>“It’s not that I’m afraid of death. I just don’t want to be there when it happens.” </li></ul><ul><ul><li>Woody Allen, screenwriter </li></ul></ul>
  25. 25. Our Old Standby Trusts Still Work <ul><li>A-B Trusts (preserving both spouses’ estate tax exemptions) </li></ul><ul><li>A-B-C Trusts (including a QTIP) </li></ul><ul><li>Charitable Remainder Trust </li></ul><ul><li>Charitable Lead Trust </li></ul>
  26. 26. The A-B-C Trust <ul><li>Trust A (aka the Survivor's Trust) contains the surviving settlor's assets only. </li></ul><ul><li>Trust B (aka the Credit-Shelter Trust) contains the amount that can pass free of estate taxes, which is equal to the decedent’s personal estate tax exemption. </li></ul><ul><li>Trust C is a Marital Trust, which is qualified for the marital deduction. </li></ul>
  27. 27. ABC – the Marital “C” subtrust <ul><li>The most common type of marital trust is the &quot;qualified terminable interest property trust&quot;, which is referred to as a QTIP Trust. </li></ul><ul><li>In this type of trust: </li></ul><ul><ul><li>the surviving spouse must be entitled to receive all of the trust's income during the survivor's lifetime; </li></ul></ul><ul><ul><li>no one but the surviving spouse may be a beneficiary until after the surviving spouse's death. </li></ul></ul><ul><ul><li>The QTIP is frequently used because: </li></ul></ul><ul><ul><li>This is considered a spendthrift trust in many jurisdictions, which means it is not subject to the creditor's of the surviving settlor. </li></ul></ul><ul><ul><li>The trust may restrict the surviving settlor from making changes, making it appropriate where each spouse has different beneficiaries, such as children from prior marriages. </li></ul></ul><ul><ul><li>A portion of the QTIP trust can be made exempt from the generation-skipping transfer tax (GSTT) using the GST exemption of the first spouse to die. </li></ul></ul><ul><li>Another type of marital trust is the &quot;income-and-general power of appointment&quot; trust. In this type of trust: </li></ul><ul><ul><li>The surviving spouse must be entitled to all of the trust's income during the survivor's lifetime; </li></ul></ul><ul><ul><li>the surviving spouse must have a &quot;general power of appointment&quot; that permits the survivor to say where the trust goes upon the survivor's death. </li></ul></ul>
  28. 28. A-B-C Diagram
  29. 29. Famous Last Words <ul><li>“I should never have switched from Scotch to Martinis.” </li></ul><ul><ul><li>Humphrey Bogart, actor </li></ul></ul>
  30. 30. If AB & ABC work, why go beyond the basics? <ul><li>Revocable trusts cannot eliminate estate taxes for unmarried individuals with over $3.5M or for married couples with over $7M. </li></ul><ul><li>In those cases, transfer taxes must be provided for in one way or another. </li></ul><ul><ul><li>Either the taxable estate must be reduced, or </li></ul></ul><ul><ul><li>Arrangements must be made to pay the tax. </li></ul></ul>
  31. 31. Difficulties Educating Clients: Being Selfless <ul><li>Clients themselves don’t benefit directly from estate planning (financially). </li></ul><ul><li>Most of estate-tax savings techniques require the client to give up at least some control over their own assets… </li></ul><ul><li>and/or to limit the benefits they receive from the assets. </li></ul><ul><li>The client needs to decide how much benefit and control they are willing to give up in order to benefit someone else. </li></ul>
  32. 32. Difficulties Educating Clients: Uncomfortable Choices <ul><li>Qualified Personal Residence Trust -- requires client to give away assets earlier than they normally would. </li></ul><ul><li>Charitable Remainder Trusts -- not only remove assets from the estate, but also keep those assets from the client’s children or other beneficiaries. </li></ul><ul><li>Irrevocable Trusts can be designed so that the grantor doesn’t receive trust income but pays income taxes on trust income in order to indirectly benefit trust beneficiaries without making taxable gifts. It can be unpleasant to have to pay taxes on someone else's income. </li></ul><ul><li>An easy sell: Life Insurance Trusts don’t impact lifestyle because the client is giving up control over an asset they probably wouldn’t tap into anyway. </li></ul>
  33. 33. Working with CPAs <ul><li>Very important to work with highly qualified CPAs </li></ul><ul><li>Look for experience with post-death administration and taxation </li></ul><ul><ul><li>Final Tax Returns for decedents </li></ul></ul><ul><ul><li>Estate Tax Returns </li></ul></ul><ul><ul><li>Experience using minority interests </li></ul></ul><ul><ul><li>Experience with business succession </li></ul></ul>
  34. 34. Don’t forget Non-tax goals! <ul><li>Revocable living trusts can accomplish most of a client’s non-tax objectives. </li></ul><ul><li>A properly drafted living trust can be used to: </li></ul><ul><ul><li>Provide for client’s care during any periods of incapacity without the need for conservatorship; </li></ul></ul><ul><ul><li>Make sure that assets are transferred to your intended beneficiaries; </li></ul></ul><ul><ul><li>Reduce or eliminate the need for probate proceedings at death, together with the fees, costs, and delays associate with probate; </li></ul></ul><ul><ul><li>Protect beneficiaries from mismanagement and from the claims of creditors and ex-spouses; </li></ul></ul><ul><ul><li>Discourage certain types of conduct; and/or </li></ul></ul><ul><ul><li>Give incentives to beneficiaries to be productive members of society. </li></ul></ul>
  35. 35. Famous Last Words <ul><li>“I’ve had a hell of a lot of fun and I’ve enjoyed every minute of it.” </li></ul><ul><ul><li>Errol Flynn, actor </li></ul></ul>
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