Estate Planning in 2010

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Hell has Frozen Over - Estate Planning in light of Estate Tax repeal

Hell has Frozen Over - Estate Planning in light of Estate Tax repeal

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  • 1. Andrew H. Hook Certified Elder Law Attorney Certified Financial Planner® Letha S. McDowell Attorney at Law Tax Practitioner Copyright 2010 Oast & Hook, P.C.
  • 2. Hell Has Frozen Over! Estate Tax Rules Create Uncertainty. Copyright 2010 Oast & Hook, P.C.
  • 3. 2010  The year of NO ESTATE TAX  The year of CARRYOVER BASIS  The year of UNCERTANITY! Copyright 2010 Oast & Hook, P.C.
  • 4. History  2001 Congress passed The Economic Growth and Tax Relief Reconciliation Act (EGTRRA).  EGTRRA gradually increased estate and generation skipping transfer (GST) tax exemption to a maximum of $3.5 million in 2009.  Estate and GST tax exemption is the maximum an individual can pass estate tax free at his or her death.  Gift tax exemption remained at $1 million.  EGTRRA also provided for carryover basis rather than step up in basis for property passing due to death in 2010. Copyright 2010 Oast & Hook, P.C.
  • 5. Repeal of the Estate and GST Tax  EGTRRA has a “sunset” provision which means that the estate tax exemption is to return to 2001 levels in 2011.  EGTRRA provides that there is no estate or GST tax in 2010.  EGTRRA did not repeal the gift tax in 2010. Copyright 2010 Oast & Hook, P.C.
  • 6. 2011 Estate Tax  Exemption - $1,000,000  Rate – 55% of any assets over $1,000,000  Annual Gift Tax Exclusion – $13,000  GST Exclusion - $1,000,000 Example – net estate $1,500,000, tax due = $275,000 Copyright 2010 Oast & Hook, P.C.
  • 7. Common Sense  Since EGTRRA, common wisdom has said that there is no way Congress can allow no estate tax and carryover basis in 2010 but reinstate prior law in 2011 and thereafter with a $1 million exemption.  Most estate planning documents drafted based on that assumption. Copyright 2010 Oast & Hook, P.C.
  • 8. Broken Government  December 14, 2009, the House of Representatives passed a bill extending the $3.5 million dollar estate tax exemption.  But the Senate could not quite agree. So nothing passed in 2009.  2010 is an election year. Copyright 2010 Oast & Hook, P.C.
  • 9. Where Are We Today?  High budget deficits make repeal of the estate and GST tax unlikely.  Many professionals think that Congress may pass a tax bill this year.  Others believe that in an election year a tax bill is highly unlikely.  What the next congress will decide to do is uncertain at best. Copyright 2010 Oast & Hook, P.C.
  • 10. What is the Problem?  Uncertainty in planning for the future.  Estate planning documents based on “formula gifts.”  Individuals dying in 2010 with the formula gift may not get the result they expected.  Individuals who planned with the expectation of a $3.5 million exemption.  Over three times as many taxpayers will be affected by these tax rules.  The tax rules provide the worst result for individuals with between $1.3 million and $3.5 million in assets. Copyright 2010 Oast & Hook, P.C.
  • 11. Carryover Basis  Carryover basis problem:  Lack of basis information on assets;  May cause additional tax to beneficiaries; and  May cause problems with family members, depending on who is making the election.  No basis adjustments for life estates.  Uncertainty of basis adjustments for irrevocable trusts.  Taxpayer (or his Executor) has the burden of proof for basis information. Copyright 2010 Oast & Hook, P.C.
  • 12. What Should You Do Today?  Update your financial statement.  Review and “patch” existing wills and trusts.  Carryover basis – Determine basis in all assets. Copyright 2010 Oast & Hook, P.C.
  • 13. How Should You Plan in a Period of Uncertainty?  Estate Tax Planning:  For estates below $1 million, it is probably unnecessary.  For estates between $1 million and $3.5 million, use disclaimer planning.  For estates above $3.5 million, use marital deduction planning formulas, irrevocable life insurance trusts (ILITs), and discount planning.  Be prepared for additional change:  Discount planning.  Crummey withdrawal rights.  Include flexibility in your documents.  Meet regularly with your estate planner. Copyright 2010 Oast & Hook, P.C.
  • 14. Do Not Let the Tax Tail Wag the Dog!  Plan for the management of your affairs if you become incapacitated.  Plan for the payment of long-term care costs.  Plan to protect your beneficiary’s inheritance.  Plan to avoid conflicts between spouses and children by prior marriages. Copyright 2010 Oast & Hook, P.C.
  • 15. Oast & Hook, P.C. Skanska Building 295 Bendix Road, Suite 170 Virginia Beach, Virginia 23452 TowneBank Building 200 High Street, Suite 402 Portsmouth, Virginia 23704 101 East Elizabeth Street Elizabeth City, North Carolina 27909 757-399-7506 252-722-2890 Copyright 2010 Oast & Hook, P.C.