The Myths & Realities Of Estate Planning 2009


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In this presentation I debunk some common misconceptions with estate planning. This knowledge and more is available to my clients. Audio will soon be added.

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  • Let’s spend a few minutes today reviewing some of the myths and realities of estate planning. By dispelling some of the common misconceptions, we will have a better understanding of how important it is to take positive action to keep our estate plans in order.
  • The Myths & Realities Of Estate Planning 2009

    1. 1. The Myths and Realities of Estate Planning Presented by: Christopher P. Walmsley, CLTC PM Financial Group The Ohio National Life Insurance Company Ohio National Life Assurance Corporation
    2. 2. <ul><li>The Ohio National Life Insurance Company and Ohio National Life Assurance Corporation issue a variety of life insurance and annuity products. Product availability varies by state. Guarantees are based upon the claims-paying ability of the issuer. </li></ul>
    3. 3. <ul><li>This presentation is intended to discuss estate planning concepts in general under current tax laws. Tax laws are subject to change. </li></ul><ul><li>This presentation is neither intended to serve as legal advice nor as an opinion of legal or tax consequences of any planning techniques. </li></ul><ul><li>You should always consult with legal and tax advisers to determine how laws and tax rules may impact your particular circumstances. </li></ul>
    4. 4. “ The current estate tax law puts estate tax planners in an impossible situation” – Wall Street Journal, 11 May 2005
    5. 5. Myth #1 The Federal Estate Tax Was Repealed
    6. 6. Reality: Repeal is only scheduled for 2010 * *Under current tax laws. Tax laws are subject to change. Year Applicable Credit Amount Applicable Exclusion Amount (estate tax free amount) Top Federal Estate Tax Rate 2009 $1,455,800 $3,500,000 45% 2010 No FET No FET N/A 2011+ $345,800 $1,000,000 55%
    7. 7. Permanent Repeal: Not an easy task 60
    8. 8. Permanent Repeal: Loss of revenue *Cost of H.R. 8 through 2015. Source: Joint Tax Committee $290,000,000,000 *
    9. 9. Permanent Repeal: A political issue <ul><li>Repeal efforts on “life support” </li></ul><ul><li>Senate </li></ul><ul><ul><li>2005: 58 Senators in support of repeal </li></ul></ul><ul><ul><li>2007: 48 Senators in support of repeal </li></ul></ul><ul><ul><li>2008: no straw poll taken </li></ul></ul><ul><ul><li>It is unlikely that the federal estate tax will be repealed </li></ul></ul>
    10. 10. Permanent Repeal or Reform <ul><li>Resolution of the estate tax issue would assist planners </li></ul><ul><li>Many in Congress agree that something needs to be done </li></ul><ul><li>2009 could be the right time for reform </li></ul><ul><ul><li>Possible reform: freeze 2009 exemption & rates </li></ul></ul><ul><ul><li>Until the estate tax laws are stabilized, flexibility in planning will remain a priority </li></ul></ul>
    11. 11. Permanent Repeal: Past is Prologue <ul><li>1797 : Enacted – U.S. Navy </li></ul><ul><li>1802 : Repealed </li></ul><ul><li>1862 : Enacted – Civil War </li></ul><ul><li>1870 : Repealed </li></ul><ul><li>1898 : Enacted – Spanish American War </li></ul><ul><li>1902 : Repealed </li></ul><ul><li>1916 : Enacted – WWI </li></ul><ul><li>2010 : Repealed – EGTRRA </li></ul><ul><li>2011 : Enacted – Sunset provision </li></ul>
    12. 12. Myth #2 State Death Taxes Were Repealed
    13. 13. <ul><li>State death tax credit repealed </li></ul><ul><ul><li>Deduction as of 2005 </li></ul></ul><ul><li>Loss of revenue </li></ul><ul><ul><li>Up to $1 billion in California (New York Times 6-21-01) </li></ul></ul><ul><ul><li>Typical state loss of revenue 2-5% (New York Times 6-21-01) </li></ul></ul>Reality: It Depends On The State
    14. 14. The States Respond: Decoupling <ul><li>Decoupling </li></ul><ul><ul><li>14 states decoupled as of January, 2009 </li></ul></ul><ul><li>Free-standing </li></ul><ul><ul><li>7 states have estate taxes that were never tied to the federal system </li></ul></ul><ul><li>Multiple taxes </li></ul><ul><ul><li>2 states impose multiple estate and inheritance taxes. </li></ul></ul>
    15. 15. No State Death Taxes As Of January 2009 Most states have estate and inheritance taxes that are levied in addition to the federal estate tax. State death tax rates generally range from 5-20%. States That Have No Death Tax Alabama Alaska Arizona Arkansas California Colorado Delaware Florida Georgia Hawaii Idaho Louisiana Michigan Mississippi Missouri Montana Nevada New Hampshire New Mexico North Dakota South Carolina South Dakota Texas Utah Virginia West Virginia Wisconsin Wyoming
    16. 16. State Death Tax: Examples <ul><li>California/Florida/Texas </li></ul><ul><ul><li>State estate tax tied to federal credit </li></ul></ul><ul><ul><li>No state estate tax in 2009 </li></ul></ul><ul><li>Pennsylvania </li></ul><ul><ul><li>State estate tax not tied to the federal tax </li></ul></ul><ul><ul><ul><li>$2.0 million to family trust = $94,076 state death tax at 1st death </li></ul></ul></ul><ul><ul><ul><li>$3.0 million to family trust = $134,843 state death tax at 1st death </li></ul></ul></ul><ul><ul><ul><li>$4.0 million to family trust = $179,843 state death tax at 1st death </li></ul></ul></ul><ul><ul><li>Life insurance death benefits are exempt from state estate and inheritance taxes in some states. </li></ul></ul>
    17. 17. Myth #3 Life Insurance for Tax Liquidity is Unnecessary if Federal Estate Tax is Repealed
    18. 18. Reality: Capital Gains and State Death Taxes Remain <ul><li>Modified carryover basis </li></ul><ul><ul><li>Stepped up basis ends in 2010 </li></ul></ul><ul><ul><li>$3 million spousal property basis increase </li></ul></ul><ul><ul><li>$1.3 million aggregate basis increase </li></ul></ul><ul><ul><li>Capital gains taxes due when property is sold </li></ul></ul><ul><ul><li>Premium on record keeping </li></ul></ul>
    19. 19. Capital Gains Regime: Example <ul><li>$6 million business </li></ul><ul><li>Business is sold pursuant to a buy-sell </li></ul><ul><ul><li>$6 million less $4.3 million basis = $1.7 million of taxable gain </li></ul></ul><ul><ul><li>$1.7 million x 26% state and fed tax rate = $442,000 capital gains tax </li></ul></ul><ul><ul><li>“ Some heirs . . . could wind up owing more in capital gains taxes when they sell than they would save from the elimination of the estate tax” Ernst & Young – Wall Street Journal, 11 May 2005. </li></ul></ul>If the taxpayer is married ...
    20. 20. Capital Gains Regime: Example <ul><li>$6 million business </li></ul><ul><li>$1 million basis </li></ul><ul><li>Business is sold by pursuant to a buy-sell </li></ul><ul><ul><li>$6 million less $1.3 million basis = $4.7 million of taxable gain </li></ul></ul><ul><ul><li>$4.7 million x 26% state and fed tax rate = $1.2 million capital gains tax </li></ul></ul><ul><ul><li>These examples do not include state estate taxes ranging from 5-20% </li></ul></ul>If the taxpayer is single ...
    21. 21. Myth #4 In 2009, the Unified Credit Shields Lifetime Gifts of up to $2 Million
    22. 22. Reality: Gift Tax Exclusion Remains at $1 Million The annual gift tax exclusion for 2009 is $13,000 per recipient Year Federal Estate Tax Exclusion Amount Gift Tax Exclusion Amount Top Federal Gift Tax Rate 2009 $3,500,000 $1,000,000 45% 2010 No FET $1,000,000 35% 2011+ $1,000,000 $1,000,000 55%
    23. 23. Myth #5 You Should Review Your Wills and Trusts Every 3 to 5 Years
    24. 24. Reality: Annual Reviews May Be Necessary In this example, death in 2009 could force the surviving spouse to elect against the decedent’s will causing additional delays and expenses Example: $3.5 Million Estate with Generic Bypass Language Year Bypass Amount Amount to Spouse 2009 $3.5 million $0 2010 Entire Estate 2011+ $1.0 million $2.5 million
    25. 25. Annual Reviews: Topics <ul><li>Amend pre-2001 documents </li></ul><ul><ul><li>Specific bypass amount </li></ul></ul><ul><ul><li>Marital share floor </li></ul></ul><ul><li>Decoupled death taxes </li></ul><ul><ul><li>Amend documents </li></ul></ul><ul><ul><li>Additional liquidity </li></ul></ul><ul><li>Reposition assets </li></ul>
    26. 26. Myth #6 Because of Tax Law Uncertainty, You Should Avoid Using Life Insurance Trusts
    27. 27. <ul><li>“… the trustee, in such trustee’s sole discretion, may terminate this trust by distributing the trust principal to any of the grantor’s then living descendants who are beneficiaries of this trust or to the grantor’s spouse in whatever proportion the trustee then deems appropriate…” </li></ul>Reality: Trusts Can Be Drafted with Flexibility Escape Clause (excerpt)
    28. 28. Myth #7 Estate Tax Reform, or Repeal, Would Signal the End of Charitable Giving
    29. 29. Reality: Charitable Giving is Growing Annual Contributions to Charities 2000-2007 ($billions) Federal Estate Tax Exclusion Amount 2000-2007 Source: Giving USA Foundation 2008
    30. 30. Charitable Giving: A Grass Roots Effort Source: American Association of Fundraising Council 2006
    31. 31. Myth #8 Revocable Living Trusts Reduce Taxes
    32. 32. Reality: Revocable Living Trusts Do Not Reduce Taxes <ul><li>Transfers to revocable trusts do not reduce estate taxes. They are considered “incomplete transfers” </li></ul><ul><ul><li>Income taxes </li></ul></ul><ul><ul><li>Gift taxes </li></ul></ul><ul><ul><li>Estate taxes </li></ul></ul>Revocable living trusts may achieve other goals such as planning for incapacity, reducing probate and providing privacy, among other things
    33. 33. Myth #9 Estate Planning is Dead
    34. 34. Reality: Estate Planning Lives! <ul><li>Asset protection </li></ul><ul><li>Family business planning </li></ul><ul><li>Multi-generational planning </li></ul><ul><li>Privacy </li></ul><ul><li>Income replacement </li></ul><ul><li>Equalization of inheritance </li></ul><ul><li>Special needs dependents </li></ul><ul><li>Charitable giving </li></ul>Life Insurance may help you achieve many of these goals
    35. 35. Your 72-Hour Plan <ul><li>Take one step with your estate plan in the next three days </li></ul>