2011 Tax Seminar
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This document summarizes the 2010 estate tax law and its implications. It discusses: 1) The prior estate tax laws from 2001-2009 which gradually increased the estate tax exemption and lowered rates. In 2010 there was a full repeal of the estate tax. 2) The new 2010 law which set the estate tax exemption at $5 million and top rate at 35% for 2011-2012. The exemption will be indexed for inflation after 2011. 3) Estate planning strategies in light of the higher exemptions including whether a bypass trust is still necessary given tools like portability which allow spousal exemption transfers.
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2011 Tax Seminar
- 1. Interpreting the 2010 Estate Tax Law Client Seminar May 25, 2011 750 University Avenue Suite 140 Los Gatos, CA 95032 (408) 354-0200 www.css-lawfirm.com Leslie Yarnes Sugai
- 2. Leslie Yarnes Sugai, Esq. 2 Prior Law Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). 2001- 2009 phased in increases of estate tax exemption and reduction in estate tax rate
- 3. Leslie Yarnes Sugai, Esq. 3 Prior Law
- 4. Leslie Yarnes Sugai, Esq. 4 Prior Law 2010- complete repeal of estate tax Modified carry over basis rules
- 5. Leslie Yarnes Sugai, Esq. 5 New Law Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 Enacted December 17, 2010 Repeals portions of prior law as if never existed
- 6. Leslie Yarnes Sugai, Esq. 6 Deaths in 2010 Under New Law Can select which tax method to use 1. Modified carry over basis rules with no estate tax, or 2. Estate tax at 35% with $5,000,000 exemption
- 7. Leslie Yarnes Sugai, Esq. 7 2010 Act Tax Summary 2011 tax rates for estate, gift & GST tax: A. $5,000,000 exemption B. 35% estate tax rate
- 8. Leslie Yarnes Sugai, Esq. 8 2010 Act Tax Summary 2012 tax rates for estate, gift and GST tax: A. $5,000,000 exemption plus inflation adjustment B. 35% rate
- 9. Leslie Yarnes Sugai, Esq. 9 2010 Act Tax Summary 2010 Act onsets after 2012 2013 tax rates – return to prior tax structure For Estate and Gift Taxes A. $1,000,000 exemption B. 55% rate
- 10. Leslie Yarnes Sugai, Esq. 10 Revocable Trust Tax Planning Typical Revocable Trust with Tax Planning an A/B trust – splits at first death into survivor’s and bypass sub-trusts
- 11. 11 Living Trust Est ate Community Property owned equally by both spouses ½ ½ Decedent’s Pourover Will Decedent’s Non-Trust Property Objective: Designate Beneficiaries of Decedent’s Non-Trust Property Probate Fees First Death Outright Gifts Survivor’s Estate Decedent’s Estate Survivor’s Revocable Trust Surviving Spouse’s Entire Estate Objective: Avoids Probate for Estate in the Trust Distributes Estate of Beneficiaries after death A Irrevocable Trusts nottaxed taxed taxed equals unified credit B Bypass Trust $5 Million* Objective: Save on Estate Taxes *maximum C Marital Trust Remaining Estate Objective: Decedent Designates Eventual Beneficiaries D Disclaimer Trust Part of Remaining Estate Objective: Save on Estate Taxes for large estates unified credit protects first taxed with surviving spouse’s estate nottaxed nottaxed Second Death Survivor’s Pourover Will Survivor’s Non-trust Property Children’s Trust Objective: To Hold Inheritance Until Designated Event Occurs Probate Outright Gifts Fees S u r v I v o r’ s D e c e d e n t’ s s e p a r a t e p r o p e r t y s e p a r a t e p r o p e r t y
- 12. Leslie Yarnes Sugai, Esq. 12 Is a Bypass Trust Still Necessary? Review following factors: 1) size of estate 2) family situation 3) comfort level for surviving spouse to have full control
- 13. Leslie Yarnes Sugai, Esq. 13 Portability New Provision in Tax Code - Surviving spouse is allowed to use the unused estate tax exemption amount of deceased spouse
- 14. Leslie Yarnes Sugai, Esq. 14 Portability DSUEA – Deceased Spouse’s Unused Exclusion Amount
- 15. Leslie Yarnes Sugai, Esq. 15 Portability - Benefits for future - Only valid for 2011 & 2012 - Not available for 2010 - Only for most recent deceased spouse - Must file estate tax return to claim
- 17. Portability
- 19. To benefit surviving spouse
- 20. No longer tax driven : use disclaimer trust for post-death tax planning
- 21. Leslie Yarnes Sugai, Esq. 18 Gifting -Previously to reduce Estate Taxes -Now- Shift of wealth at $5M exclusion
- 22. Leslie Yarnes Sugai, Esq. 19 Gifting -Clawback concerns -Delay gifts until end of 2012 Wait for congress to correct clawback and change 2013 exemption.
- 23. Leslie Yarnes Sugai, Esq. 20 Future- 2013 and Beyond -What new laws will congress pass?
- 24. Leslie Yarnes Sugai, Esq. 21 To change EP? -Modify now or later? -No clear answer
- 25. Thank you for coming Janis Carney Leslie Yarnes Sugai Sheri Sudweeks 22
Editor's Notes
- -The prior law is what we have discussed in prior seminarsLaw in effect for 10 years – with sunset in 2010 for no estate taxEP did not believe we would ever hit the sunset without a tax law change
- -Rates climbed over the past few years and for many, once we hit 2009 – no longer taxable EP-With change in rates, annual letters indicated whether you had continued Estate tax concerns
- -Concerns were always 2010 – if no new law enacted, what would we do.-Repeal of Estate Tax not beneficial to all estates-No longer an automatic step-up in cost basis – shifts taxes to income tax side-If parent died- how to determine cost basis of stock purchased 30 years ago?
- -Enacted at the 11th hour -All estates for 2010 had been on hold while we waited for Congress to act-Brought us back to where we started in 2009, but better
- -Seminar not to discuss TA and issues for deaths in 2010-However, for general knowledge, have the option for deaths in 2010 to select which tax method to use-For small estates, will use new $5 million exemption-For larger estates, may use carry over basis-Financial calculations have to be run to see which method works out best-Tax returns for all 2010 estates are due in September-$1.3 M step up in basis plus $3M for spouse -file on form 8939 -with tax return-but form not finalized yet -estate < $5M- don’t use carry over basis
- -What does the new act mean for planning going forward?
- -So for next two years–have large exemption with a relatively low tax rate. -Good for planning, and for many aggressive tax structure in documents not necessary. -Only about5,600 decedents will have estates to pay tax @ $5m exemption-Taxes are no longer the focus of planning
- HOWEVER:-Once again, the act will sunset at the end of 2012 – taking us back to our pre-EGTRRA provisions. Return to our old tax code, with only $1M and 55% tax rateThis uncertainty is making planning difficultIf $5M no tax issue, but at $1M tax issue – how do you plan?Sunset to prior law- creates a huge amount of uncertainty
- -Refer to the chart attached.-At first death, with all CP assets, ½ of estate would flow to Survivor’s trustSurvivor maintains control, has full use and ability to amend document½ to flow to Bypass Trust. Per the tax formula, fund the bypass with up to the amount of the estate tax exemption.These assets, as less than the exemption, are effectively taxed at first tax. They then bypass being taxed at the second deathWith $5 million exemption – can protect $10M estateBypass trust is irrevocable – cannot be changed, restrictions on access to asset for surviving spouse. Beneficiaries cannot be changed
- -If in S’s trust- gets a step-up in basis
- -Must timely file an estate tax return and make an irrevocable election-May require filing an estate tax return, even if the estate would not normally be required to file-If you fail to make the election on the tax return – you have lost the portability optionEx. Fred Dies-Exclusion amt. $5mTotal estate $1.5mUnused Exclusion $3.5m-For estate and gift tax exemption
- -3.5M-DSUEA for Wilma -W dies- 5+35M = 8.5M
- - May require filing for every first spouse to - If don’t make claim portability is lostA/B planning with out B Trust Only use with most recent deceased spouse -Cant accumulate DSVEA
- -With $5M- depends on size of estate-Portability will adjust for discrepancies in size of estate between spouses
- - Flexibility is keyAway from tax planningFormula clause causing unintended results Concerns- beneficiaries control of SS With no ET- over funding or under funding sub-trusts
- -Smaller estates- may limit gifting because of lower exclusions-Larger estates- if believe exemption is as high as will go - gift to take advantage of $5M-No longer any motivation for gifting
- -If exemption decreases -Will gifts be brought back into estate?-Wait to see if congress changes law? -Will $5M be on going?
- -No clear guidance of future: President $5M concession on jobs bill-still set on $3.5: Repeal still discussed: EP believe $5M here to stay -no guarantee -rates may be impacted
- -Planning only certain for two years-Consider changing focus of planning-move away from taxes-plan for LTC.-Unclear if portability will continue