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Anita Hamilton, CPA
Anita is a tax partner in the Jackson, TN, HORNE LLP office. She primarily provides
services in federal and state tax compliance for individuals, partnerships,
corporations, trusts, non-profit entities and bankruptcy work. Anita works closely with
clients who need multi-state taxation assistance. She assists closely-held
businesses and individuals with complex areas of tax law including entity structuring
and resolving difficult tax controversies with state and federal agencies. Anita
provides comprehensive tax, estate, and other personal financial consulting services
to high net worth individuals and family groups and also provides retirement planning
consulting services.
Anita has more than 20 years of public accounting experience including real estate
tax law, tax ramifications and estate planning and guidance in compliance with
government filings.
Anita earned a Bachelor of Business Administration from Union University.
Professional Affiliations
-American Institute of Certified Public Accountants, Real Estate Tax Conference
Committee
-Tennessee Society of Certified Public Accountants, Board Member
-Tennessee Society of Certified Public Accountants, State Taxation Committee
Community Involvement
-Union University, Board of Regents
-Exchange Club - Carl Perkins Center for Prevention of Child Abuse, Board Member
-Jackson Exchange Club, Exchangite of the Year
-University School of Jackson, Past Chairman of the Board, and Finance Committee
-Jackson Symphony – Finance Chair and Board Member
Anita Hamilton
CPA
Partner
26 Security Drive
Jackson, TN 38305
Main: 731.668.7070
Direct: 731.664.3706
anita.hamilton@horne-llp.com
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Reasons for Planning
Personal
• Providing for family
• Protecting assets
• Creating a legacy
Financial
• Minimizing estate tax exposure
• Preserving and maintaining assets
• Providing for charitable desires
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Estate Planning
Determining WHEN your assets will be transferred
• During life
• After death
Determining WHERE your assets will be transferred
• Family
• Outsiders
• Charity
• IRS
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Reasons for Planning Opportunities
Low interest rates
Depressed values
Available discounts
Generous estate and gift exemptions
Low tax rates
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Estate and Gift Tax System
Gift Tax
• During Life
Estate Tax
• After Death
Generation Skipping Transfer Tax
• During Life or
• After Death
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Current Gift Tax Law
Annual exclusion = $14,000 per donee
Annual gifting program = great estate shifting tool
• Single person can move $14,000 per donee per year out of their estate
at no tax cost
• Married couple can move $28,000 per donee per year at no tax cost
Carryover basis of assets received through lifetime
transfer
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Gifts in Excess of Annual Exclusion
Lifetime gift exemption
• 2013 $5.25 Million
• 2014 forward $5.25 Million + (inflation adjusted)
Gift > annual exclusion
• Utilize lifetime exemption.
• Reduce amount of estate lifetime exemption
Gift tax and estate tax reunified
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Current Estate Tax Law
2013
• Gross estate > $5.25 million
• Estate tax rate = 40%
2014 forward
• Gross estate > $5.25 million + (inflation adjusted)
• Estate tax rate = 40%
Step up in basis of inherited assets to date of death
value.
Portability of lifetime exemption.
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Current Generation Skipping Transfer Tax Law
Applies to transfers to donees more than one generation
below donor.
In addition to estate/gift tax.
2013
• Exemption = $5.25million
• GST tax rate = 40%
2014 forward
• Exemption = $5.25million + (inflation adjusted)
• GST tax rate = 40%
No portability of lifetime GST tax exemption.
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Portability
Ability to transfer unused portion of married
decedent’s lifetime exclusion to surviving spouse.
Must file a timely Form 706.
Made permanent effective January 1, 2013
Example:
• Husband dies in 2013. His net taxable estate is $3 million and is offset
by $3 million of his $5.25 million lifetime exclusion (assuming he has
not utilized any during lifetime). His remaining $2.25 million of unused
lifetime exclusion can be transferred to his surviving spouse. Surviving
spouse now has a lifetime exclusion of $7.5 million ($5.25 million of
hers + $2.25 million unused by husband).
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Portability Malpractice Traps
Election must be made on a timely-filed estate tax
return.
• No election can be made on a late-filed return.
Statute of limitations remains open on the first-to-
die’s estate tax return until the statute has run on
the surviving spouse’s estate tax return.
• “Adequate disclosure” rules (applying to post – 1997 gifts) do
not apply.
• IRS can audit the deceased spouse’s estate tax return (even
after the normal statute of limitations has run) and add any
increase in tax to the surviving spouse’s estate tax return.
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Portability Issues
Utilizing the estate tax exemption at first spouse’s
death vs. transferring the exemption to the surviving
spouse
• Size of combined estate
• Anticipated growth of the surviving spouse’s estate
• Changes in the future estate tax law
• Asset protection issues
• Additional basis step-up of property in surviving spouse’s
taxable estate
• Malpractice risks for advisors
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Portability Recordkeeping
Estate tax returns containing a portability election
(including all supporting documentation) should be
saved indefinitely because of the extended statute of
limitations.
Track any last deceased spouse’s unused
exemption amount and its use to document how
much was used and when. The “when” is vital in the
event of the demise of a later spouse.
GST exemption will need to be monitored carefully
since it will differ from the estate exemption.
Portability is not available for the GST lifetime
exemption.
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Portability Recordkeeping
Ask if any DSUE’s exist when preparing gift tax
returns for a new client. Document whether they
exist or not.
Monitor and track DSUE’s if ordering rules are
created.
Consider attaching a schedule to any gift tax return
listing the source of all prior DSUE’s and their use to
assure that the records are available. These records
will prove helpful since all gift tax returns have to be
attached to the future estate tax return of the
surviving spouse.
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• Real estate
• Stocks and bonds
• Interests in closely held
businesses
• Cash, checking accounts,
savings accounts
• Partnership interests
• Interests in trusts
• Life insurance
• Annuities
• Retirement accounts, IRA
accounts
• Crops in field at time of
death
• Payments due from employer if
still work at DOD
• Mortgages, notes, loans to
others
• Personal effects, jewelry, silver,
guns, antiques
• Automobiles
• Contents of their safe deposit
box
• Debts: mortgages, loans, credit
cards
• Charitable bequests
• Prior taxable gifts
• Any other assets
What is Reported on the Estate return?
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Value of the Gross Estate
Fair market value (FMV)
• Date of death
• Alternate valuation date:
- Six months after DOD
- Value of gross estate must have decreased
• Special use valuation:
- Farm property
- Real property used in a closely held business
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The Gift Tax Return
Form 709 is the gift tax return.
• Due date = April 15th
Current law filing requirements.
• Present interest > $14,000
• Gift splitting is elected - even if split gift < $14,000
• Gift of future interest - even if gift < $14,000
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Gifts in Excess of Annual Exclusion
Each person has $5.25 million lifetime gift exclusion.
If a gift exceeds annual exclusion, excess is offset
by this lifetime exclusion.
Use of this lifetime gift exclusion reduces the
amount of the estate exclusion.
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What is the difference in an asset received by
gift versus an inherited asset?
BASIS !!!
Gift: Basis = donor’s basis
Inheritance: Basis = FMV on decedent’s DOD
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Example - Gift
Client owns ABC stock.
Purchased 20 years ago for $5,000.
2013
• Gifts stock to only child.
• FMV = $20,000.
• Gift reported at FMV of $20,000 on gift tax return.
• Child’s basis = $5,000 (same as father’s basis).
Later
• Child sells stock when FMV = $22,000.
• Taxable gain = $17,000 ($22,000 FMV - $5,000 basis).
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Example - Inheritance
Client owns ABC stock.
Purchased 20 years ago for $5,000.
2013
• Client dies.
• FMV = $20,000.
• Stock reported at FMV of $20,000 on estate tax return.
• Child’s basis = $20,000 (FMV on parent’s DOD).
Later
• Child sells stock when FMV = $22,000.
• Taxable gain = $2,000 ($22,000 FMV - $20,000 basis).
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Example – Joint Property
Personal residence owned jointly by husband and
wife.
Cost 10 years ago = $200,000.
FMV on husband’s DOD = $300,000.
Wife’s basis after husband’s DOD = $250,000.
• Her original basis $100,000 ($200,000 x 50%)
• Her inherited basis 150,000 ($300,000 x 50%)
• Her “new” basis $250,000
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Does the beneficiary have to pay gift or
estate taxes on the amount received as a gift
or an inheritance when he receives the
property?
No.
• Gift tax paid by donor.
• Estate tax paid by decedent’s estate.
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Does the beneficiary have to pay income
taxes on the amount received as a gift or as
an inheritance?
Generally, no – not on the actual gift or inheritance.
• As the asset starts producing income (such as dividends from
stock), this income is taxable to the beneficiary.
• When the beneficiary sells the asset, he will have to pay income
tax on the appreciation (if any).
• Exception – asset that produces “income in respect of a
decedent” (IRD).
- Generally, retirement accounts or crops in field at death.
- Produces taxable income to the beneficiary as periodic
payments are received.
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Do you have to pay income taxes when you
die?
If married, Form 1040 filed by surviving spouse.
• 100% of surviving spouse’s income.
• Income of decedent earned from January 1 to DOD.
If single, final Form 1040 filed by executor.
• Income of decedent earned from January 1 to DOD.
Form 1040 due date is normal April 15th due date.
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How is income after DOD reported?
Income earned after DOD reported on Form 1041 for
the estate.
Form 1041 is required if gross income > $600.
Estate begins the day after DOD.
TIN required for estate.
Year end of estate:
• Discretionary – does not have to be December 31st.
• Cannot be more than 12 months.
• Great planning opportunity for shifting of income and related
income tax.
• Example:
- DOD 9/27/13
- Year end could be as late as 8/31/14.
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How is income after DOD reported?
(Cont.)
Due date of estate 1041 is 15th day of the 4th month
after year end.
Example before:
- Year end = 8/31/14
- Due date = 12/15/14
Form 1041 required for estate as long as estate is
open.
• Must wait for closing letter from IRS if Form 706 was filed.
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Does a beneficiary have to pay income taxes
on their inheritance?
No. Not on the actual inheritance.
If they receive a distribution from the estate, they may be
allocated part of the income of the estate.
Distribution from an estate is deemed to come first from the
income of the estate then from the principal.
This income is reported on Form 1041, Schedule K-1.
Estate gets a deduction for amount paid to beneficiary so the
income is not taxed twice.
Planning opportunity with distributions to minimize 3.8% Medicare
tax surcharge by looking at beneficiary and estate (both are
subject).
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Medicare Tax on NII for Trusts and Estates
Tax = 3.8% times lesser of:
• Undistributed net investment income, or
• Amount by which AGI > $11,950
Exempt:
• Charitable trusts
• Qualified retirement plan trusts
• Charitable remainder trusts
• Grantor trusts
• Trusts subject to tax on UBTI
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Medicare Tax on NII for Trusts and Estates
(Cont.)
Net investment income (NII) includes:
• Interest
• Dividends
• Annuity distributions
• Royalties and rents (unless trade or business)
• Other gross income from any passive trade or business
including pass - through entities
• Net gain from disposition of non-trade or business property or
non-active assets
• Deductions allocable to NII (investment interest expense,
advisory fees, expenses related to royalties and rents, SIT
allocable to NII items)
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Medicare Tax on NII for Trusts and Estates
(Cont.)
Net investment income (NII) does NOT include:
• Trade or business income
• Tax exempt interest
• Retirement distributions
• Wages, salaries, etc.
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Medicare Tax on Trusts and Estates
Can the trust or the estate be treated as materially
participating in the business, generating a net
investment income (NII) if the trustee or executor is
materially participating?
Yes, if the trustee is directly involved in the
operations of the business.
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Distribution Planning for Medicare Tax on
Trusts and Estates
Distributions can carry out income and save tax $’s
to trust. Potential tax is shifted to beneficiary.
• Trust MAGI limit for Medicare tax = $11,950
• Individual MAGI limit for Medicare tax = $200,000 (if single) or
$250,000 (if MFJ)
Utilize 65-day distribution election for estates and
complex trusts
• Distributions made within 65 days after year end are treated as if
made on December 31st of prior year
• It’s 65 days – not 2 ½ months – typically around March 4th, 5th,
or 6th
• Election must be made by due date of return
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Distribution Planning for Medicare Tax on
Trusts and Estates (Cont.)
Trustee may not have appropriate authority per trust
agreement to make additional distributions.
• Most trust agreements provide for distributions to meet
ascertainable standards (health, education, etc.) and don’t
include tax savings strategies as a reason to make additional
distributions.
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Family Planning Ideas
Implement a current annual gifting program
• Make annual family gifts
• Utilize annual gift exclusion ($14,000/donee for 2013)
• Make direct payments to medical and educational providers
Make lifetime transfers during 2013
• Take advantage of $5.25 million lifetime exemption in 2013
• Shift post-gift appreciation and income to donee
• Avoid imposition of gift or estate tax on appreciation if transfer
delayed.
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Family Planning Ideas
Utilize lifetime exemptions properly
• Review wills periodically
• Review listing of assets including ownership
• Consider temporary portability
Consider a credit shelter trust.
• Not as critical since portability is permanent
• Take advantage of the first-to-die’s lifetime exemption
• Assets of trust:
- Benefit surviving spouse
- Excluded from surviving spouse’s estate
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Buy-Sell Agreement
Legal contract.
Prearranges the sale.
Allows control until triggering event.
Types of Arrangements:
• Redemption
- Company has right to purchase stock.
• Cross purchase
- Other shareholders have right to purchase stock.
• Combination
- First rights given to company or other shareholders then offered to
the other party before shares can be offered to outside party.
- Protects sale of company to outsiders.
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Buy-Sell Agreement
Price and sales terms prearranged.
Valuation critical to set the share price.
• Determine discounts available.
• Operational considerations.
• Perform while major owner is actively engaged in business.
• Other factors:
- Competition.
- Economic conditions.
- Prices of commodities and materials.
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Family Limited Partnership
Parents contribute business and investment assets
to a partnership in exchange for a 1% general
interest and 99% limited interest
Parents gift limited interest to children and/or
grandchildren at one time or over an extended
period using their annual gift exclusions and lifetime
unified credits
Accomplishes:
• Asset protection
• Estate freezing
• Income splitting
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Family Limited Partnership Cont.
Gift of partnership interest rather than direct
interests in underlying assets
Gifts qualify for minority and lack of marketability
discounts
FLP must have a business purpose
IRS is pushing for legislation to eliminate discounts.
• Planning opportunity:
- Make substantial gifts to fully utilize gift lifetime exclusions.
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Family Limited Partnership
Advantages
• Creates valuation discounts for gifts (not as significant with the
increased lifetime exemptions)
- Minority interest discount
- Lack of marketability discount
• Donor retains control over transferred assets
• LP interests provide liability protection against creditors
Disadvantages
• IRS may challenge valuation resulting in transfer taxes
• Legal entity
• Must be operated as “true” business
• Administrative costs such as appraisal when making transfers of
interests, recordkeeping costs, tax return preparation costs
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Planning Ideas for the Charitable Minded
IRA required minimum distributions
• Available for 2013 only
• Permits a tax-free distribution from an IRA to a charitable
organization up to $100,000
Noncash gifts
• Capital gain property-asset held over 1 year
• Gifting of stock-limited to 30% of your AGI
• Gifts of capital gain property-deductible at FMV on date of
contribution
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Life Insurance
Uses
• Liquidity to pay debts, expenses, taxes
• Support for family
• Equalize inheritances
• Funding for buy/sell agreements
Life insurance trust
• Trust receives life insurance proceeds income tax free
• Life insurance proceeds are not included in estate
• Irrevocable
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Life Insurance
Review beneficiaries of life insurance, retirement
accounts, etc.
• Crucial if there has been a change in the family such as a death,
divorce, marriage, birth, etc.
• Beneficiary should not be the estate
• Beneficiary designation overrides the will
• Use of “per stirpes” language versus default “pro rata” language
Policy reviews
• Policy illustrations for sustainability
• Purpose of life insurance
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Objectives of Today’s Presentation
Overview of estate and gift tax systems
• Current law
• Compliance
Planning ideas
• Family
• Business
• Charity
• Life insurance
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Conclusion
Complex area
Estate and gift area is constant target when law
changes mentioned-current law may or may not be
“permanent”
2013 and forward are ideal for estate planning:
• Low interest rates
• Depressed values
• Available discounts
• Generous estate and gift exemptions
• Low tax rates
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Conclusion
Each person/family is unique
There is a no “one size fits all” plan
Planning can range from simple steps to more
complex strategies
Planning during the administration of the estate or
trust can defer taxes or shift tax burden
Doing nothing is a plan – may not be the best one!
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