Building Blocks of a TaxWise Estate Plan

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Building Blocks of a Tax-Wise Estate Plan
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In This Hour . . .

• Wills
• Trust Planning for Tax and Non-Tax Goals
• Federal Estate Tax (its still here!)
• Impact of Ongoing Transfer Tax Reform and recent
  developments
• Simple Strategies to Minimize the Federal Estate
  Tax
• Retirement Plan Assets and the new laws

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Wills

• Beneficiaries
• Taxes
• Representatives

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Where do you want your estate to go?Family,
Friends, Parents, Charity?
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Distribution in Absence of Will

• SPOUSE
• If no child or parent, entire estate
• If child OR parent, 30,000 ½ balance of
  estate
• If child from prior marriage, ½ estate
• CHILDREN
• If spouse, balance after spouses share
• If no spouse, entire estate
• PARENTS
• If spouse but no child, balance after spouses
  share
• If neither spouse nor child, entire estate
• in Pennsylvania

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Distribution in Absence of Will
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Wills

• Taxes
• Missed
• Opportunities
• to Save!

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Wills

• Representatives in Absence of Will
• Administrator
• Spouse
• Others entitled to intestate estate
• Creditors!
• Guardian of minors
• Of person
• Of estate

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Wills

• Effective to
• Direct distribution of your assets
• Bequests of specific property
• Unequal or equitable distribution
• Include friends and charities
• Take advantage of tax-minimizing strategies
• Identify and empower representatives
• Executor
• Trustee
• Guardian

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Wills

• NOT effective to
• Make organ donation or give burial instructions
• Designate beneficiaries of life insurance or
  retirement plans, or override designations
• Give away share of joint tenancy property

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Trusts

• Can be used to achieve tax and non-tax objectives
• Need should be determined not by asset level but
  by planning goals
• Can provide flexibility

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Trusts

• Can be inter vivos or testamentary
• If inter vivos, can be revocable or irrevocable
• If inter vivos, can be funded or unfunded
• Living trusts funded revocable inter vivos

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Where Trusts Can Be Useful

• Minor or disabled beneficiary
• Second marriage
• Avoid guardianship or probate
• Privacy
• Concern over handling of funds
• Assets in multiple jurisdictions
• Tax planning
• Dynasty objectives

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Federal Estate Tax

• Determine your gross estate
• Subtract the deductions
• Compute the tentative tax
• Apply the credits

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Federal Estate Tax

• Gross estate
• All property you own at your death, e.g., cash,
  real estate, stocks and bonds, artwork, jewelry
• Life insurance proceeds on your life
• From policies you own
• From policies youve given away within 3 years of
  your death
• Lifetime transfers with strings
• Life estate
• Greater than 5 reversionary interest
• Power to revoke or alter

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Federal Estate Tax

• Gross estate
• IRAs and retirement plans
• Property held as joint tenant with right of
  survivorship
• ½ value if your spouse is other joint tenant
• ALL value otherwise, EXCEPT to the extent that
  you can prove contribution to purchase price by
  other(s)
• General power of appointment property
• Not what your beneficiaries receive, but what you
  own

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Federal Estate Tax

• Basic Tax Saving Strategies
• Decrease size of gross estate through gifts
• Gift tax annual exclusion (12,000)
• Gift tax medical educational exclusions
• Unlimited gift tax marital deduction
• Unlimited gift tax charitable deduction
• Irrevocable life insurance trust
• Beware of incomplete transfers
• Keep good records

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Federal Estate Tax

• Deductions
• Lifetime debts
• Funeral expenses
• Estate administration expenses
• Estate gifts to spouse
• Estate gifts to charity

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Federal Estate Tax

• Marital Deduction
• Unlimited!
• Must be outright or in one of two specific trust
  forms
• Primary estate planning tool for married
  individuals with assets totaling less than 2
  million

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Federal Estate Tax

• Charitable Deduction
• Unlimited!
• Control the public benefits flowing from
  your estate taxes vs. charitable
  organizations
• Estate tax benefits can be combined with income
  tax benefits
• Maximize transfers to family and to philanthropic
  interests
• Minimize amount paid in taxes

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Federal Estate Tax

• Compute the tentative tax
• Current estate tax rates begin at 37
• Marginal rate 45 on estates greater than 3
  million
• 2001 Estate Tax Reform (still the law!)
• Top rate reduced over time from 55 to 45 for
  2009
• Tax eliminated entirely for 2010

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Federal Estate Tax

• Credits
• Most important Applicable Credit, currently
  780,800
• Shields 2 million (exemption amount) from tax
• 2001 Estate Tax Reform
• Exemption amount increased over time from
  675,000 to 3.5 million for 2009
• Disappears in 2010 with end of estate tax

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Simple Wills

• Fred has 3,000,000
• Wilma has no assets
• At Freds death, Estate 3,000,000
• All to Wilma ? No federal estate tax
• At Wilmas death, Estate 3,000,000
• Wilmas federal estate tax 460,000
• Children ? 2,540,000

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Tax-Wise Wills

• Barney has 3,000,000
• Betty has no assets
• At Barneys death, Estate 3,000,000
• 1,000,000 to Betty 2,000,000 to Bypass Trust
  ? No federal estate tax
• At Bettys death, Estate 1,000,000
• Bypass Trust 2,000,000
• No federal estate tax
• Children ? 3,000,000

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Compare

• Simple Wills
• Wilma receives 3,000,000 outright
• Federal estate tax 460,000
• Children ? 2,540,000
• Tax-Wise Wills
• Betty receives 1,000,000 outright and use of
  2,000,000 in flexible trust form
• Federal estate tax 0
• Children ? 3,000,000
• Difference to Children 460,000

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Federal Estate Tax

• Fully utilize Applicable Credit
• Married couples should combine Applicable Credit
  with Marital Deduction for maximum wealth
  transfer
• Make sure there are available assets to fund a
  bypass trust (for married couples, use gift tax
  marital deduction)

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Federal Estate Tax

• Current estate tax provides for
• stepped up basis in inherited
• property
• With estate tax repealed,
• this will be replaced with
• modified carryover basis
• Estate tax considerations replaced
• by income tax considerations

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Federal Generation - Skipping Transfer Tax

• Applies to gifts that skip a generation and
  thereby skip estate tax in that generation
• Currently 2 million exemption will increase in
  sync with FET exemption amount
• Imposed at highest estate tax rate in addition
  to estate tax
• Repealed for 2010

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Gift Tax

• To avoid large tax-motivated transfers, will NOT
  be repealed
• Exemption is 1,000,000
• Through 2009, estate tax rates apply
• After 2009, income tax rates will apply
• Annual, medical, and educational exclusions
  remain in effect

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Sunset

• Current tax law returns in its entirety January
  1, 2011
• FET top rate 55
• Exemption amount 1,000,000

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Consequences

• Misconception that planning no longer necessary
• More work for estate planners once this
  misconception overcome!
• Example Appropriateness of size of bypass
  trust vs. marital gift

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Consequences

• Additional reporting requirements for executors
  and donors
• More detailed record-keeping requirements
• Records must be retained for a longer period of
  time
• State inheritance and estate taxes

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Qualified Retirement Assets

• Spouse-beneficiary may roll over assets into a
  new plan in his/her own name
• Non-spouse beneficiary will take the assets
  subject to
• Estate tax in your estate AND
• Income tax that was deferred during your lifetime
• Taxes could consume ¾ of the plan assets
• The right assets for a charitable bequest
• New laws make it easier to designate
  beneficiaries and divide accounts

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Pension Protection Act of 2006

• Non-charitable provisions
• Makes certain provisions of the 2001 tax act
  permanent
• Increases in IRA contribution limits, including
  catch-up
• Roth 401(k) and 403(b)s
• Savings for Education through Section 529 plans
• Charitable provisions
• IRA charitable rollover
• Stricter rules on gifts of tangible personal
  property
• Stricter documentation requirements for gifts
  must have receipt or bank record

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Planning in Uncertain Times

• Increased vigilance
• Expertise/specialization
• Re-think taxable gifts
• Keep records documenting basis
• Build in flexibility