ESTATE AND GIFT TAX

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ESTATE AND GIFT TAX SELECTED OVERVIEW PLUS
REFORM? OR REPEAL? PENNSYLVANIAS NEW UNIFORM
TRUST ACT Presented by John F. Meck, Esq.
J1011041
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ESTATE/GIFT/GST TAX OVERVIEW
Exemption
Current Law Gift Estate/GST
2006 1,000,000 2,000,000
2009 1,000,000 2,500,000
2010 1,000,000 Repeal
2011 1,000,000 1,000,000
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OVERVIEW
Tax Rates on Amounts Over Exemption Tax Rates on Amounts Over Exemption Tax Rates on Amounts Over Exemption
Gift Estate/GST
2006 41 to 46 46
2007 41 to 45 45
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• Tax Calculation
• Cumulative Lifetime and then Death
• Unified Credit not optional

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Pennsylvania Gift Tax?

• None
• 1 year Rule Pennsylvania Inheritance Tax -
  3,000 exemption/calendar year

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PENNSYLVANIA INHERITANCE TAX

• No Exemption
• Assets Not subject to tax
• Assets owned jointly with spouse
• Bequests to charity
• Life insurance
• IRAs and plan benefits if under 59 ½
• Some plan benefits if over 59 ½ (monthly payments
  no ability to take a lump sum)

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• Pennsylvania Inheritance Tax Rates
• 0 - Spouses (outright sole use trusts)
• 0 - Under age 21 (assets to parents)
• 4.5 - Descendants, step-descendants, ancestors
  and spouses of children
• 12 - Siblings
• 15 - All others

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• Annual Exclusion Gifts
• 12,000/donee/year indexed
• Not optional
• Present interest out right or life estate
  present value
• Applied chronologically
• Crummey Coordination

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• Annual Exclusion Gifts
• 2503(c) Trusts- Age 21
• Custodial Accounts Age 21
• Medical and Tuition/GST Also
• Direct payment
• Dont report

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• Section 529 Election
• Up to 60,000/120,000
• Pro-rate use cant frontload
• Report 1/5 each year
• Recapture if die early/GST Exemption?

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• Split Gifts Spousal Consent on Gift Tax Return
• Pre-death gifts only
• Both U.S. citizens/residents
• Not Spousal Gifts Unlimited marital
• But GST annual exclusion applies to spousal gifts
• Non U.S. Citizens spouse

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• Disadvantage of Splitting
• All gifts
• Agent under POA How broad is POA?
• Joint/Several liability
• 2036 Potential QPRT, GRAT etc. dont split
• Second marriage use of Unified Credit

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• TIP FOR SPLITTING
• Spouses each write a check to avoid filing a Gift
  Tax Return if no other Gifts during year

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Delivery Relinquish Custody/Control

• Timing re calendar year or date of death
• Charity - relates back
• Individuals no relation back
• Cashiers check/ wire transfer

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Delivery Relinquish Custody/Control

• To Spouses Trust use two steps
• Stock donees broker
• - donors broker/
• transfer agent
• Joint Bank Account withdrawal
• Real Estate survivorship rights

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Estate Gift Tax Reform? Repeal?

• Current Law
• 2010 Repeal Estate Tax
• Keep Gift Tax 1 million unified
• credit (protects against asset shifting
  to
• reduce income tax)
• 2011 Estate Tax comes back at 1 million
  unified credit

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Estate Gift Tax Reform? Repeal

• House Bill adopted June 22, 2006 and modified
  July 29, 2006 (and probably later)
• Senate 60 votes to have a vote
• 60 votes to enact

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House Bill Provisions

• Effective 2010
• Reunify Estate, Gift GST
• Unified Credit 5 million
• Phased in 250,000 increments starts 2010
  (3,750,000) to 2015 (5 million)
• Indexed for inflation starting 2016
• Maintain Stepped up basis rules

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House Bill Provisions

• Tax Rate
• First 25 million
• 15 in 2010 20 thereafter
• based on capital gains rates which could change
• Excess over 25 million 40 rate
• Not tied to capital gains rate
• Phased down 2 year to 30 in 2015

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House Bill Provisions

• State Death Taxes
• Repeal deduction
• In 2005 deduction had replaced the phase out of
  credit

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House Bill Provisions

• New Provision
• Portability of Unified Credit between Spouses
• Simplify planning
• Asset transfers
• Plan benefits/life insurance
• Second marriage

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PA Uniform Trust Act (UTA)

• Enacted July 7, 2006
• Effective November 4, 2006 generally
• Even existing trusts
• January 1, 2007 Repeal of Rule Against
  Perpetuities
• Only new trusts

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UTA Overall Purpose

• Organized, comprehensive codification of PA trust
  law
• Facilitate finding the law
• Better compliance by trustees acting in multiple
  states
• Enable beneficiaries to understand and enforce
  their rights

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UTA

• Revocable Trust vs. Wills
• Goal level playing field
• Capacity to create
• Time to contest one year (Pew Estate)
• Notice to beneficiaries at death
• Like Supreme Court Rule 5.6
• Same rules of construction
• Road map for creditors claims

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UTA Trustee Notice to Beneficiaries

• Controversial - cant draft around
• Compromise changes from Uniform Act
• Client desire for privacy (my money) vs.
  Beneficiary need information to enforce rights
  to have a valid trust
• Transition Rules 2 year delay for existing
  trusts

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Contents of Notice

• Trusts existence
• Identify Settlor
• Trustees contact information
• Beneficiary has right to receive copy of trust
• Beneficiary has right to receive Report
  annually

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Contents of Report

• Trust assets market value
• Trust liabilities
• Trust receipts/disbursements

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Revocable Notice Trust (Will)

• No Notice to Beneficiaries required, unless
• Settler incapacitated notify guardian
• Death to spouse, executor, guardian, adult
  children and Current Beneficiaries
• Current Beneficiaries
• Age 18 if entitled to mandatory distribution
• Age 25 if only entitled to discretionary
  distribution

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Notice

• Irrevocable Trusts
• Must respond to beneficiaries reasonable requests
  for information (Copy of trust, Report etc.)
• Incapacity/Death of Settlor/Change of Trustees
  Notice to Current Beneficiaries (Age 18/25)
• Two year transition rule does not apply to change
  of Trustees

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Trustee Cut off Claim of Beneficiaries

• Current law Account/Audit
• - Receipt/Release
• New Possibility 5 years Passage of Time -Laches
• Trustee must provide Reports for 5 years notify
  beneficiary of time period to challenge
• Claim as to transaction disclosed in year 1
  barred 6 months after beneficiaries receive 5
  annual reports unless written claim presented to
  Trustee

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Unitrusts

• PA has since 2002 had power to adjust and
  power to convert to a unitrust
• New Power to draft as a unitrust without
  needing to convert
• Qualifies for favorable IRS tax treatment
  primarily unitrust amount of 3 to 5 equals all
  income for marital deduction

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UTA Selected Provisions

• Oral trust will no longer be recognized
  insurance agents
• Future trusts presumed revocable
• Reverses current PA law - presumed irrevocable
• Good drafting always state revocable or
  irrevocable