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2001: A Death Tax Odyssey

2001: A Death Tax Odyssey. Planning Opportunities and Strategies. Theme 2001 playing. Presentation overview. Back to the Future 2000 legislation that is likely to arise in 2001 No Escape from the law (of gravity) Why estate planning is necessary with or without the death tax

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2001: A Death Tax Odyssey

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  1. 2001: A Death Tax Odyssey Planning Opportunities and Strategies Theme 2001 playing

  2. Presentation overview • Back to the Future • 2000 legislation that is likely toarise in 2001 • No Escape from the law (of gravity) • Why estate planning is necessary with or without the death tax • Lost in Space?? • Planning opportunities and strategies under new and proposed legislation

  3. Back to the Future 2000 legislation likelyto arise in 2001 • Speaker Name

  4. Two major pieces of legislation introduced in 2000 • Death tax repeal • Charitable legislation

  5. Previous Legislation • Various proposals were introduced in 2000 • Proposals for repeal suggested the estate and gift tax be phased out • Proposals for reform called for a decrease in the tax brackets and an increase in the applicable exclusion amounts

  6. Arguments for repeal • Avoid double taxation • Protect small business and family farms • Favored by over 70% of Americans • Not cost effective • Costs 65 cents of every dollar collected

  7. Arguments against repeal • Benefits wealthy • Only 2% of decedents will pay any death taxes • Eliminates one of the most progressive elements of our tax system • More than half of the benefits of repeal would go to 0.1% of families

  8. Tax avoidance on assets • Proponents of repeal argue that the estate tax results in a double tax on assets • Opponents of repeal counter that if the estate tax was repealed • A double tax would not result • The appreciation in the assets avoids taxation • The assets would receive a step-up in basis at death • The gain on the assets would never be taxed

  9. Provisions of H.R. 8 • Return to carryover basis—a very complicated law • The built-in appreciation of assets to escape taxation needs to be avoided • Assets to no longer receive a step-up in basis • Assets to pass to the beneficiaries and retain the tax basis of the deceased • Prior Law • A carryover basis rule was attempted in 1976 and repealed two years later due to impossibility to track the deceased basis in the assets

  10. Projections and current tax legislation • Majority view • Many projections for the repeal or reform of the estate tax • President Bush and others still advocate for an outright repeal • Most believe that an estate tax reform is more likely

  11. Projections and current tax legislation • Economic Growth and Tax Relief Bill of 2001 approved by the House on March 8 • Projected to be viewed by the Senate in May • Calls for the reduction in the income tax rates • Brackets of 15%, 28%, 31%, 36% and 39.6% reduced to brackets of 10%, 15%, 25% and 33% by 2006 • More immediate relief reducing the current 15% bracket to 12%

  12. Potential income shifting opportunities if the death tax is repealed • If the death tax is repealed, you may • Shift tax to children or friends • Shift portfolio income overseas • Use non-grantor trusts • Utilize grantor trusts

  13. Currenttax law • Individual must withdraw assets, then make contribution • Individual is taxed on withdrawal

  14. Charitable legislation • Previous legislation passed by Congress, but vetoed by President Clinton • Tax-free withdrawal from the qualified plan assets is allowed if the assets are immediately donated to charity • Minimum age requirement applies

  15. Current proposals • Neighbor to Neighbor Act bill for 2001 would provide tax incentives for various types of charitable gifts • Takes effect for tax years beginning after December 31, 2000 • Includes charitable rollover • Extends time for deductible contributions • Increases deductibility of long term capital gain property • Allows direct charitable deduction • Increases carryover period

  16. No Escape from the Law (of gravity) Why estate planning is necessary with or withoutthe death tax • Speaker name

  17. Additional goals • Planning for disabled individuals • Protecting your assets • Distributing your assets • Giving to charity • Planning business succession • Formulating income tax strategy • Providing investment and management expertise

  18. Planning for Disabled Individuals • If an individual becomes incapacitated and an estate plan is not in place • A guardian and conservatorship would likely need to be appointed • This is a costly and time consuming process • The individual is not guaranteed to have a choice of guardian or conservator

  19. Planning for Disabled Individuals • Several estate planning documents necessary or desirable to help in planning for disabilities • Wills • Revocable trusts • Durable Power of Attorney for health care • Durable Power of Attorney for business affairs • Special needs trusts

  20. Protecting your assets • From beneficiary’s creditors • In case of divorce • From the beneficiary • From individual’s creditors

  21. Distribution of assets • Subsequent Marriages • Dynasty trusts • Incentive clauses • Completing education • Providing work incentives • Promoting charitable work or occupations • Offering disincentives for certain behavior

  22. Planning business succession • Important components • Orderly transition of management from one generation or individual to another • Buy/sell agreements • Life insurance on key employees

  23. Giving to Charity • Charitable remainder trusts • Private foundations

  24. Formulating income tax strategy • Tax planning considerations • IRA and other IRD assets(Income in respect of decedents) • Income tax • Acquire investment management expertise

  25. Lost in Space??? Planning opportunities and strategies under new and proposed legislation • William E. Lowe, JD, MBA, CFP

  26. New IRA distribution rules • Requires the owner to take their required minimum distributions at age 70½ based upon the MDIB table(Minimum Distribution Incidental Benefits) • Becomes effective on January 1, 2002 • New method optional for 2001 • The MDIB table becomes mandatory in 2002

  27. New IRA distribution rules • Required Minimum Distribution (RMD) stipulations are simplified • RMD can be allocated to a separate IRA • Beneficiaries can change without affecting the pay out • Custodian/trustee reporting requirement

  28. New IRA distribution rules - For spouse • Spouse, if sole primary beneficiary, can take ownership of IRA • If not sole beneficiary, can take over individual portion ownership if the custodian/trustee provides sub-accounting • Beneficiaries will be determined December 31, after the year of death

  29. New IRA distribution rules - For spouse • Time frame for spouse to take as own has been reduced • May leave as beneficiary IRA and defer distributions until decedent would have reached 70½ • Attractive if the spouse is younger • Spouse would use their single life expectancy

  30. New IRA distribution rules - Non-spouse beneficiary • Can take out over the single life expectancy as of December 31 of the year following the decedent’s death • Sub-accounting will allow each beneficiary to use his/her own life expectancy • Otherwise minimum distribution will be based upon the life expectancy of the oldest beneficiary • Post-mortem disclaimer

  31. New IRA Distribution Rules - Planning Opportunity • IRAs are subject to income tax and are included in the estate for estate tax purposes • Name a Private Foundation (or Charity) as a beneficiary of your IRA • Assets are excluded from your estate for estate tax purposes • The Private Foundation (or Charity) will not have to pay income taxes on the proceeds

  32. IRA Value $1,000,000 Cost Basis $0 Spouse Charitable Remainder Trust $1,000,000 Income UMB PrivateFoundation $1,344,889 • Children serve on Board of Foundation and distribute 5% per year • If Foundation grows at 8.5% in 30 years, the Foundation would grow to $4 million. Salary to children Charitable Remainder Unitrust

  33. Private Foundation Refund of Premium Payments Premiums Individual $1,000,000 Insurance P.S. 58 Individual’s Family Private Foundation • Compensation via benefits to family • Private Foundation may be able to pay part of the premium on a life insurance policy under private letter ruling

  34. Questions???

  35. 2002: Another Death Tax Odyssey? Hal speaks “That’s all, Dave—Goodby”

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