Post on 17-Apr-2018
transcript
Planning After ATRA: The CPA’s Guide to
Financial and Estate Planning
Essential Estate Planning Considerations
Presented by:
Steven G. Siegel, JD, LLM
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Personal Financial Planning Section
Introduction
About the PFP Section & PFS Credential
• The AICPA PFP Section provides information,
resources, advocacy and guidance for CPAs who
specialize in providing estate, tax, retirement, risk
management and investment planning advice to
individuals and their closely held entities
• The CPA/Personal Financial Specialist (PFS)
credential distinguishes CPAs as subject-matter
experts who have demonstrated their financial
planning knowledge through experience, education
and testing
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Personal Financial Planning Section
Introduction
Steve G. Siegel, JD, LLM
The Siegel Group
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Personal Financial Planning Section
Agenda
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Federal, estate, gift, GST, and income taxes after ATRA
Estate and Gift Tax Issues for Same-Sex Married Couples
New Medicare Tax Thresholds and Income Tax Rules of ATRA
relate directly to Estate, Gift, and Trust Planning
Importance of Grantor Trusts in 2013 Income Tax Planning
Roadmap for the Grantor Trust Rules
Portability
Formula Clauses in Wills and Trusts
General Estate Planning Opportunities Suggested by ATRA
Flexible Planning for 2013 and Beyond
Estate Freezing Transactions
Multi-Generation-Skipping Transfer Tax Planning
2014 Fiscal Year Budget Proposals
Personal Financial Planning Section
Federal Estate, Gift,
GST, and Income Tax
after ATRA
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Personal Financial Planning Section
Estate, Gift, Generation-Skipping Taxes
ATRA permanently provides for a maximum federal
estate tax rate of 40 percent with an annually
inflation-adjusted $5 million exclusion for estate,
gift, and generation-skipping taxes applicable to
decedents dying after December 31, 2011.
For 2013, the inflation-adjusted exemption amount is
$5,250,000. This translates into a unified credit of
$2,045,800 for 2013.
ATRA extends a number of important GST tax-
related provisions that were scheduled to expire
after 2012.
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Personal Financial Planning Section
Estate and Gift Taxation Issues for Same-Sex
Married Couples
In Windsor, The Supreme Court declared a distinction
between legal marriage under state law and legal
marriage under federal law unconstitutional, and found
that same-sex persons legally married by their state of
residence were entitled to all of the federal laws
regarding married persons.
Code Sec. 2056 provides an unlimited deduction from the
gross estate for property passing from a decedent to a
surviving spouse.
Many same-sex married couples should revisit their
estate plans to make certain that interests passing to the
other spouse qualify for the marital deduction and other
tax benefits.
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Personal Financial Planning Section
Estate and Gift Taxation Issues for Same-Sex
Married Couples
ATRA extended permanently the concept of
portability, which generally allows the estate of a
surviving spouse to utilize the unused portion of the
estate tax applicable exclusion amount of his or her
last predeceased spouse.
Same-sex married couples can now presumably
transfer assets between themselves with no concern
for lifetime gift tax consequences, as was previously
the concern under DOMA.
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Personal Financial Planning Section
Medicare Surtax and Income Tax Rules
Wage and self-employment income in excess of
$250,000 (married couples filing jointly), $200,000
(heads of household and single filers) or $125,000
(married couples filing separately) will be subject to
an additional Medicare tax of 0.9%.
Individuals will also be subject to a 3.8% Medicare
tax on the lesser of their net investment income or
the excess of their “modified adjusted gross
income” over the threshold amount ($250,000 for
married couples filing jointly, $200,000 for heads of
household and single filers, or $125,000 for married
persons filing separately).
Thresholds are not indexed for inflation.
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Personal Financial Planning Section
Thresholds for the Phase-Out of Personal
Exemptions and Itemized Deductions
The deduction for personal exemptions will begin to be
phased out at various levels of adjusted gross income
depending on the taxpayer’s filing status.
• $300,000 (married taxpayers filing jointly),
• $275,000 (heads of households),
• $250,000 (single taxpayers) and
$150,000 (married taxpayers filing separately).
The limitation on itemized deductions (known as the
“Pease limitation” named for the Congressman who
introduced this (Rep. Donald Pease (D-OH)) also begins
to apply at the same adjusted gross income thresholds
as noted for the phase-out of the deduction for personal
exemptions.
Will be indexed for inflation after 2013.
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Personal Financial Planning Section
Thresholds for the New 39.6% Tax Rate
Status Threshold
Married filing jointly $450,000
Heads of Households $425,000
Married Filing Separately $225,000
Single Taxpayers: $400,000
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Personal Financial Planning Section
Individual Income Tax Rates
The 10, 15, 25, 28 and 33 percent marginal rates
remain the same after 2012.
The 35 percent income bracket ranges for 2013,
therefore, are:
• $398,350 - $400,000 for single filers
• $398,350 -$425,000 for heads of household
• $398,350 - $450,000 for joint filers, surviving spouses
• $199,175 - $225,000 for married filing separately
Taxpayers who find themselves within the 39.6
percent marginal income tax bracket nevertheless
also benefit from extension of all Bush-era rates
below that level.
C-corps may become more attractive. 12
Personal Financial Planning Section
Income Taxation of Trusts and Estates
Top bracket increases of 39.6%, beginning in 2013 for
taxable income in excess for $11,950.
No 35% bracket for trusts and estates.
Long-term capital gains and qualified dividends reach
20% when the entity has taxable income in excess for
$11,950.
Medicare tax on net investment income begins to impact
trusts and estates with adjusted gross income in excess
of $11,950.
The effective income tax rate on many trusts and estates
will be 43.4% for income such as interest, rent, royalties,
and short-term capital gains, and 23.8% for long-term
capital gains and qualified dividends.
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Personal Financial Planning Section
Income Taxation of Trusts and Estates
Thresholds are indexed annually for inflation.
Distribution of capital gains may not be a simple
decision.
Retaining assets in a trust for all of the “right”
reasons has become more expensive.
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Personal Financial Planning Section
Capital Gains/Qualified Dividends Rules
ATRA raises the top rate for capital gains and
dividends to 20%.
For 2013, the maximum rate of tax on the adjusted
net capital gain of an individual is 20% on any
amount of gain that otherwise would be taxed at a
39.6% rate.
All other taxpayers will continue to enjoy a capital
gains and qualified dividends tax at a maximum rate
of 15%.
A zero percent rate will also continue to apply to
capital gains and dividends to the extent income
falls below the top of the 15% income tax bracket.
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Personal Financial Planning Section
Capital Gains/Qualified Dividends Rules
Installment payments received after 2012 are subject
to the tax rates for the year of the payment, not the
year of the sale.
For planning purposes, consider favoring
installment sales for 2013 and subsequent tax years
as a way to “stretch out” gain recognition.
The higher tax rates for 2013 and later years may
cause taxpayers to consider the use of a like kind
exchange to defer the tax that might otherwise
become due in the event of a sale
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Personal Financial Planning Section
Importance of Grantor Trusts in 2013 Income
Tax Planning
Escape from the highest tax rate bracket on trusts and estates
with the grantor trust rules.
If the grantor retains a power making the grantor taxable on the
income of the trust, all of the applicable thresholds are tested
at the level of the grantor, not at the level of the trust.
If the grantor is willing to bear the income tax burden on the
trust’s income, burden may be imposed at a significantly lower
rate on an individual than allowing it to fall on the trust.
Moreover, by paying the income tax, the grantor is burning off
assets (the tax dollars) that might otherwise have been
included in the grantor’s estate.
• Grantor’s payment of income tax liability is not a gift by the grantor to the
beneficiaries (Rev. Rul. 2004-64).
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Personal Financial Planning Section
Roadmap for the Grantor Trust Rules
Code Section Name
671 Basic Grantor Trust Rules
672 Definitions and Rules
673 Reversionary Interests
674 Power to Control Beneficial Enjoyment
675 Administrative Powers
676 Power to Revoke
677 Income for Benefit of Grantor
678 Person Other Than Grantor Treated as Substantial Owner
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Personal Financial Planning Section
Portability
Made permanent
Allows estate of a decedent who is survived by a spouse
to make a portability election to transfer the decedent’s
unused federal transfer tax exclusion
Creates “fairness” between those people who “plan”
their estate and those who fail to do so
Designed to eliminate the need to many married couples
to retitle assets and the need to force the creation of
complex trusts
No applicability to a decedent who died prior to Jan. 1,
2011
Basic exclusion amount indexed for inflation; DSUE not
indexed for inflation
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Personal Financial Planning Section
Portability
Only applies to the unused exclusion amount of the
last deceased spouse
Election is required (Form 706)
Advantages/disadvantages:
• Simplification
• Retirement plan roll over
• Planning for states with independent death taxes
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Personal Financial Planning Section
Formula Clauses in Wills and Trusts
Make sure clients understand the plan they have.
Potential problem: • Wills and trusts written before 2011 and 2012 were signed when the
federal estate tax exemption was significantly less than $5 million. All
wills and trusts with formula clauses should be reviewed and a
determination made as to what the testator/grantor intended when the
will or trust was written.
Planning in 2013 to address formulas and
beneficiaries • What should we be telling our clients to do in the new planning climate
of 2013?
• Consider the use of “caps” and “ceilings” in conjunction with formula
clauses.
• When was the last time the client checked his or her retirement plan
beneficiary designations?
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Personal Financial Planning Section
General Estate Planning Opportunities
Suggested by ATRA
For most clients, especially those that are married,
an available exclusion of $10,500,000 (increasing
annually) will cover all the gifts they wish to make.
For clients at higher levels of wealth, larger gifts
may be considered, with the gift tax paid at the
“advantageous” 40% rate.
Valuation discounts remain available (Wandry v.
Commissioner)
State gift taxes are generally not an issue
Understand when carryover basis and stepped-up
basis apply (Code Section 1014)
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Personal Financial Planning Section
General Estate Planning Opportunities
Suggested by ATRA
Consider making gifts of low basis and/or dividend-
producing property to persons who are in lower tax
brackets (the 10% and 15% brackets) and who are
not subject to the Kiddie Tax.
Remember that payments of tuition directly to an
education provider and medical expenses directly to
a medical care provider are not considered gifts at
all.
Consider gifts to grandchildren.
Loans to family members
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Personal Financial Planning Section
Planning for States with Independent Death
Taxes
What planning is appropriate in circumstances
where there may still be a state death tax regardless
of the fact that there may not be a federal estate tax
as a result of the estate falling short of the federal
exemption, but exceeding the state exemption?
Be careful of planning that directs an entire estate to
pass to a credit shelter trust.
Be careful of ignoring the presence of a state death
tax exemption at the first death of a married couple.
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Personal Financial Planning Section
Charitable Giving
Tax-motivated charitable planning for most clients will
not be necessary. That suggests the reduced use of
testamentary charitable bequests and testamentary
charitable lead trusts for most clients.
Give assets to charity that are income in respect of a
decedent (IRD) assets (such as retirement plans or
installment notes).
Charitable remainder trusts (CRTs) will have several
suggested uses.
Use a CRT to receive a gift of appreciated property from
the donor, giving the donor a charitable contribution
deduction. Have the charity sell the property and realize
the gain – which will not be taxed to the charity.
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Personal Financial Planning Section
Charitable Giving
Use a CRT with a variety of family members as the
non-charitable lifetime beneficiaries (children,
grandchildren, etc.).
A CRT can be used in connection with retirement
planning for those persons in a high tax bracket
presently who anticipate being in a lower bracket
when they retire. Here, a planning technique called a
“NIMCRUT” may be suggested.
Consider using a charitable lead annuity trust
(CLAT).
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Personal Financial Planning Section
Strategies by Estate Size
Estates Under $5,250,000, as Indexed
Estates in the $5,250,000 to $10,500,000 Range, as
Indexed
Estates Exceeding the Applicable Exclusion Amount
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Personal Financial Planning Section
Flexible Planning is Essential for 2013 and
Beyond
Dividing and Allocating Assets to Utilize the Federal
Estate Tax Exclusion
A Flexible Planning Suggestion - The Disclaimer
Trust Solution
Another Flexible Planning Suggestion: The
Contingent QTIP Trust Solution or “Clayton” QTIP
Trust
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Personal Financial Planning Section
Freeze Values at Current Levels for Senior
Generation Clients
Installment Sales
Self-Canceling Installment Note (SCIN)
• The SCIN involves the sale of property in exchange for an
installment note calling for payments at a specified interest rate
over a set period of time, which note payments terminate upon
the death of the seller.
• Since the note, by its terms, is canceled by the noteholder’s
death, the value of the note is excluded from the decedent’s
estate. (Estate of Moss v. Commissioner)
• The termination of a SCIN has potentially adverse income tax
consequences. The unrealized or unreported installment sale
gain must be reported in the year of the seller’s death on the
fiduciary income tax return for the decedent’s estate.
• The SCIN works best if the seller dies soon after the property is
transferred. 29
Personal Financial Planning Section
Freeze Values at Current Levels for Senior
Generation Clients
Sale to an Intentionally Defective Grantor Trust (IDGT)
• The grantor creates a trust for the benefit of family members, and sells
assets to the trust in exchange for a long-term installment note. The
sale is made for fair market value per appraisals, etc., (including
valuation discounts) so that the sale by the grantor to the trust is not
treated as a gift to the trust beneficiaries.
• The trust is drafted to treat the grantor as the owner of the trust for
income tax purposes, but not for estate tax purposes. This is
accomplished by including certain grantor-retained administrative
powers in the trust.
• The trust is thus “defective” for leaving the grantor subject to income
tax, but “intentionally” so, since this was done by design.
• Sale of assets to the trust avoid capital gains tax; note interest is not
subject to income tax.
• Seed money gift requirement
• Have the grantor pay the income tax.
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Personal Financial Planning Section
Grantor Retained Annuity Trusts (GRATs)
Transfer wealth with potentially no gift tax cost.
GRAT is an irrevocable trust to which the grantor
transfers property while retaining the right to receive
annuity interest.
Zero-gift Walton GRAT
• If the value of the trust property appreciates at a rate greater than the
Code Section 7520 rate, the Walton GRAT will be a success.
• Designed to be of short duration with high annual payouts
• Concerns over rising interest rates
Single-property GRAT
• Use several single property GRATs rather than diversified property
GRATs, since the single property GRATs that “succeed” by appreciating
will be beneficial, while the single property GRATs that “fail” to
appreciate will not be harmful.
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Personal Financial Planning Section
Qualified Personal Residence Trust (QPRT)
Leverage the transfer of a personal residence
Transfer personal residence to a trust in which the
grantor retains the right to use and occupy such
residence for a fixed number of years, with the
remainder interest passing to children or other
beneficiaries.
If the grantor outlives the trust term, the residence is
removed from the grantor’s estate, and all post-
transfer appreciation inures to the benefit of the
remainder beneficiaries. If the grantor dies before
the end of the trust term, the residence is included
in the grantor’s estate at its fair market value at
death.
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Personal Financial Planning Section
Qualified Personal Residence Trust
Gift calculation results in heavy weighting of the client’s
retained interest and a generally favorable gift tax result.
If the residence is sold during the QPRT term, and if it
has been the client’s principal residence, it is eligible for
the capital gain.
Tenancy in common discount
• Married persons owning a residence jointly should first transfer the
residence to themselves as tenants in common, each with an undivided
50% interest in the property, then have each spouse create his or her
own QPRT.
Interest rate environment
• While the QPRT is less attractive in a low interest rate environment, the
opportunity to combine declining property values and the favorable
calculation of the QPRT remainder interest, especially for someone
over age 65, still recommends the QPRT technique.
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Personal Financial Planning Section
Common Law GRIT
Code Section 2702 does not apply to all transaction.
If an individual does not have children and wishes to
benefit relatives who are nieces and nephews- or
persons who are “significant others”, the individual
is outside of Code Section 2702 and the tax
advantages of a GRIT are available.
Nieces and nephews (as well as cousins and other
collateral relatives and persons not considered
“related” in the eyes of the federal law) are not
covered by the term “members of the family.
No requirement of “qualified interest”.
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Personal Financial Planning Section
Dynasty Trusts
Multi-generation-skipping transfer tax planning
GST tax exemption may be used to create a Dynasty
Trust.
Provides for life estates in property for every
generation of beneficiaries
Structured to last for the maximum period of time
permitted by state law
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Personal Financial Planning Section
2014 Fiscal Year Budget Proposals
Eliminate the traditional estate tax benefits
associated with installment sales to grantor trusts
Limit the life of a Dynasty Trust to 90 years
Restoring the estate, gift and generation-skipping
transfer tax rates and exclusion amounts to their
2009 levels beginning in 2018
Mandatory five-year rule for distribution of
retirement plan assets to non-spouse beneficiaries
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Personal Financial Planning Section
Questions?
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Personal Financial Planning Section
Proposed Statement on Standards in PFP
Services
Exposure draft available for public comment until
Sept. 9
Objective: to provide process-based guidance to
AICPA members who provide PFP services when
planning, developing, presenting, implementing,
monitoring, and updating a financial plan to protect
both the public and the CPA planner
Applies to the delivery of PFP services, not services
covered by other AICPA standards
www.aicpa.org/sspfp
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Personal Financial Planning Section
PFP Section Resources (aicpa.org/PFP) The CPA’s Guide to Financial & Estate Planning– Volumes 1-4
Planning After ATRA and the Medicare Surtax Toolkit:
aicpa.org/pfp/proactiveplanning
Forefield Advisor (aicpa.org/pfp/forefield) • Client education and communication tool
• Written by CPAs, attorneys and other subject matter experts.
• More than 3,000 resources covering personal financial planning, including estate, tax, retirement, investment
and risk management planning.
• Keyword search: American Taxpayer Relief Act
AICPA Advanced Personal Financial Planning Conference (cpa2biz.com/PFP) –
January 20-22, 2014 in Las Vegas
• 2-day session (Jan 18-19) for those in earlier stages of PFP
o Implementing PFP Services: Step by Step Plans for Success
For the full calendar of upcoming PFP Section events, visit www.aicpa.org/PFP
and click on CPE & Events.
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Personal Financial Planning Section
Upcoming PFP Section Web seminars Register now for these events:
• More from this series:
- Essential Estate Planning Considerations (August 14, 1:00-2:45p.m.
ET)
- Portability – A Planning Game-Changer – But Not as Simple as It
Appears (September 19, 1:00-2:45p.m. ET)
- Business Succession Planning After the American Tax Relief Act of
2012 (October 31, 1:00-2:45p.m. ET)
- Taxation of Divorce (November 21, 1:00-2:45p.m. ET)
• Managing Your Clients’ Risk Tolerance: A Compliance Chore or a Business
Development Opportunity? (August 20, 4:00-5:00p.m. ET)
• Risk Tolerance Master Class: All the Finer Points about Dealing with Your
Clients’ Risk Tolerance (August 27, 4:00-5:00p.m. ET)
• PFP Power Hour (August 22, 3:00-4:00p.m. ET)
For the full calendar of upcoming PFP Section events, visit aicpa.org/PFP and
click on CPE & Events.
To access the archives, visit aicpa.org/pfp/webseminars.
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Personal Financial Planning Section
CPA/PFS News and Events
PFS Referral Program
• Receive 100% credit to apply toward future CPA/PFS dues by
referring a CPA to become a PFS or sit for the PFS exam
PFS Exam
• Registration open for winter window
• Discounts, sponsorships and volume pricing available
Education Opportunities
• Live 2 ½ day review class – 3 locations in Oct/Nov: OH, AZ, GA
• In-depth courses in estate, retirement, tax, investments,
insurance, and PFP process
• Self-study PFS exam review course
Learn more at aicpa.org/pfp/pfs
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