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TAX UPADATE AND SELECTED PLANNING TECHNIQUES
By Jeffrey N. Myers
Bourland, Wall & Wenzel, P.C.
Fort Worth, Texas
Brazos Valley
Estate & Financial Planning CouncilTuesday, September 17, 2002
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Jeffrey N. Myers
EDUCATION B.A., University of Texas J.D., California Western School of Law LL.M., University of San Diego
PROFESSIONAL ACTIVITIES, ACADEMIC APPOINTMENT, AND HONORS Shareholder - Bourland, Wall &Wenzel, P.C. Board Certified (Estate Planning and Probate Law) - Texas Board of Legal Specialization Adjunct Instructor 1998-1999 - University of Texas at Arlington, Continuing Legal Education Guest Lecturer in Estate Planning at
Notre Dame Tax and Estate Planning InstituteState Bar of Texas - Advanced Estate Planning & ProbateTexas Society of CPAs - Fort Worth Chapter
Note: The author gratefully acknowledges A. William Kennon of Newsom, Graham, Hedrick & Kennon, PA, Durham, North Carolina for the use of his materials on Economic Growth and Tax Relief Reconciliation Act of 2001.
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Estate Planning Update (After the 2001 Tax Act)
An overview of the new rules and their effect
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Why Plan?
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Estate Planning Motivators
Determine who your beneficiaries will be Maximize family wealth accumulation Conservation/protection of assets Control of assets (lifetime and post-death) Minimize transfer taxes
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The Transfer Tax System
IRS
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Repeal of the Estate Tax
Repealed for individuals dying after 2009
Until then ... Maximum rate declines from
55% to 45% Exemption amount
increases from $1 million to $3.5 million
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What’s the catch?
Gift tax remains, at lower rates
Generation-skipping transfer tax repealed
Carryover basis returns State death tax impact Sunset provisions apply
on 1/1/2011
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Three Layers of Transfer Taxation
Estate Taxes
Gift Taxes
GenerationSkipping
Taxes
Unified Stand-Alone
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Year Estate/GST Exemption
Highest Estate/Gift/GST Tax Rate
2001 $675,000 55%
2002 $1 million 50%
2003 $1 million 49%
2004 $1.5 million 48%
2005 $1.5 million 47%
2006 $2 million 46%
2007 $2 million 45%
2008 $2 million 45%
2009 $3.5 million 45%
2010 Unlimited Estate – 0%; Gift – 35%
2011 $1 million 50%
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Gift Tax Not Repealed Annual exclusion ($11,000 per
recipient) remains
Lifetime exemption amount increased to $1 million in 2002 and thereafter it remains the same
Beginning in 2010, gift tax rate = top individual income tax rate (35%), subject to annual exclusion and lifetime exemption
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Generation Skipping Transfer Tax
Repealed effective for generation skipping transfers after 12/31/2009
Taxed at the highest estate tax rate, which is reduced incrementally until repeal
Reinstated 1/01/2011
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Generation Skipping Transfer Tax(GSTT) Exemption
GSTT exemption (currently $1,110,000) is increased in $10,000 increments, until 2004
When the Exemption Amount reaches $1.5 million (2004), GSTT exemption will equal that amount
GSTT exemption equals Exemption Amount through 2009
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Carryover Basis at Death Beginning in 2010, decedent’s
basis in property carries over to heirs
Step-up allowed for $1.3 million; additional $3 million for property passing to surviving spouse
Step-up not allowed for Retirement Plan and IRA benefits
Executor allocates allowable step-up
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State Death Tax Credit Repealed
State death tax credit is reduced beginning in 2002
Fully phased out after 2004
Replaced with a deduction for state death taxes paid
Will impact state revenues
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And Believe It or Not ... After 12/31/2010, the entire 2001 Tax Act is
repealed Everything returns to pre-Act tax rules unless
2001 Act provisions are reinstated by future Congressional action
Could spell trouble for some of the provisions
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WHAT WILL HAPPEN BETWEEN NOW AND 2010 – THE LAW WILL BE
CHANGED!
Make estate tax repeal permanent House passed permanent
repeal on June 6 Senate struck down
permanent repeal on June 12
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WHAT WILL HAPPEN BETWEEN NOW AND 2010 – THE LAW WILL BE
CHANGED!
Retain estate tax and increase the estate tax exemption amount Senate Finance Committee Democrats have
suggested, but not passed, retaining estate tax and raising exemption amount to $3M - $4M
Also suggested was complete exemption from estate tax for the family farm and family business
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WHICH ALTERNATIVE WILL BE SELECTED?
Depends on the direction of political winds Senate Republicans need 4 – 6
votes to pass permanent repealor block filibuster preventinga vote on permanent repeal
House has already passed permanent repeal
Stay tuned
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IRA Charitable Rollover Provision – The C.A.R.E. Act
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IRA Charitable Rollover Provision – The C.A.R.E. Act
Senate Finance Committee passed on June 18
Next will be a Senate vote on bill
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IRA Charitable Rollover Provision – The C.A.R.E. Act
Bill provides: Donor 59 ½ years of age or older may
distribute IRA assets to charitable remainder trust, charitable gift annuity or pooled income fund
Donor 70 ½ years of age or older may distribute IRA assets directly to charity
Donor receives no income tax charitable deduction to use against other taxable income
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IRA Charitable Rollover Provision – The C.A.R.E. Act
Bill provides (continued): Donor accelerates no
untaxed income of IRA upon distribution to charity or deferred charitable gift vehicle
Effective January 1, 2003
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IRA Charitable Rollover Provision – The C.A.R.E. Act
In summary, if the bill passes in current form Persons at least 59 ½ years of age can make
income tax free distributions from their IRA to CRUTs, CRATs and CGAs for themselves and Charity
Persons at least 70 ½ years of age can make income tax free distributions from their IRA directly to Charity
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IRA/Retirement Plans IRA contribution limit
increased from $2,000 to $3,000 for 2002-2004, $4,000 for 2005-2007, and $5,000 for 2008
Later increases for inflation in $500 increments
No relief from accelerating IRA income subject to income tax on donation of IRA to charity during donor’s life.
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IRA: Modification to MRD RulesUnder Final Regulations
Life expectancy tables for Minimum Required Distribution (MRD) calculation are modified
Participant is living: MRD based on life of participant plus a life 10 years younger. Recalculated each year Exception: If spouse is beneficiary and more
than 10 years younger, can elect to calculate joint and survivor life expectancy using spouse’s actual age
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IRAs (continued)
Participant dies:– If surviving spouse is sole beneficiary, surviving
spouse can roll over into survivor’s IRA and elect to treat it as his or her own
* Required beginning date for MRD based on spouse’s age* MRD based on life of surviving spouse plus a life 10 years younger (recalculated each year)* At surviving spouse’s death, timely split into separate accounts for children, with MRD for each separate account based on the separate life expectancy factor of the child who is beneficiary of that separate account (not recalculated each year)
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IRAs (continued)– If surviving spouse does not roll over, MRD based on single
life expectancy of surviving spouse (recalculated each year as long as surviving spouse lives)* Distribution of MRD must begin by later of end of calendar year immediately following calendar year of participant’s death, or with spouse as beneficiary by end of calendar year in which participant would have become 70 ½
– If an individual who is not the spouse is beneficiary, no rollover is available* MRD based on life expectancy factor of beneficiary (not recalculated each year)*Distribution of MRD must begin by end of calendar year immediately following calendar year of participant’s death
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IRAs (continued)
Spouse of participant dies– MRD is not affected - the MRD during the
participant’s life is based on the participant’s life and the life of a hypothetical beneficiary 10 years younger
Ownership of the deceased spouse in the participant’s IRA will pass by the deceased spouse’s Will
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Planning Strategies
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Action Items Review and possibly revise
legal documents - Wills, Trusts, Beneficiary Documents for Retirement Plans and IRAs, Powers of Attorney, etc.
Evaluate lifetime gifting via leveraged transfer strategies
Evaluate long-term investment strategies
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Simple Will
Community Property Estate of $1 Million or Less
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Larger Estates
Consider Division of Assets Between Marital Trust and a Family Trust
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Other Planning Options Gift annual exclusion amount Gift some or all of lifetime
exemption increase to $1M in 2002 ($2M for joint gifts)
Look for transfer discounting opportunities
– Closely Held Businesses– Family Limited Partnerships
Analyze Life Insurance Qualified State Tuition
Programs Avoid Taxable Gifts
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Use of the Lifetime Exemption
$1,000,000
- $189,000
= $811,000
remaining
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Life Insurance Existing structures should undergo
critical review and possible revision to maximize benefit
- Continued liquidity need until estate taxes are repealed - Continued liquidity need if
estate taxes are reinstated- Continued liquidity need if
estate taxes are permanently repealed because of additional income
taxes - No income or capital gains tax
on insurance death benefit
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Qualified State Tuition Programs (Section 529 Plans)
Income of Section 529 plan is income tax exempt
Section 529 plan distributions for qualified higher education costs are excluded from income of recipient
Lower penalty (10%) for distributions not used for education
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TAX UPADATE AND SELECTED PLANNING TECHNIQUES
By Jeffrey N. Myers
Bourland, Wall & Wenzel, P.C.
Fort Worth, Texas
Brazos Valley
Estate & Financial Planning CouncilTuesday, September 17, 2002