Monday, December 27, 2010 A Webinar by: Alan S. Gassman, J.D., LL.M. Prepared by Alan S. Gassman, J.D., LL.M., Kenneth J. Crotty, J.D., LL.M. and Christopher J. Denicolo, J.D., LL.M. Copyright 2010 We are pleased to announce that we will be presenting a Webinar with BNA Tax & Accounting entitled Estate Tax Law Changes in 2011 on Wednesday, December 29, 2010 at 2:00 p.m. To register for this webinar and obtain further information about CLE and CPE credits, go towebinar/ or call , menu Option 6, then Option 1.webinar/ 2 Copyright 2010 Gassman, Bates & Associates, P.A. and thereafter Annual Exclusion Gifts (Dont Count at All) $13,000 $13,000 (unless adjusted to $14,000) Educational and Medical Direct Payment Exemption Unlimited Life Before Unlimited Like Before Unlimited Like Before Unlimited Like Before Lifetime Exemption$1,000,000 $5,000,000 (+ CPI in 2012) $1,000,000 Estate Tax Exemption$3,500,000 (less what is used of $1,000,000 exemption above) Unlimited (but income tax stepped-up basis is limited for large estates) $5,000,000 (less portion of used lifetime gifting exemption) $1,000,000 (less portion of used gifting exemption?) Estate Tax Rate45%0%35%55% Discounts and Installment Sales/GRATs, etc. Available Available initially (at least, not sure about rest of ) ???? Portability of First Dying Spouses $5,000,000 Exemptions No YesNot as presently legislated. *In addition to the above, the amount that passes estate tax free ($10,000,000 per couple) will increase with the cost of living beginning in 2012 in $10,000 increments. 3 Applies January 1, 2010 to December 31, Allows up to $5 million per person to pass estate tax free. Lifetime gifting exemption raised to $5 million. The above items are to be adjusted for inflation beginning in 2012! Estate tax scheduled to go back to 2001 $1 million gifting and death exemptions and rates on January 1, 2013! Estate tax rates cut to 35%. Retroactivity for 2010 estates, with the option to elect out of the estate tax and step-up basis regime in favor of having no estate tax and carryover basis regime. Portability of the $5,000,000 Estate Tax Exemption on the first dying spouse, if such spouse dies in 2011 or Elimination of carryover basis regime (unless an election is made to have no estate tax and the carryover basis regime apply with respect to a 2010 estate). The State Death Tax Deduction continues to apply to estates of decedents dying in 2010, 2011 or 2012, instead of the State Death Tax Credit. Copyright 2010 Gassman, Bates & Associates, P.A. 4 5 The below terms of extension expire on December 31, 2012, at which time the exemption for death goes down to $1,000,000 and the estate tax rate goes back up to 55%, being the same terms as would have applied for January 1, 2011 had the new law not been enacted. It will take agreement between the House, the Senate and the President to override this. Copyright 2010 Gassman, Bates & Associates, P.A. 6 People who die in 2010, 2011 or 2012 can pass up to $5,000,000 estate tax free. The $5,000,000 is reduced by any lifetime gifting (above the $13,000 per year per person level) from prior years. This goes back to $1,000,000 on January 1, The estate tax rate has been reduced from 45% (in 2009) to 35% for people who die in 2010, 2011 or It goes back up to 55% for people who die in Copyright 2010 Gassman, Bates & Associates, P.A. 7 Gifting of up to $13,000 per person per year still does not need to be reported or cause use of the lifetime gifting exemption. Discounts with respect to use of limited partnerships, LLCs, and other vehicles were not changed. Copyright 2010 Gassman, Bates & Associates, P.A. 8 Since 2001, each person has had the ability to gift up to $1,000,000 during his or her lifetime, above and beyond the $13,000 per year per person allowance described above. Use of the $1,000,000 exemption causes a reduction in the amount that can pass estate tax free on a dollar for dollar basis. The gifting exemption for 2011 and 2012 has been increased to $5,000,000! This is a remarkable change. This will allow many clients to shift income- producing assets to their children so that the children will be subject to income tax at lower rates than the parents would have. This may permit the children to gift the assets back to the parents if and when ever mutually agreed. The parents may retain constructive control of the gifted assets by using limited partnerships, irrevocable trusts, and interrelated structures. It may be possible to establish asset protection trusts which are outside of the estate of the donor, yet may be used for the benefit of the donor if there are hard times ahead. These will become popular and are not difficult to establish. Copyright 2010 Gassman, Bates & Associates, P.A. 9 Under prior estate tax law, the first dying spouse had to establish a trust or pass the $3,500,000 worth of assets directly to non spouse beneficiaries (and/or in non spousal trusts) in order to preserve use of the first dying spouses allowance. Under the new law, a surviving spouse will be able to use whatever portion of the allowance was not used by the first dying spouse. For example, if the first dying spouse leaves $1,000,000 outright to the children and the rest to the surviving spouse, then depending upon circumstances the surviving spouse may be able to leave $9,000,000 without estate tax on the second death, assuming that this law continues after Copyright 2010 Gassman, Bates & Associates, P.A. 10 Copyright 2010 Gassman, Bates & Associates, P.A. 11 People who died in 2010 can decide whether to be treated as if: (a)There was a $5,000,000 exemption level, or (b)There was no estate tax but they can only step-up the income tax basis of inherited assets by $1,300,000 (and possibly by another $3,000,000 as to assets passing to or in trust for a surviving spouse). All taxpayers who died in 2010 are presumed to have selected the $5,000,000 estate tax system, unless they make an affirmative election otherwise under forms to be provided in the future by the IRS, which will need to be filed within the later of: (i) 9 months of the date of death; or (ii) 9 months of December 17, 2010 (September 17, 2011), on forms and under rules to be promulgated by the IRS. Clients who died in 2010 with estates below $5,000,000 need not do anything, and will receive a full stepped-up income tax basis on assets that pass by death, based upon the pre-2009 rules. Only taxpayers who died in 2010 and elect out of the $5,000,000 estate tax exemption rules will be subject to the carry over basis rules. Copyright 2010 Gassman, Bates & Associates, P.A. 12 13 MEMORANDUM TO:ADVISORS FROM:ALAN S. GASSMAN, ESQ. DATE:DECEMBER 23, 2010 RE:2010 GST LOOPHOLE ********************************************************************************************************************************************************************** There is a lot of confusion on the GST loophole for It allows use of what remains of the clients $1,000,000 unified credit without using GST exemption for full skip transactions. Past the $1,000,000 a gift tax is incurred, which many people do not understand, and most people will not want to pay. It does not have to be to a grandchildren only trust. It can be to a 529 Plan or UGMA account for a grandchild or grandchildren, but the brokerage world has a hard time filling out forms and having these completed by 12/31. The following is a memo that goes into some detail on this, a sample Letter of Agreement to facilitate 2010 gifting is attached. We are also attaching an Excel chart which helps to demonstrate this concept. We welcome any questions on this The Memo: Congress has recently passed legislation that raises the estate tax exemption to $5,000,000 per person on January 1, In addition, the lifetime gift tax exemption and the generation skipping transfer (GST) exemption will also be $5,000,000 per person on January 1, GST tax generally applies to gifts to grandchildren and more remote descendants. When a donor makes a gift to grandchildren, the donor normally allocates some of his or her GST exemption to the gift so that the gift is not subject to GST tax. This allocation uses some of the donors lifetime GST exemption. This allocation is similar to the allocation of a donors lifetime gift tax exemption to taxable gifts to avoid the actual payment of gift tax on the gifts. A planning opportunity exists prior to January 1, 2011 for donors who would like to make gifts to or for grandchildren. Until the end of 2010, the GST tax rate is 0% instead of 35%. If a donor makes a gift to grandchildren before the end of the year, the gift may utilize some of the donors lifetime gift tax exemption. In 2010, the donor may elect to have the gift be subject to GST tax and no GST tax will actually be due because the tax rate is 0%. This will save the $5,000,000 GST exemption for later use by the donor. Copyright 2010 Gassman, Bates & Associates, P.A. 14 For example, if a donor makes a gift of $500,000 to a trust or a 529 Plan for grandchildren and has already used his annual exclusion for the grandchildren, the gift would use $500,000 of the donors lifetime gift tax exemption, but none of the donors GST exemption if the gift is made before the end of An example 529 Plan transaction document is attached. If the gift is made during 2010, the donor does not need to use any of his or her GST exemption because no GST tax is due on the transfer ($500,000 x 0% = $0). This allows the donor to keep the $500,000 of unallocated GST exemption for future use, without having to pay $175,000 ($500,000 x 35% = $175,000) in GST tax if the gift was made in 2011 and no GST exemption was allocated. Therefore, this donor would be able to transfer $500,000 more on death to a trust that could benefit his child or children and not be subject to estate tax at the level of the child or children. This is the advantage of preserving GST exemption while making gifts to grandchildren that might otherwise have become subject to a tax at the level of the child. If the gift was made on or after January 1, 2011, $500,000 of the donors GST exemption would be allocated to the gift to avoid the imposition of GST tax. This allocation would reduce the remaining GST exemption of the donor to $4,500,000 ($5,000,000 - $500,000 = $4,500,000) assuming that none of the donors GST exemption had been used on prior gifts. If the donor did not want to allocate GST exemption, the gift would be subject to GST tax at a 35% rate and the donor would need to pay $175,000 ($500,000 x 35% = $175,000). Copyright 2010 Gassman, Bates & Associates, P.A. 15 $10,000,000 CHILDREN AND GRANDCHILDREN GRANDCHILDREN Taxed in Children's Estate: $10,000,000 Not Taxed in Children's Estate: $5,000,000 $15,000,000 CHILDREN AND GRANDCHILDREN $5,000,000 $9,500,000 $5,000,000 $500,000 Taxed in Children's Estate: $9,500,000 Not Taxed in Children's Estate: $5,000,000 Passing to Grandchildren: $500,000 Taxed in Childrens Estate When They Die Not Taxed in Childrens Estate When They Die Taxed in Childrens Estate When They Die Not Taxed in Childrens Estate When They Die Net result less assets passing that would become subject to federal estate tax on the death of children. Net result More value passing to grandchildren without being subject to generation skipping tax or tax at the childrens level. Without 2010 $500,000 Grandchild GiftWith 2010 $500,000 Grandchild Gift Single Person with $15,000,000 Estate Tax and Lifetime Gifting Allowance 16 Tax Filing Deadlines: 1. For estates of decedents dying after 12/31/2009 and before 1/1/2011: Unless an estate elects out of the Estate Tax System to have no estate tax apply, the estate tax return must be filed by the later of: (i) 9 months after the date of death; or (ii) 9 months after 12/17/2010, which is Saturday, September 17, Disclaimers: Qualified Disclaimers with respect to property received by reason of the death of a decedent in 2010 must be may be filed by the later of : (i) 9 months after the date of death; or (ii) 9 months after 12/17/2010, which is Saturday, September 17, The disclaimer will be qualified for tax purposes assuming that state law permits a disclaimer later than 9 months from the date of death. 3. GST Allocations: Generation Skipping Tax allocation returns for transfers in trust or otherwise made after 12/31/2009 and before 12/17/2010 can be made within 9 months after 12/17/2010, which is Saturday, September 17, We now know that transfers made to GST exempt trusts in 2010 can be GST exempt if sufficient GST exemption is allocated to the transfer. 4. Portability Estate Tax Return and Election The estate of a first dying spouse must file an estate tax return and affirmatively elect to have portability apply, notwithstanding whether the first dying spouse would have had a taxable estate. 17 Copyright 2010 Gassman, Bates & Associates, P.A. Basic Exclusion Amount The $5,000,000 exclusion for estate tax, as increased with the CPI beginning in DSUEA The Deceased Spousal Unused Exclusion Amount the amount of the taxpayers most recently deceased spouses Basic Exclusion Amount not used by him or her, assuming that he or she dies after 12/31/2010. Applicable Exclusion Amount The sum of (1) the Basic Exclusion Amount plus (2) the Deceased Spousal Unused Exclusion Amount. 18 Copyright 2010 Gassman, Bates & Associates, P.A. Clients can make significant gifts under the new $5 million lifetime allowance, even if the gifting allowance goes down to $1 million in These gifts can be to trusts that benefit the spouse and descendants (dynasty trusts). Many clients already have these types of trusts in place. Clients can transfer income-producing assets to children who have a lower income tax rates. Review current planning with advisers to maximize the advantages of this legislation. Copyright 2010 Gassman, Bates & Associates, P.A. 19 20 Mrs. $7,000,000 Net Worth Mrs. $7,000,000 Net Worth Revocable Trust Mrs. $7,000,000 Net Worth Mrs. $7,000,000 Net Worth Revocable Trust Gifting Trust FLP $7,000,000 x 2.5% x.65 = $113,750 $7,000,000 x 97.5% x.65 = $4,436,250 MRS. $7,000,000 NET WORTH Copyright 2010 Gassman, Bates & Associates, P.A. 2.5%97.5% 21 Mrs. $7,000,000 Net Worth Mrs. $7,000,000 Net Worth Revocable Trust Gifting Trust FLP $7,000,000 x 2.5% x.65 = $113,750 $7,000,000 x 97.5% x.65 = $4,436,250 Gift trust purchased 97% LP interest for 97% x $7,000,000 x.65 = $4,413, year $4,413,500 interest-only Note payable at 1.53% interest = $67, per year. Note guaranteed by children. Forget everything to the left and simply marry someone who will predecease her and not leave her assets? :) $4,413,000 Note $200,000 Seed Capital 96.5% LP.5% GP $7,000,000 worth of assets 2% LP.5% GP MRS. $7,000,000 FROZEN Copyright 2010 Gassman, Bates & Associates, P.A. 22 Husband Husband's Revocable Trust Wife's Revocable Trust Wife FAMILY LIMITED PARTNERSHIP Children's Trust 49% 2% On first death 49% x $15,000,000 x.65 = $4,777,500. All fits in to Bypass Trust The Estate Tax Proof $15,000,000 Family Copyright 2010 Gassman, Bates & Associates, P.A. 23 1. Spouse must be a U.S. citizen or resident. 2. No minimum term of marriage or anti-manipulation provisions. 3. Usable by the surviving spouse for lifetime gifting and/or upon death, but does not provide a GST exemption increase. So if the surviving spouse dies with a $10,000,000 Applicable Exclusion Amount and wants to maximize what benefits children without being taxed at their level, he or she can only leave $5,000,000 to a GST Trust for children and grandchildren, and the remaining $5,000,000 would have to be used on a Non-GST basis, and will thus be expected to be taxed at the childrens levels. 4. If surviving spouse (Client) remarries then a. If new spouse dies before Client, Client will have the DSUEA only of the new spouse. b. If Client dies before new spouse, new spouse can only receive up to $5,000,000 of the first dying spouses DSUEA but may use the rest in a Bypass Trust. 5. First dying spouse must file an estate tax return, even if not up to the taxable exclusion amount ($5,000,000) and the statute of limitations on the ability of the IRS to challenge the DEUEA amount begins to run only after the surviving spouse has filed an estate tax return. IMPORTANT Provide in the Will or Trust that the fiduciaries are required to file an estate tax return for the first dying spouse, if requested by the surviving spouse, and have the surviving spouse be responsible for the costs thereof. Agree upon a personal representative or special administrator for this. 6. These rules sunset after Copyright 2010 Gassman, Bates & Associates, P.A. 25 Example: Mabel dies before her husband John and leaves him a $4,500,000 DSUEA because she gifted $500,000 during her lifetime. John has never gifted. John remarries Greta who has used $2,000,000 of her gifting exemption. If John dies first he can leave up to $4,500,000 in a Bypass Trust for Greta and/or for his descendants, and Greta can still have his entire $5,000,000 DSUEA. If Greta dies first John will be limited to a $7,000,000 applicable exclusion amount on death, unless he remarries and the new spouse dies first, in which event her DSUEA will apply. Key question on first date How large is your applicable exclusion amount. Copyright 2010 Gassman, Bates & Associates, P.A. 26 Copyright 2010 Gassman, Bates & Associates, P.A. PROTECTIVE TRUST LOGISTICAL CHART WITH LIFE INSURANCE Assumes first spouse dies in 2011 and that the surviving spouse dies in a later year when the estate tax exemption is still $5,000,000. The Unified Credit Exemption is $5,000,000 in 2011 and 2012, and is scheduled to go back to $1,000,000 in Copyright 2010 Gassman, Bates & Associates, P.A. $5,000, $5,000,000* Copyright 2010 Gassman, Bates & Associates, P.A. 28 DYNASTY ASSET PROTECTION TRUST 1.Grantor can replace the Trustee at any time and for any reason. 2.Protected from creditors of Grantor and family members. 3.Can benefit spouse and descendants as needed for health, education and maintenance. 4.Per Private Letter Ruling the Grantor may be a discretionary beneficiary of the trust and not have it subject to estate tax in his or her estate. But be very careful on this! 5.Should be grandfathered from future legislative restrictions. 6.May loan money to Grantor. 7.May own limited partnership or LLC interests that are managed at arms length by the Grantor. 8.May be subject to income tax at its own bracket, or the Grantor may be subject to income tax on the income of the trust, allowing it to grow income-tax free unless or until desired otherwise. If the Grantor is a beneficiary it must remain a disregarded Grantor Trust. Assets gifted to trust and growth thereon. Trustee Copyright 2010 Gassman, Bates & Associates, P.A. 29 Copyright 2010 Gassman, Bates & Associates, P.A. 30 Copyright 2010 Gassman, Bates & Associates, P.A. 31 Copyright 2010 Gassman, Bates & Associates, P.A. 32 Copyright 2010 Gassman, Bates & Associates, P.A. 33 Copyright 2010 Gassman, Bates & Associates, P.A. 34 Copyright 2010 Gassman, Bates & Associates, P.A. 35 Copyright 2010 Gassman, Bates & Associates, P.A. 36