Don’t Let the Sun Go Down on Me… Estate Planning outlook for 2009-2011
Leon LaBrecque, JD, CPA, CFP®, CFA
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Current Situation
• 2001 EGGTRA was passed with sweeping changes to the estate taxes, with the eventual result of repeal, temporarily.
• Because of the “Byrd rule”, the Senate was unable to gain a super majority and the Act had a 10 year sunset
• Drafters of the bill intended for repeal after 2009
• The well laid plans of mice and men…
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Main EGGTRA Points
• Gradual reduction (and eventual repeal) of Estate and GST taxes
• Phase-out of the state death tax credit• Carryover basis would replace step-up
basis– $1.3 M partial step-up for estate– $3M basis increase for spouse
• EGGTRA did not repeal gift tax– -Gift exemption decoupled in 2004– $1M exemption
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GST Trap
• EGGTRA repealed a GST tax trap. • Pre EGGTRA:
– $1M GST exemption allocable to lifetime gifts or transfers at death
– Exemption automatically applied to gifts– Had to elect to make exemption apply to trusts
• EGGTRA automatically applied the exemption to trusts
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2001-2011 Changes: Now
Year Max Estate & GST Rate
Estate tax/GST exemption
Maximum Gift Tax
Rate
Gift Tax eff.Exemption
2001 55% + 5% $675,000/$1.06M
55% + 5% $675,000
2002 50% $1M/$1.1M 50% $1M
2003 49% $1M/$1.12M 49% $1M
2004 48% $1.5M 48% $1M
2005 47% $1.5M 47% $1M
2006 46% $2M 46% $1M
2007 45% $2M 45% $1M
2008 45% $2M 45% $1M
2009 45% $3.5 45% $1M
2010 Repealed Repealed 35% $1M
2011 55% $1M 55% $1M
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What Happens at Sunset?
• Go from lowest estate tax taxes and largest credit to much higher rates and credit– Exemption goes from $3.5 M (2010 currently
has no limit but Obama’s budget has $3.5 in as the number) back to $1M.
– Rate goes from 45% to 55%
• GST trap returns• Carryover basis • Nightmare on Main Street
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More Issues
• Carryover Basis:– Presumption of zero basis in absence of
evidence– Massive record keeping and record checking
costs– Illiquidity effect
• Decoupling of Estate and Gift taxes• State death taxes
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2009 Legislation
• 2010 budget proposal (passed 04/30/09) carried the $3.5 M and the 45% rate into 2010 (no one-year repeal)
• S .722 (Baucus) permanently makes the credit $3.5M, the rate 45% and the gift and estate taxes are reunified.
• GRAT limitation to 10 years• Family LLC discounts H.436
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More options
• Lincoln/Kyl SA.873 to S.Res.13– Durbin Amendment SA.974
• Salazar(D-CO) H.173 Exclude farmland• McDermott (D-WA) H.2023 45% on estate
up to $5M, 50% on estates over $5M, 55% over $10M, $2M exemption
• Brady (R-TX) HR.3463 Repeal• Pomeroy (D-ND) H.436 $3.5 M 45%, 5%
over $10M• McCain (R-AZ) 155 tax, $5M exclusion
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Legislative Update 09/28/09
• From the House Financial Services Committee:– Obama’s proposal is for the 45% /3.5M. Victory
because not a tax increase. Republicans want expiration in 2010, but are afraid that that might cause an full expiration to 2011. Compromise
• House:– Rangel: 45%/3.5M permanent– Baucus: 45%/3.5M indexed to inflation
• Senate:– Kyl (R-AZ) and Lincoln (D-AR) 35%/5M– Durbin amendment is portend of future?
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Comparison of Plans
Proposal 2009 2010 2011
Current Law 17.9 0.0 41.4
Obama 17.9 19.4 21.1
McCain 17.9 4.5 4.9
Kyl/Lincoln 17.9 8.2 8.9
Pomeroy 19.5 21 22.9
McDermott 20.5 21.9 23.4
Salazar 17.8 0.0 40.8
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2009 & 2010 Strategies
• Lifetime gifts:– Use the annual exclusion ( $13,000/$26,000)– Gifting the gifted:
• Education expenses: §529 $60,000 over 5 years • Prepaid tuition excluded from 2503(e)
– Health care – Use the $1M
• Watch Grandkid gifts– If you use exclusion, you may be using up GST
exemption
• Do business gifts now (avoid the discount issue)• FLP, same idea
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2009-2010 Strategies
• Interspousal Transfers:– Currently no limit– QTIP or life estate transfers: benefit spouse,
then kids– QDOT for non-US citizen
• QPRT• GRAT• Dynasty
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2009-2010 Strategies
• GRAT: Irrevocable trust with retained right to receive annual payments of fixed dollars for specified period of years.– Uses the 7520 rate (October 3.2%) for growth
assumption: If market outperforms hurdle rate (likely), significant gains.
– No gift tax– Get assets back– Pass on appreciation
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2009-2010 Strategies
• QPRT: Transfers a personal residence to a trust– Depressed values make QPRTs more attractive– Donor lives in residence for the term of the
trust– Can rent after termination
• Business Gifts and FLPs: Use discounted valuations to make gifts of undervalued businesses.
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Conclusions
• Repeal is highly unlikely• Re-working of certain rules likely• With possibility of minority discounts and
GRATs, consider alternative• Use lifetime gifts• Possible Roth scenario