2001: A Death Tax Odyssey Planning Opportunities and Strategies
Dec 22, 2015
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
Lost in Space?? Planning opportunities and strategies
under new and proposed legislation
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
Arguments for repeal
Avoid double taxationProtect small business and family
farmsFavored by over 70% of Americans
Not cost effective Costs 65 cents of every dollar
collected
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
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Opponents of repeal counter that if the estate tax was repealed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
Provisions of H.R. 8Return 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and repealed two years later due to impossibility to track the deceased basis in the assets
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
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%
Potential income shifting opportunities if the death tax is repealed
If the death tax is repealed, you may Shift tax to children or friends Shift portfolio income overseas Use non-grantor trusts Utilize grantor trusts
Current tax law
Individual must withdraw assets, then make contribution
Individual is taxed on withdrawal
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
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
No Escape from the Law (of gravity)
Why estate planning is necessary with or without
the death tax
Speaker name
Additional goals
Planning for disabled individualsProtecting your assetsDistributing your assetsGiving to charityPlanning business successionFormulating income tax strategyProviding investment and management
expertise
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
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
Protecting your assets
From beneficiary’s creditorsIn case of divorceFrom the beneficiaryFrom individual’s creditors
Distribution of assets
Subsequent MarriagesDynasty trustsIncentive clauses
Completing education Providing work incentives Promoting charitable work or occupations Offering disincentives for certain behavior
Planning business succession
Important components Orderly transition of management
from one generation or individual to another
Buy/sell agreements Life insurance on key employees
Formulating income tax strategy
Tax planning considerations IRA and other IRD assets
(Income in respect of decedents)
Income taxAcquire investment management
expertise
Lost in Space???
Planning opportunities and strategies under new and proposed legislationWilliam E. Lowe, JD, MBA, CFP
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
New IRA distribution rules
Required Minimum Distribution (RMD) stipulations are simplified
RMD can be allocated to a separate IRABeneficiaries can change without
affecting the pay outCustodian/trustee reporting requirement
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
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
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
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
Charitable Remainder UnitrustIRA
Value $1,000,000Cost Basis $0
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
Trust
$1,000,000
Income
Spouse
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
Private Foundation
Individual
Individual’s Family
$1,000,000 Insurance
PremiumsRefund of Premium Payments
P.S. 58