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Estate Planning for the Death by PaulBrodie


									Planning for the Death Of the Death Tax
Richard E. Gilbert, Esq. & Michael B. Allmon, C.P.A. November 2001 I. Intro A. Begin with conclusion (the ultimate estate plan for married couples) B. Follow with discussion of the recent changes in the estate tax laws C. Then focus on planning under the new laws II. The ultimate estate plan was suggested by a client in response to her reading of our summary of the new lawsShe sent me the following e-mail: “I have notified Bill of the benefits of dying in 2010 and told him to start planning. Thank you for that very useful piece of advice- Susan” unfortunately for Susan, she had only half of the plan right… the ultimate plan would be (if Bill is to die in 2010) then Susan needs to die in late 2009the result of this would be a full step-up on all assets upon Susan’s death followed by no estate tax at Bills! III. The only certainty in our estate tax laws today is uncertainty as to what they will be in the futureA. with Budget considerations: a. Social Security, War Financing and deficits How likely is the 2010 one-year repeal? Maybe not likely B. With our client’s situations constantly changing along with the uncertain and changing laws, we are planning to hit a rapidly moving target

2 C. We are all hearing over and over, the opinions of those telling us that we should wait until we know what will happen with the laws- isn’t that the same as not planning? We believe that the only sensible approach (generally) is to review and modify continually with maximum flexibility built into clients plans (where appropriate). IV. Now more than ever it is imperative that clients make the difficult decisions and take responsibility for those decisions. Our role will now include reminding them periodically of the decisions that they have made and the impact of those decisions (SEE LAST PAGE OF RICHARD’S OUTLINE) RICHARD’S COMMENTS & DISCUSSION OF #A- D V. State death tax issues A. Credit for state death tax changed to a deduction and reduced by 25% in 2002; 50% in 2003; 75% in 2004; and repealed in 2005 B. A seemingly cruel shift of revenues from the states to the fed without input from the states in the decision - no reduction in overall taxes here C. In New York, Virginia and D.C., the top estate tax bracket will now be INCREASED to 60% in 2004, in spite of the advertised reductions D. CALIFORNIA: (according to a CPA society legislative analyst) 1. Prop 6 passed in 1982 to repeal the inheritance tax would require 2/3 of legislature to bring it back (not likely)

3 2. Then a majority of the voters would have to approve 3. CALIFORNIA and other states will be required to lobby the fed govt for changes to bring back the credit!! RICHARD’S DISCUSSION OF GST (MA ADD TO CHECK GST FORMULA) VI. Carryover Basis (part of 2010 changes)- generally replaces step-up with the normal complications! A. New limited step-up to non-spouses will be: on $1.3 million of assets + NOL c/o and cap loss c/o B. Plus $3 mill to spouse  MUST I.D. c/o basis amounts now, as failure to do so results in $0 basis!  Election of allocation of basis to assets is reported with failure to file accompanied by a $10,000 penalty! C. Also changed here is the ability to apply the $250k exclusion on personal residences (remember we are in 2010!) to the estate or grantor trust and individual beneficiaries (question on this posted on EPC forum)


PLANNING FOR C/O BASIS: A. Most important is identification of basis nowB. Next consider how to direct the fiduciary to allocate basis- not easy!! (who should benefit from reduced income taxes on the gains from selling assets?)

4 C. Trust funding at first death (in “traditional family”)- which assets to fund to the “exemption trust”- considering basis? RICHARD MISC ITEMS VIII. GIFTING STRATEGIES (increased to flat $1 million 1/02 – to future) A. c/o basis for gifted assets vs. step-up basis on inheritances until 2010 Gift to older relative who will bequeth back to you for basis adjustment? (prior to 2010)- older relative must survive 1 year after gift to be effective B. taxable gifts (with payment) probably dangerous unless very short life expectancy.- if client insists, need CYA letter explaining dangers and potential consequences (paying gift tax vs. possible repeal of estate tax) C. depends on size of estate- if estate will not likely grow above the applicable exclusion amount, don’t gift for tax only purposes? D. If estate is above the applicable exclusion amount and gifting program is in effect to reduce, combine with life insurance planning to fund extra tax? E. Discounting (use of entities) may make sense if desire to use $1 million exclusion or to leverage $10k per year… maybe gift to entity with understanding that if repeal occurs reverse gifts will be made? (can not have agreement to do so) F. Gifts of appreciated assets held 5 years now subject to max 8% cap gain rate to donee in 15% bracket. (e.g. parent to minor child over 14) G. Consider gifts of separate property to fully fund exemption type trusts with married couple (CAUTION: FAMILY LAW ISSUES)


RICHARD STATEGIES OF DESIGN (WITH A FEW COMMENTS BY MIKE) IX. Basis allocation formulas- per outline, as creative as you can get! How much guidance do you give the fiduciary? How much flexibility should the fiduciary have? The biggest coming risk to fiduciaries is basis allocation… my experience is that most do not understand this risk. X. Fiduciary issues (see article handed out today- Natural Fiduciaries; discussion of CPAs as fiduciaries)- another reason why relatives are often the wrong choice: Basis allocation- all fiduciaries will now have complex decisions and potential liability (decisions that are made about basis issues might not be judged for many years) how do we protect them in the documents? (indemnification; no contest provisions; allow for insurance) RICHARD brief discussion of items b. – e. XI. Charitable giving A. if repeal, income tax deduction will still support charitable gifts B. if carryover basis becomes law, appreciated assets will continue to be excellent candidates for charitable gifts

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