1 TAX UPADATE AND SELECTED PLANNING TECHNIQUES By Jeffrey N. Myers Bourland, Wall & Wenzel, P.C. Fort Worth, Texas Brazos Valley Estate & Financial Planning

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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Repealed for individuals dying after 2009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Generation-skipping transfer tax repealed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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Senate Finance Committee passed on June 18

Next will be a Senate vote on bill

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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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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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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