2001: A Death Tax Odyssey

Planning Opportunities and Strategies

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

Back to the Future

2000 legislation likelyto arise in 2001

Speaker Name

Two major pieces of legislation introduced in 2000

Death tax repealCharitable 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Opponents of repeal counter that if the estate tax was repealed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and repealed two years later due to impossibility to track the deceased basis in the assets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

Giving to Charity

Charitable remainder trusts Private foundations

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

Questions???

2002: Another Death Tax Odyssey?

Hal speaks “That’s all, Dave—Goodby”