What Might Interest You About Estate Planning and Taxes
Or
Is This A Great Country, or
What?
Curtis C. Coon, Esquire
305
410-244-8800
Fundamental Estate Tax Analysis
FIRST: Your estate may
include (depending on your plan and how titled):
1.
Your house (if joint, H&W, 50% on death of first,
100% on death of second;
2.
Your Retirement or deferred compensation;
3.
Your life insurance;
4.
Your savings (again, if joint, H&W, 50% on death
of first, 100% on death of second.
SECOND:
Estate Taxes are still at 55%.
THIRD: A
revocable trust does nothing to reduce taxes.
FOURTH: NO matter what the taxes are, you need an
estate plan.
Not to
worry, there are some answers available.
The
Economic Growth and Tax Relief Reconciliation Act of 2001
I.
Common problems:
a. You’re not rich, but want your children to
receive a good part of what I’ve worked for….
i.
Estate taxes, now topping at
50%, will gradually reduce to 45% in 2007, and will be eliminated in 2010 if
not amended.
Partial Solution: The size
of the unified exemption is up from $675K to $1 million as of 2002 and will
increase thereafter to 1.5 Million in 2004, gradually up to $3.5 million in
2009.
Welcome, Capital Gains Tax!
Further, the gift tax is not repealed, and will remain at 35% even after 2010.
b. What else does the act
provide for?
Carry-over tax basis for
assets, once the estate tax is repealed.
However, Step-up is allowed to $1.3 million plus another $3 million to a
surviving spouse, to be adjusted for inflation periodically after 2010.
Partial solution: reduce the size of your taxable estate, so
there is less to transfer at death (this has been a perpetual goal).
Closely held business may qualify for Estate Tax to be paid in Installment Payments. This applies to businesses with up to 45 equity holders, expanding the previous limit of 15.
What Else?
Lifetime giving, previously
limited to $10,000 per person per year, is now increased to $11,000 and will
increase periodically, per inflation.
So,
what’s the strategy?
It depends on your situation. However, there is more emphasis on stepping
up the taxb basis of property during lifetime or
providing a way to fund the tax (insurance).
Also, Estate plans may provide for change depending on the date of
death.
It still makes sense to consider many of the
tax-planning techniques used today, such as:
Irrevocable
Life Insurance Trusts (ILIT)
Provides cash necessary to pay taxes (whether estate
tax or capital gains)
Wills (generally a good idea) with ‘shelter credit’
trust, and perhaps other trusts.
Qualified Personal Residence Trust (QPRT)
(An irrevocable trust which
allows the owner to live in the residence for a term of years, and thereafter
pay rent to the beneficiary). Never did step-up basis, but does reduce the size
of the estate.
So,
what has lost favor?
Not quite as popular (perhaps) are techniques geared
to reduction of estate size (dollar value) where the 4.3 Million step-up is
exceeded.
Some
new ‘Flex’ in the law regarding Retirement savings:
Tax-free loans, not permitted in IRA’s, are permitted in 401(k).
Beginning in 2003, IRA may be established inside a 401(k) plan.
Individuals over 50 years old may make ‘catch-up’ payments of $500 in 2002, $1,000 in 2003 and up to 2500 in 2006
Life expectancy tables are to be updated to reduce the amount that is required to be withdrawn beginning at age 70 ½
Increased ‘Portability’
Expansion of available rollovers. Pre-tax IRA funds may be rolled over into any other type of retirement plan, such as a 403(b) annuity, or a 457 plan for state or other political subdivision. BUT, the recipient Plan must authorize such rollover and other limitations may apply.
‘Same desk’ rule is eliminated.
Easing of ‘Top Heavy’ rules applicable to retirement, group life and cafeteria plans:
If 60% are ‘key employees’, top-heavy rules may apply. But, “Key Employee” is redefined so one earning under $130,000 is no longer a ‘Key Employee’.
Credit available to offset up to $1,000 of admin costs for plan.
Educational Issues
Increased contribution allowance for Education Individual Retirement Accounts. $2,000, up to April 15th of following year. Contributions are not deductible, but earnings distributed for educational purpose are (even elementary and secondary may be eligible). Limited to $2,000 per year, but earning tax-free could (at 7%) produce $72,000 by age 18. Adjusted gross income limit phase-out is increased to $190 to $220K from prior $150-$160K. May also contribute to State Tuition Plan.
Exclusion from gross income, distributions from
qualified tuition plan. Contribution
for education of a
‘family member’) may go as far as first cousins). May be used for actual
living expenses. Section 529
represents a magnificent opportunity to pass on wealth adequate to educate your
children or grandchildren!
Expansion of deductibility of student loan interest.
To
Summarize, Estate preparedness includes:
1.
Evaluating the probable size and nature of the estate. Complete a questionnaire.
2.
Reviewing the Grantor’s desires and needs of the beneficiaries (i.e.,
special needs).
3.
Establishing an estate plan, including the possible use of:
a. An attorney
b. An investment advisor
c. An insurance advisor, for
products which may include:
i.
‘Nursing home’ insurance
ii.
Disability insurance
iii.
Annuity
iv.
Life insurance.
4.
Tools that may be used include:
a. Will;
b. Power of Attorney;
c. Health Care Power of
Attorney/living will;
d. Trusts;
e. Gifts during lifetime;
f. Business transition
agreements:
i.
Stockholder agreements, buy/sell agreements/ LLC agreements.
ii.
Insurance-funded buyout provisions;
g.
g. Simple life tenant/remainderman deed.