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2011 Estate Planning Update

ICPAS Estate and Gift Tax Conference Presentation on May 18th at Standard Club in Chicago

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2011 Estate Planning Update

  1. 2. Estate Planning Update - The Impact of the 2010 Tax Relief Act Brian T. Whitlock, CPA, JD, LLM
  2. 3. 2010 Tax Relief Act – Transfer Tax Highlights <ul><li>Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (P.L. 111-312) </li></ul><ul><li>Signed by President Obama on December 17, 2010 </li></ul><ul><li>Changes options for deaths occurring in 2010 </li></ul><ul><li>Reunifies the estate and gift tax credit beginning in 2011 </li></ul><ul><li>$5 million exemption for deaths occurring in 2011 and 2012 </li></ul><ul><li>Indexes Gift, Estate and GST exemptions for inflation after 2011 </li></ul><ul><li>Sets top estate and gift tax rate at 35% (2010 through 2012) </li></ul><ul><li>Sunset - January 1, 2013 </li></ul>
  3. 4. How does the Tax Relief Act Impact 2010 Deaths? <ul><li>Creates a $5 million estate tax exclusion amount </li></ul><ul><li>Sets gift and estate tax rates at 35% </li></ul><ul><li>Eliminates automatic carryover basis </li></ul><ul><li>Creates ability to elect no estate tax for 2010 deaths </li></ul><ul><ul><li>Form must be filed within 9 months of enactment </li></ul></ul><ul><ul><ul><li>Signed by President on 12/17/2010 </li></ul></ul></ul><ul><ul><ul><li>9/17/2011 is a Saturday therefore 9/19/2011 </li></ul></ul></ul><ul><ul><li>No estate tax regardless of size of estate </li></ul></ul><ul><ul><li>Carryover basis </li></ul></ul><ul><ul><ul><li>Lesser of Basis or FMV at date of death </li></ul></ul></ul><ul><ul><ul><li>Section 1022 adjustment of $1.3 million (plus $3 million for spouse) </li></ul></ul></ul><ul><ul><ul><li>Non-resident allowed basis step up of only $60,000 </li></ul></ul></ul>
  4. 5. Carryover Basis <ul><ul><li>General Rule </li></ul></ul><ul><ul><ul><li>Lesser of Basis or FMV at date of death </li></ul></ul></ul><ul><ul><ul><li>Section 1022 adjustment of $1.3 million (plus $3 million for spouse) </li></ul></ul></ul><ul><ul><li>Non-Resident Aliens </li></ul></ul><ul><ul><ul><li>Similar to Estate Tax allowed basis step up of only $60,000 </li></ul></ul></ul><ul><ul><li>“ Modified Carryover Basis” </li></ul></ul><ul><ul><ul><li>Committee Report </li></ul></ul></ul><ul><ul><ul><li>Adjustments permitted under Section 1022(b)(2)(C) </li></ul></ul></ul><ul><ul><ul><ul><li>Increase for capital loss carryovers under Section 1212(b) </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Increase for Net Operating Loss carryover under Section 172 </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Plus the sum of any losses that would have been allowable under Section 165 if property was sold at FMV before death </li></ul></ul></ul></ul><ul><ul><li>Surviving Adjustments </li></ul></ul><ul><ul><ul><li>Section 121(d)(11) extended for sale of residence by estate/trust </li></ul></ul></ul>
  5. 6. Example of Carryover Basis <ul><li>Abbie, a widow, died on August 1, 2010 with an gross estate of $17 million and a long-term capital loss carryover of $500,000 that she was not able to use during her lifetime. Her children wish to elect out of the estate tax </li></ul>Description FMV Basis Lower of FMV or Cost Chicago Residence $ 1,000,000 $ 150,000 $ 150,000 Florida Condo $ 300,000 $ 50,000 $ 50,000 Stock $ 7,500,000 $ 6,200,000 $ 6,200,000 Bonds $ 2,000,000 $ 2,200,000 $ 2,000,000 IRA $ 6,000,000 $ 0 $ 0 Personal Property $ 200,000 $ 250,000 $ 200,000
  6. 7. Example of Modified Carryover Basis <ul><li>$1.3 million base + Unused LTCL ($500K) + eligible step downs ($200K) = $2 million Modified Carryover Basis Amount </li></ul>* Allow for Section 121(b)(11) exclusion of $250,000 ** Loss on Personal assets would not have been deductible under Section 165, if sold during life Description FMV Basis Election Adj. Basis Chicago Residence $ 1,000,000 $ 150,000 $ 600,000 $ 750,000* Florida Condominium 300,000 50,000 250,000 300,000 Common Stocks 7,500,000 6,200,000 1,150,000 7,350,000 Bonds 2,000,000 2,200,000 n/a 2,000,000 IRA 6,000,000 0 0 0 Personal Property 200,000 250,000 n/a** 200,000 Total $ 17,000,000 $ 8,850,000 $ 2,000,000 $ 10,600,000
  7. 8. Step up and Estate tax vs. Carryover basis <ul><li>Amos, a single person, dies in 2010 with a taxable estate of $7 million, but $0 adjusted basis in the assets passing to his beneficiaries. </li></ul><ul><li>With no election - federal estate tax of $700,000 [($7,000,000 - $5,000,000 x .35 = $700,000]. </li></ul><ul><li>With election and the full $1.3 million basis step up the capital gains tax would be higher [($7,000,000 – $1,300,000) x .15 = $855,000]. </li></ul>
  8. 9. How does the Tax Relief Act Impact 2010 Gifts? <ul><li>Eliminates Sec 2511(c) rule re: gifts to Non-Grantor Trusts </li></ul><ul><ul><li>Retained interests, GPA, LPAs – again are incomplete gifts </li></ul></ul><ul><li>Retains Annual Exclusion for Present Interest gifts </li></ul><ul><ul><li>No change in $13,000 per person per calendar year </li></ul></ul><ul><ul><li>No change in Crummey or Cristofani </li></ul></ul><ul><li>Lifetime Gift Tax Exclusion </li></ul><ul><ul><li>No change in $1 million for transfers in 2010 </li></ul></ul><ul><ul><li>No change in length of Grantor Retained Annuity Trusts </li></ul></ul><ul><li>Gift tax rate for taxable gifts </li></ul><ul><ul><li>Remains at 35% </li></ul></ul><ul><ul><li>No change in ability to discount </li></ul></ul>
  9. 10. How does the Tax Relief Act Impact 2010 GST Gifts? <ul><li>$5,000,000 GST Exemption </li></ul><ul><ul><li>Can be allocated to transfers into trust </li></ul></ul><ul><li>GST rate at 0% for 2010 only </li></ul><ul><ul><li>Taxable skips; </li></ul></ul><ul><ul><li>Taxable distributions; and </li></ul></ul><ul><ul><li>Taxable terminations </li></ul></ul><ul><li>GST rate at 35% for 2011 and 2012 </li></ul><ul><li>Extends technical rules </li></ul><ul><ul><li>Automatic allocation of GST exemption to indirect transfers </li></ul></ul><ul><ul><li>Retroactive allocation where out of order death occurs </li></ul></ul><ul><ul><li>Qualified severance of trusts where inclusion ratio less than 1 </li></ul></ul><ul><ul><li>ETIP rules </li></ul></ul><ul><ul><li>Section 9100 relief for late election of GST exemption </li></ul></ul>
  10. 11. How does the Tax Relief Act Impact 2011 Transfers? <ul><li>Gift Tax </li></ul><ul><ul><li>$10,000 (indexed $13,000) per person per calendar year (no change) </li></ul></ul><ul><ul><li>$5 million credit equivalent amount </li></ul></ul><ul><ul><li>Unused spousal credit is portable (Survivor can use) </li></ul></ul><ul><ul><li>No change in Crummey, Cristofani, or discount rules </li></ul></ul><ul><li>Estate Tax </li></ul><ul><ul><li>$5 million credit equivalent amount </li></ul></ul><ul><ul><li>Unused spousal credit is portable </li></ul></ul><ul><ul><li>State death tax deduction extended until 2012 </li></ul></ul><ul><li>Generation Skipping Tax </li></ul><ul><ul><li>$10,000 (indexed $13,000) per person per calendar year (no change) </li></ul></ul><ul><ul><li>$5 million credit equivalent amount </li></ul></ul><ul><ul><li>No portability for unused spousal credit </li></ul></ul>
  11. 12. 2011 Estate and Gift Tax Rates <ul><li>If the amount with respect to which the tentative tax to be computed is: The tentative tax is: </li></ul><ul><li>--------------------- Not over $10,000. 18% of such amount. </li></ul><ul><li>Over $10,000 but not over $20,000. $1,800, plus 20% of the excess over $10,000. </li></ul><ul><li>Over $20,000 but not over $40,000. $3,800, plus 22% of the excess over $20,000. </li></ul><ul><li>Over $40,000 but not over $60,000. $8,200, plus 24% of the excess over $40,000. </li></ul><ul><li>Over $60,000 but not over $80,000. $13,000, plus 26% of the excess over $60,000. </li></ul><ul><li>Over $80,000 but not over $100,000. $18,200, plus 28% of the excess over $80,000. </li></ul><ul><li>Over $100,000 but not over $150,000. $23,800, plus 30% of the excess over $100,000. </li></ul><ul><li>Over $150,000 but not over $250,000. $38,800, plus 32% of the excess over $150,000. </li></ul><ul><li>Over $250,000 but not over $500,000. $70,800, plus 34% of the excess over $250,000. </li></ul><ul><li>Over $500,000. $155,800, plus 35% of the excess over $500,000. </li></ul><ul><li>For gifts made in 2010—when the estate tax had been scheduled to be temporarily repealed for one year, before the estate tax was retroactively reinstated—the gift tax rate schedule is contained in Code Sec. 2502(a) , while the estate tax schedule is contained in Code Sec. 2001(c) . The 2010 rates are the same under both the Code Sec. 2502(a) schedule and the Code Sec. 2001(c) schedule (as shown in the table above). For gifts made after 2010, the separate Code Sec. 2502(a) gift tax rate schedule does not apply, and the gift and estate tax rates are reunified into a single schedule contained in Code Sec. 2001(c) . </li></ul>
  12. 13. Applicable Credit Amount – Section 2010(c) <ul><li>(c) Applicable credit amount. </li></ul><ul><ul><li>(1) In general. The applicable credit amount is equal to the tentative tax on the applicable exclusion amount ”. </li></ul></ul><ul><ul><li>(2) Applicable exclusion amount. “…the applicable exclusion amount is the sum of— </li></ul></ul><ul><ul><ul><li>(A) the basic exclusion amount (i.e., $5,000,000 indexed for inflation to the nearest $10,000 after 2011), and </li></ul></ul></ul><ul><ul><ul><li>(B) in the case of a surviving spouse, the deceased spousal unused exclusion amount (deceased spouse dying after 12/31/2010). </li></ul></ul></ul>
  13. 14. Unused Credit of Spouse Section 2010(c)(5) <ul><li>Timely Election required </li></ul><ul><li>“ A deceased spousal unused exclusion amount may not be taken into account by a surviving spouse… unless the executor of the estate of the deceased spouse files an estate tax return on which such amount is computed and makes an election on such return that such amount may be so taken into account”. </li></ul><ul><li>Return must be filed at the time prescribed by law (including extensions). </li></ul><ul><li>The election, once made, shall be irrevocable . </li></ul><ul><li>If multiple spouses, credit limited to lesser of $5 million or unused credit of last spouse to die regardless of election </li></ul><ul><li>QUERY: What happens after Sunset? </li></ul>
  14. 15. Other Provisions extended <ul><li>Qualified Conservation Easement </li></ul><ul><ul><li>Extended for two years </li></ul></ul><ul><ul><li>Distance requirements removed, previously required to be </li></ul></ul><ul><ul><ul><li>Within 25 miles of a metropolitan urban area, or </li></ul></ul></ul><ul><ul><ul><li>Within 10 miles of a National Forest </li></ul></ul></ul><ul><li>Qualified Family Owned Business Interest (QFOBI) </li></ul><ul><ul><li>Eliminated in 2003 as unnecessary </li></ul></ul><ul><ul><li>Reinstated and available after 12/31/2012 </li></ul></ul><ul><li>Installment Payments tax on Closely held Business </li></ul>
  15. 16. State of Illinois <ul><li>Ones are wild in Springfield [1-11-11 + 1] </li></ul><ul><ul><li>January 11, 2011 plus 1 hour </li></ul></ul><ul><ul><li>Legislature passes State Tax Legislation </li></ul></ul><ul><li>Income Tax (Individual, Trust & Estate) incr. from 3% to 5% </li></ul><ul><li>C Corporation Tax increases from 4.8% to 7% </li></ul><ul><li>No Change in Replacement Tax </li></ul><ul><li>Fiduciary Income Tax increases from 3% to 5% </li></ul><ul><li>Estate Tax Reinstated </li></ul><ul><ul><li>For persons dying after 12/31/2010 </li></ul></ul><ul><ul><li>$2 million exemption </li></ul></ul><ul><ul><li>State Marital Deduction for terminable interest trusts </li></ul></ul>
  16. 17. Illinois It’s a nice place to live, just don’t die here.
  17. 18. Planning Options <ul><li>Revise Wills and Trusts </li></ul><ul><ul><li>Not Mandatory (traditional A-B works under new law) </li></ul></ul><ul><ul><ul><li>Separate trusts may be beneficial for GST </li></ul></ul></ul><ul><ul><li>Watch out for State Tax exemptions, decoupled states </li></ul></ul><ul><ul><li>Leave entire estate to Q-TIP type trust </li></ul></ul><ul><ul><ul><li>Advantage - simple trust language </li></ul></ul></ul><ul><ul><ul><li>Advantage – election can be made after death when funding </li></ul></ul></ul><ul><ul><ul><li>Disadvantage - lose ability to sprinkle or spray income </li></ul></ul></ul><ul><li>Use it or Lose it </li></ul><ul><ul><li>$10 million credit equivalent for 2011 and 2012 </li></ul></ul><ul><ul><li>May not be extended </li></ul></ul><ul><ul><li>Keys: Choose assets wisely </li></ul></ul><ul><ul><ul><li>use High basis assets </li></ul></ul></ul><ul><ul><ul><li>Gift most likely to appreciate </li></ul></ul></ul>
  18. 19. Key Strategies <ul><li>Lock in Exempt Equivalent for Estates over $20 million </li></ul><ul><li>Take advantage of depressed values </li></ul><ul><ul><li>Low Real Estate values </li></ul></ul><ul><ul><li>Many Closely held businesses at historic lows </li></ul></ul><ul><li>Leverage Low Interest Rates (Current - Rev. Rul. 2011-11) </li></ul><ul><ul><li>Intra family and Business Loans </li></ul></ul><ul><ul><ul><li>Table 1 Term Rates, or </li></ul></ul></ul><ul><ul><ul><li>Table 6 Foregone Interest (each July – 2010 .59%) </li></ul></ul></ul><ul><ul><li>Installment Sales and Term loans (Table 1 – Section 1274) </li></ul></ul><ul><ul><ul><li>Short Term .56% </li></ul></ul></ul><ul><ul><ul><li>Mid Term 2.42% </li></ul></ul></ul><ul><ul><ul><li>Long-Term 4.11% </li></ul></ul></ul><ul><ul><li>GRATs, CLTs (Table 5 - Section 7520) </li></ul></ul><ul><ul><ul><li>3% </li></ul></ul></ul>
  19. 20. Key Strategies <ul><li>Appreciate client resistance to gifting </li></ul><ul><ul><li>Fear </li></ul></ul><ul><ul><li>Uncertainty </li></ul></ul><ul><ul><ul><li>Meet Mrs. Silver </li></ul></ul></ul><ul><li>Focus on Asset Protection Planning for Donees </li></ul><ul><ul><li>Spendthrift Clauses </li></ul></ul><ul><ul><li>Layered Trustees </li></ul></ul><ul><ul><li>Power to Sprinkle or Spray of Income and or Principal </li></ul></ul><ul><li>Maximize Flexibility by “Working with IDIOTs” </li></ul><ul><ul><li>Retain power to borrow cash or substitute assets </li></ul></ul><ul><ul><li>Spouse as Trustee </li></ul></ul><ul><ul><li>Spouse as Sprinkle or Spray beneficiary </li></ul></ul><ul><ul><li>Trust Protectors </li></ul></ul>
  20. 21. Key Strategies <ul><li>Closely held Businesses </li></ul><ul><ul><li>Voting and Non-voting Stock </li></ul></ul><ul><ul><li>Discounts for Lack of Marketability and Lack of Control </li></ul></ul><ul><ul><li>Utilizing S Corporation and Flow thru entities </li></ul></ul><ul><ul><ul><li>Leveraging off of Cash Flow </li></ul></ul></ul><ul><li>Non-Qualified Deferred Compensation </li></ul><ul><ul><li>Senior Generation concerns </li></ul></ul><ul><ul><ul><li>Salary and Wages are fleeting </li></ul></ul></ul><ul><ul><ul><li>Continued income stream necessary </li></ul></ul></ul><ul><ul><ul><li>Minimize Payroll Taxes </li></ul></ul></ul><ul><ul><li>Side benefits </li></ul></ul><ul><ul><ul><li>Preserve Income Tax Deductibility of Payment </li></ul></ul></ul><ul><ul><ul><li>Save Company Payroll tax </li></ul></ul></ul><ul><ul><ul><li>Reduce value of Business </li></ul></ul></ul>
  21. 22. Questions <ul><li>Brian T. Whitlock, CPA, JD, LLM </li></ul><ul><li>Blackman Kallick, LLP </li></ul><ul><li>10 S. Riverside Plaza – 9 th Floor </li></ul><ul><li>Chicago, IL 60606 </li></ul><ul><li>Phone (312) 207-1040 </li></ul><ul><li>E-mail: [email_address] </li></ul><ul><li>Linked-in </li></ul><ul><li>Twitter: @TaxGems </li></ul>