2001: A Death Tax Odyssey Planning Opportunities and Strategies Theme 2001 playing

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 likely to arise in 2001  Speaker Name

Two major pieces of legislation introduced in 2000  Death tax repeal  Charitable 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 taxation  Protect small business and family farms  Favored 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argue that the estate tax results in a double tax on assets  Opponents of repeal counter that if the estate tax was repealed  A double tax would not result  The appreciation in the assets avoids taxation  The assets would receive a step-up in basis at death  The gain on the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. 8  Return 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beneficiaries and retain the tax basis of the deceased  Prior Law  A carryover basis rule was attempted in 1976 and repealed two years later due to impossibility to track the deceased basis in the assets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 individuals  Protecting your assets  Distributing your assets  Giving to charity  Planning business succession  Formulating income tax strategy  Providing 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 creditors  In case of divorce  From the beneficiary  From individual’s creditors

Distribution of assets  Subsequent Marriages  Dynasty trusts  Incentive 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 tax  Acquire investment management expertise

Lost in Space??? Planning opportunities and strategies under new and proposed legislation  William E. Lowe, JD, MBA, CFP

New IRA distribution rules  Requires the owner to take their required minimum distributions at age 70 ½ 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 IRA  Beneficiaries can change without affecting the pay out  Custodian/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 70 ½  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 Unitrust IRA Value $1,000,000 Cost Basis $0 UMB Private Foundation $1,344,889 YChildren serve on Board of Foundation and distribute 5% per year YIf 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 Premiums Refund of Premium Payments P.S. 58

Questions???

2002: Another Death Tax Odyssey? Hal speaks “That’s all, Dave—Goodby”