1. The Federal Gift and Estate Tax And Financial Planning  Terminology  Outline of the Federal Estate and Gift Tax  Sample Problem  Life Insurance and Estate Planning

2. Terminology:  Probate: Court passes title (after debts are paid) 1) named in will 2) intestate (by state laws when no valid will exists)  Will: Spells out how assets are to be distributed at death Valid will requirements: 1) made while competent 2) witnessed 3) form acceptable to state  Executor(rix) carries out terms of will  Administrator carries out state law (intestate)

3. GENERAL OUTLINE OF PROCEDURE 1.List and value all property in the estate 2.Subtract expenses and debts 3.Add taxable gifts 4.Calculate tax (See following slides for specifics)

4. 1) List the value of all property in the estate  personal property  cash and securities  real estate  business investments (at fair market value)

5. Step 1) List the value of all property in the estate (continued)  life insurance benefits paid to estate used to satisfy a decedent's obligations Where there is an incidence of ownership  property subject to general power of appointment vs. limited power of appointment not included even if paid to oneself under limited power if does not exceed 5/5 rule: 5% of property or $5,000  annuities payable to another party

6. Valuation date  Must select valuation date for all assets date of death or an alternative 6 months after date of death  business property may lose value fast

7. Step 2. Subtract the following:  allowable deductions  funeral expenses  probate costs  estate administration  debts  marital deduction

8. Marital Deduction  nonterminable interest from decedent to spouse  can minimize or possibly eliminate FET on S1 by passing all property to S2 but: S1 does not use the $2,000,000* property value unified credit (*2007 increasing to $3.5M in 2009)

9. Marital Deduction  Can actually increase FET, probate and estate costs when S2 dies except if: S2 remarries, consumes, or gifts (during lifetime) property marital deduction property must be nonterminable interest interest must not end by death, at an age, or any other event - so property gets taxed when S2 dies. Except QTIP trusts, Power of Appointment trusts (exempted terminal interest)

10. Unified Credit & Gift Tax Exemption

11. Gifts  Can give some or all property to charity at death to reduce estate size.  give property during life; limited charitable contributions reduce annual taxable income deductible (itemized)  2009: 13/26 gift applies to life-time taxable gifts  also reduces estate size

12. Step 3. Add Taxable Gifts - Post 1976 gifts  Even if you already paid gift tax, post 1976 added back in to increases marginal tax rates  not 10/20 gifts (now 13/26, 2009), excess of these amounts  taxes also added back if paid within 3 years of gift because the tax would have been in the estate if not paid  all taxable gifts revocable transfers gifts of life insurance (explained later) property transferred with retained interest

13. STEP 4: Calculate Tax  apply FET Unified rates  take credit for gift taxes already paid  credit for state death taxes paid  credit for gift taxes pre 1977 gifts included in gross estate  credit for taxes paid on property in a previous estate (10 years) i.e. two close deaths  take unified credit (on $2,000,000 property) $780,800 (2007) tax (or increased amount to 2009)

14. Simple Example

15. Life Insurance in Estate Planning  Involves the use of whole life insurance  Adds Liquidity FET probate costs final illness state death taxes  instead of having to liquidate assets (including businesses)

16. Ownership of Life Insurance  if “incidence of ownership” exists - included in gross estate What constitutes ‘ownership?’  assigned or given away within 3 years of death - included in estate

17. Ownership of Life Insurance  Proceeds should not be included in estate - but should be available to the estate plan.  spouse or trust should be owner and beneficiary can purchase assets from estate or can make loans to the estate  What happens if spouse owns, insured is object of insurance, and beneficiary a third party? Any gift issues?

18. Ownership of Life Insurance  When insurance coverage is assigned or transferred there are two requirements to not be included in estate more than 3 years transferred from date of death not more than 5% p(x) that the contract will revert back to donee actuarially  If transferred, taxes may be paid early cash value included in S1 if S1 dies owning policy on S2.