October 4, Dear Client: Re: Federal Taxes and Estate Planning

Transcription

1 Octber 4, 2010 Dear Client: Re: Federal Taxes and Estate Planning Due t the sweeping changes described belw, we are sending this t ur clients, frmer clients, and thers. If yu are a client, please call us at yur earliest pprtunity t schedule a time t g ver yur current estate plan and determine what changes need t be made t yur current plan t minimize taxes and t reduce the pssibility f future family cnflicts. These are chatic times as utlined belw. Unless we hear that yu want t engage us t review yur existing plan, we will nt begin that prcess. We are Estate Tax Free (srt f)! Gd News r Nt? Fr many years, the numbers f families that were affected by the federal estate tax had been drpping because the amunt f an estate necessary t file had been increasing frm $650,000 t $3,500,000 in This is why estate planners and yur wills and trusts have used terms f art such as "unified credit amunt" "taxable amunt" r "amunt necessary t reduce the estate tax t zer" as measuring tls t determine hw much culd g t family members withut tax. (See descriptin after my signature fr mre details abut this.) At the Mment - N Federal Estate r Generatin Skipping Tax In an extrardinary and unexpected way, Cngress has left us in 2010 with n federal estate r generatin skipping tax. This makes it almst impssible t interpret the terms used in wills r trusts and can make the results cntrary t what yu wished r planned. Fr example, if yur trust states that the amunt nt subject t federal estate tax ges t yur family trust (mst f ur married clients divide assets at death, between a marital trust and a family trust) and the rest t yur spuse, r a marital trust, in 2009 $3.5 millin wuld have gne t a family trust and escaped estate tax and any excess wuld g t a marital trust f which yur spuse was the nly current beneficiary, withut estate tax. In 2010, with the same estate dcuments this wuld lead t the ttal estate passing t the family trust, with nthing fr the marital trust. Fr sme this wuld be acceptable, (ften the spuse is the primary beneficiary f the family trust) fr thers this wuld be a disaster. It needs t be determined n a case by case basis based n yur wishes and yur dcuments. In anther example, if yu left yur family the $3.5 millin that escaped estate tax and the rest t charity, then the charity wuld receive nthing, since all f yur estate nw pays n estate tax. If yu left yur grandchildren the maximum amunt that culd g t them withut any generatin skipping tax, they wuld nw receive the entire estate. It is nt hard t see that smething that yu d nt intend culd result, r that litigatin might be necessary in rder t determine what yu intended in the absence f an estate tax.

2 Anther Surprise - Carryver Basis (Limited "Step Up" in Basis) It may seem a wnderful pprtunity t have a year withut estate tax, but there is als a change in the tax basis f inherited assets that can make yur heirs pay mre capital gains tax. Under the 2009 rules, there was a stepup in basis when assets were inherited t the value at date f death, limiting any capital gains tax t increases in value after death. Withut an estate tax, an heir pays capital gains tax when an asset is sld based upn the decedent's basis (riginal purchase price in many cases). In 2010, an estate des get t step up $ 1.3 millin and ptentially anther $3 millin that g t the surviving spuse. Every executr (persn wh has cntrl f assets which wuld include a trustee) must cme up with recrds t supprt the basis f all assets t make this electin, and prvide cpies t the IRS as well as t each heir. Of curse, it is difficult fr anyne t lcate recrds f purchase, imprvements, depreciatin, etc. fr each investment r piece f real estate. Generatin Skipping Tax in 2011 Generatin Skipping Tax planning is uncertain fr the future. Fr 2011 we are t pretend that the 2010 lack f Generatin Skipping Tax did nt exist. This creates all srts f interesting questins with n answers. Fr thse wh like uncertainty and want t assume it will wrk in their favr, this is an pprtunity. Fr the rest, this is a time t review any such planning and perhaps defer making gifts t grandchildren and thers affected by this tax (typically persns mre than 37.5 years yunger than the dnr). We Are Nt Dne Yet- In 2011 the Law Rlls Back t 2001 If nthing changes, the estate tax cmes back in 2011, fr all estates ver ne millin dllars and step-up basis returns. Cngress culd als decide t retractively apply an estate tax in 20 I0, and n ne knws if it will be retractive t the beginning f the year. President Obama has made such a prpsal. Sme f my clients may have beneficiary designatins which rely n tax terms than are presently meaningless (fr example, references t assets qualifying fr the marital trust). These terms may have als been used in prenuptial agreements and even buy-sell agreements. Our Advice We urge yu t meet with us t review yur current estate planning dcuments and family situatin. We anticipate a meeting lasting n mre than 2 hurs, but yu will have the peace f mind f understanding what wuld happen using yur current plan in 2010 r 2011 and yu can decide if making a change is necessary, r nt. This culd be a telephne meeting where we review yur dcuments in advance. We will als explain what srt f recrds shuld be gathered and kept fr carryver basis and the executr's electin. We can amend yur estate planning dcuments t prvide yur fiduciary with the pwer t make the necessary electin. While there is still a gift tax with a millin dllar exemptin amunt, the current gift tax rate (35%) is lwer than it will be in 2011 (45%) shuld yu wish t make taxable gifts. While we highly recmmend that yu review yur estate planning dcuments every three years r when there is a family event change, the 2010 changes in the law make this review essential. If we did meet with yu in the last year and reviewed yur dcuments we did discuss the abve changes. Please call my ffice at yur earliest cnvenience t schedule a meeting t discuss these changes. Sincerely, Hantz Titus Urbanski, llc. Tax and Business Cnsultants

3 Fr thse f yu wh wuld like a mre technical explanatin, please keep reading: 2001 Tax Act. In 2001, Cngress passed the Ecnmic Grwth and Tax Relief Recnciliatin Act (EGTRRA) which prvided fr significant phased-in increases in the federal estate, gift and generatin skipping tax (GST) exemptins and lwer tax rates. EGTRRA prvisins included: In 2009, the estate and GST exemptins increased t $3.5 millin per decedent, with a flat 45% estate and GST tax rate n any excess. The gift tax exemptin was $1.0 millin, with tax rates frm 41% t 45%. In 2010, the federal estate and GST taxes were repealed fr ne year. The gift tax $1.0 millin exemptin remained, with a lwer flat tax rate f 35%. Thus, yu had t die r pay gift tax t get the benefit f the change. The step up in basis rules (which gave a fresh-start fair market basis fr mst assets f a decedent) was replaced with an adjusted carry-ver basis. These new basis rules permit a step up in basis f up t $1.3 millin, plus an additinal $3.0 millin fr certain spusal transfers at death. On January 1, 2011, EGTRRA was autmatically repealed, resulting in an dd situatin: A $3.5 millin estate and GST exemptin and flat 45% tax rate in 2009, n estate and GST tax in 2010, and a $1.0 millin estate exemptin and tax rate up t 60% in What Happened in 2009? Estate planning practitiners universally expected Cngress t carry the 2009 estate tax rules acrss 2010 (bth Representative Rangel as Chair f the Huse Ways and Means and Senatr Baucus as Chair f the Senate Finance Cmmittee said it wuld happen earlier last fall, as did many thers). Hwever, unexpectedly in December the Huse failed t act n a ne year extensin and instead sent the Senate a bill t make the 2009 rules permanent. Because the Senate was fcused n health care and there was brad disagreement in the Senate n what t d with estate taxes, Cngress enacted n changes t the EGTRRA's 2010 rules. Thus, effective as f January 1, 2010 Planning in Chas Cngress s failure t adpt estate tax legislatin in 2009 and the pssibility that changes will nt be adpted during 2010, radically change the estate plai1i1ing cnsideratins f many clients. Fr example, Cngress has indicated that in 2010 abut 6,000 decedents will benefit frm the eliminatin f estate taxes, but ver 70,000 heirs will pay higher incme taxes because f the change in the incme tax basis rules fr assets received frm decedents Changes. The U.S. has an unpredictable planning envirnment in which any number f radically different changes may ccur in 2010: Cngress may d nthing in 2010, in which case there is an adjusted carryver basis, and n federal estate r generatin skipping tax fr peple wh die in While yu prbably will nt die in 2010, yu still need t cnsider planning fr that pssibility, because nt planning fr these changes, if death ccurs, can be disastrus. Fr example: Frmula clauses (e.g. terms that allcated yur estate exemptin t a "bypass trust") in yur planning dcuments culd inadvertently

4 disinherit sme heirs and/r yur surviving spuse and/r create cnflicts amng family members n hw yur dcuments shuld be prperly interpreted. Cnflicts culd arise amng yur heirs and fiduciaries n asset basis issues. Inadvertent generatin skipping taxes culd be incurred after Passing assets directly t yur surviving spuse may result in higher estate taxes after Inadvertent state taxes (nn-michigan at this time) culd be incurred frm ut f date terms in yur dcuments. Cngress may adpt legislatin t carry the 2009 rules ver 2010, retractive t January 1, (This was recently prpsed by President Obama.) There is brad disagreement n whether a retractive tax bill is cnstitutinal. If a retractive law it adpted, it will be challenged as uncnstitutinal and it culd take years fr the Supreme Curt t rule n the issue (similar disputes in the past tk seven t ten years t be determined by the Supreme Curt). Until such a ruling, uncertainty will prevail. Thse dying after the enactment shuld nt have that uncertainty. In any event, yur estate plan shuld cntemplate dying bth befre r after a ptential retractive enactment, which may r may nt be cnstitutinal. If Cngress acts in 2010 t address the estate tax issues, it culd: Adpt permanent estate tax exemptin, beginning in 2010 r If s, mst cmmentatrs anticipate estate tax exemptins t fall between $2-5.0 millin and tax rates 35% t 45%. Adpt a temprary higher estate exemptin. Adpt rules t limit r eliminate valuatin discunts Changes Unless Cngress enacts new legislatin in 2010, then n January 1, 2011, a number f autmatic changes ccur t the federal tax cde, including: The estate tax exemptin drps t $1.0 millin per decedent. The estate tax rate increases (e.g., 55% abve $3.0 millin and 60% abve $10 millin). States which remain "cupled" t the federal estate tax will have their state death taxes restred (This is the case in Michigan). Thus, if yu wn prperty in ne f these cupled states, yu culd have new expsure t a state estate tax. (This is cmplicated, and if yu are a Michigan resident with nly Michigan prperty, this is ne f the least f yur cncerns.) The fair market value step up in basis returns fr assets passing frm a decedent.

5 The tp incme tax rates g up by at least 4.6%, capital gain tax rates g up by up t 5% and dividend tax rates g up by up t 24.6%. Effectively, unless Cngress adpts new legislatin, in 2010 the estate tax rules rtate 180 degrees frm where they were in 2009, and then rtate 180 degrees again in nly the estate tax and incme tax rules culd be even wrse than what we had in Uncertainty makes it difficult t plan, but waiting t see what happens next is nt a gd idea. The earlier yu can implement flexible tax and estate planning t respnd t these changes, the better. Again, please call us t schedule a time t g ver yur current estate plan and determine what changes need t be made t yur current plan t minimize taxes and t reduce the pssibility f future family cnflicts in these chatic times. Again, unless we hear that yu want t engage us t review yur existing plan, we will nt begin that prcess.