BASIC ESTATE PLANNING AND BEYOND

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2010/2011 INCOME TAX PLANNING;
BASIC ESTATE
PLANNING ANDBEYOND
Dinsmore & Shohl LLP
Frederick J. Caspar, J.D.
10 Courthouse Plaza, S.W., Suite 1100
Dayton, Ohio 45402
(513) 449-2800
[email protected]
November 11, 2010
© 2010 Frederick J. Caspar

BRIEF SUMMARY OF UPCOMING CHANGES
2
ROTH IRA CONVERSIONS

Roth Conversion (previously 100,000 AGI limit)
• Pay taxes in 2010, or
• Spread income equally in 2011 and 2012
○ Election not due until 2010 tax return
filed.
3

SMALL BUSINESS JOBS AND CREDIT ACT
(9/2010)
• Section 179 Deduction for Equipment
○
Limit increased from $250,000 to $500,000 in
2010 and 2011.
○
Phase-out starts at $2 Million of qualified
property vs. $800,000 previously.


50% Bonus Depreciation Extended to 2010
Self-employed taxpayers able to deduct health
insurance premiums from earned income in 2010.
4
HEALTH REFORM ACT (3/2010)

In 2010 forward, sliding scale tax credit for
qualified small employers to offset employer health
insurance cost.
•

In 2013 forward:
•
•

See calculation at www.NFIB.com/creditcalculator
Additional tax of 0.9% on earned income over
$200,000/$250,000 for single/joint taxpayers.
Additional tax of 3.8% on unearned income to the extent
modified AGI exceeds $200,000/$250,000.
In 2018 forward: 40% excise tax on health
insurance premiums in excess of $10,800/$27,500
for individual/family coverage
5
INCOME TAX CHANGES
2010 Joint Tax Rates
$0 to $16,750
16,750 to 68,000
68,000 to 137,300
137,300 to 209,250
209,250 to 373,650
Over 373,650
10% of amount over $0
$1,675.00 + 15% of amount over $16,750
$9,362.50 + 25% of amount over 68,000
$26,687.50 + 28% of amount over $137,300
$46,833.50 + 33% of amount over 209,250
$101,085.50 + 35% of amount over 373,650
6
Expected 2011 Tax Rates
If taxable income
Is over
$0
$60,699
$146,660
$223,485
$399,144
But not over
$60,699
$146,660
$223,485
$399,144
unlimited
The tax is:
15% of the amount over $0
$9,104.80 plus 28% of the amount over $60,699
$33,173.86 plus 31% of the amount over $146,660
$56,989.60 plus 36% of the amount over $223,485
$120,226.94 plus 39.6% of the amount over $399,144
7
Simple Example
Married couple has the $100k AGI, 4
exemptions & no deductions.
 What is their tax for each year?

2010
2011
Taxable Income
$74,000
$75,200
Tax
$10,863
$13,451
Effective Average Tax
Rate
Marginal Bracket
10.86%
13.45%
25%
28%
8
Example with Unearned Income


Married couple has the $400k AGI, $300k dividend,
$100k ordinary income, 4 exemptions & no
deductions.
What is their tax for each year?
2010
2011
Taxable Income
$374,000
$390,200
Tax
$ 55,863
$118,043
Effective Average Tax
Rate
Marginal Bracket
13.97%
29.5%
35%
40%
9
To Net $1After Federal Income Taxes
Capital Gains
Max. Rate
Gross
Increase
2010
15.0%
$
1.18
2011-2012
20.0%
$
1.25
6%
2013 & later
(HI tax)
23.8%
$
1.31
11%
Dividends
Max. Rate
Gross
Increase
2010
15.0%
$
1.18
2011-2012
39.6%
$
1.66
40%
2013 & later
(HI tax)
43.4%
$
1.77
50%
10
Some 2010 Year-End
Planning
11
Will 2010 Rates be Extended

If not
• Roth conversion in 2010.
• Trigger capital gains/buy back stocks if desired.
○
If capital loss carry-forwards would offset, no benefit.
• Avoid taking capital losses until 2011.
• Sell property on installment basis.
○
Have until as late as 10/15/11 to decide whether to report in 2010
or 2011.
• Should expenditures be capitalized and not expended.
○
Sections 59(e), 174, 263, 266
• Consider avoiding tax free exchanges/rollovers.
• Pay bonuses after March 15, 2011.
○
Employees may want to accelerate bonuses.
• Avoid bonus depreciation/use slower depreciation.
• Accelerate 15% C corporation dividends into 2010.
12
BASIC ESTATE
PLANNING AND BEYOND
13

ESTATE TAX RATE CHANGES
Year
Estate Tax Exemption
2009
$3,500,000
2010
Estate tax repealed
2011 and beyond
$1,000,000
Top Estate Tax
45%
0%
55%
14

Federal Estate Tax Rate Schedule for 2011 and Beyond.
Taxable amount
over
Taxable amount not over
Marginal tax rate
(percent)
1,000,000
1,250,000
41
1,250,000
1,500,000
43
1,500,000
2,000,000
45
2,000,000
2,500,000
49
2,500,000
3,000,000
53
3,000,000
--
55
10,000,000
17,184,000
60
15

GIFT TAX CHANGES
• 35% tax rate in 2010.
• 41% to 60% tax rate in 2011 and beyond.
16
THE NEED FOR ESTATE
PLANNING

NON-FINANCIAL GOALS
• Give what you want.
• To whom you want.
• When and in the manner in which you want.

FINANCIAL GOALS
• At the least possible tax cost, consistent with
other goals.
• With needed liquidity to allow for
implementation of non-financial goals.
17
SOME RESULTS OF BAD
PLANNING
Allow the State to decide who is entitled to
your assets, and when.
 Significantly and unnecessarily reduce
family wealth.
 Jeopardize family business.
 Jeopardize the financial and mental health
of your beneficiaries.

18
SOME NON-FINANCIAL
DECISIONS

GUARDIAN
• For minor children
• For you
• Successor

EXECUTOR
• Role
• Fees

TRUSTEE
• For children
○
Special needs trust
• For parents, or other family members
• Asset protection for beneficiaries
• Business transition
19
SOME NON-FINANCIAL
DECISIONS (cont.)

AVOIDANCE OF PROBATE—ADVANTAGES OF FUNDING A LIVING
TRUST
•
•

WHAT A LIVING TRUST WILL NOT DO
•
•

Probate Administration with respect to assets in trust is avoided.
○
Court fees saved
○
Court delays avoided
○
Executor and attorney fees saved
○
Especially important to avoid multiple probates if property is
owned in other states
Confidentiality.
○
Estate, its value, and identity of beneficiaries is not a matter of public record
Save estate taxes
Protect assets from creditors during life
OTHER WAYS TO AVOID PROBATE
•
•
Transfer/payable on death
Beneficiary designation
20
SOME NON-FINANCIAL
DECISIONS (cont.)

DURABLE POWERS OF ATTORNEY
• Name Attorney-in-Fact/Successor
• Name Guardian of you/children

HEALTH CARE POWERS/LIVING
WILLS
• Allows you to make your own choice
• Organ Donation
• DNR Orders
21
SOME NON-FINANCIAL
DECISIONS (cont.)

LEAVE ROADMAP
•
•
•
•
Consolidate assets
Consolidate papers
Leave financial statement
Leave advisor information
22
SOME FINANCIAL OBJECTIVES

PRENUPTUAL
• Family Partnership/Trusts can also maintain separate
property nature of assets

LONGTERM CARE/MEDICAID
• Insurance
• Asset planning

GIFTING PROGRAMS
•
•
•
•
•
•

Gift and estate taxes are here to stay
Annual exclusion
Section 529 plans
Custodian accounts
“Formal” trusts
Can reduce income taxes
MINIMIZE ESTATE TAXES
23
ESTATE TAX SCHEDULE 2011

Federal Estate Tax Rate Schedule for 2011 and Beyond
Taxable amount
over
Taxable amount not over
Marginal tax rate
(percent)
1,000,000
1,250,000
41
1,250,000
1,500,000
43
1,500,000
2,000,000
45
2,000,000
2,500,000
49
2,500,000
3,000,000
53
3,000,000
--
55
10,000,000
17,184,000
60
24
CASE STUDY ONE

VALUE OF ESTATE IS NOT EXPECTED TO EXCEED
EXCLUSION AMOUNT
• Estate taxes not a consideration.
○
Focus on non-financial goals
○
Note Ohio estate tax (7%) on estates over $338,000
−
−
−
Spousal exemption
Life insurance designation
Lifetime gifts
• Confirm no “hidden” assets.
○
Death benefit of life insurance
○
Asset appreciation
○
Retirement accounts
• “Joint Trust” vs. separate living trusts
• Opportunities for Income Tax Planning
○
Lifetime gifts
○
Charitable gifts
25
CASE STUDY ONE (CONT.)

GIFTS OF APPRECIATED STOCK OR REAL ESTATE
•
By avoiding capital gains tax, a $1,000 contribution made this way can cost as
little as $450.
Contribution
Less capital gain tax avoided (20% x 1,000)
Less tax savings to donor from deduction (1,000 x 35%)
Net Cost to Donor

$1,000
(200)
(350)
$ 450
CHARITABLE BEQUESTS
•
A charitable bequest is a gift by Will (or trust) to a charity. If the gift is so-called
IRD (Income in Respect of a Decedent), such as an IRA or a 401(k) benefit, it
reduces estate taxes and income taxes. An IRA or 401(k) benefit is subject to
both estate and income taxes at death of up to 68 percent; naming a charity as
a beneficiary avoids both of these taxes.
•
Note Section 691(c) income tax deduction if there is estate tax on IRD.
26
CASE STUDY TWO

VALUE OF ESTATE EXCEEDS EXCLUSION AMOUNT FOR
ONE SPOUSE, BUT NOT FOR BOTH SPOUSES
(Assumes $1,000,000 Exclusion per spouse)
Residence
Investments
(including retirement accounts)
Family Business/Rental Real Estate
Life Insurance on Mr. Brown
TOTAL VALUE OF ESTATE
$
300,000
700,000
500,000
500,000
$2,000,000
27
CASE STUDY TWO (cont.)
Mr. Brown’s Estate
$2,000,000
Mrs. Brown’s Estate
$435,000
IRS
$1,565,000
John, Sue and Debbie
28
ESTATE TAX PLANNING WITH
CREDIT SHELTER (“B”) TRUST
Mr. Brown’s Estate
$1,000,000
•
$1,000,000
To Mrs. Brown's "A” Trust
Distributable to Mrs. Brown without
restriction
•
•
•
•
To Mrs. Brown’s “B” Trust
Net income to Mrs. Brown
Discretion in Trustee on
principal to Mrs. Brown for health,
maintenance and support
Up to 5% of principal each year
at Mrs. Brown’s election for any
reason
Mrs. Brown is Trustee
On Mrs. Brown’s Death
$0
IRS
$2,000,000
John, Sue and Debbie
29
TITLING OF ASSETS
Split between spouses
○
Do not know who will pass first
Adjust beneficiary/joint and survivor
designations
 Asset protection from acts of one spouse

30
CASE STUDY THREE
VALUE OF ASSETS EXCEED BOTH
SPOUSES EXCLUSION AMOUNT
31
CASE STUDY THREE (cont.)

Add Insurance Trust
Mr. Brown’s Estate
$2,000,000
Premiums Funded
$1,000,000
$1,000,000
To Mrs. Brown’s “A” Trust
•
Distributable to Mrs. Brown
without
restriction.
•
•
•
•
To Mrs. Brown’s “B” Trust
and Insurance Trust
Net Income to Mrs. Brown.
Discretion in Trustee on principal to Mrs.
Brown for health, maintenance and
support.
Up to 5% of principal each year at Mrs.
Brown’s election for any reason.
Mrs. Brown is Trustee.
Insurance Trust
$500,000
On Mrs. Brown’s Death
$0
IRS
$2,500,000
John, Sue & Debbie
32
CASE STUDY THREE (cont.)
Add Annual Gifts
Year
Annual Gifts*
1
$78,000
2
$78,000
3
$78,000
4
$78,000
5
$78,000
6
$78,000
7
$78,000
8
$78,000
9
$78,000
10
$78,000

Total Value Transferred
Estate Tax Rate
Transfer Tax Savings through Year 10
Value in Year 10 @ 6%
$
139,680
131,780
124,320
117,280
110,640
104,380
98,470
92,900
87,640
82,680
$
$
1,089,770
x55%
599,375
* Assumes three donees.
33
ADD NON-VOTING COMMON STOCK/FAMILY
LIMITED PARTNERSHIP, LLC
Mrs. Brown
(or Living Trust)
Voting
Stock/
General
Partner
Mrs. Brown
(or Living Trust)
Non-Voting Stock/
Limited Partner
Non-Voting
Stock/
Limited
Partner
Voting Stock/
General Partner
Outright or to Trusts
for Children
John
Sue
Debbie
BROWN FAMILY BUSINESS OR LIMITED PARTNERSHIP
Owns:
•
Family Business, or rental Real Estate/Investments
Allows For:
•
Control separate from economic ownership
•
Asset protection
•
Discounted gifting
34
LEVERAGED ANNUAL GIFTS
Year
Annual Gift of Non-Voting Stock or
Limited Partner Interests
Post Discount
Annual Gifts*
Value in Year 10
@ 7%
1
$130,000
$78,000
$232,800
2
$130,000
$78,000
219,630
3
$130,000
$78,000
207,200
4
$130,000
$78,000
195,470
5
$130,000
$78,000
184,400
6
$130,000
$78,000
173,970
7
$130,000
$78,000
164,100
8
$130,000
$78,000
154,800
9
$130,000
$78,000
146,000
10
$130,000
$78,000
137,800
Total Value Transferred
$1,816,170
Estate Tax Rate
x55%
Transfer Tax Savings through Year 10
$
998,894
Additional Tax Savings as Compared to Non-Leveraged Gifts
$
399,519
* Assumes three donees; 40% discount.
35
LEVERAGED ANNUAL GIFTS
(cont.)

ADDITIONAL BENEFITS OF FAMILY ENTITY
STRUCTURE
•
•
•
•
•
•
•
•
•
Asset protection
To hold and manage family assets
To provide centralized management
To encourage children to become knowledgeable in family
investment activities
To provide investment diversification to donees
To provide a degree of asset protection from divorce or
creditor judgments for non-managing/non-voting members
To provide opportunity to transfer wealth to future generations
while allowing the donor to retain managerial control
To provide an administratively easier way to transfer a
“basket” of assets
To avoid fractionalizing management and control of undividable
property
36
ADDITIONAL GIFTING
TECHNIQUES
Grantor Retained Annuity Trusts
 Defective Grantor Trust
 Installment Sale Planning for Businesses
 Qualified Personal Residence Trust
 Charitable Lead Trust
 Charitable Remainder Trust
 Additional Leveraging with Life Insurance

37
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