Personal Trust
Tax Update 2006
Fran M. DeMaris
Executive Vice President
Cannon Financial Institute
1
Tax Stats
• Members of Congress said recently that
federal regulations should be written in a
grammatically correct and concise manner.
According to the Wall Street Journal, a
treasury official responded that the
requirement would “make it hard to write
tax regulations.”
• Since 1950, the tax code has grown from 103
to 1,564 sections
• Since 1954, on average, Congress has changed
the tax code every 1.3 years
2
More Tax Stats
• Between the last major tax overhaul in 1986,
and TRA 1997 there were more than 4,000
changes to the tax code
• There are over 12,000 pages of IRS tax rules
• Each year, U.S. residents spend 5.4 billion
hours preparing taxes
• Each year, the IRS prints 8 billion pages of
forms
• The government spends $159 billion a year, or
24% of tax revenue, enforcing the tax code
3
2006
• Annual Exclusion - $12,000
• Annual Exclusion for non-citizen
spouse - $120,000
• GSTT Exemption - $2,000,000
4
2006 Changing Figures
• Unified Credit Effective Exemption Amount
(UCEEA): $2,000,000 (formerly referred to as
Unified Credit Equivalent, now Applicable
Exclusion Amount )
• Applicable Credit Amount for Gift Tax:
$345,800 (formerly known as Unified
Credit—no longer fully “unified”)
• Applicable Credit Amount for Estate Tax:
$780,800
5
Note that on the rate chart…
• The maximum estate and gift tax
bracket goes down to 46% in 2006
from 47% in 2005
• The lowest rate is effectively 41%
6
Estate Tax Credit, Effective
Exemption, and Rates
Year
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
(2011
Credit
UCEEA
Max. Rate
$220,550
$675,000
55%
$345,800
$1,000,000
50%
$345,800
$1,000,000
49%
$555,800
$1,500,000
48%
$555,800
$1,500,000
47%
$780,800
$2,000,000
46%
$780,800
$2,000,000
45%
$780,800
$2,000,000
45%
$1,455,800 $3,500,000
45%
N/A (Estate Tax Repealed)
$345,800
$1,000,000
55%)
7
Note that on the credit chart…
• The estate tax credit for 2006 is $780,800
• It will continue to increase every couple
of years hereafter until repeal
• The top tax rates continue to decrease
by 1% a year down to 45%
• Estate Tax repeal takes place in 2010
• The law, as written, will “sunset” in
2011
8
Gift Tax Credit, Effective Exemption,
and Rates
Year
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
(2011
Credit
$220,550
$345,800
$345,800
$345,800
$345,800
$345,800
$345,800
$345,800
$345,800
$345,800
$345,800
UCEEA Max. Rate
$675,000
55%
$1,000,000
50%
$1,000,000
49%
$1,000,000
48%
$1,000,000
47%
$1,000,000
46%
$1,000,000
45%
$1,000,000
45%
$1,000,000
45%
$1,000,000
35%
$1,000,000
55%)
9
Note that on the Gift chart…
• The gift tax credit likewise remains at
$345,800 for 2006
• It does NOT continue to increase, it fixes at
an effective exemption of $1,000,000
• The top rate reduces with estate tax rates
• The gift tax is NOT repealed in 2010 and is
then applied at the top income tax bracket
10
Generation Skipping Transfer Tax
Exemption & Rates under EGTRRA
Year
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011+
Exemption
GST Tax Rate
$1,060,000
55%
$1,100,000
50%
$1,120,000
49%
$1,500,000
48%
$1,500,000
47%
$2,000,000
46%
$2,000,000
45%
$2,000,000
45%
$3,500,000
45%
N/A (Estate & GST Tax Repealed)
$1,000,000 [plus indexing] 55%
11
Note that on the GSTT chart…
• This year the indexing continues as
before
• For 2006, the GSTT exemption and
Estate tax UCEEA are aligned
• The GSTT rate is the maximum estate
tax rate and thus reduces each year
• GSTT is repealed in 2010
12
State Death Tax Credit Table
If the ad ju sted taxable estate (taxable less $60,000) is: The m axim u m tax cred it is:
bu t not
of am ou nt
m ore than
m ore than
tax
p lu s
%
over
0
90,000
.8%
40,000
90,000
140,000
400
1.6%
90,000
140,000
240,000
1,200
2.4%
140,000
240,000
440,000
3,600
3.2%
240,000
440,000
640,000
10,000
4.0%
440,000
640,000
840,000
18,000
4.8%
640,000
840,000
1,040,000
27,600
5.6%
840,000
1,040,000
1,540,000
38,800
6.4%
1,040,000
1,540,000
2,040,000
70,800
7.2%
1,540,000
2,040,000
2,540,000
106,800
8.0%
2,040,000
2,540,000
3,040,000
146,800
8.8%
2,540,000
3,040,000
3,540,000
190,800
9.6%
3,040,000
3,540,000
4,040,000
238,800
10.4%
3,540,000
4,040,000
5,040,000
290,800
11.2%
4,040,000
5,040,000
6,040,000
402,800
12.0%
5,040,000
6,040,000
7,040,000
522,800
12.8%
6,040,000
7,040,000
8,040,000
650,800
13.6%
7,040,000
8,040,000
9,040,000
786,800
14.4%
8,040,000
9,040,000
10,040,000
930,800
15.2%
9,040,000
10,040,000
1,082,800
16.0% 10,040,000
13
State Death Tax Credit
• Under EGTRRA the Maximum Death Tax
Credit is quickly reduced, then eliminated as
follows:
–
–
–
–
2002
2003
2004
2005
75% of the previous credit allowed
50% of the previous credit allowed
25% of the previous credit allowed
No credit
• Credit is replaced by a deduction for estate
taxes actually paid to a state from 2005-2009
• TIP: Watch for more states to impose a state
estate tax as a result
14
What Happens If Estate Tax
Is Repealed?
• Gift Tax Still Exists
• Modified Carry-Over Basis Applies at
Death
• Planning is Still Crucial
15
Gift Tax Continues
• Gift Tax is not repealed so consider
which strategies still make sense:
– Under Annual Exclusion - Yes
– Up to Gift Tax Credit Equivalent - Yes
– Over the Gift Tax Credit Equivalent? - It
depends
16
Modified Carry Over Basis
• The Estate tax system is replaced in 2010 by a
modified system of “carry over basis”
treatment
• Basically, no estate tax but assets don’t step
up in basis, except:
– Up to $1,300,000 can be added to basis in whatever
manner determined by the executor
– An additional $3,000,000 in basis may be added to
assets transferred to a spouse
17
Estate Plan Still Vital Post-2010
• Providing for minors and disabled
persons and general
spendthrift/creditor protection
• Plan for distribution of tangible
personal property with emotional
attachments
• Control for QDRO required payments
18
Estate Plan Still Vital Post-2010
• RLTs for protection of self during
incapacity and privacy at death for
estate settlement
• Family business succession
• Charitable foundations
• Planning for an anticipated return of
the tax
19
Various Other Topical Issues
20
Applicable Federal Rate
• For purposes of determining the present
value of an annuity, an interest for life or a
term of years, or a remainder or a
reversionary interest, the federal mid-term
rate under Code Section 7520 for December
2005 is 4.53. 120% of the AFR is 5.43%.
• Applicable federal rates for various types of
transactions differ.
21
Gifts by Check
• Delivery of a check to noncharitable
donee is complete for transfer tax
purposes when the donor has parted
with “dominion and control” under
local law leaving the donor no power to
change the disposition, or
• Date on which the donee deposits the
check or presents the check for payment
22
Gift Tax Returns Binding
• After the statute of limitations has
expired (a three year statute)
• Gift must be “adequately disclosed” on
a gift tax return (Form 709)
• If so, then valuation is binding on the
IRS for both gift and estate tax purposes
23
Fees Charged to Income
• A reduction in value of the marital or
charitable share is made for “estate
transmission expenses” charged to
income
• No reduction for “estate management
expenses,” because these expenses
would have been incurred whether the
property were held in trust or not
24
Minority Interest Discount
• Lack of Control
• Lack of Marketability
–
–
–
–
Limits on ability to transfer
Blockage discount
Unusual costs of sale
Restricted stock
• Key person
• Built in gains (gifts only)
25
Family Limited Partnerships
• Business purpose requirement
• Valuation discount reasoning
• Concerns raised on present interest
– No immediate use, possession or enjoyment
– Couldn’t unilaterally withdraw capital, couldn’t
sell without LLC manager’s approval, couldn’t
effect a dissolution by themselves
• Attacks on last minute, pre-death planning
• Strangi has changed the course of IRS attacks
on these structures
26
Disclaimer of Joint Interests
• Final regulations: disclaimer of jointly
held property allowed
• Surviving joint tenant may disclaim the
one-half survivorship interest in
property held in joint tenancy with
right of survivorship or tenancy by the
entirety, within nine months of the
death of the first joint tenant
27
Reference Pages
Estate & Gift Tax Charts
Years 2006-2009
28
2006 Gift & Estate Tax Rates
If the amount is:
but not
more than more than
0
10,000
10,000
20,000
20,000
40,000
40,000
60,000
60,000
80,000
80,000
100,000
100,000
150,000
150,000
250,000
250,000
500,000
500,000
750,000
750,000
1,000,000
1,000,000
1,250,000
1,250,000
1,500,000
1,500,000
2,000,000
2,000,000
tax
1,800
3,800
8,200
13,000
18,200
23,800
38,800
70,800
155,800
248,300
345,800
448,300
555,800
780,800
plus
The tentative tax is:
of amount
%
over
18%
20%
10,000
22%
20,000
24%
40,000
26%
60,000
28%
80,000
30%
100,000
32%
150,000
34%
250,000
37%
500,000
39%
750,000
41%
1,000,000
43%
1,250,000
45%
1,500,000
46%
2,000,000
After calculating the tentative tax, subtract the $345,800 gift tax credit, or $780,800 estate tax credit 29
2007 Gift & Estate Tax Rates
If the amount is:
but not
more than more than
0
10,000
10,000
20,000
20,000
40,000
40,000
60,000
60,000
80,000
80,000
100,000
100,000
150,000
150,000
250,000
250,000
500,000
500,000
750,000
750,000
1,000,000
1,000,000
1,250,000
1,250,000
1,500,000
1,500,000
tax
1,800
3,800
8,200
13,000
18,200
23,800
38,800
70,800
155,800
248,300
345,800
448,300
555,800
plus
The tentative tax is:
of amount
%
over
18%
20%
10,000
22%
20,000
24%
40,000
26%
60,000
28%
80,000
30%
100,000
32%
150,000
34%
250,000
37%
500,000
39%
750,000
41%
1,000,000
43%
1,250,000
45%
1,500,000
After calculating the tentative tax, subtract the $345,800 gift tax credit, or $780,800 estate tax credit 30
2008 Gift & Estate Tax Rates
If the amount is:
but not
more than more than
0
10,000
10,000
20,000
20,000
40,000
40,000
60,000
60,000
80,000
80,000
100,000
100,000
150,000
150,000
250,000
250,000
500,000
500,000
750,000
750,000
1,000,000
1,000,000
1,250,000
1,250,000
1,500,000
1,500,000
tax
1,800
3,800
8,200
13,000
18,200
23,800
38,800
70,800
155,800
248,300
345,800
448,300
555,800
plus
The tentative tax is:
of amount
%
over
18%
20%
10,000
22%
20,000
24%
40,000
26%
60,000
28%
80,000
30%
100,000
32%
150,000
34%
250,000
37%
500,000
39%
750,000
41%
1,000,000
43%
1,250,000
45%
1,500,000
After calculating the tentative tax, subtract the $345,800 gift tax credit, or $780,800 estate tax credit 31
2009 Gift & Estate Tax Rates
If the amount is:
but not
more than more than
0
10,000
10,000
20,000
20,000
40,000
40,000
60,000
60,000
80,000
80,000
100,000
100,000
150,000
150,000
250,000
250,000
500,000
500,000
750,000
750,000
1,000,000
1,000,000
1,250,000
1,250,000
1,500,000
1,500,000
tax
1,800
3,800
8,200
13,000
18,200
23,800
38,800
70,800
155,800
248,300
345,800
448,300
555,800
plus
The tentative tax is:
of amount
%
over
18%
20%
10,000
22%
20,000
24%
40,000
26%
60,000
28%
80,000
30%
100,000
32%
150,000
34%
250,000
37%
500,000
39%
750,000
41%
1,000,000
43%
1,250,000
45%
1,500,000
After calculating the tentative tax, subtract the $345,800 gift tax credit, or $1,455,800 estate tax credit 32