January 24, 2007
Webinar
“Estate Planning Do’s and Don'ts”
S. James Park, J.D., LL.M.
“Tax Update and Changes for 2007”
Mathew N. Sorensen, J.D.
Hosted by Mark J. Kohler, J.D., CPA
www.kkolawyers.com
Las Vegas, NV * Beverly Hills, CA * Cedar City, UT
Telephone 435.586.9366 / Facsimile 435.586.9491
© Kyler Kohler & Ostermiller, LLP 2007
Disclaimer- Although the information contained in this
Presentation may be extremely useful and helpful, please
understand that the presentation of this information does
not constitute an attorney-client relationship. Moreover,
the information contained in this Presentation is for
general guidance only. It is strongly recommended that
each individual or entity obtain their own legal advice,
particularly applied to their own set of circumstances, facts
and specific situation. Kyler Kohler & Ostermiller, LLP is
not responsible or liable for any advice that is taken and
applied in a situation without direct consultation and
representation specific to that individual’s or company’s
needs.
INTRODUCTION TO ESTATES PLANNING
“Estate Planning” is NOT a one size fits all strategy. In fact, it can
often times be very complex. Our purpose is to summarize certain
principles of estate planning to help you gain the basic
understanding necessary to make critical decisions affecting you
and future generations for years to come.
This guide is intended to provide a broad overview and general
guidance for clients with differing financial and personal situations.
IT IS OUR GOAL TO COORDINATE YOUR BUSINESS
PLANNING, ASSET PROTECTION AND ESTATE PLANNING
GOALS INTO A SINGLE COMPREHENSIVE PLAN THAT
ADDRESSES ALL ASPECTS OF YOUR LIFE.
What is an estate plan?
It is the arrangement by which you provide for your
family after your death or disability. The goal of an estate plan is
to allow you to choose not only Who gets What when you die,
but also How and When. Also, in many circumstances, to help
those beneficiaries receive your property in a way which
maximizes the benefits to them after considering both tax and
non-tax factors.
What happens if you die without a formal estate plan?
If you do not implement your own estate plan, your
state will supply one for you through the laws of the intestacy.
Rarely will the intestacy laws result in property passing in the
manner which you would prefer. Without proper planning, a tax
of approximately 50% may be assessed on your estate of it is
over the exemption amount.
What documents are used to create an estate plan?
Trust. A trust is an arrangement where one or more persons (the grantor(s)) transfer
property to one or more persons (the trustee(s)) to manage for the benefit of one or more
persons (the beneficiary). The grantor and the trustee may be the same person who may
also be one of the beneficiaries. The contents of the Trust are private and not subject to
public inquiry. There are several kinds of trusts:
1. Revocable. Since you may change a revocable trust at any time, it is similar
to a Will. However, you may prefer to place the more significant provisions of your estate
plan in a revocable trust because the terms of a revocable trust do not become public at your
death, and assets then owned by the revocable trust do not pass through the probate process.
A revocable trust is often referred to as a “living trust” or a “loving trust.” If most of your
assets have been transferred to the revocable trust, it is called a funded revocable trust.
2. Irrevocable. An irrevocable trust is not subject to change. It is used to make
a completed gift when you do not want the donee to have outright ownership. Usually
irrevocable trusts are created to save taxes.
3. Testamentary. Unlike revocable and irrevocable trusts which involve a
transfer of property during your lifetime, a testamentary trust is created in your Will and
this becomes effective only when you die.
What other documents are included in a proper estate plan?
• Pour-Over Will
* Name guardians of minor children
* Public information
• Living Will
• Affidavit of Trust
• Durable Power of Attorney
for Finances and Health Care
• Memorandum of Personal Property
• Location of Important Documents
• Funeral and Burial Instructions
• Final Instructions
SINGLE PERSON
TRUST or
MARRIED Under the
Exemption
The
Family Trust
(Surviving Spouse
Retains Control)
Pour Over
Will
Testamentary Trust
•Holds assets in Trust
for children until they
are old enough to
manage them on their
own.
Exemption
Amount(s):
2006 $2MM
2007 $2MM
2008 $2MM
Distribution Trust
2009 $3.5MM
1/3 upon reaching 25 years old
1/3 upon reaching 30 years old
1/3 upon reaching 35 years old
2010 $Unlimited
2011 $1MM
Your children
or their issue
This structure, generally referred to as a “No-Split Trust,” consists of a
Pour Over Will and an original trust (or “Family Trust”), which houses
the trust estate during your life and disposes them according to your
wishes upon your death.
This structure does not help to avoid estates taxes, and it is generally not
used if you are married and have a gross estate over $4M.
The assets you own are valued at your death, and this value is included
in your estate for estate-tax purposes. The Internal Revenue Code
provides for an “applicable exclusion,” which is the cumulative amount
that can pass free of gift and/or estate tax upon death. ($2M in 20062008; $3.5M in 2009; Unlimited in 2010; and $1M in 2011). In addition
to the applicable exclusion amount for estate taxes, there is also an
lifetime exclusion amount for all gifts made during your life which is
currently $1m. These exclusion amounts, in addition to the Marital
Deduction are generally at the heart of most estate planning.
Unfortunately, this supports the notion that sometimes marriage is the
best tax planning strategy of all.
MARRIED TRUST
with Estate over the
Exemption
Pour Over
Will
The
Family Trust
All assets not specifically disposed of
by a written instrument, or not titled in
the name of the trust will go into the
Trust.
Bypass (Exemption)Trust
Decedent’s Separate and
Community Property
(Not included in the
Survivor’s Estate)
OPTIONAL
Marital Income Trust
(QTIP) – income payable
at least annually to
Survivor.
(Income to Survivor and
Principal not to exceed the
greater of 5%or $5,000)
Both included in
Survivor’s Estate.
Taxable to the
extent it exceeds
Survivor’s
Exemption Amount
Survivor’s Trust
$ Funded with Sep and
Community Property.
(Included in Survivor’s Estate)
Exemption Amount(s):
2006
$2MM
2007
$2MM
2008
$2MM
2009
$3.5MM
2010
$Unlimited
2011
$1MM
Distribution Trust
Your Children
or their issue
Typically distributed after the death
of the Surviving Spouse.
1/3 upon reaching 25 years old
1/3 upon reaching 30 years old
1/3 upon reaching 35 years old
This structure, based on the estimated size of the estate, consists of an original trust (or
“Family Trust”), which is split into three separate trusts upon the death of either
Grantor-Spouse. These are the Survivor’s Trust, the Bypass Trust, and a Marital Income
Trust. This structure was chosen to save transfer taxes by allocating assets into the
special irrevocable sub-trusts upon the death of either of you or your spouse.
The assets you own are valued at your death, and this value is included in your estate
for estate-tax purposes. The Internal Revenue Code provides for an “applicable
exclusion,” which is the cumulative amount that can pass free of gift and/or estate tax
upon death. ($2M in 2006-2008; $3.5M in 2009; Unlimited in 2010; and $1M in 2011).
In addition to the applicable exclusion amount for estate taxes, there is also an lifetime
exclusion amount for all gifts made during your life which is currently $1m. These
exclusion amounts, in addition to the Marital Deduction are generally at the heart of
most estate planning.
Marital Deduction: Transfers between spouses are entitled to an estate tax deduction.
By leaving assets to a surviving spouse, estate taxes can be deferred until the survivor’s
death.
The Survivor’s Trust: All assets belonging to the surviving spouse are properly
allocated to his/her trust. These include all separately held property and also that
spouse’s share of the community property held. This generally comprises the
survivor’s estate upon which will be taxable upon his or her eventual passing.
Basic Explanation
The Exemption Trust:
A "bypass trust" is used to give benefits to one or more beneficiaries without giving them enough rights of
ownership to require taxation of the trust assets in the beneficiaries' estates. For married couples, the use of a
bypass trust is generally used to preserve the “applicable exclusion” amount for federal gift and estate taxes.
This bypass trust is also utilized to allocate the generation-skipping transfer tax exemption (“GST
exemption”). If any amount of these exclusions are not fully utilized in the bypass trust, they can be utilized in
a Marital Income or QTIP trust.
Marital Income Trust (QTIP):
A “qualified terminable income property” (“QTIP”) trust is a Marital Trust that requires the income from the
trust to distributed at least annually ONLY to the surviving spouse during his/her lifetime. This trust may or
may not limit the survivor’s power to change the beneficiaries of the trust depending on the intentions of the
Grantors. A QTIP trust is the only type of trust that can qualify for the marital deduction and still fully utilize
any remaining GST exemption amount of the predeceased spouse, assuming the appropriate election is made.
A QTIP trust does not save or defer any more estate taxes than any other trust that would otherwise qualify for
the marital deduction, however as previously discussed, it is useful to fully utilize the remainder of the GST
exemption; to reduce the survivor’s power to dissipate the trust and change its distribution; or to shield assets
from claims against the surviving spouse. It is most commonly used to ensure that approximately ½ of the
estate moves to the primary beneficiaries without it being depleted by the surviving spouse.
Life
Insurance
Investment
Accounts
XYZ
Properties, LLC)
XYZ
Holdings, LP
(Limited Partnership)
Long Term
Real Estate
Rentals
Long Term
Real Estate
100%
1%
99%
Personal
Residence
THE
JONES FAMILY
REVOCABLE LIVING
TRUST
XYZ
Enterprises, Inc.
(S-Corp)
100%
1st Death
Bypass
Trust
Survivor
Trust
2nd Death
Coordinating the
Estate and
Business Plan
Children
Trusts
DO’S
Do…
1. Contact an Estate Planning Professional to create or update
your Estate Plan;
2. Coordinate all of your business and asset protection strategies
with your Estate Plan;
3. Transfer your ownership interests in Partnerships, LLCs and
other business entities into your Trust;
4. Transfer your Stocks, Bonds and other Investments into your
Trust;
5. Transfer your ownership in your personal residence into your
Trust;
6. Consider utilizing the provisions of your Trust to distribute the
proceeds of your Life Insurance and other Death Benefits; and
7. Educate yourself on the power of the many different trust
structures that are available to you, for example: The
Irrevocable Life Insurance Trust; the Qualified Personal
Residence Trust; a Charitable Remainder Trust; and many
others.
DON’TS
Don’t…
1.
2.
3.
4.
5.
6.
7.
8.
9.
Die, or let your loved ones die without at least a Will;
Think your too young to worry about an Estate Plan;
Procrastinate planning for your loved ones;
Plan on the total repeal of the Estate Tax (2011);
Think your revocable living trust will afford you asset
protection;
Listen to what “the word on the street is”;
Transfer your assets to any type of irrevocable trust without
fully understanding the PROS and the CONS;
Transfer ALL of your assets into a Family Limited Partnership
as the silver bullet solution; and
Think that “one-size fits all.”
“Tax Update and Changes for 2007”
Mathew N. Sorensen, J.D.
Summary of Tax Update and
Changes for 2007
• Major changes to 2007 tax laws were made in the
Pension Protection Act of 2006 and the Tax Relief and
Health Care Act of 2006.
• Changes to HSA contribution rules
• Long Distance Phone Tax Refund
• State Sales Tax Deduction
• Mortgage Insurance Deduction
• Updated number and 2007 tax tables
Tax Relief and Health Care Act of 2006
•
Tax Relief and Health Care Act of 2006 makes generous changes to encourage the
use of HSA accounts.
•
Major changes to Health Savings Accounts (“HSA”) is the amount that may be
contributed. HSA’s allow for deductible contributions, tax free growth, and tax free
withdrawal for qualified medical expenses but you must have a high deductible
health plan.
•
Maximum contributions allowed for partial year eligibility. So, if you have a
HDHP you can enroll in December and still put in the full amount.
•
Allowed to make a one time transfer from your IRA to your HSA account.
Maximum amount you can transfer is limited to the yearly amount that can be
contributed to an HSA.
•
Allows for a one time roll over from a Flexible Spending Account (“FSA”) or
Health Reimbursement Arrangement (“HRA”) to an HSA.
Health Savings Account Changes
Tax Deductible
Contribution
Tax Free
Growth
Tax Free
Withdrawal
• Requirements are that you maintain a high deductible health plan.
($1,050 individual, $2,100 family).
• OLD PROVISION- Amount your could contribute into account used to
be the amount of your high deductible health plan or the maximum
amount allowed by the IRS ($2,850 single, $5,650 family) whichever is
less.
• NEW PROVISION- Amount you can contribute into account now is not
limited by the amount of the high deductible health plan and is now the
maximum amount allowed by the IRS for all qualifying high deductible
health insurance plans.
More Flexibility in Transferring Funds
to Health Savings Account
Individual
Retirement
Account
Flexible
Spending
Account
Health
Reimbursement
Arrangement
Health Savings
Account
• FSA’s or HRA to HSA- One time transfer per
HRA or FSA. Limits on what can be transferred
is determined by the value in the account as of
September 21, 2006 or the date of the transfer,
whichever is less.
• IRA to HSA- One time transfer. Amount that
can be transferred is equal to the maximum
contribution amount allowed by the IRS.
($2,850 single, $5,650 family)
Federal Pension Plan Protection Act of 2006
•
Restrictions on Charitable Contributions (need dated bank record or dated receipt). Clothing and
Household items must be in good or better condition. No used socks or undergarments.
•
Charitable contributions can be made directly from your IRA and never taken into your taxable
income. You can always take the IRA money into income and then make your charitable contribution,
but your will have a higher AGI. Making a charitable contribution directly out of your IRA keeps
your AGI low which helps avoid phase-outs of itemized deductions, personal exemptions, or credits.
•
Law made the increased retirement plan contributions and catch up amounts permanent. IRA
contribution amount increases to $5,000 in 2008, stays at $4,000 for 2007.
•
Conversions to ROTH IRA’s to be changed in 2010.Under current law, an individual is allowed to
convert a traditional IRA into a Roth IRA if the taxpayers AGI for the year (not including the income
from the converted IRA) is $100,000 or less. Beginning in 2010, the $100,000 AGI limit will be
eliminated and anyone will be able to convert a traditional IRA into a Roth IRA. Taxpayers can
choose to elect to take the income completely into their 2010 return or include half of the conversion
income into 2011 and half into 2012.
Updated 2007 Numbers
•
Auto Expense Update
48.5 cents for business
14 cents for charity
20 cents for medical and moving
•
Updated Tax Table for 2007
Miscellaneous Items
•
Mortgage Insurance Premium. Itemized deduction allowed for the cost of
premiums for mortgage insurance on a personal residence.
•
Long Distance Excise Tax Refund. Taxpayers entitled to refund for tax paid
from 2003 to 2006. IRS will allows you to claim a refund for the exact
amount of tax paid for these years or you can request the standard refund
amount ranging from $30-$60 based upon the number of exemptions you
claim on your individual income tax return.
•
Provision allowing for the deduction of State sales tax in lieu of State and
local income taxes. Option is available to all taxpayers, though it will be
especially helpful to residents in states without state income tax. There is a
worksheet provided by the IRS to calculate the amount of the deduction.
Capital Gains Break Extended
for Another 2 Years
•
In 2003, Congress reduced the tax rates on long term capital gains from 10%
and 20% to 5% and 15% respectively. These rates were set to expire but
congress extended them until 2010 in 2006 legislation. Major rate is the 15%
long term capital gains rate which was extended.
•
An interesting outcome of the changes in the law is that the rate for taxpayers
in low income tax brackets is zero for three years. From 2008 to 2010,
taxpayers in the 0-15% tax bracket (maximum income of $63,701 for married
couples, including the gain on the asset sold) can sale appreciated assets for no
tax. Sale of assets applicable to this provision include real property, stocks and
bonds.
Tax Bracket
0-15%
25% and up
Capital Gains Rate
2006-2007
2008-2010
5%
15%
0%
15%