9 29 09 dont let the sun go down on me

16
Don’t Let the Sun Go Down on Me… Estate Planning outlook for 2009-2011 Leon LaBrecque, JD, CPA, CFP®, CFA

Upload: leonljpr

Post on 15-Jan-2015

385 views

Category:

Documents


5 download

DESCRIPTION

2009-2010 Estate Tax Sunset Provsions & Legislative Update

TRANSCRIPT

Page 1: 9 29 09 Dont Let The Sun Go Down On Me

Don’t Let the Sun Go Down on Me…  Estate Planning outlook for 2009-2011

Leon LaBrecque, JD, CPA, CFP®, CFA

Page 2: 9 29 09 Dont Let The Sun Go Down On Me

04/10/23 LJPR, LLC 2

Current Situation

• 2001 EGGTRA was passed with sweeping changes to the estate taxes, with the eventual result of repeal, temporarily.

• Because of the “Byrd rule”, the Senate was unable to gain a super majority and the Act had a 10 year sunset

• Drafters of the bill intended for repeal after 2009

• The well laid plans of mice and men…

Page 3: 9 29 09 Dont Let The Sun Go Down On Me

04/10/23 LJPR, LLC 3

Main EGGTRA Points

• Gradual reduction (and eventual repeal) of Estate and GST taxes

• Phase-out of the state death tax credit• Carryover basis would replace step-up

basis– $1.3 M partial step-up for estate– $3M basis increase for spouse

• EGGTRA did not repeal gift tax– -Gift exemption decoupled in 2004– $1M exemption

Page 4: 9 29 09 Dont Let The Sun Go Down On Me

04/10/23 LJPR, LLC 4

GST Trap

• EGGTRA repealed a GST tax trap. • Pre EGGTRA:

– $1M GST exemption allocable to lifetime gifts or transfers at death

– Exemption automatically applied to gifts– Had to elect to make exemption apply to trusts

• EGGTRA automatically applied the exemption to trusts

Page 5: 9 29 09 Dont Let The Sun Go Down On Me

04/10/23 LJPR, LLC 5

2001-2011 Changes: Now

Year Max Estate & GST Rate

Estate tax/GST exemption

Maximum Gift Tax

Rate

Gift Tax eff.Exemption

2001 55% + 5% $675,000/$1.06M

55% + 5% $675,000

2002 50% $1M/$1.1M 50% $1M

2003 49% $1M/$1.12M 49% $1M

2004 48% $1.5M 48% $1M

2005 47% $1.5M 47% $1M

2006 46% $2M 46% $1M

2007 45% $2M 45% $1M

2008 45% $2M 45% $1M

2009 45% $3.5 45% $1M

2010 Repealed Repealed 35% $1M

2011 55% $1M 55% $1M

Page 6: 9 29 09 Dont Let The Sun Go Down On Me

04/10/23 LJPR, LLC 6

What Happens at Sunset?

• Go from lowest estate tax taxes and largest credit to much higher rates and credit– Exemption goes from $3.5 M (2010 currently

has no limit but Obama’s budget has $3.5 in as the number) back to $1M.

– Rate goes from 45% to 55%

• GST trap returns• Carryover basis • Nightmare on Main Street

Page 7: 9 29 09 Dont Let The Sun Go Down On Me

04/10/23 LJPR, LLC 7

More Issues

• Carryover Basis:– Presumption of zero basis in absence of

evidence– Massive record keeping and record checking

costs– Illiquidity effect

• Decoupling of Estate and Gift taxes• State death taxes

Page 8: 9 29 09 Dont Let The Sun Go Down On Me

04/10/23 LJPR, LLC 8

2009 Legislation

• 2010 budget proposal (passed 04/30/09) carried the $3.5 M and the 45% rate into 2010 (no one-year repeal)

• S .722 (Baucus) permanently makes the credit $3.5M, the rate 45% and the gift and estate taxes are reunified.

• GRAT limitation to 10 years• Family LLC discounts H.436

Page 9: 9 29 09 Dont Let The Sun Go Down On Me

04/10/23 LJPR, LLC 9

More options

• Lincoln/Kyl SA.873 to S.Res.13– Durbin Amendment SA.974

• Salazar(D-CO) H.173 Exclude farmland• McDermott (D-WA) H.2023 45% on estate

up to $5M, 50% on estates over $5M, 55% over $10M, $2M exemption

• Brady (R-TX) HR.3463 Repeal• Pomeroy (D-ND) H.436 $3.5 M 45%, 5%

over $10M• McCain (R-AZ) 155 tax, $5M exclusion

Page 10: 9 29 09 Dont Let The Sun Go Down On Me

04/10/23 LJPR, LLC 10

Legislative Update 09/28/09

• From the House Financial Services Committee:– Obama’s proposal is for the 45% /3.5M. Victory

because not a tax increase. Republicans want expiration in 2010, but are afraid that that might cause an full expiration to 2011. Compromise

• House:– Rangel: 45%/3.5M permanent– Baucus: 45%/3.5M indexed to inflation

• Senate:– Kyl (R-AZ) and Lincoln (D-AR) 35%/5M– Durbin amendment is portend of future?

Page 11: 9 29 09 Dont Let The Sun Go Down On Me

04/10/23 LJPR, LLC 11

Comparison of Plans

Proposal 2009 2010 2011

Current Law 17.9 0.0 41.4

Obama 17.9 19.4 21.1

McCain 17.9 4.5 4.9

Kyl/Lincoln 17.9 8.2 8.9

Pomeroy 19.5 21 22.9

McDermott 20.5 21.9 23.4

Salazar 17.8 0.0 40.8

Page 12: 9 29 09 Dont Let The Sun Go Down On Me

04/10/23 LJPR, LLC 12

2009 & 2010 Strategies

• Lifetime gifts:– Use the annual exclusion ( $13,000/$26,000)– Gifting the gifted:

• Education expenses: §529 $60,000 over 5 years • Prepaid tuition excluded from 2503(e)

– Health care – Use the $1M

• Watch Grandkid gifts– If you use exclusion, you may be using up GST

exemption

• Do business gifts now (avoid the discount issue)• FLP, same idea

Page 13: 9 29 09 Dont Let The Sun Go Down On Me

04/10/23 LJPR, LLC 13

2009-2010 Strategies

• Interspousal Transfers:– Currently no limit– QTIP or life estate transfers: benefit spouse,

then kids– QDOT for non-US citizen

• QPRT• GRAT• Dynasty

Page 14: 9 29 09 Dont Let The Sun Go Down On Me

04/10/23 LJPR, LLC 14

2009-2010 Strategies

• GRAT: Irrevocable trust with retained right to receive annual payments of fixed dollars for specified period of years.– Uses the 7520 rate (October 3.2%) for growth

assumption: If market outperforms hurdle rate (likely), significant gains.

– No gift tax– Get assets back– Pass on appreciation

Page 15: 9 29 09 Dont Let The Sun Go Down On Me

04/10/23 LJPR, LLC 15

2009-2010 Strategies

• QPRT: Transfers a personal residence to a trust– Depressed values make QPRTs more attractive– Donor lives in residence for the term of the

trust– Can rent after termination

• Business Gifts and FLPs: Use discounted valuations to make gifts of undervalued businesses.

Page 16: 9 29 09 Dont Let The Sun Go Down On Me

04/10/23 LJPR, LLC 16

Conclusions

• Repeal is highly unlikely• Re-working of certain rules likely• With possibility of minority discounts and

GRATs, consider alternative• Use lifetime gifts• Possible Roth scenario