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ESTATE AND GIFT TAX – SELECTED OVERVIEW – PLUS – REFORM? OR REPEAL?

ESTATE AND GIFT TAX – SELECTED OVERVIEW – PLUS – REFORM? OR REPEAL? PENNSYLVANIA’S NEW UNIFORM TRUST ACT Presented by John F. Meck, Esq. J1011041. ESTATE/GIFT/GST TAX OVERVIEW. Exemption. OVERVIEW. Tax Calculation Cumulative – Lifetime and then Death Unified Credit not optional.

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ESTATE AND GIFT TAX – SELECTED OVERVIEW – PLUS – REFORM? OR REPEAL?

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  1. ESTATE AND GIFT TAX – SELECTED OVERVIEW – PLUS – REFORM? OR REPEAL? PENNSYLVANIA’S NEW UNIFORM TRUST ACT Presented by John F. Meck, Esq. J1011041

  2. ESTATE/GIFT/GST TAX OVERVIEW Exemption

  3. OVERVIEW

  4. Tax Calculation • Cumulative – Lifetime and then Death • Unified Credit not optional

  5. Pennsylvania Gift Tax? • None • 1 year Rule – Pennsylvania Inheritance Tax - $3,000 exemption/calendar year

  6. PENNSYLVANIA INHERITANCE TAX • No Exemption • Assets Not subject to tax • Assets owned jointly with spouse • Bequests to charity • Life insurance • IRAs and plan benefits if under 59 ½ • Some plan benefits if over 59 ½ (monthly payments – no ability to take a lump sum)

  7. Pennsylvania Inheritance Tax Rates 0% - Spouses (outright & “sole use trusts”) 0% - Under age 21 (assets to parents) 4.5% - Descendants, step-descendants, ancestors and spouses of children 12% - Siblings 15% - All others

  8. Annual Exclusion Gifts • $12,000/donee/year – indexed • Not optional • Present interest – out right or life estate present value • Applied chronologically • Crummey Coordination

  9. Annual Exclusion Gifts • § 2503(c) Trusts- Age 21 • Custodial Accounts – Age 21 • Medical and Tuition/GST Also • Direct payment • Don’t report

  10. Section 529 Election • Up to $60,000/$120,000 • Pro-rate use – can’t “frontload” • Report 1/5 each year • Recapture if die early/GST Exemption?

  11. Split Gifts – Spousal Consent on Gift Tax Return • Pre-death gifts only • Both U.S. citizens/residents • Not Spousal Gifts – Unlimited marital • But GST annual exclusion applies to spousal gifts • Non U.S. Citizens spouse

  12. Disadvantage of Splitting • All gifts • Agent under POA – How broad is POA? • Joint/Several liability • 2036 Potential – QPRT, GRAT etc. – don’t split • Second marriage – use of Unified Credit

  13. TIP FOR SPLITTING • Spouses each write a check to avoid filing a Gift Tax Return; if no other Gifts during year

  14. Delivery – Relinquish Custody/Control Timing re calendar year or date of death • Charity - relates back • Individuals – no relation back • Cashiers check/ wire transfer

  15. Delivery – Relinquish Custody/Control • To Spouse’s Trust – use two steps • Stock – donee’s broker - donor’s broker/ transfer agent • Joint Bank Account – withdrawal • Real Estate – survivorship rights

  16. Estate & Gift Tax – Reform? Repeal? Current Law 2010 Repeal Estate Tax Keep Gift Tax $1 million unified credit (protects against asset shifting to reduce income tax) 2011 Estate Tax comes back at $1 million unified credit

  17. Estate & Gift Tax – Reform? Repeal • House Bill adopted June 22, 2006 and modified July 29, 2006 (and probably later) • Senate – 60 votes to have a vote 60 votes to enact

  18. House Bill Provisions • Effective 2010 • Reunify – Estate, Gift & GST • Unified Credit $5 million • Phased in $250,000 increments starts 2010 ($3,750,000) to 2015 ($5 million) • Indexed for inflation starting 2016 • Maintain “Stepped up basis” rules

  19. House Bill Provisions Tax Rate • First $25 million • 15% in 2010; 20% thereafter • based on capital gains rates which could change • Excess over $25 million – 40% rate • Not tied to capital gains rate • Phased down 2% year to 30% in 2015

  20. House Bill Provisions State Death Taxes • Repeal deduction • In 2005 deduction had replaced the phase out of credit

  21. House Bill Provisions New Provision • Portability of Unified Credit between Spouses • Simplify planning • Asset transfers • Plan benefits/life insurance • Second marriage

  22. PA Uniform Trust Act (UTA) • Enacted July 7, 2006 • Effective November 4, 2006 – generally • Even existing trusts • January 1, 2007 – Repeal of Rule Against Perpetuities • Only new trusts

  23. UTA – Overall Purpose • Organized, comprehensive codification of PA trust law • Facilitate finding the law • Better compliance by trustees acting in multiple states • Enable beneficiaries to understand and enforce their rights

  24. UTA Revocable Trust vs. Wills • Goal – level playing field • Capacity to create • Time to contest – one year (Pew Estate) • Notice to beneficiaries at death • Like Supreme Court Rule 5.6 • Same rules of construction • Road map for creditor’s claims

  25. UTA – Trustee Notice to Beneficiaries • Controversial - can‘t “draft around” • Compromise – changes from Uniform Act • Client – desire for privacy (“my money”) vs. Beneficiary – need information to enforce rights to have a valid trust • Transition Rules – 2 year delay for existing trusts

  26. Contents of Notice • Trusts existence • Identify Settlor • Trustees contact information • Beneficiary has right to receive copy of trust • Beneficiary has right to receive “Report” annually

  27. Revocable Notice Trust (=Will) • No Notice to Beneficiaries required, unless • Settler incapacitated – notify guardian • Death – to spouse, executor, guardian, adult children and “Current” Beneficiaries • Current Beneficiaries • Age 18 if entitled to mandatory distribution • Age 25 if only entitled to discretionary distribution

  28. Notice Irrevocable Trusts • Must respond to beneficiaries reasonable requests for information (Copy of trust, Report etc.) • Incapacity/Death of Settlor/Change of Trustees – Notice to Current Beneficiaries (Age 18/25) • Two year transition rule does not apply to change of Trustees

  29. Trustee – Cut off Claim of Beneficiaries • Current law – Account/Audit - Receipt/Release • New Possibility – 5 years Passage of Time -Laches • Trustee must provide Reports for 5 years notify beneficiary of time period to challenge • Claim as to transaction disclosed in year #1 barred 6 months after beneficiaries receive 5 annual reports unless written claim presented to Trustee

  30. Unitrusts • PA has since 2002 had “power to adjust” and “power to convert to a unitrust” • New – Power to draft as a unitrust without needing to convert • Qualifies for favorable IRS tax treatment – primarily unitrust amount of 3% to 5% equals “all income” for marital deduction

  31. UTA – Selected Provisions • Oral trust will no longer be recognized – insurance agents • Future trusts presumed revocable • Reverses current PA law - presumed irrevocable • Good drafting – always state revocable or irrevocable

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