2001: A Death Tax Odyssey

1. 2001: A Death Tax Odyssey Planning Opportunities and Strategies Theme 2001 playing

2. Presentation overview • Back to the Future • 2000 legislation that is likely toarise in 2001 • No Escape from the law (of gravity) • Why estate planning is necessary with or without the death tax • Lost in Space?? • Planning opportunities and strategies under new and proposed legislation

3. Back to the Future 2000 legislation likelyto arise in 2001 • Speaker Name

4. Two major pieces of legislation introduced in 2000 • Death tax repeal • Charitable legislation

5. Previous Legislation • Various proposals were introduced in 2000 • Proposals for repeal suggested the estate and gift tax be phased out • Proposals for reform called for a decrease in the tax brackets and an increase in the applicable exclusion amounts

6. Arguments for repeal • Avoid double taxation • Protect small business and family farms • Favored by over 70% of Americans • Not cost effective • Costs 65 cents of every dollar collected

7. Arguments against repeal • Benefits wealthy • Only 2% of decedents will pay any death taxes • Eliminates one of the most progressive elements of our tax system • More than half of the benefits of repeal would go to 0.1% of families

8. Tax avoidance on assets • Proponents of repeal argue that the estate tax results in a double tax on assets • Opponents of repeal counter that if the estate tax was repealed • A double tax would not result • The appreciation in the assets avoids taxation • The assets would receive a step-up in basis at death • The gain on the assets would never be taxed

9. Provisions of H.R. 8 • Return to carryover basis—a very complicated law • The built-in appreciation of assets to escape taxation needs to be avoided • Assets to no longer receive a step-up in basis • Assets to pass to the beneficiaries and retain the tax basis of the deceased • Prior Law • A carryover basis rule was attempted in 1976 and repealed two years later due to impossibility to track the deceased basis in the assets

10. Projections and current tax legislation • Majority view • Many projections for the repeal or reform of the estate tax • President Bush and others still advocate for an outright repeal • Most believe that an estate tax reform is more likely

11. Projections and current tax legislation • Economic Growth and Tax Relief Bill of 2001 approved by the House on March 8 • Projected to be viewed by the Senate in May • Calls for the reduction in the income tax rates • Brackets of 15%, 28%, 31%, 36% and 39.6% reduced to brackets of 10%, 15%, 25% and 33% by 2006 • More immediate relief reducing the current 15% bracket to 12%

12. Potential income shifting opportunities if the death tax is repealed • If the death tax is repealed, you may • Shift tax to children or friends • Shift portfolio income overseas • Use non-grantor trusts • Utilize grantor trusts

13. Currenttax law • Individual must withdraw assets, then make contribution • Individual is taxed on withdrawal

14. Charitable legislation • Previous legislation passed by Congress, but vetoed by President Clinton • Tax-free withdrawal from the qualified plan assets is allowed if the assets are immediately donated to charity • Minimum age requirement applies

15. Current proposals • Neighbor to Neighbor Act bill for 2001 would provide tax incentives for various types of charitable gifts • Takes effect for tax years beginning after December 31, 2000 • Includes charitable rollover • Extends time for deductible contributions • Increases deductibility of long term capital gain property • Allows direct charitable deduction • Increases carryover period

16. No Escape from the Law (of gravity) Why estate planning is necessary with or withoutthe death tax • Speaker name

17. Additional goals • Planning for disabled individuals • Protecting your assets • Distributing your assets • Giving to charity • Planning business succession • Formulating income tax strategy • Providing investment and management expertise

18. Planning for Disabled Individuals • If an individual becomes incapacitated and an estate plan is not in place • A guardian and conservatorship would likely need to be appointed • This is a costly and time consuming process • The individual is not guaranteed to have a choice of guardian or conservator

19. Planning for Disabled Individuals • Several estate planning documents necessary or desirable to help in planning for disabilities • Wills • Revocable trusts • Durable Power of Attorney for health care • Durable Power of Attorney for business affairs • Special needs trusts

20. Protecting your assets • From beneficiary’s creditors • In case of divorce • From the beneficiary • From individual’s creditors

21. Distribution of assets • Subsequent Marriages • Dynasty trusts • Incentive clauses • Completing education • Providing work incentives • Promoting charitable work or occupations • Offering disincentives for certain behavior

22. Planning business succession • Important components • Orderly transition of management from one generation or individual to another • Buy/sell agreements • Life insurance on key employees

23. Giving to Charity • Charitable remainder trusts • Private foundations

24. Formulating income tax strategy • Tax planning considerations • IRA and other IRD assets(Income in respect of decedents) • Income tax • Acquire investment management expertise

25. Lost in Space??? Planning opportunities and strategies under new and proposed legislation • William E. Lowe, JD, MBA, CFP

26. New IRA distribution rules • Requires the owner to take their required minimum distributions at age 70½ based upon the MDIB table(Minimum Distribution Incidental Benefits) • Becomes effective on January 1, 2002 • New method optional for 2001 • The MDIB table becomes mandatory in 2002

27. New IRA distribution rules • Required Minimum Distribution (RMD) stipulations are simplified • RMD can be allocated to a separate IRA • Beneficiaries can change without affecting the pay out • Custodian/trustee reporting requirement

28. New IRA distribution rules - For spouse • Spouse, if sole primary beneficiary, can take ownership of IRA • If not sole beneficiary, can take over individual portion ownership if the custodian/trustee provides sub-accounting • Beneficiaries will be determined December 31, after the year of death

29. New IRA distribution rules - For spouse • Time frame for spouse to take as own has been reduced • May leave as beneficiary IRA and defer distributions until decedent would have reached 70½ • Attractive if the spouse is younger • Spouse would use their single life expectancy

30. New IRA distribution rules - Non-spouse beneficiary • Can take out over the single life expectancy as of December 31 of the year following the decedent’s death • Sub-accounting will allow each beneficiary to use his/her own life expectancy • Otherwise minimum distribution will be based upon the life expectancy of the oldest beneficiary • Post-mortem disclaimer

31. New IRA Distribution Rules - Planning Opportunity • IRAs are subject to income tax and are included in the estate for estate tax purposes • Name a Private Foundation (or Charity) as a beneficiary of your IRA • Assets are excluded from your estate for estate tax purposes • The Private Foundation (or Charity) will not have to pay income taxes on the proceeds

32. IRA Value $1,000,000 Cost Basis $0 Spouse Charitable Remainder Trust $1,000,000 Income UMB PrivateFoundation $1,344,889 • Children serve on Board of Foundation and distribute 5% per year • If Foundation grows at 8.5% in 30 years, the Foundation would grow to $4 million. Salary to children Charitable Remainder Unitrust

33. Private Foundation Refund of Premium Payments Premiums Individual $1,000,000 Insurance P.S. 58 Individual’s Family Private Foundation • Compensation via benefits to family • Private Foundation may be able to pay part of the premium on a life insurance policy under private letter ruling

34. Questions???

35. 2002: Another Death Tax Odyssey? Hal speaks “That’s all, Dave—Goodby”