Presentation on theme: "THE CHANGING WORLD OF ESTATE PLANNING A World of Uncertainty and Opportunity Where Have We Been? Where Are We Going? “Predictions are difficult – especially."— Presentation transcript:
THE CHANGING WORLD OF ESTATE PLANNING A World of Uncertainty and Opportunity Where Have We Been? Where Are We Going? “Predictions are difficult – especially about the future” Yogi Berra A. Stephen McDaniel Wyatt Tarrant & Combs LLP
A BRIEF HISTORY OF TIME Trusts Date Back A Few Thousand Years To Ancient Egypt The Will/Trust World As We Know It Appeared In The 8 th Century – English Clergy Began Acting As Executors And Trustees The First Wills Were Nuncupative Lots of Contests In Terrorem Clauses Appeared
A BRIEF HISTORY OF TIME Advisors Began Calling Themselves “Lawyers” In The 12 th Or 13 th Century Few Had Offices Most Practiced Out Of Bars Or Pubs Early Wills Were Interesting – “Lex Testamentaria” (1590) – Early Text Girls 12 Could Make a Will Boys Had To Be 14 (Immature Even Then) An “Old Man” Who Forgets His Name Cannot Make Will
A BRIEF HISTORY Continued Attorneys Established The First Trust Companies In The U.S. And England Many Became Wealthy Managing Estates Corporate Trusts First Appeared In The Early 1800’s – Farmers Fire Insurance And Loan Company Of New York Was One Of the First 1906 - Congress Enacted Laws To Allow Banks To Be Trustees By 1920 Over 1300 Banks Offered Trust Services
A BRIEF HISTORY Continued By 1980 Over 4,000 Banks Offered Trust Services & Controlled The Business Trust Assets Jumped To Over One Trillion Dollars Today Bank Trust Companies Have Less Than Half of the Trust Business And The Numbers Are Falling! Private Trust Companies Are Now The Rage Wyoming Private Trust Companies I Found 2,907 Non Bank Trust Companies On The Internet
FEDERAL ESTATE TAX How Has it Changed? A Brief History Of The Law #1 Even Before I Was Born: Egyptians (700 B.C.), Romans & Greeks Tax Estates 1798: First Federal Death Tax Is Passed To Pay For The Revolution Taxed Inheritances of Over $50 It Is Repealed In 1802 1862: The Death Tax Reappears To Pay For The Civil War It Is Repealed In 1870
FEDERAL ESTATE TAX How Has it Changed? A Brief History Of The Law #2 1898: The Estate Tax Reappears, This Time To Pay For The Spanish American War Is It Proper “To Stand By The Grave Side Of A Dead Father And Collect Tax” Senator Allen The Tax Is Repealed In 1902 But Factors That Existed Around The Turn Of The Century Caused The Debate To Continue Jekyll Island
FEDERAL ESTATE TAX How Has it Changed? A Brief History of the Law #3 1916: First Estate Tax - $50,000 Exclusion 1924: First Gift Tax - $3,000 Exclusion 1948: Marital Deduction: ½ of the estate Maximum Rate 77% 1976: Increased Exclusion from $60,000 to $175,625 (’81) 1981: Increased Exclusion to $600,000 (’87) and Gift Tax Exclusion to $10,000 Unlimited Marital Deduction
FEDERAL ESTATE TAX How Has it Changed? A Brief History of the Law #4 1997: Taxpayer Relief Act Call For Increase In Exclusion To $1 Million 2000: The Battle For Repeal Heats Up Tractor At the White House 2001: Everything Is Changed: Welcome To The State Of Confusion Ten Years Of Uncertainty Ten Years Of Change – What Year You Die Matters
FEDERAL ESTATE TAX How Has it Changed? A Brief History of the Law #5 2010: The Sky Falls. No Tax But…. How Did That Happen? Blanch Lincoln & John Kyle Refused To Vote For a $3.5 Million Exemption The Sky Falls: No Death Tax The “Winners”: At Least 6 of Them Dan Duncan (Intergy) - $ 9 Billion George Steinbrenner (Yankees) - $1.1 Billion
ESTATE TAX STATISTICS 1976: 139,000 Estates Subject To Tax 7 ½% Of All Estates Subject To Tax 1996: 32,000 Taxable Estates Less Than 2% Subject To Tax $17 Billion In Revenue 2000: 52,000 Taxable Estates $24.4 Billion In Revenue 2012: (Revenue Was From 2011 Deaths) 3,738Taxable Estates Less then 1/4% Subject To Tax $ 8.5 Billion In Revenue
ESTATE TAX REVENUE 2012 Year Under $5M $ 5M to 10M $ 10M to 20M Over $20M Total Taxable Returns 237 999 502 405 3,738 Tax (Billions) $.1 $ 1.2 $ 1.9 $ 5.3 $ 8.5
WHERE DO WE GO FROM HERE? Obama Proposal – It Is Not Over Until It Is Over! As We Move toward the next election There is More to Discuss Fiscal year “Green book” Proposals 2014 Reinstate the $3.5 Million exemption in 2018 Move th3 top Tax rate to 45% No indexing Retain Portability No Clawback
WHERE DO WE GO FROM HERE? Fiscal year “Green book” Proposals 2014 Continued Require GRATS to Run For At Least 10 Years Limit GRATS to Run for life plus 10 years Killing the 99 year Grat Limit GST Exemptions to 90 Years Require Basis Consistency Limit Crummey Withdrawal Rights to $50,000 a Year Strangely, the provisions to Reduce Discounting on Family Entities is gone!
WHERE DO WE GO FROM HERE? Republican Proposal – They Have Not Given Up! Abolish the Death Tax
WHERE DO WE GO FROM HERE? Lobby Money Is The King! Millions Went Into The 2012 & 2014 Elections Millions More will go into the 2016 Elections Tax Foundation Survey (2009) Estate Tax Is The “Most Unfair Tax” 2/3 Of The Population Are For Repeal Possible Results – It Is Not Over! The Fight Will Continue To Repeal The Death Tax If Repeal Is Not An Option The Tax Rate Is The Battle Field
STATE INHERITANCE TAX Under Prior Law States Received A Part Of The Federal Estate Tax – State Death Tax Credit - 6% To 16% Of The Federal Share Of The Tax Since 2005 The Credit Is Gone – Along With $5 Billion To The States 20 States (more or less) Have Decoupled From The Federal Law or Have Their Own State Inheritance Tax Do You Know Which States?
DEATH TAX So What Does All Of This Mean To You?
DOCUMENTS MUST BE FLEXIBLE What If The Federal Exemption Changes Again? What If The Federal Estate Tax Is Repealed? What If The State Changes The Inheritance Tax Law? What If Your Assets – Or Values – Change? What If You Are No Longer Capable Because Of Illness Or Accident To Change Your Plan?
Blowing in the Wind We Are In The Midst Of The Most Radical Changes In The Estate Planning Profession Since The Federal Estate Tax Was Reinstated For The 4 th Time In 1916 Death Taxes No Longer Drive The Train In 2014 Fewer Than 4,000 Estates Will Be Subject To Death Tax That Is Less Than 1/2 Of 1 % Of Those Who Die
A CHANGING WORLD Previous Tax Tools Are Turned Upside Down Will We Argue For Higher Values To Increase Basis? Will We Reverse The “Defective “ Trust Concept? Remember The Old Clifford Trusts? Will Marital Deduction Planning Be More Complex? You Might Want To Actually Leave Assets In The Estate Of The Surviving Spouse To Increase Basis At The 2 nd Death
A CHANGING WORLD American Society has changed Married Couples 1950: 78% 2010: 48% Married with Children 1950: 43% 2010: 20% By age 85 Women outnumber men by 4 to 1 47% of American families support a minor or adult child or an elderly parent 15% support both
A CHANGING WORLD 49 million 79 million 41 million 71 million 23 million Silent Generation Baby Boomers Gen X Gen Y Gen Z
MY TOP TEN (More or Less) THINGS YOU NEED TO CONSIDER
WINDSOR v. U.S. Doc # 12-2335-cv (10-12) Edie & Thea Start Committed Relationship In 1962 1993 Registered As Domestic Partners – New York Married In Canada In 2011 Thea Died Edie Filed Estate Tax Return – Claimed Marital Deduction IRS Says No – Cites Defense Of Marriage Act District Court Agreed With Edie DOMA Unconstitutional Ct Of Appeals Agreed Supreme Court Rules The Federal Government Is Prohibited From Placing Any Classification On The Recognition Of Marriages – This Is A State Issue, And Must Be Left To The States
Deinlein v. U.S. 114 AFTR 2d 2014-5390 (DC KY) 7/23/14 Taxpayer Owes The IRS Tax Liens Filed Mother Dies Taxpayer Disclaims The Inheritance Tax Court Holds That The lien Attaches to the interest notwithstanding the Disclaimer Case Follows Drye 528 US 49 (1999)
FAILURE TO TIMELY FILE 706 TO ELECT PORTABILITY Rev Proc 2014-18 Provides An Extension To Estates To Elect Portability For Decedents Who Died In 2011,1012 And 2013 Who Did Not Timely File A Federal Estate Tax Return It Applies To Estates Too Small To Require The Filing Of A Return Requires Filing By December 31, 2014 PLR 201421002 May Offer Help To Those Who Fail To Meet The 12-31 Deadline
ESTATE TAX UPDATE INSURANCE Remember Rev Rul 2009-13 Outlined Income Tax Consequences Of The Sale Or Cancellation of An Insurance Policy Did Anyone Care? The IRS Did! Fujishima Turner Perez Chambers
ESTATE TAX UPDATE LIFE INSURANCE Brown v. Comm’r (7 th Cir 9-11-12) 1982 Brown Purchases NW Mutual Policy $1,837 Level Premium - $100,000 DB 1987 CVs Used To Pay Premiums 2004 Dividends Used to Pay Premiums & Loans 2005 Loans Equal Cash Values – Policy Terminated By Company 1099: $29,093 Taxable Court Agrees!
ESTATE TAX UPDATE LIFE INSURANCE White v. Comm’r, T.C. Summary Opinion 2012-108 (2012) 1992 White Works for Company Company Offers Insurance through payroll deductions White pays $22,000 over years White changes jobs & stops paying Policy lapses in 2008 1099: $3,000 Taxable Court Agrees!
THINGS TO THINK ABOUT Swap High Basis Assets Held In Grantor Trusts For Low Basis Assets Get Rid Of Discount Entities – Get More Basis Give Beneficiaries A General Power Of Appointment Turn Your Poorer Ancestor Into An Asset Gift Low Basis Assets Into Trust For Parent Consider A GRAT For The Poorer Parent Give The Parent A General Power Of Appointment Parent Dies, Basis Is Stepped Up, Assets Pass To Grandchildren – Sooner Rather Than Later
DEATH TAX AND ASSET PROTECTION THE FAMILY GIFT TRUST ALMOST TO GOOD TO BE TRUE
FAMILY GIFT TRUST Husband Creates Trust For Wife (And Children) For Life Of Wife Maximum Gift $5.34 Million Spouse Receives Income/Principal – Support In Accustomed Standard Of Living Trust Is Protected From Claims Of Creditors, Future Spouses & Death Tax At Death Of Spouse Trust Can Then Be Held For Children For Life & Pass To Grandchildren Same Asset and Death Tax Protection No Gift or Death Tax – Ever – Regardless Of Value! No Probate - Ever
GRANTOR RETAINED ANNUITY TRUSTS MECHANICS OF CREATION/CONCEPT Assets to Trust Annuity to Grantor Family Remainder for Family Grantor
GRATS REVISITED We Obsess Over Short Term GRATS The Walton’s Moved $XXX Using 2 Year Trusts IRS Rate For November Is 2.2% A 15% Jump Each Year For 2 Years On $1 Million $270,000 Tax Free To Kids Why Not Go Long? 10 Years Ten Year GRAT $1 Million Assume a 6 % Return over 10 Years $300,000 At End Of The Term
GRATS REVISITED Assume An IRS 7520 Rate Of 2.2% Why Not Go REAL Long? 99 Year Zero GRAT !! $1 Million - $ 24,886 Per Year – Zero Grat Ten Years From Now the Grantor Dies The Trust Still has $1 million In Principal The 7520 Rate Is Higher – 5% What Happens? The value In the estate is $491,555 20.2036-1(c)(2)(iv)(ii)
GRATS REVISITED A Grat Is An Annuity Per Section 20.2036-1(c)(2)(iv)(ii) The Value using the 7520 Rate At Death Is The Amount of Corpus Necessary to yield the annual pay out Look At the Amount Included! 2.0%$ 772,000 4.0%$ 603,000
GRATS REVISITED The Term Is Important Even A 50 Year GRAT May Not Work It Is a “Math” Thing Obama Proposal Limits to Life expectancy plus 10 Years 31 Years for a 60 year old You have To Run The numbers Must Address Payment Of The Tax – Not From The GRAT At Death Might The Trustee And The Child Who Inherits Acknowledge A Merger Of The Annuity Interest And The Remainder Interest And Terminate the trust? If So..”Poof” It Ends Might The Grantor Buy Out The Annuity Interest During Life And End It Leaving The Balance With The Child?
CHARITABLE LEAD TRUST ASSETS INCOME FOR TERM OF YEARS THEN TO BENEFICIARY CHARITY
CHARITABLE LEAD TRUST Grantor Transfers Assets to Trust Income (Fixed Amount or Percent) Is Paid to Charity for Term of Years Grantor Receives Charitable Deduction Gift to Family at End of Charitable Term Is Discounted Remember – 65% of American households give to charity - $298 Billion in 2011 161,000 Donor Advised funds in US
CHARITABLE LEAD TRUST Grantor Gives $50,000 a Year To Charity Grantor Transfers $1 million to 20 Year Trust Remainder to Children Trust Pays $56,530 Per Year To Charity Zero Gift Assume a 6% Return Over 20 Years $1,127,000 Goes To Kids 20 Years From Now Grantor Receives $ 1 Million Charitable Deduction
THE FUTURE OF ESTATE PLANNING It Is NOT About Death Taxes! It Is Not About Taxes! It Is About Leaving A Positive Legacy For Heirs It Does Not Start With Things It Starts With People Protecting And Preserving Family Wealth Is The New Goal
IS ESTATE PLANNING DEAD? Just The Baby Boomers Will give us enough work for years Lots of Dead People. Lots of Estates to administer 2.5 million will die in 2014 Up from 1.7 million in l960 2020: 2.9 2030: 3.3 2040: 3.8
I SPENT A LIFETIME CREATING AN ESTATE HOW DO I PROTECT IT FOR THE CHILDREN & GRANDCHILDREN?
HIPAA PRIVACY LAW Problem: Medical Providers Can Be Reluctant To Release Medical Information On A Child Even To Parents Once The Child Is 18. Solution: Adult Children Should Sign Medical Power Of Attorney Naming Their Parents. Problem: Out Of Town Without The Kids?
HOW TO BLOW AN INHERITANCE 35% Wish to protect the heirs from themselves – mismanaging the inheritance Wealth Counsel Industry survey Lost inheritances (published 3-7-13 in WSJ) 70% of inherited wealth of affluent residents gone by end of 2 nd generation 90% by end of 3 rd generation
MAJOR TRENDS Estate Planning Is For The Living, Not The Dead I Kill Off Most Clients In the First 30 Minutes Of The Meeting. Why Are They Uncomfortable? Primary Goal Of Most Clients Pass Wealth Free Of Tax – NOPE! Protect The Wealth Of The Family – Yes!
CLIENT GOALS & ATTITUDES ARE CHANGING Clients Want Satisfying Careers For Children Children Supporting Themselves Financial Success Is A Low Priority Asset Protection Is High Priority “I Want My Children To Have Enough To Be All They Can Be…..But Not Be Nothing” “I Want My Children To Have Enough To Do All They Can Do…..But Not Do Nothing”
CLIENT ATTITUDES - - THE IMPLICATIONS Greater Use Of Trusts – It Is Not Just Taxes! Changes In Trustee Roles Increased Complexity In Structure Of Trusts – Not Just Health, Support & Education Please Define Support In Her Accustomed Manner Of Living Support In Reasonable Comfort Purpose Clauses Are Important
LITIGATION ISSUES Estate – Will Contests – Are Up Substantially Bad Document Dysfunctional family- Greed Incompetent fiduciaries Good Estate Planning Includes Making It Difficult For Family To Fight Contest Provisions – In Terrorem Clauses Required Mediation
LITIGATION ISSUES The Mother Of Probate Law Revisited 89 Year Old Marries Innocent 26 Year Old Marriage Lasts 14 Months Husband Gifts Wife $6 Million Husband Dies 0 $1.6 Billon Estate Wife and Son Go to War Wife File Bankruptcy. Court Gives Her $474 million – Later Reduced to $90 million Wife Dies Of Overdose Who Is The Daddy? Marshall Case Gets To U.S. Supreme Court Son Dies – But The Fight Continues
LITIGATION ISSUES The Strange Case Of Brooke Astor Dies In 2005 At Age 105 Changes Estate Plan in 2004 Son – Age 85 - Indicted and Tried for Fraud and Larceny 19 Weeks Of Trial Found Guilty on 14 Counts Gave Himself a $1M Raise Using Power Of Attorney Sold Art For $10M And Paid Himself $2M Attorney For Ms Astor Indicted and Tried Both Convicted And Likely Going To Jail
YOUR CLIENTS – AN EXPLOSION OF WEALTH American households have a total Wealth of $66 Trillion Most is owned by the top 20% Americans over 65 have a net worth 47 times the net worth of those under 35 Are You counting on an inheritance? Count Again We are living longer It is expensive
AN AGING POPULATION – OUR BIGGEST CHALLENGE In 2010 There Were More People 65 And Over Than 5 And Under Those Older than 85 -fastest growing demographic group 3.9 Million live with children Dementia Treatment Direct Cost To Famlies: $109 Billion In 2012 Average Family spends $41 to $56,000 a year Expected To Double in 30 years Alzheimer’s Is A Greater Threat Than Cancer Cancer Cost only $77 billion In Direct Cost to famlies
AN AGING POPULATION - OUR CHALLENGE 1985: 1 In 8 Are Over 65 2011: 1 In 6 Are Over 65 3.6 Million New Recipients In 2011 Those Over 100 1990: 37,000 2011: 100,000 plus From 1990 To 2020 The Average Age Of The Population Will Go From 33 To 42 What Are The Fears Of The Elderly?
AN AGING POPULATION – OUR BIGGEST CHALLENGE 76 Million Baby Boomers (1946-60) Turning 65 This Year 10,000 A Day 42 Million Are Over 50 Between Now and 2025 Those 65 Over Will Increase 60% They Are 26% Of the Population Over The Next 10 Years 30 Million Will Retire They Are Going To Retire With 20 to 30 Years To Live
AN AGING POPULATION –OUR BIGGEST CHALLENGE When Are You No Longer Competent? –Time Test –Animal Test –Thing Test –Count Test How Do You Know? Who Says You Are Incompetent? Who Manages Your Assets? Durable Power Of Attorney Who Makes Medical Decisions? Health Care Power Of Attorney Living Will
AN AGING POPULATION OPPORTUNITIES Retirement Funds Long Term Care Medical Needs Disability Needs Education Needs
THE TIMES THEY ARE A-CHANGING Think legacy Planning Think Litigation 14 million Legal Aliens Don’t forget Business continuation 87% of Business owners have no written exit plan 47% never intend to retire Unmarried Partners Are the Norm 8 million opposite sex households 1 million same sex households Baby Boomer divorces are skyrocketing 66% are initiated by women Widowers are 10 time more likely to remarry than Widows
SO WHAT DO WE LEARN? The Tax Law Changed But Your Estate Plan Did Not Your Assets Changed But Your Estate Plan Did Not If We Do Not Die, We Will Get Old? Will We Be Competent During Our Last Years? Who Will Manage Our Finances? Documents Must Be flexible What Year Do You Plan To Die? What Will The Law Be? What Will Your Estate Be Worth? Those Who Fail To Plan, Plan To Fail
CHANGES IN THE TAX LAW Will prepared in 1999 Client’s Estate: $4 Million – Then & Now Client wants the Maximum that can pass tax free to go to children of first wife ($650,000 in 2001) Client dies in 2014 Kids get $4 million – Wife Zero The Fight Starts! Lawyers Win THE LAW CHANGED MY WILL!
CHANGES IN THE TAX LAW THE LAW CHANGED MY WILL! Will prepared in 2003 Client’s Estate: $4 Million Client wants the Maximum that can pass GST tax free to go to Grandchildren ($1 Million in 2003) Balance To Daughters Client dies in 2014 Estate Is Now $5 Million Grandchildren get $5 Million Daughters Split Nothing
THE CHANGING WORLD OF ESTATE A. Stephen McDaniel Wyatt Tarrant & Combs LLP 66 NOW FOR 5 MINUTES OF FUN! IF WE HAVE TIME...
A BRIEF HISTORY Think About The World 1946 – First Electronic Computer - ENIAC 1947 – Transistor Is Invented 1954 – Firs Transistor Radio & RCA Color TV Hits The Market 1956 First Wireless Remote 1958 – BOA Introduces “Visa” Consumer Debt Surges 1965 – Fred Smith Gets A “C” 1965 – Gordon Moore (Intel) Predicts Processor Speed Will Double Every 2 Years 1971 – Intel 4004 Processor 10,000 Instructions A Second 2006 – Intel Processor Executes 20 Billion A Second 2008 – IBM Roadrunner 1 Trillion A Second 2011 – Fitijsu 10 Trillion A Second
A BRIEF HISTORY Think About The World 1969 – Wal-Mart Is Incorporated 1970 – One Sq. Inch Of Hard Drive.9 Megabytes 2012 – Segate Introduces Hard Drive with 1 Terabit per Sq. Inch 1970 Texas Instruments TI30 – The Slide Rule Is Dead 1971 – FedEx Incorporated First Answering Machine “Phone Mate 400” Intel 4040 Processor executes 10,000 instructions per second Processors Now Easily Execute Billions a Second 1973 – Motorola Introduces Cell Phone 1983 - Cell Phone Hits Market 12”, 2 Lbs, $3,995
A BRIEF HISTORY Think About The World 1977 Apple Two Atari 2600 JVC Introduces the VCR 1979 – Walkman Introduced 1981 – IBM PC 1984 – FedEx Introduces “Zap Mail” 1988 – Fert & Grunberg Develop Process Results in Nobel in 95 Results in IPod in 2001 1989 – Berlin Wall Comes Down 1990 – Kodak Introduces Digital Camera 1991 – First Web Sites Appear
A BRIEF HISTORY Think About The World 1995 – The Dow is at 4,000! NetScape Goes Public First DVD Hits Market GPS Available To Public E-Bay - First Sale Is Broken Laser Pointer Google - Searches Per Day Exceed 400 Million 2011 – 4 Billion Ticket Master Sells First On line Ticket China Explodes US Skilled Worker $4,000 Per Month China Skilled Worker $150 Per Month
A BRIEF HISTORY Think About The World 1999 – the Blackberry Arrives 2001 - Apple iPOD Hits Market 2007 – Dow Hits 14,000 Apple introduces the iphone 2008 – Lehman Brothers files Bankruptcy Fed Reserve Loans AIG $85 Billion Dow Ends Year At 9,000 First Baby Boomers Begin To Collect SS
A BRIEF HISTORY Think About The World 2009 – More New Cars Sold In China Than US 2010 – Social Security Payments Exceed Revenue Projections Had Said 2016 24% Of Home Mortgages Under Water 2011 Apple Introduces The iPad IBM’s Watson Beats Jennings & Rutter 2012 – Nothing Happened Worth Talking About Fox News Was Wrong The World Did Not End In December Congress Did Nothing Of Value
A BRIEF HISTORY Think About The World Now, Why Do You Think That You, Your Office Or Company Can Do Business The Same Way You Did In 1994, 2004 or Even 2010? The World Has Changed! The Day a Client Can Go on His Computer And Prepare His Own Estate Planning Documents Is Here Change, Or You Are History
A. STEPHEN MCDANIEL Senior Attorney – Wyatt Tarrant & Combs LLP 200 Plus Attorneys – 27 Estate Attorneys Memphis Attorneys: 5 Certified Estate Planning Specialists (7 In Memphis) 2 CPA’s 1 LLM in Tax Former Attorney With IRS Estate & Gift Tax Division UM Law School Adjunct Professor Estate Planning, Trust Law, Estate Tax, Insurance Law Named Twice by Worth Magazine as top 100 Estate Planning Attorney In U.S. Past President of National Association of Estate Planners 200 Councils and 20,000 members Past President of Estate law Specialist Board Administers ABA approved Board Certification of Estate Planning Attorneys