1 TAX UPADATE AND SELECTED PLANNING TECHNIQUES By Jeffrey N. Myers Bourland, Wall & Wenzel, P.C. Fort Worth, Texas Brazos Valley Estate & Financial Planning Council Tuesday, September 17, 2002

2 Jeffrey N. Myers EDUCATION B.A., University of Texas J.D., California Western School of Law LL.M., University of San Diego PROFESSIONAL ACTIVITIES, ACADEMIC APPOINTMENT, AND HONORS Shareholder - Bourland, Wall &Wenzel, P.C. Board Certified (Estate Planning and Probate Law) - Texas Board of Legal Specialization Adjunct Instructor University of Texas at Arlington, Continuing Legal Education Guest Lecturer in Estate Planning at Notre Dame Tax and Estate Planning Institute State Bar of Texas - Advanced Estate Planning & Probate Texas Society of CPAs - Fort Worth Chapter Note: The author gratefully acknowledges A. William Kennon of Newsom, Graham, Hedrick & Kennon, PA, Durham, North Carolina for the use of his materials on Economic Growth and Tax Relief Reconciliation Act of 2001.

3 Estate Planning Update (After the 2001 Tax Act) An overview of the new rules and their effect

4 Why Plan?

5 Estate Planning Motivators l Determine who your beneficiaries will be l Maximize family wealth accumulation l Conservation/protection of assets l Control of assets (lifetime and post-death) l Minimize transfer taxes

6 The Transfer Tax System IRS

7 Repeal of the Estate Tax l Repealed for individuals dying after 2009 l Until then... l Maximum rate declines from 55% to 45% l Exemption amount increases from $1 million to $3.5 million

8 What’s the catch? l Gift tax remains, at lower rates l Generation-skipping transfer tax repealed l Carryover basis returns l State death tax impact l Sunset provisions apply on 1/1/2011

9 Three Layers of Transfer Taxation Estate Taxes Gift Taxes Generation Skipping Taxes Unified Stand-Alone

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11 Gift Tax Not Repealed lAlAnnual exclusion ($11,000 per recipient) remains lLlLifetime exemption amount increased to $1 million in 2002 and thereafter it remains the same lBlBeginning in 2010, gift tax rate = top individual income tax rate (35%), subject to annual exclusion and lifetime exemption

12 Generation Skipping Transfer Tax l Repealed effective for generation skipping transfers after 12/31/2009 l Taxed at the highest estate tax rate, which is reduced incrementally until repeal l Reinstated 1/01/2011

13 Generation Skipping Transfer Tax (GSTT) Exemption l GSTT exemption (currently $1,110,000) is increased in $10,000 increments, until 2004 l When the Exemption Amount reaches $1.5 million (2004), GSTT exemption will equal that amount l GSTT exemption equals Exemption Amount through 2009

14 Carryover Basis at Death l Beginning in 2010, decedent’s basis in property carries over to heirs l Step-up allowed for $1.3 million; additional $3 million for property passing to surviving spouse l Step-up not allowed for Retirement Plan and IRA benefits l Executor allocates allowable step-up

15 State Death Tax Credit Repealed l State death tax credit is reduced beginning in 2002 l Fully phased out after 2004 l Replaced with a deduction for state death taxes paid l Will impact state revenues

16 And Believe It or Not... l After 12/31/2010, the entire 2001 Tax Act is repealed l Everything returns to pre-Act tax rules unless 2001 Act provisions are reinstated by future Congressional action l Could spell trouble for some of the provisions

17 WHAT WILL HAPPEN BETWEEN NOW AND 2010 – THE LAW WILL BE CHANGED! l Make estate tax repeal permanent l House passed permanent repeal on June 6 l Senate struck down permanent repeal on June 12

18 WHAT WILL HAPPEN BETWEEN NOW AND 2010 – THE LAW WILL BE CHANGED! l Retain estate tax and increase the estate tax exemption amount l Senate Finance Committee Democrats have suggested, but not passed, retaining estate tax and raising exemption amount to $3M - $4M l Also suggested was complete exemption from estate tax for the family farm and family business

19 WHICH ALTERNATIVE WILL BE SELECTED? l Depends on the direction of political winds l Senate Republicans need 4 – 6 votes to pass permanent repeal or block filibuster preventing a vote on permanent repeal l House has already passed permanent repeal l Stay tuned

20 IRA Charitable Rollover Provision – The C.A.R.E. Act

21 IRA Charitable Rollover Provision – The C.A.R.E. Act l Senate Finance Committee passed on June 18 l Next will be a Senate vote on bill

22 IRA Charitable Rollover Provision – The C.A.R.E. Act l Bill provides: l Donor 59 ½ years of age or older may distribute IRA assets to charitable remainder trust, charitable gift annuity or pooled income fund l Donor 70 ½ years of age or older may distribute IRA assets directly to charity l Donor receives no income tax charitable deduction to use against other taxable income

23 IRA Charitable Rollover Provision – The C.A.R.E. Act l Bill provides (continued): l Donor accelerates no untaxed income of IRA upon distribution to charity or deferred charitable gift vehicle l Effective January 1, 2003

24 IRA Charitable Rollover Provision – The C.A.R.E. Act l In summary, if the bill passes in current form l Persons at least 59 ½ years of age can make income tax free distributions from their IRA to CRUTs, CRATs and CGAs for themselves and Charity l Persons at least 70 ½ years of age can make income tax free distributions from their IRA directly to Charity

25 IRA/Retirement Plans l IRA contribution limit increased from $2,000 to $3,000 for , $4,000 for , and $5,000 for 2008 l Later increases for inflation in $500 increments l No relief from accelerating IRA income subject to income tax on donation of IRA to charity during donor’s life.

26 IRA: Modification to MRD Rules Under Final Regulations l Life expectancy tables for Minimum Required Distribution (MRD) calculation are modified l Participant is living: MRD based on life of participant plus a life 10 years younger. Recalculated each year l Exception: If spouse is beneficiary and more than 10 years younger, can elect to calculate joint and survivor life expectancy using spouse’s actual age

27 IRAs (continued) l Participant dies: – If surviving spouse is sole beneficiary, surviving spouse can roll over into survivor’s IRA and elect to treat it as his or her own * Required beginning date for MRD based on spouse’s age * MRD based on life of surviving spouse plus a life 10 years younger (recalculated each year) * At surviving spouse’s death, timely split into separate accounts for children, with MRD for each separate account based on the separate life expectancy factor of the child who is beneficiary of that separate account (not recalculated each year)

28 IRAs (continued) – If surviving spouse does not roll over, MRD based on single life expectancy of surviving spouse (recalculated each year as long as surviving spouse lives) * Distribution of MRD must begin by later of end of calendar year immediately following calendar year of participant’s death, or with spouse as beneficiary by end of calendar year in which participant would have become 70 ½ – If an individual who is not the spouse is beneficiary, no rollover is available * MRD based on life expectancy factor of beneficiary (not recalculated each year) *Distribution of MRD must begin by end of calendar year immediately following calendar year of participant’s death

29 IRAs (continued) l Spouse of participant dies – MRD is not affected - the MRD during the participant’s life is based on the participant’s life and the life of a hypothetical beneficiary 10 years younger l Ownership of the deceased spouse in the participant’s IRA will pass by the deceased spouse’s Will

30 Planning Strategies

31 Action Items l Review and possibly revise legal documents - Wills, Trusts, Beneficiary Documents for Retirement Plans and IRAs, Powers of Attorney, etc. l Evaluate lifetime gifting via leveraged transfer strategies l Evaluate long-term investment strategies

32 Simple Will l Community Property Estate of $1 Million or Less

33 Larger Estates l Consider Division of Assets Between Marital Trust and a Family Trust

34 Other Planning Options l Gift annual exclusion amount l Gift some or all of lifetime exemption increase to $1M in 2002 ($2M for joint gifts) l Look for transfer discounting opportunities – Closely Held Businesses – Family Limited Partnerships l Analyze Life Insurance l Qualified State Tuition Programs l Avoid Taxable Gifts

35 Use of the Lifetime Exemption $1,000,000 - $189,000 = $811,000 remaining

36 Life Insurance l Existing structures should undergo critical review and possible revision to maximize benefit - Continued liquidity need until estate taxes are repealed - Continued liquidity need if estate taxes are reinstated - Continued liquidity need if estate taxes are permanently repealed because of additional income taxes - No income or capital gains tax on insurance death benefit

37 Qualified State Tuition Programs (Section 529 Plans) l Income of Section 529 plan is income tax exempt l Section 529 plan distributions for qualified higher education costs are excluded from income of recipient l Lower penalty (10%) for distributions not used for education

38 TAX UPADATE AND SELECTED PLANNING TECHNIQUES By Jeffrey N. Myers Bourland, Wall & Wenzel, P.C. Fort Worth, Texas Brazos Valley Estate & Financial Planning Council Tuesday, September 17, 2002