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  1. NEW TAX LAWS AND HOW THEY IMPACT ESTATE PLANNING By Michael V. Bourland Michelle Coleman Johnson Bourland, Wall & Wenzel, P.C. Fort Worth, Texas TexasBank Hudson Oaks Banking Center Weatherford, TX Wednesday, May 29, 2002 4:00 p.m. to 5:00 p.m.

  2. Michael V. Bourland EDUCATION B.A., Baylor University J.D., Baylor University L.L.M. in Taxation, University of Miami, Florida PROFESSIONAL ACTIVITIES Founding Shareholder - Bourland, Wall & Wenzel, P.C. Board Certified (Estate Planning and Probate Law) - Texas Board of Legal Specialization Fellow, American College of Trust and Estate Counsel Former Member, Real Estate, Probate and Trust Law Council (State Bar of Texas Real Estate, Probate and Trust Law Section) ACADEMIC APPOINTMENT AND HONORS Guest Lecturer in Estate Planning at Baylor University School of Law Baylor University School of Business The Center for American and International Law University of Texas School of Law

  3. Michelle Coleman-Johnson EDUCATION B.B.A., Magna Cum Laude, Stephen F. Austin State University J.D., Baylor University (Estate Planning And Probate Law Concentration) PROFESSIONAL ACTIVITIES, ACADEMIC APPOINTMENT, AND HONORS Associate Attorney, Bourland, Wall & Wenzel P.C. Certified Public Accountant Guest Lecturer at Baylor University School of Law (Nonprofit Organizations) Tarrant County Probate Bar, Tax and Estate Planning Section (Elder Law) Tarrant County Young Lawyers Association (Estate Planning) Note: The authors gratefully acknowledge 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.

  4. Estate Planning Update (After the 2001 Tax Act) An overview of the new rules and how you are affected

  5. Why Plan?

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

  7. The Transfer Tax System IRS

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

  9. What is the gross estate? • Life insurance proceeds • Retirement benefits • Jointly owned property • Collectibles • “Indian giver” arrangements

  10. How do we calculate the tax? GROSS ESTATE + previous taxable transfers - debts and administration expenses - deductible transfers X marginal tax rate = Preliminary (Tentative) Federal Estate Tax - applicable exemption credit - state death tax credit = FEDERAL ESTATE TAX

  11. When are estate taxes due? +9 Months

  12. Estate Taxation Under the New System

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

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

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

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

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

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

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

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

  21. Planning Strategies

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

  23. Simple Will • Community Property Estate of $1 Million or Less

  24. Larger Estates • Consider Division of Assets Between Marital Trust and a Family Trust

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

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

  27. Life Insurance • 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

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

  29. IRA/Retirement Plans • IRA contribution limit increased from $2,000 to $3,000 for 2002-2004, $4,000 for 2005-2007, and $5,000 for 2008 • Later increases for inflation in $500 increments • No relief from accelerating IRA income subject to income tax on donation of IRA to charity during donor’s life.

  30. IRA: Modification to MRD RulesUnder Final Regulations • Life expectancy tables for Minimum Required Distribution (MRD) calculation are modified • Participant is living: MRD based on life of participant plus a life 10 years younger. Recalculated each year • 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

  31. IRAs (continued) • 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)

  32. 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

  33. IRAs (continued) • 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 • Ownership of the deceased spouse in the participant’s IRA will pass by the deceased spouse’s Will

  34. NEW TAX LAWS AND HOW THEY IMPACT ESTATE PLANNING By Michael V. Bourland Michelle Coleman Johnson Bourland, Wall & Wenzel, P.C. Fort Worth, Texas TexasBank Hudson Oaks Banking Center Weatherford, TX Wednesday, May 29, 2002 4:00 p.m. to 5:00 p.m.