Federal Estate and Income Tax Legislative Developments Affecting Wealthy Clients

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Federal Estate and Income Tax Legislative
Developments Affecting Wealthy Clients

• Dennis I. Belcher
• dbelcher_at_mcguirewoods.com
• March 18, 2009

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2009 Significant Year in Estate and Financial
Planning

• Increase in Estate and GST Tax Exemptions
• AFRs all time low
• Extreme investment volatility
• Federal transfer tax legislation
• Federal income tax legislation

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Increase in Estate Tax Exemption

• 75 increase in Estate Tax Exemption
• Removes many taxpayers from system
• Opportunity to notify clients
• DJIA 7,000 May 1997 Estate Tax Exemption
  600,000
• 3.5 million equal to 6.7 million at high of DJIA

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Impact on Estate Planning IRS 2007 Form 706
Return Statistics

• 706s filed in 2001 120,000
• 706s filed in 2007 38,031
• 706s filed in 2007 with assets of 3.5 million
  and above 14,281
• 706s filed in 2007 with assets in excess of 5.0
  million 8,338

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Increase in GST Exemption

• 75 increase in GST Exemption
• Consider late allocation of increased GST
  exemption to existing dynasty trusts with mixed
  inclusion ratio
• Review estate plans with bequest of GST exemption

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April AFRs Historically Low

• Short-term rate .83
• Mid-term rate 2.15
• Long-term rate 3.67
• Section 7520 rate 2.60

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Planning OpportunitiesLow April AFRs

• Intra-family loans
• Leveraged Non-Taxable Transfers
• GRATs (small gift, downside protection, but no
  GST planning and annual valuations)
• Installment Sales to Grantor Trusts (seed money
  gift, downside risk, but GST planning and fewer
  valuations)
• Charitable Lead Annuity Trusts

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Extreme Investment Volatility

• Dow Jones Industrial Average
• May 1, 2008 13,010
• November 1, 2008 9,320
• March 17, 2009 7,275
• Investment volatility creates opportunities to
  transfer wealth

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Planning Opportunities Investment Volatility

• GRATs (small gift, downside protection, but no
  GST planning and annual valuations)
• Installment sales to grantor trusts (seed money
  gift, downside risk, but GST planning and fewer
  valuations)
• Charitable Lead Trusts (zeroed out)

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Federal Transfer Tax Legislation

• Exemptions and rates
• Loophole closers (revenue raisers)
• Portability of estate tax exemption
• Retroactivity of legislation
• Timing of legislation

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H.R. 436 Certain Estate Tax Relief of 2009

• Representative Earl Pomeroy (D-ND) introduced
  January 9, 2009
• Member of House Ways and Means Committee
• No cosponsors
• Effective date is date of enactment

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H.R. 436 Exemptions and Rates

• Estate tax exemption - 3.5 million
• GST tax exemption - 3.5 million
• Estate and GST tax rate 45
• Estate tax 5 surcharge (50 estate tax rate)
  on estates above 10 million to 41.5 million

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H.R. 436 Valuation Rules

• No valuation discounts applicable to
  non-business assets
• Nonbusiness asset is defined as any asset not
  used in the active conduct of a trade or business
• Exceptions for material participation in real
  property and working capital

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Presidents Proposed Budget Estate Tax Provisions

• Table S 5, footnote 1 (page 121)
• In continuing the 2001 and 2003 tax cuts, the
  estate tax is maintained at its 2009 parameters.

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Presidents Proposed Budget Estate Tax Provisions

• Estate tax exemption 3.5 million
• GST tax exemption 3.5 million
• Estate tax rate 45
• GST tax rate 45
• No other provisions

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Presidents Proposed Budget Whats Not Included

• GST and conservation easement provisions that
  expire in 2010
• Portability
• Section 2032A increase
• Section 6166 clean-up
• Issue How to pay for additions to budget?

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Expiring 2001 Tax ActGST Tax Fix-Up Provisions

• Application of automatic allocation rules to
  indirect skips
• Retroactive allocation of GST exemption when
  beneficiaries predecease transferor
• Qualified severances under section 2642(a)(3)
• 9100 relief for missed allocations and elections

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Possible Loophole Closers (Revenue Raisers)

• Valuation discounts
• Passive assets
• Aggregation of prior gifts
• GRATs (10 remainder interest)
• QPRTs
• Retroactivity?

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Planning with Possible Retroactive Changes

• U. S. Supreme Court has upheld validity of
  retroactive tax legislation
• If concerned about retroactive legislation,
  consider
• Disclaimers
• Defined value clauses
• Rescission
• Contingent gift

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Other Possible Reforms

• Portability of Exemptions
• Recoupling of Gift and Estate Tax Exemptions
• Section 2032A increase
• Section 6166 clean-up
• No state death tax deduction

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Portability ofTransfer Tax Exemptions

• Senate Hearing April 3, 2008
• Transfer of spouses unused estate tax exemption
  to surviving spouse
• Multiple marriages issue (limitation on amount of
  transferred exemption)
• GST exemption?

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President Proposed Budget Over 250K Income
Tax Changes

• Increase in top two tax brackets (33 and 36
  to 36 and 39.6 )
• Increase to 20 dividend/capital gains tax
• Reinstate personal exemption phaseout and
  limitations on itemized deductions
• Further limit itemized deductions by capping tax
  benefit at 28 tax rate

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Charitable Contributions28 Cap on Itemized
Deductions

• Under the Presidents proposed budget, charitable
  contributions will be subject to additional 5 to
  7 income tax.
• After the 2001 Tax Act expires in 2010 (36 and
  39.5 brackets), a 100,000 charitable gift will
  incur 11,500 additional federal income tax.

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Federal Transfer Tax LegislationPrediction
Exemptions and Rates

• Estate tax exemption - 3.5 million
• GST tax exemption - 3.5 million
• Rates 45 (possible surcharge)
• Section 2032A increase
• Watch Senate Budget Committee and whether any
  Add-Ons

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How to Pay for Add-Ons

• Add-ons GST provisions, conservation easements,
  portability, section 2032A, section 6166, etc.
• Pay with loophole closers, phase-ins, surcharge,
  increased rates, decreased exemptions

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Planning in Light of Tax Reform

• Leveraged Non-Taxable Transfers
• GRATs (small gift, downside protection, but no
  GST planning and annual valuations)
• Installment Sales to Grantor Trusts (seed money
  gift, downside risk, but GST planning and fewer
  valuations)
• Accelerate dividend and capital gain income into
  early 2009

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QUESTIONS