estate planning. three questions you probably want answered: how much tax will i owe? when do i pay...
TRANSCRIPT
ESTATE PLANNING
Three questions you probably want answered: How much tax will I owe?
When do I pay the tax?
How do I pay the tax?
HOW MUCH TAX WILL I OWE?
How Much Tax Will I Owe?
How much estate tax you will owe depends on: the value of your estate, the use of exemptions from federal estate and
TN inheritance taxes, the use of gifting and charitable techniques, the use of other techniques your tax rate
The Value of Your Estate
The Value of Your Estate The estate tax is applied to the value of property you own at
your death
What is property? ANYTHING YOU OWN AT YOUR DEATH
Tangible vs intangible property
Jointly owned property
Beneficiary Designation: 401ks, IRAs, Annuities
Life insurance
Trust property: Revocable vs irrevocable
Estate Tax Exemptions
Estate Tax Exemptions
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
$3.5
Federal Estate Tax Exemption: Federal Estate Tax Exemption for 2008:
Each individual has the equivalent of a $2,000,000 exemption from federal estate taxes; $1,000,000 begins 2011
“Use it or lose it”
Unlimited Marital Deduction:
You can leave any amount to a spouse at your death and there will be no tax: however, surviving spouse pays tax at his / her death
Tennessee Inheritance Tax
$1,000,000 (use it or lose it) Unlimited marital deduction Remember there is a difference in the
Federal and TN exemption amounts: $2,000,000 in 2008, 3,500,000 in 2009, Zero in 2010 then back to $1,000,000 in 2011 Difference in 2008-2010 necessitates planning so
that no taxes are paid on the first death
How to Fund The Exemption
You must have assets in your name
Jointly owned assets
Beneficiary designated assets
How Much Tax Will I Owe?
Value estate
Use the exemptions
Apply the tax rates
Federal Estate Tax Rates
0%
10%
20%
30%
40%
50%
60%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Notice rate goes to 45% in 2009, no tax in 2010, then back to 55% in 2011
A look at how much estate tax a family might owe: Mr. and Mrs. Smith are worth $5
million Sweetheart wills Three children, and five
grandchildren. The Smith’s own $2,000,000
business, $2,000,000 land and $1 million IRA.
Mr. Smith also has a $1 million life insurance policy
Mr. Smith dies in 2015 and Mrs. Smith dies in 2016
Federal Estate Planning Diagram$5 Million Estate Plus $1 Million Life Insurance
Mr. Smith had a $1 million exemption in 2015 but did not use the exemption because he left everything to his wife
When Mrs. Smith dies in December 2011, she has a $1 million exemption
IRS’s portion -about$2,700,000
Heirs portion-about $3,300,000
These numbers are approximations only, and are used to illustrate how the estate tax works.
$5,000,000 $1,000,000 life$6,000,000$1,000,000 exemption$5,000,000 tax rate X
$2,700,000 Tax Liability
What Can The Smiths Do?
Use both of the Smith’s exemptions
Give it away:
To Family Members
To Charitable Organization(s)
Life Insurance Trust
Use Both of the Exemptions Each had a $ 1 million exemption but only one was used.
Use the exemption by:
Bequeath amount equal to exemption: The first to die leaves the children and/or grandchildren, $ 1 million in some type of asset.
Trust amount equal to exemption: The first to die leaving an amount equal to the exemption in trust for the surviving spouse and children.
Exemption Amount in Trust
Trust benefits: Protect against divorce, Protect against creditors, Protect and provide for financially
inexperienced, Provide for disabled, handicapped, Many trusts are for the lifetime of a
beneficiary
Trust Example: Exemption in Trust
Trust Trust
Husband Dies First
$1,000,000
Wife Wife still has her exemptionto use at her death
Estate Planning Using Exemptions$5,000,000 Estate plus life insurance
These numbers are approximations only, and are used to illustrate how the estate tax works.
New Plan Old Plan$6,000,000 $6,000,000$2,000,000 $1,000,000$4,000,000 $5,000,000$2,330,000 $2,700,000$1,670,000 $2,250,000
Heirs receive $3,670,000 $3,300,000IRS receives $2,330,000 $2,700,000
Exemptions
Tax
WHAT ELSE CAN WE DO?
Use of Gifting Techniques
Giving to Family Members Giving to Charity Giving to a Life Insurance Trust
Federal Gift Tax
Annual Exclusion: Each individual can give up to $12,000 per person each year ( husband and wife can give $24,000 per person each year: for example, gift by married couple to daughter and son-in-law = $48,000 )
Lifetime Exemption: $1,000,000 lifetime exemption once lifetime exemption used gift tax applies of up to 45%
Unlimited Marital Deduction
Tennessee Gift Tax
Each individual can give up to $12,000 to any direct relative per year or
5,000 to the first person and 3,000 to any other person per year
Giving To Family Members
You can give $12,000 annually to children and grandchildren free of gift taxes each year (Federal and TN) spouse can also give away $12,000 Smiths have 3 children and 5 grandchildren could transfer $192,000 tax free each year In the seven years prior to their deaths, the
Smiths could have given away $1,344,000 Advantage: Giving away asset plus appreciation
How Can I Leverage More Into The Gift Amounts? Transfer the real estate (except home) and
investments to a Family Limited Partnership or LLC,
Receive back both control and noncontrol interests for example, 1% control and 99% noncontrol interests,
Give children and grandchildren noncontrol interests,
Value the partnership or LLC and receive discounts
How Can I Leverage More into the Gifts: Con’t
After assets are transferred to Family Limited Partnership receive discounts on value for: Lack of marketability Lack of control
Typical discount might be 30%
Example: If the Smiths put their 2 million dollar business and 2 million of land in a limited partnership, transferred the noncontrolling interest to their children and grandchildren, and received a 30% discount, the value for estate tax purposes would now be 2,800,000 rather than 4,000,000. ( 4,000,000 x 30% = 1,200,000 discount)
Biggest mistake: Failure to actually give the partnership interests away.
Gift of Limited Partnership Interests$5,000,000 Estate plus life insurance
These numbers are approximations only, and are used to illustrate how the estate tax works.
New Plan Old Plan$6,000,000 $6,000,000$2,000,000 $1,000,000$4,000,000 $5,000,000$1,200,000$2,800,000$1,600,000 $2,700,000$1,200,000
Heirs receive $4,400,000 $3,200,000IRS receives $1,600,000 $2,700,000
Exemptions
Partnership Discount
Tax
Giving To Charities
Giving To Charities
100% deduction from estate taxes Retirement plan assets have not been taxed
and will be subject to income tax as well as estate tax
No income or estate taxes on IRA or 401k if given to charity at your death
Twist on Gift to Charity
Bequest to Private Foundation Family members may be on board and
receive reasonable compensation Teach younger generation decisionmaking,
finances (budget and investing) Leave a legacy of values
Life Insurance Trusts
Life Insurance Trust
Life Insurance Trust
Life premiums
Insured gives amount of premiums to trust; this amount is considered a gift to the beneficiaries
Trust buys life insurance
Life insurance is not inside estate
Gift Life Insurance To Trust$5,000,000 Estate plus life insurance
These numbers are approximations only, and are used to illustrate how the estate tax works.
New Plan Old Plan$6,000,000 $6,000,000$2,000,000 $1,000,000$4,000,000 $5,000,000$1,200,000$2,800,000$1,000,000$1,260,000$1,000,000$ 260,000
Heirs receive $4, 450,000 $3,300,000IRS receives $ 550,000 $2,700,000
Exemptions
Partnership Discount
Gift to University, Church
Life Insurance Trust
When Do I Pay The Taxes?
If taxes are due, they must be paid 9 months following date of death
Estate tax returns are due at that time. Extensions may be filed but tax is still due.
How Do I Pay the Estate Taxes? Use cash
use up all estate liquidity use 100 cent dollars
Sell assets at death may be bad market use 100 to 150 cent dollars
Borrow lender may not be willing use 200 cent dollars
Insured approach pennies on the dollar
Financial Planning Steps
Estate planning is one step in the financial planning process that encompasses almost every aspect of your financial picture
Focus should be on an integrated approach to planning for transfer of wealth and/or the support of your family in the case of untimely death
Use the checklist to identify and record completed items
Identify gaps in your plan Prioritize and take action
Identify Advisory Team Members
Thank you for your time. It was a pleasure to speak with you today.
Marguerite Self Elkins, CFP®, J.D., LL.M
Securities and Investment Advisory Services offered through Woodbury Financial Services, In. Member FINRA, SIPC and Registered Investment Advisor. P.O. Box 64284, St. Paul, MN 55164 800-800-2000. CrossBridge Capital Advisors and Woodbury Financial Services, Inc. are not affiliated entities.