J.K. Lasser's New Rules for Estate and Tax Planning E-Book

Stewart H. Welch

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: J.K. Lasser
• Sprache: Englisch
• Veröffentlichungsjahr: 2010

Seitenzahl: 463

Beschreibung

A complete guide to planning an estate under today's tax rules When it comes to your estate-no matter how big or small it may be-you shouldn't leave anything to chance. Proper planning is necessary to protect both your assets and your heirs. Experts Stewart Welch III, Harold Apolinsky, and Craig Stephens know this better than anyone else, and in the Third Edition of J.K. Lasser's New Rules for Estate and Tax Planning, they offer valuable advice and solid strategies to help you plan your estate under today's tax rules. Packed with up-to-the-minute facts, this practical resource covers essential issues; including how new legislation will impact inheritances and trusts, the do's and don't of gifting, retirement planning, and much more. * Reflects the most recent changes in tax laws as applicable to estate taxation * Offers useful planning with regard to trusts, charitable contributions, life insurance, and wills * Outlines the best ways to preserve your wealth through proper planning strategies Filled with in-depth insights and expert advice, this book will show you how to efficiently arrange your estate today so that you can leave more to those you care about tomorrow.

Leseprobe

Table of Contents

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Title Page

Copyright Page

Acknowledgements

Sirote & Permutt, P.C.

Harold Apolinsky’s Family

Our Team

Craig M. Stephens’ Family

Craig’s Thanks

My Coauthor

Technical Assistance

THE WELCH GROUP Associates

John Wiley & Sons, Inc.

My Family

My Clients

Introduction

CHAPTER 1 - Congress Plays ‘The Guessing Game’ with the Estate Tax Laws

Cautionary Note

Retirement Savings and Pension Reform

Marginal Tax Rates

Education Funding Incentives

Business and Corporate Tax Relief

Estate, Gift, and Generation-Skipping Transfers

CHAPTER 2 - Estate Planning

What Is Estate Planning?

The Benefits of Estate Planning

The Nightmares of Poor Planning

The Myths of Estate Planning

Guidelines for Successful Estate Planning

CHAPTER 3 - The Estate Tax System

Determining Your Estate Net Worth

Understanding the Estate Tax System

Your Estate Tax Picture

Your Future Estate

Overview of Estate Planning Strategies

CHAPTER 4 - Investment Strategies for Maximizing Estate Growth

Growth Strategy with a Safety Net®

Prioritizing Your Investment Dollars

Retirement Planning: Choosing the Best Investment Environments

Some Final Thoughts on Investing

CHAPTER 5 - Retire with Dignity

Your Retirement Requirements

CHAPTER 6 - You Don’t Have a Will? Big Trouble!

Property Transfers at Death

Transfers via Probate

Direct Transfers by Title

Other Methods of Property Ownership

Choosing the Best Methods of Ownership

Setting Estate Planning Goals

CHAPTER 7 - Where There’s a Will, There’s Your Way!

What Is a Will?

Types of Wills

Advantages and Disadvantages of Wills

Intelligent Decisions Concerning Your Will’s Basic Provisions

Executing Your Will

Where to Store Your Will

Other Important Documents

Working with Your Attorney

When to Review Your Estate Plan

CHAPTER 8 - Using Trusts in Your Estate Plan

The Credit Shelter Trust Will

Disclaimers

Marital Trusts

Spendthrift Trust

Standby Trust

Other Trusts

CHAPTER 9 - Understanding the Living Trust

Advantages of Living Trusts

Disadvantages of Living Trusts

How a Living Trust Operates

Transferring Property into Your Living Trust

Types of Property Likely to Be Transferred

Living Trust Myths

Transacting Business with Your Trust

CHAPTER 10 - Using Insurance in Your Estate Plan

Life Insurance

Using Life Insurance to Replace Income

How Much Life Insurance Do You Need?

What Type of Life Insurance Is Best for You?

Insurance on a Homemaker

Insurance on Adult Children

How to Get the Best Deal on Term Life Insurance

Insurance Warnings!

Using Life Insurance for Estate Liquidity

How Much Is Enough?

What Type of Life Insurance Is Best for Estate Liquidity?

The Irrevocable Life Insurance Trust

Getting Your Life Insurance into Your Trust

Using Life Insurance to Leverage Your Estate

About Your Cash Values

Long-Term Care Insurance

CHAPTER 11 - Smart Strategies for Gifting Assets to Family Members

The Annual Gift Tax Exclusion

Unintended Gifts

Filing a Gift Tax Return

The Lifetime Applicable Exclusion Amount

Outright Gifts

When the Donee Is a Minor

Other Tax-Free Gifts

Family Gifts Utilizing Trusts

Grantor Retained Annuity Trust

Grantor Retained Unitrust

Qualified Personal Residence Trust

Taking Advantage of Generation Skipping Transfers

Sales to Family Members

Loans to Family Members

CHAPTER 12 - Strategic Planning with Charities

Outright Gifts to Charities

Testamentary Gifts to Charities

Gifts Using Charitable Trusts

Using Your Charitable Trust for Retirement Planning

The Private Foundation

CHAPTER 13 - Family Limited Partnerships

General Structure of the Family Limited Partnership

Family Limited Partnership Rules

CHAPTER 14 - Succession Planning for the Family Business or Farm

Special Estate Tax Benefits for Farmers and Closely Held Business Owners

Valuing Your Business or Farm

Succession or Sale?

Succession Planning: Keeping the Family Business in the Family

Maximizing Your Business’s Value through a Sale

Structuring Your Buy-Sell Agreement

Types of Buy-Sell Agreements

Funding the Buy-Sell Agreement

One Final Strategy—the Employee Stock Ownership Plan

CHAPTER 15 - Asset Protection Strategies

The Concept of Fraudulent Transfers

A Word about Jointly Held Property

Retirement Plans

Life Insurance

Using Trusts to Protect Assets

Using Limited Liability Entities to Protect Assets

Use of Multiple Limited Liability Entities

Foreign Asset Protection Trusts

Domestic Asset Protection Trusts

EPILOGUE

APPENDIX A - Professional Advisors

APPENDIX B - Estate Planning Terms

Index

Look for these and other titles from J.K. Lasser™—Practical Guides for All Your Financial Needs

J.K. Lasser’s Small Business Taxes by Barbara Weltman J.K. Lasser’s 1001 Deductions and Tax Breaks by Barbara Weltman J.K. Lasser’s Real Estate Tax Edge by Scott Estill and Stephanie Long J.K. Lasser’s The New Bankruptcy Law and You by Nathalie Martin and Stewart Paley

Copyright © 2010 by Harold Apolinsky, Stewart Welch, and Craig M. Stephens. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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eISBN : 978-0-470-53569-1

Acknowledgments

Sirote & Permutt, P.C.

It would not have been possible to write a book of this magnitude without the support, assistance, and encouragement of our law firm, Sirote & Permutt. We owe a special thank you to the 11 other members of our Estate and Probate Department: Katherine N. Barr, Elizabeth Hutchins, Shirley Justice, Leigh Kaylor, Melinda Mathews, Joel Mendler, Sandy Mullins, Tanya Shunnara, Judy Todd, Catherine Wilson, Melissa May, and Peter Wright—bright and gifted lawyers who believe in top-quality legal care, outstanding service to clients, and innovation. We are all constantly seeking and studying new estate planning ideas to help clients not only accumulate wealth, but keep wealth within their families.

Harold Apolinsky’s Family

I want to acknowledge the encouragement of my wife, Marissa Levine Apolinsky, who exhibited unlimited patience as I spent time writing. Also, the years of encouragement from my children, Steve Apolinsky, Felice Apolinsky, and Craig Apolinsky, who convinced me that with hard work and determination nothing was impossible to achieve.

Our Team

Finally, without the help of our loyal assistants, Marsha Self and Beverly Stradford, and our top estate planning associate Tanya Shunnara, Esq., the demanding publishing deadlines could never have been met. The most fun for me has been to work with Stewart Welch, a most gifted individual and innovative financial advisor.

Harold Apolinsky, Esq., EPLS

Craig M. Stephens’ Family

I would like to thank my wife, Jenna S. Stephens, who provided me with uninterrupted evenings and weekends working on this book while we awaited the arrival of our twins, Stirling and Sloan, who were born on February 9, 2009. Juggling this book revision, a growing practice, the many doctors’ appointments, and being a parent for the first time required significant support from my loving wife, and I thank her for it.

Craig’s Thanks

I would like to thank Harold Apolinsky and Stewart Welch III for providing me with the opportunity to be a part of the second revision of this book and a co-author of the third revision. I am fortunate to have worked with Harold and Stewart on many projects, and our collaborative efforts will hopefully lead many families to produce a lasting legacy for decades to come.

Craig M. Stephens, Esq.

My Coauthor

This book would have never happened without help and moral support from many people. First and foremost, I want to thank my coauthors, Harold Apolinsky and Craig Stephens. Harold is not only a true scholar but a true gentleman as well. He has been generous with both his time and his talents. Thanks, Harold. I also want to thank Craig Stephens for his insightful contributions to this revision. Craig is a rising star in the legal profession.

Technical Assistance

Bob Holman, CPA, is a senior partner with the accounting firm of Sellers, Richardson, Holman & West, LLP., in Birmingham, Alabama. I have had the distinct pleasure of working with Bob for more than two decades. He is unquestionably one of the brightest people I have ever met.

As most of you are aware, insurance can be a very confusing product to understand. I am fortunate to have had the assistance of four of the country’s top insurance specialists. First, I would like to thank my father, Stewart H. Welch Jr., CLU, who has been a top professional in the business for more than 50 years. He never ceases to amaze me with his energy and creative ideas. I have truly been blessed to have had his guidance throughout my life. My father’s assistant, Betty Brown, provided valuable assistance in running life insurance illustrations in this book. Babs Hart specializes in long-term care insurance, and her input regarding that section of the text was invaluable. Mike Priestley specializes in disability income insurance and was always available to answer my questions regarding the intricacies of this product. Howard Neiswender, an estate tax specialist with the Birmingham, Alabama, law firm of Balch & Bingham, LLP, provided valuable insights regarding asset protection.

THE WELCH GROUP Associates

I could not have considered attempting this project without the assistance and moral support of my associates. Greg’s skill at overseeing the management of our firm relieved me of much pressure and allowed me to concentrate on this project. Michael Wagner, CPA and Kimberly Reynolds, MBA are advisors at The Welch Group. Their expertise and diligence in preparing for our client meetings has made my life much easier and enjoyable. Jeff Davenport, our Systems Administrator Wendy Weber, and Ramona Boehm can always be counterd on to make certain our administration operations run smoothly. Roxie Jones is our receptionist and always makes everyone feel well taken care of. Diana Simpson, CFP®, MBA, is a partner in Fee-Only Planning Professionals, LLC, a financial advisory firm in which I am the principal owner. Diana is extraordinarily bright and acted as my technical fact checker for this book. I am grateful to Diana and her associates, Woodard Peay, CFP®, MBA, Melissa Erikson, and Deborah Brown, for running their company so well. Finally, very special thanks to Hugh Smith, CPA, CFP®, CFA, for his expert support of this project. Hugh is a prinicipal at The Welch Group.

John Wiley & Sons, Inc.

I feel very fortunate to have the opportunity to work with the prestigious publishing house of John Wiley & Sons, Inc., a traditional “blue blood” firm whose roots can be traced back to 1807. I could not mention John Wiley & Sons, Inc., without thanking Executive Editor Debra Englander, a longtime friend of mine who has become as much my sister as a trusted colleague.

My Family

Writing a book of this type is a full-time job in and of itself. Because running my company is also a full-time job, my family ends up paying a large price for my commitments. The biggest price by far was paid by my wife, Kathie. She endured many weeknights and most weekends alone while I spent all of my nonwork hours writing. Throughout the entire time she remained very supportive, and I love her even more for it. I especially want to thank my mother, Sally Welch, for her constant prayers and support. She is a fine person who has been a guiding light all of my life. I also have two wonderful sisters, Jean Watson and Babs Hart, who have always been cheerleaders for all my endeavors.

My Clients

There is no way to express how grateful I am for the wonderful clients I have the pleasure of serving. Each, in their own way, has contributed to my own learning and therefore to this book.

Stewart Welch III

Introduction

Writing a book of this magnitude requires a tremendous amount of time and emotional energy. I agreed to take on this project only under the condition that I could convince one of the country’s best legal minds to join me as a that I could convince one of the country’s best legal minds to join me as a coauthor. To my great delight, Harold Apolinsky agreed to my proposal. Harold is one of the country’s most respected estate tax lawyers. He testified before Congress and spent innumerable hours in Washington lobbying influential senators and representatives. He served as general counsel for the American Family Business Institute. The American Family Business Institute is the premiere trade association educating members of Congress on the need for major reform of the estate tax. Dick Patten serves as the president and CEO of the American Family Business Institute in Washington, D.C. Carrie Simms serves as executive director (and is available to answer any questions). For more information, please visit www.nodeathtax.org. I am also delighted that Harold convinced his protégé, Craig Stephens to also coauthor this book. Craig is both highly intelligent and resourceful and has been a pleasure to work with on this project.

I own a fee-only wealth management firm serving a nationwide clientele, Harold is the senior tax and estate planning member in one of Alabama’s largest law firms along with Craig Stephens, who is a partner in the same law firm. Together, we have had the opportunity to work with many affluent individuals throughout the United States. The common characteristic that we find among them is that they take pride in both their financial success and in their ability to handle their finances. But this book was not written just for the affluent but for the many people who want to become affluent.

What does it take? Although you may already have accumulated a sizable estate and feel comfortable handling your investments, chances are you haven’t paid sufficient attention to estate planning. This is the reason we wanted to write this book. The purpose of J.K. Lasser’s New Rules for Estate and Tax Planning is to make certain that you have taken steps to make sure your estate is in order and that you have a specific strategy in place. Whether you are just getting your financial feet on the ground or you are a millionaire several times over, this book offers valuable strategies you can use today and in the future.

As you read this book, we encourage you to keep your parents’ situation in mind because some of the more advanced strategies may be more appropriate for them than for yourself. You may want to discuss these issues with them or lend this book to them. After all, you should all share the goal of maximizing the amount of money that you can transfer to your heirs and charitable organizations.

The book begins with an overview of the most important aspects of the. You will be able to use this chapter as a reference tool for reviewing significant estate and income tax laws affecting you.

Next, you will need to assess the adequacy of your current estate plan. What is the value of your total estate? You will learn how to determine your estate net worth. This is vital because knowing its value will let you define the resources available to your family to provide for their income needs should you die prematurely. You will also be able to determine approximately how much in estate taxes your heirs might owe.

It is also important to assess whether you are on track toward retirement—are you accumulating enough investment assets to provide you with a worry-free retirement? Studies indicate that the average working American is saving less than one-third of what he or she needs to have enough assets to maintain the same lifestyle during retirement. In many cases, this shortfall will be made up from inheritances. If you find out that you’re lagging behind, this book will help you figure out how much you need to be investing to get on track, and you’ll learn how to devise an appropriate investment plan.

Another key aspect of estate planning is, of course, having a will. Research indicates that as many as 80 percent of adult Americans don’t have either a will or their will is out-of-date. If you fall into this group, you should stop procrastinating. It really does matter if you die without a will! We’ll outline the perils of dying without one. The resulting chaos will surprise you. You’ll learn how to prepare yourself so that you can minimize the time and expense of working with an attorney.

The use of trusts is a vital part of most estate plans. You can use them to protect your children from themselves, to protect you from possible future creditors, or to save on income and estate taxes. These are powerful weapons in the war to protect your assets for yourself as well as future heirs. It is our experience that many people carry large amounts of life insurance, including their employer’s group life. Utilizing some type of trust is often an invaluable estate planning tool. You’ll learn about the irrevocable life insurance trust, living trust, and other types of trusts.

Many of you face the difficult task of funding your children’s education. You’ll learn how to effectively use qualified tuition plans and education individual retirement accounts as well as custodial accounts and minors’ trusts. You’ll also learn about how grandparents can be willing partners in assisting with your children’s educational expenses.

If you are interested in providing financial support to a religious organization, an educational institution, or a favorite charity, you’ll gain insights on the best ways to maximize the effectiveness of your donations. Often, gifts to tax-exempt organizations can solve a financial dilemma such as how to convert low-basis non-income-producing property into income-producing property while avoiding a large tax bill.

Once you have accumulated enough assets for your retirement years, you may want to shift your focus to transfer strategies for your children and other heirs. To heirs we’ll outline strategies that will allow you to transfer significant wealth at a fraction of its market value while maintaining control of your property.

People who own a family business or farm often face a perilous future; this is especially worrisome because many of these individuals desperately want to ensure that the business or farm remains in the family so that it can be continued by future generations of family members. Obstacles to this goal include estate taxes and lack of liquidity. The solution is a well-developed transition plan, which is also fully explained in this book.

In today’s litigious society, many people fear the threat of a lawsuit that results in financial ruin. Feeling helpless, we may cross our fingers and hope it does not happen to us. A preferable approach is to be proactive. If you consider yourself a likely target, you can do many things to protect your assets. Some solutions are as simple as transferring assets to a spouse who is less at risk. Other resolutions include the use of trusts, family limited partnerships, and even more exotic options such as domestic or foreign asset protection trusts.

As you develop and implement your estate plan, you’ll almost certainly need the assistance of a qualified professional. Finding the right person, someone who is truly qualified, can be a daunting task. It is one of the reasons many people fail to establish their estate plan. To help this process your coauthors will gladly help you find an advisor to assist you with your needs. In this appendix are tips on how to get the most out of your advisors while minimizing their fees.

As Americans, our limitations are constrained only by our own imagination, our willingness to take time to develop an appropriate strategy, and the self-discipline to execute our game plan. Picking up this book is an essential first step. Carefully reading it and implementing the strategies most appropriate to your situation will enable you to take a giant leap toward taking charge of your financial destiny. May God smile on your journey.

Stewart H. Welch III, CFP®, AEP

CHAPTER 1

Congress Plays ‘The Guessing Game’ with the Estate Tax Laws

The law signed on June 7, 2001, by President George W. Bush—the Economic Growth and Tax Relief Reconciliation Act of 2001 (Tax Relief Act-2001)—remains the largest tax cut in over 20 years and significantly reduced or eliminated death taxes for millions of American’s while substantially increasing the allowed contributions to various retirement plans.

Unfortunately, the Tax Relief Act-2001 has a sunset provision, which means that unless Congress extends this tax law, or makes it permanent, it will revert back to the old law on January 1, 2011. In fact, the Tax Relief Act-2001 provided for the elimination of estate taxes altogether beginning January 1, 2010. Obviously, Congress has no intention of allowing this to happen but their preoccupation with passing healthcare reform distracted them from focusing on estate tax law changes.

Cautionary Note

Prior to the 2009 trillion dollar-plus deficit, both Democrats and Republicans had arrived at a consensus opinion that the estate tax exemption (the size estate you can own before you are subject to death taxes) should be set at $3.5 million dollars and then indexed for inflation. The combination of focusing on passing healthcare reform and the almost incomprehensible rising national debt has now left the final decisions regarding new estate tax rules up in the air. In preparing this updated book revision, the author’s chose optimism and we have therefore assumed that Congress will settle on a $3.5 million exemption. So, as you review our examples throughout this book, note that we are using $3.5 million as the size estate you can own before your estate is subject to death taxes.

As of the date of this book revision (October 2009), we expect Congress to react within a range of possibilities:

• Before the end of 2009, Congress will likely extend the current estate tax exemption for one year. Meaning that for 2010, the estate tax exemption will remain $3.5 million. We believe there is no chance they will do nothing and allow estate taxes to be zero (as scheduled under the current law). What if Donald and Melania Trump died? Instead of receiving billions in death taxes, the federal government would receive nothing! And think of all the wealthy people who are in hospitals on life support. Avoiding millions in estate taxes would give a whole new meaning to ‘Pull the Plug’!

• Extending the 2009 estate tax limits will buy Congress time to focus on this issue, which will likely be one of the top campaign issues of the 2010 mid-term elections. Politicians running for re-election are likely to feel the pressure of cross-currents of voting in favor of a law that helps the rich avoid taxes (i.e. keeping the estate tax exemption at $3.5 million) versus doing nothing and allowing the current law to ‘sunset’ on December 31, 2010, which will cause millions of middle-class Americans to be subject to death taxes. The result would be that anyone dying with an estate exceeding $1 million, could be subject to death taxes as high as 55% on the excess. Many middle-class families who own a home and have adequate life insurance will quickly become subject to death taxes.

Whatever Congress finally decides, we’ll keep you well informed. For the most up-to-date details on estate tax law changes, go to www.jklasser.com.

Retirement Savings and Pension Reform

Tax Relief Act-2001 provided for significant increases in contribution limits to various types of retirement plans. Below are current provisions and contribution limits for some of the more common retirement plans.

Traditional Individual Retirement Accounts and Roth Individual Retirement Accounts

Qualifying taxpayers can deduct $5,000 annually for Traditional IRAs. If you are age 50 or older, the law provides for a catch-up provision, allowing additional contributions of up to $1,000 per year. The purpose of the catch-up provision is to allow individuals to make up for missed retirement savings opportunities earlier in life. Table 1.1 illustrates the contribution limits for 2010.

TABLE 1.1Traditional IRA and Roth IRA Contribution Limits

YearMaximum Contribution under Age 50Additional Contribution under Catch-up Provision12010$5,000$1,000 (catch-up)1For eligible individuals age 50 and older.

Unfortunately, income-based eligibility apply to both the Traditional IRA and the Roth IRA. For a refresher on these rules, review Table 1.2. Also, don’t forget that alimony is considered earned income for the purpose of eligibility for contributions to both the Traditional IRA and the Roth IRA.

Employer-Provided Retirement Plans

The Tax Relief Act-2001 provided significant expansion of allowable contributions and rules to employer provided retirement plans. The types of plans covered include: 401(k), 403(b), SIMPLE (Savings Incentive Match Plan for Employees), and 457 plans. Table 1.3 provides a summary of the contribution limitations for these type of plans.

If you are age 50 or older you have an opportunity to contribute even more to these plans based on catch-up provisions. Table 1.4 illustrates your maximum contribution limits.

Eligible retirement plans offer employees the ability to make voluntary contributions into a separate account for their Traditional IRA and Roth IRA. We expect this to remain a popular feature, but a word of caution is in order. The primary advantage of this feature is that your contributions are made through payroll deduction. The disadvantage is that you will likely be limited to the investment choices currently available through your plan. Contrast this with your ability to open your IRA, for example, through a discount broker such as Charles Schwab and Company, where you would have access to over 5,000 mutual funds as well as individual stocks, bonds, and so forth. Generally, the

TABLE 1.2Expected Adjusted Gross Income (AGI) Limitations for Deductible Contributions for 2010

Traditional IRARoth IRASingle$55,000-$65,000$105,000-$120,000Head of Household$55,000-$65,000$105,000-$120,000Married-Filing Separately$0-$10,000$0-$10,000Married-Filing Jointly$89,000-$109,000$166,000-$176,000Non-working Spouse1$156,000-$176,000$166,000-$176,0001This AGI phase-out of deductibility limitations apply to nonworking spouses whose working spouse is an active participant in an employer-sponsored retirement plan.

TABLE 1.3Expected Contribution Limitations for Certain Contributory Retirement Plans for 2010

Year401(k); 403(b) PlansSIMPLE Plans457 Plans2010$16,500$15,000$16,500

better choice will be to maintain control of your IRA outside of your company’s retirement plan.

The Tax Relief Act-2001 provided additional incentives for low-income taxpayers to contribute to their retirement plan [401(k), 403(b), 457(b), Traditional IRA, or Roth IRA] by providing tax credits for contributions, but the Pension Protection Act of 2006 made it permanent. For those who are eligible, this is an excellent opportunity to get Uncle Sam to pay a portion of your retirement plan contribution. This credit would be claimed on the individual’s tax return. Table 1.5 outlines how the tax credit works.

An interesting option provided under the Tax Relief Act-2001 permits employers to add a feature that allows employees to elect Roth status for all or part of their contributions to their employer’s 401(k) or 403(b) plan. This means that your contribution would be includable as income, but future distributions would be tax-free.

The Tax Relief Act-2001 raised the ceiling on the total dollar contributions for profit-sharing plans, money purchase pension plans, and contributory plans such as the 401(k). For 2009 and 2010, the limit is $49,000. Future years contribution limits are indexed for inflation.

Marginal Tax Rates

The Tax Relief Act-2001 increased the number of tax brackets from five to six by introducing a 10 percent tax bracket to replace a portion of the current 15 percent bracket. The law then reduced the 28, 31, 36, and 39.6 percent brackets over six years to 25, 28, 33, and 35 percent, respectively. The Obama Administration has pledged no new taxes on middle-class Americans while promising greater tax relief for poor Americans. Clearly, the government will need additional tax dollars to tackle an $11 trillion national debt that continues to rise at an alarming rate. If, as the Obama Administration promises, that tax burden will be born only by families with incomes exceeding $250,000 it’s hard to imagine how this small group of taxpayers can pay enough taxes to adequately address the problem. Our best guess is higher tax rates on a broader base of taxpayers. See Table 1.6 for a complete review of the schedule for joint and single tax filers.

TABLE 1.4The “Catch-up” Provisions: Retirement Plan Contribution Limits for Plan Participants Age 50 and Older (amounts described include base contribution, plus “catch up” contribution)

Year401(k); 403(b); 457(b) PlansSIMPLE Plans2009$22,000$14,0002010Indexed1Indexed11Indexing is based on allowable contributions excluding any catch-up contributions. See Table 1.3.

TABLE 1.5Tax Credit for Low-Income Taxpayers Contributing to a 401(k), 403(b), 457(b), Traditional IRA, or Roth IRA

Although the Jobs and Growth Act-2003 accelerated the income tax marginal rate reductions, all of the rate reductions are subject to the Tax Relief Act-2001 sunset provision, which would return the rates to 15, 28, 31, 36, and 39.6 percent after 2010 unless Congress takes some affirmative action.

TABLE 1.6Schedule of Reduction of Individual Income Tax Rates (bracket cut-off amounts could slightly change in 2010)

Tip

Use these lower rates as an opportunity to increase your contributions to your company’s retirement plan. When it’s time to retire, you’ll be glad to have the additional money in your account.

Education Funding Incentives

Saving and paying for educational costs became a lot easier under the Tax Relief Act-2001. The act made significant modifications to both Education IRAs and Section 529 plans. What follows is an overview of both plans.

Education IRA

Under prior law, you could make a nondeductible contribution of up to $500 per year to an Education IRA, more commonly known as Coverdell Education Savings Accounts. Your earnings grew tax-free and the distributions, when used for qualified educational expenses, were taxed at the student beneficiary’s tax bracket. While this Education IRA was beneficial, it was only a partial solution to the problem of funding today’s education costs.

With the passage of the Tax Relief Act-2001, Congress took a giant step toward providing real assistance in reducing the costs of education. The most significant provisions included the following:

• Increased the contribution limits from $500 per year to $2,000 per year.

• Provided that distributions, when used to pay for qualified education expenses, would be tax-free.

• Allowed tax-free withdrawals for elementary (including kindergarten) and secondary public, private, and religious school tuition and expenses.

• Included tuition, room and board, tutoring, uniforms, extended day program costs, computer technology hardware and software, Internet access, and special needs services for special needs beneficiary as qualifying expenses.

• Allowed HOPE Scholarship Credit and Lifetime Learning Credit for other expenses.

• Extended the time in which the contribution can be made to April 15 of the following tax year.

• Your ability to contribute to an Education IRA is phased out above certain income levels. The Tax Relief Act-2001 increased the phase-out range for joint filers with adjusted gross income (AGI) of $190,000-$220,000. The phase-out range for single tax filers is AGI of $95,000-$110,000, the same as the prior law.

• Repealed the excise tax when a contribution to an Education IRA is made in the same year as a contribution to a qualified tuition plan for the same beneficiary.

This enhanced Education IRA provided—and still provides—significant incentives to prefund education expenses. However, the $2,000 contribution amount is scheduled to drop to $500 after 2010. Unless the law is changed before that time, it is expected that Education IRAs will be a less attractive way to save for college expenses.

Tip

If you would like to make a contribution to an Education IRA for your child but does not qualify because your AGI is too high, consider having your child contribute to his or her own account. Unlike other IRAs, a person does not have to have earned income to contribute to an Education IRA nor is there a minimum age requirement.

Section 529 Plans

Section 529 plans (also referred to as qualified tuition plans) received a dramatic boost under the Tax Relief Act-2001. Because of the importance of these programs in both funding the costs of higher education and estate planning, they will be covered in detail in this section.

WHAT IS A SECTION 529 PLAN?

A Section 529 plan is a program that allows individuals to (1) purchase tuition credits or certificates on behalf of a designated beneficiary, entitling the beneficiary to a waiver or payment of the beneficiary’s higher education expenses; or (2) make contributions to an account that is established for the sole purpose of meeting qualified higher education expenses of the designated beneficiary of the account.

PLAN CONTRIBUTIONS

A Section 529 plan may only accept contributions in the form of cash and not in property. However, a Section 529 plan may accept payment by check, money order, credit card, or other similar methods.

There are no limits as to the amount of money that can be contributed to a Section 529 plan (unless limited by the plan sponsor); however, there are penalties for distributions not used for qualified education expenses. Most important, unlike the Education IRA, there are no income phase-out rules that prevent high-income taxpayers from contributing to a Section 529 plan.

TAX-FREE GROWTH

Earnings in a Section 529 plan grow tax deferred until distributions are made, at which time the distributions are tax-free if used to pay qualified education expenses. For example, suppose you and your spouse contributed $100,000 to a Section 529 plan on behalf of a one-year-old grandchild. This $100,000 would grow tax-free until such time as it is distributed for higher education expenses, presumably beginning at the child’s age 18. If your plan sponsor averaged a 9 percent return, the account value would exceed $400,000 by the time you are ready to begin drawing funds for your grandchild’s college. When the funds are then used to pay for qualified education expenses, there will be no income taxes due on those distributions. Qualified higher education expenses include tuition, books, supplies, equipment, fees, expenses for special needs services, and room and board (within certain limits). The amount of qualified higher education expenses is reduced by scholarships and amounts paid by the beneficiary or others that qualify for the HOPE Scholarship or Lifetime Learning Credits.

Tip

If you are currently using a Uniform Gift to Minors Account (UGMA) or a Uniform Transfer to Minors Account (UTMA) as a funding vehicle for your child’s education, consider the Section 529 plan or an Education IRA instead. By doing so, you’ll not only avoid current taxation on earnings (remember the so-called kiddie tax?), but distributions used for education expenses will be tax-free.

PENALTIES ON NONQUALIFIED DISTRIBUTIONS

If distributions from a Section 529 plan are not used for qualified education expenses, a 10 percent penalty is imposed on the recipient of the funds. In addition, the earnings portion of the distribution is subject to ordinary income taxes. Usually, the tax will be triggered when distributions exceed the educational expenses of the designated beneficiary. According to some states’ plans, any funds not distributed prior to the beneficiary attaining the age of 30 will be deemed a nonqualifying distribution (some exceptions apply for a special needs beneficiary). Exceptions to this penalty apply for payments made due to the beneficiary’s death, disability, or receipt of a scholarship.

INVESTMENT OPTIONS

One potential downside of Section 529 plans is that you are unable to direct the investments of the plan. The investment accounts are operated as blind pools where you have no input over specific investment decisions. Most plan sponsors do, however, indicate the general investment approach they use. Often, contributors have the ability to select from a variety of investment strategies, with some Section 529 plans offering as many as 10 options. An important feature added under the Tax Relief Act-2001 is the ability to switch from one state-sponsored program to another every 12 months. This significantly increases your ability to change your broad investment strategy to meet your particular needs.

GIFT TAX CONSEQUENCES

A contribution to a Section 529 plan is considered a completed gift from the account owner to the designated beneficiary at the time of the contribution and is thus eligible for the annual gift tax exclusion (currently $13,000 or $26,000 in the case of a joint gift by spouses). If the contribution exceeds the annual gift tax exclusion, the amount not exceeding five times the current annual exclusion may be applied pro rata to annual exclusions over five years.

For example, you could make an initial contribution of $65,000 for each designated beneficiary without incurring gift tax liability for the contribution. The $65,000 contribution would be treated as if you made a $13,000 contribution in each of the next five years. Note that this presumes that no other gifts are made to the beneficiary during this five-year period. Any additional gifts would be subject to gift taxes. However, because the annual exclusion amount is indexed for inflation, this amount could increase in future years. Married couples can join together in making gifts, thus increasing the potential contribution to $130,000 without incurring gift taxes.

ESTATE TAX CONSEQUENCES

Even though the donor retains the right to change the designated beneficiary (to another member of the donor’s family) and to receive distributions from the account if no other person is designated, funds invested in the Section 529 plan are not included in the donor’s gross estate unless the funds are in fact returned to the donor. Thus, once you contribute an amount to a Section 529 plan, that amount is out of your estate(s), as is the future appreciation on that amount. However, if a contribution exceeding the annual exclusion is applied pro rata to the annual exclusion over five years but the donor dies before the fifth year, that portion of the contribution that has not yet been applied to the annual exclusion for the years following the donor’s death will be included in the donor’s estate.

For example, suppose Mr. Leonard contributes $65,000 to a Section 529 plan and elects to have this applied pro rata over the next five years to the annual exclusion. Furthermore, assume Mr. Leonard passes away in the fourth year following the contribution. The amount of the annual exclusion to be applied in the fifth year ($13,000) would be brought back into Mr. Leonard’s estate.

COORDINATION WITH THE HOPE SCHOLARSHIP AND LIFETIME LEARNING CREDITS

Taxpayers will be able to use HOPE Scholarship and Lifetime Learning Credits during the same year distributions are taken for a Section 529 plan as long as the monies are used for different qualified education expenses. In other words, you cannot claim the HOPE Scholarship Credit for room and board and then use Section 529 funds to pay for room and board.

Tip

Creditor Protection for Section 529 Plans?

Funds held in a Section 529 plan may be subject to the claims of creditors and divorce proceedings. Typically, state law will prevail. If you are concerned about creditor protection, consider using a Section 529 plan sponsored by a state that has strong creditor protection laws.

For more information on Section 529 plans go to the Resource Center at www.welchgroup.com; then click on ‘Links’.

SOME FINAL THOUGHTS ON SECTION 529 PLANS

Note that under the Section 529 plan, you are able to change your beneficiary. This is important because one child may choose not to attend college or may attend a relatively inexpensive college while another child may attend a very expensive college. A Section 529 plan allows you to move your funds around as needed. The Tax Relief Act-2001 included “cousins” in the definition of family member. However, be sure to check the applicable plan’s rules and restrictions for changing beneficiaries.

Tax Relief Act-2001—Miscellaneous Provisions Relating to Education

Several other provisions of the Tax Relief Act-2001 are worth noting:

• Employers are now allowed to offer education assistance programs providing up to $5,250 per year for an employee. The payment is deductible by the employer and not includable in the income of the employee. Undergraduate and graduate courses qualify, and the courses do not have to be related to the employee’s job-related field.

• The new law loosened the requirements for deductibility of student loan interest.

The Jobs and Growth Act-2003 provided significant capital gains tax relief. The law immediately dropped the maximum net capital gains rate by 5 percentage points from 20 percent to 15 percent. The 10 percent capital gains rate for lower-income taxpayers fell to 5 percent. The lower rates are expected to continue through December 31, 2010, at which time the ‘sunset’ provision of the Tax Act-2001 provides for capital gains taxes to revert back to 20%.

Tip

Review all assets where you have a long-term capital gain to determine if it is advisable to sell before the current capital gains tax (15% federal) reverts back to the old capital gains tax rate of 20% (January 1, 2011).

The Jobs and Growth Act-2003 also provided significant tax relief for certain dividends from domestic or qualified foreign corporations. Such dividends received are now taxed at a 15 percent rate. This special rate terminates on December 31, 2010, and the pre-Jobs and Growth Tax Act rates return in January of 2011. A tax advisor should be consulted to determine whether a dividend qualifies for the lower tax treatment.

Business and Corporate Tax Relief

The Jobs and Growth Act-2003 provided certain business and corporate tax relief. For business property placed in service in 2009, the business taxpayer can immediately deduct (rather than depreciate) up to $250,000 in qualified property placed in service for the year under Section 179 of the Internal Revenue Code.

For certain new property (instead of used property that may be new to the business), there may be an available 50 percent bonus depreciation depending on the type of property involved. This deduction is scheduled to end after 2009, except for certain property, which will remain eligible until the end of 2010.

Estate, Gift, and Generation-Skipping Transfers

The Tax Relief Act-2001 provides some relief from the death tax imposed on estates of individuals who have paid taxes their entire lives. Although the estate and generation-skipping taxes are repealed in 2010, the repeal is not permanent. This uncertainty creates planning problems that we will address in this book. To accentuate the problem the new law presents for planners, see if you can answer the question in the next box.

Under the Tax Relief Act-2001, what amount of federal estate tax will be owed on an estate of $5,000,000? a. $675,000 b. $0 c. $2,045,000

TABLE 1.7Potential Estate (Death) Tax Savings under Tax Relief Act-2001 as Compared to Death in 2011

Give up? The answer is that all three answers are correct! The first answer, a, is correct if you die in 2010 (assuming the $3.5 million exemption is extended by Congress); b is correct if you die in 2010 (the estate tax is repealed for one year!); and c is correct if you die in 2011. We hope you are beginning to see the importance of carefully developing your estate plan.

Please don’t misunderstand. The Tax Relief Act-2001 does provide potentially significant tax relief, assuming that death occurs prior to January 1, 2011. Table 1.7 illustrates the estate tax savings under current law versus what taxes will be if the current law reverts to prior law on January 1, 2011 under the sunset provision.

Following is a list of select provisions that could affect your estate planning:

• The tax law lowered the maximum estate, gift, and generation-skipping tax rates, and it raised the amount of assets that are not subject to estate taxes (applicable exclusion amount). Table 1.8 outlines the applicable exclusion amount and the estate tax rates based on current law as of October 2009.

• Although the new tax law repealed the estate and generation-skipping taxes in 2010, the gift tax will remain in effect with a $1,000,000 unified credit effective exemption amount unless Congress changes the law. The highest gift tax rate will equal the highest income tax rate then in effect. As a result, family gifting plans may need to be adjusted.

TABLE 1.8Tax Relief Act-2001 Applicable Exclusion Amount

YearApplicable Exclusion AmountMaximum Estate Tax Rate (%)2009$3,500,0004520101Estate tax repealed02011$1,000,0002551Congress is likely to extend the 2009 exemption limits through 2010.2Tax Relief Act-2001 is automatically repealed unless Congress extends the law.

• Under prior law and under the Tax Relief Act-2001 for calendar years 2005-2009, a decedent’s heirs receive a new tax basis (called a step-up basis) in property received from the decedent equal to the property’s fair market value as of the date of death (or six months after the date of death if elected by the executor). As a result, if the property has appreciated, the heirs can sell the property shortly after the decedent’s death without recognizing taxable gain. Under the Tax Relief Act-2001, for calendar year 2010, heirs will not receive a new tax basis, regardless of when assets were purchased unless Congress takes action. Instead, with limited exceptions, heirs will take the property subject to the decedent’s old tax basis, which could result in the heirs recognizing taxable gain when and if the property is sold. However, due to two exceptions to this new rule, some taxable gain will be avoidable. First, $1,300,000 worth of certain assets can receive a new, fair market value basis. Second, the estate can increase the basis of an additional $3,000,000 worth of certain assets transferred to a surviving spouse. As a result, it is critically important that taxpayers begin compiling accurate records to document the income tax basis of their property. These records will determine future generations’ income tax liability.

• Additionally, accurate tax basis records must be kept beginning in 2010 because a decedent’s personal representative and/or trustee will be required to report detailed information to the Internal Revenue Service (IRS) of transfers at death in excess of $1.3 million and for certain transfers of appreciated property. Noncompliance will result in financial penalties.

• Although the tax law repeals the estate and generation-skipping taxes in 2010, the law also allows the Tax Relief Act-2001 to automatically “sunset” after December 31, 2010. In effect, the tax law repeals the estate tax and the generation-skipping tax for one year—2010. Due to budgetary restrictions, the law allows the estate tax rules, rates, and exemptions in effect prior to passage of the Tax Relief Act-2001 to come back in force in 2011. In 2010, Congress can choose to do nothing and thereby impose a new level of taxes on millions of Americans included the middle-class by allowing the law to revert to pre-Tax Relief-2001 tax law or they can proactively make changes such as fixing the estate exemption amount at $3.5 million.

Table 1.9 provides a summary of the changes under Tax Relief Act-2001.

Estate Planning Issues under the Tax Relief Act-2001

Because of the uncertainty surrounding the current status of the estate tax laws, everyone with a net worth of more than $1,000,000 should review their estate plan. An approach we favor is for the client to contact one of their professional advisors on the estate planning team, whether the estate planning lawyer, financial planner, life insurance agent, accountant, or trust officer. Authorize that team member to assemble the team in a preliminary meeting to review the listing of the assets and liabilities (financial x-ray), review the current documents, and then meet with the client and the client’s spouse to make team recommendations. This approach maximizes the creative input and communication and often aids in identifying important new alternatives to consider. The financial x-ray would show what assets are titled in the name of each spouse; what, if any, assets are titled in joint names; and, ideally, what assets are in the children’s names.

TABLE 1.9 Applicable Exclusion amount

As has been said previously, what will be the estate or death tax is really elective. By making annual gifts during your lifetime, then transferring the maximum tax free amount (applicable exclusion amount) to your children and grandchildren at death, and finally bequesting your remaining estate to a family charitable foundation, your estate tax would be zero.

Here are two areas to focus your attention:

1. Does each spouse have the new tax-free amount in his or her separate name? The first and simplest step of estate planning is to obtain two tax-free amounts for the family instead of one. This requires, however, not only the proper words in the documents, but that the first spouse to die have titled in his or her name (not jointly) assets with a fair market value (other than qualified retirement plans or IRAs) equal to the tax-free amount ($3,500,000 in 2009). This step can basically save the family up to $1,400,000 in taxes.

2. The client should also focus on what is currently to be done with the tax-free amount at the client’s death. Will it simply go in trust for the surviving spouse? Will it go in trust for the benefit of the surviving spouse, children, and grandchildren? Will it go outright to children and grandchildren?

In summary, you should take the following three steps as you undertake your estate planning review based on 2010 estate tax laws and the likely alternative changes in 2011:

1. Contact your advisor(s) and request a review of your current estate plan in view of the range of changes most likely. Your plan will need to be flexible enough to deal with a variety of possible outcomes.

2. The most prudent assumption for you to make, considering the changes scheduled for 2011, is that the amount of assets that you will be able to pass to nonspousal heirs will be $1,000,000. By providing adequate liquidity under this circumstance, you assure your heirs that you will have adequate resources to pay estate taxes no matter what year you die.

3. Let your voice be heard! Congressional indecisiveness makes it practically impossible to properly plan your estate. Contact your congressional representatives and request resolution to the question mark surrounding the current estate tax law. Go to the Resource Center at www.welchgroup.com; then click on ‘Links’; then click on ‘Congressional Representatives Contact List’.

In this chapter we have provided an overview of both the complications surrounding the current uncertainty regarding estate tax laws as well as actions you should consider taking now. In our next chapter, we will delve deeper into the importance of developing your estate plan.

CHAPTER 2

Estate Planning

You Need It—Here’s Why

What Is Estate Planning?

Estate planning is the process of controlling your assets, both during your life and after your death, with three primary objectives in mind. First, you want to ensure that your assets will always be sufficient to provide for you and your family’s lifestyle needs. Second, you want to make certain that your assets go to the people and/or organizations of your choosing. Finally, you want to minimize the amount of taxes, fees, and court interference associated with settling your estate. This definition is broad, as well it should be. A properly designed estate plan encompasses the landscape of financial issues.

Investment Planning

Your investment plan should focus on providing enough assets to meet your retirement needs, the cost of funding your children’s education, and expenses such as financial assistance for elderly parents. It should be designed so that your expected long-term returns will meet your financial objectives. Your risk tolerance should be examined to ensure that your portfolio is not too aggressive for your personality.

Tax Planning

As you’re managing all your finances, you should pay close attention to tax efficiency. Consider the following question. How can you best use tax-deferred or tax-free investment vehicles? Are there ways to accomplish some of your goals by shifting income from yourself to another family member who is in a lower tax bracket? Can you make a gift to a charity in such a way that you receive long-term economic benefits? Is it possible to convert ordinary income, which is taxed at your highest tax bracket, to long-term capital gains?

Protecting Your Family

How long will you live? Of course, you cannot answer this question. Your estate plan should address the possibility of a premature death as well as the possibility that you will live “too long.” Simple solutions to “dying too soon” include the use of life insurance. Issues of “living too long” are often handled through use of trusts, living trusts, a power of attorney, or long-term care insurance.

Protecting Your Assets

Given our litigious society, if you have accumulated significant assets, your estate plan should include an asset protection plan. You can employ simple strategies such as liability insurance or more exotic strategies such as foreign asset protection trusts.

Carrying out Your Personal Goals and Wishes

Do you have a deep desire to protect our environment? Have you considered making gifts to your alma mater? Do you have a relative who may need financial support? Outline all your goals and then design your estate plan to carry them out.

Gathering and Drafting Appropriate Documents