Hell has Frozen Over - Estate Planning in light of Estate Tax repeal

1. Andrew H. Hook
Certified Elder Law Attorney
Certified Financial Planner®
Letha S. McDowell
Attorney at Law
Tax Practitioner
Copyright 2010 Oast & Hook, P.C.

2. Hell Has Frozen Over!
Estate Tax Rules Create Uncertainty.
Copyright 2010 Oast & Hook, P.C.

3. 2010
 The year of NO ESTATE TAX
 The year of CARRYOVER BASIS
 The year of UNCERTANITY!
Copyright 2010 Oast & Hook, P.C.

4. History
 2001 Congress passed The Economic Growth and Tax
Relief Reconciliation Act (EGTRRA).
 EGTRRA gradually increased estate and generation
skipping transfer (GST) tax exemption to a maximum of
$3.5 million in 2009.
 Estate and GST tax exemption is the maximum an
individual can pass estate tax free at his or her
death.
 Gift tax exemption remained at $1 million.
 EGTRRA also provided for carryover basis rather than
step up in basis for property passing due to death in
2010.
Copyright 2010 Oast & Hook, P.C.

5. Repeal of the Estate and GST
Tax
 EGTRRA has a “sunset” provision
which means that the estate tax
exemption is to return to 2001 levels
in 2011.
 EGTRRA provides that there is no
estate or GST tax in 2010.
 EGTRRA did not repeal the gift tax in
2010.
Copyright 2010 Oast & Hook, P.C.

6. 2011 Estate Tax
 Exemption - $1,000,000
 Rate – 55% of any assets over $1,000,000
 Annual Gift Tax Exclusion – $13,000
 GST Exclusion - $1,000,000
Example – net estate $1,500,000, tax due =
$275,000
Copyright 2010 Oast & Hook, P.C.

7. Common Sense
 Since EGTRRA, common wisdom has
said that there is no way Congress
can allow no estate tax and carryover
basis in 2010 but reinstate prior law in
2011 and thereafter with a $1 million
exemption.
 Most estate planning documents
drafted based on that assumption.
Copyright 2010 Oast & Hook, P.C.

8. Broken Government
 December 14, 2009, the House of
Representatives passed a bill
extending the $3.5 million dollar
estate tax exemption.
 But the Senate could not quite agree.
So nothing passed in 2009.
 2010 is an election year.
Copyright 2010 Oast & Hook, P.C.

9. Where Are We Today?
 High budget deficits make repeal of the
estate and GST tax unlikely.
 Many professionals think that Congress
may pass a tax bill this year.
 Others believe that in an election year a
tax bill is highly unlikely.
 What the next congress will decide to
do is uncertain at best.
Copyright 2010 Oast & Hook, P.C.

10. What is the Problem?
 Uncertainty in planning for the future.
 Estate planning documents based on “formula
gifts.”
 Individuals dying in 2010 with the formula gift
may not get the result they expected.
 Individuals who planned with the expectation of
a $3.5 million exemption.
 Over three times as many taxpayers will be
affected by these tax rules.
 The tax rules provide the worst result for
individuals with between $1.3 million and $3.5
million in assets.
Copyright 2010 Oast & Hook, P.C.

11. Carryover Basis
 Carryover basis problem:
 Lack of basis information on assets;
 May cause additional tax to beneficiaries; and
 May cause problems with family members, depending
on who is making the election.
 No basis adjustments for life estates.
 Uncertainty of basis adjustments for irrevocable trusts.
 Taxpayer (or his Executor) has the burden of proof for basis
information.
Copyright 2010 Oast & Hook, P.C.

12. What Should You Do Today?
 Update your financial statement.
 Review and “patch” existing wills and
trusts.
 Carryover basis – Determine basis in
all assets.
Copyright 2010 Oast & Hook, P.C.

13. How Should You Plan in a
Period of Uncertainty?
 Estate Tax Planning:
 For estates below $1 million, it is probably
unnecessary.
 For estates between $1 million and $3.5 million, use
disclaimer planning.
 For estates above $3.5 million, use marital deduction
planning formulas, irrevocable life insurance trusts
(ILITs), and discount planning.
 Be prepared for additional change:
 Discount planning.
 Crummey withdrawal rights.
 Include flexibility in your documents.
 Meet regularly with your estate planner.
Copyright 2010 Oast & Hook, P.C.

14. Do Not Let the Tax Tail Wag the
Dog!
 Plan for the management of your affairs if
you become incapacitated.
 Plan for the payment of long-term care
costs.
 Plan to protect your beneficiary’s
inheritance.
 Plan to avoid conflicts between spouses
and children by prior marriages.
Copyright 2010 Oast & Hook, P.C.

15. Oast & Hook, P.C.
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295 Bendix Road, Suite 170
Virginia Beach, Virginia 23452
TowneBank Building
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Portsmouth, Virginia 23704
101 East Elizabeth Street
Elizabeth City, North Carolina 27909
757-399-7506 252-722-2890
www.oasthook.com
Copyright 2010 Oast & Hook, P.C.