© 2010 Frederick J. Caspar
2010/2011 INCOME TAX PLANNING;
BASIC ESTATE PLANNING
ANDBEYOND Dinsmore & Shohl LLPFrederick J. Caspar, J.D.
10 Courthouse Plaza, S.W., Suite 1100Dayton, Ohio 45402
(513) [email protected]
November 11, 2010
3
ROTH IRA CONVERSIONS Roth Conversion (previously 100,000 AGI limit)
• Pay taxes in 2010, or• Spread income equally in 2011 and 2012
○ Election not due until 2010 tax return filed.
4
SMALL BUSINESS JOBS AND CREDIT ACT (9/2010)• Section 179 Deduction for Equipment
○ Limit increased from $250,000 to $500,000 in 2010 and 2011.
○ Phase-out starts at $2 Million of qualified property vs. $800,000 previously.
50% Bonus Depreciation Extended to 2010 Self-employed taxpayers able to deduct health
insurance premiums from earned income in 2010.
5
HEALTH REFORM ACT (3/2010) In 2010 forward, sliding scale tax credit for
qualified small employers to offset employer health insurance cost.• See calculation at www.NFIB.com/creditcalculator
In 2013 forward:• Additional tax of 0.9% on earned income over $200,000/$250,000 for single/joint taxpayers.• Additional tax of 3.8% on unearned income to the extent modified AGI exceeds $200,000/$250,000.
In 2018 forward: 40% excise tax on health insurance premiums in excess of $10,800/$27,500 for individual/family coverage
6
INCOME TAX CHANGES2010 Joint Tax Rates
$0 to $16,750 10% of amount over $016,750 to 68,000 $1,675.00 + 15% of amount over $16,75068,000 to 137,300 $9,362.50 + 25% of amount over 68,000137,300 to 209,250 $26,687.50 + 28% of amount over $137,300209,250 to 373,650 $46,833.50 + 33% of amount over 209,250Over 373,650 $101,085.50 + 35% of amount over 373,650
7
Expected 2011 Tax RatesIf taxable income
Is over But not over The tax is:$0 $60,699 15% of the amount over $0$60,699 $146,660 $9,104.80 plus 28% of the amount over $60,699$146,660 $223,485 $33,173.86 plus 31% of the amount over $146,660$223,485 $399,144 $56,989.60 plus 36% of the amount over $223,485$399,144 unlimited $120,226.94 plus 39.6% of the amount over
$399,144
8
Simple Example Married couple has the $100k AGI, 4
exemptions & no deductions. What is their tax for each year?
2010 2011
Taxable Income $74,000 $75,200
Tax $10,863 $13,451
Effective Average Tax Rate
10.86% 13.45%
Marginal Bracket 25% 28%
9
Example with Unearned Income Married couple has the $400k AGI, $300k dividend,
$100k ordinary income, 4 exemptions & no deductions.
What is their tax for each year?
2010 2011
Taxable Income $374,000 $390,200
Tax $ 55,863 $118,043
Effective Average Tax Rate
13.97% 29.5%
Marginal Bracket 35% 40%
10
To Net $1After Federal Income Taxes
Capital Gains Max. Rate Gross Increase
2010 15.0% $ 1.18
2011-2012 20.0% $ 1.25 6%
2013 & later (HI tax)
23.8% $ 1.31 11%
Dividends Max. Rate Gross Increase
2010 15.0% $ 1.18
2011-2012 39.6% $ 1.66 40%
2013 & later (HI tax)
43.4% $ 1.77 50%
12
Will 2010 Rates be Extended If not
• Roth conversion in 2010.• Trigger capital gains/buy back stocks if desired.
○ If capital loss carry-forwards would offset, no benefit.• Avoid taking capital losses until 2011.• Sell property on installment basis.
○ Have until as late as 10/15/11 to decide whether to report in 2010 or 2011.
• Should expenditures be capitalized and not expended.○ Sections 59(e), 174, 263, 266
• Consider avoiding tax free exchanges/rollovers.• Pay bonuses after March 15, 2011.
○ Employees may want to accelerate bonuses.• Avoid bonus depreciation/use slower depreciation.• Accelerate 15% C corporation dividends into 2010.
14
ESTATE TAX RATE CHANGES
Year Estate Tax Exemption Top Estate Tax
2009 $3,500,000 45%
2010 Estate tax repealed 0%
2011 and beyond $1,000,000 55%
15
Federal Estate Tax Rate Schedule for 2011 and Beyond.
Taxable amount over
Taxable amount not over Marginal tax rate (percent)
1,000,000 1,250,000 41
1,250,000 1,500,000 43
1,500,000 2,000,000 45
2,000,000 2,500,000 49
2,500,000 3,000,000 53
3,000,000 -- 55
10,000,000 17,184,000 60
17
THE NEED FOR ESTATE PLANNING NON-FINANCIAL GOALS
• Give what you want.• To whom you want.• When and in the manner in which you want.
FINANCIAL GOALS• At the least possible tax cost, consistent with
other goals.• With needed liquidity to allow for
implementation of non-financial goals.
18
SOME RESULTS OF BAD PLANNING Allow the State to decide who is entitled to
your assets, and when. Significantly and unnecessarily reduce
family wealth. Jeopardize family business. Jeopardize the financial and mental health
of your beneficiaries.
19
SOME NON-FINANCIAL DECISIONS GUARDIAN
• For minor children• For you• Successor
EXECUTOR• Role• Fees
TRUSTEE• For children
○ Special needs trust• For parents, or other family members• Asset protection for beneficiaries• Business transition
20
SOME NON-FINANCIAL DECISIONS (cont.) AVOIDANCE OF PROBATE—ADVANTAGES OF FUNDING A LIVING
TRUST• Probate Administration with respect to assets in trust is avoided.
○ Court fees saved○ Court delays avoided○ Executor and attorney fees saved○ Especially important to avoid multiple probates if property is
owned in other states• Confidentiality.
○ Estate, its value, and identity of beneficiaries is not a matter of public record
WHAT A LIVING TRUST WILL NOT DO• Save estate taxes• Protect assets from creditors during life
OTHER WAYS TO AVOID PROBATE• Transfer/payable on death• Beneficiary designation
21
SOME NON-FINANCIAL DECISIONS (cont.) DURABLE POWERS OF ATTORNEY
• Name Attorney-in-Fact/Successor• Name Guardian of you/children
HEALTH CARE POWERS/LIVING WILLS• Allows you to make your own choice• Organ Donation• DNR Orders
22
SOME NON-FINANCIAL DECISIONS (cont.) LEAVE ROADMAP
• Consolidate assets• Consolidate papers• Leave financial statement• Leave advisor information
23
SOME FINANCIAL OBJECTIVES PRENUPTUAL
• Family Partnership/Trusts can also maintain separate property nature of assets
LONGTERM CARE/MEDICAID• Insurance• Asset planning
GIFTING PROGRAMS• Gift and estate taxes are here to stay• Annual exclusion• Section 529 plans• Custodian accounts• “Formal” trusts• Can reduce income taxes
MINIMIZE ESTATE TAXES
24
ESTATE TAX SCHEDULE 2011 Federal Estate Tax Rate Schedule for 2011 and Beyond
Taxable amount over
Taxable amount not over Marginal tax rate (percent)
1,000,000 1,250,000 41
1,250,000 1,500,000 43
1,500,000 2,000,000 45
2,000,000 2,500,000 49
2,500,000 3,000,000 53
3,000,000 -- 55
10,000,000 17,184,000 60
25
CASE STUDY ONE VALUE OF ESTATE IS NOT EXPECTED TO EXCEED
EXCLUSION AMOUNT• Estate taxes not a consideration.
○ Focus on non-financial goals○ Note Ohio estate tax (7%) on estates over $338,000
− Spousal exemption− Life insurance designation− Lifetime gifts
• Confirm no “hidden” assets.○ Death benefit of life insurance○ Asset appreciation○ Retirement accounts
• “Joint Trust” vs. separate living trusts• Opportunities for Income Tax Planning
○ Lifetime gifts○ Charitable gifts
26
CASE STUDY ONE (CONT.) GIFTS OF APPRECIATED STOCK OR REAL ESTATE
• By avoiding capital gains tax, a $1,000 contribution made this way can cost as little as $450.
Contribution $1,000Less capital gain tax avoided (20% x 1,000) (200)Less tax savings to donor from deduction (1,000 x 35%) (350)Net Cost to Donor $ 450
CHARITABLE BEQUESTS
• A charitable bequest is a gift by Will (or trust) to a charity. If the gift is so-called IRD (Income in Respect of a Decedent), such as an IRA or a 401(k) benefit, it reduces estate taxes and income taxes. An IRA or 401(k) benefit is subject to both estate and income taxes at death of up to 68 percent; naming a charity as a beneficiary avoids both of these taxes.
• Note Section 691(c) income tax deduction if there is estate tax on IRD.
27
CASE STUDY TWO VALUE OF ESTATE EXCEEDS EXCLUSION AMOUNT FOR
ONE SPOUSE, BUT NOT FOR BOTH SPOUSES(Assumes $1,000,000 Exclusion per spouse)
Residence $ 300,000Investments 700,000 (including retirement accounts)Family Business/Rental Real Estate 500,000Life Insurance on Mr. Brown 500,000
TOTAL VALUE OF ESTATE $2,000,000
28
CASE STUDY TWO (cont.)Mr. Brown’s Estate
$2,000,000
Mrs. Brown’s Estate
$435,000 $1,565,000
IRS John, Sue and Debbie
29
ESTATE TAX PLANNING WITH CREDIT SHELTER (“B”) TRUST
Mr. Brown’s Estate
$1,000,000 $1,000,000
On Mrs. Brown’s Death
$0 $2,000,000
IRS John, Sue and Debbie
To Mrs. Brown's "A” Trust• Distributable to Mrs. Brown without restriction
To Mrs. Brown’s “B” Trust• Net income to Mrs. Brown• Discretion in Trustee on principal to Mrs. Brown for health, maintenance and support• Up to 5% of principal each year at Mrs. Brown’s election for any reason• Mrs. Brown is Trustee
30
TITLING OF ASSETSSplit between spouses
○ Do not know who will pass first
Adjust beneficiary/joint and survivor designations
Asset protection from acts of one spouse
32
CASE STUDY THREE (cont.) Add Insurance Trust
Mr. Brown’s Estate
$2,000,000 Premiums Funded
$1,000,000 $1,000,000 Insurance Trust
To Mrs. Brown’s “A” Trust
• Distributable to Mrs. Brown without restriction.
To Mrs. Brown’s “B” Trust and Insurance Trust
• Net Income to Mrs. Brown. • Discretion in Trustee on principal to Mrs. Brown for health, maintenance and support.• Up to 5% of principal each year at Mrs. Brown’s election for any reason.• Mrs. Brown is Trustee.
$500,000
On Mrs. Brown’s Death
$0 $2,500,000
IRS John, Sue & Debbie
33
CASE STUDY THREE (cont.) Add Annual GiftsYear Annual Gifts* Value in Year 10 @ 6%1 $78,000 $ 139,6802 $78,000 131,7803 $78,000 124,3204 $78,000 117,2805 $78,000 110,6406 $78,000 104,3807 $78,000 98,4708 $78,000 92,9009 $78,000 87,64010 $78,000 82,680
Total Value Transferred $ 1,089,770Estate Tax Rate x55%Transfer Tax Savings through Year 10 $ 599,375
* Assumes three donees.
34
ADD NON-VOTING COMMON STOCK/FAMILY LIMITED PARTNERSHIP, LLC
Mrs. Brown(or Living Trust)
Mrs. Brown(or Living Trust)
Outright or to Trusts for Children
Voting Stock/
General Partner
Non-Voting Stock/Limited Partner
Non-Voting Stock/Limited Partner
Voting Stock/General Partner
John Sue Debbie
BROWN FAMILY BUSINESS OR LIMITED PARTNERSHIP
Owns:• Family Business, or rental Real Estate/InvestmentsAllows For:• Control separate from economic ownership• Asset protection• Discounted gifting
35
LEVERAGED ANNUAL GIFTS
YearAnnual Gift of Non-Voting Stock or
Limited Partner InterestsPost Discount Annual Gifts*
Value in Year 10 @ 7%
1 $130,000 $78,000 $232,800
2 $130,000 $78,000 219,630
3 $130,000 $78,000 207,200
4 $130,000 $78,000 195,470
5 $130,000 $78,000 184,400
6 $130,000 $78,000 173,970
7 $130,000 $78,000 164,100
8 $130,000 $78,000 154,800
9 $130,000 $78,000 146,000
10 $130,000 $78,000 137,800
Total Value Transferred $1,816,170
Estate Tax Rate x55%
Transfer Tax Savings through Year 10 $ 998,894
Additional Tax Savings as Compared to Non-Leveraged Gifts $ 399,519
* Assumes three donees; 40% discount.
36
LEVERAGED ANNUAL GIFTS (cont.) ADDITIONAL BENEFITS OF FAMILY ENTITY
STRUCTURE• Asset protection• To hold and manage family assets• To provide centralized management• To encourage children to become knowledgeable in family
investment activities• To provide investment diversification to donees• To provide a degree of asset protection from divorce or
creditor judgments for non-managing/non-voting members• To provide opportunity to transfer wealth to future generations
while allowing the donor to retain managerial control• To provide an administratively easier way to transfer a
“basket” of assets• To avoid fractionalizing management and control of
undividable property