planning after atra: the cpa’s guide to after atra: the cpa’s guide to financial and estate...

Planning After ATRA: The CPA’s Guide to

Financial and Estate Planning

Essential Estate Planning Considerations

Presented by:

Steven G. Siegel, JD, LLM

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Personal Financial Planning Section

Introduction

About the PFP Section & PFS Credential

• The AICPA PFP Section provides information,

resources, advocacy and guidance for CPAs who

specialize in providing estate, tax, retirement, risk

management and investment planning advice to

individuals and their closely held entities

• The CPA/Personal Financial Specialist (PFS)

credential distinguishes CPAs as subject-matter

experts who have demonstrated their financial

planning knowledge through experience, education

and testing

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Introduction

Steve G. Siegel, JD, LLM

The Siegel Group

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Agenda

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Federal, estate, gift, GST, and income taxes after ATRA

Estate and Gift Tax Issues for Same-Sex Married Couples

New Medicare Tax Thresholds and Income Tax Rules of ATRA

relate directly to Estate, Gift, and Trust Planning

Importance of Grantor Trusts in 2013 Income Tax Planning

Roadmap for the Grantor Trust Rules

Portability

Formula Clauses in Wills and Trusts

General Estate Planning Opportunities Suggested by ATRA

Flexible Planning for 2013 and Beyond

Estate Freezing Transactions

Multi-Generation-Skipping Transfer Tax Planning

2014 Fiscal Year Budget Proposals


Federal Estate, Gift,

GST, and Income Tax

after ATRA

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Estate, Gift, Generation-Skipping Taxes

ATRA permanently provides for a maximum federal

estate tax rate of 40 percent with an annually

inflation-adjusted $5 million exclusion for estate,

gift, and generation-skipping taxes applicable to

decedents dying after December 31, 2011.

For 2013, the inflation-adjusted exemption amount is

$5,250,000. This translates into a unified credit of

$2,045,800 for 2013.

ATRA extends a number of important GST tax-

related provisions that were scheduled to expire

after 2012.

6


Estate and Gift Taxation Issues for Same-Sex

Married Couples

In Windsor, The Supreme Court declared a distinction

between legal marriage under state law and legal

marriage under federal law unconstitutional, and found

that same-sex persons legally married by their state of

residence were entitled to all of the federal laws

regarding married persons.

Code Sec. 2056 provides an unlimited deduction from the

gross estate for property passing from a decedent to a

surviving spouse.

Many same-sex married couples should revisit their

estate plans to make certain that interests passing to the

other spouse qualify for the marital deduction and other

tax benefits.

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Estate and Gift Taxation Issues for Same-Sex

Married Couples

ATRA extended permanently the concept of

portability, which generally allows the estate of a

surviving spouse to utilize the unused portion of the

estate tax applicable exclusion amount of his or her

last predeceased spouse.

Same-sex married couples can now presumably

transfer assets between themselves with no concern

for lifetime gift tax consequences, as was previously

the concern under DOMA.

8


Medicare Surtax and Income Tax Rules

Wage and self-employment income in excess of

$250,000 (married couples filing jointly), $200,000

(heads of household and single filers) or $125,000

(married couples filing separately) will be subject to

an additional Medicare tax of 0.9%.

Individuals will also be subject to a 3.8% Medicare

tax on the lesser of their net investment income or

the excess of their “modified adjusted gross

income” over the threshold amount ($250,000 for

married couples filing jointly, $200,000 for heads of

household and single filers, or $125,000 for married

persons filing separately).

Thresholds are not indexed for inflation.

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Thresholds for the Phase-Out of Personal

Exemptions and Itemized Deductions

The deduction for personal exemptions will begin to be

phased out at various levels of adjusted gross income

depending on the taxpayer’s filing status.

• $300,000 (married taxpayers filing jointly),

• $275,000 (heads of households),

• $250,000 (single taxpayers) and

$150,000 (married taxpayers filing separately).

The limitation on itemized deductions (known as the

“Pease limitation” named for the Congressman who

introduced this (Rep. Donald Pease (D-OH)) also begins

to apply at the same adjusted gross income thresholds

as noted for the phase-out of the deduction for personal

exemptions.

Will be indexed for inflation after 2013.

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Thresholds for the New 39.6% Tax Rate

Status Threshold

Married filing jointly $450,000

Heads of Households $425,000

Married Filing Separately $225,000

Single Taxpayers: $400,000

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Individual Income Tax Rates

The 10, 15, 25, 28 and 33 percent marginal rates

remain the same after 2012.

The 35 percent income bracket ranges for 2013,

therefore, are:

• $398,350 - $400,000 for single filers

• $398,350 -$425,000 for heads of household

• $398,350 - $450,000 for joint filers, surviving spouses

• $199,175 - $225,000 for married filing separately

Taxpayers who find themselves within the 39.6

percent marginal income tax bracket nevertheless

also benefit from extension of all Bush-era rates

below that level.

C-corps may become more attractive. 12


Income Taxation of Trusts and Estates

Top bracket increases of 39.6%, beginning in 2013 for

taxable income in excess for $11,950.

No 35% bracket for trusts and estates.

Long-term capital gains and qualified dividends reach

20% when the entity has taxable income in excess for

$11,950.

Medicare tax on net investment income begins to impact

trusts and estates with adjusted gross income in excess

of $11,950.

The effective income tax rate on many trusts and estates

will be 43.4% for income such as interest, rent, royalties,

and short-term capital gains, and 23.8% for long-term

capital gains and qualified dividends.

13


Income Taxation of Trusts and Estates

Thresholds are indexed annually for inflation.

Distribution of capital gains may not be a simple

decision.

Retaining assets in a trust for all of the “right”

reasons has become more expensive.

14


Capital Gains/Qualified Dividends Rules

ATRA raises the top rate for capital gains and

dividends to 20%.

For 2013, the maximum rate of tax on the adjusted

net capital gain of an individual is 20% on any

amount of gain that otherwise would be taxed at a

39.6% rate.

All other taxpayers will continue to enjoy a capital

gains and qualified dividends tax at a maximum rate

of 15%.

A zero percent rate will also continue to apply to

capital gains and dividends to the extent income

falls below the top of the 15% income tax bracket.

15


Capital Gains/Qualified Dividends Rules

Installment payments received after 2012 are subject

to the tax rates for the year of the payment, not the

year of the sale.

For planning purposes, consider favoring

installment sales for 2013 and subsequent tax years

as a way to “stretch out” gain recognition.

The higher tax rates for 2013 and later years may

cause taxpayers to consider the use of a like kind

exchange to defer the tax that might otherwise

become due in the event of a sale

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Importance of Grantor Trusts in 2013 Income

Tax Planning

Escape from the highest tax rate bracket on trusts and estates

with the grantor trust rules.

If the grantor retains a power making the grantor taxable on the

income of the trust, all of the applicable thresholds are tested

at the level of the grantor, not at the level of the trust.

If the grantor is willing to bear the income tax burden on the

trust’s income, burden may be imposed at a significantly lower

rate on an individual than allowing it to fall on the trust.

Moreover, by paying the income tax, the grantor is burning off

assets (the tax dollars) that might otherwise have been

included in the grantor’s estate.

• Grantor’s payment of income tax liability is not a gift by the grantor to the

beneficiaries (Rev. Rul. 2004-64).

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Roadmap for the Grantor Trust Rules

Code Section Name

671 Basic Grantor Trust Rules

672 Definitions and Rules

673 Reversionary Interests

674 Power to Control Beneficial Enjoyment

675 Administrative Powers

676 Power to Revoke

677 Income for Benefit of Grantor

678 Person Other Than Grantor Treated as Substantial Owner

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Portability

Made permanent

Allows estate of a decedent who is survived by a spouse

to make a portability election to transfer the decedent’s

unused federal transfer tax exclusion

Creates “fairness” between those people who “plan”

their estate and those who fail to do so

Designed to eliminate the need to many married couples

to retitle assets and the need to force the creation of

complex trusts

No applicability to a decedent who died prior to Jan. 1,

2011

Basic exclusion amount indexed for inflation; DSUE not

indexed for inflation

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Portability

Only applies to the unused exclusion amount of the

last deceased spouse

Election is required (Form 706)

Advantages/disadvantages:

• Simplification

• Retirement plan roll over

• Planning for states with independent death taxes

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Formula Clauses in Wills and Trusts

Make sure clients understand the plan they have.

Potential problem: • Wills and trusts written before 2011 and 2012 were signed when the

federal estate tax exemption was significantly less than $5 million. All

wills and trusts with formula clauses should be reviewed and a

determination made as to what the testator/grantor intended when the

will or trust was written.

Planning in 2013 to address formulas and

beneficiaries • What should we be telling our clients to do in the new planning climate

of 2013?

• Consider the use of “caps” and “ceilings” in conjunction with formula

clauses.

• When was the last time the client checked his or her retirement plan

beneficiary designations?

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General Estate Planning Opportunities

Suggested by ATRA

For most clients, especially those that are married,

an available exclusion of $10,500,000 (increasing

annually) will cover all the gifts they wish to make.

For clients at higher levels of wealth, larger gifts

may be considered, with the gift tax paid at the

“advantageous” 40% rate.

Valuation discounts remain available (Wandry v.

Commissioner)

State gift taxes are generally not an issue

Understand when carryover basis and stepped-up

basis apply (Code Section 1014)

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General Estate Planning Opportunities

Suggested by ATRA

Consider making gifts of low basis and/or dividend-

producing property to persons who are in lower tax

brackets (the 10% and 15% brackets) and who are

not subject to the Kiddie Tax.

Remember that payments of tuition directly to an

education provider and medical expenses directly to

a medical care provider are not considered gifts at

all.

Consider gifts to grandchildren.

Loans to family members

23


Planning for States with Independent Death

Taxes

What planning is appropriate in circumstances

where there may still be a state death tax regardless

of the fact that there may not be a federal estate tax

as a result of the estate falling short of the federal

exemption, but exceeding the state exemption?

Be careful of planning that directs an entire estate to

pass to a credit shelter trust.

Be careful of ignoring the presence of a state death

tax exemption at the first death of a married couple.

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Charitable Giving

Tax-motivated charitable planning for most clients will

not be necessary. That suggests the reduced use of

testamentary charitable bequests and testamentary

charitable lead trusts for most clients.

Give assets to charity that are income in respect of a

decedent (IRD) assets (such as retirement plans or

installment notes).

Charitable remainder trusts (CRTs) will have several

suggested uses.

Use a CRT to receive a gift of appreciated property from

the donor, giving the donor a charitable contribution

deduction. Have the charity sell the property and realize

the gain – which will not be taxed to the charity.

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Charitable Giving

Use a CRT with a variety of family members as the

non-charitable lifetime beneficiaries (children,

grandchildren, etc.).

A CRT can be used in connection with retirement

planning for those persons in a high tax bracket

presently who anticipate being in a lower bracket

when they retire. Here, a planning technique called a

“NIMCRUT” may be suggested.

Consider using a charitable lead annuity trust

(CLAT).

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Strategies by Estate Size

Estates Under $5,250,000, as Indexed

Estates in the $5,250,000 to $10,500,000 Range, as

Indexed

Estates Exceeding the Applicable Exclusion Amount

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Flexible Planning is Essential for 2013 and

Beyond

Dividing and Allocating Assets to Utilize the Federal

Estate Tax Exclusion

A Flexible Planning Suggestion - The Disclaimer

Trust Solution

Another Flexible Planning Suggestion: The

Contingent QTIP Trust Solution or “Clayton” QTIP

Trust

28


Freeze Values at Current Levels for Senior

Generation Clients

Installment Sales

Self-Canceling Installment Note (SCIN)

• The SCIN involves the sale of property in exchange for an

installment note calling for payments at a specified interest rate

over a set period of time, which note payments terminate upon

the death of the seller.

• Since the note, by its terms, is canceled by the noteholder’s

death, the value of the note is excluded from the decedent’s

estate. (Estate of Moss v. Commissioner)

• The termination of a SCIN has potentially adverse income tax

consequences. The unrealized or unreported installment sale

gain must be reported in the year of the seller’s death on the

fiduciary income tax return for the decedent’s estate.

• The SCIN works best if the seller dies soon after the property is

transferred. 29


Freeze Values at Current Levels for Senior

Generation Clients

Sale to an Intentionally Defective Grantor Trust (IDGT)

• The grantor creates a trust for the benefit of family members, and sells

assets to the trust in exchange for a long-term installment note. The

sale is made for fair market value per appraisals, etc., (including

valuation discounts) so that the sale by the grantor to the trust is not

treated as a gift to the trust beneficiaries.

• The trust is drafted to treat the grantor as the owner of the trust for

income tax purposes, but not for estate tax purposes. This is

accomplished by including certain grantor-retained administrative

powers in the trust.

• The trust is thus “defective” for leaving the grantor subject to income

tax, but “intentionally” so, since this was done by design.

• Sale of assets to the trust avoid capital gains tax; note interest is not

subject to income tax.

• Seed money gift requirement

• Have the grantor pay the income tax.

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Grantor Retained Annuity Trusts (GRATs)

Transfer wealth with potentially no gift tax cost.

GRAT is an irrevocable trust to which the grantor

transfers property while retaining the right to receive

annuity interest.

Zero-gift Walton GRAT

• If the value of the trust property appreciates at a rate greater than the

Code Section 7520 rate, the Walton GRAT will be a success.

• Designed to be of short duration with high annual payouts

• Concerns over rising interest rates

Single-property GRAT

• Use several single property GRATs rather than diversified property

GRATs, since the single property GRATs that “succeed” by appreciating

will be beneficial, while the single property GRATs that “fail” to

appreciate will not be harmful.

31


Qualified Personal Residence Trust (QPRT)

Leverage the transfer of a personal residence

Transfer personal residence to a trust in which the

grantor retains the right to use and occupy such

residence for a fixed number of years, with the

remainder interest passing to children or other

beneficiaries.

If the grantor outlives the trust term, the residence is

removed from the grantor’s estate, and all post-

transfer appreciation inures to the benefit of the

remainder beneficiaries. If the grantor dies before

the end of the trust term, the residence is included

in the grantor’s estate at its fair market value at

death.

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Qualified Personal Residence Trust

Gift calculation results in heavy weighting of the client’s

retained interest and a generally favorable gift tax result.

If the residence is sold during the QPRT term, and if it

has been the client’s principal residence, it is eligible for

the capital gain.

Tenancy in common discount

• Married persons owning a residence jointly should first transfer the

residence to themselves as tenants in common, each with an undivided

50% interest in the property, then have each spouse create his or her

own QPRT.

Interest rate environment

• While the QPRT is less attractive in a low interest rate environment, the

opportunity to combine declining property values and the favorable

calculation of the QPRT remainder interest, especially for someone

over age 65, still recommends the QPRT technique.

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Common Law GRIT

Code Section 2702 does not apply to all transaction.

If an individual does not have children and wishes to

benefit relatives who are nieces and nephews- or

persons who are “significant others”, the individual

is outside of Code Section 2702 and the tax

advantages of a GRIT are available.

Nieces and nephews (as well as cousins and other

collateral relatives and persons not considered

“related” in the eyes of the federal law) are not

covered by the term “members of the family.

No requirement of “qualified interest”.

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Dynasty Trusts

Multi-generation-skipping transfer tax planning

GST tax exemption may be used to create a Dynasty

Trust.

Provides for life estates in property for every

generation of beneficiaries

Structured to last for the maximum period of time

permitted by state law

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2014 Fiscal Year Budget Proposals

Eliminate the traditional estate tax benefits

associated with installment sales to grantor trusts

Limit the life of a Dynasty Trust to 90 years

Restoring the estate, gift and generation-skipping

transfer tax rates and exclusion amounts to their

2009 levels beginning in 2018

Mandatory five-year rule for distribution of

retirement plan assets to non-spouse beneficiaries

36


Questions?

37


Proposed Statement on Standards in PFP

Services

Exposure draft available for public comment until

Sept. 9

Objective: to provide process-based guidance to

AICPA members who provide PFP services when

planning, developing, presenting, implementing,

monitoring, and updating a financial plan to protect

both the public and the CPA planner

Applies to the delivery of PFP services, not services

covered by other AICPA standards

www.aicpa.org/sspfp

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http://www.aicpa.org/InterestAreas/PersonalFinancialPlanning/Resources/PracticeCenter/ProfessionalResponsibilities/Pages/PFPexposuredraft.aspx


PFP Section Resources (aicpa.org/PFP) The CPA’s Guide to Financial & Estate Planning– Volumes 1-4

Planning After ATRA and the Medicare Surtax Toolkit:

aicpa.org/pfp/proactiveplanning

Forefield Advisor (aicpa.org/pfp/forefield) • Client education and communication tool

• Written by CPAs, attorneys and other subject matter experts.

• More than 3,000 resources covering personal financial planning, including estate, tax, retirement, investment

and risk management planning.

• Keyword search: American Taxpayer Relief Act

AICPA Advanced Personal Financial Planning Conference (cpa2biz.com/PFP) –

January 20-22, 2014 in Las Vegas

• 2-day session (Jan 18-19) for those in earlier stages of PFP

o Implementing PFP Services: Step by Step Plans for Success

For the full calendar of upcoming PFP Section events, visit www.aicpa.org/PFP

and click on CPE & Events.

39

http://www.aicpa.org/InterestAreas/PersonalFinancialPlanning/Resources/EstatePlanning/Pages/GuidetoFinancialandEstatePlanning.aspx

http://www.aicpa.org/pfp/proactiveplanning




http://www.aicpa.org/pfp/forefield




http://www.cpa2biz.com/pfp


Upcoming PFP Section Web seminars Register now for these events:

• More from this series:

- Essential Estate Planning Considerations (August 14, 1:00-2:45p.m.

ET)

- Portability – A Planning Game-Changer – But Not as Simple as It

Appears (September 19, 1:00-2:45p.m. ET)

- Business Succession Planning After the American Tax Relief Act of

2012 (October 31, 1:00-2:45p.m. ET)

- Taxation of Divorce (November 21, 1:00-2:45p.m. ET)

• Managing Your Clients’ Risk Tolerance: A Compliance Chore or a Business

Development Opportunity? (August 20, 4:00-5:00p.m. ET)

• Risk Tolerance Master Class: All the Finer Points about Dealing with Your

Clients’ Risk Tolerance (August 27, 4:00-5:00p.m. ET)

• PFP Power Hour (August 22, 3:00-4:00p.m. ET)

For the full calendar of upcoming PFP Section events, visit aicpa.org/PFP and

click on CPE & Events.

To access the archives, visit aicpa.org/pfp/webseminars.

40

http://www.aicpa.org/PFP

http://www.aicpa.org/pfp/webseminars


CPA/PFS News and Events

PFS Referral Program

• Receive 100% credit to apply toward future CPA/PFS dues by

referring a CPA to become a PFS or sit for the PFS exam

PFS Exam

• Registration open for winter window

• Discounts, sponsorships and volume pricing available

Education Opportunities

• Live 2 ½ day review class – 3 locations in Oct/Nov: OH, AZ, GA

• In-depth courses in estate, retirement, tax, investments,

insurance, and PFP process

• Self-study PFS exam review course

Learn more at aicpa.org/pfp/pfs

41

http://www.aicpa.org/pfp/pfs




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