Chapter 1

Estate Planning

An Overview

Definitions

• Estate Planning• Life Interest versus

• Estate in Fee Simple Absolute• Escheat (to the state)• Intestate • Will (Last Will and Testament)• Codicil• Equitable Apportionment• Residue (Residual) (in a LW&T)

• Predecease (like if I “predecease” my wife)

KNOW THESE TERMS -- not word for word defini-tions but how they work

• Donor

• Donee

• Grantor

Types of Income Taxes

Federal Taxes• Income Tax• Payroll Taxes• Estate Taxes• Gift Taxes• Excise Taxes

State Taxes• Income Tax• Property Tax• Sales Tax• Inheritance Tax• Excise Taxes

Income Tax vs. Estate / Gift Tax

• What is different between the two??

• When we say “transfer tax”, what are we referring to??

• How do the tax rates compare?

Gift Tax versus Estate Tax

• What is the differences between the two?

• What are the lifetime exclusions of each?

• How do the tax rates compare?

• Why is it necessary to apply transfer tax to lifetime gifts instead of just applying the tax at death??

What is the objective of Estate Planning??

What is the objective of Estate Planning??• Accumulation (of wealth)• Conservation (of wealth) • Distribution (of wealth)

What is this man’s Estate Plan??

“Give your kids enough money so they can do anything, but not enough so that they can do nothing”

“It’s hard to teach a new dog old tricks”

Warren Buffet

How do we own property??

• Fee Simple Absolute ….. outright ownership

• Life Estate …… ownership for a period of time …….. temporary

ownership

Under what circumstances might we use a life estate??

What if we die intestate in SC??

1. Spouse and Children Spouse gets everything ….. unless there are children. Then Spouse gets half / children get half.

Ÿ What about the age of the children?Ÿ If children predecease but have children (grandchildren), the

grandchildren step into the shoes of their parents.

2. No spouse or children ……. Goes to your parents.3. No parents ……. Goes to brothers and sisters (or children or

brothers and sisters (nieces and nephews))4. Other relatives5. State of SC

Note: Anti-Lapse Providsion …….. Name a charity if no “relatives”

Besides wealth transfer and financial assets, what other BIG question is dealt with in a LW&T?? hint: children??

Roles of Advisors in Estate Planning

• Attorney• Bank (Trust) Officer• Investment Advisor / Financial

Planner• CPA / Accountant• Insurance Agent

What role does each play??

The following table shows how the gift-tax rate will decrease over the next several years and how it reverts to pre-tax law levels in 2011 with the expiration of the new tax law:

YearApplicableExclusion

Limit

Maximumgift tax rate

2003 $1 million 49%

2004 $1.5 million 48%

2005 $1.5 million 47%

2006 $2 million 46%

2007 $2 million 45%

2008 $2 million 45%

2009 $3.5 million 45%

2010 Repeal of estate tax 35%

2011 $1 million 55%

Column A Column B Column C Column D

Taxable amount over

Taxable amount not over

Tax on amount in Column A

Rate of tax on excess over amt. in Column A - Percent

0 10,000 0 18

10,000 20,000 1,800 20

20,000 40,000 3,800 22

40,000 60,000 8,200 24

60,000 80,000 13,000 26

80,000 100,000 18,200 28

100,000 150,000 23,800 30

150,000 250,000 38,800 32

250,000 500,000 70,800 34

500,000 750,000 155,800 37

750,000 1,000,000 248,300 39

1,000,000 1,250,000 345,800 41

1,250,000 1,500,000 448,300 43

1,500,000 .............. 555,800 45

2,000,000 .............. 780,800 45

2007 Estate and Gift Tax Rates

Personal income taxes: …….. 38%

Social security, Medicare, and unemployment and other retirement taxes: … 32%

Excise, customs, estate, gift, and miscellaneous taxes: …….. 6%

Corporate income taxes: …….. 11%

Borrowing to cover deficit ……… 13%

2005 Tax Revenue ($2.2 Trillion) – US Government

Social security, Medicare and other retirement (see Footnote 1): 37%. Footnote 1: Social security, Medicare, and other retirement: These programs provide income support for the retired and disabled and medical care for the elderly.

Social programs (see Footnote 4): 20%. Footnote 4: Social programs: About 14% of total outlays were for Medicaid, food stamps, temporary assistance for needy families, supplemental security income, and related programs; and the remaining outlays were for health research and public health programs, unemployment compensation, assisted housing, and social services.

National defense, veterans, and foreign affairs (see Footnote 2): 24%. Footnote 2: National defense, veterans, and foreign affairs: About 20% of outlays were to equip, modernize, and pay our armed forces and to fund the Global War on Terrorism and other national defense activities; about 3% were for veterans benefits and services; and about 1% were for international activities, including military and economic assistance to foreign countries and the maintenance of U.S. embassies abroad.

Physical, human, and community development (see Footnote 3): 10%. Footnote 3: Physical, human, and community development: These outlays were for agriculture; natural resources; environment; transportation; aid for elementary and secondary education and direct assistance to college students; job training; deposit insurance, commerce and housing credit, and community development; and space, energy, and general science programs.

Net interest on the debt: 7%

Law enforcement and general government: 2%