NO
NEW FEDERAL LEGISLATION - GOOD NEWS OR BAD NEWS? |
| We have waited to publish our Newsletter in order to make
sure that we could report to you any last minute federal
estate planning legislative changes. Many were discussed.
The most highly publicized was the proposal for the 10
year phasing out of the Federal Gift and Estate Taxes.
This legislation was actually passed by both houses of
the Republican legislature. However, it turned out to
be a political impossibility; President Clinton vetoed
the bill as he had promised. As a result, there was no
federal tax legislation enacted in 1999 which significantly
affects estate planning. |
| Will
the Federal Gift and Estate Taxes be repealed in the near
future? The "street talk" among the experts is that it
would take both a Republican President and Republican
control of both Houses of Congress before such legislation
would be successful. In response to the attempted repeal,
the Treasury Department issued a statement pointing out
that in 1997, the Estate, Gift and Generation-Skipping
Transfer Taxes generated revenues of $24 billion, for
an administrative cost of $100 million. Therefore, these
taxes are very cost effective, and raise substantial revenue.
So, perhaps the bad news is that there is a significant
revenue reason to maintain these taxes. |
| The
good news is that no federal tax legislation means that
the Treasury Department's "wish list," which would eliminate
various planning techniques, was again ignored by Congress.
As we have previously discussed, the Treasury Department
wants to eliminate non-business discounts when interests
of family limited partnerships or family limited liability
companies are transferred from one generation to another.
Also, Treasury desires to eliminate qualified personal
residence trusts, and the full basis adjustment for community
property. None of these provisions were enacted. Therefore,
the use of these techniques during the upcoming year should
remain viable and will probably be "grandfathered" if
these techniques are completed before future legislation,
if any, is enacted. The Clinton Administration has renewed
this list in its year 2000 budget proposal released this
month. |
A
CHECKLIST FOR EVALUATION OF YOUR ESTATE PLANNING |
| It is important to periodically review your estate planning
and make sure that fundamental implementation tasks have
been accomplished and maintained. It is equally important
to consider the need for changes in the managers of your
estate plan (personal representatives and trustees) and
your dispositive plan. Let's review these matters: |
| 1.
Approximate Equal Division of Assets Between Spouses. This division of assets maximizes your ability to
take advantage of both spouses' applicable credit amounts
(presently $675,000), GST exclusion amounts (presently
$1,010,000), and the progressive tax rates. Sometimes,
business or other reasons override such equalization. |
| 2. Funding of Revocable Trusts. Many of you have
decided to use revocable trusts in order to avoid probate,
deal better with incapacity, obtain privacy, and better
organize your assets. To obtain these and the other benefits
of revocable trusts, it is necessary to transfer all of
your assets to the trusts. |
| 3.
Proper Implementation of Annual Exclusion Gifting. Many of you have formed life insurance trusts, children's
trusts, grandchildren's trusts, perpetual trusts,
or other types of trusts to which you make annual gifts.
Often these trusts are designed so that annual exclusion
gifts ($10,000 or less) to the trusts qualify as gift-tax
free. However, certain steps need to be accomplished in
order to qualify for this tax free gifting. Gift letters
need to be signed, contributions need to be held in the
trust's accounts for 45 days, and notice letters need
to be signed by beneficiaries. |
| 4.
Life Insurance and Life Insurance Trusts. The best
way to keep life insurance proceeds from being taxed is
to have the policies owned by an irrevocable life insurance
trust. Do you have policies which have not been transferred
to such a trust? Ownership of policies by your spouse
or corporation will generally not avoid the proceeds from
being taxed. |
| 5.
Managerial Changes. Have you reviewed your choices
of personal representatives, trustees, and guardians?
Should there be changes? |
| 6.
Dispositive Changes. Have you reviewed your dispositive
plan for your children and grandchildren? Is it still
appropriate? Have you considered using the new perpetual
trust approach which has proven to be very popular? |
| 7.
Dealing With Incapacity. If you are using wills as
your primary estate planning vehicle, your durable powers
of attorney should be kept "fresh." This means they should
be renewed approximately every two years. |
| 8.
Living Wills and Health Care Proxies. Many people
desire to indicate their intention regarding their health
care if, in the future, they suffer from a terminal illness. |
| 9.
IRA and Qualified Plan Interests. These interests
are often very significant family assets. It is important
to carefully plan who should be the "designated beneficiaries"
of these interests. This choice will determine how long
the assets can grow tax-free before having to be distributed.
Various "designated beneficiary" choices need to be analyzed:
surviving spouse, bypass trust, marital trust, children,
grandchildren, or charities. |
| 10.
Gift Tax Returns. Many of our clients have used estate
planning techniques which have produced gifts greater
than annual exclusion amounts ($10,000 per donee). This
gifting requires the filing of appropriate federal gift
tax returns by April 15th of the following year. Such
filing satisfies your reporting requirements, and also,
if done appropriately, begins the three year statue of
limitations period during which the IRS may challenge
the value of the gift. If you have done such gifting,
have you directed that such returns be prepared and filed? |
| 11.
Generation-Skipping Transfer Tax Exemption Allocation. The Federal GST Tax applies when you create trusts or
make gifts which skip a generation. For example, gifts
or trusts which you make for the benefit for your grandchildren
or great-grandchildren. Each person may exempt such gifts
from taxation up to a total amount of $1,010,000. However,
in order to accomplish such exemption, it is often necessary
to file a Federal Gift Tax return which expressly allocates
a portion of your exemption amount to the gift or trust.
If you have made such gifts or created such trusts, have
you directed that Federal Gift Tax returns be prepared
and GST Exemption be allocated? |
| Our
staff would be happy to review with you the status of
your estate planning in regard to the above-listed matters,
and any other subjects. |
ESTATE
PLANNING TECHNIQUES WHICH YOU SHOULD CONSIDER |
| The
federal transfer taxes (gift, estate, and generation-skipping
taxes) can be minimized by good planning. Conversely,
a lack of planning is penalized severely with additional
unnecessary taxes. A variety of planning techniques are
available. It may be time for you to add necessary techniques
to your family's estate plan. The following should be
considered: |
| 1.
Annual Exclusion Gifting. Each person may gift up
to $10,000 every year to as many persons as the donor
desires. In addition, these gifts may be made to various
kinds of trusts, if the trusts are appropriately drafted.
Many of the techniques described below are for the implementation
of annual exclusion gifting. |
| 2.
Applicable Credit Gifting. In addition to the annual
exclusion gifting, each person may transfer an amount
protected by the applicable credit over the person's lifetime
or at the person's death. For the year 2000, the applicable
credit amount is $675,000. There is a major advantage
to using this credit during your lifetime, rather than
waiting until you die. If you gift amounts during your
lifetime, then the growth of these amounts will not be
included in your estate and taxed at your death. This
growth may be very substantial. Many of the techniques
described below may be used for the implementation of
applicable credit gifting. |
| 3.
Family Limited Liability Companies. These entities
are used for creditor protection and discounted gifting,
and the grantor may retain control. These entities are
used for both annual exclusion gifting and applicable
credit gifting. |
| 4.
Children's Trusts and Grandchildren's Trusts. These
are popular vehicles for annual exclusion gifting and
applicable credit gifting. |
| 5.
Qualified Personal Residence Trusts. These trusts
are used for leveraged gifting of up to three family residences
while retaining the use of such residences for the period
you desire. Gifts to these trusts use a portion of your
applicable credit amount. |
| 6.
Grantor Retained Income Trusts. This type of trust
may be used for leveraged gifting of income producing
property to nieces and nephews and non-family members.
Gifts to these trusts use a portion of your applicable
credit amount. |
| 7.
A Perpetual Trust Plan. This new popular dispositive
plan provides creditor protection for your children, grandchildren,
and descendants, while avoiding future gift, estate, and
GST taxes on exempt assets. This plan provides your beneficiaries
with flexibility and substantial control. Perpetual
trusts are usually created during your lifetime. You
may make lifetime annual exclusion gifts and applicable
credit gifts to the trusts. Then at your death, all or
a portion of your remaining assets pourover to the perpetual
trust. |
| 8.
Alaska's New Self-Settled Spendthrift Trust. These
new trusts were authorized by the Alaska legislature beginning
in 1997. They are designed to provide both creditor protection
and the ability for the donor to create a trust, contribute
assets to the trust, be a discretionary beneficiary, and
yet not have the assets included and taxed in the donor's
estate when the donor dies. Both annual exclusion gifts
and applicable credit gifts may be made to such trusts. |
| 9.
Electing Alaska Community Property. Through the use
of a community property trust or a joint revocable trust,
you can avoid unnecessary income taxes when property is
sold after the death of the first spouse. |
| 10.
Qualified Family Owned Business Interests. If your
family owns more than 50% of a business entity which will
be continued after your death by family members, then
you may qualify for an additional estate tax deduction.
In the year 2000, this additional deduction may be as
large as $625,000. If you think you may qualify for this
deduction, then it is important that certain additional
provisions be added to your wills or revocable trusts. |
| 11.
Buy-Sell Agreements. Often family members or the family
and unrelated persons will own business or investment
entities, such as corporations, partnerships, or limited
liability companies. Usually, it is very desirable to
have buy-sell agreements which limit the transfer of these
interests, and provide for fair and reasonable purchases
of interests upon specific events, such as death, incapacity,
insolvency, divorce, and similar events. The existence
of a well written buy-sell agreement will often avoid
lengthy and costly litigation. |
| 12.
Estate Freeze Techniques. Various techniques are available
to "freeze" the value of family business interests which
you own, so that most of the growth of these interests
goes to the next generation. |
| 13.
Charitable Giving. The Federal Gift and Estate Taxes
both provide for a 100% deduction for charitable contributions.
In addition, charitable contributions during your lifetime
will often qualify for a significant federal income tax
deduction. There are various methods for accomplishing
these contributions. |
- Outright Contributions to the charity involved.
- Charitable
Remainder Trusts. A method for you to obtain a larger
amount of annual income from the sale of appreciated
assets. For example, you contribute appreciated assets
(e.g., stock) to this tax-exempt trust. The trust
sells the stock, and then pays you income for life,
with the remainder going to the charity of your choice.
- Charitable
Lead Trusts. A method to transfer significant assets
to your children or grandchildren for a very small
gift amount, by first providing for annual distributions
to charities for a period of time.
- Donor Advised Funds. Your own "private foundation,"
without all of the administrative technicalities and
expenses. This popular technique allows you to create
a family fund at a public charity. Your family determines
the annual distributions to be made from the fund
to the charities which you desire to support. (See
the discussion of the Alaska Community Foundation,
below).
|
| We
are available to discuss any of the above estate planning
approaches with you. When you so desire, our staff will
assist you in implementing new appropriate techniques. |
GIFTING
TO QUALIFIED STATE TUITION PROGRAMS |
| This
is an excellent method for an older generation to set
aside funds for their children's or grandchildren's education.
The bottom line of this approach is that it is a way to
make five annual exclusion gifts (5 x $10,000) for education
of a designated beneficiary (e.g., a grandchild) right
now (instead of over five years). The funds will grow
tax-free, and will be excluded from your gross estate
if you live for a period of five years. When the funds
are distributed for the education expenses of the designated
beneficiary, the principal is income tax free, and the
income portion will be taxed to the designated beneficiary,
who will probably be in a very low income tax bracket.
Pending legislation would even eliminate this income tax
liability for the beneficiary. |
| To
take advantage of this "up-front annual exclusion gifting"
technique, you must use a Qualified State Tuition Program.
Alaska has pending legislation to enact such a program. |
THE
ALASKA COMMUNITY FOUNDATION |
| The
Purpose of a Community Foundation. The Alaska Community
Foundation is a private nonprofit organization which is
tax exempt under §501(c)(3) of the Internal Revenue Code.
Its mission is to meet the Alaska community's charitable
needs by providing a vehicle for many different donors
to exercise their varied charitable interests at minimum
costs and with maximum convenience. Funds which you create
with the Community Foundation do not require separate
tax-exempt status; they benefit from the umbrella tax-exempt
status given to the Community Foundation by the Internal
Revenue Service. Gifts to the Community Foundation may
be in the form of cash, publicly-traded securities, closely-held
stock, real property, and personal property. They may
be conveyed, during your lifetime as outright gifts, or
upon your death through your estate planning. There are
no set-up costs to creating a fund with the Alaska Community
Foundation. Once a fund is established, however, an annual
administrative fee is assessed. This small administrative
fee is used to offset the costs of administering the funds.
Any excess amounts are granted back to the community by
the Foundation. |
| The
Alaska Community Foundation is a highly cost-effective,
simplified alternative to creating an independent private
foundation or charitable trust. The Alaska Community Foundation
is free of the costs and regulations imposed by the IRS
on private foundations. Further, the Community Foundation
is treated as a public charity, and therefore offers the
maximum tax deductions for charitable gifts. |
| Donors
may choose the types of funds which they desire to create
with the Community Foundation: |
- Unrestricted
Fund. This type of fund allows the Alaska Community
Foundation to allocate the donor's gift to support
the unmet or future charitable needs of the Alaska
community.
- Field
of Interest Fund. Donors who create a field of
interest fund name the cause or issue which they desire
to support.
- Donor
Advised Fund. Your family annually advises the
Alaska Community Foundation about how distributions
should be made. While ultimate authority for such
distributions must remain with the Community Foundation's
Board, it takes the family's recommendations very
seriously.
- Scholarship
Funds. These are a rapidly growing and popular
segment of many community foundations. Donors may
design the type of fund they desire.
- Designated Funds. Some donors may wish to benefit
certain specific charities. They may have more than
one charity that they wish to permanently benefit,
or they may want to ensure the preservation of an
endowment fund.
|
| Some
donors may wish to use various estate planning techniques
which will combine benefits to their family with charitable
giving. These techniques include charitable remainder
trusts, charitable lead trusts, gift annuities, and others. |
| The
Alaska Community Foundation is Now Operating. A group
of Alaskans have donated their time for the past several
years to form the Alaska Community Foundation. All of
the technical organizational work and filings have been
accomplished. The Foundation is a nonprofit corporation,
with IRS tax exempt status. Very recently, the foundation
received a grant from the David and Lucille Packard Foundation
for the year 2000. Therefore, the Alaska Community Foundation
is now ready to assist you in the long term charitable
gift giving which you desire. You may contact the foundation
at: |
| Alaska
Community Foundation |
| Attn:
Tristan Fackler, Executive Administrator |
| 700 G Street |
| P.O.
Box 100360, ATO 1950 |
| Anchorage,
Alaska 99501 |
| Tel:
(907) 265-6044 Fax: (907) 265-6122 |
| EndowAK@pobox.alaska.net |
|
| We
hope the above information is helpful to you. We remain
available to help you maintain your estate plan and to
add appropriate new techniques when you so desire. If
you would like to meet with one of our staff to discuss
any of the above subjects, please call. |
