JK lassers new rules for estate, retirement, and tax planning

Winston Busby, Esq., LLM Stewart Welch III, Accredited Estate Planner, Certified Financial Planner®Introduction CHAPTER 1: Tax Cuts and Jobs Act of 2017 Ordinary Income Tax Rates Capital

Table of Contents

Cover

Acknowledgments

J Winston Busby, Esq., LLM

Stewart Welch III, Accredited Estate Planner, Certified Financial Planner®Introduction

CHAPTER 1: Tax Cuts and Jobs Act of 2017

Ordinary Income Tax Rates

Capital Gains Tax Rates and Qualified Dividends

Educational Provisions

Business and Corporate Tax Relief

Estate, Gift, and Generation Skipping Transfers

Dangers of Relying on Portability

Limitations on Deductions

CHAPTER 2: Estate Planning

What Is Estate Planning?

The Benefits of Estate Planning

The Nightmares of Poor Planning

The Myths of Estate Planning

Guidelines for Successful Estate Planning

CHAPTER 3: The Estate Tax System

Determining Your Estate Net Worth

Your Estate Tax Picture

Your Future Estate

Overview of Estate Planning Strategies

CHAPTER 4: Investment Strategies for Maximizing Estate Growth

Growth Strategy with a Safety Net®

Prioritizing Your Investment Dollars

Retirement Planning: Choosing the Best Investment Environments

Roth Conversions

Some Final Thoughts on Investing

CHAPTER 5: Retirement Planning: Living Your Dream

Your Retirement Requirements

Best Retirement Strategies

Reverse Mortgages

Social Security Strategies

Customizing Your Health Care Plan

CHAPTER 6: You Don't Have a Will? Big Trouble!

Property Transfers at Death

Transfers via Probate

Direct Transfers by Title

Other Methods of Property Ownership

Choosing the Best Methods of Ownership

Setting Estate Planning Goals

CHAPTER 7: Where There's a Will, There's Your Way!

What Is a Will?

Types of Wills

Advantages and Disadvantages of Wills

Intelligent Decisions Concerning Your Will's Basic ProvisionsExecuting Your Will

Where to Store Your Will

Other Important Documents

Working with Your Attorney

When to Review Your Estate Plan

CHAPTER 8: Using Trusts in Your Estate Plan

The Credit Shelter Trust Will

CHAPTER 9: Understanding the Living Trust

Advantages of Living Trusts

Disadvantages of Living Trusts

How a Living Trust Operates

Transferring Property into Your Living Trust

Types of Property Likely to Be Transferred

Living Trust Myths

Transacting Business with Your Trust

CHAPTER 10: Using Insurance in Your Estate Plan

Life Insurance

Using Life Insurance to Replace Income

How Much Life Insurance Do You Need?

What Type of Life Insurance Is Best for You?

Insurance on a Homemaker

Insurance on Adult Children

How to Get the Best Deal on Term Life Insurance

What Type of Life Insurance Is Best for Estate Liquidity?

The Irrevocable Life Insurance Trust

Getting Your Life Insurance into Your Trust

Using Life Insurance to Leverage Your Estate

About Your Cash Values

CHAPTER 11: Smart Strategies for Gifting Assets to Family MembersThe Annual Gift Tax Exclusion

Unintended Gifts

Filing a Gift Tax Return

The Lifetime Applicable Exclusion Amount

Outright Gifts

When the Donee Is a Minor

Other Tax Free Gifts

Family Gifts Utilizing Trusts

Grantor Retained Annuity Trust

Grantor Retained Unitrust

Qualified Personal Residence Trust

Taking Advantage of Generation Skipping Transfers

Sales to Family Members

Loans to Family Members

Sales to Intentionally Defective Grantor Trusts

The Legacy Trust

CHAPTER 12: Strategic Planning with Charities

Outright Gifts to Charities

Testamentary Gifts to Charities

Gifts Using Charitable Trusts

Using Your Charitable Trust for Retirement Planning

The Private Foundation

CHAPTER 13: Family Limited Partnerships

General Structure of the Family Limited Partnership

Family Limited Partnership Rules

CHAPTER 14: Succession Planning for the Family Business or Farm

Special Estate Tax Benefits for Farmers and Closely Held Business OwnersValuing Your Business or Farm

Succession or Sale?

Succession Planning: Keeping the Family Business in the Family

Maximizing Your Business's Value through a Sale

Structuring Your Buy Sell Agreement

Types of Buy Sell Agreements

Funding the Buy Sell Agreement

One Final Strategy—The Employee Stock Ownership Plan

CHAPTER 15: Asset Protection Strategies

The Concept of Fraudulent Transfers

A Word about Jointly Held Property

Retirement Plans

Life Insurance

Using Trusts to Protect Assets

Using Limited Liability Entities to Protect Assets

Use of Multiple Limited Liability Entities

Foreign Asset Protection Trusts

Domestic Asset Protection Trusts

CHAPTER 16: Personal Business Planning Issues

Choosing the Right Entity for Your Business

Closing Thoughts

Importance of a Business Plan

EPILOGUE: Dealing with Parents and Their Money

APPENDIX A: Professional Advisers

APPENDIX B: Estate Planning Terms

APPENDIX C: IRS Life Expectancy Table

About the Authors

Stewart H Welch, III, AEP®, CFP®

J Winston Busby

End User License Agreement

List of Tables

Chapter 1

TABLE 1.1 Schedule of Individual Income Tax Rates

TABLE 1.2 2018 Tax Relief Act Applicable Exclusion Amount

Chapter 3

TABLE 3.1 Applicable Federal Gift and Estate Tax Exemption Amounts

TABLE 3.2 Federal Gift and Estate Tax Rate Table (Tentative Tax)

TABLE 3.3 Applicable Federal Gift and Estate Tax Credit and Exclusion Amounts

TABLE 3.4 The Future Value of Your Estate

Chapter 4

TABLE 4.1 Initial Safety Net

TABLE 4.2 Growth Strategy with a Safety Net®

TABLE 4.3 Retirement Portfolio Equity (Stock) Allocation Guidelines Based on

TABLE 4.4 The Power of Retirement Plan Investing

TABLE 4.5 Phase Out of Deductibility of Traditional IRA and Roth IRA

Contribu

Chapter 5

TABLE 5.1 Social Security Benefits Estimate (2018 estimate)

TABLE 5.2 Social Security Benefits Based on Claiming Age

Chapter 10

TABLE 10.1 $1 Million Term Life Insurance for Male, Age 50

TABLE 10.2 $1 Million Life Insurance Premium Comparison for Male, Age 50 Chapter 11

TABLE 11.1 Applicable Exclusion Amount Increases (2005–2018)

TABLE 11.2 Benefits Comparison of GRAT versus GRUT

Chapter 12

TABLE 12.1 Survivorship Life Insurance

List of Illustrations

Chapter 4

Figure 4.1 Growth Strategy with a Safety Net®

Chapter 8

Figure 8.1 Simple Will

Figure 8.2 Credit Shelter Trust Will

Figure 8.3 Simple Will with Disclaimer Credit Shelter Trust Option

Figure 8.4 Two Trust Will Utilizing a General Power of Appointment Trust and a

Figure 8.5 Two Trust Will Utilizing a QTIP Trust and a Credit Shelter Trust Chapter 10

Figure 10.1 Millhouse Estate Plan without Irrevocable Life Insurance Trust

Figure 10.2 Millhouse Estate Plan with Irrevocable Life Insurance Trust

Look for these and other titles from J.K Lasser TM —Practical Guides for All Your Financial Needs

J.K Lasser's Small Business Taxes by Barbara Weltman

J.K Lasser's 1001 Deductions and Tax Breaks by Barbara Weltman

J.K Lasser's Your Income Tax

J.K Lasser's Your Income Tax (Professional Edition)

J.K LASSER’S®

NEW RULES FOR ESTATE, RETIREMENT, AND TAX PLANNING

Sixth Edition

Stewart H Welch III, AEP®, CFP®

J Winston Busby, ESQ., LLM

Copyright © 2019 by John Wiley & Sons, Inc All rights reserved.

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Library of Congress Cataloging in Publication Data is Available:

J Winston Busby, Esq., LLM

I would like to thank my wife, Casey Busby, and my daughter, Frances, who was bornshortly after the release of the previous edition Both were very understanding, especiallyCasey, who juggled her career, Frances, and my absence so I could work on this book Ithank you both

I am extremely grateful and humbled each day by the chance to learn from and work withall of the attorneys at Sirote and Permutt and especially the other members of the PrivateClients, Trusts & Estates Group, including Harold Apolinsky, John Baggette, KatherineBarr, Clay Garrett, Wes Hill, Elizabeth Hutchins, Shirley Justice, Leigh Kaylor, MelindaMathews, Howard Neiswender, Tanya Shunnara, Craig Stephens, and Peter Wright

I would also like to sincerely thank Stewart Welch III for the opportunity to once againserve as a coauthor with him Additionally, I would like to thank Harold Apolinsky andCraig Stephens, each coauthors of previous editions of this book, for graciously allowing

me the opportunity to join this project for the previous edition and to continue their

earlier work with this edition

Completing this project would not have been possible without the tireless work of myassistant, Reva Kirk

I am extremely grateful to Alex Sidwell and Nathan Stotser for their assistance during theearly stages of writing this edition Finally, I could not have completed this project

without the work and dedication of Alex Sidwell, who served as a research and editingassistant throughout the project

Stewart Welch III, Accredited Estate Planner, Certified

Financial Planner®

This book would have never happened without the help and moral support from manypeople First and foremost, I want to thank my coauthor, Winston Busby Winston is anextremely gifted lawyer and has been a pleasure to work with on this project He has

always made himself available when I had highly technical questions…questions to which

he simply knew the answers because he's that smart! Winston's partner, and a seniorpartner at his firm, Harold Apolinsky, coauthored several previous versions of this book.Harold is a brilliant lawyer and true Southern gentleman

As most of you are aware, insurance can be a very confusing product to understand BabsHart, of Tuscaloosa, Alabama, specializes in long term care insurance, and her input

regarding that section of the text was invaluable She also provided technical researchregarding the life insurance products discussed in this book

James (Jimbo) A King III is co owner of McGowan & King in Birmingham, Alabama;Jimbo specializes in reverse mortgage lending He is the man I turn to when I have

questions about reverse mortgages

I also want to thank John West, CPA, a partner with the accounting firm of RSM US LLP,

in Birmingham, Alabama Whenever I get stuck on a complex tax question or calculation,John is the person I turn to for quick, accurate answers

I am so fortunate to be surrounded by a group of highly talented professional adviserswho each helped me with research for this book project Greg Weyandt, MPA, CPA, is amember (partner) of our firm and the chief operating officer, chief financial officer, andchief compliance officer Greg runs the day to day operations with near flawless

precision, which allowed me to concentrate on this project Hugh Smith, CPA, CFP, CFA,

is a member at The Welch Group and the chief investment officer and is one the brightesttax, market analyst, and financial planning experts I know Michael Wagner, CPA, CFP,and Kimberly Reynolds, MS, CFP, are members at The Welch Group and are among themost all around talented advisers in the field of financial planning They each providedtechnical assistance with this book Senior Financial Advisers Foster Hyde, MS, CFP andBeth Moody, MS, CFP are rising stars at our firm and not only help prepare, but also helprun our client meetings They are assisted by a highly talented group of young advisers,including Maggie Elliott, MS, CFP, Adviser; Matt Savela, CPA, Adviser; and Brett Norris,CFP, Associate Adviser

Our Welch Investments Division of The Welch Group, LLC is run by two members,

Woodard Peay, CFP, MBA, and Marshall Clay, Esq., CFP Woodard is a seasoned

professional in financial planning who also knows what it takes to run a successful

business Marshall graduated from West Point Academy, served our country as a

commissioned officer for seven years, then graduated from Cumberland Law School

before joining us Rounding out their team is Callie Jowers, CFP, Adviser; and ReaganWhite, Associate Adviser Callie graduated magna cum laude in Family Financial Planning

& Counseling from the University of Alabama Reagan also attended the University ofAlabama, where he graduated with a Bachelor of Science degree in finance

Our adviser team is supported by an incredible administrative team that includes RoxieJones, Ramona Boehm, Wendy Weber, Jeff Davenport, Kelly DeRoy, Andrea Messick,Lauren Wright, and Brent Gillis, CIC

Writing a book revision and meeting promised deadlines is as time consuming as it isintellectually stimulating, and the price charged is often paid by family members I offer aspecial thanks to my wife, Kathie, for her patience related to this and my many other

endeavors I also have two wonderful sisters, Jean Watson and Babs Hart, who have

always been cheerleaders for all my endeavors

Perhaps the single most influential person in my life has been my father, Stewart H

Welch Jr., who passed away one week before his 99th birthday He served as a living

testament of the true meaning of a life of service to others He was truly a remarkableperson!

There is no way to express how grateful I am for the wonderful clients I have the pleasure

of serving Each, in their own way, has contributed to my own learning and therefore tothis book

Winston and I feel very fortunate to have the opportunity to work with the prestigiouspublishing house of John Wiley & Sons, Inc., a traditional “blueblood” firm whose rootscan be traced back to 1807 We could not mention John Wiley & Sons, Inc., without

thanking “our Wiley teammate”: Executive Editor Sheck Cho

Much of the world we find ourselves in today is defined by chaos, complexity, and a

constant state of change The IRS tax code and accompanying regulations currently runsabout 40,000 pages! And then there are our elected representatives in Congress who feelit's their mandate to constantly change laws and regulations The financial markets todayare complex and, in many ways, globally intertwined, making it impossible to predict howevents in one part of the world may affect markets in other parts of the world It's no

wonder that so many people simply throw their hands up and focus on trying to pay theirbills rather than planning for long term events like estate, retirement, and tax planning

I own a fee only investment management and financial advisory firm serving clients

throughout the United States Winston Busby is a highly intelligent and resourceful

estate planning attorney with one of Alabama's largest and most prestigious law firms.Together, our combined experience helping families plan their financial futures exceeds

50 years We have had the opportunity to work with many affluent individuals and

families throughout the United States The common characteristic that we find amongthem is that they take pride in both their financial success and in their ability to handletheir finances This book was not written just for the affluent but also for the many

people who want to become affluent

What does it take? Although you may already have accumulated a sizable estate and feelcomfortable handling your investments, chances are there's a lot more you could do inthe area of estate, retirement, and tax planning Tax laws change, creating new

opportunities and challenges regarding wealth accumulation and estate planning The TaxCuts and Jobs Act of 2017 is the most significant tax legislation since the Reagan

Administration This is the reason we wrote this book The purpose of J.K Lasser's New

Rules for Estate, Retirement, and Tax Planning, Sixth Edition, is to make certain that you

have taken steps to make sure your finances are in order and that you have a specific

strategy in place Whether you are a wealthy Baby Boomer (or not so wealthy) or a

Millennial (or a generation in between) who just wants to know the basics of writing awill, how much you should be saving for retirement, or how best to cut your income

taxes, this book offers valuable strategies you can use today and in the future

As you read this book, we encourage you to keep your parents' situation in mind becausesome of the more advanced strategies may be more appropriate for them than for

yourself You may want to share the ideas in this book with them or, better yet, buy themtheir own copy After all, you should all share the goal of maximizing the amount of

money that you can transfer to your heirs and charitable organizations

The book begins with an overview of the most important aspects of the Tax Cuts and JobsAct of 2017 You will be able to use this chapter as a reference tool for reviewing

significant estate and income tax laws affecting you

Next, you will need to assess the adequacy of your current estate plan What is the value

of your total estate? You will learn how to determine your estate net worth This is vital

because knowing its value will let you define the resources available to your family toprovide for their income needs should you die pre maturely You will also be able to

determine approximately how much in estate taxes your heirs might owe

It is also important to assess whether you are on track toward retirement—are you

accumulating enough investment assets to provide you with a worry free retirement?Studies indicate that the average working American is saving less than one third of what

he or she needs to have enough assets to maintain the same lifestyle during retirement

In some cases, this shortfall will be made up from inheritances If you find out that you'relagging behind, this book will help you figure out how much you need to be investing toget on track, and you'll learn how to devise an appropriate investment plan Whether youare a pre retiree (planning to retire within 10 years), already retired, or retirement is

decades away, we outline the very best strategies for you to use to create your best

retirement possible

Another key aspect of estate planning is, of course, having a will Research indicates that

as many as 80 percent of adult Americans either don't have a will or their will is out ofdate If you fall into this group, you should stop procrastinating It really does matter ifyou die without a will! We'll outline the perils of dying without one The resulting chaoswill surprise you You'll learn how to prepare yourself so that you can minimize the timeand expense of working with an attorney

The use of trusts is a vital part of most estate plans You can use them to protect yourchildren from themselves, to protect you from possible future creditors, or to save onincome and estate taxes These are powerful weapons in the war to protect your assets foryourself as well as future heirs It is our experience that many people carry large amounts

of life insurance, including their employer's group life Utilizing some type of trust is

often an invaluable estate planning tool You'll learn about the irrevocable life insurancetrust, living trust, and other types of trusts Be sure to read the section about the LegacyTrust: a concept you can use to create a financial safety net for future generations of

family members (made famous by the Rockefellers and Kennedys)

Many of you face the difficult task of funding your children's education You'll learn how

to effectively use qualified tuition plans and education individual retirement accounts aswell as custodial accounts and minors' trusts You'll also learn about how grandparentscan be willing partners in assisting with your children's educational expenses

If you are interested in providing financial support to a religious organization, an

educational institution, or a favorite charity, you'll gain insights on the best ways to

maximize the effectiveness of your donations Often, gifts to tax exempt organizationscan solve a financial dilemma such as how to convert low basis non income producingproperty into income producing property while avoiding a large tax bill

Once you have accumulated enough assets for your retirement years, you may want toshift your focus to transfer strategies for your children and other heirs We'll outline

strategies that will allow you to transfer to heirs significant wealth at a fraction of its

market value while maintaining control of your property

People who own a family business or farm often face a perilous future; this is especiallyworrisome because many of these individuals desperately want to ensure that the

business or farm remains in the family so that it can be continued by future generations

of family members Obstacles to this goal include estate taxes and lack of liquidity Thesolution is a well developed transition plan, which is also fully explained in this book

In today's litigious society, many people fear the threat of a lawsuit that will result in

financial ruin Feeling helpless, we may cross our fingers and hope it does not happen to

us A preferable approach is to be proactive If you consider yourself a likely target, youcan do many things to protect your assets Some solutions are as simple as transferringassets to a spouse who is less at risk Other solutions include the use of trusts, familylimited partnerships, and even more exotic options such as domestic or foreign asset

protection trusts For entrepreneurs, we extensively review the pros and cons of the

various entity choices you have for operating your business

As you develop and implement your estate, retirement, and tax plan, you'll almost

certainly need the assistance of a qualified professional Finding the right person,

someone who is truly qualified, can be a daunting task It is one of the reasons many

people fail to plan at all To help support you with this process, your coauthors will gladlyhelp you find an adviser to assist you with your needs (Appendix A) In Appendix A wealso offer tips on how to get the most out of your advisers while minimizing their fees.Because the world around us is constantly changing and we want you to stay on top ofthese changes, we maintain a Web link with updates of important changes related to thecontent of this book as well as other topics we believe would be of concern to you Youcan access this resource by visiting the Resource Center at www.welchgroup.com; click on

“Links,” then “ESTATE BOOK UPDATES.”

As Americans, our limitations are constrained only by our own imagination, our

willingness to take time to develop appropriate strategies, and the self discipline to

execute our game plan Picking up this book is an essential first step Carefully reading itand implementing the strategies most appropriate to your situation will enable you totake a giant leap toward taking charge of your financial destiny May God smile on yourjourney

Stewart H Welch III, CFP®Accredited Estate Planner

CHAPTER 1

Tax Cuts and Jobs Act of 2017

President Trump signed new tax legislation on December 19, 2017, that will significantlyimpact many Americans The title of the new law was intended to be the Tax Cuts andJobs Act However, due to certain procedures involved in passing the new law, the shorttitle was removed and the official title is “To provide for reconciliation pursuant to title IIand V of the concurrent resolution on the budget for fiscal year 2018.” Despite the issuessurrounding the name, the new tax law is commonly known as the Tax Cuts and Jobs Actand will be referred to in this book as the TCJA

The TCJA sets forth the most extensive changes to the tax law in more than 30 years,although many of the provisions are set to expire after 2025 The TCJA significantly

impacted both individual and corporate taxpayers Individual tax rates were reduced, andindividual deductions were modified Taxpayers operating businesses through flow

through entities, such as LLCs, S corporations, or sole proprietorships, received a

favorable new deduction for certain types of income The TCJA reduced corporate taxrates for corporations taxed as C corporations In the estate and gift tax arena, the TCJAdoubled the amount of wealth that may pass tax free to nonspouse, noncharitable

beneficiaries

Although the TCJA made changes to many areas of the tax law, not all the provisions ofthe TCJA are permanent Most provisions took effect on January 1, 2018 The TCJA

included a sunset provision stating that many provisions will expire after 2025 For

instance, the TCJA created provisions regarding individual tax reform that extend through

2025 However, the changes to business reform measures are generally permanent

Taxpayers should become familiar with an overview of the TCJA and its effect on incometax provisions, business tax provisions, and estate and gift tax provisions

Ordinary Income Tax Rates

The TCJA effectively changed individual income tax rates from 2018 to 2025 for all

Americans other than those under the 10 percent tax bracket

The TCJA shifted the marginal tax rates for Americans making more than $9,525 Themarginal tax rates for middle class Americans are subject to a progressive rate structure

as income increases The ordinary income tax rates under the new law are: 10 percent, 12percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent However, the

TCJA dramatically altered the income brackets to which the tax rates are applied Forexample, the marginal tax rate of 35 percent, which previously encompassed $424,950–

$426,700, now encompasses an income bracket of $200,000–$500,000 See Table 1.1 for

a complete review of the schedule for joint and single tax filers for 2018 The marginalbrackets are indexed for inflation and set to increase beginning in 2018

TABLE 1.1 Schedule of Individual Income Tax Rates

Capital Gains Tax Rates and Qualified Dividends

The TCJA maintained the favorable maximum capital gains rates of 15 percent for all

Americans making less than $425,000 ($479,000 for married filing jointly), indexed forinflation For wealthier Americans, the maximum capital gains rate will be 20 percent

Similarly, the 15 percent rate on qualified dividends will apply to taxpayers making lessthan $425,000 ($479,000 for married filing jointly), indexed for inflation For taxpayerswith incomes above those thresholds, dividends will be taxed at 20 percent

Educational Provisions

Prior law introduced many tax benefits for implementing an educational savings plan

With respect to the TCJA, prior benefits were retained by extending the American

Opportunity Tax Credit for Higher Education Expenses through 2025 as well as the

addition of new benefits in some areas Some of these benefits are highlighted below

Education IRA

The TCJA continued the opportunity for taxpayers to contribute to a Coverdell EducationSavings Account Because of some of the restrictions outlined below and the enhanced

features to 529 plans under the TCJA, most taxpayers will likely utilize the benefits of a

529 plan under the new law as opposed to Education Savings Accounts Nonetheless, thefeatures of these accounts under the TCJA include:

Permanently increased the contribution limits from $500 per year to $2,000 per

year

Distributions, when used to pay for qualified education expenses, are tax free

Allowed tax free withdrawals for elementary (including kindergarten), secondary,

and postsecondary school tuition and expenses

Included tuition, room and board, tutoring, uniforms, extended day program costs,

computer technology hardware and software, Internet access, and special needs

services for special needs beneficiaries as qualifying expenses

The age limit is waived for special needs beneficiaries

Contributions can be made until the donor's due date for their federal income taxreturn

For donors who are single tax filers with a modified adjusted gross income (MAGI) ofbetween $95,000 and $110,000 ($110,000 and $220,000 for married taxpayers filingjointly), the contribution limits are (ratably) phased out These MAGI thresholds areadjusted annually for inflation

Tip

If you would like to make a contribution to an education IRA for your

child but you do not qualify because your adjusted gross income (AGI) is too high, consider having your child contribute to his or her own account Unlike other IRAs, a person does not have to have earned income to

contribute to an education IRA, nor is there a minimum age requirement Contributions cannot be made for beneficiaries who are 18 years of age or older.

Section 529 Plans

529 college savings plans were expanded through broadening the meaning of “qualifiedhigher education expenses” to include tuition at public, private, or religious elementary orsecondary schools, limited to $10,000 per student during the taxable year

Business and Corporate Tax Relief

Under prior law, the business taxpayer was allowed to immediately deduct up to

$500,000 of business property purchased during the calendar year Prior law also allowedfor 50 percent bonus depreciation for purchases of certain new property The TCJA

increased the deductible amount to $1 million with a phase out threshold of $2.5 million.The TCJA expanded the bonus depreciation percentage from 50 percent to 100 percent forpurchases of property acquired and in service after September 27, 2017, and before 2023(2024 for “long production period” property and certain aircraft) For the latest updatesregarding tax law changes, visit the Resource Center at www.welchgroup.com; click on

“Helpful Links,” then “ESTATE BOOK UPDATES.”

Corporate Tax Rate Changes

Under prior law, the tax liability for corporations taxed as C corporations was determined

by applying a certain set of progressive rates to brackets of taxable income A rate of 35

percent as applied at the highest income levels ($18,333,333 in 2017).

Under the TCJA, the corporate tax regime is changed from a progressive rate structure to

a flat rate of 21 percent You will notice that this rate is significantly lower than the

highest individual rate However, corporations (again, taxed as C corporations) are stillsubject to the so called double tax on income, meaning that income is first taxed at thecorporate level, now at 21 percent but if it is distributed to shareholders as a dividend, theincome is subject to a second level of tax at a top rate 20 percent

Pass Through Income Deduction Under § 199A

One of the biggest changes to the tax law under the TCJA is the new 20 percent deductionfor business income derived from a pass through entity Note, in the discussion of thecorporate tax above, we talked about the double tax Income from a pass through entity issubject to only one level of tax

Under prior law, sole proprietorships, partnerships, LLCs, and S corporations were treated

as pass through entities subject to tax at the individual owner or shareholder level Theincome earned by the owners or shareholders was reported on their individual tax returnsand subject to ordinary income tax rates

Under the TCJA, a 20 percent deduction is now available for taxpayers with domestic

“qualified business income” from these types of businesses for tax years after December

31, 2017, and before January 1, 2026 The provisions under new Section 199A are

extremely nuanced and complicated, but limits on the deduction are imposed on certaintypes of income unless a taxpayer's income is below a threshold amount (taxable incomeunder $315,000 for joint filers, $157,500 for single filers)

The deduction is available to noncorporate taxpayers such as trusts and estates However,pass through income from certain service businesses in the fields of health, law,

accounting, performing arts, and other service businesses are not eligible for the

deduction However, engineers and architects are not subject to this restriction

Many other limitations and complications to the new pass through deduction exist, andmany tax advisers are looking to the IRS to guide them through issues raised by the

deduction

Additionally, new regulations addressing the deduction were proposed on August 8, 2018.Taxpayers may rely on these rules until final regulations are published

Estate, Gift, and Generation Skipping Transfers

The TCJA retained the current transfer tax regime but made a significant change thatgives taxpayers a tremendous planning opportunity The tax rate is 40 percent on estatesexceeding the exemption amount (i.e., the “taxable” estate) The previous exclusion

amount enacted was $5 million indexed for inflation and under prior law was set to be

$5,490,000 in 2018 Under the TCJA, the exemption amount doubled, meaning that each

individual may transfer up to $11,180,000 (indexed for inflation) at death or by gift

during life without paying transfer taxes Because of portability, this effectively allowedspouses to transfer approximately $22 million to beneficiaries without estate gift taxes.The applicable exclusion amount is now the basic exclusion amount of $11,180,000

million (indexed for inflation) plus a deceased spouse's unused exclusion (DSUE)

amount

Following is a list of select provisions that could affect your estate planning:

The TCJA maintained the maximum estate, gift, and generation skipping rates at 40percent The TCJA also temporarily increased the exclusion amount to $11.18 million,indexed annually for inflation (see Table 1.2) This amount is set to return to pre

2018 levels at the end of 2025

TABLE 1.2 2018 Tax Relief Act Applicable Exclusion Amount

Year Applicable Exclusion Amount Maximum Estate Tax Rate (%)

Portability is still a feature of the estate tax system under the TCJA A decedent's

applicable exclusion amount is now the basic exclusion amount of $11.18 millionplus the DSUE amount Congress intended that portability would simplify estate

planning Portability will continue to be an important component of the tax system.The TCJA retained the “annual exclusion” in which taxpayers may make gifts of

assets (assuming the gift is of a present interest) to as many donees as they like

without using their applicable exclusion amount For spouses, the amount effectivelydoubles In 2018, the annual exclusion amount is $15,000

Estate Planning Issues under the 2017 TCJA

Because of the unique opportunity provided by the TCJA, everyone should review theirestate plan to take advantage of the new provisions through 2025 An approach we favor

is for the client to contact one of their professional advisers on the estate planning team,whether the estate planning lawyer, financial planner, life insurance agent, accountant, ortrust officer Authorize that team member to assemble the team in a preliminary meeting

to review the listing of the assets and liabilities (financial X ray), review the current

documents, and then meet with the client and the client's spouse to make team

recommendations This approach maximizes creative input and communication and oftenaids in identifying important new alternatives to consider The financial X ray would

show what assets are titled in the name of each spouse; what, if any, assets are titled injoint names; and, ideally, what assets are in the children's names

Understand that payment of estate or death taxes is largely elective By making annualgifts during your lifetime, then transferring the maximum tax free amount (applicableexclusion amount) to your children and grandchildren at death, and finally bequeathingyour remaining estate to a family charitable foundation, your estate tax would be zero

For example, Raymond and Laura Gold have a $50 million net worth Each year, theymake maximum annual gifts to their two children and their spouses, plus maximum

annual gifts to 529 plans for each of their grandchildren Their wills direct the maximum

to legacy trusts (Chapter 11) for the children, with the balance to a private foundation(Chapter 12) where the children (and eventually grandchildren) will serve as trustees Ifthey died in 2018, the disposition of their estate would look as follows:

$50,000,000 Total estate–22,360,000 Exemption amount (2018) to legacy trust

$27,640,000 Directed to private foundation

$         0 Estate tax

So here's the question: Is $22,360,000 “enough” to leave to your children? If not, you canstill achieve “zero” estate taxes by employing additional strategies outlined throughoutthis book

Here are two areas to focus your attention on:

1 With the advent of portability, does the plan provide the most flexibility while

simultaneously taking advantage of the permanently enacted favorable transfer taxprovisions and achieving the best result from an income tax perspective?

2 As discussed later in this chapter, does the estate plan and overall tax plan adequatelyprepare for income tax issues that may be a function of increased exclusion amounts

or the 3.8 percent tax on net investment income that began in 2013 under the

Affordable Care and Patient Protection Act?

Planning with Portability Under the TCJA

Portability allows the second spouse to die to use the DSUE amount from the first spouse

to die For example, assuming a couple where the husband has $1 million of assets in hisname while the wife has $14 million in her name (combined estate of $15 million)

Assuming a $11.18 million exclusion amount, under prior law if the husband died with $1million of assets titled in his name (and payable to wife), then $10.18 million of his

exclusion was wasted This is because at her subsequent death, her now $15 million

estate would be eligible for only her $11.18 million exclusion amount Thus her taxableestate would be approximately $4 million Portability will now allow the surviving wife touse the $10.18 million DSUE amount of her deceased husband plus her own $11.18

million exclusion amount Thus, she could transfer $22.38 million tax free at her death

Dangers of Relying on Portability

The purpose of portability is to provide a level of simplicity to estate planning For

couples with a combined net worth of less than the exclusion amount this may be true,assuming the net worth does not grow faster than the inflation adjusted exclusion

amount Couples with a combined estate of this size may rely on portability to minimize

or eliminate estate taxes For high net worth couples, relying on portability for tax

planning is not the best option Moreover, there are several tax and nontax advantages toincorporating a plan that uses traditional credit shelter and marital trust planning to beused in conjunction with portability First, appreciation in the assets is protected fromestate taxes on the death of the second spouse to die Second, the use of trusts will protectthe assets from potential creditors of the beneficiaries and safeguard the assets in theevent the surviving spouse remarries

Despite the advantages of portability, solely relying on portability is a recipe for disaster.The key to a solid estate plan is flexibility Therefore, an ideal plan should build in theflexibility to defer the decision of whether to rely on portability or traditional credit

shelter and marital trust planning until the death of the first spouse

Planning Considerations Under the 2017 TCJA

With the opportunity provided by the TCJA, you have an opportunity to revisit your ownestate plan in light of a recently passed estate tax law that offers many opportunities forbusiness owners and wealthy families, as well as the “not yet wealthy.” Here's a quickreview of the major provisions of the law as well as several planning strategies worth

considering:

Up to $11.18 million (inflation adjusted annually) exempt from estate taxes.

Planning point: Many wills use a formula that states that the maximum amount

allowed under law first goes to fill up the family trust, with the balance going eitheroutright or in trust for the surviving spouse With this higher limit, it means that inmany cases all of the assets will go to the family trust and none to the surviving

spouse, either outright or in the marital trust For many families, this is an

unintended consequence So, the best course of action is to review your current

planning documents to insure that even with the changes in the tax law that yourassets will be transferred in a fashion that you desire

Portability of exemption amount Planning point: Theoretically, the activity of

equalizing the estates between spouses is no longer necessary since the survivingspouse now “inherits” the DSUE amount However, if the surviving spouse remarriesand that new spouse dies, the exemption of the first deceased spouse would be lostforever Relying solely on portability is not an ideal strategy, and building a plan withflexibility is the best course of action When you review your estate documents,

determine the impact that portability will have on your plan in light of your personalcircumstances

Make gifts during your lifetime Planning point: If you are a small business owner

who would like to make certain the business stays in the family, now may be an

excellent time to gift some of your business ownership to children And this is notjust for business owners If you have an estate that significantly exceeds the

exemption amount, you may want to consider making tax free gifts to family

members, using assets that you believe will appreciate in value in the years ahead.

Heirs receive a new tax basis for transfers at death (This is not new but is a point

worth making.) Planning point: You face a trade off in deciding whether to make

transfers during your lifetime versus transfers at death The recipient of a gift duringyour lifetime gets your same tax basis so that a future sale would be potentially

subject to capital gains taxes With the exclusion amount now exceeding $11 million,the income tax consequences of receiving a step up in basis may be a more importantfactor than the transfer tax consequences

The 3.8 Percent Tax on Net Investment Income

The 3.8 percent tax on net investment income (NII) was enacted as a new Section 1411 tothe Code in 2013 The purpose behind the tax was to tax “unearned” income, such as

dividends, rents, royalties, gain on the sale of capital assets, and income from businesses

in which the taxpayer did not “materially participate” to name a few

The effect of the 3.8 percent surtax tax is that taxpayers in the highest income brackets(37 percent for ordinary income and 20 percent for net capital gains) may be subject to anadditional 3.8 percent tax on income that meets the definition of NII

Anytime that a client owns an interest in a business, there are numerous planning

considerations involved If the business interest is held in trust, then there is an

additional layer of issues to work through to get the best result for the client

NOTICE

As we are sure you are aware, Congress frequently changes tax law that

can significantly impact your estate, retirement, and tax planning To stay apprised of the latest changes that affect you, visit the Resource Center at

www.welchgroup.com ; click on “Links,” then “ESTATE BOOK UPDATES.” Posted content will focus on tax law changes that affect this book's

content as well as changes we believe are most important to our readers.

Although the NII tax is harsh, there are some planning opportunities to minimize the tax.Individuals that own an interest in a trade or business should consult their tax

professionals to ensure that the requirements of active participation are satisfied

Distributing NII from trusts will lower the amount of the NII tax imposed on trusts

However, there may be nontax reasons to not distribute the income to a beneficiary—forinstance, to protect the distribution from creditors or provide incentive to the beneficiary

If you feel your estate is not large enough to take advantage of any of these strategies, beclear that, at a minimum, you need at least a basic estate plan, which would include a will,durable power of attorney, and an advanced health care directive

Limitations on Deductions

The TCJA made significant changes to income tax deductions for individual taxpayers.The biggest changes involve an increase in the standard deduction and the suspension orlimitation on certain other deductions As discussed below, the increase in the standarddeduction may cause a taxpayer who previously itemized to utilize the more beneficialstandard deduction Taxpayers should consult their personal tax professionals to

determine what is best for their particular circumstances, but many will change to a

system in which they no longer deduct the interest on their mortgage or property taxes ontheir home

Changes to Standard Deduction

Under the TCJA, the standard deduction is increased from $13,000 to $24,000 for

married taxpayers that file a joint return The TCJA also eliminates the personal

exemption Because of the increase in the standard deduction and the elimination or

limitations imposed on other itemized deductions, many taxpayers who previously

itemized will now use the standard deduction and may only itemize once every severalyears—for example if they have significant charitable contributions

Mortgage Interest Deduction

The mortgage interest deduction—perhaps the most well known itemized deduction—hasbeen modified significantly by the TCJA Under the TCJA, homeowners with mortgagesthat existed before the enactment of the new law may continue to deduct interest on atotal of $1 million of debt for their first and second home However, new buyers are

limited to deduct the interest on $750,000

Additionally, deductions are suspended for home equity loans through 2025 unless theloan is used to make substantial improvements to the home and the combined total of theloan and the first mortgage does not exceed $750,000

However, because of the substantially increased standard deduction, millions fewer

taxpayers will likely opt to take the standard deduction rather than using the mortgageinterest deduction

Charitable Deductions

For tax years after 2017 and before 2026, the limitation on the deduction for cash

contributions made to public charities, private operating foundations, and private

distributing foundations is increased from 50 percent to 60 percent of AGI The limitation

on deductions for cash contributions to private nonoperating foundations remains at 30percent of the AGI

For tax years beginning after 2017, the 80 percent deduction for contributions made foruniversity athletic seating rights is repealed In other words, season ticket holders for

college football (and other sports) may not deduct the contribution for the right to

purchase season tickets under the new law

Deduction for State and Local Taxes

Perhaps one of the most significant changes for individual taxpayers is the new limitation

on the deductibility of state and local taxes The new limitation applies to taxes such asproperty taxes and state/city income taxes

Under the TCJA, taxpayers that continue to itemize deductions will be limited in

deducting up to $10,000 (for married filing jointly) of state and local property taxes

Alimony Payments Deduction

The TCJA eliminates the above the line deduction for alimony payments effective fordivorces, separations, or modifications entered into after 2018 However, the TCJA doesnot require the alimony payee to include the payments as income

Miscellaneous Itemized Deductions

Under the TCJA, all miscellaneous itemized deductions subject to the 2 percent floor,including expenses such as tax preparation fees, investment fees and expenses, the “homeoffice” deduction, and other unreimbursed employee expenses, are suspended for taxyears beginning after December 31, 2017, and before January 1, 2026

Pease Limitation

The TCJA repealed the so called Pease limitation until January 1, 2026 Under prior law,the Pease limitation provided additional restrictions on the ability of high income

taxpayers to take full advantage of itemized deductions, such as charitable deductions

In this chapter, we have provided an overview of the current tax laws and how the

changes to the tax law may impact you in the near future In our next chapter, we willdelve deeper into the importance of developing your estate plan and planning

opportunities under the TCJA

CHAPTER 2

Estate Planning

What Is Estate Planning?

Estate planning is the process of controlling your assets, both during your life and afteryour death, with three primary objectives in mind First, you want to ensure that yourassets will always be sufficient to provide for you and your family's lifestyle needs

Second, you want to make certain that your assets go to the people and/or organizations

of your choosing Finally, you want to minimize the amount of taxes, fees, and court

interference associated with settling your estate This definition is broad, as well it should

be A properly designed estate plan encompasses the landscape of financial issues

Investment Planning

Your investment plan should focus on providing enough assets to meet your retirementneeds, the cost of funding your children's education, and expenses such as financial

assistance for elderly parents It should be designed so that your expected long term

returns will meet your financial objectives Your risk tolerance should be examined toensure that your portfolio is not too aggressive for your personality

to convert ordinary income, which is taxed at your highest tax bracket, to long term

capital gains?

Protecting Your Family

How long will you live? Of course, you cannot answer this question Your estate plan

should address the possibility of a premature death as well as the possibility that you willlive “too long.” Simple solutions to “dying too soon” include the use of life insurance.Issues of “living too long” are often handled through use of trusts, living trusts, a power

of attorney, or long term care insurance

Protecting Your Assets

Given our litigious society, if you have accumulated significant assets, your estate planshould include an asset protection plan You can employ simple strategies such as liabilityinsurance or more sophisticated strategies such as domestic or foreign asset protection

Carrying Out Your Personal Goals and Wishes

Do you have a deep desire to protect our environment? Have you considered making gifts

to your alma mater? Do you have a relative who may need financial support? Outline allyour goals and then design your estate plan to carry them out

Gathering and Drafting Appropriate Documents

A vital part of your estate plan will consist of developing appropriate legal documents toensure that your wishes are carried out The most basic of the documents will be yourwill Other documents include deeds, mortgages, and trusts and property titles Part ofyour estate plan should include gathering and organizing all vital documents This hastwo important advantages First, your documents will be easy for you to locate and

retrieve when they need to be reviewed Second, your survivors won't have to search fordocuments needed to settle your estate after your death Believe us, your loved ones willthink kindly of you for having done this for them

As you can see, estate planning consists of much more than avoiding taxes The right

planning will not only give you and your family great peace of mind but will also help youaccumulate wealth faster and more effectively

The Benefits of Estate Planning

Developing your estate plan is perhaps the most important financial step you can take Itcreates focus and puts you in charge of many aspects of your finances Let's look at thebenefits to your immediate family

If you are single, your estate plan will provide for the orderly transfer of your assets tothose people or organizations you specify, thus reducing or eliminating the hassle forthose who will assist in settling your estate Case in point: We have a client whose brotherdied without a will, called intestate As a result, our client had to spend hundreds of hoursdealing with the probate courts in another state Our client was his brother's only familymember, so ultimately everything will go to him If the deceased brother had executed asimple will leaving everything to the surviving brother, he would have spared him

immeasurable aggravation, not to mention tens of thousands of dollars in legal and otherexpenses

If you are married and have children, the issues will usually be more complex, but thebenefits of planning will also be more profound Make certain that your surviving familyhas immediate access to cash to cover ongoing living expenses while your estate is beingsettled Although it may be hard to imagine that this would be a problem, it is not unusualfor the courts to freeze assets for weeks or even months while trying to determine theproper disposition of the estate The surviving spouse is then forced to apply to the courtfor needed cash to pay current living expenses You can imagine the additional stress

caused by this difficulty.

In your estate plan, you may also want to address issues regarding funding for your

children's education If you have young children, you may want your surviving spouse tohave the option of not being employed so that he or she can devote more attention to

your children

If your spouse lacks knowledge or experience in financial matters, your estate plan shouldprovide for assistance with financial management, such as setting up trusts or managinginvestments Also, your estate plan should consider the consequences of both you andyour spouse dying simultaneously If you have minor children, you will want to selectsomeone to manage your assets for their benefit You don't want the court to make thisdecision for you In this situation, your estate plan should also address when your

children will receive your assets free of trust When children receive substantial assetsbefore they are mature enough to handle them properly, the results can be devastating

We recall the case of a child who starred in several movies Because he was a minor, hisearnings were held in trust until he was legally an adult When he turned 18, he took

possession of the money and immediately began to use it to support a lavish lifestyle.Within 24 months, he had run through all of his money! The sad thing is, if handled

appropriately, it would have been enough money to provide a lifetime of basic financialsupport

Even more pressing than financial matters is the issue of who will raise your children ifyou and your spouse die prematurely Give very careful thought to your choice of a legalguardian Remember, it is this person's values that are likely to be instilled in your

children In developing your estate plan, you will also want to give consideration to theage and financial condition of a potential guardian Some guardians may lack the childrearing skills you feel are necessary Make sure that your plan does not create an

additional financial burden for the guardian

Do you have a favorite cause, charity, or religious organization? You can use your estateplan to provide financial assistance either during your life or at your death This is one ofthe instances in which our government actually provides you with incentives to do so.During your lifetime and at your death, your estate plan should focus on how best to

reduce taxes and expenses For when you're alive, the primary focus is on income tax

issues At death, there may also be estate tax issues and administrative fees as well asother expenses to consider Plan well and you can minimize costs, thus allowing moremoney to pass to your family

Your estate plan can also be used to provide assistance and help for members of your

extended family Consider carefully, for example, whether you may need to provide

financial support for a parent, sibling, niece, or nephew If the answer is yes or maybe,there may be solutions that also provide you with tax benefits

The ultimate benefit of a well crafted estate plan is that it provides you with a compassfor managing your finances It will lessen not only your own stress but that of your loved

ones as well It is the right thing for you to do, and it's worth the time, effort, and expense.

The Nightmares of Poor Planning

All too often, people procrastinate and neglect their estate planning The results can bedevastating Take a moment to review the following list and determine whether any of theexamples could apply to you or your family If the answer is yes, let this serve as yourwake up call to get started now!

You are sued, which results in an exceedingly high judgment against you Your estateplan should include asset protection strategies

You become disabled and are unable to handle your finances Part of an appropriateestate plan includes a power of attorney designating who will take control of yourfinances should you become incompetent

You die without naming the guardians of your child or children This mistake forcesthe courts to make this decision for you, possibly resulting in your children beingraised by someone you would not have chosen

Your children inherit money at an age that destroys both their ambition and theirwork ethic We have seen this happen often Setting up a trust that provides for theirneeds without overindulging them can solve this problem

You own a business or real estate that must be sold at fire sale prices in order to payyour estate taxes We've seen cases where property had to be sold for a fraction of itstrue value because the taxes were due but real estate prices were depressed You

must determine your potential estate tax liability and determine where the cash

would come from to pay that liability

You or your spouse move to a nursing home, and the bills consume all of your assets.One potential solution to this problem is to own a long term care insurance policy.You fail to provide for a child with a disability or special needs In such a case, thechild may become a ward of the state If your child has special needs, you need toconsider specialized trust planning

Your family must pay excessive legal fees and court costs to settle your estate Youmay not be able to eliminate these costs, but you can significantly reduce them

through proper planning

Each of these nightmares has a solution that can be addressed through your estate plan

The Myths of Estate Planning

You still may not be convinced that estate planning is absolutely necessary We often findthat people have preconceived notions about estate planning that have no basis in reality.Let's examine a few of the more popular versions

Myth 1: Estate Planning Is for Old People

You are part of the Baby Boomer generation, Generation X, Generation Y, or the

Millennial Generation and have plenty of time to develop your estate plan, right? Wrong.Estate planning is an important consideration not only for older people but for everyone.Unless your family circumstances and finances are incredibly simple, you need to begindeveloping your estate plan now

Myth 2: Estate Planning Is for the Rich

While the TCJA has significantly reduced the number of estates that will be subject todeath taxes, there are many estate planning issues other than taxes For example,

consider the issue of financial management in the event you become incompetent owing

to an accident or illness Moreover, proper attention should be given to planning for thefinancial future of your young family in the event of your untimely death

Myth 3: Estate Planning Focuses on Death

Many people avoid estate planning because it makes them think about death—either theirown death or the death of someone they love We have had many client meetings in

which an individual broke out in tears at the thought of a loved one's death Obviously,estate planning must deal with death, but many living issues are just as important Forexample, what is the best way to fund your child's college education? Do you pay for itfrom cash flow, or do you gift your child money and use a custodial account or a qualifiededucational trust? What is the best way to protect your hard earned assets from a

successful lawsuit? Your estate plan must address an array of living issues as well as

Federal tax returns (for the past seven years)

State tax returns (for the past seven years)

Pay stubs (the two most recent ones)

Financial statement

Confirmation statements (brokerage accounts, mutual funds, etc.)

Retirement plan statements (individual retirement account [IRA], Keogh, pension,

profit sharing, etc.)

Insurance policies (life, disability, property and casualty, health, etc.)

Amortization schedules (home, business, property, etc.)

Business documents (partnership agreements, corporate papers, etc.)

Corporate/partnership tax returns

Wills (if you are married, for you and your spouse)

Trust agreements

Gift tax returns

Employee benefits summary

Notes, mortgages, deeds to real estate, termite bond, survey, appraisal

Bank account statement(s) (for the past 12 months)

Credit card statement(s) (for the past 12 months)

For a printable detailed form, visit the Resource Center at www.welchgroup.com; click on

“Links,” then “Probate Checklist.”

Determine Your Current Estate Net Worth

A detailed discussion of how to determine your current estate net worth is included inChapter 3 Put simply, it is vital that you know where you are now People often believethey have small estates, and therefore have little concern for estate planning They areshocked to find that not only could they potentially owe estate taxes, but those taxes

could run into the tens of thousands of dollars! When you include your life insurance, thedollars add up fast Furthermore, even if your estate is not subject to estate tax, there arenumerous income tax issues that require proper estate planning

Establish Your Estate Planning Goals

Included in Chapter 6 is a discussion of how to establish your estate planning goals

There are many, many strategies available to accomplish a vast array of potential goals Byestablishing your goals early, you bring order and focus to your estate plan while avoidingthe hit and miss planning that most people use Your goals should be divided into lifetimegoals and death goals

Hire Competent Professional Help

Most likely you will need a team of competent advisers from various fields to assist you inyour estate planning, including attorneys, financial advisers, insurance representatives,accountants, and bankers Many of these people specialize within their general fields Forexample, some attorneys specialize in estate planning Many financial advisers are nowspecializing in wealth management, which focuses on wealth accumulation and

multigenerational wealth transfers You will find life insurance representatives who

specialize in working with business owners and bankers who cater to high net worth

clients Putting together the right advisers and then working with them as a team will paybig dividends in your end results

Monitor Your Progress

Estate planning is a dynamic process, not a static one Your circumstances are constantlychanging, as are our tax laws Reviewing your estate plan every two to three years willkeep you on the leading edge of the strategies and techniques available to meet your

goals

In the next chapter, we will review how the federal tax system works, and you'll learn how

to develop your estate net worth statement, calculate your potential estate taxes, and

outline a broad range of strategies you can use to reduce taxes and implement your estateplan

CHAPTER 3

The Estate Tax System

Determining Your Estate Net Worth

Although minimizing the amount of estate taxes you will owe should not be your onlygoal, it is certainly an important one The estate tax system places a tax on the transfer ofwealth for the purpose of redistributing it to the masses The transfer tax system

comprises less than 1 percent of the revenue raised through taxation in the United States.While the estate planning revisions of the TCJA focused on eliminating death taxes on allbut super wealthy Americans, it's still very important to pay close attention to the estatetax laws Why? Because Congress seems compelled to change the limits every few years,and they will rise or fall depending on who has control of Congress For example, since

2001, Congress has made eight significant changes to the estate tax exemption limits Theamount has varied from an exemption as low as $675,000 (2001) to a 100 percent

exemption (2010) to the recent high of $11,180,000 (2018) Table 3.1 is a reminder of thecurrent estate and gift tax limits

TABLE 3.1 Applicable Federal Gift and Estate Tax Exemption Amounts

Year of Death Gift Tax Exemption ($) Estate Tax Exemption ($)

a For subsequent years, the gift and estate tax exemptions are indexed for inflation For current year

updates, visit the Resource Center at www.welchgroup.com; click on “Links,” then “ESTATE BOOK

UPDATES.”

Understanding the Estate Tax System

It seems like everything you do subjects you to another tax: Your earnings are subject toincome taxes; your purchases are subject to sales tax; your real estate holdings are subject

to property tax; your security sales are subject to capital gains taxes It's hard to believethat you or your heirs are expected to pay taxes upon your death The government doesgive you a break, but to receive the maximum benefits you must plan carefully Here'show the system works:

First, you die Ouch! Then your executor makes a list of all of your assets (called an estate

inventory) to determine your gross estate

Definition

Executor: The person or institution that is legally responsible for settling

an estate He or she may also be referred to as the estate representative or administrator Normally you appoint an executor by way of instructions

in your will.

The executor then subtracts from the gross estate all allowable exemptions and

deductions, which include your liabilities, notes, and mortgages (assuming the estate isliable for the debt), funeral expenses, and administrative costs of settling your estate

(attorneys' fees, court costs, etc.) If you were married, any assets left to your spouse

would not be subject to estate taxes at this time because of the unlimited marital

deduction, so the value of the assets left to your spouse are also deducted (the

government waits until your spouse dies and then assesses the estate tax) If you leavemoney to qualified charities, you get to deduct that as well You have now arrived at yourtaxable estate If you made taxable gifts during your life, then adjusted taxable gifts areadded to the taxable estate to determine your tax base

Definition

Unlimited marital deduction: The legal provision that enables you to leave

an unlimited amount of assets to a surviving spouse free of estate taxes.

This has the effect of postponing the estate taxes until the death of that

spouse For example: Bill Gates dies and leaves his $90 billion to his wife, Melinda Melinda doesn't owe any estate taxes due to the unlimited

marital deduction At her death, believe us, the taxman is waiting!

Definition

Adjusted taxable gifts: The total amount of taxable gifts you made during

your life less any gifts that are included in your gross estate because of the

“string provisions” of Internal Revenue Code (IRC) §§ 2035–2039, which are discussed later in the book.

Your executor then figures the tentative tax using the IRS tax tables (see Table 3.2) Note:The rate is essentially now a flat tax rate because in order for estate tax to be imposed, thetaxable estate must always be in excess of the amount at which the highest rate applies

TABLE 3.2 Federal Gift and Estate Tax Rate Table (Tentative Tax)

On Amount in Taxable Estate ($) Tax Owed ($) Plus (%) Excess of ($)

From the tentative tax amount your executor subtracts the applicable federal gift and

estate tax credit This is a dollar for dollar deduction from the tentative tax amount (see

Applicable federal gift and estate tax credit The dollar credit amount

allowed by the federal government that has the effect of making a certain portion of your estate not subject to taxes.

If the result of subtracting the applicable gift and estate tax credit is a positive number,that is the amount of taxes that are due Your executor must then raise the cash to pay thetaxes Generally, the tax is due nine months from the date of your death Once the taxesare paid, your executor distributes the balance of your assets according to the directionsgiven in your will If you do not have a will, your assets will be distributed according tostate law (see Chapter 6) This process can take from six months to several years Soundconfusing? Let's walk through an example

Case Study

Alfred and Jane Crocker want to develop a plan that will minimize taxes and set up

trusts for their two daughters in case they die prematurely Our first objective is to

determine their current estate tax liability We do this by completing Worksheet 3.1

WORKSHEET 3.1 Sample Estate Net Worth Statement

Real estate (estimated

current market value):

Alfred's 401(k) and IRA 1,625,000 XX 1,625,000

Short term liabilities:

Taxable estate (total assets

less total liabilities)

13,213,500 604,250 10,053,000 23,870,750

a Funeral and administrative expenses can vary from 2 percent to 8 percent For the sake of

simplicity, they are ignored in this case study.

Next, we need to determine the Crocker's potential estate tax liability Let's assumethat Alfred dies first Alfred has named Jane as the beneficiary of all of his life

insurance policies and his retirement plans Most of their other assets, such as theirhome and personal property, are titled in both of their names (joint tenants withright of survivorship) So, all of Alfred's assets would be transferred to Jane (see

Worksheet 3.2)

WORKSHEET 3.2 Jane's Estate Net Worth Statement after Alfred's Death

As of 2/20/XX

Your name: Jane Crocker

Date of birth: 5/20/XX

Ownership ($) Jane

Assets

Cash and cash equivalents:

Other: Proceeds from life insurance 4,875,000  

Personal and household property:

Other investments: Ltd partnership 25,000   Retirement plans: 401(k) and IRAs 1,650,000   Equity interest in a business

Life insurance (face amount):

Taxable estate (total assets less total liabilities) 23,870,750  

a Funeral and administrative expenses can vary from 2 percent to 8 percent For the sake of

simplicity, they are ignored in this case study.

Because of the unlimited marital deduction, there are no estate taxes due at Alfred'sdeath Our attention is drawn to the possible estate tax should Jane now die

prematurely or if the combined estate of Jane and Alfred will likely grow to the pointthat it will become large enough to be subject to estate taxes in the future And if this

is the case, what can we do to minimize this risk while both Alfred and Jane are able

to make changes to their estate plan?

Step

1

Determine the total value of Jane's assets (including her life

insurance) This represents her gross estate

Subtract the following:

(a) Charitable contributions made through Jane's will –$0(b) Unlimited marital deduction (not applicable for Jane –$0(c) Liabilities for which Jane's estate is liable –$599,250(d) Estimated funeral and administrative costs –$30,000Step