The Strategist
2nd Quarter 1997 - Volume 4 Issue 2
May 31st is an important date to our clients
that are charitably inclined and even for some that are not. In recent
newsletters, we have advised you that after May 31st of this year, if you make
a gift of appreciated securities to a private foundation, you will only be able
to receive an income tax deduction equal to the cost basis of the appreciated
securities. For example, assume I own $1,000,000 of IBM stock that I purchased
20 years ago for $100,000. I decide to give all of this stock to my private
foundation. If I gift the shares on or before May 31st, I can take an income
tax deduction for the full $1,000,000. If I wait until June 2nd, I will only
receive a tax deduction of $100,000 (my basis in the stock).
I recently received a call from one of my
clients that asked an interesting question. The client had a private foundation
that was already funded but the client wanted to add more to the foundation.
Several years ago, the client also had invested in a publicly traded high tech
stock that had increased dramatically in value.
He eventually wanted the value of the stock
to go to his private foundation but was not quite ready to give up the secure
feeling of owning this stock. Actually, the client confessed he just wanted to
make sure he and his wife had a steady income stream if they needed it in the
future.
He asked that if he created a charitable
remainder trust (CRT) after May 31st and named his private foundation as the
remainder beneficiary would there be any adverse tax consequences? The answer
in a word -- YES !
If the client created a CRT funded with
appreciated securities and named his private foundation as the
remainder beneficiary, the income tax deduction would be limited to his cost
basis in the securities. What if the client created and funded the CRT before
May 31st? As long as the CRT is in place and funded on or before May 31st of
this year, the client will receive the normal income tax deduction (the value
of the property contributed to the CRT less the present value of the
anticipated income retained for the client's lifetime).
Is there any way to get around this
reduction in the income tax deduction? In most cases, you do not really need to
get around it because most people do not have a private foundation. A charity
or a group of charities can be named to receive the funds after the death of the
clients. Also, many areas have community foundations that will allow the
deduction to qualify as a public charity.
A community foundation will allow you to
designate the uses of the funds to specific areas of your charitable interests and/or
be specific in directing the funds for charitable causes in your city or
county.
Recently you may have heard that a balanced
budget compromise has been reached in Washington. There has been substantial
inaccurate information published about proposed tax cuts in the bill.
To give you an example of the inaccurate
information that is occurring, let me tell you about a recent Saturday morning.
I was reading the morning paper and, apparently overnight, the powers that be
in Washington had 1) cut the capital gains tax in half, 2) eliminated all
estate taxes on closely-held businesses, and 3) doubled the Unified Credit from
$600,000 to $1,200,000 for each person or estate.
At first, I was excited and then cautious. I
immediately started a search of numerous publications and the Internet to look
at the actual bill.
Guess what? There is no 50% cut in the
capital gains tax, no elimination of estate taxes on closely-held businesses,
or any doubling of the Unified Credit. As a matter of fact, there is no bill.
Then what was my newspaper referring to? An
agreement to agree. Nothing is set other than these proposed cuts will be
negotiated over the summer. As soon as anything is in writing, we will include
it in our newsletter to let you know what the bill says. In the mean time, I
thought I would make my predictions about what will be included in the bill.
On a capital gains tax cut - the current
maximum rate is 28% and I believe the best we can hope for is 19.8%. This is
half of the maximum ordinary income tax rate of 39.6%. However, I believe the
number will be in the 22% to 24% range with no indexing for inflation.
On estate tax relief for closely-held
business owners - at best, I believe that there may be a chance for the first
$2,000,000 of business value to pass tax free as long as the family does not
sell or close the business within 10 years from the date of death. If the
business is sold within 10 years from the date of death, has a material change
in family ownership, or goes public, the estate tax and interest would become
due. Also, I believe that this may apply to only the first $2,000,000 of value
on the business.
On an increase in the Unified Credit - I
believe we will see an increase to $1,000,000 over 4 years beginning in 1998. I
believe the phase-in will be $100,000 per year until the $1,000,000 mark is
reached. If I am correct, there are numerous estate planning opportunities to
eliminate estate taxes for your children, grandchildren, and even
great-grandchildren.
A year ago, most insurance companies were
warning that term insurance rates would be increasing in 1997. Their reasoning
was proposed guidelines that would require them to change their reserves and
therefore increase their premiums. 1997 is almost half over and not only did
term rates not go up for most carriers but for many companies there has been a
dramatic decrease. Let me give you an example of a case we are working on.
A client is updating his life insurance
coverage with me. A few years ago, he bought a combination of policies including
term and permanent life insurance on himself. At his wife's recommendation last
year, he purchased $250,000 of term insurance on her. She reasoned that with
two young children at home, if something happened to her, he would be forced to
hire a housekeeper, a nanny, and a cook. He had never thought about it until
she started adding up the cost and he was astonished and more appreciative of
his wife and the many roles that she filled.
One year ago at age 34, she was issued a ten
year level term policy from a AAA rated carrier for $210. This year he asked me
to get a quote on another $250,000 of the same ten year level term insurance on
her. He later called me to say that there must be a mistake since the premium I
quoted him was exactly one-half of last year's premium for the same coverage. I
confirmed with the insurance company that their new rates for healthy non
smoking females had been cut in half. I was amazed and the client was
delighted.
As you know, we try to offer quick tips to
our readers on a variety of subjects. This quarter's tip has to do with why it
is important to compare different insurance companies for the desired coverage.
We all know that insurance companies price
their life insurance products differently when you are a smoker versus a
non-smoker.
But did you know that different insurance
companies can have different definitions of what a smoker is?
For example, the husband I mentioned in the
previous section did not smoke cigarettes but did admit he smoked a cigar once
a week on the golf course. When inquiring with the various insurance companies,
we received no less than three different classifications for him. The same
company that gave his wife the great rates considered him a smoker, both now
and forever. (Her classification was "never smoked".) Another company
would consider him a smoker for 2 years. Still another company considered him a
non-smoker since he smoked only cigars.
Also, comparing different life insurance
companies can produce different underwriting results if you have a problematic
medical history.
Finally, if any of you tried to reach us by
e-mail and failed during the week of May 12th - we were in the process of
changing and upgrading our Internet service. We were unable to access our web
site and e-mail for 6 days.
The good news is that we are back on-line. I
can be reached at my e-mail address below. You can now reach Martte, my
assistant, at her e-mail address of martte@wealth-transfer.com.
We look forward to hearing from you by
e-mail, regular mail, or telephone with any questions or comments you may have.
The
Wealth Transfer Group, Inc. is not engaged in the practice of law or accounting
nor are any of its employees, representatives, or agents. Tax and legal advice
should be obtained from qualified personnel.
(c) 1997 The Wealth Transfer Group, Inc.
283 Cranes Roost Boulevard, Suite 145, Altamonte Springs, Florida, 32701 (407)
339-5787
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