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New partner, new life. Things will change, whether you want them to or not. One area that will change for you is the area of estate planning. You have reached a plateau and you must reach even higher. It is never too early to begin estate planning. There are many “valid” reasons to avoid estate planning. Some of them may even apply to you. Some of the common excuses that I hear include: I am too poor, I am too young, I have no assets. But are you really? If we look at each of these very good reasons we can understand why some of you feel this way. Estate planning is generally associated with wealth, but what is wealth? Philosophical meditations aside, it can be the trappings of a comfortable lifestyle, a thick stock portfolio or a lot of money in the bank. But true wealth means more than the expensive car or the financial cushion. Providing for your family — your real riches –is usually number one on the list of assets that you treasure. If something happened to you on your way home from the store, would your family be provided for? You may have considered their financial well-being should they have to continue without you. But, what if your spouse accompanied you on that trip to the store? Who would be there for your children? Selecting the right person or persons to care for your children may be more important than assuring that they’ll be able to attend computer camp. If you don’t make the choice, the courts will, and your kids may be raised in a way that could happen only over your dead body. Will the person(s) selected by the court have your values? Will they have the undying affection for your loved ones? Will they be able to manage the money from your insurance to the benefit of your pride and joy? Maybe the courts will choose your parents, but they may be too old and not up to the task. Maybe it will be your in-laws, but they may not share your values. You might have selected your best friends, the ones with children the same age as your children. You might have, but you did not. We hear about the estate (death) tax going away, but that does not change many aspects of estate planning. It is not all about money, and what if this tax does not go away but is just changed? Planning is of paramount importance. As a new partner you may feel underpaid and underappreciated. But do not fret; the federal and state governments do not feel that way about you. If you should die without a will (intestate), the state will provide a substitute. It probably will not look like a will that you might have written, if you had the time. You probably want your family’s destiny to be controlled by you, not others. If that is the case, then you must do something now, because there may not be a later. UNDERSTAND THE RULES Let us look at some of the basic rules. It is said that these rules are “to die for.” As in the rules of law you are used to, these rules are very specific, and adherence to them could mean the difference between an outrageously high gift and estate tax or one that is more than manageable. The gift and estate taxes are combined into one tax rate structure. The current applicable exemption amount for the years 2000 and 2001 is $675,000. The applicable exemption is a number that we can understand. For the years 2002 and 2003 it is $700,000; $850,000 for the year 2004; and rising to $900,000 for 2005. Ultimately it is scheduled to rise to $1,000,000, but not until the year 2006, unless changed by Congress. These figures represent the amount of your taxable estate on which there would be no tax, the excludable amount. Your estate will be able to exclude this amount from your taxable estate and if you leave the balance to your spouse, there will be no estate tax at your passing. With proper planning, these amounts can be doubled for your children’s benefit. Estate taxes are computed by applying the unified rate schedule to the total of cumulative lifetime transfers (gifts) and transfers at death (your net estate, i.e., the gross estate less allowable expenses) and taking credit for the gift taxes paid on the gifts. Rates begin at 18 percent for taxable amounts of $10,000, rising to 55 percent for amounts over $3 million. These so-called “graduated” rates — there are 17 in all, including the 18 and 55 percent — are applied to the amounts to which they correlate. For example, the rate applicable to $10,001 to $20,000 is 20 percent, and the rate for $20,001 to $40,000 is 22 percent. So a gift of $40,000 would be taxed at 18 percent on the first $10,000, at 20 percent for the next $10,000 (i.e., up to $20,000) and then at 22 percent for the $20,001 to $40,000 part of the gift. If you should be so lucky, for estates over $10 million the lower brackets are phased out until you reach $17,184,000, when the rate is a flat 55 percent. The phase-out is accomplished by adding 5 percent of the amount over $10,000,000, until the $17,184,00 amount is reached. This amount may not seem substantial for what you hope will be a large estate, so there are some other thoughts to consider. USING INSURANCE Life insurance can be an important part of your estate plan since it can provide: � liquidity to pay estate taxes, especially if a significant portion of your estate is a closely held business, and � immediate funds to your family to protect your assets in the event of a sudden death. By transferring the ownership of your life insurance to a “life insurance trust,” the insurance proceeds can be excluded from your taxable estate. You are now on the way to an efficient estate plan — maximum amount, minimum tax. With proper planning the combined gift and estate tax can be reduced, sometimes dramatically. Various proposals being considered by Congress may further reduce these amounts over time. It is important to monitor this political activity because it could affect your planning. Remember that planning is a continuous process. CALCULATING THE TAX The estate tax computation starts with a calculation of the gross estate — all assets owned by or in the name of the decedent. The gross estate is either valued at the date of death or the alternate valuation date (generally six months later). The lower value is used, resulting in a lower estate tax. Administrative expenses (i.e., funeral costs, attorneys’ fees and accounting fees), charitable and marital deductions are subtracted from the gross estate to arrive at the taxable estate. Since this is a unified tax, taxable gifts made after 1976 are added to the estate to establish the total taxable estate. It is at this point that the tentative estate tax is calculated. Certain credits — i.e., gift taxes, state death taxes, foreign taxes (if any) and other adjustments — are made to establish the final estate tax. As Yogi Berra once said, “It ain’t over ’til it’s over.” Now is the time when the IRS makes its presence known. IRS EXAMINATION Many estate tax returns are examined by the Internal Revenue Service. Unlike other government agencies, the IRS is like an elephant; it never forgets. Every gift tax return that you have ever filed is brought forth, like a heavy talisman hanging around your neck. If you made a mistake or omitted something it will be able to correct the error for you. The IRS is diligent in second-guessing the valuations of your assets. In establishing your gross estate you must include your interests in various assets such as art, ventures and real estate. Those assets must be professionally valued where appropriate. Discounts can be taken for a number of reasons like minority interests or lack of marketability. PLANNING DEVICES In planning your estate you might establish a family limited partnership (FLP) or other tax-saving device. Gifts of FLP interests with appropriate discounts during your lifetime can reduce your estate tax. Lifetime giving, or “giving with a warm hand,” has some distinct advantages. Since in some cases gifts of interests in an FLP might involve a closely held family business, the value of the gifts may be easier to ascertain if you are available to assist with the valuation. Your taxable estate is reduced not only by future income and appreciation on the FLP interest but also any tax paid on the gift (provided you live for three years after the gift). Dying with just the right amount to avoid estate and generation skipping transferor (GST) tax is a goal that some try to achieve. Obviously, predicting that moment is more than difficult, but you can try to get close. You might consider transferring the ownership of your home or homes to a qualified personal residence trust (QPRT) or implementing some other strategies to reduce your estate tax and transfer more wealth to the next or successive generations. Gift taxes are computed by applying the unified rate schedule to cumulative taxable gifts, calculating the tax and subtracting the taxes paid for prior taxable periods. There is currently a $10,000 annual exclusion per donee for gifts of a present interest, with an annual maximum of $20,000 per donee applicable to spouses who utilize gift splitting (electing to have half of the gift made by the spouse as theirs). In addition, there is an unlimited exclusion for payments of tuition and medical expenses, but only if paid directly to the institution owed the amounts, i.e., a university, hospitals or doctors. Always keep in mind that transfers to your citizen spouse are not taxable and have no limitation. This gives you the ability to balance estates to achieve the optimum result, the lowest tax. Gifts subject to the GST are defined as amounts gifted to a skip person, i.e., a grandchild or someone two generations or more younger than the transferor. An event called a taxable termination occurs when an interest in property held in trust for the next generation terminates and trust property is held for, or is distributed to, a skip person. An amount equal to $1,030,000 (indexed for inflation) can be excluded from the GST amount for the year 2000. Married couples can exclude $2,060,000 at this time. BEGINNING THE PROCESS Now that you understand some of the rules you can start to do some planning. Some of you may have minor children and it may be the right time to plan for them. Prep school, college, grad school, law school, weddings and, unfortunately, sometimes divorces are on the horizon. Grandchildren are the dividend of this investment. As a new partner, some of the cash flow problems you will encounter will relate to your receiving a “draw” or an advance against future earnings. And, now that you are deemed self-employed, you are subject to a new tax, the self-employment tax. It is similar to the Social Security tax that you always had withheld from your salary, except that now you are paying the equivalent of both sides, the employee portion and the employer’s portion. There are some tax breaks, but it is a new financial responsibility. Your retirement is your responsibility. It is your job to make sure that you have enough money to provide for your future while at the same time living the life of a partner. You should read and understand your partnership agreement. You may feel that you have just started and retirement looms way off in a future you aren’t even imagining, but planning for that day should be high on your list of things that you must deal with — now. A popular misconception involves already having a will. When was it prepared and by whom? Where were you living and who was living at that time? Is the executor that you selected a while ago the person you want today? Yesterday’s best friend is tomorrow’s enemy, or at least not the person you want to trust your family’s future to. Maybe the kids have grown up and can handle things themselves. On the other hand, maybe they cannot be trusted to handle their own affairs and settle them amicably among themselves. Prepare a will and keep it updated. Review it at least every three years, when the law changes or when an important life event takes place. You are the master of your own destiny and your family’s future well-being. Laurence J. Foster is a tax partner at Richard A. Eisner & Company, a New York-based accounting and consulting firm.

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