Why Has Income Tax Planning Become a Bigger Part of Estate Planning?

February 17, 2016

Many of you may have had your estate plan prepared at a time when the exemptions from Federal estate tax were much lower and the ability to use a deceased spouse’s exemption was unavailable. To ensure that a married couple maximized the use of the available exemptions, your estate plan may have been structured so that upon the death of one spouse, two subtrusts were automatically created for the benefit of the surviving spouse.  

As discussed in an earlier post, the estate tax laws have changed and exemptions from Federal estate tax were permanently set at higher levels. In addition, married couples are permitted to transfer any unused Federal estate tax exemption to a surviving spouse by way of a concept known as ‘portability.’ Thus, the need for an automatic allocation between two subtrusts upon the death of one spouse is no longer necessary in certain circumstances and may have unintended income tax consequences as follows.

As you may know, upon the death of one spouse, the tax basis in certain assets owned by that spouse is adjusted to the fair market value as of the date of death. This adjustment is often referred to as a “step-up” or “step-down” in basis. Assets funded into the subtrusts will receive a basis adjustment on the death of the first spouse. Upon the death of the surviving spouse, only assets held in one of the subtrusts (i.e., the Marital Trust) will be adjusted to the fair market value as of the date of death of the surviving spouse. The assets of the other subtrust (i.e., Credit Shelter or Bypass Trust) continue with the same tax basis that was received upon the death of the first spouse. Therefore, the beneficiaries under your estate plan after both of you are gone may pay more in capital gains tax on any assets held in the subtrusts if automatic allocation is made between the subtrusts and the assets appreciate in value after the date of death of the first spouse.

To provide maximum flexibility to the family following the death of the first spouse, you should consider amending your estate plan to remove the automatic allocation and having all the assets pass to one subtrust. The surviving spouse would then have the ability to reallocate (i.e., disclaim) a portion of the assets, if necessary, but the reallocation would be made after evaluating both the income tax and estate tax situation at that time.

Realizing this may be a lot to digest, the main point is that if you have not recently reviewed your estate plan, you should do so to see if any changes need to be made. Rest assured that any change would be implemented only after collaboration and concurrence of all of your advisors (i.e., your financial advisors, your accountant and your attorney). #estateplanning #taxplanning #incometaxplanning #portability #estateplanupdate

ALERT – New Rules for Basis Consistency

February 13, 2016

If you are an executor of an estate or an advisor to such executor, then you need to be aware of two new statutes that may impact you and a change in the initial deadline. Included in the Surface Transportation and Veterans Health Care Choice Improvement Act that was effective on July 31, 2015, were two statutes that require the executor of an estate to report to the IRS and to the beneficiaries of the estate the basis (in this case, fair market value of the asset that is determined after a death) of the assets that the beneficiaries are to receive from the estate.

Section 1014(f) requires that the basis the beneficiary receives be consistent with the value as reported on the estate tax return. Section 6035 is the reporting requirement on new Form 8971. Under Section 6035, executors are required to provide certain information on Form 8971 to beneficiaries no later than the earlier of (a) 30 days after the estate tax return was due (taking into account any extensions), or (b) 30 days after the estate tax return is filed. In Notice 2015-57, effective on August 21, 2015, the initial deadline for such reporting was extended to February 29, 2016 to allow for the promulgation of regulations.

On February 11, 2016, Notice 2016-19 was released in which the initial deadline was further extended to March 31, 2016 to allow for more time to issue regulations relating to these new statutes. Among other items that are in need of clarification is whether an executor of an estate in which an estate tax return is only being filed to take advantage of portability needs to complete and file Form 8971. The recent Notice advises executors and others to not file Form 8971 until the release of the regulations, which are expected “very shortly.” Thus, executors and advisors remain in limbo in certain situations and will need to stay tuned for further updates.  Furthermore, beneficiaries need to be aware that they will be receiving this information and will be responsible for maintaining accurate records.  #estateadministration #taxplanning #basisconsistency #form8971

David Bowie’s Last Will and Testament – What Is to be Learned?

February 2, 2016

Last week David’s Bowie’s Last Will and Testament was filed in a New York Surrogate Court.  We learned how he wanted to be remembered, a subject I addressed in an earlier post.  We also learned how his considerable estate will be divided and about specific gifts he wanted to have made.  But most importantly, we learned that having a Last Will and Testament as the main instrument that details the disposition of our estate does not ensure privacy regarding our personal and financial affairs after death. In fact, having a Last Will and Testament means that anyone can see who benefits from an estate and ensures the Court has to be involved at some level. 

For some individuals, privacy may not be a priority issue after death, but for others privacy is tantamount.  This is why when you think about your own estate plan you should ask – “What level of privacy in my personal and financial affairs do I want to achieve after my death?”  If you want the utmost privacy, then consider using a Revocable Living Trust as the main instrument in which to dispose of your estate.  If, however, there are problematic parties or other reasons to have the Court supervise the administration of your estate, then perhaps having only a Last Will and Testament to dispose of your estate is the path to take.  But, you should consider who will have access to your estate plan and what will they learn as result.  Either way, a thoughtful conversation with your professional advisor should be had as you begin constructing your estate plan. #davidbowieswill #estateplanning #revocabletrust #livingtrust

How Do You Want to Be Remembered…

January 26, 2016

When it comes to being remembered, you may have very detailed plans that you want implemented or you may not have thought about it at all.  During the recent blizzard or Snowzilla on the East Coast, the Tomb of the Unknowns was constantly guarded, as it has been since 1937, a tribute to those who had fought in earlier wars.   Of course this raises the question as to how you would want to be remembered.  Here is a short list of some considerations:

(1) Who should be notified – Family, friends, colleagues, organizations or groups, listservs, newsletters or other publications?

(2) What personal information would you want to have included? Certain information is required for a death certificate, but are there certain accomplishments or interesting stories you would want shared?  Do you want an obituary, and if so, what should it say?  

(3)    How do you want your remains handled and where do you want to be buried? This could include your preference for cremation versus burial or use of a family burial plot, mausoleum crypt or cremation niche for an urn.

(4) Do you want a marker or headstone? If so, what should the engraving say and how should the marker be designed?  Do you have a preference as to the type of urn or casket?

(5) Do you want a memorial service or just a big party? Should any service be religious, and if so, are there particular hymns to sing, certain readings to include and/or particular persons you want to provide eulogies or words of remembrance?  Are there military honors to be bestowed?  Should any service be for family and close friends only?  If you are to be buried, are there personal items to include in the casket? A particular outfit in which you want to be buried?  Do you want a viewing?

(6) How should the costs and expenses be paid and by whom?

This list includes only a few of the items to consider, but will hopefully start the conversation with family members.  Ultimately, the more planning that is done can help alleviate stress on surviving family members during an already difficult time and also pay tribute in a respectful, thoughtful manner.  #estateplanning #howtoberemembered #blizzard2016 #snowzilla

If I Won a $1 Million in the Lottery or $1.5 Billion…

January 13, 2016

Today there is a lot focus on the Powerball lottery that currently has a jackpot of $1.5 billion (and climbing) and many discussions are being had detailing what one would do if they won. Some of the considerations include making gifts and loans to friends and family members.

Although chances of winning are 1 in 292 million, if you are in a position to consider making gifts or loans to friends and family members, there are a few key points to remember as to minimize any gift tax consequences. As highlighted in an earlier article, we each have the ability to gift during our lifetimes without incurring gift tax. The current exemption is $5.45 million per person above which a 40% flat tax is imposed. In order to utilize that exemption, a gift tax return is required.

Furthermore, each of us has the ability to gift up to $14,000 per person to an unlimited number of people each year. If you are married, a married couple can gift up to $28,000 per person each year. These annual gifts do not count against the lifetime exemption, and are therefore a separate method in which gifting can be made.

IRS regulations also permit you to pay the tuition expenses for a full-time or part-time student directly to the “qualifying educational organization” without having to claim an exemption from gift tax or incurring gift tax. Tuition expenses do not include books, supplies, dorm fees, board or other such expenses that are not direct tuition expenses.

In addition, you can pay for “qualifying medical expenses” that include expenses for diagnosis, cure, treatment, prevention as well as amounts paid for medical insurance. This exemption does not include any expenses that were reimbursed ultimately by medical insurance. Again, such expenses can be paid directly and you would not have to claim your lifetime exemption or incur gift tax

And what about making loans to friends and family? Be sure that any loan you make is not deemed to be a gift. That is, the loan should impose interest at current fair market values. Applicable Federal Rates (AFR) for January range from 0.75% for short term loans (up to 3 years) to 2.65% for long term loans (over 9 years). Loans can be structured in a myriad of different ways.

So, while you are thinking about what you would do if you won a million dollars or more in the lottery, be sure to keep in mind a few gift exemptions that are available to you that help minimize potential tax consequences and good luck! #powerball #ifIWonPowerball #winningthelottery #lottery #gifttax #estateplanning #taxplanning

Online Forms – To Use or Not to Use?

January 10, 2016

Many people ask why they should not use online forms that are available for free? Why do I need to go to an estate planning attorney? If you choose to use a form, you run the risk that the form will not be accepted in the state in which you live. Each state has different requirements for the execution of a will, trust or power of attorney. An estate planning attorney can help guide you through the requirements and also ask the tough questions about the family dynamics that are often not considered when using a form. More importantly, using an estate planning attorney ensures that your wishes for the disposition of your estate are clearly identified for your family in the proper manner.

In addition, a form does not encourage the dialog that a visit with an estate planning attorney does. That dialog includes important topics such as incapacity planning, tax planning, health care decisions and guardianship. However, an estate planning discussion also involves the little stuff. For example, who will receive Aunt Sue’s china or Uncle Frank’s antique car. Very often people forget about the little things and focus on the house, bank accounts or life insurance, when in fact, the disputes arise over a particular piece of furniture or jewelry that had strong sentimental value. Forms do not address these issues in the way that having a conversation does. Regardless of the value of your estate, forms do not lay the complete groundwork for your legacy. #legalforms #estateplanning

Your final moments…

January 3, 2016

We may not know what Army veteran Matthew Whalen’s final wishes were, but one can imagine that dying so young was not in his plans although saving lives seemed to be part of who he was.  Many of us would like to control our final moments, but very often cannot. However, by having an advance medical directive and living will, we can control who is in charge of making those final healthcare decisions and provide guidance to our family and friends about end of life decisions and organ donation.  And, what is more important is that by establishing these directives, the conversations can be had with family and friends about those specific wishes and desires and avoid having to figure out what was wanted at an already stressful time. #advancedirective #estateplanning #livingwill #organdonation

Donor Advised Funds

December 31, 2015

As another year begins many individuals make resolutions. Very often one of those resolutions is to have an estate plan prepared or update an outdated estate plan.  A couple of considerations in preparing an estate plan is whether you are charitably inclined and would you like to do more for your community?  A donor advised fund is one way to set aside funds for charitable purposes that can be capitalized upon during your lifetime and within your estate plan.  Moreover, a donor advised fund can continue after you are gone.  Here is just one person’s rationale behind the creation of a donor advised fund that also allowed her to get more involved with her community. @CFNOVA #donoradvisedfunds #taxplanning #charitablegiving

Why Estate Planning Continues to Matter

December 30, 2015

There are those that wonder if estate planning will remain an important consideration given that many estate and gift tax planning provisions that were enacted in early January 2013 are ‘permanent’. However, we know that individuals have needs in addition to potential estate and gift tax planning, and estate planning encompasses much more than tax planning. Here are a few items to remember as to why estate planning continues to matter.

With the passage of the 2012 Tax Act, provisions now exist that will encourage individuals to continue focusing on estate planning. For example, for the foreseeable future, the gift, estate and generation-skipping transfer tax exemptions are unified, with exemptions of $5 million per person ($10 million for married couples), indexed for inflation, and a tax rate of 40% (for 2016 the exemptions will be $5.45 million per person).  There are those that may rely on the ‘permanence’ of these provisions. However, as has been seen in the past, nothing tends to be permanent with Congress and commentators have been quoted that ‘permanent’ is in the eye of the beholder. With that said and given the continued uncertainly as to when Congress may next change course, including, but not limited to, passing additional provisions that reduce the availability of some advanced estate planning techniques, individuals who are considering making life time gifts to family members, including grandchildren, are well advised to make those gifts sooner rather than later and take advantage of the continued higher exemptions. For example, transfers of closely held business interests may be accomplished by utilizing the increased exemptions and applying valuation discounts that are available.

In addition, the 2012 Tax Act allows married couples to transfer any unused Federal estate tax exemption to a surviving spouse. This ‘portability’ provision has also been made ‘permanent’, but the executor must file an estate tax return in order to claim the unused exemption. Failure of the executor to timely file the estate tax return may result in future application of estate tax to the surviving spouse’s estate, if exemptions decrease and/or the estate increases, and the possibility of liability for exposure to the estate tax. In addition, individuals must understand that if a surviving spouse remarries and the new spouse dies, only the unused exemption of the second deceased spouse can be used. Therefore, the application of the portability provision must be analyzed at that time to determine whether it best fits the circumstances.

Finally, individuals living in Maryland and the District of Columbia need to remember that lower exemptions from estate tax exist. For example, Maryland’s exemption for 2016 is only $2 million per person and the exemption for the District of Columbia is currently only $1 million per person (although that may change). Thus, proper planning is essential to minimize the impact of those taxes.

Beyond estate and gift tax planning, many worry about what happens if they become incapacitated whether through an illness or accident. Planning for long-term care has gradually become and continues to be a major consideration in any estate plan. Individuals want to ensure that during any period of incapacity they have the appropriate fiduciaries in place to manage their financial and healthcare affairs. Without adequate planning, families may have to resort to the guardianship and conservatorship process, a court driven process, to gain access to assets and make important decisions. Furthermore, those without proper estate planning may find themselves and their hard earned savings wasted by family members, and therefore, not used or available for their care. Although conservatorship proceedings may be necessary in certain circumstances, a financial or durable general power of attorney would permit an individual to appoint an agent to act on their behalf with respect to their property, finances and personal affairs.

Moreover, planning for health care is also a necessary part of any estate plan, particularly now after the enactment of health care reform. Studies have shown that only between one-fourth and one-third of Americans actually have an advance medical directive or health care power of attorney. These studies have shown that in dealing with end of life circumstances, individuals who have had the detailed conversations about their health care ultimately reduce the emotional and financial costs associated with their end of life care, and therefore, reduce the overall burden on surviving family members. A healthcare power of attorney or advance medical directive allows an individual to appoint an agent to make medical decisions on their behalf.

Without the appropriate financial and medical powers of attorney in place, individuals are relying on their family members to make the ‘right decisions,’ which may not be in the best interest of the actual incapacitated individual. For example, sufficient assets may exist to keep an individual at home with the aid of home health care providers, but without specific direction in an estate plan and a trusted named fiduciary, those who have control of the finances, whether by default under state law or by familial relationship, may decide to sell the home and move the individual to a low-cost facility in order to preserve an inheritance for future generations (i.e., the person in control of the finances). This result does not satisfy the individual’s ultimate financial and health care goals.

Alternatively, individuals may use a revocable living trust to plan for incapacity and specifically outline how they want their assets used for their benefit and for the benefit of those who depend on them, including family members with special needs. Special needs planning can be accomplished through estate planning. Without such planning, special needs family members may not receive the care and support that was intended.

Estate planning encompasses much more than tax planning or planning for what happens immediately after one’s death. The laws are constantly changing. An individual’s family situations may change as well as their goals and objectives over time. Estate planning should, therefore, have a priority in all our lives. #estateplanning #taxplanning #incapacityplanning