Michigan Estate Planning Blog

Obama Budget… And Estate Planning Consequences

As you are likely to have heard, President Obama unveiled his budget proposal not too long ago and it packs a wallop. We are living an era of fierce partisanship, and election season hasn’t exactly put a damper on that. As a result, the media and the critics have been quick to pounce on a number of points, to include accusations that the President’s proposal is mere election-season partisanship. That media din aside, it truly is an important proposal to understand, especially when you are planning your estate. Why? Because you can at least attempt to hedge your bets against political tides, if not also plan for what may become law. Fortunately, there are a few straightforward analyses of the proposal from an estate planning perspective, like this one from the Wills, Trusts & Estates Professor (and the second part, here). Here are a few topics to whet your appetite: Wealth Transfer Taxes: The proposed budget would permanently roll back the Estate, Gift, and Generation-Skipping Transfer (GST) taxes to their 2009 levels. The exemptions and rates would remain unified and “portability” between spouses of unused exemptions would also become permanent. However, that means going back to an exemption amount of $3.5 million and a taxation rate of 45%, thereby saving us from the possible default of falling to 2001 levels (a $1 million exemption at a 55% rate), but still representing a serious hike from the current exemptions and rate (at $5 million and 35%, respectively). Grantor Trusts: Grantor trusts, and grantor retained annuity trusts (GRATs) in particular, get some special attention. For GRATs, the proposal calls for longer “minimum” terms, with 10 years as the minimum. For those of you familiar with the device, you know this makes the prospect inherently more risky, since you have to “outlive” the term of the GRAT before transfer of the trust assets. There’s more to GRATs, but even with Grantor trusts in general the proposal is intended to beef up transfer taxes. Why? Because, as a class of trusts, they have been so useful for disseminating wealth. Those are two of the bigger – and to a certain extent, less nuanced topics – but it ought be clear that there are myriad changes in the works (also see the changes regarding “valuation”) and you are well-advised to stay tuned and keep informed. It is politics, of course, and not yet actual law. On the other hand, it can help you understand the evolving debate and your own estate plans. If these changes were to become law, the impact would expansive.

Reference: Wills, Trusts & Estates Prof Blog (February 15, 2012) “Obama’s Budget Proposal Part 1” and “Obama’s Budget Proposal Part 2”

Estate Tax Uncertainty Continues

If you’ve been following the political saga of the estate tax over the past few years then you know it’s coming to a head… again. In fact, the estate tax may very well be amongst the largest and most divisive topics as we sink deeper into the current election cycle. It’s hard to say which way it will fall, or if it will stay there for long, and that just makes estate planning a bit tricky. Even if it’s hard to say what will happen, there still are some fairly likely situations that may occur and with very different consequences. It’s worth thinking systematically, or at least understanding your odds, and in that vein I found a recent article laying out the four possibilities. 1. Gridlock. Each party pushes and pulls and yet there is no victor, and so we all lose. That is to say that if the current law isn’t extended, updated, or changed, the compromise deal reached in December of 2010 will sunset and the law will revert all the way to pre Bush tax-cuts at a whopping 55% over the $1 million exemption. That’s higher than a number of pro-tax advocates care to call for, especially given the inflation of some ten years. That said, Congressman Jim McDermott of Washington has put just such a bill into the works, with those rates and exemption amount indexed for inflation. 2. Stalemate. Perhaps no one will win but no one will want to lose, and receive their self-inflicted pain, either. Instead of failing to pass any measure they can simply extend what we have now. President Obama signed it once already and it’s a far better deal than most anti-tax representatives have seen before or since the lapse in 2010. 3. Democrat control. In many ways it’s fairly difficult to say what this would amount to since there are more pro-tax representatives amongst Democrats but few that are so concerned as to return to steep taxation. To take President Obama as a cue, it may mean a return to a higher rate (somewhere between the current 35% and 55%) to add a bit more edge, but also a higher exemption amount to cut into fewer estates. 4. Republican control. Especially if there is a Republican in the White House sometime soon, there’s renewed possibility of dropping rates and exemptions or even a lapse of the tax entirely. Of course, even with most of the legislative and executive branches there is a growing political furor over the taxation of wealth – even certain potential Republican candidates are voicing these concerns – and the estate tax is an easy target. In the end, 2012 will be about keeping one eye on the ebb and flow of politics, even if it is a particularly rapid current these days, and intelligently planning. After all, having plans in place won’t hurt if the estate tax does pass on into legislative history, but the other way around can bring some pain. For that matter, the estate tax isn’t the only impetus for a solid plan for the distribution of wealth.

Reference: Producers Web (January 17, 2012) ”4 potential scenarios for the future of the estate tax”

Estate (Tax) Planning Perspectives

Don’t be lulled into a false sense of security when it comes to estate law. That’s the lesson from a recent article out of Investment News, a gentle reminder that the estate law trap may be closing soon. As many taxpayers are well aware, the current laws related to wealth transfers (i.e., the estate tax, the gift tax, and the generation-skipping transfer (GST) tax) were set just over a year ago in the final days of December. Those laws offered fairly generous policies, effective rates, and exemption amounts, generous enough to surprise even the experts and to calm the thousands of families just spared from the estate tax. According to a Trusts & Estates magazine survey of legal and financial advisors, over the past year tax avoidance dropped from the primary concern of many to the fourth place concern. The gentle reminder: The laws are only good until 2013 and, barring any sudden outburst of non-partisan productivity at Capitol Hill, are set to expire within a year’s time. Snap, the tax trap shuts! While tax avoidance need not be your primary concern when it comes to planning, it’s likely to be a very important factor for purely economic reasons and, since estate planning is about the long haul in the first place, you can’t base it on short-term laws. Of course, however you rate the importance of tax avoidance when it comes to estate planning; it is rarely the sole concern. This lull in the taxes also can help clarify your goals in other areas. If tax avoidance dropped from number 1 to number 4, what did people start thinking about? According to the survey, people began planning in earnest to avoid chaos and discord among beneficiaries, to avoid probate, and to protect children from mismanaging their inheritance.

Reference: Investment News (January 15, 2012) “Estate tax lull may trap wealthy”

State Estate (And Inheritance) Taxes In Flux

Not all states are created equal whether that be for business, for beaches, or… for dying. Recently, Forbes released its perennial (and cheery) bit of advice regarding how to avoid state death and inheritance taxes: where not to die in 2012. As you may well know, the federal government isn’t the only level of government to impose wealth transfer taxes. In fact, 13 states and the District of Columbia impose an estate tax, generally with exemption amounts hovering around $1-2 million (far below the current federal rate of $5 million) and with a taxation rate generally pegged at 16 percent. Among the several states, Ohio offers the lowest rate at seven percent while Minnesota tops out at 41 percent. Fully six states impose an inheritance tax, one that hits the recipient of the inheritance rather than the estate from which the inheritance came. And two states actually impose both: Maryland and New Jersey. As we head into 2012, though, it’s worth noting that there has been a lot of movement regarding such state level taxation (with possibly more to come down the road). Some states are keeping their current rates or simply indexing them for inflation, while still others are making large changes. Connecticut, for one, lowered its exemption amount retroactively to be effective from January 1, 2011, at $2 million instead of the previous $3 million. In addition, there were several taxpayer-friendly changes, such as the raising exemption amount in Maine to $2 million up from $1 million and in Vermont to $2.75 million up from $2 million, with gentler tax rates to boot. Ohio actually repealed their estate tax, as many of you will have heard, but that isn’t effective until 2013. Until then, Ohio boasts the lowest exemption amount (i.e., at $338,333), with New Jersey set to take up that onerous title come next year (i.e., at $675,000). What other states are rumbling? Strong movements are underway to end such taxes in states like Indiana, Tennessee, Nebraska, and Oregon, according to the American Family Business Institute. Also, Pennsylvania has just passed a “carve-out” exemption from the state inheritance tax for farmers. In all, 2012 may bring even more changes and fewer estate dangers. Already it seems to be that much safer to pass along your estate. That said, all of this remains to be seen and tax increases may be lurking as state budgets dwindle and the politics grow more toxic. As James Walschlager, an analyst with tax publisher CCH, put it: “Most of the states are still in pretty poor shape, and if the economy doesn’t improve you might see more action by state legislatures seeking other sources of revenue.” There is much to learn about each state and the original article also has a handy interactive map. Here’s to looking forward with optimism… but also with caution.

Reference: Forbes (December 22, 2011) “Where Not To Die in 2012

The Benefits of Marriage and The Shock of (Some) State Inheritance Taxes

When it comes to death taxes, sometimes – that is, all the time – it’s not about your intentions, but only the cold hard facts. In a case recently showcased in Forbes, the intention was to wed, but the cold hard facts were that they just couldn’t get there. Result: A $214,000 tax bill. It’s the story of a New Jersey couple who was in a relationship from the 1960’s and weren’t planning on cutting that streak short anytime soon. No, in fact they were planning to retire and move into a condo in Florida where they also intended to finally tie the knot. Peter, the boyfriend, never made it and died in New Jersey, but not before leaving shares of some valuable stock worth more than $1 million. Unfortunately, that’s when the New Jersey inheritance tax kicks in with a vengeance, as any amount over $500 to someone other than a spouse or direct family member triggers a 15 percent tax. Ouch! Indeed, Peter gave his girlfriend the stock long before his untimely passing, but not before the extra tricky part of New Jersey law kicks in. Why? Because any gift made within 3 years of passing is assumed to be “in contemplation of death” and incurs taxation regardless (i.e., the dreaded “clawback”). The Forbes article contains more of the details of the story. However, here are a couple quick lessons to glean. First, the power of marriage from an estate planning perspective is huge and, second, understanding your legal environment now (and the wrinkles you’ll face) later is essential to proper estate planning. We always talk about the federal level of taxation. Nevertheless, depending upon your state of residence at death, there are a host of landmines to avoid.

Reference: Forbes (December 23, 2011) “Delayed Nuptials Cost Couple $214,000 In State Death Tax”

State Estate (And Inheritance) Taxes In Flux

Not all states are created equal whether that be for business, for beaches, or… for dying. Recently, Forbes released its perennial (and cheery) bit of advice regarding how to avoid state death and inheritance taxes: where not to die in 2012. As you may well know, the federal government isn’t the only level of government to impose wealth transfer taxes. In fact, 13 states and the District of Columbia impose an estate tax, generally with exemption amounts hovering around $1-2 million (far below the current federal rate of $5 million) and with a taxation rate generally pegged at 16 percent. Among the several states, Ohio offers the lowest rate at seven percent while Minnesota tops out at 41 percent. Fully six states impose an inheritance tax, one that hits the recipient of the inheritance rather than the estate from which the inheritance came. And two states actually impose both: Maryland and New Jersey. As we head into 2012, though, it’s worth noting that there has been a lot of movement regarding such state level taxation (with possibly more to come down the road). Some states are keeping their current rates or simply indexing them for inflation, while still others are making large changes. Connecticut, for one, lowered its exemption amount retroactively to be effective from January 1, 2011, at $2 million instead of the previous $3 million. In addition, there were several taxpayer-friendly changes, such as the raising exemption amount in Maine to $2 million up from $1 million and in Vermont to $2.75 million up from $2 million, with gentler tax rates to boot. Ohio actually repealed their estate tax, as many of you will have heard, but that isn’t effective until 2013. Until then, Ohio boasts the lowest exemption amount (i.e., at $338,333), with New Jersey set to take up that onerous title come next year (i.e., at $675,000). What other states are rumbling? Strong movements are underway to end such taxes in states like Indiana, Tennessee, Nebraska, and Oregon, according to the American Family Business Institute. Also, Pennsylvania has just passed a “carve-out” exemption from the state inheritance tax for farmers. In all, 2012 may bring even more changes and fewer estate dangers. Already it seems to be that much safer to pass along your estate. That said, all of this remains to be seen and tax increases may be lurking as state budgets dwindle and the politics grow more toxic. As James Walschlager, an analyst with tax publisher CCH, put it: “Most of the states are still in pretty poor shape, and if the economy doesn’t improve you might see more action by state legislatures seeking other sources of revenue.” There is much to learn about each state and the original article also has a handy interactive map. Here’s to looking forward with optimism… but also with caution.

Reference: Forbes (December 22, 2011) “Where Not To Die in 2012”

The Benefits of Marriage and The Shock of (Some) State Inheritance Taxes

When it comes to death taxes, sometimes – that is, all the time – it’s not about your intentions, but only the cold hard facts. In a case recently showcased in Forbes, the intention was to wed, but the cold hard facts were that they just couldn’t get there. Result: A $214,000 tax bill. It’s the story of a New Jersey couple who was in a relationship from the 1960’s and weren’t planning on cutting that streak short anytime soon. No, in fact they were planning to retire and move into a condo in Florida where they also intended to finally tie the knot. Peter, the boyfriend, never made it and died in New Jersey, but not before leaving shares of some valuable stock worth more than $1 million. Unfortunately, that’s when the New Jersey inheritance tax kicks in with a vengeance, as any amount over $500 to someone other than a spouse or direct family member triggers a 15 percent tax. Ouch! Indeed, Peter gave his girlfriend the stock long before his untimely passing, but not before the extra tricky part of New Jersey law kicks in. Why? Because any gift made within 3 years of passing is assumed to be “in contemplation of death” and incurs taxation regardless (i.e., the dreaded “clawback”). The Forbes article contains more of the details of the story. However, here are a couple quick lessons to glean. First, the power of marriage from an estate planning perspective is huge and, second, understanding your legal environment now (and the wrinkles you’ll face) later is essential to proper estate planning. We always talk about the federal level of taxation. Nevertheless, depending upon your state of residence at death, there are a host of landmines to avoid.

Reference: Forbes (December 23, 2011) “Delayed Nuptials Cost Couple $214,000 In State Death Tax

New Lexus Under Your Christmas Tree? Mind The Gift Taxes!

Christmas is over and you might have even gotten all the tinsel out of the house by now, but that doesn’t mean you’re done giving gifts. It’s likely you’re just now turning to the largest “gifts,” as your think about taxes and your estate plan. To that end, an article about the “5 Common Tax Myths About Gift Giving” came out recently in Forbes. Myth: You have to pay taxes on gifts that you receive. False. You pay gift taxes on the gifts you give, not on what you receive. The reason for the gift tax is to keep people from avoiding the estate tax by simply “giving” it away while they are alive. Accordingly, the person that does the giving accepts the tax liability. (That said, the receiver may then owe other taxes since they now own the assets, but that’s all in the course of ownership). Myth: You pay a tax on gifts you make that are over $10k. This is not entirely true since there are a number of other factors. For starters, the amount is now closer to $13k worth of gifts in a year. However, gifts to spouses (so long as they are citizens) and approved charities don’t count against that limit. If you do exceed that amount, it will first count against your lifetime exemption of $5 million. Remember to file a gift tax return with your 2011 income tax filing. Myth: You can give freely by offering them as loans and then forgiving the loans. False, the IRS is out in front of you on that, too. Loans are loans anad gifts are gifts. Should the IRS feel you’re treating a loan as a gift, it will consider it as such. Myth: Charitable deductions can always be deducted against your taxable income. Not quite. First, charitable deductions can only be claimed if the IRS recognizes the charity as a charity. Second, you can only deduct the effective amount given. So, if you receive anything of value in return, then such value counts against the value of your charitable contribution (e.g., a $100 gift is only a $60 charitable deduction, if you receive a $40 steak dinner in return). Finally, one other myth is that you need not worry about how your home state treats gifts, independent of the IRS. No, each state has its own quirks regarding deductions and ownership. For that matter, too, it’s worth noting that these amounts and rules are subject to evolving tax law which is in the cross hairs of 2012 politics and may, therefore, change within a year.

Reference: Forbes (December 27, 2011) “5 Common Tax Myths About Gift Giving”

 

ESTATE TAX FILING FOR 2010 – DEADLINE EXTENDED

If your last name is “Steinbrenner,” or you also are the heir to the estate of a decedent who passed in 2010, then you likely know that your assets stand at a crossroads and that the estate executor has a huge choice: to file for the estate tax or not to file? That, is the question. Formerly, the deadline was November 15, 2011, only a couple weeks out. Good news: Now, the deadline has been extended out to January 17, 2012. So, why is there even a choice to file an estate tax return anyway and why might it be a difficult choice? It exists, as you may know, because last December’s budget compromise created an estate tax for the year in which there wasn’t any estate tax. The move was to offer a “retroactive” estate tax to cover up the hole Congress had previously left open by allowing the 2010 tax to lapse. Of course, practically speaking anyway, it still doesn’t sound like a choice was created because, well, who would choose the estate tax? Indeed, there is a reason to choose the estate tax, but it depends entirely on the nature of the assets in the estate because of the “carryover basis” versus the “stepped-up basis” dilemma. If you choose not to pay the estate tax, then it catches up to you in the form of capital gains taxes upon the eventual sale of those assets. This is because the IRS will use the “carryover basis” or the original cost of the assets when determining capital gains. Assets that have significantly appreciated, or assets for which you cannot prove an original value, can become liabilities if you also plan to sell them. On the other hand, if you chose to pay the tax (35% on assets in excess of $5 million) then the IRS will use the “stepped-up basis” or current market value when determining the capital gains tax owed. More advice and information can be found in Deborah Jacobs’s recent article (as well as in an earlier New York Times piece), but so much depends on the particular assets and record-keeping abilities of the estate. Bottom line: As with any estate tax planning, make sure you consult with competent legal counsel, especially well before the clock runs out on January 17, 2012. In such instances, it may be prudent to file the estate tax return since you won’t pay taxes, but the rest involve a difficult calculation.

Reference: Forbes (September 13, 2011) “IRS Extends Key Deadline for 2010 Heirs”

Estate Planning New Year’s Resolutions

Time has almost expired for 2011. So, with the exception of a few last minute gifts and end-of-year financial transactions, that usually means relaxing with eggnog and, a bit later, champagne. Of course, it also means that 2012 is about to start ticking and that’s big news. 2012 is going to be a big year for planning. Why? Because the end of 2012 also means the end of the foreseeable future regarding a huge swath of estate planning issues. Everything we know now about the estate tax, the gift tax, and the other wealth transfer taxes is only set in the tax code until the end of 2012… at least until Congress finishes battling it out and makes a decision about what to do going forward. In the end, proper planning these days is about taking advantage of what we know about 2012, and hedging our bets about the future thereafter. So what do we know? Smart Money recently provided a brief run-down here: The estate tax is still set at a $5 million exemption with a 35% rate thereafter but, barring action, it will revert back to a $1 million exemption and a 55% rate! To be precise, the estate tax is actually indexed for inflation and that means it is effectively set at $5.12 million for 2012 The exemption amount for the gift tax is the same as it is for the lifetime gift-tax exemption at the inflation indexed $5.12 million, and in like fashion will snap back in 2013 without any action. This means that it may be the last year ever to take advantage of that unprecedented gifting amount. Finally, a new and very progressive provision will still be in place for 2012: “portability.” Portability means that a spouse may pass along their unused estate/gift tax exemption to their surviving spouse. That makes the effective total a married couple can pass on without tax a whopping $10 million, or $10.24 once indexed for inflation. These at least are the basic facts. It may well be that we will see a situation not unlike what occurred in 2010, when the Bush-era laws expired at congressional inaction. Remember that? Taxpayers tried to hold out until 2010 and then tried to hold onto 2010 laws (or lack thereof) until the first moments of 2011. Will we be holding onto these laws currently in play through 2012 and their generous exemptions, or is 2013 going to be even more advantageous… or treacherous for taxpayers?

Reference: Smart Money (December 13, 2011) “Estate Planning for 2012”

ESTATE TAX FILING FOR 2010 – DEADLINE EXTENDED

If your last name is “Steinbrenner,” or you also are the heir to the estate of a decedent who passed in 2010, then you likely know that your assets stand at a crossroads and that the estate executor has a huge choice: to file for the estate tax or not to file? That, is the question. Formerly, the deadline was November 15, 2011, only a couple weeks out. Good news: Now, the deadline has been extended out to January 17, 2012. So, why is there even a choice to file an estate tax return anyway and why might it be a difficult choice? It exists, as you may know, because last December’s budget compromise created an estate tax for the year in which there wasn’t any estate tax. The move was to offer a “retroactive” estate tax to cover up the hole Congress had previously left open by allowing the 2010 tax to lapse. Of course, practically speaking anyway, it still doesn’t sound like a choice was created because, well, who would choose the estate tax? Indeed, there is a reason to choose the estate tax, but it depends entirely on the nature of the assets in the estate because of the “carryover basis” versus the “stepped-up basis” dilemma. If you choose not to pay the estate tax, then it catches up to you in the form of capital gains taxes upon the eventual sale of those assets. This is because the IRS will use the “carryover basis” or the original cost of the assets when determining capital gains. Assets that have significantly appreciated, or assets for which you cannot prove an original value, can become liabilities if you also plan to sell them. On the other hand, if you chose to pay the tax (35% on assets in excess of $5 million) then the IRS will use the “stepped-up basis” or current market value when determining the capital gains tax owed. More advice and information can be found in Deborah Jacobs’s recent article (as well as in an earlier New York Times piece), but so much depends on the particular assets and record-keeping abilities of the estate. Bottom line: As with any estate tax planning, make sure you consult with competent legal counsel, especially well before the clock runs out on January 17, 2012. In such instances, it may be prudent to file the estate tax return since you won’t pay taxes, but the rest involve a difficult calculation. You can learn more about estate taxes on the Estate Tax Practice Center on our website.

Reference: Forbes (September 13, 2011) “IRS Extends Key Deadline for 2010 Heirs”

The Estate Tax In The Crosshairs

We’ve been glued to the news for the past few years trying to figure out what Congress is going to do next with the Estate Tax. More uncertainty has been the answer. Currently, we are living under an estate tax approach that is due to die on December 31, 2012. What follows is anybody’s guess. Now though, all eyes are on the upcoming presidential election. Accordingly, it is the new crop of candidates we’re watching, and there’s quite a fight brewing. Both Herman Cain and Rick Perry have come out with massive tax overhaul plans leaving many to wonder which plan would be cheaper and for whom. Since this blog post is about the estate tax, it’s worth noting that the biggest similarity involves doing away with the estate tax. Indeed, each of the major potential Republican candidates has come out strongly against the estate tax with each, except Jon Hunstman, signing the American Family Business Institute’s (AFBI) pledge to repeal the estate tax. [Sidebar: Huntsman doesn’t like signing pledges, even if he also doesn’t care for the estate tax.] The two current representatives, Rep. Michele Bachman and Sen. Ron Paul, put forward their own separate bills to repeal the estate tax. Repealing the estate tax is one of the few pillars of agreement in conservative politics today. However, President Obama is not keen on doing away with the estate tax, so we can expect the issue will become a flashpoint during the presidential election. What’s going to happen? How can we plan our estates in the midst of all this certain uncertainty? Even if you have full faith in a Republican victory, regardless of the candidate, their bills still have to make their way through what may remain a divided Congress. Simply put, it’s possible that we haven’t seen anything yet when it comes to the political squabble that is the Estate Tax.

Reference: MarketWatch (October 25, 2011) “Perry flat tax vs. Cain 9-9-9: How they’d hit you”

Credit Shelter Trust Still A Valuable Estate Planning Strategy

One of the most-heralded simplifications of the new estate tax law is portability of the individual’s federal estate tax exemption between married persons. Some media “experts” have been saying that portability would eliminate the need for most estate planning. Not true. As pointed out recently in the Journal of Financial Planning, credit shelter trusts are still a savvy planning strategy. Portability means that any unused portion of a deceased spouse’s estate tax exemption doesn’t simply dissipate but can go automatically to the surviving spouse. Each individual gets a $5 million exemption, which means a married couple can effectively protect up to $10 million with their combined exemptions. That amount is sufficient to protect the vast majority of estates, eliminating the need for a credit shelter trust to pass and protect the exemption of the first spouse to die. Or so it would seem. There are two conditions that limit the effectiveness of portability. The first is obvious: portability will expire at the end of 2012, unless Congress acts to preserve it. The second is that the surviving spouse must file a timely estate tax return in order for the IRS to assess and transfer the exemption, even if the estate value wouldn’t have otherwise triggered an estate tax return. So this simple, automatic portability thing is not as simple, nor as automatic as many would like believe. Moreover, portability as a technique lacks many estate planning advantages, especially in the cases of blended families, appreciating assets, or where sprinkling taxable income to beneficiaries in lower brackets could result in a net tax savings. Lastly, remember that portability will sunset for people dying on or after January 1, 2013. Relying on portability will be effective only in those situations in which both spouses die prior to that date. In most situations, a properly planned credit shelter trust will offer significant advantages over reliance on automatic portability.

Reference: The Journal of Financial Planning (August 2011 ed.) “Why Portability Isn’t a Cure-All

Dynasty Trusts Offer a Unique Estate Planning Opportunity

There are many strategies – or tools – available to the savvy estate planner to help protect and preserve the fruits of a lifetime of accomplishment, and pass them along to future generations. Bloomberg recently wrote about a specific type of trust known as the Dynasty Trust – a little known strategy that you might have thought was only suitable for the ultra-rich. However, in today’s tax environment, Dynasty Trusts are gaining popularity as a valid strategy for those of more modest means. Trusts can be powerful tools for overcoming transfer taxes to include the estate tax, the gift tax, and the generation-skipping transfer tax – but there are always limitations. A dynasty trust is used to pass money on to multiple generations of descendants while paying as little in taxes as possible. The trusts have no expiration date and there are no required minimum distributions, meaning their assets may grow for an unlimited number of future generations. This year represents a pretty good opportunity to set one up too, thanks in no small part to the generous gift tax exemptions in effect until the end of 2012. Currently the exemption is set at $5 million, and effectively $10 for married couples, which is a nice hefty amount to begin a trust. Since the trusts last indefinitely and avoid taxes, the money can simply accumulate over the remainder of your lifetime, offering a huge advantage over other transfer methods. Bloomberg offers some math: A dynasty trust funded with $10 million from a couple today could be worth as much as $184 million in 50 years, assuming no intergenerational transfer taxes and a 6 percent annual return, and before subtracting any federal income or capital-gains taxes paid on the trust’s investment returns. By comparison, assets not placed in a trust and taxed twice as an estate in that period could be worth $39 million at the end of 50 years, assuming a $1 million exemption and 55 percent top rate. Because of their unique nature, dynasty trusts can’t be set up in all states – most states have restrictions on the life of a trust – so setting one up might mean doing so across state lines. Still, if you are looking to set up this kind of family wealth, or transfer a large.

Reference:  Bloomberg (July 28, 2011) “Dynasty Trusts Let U.S. Wealthy Duck Estate, Gift Taxes Forever”

ESTATE PLANNING / ESTATE TAXES

With the new estate tax laws in place, including the $5 million exemption ($10 million for a married couple), many people are enjoying a false sense of security about any potential estate tax liability. First, as Forbes recently pointed out, keep in mind this new generous law expires at the end of 2012 … and it’s anyone’s guess what will happen next. In the meantime, also remember that if your state imposes a state estate or inheritance tax, the likely outcome is that combined federal and state taxes could pack a surprising punch for those above the $5 million exemption amount. The federal estate tax rate runs 35 percent, but depending on where you live, combined federal and state tax rates could run as high as 48 percent. Forbes has a handy chart here for you to review the impact of combined state and federal estate taxes by state. You can learn more about estate taxes on the Estate Tax Practice Center on our website. Also, stay informed about changes in the law that could affect you and your estate planning by subscribing to our free monthly estate planning e-newsletter.

Reference: Forbes – Robert W. Wood (July 7, 2011) “Will Ohio Estate Tax Repeal Trigger More?”

ESTATE PLANNING / SOCIAL SECURITY

When should you start taking your Social Security benefits? The current common advice is to wait as long as possible, in order to maximize your eventual monthly benefit. In fact, AARP recently launched a new online calculator to help you decide when to start taking benefits … and it clearly illustrates the benefits to claiming later. The calculator is a useful tool, and worth checking out, but as Reuters Wealth points out, the calculator is not totally neutral, and lacks advanced features that could allow you to estimate more complex situations. For example, the AARP calculator does not allow you to figure out when you should start benefits if you are no longer working and have to weigh savings withdrawals against starting benefits. It also won’t allow you to figure the tax impact of your decisions, which can be sizable. Further, it really does not allow you to compare the outcome of various scenarios in which you and your spouse choose different start dates to coordinate benefits. For those types of complex calculations, you probably will still want to consult with a professional who can help identify issues pertinent to your unique situation. Other websites with helpful calculators include: • Should you Start Social Security Early • Break-Even Calculator • Social Security Administration.

Reference: Reuters Wealth – (July 12, 2011) “Now or Later? AARP’s new Social Security Calculator?”

ESTATE TAX FILING FOR 2010 – DEADLINE EXTENDED

If your last name is “Steinbrenner,” or you also are the heir to the estate of a decedent who passed in 2010, then you likely know that your assets stand at a crossroads and that the estate executor has a huge choice: to file for the estate tax or not to file? That, is the question. Formerly, the deadline was November 15, 2011, only a couple weeks out. Good news: Now, the deadline has been extended out to January 17, 2012. So, why is there even a choice to file an estate tax return anyway and why might it be a difficult choice? It exists, as you may know, because last December’s budget compromise created an estate tax for the year in which there wasn’t any estate tax. The move was to offer a “retroactive” estate tax to cover up the hole Congress had previously left open by allowing the 2010 tax to lapse. Of course, practically speaking anyway, it still doesn’t sound like a choice was created because, well, who would choose the estate tax? Indeed, there is a reason to choose the estate tax, but it depends entirely on the nature of the assets in the estate because of the “carryover basis” versus the “stepped-up basis” dilemma. If you choose not to pay the estate tax, then it catches up to you in the form of capital gains taxes upon the eventual sale of those assets. This is because the IRS will use the “carryover basis” or the original cost of the assets when determining capital gains. Assets that have significantly appreciated, or assets for which you cannot prove an original value, can become liabilities if you also plan to sell them. On the other hand, if you chose to pay the tax (35% on assets in excess of $5 million) then the IRS will use the “stepped-up basis” or current market value when determining the capital gains tax owed. More advice and information can be found in Deborah Jacobs’s recent article (as well as in an earlier New York Times piece), but so much depends on the particular assets and record-keeping abilities of the estate. Bottom line: As with any estate tax planning, make sure you consult with competent legal counsel, especially well before the clock runs out on January 17, 2012. In such instances, it may be prudent to file the estate tax return since you won’t pay taxes, but the rest involve a difficult calculation. You can learn more about estate taxes on the Estate Tax Practice Center on our website.

Reference: Forbes (September 13, 2011) “IRS Extends Key Deadline for 2010 Heirs

Reversing Your Roth IRA

Are you still reeling? August was a tumultuous money month (to say the least), but at least we can breathe a sigh of relief that it’s over. Hopefully the upcoming months will bode better. The S+P downgrade and the following correction, as well as several other market drops, hit and hurt a lot of people. Of course, if your Roth IRA was hit then you’ve also got a bit more work to do to protect yourself. As a recent SmartMoney article details, you can still un-do a Roth IRA rollover from 2010, at least until October 17, that is. Many people rolled over into Roth accounts in 2010, as recent rules allowed Americans of all incomes to do so. Why did they do so? Well, the Roth IRA can be a powerful income source in retirement or even a tool for estate planning purposes. This is because you pay the tax up front and no tax at the time of withdrawal. That is why the Roth IRA is so special. Problem 1: With the recent market volatility, perhaps you have lost your shirt (and your socks) on your investment accounts, including your recently converted Roth IRA. Problem 2: Now you are facing a larger tax bill due to your Roth IRA conversion and you have even fewer spare dollars to foot the bill. Good news: Before it’s too late, “re-characterize” your Roth IRA accounts and, by so doing, at least save yourself from the tax burden and live to fight another day. Read the SmartMoney article and share it with your similarly situated family members and friends.

Are you still reeling? August was a tumultuous money month (to say the least), but at least we can breathe a sigh of relief that it’s over. Hopefully the upcoming months will bode better.

The S+P downgrade and the following correction, as well as several other market drops, hit and hurt a lot of people. Of course, if your Roth IRA was hit then you’ve also got a bit more work to do to protect yourself. As a recent SmartMoney article details, you can still un-do a Roth IRA rollover from 2010, at least until October 17, that is.

Many people rolled over into Roth accounts in 2010, as recent rules allowed Americans of all incomes to do so. Why did they do so? Well, the Roth IRA can be a powerful income source in retirement or even a tool for estate planning purposes. This is because you pay the tax up front and no tax at the time of withdrawal. That is why the Roth IRA is so special.

Problem 1: With the recent market volatility, perhaps you have lost your shirt (and your socks) on your investment accounts, including your recently converted Roth IRA. Problem 2: Now you are facing a larger tax bill due to your Roth IRA conversion and you have even fewer spare dollars to foot the bill.

Good news: Before it’s too late, “re-characterize” your Roth IRA accounts and, by so doing, at least save yourself from the tax burden and live to fight another day. Read the SmartMoney article and share it with your similarly situated family members and friends.

Reference: SmartMoney (September 7, 2011) “Should You Reverse That Roth Conversion?”

ESTATE LAW / INHERITED IRA’S

Inheriting something is not the same as knowing what to do with it, and that may be especially true with retirement accounts. As a bit of guidance I found a recent article from Forbes offering seven steps to take if you have recently received an inheritance, or if you know that you will receive an account. Likewise, if you are planning on leaving a retirement account or if you want to keep your beneficiary in the know, these are some of the things to discuss with them. Without further ado then, a slightly re-tooled list of ideas: 1. Find out if a required minimum distribution (RMD) needs to be taken for the year you receive it. If the account is tax-deferred (like a traditional IRA or 401k) and the owner was at least 70½ then you need to contact the account custodian to be sure that it has been taken and to take it yourself if needed. 2. If there are multiple beneficiaries, then consider splitting the account into separate IRAs for each, thus avoiding investment disputes and allowing the younger beneficiaries greater leverage in stretching out RMD’s. 3. If there are secondary beneficiaries you can choose to disclaim the IRA, especially if it’s not something that you need or even a tax burden, and in that way pass it on to the next. 4. You need to figure out when to begin taking RMD’s. If you’re not the spouse of the deceased, this means re-titling the account to reflect that it is yours by way of a beneficiary inheritance. If you are the spouse this either means waiting until your spouse would have begun taking them (when they would have turned 70½) or rolling it into your own IRA and taking it as your own. 5. Determine if you want to keep the account in the original institution. Some institutions don’t allow you to take distributions across your own lifetime and you may just want to shift it over. In that case it is often best to open an account at another institution and ask them to retrieve the account (rather than backing it out yourself, as that can be risky.) 6. Name your own beneficiaries and secondary beneficiaries, ensuring the protection of the account and giving flexibility to your heirs.

Reference: Forbes (August 23, 2011) “7 Steps to Take When Inheriting a Retirement Account”

ESTATE PLANNING

Watching the market nowadays is hardly a soothing pastime. It seems that once again we’re watching our futures in ticking numbers and advancing line graphs. There is, at least, some solace to be found in volatile markets for the careful estate planner, however. Indeed, there are a number of ways that the present woes of the marketplace can create a useful estate planning environment, and a few of them can be found in this recent article from the Wall Street Journal. In large part the advice divides between whether you have holdings in private or public stock, but there are three ideas. If you have holdings in private stock, then volatility raises the possibility of greater discounts when gifting. In general, private stock can have discounts up to 30% or 35% applied when they are gifted simply because, without public trade, it would have been harder to find a buyer and the IRS takes note of that fact. The IRS, thankfully, can also be persuaded to take note of market volatility and its affect on the sale of private stock. With volatility too high (hovering around 40 by the Chicago Board Options Exchange Volatility Index) discounts might range as high as 40% to 50%. If you have public stock, then consider a Grantor Retained Annuity Trust (GRAT). As many readers will know, a GRAT works like a trust turned annuity, since you put assets in a trust and thereafter receive payments for a set period. The principle benefit is the ability to give away assets without paying tax on the appreciation. With markets as they are, and with interest rates at such lows, timing could be perfect to form a GRAT around depressed assets and lock out the tax-man when those assets bounce back. (The GRAT just has to rise above the IRS’s “hurdle rate” presently 2.2% a year.) Finally, even simple options can work wonders: with low interest and low stock prices, it may also be the time to make an interfamily loan to fund an investment. Using the loan to purchase depressed stock (or depressed real estate if you have faith in that market) can secure that appreciation for your family member. These are a few of the WSJ’s ideas to get started. You’ll find some more out there (like Deborah Jacobs’s recent advice on gifting), but in general it’s a good time to look over your assets and your plans with your counsel. You need to weather the present storm, yes, but there’s more work to be done too.

Reference:  The Wall Street Journal (August 20, 2011) “How Volatility Eases Estate Planning”

Opportunities And Traps: Non-Citizen Gifting Gotchas

Often, American citizens aren’t the only ones subject to American taxes. So, it isn’t only American citizens who have something to gain from the recent tax law changes. We’ve all been given a generous tax windfall for 2011 and 2012 when it comes to gift and estate taxes, and, according to a recent article in Private Wealth, it may be an especially windfall for wealthy non-citizens. For a wealthy non-citizen residing in the U.S., the problem is their possible tax liabilities lie within a hazy zone between a “domiciled resident” and a “non-domiciled resident.” The initial guidelines for determining domicile status are (1) they must reside in the U.S. and (2) they intend to reside in the U.S. indefinitely. While the fact of residence is fairly easily ascertained, it is the “intent” issue where a number of factors come into play (like residence size, organizational memberships, and the location of burial plots). Oftentimes, it is difficult to predict what the IRS will conclude. Accordingly, you might never know with certainty whether you are or are not a domiciled resident. The difference in taxes is vast. A domiciled resident is subject to U.S. gift and estate taxes on all assets, whereas a non-domiciled resident is only subject to taxes on U.S.-based assets (physical ones, usually, such as art). If you know you are a non-domiciled resident, then you can transfer massive amounts of wealth without U.S taxation – and it might be wise to do so. However, if it is later determined that you were, in the opinion of the IRS, domiciled, then you’ll be subject to tax, interest, and possible penalties. That wouldn’t be a pleasant surprise, to say the least. The idea, then, is to play it safe. Hedge your bets by transferring assets as though you were domiciled. You’ll still be transferring assets, but you’ll be safer doing so. The sooner the better for domiciled, non-domiciled, and citizen alike, however, since we’re only guaranteed the present exemptions until the end of 2012. The original article goes into far more depth, and certainly more information can be found there. Nevertheless, if this issue may touch or concern you, then you should meet with counsel to assess your potential liability… and the best way to hedge your bets.

Reference: Private Wealth (July 2011) “Foreigners and the Gift Tax”

Potential Portability Problems

Much ado has been made about the new power in estate planning known as “portability,” and for good reason. Nevertheless, it’s also prudent never to put all your eggs in one basket. So it is with the matter of estate tax exemption portabilility. I’ve written previous blog posts regarding some of those issues, like when the Journal of Financial Planning upheld the credit-shelter trust over “portability”, but a recent Bloomberg article gives renewed emphasis and food for thought. As you may know, “portability” is the new ability for a deceased spouse to transfer their unused gift and estate tax exemption amount to their surviving spouse. Provided all the required paperwork is timely filed with the IRS, that effectively allows a married couple to exempt an astounding $10 million from federal taxes for their loved ones without the use of trusts or legal devices. Bloomberg suggests that it is better to think of portability as a “safety valve” for married couples, especially those whose assets would be entirely covered by the doubled exemption, but not something to be relied upon. The biggest limitation, for one, is that portability exists at the whim of lawmakers. After the budget showdown last December, existence of portability is only guaranteed until the end of 2012 (if that, Congress being the politically fickle animal that it is). But there is another important caveat Bloomberg touches upon that is worth mentioning. Portability is a power that exists between spouses, but in a world of shifting marriages, divorces, and remarriages that also creates strange limitations. Portability only applies to the last deceased spouse. Accordingly, if a widow remarries, then they could potentially lose that massive exemption (even after their own estate has doubled, creating an estate tax liability). Indeed, if portability isn’t lost and if the widow’s new spouse predeceases after using their own exemption by gifting, then the widow’s estate is in the same tricky situation. Portability is a wonderful tool to consider, but clearly, too, it is a difficult one with which to make long-term estate tax plans. More information and ideas about trusts can be found in those articles, and of course the best resource is your own legal counsel.

Reference: Bloomberg (August 16, 2011) “Wealthy Take Estate-Tax Exemptions Beyond Grave Until 2013”

IRS Issues Estate Tax Guidance… For 2010 Decedent’s Estates

After a bit of biding our time, we finally have something official with which to work regarding 2010 estate taxes. Nevertheless, there is a bit more waiting to do. The IRS recently published its guidance in the form of Notice 2011-66 and Revenue Procedure 2011-41. As you may recall, 2010 was a uniquely advantageous year for decedent’s estates. Yet, in many ways, it was a uniquely stressful year for estate tax planning. Most of the wealth transfer taxes lapsed after the inaction of Congress the previous year, until last December’s tax compromise that is. This compromise set the transfer taxes back in place, retroactively for the entire past year (i.e., 2010). With taxes both in effect and not in effect by various laws, the December compromise left it to individuals taxpayers to decide between paying estate taxes or not paying estate taxes. Consequently, much of the chatter on the issue has been debating which path to take (since it’s not actually as obvious as one would think). Now, resolving that tax dilemma is less hypothetical since Notice 2011-66 explains how to opt out of the estate tax and Revenue Procedure 2011-41 explains the special tax rules that will go into effect if you do opt out. Hani Sarji has offered up a helpful piece on his Forbes-based blog explaining the developments in detail, along with the pros and cons. He also provides several helpful tables of information to help you navigate this issue.

Reference: Forbes (August 9, 2011) “Tax Deadlines for 2010 Deaths? IRS Finally Issues Guidance”

Credit Shelter Trust Still A Valuable Estate Planning Strategy

One of the most-heralded simplifications of the new estate tax law is portability of the individual’s federal estate tax exemption between married persons. Some media “experts” have been saying that portability would eliminate the need for most estate planning. Not true. As pointed out recently in the Journal of Financial Planning, credit shelter trusts are still a savvy planning strategy. Portability means that any unused portion of a deceased spouse’s estate tax exemption doesn’t simply dissipate but can go automatically to the surviving spouse. Each individual gets a $5 million exemption, which means a married couple can effectively protect up to $10 million with their combined exemptions. That amount is sufficient to protect the vast majority of estates, eliminating the need for a credit shelter trust to pass and protect the exemption of the first spouse to die. Or so it would seem. There are two conditions that limit the effectiveness of portability. The first is obvious: portability will expire at the end of 2012, unless Congress acts to preserve it. The second is that the surviving spouse must file a timely estate tax return in order for the IRS to assess and transfer the exemption, even if the estate value wouldn’t have otherwise triggered an estate tax return. So this simple, automatic portability thing is not as simple, nor as automatic as many would like believe. Moreover, portability as a technique lacks many estate planning advantages, especially in the cases of blended families, appreciating assets, or where sprinkling taxable income to beneficiaries in lower brackets could result in a net tax savings. Lastly, remember that portability will sunset for people dying on or after January 1, 2013. Relying on portability will be effective only in those situations in which both spouses die prior to that date. In most situations, a properly planned credit shelter trust will offer significant advantages over reliance on automatic portability.

Reference: The Journal of Financial Planning (August 2011 ed.) “Why Portability Isn’t a Cure-All”

ESTATE PLANNING / ESTATE TAXES

With the new estate tax laws in place, including the $5 million exemption ($10 million for a married couple), many people are enjoying a false sense of security about any potential estate tax liability. First, as Forbes recently pointed out, keep in mind this new generous law expires at the end of 2012 … and it’s anyone’s guess what will happen next. In the meantime, also remember that if your state imposes a state estate or inheritance tax, the likely outcome is that combined federal and state taxes could pack a surprising punch for those above the $5 million exemption amount. The federal estate tax rate runs 35 percent, but depending on where you live, combined federal and state tax rates could run as high as 48 percent. Forbes has a handy chart here for you to review the impact of combined state and federal estate taxes by state. You can learn more about estate taxes on the Estate Tax Practice Center on our website. Also, stay informed about changes in the law that could affect you and your estate planning by subscribing to our free monthly estate planning e-newsletter. Reference: Forbes – Robert W. Wood (July 7, 2011) “Will Ohio Estate Tax Repeal Trigger More?”

ESTATE PLANNING / STATE ESTATE TAXES

As of July 1, it’s official: Ohio has repealed its state estate tax, as reported through Forbes. Of course, it’s not quite dead yet as the estate tax provision of the new law doesn’t go into effect until Jan 1, 2013. Once it kicks in, though, the Ohio estate tax repeal is meant to be permanent. This will leave New Jersey with the distinction of being the state with the lowest estate exemption of $675,000. Other states are in the news as well, with both Maine and Oregon tweaking their state estate taxes. The Maine budget makes a prospective change in their exemption, doubling it from $1 million to $2 million as of Jan. 1, 2013 and thereby exempting some 400 estates. Oregon, on the other hand, has introduced new graduated rates from 10% to 16% applied to the estate above $1 million. The tax applies to the entire estate but jumps up to a flat 16% on portions in excess of $1 million, thus going in the opposite direction of Maine and Ohio and introducing a new calculus for Oregon estate planning. For a map showing state estate taxes and rates for 2011, click here. You also can learn more about estate tax planning on the Estate Tax Practice Center on our website, where we have a handy estate tax calculator to help estimate your federal estate tax liability. Reference: Forbes – Ashlea Ebeling (Jun 30/ Jul 1, 2011) “Ohio Repeals its Estate Tax; Maine and Oregon Tweak Theirs”

ESTATE PLANNING / ESTATE TAX

SmartMoney recently ran a reminder to all possible victims of the estate tax. The fact is that you could have a taxable estate, and not even realize it. Most people assume that since they don’t “feel” wealthy, they don’t have to worry about estate taxes -- but they don’t actually do the math. Your “taxable estate” includes (minus liabilities): proceeds from life insurance policies; your primary residence and any vacation and/or rental properties; retirement accounts, investment accounts; cars, furniture, collectibles, and the rest of your “stuff.” Plus any private business ownership interests (such as shares in a family business or partnership). Smart Money offers a hypothetical example: Stephanie is a divorced single parent. Since she earns a healthy salary, she has a $4 million term life policy to provide for her three teenagers. She also has $800,000 of equity in her home, $1 million in retirement plan accounts, and $500,000 worth of assorted personal assets (cars, clothes, furniture, jewelry, and so forth). Stephanie has no significant debts beyond her home mortgage. Since she has never considered herself to be anything close to “rich” she has never done any estate-tax-avoidance planning. However, if she died tomorrow, her estate would be worth a whopping $6.3 million for federal estate tax purposes ($4 million + $800,000 + $1 million + $500,000), and her estate would owe the Feds $455,000 ($6.3 million estate – $5 million exemption) x 35% tax rate). Yikes! There may be a state estate tax bill too. The bottom line is that estate planning means planning for contingencies. Consulting an estate planning attorney will not only help you plan for a potential estate tax liability, but also deal with important non-tax issues like probate avoidance, distribution of your hard-earned assets, providing for your own care in the event of long-term illness or disability, and the naming of guardians for any minor children. You can learn more about the estate tax, and even calculate your current (and potential future) estate tax liability with the estate tax calculator on our website. Link: http://blogs.smartmoney.com/tax/2011/02/17/think-youre-estate-tax-exempt-maybe-not/?mod=rss_ From SmartMoney Blog – Bill Bischoff – (Feb 17, 2011) “Think You’re Estate Tax Exempt? Maybe Not”

ESTATE PLANNING / ESTATE TAX

It would be an understatement to say that the federal estate tax is in a state of flux. The current rules, with the generous $5 million individual exemption ($10 million for a couple), expire at the end of 2012. Last month, the Treasure Department released the “General Explanations of the Administrations’ Fiscal Year 2012 Revenue Proposals,” also known as the “Greenbook.” Perusal of the Greenbook reveals that the Obama Administration will be seeking to make some big estate tax changes. • Return the Gift, Estate, and Generation-Skipping Transfer (GST) taxes to 2009 levels. The Greenbook proposes that in 2013 the exemptions return to $3.5 million for the estate tax, $1 million for the gift tax, and slightly over $1 million (reflecting inflation adjustments since 1999) for the generation skipping transfer (“GST”) tax. • Make portability permanent. Portability is the ability for the first spouse’s estate exemptions to be passed on to the surviving spouse, essentially doubling the estate exemptions for couples while cutting down on the stress of so many trusts. • Limitations on the use of valuation discounts. Although the IRS has long had defenses in place against attempts to reduce the value of the taxable portion of an estate, Chapter 14 of the tax code, the effectiveness of these defenses have been challenged in a number of ways and part of the proposal is to strengthen Chapter 14 by significantly hampering any effort to receive a valuation discount. • Impose a ten-year minimum term on GRATs. Grantor retained annuity trusts (“GRATs”) have become extremely popular estate planning vehicles over the past several years. Among other reasons, they are relatively low cost to implement, are fairly low risk, and can transfer significant amounts of wealth to lower generations with virtually no estate or gift tax, often without using any of the transferor’s exemption. One requirement for a successful GRAT, however, is that the grantor must survive the term, otherwise the trust “fails.” To minimize risk, estate lawyers usually use a series of short-term (e.g., three-year) GRATs in their planning. The proposal is to require a term of no less than 10 years. This proposal would apply to GRATs created after the date of enactment, and has been made several times in the past. • Limiting the capacity of Dynasty Trusts. Under current law in many states, a Dynasty Trust can be established to transfer wealth across generations and exist for that purpose “in perpetuity.” The Obama proposal would provide that, on the 90th anniversary of the creation of a trust, the Generation-Skipping Tax (GST) exclusion allotted to the trust would terminate. This proposal would apply to trusts created after enactment, and to the portion of a pre-existing trust attributable to additions made after the date. Many of these proposals have been made before, and most are likely to face stiff opposition. However, the take-away here is that the “death tax” is not dead. The current law, with its generous exemptions, could be the calm before the storm. A wise planner would move sooner rather than later to preserve estate assets for future generations.

ELDER LAW / RETIREMENT PLANNING

It’s no secret that “retirement” is a touchy subject nowadays. Costs are up, savings are down, and the public is generally pessimistic according to the 2011 Retirement Confidence Survey. As a recent SmartMoney article relates, one increasingly popular solution, although it might not be an easy one, is to escape domestic problems and costs by going global and retiring abroad. It’s hard to say just how many retirees are living offshore. They aren’t counted in the census, and many go to great pains to fly below the radar, but according to the Social Security Administration the number of retirees taking benefits overseas has risen 32% since 2002. Some end up in small French villages or other cultured corners, many more retire to exotic regions like Thailand, while still others fly south to warmer climes in South America, happy to endure the rainy seasons to live where they can stretch out their dollar in style. The potential pay-off is great, especially if you have a taste for tropical drinks, but there are a number of concerns too. Simply put, it’s an entirely different place. Moving out of the way of rising costs in the US may mean moving into the path of hurricanes, into entirely different cultural waters with conflicts you don’t understand, and a potential web of paperwork and legal technicalities. Be cautious of scams, particularly the yet-to-be-completed “development.” Investors have been known to abandon such projects, leaving an incomplete, insolvent, or undersold development that may not fulfill the promises of the pamphlet. The Smart Money article is quite lengthy and detailed. If an off-shore retirement destination is enticing you, I suggest reading this – and many others. Due diligence is the key to a successful off-shore transition.

ESTATE PLANNING / ESTATE TAX

It would be an understatement to say that the federal estate tax is in a state of flux. The current rules, with the generous $5 million individual exemption ($10 million for a couple), expire at the end of 2012. Last month, the Treasure Department released the “General Explanations of the Administrations’ Fiscal Year 2012 Revenue Proposals,” also known as the “Greenbook.” Perusal of the Greenbook reveals that the Obama Administration will be seeking to make some big estate tax changes. • Return the Gift, Estate, and Generation-Skipping Transfer (GST) taxes to 2009 levels. The Greenbook proposes that in 2013 the exemptions return to $3.5 million for the estate tax, $1 million for the gift tax, and slightly over $1 million (reflecting inflation adjustments since 1999) for the generation skipping transfer (“GST”) tax. • Make portability permanent. Portability is the ability for the first spouse’s estate exemptions to be passed on to the surviving spouse, essentially doubling the estate exemptions for couples while cutting down on the stress of so many trusts. • Limitations on the use of valuation discounts. Although the IRS has long had defenses in place against attempts to reduce the value of the taxable portion of an estate, Chapter 14 of the tax code, the effectiveness of these defenses have been challenged in a number of ways and part of the proposal is to strengthen Chapter 14 by significantly hampering any effort to receive a valuation discount. • Impose a ten-year minimum term on GRATs. Grantor retained annuity trusts (“GRATs”) have become extremely popular estate planning vehicles over the past several years. Among other reasons, they are relatively low cost to implement, are fairly low risk, and can transfer significant amounts of wealth to lower generations with virtually no estate or gift tax, often without using any of the transferor’s exemption. One requirement for a successful GRAT, however, is that the grantor must survive the term, otherwise the trust “fails.” To minimize risk, estate lawyers usually use a series of short-term (e.g., three-year) GRATs in their planning. The proposal is to require a term of no less than 10 years. This proposal would apply to GRATs created after the date of enactment, and has been made several times in the past. • Limiting the capacity of Dynasty Trusts. Under current law in many states, a Dynasty Trust can be established to transfer wealth across generations and exist for that purpose “in perpetuity.” The Obama proposal would provide that, on the 90th anniversary of the creation of a trust, the Generation-Skipping Tax (GST) exclusion allotted to the trust would terminate. This proposal would apply to trusts created after enactment, and to the portion of a pre-existing trust attributable to additions made after the date. Many of these proposals have been made before, and most are likely to face stiff opposition. However, the take-away here is that the “death tax” is not dead. The current law, with its generous exemptions, could be the calm before the storm. A wise planner would move sooner rather than later to preserve estate assets for future generations.

Link: http://blogs.forbes.com/lewissaret/2011/03/11/obama-estate-tax-budget-proposals/

From Forbes.com (March 11, 2011) “Obama Estate Tax Budget Proposals”

ESTATE PLANNING / ESTATE PLAN REVIEW

From Forbes.com (12/30/2010) “Rewrite Your Will” With couples now able to pass $10 million untaxed, it’s time to redo your estate plan. A new year, a new tax law, and time for a new estate plan – or at least a review of the plan you currently have. Congress has increased the exemption from the federal estate tax to $5 million, leaving fewer than 4,000 U.S. families likely to be affected by the 35% federal estate tax in 2011. This new deal expires in 2012, but experts predict the estate tax exemption will not be reduced. This higher exemption, combined with the new “portability” provision throws new light on many old planning strategies. “Portability” means that if a married person dies in 2011 or 2012 without using their full $5 million exemption, the unused exemption is passed along to the surviving spouse, added to their exemption amount, for a combined exemption of up to $10 million in assets that the surviving spouse can transfer to heirs federal estate tax-free. What do all of these changes mean to you? Forbes recently ran an article in their Money & Investing section with a good summary. Here are three of their top considerations: • Everyone still needs fundamental estate planning. Regardless your age, marital status or net worth, you still need fundamental estate planning such as a will, a living will, health care / medical directives, and a durable power of attorney. • Review your current estate plan. Due to the increase in the applicable exemption amount to $5 million (and a combined $10 million for married couples), some estate tax planning strategies may need to be revised and/or simplified. Especially in light of the new portability provision, some bypass or credit shelter trusts may no longer be necessary, or their terms may need to be changed. Note: Remember that bypass trusts often accomplish important, non-tax goals as well, to include asset protection and estate equalization. • Plan for state estate taxes. Currently, 21 states and the District of Columbia have estate or inheritance taxes, or both, in place for 2011. The typical exemption amount for estate taxes is only $1 million, and inheritance taxes – levied on the recipient of any bequest – can hit the first dollar (no exemptions). You can find an interactive map showing which states impose estate or inheritance taxes, and their details, here. We offer our clients an affordable estate review consultation. Visit our website to learn more about our estate plan review process.

ESTATE PLANNING / ESTATE TAX

From Forbes.com (March 11, 2011) “Obama Estate Tax Budget Proposals” In February 2011, the Treasury Department released its “General Explanations of the Administration’s Fiscal Year 2012 Revenue Proposals,” which tax lawyers generally refer to as the “Greenbook.” The Greenbook makes the following estate tax proposals, which planners and individuals should consider when engaging in estate planning during 2011 and 2012 because these proposals represent the Obama Administration’s current thinking with respect to estate taxes. It would be an understatement to say that the federal estate tax is in a state of flux. The current rules, with the generous $5 million individual exemption ($10 million for a couple), expire at the end of 2012. Last month, the Treasure Department released the “General Explanations of the Administrations’ Fiscal Year 2012 Revenue Proposals,” also known as the “Greenbook.” Perusal of the Greenbook reveals that the Obama Administration will be seeking to make some big estate tax changes. • Return the Gift, Estate, and Generation-Skipping Transfer (GST) taxes to 2009 levels. The Greenbook proposes that in 2013 the exemptions return to $3.5 million for the estate tax, $1 million for the gift tax, and slightly over $1 million (reflecting inflation adjustments since 1999) for the generation skipping transfer (“GST”) tax. • Make portability permanent. Portability is the ability for the first spouse’s estate exemptions to be passed on to the surviving spouse, essentially doubling the estate exemptions for couples while cutting down on the stress of so many trusts. • Limitations on the use of valuation discounts. Although the IRS has long had defenses in place against attempts to reduce the value of the taxable portion of an estate, Chapter 14 of the tax code, the effectiveness of these defenses have been challenged in a number of ways and part of the proposal is to strengthen Chapter 14 by significantly hampering any effort to receive a valuation discount. • Impose a ten-year minimum term on GRATs. Grantor retained annuity trusts (“GRATs”) have become extremely popular estate planning vehicles over the past several years. Among other reasons, they are relatively low cost to implement, are fairly low risk, and can transfer significant amounts of wealth to lower generations with virtually no estate or gift tax, often without using any of the transferor’s exemption. One requirement for a successful GRAT, however, is that the grantor must survive the term, otherwise the trust “fails.” To minimize risk, estate lawyers usually use a series of short-term (e.g., three-year) GRATs in their planning. The proposal is to require a term of no less than 10 years. This proposal would apply to GRATs created after the date of enactment, and has been made several times in the past. • Limiting the capacity of Dynasty Trusts. Under current law in many states, a Dynasty Trust can be established to transfer wealth across generations and exist for that purpose “in perpetuity.” The Obama proposal would provide that, on the 90th anniversary of the creation of a trust, the Generation-Skipping Tax (GST) exclusion allotted to the trust would terminate. This proposal would apply to trusts created after enactment, and to the portion of a pre-existing trust attributable to additions made after the date. Many of these proposals have been made before, and most are likely to face stiff opposition. However, the take-away here is that the “death tax” is not dead. The current law, with its generous exemptions, could be the calm before the storm. A wise planner would move sooner rather than later to preserve estate assets for future generations.

Link: http://blogs.forbes.com/lewissaret/2011/03/11/obama-estate-tax-budget-proposals/

 

ELDER PLANNING / TAX RELIEF ACT

From SMARTBUSINESS  (March 1, 2011) “How the 2010 Tax Relief Act could impact your estate”

Article Quotation: The 2010 Tax Relief Act has resulted in significant changes to the estate and gift tax rules, providing some clarity — at least for the next two years.

The 2010 Tax Relief Act brought significant changes to the estate and gift tax rules – and an excellent opportunity for you to review your estate planning goals, and the legal documents to achieve them. The new law is complex, and the rules are only in place for two years – this year and next. SmartBusiness recently ran an article highlighting some of the more important provisions:

• Estate Taxes. The estate tax exemption will be $5 million ($10 for a married couple), with a maximum tax rate of 35 percent. The new law also provides a “portability” feature of the exemption amounts for married couples. Any exemption amount that remains unused at the death of a spouse is available for use by the surviving spouse. These two changes – the increase in the exemption amount and the portability feature – could impact your estate plan if your planning strategy includes a Credit Shelter Trust. Under certain circumstances, your credit shelter trust could be over-funded, leaving limited assets for your surviving spouse. It also is possible that you may no longer need a credit shelter trust at all.
• Gift Taxes. The new gift tax exemption is set at $5 million, up from just $1 million. Generally, you may consider gifting property that you believe will appreciate in value. Gifting now will now only remove the current value of the property from your estate, but also any future appreciation.

Remember, even if your total estate is less than $5 million, you (and your family) still need comprehensive estate planning to take advantage of tax planning opportunities available to you and to ensure that your wishes are carried out in the event of your death or disability.

You can learn more about estate tax in the Estate Tax Practice Center on our website. Be sure to check out our handy Estate Tax Calculator, too.

ELDER PLANNING / TAX RELIEF ACT

“How the 2010 Tax Relief Act could impact your estate”

The 2010 Tax Relief Act has resulted in significant changes to the estate and gift tax rules, providing some clarity — at least for the next two years. The 2010 Tax Relief Act brought significant changes to the estate and gift tax rules – and an excellent opportunity for you to review your estate planning goals, and the legal documents to achieve them. The new law is complex, and the rules are only in place for two years – this year and next. SmartBusiness recently ran an article highlighting some of the more important provisions: • Estate Taxes. The estate tax exemption will be $5 million ($10 for a married couple), with a maximum tax rate of 35 percent. The new law also provides a “portability” feature of the exemption amounts for married couples. Any exemption amount that remains unused at the death of a spouse is available for use by the surviving spouse. These two changes – the increase in the exemption amount and the portability feature – could impact your estate plan if your planning strategy includes a Credit Shelter Trust. Under certain circumstances, your credit shelter trust could be over-funded, leaving limited assets for your surviving spouse. It also is possible that you may no longer need a credit shelter trust at all. • Gift Taxes. The new gift tax exemption is set at $5 million, up from just $1 million. Generally, you may consider gifting property that you believe will appreciate in value. Gifting now will now only remove the current value of the property from your estate, but also any future appreciation. Remember, even if your total estate is less than $5 million, you (and your family) still need comprehensive estate planning to take advantage of tax planning opportunities available to you and to ensure that your wishes are carried out in the event of your death or disability. You can learn more about estate tax in the Estate Tax Practice Center on our website. Be sure to check out our handy Estate Tax Calculator, too.

ELDER PLANNING / TAX RELIEF ACT

From SMARTBUSINESS (March 1, 2011)

“How the 2010 Tax Relief Act could impact your estate”

The 2010 Tax Relief Act has resulted in significant changes to the estate and gift tax rules, providing some clarity — at least for the next two years. The 2010 Tax Relief Act brought significant changes to the estate and gift tax rules – and an excellent opportunity for you to review your estate planning goals, and the legal documents to achieve them. The new law is complex, and the rules are only in place for two years – this year and next. SmartBusiness recently ran an article highlighting some of the more important provisions: • Estate Taxes. The estate tax exemption will be $5 million ($10 for a married couple), with a maximum tax rate of 35 percent. The new law also provides a “portability” feature of the exemption amounts for married couples. Any exemption amount that remains unused at the death of a spouse is available for use by the surviving spouse. These two changes – the increase in the exemption amount and the portability feature – could impact your estate plan if your planning strategy includes a Credit Shelter Trust. Under certain circumstances, your credit shelter trust could be over-funded, leaving limited assets for your surviving spouse. It also is possible that you may no longer need a credit shelter trust at all. • Gift Taxes. The new gift tax exemption is set at $5 million, up from just $1 million. Generally, you may consider gifting property that you believe will appreciate in value. Gifting now will now only remove the current value of the property from your estate, but also any future appreciation. Remember, even if your total estate is less than $5 million, you (and your family) still need comprehensive estate planning to take advantage of tax planning opportunities available to you and to ensure that your wishes are carried out in the event of your death or disability. You can learn more about estate tax in the Estate Tax Practice Center on our website. Be sure to check out our handy Estate Tax Calculator, too.

ESTATE TAX

From SmartMoney Blog – Bill Bischoff – (Feb 17, 2011) “Think You’re Estate Tax Exempt? Maybe Not” Article Quotation: You may think you don’t have to worry about the federal estate tax because you’re not “rich.” In fact, some unsuspecting upper middle-class folks are exposed to the tax, which hits at a painful 35% rate. Sample Blog Post: SmartMoney recently ran a reminder to all possible victims of the estate tax. The fact is that you could have a taxable estate, and not even realize it. Most people assume that since they don’t “feel” wealthy, they don’t have to worry about estate taxes -- but they don’t actually do the math. Your “taxable estate” includes (minus liabilities): proceeds from life insurance policies; your primary residence and any vacation and/or rental properties; retirement accounts, investment accounts; cars, furniture, collectibles, and the rest of your “stuff.” Plus any private business ownership interests (such as shares in a family business or partnership). Smart Money offers a hypothetical example: Stephanie is a divorced single parent. Since she earns a healthy salary, she has a $4 million term life policy to provide for her three teenagers. She also has $800,000 of equity in her home, $1 million in retirement plan accounts, and $500,000 worth of assorted personal assets (cars, clothes, furniture, jewelry, and so forth). Stephanie has no significant debts beyond her home mortgage. Since she has never considered herself to be anything close to “rich” she has never done any estate-tax-avoidance planning. However, if she died tomorrow, her estate would be worth a whopping $6.3 million for federal estate tax purposes ($4 million + $800,000 + $1 million + $500,000), and her estate would owe the Feds $455,000 ($6.3 million estate – $5 million exemption) x 35% tax rate). Yikes! There may be a state estate tax bill too. The bottom line is that estate planning means planning for contingencies. Consulting an estate planning attorney will not only help you plan for a potential estate tax liability, but also deal with important non-tax issues like probate avoidance, distribution of your hard-earned assets, providing for your own care in the event of long-term illness or disability, and the naming of guardians for any minor children. You can learn more about the estate tax, and even calculate your current (and potential future) estate tax liability with our website.

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