Michigan Estate Planning Blog

Capital Gain Conundrum

A new tax season and a new tax reporting rule for capital gains. It’s not a big change but, as Robert Wood writing for Forbes reminds us, any change to something as important as the capital gains tax is worth noting, especially with tax season upon us. From the IRS news release: New Way to Report Capital Gains and Losses In most cases, taxpayers now use new Form 8949 to report capital gain and loss transactions. Schedule D, the form traditionally used to show these individual transactions, is now used as a summary sheet, reporting amounts for total sales price, basis and other adjustments for all individual transactions, and for figuring the tax. For securities both bought and sold in 2011, the Form 1099-B, issued by the broker, normally shows the taxpayer’s basis. The information on this form will help taxpayers correctly fill out Form 8949. See the instructions for Form 8949 and Schedule D for details. If nothing else, let this practical change remind you of the very practical reality of capital gains and losses, and what they mean to your estate planning strategies. Your goal, after all, is to leave your assets to your loved ones. However, depending on how you manage your planning, you also may be incurring unnecessary gift or estate taxes on your end… and inheritance or capital gains taxes on the recipient’s end. Accordingly, bearing this in mind can allow more precise footwork with your overall wealth transfer planning (especially when it comes to the taxable basis of the assets).

Reference: Forbes (January 11, 2012) “New Capital Gains Tax Reporting For 2011 Returns”; IRS.GOV news (January 2012) “2011 Changes Offer Tax Benefits to Almost Everyone; Special Tax Payment and Reporting Requirements Apply to Many”

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”

 

GIVING / COLLEGE 529 PLANS

Whether you’re a parent or a grandparent, one of the hallmark ways of preparing for the upcoming generation is the college savings 529 plan. There’s a bit of bittersweet news there nowadays: overall funds are down, but the alternatives even lower. According to a recent Wall Street Journal article, and Morningstar research, investments in 529 plans fell an average of 9.5% in the third quarter and are now down 5.9% this year through Sept. 30. This marks the worst setback since the market crash in early 2009. Of course, thanks to market volatility and several rounds of bad news from around the globe, the Standard & Poor's 500-stock index fell 14% and 10% over the same periods. Further, while the S&P has been fairly flat over the past five years, the average 529 plan has returned 4.6%, and accumulated earnings are still tax free. It just may be, as many uphold, that the 529 is still a great option if you have a future student for whom you need to plan. Indeed, especially for grandparents, the current tax environment might be especially helpful. Whatever investment vehicle you choose, your help and proper planning may be more important now than ever before as the last five years also have seen tuition and fees increases by as much as 38% for in-state, public college students and 30% for private college students.

Reference: The Wall Street Journal (October 18, 2011) “Bad Marks for College-Savings Plan May Not Call for a Time Out”

Valuation Discount Strategies

Oftentimes, proper planning is about the ability to offer proper proof. That’s my primary take-away lesson from the Ninth Circuit Court of Appeals and the case of Estate of Petter v. Commissioner, as assessed in a recent Forbes article. As many of you appreciate, when giving away assets it is important to get the most bang for your buck and that can be achieved by generating “discounts.” This was the plan of Ms. Petter when she transferred $22 million of UPS stock to a limited liability company (LLC) and then gave or sold units of the LLC to her heirs. Note: An LLC can help diffuse ownership and effectively transform the taxable value of the underlying assets. This transformation of value hinges on the “marketability” of the interests held by the LLC members and their degree of “control” over the assets. As a result, the lack of marketability and control makes the interests held by the LLC members less valuable. Accordingly, such interests are “worth less” than the face value of the underlying assets and their value inside the LLC may be “discounted.” Such was the case with the LLC established by Ms. Petter. Ms. Petter claimed a whopping 51% discount on the underlying assets of the LLC. Unfortunately, she was unable to support this discounted value and the IRS rejected that figure and approved a far more conservative discount of 36%. Not to be defeated, Ms. Petter tried another approach. She built a provision into her planning that were there a valuation dispute with the IRS, then any discounted percentage denied would automatically go to her chosen charity… instead of to her estate or an heir. Why? She wanted to avoid any gift or estate taxes. Naturally, the IRS challenged this fall back position, but the Ninth Circuit upheld it.

Reference: Forbes (September 30, 2011) “Fancy Appraisals Can Defeat IRS”

CRTs – More Benefits Of Giving And Receiving

Sometimes, giving an asset to charity doesn’t mean you can no longer enjoy benefits from it. Yes, it’s true. And, the magical legal tool that affords this wonder is the “Charitable Remainder Trust (CRT).” Recently, Reuters cast another spotlight on this powerful tool with an eye to the future. A CRT, as many of you may be aware, is a specific type of irrevocable trust set up to give an asset away to charity at the time of death, but to allow you to receive income from the asset for your lifetime, another’s lifetime or even a period of years. The CRT allows you to do good, receive an income, and avoid some hefty taxes. As Reuter’s puts it: “In essence, the trust takes advantage of the tax-exempt status of the nonprofit it benefits.” The important thing about the CRT these days, at least as far as taxes are concerned, is the future. The returns on a CRT are similar to any investment in accordance with the market. And, with the market as it is, that’s not great. It follows then that the tax reduction might not be that great either. But many taxpayers are concerned about increased taxation in the future. President Obama already has called for further taxation with the new idea of the so-called Buffet Rule, not to mention the closing of Bush-era tax cuts and stricter estate taxes. For as many in Congress as are calling for tax reduction there are those calling for tax increases… and the super-committee might be turning the latter direction. If the Bush-era tax cuts expire, and in particular if the capital gains tax rises back up to 24% instead of 15%, the CRT will be quite the advantageous machine. In the end, a CRT is an irrevocable trust. It can’t be undone once it is created. More background and insights can be gleaned in the original article. Whether a CRT is right for you and your circumstances will require competent legal counsel. As always, look before you leap.

Reference: Reuters (Sepetember 30, 2011) “Charitable remainder trusts: how the wealthy give it away and get it back”

GIVING AND RECEIVING: THE CHARITABLE GIFT ANNUITY

Remember the good old days, you know, when you could invest in a certificate of deposit (CD) and the bank would actually pay you something called “interest” on your deposit? No, really, I kid you not. Obviously, I am being a bit factitious, but you get the point. It is hard enough to make money these days, let alone accumulate wealth. Let’s say you are retired and are looking for a place to put your money to work. And, you need more of a return on that money than the banks are paying on their CDs. Also, you are intending to leave a bequest from your estate to support your favorite charity. Here is a win-win idea to consider, especially if you are charitably-inclined – invest in a charitable gift annuity. Recently, none other than The Wall Street Journal ran an article on this very subject, entitled “Earning income by Making a Gift.” Here is how it works: Give the money to your favorite charity… instead of to your favorite bank. However, you may “give and receive” when you make the gift to charity in exchange for a charitable gift annuity. Ultimately, you’ll be giving what remains of that charitable gift to the charity at the time of your death. However, in the interim, you’ll receive a fixed and predictable stream of income over your lifetime. The most important detail is that the “annuity rate” is determined by your age, rather than national interest rates. That means a couple at age 65 would receive around a 4.7% yield and a couple at age 75 would get 5.7% (individuals at age 65 and 75, respectively, would receive even higher yields at 5.3% and 6.5%). Further, the money is tax friendly. The yield is largely tax-free and the initial chartable donation offers a sizable upfront tax deduction. Some savvy life insurance planning can even replace the value of the asset contributed to the annuity for your loved ones. How? With the increased return on your money via the charitable gift annuity, you may find enough left over to pay the life insurance premiums. A charitable gift annuity can help you support yourself, provide for your heirs (via the life insurance “wealth replacement”), and your favorite charity, all in one fell swoop. Nevertheless, it can be a little tricky. Ensure that your charity can support a charitable gift annuity. Not all can. Look before you leap is good advice here. Check out The American Council on Gift Annuities website (acga-web.org.), but remember two important caveats. First: a charitable gift annuity locks you into that rate for your lifetime. So, what is competitive now may not be should national interest rates rise and the yield will no longer be as competitive. Some regard this as unlikely, especially in the short term (i.e., Ben Bernanke, Chairman of the Federal Reserve Bank has said interest rates will be suppressed for another two years). Second: if the charity itself could suffer economic hardship and thereby be unable to meet their annuity obligations and cease payments. This is a real possibility. Charitable gift annuities are not backed by the government like CDs. Clearly, then, if a charitable gift annuity is right for you, then it will take some research and proper planning to pull off well.

Reference: The Wall Street Journal (September 17, 2011) “Earning income by Making a Gift”

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”

ESTATE PLANNING / GIFTING REAL ESTATE

New tax rules make big gifts to family members popular this year. If you made a gift of real estate (or are considering making one) be warned – the IRS is scrutinizing land-transfer records looking for folks who may have made a reporting error. As The Wall Street Journal reports, the IRS has begun requesting state land-transfer records and checking them against reports of the past few years to find if there are any discrepancies. Congress raised the limit on how much a person can give in a lifetime to $5 million without having to pay gift tax. Still, any time you give one person a gift of more than $13,000, you are supposed to let the IRS know by filing a Form 709. Land transfers can easily exceed the $13,000 limit, which could explain why the IRS is so interested in examining them. States that have already handed over information on gift-like transactions include Connecticut, Florida, Hawaii, Nebraska, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, Virginia, Washington and Wisconsin, generating several hundred cases for review, with 12 cases resulting in taxes or penalties. In fact, according to IRS documents, the failure-to-report rate is “extremely high.” Taxpayers need to be aware that there is no special exception to the rules when making a transfer to a family member. If the property is valued at more than $13,000, a gift-tax return must be filed. Even if the transfer falls within the lifetime exemption amount – currently $5 million – it must be reported. You can learn more about gift and generation-skipping-transfer taxes in the Estate Tax Practice Center on our website. You can even use our handy Estate Tax Calculator to estimate your future estate tax liability.

 

Tax-Smart Giving

As many have written, 2011 and 2012 just might be great years for gifting, but that doesn’t mean there aren’t fundamentals worth considering, as Benny Kass points out in a recent piece for the Chicago Tribune about gifting property. You likely know that property transfers can be made as outright gifts while you are living or post-mortem after your death. One of the key considerations is the tax consequences. Lifetime gifting raises the issue of “tax basis,” since "the tax basis of the giver of the property (the giftor) becomes the tax basis of the recipient of the gift (the giftee)." If the property has significantly appreciated in value (and, yes, even in this economy some real estate has appreciated greatly), the recipient receives the same tax basis as the giver. For example, a $100,000 home that has appreciated to $500,000 at the time of its gift still has only a $100,000 tax basis. Further, if the recipient doesn’t own and live in that home for two of the following five years before selling it, then this tax basis will make the ensuing profit from sale a prime target for capital gains upon and other taxes (i.e., the difference between the tax basis and sale price in this example). It’s a tricky arithmetic. If the recipient is going to turn around and sell appreciated property, then simply gifting a capital gains tax bill might not be efficient. Perhaps other transfer options might make more sense. Regardless, if you decide to gift, remember to file a gift tax return. Should you wish to take a “belt and suspenders approach,” you may want to file a gift tax return even if you aren’t likely to incur gift taxes upon the transfer. As the Chicago Tribune article points out, the IRS is in the middle of a campaign to uncover unreported but taxable gifts… by looking specifically at real estate transfers.

Reference: Chicago Tribune (July 29, 2011) “Giving property as a gift requires careful tax planning”

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 family business, then this planning strategy may make sense for you.

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

ESTATE PLANNING

The Tax Relief Act of 2010, passed in December, opens a number of new estate planning opportunities – some of which may be short-lived, since the law expires at the end of 2012. Of course, with the change in the law comes the possibility that your current estate planning may need some updates, both to reflect the new rules and perhaps to take advantage of opportunities that were not previously available to you. In their article The New Rules of Estate Planning, Smart Money focused on a few of the most common issues to consider. • Gifting as a Means of Asset Protection. The new law raises the gift tax exemption from $1 million to $5 million, which means you can give away up to $5 million of your estate without paying gift taxes. Under the previous law, sheltering significant holdings from potential creditors required sophisticated planning, legal entities and valuation discounts. Now, especially with the market-induced valuation discounts, transferring significant holdings is much less complex, and you can much more easily shift up to $5 million to someone else. If you have asset protection concerns, this may be a strategy to discuss with your estate attorney. • Formula Clauses. Certain wording in older estate planning documents could have unintended consequences in today’s generous tax-exemption environment. For example, it was not uncommon for documents to call for “an amount up to the federal estate tax exemption” to be transferred to a trust for the benefit of your children, with the balance passing on to your spouse. This, when the exemption amount was $675,000, may have made sense. But with a $5 million exemption, the same language could easily result in unintentionally disinheriting your spouse. • Dynasty Trusts. The new rules also make certain types of trusts more attractive, like the Dynasty Trust, which can shelter assets from estate taxes for generations. More than half the states and the District of Columbia now allow such trusts, and there is talk that these types of trusts could be curtailed in the future. So now may be a good time to explore the possibility. • State Taxes. Sixteen states and the District of Columbia have decoupled from the federal estate tax guidelines and enacted their own estate tax laws. And, given the revenue-fix many states are in, who knows what will happen next? To help avoid a future state tax bite, an aggressive gifting strategy now might be a good strategy to consider. You can learn more about estate and gift taxes on the Estate Tax Practice Center on our website. And, be sure to sign up for our free monthly e-newsletter to stay abreast of changes that could affect you, your family and your estate plan. Reference: Smart Money (July 14, 2011) “The New Rules of Estate Planning”

ESTATE PLANNING / GIFT TAXES

If you own private business interests or other rapidly appreciating assets, and would like to gift those to the next generation at the lowest possible tax cost, you may want to act sooner rather than later. The Tax Relief Act of 2010 included a 400 percent increase in the lifetime gift tax exemption, from $1 million in 2009 to the current $5 million ($10 million for a married couple). These provisions are due to expire on the last day of 2012. If you are considering a gifting strategy, you are wise to start exploring your options now, while you have time to carefully consider, since giving away assets requires careful thought and planning, There are several strategies we could use to maximize the value of the exemption, to include an advanced strategy known as an installment sale to an Intentionally Defective Grantor Trust (IDGT). Gavin Morrissey of Commonwealth Financial recently wrote in detail about how this strategy works. The bottom line is that this complex strategy, when properly executed in the proper circumstances, can result in quite significant tax savings. As Morrissey points out, the strategy works best when the assets to be transferred are rapidly appreciating – such as private business interests or pre-IPO stock.

Reference: ADVISORONE.COM (June 15, 2011): Estate Planning: Time Running Out on $5M Gift-Tax Exemption.

ESTATE PLANNING / GIFT TAXES

If you own private business interests or other rapidly appreciating assets, and would like to gift those to the next generation at the lowest possible tax cost, you may want to act sooner rather than later. The Tax Relief Act of 2010 included a 400 percent increase in the lifetime gift tax exemption, from $1 million in 2009 to the current $5 million ($10 million for a married couple). These provisions are due to expire on the last day of 2012. If you are considering a gifting strategy, you are wise to start exploring your options now, while you have time to carefully consider, since giving away assets requires careful thought and planning, There are several strategies we could use to maximize the value of the exemption, to include an advanced strategy known as an installment sale to an Intentionally Defective Grantor Trust (IDGT). Gavin Morrissey of Commonwealth Financial recently wrote in detail about how this strategy works. The bottom line is that this complex strategy, when properly executed in the proper circumstances, can result in quite significant tax savings. As Morrissey points out, the strategy works best when the assets to be transferred are rapidly appreciating – such as private business interests or pre-IPO stock.

Reference: ADVISORONE.COM (June 15, 2011): Estate Planning: Time Running Out on $5M Gift-Tax Exemption.

ESTATE PLANNING / GIFTING REAL ESTATE

New tax rules make big gifts to family members popular this year. If you made a gift of real estate (or are considering making one) be warned – the IRS is scrutinizing land-transfer records looking for folks who may have made a reporting error. As The Wall Street Journal reports, the IRS has begun requesting state land-transfer records and checking them against reports of the past few years to find if there are any discrepancies. Congress raised the limit on how much a person can give in a lifetime to $5 million without having to pay gift tax. Still, any time you give one person a gift of more than $13,000, you are supposed to let the IRS know by filing a Form 709. Land transfers can easily exceed the $13,000 limit, which could explain why the IRS is so interested in examining them. States that have already handed over information on gift-like transactions include Connecticut, Florida, Hawaii, Nebraska, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, Virginia, Washington and Wisconsin, generating several hundred cases for review, with 12 cases resulting in taxes or penalties. In fact, according to IRS documents, the failure-to-report rate is “extremely high.” Taxpayers need to be aware that there is no special exception to the rules when making a transfer to a family member. If the property is valued at more than $13,000, a gift-tax return must be filed. Even if the transfer falls within the lifetime exemption amount – currently $5 million – it must be reported. You can learn more about gift and generation-skipping-transfer taxes in the Estate Tax Practice Center on our website. You can even use our handy Estate Tax Calculator to estimate your future estate tax liability.

Link: http://online.wsj.com/article/SB10001424052702304066504576345672097256428.html?mod=WSJ_Taxes_Taxes_8_1 From The Wall Street Journal Online (May 26, 2011) “IRS Scrutinizes Gifts of Real Estate

ESTATE PLANNING / CHARITABLE GIVING

The idea of giving to charity would seem to be a simple, but the simple methods aren’t always the best ones. Sometimes a bit of financial finesse can go a long way, helping both your charity of choice and your own finances. I refer to that as “doing well by doing good.” If you want to be a tax-savvy philanthropist, consider using a time-honored strategy known as a “charitable remainder trust” (CRT). The Times-Herald Record recently offered a crash course in their article, “Protecting Your Future: Trust option for leaving assets to charity.” A CRT allows you to give assets to charity in a tax-savvy manner that may even provide an income stream that helps both you and your charity. When the CRT is established, the assets you’ve chosen to donate are transferred to the trust. The charity you’ve chosen is the trustee, and manages the assets. They may pay you and/or your beneficiaries a portion of the income generated by the trust either for a certain number of years, or your entire life. At the end of the term, depending on the type of payout you’ve chosen, the charity receives the remainder of the principal in the trust. This strategy works best when the underlying assets are highly appreciated, and by donating them to charity you can avoid a significant capital gains tax. Of course, your family members may not be too happy to see those assets going to charity – so you may want to consider replacing their value for your heirs with life insurance. You can learn more about charitable trusts in the Charitable Planning Practice Center on our website, and in the September 2010 issue of our estate planning newsletters, “Charitable Opportunities.” Link: http://www.recordonline.com/apps/pbcs.dll/article?AID=/20110508/BIZ/105080322 From Recordonline.com of the Times Herald-Record (May 8, 2011) “Trust Options for Leaving Assets to Charity”

ESTATE PLANNING / GIFTING & COLLEGE PLANNING

If you are a grandparent wanting to help your grandchildren with the future costs of college tuition, pay attention now. Recent tax law changes are making it easier for you to help pay education bills for your grandchildren – and even future generations. As the Wall Street Journal recently explained, generous exemption increases in the federal gift and generation-skipping taxes are in effect now through 2012. Most experts believe this federal generosity may be short-lived, so now may be an excellent time to plan. Tuition rates are rising steadily, and helping your grandchildren (or great grandchildren) obtain a good education without the burden of hefty loans is an excellent way to give them a “leg up” in the world. Finding a tax-savvy way of doing it is even better – especially for you! Directly paying tuition is the simplest technique, and the most efficient. A grandparent is allowed to pay an unlimited amount of their grandchild’s tuition directly to the school without incurring the gift tax or eating away at their gift tax exemption and, if you’re looking at a school like Harvard, this also could be a potent estate reduction technique. Some schools also allow you to pay upfront for all four years, lock-in tuition rates, and avoid future increases (pre-paying tuition does not guarantee admission). A less direct route comes in the form of 529 college-savings plans, by which you plug money into a trust especially designed for education. The advantage here is that the 529 plan can outlive you when you’re not around to pay directly, and for that reason can serve as the better model if you are funding a toddler’s future education. This grants greater leverage but there are, of course, wrinkles to explore in terms of tax liability and ownership. The WSJ article is a good starting point, but you are well-advised to seek competent counsel before giving away any assets or establishing any type of irrevocable planning. Link(s): http://online.wsj.com/article/SB10001424052748704729304576287401735858710.html From The Wall Street Journal Online (April 30, 2011) “Paying Grandkids’ College Bill”

ESTATE PLANNING / DYNASTY TRUSTS

As budget debates continue to escalate, yet another estate planning tool has come under fire, reports The Wall Street Journal. If you’re interested in a “Dynasty Trust” you may want to act sooner rather than later. The main objective of a Dynasty Trust is to continue for as long as possible, benefiting several succeeding generations. Usually, beneficiaries are allowed access to income only, so the trust’s principal assets remain intact to provide an income stream for future generations. Dynasty trusts have become increasingly popular since the 1986 tax overhaul and the current version of the “generation-skipping tax.” (GST). The GST imposes a levy that on transfer that skip one generation – such as those from grandparent to grandchild while the grandchild’s parent is still alive. You can avoid the GST, however, if your transfer skips more than one generation. The Journal uses an example to illustrate: Robert, a widower, has a net worth of $15 million and his heirs include children, grandchildren and great-grandchildren. If he leaves everything to his children and they in turn leave everything to theirs and so on, there could be an estate tax toll with each generation. Robert would like to put his entire estate into a trust and skip layers of tax. But if he does, the generation-skipping tax kicks in and replaces the lost taxes—except for an exempted amount, which is currently $5 million per individual or $10 million per married couple. That $5 million can be pumped up using discounts, life insurance and other leveraging techniques. Dynasty trusts push that generation-skipping tax exemption to the max, putting the exempted amount beyond the reach of estate taxes for the life of the trust. That, in turn, means the heirs don't have to "spend" their own exemptions on those assets. Dynasty trusts are now allowed in 23 states and the District of Columbia. (You don’t have to live in a state to establish a trust there.) When the Journal reports that Dynasty Trusts are under attack, they mean that the President’s budget proposal would remove the federal tax exemption after 90 years. So the trust can continue indefinitely, but the tax exemption cannot. The Journal also suggests that the measure is unlikely to pass this year, but taxpayers should know that the idea is in play. As proposed, the change would apply to new trusts or additions of money to existing ones, but not to those already funded. Bottom line: if you are considering setting up a Dynasty Trust, now is the time. You can take advantage of the current generous terms of the estate and gift tax – a $5 million individual exemption and top 35% rate, and lock in family wealth that may continue in perpetuity for your heirs.

 

Link: http://online.wsj.com/article/SB10001424052748703752404576179031767463642.html?mod=WSJ_Taxes_Taxes_2

 

From The Wall Street Journal Online (March 5, 2011) “Dynasty Trusts Under Attack”

LIFETIME GIFTING

From The Wall Street Journal Online (Jan 29, 2011) “The $5 Million Tax Break” Lifetime gifting has always been an important aspect of comprehensive estate planning. As the old saying goes, “If you’re giving while you’re living, then you’re knowing where it’s going.” But the new tax legislation passed in December makes gifting even more attractive for wealthy families. A recent article in the Wall Street Journal, “The $5 Million Tax Break,” points out why lifetime gifting is suddenly so attractive under the new laws. It’s a good article, worth reading, but here are the high points, in a nut-shell: For the next two years, the gift-tax exemption jumps to $5 million from $1 million for individuals, and to $10 million (up from $2 million) for couples. What’s more, the tax rate on gifts above those amounts fell to 35 percent, from a scheduled 55 percent. The gift tax has long been a feature of the tax law, and the gift tax exemption in recent years has remained lower than the estate tax exemption to discourage the wealthy from draining their estates through gifts in order to avoid estate taxes. This new gift tax break, however, may be an important tax planning strategy to consider now, especially for family business owners who want to transfer business interests to the next generation. Why? If you make your gifts now – or within the next two years – you can take advantage of what could be a short-lived tax break, locking in potentially significant tax savings for your heirs. Savings large enough that they could mean the difference between a business continuation or a business failure. Who knows what Congress will do after 2012? While many hope lawmakers will extend the current regime beyond 2012, other events – such as a debt crisis – could render these breaks temporary. You can learn more about transfer taxes, including estate taxes, gift taxes and the generation-skipping transfer tax at the Estate Tax Planning Practice Center on our website. You also will find a handy estate tax calculator to help you estimate your current and future estate tax liability.

ESTATE PLANNING / LIFETIME GIFTING

 From The Wall Street Journal Online (Jan 29, 2011) “The $5 Million Tax Break”

 Lifetime gifting has always been an important aspect of comprehensive estate planning. As the old saying goes, “If you’re giving while you’re living, then you’re knowing where it’s going.” But the new tax legislation passed in December makes gifting even more attractive for wealthy families.

A recent article in the Wall Street Journal, “The $5 Million Tax Break,” points out why lifetime gifting is suddenly so attractive under the new laws. It’s a good article, worth reading, but here are the high points, in a nut-shell:

For the next two years, the gift-tax exemption jumps to $5 million from $1 million for individuals, and to $10 million (up from $2 million) for couples. What’s more, the tax rate on gifts above those amounts fell to 35 percent, from a scheduled 55 percent.

The gift tax has long been a feature of the tax law, and the gift tax exemption in recent years has remained lower than the estate tax exemption to discourage the wealthy from draining their estates through gifts in order to avoid estate taxes. This new gift tax break, however, may be an important tax planning strategy to consider now, especially for family business owners who want to transfer business interests to the next generation.

Why? If you make your gifts now – or within the next two years – you can take advantage of what could be a short-lived tax break, locking in potentially significant tax savings for your heirs. Savings large enough that they could mean the difference between a business continuation or a business failure. Who knows what Congress will do after 2012? While many hope lawmakers will extend the current regime beyond 2012, other events – such as a debt crisis – could render these breaks temporary.

You can learn more about transfer taxes, including estate taxes, gift taxes and the generation-skipping transfer tax at www.jerryreiflawyer.com. You also will find a handy estate tax calculator to help you estimate your current and future estate tax liability.

 

Link: http://online.wsj.com/article/SB10001424052748704062604576106171136583088.html

Lifetime Giving More Attractive Now

Lifetime gifting has always been an important aspect of comprehensive estate planning. As the old saying goes, “If you’re giving while you’re living, then you’re knowing where it’s going.” But the new tax legislation passed in December makes gifting even more attractive for wealthy families.

A recent article in the Wall Street Journal, “The $5 Million Tax Break,” points out why lifetime gifting is suddenly so attractive under the new laws. It’s a good article, worth reading, but here are the high points, in a nut-shell:

For the next two years, the gift-tax exemption jumps to $5 million from $1 million for individuals, and to $10 million (up from $2 million) for couples. What’s more, the tax rate on gifts above those amounts fell to 35 percent, from a scheduled 55 percent.

The gift tax has long been a feature of the tax law, and the gift tax exemption in recent years has remained lower than the estate tax exemption to discourage the wealthy from draining their estates through gifts in order to avoid estate taxes. This new gift tax break, however, may be an important tax planning strategy to consider now, especially for family business owners who want to transfer business interests to the next generation.

Why? If you make your gifts now – or within the next two years – you can take advantage of what could be a short-lived tax break, locking in potentially significant tax savings for your heirs. Savings large enough that they could mean the difference between a business continuation or a business failure. Who knows what Congress will do after 2012? While many hope lawmakers will extend the current regime beyond 2012, other events – such as a debt crisis – could render these breaks temporary.

You can learn more about transfer taxes, including estate taxes, gift taxes and the generation-skipping transfer tax at the http://www.jerryreiflawyer.com/MichiganEstateTax.php our website. You also will find a handy estate tax calculator to help you estimate your current and future estate tax liability.

 

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