Estate Planning and Tax Lawyer Blog

The federal estate tax has gained lots of attention in 2010 because it ceased to exist...at least until Congress reinstates it, which many believe will be the case.

For Florida residents with sizeable estates – in 2009, the estate tax threshold was $3.5 million – adding an AB provision to a living trust can provide substantial tax savings.  An AB trust ensures that both spouses can take advantage of the government’s “unified credit” – a credit that allows you to exempt $1 million during your lifetime to reduce or eliminate gift taxes or reduce estate taxes.

By establishing an AB trust, each spouse can take advantage of the unified credit – once when the first spouse dies, and again at the death of the second spouse.

When the first spouse dies, an AB trust creates two separate trusts.  The assets of the survivor are transferred to the A trust, and an amount up to the exemption limit of the deceased spouse’s assets goes to the B trust.  Each trust is taxable, and each can use the exemption.

The B trust is subject to estate taxes, but because of the unified credit, no taxes are owed.  The surviving spouse receives income from the B trust while maintaining control over the A trust.  Upon the death of the second spouse, the benefits from the B trust go to the spouses’ beneficiaries, usually the children.  Only the A trust is subject to estate taxes, since the B trust was taxed at the death of the first spouse.

Sound complicated?  It can be, which is why you should consult a Florida estate and tax planning attorney if you have a large estate and want to learn more about the benefits of establishing an AB trust.

There are many couples in the Jacksonville, Florida and throughout the State of Florida who face the problem of setting up an estate plan for their partner when they choose not to be married or are not legally allowed to be married.  Married couples may take advantage of the unlimited marital deduction when creating their estate plan both to balance their estates (gifting while alive) and deferring estate taxes (upon the death of the first).  This is deduction is not available to partners who are not married.  However, Florida specifically has additional hurdles to overcome for those of you who are in this specific situation. 

Florida homestead laws state that the homestead must pass to the surviving spouse and then lineal descendants free of the creditors of the first spouse to die.  Since surviving partners are specifically not given the protection under Florida’s homestead laws, it is very important that the first partner to die does not have any unexpected medical bills or large creditors.  The creditors may cause the home to be sold in order to satisfy the outstanding debt, leaving your partner without your home.

The Florida Health Care Surrogate and Durable Power of Attorney statutes do not include partners as next of kin in determining who you may serve as your surrogate/power of attorney.  If you do not have any documentation in place for this, your partner will be left out of the decision making process for you.

Finally, if you have no estate plan in place at all, a partner will receive nothing under the will that the State of Florida has set up for you.  So if it is your intent to pass assets onto your partner, you will want to have a valid estate plan set up.

If you would like to discuss the estate planning issues relating to same sex or unwed couples in the Jacksonville, Florida and throughout the State of Florida, please consult with an estate planning attorney who is knowledgeable with the issues being raised by your specific situations.

Previously, I’ve discuss how the new Medicare Surtax works and provided a few examples on how to calculate the amount to be taxed.  This new tax is easily avoidable though with just a little planning.  Again, it does not come into effect until January of 2013!  Below are two examples which illustrate a quick way to avoid the tax:

1)      Keith, a single man, has NII of $200,000 and a required minimum distribtion from his traditional IRA of $125,000.  He will owe tax on $125,000 of income (lesser of 1) NII of $200,000 or 2) excess of $325,000 of MAGI over $200,000 threshold).

2)      Kim, a single woman, has NII of $200,000 a distribution of $125,000 from her Roth IRA.  She will not be subject to the tax (lesser of 1) NII of $200,000 or 2) excess of $200,000 of MAGI over $200,000 threshold).  The key to this example is the fact that the distribution from the Roth IRA is NOT includible in MAGI.  This may be something to contemplate in whether or not to convert to a Roth IRA.

While the new tax does not come into effect until January 1, 2013, it is never too late to start planning.  You have some options – you can either convert to a Roth IRA to reduce your future MAGI or decrease your NII by changing your investment portfolio.  If you are interested in learning more about the new Medicare surtax, please consult with a tax professional.

A few days ago, I blogged about a new Medicare Surtax that was included in the recently signed Health Care Bill.  For purposes of review, the taxable amount is equal to the lesser of 1) net investment income or 2) the excess of modified adjusted gross income over a threshold amount. 

Investment income includes income sources such as interest, dividends, capital gains, annuities, rents, royalties and other passive activity income.   Net investment income simply equals investment income minus investment expenses, lets call that NII.Modified adjusted gross income is your adjusted gross income plus the net foreign income exclusion amount, lets call that MAGI. Finally, the threshold amount is $250,000 for married taxpayers filing jointly, $125,000 for married taxpayers filing separately and $200,000 for single taxpayers.  Here are a few examples on how to determine the amount that is taxable:

1)      Matt, a single man, has $100,000 of salary and $75,000 of net investment income.  His MAGI would be $175,000.  Matt would not owe the additional tax because his MAGI is below the $200,000 threshold.

2)      Lora, a single woman, has $250,000 of net investment income and no other income.  She would owe the tax on $50,000 of income (lesser of 1) NII of $250,000 or 2) the excess of $250,000 of MAGI over $200,000 threshold).

3)      Mark and Danielle, married filing jointly, have $500,000 of salaries and no NII.  They will owe no tax because they have no NII.

4)      Mike and Barb, married filing jointly, have $450,000 of salaries and $50,000 of NII.  They will owe tax on $50,000 (lesser of 1) NII of $50,000 or 2) excess of $450,000 of MAGI over $250,000 threshold).

5)      Doug and Darlene, married filing jointly, have $300,000 of salaries and $150,000 of NII.  They will be taxed on $150,000 of income (lesser of 1) NII of $150,000 or 2) excess of $450,000 of MAGI over $250,000 threshold).

My next blog will show a few examples in which you can further avoid the new surtax and discuss some planning that cna be done to avoid the tax.  Planning should start now!To answer any questions in regards to the new surtax, please consult with a tax professional.

Do you see yourself fitting into any of the following: having a traditional IRA that is or will require you to take a large required minimum distribution upon you obtaining the age of 70 ½ years of age; owning rental properties that pay you rent that is greater than the expenses related to the property; or having an investment portfolio that is full of annuities and investments that pay large dividends.  If so, beginning on January 1, 2013, there will be a new Medicare surtax, meaning that you could pay additional Medicare taxes above what you already pay.  The new tax rate is 3.8%.  The taxable amount is equal to the lesser of 1) net investment income or 2) the excess of modified adjusted gross income over a threshold amount.  First, let me try to simply define the terms above.

Investment income includes income sources such as interest, dividends, capital gains, annuities, rents, royalties and other passive activity income.   Net investment income simply equals investment income minus investment expenses, lets call that NII.

Modified adjusted gross income is your adjusted gross income plus the net foreign income exclusion amount, lets call that MAGI.  Don’t worry about the foreign income exclusion amount for now. 

Finally, the threshold amount is $250,000 for married taxpayers filing jointly, $125,000 for married taxpayers filing separately and $200,000 for single taxpayers.  Over the next few days, I will be giving a series of examples to further explain how this new surtax will work.

To further discuss this new surtax, please conult with a tax professional to answer all of your questions.

Probate is a lot like trying to get to a destination going through a long construction zone, very frustrating.  An important goal in Florida estate planning is to spare your family the expense and hassle of a probate court proceeding.  Here are some options to avoid Florida probate:

Living trust – setting up a Florida living trust can ensure that all your assets will be passed on to whomever you designate without probate court proceedings.  This entails creating living trust documentation and assigning a successor trustee to transfer the assets to your beneficiaries after your death.  However, you must transfer property ownership to yourself first as the trustee of your trust to ensure the property will be controlled by the terms of the living trust.  An estate planning attorney can help you with this.

Joint tenancy – if you own property with a spouse or someone else, a “right of survivorship” provision will ensure that the property transfers to the surviving owner.  In Florida, each owner must own an equal share of the property.  For married couples, this is known as “tenancy by the entirety.”  The downside to joint tenancy is that it can really mess up estate tax planning (remember, the estate tax returns on January 1, 2011, if not before).

Transfer-on-death designations – in Florida, you can register brokerage accounts in “transfer-on-death” (TOD) form.  Bank accounts and CDs can be designated “payable-in-death” (POD).  For both, the beneficiary inherits immediately upon your death, but you control the funds until that time.  Florida does not have such provisions for real property, like homes or vehicles.  There is also a possibility that TOD and POD designations will not avoid probate in the future.  There is talk that the Florida lawmakers are contemplating making accounts with TOD and POD designations an asset subject to probate.

If you need information on how to avoid Florida probate, consult a Florida estate and tax planning attorney.

I was given a plan to review for a potential client who is a physician with significant wealth.  The plan was drafted about two months ago and the initial concern from the financial advisor was that funding was not discussed with the client.   So I began reviewing the plan and noticed that the attorney who drafted it did no tax planning at all.  The plan gave everything to the surviving spouse in a trust that qualified for the marital deduction.

Although the plan works great for this year, as of January 1, 2011, the estate tax returns.  So unless both spouses passed away this year, the plan would cause more taxes to be owed upon the second of them to pass away than they would had they done some VERY simple tax planning.

Just because there is no estate tax for this year does not mean that there is no longer a need to do tax planning.  In fact, the tax rules this year require even more tax planning to take place to make sure you effectively pass assets that will increase the basis in the assets to their maximum amount permitted under this years basis rules.  This will all change of course in 2011.

Unfortunately there is no crystal ball that I can look into to give anyone a clear answer to where things will be a year from now.  However, your plan should be reviewed, no matter how new, to ensure that the plan is still tax efficient.  To have your plan reviewed, please consult an estate planning attorney to set up an appointment.

The primary purpose of a Florida living trust is to spare your beneficiaries the delay, publicity and expense of a probate court proceeding.  In Florida, a probate court proceeding can take anywhere from 8-15 months, depending on the size of the estate and whether or not a hearing is needed.  However, with a Florida living trust, your assets can pass to your beneficiaries without delay, usually within a month or two.

Florida also has a simplified probate process for smaller estates – those less than $75,000 – so if your estate falls into this category, a living trust may be an unnecessary expense.

A living trust also allows you to do disability planning in order to avoid having to set up a guardianship in the future.  This alone is a big benefit to setting up a living trust and transferring all of your assets into the living trust.

There are two types of living trusts:  revocable and irrevocable.  A revocable living trust keeps you in control of your assets while you are still living, and allows you to change beneficiaries, modify the terms or even revoke the trust.

An irrevocable living trust is one you do not control, and it cannot be changed or revoked.  However, there are tax benefits to an irrevocable trust that are not available with a revocable trust.  Generally, an irrevocable trust is not subject to estate taxes.  On the other hand, an irrevocable trust is only available in certain situations.

If you are interested in learning about all the advantages of a living trust, consult a Florida estate and tax planning attorney.

As I blogged about last week, the Florida House and Senate has introduced a set of companion bills that will introduce an estate tax on the estates of nonresidents who have property in the state of Florida.  The bills, having read them, are quite confusing. 

My interpretation of them is that they will tax any property of a nonresident that is located in Florida when the nonresidents estate will also be taxed in their home state.  The tax rate in Florida would be the exact same tax rate that is used in the nonresident’s home state.

The tax returns would be due either at the same time as the nonresident’s home state requires it be due or twelve months after death, depending on which bill you read.

Again, the bills are quite confusing and need some work by both the Senate and House to reconcile their differences.   I will update the status of the bills as updates come available.  Again, this may be a great time for snowbirds to begin thinking about becoming a Florida resident.  To consult with an attorney in regards to whether or not you should make Florida your residence, please consult with an estate planning attorney to discuss whether or not to become a Florida resident.

I recently had a potential client come and ask me what happens when property is sold that is subject to the life estate.   My answer to her was it depends (I know, a typical lawyer answer).

The reason it depends is that it depends on who is selling the interest in the property.  With a life estate, there are two real property interests involved.  The first interest is the holder of the life estate itself.  A life estate gives the holder the right to use the property until their death.  Upon death, the property automatically transfers to the remaindermen, the second property interest involved.

If only the holder of the life estate sells their interest, then the buyer is only buying a right to use the property during the life of seller.  They could be buying it for a day or for many years, no one knows.  A valuation specialist usually must be brought in to value the life estate, which is based upon the age of the holder of the life estate.  Again though, the buyer is only buying a right to use the property during the life of the seller, not forever.  Upon the seller’s death, the rights in the property then pass automatically to the remaindermen. 

In order to fully purchase the property so that the buyer owns the property outright, both the holder of the life estate and the remaindermen need to be parties to the transfer.  They each need to transfer their respective property interests to the buyer.

If you have any questions in regards to a life estate, please consult an estate planning attorney to discuss the life estate further.

I have written several blogs in the past on the benefits of being a Florida resident (see my blogs on February 12, 2010).  However, the Florida legislature has added yet another.  On February 22^nd the House and on February 26^th the Senate introduced companion bills that, if passed, would introduce an estate tax in Florida for non-residents.  The Senate's version cites the bill as the Florida Taxpayers Protection Act.  If passed, the bill will go into effect on July 1, 2010.

The bill states that a non-resident, who owns property in the state of Florida and whose state of domicile has an estate tax, will be subject to a separate Florida estate tax on the assets owned in Florida.  This means that those of you who are snowbirds who have a secondary home down in Florida, will be subject to an estate tax here in Florida if your home state has their own estate tax.  There are currently sixteen states have their own separate estate tax.  Now may be a good time to think about becoming a Florida resident.

If you spend your winter months in Florida but claim another state as your residence, you may be much better off by making Florida your state of residence.  To consult with an attorney in regards to whether or not you should make Florida your residence, please consult with an estate planning attorney to discuss whether or not to become a Florida resident.

Although Florida has no income tax, intangibles tax, gift tax, estate tax or generation skipping tax, Florida still has a few taxes that new residents need to be aware of.

Sales Tax:  Florida has a state sales tax that is 6%.  Each county then may impose an additional sales tax from .25% to 2.5% which is computed on the first $5,000 of the purchase price.  The $5,000 limit, however, does not apply to certain rentals or services.  The sales tax is paid directly to the seller at the time of the purchase.

Use Tax:  Florida has a “use” tax which is a tax on certain purchases made outside of the state within 6 months of bringing it into Florida.  The tax rate is 6%.  Examples of purchases subject to this tax are items bought online or furniture bought in another state.  Items that are bought in another state and used there for over 6 months are exempt from the use tax.  Further, you do not owe the tax if you paid at least 6% in tax when you purchased the item.  However, if you paid less than 6% tax on the item, you will owe the difference to equal 6 percent.  Finally, if the tax, once computed, is less than $1.00, you do not have to pay the tax.

Ad Valorem Tax:  Also known as property tax.  This tax is assessed by the county’s property appraiser and collected on an annual basis.  If your property is homesteaded property, you get a $25,000 exemption plus a cap on the assessed value and the amount it can be increased per year.  There are additional exemptions for disabled individuals.

Doc stamp tax: When you purchase a piece of real property, you pay a doc stamp tax based either upon the amount paid for the property or the mortgage on the property.  Most documents that are recorded with the Clerk of the Court require the doc stamp tax to be paid.  This tax is paid usually to the Clerk of Courts office.

There are other taxes such as the registration fees you pay for your motor vehicle, fuel taxes, hotel taxes and the list goes on and on.  To find out more information about the taxes that Florida residents must pay, please contact a tax professional with knowledge of the Florida tax system.