Estate Planning and Tax Lawyer Blog

Well you may have heard yesterday that the “Super Committee” failed to reach an agreement on how to come up with 1.5 Trillion Dollars over the next ten years to reduce the nation’s debt. The “Super Committee” was formed earlier this year when Congress passed the spending bill to prevent the government shut down. Their mandate was to have a way to save money by November 23rd and then Congress had until December 23rd to pass a bill to enact the committee's recommendations.

It had been heavily rumored that the estate and gift taxes may be affected and lowered back to their 2009 levels. In fact, I had expected them to announce such a change this week. However, it was announced yesterday that they bipartisan group could not agree on how to cut spending or raise taxes in order to get to the 1.5 Trillion Dollar mark.

Although the “Super Committee” could not agree on how to come up with the numbers, they did state that they would pass onto Congress what progress they had made so far. Congress, under the spending bill’s mandate, has until December 23rd to pass a law to come up with the 1.5 Trillion Dollars. This means although the “Super Committee” failed, Congress still has the ability to act. This story is far from over…

Continue reading ""Super Committee" not so super" »

In these tough economic times, those elderly parents who have buttoned up their estate plan to leave everything to their children and grandchildren upon their deaths may want to think about loosening the strings a little before they go and receive the added benefit of saving on estate taxes as well.

A married couple can provide a gift of $26,000 per year to a child or grandchild with no gift tax due. In 2010, the number of gifts you can give as a couple is unlimited, but it is restricted to no more than $26,000 per calendar year per married couple, or $13,000 per year per spouse.

Generally speaking, the recipient of your gift will not have to pay any federal gift tax or income tax. And it shouldn’t affect your federal income tax either.

With many adults jobless and their children struggling as well, this could be a financial lifesaver for family members who need the help now, not when you’re gone. Even if the recipient is not jobless, the extra money can help fund retirement accounts or pay off debt that will result in a much better financial life for your loved ones.

Consult a Florida estate planning attorney for more strategies on helping your family through careful estate planning.

A New York Times article says that the 2010 gift tax is a tax-saving gift to the wealthy, and that individuals with more than $5 million and couples with more than $10 million should look long and hard at taking advantage of it in 2010 by making gifts.

The current gift tax of 35 percent is the lowest it’s been since the 1930s. But once the clock strikes midnight on Dec. 31, 2010, it goes up to 55 percent with an exemption of just $1.12 million. And, according to a number of financial experts, people who overlook this opportunity are going to miss significant tax savings in 2010.

According to the article, here are the comparative calculations on a $3 million gift to a grandchild:

2009: 110 percent (gift tax, generation-skipping tax and gift tax on the generation-skipping tax) = $6.3 million tax on $3 million gift.

2010: 35 percent (gift tax only) = 35 percent ($1.05 million tax on $3 million gift).

2011: 140 percent (gift tax, generation-skipping tax and gift tax on the generation-skipping tax) = $7.2 million tax on $3 million gift.

Many estate planning experts are counseling clients to not rush into anything, but to plan and watch what happens between now and the end of the year with estate tax debates in Congress.

Need help with your estate tax planning? Contact our Jacksonville Florida estate planning law firm.

Recently, the IRS announced its annual inflation adjustments. These are important for many different reasons but specifically in estate planning, the annual gift exemption is adjusted for inflation as well as the amount a non-citizen spouse may receive from their spouse annually.

In 2011, the annual gift exemption will not increase at all and will remain at $13,000 per year per person. However, the amount that a spouse may give to their non-citizen spouse on an annual basis increases to $136,000 per year, up from $134,000 in 2010.

To learn more about using the annual gift exemption to lower the value of your estate or about gifting to your non-citizen spouse, please consult our law firm of Wood, Atter & Wolf, P.A. with offices located in jacksonville and Ponte Vedra Beach.

The Section 7520 rate, a minimum interest rate that the IRS makes you use, is at 2.8% for July. This rate is published on a monthly basis. An example of when this rate is used is when you create a note. Recently, I prepared a short term note, less than three years, using an interest rate of .76%.

With rates being this low, it is a great time to do some advanced estate planning. A few great planning ideas include:

1) Grantor Retained Annuity Trusts (GRATs). A GRAT is a trust where the grantor retains the annuity interest for a period of years with the remainder going to the beneficiaries. The annuity payment is calculated using the 7520 rate. With a low rate, the assets should be able to increase faster than the interest rate. Therefore, the investment returns above and beyond the interest rate is passed on to the beneficiaries of the GRAT.

2) Charitable Lead Annuity Trust (CLAT). The same reasoning for doing a GRAT applies to a CLAT. The difference is that a charity has the annuity interest instead of the grantor.

3) Gift of a remainder in personal residence or farm. A lot of clients give a piece of real estate to charity upon their death. With low interest rates, the life estate retained by the property owner is worth less and the remainder to the charity is valued higher. The higher the gift to a charity, the bigger the tax deduction.

4) Notes to family members. With banks still being reluctant to give loans to new businesses, some clients are giving intrafamily loans. The interest rate will be low on the note, very low if the note is for less than 3 years.

The above are just a few great advanced planning opportunities available now while the 7520 rates are low. However, Congress and the IRS have recognized some of these and are discussing how to increase the taxes being paid. So plan now while the planning is good.

To discuss planning opportunities while the 7520 rate is low, please consult with an estate planning attorney.

My last blog on gifting between spouses discussed an irrevocable trust that allows spouses to gift into irrevocable trusts while still maintaining control and allowing the assets to grow income tax free and pass estate and gift tax free to the beneficiaries.  However, doing so is not as easy as it sounds. 

The type of assets that may hold are cash, stocks, bonds, insurance, real property and business interests to name a few.  The amount that may be transferred into the trusts though is the tricky part.  The IRS has a rule, called the 5 and 5 rule, which states that when an annual exclusion gift is placed into an irrevocable trust for a spouse, a portion of the transfer will be included in the spouse's estate if the transfer is greater than $5,000 or 5% of the value of the trust property. 

Taking the 5 and 5 rule into account, if the trust has no asset in it, then $5,000 will be the limit for transferring assets into the trust until such a time arises that 5% of the value of the trust becomes greater than $5,000.  At that point, then the amount that may be transferred per year will be 5% of the trust assets until you reach the annual gift exclusion amount (currently $13,000 per year in 2010).  You can transfer $260,000 in year one into the trust tax free by filing a gift tax return and borrowing against your lifetime gift exemption ($1,000,000).  By doing this, 5% of $260,000 is $13,000 and you may then transfer the maximum amount per year.  This second technique is super charging the trust and dramatically increases the amount that passes to your beneficiaries completely tax free.  By creating these trusts, you are creating a second estate tax exemption above and beyond the exemption that the IRS currently allows. 

To discuss the benefits of these trusts, please contact an estate planning attorney.

Generally, when clients make gifts, they make them to their children and grandchildren in an amount that is completely free from the gift tax (currently in an amount equal to $13,000 per year).  However, you may use the same logic to make gifts between spouses.  The best part...you do not lose control of the money and it passes to your beneficiaries free from the estate tax.  It must be done correctly though.

First, set up an irrevocable trust, where the donor spouse is the trustmaker and the other spouse, the donee, is the beneficiary.  The donee spouse may also be the Trustee so you do not lose any control over the assets.  The Trustee then may pay out of the trust for the beneficiary’s health, education and maintenance.  By limiting the distributions to this standard, the assets held in the irrevocable trust are asset protected for the beneficiary.Further, the trust is generally structured as a grantor trust, meaning that the income taxes that would be owed by the trust are actually paid by the trustmaker.  By structuring it as a grantor trust, then the assets in the trust will grow income tax free as well!  In my next blog, I will discuss the rules that apply to transfers to the trust as there are specific requirements for gifts between spouses to ensure that they are free from gift taxes.

To learn more about spousal gifitng, please consult with an estate planning attorney.

Although there is currently no estate tax (which could change any day), there are eight basic estate planning steps that everyone should take, no matter what your net worth is. 

The first step is to have a financial power of attorney.  The financial power of attorney appoints someone to handle your financial affairs if you are unable to do so yourself.  This document ensures that all of your assets are taken care of and your bills are being paid.  The person appointed can be appointed immediately or only upon your disability.  Without a financial power of attorney, your family will have to go to court to have permission to deal with your assets.  State laws change frequently, make sure your financial power of attorney is valid under your state’s law.

Step two is to make sure you have a valid health care power of attorney and living will.  The health care power of attorney allows someone to make health care decisions for you if you are unable to make them for yourself.  A living will states what your intent is if you are in a persistent, vegetative state.  More commonly stated as “whether or not to pull the plug”.  Your health care power of attorney needs to have the HIPAA authorizations within it, otherwise it is not a valid document.

Step three is to calculate your net worth.  You may be surprised where you stand financially.  This is important from a tax standpoint but you will also get a hold of everything you own.  Sometimes assets fall through the cracks and are not properly planned for because they were not brought up during the estate planning discussion.

Step four is to review your beneficiary designations.  Upon your death, your beneficiary designations control how that specific asset will pass.  A will or trust has no say.  If your ex-spouse is named accidently, the ex-spouse will receive that asset.  Beware, it happens everyday!

Step five is to create or update your will.  A will allows you to determine how your assets pass to your loved ones.  If you do not have a will, the state where you live has graciously set one up for you but it probably does not pass your assets according to your wishes.  This is especially true when you are remarried and have children from your current and/or previous marriage. 

Step six is to plan for your state’s estate tax.  The District of Columbia and23 other states have their own estate or inheritance taxes.   If you don’t plan for them, you could inadvertently cause a state estate tax upon your death.

Step seven is to check how your assets are currently titled.  Do you have everything titled jointly?  If you have a trust, does your trust own your assets?  If you are unsure how your assets are titled, please review the title of your assets as it makes a big difference upon your death.

Finally, the last step is to gift while you are alive.  Currently, you can give $13,000 per year to anyone you wish.  You can stand outside of your church and write a $13,000 check to everyone who passes by.  Additionally, you can pay anyone’s college or private school tuition or medical bills so long as they money goes directly to the educational facility or medical provider.

If you need help with any of the above estate planning steps, please consult an estate planning attorney for estate planning legal counsel.

Currently, the basis of property acquired from a decedent generally is the fair market value of the property on the decedent’s     date of death.  Property included in the decedent’s gross estate for estate tax purposes must be valued at its fair market value on the date of death.

A donee’s basis in property received by gift generally is the donor’s adjusted basis in the property, increase by the gift tax, if any, paid on the transfer.  If the donor’s basis exceeds the fair market value of the property on the date of the gift, the donee’s basis is limited to that fair market value for purposes of determining any subsequent loss.

President Obama recently proposed a consistency and reporting requirement to the above basis in his proposed budget rules.  He is proposing that the basis of inherited property equal the value of that property determined for estate tax purposes.  He is also proposing that the basis of property received by gift must equal the donor’s basis.  The reporting of the basis would be imposed on the executor of the estate and on the donor of a lifetime gift to both the recipient of the property and the IRS.

This may mean that every estate may have to file an estate tax return or any gift may require a gift tax return to report the basis of the property transferred.

If you require assistance with tax planning, please contact a tax attorney for tax planning legal counsel.