Category Archives: Estate Planning

Elections (may) Have Consequences: The Fiscal Cliff and Estate and Gift Taxes

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For much of 2012, the looming changes to the tax rates and exemptions set to go into effect in 2013 have weighed heavily on all discussions of estate planning.  The so-called “Fiscal Cliff” and the 2012 Presidential and Congressional elections left planners with uncertainty of whether the scheduled sunset provisions of the Bush/Obama tax cuts would go into effect or if Congress and the President would strike a deal before year’s end.

Tuesday ‘s election ended some of the uncertainty with regard to the respective players in this debate and what type of leverage they would have.  President Obama won a second term as President while in Congress, the Democrats extended their majority in the Senate.  In the House, Republicans retain control, albeit by a slightly slimmer margin.  In the days following the election, the three lead players in the upcoming negotiations (President Obama, Speaker of the House John Boehner and Senate Minority Leader Mitch McConell) each expressed their positions with each retaining their previous stance on increasing or retaining existing tax rates and exemptions.

Earlier today, President Obama announced that he will meet with Congressional leaders next week to begin working on a deal to avoid the Fiscal Cliff.  The possible outcomes are several:

  1. The President and Congress will agree to a comprehensive deal-Both sides have indicated a desire to achieve a deal on both tax issues and spending cuts.  But despite the results of the election, there appears to be no true bridging of the two sides polarized positions.  This may change  after next week’s negotiations, but such a change would reflect a major shift in tactics and attitudes.
  2. The President and Congress will agree to a temporary, non-comprehensive plan-In his press conference today, President Obama stated he was ready to sign  into law the permanent extension of the income tax rates for 98% of all taxpayers.  The Senate has previously passed such a bill, but the House has refused to even vote on it.  It is possible that they will now agree to separate those tax rates from other issues, but that remains unlikely.  More likely would be a temporary extension of the current tax rates and exemptions similar to the extension passed in 2010.
  3. No deal is reached before the end of the year-If no deal is reached before the end of the year, the tax rates and exemptions revert back to their pre-President Bush levels.  While this may be frowned upon by many financial analysts, this would change the political dynamic  significantly and may force one or both sides to finally come to a comprehensive deal.
  4. A deal is reached on issues other than estate and gift tax rates and exemptions-The previously mentioned Senate bill made no mention of any extension, increase or decrease to the estate and gifts taxes.  During the Presidential campaign, neither candidate spent much time discussing these transfer taxes.  For those reasons, it would not be surprising to see the income tax issues resolved while the gift and estate tax issues are left to sunset and possibly be renegotiated in 2013.

If we are to believe the President, in any of these four scenarios, we should expect to see the federal estate and gift tax rates to increase and the respective exemptions to decrease come 2013.  To best prepare for these changes, you should consider the following three pieces of advice:

1. Make 2012 gifts ASAP-The current gift tax exemption of $5.12 million is unlikely to ever return to this high level in the foreseeable future.  For those with the means or the need to utilize a 2012 gift, it is already past the point of making more complicated gifts.  With that said, by utilizing transfers to a grantor trust, it is still possible to make a 2012 gift today of cash, securities or even a promissory note and substitute harder to value assets in 2013.

2. Consider or reconsider the use of a credit shelter trust under your will-The lower estate tax exemptions that will likely go into effect will make using a credit shelter trust, a testamentary trust that allows property to pass estate tax-free at the death of both spouses, more attractive.  Since 2010, such trusts were less appealing given the disparity between Federal and State estate taxes.  If the exemptions are reduced, that disparity will decrease as well.

3.  Speak to an estate planning attorney and stay informed.  This is a fluid issue and things may change dramatically very quickly.  It is important to keep in touch with your estate planning attorney to learn about any changes.  If you do not have an attorney, you can also keep yourself updated by reading this and other estate planning blogs.

For more information about the 2012 Estate and Gift Tax changes, please contact info@levyestatelaw.com

Giving While You Can: The 2012 Gift Tax Planning Opportunity-Part III Planning Techniques and Strategies For Making A 2012 Gift

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Over the past two days, I have discussed why the 2012 Gift Tax Planning Opportunity is a big deal and provided several ‘best fits’ for making a 2012 Gift.  Today, I conclude this series with some examples of planning techniques and strategies that can be used to maximize your 2012 gifts.  As with any estate planning strategy, most of these techniques require careful coordination with an estate planning attorney, accountant and other advisers to ensure that they are properly structured:

1)   Outright Gifts-The simplest gifting technique requires very little work and time to complete.  This can be accomplished by any properly executed form of transfer and also requires less setup fees than the other techniques listed below.

There are several downsides to outright gifts.  First, assets gifted directly to a beneficiary remain exposed to the claims of creditors.  Second, if the gift is being made to a minor or an adult that is ill prepared to handle such a large-scale gift, the transferred assets can be wasted.  Finally, while making such a gift removes it from the donor’s taxable estate, it will be included in the beneficiary’s estate.

2)   Gifts to Trust-As an alternative, a gift to a trust may be more appropriate if there are concerns about creditor claims, taxes or waste.  An irrevocable trust can hold the gifted property outside the beneficiary’s taxable estate and the assets can be distributed to beneficiaries at the discretion of the named trustees.  Setting up a trust will require additional fees for set up and administration that are not required of a direct gift.  A suitable trustee will also be required that fits the grantor’s specifications.

3)   Grantor Retained Annuity Trust (GRAT)-Several of the more complicated trust arrangements could be useful for 2012.  A GRAT, for example, can be used to pass property to beneficiaries while retaining annuity for the donor for a set period of years.  Depending on the donor’s goals, the GRAT can be structured to have minimal annuity payments or as a means to ‘freeze’ the value of the donor’s estate.

4)   Intentionally Defective Grantor Trust (IDGT)-Using an IDGT can provide several benefits.  First, it can provide a way to remove an appreciating asset from a donor’s estate.   Second, if a portion of the transferred assets are transferred in exchange for a promissory note, the donor can retain an income stream through the repayment of interest and the principal.  Finally, because IDGTs are taxed to the Grantor of the Trust rather than the Trust for income tax purposes, the donor can further reduce the size of his estate while increasing the value of the property passing to their beneficiaries.

5)   Qualified Personal Residence Trust (QPRT)-Individuals who own their primary residences may utilize the 2012 Gift by transferring their residence to a QPRT.  The donor retains the exclusive right to live in the residence for a set period of years.  At the end of that period, ownership transfers to the remainder beneficiaries of the trust.  The donor can still live in the residence if they pay rent to the remainder beneficiaries.  The longer the term of the trust, the smaller the gift would be.  With the larger exemption in 2012, donors can set up a QPRT with a relatively short term to maximize their gifts.

6)   Family Limited Partnerships/LLCs-If a donor wishes to pool several assets into a single entity, they can utilize a family limited partnership or LLC as a means to centralize the management of certain assets.  A gift of an LLC or FLP interest can receive a valuation discount that would not be available to transfers of the underlying assets.

7)   Intrafamily Loan Forgiveness-2012 provides individuals and families to consider removing outstanding loans from a donor’s taxable estate.  Rather than continue to receive payments on a loan, the holder of a promissory note or other debt instrument can forgive all or a portion of the outstanding debt by making a gift of the forgiven amount.

8)   Funding a large life insurance policy-Donors can utilize all or a portion of a 2012 gift to fund a large life insurance policy.  If the beneficiaries do not need immediate access to the funds, this may be an attractive option to provide for a later benefit.  To fully protect the gift from any taxation, the insurance policy should be purchased by an irrevocable life insurance trust (ILIT).

As we draw closer to the so-called “Taxmageddon,”  the opportunity to fully take advantage of the current tax rates and exemptions shrinks.  Many of the techniques discussed above require time to set up and fund, so for those looking to make a 2012 Gift, time is not on your side.  The time to start planning your 2012 Gifts is now.

Please contact info@levyestatelaw.com for more information about 2012 Gift Tax Planning.

Giving While You Can: The 2012 Gift Tax Planning Opportunity-Part II Best Fits For “Supersize” Gifts

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As the window for making large-scale gifts shrinks each day, many individuals and families will be encouraged by their attorneys and other advisers to consider taking advantage of the 2012 Gift Tax Planning Opportunity.  While this unique event could be a windfall for many people, there are certain situations where utilizing the current gift tax exemption and gift tax rates are most beneficial to the donors.

Below is a non-exhaustive list of some of the ‘best fits’ for making a 2012 Gift:

1)    Individuals with a taxable estate at or above the current Federal Estate Tax Exemption-The current federal estate tax exemption, as with the gift tax exemption, is $5.12 million.  And just as the gift tax exemption will expire on December 31st, the federal estate tax exemption will reduce to $1 million 2013.

Given the likelihood that the estate tax exemption will be reduced, individuals who may have a taxable estate if they die in 2012 would be wise to consider gifting a portion of their estate before year’s end.  By doing so, they can increase the portion of their estate that passes to their heirs free of federal estate tax.

2)    Individuals with a taxable estate at or above their current State Estate Tax Exemption-Residents of Connecticut, New Jersey and New York face lower estate tax exemptions than residents of most other states in the U.S.  Even those individuals whose estates will likely pass free of federal estate tax could have a state estate tax imposed which would similarly reduce the value of the property passing to their heirs.  Making a 2012 Gift is especially useful in reducing potential state estate tax exposure because none of the tri-state area states impose a state specific gift tax.

3)    Family Business owners looking to transition their businesses to their family-One of the many reasons that business succession planning fails is that the incoming owners may be unable to pay the current owners the full value of the companies they are purchasing.  In a family business, a senior family member willing to transfer some or all of their business to their successors as a gift can avoid this hurdle while assuring that the business continues uninterrupted.  For those concerned about a loss of income or not receiving sufficient assets to live off of, using a planning technique like a GRAT or a sale to a defective grantor trust may allow the senior family member to be more generous with their gifting.

4)    Real Estate Owners-In some areas of the country, real estate have begun to rebound.  Nevertheless, the values are still significantly lower than they were prior to the 2008 Financial Crisis.  Gifting a second home or investment property this year could be more tax efficient than transferring it when values increase.  In addition, individuals interested in gifting their primary residence can utilize a technique known as a qualified personal residence trust (QPRT) to transfer ownership of the property while retaining the right to live in the residence for a set period of years.

5)    Individuals with highly appreciating or income producing property-Property likely to increase in value over the next few years can either be gifted outright or to a trust using today’s values.  This allows the beneficiary of the gift to receive the full benefit of the appreciation while reducing the donor’s taxable estate.  Alternatively, by utilizing planning techniques like a GRAT or IDGT, the donor can freeze the value of their taxable estate while also providing their beneficiaries with a significant long-term benefit.  This is also true of property that produces significant income.

6)    Same Sex Married Couples and Domestic Partners-Without the benefit of a marital deduction at the federal level (New York same sex married couples) or at both state and federal levels (domestic partners), non-traditional couples are at a distinct transfer tax disadvantage.  In addition, whereas gifts between married couples are consider non-taxable events, gifts between same sex married couples and domestic partners are.  Fully utilizing the 2012 Gift opportunity may be a unique opportunity for these couples to make tax-free gifts to one and other.

7)    Individuals who have made intra-family loans-The current low interest rate environment have encouraged many family members to make loans to their junior family members.  However, if the junior family member does not pay back the principal of these loans and interest, the lender is deemed to have made a gift.  If the lender does not need or want the money back, a 2012 Gift can be used to forgive a portion or the entire loan amount.

Other individuals and situations may also be appropriate for 2012 Gifts.  Tomorrow, I will go over several planning techniques that can be used to maximize the benefit of making a 2012 Gift.

Please contact info@levyestatelaw.com for more information about 2012 Gifts.

Give While You Can: The 2012 Gift Tax Planning Opportunity-Part I An Introduction/Re-Introduction

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Estate Planners are always looking for new ways to assist their clients navigate and fully take advantage of the transfer tax system in ways that effectuate their wishes and intentions.  Much of our focus is on planning their estates and how property will pass when they die.  For some clients, estate planning also includes devising strategies for transferring assets during their lifetime.

From 2002 until the end of 2010, each individual could only transfer $1 million during their lifetime without incurring a gift tax.  This changed dramatically at the end of 2010 when the President and Congress enacted the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act (“TRA 2010” for short).   Among the changes to the tax system was a significant increase in the lifetime gift tax exemption.  This provided a significant opportunity for individuals looking to make large-scale transfers of property during their lifetime.

As with most good things, this opportunity will not last forever and it is unclear whether the gift tax exemption will ever be this high again.  Over the next three days, I will explain what this opportunity could mean to you and your family, who this opportunity would be a good fit for and provide several planning techniques that can be used to maximize the benefits of this ‘once-in-a –lifetime’ tax planning event.

First, here is a brief overview of what this means to you and your family:

What is the 2012 Gift Tax Planning Opportunity? Under TRA 2010, the lifetime gift tax exemption was increased from $1 million to $5 million per individual ($10 million per married couple).  In 2012, the exemption was increased to $5.12 million.

Why is it a big deal?  The lifetime exemption has never been this high before and given the current fiscal health of the United States, it may never be this high again.  Before 2010, individuals wanting to make large-scale lifetime transfers above the $1 million exemption had to choose between making multiple smaller transfers utilizing the annual gift tax exclusion (currently $13,000 per individual) or paying a gift tax at a maximum tax rate between 35% and 50%.  After 2010, individuals could transfer five times as many assets at one time without incurring any gift tax.

When do the current exemption and tax rates expire?  The current gift tax exemption and maximum tax rate of 35% will expire on December 31, 2012.   It is possible that before the November election (very unlikely) or during the lame duck session after the election (possible), Congress and the President will enact new legislation that may maintain the current exemption and tax rate or possibly reduce both.  If the current exemption and maximum tax rate expire, the exemption will reduce to $1 million and the maximum tax rate will increase to 55%.

Who should take advantage of the current exemption and tax rates?  This opportunity could be useful to a wide variety of individuals and families.  For wealthy individuals looking to reduce the size of the taxable estates, making a gift this year will provide more certainty about their tax liability than exists with the current federal estate tax regime (the estate tax rates and exemptions will expire on December 31, 2012 as well).  In New York, there is no separate state gift tax, so a 2012 gift that reduces the New York state estate tax liability would be good utilization of the current federal exemption and rate.  I will go into more detail about this in tomorrow’s post.

Are there other reasons to make a 2012 gift besides gift tax savings? Yes.  In addition to the historically low gift tax rate and high exemption, interest rates are at historic lows.  For people looking to utilize planning techniques such as GRATs, transfers to defective grantor trusts and intra family loans, this low rate environment will allow individuals to pass the maximum amount of property to their beneficiaries while keeping any annuity, installment sale or loan payments low.

Depressed asset values also provide an additional benefit to the gift tax savings.  While the stock market has rebounded significantly, real estate and other non-publically traded assets have not.  Transferring these types of assets now will allow your beneficiaries to enjoy the appreciation of the property when values rebound.

Are there risks/disadvantages to making a 2012 gift?  Few planning opportunities are risk free.  Making 2012 gift comes with several including the possibility of running out of money if the donor does not retain sufficient assets; the transferred assets being included in an individual’s estate if they die within three years of making the gift; the potential of a ‘claw back’ of a portion of a 2012 if the exemption and tax rates are reduced; and the loss of a step-up in basis that property receives if the donor transfers the property at death.  It is therefore essential that anyone interested in making large-scale gifts consult with their attorneys, accountants and other advisors before making such a gift.

I don’t have $5.12 million.  Can I still make a 2012 gift?  You can and in some circumstances, you should.  Utilizing a portion of the full exemption can provide the same benefits to a person or family with a smaller taxable estate as it can to someone with a federal taxable estate.

Please contact info@levyestatelaw.com for more information about 2012 gift tax planning.

You Don’t Need A “License To Ill” To Express and Protect Your Values

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“Cause I’m a specializer, rhyme reviser

Ain’t selling out to advertisers

What you get is what you see

And you won’t see me out there advertising”

-“Triple Trouble” by Beastie Boys

Earlier this year, Adam “MCA” Yauch, one-third of the groundbreaking rap group the Beastie Boys, passed away from salivary gland cancer.  Throughout his career, Yauch had publicly expressed very clear opinions on a range of issues from Tibet to the objectification of women.  It was not surprising to find out that his Last Will and Testament reflected these convictions.

Yauch’s will included several conditions that will prevent his music from being used for purposes that he would have objected to.  His wife Dechen was named the sole owner of his artistic property, allowing her the right to utilize it in a manner that she believes her husband would have approved of. In addition, his will contained provisions that expressly prevented his personal image and created works from being used for advertising purposes.

Provisions that express your values and beliefs are not just the providence of artists or the super affluent.  For individuals who wish to reflect their beliefs in their wills, there are several methods of doing so:

1)    Conditional bequests-Wills may include bequests that are conditioned on the gift being used for specific purposes or may become available to the recipient only if they abide by certain conditions.  Utilizing these types of bequests can provide an individual with the knowledge that the money they are leaving behind will be used for only specific purposes.

2)     Fiduciary Instructions-In the same way that a conditional gift can limit the ways a beneficiary can receive the testator’s property, instructions to a fiduciary can also allow a testator control over how their property is used.  In some ways, instructions to a fiduciary can be more difficult to enforce.  Furthermore, depending on the type of instructions, the restrictions put on the fiduciaries may not be upheld by the Surrogate’s Court.

3)     Charitable Gifts-Putting conditions on bequests and limiting a fiduciary’s actions may not always provide a testator with clarity that their values and beliefs will ultimately be upheld.  A more concrete way to utilize an estate plan in this manner is by making charitable gifts to causes that you support.  Gifts can be made at death, during an individual’s lifetime or a combination of both.  A secondary benefit to charitable planning is the possible estate, gift and income tax deductions created by any gift made to an eligible charity.

By protecting his image, Adam Yauch was able to ensure that his values would continue to be expressed even after his death.  This benefit of estate planning is not always considered, but it is a powerful way to continue your legacy long after your passing.

Please contact info@levyestatelaw.com for more information about estate planning.

Five Reasons Why You Should NOT Have An Estate Plan

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You may be wondering why I would ever consider writing a post about not having an estate plan.  As an estate planning attorney, it might seem counterintuitive for me to discuss the reasons why an estate plan isn’t a necessary component of every adult’s life planning.

The reality is the reasons listed below come not from me, but from conversations I have had with people who do not have estate plans.  People of all ages, levels of wealth and familial situations have used one or more of these reasons to explain their reluctance or unwillingness to prepare an estate plan.  And with more than 60% of adults in the United States lacking even a basic will, it’s more likely than not that a relative, friend or colleague of yours has relied one of these reasons.

Reason Number One: Insufficient Assets.  One of the key goals of any estate plan is to delay, minimize or eliminate any estate taxes on the assets passing from an individual to his or her heirs.  Without sufficient assets, this component of an estate plan is unnecessary.

BUT, for individuals living in New York, New Jersey and Connecticut, having sufficient assets to require tax planning is more common than in other parts of the country.  First, individual income and personal wealth are higher in the tri-state area than in many other parts of the United States.  Second, the estate tax exemptions in Connecticut  ($2,000,000), New Jersey ($675,000) and New York ($1,000,000) are amongst the lowest in the US (many states do not have a state estate tax).  When you consider the real estate values in the tri-state area and the fact that life insurance death benefits are included in a taxable estate, it is very easy for an estate to surpass the state exemptions.

This does not even factor in the possibility that in 2013, the federal estate tax exemption will drop to $1,000,000.  This would expose many individuals to both federal and states estate taxes.

Reason Number Two: Estate Planning is Expensive.  Compared to many forms of planning, the upfront costs of preparing a good estate plan may seem expensive.

BUT, unlike other forms of planning, the fees for estate planning are not re-occurring unless your plan needs to be changed.  Additionally, while many of the larger law firms may charge fees that are uneconomical for many, there are numerous high quality boutique law firms and solo practitioners in the tri-state area who can provide a comparable service for a fraction of the cost.

Reason Number Three: I’m Too Young To Need An Estate Plan.  Fortunately, the likelihood of a premature death is small for most Americans.  For parents with minor children, the chances that both parents will pass before a child reaches 18 is very remote.

BUT, just because something is unlikely or an event is remote does not mean it is impossible.  The care of a minor child is not something most parents want to leave to chance.  And while there may be relatives or friends willing to step in and care for a minor child, not having a guardian named is a risk not worth taking.

Reason Four: I Can Rely on the State Intestacy Statute to pass my property to my heirs.  It is true that every person has a fallback estate plan regardless of whether they prepare any documents on their own.  New York, like all states, has a statute known as the intestacy statute which governs who will inherit your property and who will be able to manage your property if you die without a will.

BUT, the distribution pattern laid out by the New York intestacy statute is not necessarily what you would want.  For example, if a spouse and children survive an individual, the spouse will receive only fifty percent of the estate with the remainder passing to his or her children.  There are no provisions to reduce estate taxes, protect assets from waste or select your own representatives by utilizing this statute.  Furthermore, from a purely ideological perspective, there are very few people who would prefer such intimate decisions to be made by the government rather than by themselves.

Reason Five: Mortality Fears.  An unfortunate consequence of preparing an estate plan is the necessity to think about death and severe illness.  In many cases, this fear trumps all the previous reasons for stopping individuals from preparing an estate plan.

There is no BUT attached to this reason as because mortality fears are very real and deserve proper consideration.  In my experience, for many of my clients, preparing an estate plan allows an individual a sense of piece of mind from the fact that their affairs will be handled properly if they die.  Furthermore, preparing an estate plan reduces the stress and complications that your family will have to deal with in the aftermath of an already traumatic event.

And in the end, for all the reasons not to prepare an estate plan, the ability to protect your family from those stresses and complications remains the best counter-argument for estate planning.

Please contact info@levyestatelaw.com for more information about estate planning.

The 2012 Lifetime Gifting Opportunity-A Planning Trick or Treat?

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For estate planning professionals, one of the major changes presented by the 2010 Tax Act was the increase of the lifetime gift tax exemption from $1 million to $5 million (in 2012, it increased to $5.12 million).  This substantial increase to the amount that an individual could gift during their lifetime posed what many consider to be an “once-in-a-lifetime” opportunity to gift large portions of a person’s assets during their lifetime.  And with this increase in effect until December 31, 2012, a sense of urgency spread amongst advisors.

But just as quickly as this opportunity presented itself, tax professionals began to question if this was really the great planning tool it appeared to be.  Specifically, some began to worry that utilizing the full lifetime gift tax exemption may eventually lead to a claw back of a portion of the gift when the donor dies.

The premise of the claw back relates to interplay between lifetime gifting and the calculation of estate taxes at a person’s death.  When an estate ‘s executor calculates the taxable value of an estate, he or she must account for taxable gifts (gifts in excess of the annual gift tax exclusion) made by the decedent during their lifetime.  The more taxable gifts that are made, the smaller amount that can pass at your death free of estate tax.

The concern is because the current estate and gift tax exemptions are $5.12 million and both are set to reduce to $1 million, the IRS may impute a portion of a gift made before the end of 2012 into a future calculation of estate tax.  By way of example, if a claw back exists and an individual with a $6 million estate gifts the full $5.12 million before the end of 2012, then $4.12 million of that gift will be clawed back and used to calculate their estate taxes.

The main argument for the existence of a claw back is that under the current statutory interpretation, when calculating an estate tax, a tax preparer uses the constructive gift tax that would be due in the year that a gift is made.  Therefore, where that amount is low as it would be in years with a high exemption, the credit against the estate tax would be high and reduce the estate tax by less.  There has yet to be dispositive word from the IRS one-way or the other on this interpretation.

For those who don’t believe that the claw back is a problem, the primary argument against the application of a claw back is the intent of the 2010 Tax Act.  There was clearly no intention on the part of Congress to allow for large-scale gifts only to eventually recapture the lost tax revenue at a later date.   In addition, the nature of the gift and estate tax system is to tax gifts at the time they are made, not at death.  A claw back would be inconsistent with this.

There is also a political argument against the claw back.  While the gridlock in Washington makes any action before the end of 2012 unlikely, it is in neither party’s interest to apply a claw back.  Further, the 2010 Act was supported by both a Democrat President and Congress who would be more likely to support purported tax increases than their Republican counterparts.  It seems unlikely that they will support matters that would counter their previously passed laws.

Claw back or not, making a large gift before the exemptions expire at the end of 2012 still make sense for those with the means to make them.  For people with appreciable assets, shifting those assets to a younger generation now will remove the appreciation from their estates.  Further, for business owners looking to transfers their business in a tax efficient manner, this may be the best time to make those transfers while incurring less taxes than they will incur in future years.

Large scale gifting always comes with a degree of risk from a tax perspective.  The fear of a claw back may turn out to be real or imaginary, but in the end, it should not be the deciding factor in determining whether making a large gift is right for you.

For more information about lifetime gifting, please contact info@levyestatelaw.com.

The Coming “Taxmageddon” and How It May-Or May Not-Affect Your Estate Plan

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This December, for the third time in four years, Americans will be faced with a significant change to the federal tax laws that may significantly affect their estate planning.  The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 will expire on December 31st of this year and barring Congressional Action, 2013 will begin with significant changes to the tax rates and exemptions that many have relied on in preparing their estate plans.

This potential change, which has been termed “Taxmageddon” by many in the media,  could be prevented if Congress and the President agree on a temporary or permanent change to the Tax Code.  However, with a national election coming in November and less than two months after that for any action to occur, there is a very real possibility that the below changes will go into effect.

Here is how these changes will affect your estate plan if there is no action by Congress and the President:

Estate and Generation Skipping Transfer Tax (GST Tax) Exemptions and Rates-The 2010 Tax Act increased the federal estate and GST tax exemption to the highest amount it has ever been and reduced the top tax rate to the lowest it has ever been.  After an adjustment at the end of 2011, the exemption stands at $5.12 million and the top tax rate is 35%.  Without a change to the law, starting in 2013, the exemption drops to $1 million and the top tax rate increases to 55%.

Gift Tax Lifetime Exemption and Rates-Currently, the lifetime gift tax exemption and top gift tax rate mirror the estate tax exemptions and rates.  However, prior to the end of 2011, the gift tax exemption had remained much lower than the increasing estate tax exemption.  And while opponent of the estate tax will likely work diligently to return the exemption to as close to the current exemption as possible, it is unclear that the gift tax exemption will have the same current support.  With a drop from $5.12 million to $1 million, the ability to make large lifetime gifts may soon disappear forever.

Portability of Spouse’s Estate Tax Exemption-One of the new ideas enacted by the 2010 Tax Act was the concept of portability.  Previously, a spouse could utilize their deceased spouse’s estate tax exemption only by using a credit-shelter trust created under their will.  The 2010 Tax Act allowed spouses to utilize any unused part of their spouse’s estate tax exemption without using a trust.  This concept will sunset along with the other provisions of the 2010 Act and it is unclear whether it will be continued when and if the Tax Code is amended.

Personal Income Tax Rates-All federal income tax rates are set to increase in 2013 with the largest increases falling on those making less than $9,000 a year and those making more than $380,000 a year.  It is uniformly agreed amongst both political parties than increasing the tax rates of most Americans would be harmful to our already fragile economy.  The difference that exists is about whether or not the tax rates for the top income earners should remain at the current 35% level or increase to 39.6%.   There is also some support for an additional tax on persons making over $1 million a year in income.

Personal Capital Gains Tax Rates-The current 15% tax rate for long-term capital gains will expire at the end of 2012 and increase to 20% beginning in 2013.  In addition, all dividends will be subject to ordinary income tax rates as the distinction between qualified and ordinary dividends will disappear.  For high earners, an additional 3.8% surcharge on capital gains income will be applied as part of the Affordable Care Act.

These changes can significantly alter not only a person’s financial planning, but their estate planning as well.  With less than six months until this change comes and the two political parties in no position to compromise, now is the time to speak with your financial advisors and your estate planning attorney to understand the consequences of this possible ‘doomsday’ scenario.

For more information on the 2013 tax changes, please contact info@levyestatelaw.com

 

Old Problems, New Solutions: Estate Planning For Non-Traditional Families. Part 3-Planning Complications For Non-Traditional Families

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“At a certain point, I’ve just concluded that for me personally it is important for me to go ahead and affirm that I think same-sex couples should be able to get married.”-President Barack Obama, May 9, 2012

The historic comments made by President Obama regarding his support for gay marriage marks another important step towards same-sex couples receiving the same legal treatment as heterosexual couples.  This progress was further augmented by a ruling earlier this week by 1st Circuit Court of Appeals which held that the Defense of Marriage Act (DOMA) was unconstitutional.  As public support for these changes increases, it is likely that more progress will be made.

But as quickly as social views may be changing, the laws relating to estate planning are unlikely to change in such a rapid manner.  Additionally, other forms of non-traditional families such as domestic partnerships, single parents and parenting partners are unlikely to see their rights change.

With the optimism attached to the president’s words and the realistic knowledge that laws are slow to change, non-traditional families should be aware of the following issues related to their estate plans:

1)   Guardianship of Minor Children-The care of minor children when one or both parents die is a difficult one in any circumstance, but it becomes much more difficult when the choices may be limited or may be conflicted with other familial relationships.  For single parents and parents who have entered into parenting partnerships, it is incredibly important to determine who your child’s guardian will be if you should die or become disabled.

This issue can also become highly problematic if a former spouse is still alive or if other relatives disapprove of your relationship.  Without the fallback legal protections of marriage, who is appointed guardian after a parent dies could become tangled up in a lengthy court proceeding.

Preparing a will or a similar guardianship appointment document can ensure that your wishes as to the care of your child are known and respected.  Notifying your family members about your selection can also reduce the likelihood of a conflict after you have passed.

2)   Inheritance-Married couples, both heterosexual and same-sex, have automatic inheritance rights under the New York intestacy statute.  However, relying on this statute may cause fifty percent of your estate to pass to your children outright regardless of their age.

For other non-traditional families, no automatic inheritance rights exist.  Rather than inheriting fifty percent of a deceased parent’s estate, a child of a non-married couple would inherit the entire estate of their predeceased parent if no will exists.  Having a will in place allows a surviving domestic partner to inherit property from their deceased partner.  A will can also include a trust for the benefit of the deceased’s children, which can protect the assets from waste by a child who may be unprepared to manage an inheritance.

Alternatively, families may choose to use one or more revocable trusts to pass property to their surviving spouses, partners or children.  A revocable trust avoids the probate process for any assets contributed to it during an individual’s lifetime and can be coupled with a “pour over” will to receive any assets that remain in the deceased person’s estate.  A revocable trust should also be considered if a family believes that another family member may challenge their estate plan.

3)   Estate Taxes-The New York Marriage Equality Act allowed same-sex couples to utilize the New York state marital deduction for estate tax purposes.  Same-sex couples can now pass unlimited assets to their spouses upon their death without incurring a New York State estate tax.  However, because of DOMA, the corresponding federal marital deduction is not available to same-sex couples.

For other non-traditional families, estate taxes will apply to any assets above the federal ($5.12 million) and New York ($1 million) estate tax exemptions.  Families can reduce their potential estate tax liability by utilizing the annual gift tax exclusion of $13,000 per beneficiary per year or by contributing a portion of their estate to charity.

Families may also prepare for an eventual estate tax liability by purchasing additional life insurance to provide the necessary liquidity to their estate.  In order to avoid additional estate taxation, the life insurance should be owned and administered by an irrevocable life insurance trust.

4)   Gift Taxes-All non-traditional families must also be mindful of potential gift tax liability under the federal tax code.  While a heterosexual married couple can pass assets freely between spouses, non-traditional families may incur a gift tax if they pass assets to their spouses, partners or children above the annual gift tax exclusion of $13,000 per person.  Any excess will be credited towards their lifetime gift tax exemption.  And while that exemption is currently $5.12 million, it is scheduled to be reduced to $1 million at the end of 2012.

This gives families additional incentive to maximize their use of the annual gift tax exclusion every year.  For larger transfers, families may wish to consider the use of more advanced planning structures like sales to defective grantor trusts or GRATs to zero out the gift tax liability.  Families can also use family owned entities such as limited partnerships and LLCs to reduce the value of the assets being transferred.

For non-traditional family, estate planning is more complicated and with less advantages than are afforded to traditional families.  Nevertheless, a properly drafted and administered estate plan can provide any family with the financial protection and security that they deserve.

Please contact info@levyestatelaw.com for more information about estate planning for non-traditional families.

Old Problems, New Solutions: Estate Planning For Non-Traditional Families. Part 2-Planning for Blended Families

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Once upon a time, a lovely lady was bringing up three equally love girls.  At the same time, there was a man with three boys of his own, four men living all together.  One day, the lady met the fella and the rest became television history.

As The Brady Bunch reminds us, the concept of a blended family has been well known for decades now.  A family created by a couple bringing children from a previous marriage have specific issues that a traditional family will not have to deal with.  In the context of estate planning, a failure to consider the complexity of these issues and how a family resolves them can cause many problems both during and after the couple’s lifetime together.

The key considerations that a blended family must consider when preparing an estate plan include the following, namely:

1. Guardianship of minor children-One of the more complicated issues related to blended families is what happens to a child if their biological parent predeceases their stepparent.  If the child’s other biological parent is still living, they will likely be named as the successor guardian. This may uproot the child from their current homes and may not be what the child prefers.

In some circumstances, the relationship between the former spouses may be so negative that the stepparent may be named as the successor guardian.  This may lead to a dispute over guardianship that will ultimately decided by the Surrogate’s Court.  To avoid this contentious form of litigation, it is suggested that issues of guardianship be coordinated with both biological parents and the stepparent that the children live with.

2. Inheritance-Determining who will inherit your assets becomes more complicated when an individual remarries.  An individual must be aware of the rights (and lack thereof) of their new spouse, former spouse, biological children and stepchildren.

In some circumstances, a spouse in a blended family will have come to the marriage with significant wealth.  Some may have continuing support obligations to their former spouses.  Others may enter into a prenuptial agreement with their current spouse outlining what, if any, inheritance rights they will be entitled to.  Without a prenuptial agreement or a last will and testament, the new spouse will be entitled to fifty percent of their spouse’s estate as their statutory marital share.  As an alternative, couples should prepare wills which outline what inheritance rights, if any, the surviving spouse will receive.

If either spouse had previously prepared a will or executed any beneficiary designations, it is essential that these documents and designations be updated to remove the former spouse as a beneficiary.

Children also pose a potential planning problem.  New York intestacy law and most wills do not provide for children that are not biologically related to a parent.  For stepchildren, this could potentially leave them without an inheritance if their biological parent passes before their stepparent.  Careful drafting and consideration should be taken to ensure all children are cared for in some manner.

3. Estate Taxes-As mentioned above, spouses in a blended family will often come into a marriage with preexisting wealth.  It may be a spouse’s desire to use their wealth created before the new marriage to benefit their children when they die.  However, when an estate tax may be due at the federal or state level, it may beneficial to leave assets to the surviving spouse to take advantage of the marital deduction for estate tax.

The use of a marital trust called a qualified terminable interest trust, or QTIP trust, can satisfy both goals.  Under the terms of this type of trust, the surviving spouse receives all of the income of the trust.  If that is insufficient, the surviving spouse may also be given a “5 and 5 power” to take the greater of (a) $5,000 or (b) 5% of the trust principal out every year.  The majority of the trust principal is preserved for the deceased spouse’s children and the entire trust principal avoids estate tax until the surviving spouse passes.

Blended families have become a common and widely accepted type of family structure.  With that said, there are key differences in the estate planning needs, goals and potential problems of a blended family will face.  Families and planners alike must be aware of these differences in order to achieve a positive result.

For more information about estate planning for blended families, please contact info@levyestatelaw.com.