The changes in the Estate and Gift Tax laws over the last decade have altered the landscape of Estate Planning.
Clients who have implemented tax planning as part of their Estate Plan prior to the 2012 American Taxpayer Relief Act (ATRA) should revisit their Estate Plans to ensure that the plan in place accurately reflects their intentions and needs.
Individuals and Married Couples Worth Less than $5 Million:
Spouses with a total net worth that is less than $5 million are currently under the threshold which triggers an Estate Tax (assuming no taxable gifts were made) and the Estate Tax driven aspects of their Estate Plan may no longer be necessary.
Many of the planning ideas which were intended to lessen the Estate Tax such as the creation of a Family Limited Partnership, the creation and funding of a Credit Shelter Trust / Family Trust (see below) or the creation of a GST Trust (see below) may no longer be necessary for tax purposes.
Also, liquidity planning to ensure that the client’s Estate has sufficient liquidity to pay Estate Taxes upon the client’s death (i.e. second to die life insurance policies) may no longer be required.
Married Couples Worth More than $5 Million:
For married couples whose net worth is more than $5 Million, portability has provided them with flexibility in structuring their Estate Plan that was not available before ATRA.
Namely, the first spouse to die can leave their assets outright to the surviving spouse (rather than to a Credit Shelter Trust for the surviving spouse’s benefit) without wasting the first spouse’s Exemption.
Further, the division of assets between spouses that may have been recommended prior to ATRA may no longer be necessary.
Individuals Worth More than $5 Million and Married Couples Worth More than $10 Million:
Single individuals whose net worth is more than $5 million and married couples with a combined net worth of more than $10 million have Estate and Gift Tax issues that cannot be addressed by merely utilizing their Exemption(s) to shelter assets from transfer taxes.
While ATRA has provided additional flexibility in achieving certain tax objectives (see previous Paragraph), tax planning will still be a priority for people in this category as the top Estate and Gift Tax Rates have been increased from thirty-five percent (35%) to forty percent (40%).
Additional tax planning ideas can include formulating a gift giving program, creating Family Limited Partnerships, creating and funding a Personal Residence Trust, creating and funding a Grantor Retained Annuity Trust, entering into a sale to a Defective Grantor Trust, creating Private Annuities, creating and funding a Life Insurance Trust, creating a Charitable Trust or Private Foundation, etc.
The new American Taxpayer Relief Act passed December 2012 finalized the Federal Estate Tax laws after 11 years of uncertainty that began with the Bush Tax Cuts in 2001.
During these 11 years of uncertainty, the Estate Tax was temporarily repealed for one (1) year (2010), the value of assets that each individual could transfer to beneficiaries free of Estate and Gift Taxes (and Generation Skipping Transfer Taxes) rose from $1 million to $5 million (indexed for inflation), the top Estate and Gift Tax rates fell from fifty-five percent (55%) to thirty-five percent (35%), and the Annual Exclusion rose from $10,000 per year, per individual to $13,000 per year, per individual.
Prior to the passing of the new American Taxpayer Relief Act of 2012, all of the foregoing tax breaks were going to expire and the Estate and Gift Tax laws in existence before the Bush Tax Cuts were to set to return on January 1, 2013.
With the passing of the American Taxpayer Relief Act of 2012 (ATRA), a return to the Gift and Estate Tax laws as they existed in 2001 was avoided and the Federal Gift and Estate Tax laws appear to be finalized for the foreseeable future. The final Gift and Estate Tax laws are as follows:
1. The value of assets (after deductions) that each individual can pass to their family free of Estate and Gift Taxes is $5 million (indexed for inflation) (for a total of $10 million for husband and wife) (the “Exemption”);
2. Surviving spouses can add the deceased spouse’s unused Exemption to the surviving spouse’s Exemption allowing the surviving spouse to shelter more than $5 million of assets from Estate and Gift Taxes upon the surviving spouse’s death. This tax benefit, which was also available for decedents dying in 2011 and 2012, is commonly referred to as “portability”;
3. The value of assets that each individual can pass to a skip generation (i.e., grandchildren) free of GST Taxes is $5 million (indexed for inflation);
4. The top Estate and Gift Tax Rate (and GST Tax Rate) is forty percent (40%); and
5. The Annual Exclusion (the amount each individual can gift each year without reducing the individual’s $5 million Exemption) is $14,000 per year, per individual.
Additional provisions of ATRA include the following: maintaining the tax rates for individuals earning less than $400,000 (and $450,000 for married filing jointly); increasing the income tax rates for individuals earning more than $400,000 (and $450,000 married filing jointly) from 35% to 39.6%; increasing the Long Term Capital Gains Rates from 15% to 20% for taxpayers in the 39.6% tax bracket; reducing personal exemptions and limiting itemized deductions for taxpayers with Adjusted Gross Income in excess of $250,000 (single) and $300,000 (married filing jointly).
Several of our Firm’s clients over the years have flatly refuse to execute a will or even discuss the subject because they feel that either of these actions will hasten death.
Often these are the people who have abdicated their legally protected right to make a will (and pass on their property as they desire) by dying intestate, allowing the state to dictate who gets what and when.
Opportunities to provide for a problem child, a dependent spouse, a favorite charity, a spendthrift sister, a needy parent, etc., are all lost when a will is not employed.
The positions of personal representative of the estate, trustee of family funds, and guardians of the children are all left to the discretion of the probate judge who, although qualified to choose such key persons, is necessarily a stranger to your family, its history and circumstances.
A thoughtful will avoids all this.
A will can, among other things, anticipate family financial needs, ensure continuity of family businesses, protect funds from claims of creditors, authorize sales of real property, educate children and grandchildren and save estate and income taxes.
As can be seen, a will could be the most important and significant document you ever sign in your life.
There are those who have an exaggerated opinion of the cost of a lawyer’s advice in the preparation of a will, but the cost of not procuring correct, current guidance in making your will can be far more costly than any legal fees involved.
There is a growing trend in this country to undermine the sanctity and significance of the act of making a will which is a by-product of the fast-paced computer age in which we live.
We see evidence of it all around us. The teller at our local bank hands us a form in small print and asks us to “sign here” to open a joint account or safe deposit box with a family member. The insurance salesman asks, “Who do you want as the beneficiary of this policy?” and then writes down our response on a piece of paper which is submitted to the company and is buried in the final policy we receive at a later time.
Our employer asks us to list the beneficiary of our retirement plan benefits. The title company representative asks us whether we want more than one name on the deed to property we are acquiring.
These acts, although innocuous in and of themselves, are each destructive of the consummate act of making a will and may operate so as to defeat the intentions of the individual as expressed in his will.
Such inconsistences between the terms of a person’s will and the way in which he actually owns property often result in the payment of additional estate taxes, the failure of bequests for family members and increase the likelihood of will contests, particularly in families of second marriages.
And because these arrangements bypass a person’s will and yet result in the passage of property at death, they are themselves considered as will substitutes. In trust for (ITF) bank accounts and joint safe deposit boxes have long been considered “poor man’s will” for the reason that they take the place of a will do not involve the probate and are, therefore, an inexpensive way to pass on property at death.
Encouraging the growth of these will substitute devices is the growing fear of probate – fear of the unknown cost, expense, delay and inconvenience of the court process of providing a person’s last will and testament, clearing title to his assets and passing them on to his family.
Many exaggerations exist as to lawyer’s fees, delays caused by litigation between family members fueding over the assets and the amount of taxes paid to settle the estate.
There is no more personal an act or expression of genuine concern than a person providing in their will for the guaranteed financial security and well-being of a loved one.
All of the effort spent in a life in gaining a good education, obtaining your first job, seeing savings grow and paying taxes, seems miniscule and irrelevant when compared to actually passing on all that it has taken a lifetime to accumulate.
That opportunity is typically perceived by an individual as the essence of making a will.
The formalities of execution which the law requires as an attendant to the act of making a will heighten the solemnity and importance of the occasion.
There is a silence as the individual grasps the pen to sign their name to the will after having heard the lawyer’s instructions which precede the execution of the document. There is reflection, concern and contemplation at work at that moment.
Lawyers call it the moment of truth – that instant where the mortal meets the immortal – the recognition and admission by an individual that he will not live forever and with it, he has chosen to provide for the people most dear to him in his own way, not to be confused with the thousands of similar ways in which the transmission of wealth is provided for in wills signed the same day in lawyers’ offices, bank trust departments and other places around the country by persons who have given the matter the same degree of premediation.
Florida tax laws give residents several advantages over tax laws of other states.
Here are some of them (Continued):
5. Florida Real Estate Taxes. Real estate taxes are assessed as of Jan. 1 each year, but are not payable until the following Nov. 1. Taxes are assessed on a calendar year basis. Taxes for any year become delinquent if not paid by April 1 of the next year.
The state imposes no tax on real estate; such taxes usually are imposed by the county and by municipalities. County and city taxes are included in one bill, which is sent by the county tax collector.
6. Florida Real Estate Tax Homestead Exemption. In 1934, during tough economic times, Florida amended its Constitution to provide that homesteads would be exempt from taxation up to $5,000. The homestead exemption has since increased to $25,000.
Any tangible personal property used for the production of income, such as furniture and furnishings in an office or rental apartment, however, are taxable. A tax return covering such items must be filled no later than April 1 of each year, and a 10 percent penalty is assessed for failure to file the return.
7. Florida Tangible Personal Property Tax. The Florida legislature has exempted from taxation all household furnishings, clothing and other items.
8. Florida Intangible Tax. Florida has an intangible tax on stocks, bonds and other securities. The tax is $1 per thousand dollars of valuation on stocks and bonds. In 1974, the Legislature provided a $20,000 exemption. Married couples have a joint exemption of $40,000.
Intangible consist of variety of items including personal loans, notes, and accounts receivable.
Florida tax laws give residents several advantages over tax laws of other states.
Here are some of them:
1. No State Income Tax. A prohibition against such a tax was drafted into Florida’s Constitution in 1885. This prohibition was re-enacted in the 1968 Constitution. In order to enact a personal income tax, the state’s Constitution would have to be amended, requiring voters’ approval.
2. No City Income Taxes. Florida municipalities are prohibited from enacting local income tax.
3. No Florida Gift Tax. Residents of a number of states may pay state as well as federal tax on gifts. Florida residents pay no state gift taxes.
4. No State Inheritance Tax. Florida has adopted an estate tax that is the equivalent of the credit for state death taxes paid to the U.S. government whenever a federal estate tax is paid.
Florida’s death tax is a transfer tax based on the gross value of the estate regardless of how many beneficiaries the decedent has, or how much money each beneficiary inherits.
In U.S. Tax Court Memo 2013-34 issued February 4, 2013 in the matter of the Estate of Evenchik v. Commissioner of Internal Revenue, the taxpayer was denied a charitable deduction for federal income tax purposes of shares of stock in a closely-held corporation which were transferred to a charitable organization.
The taxpayer executed an Assignment of Stock by Gift transferring the shares in the corporation to the charitable organization, and then obtained an appraisal of the underlying assets held by the corporation.
The gift amount claimed on the taxpayer’s Federal Income Tax Return (IRS Form 1040) was $1,045,289.30, and the taxpayer submitted a copy of the appraisal with the Return.
The Commissioner issued a Notice of Deficiency disallowing the entire charitable deduction. The sole question before the U.S. Tax Court was whether the appraisal submitted by the taxpayer was a “qualified appraisal.”
Charitable gifts of property in excess of $5,000 are required to be substantiated by qualified appraisal.
The U.S. Tax Court found that the appraisal did not meet the requirements of the Internal Revenue Code relating to qualified appraisals and rejected the taxpayer’s argument of substantial compliance primarily because the appraisal submitted to the IRS was for the underlying assets held by the corporation, while the gift itself was of shares of stock in the corporation.
The U.S. Tax Court, therefore, held that the appraisal was of the wrong asset.
The U.S. Tax Court further found that the appraisal failed to state the date or expected date of the gift, the terms of the agreement entered into by the taxpayer and the charitable organization, that the appraisal was prepared for income tax purposes, and the date used to value the assets.
The U.S. Tax Court, therefore, held that the taxpayer was not entitled to the deduction.
If you are considering making a significant gift to charity, it is important that you receive professional advice to avoid costly mistakes such as these.
The attorneys of Thomas N. Silverman, P.A. are admitted to practice before the U.S. Tax Court and are knowledgeable and experienced in the requirements and planning associated with charitable giving.
We can also assist you in integrating charitable giving as part of your overall estate plan.
Thomas N. Silverman was recently quoted by the Palm Beach Daily News in an article about recently passed tax laws and their affect on trusts.
Article Link on Palm Beach Daily News Website. By Gail Liberman
Just 52 percent of American millionaires have established trusts and/or estate managers, according to a recent survey by PNC Wealth Management. But thanks to the new estate tax law, you might not necessarily need a trust.
“In fact, we’re starting to see people undo them [trusts],” says Palm Beach Gardens estate planning attorney Thomas Silverman.
One of the most popular types of trusts is a credit shelter trust, which is set up between spouses, often to minimize estate taxes.
Thanks to the recent fiscal cliff deal, this type of trust may prove unnecessary for some.
That’s because estates with at least $5.25 million in assets — $10.50 million for married couples — are exempt from the federal estate tax this year. That exemption is indexed to inflation.
“You can hold property in your own name or it can be joint,” Silverman says.
After the death of the first spouse, a permanent “portability” feature lets the surviving spouse carry over the unused portion of a spouse’s estate tax exemption to expand his or her own exemption. So a will coupled with named beneficiaries on financial accounts to avoid probate may be all that some couples with less than $10.50 million may need.
The federal estate tax runs a maximum of 40 percent on amounts over the exemption — up from 35 percent. Estates of snowbirds, however, also could get saddled with state death taxes.
Already have a credit shelter trust with your spouse? You may need to have it reviewed, Silverman suggests. If your assets were divided among spousal trusts, you could encounter added accounting and administrative headaches and costs you don’t really need.
Due to the estate tax changes, generation-skipping transfer trusts also could prove problematic — especially if you’d like your children to get some assets free of a trust. With the increase in the estate tax exemption, your trust wordage could unwittingly finance your grandchildren’s trust with more money than you’d like.
“Everybody should look at amending (a trust) if it were only set up to save estate taxes,” Silverman says. “It’s one or two hours of a lawyer’s time.”
Of course, there still are many reasons to have a trust.
Do you trust your kids to manage their own assets? Do you have children with disabilities or special needs? Might your assets added to those of your children put them in a higher tax bracket?
In such cases, trusts still could prove important, notes Shelley Cabangon, vice president of PNC Wealth Management.
Are you in a second marriage and want your children to get your assets? Simply naming a spouse as beneficiary, for example, could wind up excluding your children from your money if your surviving spouse selects a different beneficiary.
A trust also can protect family members against lawsuits and divorce, Cabangon says.
“We had some people who could afford to make significant gifts (to avoid the estate tax) but still wanted to hold off because they wanted more certainty,” Cabangon says. “We’re encouraging people to do it now.”