North Carolina Estate Planning Blog : North Carolina Estate Planning Lawyer & Attorney : Trust Counsel, PA : Trust Administration : Serving Chapel Hill, Durham, Raleigh, Pittsboro, Orange County, Chatham County

On December 17, 2010 the President signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Relief Act), extending the Bush-era tax cuts. This new law creates a once-in-a-lifetime planning opportunity that ends at midnight, December 31, 2010.

The new law also presents additional planning opportunities that are less immediate, but no less important.

Background

Generally, transfers (greater than $13,000 per year) to generations younger than children are subject to what is known as the generation-skipping transfer tax, an onerous tax that equals the maximum gift or estate tax rate. The purpose of this tax, enacted in the late 1980s, is to prevent wealthy individuals from transferring assets to younger generations for the purpose of avoiding application of the estate tax at every generation.

A Unique Opportunity

The 2010 Tax Relief Act creates a unique opportunity to make gifts through December 31, 2010 that are not subject to the generation-skipping transfer tax. This is because, under the new law, the tax rate is zero for any generation-skipping transfer made in 2010.  Beginning January 1, 2011, the tax rate for these transfers will be 35%. In two short years the rate goes back to 55%.

Take Advantage of the Lowest Tax Rates in Decades

I urge you to consider taking advantage of this rare gift from Congress and consider making transfers to generations younger than children, even if you do not yet have grandchildren. An estate planning attorney can help you structure these gifts so that they meet your goals and objectives, regardless of amount.

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You know the importance of having a will. If you die "intestate" (without a will in legal language), your state's laws will determine the disposition of your assets. Your actual wishes will be irrelevant, even though they may be well-known to your friends and relatives.

An Effective Will     Here are three basic things you should cover:     Executor Designation. The executor is the person who becomes legally responsible for wrapping up your affairs after you die. He or she will pay outstanding bills, file any necessary tax returns, make tax payments, and dole out the remaining assets as instructed by your will. You should name at least one alternate choice, in case the first choice doesn't work out.     Asset Disposition Instructions. A properly drafted will generally heads off disputes regarding which heirs get which assets.     Guardian Designation. The guardian takes legal charge of your minor children, if you (and your spouse) die. Designate at least one alternate in case your first choice is unable to fulfill the role. For more information, click here to read our previous article, "Picking a Guardian for Your Kids"

But even if you do have a will, here is a critical point: Your will has no effect on asset distributions that automatically occur upon your death under "operation of law."

The most common applications of the "operation of law" principle is with life insurance death benefits and tax-advantaged retirement accounts.

For example, whoever you designate as the beneficiary of your life insurance policy will automatically receive the death benefit proceeds. It doesn't matter what your will says about who should receive the money.

Similarly, the person or persons designated as the beneficiary of your tax-deferred retirement account, traditional IRA, or Roth IRA will automatically receive that money by "operation of law." It makes no difference if your will contains contrary instructions.

Another example: When you co-own real estate with someone in "joint tenancy with right of survivorship," that co-owner automatically inherits the whole property, regardless of what your will says.

You may have other assets that are affected by the "operation of law" rules. Talk with your estate planning adviser to ensure your wishes are carried out.

Finally, at the same time you have your will drafted or revised, be sure to get all your beneficiary designations and real property ownership arrangements in line with your current intentions about who should receive what, after you die.

From today's TrustCounsel eNewsletter.

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Local Financial Planner Janet Ramsey, MBA, CFP will be offering a course entitled Wealth Planning in the New Normal, Navigating Retirement Decisions in Rough Waters as part of Duke University's OLLI program.  The course will run from January 20 to March 31, 2011.  Greg Herman-Giddens will speak on non-tax reasons to do estate planning.

For more information and to register,  click Continue Reading.

Continue Reading...

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This afternoon, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. This legislation, negotiated by the White House and select members of the House and Senate, provides for a short-term extension of tax cuts made in 2001.  It also addresses the Alternative Minimum Tax (AMT) and Estate, Gift and Generation-skipping Transfer taxes.

HIGHLIGHTS

Two-year extension of all current tax rates through 2012

• Rates remain 10, 25, 28, 33, and 35 percent
• 2-year extension of reduced 0 or 15 percent rate for capital gains & dividends
• 2-year continued repeal of Personal Exemption Phase-out (PEP) & itemized deduction limitation (Pease)

Temporary modification of Estate, Gift and Generation-Skipping Transfer Tax for 2010, 2011, 2012

• Reunification of estate and gift taxes
• 35% top rate and $5 million exemption for estate, gift and GST
• Alternatively, taxpayer may choose modified carryover basis for 2010
• Unused exemption may be transferred to spouse
• Exemption amount indexed for inflation in 2012

AMT Patch for 2010 and 2011

• Increases the exemption amounts for 2010 to $47,450 ($72,450 married filing jointly) and for 2011 to $48,450 ($74,450 married filing jointly).  It also allows the nonrefundable personal credits against the AMT.

Extension of “tax extenders” for 2010 and 2011, including:

• Tax-free distributions of up to $100,000 from individual retirement plans for charitable purposes
• Above-the-line deduction for qualified tuition and related expenses
• Expanded Coverdell Accounts and definition of education expenses
• American Opportunity Tax Credit for tuition expenses of up to $2,500
• Deduction of state and local general sales taxes
• 30-percent credit for energy-efficiency improvements to the home (IRC section 25C)
• Exclusion of qualified small business capital gains (IRC§1202)

Temporary Employee Payroll Tax Cut

• Provides a payroll tax holiday during 2011 of two percentage points. Employees will pay only 4.2 percent on wages and self-employed individuals will pay only 10.4 percent on self-employment income up to $106,800.
  

Source:  Financial Planning Association

 

Continue Reading...

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Last night the House passed HR 4853 by a vote of 277-148 approving the Tax Relief Act of 2010 as passed by the Senate Wednesday. The bill now goes to the President for signature.

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The new website, which has been developed over the past year, is launching just days after President Obama called for fundamental reform of the income tax system, touching off a new national conversation about the tax code.

“The AICPA developed 360Taxes.org to give taxpayers a place to go for free, plain-English answers to their most commontax questions,” said AICPA President and CEO Barry Melancon.  “The renowned tax expertise of CPAs literally is now at taxpayers’ fingertips.”

Jordan Amin, chair of the AICPA’s Financial Literacy Commission, said that 360Taxes.org will be one of the most important websites for taxpayers not just at tax filing time but also at each of their life stages. “You have to think about taxes when you’re buying, renovating or selling a home; getting married or divorced; starting a family; saving for retirement or an education; buying life insurance; and starting or selling a business,” Amin said.  “CPAs have always helped taxpayers plan for these financial decisions and now their expertise is backing360Taxes.org.”

Features of 360Taxes.org include:

·         Ask a CPA, which offers taxpayers a way to ask tax-related questions and read answers to questions from other taxpayers.

·         Frequently Asked Questions about timely tax topics.

·         Tax tips and in-depth articles on topics such as estate taxes and how to offset education costs using tax credits and deductions. 

·         Calculators that help determine the tax benefits of contributing to certain types of retirement plans and the cost of monthly mortgage payments.

·         Links to consumer-focused tax blogs written by CPAs.

·         Resources for choosing a CPA to help with tax and other financial services.

360Taxes.org is an extension of the AICPA’s successful 360 Degrees of Financial Literacy program (http://www.360financialliteracy.org/), a public service, non-commercial effort of the nation’s Certified Public Accountants to help Americans understand their personal finances through every stage of life.

Source:  AICPA December 15, 2010 Press Release

 

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The Senate has passed (by vote of 81-19) the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Relief Act), and the House is expected to take up the measure tomorrow.

The Act includes bringing back the $100,000 IRA spousal rollover for 2010 and 2011.

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Christmas is in 12 days, so I thought it appropriate to use the "12 Days of Christmas" theme to talk about the fact that estate planning is truly a gift to your family or other beneficiaries.  While planning for one's incapacity and demise is not exactly a cheery topic, the holidays are about spending time with and enjoying family, and giving to others.  So, here are 12 things you can do for the benefit of your family:

1. Set up and fund a Living Trust to save your family the time, cost and burden of probate.
2. Have a Will that names an executor to handle your estate, waives the requirement of bond, and clearly states where you want your assets to go at your death.
3. Have Durable Power of Attorney so that if you become incapacitated your family does not have to institute a court proceeding to have you declared incompetent and have a guardian appointed to manage your property.
4. Have a Health Care Power of Attorney that sets out your wishes regarding your health care so that family members can make informed decisions about your health care if you can't express your own wishes.
5. Have a Living Will that states what your wishes are regarding life support in end-of-life situations so that your family doesn't have to guess what you would have wanted.
6. Have a HIPAA Authorization naming your family members so that they can talk to your doctors and get your medical information in case you aren't in a position to consent at the time.
7. If you have anyone who is dependent on you for support, make sure you have adequate Life Insurance, as well as disability insurance.
8. Make sure that your Beneficiary Designations for retirement accounts and life insurance are up to date and name the proper persons (e.g. not your estate, as that will trigger probate and possibly adverse income tax consequences).
9. Consider Long Term Care Insurance to ensure payment for any needed care and to help preserve your children's inheritance.
10. Have an Umbrella Liability Insurance Policy so that your estate is not wiped out due to an a serious accident or other liability.
11. Let your family know what your wishes are for Funeral and Burial arrangements.
12. Spend quality time with your loved ones, sharing your family history, values, and what else is important to you to help ensure an Emotional Legacy as well as a financial one.

Merry Christmas to all!

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 The Senate Finance Committee has produced a summary of the Reid Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, which extends the Bush tax cuts for two years.  Here's what the proposal says regarding estate, gift and generation-skipping transfer taxes:

Temporary estate, gift and generation skipping transfer tax relief. The EGTRRA phased-out the estate and generation-skipping transfer taxes so that they were fully repealed in 2010, and lowered the gift tax rate to 35 percent and increased the gift tax exemption to $1 million for 2010. The proposal sets the exemption at $5 million per person and $10 million per couple and a top tax rate of 35 percent for the estate, gift, and generation skipping transfer taxes for two years, through 2012. The exemption amount is indexed beginning in 2012. The proposal is effective January 1, 2010, but allows an election to choose no estate tax and modified carryover basis for estates arising on or after January 1, 2010 and before January 1, 2011. The proposal sets a $5 million generation-skipping transfer tax exemption and zero percent rate for the 2010 year.

Portability of unused exemption. Under current law, couples have to do complicated estate planning to claim their entire exemption (currently $7 million for a couple). The proposal allows the executor of a deceased spouse’s estate to transfer any unused exemption to the surviving spouse without such planning. The proposal is effective for estates of decedents dying after December 31, 2010.

Reunification. Prior to the EGTRRA, the estate and gift taxes were unified, creating a single graduated rate schedule for both. That single lifetime exemption could be used for gifts and/or bequests. The EGTRRA decoupled these systems. The proposal reunifies the estate and gift taxes. The proposal is effective for gifts made after December 31, 2010.

Note:  under the portability heading, the reference to the current $7 million exemption per couple is erroneous, as there is no estate tax this year.  The estate tax exemption was $3.5 million per person in 2009.

 

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The House has decided not to vote on the tax cut agreement Obama reached with Republican leaders earlier this week.  Particularly objectionable was the proposed $5 million estate tax exemption.  From CNN.com:

"According to several Democratic members and aides, much of the discussion focused on the addition of the estate tax provision to the package. The estate tax is scheduled to be reinstated at a higher rate of 55% next year, with the exemption up to $1 million.

A bill that passed in the House a year ago set the threshold for the exemption at $3.5 million and the tax rate at 45%, while the provision in the tax deal exempts estates up to $5 million and sets a lower rate."

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From today's press release from the American Institute of Certified Public Accountants:

The American Institute of Certified Public Accountants has asked the Internal Revenue Service to issue guidance about how to apply carryover basis rules for the assets of taxpayers who died in 2010 in order to settle their estates.   Basis is generally the original purchase price of an asset, such as stocks or property.

 “The carryover basis regime is new and unfamiliar, and the April 18, 2011, due date for filing the information returns allocating the basis adjustments to particular assets is rapidly approaching,” the AICPA said. 

 The traditional “step-up basis” method, under which heirs were permitted to use the fair market value of the assets at the time of the decedent’s death, was repealed for 2010 by the Economic Growth and Tax Relief Reconciliation Act of 2001 and replaced with carryover basis.  Under carryover basis, heirs use the decedent’s original cost of the assets as their basis when calculating taxes due, but the executor is allowed to increase the basis of the assets up to $1.3 million. An additional $3 million increase is permitted if the assets are passed to the surviving spouse.

 Among the specific questions for which the AICPA requested guidance are who will make the basis allocation if the estate does not have an executor, what happens to the decedent’s suspended passive losses, will the basis allocation form be a stand-alone form or a form attached to the decedent’s final Form 1040, how do the rules apply to community property, and how are net operating loss carryovers and capital loss carryovers measured?

[Emphasis added]  Click here for a copy of the AICPA letter.

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The agreement includes a two year extension on the Bush income tax cuts, and with regard to the estate tax (from the Washington Post):

"The deal also would revive the estate tax, but it would exempt inheritances of up to $5 million for individuals and $10 million for couples. Democrats on Capitol Hill are strongly opposed to setting the cap at that high a level and to the 35 percent rate discussed by Obama and Republicans that would apply to the taxable portion of estates."

Stay posted for updates on the future of the death tax.  I think the only certainty right now is that there will be no permanent repeal.

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Senator Max Baucus, Chair of the Senate Finance Committee on Finance, introduced the "Middle Class Tax Cut Act of 2010" which would make the Bush income tax cuts permanent for those making under $250,000 per year.  

There may be a vote on the bill today, but it is unlikely to garner much Republican support and will probably fail.  Republicans want to extent the Bush cuts for all taxpayers.

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The legislative text and summary of the Middle Class Tax Cut Act of 2010, released yesterday by Senate Finance Committee Chairman Max Baucus (D-Mont.), is now available at the Finance Committee’s website at http://finance.senate.gov/legislation/.   A summary of some of the estate tax provisions is set out below.

Permanent estate, gift and generation skipping transfer tax relief.  EGTRRA phased-out the estate and generation-skipping transfer taxes so that they were fully repealed in 2010, and lowered the gift tax rate to 35 percent and increased the gift tax exemption to $1 million for 2010. The proposal reinstates the 2009 law for the estate, gift, and generation skipping transfer taxes permanently, setting the exemption at $3.5 million per person and $7 million per couple and a top tax rate of 45 percent. The exemption amount is indexed beginning in 2011. The proposal is effective January 1, 2010, but allows an election to choose no estate tax and modified carryover basis for estates arising on or after January 1, 2010 and before the date of introduction. The proposal is effective upon date of introduction for gift and generation skipping transfer taxes.

Portability of unused exemption. Under current law, couples have to do complicated estate planning to claim their entire exemption (currently $7 million for a couple). The proposal allows the executor of a deceased spouse’s estate to transfer any unused exemption to the surviving spouse without such planning.

Deferral of estate tax for farmland. The proposal allows taxpayers to defer the payment of estate taxes on farmland of a family farm until the farmland is sold or transferred outside the family or ceases to be used for farming. The proposal also increases the valuation adjustment for donations of a conservation easement.

Increase of special use revaluation amount. The proposal increases the amount of the revaluation to the exemption amount, allowing up to a $3.5 million adjustment.

Minimum 10-year term for grantor retained annuity trusts (GRATs). The proposal requires that GRATs be set up for a minimum 10-year term. The proposal applies to transfers for which returns are filed after the date of enactment.

Basis for estate and income taxes. The proposal clarifies that the basis of property in the hands of the heir is the same as its value for estate and gift tax purposes. The proposal also requires the executor or donor to report the value to the IRS and heir. The proposal applies to transfers for which returns are filed after the date of enactment.

Thanks to Robert Keebler, CPA for this summary.

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For the past ten years, the federal estate tax rules have been changing and they will shift again on January 1, 2011. As of that date, the federal estate tax will return with a $1 million exemption and  rate of 37-55%.  Thus, virtually everyone with assets in excess of $1 million should have their estate plan reviewed.

Bypass Trust Arrangements Can Save Estate Taxes

Married couples concerned about estate taxes can set up a bypass trust arrangement in their wills or living trust documents. (Bypass trusts are also commonly called credit shelter trusts).

The main purpose of a bypass trust is to allow both spouses to take advantage of their respective federal estate tax exemptions. Typically, assets with value equal to the current exemption amount are automatically put into the bypass trust when the first spouse dies. The trust is created at that time and is irrevocable.

The beneficiaries of the trust are designated by the first spouse to die, and the assets used to fund the trust come out of that person's estate when death occurs. Typically, the trust beneficiaries are that person's children and/or grandchildren.

Since the first spouse to die designates the beneficiaries of the bypass trust, the assets used to fund the trust are included in that person's estate for federal estate tax purposes. However, no federal estate tax is due because that person's estate tax exemption provides sufficient shelter.

The surviving spouse can be given money from the bypass trust to meet his or her reasonable financial needs. When the surviving spouse passes away, the remaining assets in the bypass trust go the beneficiaries of the trust (such as the children and/or grandchildren).

A Potential Problem

Even with properly drafted bypass trust provisions, asset ownership and beneficiary designations must be coordinated with the intent of the estate plan so that assets are available to be sheltered in the bypass trust at the death of the first spouse to die.  This asset allocation is a crucial part of any estate plan.

The Bottom Line

Throughout your life, your estate plan will have to be altered at times due to tax changes and other events. Some situations are inherently unpredictable--like winning the lottery or losing a bundle in the stock market. However, it's a fact that the federal estate tax laws are in flux and proper planning is needed. Anyone with assets over $1 million who has not had their plan created or updated after January 1, 2010 with the return of the estate tax (with a $1 million exemption) factored in should schedule an appointment for a review to see what, if any, changes are advisable.  This is particularly important for married couples.

P.S.  Remember that the proceeds of life insurance policies are taxable for federal estate tax purposes.

 

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