Although Obama’s American Taxpayer Relief Act was said to make permanent changes, lawmakers had also advised that it was just the first step in a series of changes. Now Obama’s 2013 budget proposal has several amendments, of which are changes to tax laws that were recently made permanent by the American Taxpayer Relief Act.Continue Reading...
Recently we wrote about North Carolina potentially joining several other states that are repealing state estate tax (or “death tax”). Last week, the North Carolina House Finance Committee approved repeal of the state’s death tax. If the repeal is enacted into law, soon there will no longer be any states in the Southeast that impose a death tax. (Tennessee’s death tax will expire in 2016.)Continue Reading...
Most of the country’s attention has been on federal estate tax changes made by the American Taxpayer Relief Act of 2012. Little focus centered on state estate taxes. North Carolina is among 21 states where state-level estate or inheritance taxes are imposed on assets passed on to heirs.Continue Reading...
Congress has failed to avert the fiscal cliff. We have only nine days until the estate tax exemption drops to $1 million (and the rate goes up to 55%). Not to mention the income tax increases.
To make matters worse, the IRS's online site for applying for tax identification numbers (EINs) will be unavailable from 4:00 pm. on December 27th through the rest of the year. This will hamper last minute planning efforts that require EINs, such as trusts and LLCs, and bank and brokerage accounts for same.
If you still want to take advantage of the $5.12 gift and estate tax exemption - now there's even more reason to act before it's too late.
Merry Christmas to all!
Although this is the North Carolina Estate Planning Blog, much of what I blog about applies to folks all over the country. Since I am licensed in Tennessee and have clients there, I thought it was appropriate to report on these important changes in Tennessee transfer tax.Continue Reading...
Estate Planning attorneys all across the country are frantically working to help their clients utilize the $5.12 million gift and estate tax exemption before it disappears at year end. Most people are making gifts to irrevocable trusts that will save taxes and provide creditor protection for generations of descendants.
We have only two weeks left, with Christmas intervening, but all is not lost. For those who want to provide a meaningful legacy this holiday season, we can still help. As my colleague Steve Oshins in Las Vegas suggested, here is the way last minute planning can be accomplished:
1. Set up a simple one-page gift trust with just the essential terms so you have a valid trust under state law.
2. Give the settlor’s best friend (or attorney/CPA) as Trust Protector the power to completely amend and restate the trust (maybe for a selected period of time like three months) in the Trust Protector’s sole and absolute discretion.
3. Get the trust fully executed and funded with the $5MM gift before year-end.
4. Reconvene in 2013 and have the Trust Protector restate the trust with regular provisions. The settlor can make recommendations, but it clearly must be done in the sole and absolute discretion of the Trust Protector to avoid IRC 2038 (estate tax inclusion).
So, if you are one of the tardy ones, don't despair. Email me early next week and let's get this done.
Greg Herman-Giddens - firstname.lastname@example.org
Now, weeks past the election with nothing positive coming out of Congress, people of means are finally starting to realize that it makes sense to use some or all of the $5.12 million federal gift and estate tax exemption before it falls to $1million next year. Doing so can save millions of dollars for one's heirs.
This week I've already spoken to three people about such gifting, which can be leveraged with the use of limited liability companies and trusts. Married couples can even make gifts to trusts but keep the assets in the family for future use.
It's still not too late for implementing gifting plans, but the clock is ticking. Estate planning attorneys, myself included, are running out of time to help clients. As it stands, I will be working weekends though the remainder of 2012.
Ben Franklin said that nothing is certain but death and taxes. True, but tax exemptions and rates are certain to change. Act now before they change for the worse.
A recent press briefing with Press Secretary Jay Carney touched on tax issues that will affect every American in 2013. Right now, Americans are ill-prepared for the approaching drop off the “fiscal cliff.” As tax cuts are about to expire in the New Year, how will individuals be affected?Continue Reading...
When administering an estate, determining the date of death values of the decedent’s assets is essential. Filing federal and state estate tax returns and paying any taxes due can only be done when the value of all the decedent’s property is known. In addition, the date of death values establish the new cost basis for capital assets. Delays in probate may stem from valuation complications since the methods to determine date of death values is different for each asset.Continue Reading...
Estate Planning Awareness Week comes during the final quarter of the year, just before the New Year shift known as the “fiscal cliff.” What is the fiscal cliff? This buzz word encompasses the impending year-end financial perfect storm. As the calendar flips over to 2013, multiple economic changes will take place at the same time. Automatic spending cuts, expiring tax cuts, and new taxes are slated to happen simultaneously, leaving Americans hanging on a fiscal cliff.
The IRS charges hefty penalties for failure to timely pay taxes. Just like with the failure to file penalties, the failure to file penalty is 5% per month, with a maximum of 25%. Interest is also charged.
For those who need to pay taxes at the last minute, or simply like the convenience of paying online or by phone, the IRS offers The Electronic Federal Tax Payment System (EFTPS). In addition to income tax, gift and estate taxes can also be paid through EFTPS. This year only gifts and estates in excess of $5.12 million may incur taxes, but next year that amount is schedule to drop to $1,000,000.
The IRS has released a draft 2012 Form 706, U.S. Estate (and Generation-Skipping Transfer) Tax Return dated August 16, 2012. The changes to the return address portability of a deceased spouse's unused gift and estate tax exemption and contingent claims that may not be immediately deductible under IRC Section 2053.
The current federal estate tax exemption is $5.12 million, but it will drop to $1million in 2013 unless Congress passes a new law prior to the end of the year.
Despite all the wrangling in Congress, we are still facing income and estate tax increases in 2013, now only five months away. See if you might be able to utilize any of these planning tips from the Accounting Today article Midyear Tax Planning: Top 10 Tips in a Time of Uncertainly.
One thing the article does not address is planning by executors and trustees to minimize the impact of the coming top income tax rate of 39.6% and the additional 3.8% investment income surtax. Trusts and estates reach the highest income tax rate at $11,650 (for 2012). Executors and trustees should consult a CPA or tax attorney with expertise in fiduciary income tax matters.
The proposal provides for a continuation of the current income tax laws for one more year, preventing the scheduled expiration of the Bush tax cuts on December 31, 2012. This would be most meaningful for those individuals with income over $200,000 or couples over $250,000, as Democrats are calling for tax rates to automatically increase for these taxpayers.
The Bill also includes a one year continuation of the current $5.12 million estate tax exemption (with inflation adjustments), 35% tax rate and spousal portability of the exemption.
Two House Bills, which have already passed, provide for repeal of the new health care law and the dreaded $3.8 investment surtax that is also scheduled to hit in 2013.
However, with a Democrat controlled Senate, don't look for these Bills to become law anytime soon. Most likely, nothing will happen before the election.
See this article in Accounting Today for more on the Bill.
Persons who have relied upon certain trusts as a means of limiting estate taxes upon their death might have cause for concern regarding an Obama administration budget proposal for 2013. While the current proposal remains very broad, and thus might be subject to change down the road, as it stands now, it would require those who set up “grantor trusts” to include trust assets in their own estates for estate tax purposes.
Current tax policy effectively keeps income tax rules and estate tax rules separate. With proper planning, a trust grantor and an irrevocable trust can be treated as the same person under income tax law, meaning that transfers between the two do not trigger an income tax. Meanwhile, trusts designated as grantor trusts can be designed to be separate from the grantor for estate tax purposes and, thus, no estate tax is paid on assets held in these trusts upon the creator’s death.
These trusts are often called “intentionally defective grantor trusts, and are used in sophisticated estate and asset protection planning. Particularly in recent years, many people have relied upon these distinctions to avoid or minimize income and estate taxes. Under the current administration’s proposed policy, this type of planning would no longer be possible.
There's no real cause for alarm yet, however, as the current state of affairs in Washington most likely prevents any action in the near future.
See this Bloomberg article.
North Carolina repealed its intangible, inheritance and gift taxes within the last decade or so, but still maintains an estate tax with an exemption equal to the federal amount (currently $5.12 million). These changes have made North Carolina more appealing to wealthy individuals, but our relatively high income tax still drives some folks to Florida, which has no income tax (or estate tax). A few of my clients have changed their domicile to Florida in order to save income taxes, particularly with regard to sale of a business or other event where a great deal of capital gain is realized.
Other states, such as our neighbor to the West, Tennessee, are also looking a repealing certain taxes to prevent flight of of wealthy residents to other states. See this Wall Street Journal article. Tennessee does not tax earned income, however, which might make it appealing to highly paid professionals who spend most of their income!
Wealthy folks looking to transfer assets to younger generations in tax-advantaged ways should act now, as the Obama administration is seeking to limit several favorite techniques of estate planning attorneys. On the chopping block are the most commons uses of IDGTs (Intentionally Defective Grantor Trusts), GRATs (Grantor Retained Annuity Trusts), and discounts for gifts of interests in FLPs (Family Limited Partnerships) and FLLCs (Family Limited Liability Companies). Tax-free Dynasty Trusts would also be a thing of the past. This Forbes article from Deborah Jacobs provides a good overview of the proposals.
Some may argue that the passage of some or all of the proposed revenue boosting laws is unlikely, but I'm advising my clients to act now before it's too late.
From the AICPA:
Beginning in January 1, 2011, the Internal Revenue Code provides for portability of the estate tax exemption between spouses. According to issued guidance so far from the IRS (Notice 2011-82 and IR-2011-97), to claim the benefit of portability, a timely filed Form 706, U.S. Estate (and Generation-Skipping Transfer) Tax Return, is required. If the estate tax return is not timely filed, the guidance provides that the surviving spouse will not be able to claim the benefit of portability.
There is a procedure under section Treas. Reg. § 20.6081-1(c) that permits an estate, upon showing good cause, to seek a 6-month extension of time to file the estate tax return. Under this procedure, an estate is to file Form 4768, Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes. Form 4768 must contain a detailed explanation of why it is impossible or impractical to file a reasonably complete estate tax return by the due date and an explanation showing good cause for not requesting the automatic extension of time to file the return. Section 20.6081-1(c) provides that Form 4768 should be filed sufficiently early to permit the IRS time to consider the matter and reply before what otherwise would be the due date of the return. The instructions to Form 4768 provide that if the estate has not filed an application for an automatic extension and the time for filing such application has passed, the estate should file Form 4768 as soon as possible. It may be worth considering requesting a 6-month extension of time to file the estate tax return if you missed filing the return in time and would like to try to obtain the benefit of portability for the surviving spouse.Blogger's note: Unless Congress extends the availability of portability and use of the additional exemption gained, it will expire at the end of this year, along with the increased $5.12 million exemption (reverts to $1 million). We'll see what happens after the election!
I just came across this article, Closing Down the Estate, on SmartMoney.com. It gives a good overview of what an executor is responsible for from a tax perspective, but is by no means exhaustive. Since Executors can be personally liable for certain tax penalties, they should make sure to engage an experienced tax attorney or CPA to ensure that everything is done timely and correctly.
According to Robert Keebler, CPA, the IRS may allow a late filed Federal Estate Tax Return, Form 706, if the only reason for filing the return is for the surviving spouse to claim the deceased spouse's unused estate tax exemption. The current exemption is $5 million, but it is scheduled to reduce to $1 million in 2013.
Form 706 is due nine months after death, with an automatic six month extension available.
On November 17, 2011, Congressman Jim McDermott (D-WA), a senior member of the House Ways and Means Committee, introduced HR 3467, the “Sensible Estate Tax Act of 2011”. Along with changes to the estate tax, the bill includes many of Obama's 2012 Fiscal Year Proposals with regard to gift and GST taxes. The bill includes the following:
Estate Tax Exclusion Amount of $1,000,000 with Top Rate of 55%:
Reduction of the estate tax exclusion amount to $1 million for decedents dying after December 31, 2011, and indexing for inflation from the year 2000 for decedents dying after 2012. The top tax rate is 55%, and the graduated amounts subject to the rate schedule would also be indexed for inflation.
Provisions designed to coordinate with the gift tax to reflect the decrease in the applicable exclusion amount.
Permanent Spousal Portability of the Estate Tax Exclusion Amount:
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the "2010 Act") created portability of the estate tax exemption between spouses, but the law expires on December 31, 2012. The Bill makes portability permanent.
Also included is a technical correction in the definition of “deceased spousal unused exclusion amount (“DSUEA”)” of a surviving spouse. The reference to the basic exclusion amount of the last deceased spouse of the surviving spouse would be replaced with a reference to the applicable exclusion amount of the last deceased spouse, so that the statute would reflect the calculation of the DSUEA as described by the Joint Committee on Taxation.
Credit for State Death Taxes Restored:
The credit was phased out from 2002 to 2005. Before, many states had estate tax laws that permitted them to "pick up" the amounts allowable as a federal estate tax credit. Thus states could share in the estate tax collections without increasing the overall estate tax burden. The bill would restore the revenue sharing mechanism with the states.
Valuation Discounts and Minority Interest Discounts Limited:
Valuation discount limitations for certain transfers of nonbusiness assets (defined as an asset which is not used in the active conduct of one or more trades or businesses), including:
- For the transfer of an interest in an entity which is not actively traded, no valuation discount would be allowed with respect to “nonbusiness assets”;
- For the transfer of an interest in an entity which is not actively traded, no discount would be allowed by reason of the fact that the transferee does not have control of the entity if the transferee and the transferee’s family members have control of the entity.
- Effective with regard to transfers after the date of enactment.
Consistency in Value For Transfer and Income Tax Purposes Would be Required :
Imposition of a consistency and a reporting requirement, with penalties for inconsistent basis reporting. The basis of property acquired from a decedent pursuant to Internal Revenue Code ("IRC") Section 1014 must equal the value of that property for estate tax purposes, and the basis of property received by gift must equal the donor's basis determined under IRC Section 1015.
Effective for transfers for which returns are filed after the date of enactment.
Restrictions on Grantor Retained Annuity Trusts :
- Minimum 10 year term;
- Annuity payment cannot be reduced from one year to the next during the first 10 years of the GRAT term; and
- The remainder interest at the time of the transfer must have “a value greater than zero.’’
- The bill contains no guidance regarding the parameters of the "greater than zero" requirement.
- Effective for transfers made after the date of enactment.
Duration of Generation-Skipping Transfer Tax Exemption Limited:
Expiration of the GST exemption 90 years after the establishment of a trust. This is done by increasing to one the inclusion ratio with respect to property transferred after that date.
Applies to trusts created after enactment, and to transfers made from pre-existing trusts if the transfer is made out of principal added to the trust after the date of enactment (subject to grandfathering exceptions).
My view is the that Bill has no chance of passage in its current form, the main sticking point being the drastic reduction of the current estate tax exemption and increase of the rate.
Here are the states with an estate and or inheritance tax, ranked from approximate highest to lowest tax burden (North Carolina has the distinction of being the best of the worst):
- New Jersey - $675,000 exemption, 16% top rate (estate tax); $500 exemption/16% top rate (inheritance tax)
- Maryland -$1M/16% (estate tax); $50,000/10% (inheritance tax)
- Pennsylvania - 0/15% (inheritance tax)
- Iowa - $0/15% (inheritance tax)
- Indiana - $100/20% (inheritance tax)
- Kentucky - $500/16% (inheritance tax)
- Nebraska - $10,000/18% (inheritance tax)
- Ohio - $338,338/7% (repealed effective 1/1/2013)
- Rhode Island - $850,000/16%
- Minnesota - $1M/16.7%
- Maine - $1M/16%
- Oregon - $1M/16%
- District of Columbia - $1M/16%
- Massachusetts - $1M/16%
- Washington - $2M/19%
- Illinois - $2M/16.7%
- Connecticut -$2M/12%
- Vermont - $2.75M/16%
- North Carolina - $5M - 16%
State death taxes are deductible against the federal estate tax, which currently has a $5 million exemption and 35% rate.
This news courtesy of Financial Advisor Nat Harris (emphasis added):
House Democrats plan to introduce a bill today to extend and overhaul the estate tax beyond 2012 in the opening salvo of what is likely to be a long and politically-charged debate next year.
A favored target of Republicans, the tax on inherited wealth already promises to be one of the most controversial elements of the tax code up for renewal at the end of next year. Six Republican presidential candidates, including all of the front-runners, have said they would repeal the tax.
But the legislation by Rep. Jim McDermott (D., Wash.), a veteran member of the House Ways and Means Committee, proposes to extend the current reach of the estate tax by reducing the amount of the estate exempted from the tax to $1 million from $5 million and raising the tax rate to 55% from 35%, bringing it back to pre-Bush era levels.
"I'm not against people making money in this country, but I do think they have a responsibility to give some of it back," especially at a time of a deep federal budget deficit, McDermott said in an interview this week.
While Democrats acknowledge they will face stiff resistance from Republicans, McDermott said taxpayers need to know Congress is not ignoring the issue until the last minute. In a deal brokered with President Barack Obama last December, Congress reinstated the estate tax for this year and next, after letting it lapse for one year in 2010. While the estate tax is slated to revert back to 2001 levels after next year, Republicans in Congress have already introduced legislation to repeal it again.
"It really is a question of clarity," for both families and planners, McDermott said. "The question is how to bring fairness into it."
Under McDermott's proposal, co-sponsored by Rep. Charles Rangel (D., N.Y.), the exemption for married couples would drop to $2 million from $10 million.
Spouses could still claim the remainder of their partner's exemption if some remains unused after death, as they can now. The rate and $1 million exemption would be adjusted for inflation, beginning at the 2000 level.
The bill, slated to be introduced today, would also unify the estate and gift taxes. That means a taxpayer would only have a single exemption of $1 million for their estate and most gifts. The legislation also includes several provisions from Obama's last budget proposal to end targeted estate tax breaks.
Republicans, often led by Sen. Jon Kyl (R., Ariz.) have pushed hard in previous years to repeal the tax, whose rates and exemption levels have varied wildly over the last decade.
The IRS announced today that the amount exemption from estate taxes will increase next year. For an estate of any decedent dying during calendar year 2012, the basic exclusion from estate tax amount will be $5,120,000, up from $5,000,000 in 2011.
For Special Use Valuation for qualified real property, the aggregate decrease in the value of the property resulting from the election cannot exceed $1,040,000, up from $1,020,000 for 2011.
The annual exclusion for gifts will remain at $13,000.
The IRS has just issued Revenue Procedure 2011-48, which provides guidance regarding the filing and subsequent resolution of a protective claim for refund of estate tax that is based on a deduction for a claim or expense under section 2053 of the Internal Revenue Code.
Section 2053 allows deductions to be taken against the estate tax for claims and expenses such as funeral costs, administrative expenses, debts, etc. Generally the amount deducted must have actually been paid at the time of filing of the estate tax return, which is due nine months after the decedent's date of death (a six month extension is available).
For claims and expenses which have not been paid, but are anticipated to be paid after filing, the executor can file a protective claim for a refund.
The IRS has released the final instructions for the 2011 United States Estate (and Generation-Skipping Transfer Tax Return (Form 706), and Guidance on Electing Portability of Deceased Spousal Exclusion Amount (Notice 2011-82).
The federal estate tax return and any tax is due nine months after the date of death, although a six month extension for filing (not paying) is available. This year the estate tax exemption is $5 million. Estates valued under that amount are not required to file a return, but the executor of an estate of someone married at the time of his or her death may wish to do so to ensure that the surviving spouse can take advantage of whatever part of the $5 million exemption was not used by the decedent.
IR-2011-91 (emphasis added):
WASHINGTON — The Internal Revenue Service announced today that large estates of people who died in 2010 will have until early next year to file various required returns and pay any estate taxes due. In addition, the IRS is providing penalty relief to certain beneficiaries of these estates on their 2010 federal income tax returns.
This relief is designed to give large estates, normally those over $5 million, more time to comply with key tax law changes enacted late last year. Revised versions of the estate tax forms are now available on IRS.gov, and the carryover basis form will be released this fall.
The IRS is providing the following relief:
Large estates, opting out of the estate tax, now will have until Tuesday, Jan. 17, 2012, to file Form 8939. This special carryover basis form, required of estates making this choice, was previously due on Nov. 15, 2011. Because this is a change in the specified due date rather than an extension, no statement or form needs to be filed with the IRS to have this new due date apply.
2010 estates that request an extension on Form 4768 will have until March 2012 to file their estate tax returns and pay any estate tax due. Normally, a six-month filing extension is automatically granted to estates filing this form, but extensions of time to pay are granted only for good cause. As a result, most 2010 estates that timely file Form 4768 will have until Monday, March 19, 2012 to file Form 706 or Form 706-NA. For estates of those dying late in 2010 (after Dec. 16, 2010 and before Jan. 1, 2011), the due date is 15 months after the date of death. No late-filing or late-payment penalties will be due, though interest still will be charged on any estate tax paid after the original due date.
Special penalty relief is provided to many individuals, estates and trusts that already filed a 2010 federal income tax return, or obtained an extension and plan to file by the Oct. 17, 2011 extended due date. Late-payment and negligence penalty relief applies to persons inheriting property from a decedent dying in 2010, who then sells the property in 2010 but improperly reports gain or loss because they did not know whether the estate made the carryover basis election. Details are in Notice 2011-76, posted today on IRS.gov.
The Tax Relief Act of 2010 included a spousal portability provision for the $5 million estate tax exemption. If a married person dies after December 31, 2010 and does not use all of his or her exemption, the unused portion can be transferred to the surviving spouse.
For example, if husband dies and uses $1,000,000 of his exemption on bequests to his children, with the remainder of the assets passing tax-free to his wife, she can add the remaining $4 million of the husband's exemption to her exemption (making her total exemption $9 million under current law).
To take advantage of portability, however, the unused exemption must be transferred from the estate of the first spouse to die to the surviving spouse. This can be done only by filing a federal estate tax return (Form 706), even if no tax is due. If the return is not filed, any excess exemption is forfeited and cannot be used at the death of the surviving spouse.
Form 706 is due nine months after the death of the decedent, with a six month extension available. Executors should file extensions now for decedents who died in early 2011 since the final 2011 Form 706 is not yet available.
The IRS has released draft instructions for the 2010 Form 706, the U.S. Estate Tax Return. Executors of estates of decedents who died in 2010 between the estate tax, with a $5 million exemption and 35% rate, or the modified carryover basis rules. The modified carryover basis law does not institute a tax, but limits a step up in basis for property acquired from a decedent to $1.3 million, with another $3 million for property passing to a spouse. Other property would have the same. basis that it had in the hands of the decedent, so that when sold, capital gains tax may be due.
On his bus tour in Illinois last week, Obama responded to a question about the future of the estate tax from a local farmer. The President stated that a compromise between the current $5 million exemption ($10 million per married couple) and the $1 million exemption that will return in 2013 had been discussed. The compromise would be a $7 million exemption per family, which I take to mean a $3.5 million exemption per person with spousal portability. No mention was made of the estate tax rate.
Personally, I don't expect widespread Republican support for such a compromise, particularly given anti-estate tax Senator Kyl's membership in the congressional super committee.
Arizona Senator Jon Kyl will join the bipartisan Congressional super committee, which has the task of cutting $1.5 trillion from the federal budget in the next decade. Kyl is a staunch opponent of the estate tax, and his appointment to the committee makes any movement toward a decrease in the current $5 million exemption or increase in the 35% rate unlikely. Democrats have called for the rate to increase to 45%.
If Congress doesn't act before December 31, 2012, the exemption will revert to $1 million, with a 55% rate.
Related article in the New York Post.
In the 2011-2012 Session, the North Carolina General Assembly passed several laws affecting estate planning, trusts and probate:
- S.L. 2011-5 and S.L. 330- The reference to the Internal Revenue Code in G.S. 105-228.90(b)(1b) is changed from May 1, 2010 to January 1, 2011. This puts NC in sync with the federal government with regard to the estate tax ($5 million exemption). For 2010 NC had no estate tax.
- S.L. 2011-339 - 1) Contains minor changes to the notice provision for trustee compensation under G.S. 32-55; 2) Clarification that certain marital trusts are exempt from the claims of creditors of the surviving spouse under G.S. 36C-5-505; 3) An addition to G.S. 36C-7-704 expressly states that a successor trustee is vested with the title to property of a former trustee; 4)Clarifies powers of a trustee to wind up administration of a trust under G.S. 36C-8-816; 5) Establishes a new category of corporate fiduciary, a "trust institution", with less restrictions than a bank. Effective October 1, 2011, and applies to all trusts created before, on or after that date.
- S.L. 2011-344 - Numerous but mostly minor changes or clarifications to right to appeal a Clerk's order, jurisdiction, probate in solemn form, venue, renunciation of right to serve as executor or administrator, revocation of letters, resignation of personal representative, collectors, small estates, summary administration, intestate succession, allowances, will requirements, caveats, will construction, and much more. The changes are effective January 1, 2012, and apply to estates of decedents dying on or after that date.
The IRS recently issued guidance on the treatment of basis for certain estates of persons who died in 2010. This will assist executors who decide to opt out of the estate tax and have the carryover basis rules apply. Form 8939, the basis allocation form required to be filed by executors opting out of the estate tax, is due November 15, 2011.
The IRS plans to release Form 8939 and instructions early this fall.
Under EGTRRA 2001, the estate tax was repealed for persons who died in 2010. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 then reinstated the estate tax for 2010 decedents. Executors of estates of decedents who died in 2010 can now opt out of the estate tax, and instead elect the repealed carry-over basis provisions of the 2001 Act.
Notice 2011-66 provides guidance for executors of estates of decedents who died in 2010 regarding the time and manner of choosing to opt out of the estate tax have the carryover basis rules apply.
Revenue Procedure 2011-41 provides safe harbor guidance regarding property acquired from estates of decedents who died in 2010.
Good news for beneficiaries of large North Carolina estates of decedents dying in 2010. From the North Carolina Department of Revenue:
S.L. 2011-5 updated the State's conformity date to the Internal Revenue Code from May 1, 2010 to January 1, 2011. Subsequently, S.L. 2011-330 (passed on June 27, 2011) clarified that the North Carolina Estate Tax is effective and applies to the estates of decedents dying on or after January 1, 2011. For North Carolina purposes there is no estate tax for decedents dying in 2010. North Carolina law conforms to the higher exclusion amounts and gives estates that chose to pay federal estate tax for 2010 the same stepped-up basis for North Carolina purposes as for federal purposes for the property passing through the estate.
This also makes clear that North Carolina's current estate tax exemption is $5 million.
A June 22, 2011article on Trusts and Estates magazine's website contains a nice summary of President Obama's budget proposal measures effecting estate planning. However, with Republican control in Congress and the possibility of a Republican President being elected next year, there is no certainty that any of the changes will actually take effect. Obama already agreed to the temporary increase of the estate tax exemption to $5 million and reduction of the rate to 35% through the end of 2012, and there has been recent discussion in Congress of continuing the law beyond next year.
The federal estate tax exemption is currently set at $5 million ($10 million for married couples), with a 35% rate. This law is set to expire on December 31, 2012, with the exemption reverting to $1 million (and a 55% rate) on January 1, 2013.
This has made planing for those with assets of between $1 million and $5 million or so challenging, but I have been telling my clients that I believed that Congress would ultimately continue the $5 million exemption. Congress is now beginning discussions on the future of the estate tax, and early indications are that a $5 million exemption would be acceptable to both parties. Democrats, however, would like to see the rate increased to 45%.
The majority of states no longer have an estate tax, but North Carolina is not one of them. Hungry for revenue, some states, such as Connecticut, are trying to lower the tax threshold. I'm not aware of any such movement for North Carolina. Here's a chart of the states with an estate tax, with the exemption amounts:
Tennessee, not listed above, has an inheritance tax with a $1 million exemption. Inheritance tax differs from estate tax in that the rate differs depending on the relationship of the inheritor to the deceased. Immediate family member are subject to the lowest rate. While estate taxes raise revenue, of course, the taxes are often cause for wealthy individuals to move to states like Florida, which has no estate tax (and no income tax as well).
Note: the correct name of the source is the American College of Trust and Estate Counsel (not Council).
The IRS is extending the filing deadline of Form 8939, Allocation of Increase in Basis of Property Acquired from a Decedent, which must be submitted to determine the new basis of assets in 2010 estates that opt out of the federal estate tax.
The form will no longer be due on April 18, and the IRS will issue more guidance at a future date and set the new deadline at “a reasonable period of time” after that, according to a statement issued on March 31, 2011.
The estate tax was eliminated in 2010 due to a phase-out approved in 2001, but under TRA 2010 enacted in December, the tax was reinstated at a top rate of 35% with a $5 million threshold for individuals and $10 million for married couples.
Estates have an alternative option to allocate up to $1.3 million in basis to estate assets, with an additional $3 million for assets passing to a surviving spouse. To the extent the increased basis does not bring the basis to fair market value, the heirs would then pay capital gains taxes on inherited assets they sell.
The extension will be of help to executors of estates opting to for carryover basis, because determining the cost basis of property, including stock held for decades, or a family business, may require extensive research.
Here's a recent marketwatch.com article on State Estate and Inheritance Taxes, and the various exemption amounts for each state. A majority of states, including Florida, have no state estate or inheritance taxes, and a couple of others effectively have the same $5 million exemption as the federal estate tax.
As reported in the article, North Carolina falls into that category, although due to an outdated reference to the Internal Revenue Code in the North Carolina statutes, some practitioners are of the opinion that North Carolina's current exemption is only $1 million. It is expected that the matter will be resolved by a technical corrections bill later this year. Assuming that North Carolina's estate tax exemption is $5 million, it is certainly not one of the worst places to die, but because the North Carolina tax is merely a deduction, and not a credit, against the federal estate tax, it is also not one of the best.
There are also many states, particularly in the Northeast and Midwest, that have much lower exemptions. New Jersey is ranked as the worst place to die from a death tax perspective.
Just As the Name Implies
Second-to-die life insurance doesn't pay off until the death of the second policyholder. Why is it needed? Let's say you own several million dollars worth of assets. By law, you can leave the entire amount to your surviving spouse with no estate tax consequences. But those assets then become part of your spouse's estate and could be taxed after death at rates of up to 35 percent in 2011 and 2012.
Unfavorable Rule for Corporate-Owned Life Insurance
For corporate owned life insurance (COLI) issued after the August 17, 2006, enactment of the Pension Protection Act, an unfavorable provision generally requires businesses to include death benefit proceeds (in excess of premiums paid) in taxable income.
But second-to-die insurance can also be used by the co-owners or partners of a business operation. In this scenario, the insurance proceeds are paid upon the second owner's death.
One IRS ruling gives a little more flexibility to policyholders of second-to-die insurance, which is also called "survivorship insurance" in some circles. Specifically, the ruling may allow you to transfer ownership of your policy and get the proceeds out of your taxable estate.
Generally, life insurance proceeds paid directly to you because of the death of the policyholder are not taxable. However, your taxable estate will include proceeds from a life insurance policy on your life if the money is paid to the estate (or if it's received by someone else for the benefit of the estate). Also, the proceeds are included in your taxable estate if you possess any "incidents of ownership" in the policy, such as the right to change the beneficiaries or borrow against the policy.
If you want life insurance proceeds to avoid federal estate tax, you may want to transfer ownership of your life insurance policy to another person or entity. (See lower right-hand box if the entity is a corporation.)
You can transfer the ownership rights in an existing policy, but the proceeds are still taxable under federal law if you die within three years of the transfer -- and possibly under state law too.
In the IRS private letter ruling, a couple transferred a second-to-die life insurance policy to an irrevocable trust and named their daughter, who is executor of their estate, as the trustee. They also granted their daughter discretion to use the proceeds to pay estate tax, inheritance tax and other taxes due because of death, but she is under no compulsion to do so.
Result: The IRS said that the life insurance proceeds will not be included in the estate of the second spouse to die, even though the funds could be used to pay estate tax. (IRS PLR 200147039)
Check with your estate-planning attorney to learn whether second-to-die insurance is right for you or whether transferring ownership of a policy is a smart move. Keep in mind that transferring ownership may also have gift tax consequences.
Since the enactment of TRA 2010 in December of last year, tax practitioners have been concerned that gifts made during 2011 and 2012 may, partially because of the way in which the current Federal Estate and Generation-Skipping Transfer Tax Return (Form 706) is worded, be subject to an estate tax for decedents dying in years after 2012 if the federal estate tax exemption is reduced at that time. This is generally referred to as the "claw back" scenario.
The February 2, 2011 AALU Bulletin article on this subject indicates that taxpayers should not hesitate to take advantage of the $5 million gift and generation-skipping transfer tax exemptions available this year and next and should not be concerned that such gifts will be subject to a claw back in later years:
"What is reasonably clear is that Congress did not intend that gifts made during 2011 and 2012 would be subject to an additional estate tax in 2013 and thereafter. Furthermore, it is likely that some type of administrative or legislative relief will be forthcoming assuming that an unintended “glitch” does exist. This relief may be as simple as revising the Form 706."
Last week I was interviewed regarding income and estate taxes in 2010 and 2011 offering tips and insights based on what I see in my practice. Click here for the text and the podcast.
"Nothing is certain but death and taxes," Benjamin Franklin famously said. In the last decade, another occurrence has been certain: The federal estate tax keeps changing. The tax cut legislation passed recently establishes new estate and gift tax rules for this year, next year and last year. Here is a summary of the rules, along with some estate planning considerations for high-net-worth individuals.
The new tax cut extension package, which was signed into law on December 17, 2010, establishes a new (but temporary) estate and gift tax regime for 2011 and 2012. It also clarifies the situation for the estates of individuals who died in 2010 (see right-hand box).
Here is a brief summary of the relevant estate and gift tax provisions in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.
Note: North Carolina law provides that North Carolina estate tax is due only if federal estate tax is due, so the NC exemption is essentially $5 million as well.Continue Reading...
This week I'm attending the University of Miami School of Law Heckerling Institute on Estate Planning. Most of the speakers so far are of the opinion of that the current federal estate tax exemption will not be decreased in 2013 when TRA 2010 expires.
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.
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
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.
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."
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.
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.
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.
The results of the recent midterm elections may not bring about speedy estate tax repeal or reform. To see why, check out this Forbes.com article Results of Midterm Elections Do Not Bring Certainty to the Federal Estate Tax.
Today I was alerted to the existence of a draft of the IRS from that will be required to be filed for estates of decedents dying in 2010 with estates in excess of $1.3 million. IRS Form 8939 - Allocation of Increase in Basis for Property Received from a Decedent. The due date is April 15, 2011.
This form is necessitated by the Modified Carryover Basis rules that replaced the estate tax for 2010. Each decedent's estate gets $1.3 million worth of basis to allocate to appreciated assets, with an additional $3 million for assets going to a surviving spouse. IRC Section 1022. The allocated basis will effectively eliminate capital gains tax liability for assets sold soon after death.
On October 30, 2010, there was a brief piece in the Durham Herald-Sun reporting that U.S. Representative Cynthia Lummis (R-WY) said that some of her constituents are so worried about the reinstatement of the federal estate tax that they plan to discontinue dialysis and other life-extending medical treatments so they can die before the end of the year.
Lummis, the sole Wyoming representative to the U.S. House, declined to name the residents who made the comments.
I personally find it hard to believe that someone would chose to die just to save taxes. But, it what Lummis says is true, that would make a great political commercial for Republicans - elderly farmers and ranchers saying that since Democrats are getting in the way of estate tax reform, they are going to pull their own plugs to save taxes for their children.
The federal estate tax is a big issue in many congressional races, with proponents of repeal arguing that it severely impacts family businesses and farms. See this article in the online version of the Wall Street Journal.
What is rarely discussed is that with proper planning, including the use of life insurance, the heavy financial burden of the estate tax can be avoided or drastically reduced. Attorneys fees and life insurance premiums are a lot cheaper than a 55% estate tax. Many family business owners and farmers simply refuse to plan ahead.
Here's the latest from theHill.com. Bottom line - nobody knows what's going to happen when Congress is back in session.
The Tax Hike Prevention Act of 2010 was introduced in the Senate on September 13 as Senate Bill 3773 "to permanently extend the 2001 and 2003 tax relief provisions and to provide permanent AMT relief and estate tax relief, and for other purposes."
Highlights of the proposed Estate Tax Relief Provisions include:
1. To be effective beginning January 1, 2010 with respect to decedents dying on or after that date; and beginning on January 1, 2011 with respect to gifts made and generation-skipping transfers on and after that date.
2. Reunification of the Gift Tax and Estate Tax Unified Credit Equivalent Amount to $5 million and the amount is indexed for inflation.
3. Top Marginal Rate of Gift, Estate and Generation-Skipping Transfer Tax of 35%.
4. "Portability" of decedent's unused Unified Credit by election of the executor of the decedent's estate to pass the unused portion to the surviving spouse.
5. Special election available for decedents dying in 2010 to apply existing 2010 law rather than the Tax Hike Prevention Act of 2010.
Thanks to attorney David Cahoone of Sarasota, Florida for this update.
This update is from Tax Analysts by way of Robert Keebler, CPA:
Obama administration officials are considering a proposal to allow taxpayers to elect to apply 2009 rules to their 2010 estate tax bills, a Treasury Department official said in an interview that aired September 12.
Treasury Assistant Secretary for Tax Policy Michael Mundaca said in a C-SPAN interview that the Obama administration would like to make permanent the 2009 iteration of the now-expired estate tax. The estate tax was allowed to lapse for 2010, and Congress has not agreed on a fix. Allowing taxpayers to retroactively apply the 2009 rates to their 2010 taxes is one possibility being considered, Mundaca said.
The option could prove appealing to taxpayers who have inherited estates worth less than the $3.5 million estate tax exemption for 2009 but more than $1.3 million. The current law repeals the estate tax entirely but allows a basis step-up for only $1.3 million of the estate's assets, not for the entirety of the estate as under the 2009 law. Thus, heirs of decedents dying in 2010 may exempt only $1.3 million of capital gains when they dispose of the property and must calculate capital gains tax using the decedent's basis in the property.
Most people know that the proceeds of a life insurance policy are generally free of income taxes. What many don't realize, however, is that the same proceeds are included in one's estate for estate tax purposes.
The federal estate tax will be back next year with a rate of 55% for amounts over $1 million. This will mean that many folks who do not think of themselves as wealthy will have a significant estate tax problem in the event of their death.
However, this is an easy problem to fix. By creating an Irrevocable Life Insurance Trust (ILIT) and transferring the ownership of the policy to the trust, estate tax at the death of the insured (and the beneficiaries) can be avoided. For a transferred policy, the insured must survive by three years for the proceeds to escape taxation, but a newly issued policy in the name of the trust is immediately exempt.
I see a lot of clients who are reluctant to set up an ILIT because of the cost (usually $1,000 to $2,500 or so). Not chicken feed, but not much compared to the hundred of thousands of dollars the ILIT will save. People don't think twice about spending $500 a year to insure a $20,000 car, but can't justify a one-time expense of a couple of thousand dollars to save a couple of hundred thousand for the benefit of their family. Not logical.
That's why I call the failure to create an ILIT estate planning's costliest mistake. An ILIT is quickly and easily implemented by an experienced estate planning attorney, will not limit or complicate the ownership of your assets, and is a veritable bargain in comparison the benefit it will provide.
This year, of course, there is no federal estate tax. However, many Wills and Trusts drafted in the past contain formula clauses based on the existence of the federal estate and/or generation-skipping transfer tax. These convoluted clauses were generally designed to maximize tax savings.
In 2010 there is no federal estate tax. So what happens if a persons with such a Will or Trust dies this year? How is the formula to be interpreted? Well, recent changes to North Carolina law (N.C.G.S. Sections 31-46.1 and 36C-1-113) help provide certainty in the interpretation of the formula clauses. NC law now provides that the clauses are to be given effect as if the federal estate and generation-skipping transfer taxes law as of December 31, 2009 were in effect.
Executors or trustees, or an affected beneficiary, if they believe the testator would not have intended such a result, may bring a proceeding for a court determination.
Successful estate planning generally involves passing on your assets to your heirs at a low tax cost. To help achieve that goal, there are a few things to keep in mind about retirement accounts.Continue Reading...
While there is still debate over whether Congress will increase the scheduled $1 million exemption and decrease the 55% rate when the estate tax returns in 2011, as the days and weeks pass it seems much less likely that the estate tax will be implemented retroactively for 2010. See this article in Investment News, which also discusses upcoming changes in the the income tax.
With only a couple of days until Congress takes its summer recess, it's likely that that nothing will happen with estate tax reform until September at the earliest. Even though this article from Investment News states that "reversion to 55% rate and $1 million exemption [is] not seen as likely," many tax professionals feel differently.
Persons whose estates would be affected by the estate tax at a $1 million exemption should not wait to plan, given the 55% rate that will apply. The potential cost to one's heirs is simply too great.
My former colleague and attorney Julie Garber recently sent the following email to over 50 attorneys, trust officers and accountants located throughout the U.S.:
"Hi, I am conducting a straw poll on the estate tax for my blog. The question is what do you think Congress is going to do with the estate tax in 2010 and here are the choices for answers:
A. Nothing, tax will come back on Jan. 1, 2011 with $1 million exemption, 55% tax rate
B. Reinstate tax at 2009 levels ($3.5 million exemption, 45% rate) and make it retroactive to Jan. 1, 2010
C. Reinstate tax at 2009 levels ($3.5 million exemption, 45% rate) and not make it retroactive to Jan. 1, 2010
D. Reinstate tax at 2009 levels ($3.5 million exemption, 45% rate) and give heirs of decedents who die in 2010 but prior to enactment of the new law the choice between using the modified carryover basis and the new law
E. Something else - please describe"
The results of the poll:
- 68% chose A
- 11% chose B
- 7% chose C
- 7% chose D
- 7% chose E
Yesterday I listened in on a conference call about planning to avoid the 3.8% Medicare Surtax that will come into effect in 2013. The speaker, CPA Robert Keebler, a nationally known tax expert, stated that it is likely that Congress will offer estates of those who die in 2010 the choice between the estate tax system, with a step-up in basis for appreciated property, and the modified carryover basis system currently in effect. The latter system will be most advantageous for virtually all estates except those under $1 million. Click "Continue Reading" for a brief explanation of the modified carryover basis rule.
Keebler and Jonathan Mintz, an Executive Director of WealthCounsel, LLC both agree that Congress will not provide for an increase of the estate tax exemption over the $1 million that is scheduled for next year.
Watch out for your heirs, who might not want you to live to 2011 due to the heavy estate tax burden estates over $1 million will face next year. See this article from the Wall Street Journal.
Friday's Wall Street Journal had an article on the latest estate tax proposal, from independent Senator Bernie Sanders and Democratic Senators Tom Harkin of Iowa, Sheldon Whitehouse of Rhode Island and Sherrod Brown of Ohio.
The proposal would retroactively reinstate a $3.5 million exemption with a tax rate of 45%. Estates valued between $10 million and $50 million would pay a 50% rate, estates valued above $50 million would pay 55%, and estates in excess of $500 million would be hit with an additional 10% surtax. The proposal includes a 10-year minimum on grantor retained annuity trusts (GRATs), which would greatly reduce the usefulness of these trusts as estate tax reduction strategies .
Don't look for the proposal to become law anytime soon, however. Many estate tax measures have stalled in this Congress and I don't think things will change in the near future.
On June 15, 2010, the House of Representatives passed The Small Business Jobs Tax Relief Act of 2010 (the "Act") which, if passed by the Senate and signed by the President, will significantly limit the utility of Grantor Retained Annuity Trusts (GRATs).
The Act would impose the following new limitations on GRATs:
(1) A required minimum 10-year term;
(2) The annual annuity payment cannot decrease relative to any prior year during the first 10 years of the term; and
(3) The remainder interest must have a value greater than zero determined as of the time of the transfer.
The new legislation would apply to all transfers to GRATs made after the date of the enactment of the Act.
Impact of New Legislation
When creating a GRAT, a short annuity payment period is considered advantageous because the grantor's death during the annuity payment period will cause all of the GRAT property to be included in the grantor's estate for tax purposes. In addition, potential significant appreciation within the shorter term will not be cancelled out by virtue of a longer term normalization or reduction in values. The required minimum 10-year term increases the mortality risk and could make GRATs less desirable for those who anticipate significant short term appreciation. Furthermore, by mandating that the annual annuity payments cannot decrease during the first 10 years of the GRAT term, the Act removes the possibility of front-loading the annual annuity payments as a means of converting a 10-year GRAT into a shorter term GRAT.
By requiring a remainder interest with a value greater than zero, the Act would require that the grantor pay gift tax, or at least use some portion of the grantor's $1,000,000 gift tax exemption, when establishing the GRAT. Since the GRAT may or may not actually realize an investment return sufficiently in excess of the §7520 Rate (i.e., the hurdle rate to beat to actually have an effective transfer of property via the GRAT) so as to pass property to the GRAT remainder beneficiaries, this can result in a waste of the grantor's gift tax exemption or the payment of gift tax without any benefit.
Please click here for a more detailed explanation of how GRATs work.
What action do you need to take?
Although it is impossible to say whether the Act will actually become law, the current confluence of (i) low asset values, (ii) a §7520 Rate near its all time low, and (iii) the real possibility that GRATs might not remain as viable an estate tax planning technique for much longer, suggests that now is the time to establish a GRAT.
Source: Moses & Singer, LLP June 2010 Client Alert
Here's an article about Houston's Dan Duncan's death this year and his $9 billion estate, which will completely escape estate taxes (although his heirs may be liable for capital gains taxes upon the sale of some of his assets). Had an estate tax been in place this year, the IRS would have received about $4 billion from Duncan's estate. Not much in terms of the federal budget, but think how far that amount would go in cleaning up the gulf oil mess.
On June 2, 2010, Senator Charles Grassley (R-IA) offered reporters his view on the uncertain future of the estate tax. Grassley is the ranking Republican on the Senate Finance Committee.
From today's GiftLaw eNewsletter: In December of 2009, the House passed the Permanent Estate Tax Relief for Families, Farmers and Small Businesses Act of 2009. This makes permanent the 2009 estate exemption of $3.5 million and top estate tax rate of 45%. If the House and Senate are not able to take action on estate taxes by the end of 2010 then on January 1, 2011 the estate tax returns with a 55% top rate and an exemption of $1 million (plus indexed increases). If this were to happen, Sen. Grassley stated that there will be a "tremendous upheaval at the grassroots of America."
Sen. Grassley noted that Sen. Jon Kyle (R-AZ) and Sen. Blanche Lincoln (D-AR) have proposed that the Senate Finance Committee pass an estate tax bill with a $5 million per person exemption and a 35% top estate tax rate. However, Grassley expressed the opinion that "the Finance Committee would like to take up consideration of legislation, but we aren't assured by the majority leader that the bill passed out of committee will be taken up on the floor."
Under the Senate rules, even if the Finance Committee were to pass the Kyle-Lincoln estate tax compromise, Majority Leader Harry Reid (D-NV) is not obligated to schedule a floor vote and could simply stall the legislation.
In my view, Grassley's statement about the upheaval is ludicrous. The folks who constitute America's "grassroots" are not millionaires. Even with a $1 million exemption, proper planing can reduce or eliminate estate taxes for those with far more than $1,000,000. Stop whining and start focusing on something that will really help our country. That's my 2 cents on this Saturday afternoon.
With the federal estate tax returning next year at a rate of 55%, with only a $1 million exemption, planning to reduce estate tax should be on the forefront of the minds of those fortunate enough to have assets in excess of that amount.
One technique that was shared with me recently by Chad Virgil, CFP, works as follows (example scenario):
- 75 year old man in standard health
- $500,000 IRA
- Taxable estate
- The IRA is converted into a $500,000 single-life qualified annuity, which generates $48,145 annually for life, with no residual estate tax value.
- After income taxation at the highest rates (35% federal, 7.75% NC), the net income per year is $27,563.
- An irrevocable life insurance trust (ILIT) is formed, and purchases a $500,000 single person guaranteed universal life policy - premium is $24,058 per year. This amount would be covered by the gift tax annual exclusion of $13,000 for just two beneficiaries of the ILIT (e.g two children). The ILIT means that the $500,000 will be received estate tax-free by the children.
- $3,505 of net income is left over each year - enough for a nice trip to the Caribbean!
Note: the numbers used in this illustration are from March, 2010, with a MetLife annuity and Hartford life insurance policy.
TheHill.com reported today that, according to Senate Minority Whip Jon Kyl (R-Ariz.), a deal in the works between Senate Democrats and Republicans on the estate tax has fallen apart.
Senator Kyl said: "We no longer have an agreement because the Democratic side has decided that unless a matter has a guaranteed majority of Democratic votes going in, they're not going to allow it on the floor, at least not voluntarily," he said. "So we have to find a way to get a reasonable permanent estate tax reform to the floor where members can vote on it."
Kyl did not share the details of the proposal, but the article states “sources have told The Hill that lawmakers were looking to give taxpayers the option of prepaying their estate tax. The levy would be set at 35 percent for those worth more than $3.5 million. However, the exemption would ultimately increase over time to $5 million and wouldn't be indexed for inflation. Prepayment trusts would pay a lower rate.”
So, one day closer to the return of the $1 million exemption and 55% rate on January 1, 2011.
Thanks to a client for bringing this article to my attention: How To Protect Your Family From Estate Tax Uncertainty. It contains good advice, which I have highlighted in bold in the following text from the article:
Make sure your estate plan accounts for a year with no estate tax, as well as a minimal $1 million exemption next year. Typically, a couple's wills are designed to use each spouse's estate tax exemption, without leaving a surviving spouse short of funds. When the first spouse dies, the exemption amount goes into a "bypass" trust for the children and the rest goes outright to the surviving spouse. The survivor has access to trust income and, if needed, principal, but the amount in the trust bypasses his or her estate.
With no estate tax such formula-driven plans don't work as intended, with too little, too much or even nothing left to certain heirs. So far ten states have passed laws saying that an estate's executor can fund the trust as if the 2009 estate law is in place; Florida has decided to require heirs to go to court to sort it out.
If you have a bypass trust, consult a lawyer now. You may be able to do a cheap fix with a codicil that clarifies how your assets should be allocated if there is no estate tax when you die. Or, if your plan is old and you live in a state with an estate tax, consider a will rewrite that might help your family minimize the combined federal and state tax bite. (Nineteen states and the District of Columbia have their own estate taxes, and these laws are also constantly in flux.)
Note: North Carolina does not have an estate tax this year, but it should return next year along with the federal tax.
More from theHill.com on the estate tax in Kyl: Deal on the estate tax in the offing:
"Sources close to the matter told The Hill last week that lawmakers are looking to give taxpayers the option of prepaying their estate tax. The levy would be set at 35 percent for those worth more than $3.5 million, however the exemption would ultimately increase over time to $5 million and would not be indexed for inflation. Prepayment trusts would pay a lower rate.
It is unclear how the gift tax would be addressed. Kyl recently told The Hill that he would like the rate to mirror the estate tax.
The senator said the proposal will be fully compliant with pay-as-you-go rules, which stipulates that anything more expensive than the House-passed estate tax bill must be offset.
The lower chamber recently passed legislation creating a 45 percent tax on estates worth more than $3.5 million. Kyl could need approximately $80 billion in offsets if he goes with the aforementioned plan. "
This is the first I have heard about prepaying the estate tax. Sounds like a desperate money-grab from Congress that will not be attractive to most wealthy folks. Just like with the Roth IRA conversions, prepaying tax is a hard pill to swallow as well as a gamble. I wonder if there will be any refund provisions in case the value of one's estate is significantly less at death.
Lest you start to feel complacent about estate tax reform, I should report that just this morning Professor Jeff Pennell of Emory Law School stated in a presentation in Atlanta that he did not believe that any estate tax fix would pass this year. He feels that nothing in Congress has changed since December 2009 and there are would just not be enough votes for it.
These are interesting times for estate tax nerds like me!
On May 4, Senate Finance Chairman Max Baucus (D-Mont.) stated that members of Congress will discuss the estate tax along with a small business tax bill this week. An aide reported that Committee and floor action on the small business bill might happen before the end of May.
Republicans in particular are trying to increase the estate tax exemption that will be in effect next year from $1 million to at least $3.5 million.
From Baucus sees action on small business bill, estate tax soon on theHill.com:
Baucus said talks on the estate tax and the small business bill are happening simultaneously.
"On substance we are getting very close," Baucus said about progress on the small business bill.
Senate staffers expect the legislation to cost between $10 billion and $15 billion over 10 years. The bill's marquee provision will likely zero out capital gains for one year for small businesses registered as C corporations. A similar measure was in the House-passed small business bill.
Finance could markup its small business bill as early as next week, but that timeline could slip if negotiations on the estate tax falter. Still, a floor vote on the bill before the Memorial Day recess is likely.
Staffers said there would likely have to be an agreement on both the estate and small business bill for both measures to advance. That agreement would likely have to include Senate Majority Leader Harry Reid (D-Nev.) abiding by whatever Finance committee members agreed to.
On the estate tax, Finance members Jon Kyl (R-Ariz.) and Blanche Lincoln (D-Ark.) are leading the negotiations, staffers said.
The tax is currently repealed, but barring congressional action it returns next year to pre-2001 levels by socking estates worth more than $1 million with a tax that tops out at 55 percent.
The senators seek to create a less onerous tax. Kyl recently told The Hill the starting point for discussions on the tax was the 2009 law. He also said estates will likely have a choice in complying with the current repeal or the new bill once the legislation is enacted.
The new chair of the House Ways and Means Committee, Rep. Sander Levin (D-Mich.) was quoted in an April 19 article on DailyFinance.com:
Levin indicated he wants to change the current estate tax law. In 2010, the estate tax expired, but under current law in 2011 it will revert to 2000 levels, when estates worth more than $1 million were liable for the federal tax. In 2009, estates below $3.5 million were not liable for estate tax.
"I find this uncertainty unacceptable and unfair," Levin said. Many wills are written to leave as much to the children as possible below the threshold at which estate taxes must be paid, with the rest going to the surviving spouse. "Today that means that the children may well be left with nothing," he said.
The article doesn't contain any further information about what Levin has in mind, but I assume that he is thinking about bringing the estate tax back with a $3.5 million exemption, retroactive to January 1, 2010. However, as previous blog entries discuss, the IRS undoubtedly faces litigation if the estate tax is retroactively reinstated.
Also, Levin's comment about the way "[m]any wills are written" is not particularly accurate. Most wills (and living trusts) that contain estate tax savings provisions contain a family/credit shelter/bypass trust that receives the amount exempt from estate taxes. This allows the surviving spouse to utilize the funds for support for the remainder of his or her life. At the survivor's death the trust is paid to the children. Furthermore, in most marriages, the surviving spouse will leave the assets to the kids at his or her death, so they won't exactly be left with nothing. What he describes is primarily a problem in second marriages.
What I take from Levin's statements is that the estate tax issue will not be resolved in the near future, anyway.
Forbes.com has been publishing a series on finance and taxes - here's one about an estate tax worst case scenario: Estate Tax Could Come Back with a Sharp Bite. Author Deborah Jacobs discusses the possibility that we could have a $1 million exemption, combined with the elimination of tax reducing strategies such as Grantor Retained Annuity Trusts (GRATs) and Family Limited Partnerships (FLPs).
There has been talk in Washington about possibly reinstating the estate tax retroactively to January 1, 2010? If that's done, however, many have speculated that litigation challenging the constitutionality of doing so will follow. But from whom?
Here's a possible candidate, according to Scott Martin of the The Trust Advisor Blog : "Houston gas pipeline mogul Dan Duncan was the 74th richest person in the world when he died on March 28. If he'd passed away three months earlier or ten months later, his $9 billion estate could have generated up to $4 billion for the IRS. But because there's no federal estate tax this year, the government gets nothing." Martin also states that "the sheer amount of money on the table makes a retroactive tax more unlikely. Big estates mean big lawyers ready to fight to see those billions of dollars go to the deceased's heirs, and the headaches could go on for years."
A recent AALU report, Update on Estate Tax Reform: Developments and Dynamics, lists three factors that affect the ongoing environment for federal estate tax legislation:
1) a packed congressional schedule; 2) a focus on deficit reduction; and 3) the upcoming mid-term elections.
The report states that we may have a better idea of what's to come once Congress returns to session, but that the Senate may be hesitant to pass a reconciliation bill (which could include estate tax provisions) because of the recent health care reconciliation bill. If it is not included in a reconciliation bill (which requires only 51 votes), 60 votes would be necessary to pass estate tax legislation:
“The difficulty in finding 60 votes may lead to either (1) reversion in 2010 to a $1 million exemption and 55% rate or (2) a short-term extension of tax cuts, including the estate tax on a two- year basis at $3.5 million exemption and 45% rate, possibly during a lame duck session (when Congress returns after November elections).”
I'm telling my clients that (1) is a good possibility, given that that is what will happen if Congress takes no action. All those with estates over $ 1 million should run, not walk, to their estate planning attorney! A $2 million North Carolina estate could face over $600,000 in taxes.
Support is growing in Congress for allowing estates of decedents dying in 2010 to choose between the $3.5 million estate tax exemption (per 2009 law) and the current modified carryover basis law. Ever a good source of tax news, thehill.com has a brief article on this topic.
For a description of the modified carryover basis law, click "Continue Reading."Continue Reading...
Here's the latest on the fight over the future of the estate tax tax, from Bloomberg.com. In general, Republicans and business lobbyists are pushing for a $5 million exemption and a 35% rate, while the Obama administration is counting on a $3.5 million exemption and a 45% rate. If nothing is done, 2011 will bring a $1 million exemption and a 55% rate.
Yes, I know this is the North Carolina Estate Planning Blog, but in these troubled economic times, with most states, including NC, desperate for cash, this could be a sign of things to come here and elsewhere.
Washington currently has a $2 million estate tax exemption, with rates ranging from 10% to 19%. A bill was introduced in the state legislature on February 13 to double the rates (20% to 28%).
North Carolina's estate tax is tied to the federal estate tax, so there is no tax this year. It will return next year, however, when the federal estate tax is back, with a scheduled $1 million exemption and 55% rate. North Carolina's top rate is 16%.
There is no estate tax in North Carolina this year, but residents (and owners of real estate) in 19 other states do have a state estate tax, even in the absence of the federal estate tax. Take a look at this article on Forbes.com, Where Not to Die In 2010.
The North Carolina estate tax will return next year when the federal estate tax is reinstated.
Nothing has been decided yet, but here's the scoop from TheHill.com as of February 9, 2010. At a minimum, the 2009 $3.5 million exemption and 45% rate would continue, effective January 1, 2010.
For years, there has only been North Carolina estate tax due if federal estate tax was due. Now, however, that the federal estate tax is gone (for now, anyway), what's the status of the NC estate tax?
N.C.G.S. Section 105-32.2 provides, in pertinent part, as follows:
"The amount of the estate tax imposed by this section is the amount of the state death tax credit that, as of December 31, 2001, would have been allowed under section 2011 of the Code against the federal taxable estate. The tax may not exceed the amount of federal estate tax due under the Code." [Emphasis added.]
Regardless of how the first sentence above is interpreted, since zero federal estate tax is due for individuals dying in 2010, the second sentence clearly mandates a zero NC estate tax as well.
From The New York Times to my bully pulpit:
This article helps explain why revising old estate plans is more important than ever, given this bizarre (tax-wise) year of 2010.
And for heaven's sake, if you don't have an estate plan, what are you waiting for? Today is the first day of the rest of your life, but tomorrow may be the last day of the life you had. Be a grownup and get a plan!
This is from Steve Akers' recent presentation, Estate Planning in Light of One-Year 'Repeal' of Estate and GST Tax in 2010:
"the Administration proposes to dramatically change the rules regarding valuation discounts (emphasis added). If there is an estate and gift tax reform package adopted next year, it could include that provision. If there is no legislation, there are indications that the IRS will issue regulations under §2704 that would place significant restrictions on valuation discounts on entities that are valued on the basis of their liquidation value (such as family limited partnerships holding marketable securities or other assets other than operating businesses.) Therefore, to have a chance to take advantage of the lower 35% rates in 2010 and to avoid the coming restrictions on valuation discounts, clients should consider make desired gifts and sales as early in the year as possible (Emphasis added).
Since the estate tax is sure to return, I am advising clients for whom a family limited liability company makes sense to form it now, and if possible use their $1 million lifetime gift tax exemption now to take advantage of discounting before it is legislated away.
I just put this Estate Planning Alert on my firm's website homepage, but thought it would also be appropriate for this blog:
As of January 1, 2010, there is no more federal estate tax. The estate tax has been replaced with a complex modified carryover basis regime. In 2011, the estate tax is scheduled to return, with a $1,000,000 exemption and 55% rate (plus an additional 16% for North Carolina residents). Due to these changing laws, it is imperative that everyone with an estate of $1 million or more do proper planning to ensure that income and estate taxes will be minimized. Be aware that the face value of life insurance is included in calculating one's estate, so even many young couples have estates in excess of $1 million. Do not let your family pay tax unnecessarily. Consult an estate planning specialist today.
From its inception, the 2001 tax act was scheduled to repeal the federal estate tax and generation skipping transfer tax (GSTT) for one year beginning January 1, 2010. This should come as no surprise. What is surprising, however, is the fact that the 2001 tax act has now played out and repeal, at least temporarily - and unless reinstated retroactively - is upon us. This post is from today's Advisor's Forum Wealth Counselor and explores how we got here (which may be instructive as to what will happen in the future) as well as some of the planning implications of no federal estate tax or GSTT for at least some part of 2010.Continue Reading...
It's 2010! As of January 1st, the federal estate tax is no more and it may mean that you should revise your estate plan and related documents. Anyone with total assets over $1 million (including face value of life insurance, retirement, home equity, etc.) should make make sure there estate plan is up to date. Click "Continue Reading" to find out what the change involves, what happens next year, and what steps you might want to take now to ensure your wishes are carried out.Continue Reading...
We only have a few hours left before the much reviled "death" tax disappears, to be replaced by a complicated and confusing carryover basis regime. So, if your estate is over $3.5 million, the tax impact may be less if you die tomorrow rather than today. Don't count on certain tax savings, however, as Congress could very well reinstate the estate tax retroactively to January 1, 2010. And if you wait until 2011 to die, your estate could be taxed even more, as the estate tax will return then, with a $1 million exemption and a 55% rate.
My advice - don't die, but see your estate attorney right away! Failure to plan for all these changing laws could end up being very costly.
Here's a recent article on the estate tax from the WSJ.com. Not exactly objective reporting, more like an opinion piece against the "death" tax.
The articles states that "the best strategic outcome now is to let the death tax expire in January as scheduled under current law, and return to this debate next year when the tax rate is zero. Then let liberal Democrats explain to voters on the eve of elections that they must restore one of the most despised of all taxes."
This is not exactly accurate in that while "restoration" of the estate tax for 2010 would require congressional action, without any action the exemption will be reduced to $1 million and the rate will increase to 55% in 2011. So if next year the Democrats propose imposing the current $3.5 million exemption and 45% rate on 2010 and future years, they will actually be proposing significant tax relief. That would get my vote.
Here are yesterday's and today's articles from the Wall Street Journal. While there is a brief discussion of the 2010 "Carryover" Basis rule that will apply instead of the estate tax, there is no mention of the fact that each estate will have $1.3 million in basis to apply to assets, with an extra $3 million for spouses. Even with these generous exemptions, it will be a record-keeping nightmare.
Other than perhaps a one year extension of current law, we are unlikely to see any movement on the estate tax in 2009. CCH Tax Newsletter.
The U.S. House of Representatives is scheduled to vote on the estate tax today, but even if legislation passes, Senate approval is necessary. Lots of politics involved for a tax that affects so few people. See what the Washington Post has to say.
This legislation would continue the current $3.5 million exemption and 45% rate, but does not include the spousal "portability." While the bill may very well pass in the House, Senate action is uncertain. More...
On November 17, 2009, Senators Tom Carper (D-DE) and George V. Voinovich (R-OH) reintroduced bipartisan legislation that would freeze the estate tax at its current 2009 level (a $3.5 million exemption and 45% rate) and allow a surviving spouse to elect to use the exemption of the his or her predeceased spouse. The bill was referred to the Senate Finance Committee.
Another article from CQ Politics about the Democrats' plan for the estate tax in 2010.
Planning for tax-qualified plans, which includes IRAs, 401(k)s and qualified retirement plans, requires a careful examination of the potential taxes that impact these assets. Unlike most other assets that receive a “basis step up” to current fair market value upon the owner’s death, IRAs, 401(k)s and other qualified retirement plans do not step-up to the date-of-death value. Therefore, beneficiaries who receive these assets do so subject to income tax. If your estate is subject to estate tax, the value of these assets may be further reduced by the estate tax. And if you name grandchildren or younger generations as beneficiaries, these assets may additionally be reduced by the generation-skipping transfer tax. All tolled, these assets may be reduced by 70% or more.
There are several strategies available to help reduce the impact of these taxes:
- Structure accounts to provide the longest term payout possible (stretch).
- Name a Retirement Trust as Beneficiary
- Take the money out during lifetime and pay the income tax, then gift the remaining cash either outright or through an irrevocable life insurance trust. Or consider a Roth conversion.
- Take the money out during lifetime and buy an immediate annuity to provide a guaranteed annual income, to pay the income tax, and to pay for insurance owned by a wealth replacement trust.
- Name a Charitable Remainder Trust as beneficiary with a lifetime payout to your surviving spouse. The remaining assets would pass to charity at the death of your spouse.
- Give the accounts to charity at death.
Coming as no surprise to me, anyway, an article on the website CQ Polictics, House LIkely to Delay Estate Tax Consideration, states that the House will likely postpone any movement on estate tax legislation until after Thanksgiving. I'm still of the opinion that a one year "patch" continuing the current $3.5 million exemption and 45% rate is the most likely outcome.
One common oversight I see when reviewing new clients’ financial status is failure to consider the estate tax impact of large life insurance policies. Most people know that life insurance proceeds are received free from income tax. What most don’t know, however, is that the proceeds are part of the insured’s estate for estate tax purposes if:
- The proceeds are payable to the insured estate, or
- The insured has any “incidents of ownership” of the policy, such as the right to change the beneficiary or access the cash value.
Life insurance proceeds of any amount can be paid to a U.S. citizen spouse free from tax. But – those same proceeds, or the value of items purchased with the proceeds, will be included in the taxable estate of the surviving spouse.
This may not be a problem for most of us at the current $3.5 million estate tax exemption. However, barring a change in the law, in less than 14 months the exemption will revert to $1 million, and the rate will increase from 45% to 55%. North Carolina adds another 16%.
With a $1 million exemption even a $250,000 policy could be subject to estate tax when combined with the value of real estate, retirement accounts, and all the other assets of a decedent. Why take the chance of losing over half the proceeds to Uncle Sam? The solution is to create an irrevocable life insurance trust (ILIT) to own the policy. The proceeds will then escape taxation at the death of the insured, his or her spouse, and can be structured to avoid taxes at the death of the children or other beneficiaries are well. In addition, the proceeds are protected from creditors and mismanagement by the beneficiaries.
If an existing policy is transferred to an ILIT, the proceeds will still be included in the insured’s estate for estate tax purposes if he or she dies within three years of the transfer, so it's best not to delay planning for existing policies.
ILITs must be structured properly to take into account various estate, gift and income tax issues, as well as state law. Make sure you have an estate planning specialist prepare your ILIT and work with your life insurance agent. ILITs are not inexpensive to create, but your beneficiaries could easily save several hundred thousand dollars or more.
This article on Trusts & Estates journal's website discusses a very real possibility - a return in 2011 to the estate tax laws of 2001. Briefly, that would mean a $1 million exemption and a 55% rate.
On October 15, 2009, Rep. Schrader (D. Oregon) introduced "The Small Business and Family Farm Estate Tax Relief Act of 2009" ( H.R. 3841), which would "repeal carryover basis for decedents dying in 2009, and "increase the estate tax exemption to $5,000,000" and "reduce the maximum estate and gift tax rate to 45 percent" for decedents dying after December 31, 2009.
Trouble is, carryover basis is to apply to decedents dying in 2010, not 2009. Seems this bill needs to be amended to correct the description of what it would do.
Check out this aptly titled article on webcpa.com - The dangers of postponing estate planning until Congress clarifies the law. Don't let the expenditure of a few hours or a couple of thousand dollars keep you from putting a plan into place that could avoid unintended financial problems for your family and/or save them hundreds of thousands of dollars in taxes. Estate plans are not meant to be a "once and done" solution. Regular updates are necessary, just like tuneups for a car. Without regular maintenance, your car will eventually breakdown and be useless. The same could be said for an estate plan.
This article from WSJ online on the effect on changing estate tax exemptions on what's left for the surviving spouse describes just one reason why.
Here's a link to an article from Evan Cooper at Investment News about a recent webinar on the federal estate tax that the magazine hosted - geared for financial advisors but worthy reading for all those interested in what will happen with the estate tax. There were no definite conclusions by the panel, but most experts agree that estate taxes are likely to go up, rather than down.
One listener, J.B. Stroll, commented: "Having listened to the presentation, I thought a major take-away was that Congressman Rangel had intimated to a speaker that the proposal would be for a "patch" with the existing 2009 rules for one more year. There wasn't time for congress to deal with revamping of the estate taxes." (Emphasis added). This is consistent to what I have heard.
As an estate planning attorney, here's one recommendation from the article I certainly endorse: "When your clients have anything remotely related to estate planning to consider, find a competent estate-planning attorney with whom to work. This stuff is so complicated already — and likely to become even more complex — that your clients will thank you a million times over for helping them get their estate plans in order. A lifetime of hard work can disappear as a result of one tiny mistake, so be ultracareful."
In addition to providing ease of management and significant asset protection, FLPs and (FLLCs) are still a excellent planning tool for obtaining gift and estate tax discounts (for minority interests and lack of marketability) - provided that the implementation and valuation are done correctly. See this BVWire article on Keller v. U.S., 2009 WL 2601611 (S.D. Tex.) (Aug. 20, 2009).
However, anyone considering a FLP or FLLC for the transfer tax advantages should not delay - the Obama administration has recommended legislation prohibiting such discounts in most cases.
Jonathan Weisman of the Wall Street Journal reports that the Estate Tax Faces Its Own Life-and-Death Struggle. When and what will happen with regard to the federal estate tax is still very much up in the air.
Here's what's happened this decade:
Fellow Blawger Gideon Alper, who writes the Gay Couples Law Blog, has an interesting take on what will, or will not, happen with the federal estate tax over the next year or so: Estate Tax Repeal in 2010 Not a Big Deal Because Congress Can Pass a Retroactive Tax Amendment.
Regardless of what happens with the estate tax, the bottom line for those whose estates are $1 million or more, or are likely to be in the near future, is to be prepared, to the extent possible, by implementing a comprehensive, yet flexible, estate plan. And then - review it as the tax legislation does change.
Hurry up and wait is basically the message of this article from TheHill.com
TheHill.com is self-described as the publication “for and about Congress, breaking stories from Capitol Hill, K Street and the White House. The Hill stands alone in delivering solid, nonpartisan reporting on the inner workings of Congress and the nexus of politics and business.”
For those seeking some certainty in the tax laws to be able to do more effective planning, the situation on the Hill may seem more like the "Hell."
I, for one, am advising my clients not to count on a $3.5 million or more exemption in the future as a given. This goes for current planning and post-mortem planning, such as funding credit-shelter trusts by disclaimer after the death of the first spouse to die. Not that my clients always take my advice...I just make sure my file is documented so if the kids end up with large estate tax bill, I won't be the one to blame.
More news on the possible future of the federal estate tax from WSJ.com.
Based on inside sources in the U.S. Senate, here's a prediction about what will happen with the estate tax. Since health care reform has consumed Congress and the Obama administration (except for drinking beer with professors and policemen), there will likely be no action on the estate tax until late December. At that time, with a cash-hungry government facing a year with no estate tax whatsoever, Congress will institute a one-year patch extending the current $3.5 million exemption through 2010. Then, in 2011, the exemption will drop to $1 million (with no action from Congress necessary). This, in addition to the coming increases in income taxes, will help pay for health care reform and all the other hemorrhaging of taxpayers' money. Bad for taxpayers, but a boon for tax planning professionals. We'll see...
The U.S. Tax Court decision in Estate of Erma V. Jorgensen, T.C. Memo 2009-66, provides another example of the wrong way to create and administer a family limited partnership from an estate tax planning perspective. See this article by attorney Kay Ford Bailey of Austin, Texas for a brief analysis.
On April 22, 2009 Representative Jim McDermott of Washington has introduced H.R. 2023, which has been submitted to the Ways and Means Committee for study. The Sensible Estate Tax Act of 2009 would (1) allow an estate tax exclusion of $2 million adjusted for inflation in calendar years after 2010; (2) revise the estate tax rates for larger estates (45% up to $5 million, 50% from $5-10 million, and 55% above $10 million; inflation adjusted); (3) restore the estate tax credit for state estate, inheritance, legacy, or succession taxes; (4) restore the unified credit against the gift tax; and (5) allow a surviving spouse an increase in the unified estate tax credit by the amount of any unused credit of a deceased spouse.
I agree that this legislation is sensible from a fiscal standpoint, enabling the IRS to collect more revenue (than a $3.5 million or higher exemption would allow), while providing a healthy $4 million that married couples can pass on to children or others with no special planning. It will also help many states such as Florida that only can collect estate tax on a state level to the extent that the federal government provides a credit, rather than a deduction.
As for spousal portability, as I have said before, while on its face it appears to obviate the need for credit-shelter or bypass trusts, that's not necessarily the case. Even with portable exemptions, credit-shelter trusts will be important from an asset preservation standpoint, avoiding the possibility of taxation should the surviving spouse's estate exceed $4 million, and protection against future reductions in the estate tax exemption.
There's also the question of how the exemption amount available to the surviving spouse would be established. If a couple thinks there's a chance that the survivor's estate will exceed $4 million, would an estate return need to be filed at the first death, even it it's under $2 million? How else would any transfers to others than the spouse be documented?
In the recent case of Estate of Valeria M. Miller v. Commissioner; T.C. Memo. 2009-119; No. 5207-07 (27 May 2009), the U.S. Tax Court allowed a 35% discount for gifts of family limited partnership interests. No discount was permitted for the FLP interest owned by the decedent at her death.
This case shows that a properly planned and executed family limited partnership or limited liability company is still a very effective way to pass on wealth to younger generations. However, Obama's tax proposals would do away with such discounts in most cases.
Click here for a summary and the full text of the case, thanks to NC State's GiftLaw eNewsletter.
A while back I blogged about the advisability of trustees of irrevocable life insurance trusts (ILITs) reviewing the policy owned by the trust to help ensure the policy is still a sound investment and won't lapse. Here's an article from the Wall Street Journal website covering a related topic, Keep Tabs on Insurance that Covers Estate Taxes. The article doesn't discuss the use of ILITs to avoid estate taxes on the life insurance proceeds and further protect the funds for the beneficiaries, but in my opinion an ILIT should always be used for life insurance in a taxable estate (over $3.5 million in 2009). ILITs are the best (estate) tax shelters around! Even for relatively "small" $1,000,000 policy, a $2,500 trust could easily save over $500,000 in estate taxes.
President Obama's Green Book contains proposals for modifying the GRAT rules, eliminating valuation discounts for transfers of interest in many family limited partnerships and limited liability companies, and increasing income tax rates and limiting deductions for high income taxpayers.
Here's a nice outline prepared by Bob Keebler, CPA of Virchow Krause & Company, LLP in Wisconsin.Continue Reading...
There has been much recent discussion about "death" tax reform, and several bills have been introduced in Congress to that effect (as I have blogged about over the last few months), but so far the law as provided in the Economic Growth and Tax Relief Reconciliation Act of 2001(EGTRA) is still in effect.
EGTRA put into place the following estate tax "phase-out" schedule, which repeals the estate tax for a grand total of one year, and brings bring a $1 million exemption and 55% rate in 2011:Continue Reading...
The debate over extending the $3.5 million estate tax exemption versus increasing the exemption to $5 million is discussed in this NY Times article. Don't our legislators have better things to do than argue over reducing taxes for such a minute percentage of the U.S. population?
Those with estates over $3.5 million simply need to avail themselves of the services of a qualified estate planning attorney to implement measures to reduce or eliminate estate taxes.
The U.S. Senate went two different ways on the estate tax, which has been a contentious issue for years — a tax congressional Republicans have villified as the “death tax”.
Senators voted 51-48 to include a provision in the fiscal 2010 budget that called for exempting estates at $5 million for individuals and limiting the tax to 35 percent — though the measure is non-binding and could be stripped out when the legislation is melded with a separate budget that passed the House of Representatives.
The amendment provoked a moment of drama in an otherwise long day of voting in the Senate where Democratic leaders scrambled to find the votes to kill the amendment, which scores some political points to those who have rallied against the estate tax for years.
The New York Times was so incensed by the amendment it wrote the following in its lead editorial on Thursday:
“The proverbial millionaires next door — the plumbers, contra ctors and accountants who amass substantial wealth through hard work and modest living — are not the intended beneficiaries of the proposed cut. The Obama budget already takes care of them, because it retains today’s law, which imposes the estate tax only on couples with property worth more than $7 million, or individuals with property worth more than $3.5 million. That means 99.8 percent of estates will never — ever — pay a penny of estate tax.”
Senate Minority Leader Mitch McConnell argued that “No one should have to be taxed on their assets twice, and no one should have to visit the taxman and the undertaker on the same day. But if we can’t repeal this tax, then we should at least lower it at a time when Americans are already burdened by shrinking retirement savings.”
But minutes later the Senate adopted a second amendment that would require a 60-vote threshold to change the estate tax rate and exemption beyond the current levels unless commensurate tax relief was offered those who earn less than $100,000 annually.
Since Republicans now have only 42 seats in the Senate, and 10 Democrats supported the earlier amendment, reaching 60 votes likely would be tough.
In any event, since the amendments are part of the non-binding budget resolution, the votes are really just symbolic.
Click "Continue Reading" to view the statements of Senator Max Baucus (D-MT) (chairman of the Senate Finance Committee) made on the floor of the Senate last week. He opposed an amendment proposed by Senator John Thune (R-SD) to President Obama’s budget. Obama proposes limiting deductibility for charitable gifts for high income taxpayers to a 28%. Senator Thune’s amendment would have eliminated this deductibility cap. The amendment failed - 48 for and 49 against.Continue Reading...
From the GiftLaw eNewsletter:
Senate Finance Committee Chair Max Baucus (D-MT) introduced the Taxpayer Certainty and Relief Act of 2009 on March 26, 2009. The tax bill includes a $2.3 trillion middle class tax cut package and also creates a freeze on estate tax rates and major estate planning modifications.
Sen. Baucus indicated, "By guaranteeing a little extra cash in the pocket of working moms and dads and by making sure that the AMT and the estate tax can move with the economy, we avoid sweeping tax increases for millions of American families."
The bill would make permanent many of the provisions enacted for tax relief during the past decade. Several of the provisions are intended to reduce income taxes for low and middle income taxpayers. The bill would not change the scheduled increase in the top two tax brackets in 2011 to 36% and 39.6%.
The middle class reductions:
1. For taxpayers in the 10%, 15%, 25% and 28% brackets, the rates are continued.
2. The alternative minimum tax exemption is indexed for inflation.
3. The zero percent long-term capital gain rate for taxpayers in the 10% and 15% bracket is continued.
4. The child tax credit is refundable for incomes below $3,000.
5. The marriage penalty relief for taxpayers in the 15% bracket is continued.
6. The adoption and exclusion caps of $10,000 per eligible child are continued.
Sen. Baucus proposes significant changes in estate taxes. Rather than repealing the estate tax in 2010, the exemption is frozen at $3.5 million per person ($7 million per couple), with the estate tax rate set at 45%. The exemption would be increased for inflation in $10,000 increments starting in 2011.
Farmers and ranchers would benefit from an increase in the special use valuation from $750,000 to $3.5 million. This would permit transfer of very valuable farms and ranches from parents to children who are actually operating the farm or ranch.
A change that will require modifications to most large estate plans is the proposal to pass "marital deduction portability." If a surviving spouse passes away with an estate larger than the applicable exemption, he or she will be able to use the "aggregate deceased spousal unused exclusion amount."
In order to use a portion of the first decedent spouse's exclusion, his or her executor must make an election on that estate tax return. If the "Spousal Unused Exclusion" election is made, the surviving spouse may then use the remaining unused exemption.
If this bill becomes law, the full estate could be transferred to surviving spouse and he or she will have an estate exemption of $7 million.
Note: If this bill becomes law, the first tendency of many couples with taxable estates will be to revise their wills or trusts to do away with the credit-shelter (bypass) trusts. However, there will still be compelling reasons to have such trusts. With a credit-shelter trust, growth in the value of the assets is also protected from estate taxes, while that is not necessarily true if a couple relies on exemption portability. In addition, the credit shelter (or marital) trust provides valuable protection from mismanagement, creditors, and future spouses.
While only about .05% of estates will be subject to federal estate tax with the current $3.5 million exemption, this article, which originally ran in Trusts and Estates magazine, says to expect an audit in virtually all taxable estates.
The U.S. Tax Court issued an opinion on January 29, 2009 in the Estate of Marjorie deGreeff Litchfield v. Commissioner (T.C. Memo. 2009-21). The case involved the determination of appropriate (estate tax) discounts for built-in capital gains tax liabilities, and lack of control and lack of marketability for minority interests in two closely held family corporations, including one that had recently converted to a subchapter S corporation. The court allowed a discount of 91% for the built-in capital gains tax for the C corporation, and 52% for the S corporation. The minority interest (lack of control) discount was determined to be 14.8% for the C corporation and 11.9% for the S corporation. The lack of marketability discounts were established at 25% and 20%, respectively, for the two entities. The FMV Valuation Alert offers a nice summary.
This case involved farmland and marketable securities. Discounts for transfers of entities owning marketable securities and cash will be history if HR 436, the Certain Estate Tax Relief Act of 2009, passes.
The estate tax exemption is up (to $3.5 million) and portfolios are down. However, for those whose estates are still above $3,500,000, now is the perfect time to transfer wealth to younger generations. Interest rates are low, and the tax laws may never be more favorable. See Tough Times Are Good Times to Trim Estates on the WSJ website.
Where Not To Die01.19.09, 06:00 PM EST
Sixteen states and the District of Columbia (shaded in red) impose their own estate taxes. The dollar amount exempted from tax (in black) and the top tax rate (in yellow) vary by state. Eight states (shaded in orange) levy an inheritance tax, meaning the tax rate (in black) depends on who gets the money. New Jersey and Maryland levy both types of tax.
1. H.R.96 : To amend the Internal Revenue Code of 1986 to increase the maximum reduction in estate tax value for farmland and other special use property, to restore and increase the estate tax deduction for family-owned business interests, and for other purposes.
Sponsor: Rep Conaway, K. Michael [TX-11] (introduced 1/6/2009) Cosponsors (None) Latest Major Action: 1/6/2009 Referred to House committee. Status: Referred to the House Committee on Ways and Means.
2. H.R.173 : To amend the Internal Revenue Code of 1986 to exempt certain farmland from the estate tax.
Sponsor: Rep Salazar, John T. [CO-3] (introduced 1/6/2009) Cosponsors (7)
Latest Major Action: 1/6/2009 Referred to House committee. Status: Referred to the House Committee on Ways and Means.
3. H.R.436 : To amend the Internal Revenue Code of 1986 to repeal the new carryover basis rules in order to prevent tax increases and the imposition of compliance burdens on many more estates than would benefit from repeal, to retain the estate tax with a $3,500,000 exemption, and for other purposes.
Sponsor: Rep Pomeroy, Earl [ND] (introduced 1/9/2009) Cosponsors (None)
Latest Major Action: 1/9/2009 Referred to House committee. Status: Referred to the House Committee on Ways and Means.
4. H.R.533 : To make full estate tax repeal, small business expensing, and SECA tax deduction for health insurance permanent.
Sponsor: Rep Neugebauer, Randy [TX-19] (introduced 1/14/2009) Cosponsors (None) Latest Major Action: 1/14/2009 Referred to House committee. Status: Referred to the House Committee on Ways and Means.
A bill entitled the Certain Estate Tax Relief Act of 2009 was recently introduced in the U.S. House of Representatives. The bill retains the current $3.5 million federal estate tax exemption, freezes the estate tax rate at 45%, and repeals the carryover basis rules which would otherwise be in place next year. The effective date would be January 1, 2010.
The bill also contains a provision disallowing valuation discounts for transfers for interests in entities (such as LLCs and corporations) containing "nonbusiness assets." This is aimed at preventing the use of family limited partnerships and limited liability companies (which are not true operating businesses - holding marketable securities, for example) for discounted transfers to younger family members. This would eliminate a common and highly effective method for gift and estate tax reduction, but LLCs would continue to be an excellent tool for asset protection. The effective date of this portion of the Act would be the date of enactment.
Click "Continue Reading" for the text of the bill.Continue Reading...
Today's Wall Street Journal has an article on the latest buzz on what the Democrats would like to do with the federal estate tax. This summary is courtesy of Stephen Bigge, CPA:
Tired of all the taxes here in the good ole USA and thinking of moving to a tropical isle with little or no taxation? Besides the emotional and security issues, there tax penalties for leaving the U.S. In addition to providing tax relief to military personnel and veterans, the Heroes Earnings Assistance and Relief Act (HEART Act) of 2008 also contains a couple of provisions regarding expatriate taxation. Those who renounce their U.S. citizens in an attempt to save on taxes face the following:
- A tax on the net unrealized gain of worldwide assets, due at the time the individual leaves the U.S. The gain is based on the fair market value on the day before the expiration date, and assumes the assets were sold on that date. The first $600,000 on gain is exempt. Recognition of the gain can be deferred until actual sale only if proper security is furnished to the IRS.
- There is a 45% gift/estate tax due on transfers made by an expatriate during his or her lifetime or at death to a U.S. beneficiary. The beneficiary is liable for payment of the tax.
What is an LLC?
In 1977 Wyoming was the first state to enact laws permitting the creation of a Limited Liability Company. An LLC combines the best features of a corporation with the best features of a partnership. Among other things, an LLC has the limited liability of a corporation and the ease of management and flow-through income tax treatment of a partnership.
In 2000, Wyoming again led the nation by enacting its Close LLC statute. This type of LLC is designed specifically for a small closely held family business. Family assets (such as stocks, bonds, farms, ranches, rental property, CDs and family businesses) can be managed under the protective umbrella of a Wyoming Close LLC.Continue Reading...
Here's a recent comprehensive report from the Urban-Brookings Tax Policy Center entitled Back from the Grave: Revenue and Distributional Effects of Reforming the Federal Estate Tax. An outline of the presidential candidates' and other recent proposals for reform is contained in Table 11 on page 20.
I'm back from vacation, furiously trying to catch up on things (as if!), but thought I would quickly add this tidbit from the NC Department of Revenue. It only applies to returns of NC residents who owned real estate in one or more other states, and generally results in a reduced amount of tax.
The change became effective July 16, 2008, but amended returns can be filed for any returns for which the time to claim a refund had not expired as of December 31, 2007.Continue Reading...
The introduction of two estate tax bills - one in the Senate (S. 3284) and the other in the House (H.R. 6499) - enhances the likelihood of ultimate (more probable in 2009 than 2008) estate tax reform.
Senate Bill - $3.5 Million Exemption. Senator Carper (D-DE) introduced S. 3284 with two co-sponsors, Senator Voinovich (R-OH) and Senator Leahy (D-VT). The bill would permanently fix the lifetime estate tax exemption at $3.5 million (indexed for inflation) and the estate tax marginal rate at 45% (essentially freezing the exemption and rate levels slated by the current Revenue Code to be in place in 2009). Significantly, this initiative represents the first time, within our memory, Senators from both parties have co-sponsored such estate tax reform legislation.
House Bill - $2 Million Exemption. Representative McDermott (D-WA), a member of the Ways and Means Committee, has, without co-sponsors, introduced H.R. 6499 which sets the lifetime exemption at $2 million (indexed for inflation) and adopts other major reform approaches, such as gift and estate tax reunification. Rep. McDermott’s bill would repeal portions of the Economic Growth and Tax Relief Reconciliation Act of 2001 related to the estate tax. Its major thrust would be the adoption of the $2million lifetime exemption, indexed for inflation. The bill would be applicable for all “estates of decedents dying and gifts made after December 31, 2008” and would reunify the gift and estate tax exemption/exclusion amounts. Instead of the applicable exclusion amount for the gift tax being $1 million, it would equal $2 million in 2009 and would be indexed for inflation going forward.
The exclusion amount for the estate tax would also be increased by any unused exclusion from a deceased spouse. This provision (not previously introduced in the current Congressional session, but often described as implementing spousal exemption portability) would allow the surviving spouse to increase his or her exclusion amount by the unused comparable amount of a deceased spouse, if the executor makes an election at the time of the deceased spouse’s death. Furthermore, the exclusion amount could be increased by the unused amount of more than one deceased spouse if the surviving spouse had been married more than once, but the total for each such deceased spouse would be capped at the basic exclusion amount of $2 million, indexed for inflation.
The rate for the estate tax would be 45% for all estates between $1.5 and $5 million, 50% for estates between $5 and $10 million, and 55% for estates over $10 million. Furthermore, the bill would reinstitute the credit for State death taxes and would repeal the deduction for such taxes. The credit was taken away in 2001 and the deduction was put in its place. This bill would restore the credit as it was prior to the 2001 amendment.
When doing estate planning, one needs to consider to whom to leave one's property, which is usually not much of a problem. Next, one must decide who will be in charge of the administration the Will - the executor . This choice is sometimes more difficult, but even without suitable family or friends, a professional or corporate fiduciary can be named. Once these decisions are made, the very simplest of wills can be created.
However, a simple will does not address three very important estate planning considerations dealing with protecting assets and family members:
- Estate Taxes - currently estate taxes are an issue for estates over $2 million. What many people don't realize is that virtually everything they own is taxable. The most common misconception is that life insurance is tax free. This is generally true for income tax purposes, but not for estate tax purposes. The combination of life insurance face value, retirement plans and equity in real estate put many couples over the exemption amount. Without proper planning property roughly 50% of the property over $2 million will go to the government (45% federal tax plus NC estate tax). Also, in 2011 the estate tax exemption will be reduced to $1 million.
- Probate Avoidance - Even the most sophisticated Will does not avoid probate for property passing under the terms of the Will. The probate process, governing by the court, can be lengthy and expensive. Living Trusts can keep matters out of the court and save time, money and hassle. As a rule of thumb, I recommend Living Trusts for those who have probate assets of $200,000 or more. An example of a probate asset would be a brokerage account in one's sole name.
- Asset Protection - Leaving an inheritance to someone outright makes things simple, but once that person receives the assets, there is no protection for the inheritance. The assets could be lost to bad judgment, creditors, or divorcing spouses. I urge my clients to consider leaving assets in trust, even to their spouses. The protection offered can be invaluable in case the unexpected happens. The trusts can be designed to be very flexible, and the beneficiary can even be a trustee.
As you can see, it pays to look beyond the basics when developing an estate plan.
As a proponent of Family Limited Liability Companies (LLCs) for asset management, creditor protection, and ease of gifting, I was pleased to read about the U.S. Tax Court's decision in Mirowski v. Commissioner, T.C. Memo 2008-74. March 26, 2008.
Mrs. Mirowski, widow of the inventor of the heart defibrillator implant, created a trust for each of her three daughters in 1992, which were funded with portions of her interests in the patent licenses. Then, in 2001, she formed a single member LLC, transferring substantial assets to it. Shortly thereafter, Mrs. Mirowski gifted a 16% interest in the LLC to each of the trusts. A mere four days later, she died unexpectedly.
The IRS argued under Section 2036(a) of the Internal Revenue Code that Mrs. Mirowski retained the right to income or enjoyment of the gifted property, so that it was included in her taxable estate. The estate maintained that the Section 2038 "bona fide sale" exception applied, so that the transferred assets were not subject to estate tax.
The Tax Court agreed, holding that the LLC's activities do not have to be equivalent to those of a "business" for the bona fide sale exception to be applicable. The Court stated that Mrs. Mirowski had "legitimate and significant non-tax reasons" for establishing and funding the LLC, including 1) joint management of family assets, 2) combining family assets to maximize investment opportunities, and 3) enabling equal transfers to her daughters.
Some key points for Family LLCs to hold up for gift and estate tax purposes:
- Strictly follow the terms of the Operating Agreement
- State the reasons for the LLC in the Operating Agreement
- Have the Agreement reviewed by separate counsel for all initial members
- Leave enough assets outside the LLC to live on and pay taxes
- Don't mingle LLC assets with personal assets
- File the proper tax returns each year
- File the necessary documents with the Secretary of State each year
- Don't put your personal residence in a Family LLC
- Make sure the senior generation does not have the power to allocate profits and losses
- Require annual distributions
- Have the junior family members (or their trusts) make initial contributions to the LLC to provide for the pooling of assets
- Don't wait until the senior family member is near death
The bottom line is that Family LLCs remain a viable and attractive option for transfers of family wealth, while also providing asset protection and management advantages. Just make sure you use an attorney experienced in forming Family LLCs to assist you, and carefully follow all of his or her instructions.
Yesterday a public hearing on possible gift and estate tax reform was scheduled before the Senate Finance Committee. Click "Continue Reading" for the full text of the report by the staff of the Joint Committee on Taxation. I could not get the proper formatting to reproduce, so it's a bit difficult to read.
Of primary concern are potential limitations on Dynasty Trusts, discounts for Gifts of Interests in Family Limited Partnerships (and LLCs), and use of Crummy Withdrawal Powers in trusts (which allow use of the $12,000 annual gift tax exclusion for transfers to trusts).
Items for Immediate Consideration:
- Dynasty Trusts (page 33) - take action now to create or fully fund Dynasty Trusts.
- Family Limited Partnerships (page 37) - those considering creating a Family Limited Partnership or Limited Liability Company should do so now. Those with existing entities should not delay making contemplated gifts of ownership interests.
- Crummy Powers (page 46) - fund Crummy trusts early in 2008 - review the three options.
By the way, the report references the "$11,000" annual gift tax exclusion, which is an error. The exclusion was increased to $12,000 last year.
As reported in the TaxProf Blog, Citizens for Tax Justice has released a state-by-state ranking of the number of estates owing federal estate tax in 2006. North Carolina ranked 13th, with 523 estates paying estate tax that year. Not exactly a large number! The estate tax exemption in 2006 was $2 million, as it is this year, so only estates valued over that amount owed tax. Assets passing to a surviving spouse or charity are tax-free regardless of the amount.
With proper planning, married couples can pass on up to $4 million to their heirs without tax.
From this article in the New York Times yesterday:
Beginning next year, the federal estate tax exemption will increase to $3.5 million. This means that the tax would apply to only about 0.3 percent of people who die each year. Not exactly the average American.
However, as part of the 2009 budget resolution, Senator Max Baucus, Democrat of Montana and chairman of the Finance Committee, has proposed to keep the tax at those levels, with annual adjustments for inflation. The proposal is expected to pass.
Under current law, the estate tax will be eliminated in 2010 for that year only. In 2011 the exemption would drop down to $1 million. Republican senators,, however, feel that Baucus’s proposal is not sufficient. After it passes, Senator Jon Kyl, Republican of Arizona, is expected to propose further cutting the estate taxes.
The government would have to borrow to make up for the $200 billion tax loss, worsening the deficit and adding about $100 billion in interest to the nation’s tab.
The Kyl proposal needs a simple majority to pass. So if every Republican votes yes, just one Democrat would have to join them for the proposal to pass.
I personally feel that a $3.5 million exemption is quite generous, particularly given that married couples who do proper estate planning can pass double that amount to their heirs. If persons with estates over the exemption amount don't want to pay taxes, a good estate planning attorney can certainly help!
This week I'm in Orlando at the University of Miami School of Law's Heckerling Estate Planning Institute. Yesterday there was a discussion of what may be coming down the pike as to the federal estate tax (death tax):
Date of New Legislation: It's unlikely there will be any action until after the November 2008 election. There are 35 seats open in the Senate, 23 of which are currently occupied by Republicans. The democrats will probably end up with the majority. In any event, we will probably see no movement until 2009.
Chance of Outright Repeal: No way, even if the Republicans are in charge.
Exemption Amount: The current amount exempt from federal estate taxes is $2 million, and it is scheduled to rise to $3.5 million in 2009. With a Democrat in the White house and a Democrat controlled Senate, the exemption would probably stay at $3.5 million for a number of years. If the Republicans are in control, the exemption will most likely be increased to $5 million. Any increases in the exemption as part of the 2009 legislation over $3.5 million per person would not be available in that year, but would instead be phased in over several years. The phase-in could be similar to what was proposed in HR 5970 in July 2006.
Rate: We will probably see the top rate decrease from the current 45% to 35%, although very large estates may face a higher rate.
"Portability" of Exemption Between Spouses: Very likely that the new legislation would provide that the surviving spouse could utilize both exemptions, in a manner similar to that proposed in HR 5970 and HR 5638.
The IRS recently announced that the total number of estate tax returns filed fell by 58 percent to about 45,000 in 2005 from about 108,000 in 2001. The total amount of assets represented by these returns also fell, although by a lesser percentage. The total gross estate (assets) on these returns fell by 14 percent to $185 billion in 2005 from $216 billion in 2001. Net estate taxes reported on these returns declined by even less, only 8 percent. Click here for the IRS Estate Tax Facts.
With the estate tax exemption now at $2 million, I am doing fewer estate tax returns as part of my estate administration practice. Since, strangely enough, I enjoy preparing tax returns, that's disappointing. Death may be certain, and taxes may be certain, but death taxes are becoming a relative rarity.
Having just ridden a motorcycle through the endless farms of Iowa on my way to and from Sturgis, South Dakota, this news item caught my attention. Last month a bill was introduced to defer federal estate taxes on family farms as long as the land is used for farming or conservation purposes. See this article on the Save the Family Farm and Ranch Act of 2007.
While proper estate planning, including the use of life insurance trusts and family limited liability companies, could avoid much of the impact of estate taxes on family farms, I think this bill is a good move to help protect our nation's farmers and their contributions to our food supply.
A recent U.S. Tax Court case held executors liable for the penalty for the late filing estate tax return despite their attempt to blame their lawyer for the untimely return. Decedent, a U.S. citizen domiciled in Germany, died on September 10, 1999. She had two wills - U.S. and German. Two individuals, Roisen and Helman, were nominated as executors. They hired an attorney, who sought an extension of time for filing the estate tax return. The return was eventually filed on September 19, 2001, although the last date is could be timely filed was December 10, 2000. The IRS imposed a $233,359 penalty for late filing the return. The surviving executor argued the penalty should not be imposed because the return was late filed as a result of reasonable cause, not willful neglect. He argued that his attorney failed to advise him the return was due. The court found that the executor’s expectation that an attorney will file a return does not relieve the executor from his statutory duty to timely file the return. An executor might be excused if he reasonably relied on incorrect advice, such as no return was required, but here there was no evidence the executors even knew the filing deadline had passed, much less any evidence that they received errant advice.
Estate of Zlotowski v. Commissioner, T.C. Memo 2007-203 (July 24, 2007)
Lesson learned: You can't always blame the lawyer! Executors need to keep themselves informed about estate matters, including tax and other deadlines.
North Carolina is not known for its attractive estate planning and asset protection laws, but NC residents can avail themselves of certain out-of-state planning strategies that can provide significant estate tax savings and creditor protection. One state that has some of the most favorable laws is Nevada.
As a write this, I'm sitting in a hotel room in Las Vegas, having just finished up a meeting with nationally known estate planning and asset protection attorney Steve Oshins, whose office is located here. Mr. Oshins, who is published frequently in Trust & Estates magazine and Estate Planning magazine, has developed several innovative trusts and trust-related strategies, such as the Megatrust, the Inheritors Trust and the Opportunity Shifting Trust.
I have joined Mr. Oshins' Advanced Planning Legal Network to be able to bring these same types of techniques to my clients.
Click "Continue Reading" for a brief description of the advantages of using Nevada laws for estate planning.Continue Reading...
Yesterday the U.S. Senate approved an amendment to the Budget Resolution that would extend the 2009 estate tax rate (45%) and exemption ($3.5 million) through 2012. Under current law the estate tax would be "repealed" in 2010, but would return in 2011 with an exemption of only $1 million.
Click "Continue Reading" to view a report from Marshall Jones of West Palm Beach.Continue Reading...
An article in the February 24-25 issue of The Wall Street Journal describes how 529 College Savings plans can be used to reduce estate taxes. Earnings on the funds invested in such plans are tax-free if used for qualified college educational expenses. North Carolina residents also get a small tax deduction for contributions to North Carolina sponsored plans (Click "Continue Reading" for more information).
The plans allow the owner to maintain control over how the funds are used, and even change the beneficiary to another relative or the owner himself. If the funds are not used for educational expenses, taxes are due on the gains, along with a 10% penalty.
Gift tax rules allow using up to five years of the $12,000 annual gift tax exclusion at once, so that one person can put $60,000 into a plan in one year. For wealthy grandparents with multiple granchildren, this can add up to substantial estate tax savings. The current estate tax exemption is $2 million, so persons with estates over this amount may want to consider this technique. Before establishing the accounts, however, be sure to check with a qualified tax and investment advisor. There are fees associated with 529 Plans, and investment performance in many types of plans have been lackluster of the last several years.
Check out www.savingforcollege.com for a plethora of information on 529 Plans.Continue Reading...
Jeffrey Pennell, a professor at Emory Law School, was one of the featured speakers today at the Mid-South Forum ( meeting of estate planning attorneys) in Atlanta. In January I reported on his comments on the future of the estate tax at the Heckerling Estate Planning Institute in Orlando.
Professor Pennell believes that Congress will not act until late in 2009, and then will extend the $3.5 million estate tax exemption and reduce the rate to about 35%. He pointed out that for the country's extremely wealthy families - the ones that can influence Congress - the rate is much more important than a difference of a million dollars or two in the exemption amount.
An article by Robert Frank in yesterday's Wall Street Journal describes the recent dramatic drop in taxable estate tax returns. The rising estate tax exemption (currently $2 million), decreases in the tax rate, effective tax planning, increasing charitable giving by the super-wealthy and the advent of young dot.com millionaires all seem to be contributing to the reduction in returns and revenues.
In 2005 only 18,431 taxable estate tax returns were filed, one-third less than the year before, despite the fact that the number of millionaire households in the U.S. has increased more than twofold between 1995 and 2004.
The following news is from Stephanie Heilborn of the Milbank, Tweed law firm in New York City:
Russ Sullivan, Democratic Staff Director of the Senate Finance Committee, spoke at the joint meeting of the Estate & Gift Tax Committee and Trusts, Estates & Surrogate's Courts Committee of the NYC Bar Association last night. He provided some good insight into the current thinking on estate & gift tax reform.
Congress expects to address the estate tax in the second half of 2007. The bottom line is that for any bill to pass both houses, it cannot reduce the revenues raised by estate/gift tax by more than 50% (apparently the reason last year's proposal didn't pass is that it cost just a little too much (it reduced revenues by 60%) for some key Democratic senators to support it). Any new estate tax law is highly likely to contain the following provisions:
Step-up in basis (the feedback regarding carryover basis has been loudly and uniformly negative)
Estate tax exemption between $3.5 million and $5 million
Estate tax rate will correspond to the capital gains rate--possibly 15% rate for the first $5-10 million and a higher rate, which "will start with a 3", for the balance over that
Exemptions will be transferable between spouses
No state tax deduction (Apparently the state governors have been terrible lobbiers--not a single one has complained about the loss of state estate tax revenues.)
There will be "offsets" in exchange for the reduction in tax rates. These are likely to include restrictions on discounts available for family limited partnerships, especially those funded with mostly marketable securities. He told us, "Take a good look at some of the proposals from during the Clinton administration."
Unclear whether the estate and gift tax will be reunified--there has been disagreement within the Senate Finance Committee staffs
If we get to 2010 and no estate tax bill has been passed, they will extend the 2009 provisions for a while--even the more progressive Democrats agree that we can't go back to the pre-2001 law.
Finally, they do expect to issue technical corrections to the Pension Protection Act of 2006 sometime next year.
This is good news for most, but any new limitations on discounts available for family limited partnerships and limited liability companies could restrict planning for some wealthier taxpayers.
From EstatePlanningLawFirms.com on November 6, 2006:
Washington D.C. – Congressman Ted Poe (TX-02) announced that the House of Representatives passed H.R. 5638, the Permanent Estate Tax Relief Act of 2006. This bill will make certain provisions in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) permanent. Without the passage of H.R. 5638, the estate tax repeal and all other provisions of EGTRRA would sunset on December 31, 2010. This would cause taxes placed on estates to revert back to their previous rates which were significantly higher. The current lower tax rate allows citizens who die to leave more to their beneficiaries, and less to the government. This is important to family owned businesses of all sizes, many were forced to sell their business because they couldn’t pay the taxes when the owner died.
“The old saying goes that the only two certainties in life are death and taxes. Under an estate or death tax, small farmers and family minded individuals who saved their whole lives to leave something to their children have to pay taxes, die, and then pay taxes again. It is unconscionable that the government punishes people by taxing them in life and in death. I urge the Senate to pass this bill quickly so that President Bush can sign it in to law,” Poe said.
Important Provisions of H.R. 5638:
1-Reunifies the estate, gift and generation-skipping transfer taxes - giving individuals greater flexibility to make estate planning decisions during life.
2-Increases the exemption amount to $5 million per person effective January 1, 2010.
3-Reduces the rate of tax on estates up to $25 million to the capital gains tax rate (15 percent).
4-Reduces the rate of tax on estates of $25 million or more to twice the capital gains rate (currently 30 percent).
5-Simplifies estate tax planning by allowing married couples to take full advantage of the $5 million exemption by carrying over any unused exemption to the surviving spouse.
Due to #5, advance estate tax planning would not be as important, and would obviate the need for credit-shelter (bypass) trusts in many cases. Effectively, only couples with a net worth in excess of of $10 million would need to worry about estate taxes.
Since the Senate appears to be Democrat-controlled now, the chances of this bill passing is somewhat less now that than before the election. Prior estate tax relief has passed in the House, only to fail in the Senate.
When the Estate Tax is repealed (albiet for one year) in 2010, some heirs will face capital gains tax instead, with complicated and burdensome record keeping necessary. Check out this article at Bankrate.com, from which the chart below was taken...
|Tax cost of selling inherited assets:|
WASHINGTON - United States Senator Mary Landrieu, D-La., announced that she is introducing a bill to bring relief and reform to the federal estate tax system. Under Sen. Landrieu's proposal, 99.99 percent of Louisiana residents would no longer be subject to any federal estate tax whatsoever and there would be a rate cut for those who would still have a tax liability.
"This is a plan that has a chance to pass Congress," said Sen. Landrieu, who added that she hopes the plan will serve as the blueprint for future Congressional debate and compromise on the issue.
"Unlike the current law, my plan is clear, simple and fair," she said. "It gives most opponents of the estate tax what they want: a significant tax cut. It gives most reformers what they want: a stable and predictable system that enables long-term estate planning. It gives most small business people and farmers what they want: a chance to keep what they have built up in their families over a lifetime of hard work. And it does all of this in a way that is fiscally responsible."
"How can people do wise and informed estate planning under the current system, which is unstable, uncertain and unfair?" Sen. Landrieu asked. "We need certainty. We need reform. And we need relief. I think my proposal lays a clear, balanced path to each."
Under Sen. Landrieu's Estate Tax Relief and Reform Act of 2006, the federal estate tax exemption level would be set at $5 million per person and $10 million per couple. The current exemption is $2 million per person but falls to $1 million in 2011.
"By dramatically raising the exemption, we will effectively get most people of Louisiana out of the tax altogether and forever," Sen. Landrieu said. "This is especially beneficial for many small business owners and family farmers."
The current estate tax only applies to about two percent of estates nationwide, so the "relief" only helps a very small percentage of the population. With the Democrats likely to regain control of Congress, I don't think Senator Landrieu can count on her proposal passing. It's ironic that she feels the citizens of her state should be freed from the burden of the estate tax after she requested $250 billion in Hurricane Katrina relief last year.