Florida Estate Planning, Probate and Asset Protection

Your Estate Plan - Time for Some Spring Cleaning

WITH the federal tax on estates now kicking in at $5.25 million — or $10.5 million for a couple — it may seem that only the very wealthy need to worry about paying the tax. But that doesn’t mean that everyone else can forget about an estate plan.

We all are familiar with the annual family ritual known as “spring cleaning.” With the changes in the estate tax laws, this may be a good time for some “spring estate plan cleanup.”

Estate planning is an ongoing process, not a one-time event. Not only are there changes in tax laws, but your life and the lives of your loved ones are in a constant change of flux as you move through life together. Accordingly, keeping your estate plan up with life changes requires action, not complacency.

This message was brought home in a recent article by The New York Times titled “Estate Planning Remains a Moving Target Under the New Tax Law.” The article notes that new tax law makes the estate tax a far less likely threat to the life’s work of many Americans. In fact, the “permanent” nature of this most recent iteration of the tax law allows individuals to exempt $5.25 million from taxation (doubled to $10.5 for married couples). Even better, the exemption is set to index for inflation.

All that noted, no changes to the estate tax or any other transfer tax will change the necessity for responsible adult Americans to make sure their estate plans are current. For example, wills, trusts, beneficiary designations and even medical directives should be reviewed periodically.

As suggested in the original article, now is a great time to do some spring cleaning. It’s a chance to review what you have done, make any needed changes and perhaps tie up some loose ends.

Reference: The New York Times (April 26, 2013) “Estate Planning Remains a Moving Target Under the New Tax Law”

Credit Shelter Trusts – The Tried and True Tool

Credit shelter trusts are a way to take full advantage of state and federal estate tax exemptions. Although such trusts may appear needless unless you are a multi-millionaire, there are still reasons for those of more modest means to do this kind of planning, and one of the main ones is state taxes.

There are some estate planning tools that are just basic and vital, regardless of tax law changes. Unfortunately, some of these tools may be ignored by taxpayers (to their peril) when they appear to be eclipsed by changes in the tax laws. For the prudent taxpayers, however, old standbys like the credit shelter trust should not be swept aside.

Before the advent of portability as a method to maximize the full estate tax exemption available to married couples, such couples would oftentimes get caught in a marital deduction trap. In other words, the first spouse to die could pass all their wealth to the surviving spouse without triggering estate taxes, but upon the death of the surviving spouse only one spousal exemption (i.e., that of the surviving spouse) would be available to reduce estate taxes on the couples combined estate. Under the right circumstances, this was a recipe for disaster.

Enter the credit shelter trust, also known as a bypass trust, which was a way of avoiding that marital deduction trap. Nevertheless, recent changes to the federal estate tax laws now allow a decedent spouse to pass their assets and their estate tax exemption to their surviving spouse. This portability of the estate tax exemption can now give a married couple the power to shelter as much as $10.5 million tax-free.

So, no need for those credit shelter trusts? Not so fast! As addressed in a recent post in Elder Law Answers titled simply “Credit Shelter Trusts,” there is still plenty of life left in the this tried-and-true estate tax planning approach.

For starters, many states still have their own independent estate taxes at much lower levels than the $5.25 million level exempted per spouse under the federal estate tax exemption. More importantly, portability does not apply to such taxes. In addition, credit shelter trusts not only shelter assets from estate taxes, but they can protect an inheritance from the unsuccessful remarriage of the surviving spouse and general inheritance protection.

While there are myriad trust arrangements available to help you achieve your specific estate planning goals, the basic credit shelter trust is a proven tool that should be considered in the estate planning of every married couple.

Reference: Elder Law Answers (updated: April 18, 2013) “Credit Shelter Trusts”

Watch Out for “State” Estate Taxes

Federal estate taxes aren't an issue for most Americans. But you may need to worry about death taxes in your state.

Budgets are set to battle once more on Capitol Hill in the near future. All considered, estate planners are fairly content with the last battle and the federal estate tax laws that went into effect with the American Taxpayer Relief Act (ATRA) at the beginning of the year. Consequently, most taxpayers have been spared the federal estate tax. But don’t forget about what your state has in store for you.

As a recent Kiplinger article warns, the state level transfer taxes have not fallen away like the federal transfer tax. The article, titled “Beware States With Their Own Estate Taxes,” notes that fully 21 states (plus the District of Columbia) currently impose some kind of transfer tax, whether a death tax, an inheritance tax, or both simultaneously. Furthermore, if you pay too much attention to the federal tax, then you might think you are home free in terms of exempt amounts. Unfortunately, state taxes are, generally, set with much lower exemption amounts.

The Federal tax has been permanently set at a rather generous range with a $5.25 million exemption amount. On the other hand, New York starts taking a piece of the estate pie at $1 million.

If you live in a death tax state, now is the time to be planning to avoid or minimize the impact. For that matter, too, where do you plan your retirement? Crossing into a new state for retirement or late-in-life care is not just about passing the “Welcome” sign on the highway. Accordingly, remember to consider how your move will affect your assets and overall estate plan.

Then again, how much do you trust Congress and their idea of a “permanent” estate tax law?

Already these new budget battles have given platform to new calls for a change in the “permanent” federal estate tax exemption. In fact, the Obama Budget Proposal would reduce the just-agreed-upon “permanent” exemption from $5.25 million to $3.5 million (The Washington Times here).

Reference: Kiplinger (May 2013 issue) “Beware States With Their Own Estate Taxes”

IRS Estate Audits Increase

The IRS scrutinized estate tax returns more than any category of individual tax returns in tax year 2011, at close to a 30 percent rate of examination, while individual income tax returns with $1 million or more in income saw a slight decline in audit coverage, according to the "2012 Internal Revenue Service Data Book," issued March 25.

Whether it’s Caller I.D. or the return address on an envelope in your mailbox, no one likes to hear from the IRS. Audits are never good news. And it’s not just income taxes that are subject to them.

Estate tax return audits can be especially bad news. First, the estate tax return itself must be filed within nine months following the death of the loved one who owned the assets subject to the return. Second, to make matters worse, the IRS seems to be upping pressure on estate tax returns more than any other.

With tax season dying out for most of us (if you haven’t filed for an extension), the last thing you might want to hear about are audits of any kind. Nevertheless, the fiscally-minded writers at AccountingWeb want to warn taxpayers about this apparent IRS interest in estate tax returns in an article titled “IRS 2011 Audit Rates Show Estate Tax Returns under the Microscope.”

Bottom line: take this as fresh evidence to cross your “t’s” and dot your “i’s” when it comes to your own estate planning.

Reference: Accounting Web (March 27, 2013) “IRS 2011 Audit Rates Show Estate Tax Returns under the Microscope”

The “Permanence” of Portability

It certainly is possible that a future Congress could modify today's laws or even erase them completely. But in this case, it appears unlikely, tax lawyers say. The "portability" law … attracted strong bipartisan support in Congress. Perhaps more importantly, it generally makes sense—even though, like most tax laws, it can be tricky.

There may be battles aplenty over the budget, and many more to come. At least we have a set of solid laws set in stone under the recently passed American Taxpayer Relief Act of 2012 (ATRA), right? While it appears safe to breathe a bit easier, many people still don’t trust any tax law claimed to be “permanent” by Congress and the White House.

When it comes to making estate plans, certainty is an essential. Any uncertainty can wreak havoc on even the most carefully crafted plans. One popular “permanent” part of estate planning under ATRA is “portability.” Is it here to stay and can we trust it?

“Portability,” as you may well know, is the new ability of a spouse to pass their unused unified gift tax lifetime exemption and/or estate tax exemption on to their surviving spouse. It grew out of budget deals and then was made “permanent” under ATRA, also known as the bridge over the Fiscal Cliff.

As a questioner over in a recent Wall Street Journal Q&A (“Is Estate-Tax Portability Permanent?”) pointed out, estate tax “portability” is a great option but an act of Congress could just as easily undo it. What then?

The general consensus is that portability is probably here to stay and for a multitude of reasons. Assuming that remains true, the key to portability is to separate myth from reality. The first myth: portability is not automatic? The first reality: it can be rather complex, especially in terms of unintended consequences. For example, what happens when the surviving spouse remarries?

For the time being, perhaps you can breathe easier as to portability. The larger question, however, is what do you and your spouse hope to achieve through your estate plan from both tax and non-tax perspectives?

Reference: The Wall Street Journal (March 31, 2013) “Is Estate-Tax Portability Permanent?”

New Estate Tax Law - Estate Planning Review Recommended

After years of changes and political arm-twisting, the federal estate tax rules became clear and stable with the year-end fiscal cliff deal. They are now set permanently into the tax code - at least until the tax code changes again.

Do we now find ourselves living in the calm after the storm? The estate tax laws seem to have finally found a safe harbor after so many years of indecision, short-sighted planning, and even damage control. So are you confident with your estate planning, or are you still somewhat concerned?

As you may have heard, the midnight compromise signed into law just before the tax law shifted back ten years into the past, otherwise known as the American Taxpayer Relief Act of 2012 (or ATRA 2012), finally set estate laws and wealth transfer taxes into stone. While “permanent” and “tax law” may seem a bit oxymoronic, the deal struck in stone is at least better than the silly putty in play for a decade.

A recent Reuters article titled “New estate tax rules call for new planning tactics” is a clarion call to review your estate planning. Some of the tax changes may have created some unintended consequences you ought to investigate, especially with the more generous federal estate tax exemption amount.

Regardless, it is prudent to review your estate plan from time to time. After all, estate planning is a process, not an event.

Reference: Reuters (February 26, 2013) “New estate tax rules call for new planning tactics”

The Beauty and the Beast of the Estate Tax Rules

With the passage of the American Tax Relief Act of 2012 (ATRA), Congress finally made the estate tax rules permanent.

We certainly have been through some uncertain times regarding estate taxes over the past several years. From changing exemption amounts, to a one-year repeal, to “band-aid” fixes, the only thing certain about the federal estate tax was its uncertainty.

Until now.

Congress finally gave us permanent estate tax rules; and by permanent, I mean that except for a built in inflation factor for the estate and gift exclusion, the provisions don’t expire or change with the passage of time.

Interestingly, despite its potentially onerous tax bite, the federal estate tax remains largely a voluntary tax. As Forbes points out in a recent column, “Want to Avoid the Estate Tax Cliff? Five Ways to Help,” the new provisions still allow savvy planners to substantially reduce, or even eliminate, federal estate taxes -- even on estates that far surpass the $5.25 million exemption.

Forbes goes on to list five powerful strategies for reducing federal estate taxes:

      Gifting. The new provisions allow you to make tax-free lifetime gifts up to an amount equal to the federal estate tax exemption, currently $5.25 million. Straightforward gifting of assets while you are alive removes them -- and their future growth or appreciation -- from your estate tax-free.

      Discounting. There are still a myriad of techniques that can be used to discount the value of stock for transfer purposes. These techniques center on lack of control/minority interest and/or lack of marketability, and can create a substantial valuation discount.

      Loans. Family business owners can take advantage of historically low interest rates for loans used to execute sales of stock. As Forbes points out, “currently, a parent can sell shares of the family-owned business to the child for a fixed long term interest rate as low as 2.52%, and not incur a gift tax because of the loan rate.”

      Insurance. Properly purchased and owned, life insurance can be used to provide the cash needed to pay any federal estate taxes that may remain after other planning strategies are exhausted. Remember, the cash-call on federal estate taxes is due within nine months of the business owner's death.

      Charitable Giving. If the family is not interested in the business, but is interested in the wealth it has generated, a charitable gift of a business interest may be a savvy way to dispose of the business while also saving on taxes. As Forbes points out, “there are still a number of tax-smart ways to transfer the business to a nonprofit organization, and fulfill your estate planning goals.”

The beauty of the new estate tax rules is their permanence. The beast is their sting -- 40 percent on the first dollar over the exemption amount (currently $5.25 million). Failure to wisely plan for a potential estate tax liability can be disastrous for your family and/or your business.

Reference: Forbes (January 30, 2013) “Want to Avoid the Estate Tax Cliff? Five Ways to Help”

Some Surprising “Winners” in Fiscal Cliff Deal

… On the whole, small businesses fared pretty well in this fiscal cliff deal.

They say a true compromise is when everyone walks away a little unhappy. If that’s true, then the American Taxpayer Relief Act passed by Congress and touted as narrowly avoiding a Fiscal Cliff, was the truest of compromises. While no one got everything they wanted, there are some surprising winners in the deal. Business writer Kent Hoover of the Business Journal (Minneapolis-St. Paul) outlined his take on The 5 Winners of the Fiscal Business Awards:

• Small Business. Most small businesses avoided higher taxes when the threshold for increases was set at $450,000 instead of $250,000. Small business owners also should benefit from the $5.12 million estate tax exemption ($10.24 for a married couple), especially with the annual inflation adjustment. Finally, small business owners can immediately expense up to $500,000 in capital expenditures (such as new equipment), instead of having to claim depreciation over time. (Without the deal, the Section 179 annual expensing limit would have fallen to $25,000.)
• Physicians. Popularly known as the “doc fix,” Congress blocked a scheduled 26.5 percent decrease in Medicare reimbursements to doctors. (Beware, though, this block is only temporary, and doctors could face a decrease in 2014.)
• Manufacturers and Technology Companies. Many of these companies will take advantage of the research and development tax credit, which provides incentives for companies to do R&D in the U.S.
• Utilities. Congress kept the capital gains and dividends rate at 15 percent for households earning below $450,000 (20 percent for households above that threshold). This is in contrast to taxation at ordinary income tax rates as high as 39.6 percent for wealthy Americans. According to Hoover, “That would have been bad news for companies, notably utilities, that offer dividends in order to attract investors and raise capital. The steady income that dividends provide loses its attractiveness when it's taxed at such a high rate.”
• Wind energy, Hollywood and NASCAR. What would any tax code be without special-interests? This deal is no different. The wind energy industry gets a production tax credit for projects that begin construction this year. Hollywood studios get tax breaks for doing their television and film production in the U.S.  And NASCAR fans – for some reason Congress saw fit to extend a tax break for "motorsports racing track facilities."

For a look at some of the other industry-specific tax breaks, hop on over to The Wall Street Journal blog, “From NASCAR to rum, the 10 weirdest parts of the ‘fiscal cliff’ bill.”

Reference: Minneapolis-St. Paul Business Journal (January 3, 2013,) “The 5 winners of the Fiscal Cliff Business Awards are ...”

To Give or Not to Give

Discussions of the looming fiscal cliff have paid scant attention to estate and gift taxes.

But wealthy people might do well to consider being very generous this month and giving very large gifts at today’s bargain tax prices.

While the estate and gift tax has been in flux for the past decade, only its most recent uncertainty has forced the wealthiest to address their financial fate. A recent Forbes article, Give Now or Pay Later: Rich Face Dilemma With Fate Of Estate And Gift Taxes Up In Air, discusses, in plain language, the consequences of giving now or waiting.

Basically, the current estate and gift tax exempts $5 million of gifts or bequests and taxes any excess at 35 percent. And unless Congress takes action, on January 1, the tax will return to a $1 million exemption with the excess taxed at 55 percent. Accordingly, the wealthy may want to consider giving large gifts before the end of the year.

However, proceed with caution. If you are gifting assets to your nephew that have appreciated in value, your gift comes with your basis – the amount you paid for the asset. If your nephew sells the asset, he will owe tax on both your capital gain and any appreciation after the gift. If your nephew inherits the asset, however, he will only owe capital gains tax on the gains that occur after inheriting the assets. 

The undetermined fate of the federal estate and gift taxes has the potential to cause the wealthy to make ill-advised gifts. To avoid making one of these ill-advised gifts, and potentially costing you or your loved ones millions of dollars, consult with your estate planning attorney in advance.

Reference:  Forbes (December 17, 2012) “Give Now of Pay Later:  Rich Face Dilemma With Fate of Estate and Gift Taxes Up In Air”

Fiscal Cliff Killing Family Farms

Farmers worried about tax increases that would take effect Jan. 1 if Congress can't compromise on the so-called fiscal cliff have helped lead to a frenzy of farmland sales this fall. The worries about possible increases in capital gains and estate taxes are adding to the normally busy time for farmland sales after harvest in Iowa and Nebraska.

With the Fiscal Cliff looming with each passing day to 2013, family farms may be the latest casualty.

So, what’s the big deal? Why the flurry of family farm sales in 2012?

Some background is required to appreciate the problem. The perennial tax problem stalking family farms is that they are “illiquid assets.” The land is itself the primary asset enabling family farmers to make a living. Accordingly, when the land is sold there can be hefty taxes to pay. To make matters worse, if the death tax exemption drops to $1 million in 2013, then the heirs may be forced to sell the land just to pay the taxes.

More than a few news sources have shed light on this dilemma recently, to include the San Francisco Chronicle in an article titled “Farmland sales [are] brisk because of tax law changes.”

While the reality of the Fiscal Cliff is not good for farming families, it’s also not good for anyone owning real estate or other illiquid assets.

Going forward, do you have any illiquid assets or legacies worth leaving that require protection? Take a lesson from those that have already gotten to work: this takes action and forethought.

Reference: SFGate (San Francisco Chronicle) (November 25, 2012) “Farmland sales brisk because of tax law changes”