Florida Estate Planning, Probate and Asset Protection

New Lexus Under Your Christmas Tree? Mind The Gift Taxes!

 

Did you get any exciting gifts this holiday season? What’s not so exciting are the tax implications that may come with them. We often get questions about those implications this time of year so let’s take a look at some of the most common tax myths about gifts.

Christmas is over and you might have even gotten all the tinsel out of the house by now, but that doesn’t mean you’re done giving gifts. It’s likely you’re just now turning to the largest “gifts,” as your think about taxes and your estate plan. To that end, an article about the “5 Common Tax Myths About Gift Giving” came out recently in Forbes.

Myth: You have to pay taxes on gifts that you receive. False. You pay gift taxes on the gifts you give, not on what you receive. The reason for the gift tax is to keep people from avoiding the estate tax by simply “giving” it away while they are alive. Accordingly, the person that does the giving accepts the tax liability. (That said, the receiver may then owe other taxes since they now own the assets, but that’s all in the course of ownership).

Myth: You pay a tax on gifts you make that are over $10k. This is not entirely true since there are a number of other factors. For starters, the amount is now closer to $13k worth of gifts in a year. However, gifts to spouses (so long as they are citizens) and approved charities don’t count against that limit. If you do exceed that amount, it will first count against your lifetime exemption of $5 million. Remember to file a gift tax return with your 2011 income tax filing.

Myth: You can give freely by offering them as loans and then forgiving the loans. False, the IRS is out in front of you on that, too. Loans are loans anad gifts are gifts. Should the IRS feel you’re treating a loan as a gift, it will consider it as such.

Myth: Charitable deductions can always be deducted against your taxable income. Not quite. First, charitable deductions can only be claimed if the IRS recognizes the charity as a charity. Second, you can only deduct the effective amount given. So, if you receive anything of value in return, then such value counts against the value of your charitable contribution (e.g., a $100 gift is only a $60 charitable deduction, if you receive a $40 steak dinner in return).

Finally, one other myth is that you need not worry about how your home state treats gifts, independent of the IRS. No, each state has its own quirks regarding deductions and ownership.

For that matter, too, it’s worth noting that these amounts and rules are subject to evolving tax law which is in the cross hairs of 2012 politics and may, therefore, change within a year.

Reference: Forbes (December 27, 2011) “5 Common Tax Myths About Gift Giving”

 

 

 

 

Opportunities And Traps: Non-Citizen Gifting Gotchas

 

Wealthy non-citizens who live in the U.S., but who are not certain whether they are subject to U.S. gift and estate taxes, can (in some cases) take advantage of the new law to hedge their gifting.

 

Often, American citizens aren’t the only ones subject to American taxes. So, it isn’t only American citizens who have something to gain from the recent tax law changes. We’ve all been given a generous tax windfall for 2011 and 2012 when it comes to gift and estate taxes, and, according to a recent article in Private Wealth, it may be an especially windfall for wealthy non-citizens.

For a wealthy non-citizen residing in the U.S., the problem is their possible tax liabilities lie within a hazy zone between a “domiciled resident” and a “non-domiciled resident.” The initial guidelines for determining domicile status are (1) they must reside in the U.S. and (2) they intend to reside in the U.S. indefinitely. While the fact of residence is fairly easily ascertained, it is the “intent” issue where a number of factors come into play (like residence size, organizational memberships, and the location of burial plots). Oftentimes, it is difficult to predict what the IRS will conclude. Accordingly, you might never know with certainty whether you are or are not a domiciled resident.

The difference in taxes is vast. A domiciled resident is subject to U.S. gift and estate taxes on all assets, whereas a non-domiciled resident is only subject to taxes on U.S.-based assets (physical ones, usually, such as art). If you know you are a non-domiciled resident, then you can transfer massive amounts of wealth without U.S taxation – and it might be wise to do so. However, if it is later determined that you were, in the opinion of the IRS, domiciled, then you’ll be subject to tax, interest, and possible penalties. That wouldn’t be a pleasant surprise, to say the least.

The idea, then, is to play it safe. Hedge your bets by transferring assets as though you were domiciled. You’ll still be transferring assets, but you’ll be safer doing so. The sooner the better for domiciled, non-domiciled, and citizen alike, however, since we’re only guaranteed the present exemptions until the end of 2012.

The original article goes into far more depth, and certainly more information can be found there. Nevertheless, if this issue may touch or concern you, then you should meet with counsel to assess your potential liability… and the best way to hedge your bets.

Reference: Private Wealth (July 2011) “Foreigners and the Gift Tax”

 

ESTATE PLANNING / ESTATE TAXES

 From Forbes.com (Feb 4, 2011) “Estate Tax Lessons From George Steinbrenner, Gary Coleman And More”

" Big changes on the estate tax front this year call for smart planning. Celebrities provide motivation."

The New Year is well underway, and we’re three months into a new estate tax law as well. Now is a good time to review your estate plan, and Forbes.com provides some “motivation” for proper legal planning by recounting tips we could all learn from last year’s highly-publicized celebrity estates.

Tip # 1 – Familiarize Yourself with 2011 Estate Tax Laws. George Steinbrenner, as you may recall, timed his death well by passing away in 2010 when there was no estate tax. Of course, while his estate was highly publicized, other wealthy people died last year, too – and now their heirs can elect whether to use the 2010 or the 2011 laws, picking whichever regime is most advantageous.

What are the 2011 estate tax laws? In a nutshell, the federal estate tax is back, at a maximum rate of 35 percent, with a $5 million exemption for individuals and a $10 million exemption for married couples. The gift tax and generation skipping tax are both set at the same $5 million level. Additionally, the annual gift exclusion remains $13,000 per individual per year.

The catch? These new laws are just temporary, in effect only through 2012. So don’t become complacent. You’ll want to stay tuned to see what develops, and what happens next. Sort of like a daytime drama, eh?

One good way to stay on top of the law is to subscribe to this blog and visit our website to subscribe to our monthly e-newsletter. We will post news as it develops.

Tip #2 – Review and Update Your Estate Planning Documents. As you may recall, Gary Coleman broke this critical rule. He created a handwritten codicil to his will leaving much of his estate to his then-wife. They later divorced, however, and Coleman never updated his will or created a new one. This led to a court fight that could have easily been avoided had Coleman updated or made a new will, making his wishes clearly known. Your wills, trusts, powers of attorney and other documents (including health care directives) should be reviewed and updated every few years – or whenever you experience significant life events like a marriage, divorce, move to another state, birth of a child or grandchild, etc.

Learn more about the estate plan review process on our website www.kaneandkoltun.com.

Tip # 3 – Beware of Financial Exploitation. Forbes notes the circumstances surrounding Anna Nicole Smith and her protracted legal siege as an example of what not to do. 2010 marked the fifteenth year of fighting, and the Supreme Court’s ruling that it will hear her case once more, of whether or not her late 90-year-old husband left his estate to her. Some allege the young model was financially exploiting her (wealthy) elderly husband.

This year the first of the baby boomers will turn 65, along with approximately 2.5 million of their peers. Exploitation of those 65 and older is a growing epidemic: a study by Met Life found that seniors are exploited in the amount of $2.6 billion annually. This figure is only expected to grow as the baby boomers hit retirement age.

Good estate planning is one of the first lines of defense against financial exploitation. With solid legal documents spelling out your wishes regarding your estate, your personal and health care decisions, and proper planning for long-term care, you will be better protected than most. Which means you will not be an “easy target.”

Learn more about fundamental estate planning on our website.

 

ESTATE PLANNING / TRANSFER TAXES

From: Robert Wood of Forbes in the November 9^th article, “Estate Tax Steps For This Year”

                 As you surely know by now, the Federal Estate Tax lapsed in 2010 and Congress has not yet decided what to do about it. Last week I ran across another good end-of-year planning article, written by Robert Wood for Forbes. I think his tips are worth repeating here.

1. Remember that, even though there is no estate tax this year, executors for estates valued at more than $1.3 million still must file an “informational” return with the IRS.
   
   
2. While some (morbid) people are referring to this as “the year to die,” it is perhaps more importantly “the year to give.” The Gift Tax is still in place at 35%, with an annual exclusion of $13,000 per person ($26,000 for a married couple who choose to combine their gifts). While that may seem steep, it’s actually a bargain compared to the 55% tax expected to go into effect next year. If giving in large amounts is in your plans, consider doing so before year’s end.
   
   
3. Finally, the Estate Tax didn’t die alone. The Generation Skipping Transfer (GST) Tax also is lapsed until December 31^st. The GST Tax works as the name suggests by taxing the transfer of funds that skip a generation, say from parent to grandchild or great grandchild. It is applied in addition to the gift tax when you make a large gift to your grandchild. The GST returns next year, and while grandparents will still be able to shield as much as $1.31 Million, any more than that will be subject to GST at 55% in addition to the Gift Tax (expected to be 55% as well). If you plan on a very large gift across generations, now is the time.

 

Visit the Estate Tax practice center on our website to learn more about these transfer taxes.