The Wiewel Law Firm, an estate planning law firm in Austin, Texas
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Category: Estate Tax

Balancing retirement with special needs planning

Creating a Family LLC for Estate Planning

If you want to transfer assets to your children, grandchildren or other family members but are worried about gift taxes or the weight of estate taxes your beneficiaries will owe upon your death, creating a family LLC for estate planning can help you control and protect assets during your lifetime, keep assets in the family and lessen taxes owed by you or your family members.

Investopedia’s article entitled “Using an LLC for Estate Planning” explains that a LLC is a legal entity in which its owners (called members) are protected from personal liability in case of debt, lawsuit, or other claims. This shields a member’s personal assets, like a home, automobile, personal bank account or investments.

Creating a family LLC for estate planning lets you effectively reduce the estate taxes your children would be required to pay on their inheritance. A LLC also lets you distribute that inheritance to your children during your lifetime, without as much in gift taxes. You can also have the ability to maintain control over your assets.

In a family LLC, the parents maintain management of the LLC, and the children or grandchildren hold shares in the LLC’s assets. However, they don’t have management or voting rights. This lets the parents purchase, sell, trade, or distribute the LLC’s assets, while the other members are restricted in their ability to sell their LLC shares, withdraw from the company, or transfer their membership in the company. Therefore, the parents keep control over the assets and can protect them from financial decisions made by younger members. Gifts of shares to younger members do come with gift taxes. However, there are significant tax benefits that let you give more, and lower the value of your estate.

As far as tax benefits, if you’re the manager of the LLC, and your children are non-managing members, the value of units transferred to them can be discounted quite steeply—frequently up to 40% of their market value—based on the fact that without management rights, LLC units become less marketable.

Your children can now get an advance on their inheritance, but at a lower tax burden than they otherwise would’ve had to pay on their personal income taxes. The overall value of your estate is reduced, which means that there is an eventual lower estate tax when you die. The ability to discount the value of units transferred to your children, also permits you to give them gifts of discounted LLC units. That lets you to gift beyond the current $15,000 gift limit, without having to pay a gift tax.

You can give significant gifts without gift taxes, and at the same time reduce the value of your estate and lower the eventual estate tax your heirs will face.

Speak to an experienced estate planning attorney about a family LLC, since estate planning is already complex. LLC planning can be even more complex and subject you to heightened IRS scrutiny. The regulations governing LLCs vary from state to state and evolve over time. In short, a family LLC is certainly not for everyone and it appropriately should be vetted thoroughly before creating one.

Reference: Investopedia (Oct. 25, 2019) “Using an LLC for Estate Planning”

 

Balancing retirement with special needs planning

Utilizing the SECURE and CARES Acts?

Are you utilizing the SECURE and CARES Acts in the best way possible? The SECURE Act made a number of changes to IRAs, effective January 1, 2020. It was followed by the CARES Act, effective March 27, 2020, which brought even more changes. A recent article from the Milwaukee Business Journal, titled “IRA planning tips for changes associated with the SECURE and CARES acts,” explains what account owners need to know.

Setting Every Community Up for Retirement (SECURE) Act

The age when you have to take your RMD increased from 70½ to 72, if you turned 70½ on or before December 31, 2019. Younger than 70½ before 2020? You still must take your RMDs. But, if you can, consider deferring any distributions from your RMD, until you must. This gives your IRA a chance to rebound, rather than locking in any losses from the current market.

Beneficiary rules changed. The “stretch” feature of the IRA was eliminated. Any non-spousal beneficiary of an IRA owner who dies after Dec. 31, 2019, must take the entire amount of the IRA within 10 years after the date of death. The exceptions are those who fall into the “Eligible Designated Beneficiary” category. That includes the surviving spouse, a child under age 18, a disabled or chronically ill beneficiary, or a beneficiary who is not more than ten years younger than the IRA owner. The Eligible Designated Beneficiary can take distributions over their life expectancy, starting in the year after the death of the IRA holder. If your estate plan intended any IRA to be paid to a trust, the trust may include a “conduit IRA” provision. This may not work under the new rules. Talk with your estate planning attorney.

IRA contributions can be made at any age, as long as there is earned income. If you have earned income and are 70 or 71, consider continuing to contribute to a Roth IRA. These assets grow tax free and qualified withdrawals are also tax free. If you plan on making Qualified Charitable Distributions (QCD), you’ll be able to use that contribution (up to $100,000 per year) from the IRA to offset any RMDs for the year and not be treated as a taxable distribution.

Coronavirus Aid, Relief and Economic Security (CARES) Act

The deadline for contributions for traditional or Roth IRAs this year is July 15, 2020. The 2019 limit is $6,000 if you are younger than 50 and $7,000 if you are 50 and older.

RMDs have been waived for 2020. This applies to life expectancy payments. It may be possible to “undo” an RMD, if it meets these qualifications:

  • The RMD must have been taken between February 1—May 15 and must be recontributed or rolled over prior to July 15.
  • RMDs taken in January or after May 15 are not eligible.
  • Only one rollover per person is permitted within the last 12 months.
  • Life expectancy payments may not be rolled over.

Individuals impacted by coronavirus may be permitted to take out $100,000 from an IRA with no penalties. They are eligible if they have:

  • Been diagnosed with SARS-Cov-2 or COVID-19
  • A spouse or dependent has been diagnosed
  • Have experienced adverse consequences as a result of being quarantined, furloughed or laid off or having work hours reduced due to the virus, are unable to work because of a lack of child care, closed or reduced hours of a business owned or operated by the individual or due to other factors, as determined by the Secretary of the Treasury.
  • Note that these distributions are still taxable, but the income taxes can be spread ratably over a three-year period and are not subject to the 10% early distribution penalty.

Keep careful records, as it is not yet known how any of these distributions/redistributions will be accounted for through tax reporting. All of these tips will allow you to utilize the SECURE and CARE Acts effectively.

Reference: Milwaukee Business Journal (June 1, 2020) “IRA planning tips for changes associated with the SECURE and CARES acts”

 

Balancing retirement with special needs planning

Looking at tapping an Inherited IRA?

Are you looking at tapping an inherited IRA this year?  The rules about when and how you can tap the money you inherited changed with the passage of the SECURE Act at the end of December 2019. It then changed again with the passage of the CARES Act in late March, in response to the financial impact of the pandemic.

Things are different now, reports the article “Read This Before You Touch Your Inherited IRA Funds” from the News & Record, but one thing is the same: you need to know the rules.

First, if the owner had the account for fewer than five years, you may need to pay taxes on traditional IRA distributions and on Roth IRA earnings. This year, the federal government has waived mandatory distributions (required minimum distributions, or RMDs) for 2020. You may take out money if you wish, but you can also leave it in the account for a year.

Surviving spouses who don’t need the money may consider doing a spousal transfer, rolling the spouse’s IRA funds into their own. The RMD doesn’t occur until age 72. This is only available for surviving spouses, and only if the spouse is the decedent’s sole beneficiary.

The federal government has also waived the 10% early withdrawal penalty for taxpayers who are under 59½. If you are over 59½, then you can access your funds.

The five-year method of taking IRA funds from an inherited IRA is available to beneficiaries, if the owner died in 2019 or earlier. You can take as much as you wish, but by December 31 of the fifth year following the owner’s death, the entire account must be depleted. The ten-year method is similar, but only applies if the IRA’s owner died in 2020 or later. By December 31 of the tenth year following the owner’s death, the entire IRA must be depleted.

Heirs can take the entire amount in a lump sum immediately, but that may move their income into a higher tax bracket and could increase tax liability dramatically.

A big change to inherited IRAs has to do with the “life expectancy” method, which is now only available to the surviving spouse, minor children, disabled or chronically ill people and anyone not more than ten years younger than the deceased. Minor children may use the life expectancy method until they turn 18, and then they have ten years to withdraw all remaining funds.

There is no right or wrong answer, when it comes to taking distributions from inherited IRAs. However, it is best to do so, only when you fully understand how taking the withdrawals will impact your taxes and your long-term financial picture. Speak with an estate planning attorney to learn how the inherited IRA fits in with your overall estate plan.

Reference: News & Record (May 25, 2020) “Read This Before You Touch Your Inherited IRA Funds”

 

Balancing retirement with special needs planning

GRAT Assets Included in Taxable Estate

The 9th U.S. Circuit Court of Appeals addressed whether a Grantor Retained Annuity Trust, or GRAT, should be included as a taxable asset in an estate, where the decedent died during the annuity period. The case, Badgley v. United States, was discussed in an article from Wealth Management titled “A String of Bad Luck: GRAT Assets Included in Taxable Estate.”

In 1988, Patricia Yoder created a GRAT, retaining the right to receive an annual annuity for a 15-year term. On the earlier of the term’s expiration and her death, the remainder interest would transfer to Patricia’s daughters under the terms of the GRAT. She funded the GRAT with a partnership interest valued at approximately $2.4 million. A gift tax return reporting the gift of the GRAT’s remainder interest was filed. She died in November 2012, just before the end of the GRAT term.

The family filed an estate tax return, and the entire date-of-death value of the GRAT was included in the gross estate. The executor of the estate then filed an action for a tax refund, claiming that only the present value of the unpaid annuity payments should have been included. A district court rejected that argument, stating that Patricia’s annuity interest was both a retained right to income and the continued enjoyment of the property, as defined in IRC Section 2036 and, therefore, was wholly includable.

The executor argued that it was not includible, as there is no explicit mention of annuities in Section 2036. The court disagreed, stating that “if the taxpayer does not let the property go, neither will the taxman.”

The court held that Section 2036 includes purportedly transferred property that the taxpayer continues to retain possession and enjoyment of, or a right to income. If there is enough of a connection from the owner to the transferred property, the property is included in the taxable estate.

In this case, the owner of the annuity received a substantial economic benefit from the GRAT, in the form of a 15-year annuity, so it was properly included in her estate.

When planning to minimize taxes during life and death, GRATs are frequently used to transfer appreciation from a person’s taxable estate with minimal or no gift tax, by reducing or zeroing out the value of the remainder interest, through fine-tuning the trust term and annuity amount.

However, there is a risk: there’s no way to know when a person will die. The successful use of the GRAT is predicated on avoiding the estate tax, in addition to the gift tax, and the GRAT success requires the person to survive the GRAT’s term.

An estate planning attorney working closely with the family and their financial professionals will need to explain how the GRAT works to ensure that it works to their estate’s benefit.

Reference: Wealth Management (May 13, 2020) “A String of Bad Luck: GRAT Assets Included in Taxable Estate”

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Balancing retirement with special needs planning

What are Three Areas of Giving Not to Skip?

It may be important to you that your family and the charities in which you believe, benefit from your success. Giving lets you practice your core values. However, for your giving to be meaningful, you need a plan to maximize your generosity.

Kiplinger’s recent article entitled “Gifting: 3 Areas You Shouldn’t Overlook” advises that there are many things to think about before gifting, and although there are benefits to estate planning, there are other issues to consider.

Think about your gifting goals. Any amount given to a family member, friend, or organization will no doubt be treasured, but ask yourself if the recipient really wants or values the gift, or it only satisfies your personal goals.

As far as giving to a charity, you should be certain that your donation is going to the right organization and will be used for your intended purpose. Your giving goals, objectives and motivations should match the recipient’s best interests.

If gifting straight to a family member is not a goal for you now, but you want to engage your family in your giving strategy and decision making, there are several gifting vehicles you can employ, like annual gifts, estate plans and trusts. Whichever one you elect to use, it will let you place an official process in the works for your strategy. Family engagement and a formalized structure can help your gift make the greatest impact.

There is more to gifting than just determining who and how much. It’s critical to be educated on the numbers, in order to maximize your gift value and decrease your tax exposure.

You can now gift up to $11.58 million to others ($23.16 million for a married couple) while alive, without any federal gift taxes. The amount of gift tax exemption used during your life also decreases your federal estate tax exemption. You should also be aware that this amount will fall back to $5 million (and $10 million for a married couple) indexed for inflation after 2025, unless renewed.

If you transfer your wealth to heirs and beneficiaries early and letting it compound over time, you can avoid significant estate taxes. In addition, note the annual gift exemption because with it, you can gift up to $15,000 ($30,000 as a married couple) to anyone or any kind of trust every year without taxes.

An experienced estate planning attorney can help you create a giving strategy to achieve success for you and those you are benefiting.

Reference: Kiplinger (March 19, 2020) “Gifting: 3 Areas You Shouldn’t Overlook”

 

Balancing retirement with special needs planning

Should I Give My Kid the House Now or Leave It to Him in My Will?

Transferring your house to your children while you’re alive may avoid probate, the court process that otherwise follows death. However, gifting a home also can result in a big, unnecessary tax burden and put your house at risk, if your children are sued or file for bankruptcy.

Further, you also could be making a big mistake, if you hope it will help keep the house from being used for your nursing home bills.

MarketWatch’s recent article entitled “Why you shouldn’t give your house to your adult children” advises that there are better ways to transfer a house to your children, as well as a little-known potential fix that may help even if the giver has since passed away.

If you bequeath a house to your children so that they get it after your death, they get a “step-up in tax basis.” All the appreciation that occurred while the parent owned the house is never taxed. However, when a parent gives an adult child a house, it can be a tax nightmare for the recipient. For example, if the mother paid $16,000 for her home in 1976, and the current market value is $200,000, none of that gain would be taxable, if the son inherited the house.

Families who see this mistake in time can undo the damage, by gifting the house back to the parent.

Sometimes people transfer a home to try to qualify for Medicaid, the government program that pays health care and nursing home bills for the poor. However, any gifts or transfers made within five years of applying for the program can result in a penalty period, when seniors are disqualified from receiving benefits.

In addition, giving your home to someone else also can expose you to their financial problems. Their creditors could file liens on your home and, depending on state law, get some or most of its value. In a divorce, the house could become an asset that must be sold and divided in a property settlement.

However, Tax Code says that if the parent retains a “life interest” or “life estate” in the property, which includes the right to continue living there, the home would remain in her estate rather than be considered a completed gift.

There are specific rules for what qualifies as a life interest, including the power to determine what happens to the property and liability for its bills. To make certain, a child, as executor of his mother’s estate, could file a gift tax return on her behalf to show that he was given a “remainder interest,” or the right to inherit when his mother’s life interest expired at her death.

There are smarter ways to transfer a house. There are other ways around probate. Many states and DC permit “transfer on death” deeds that let people leave their homes to beneficiaries without having to go through probate. Another option is a living trust.

Reference: MarketWatch (April 16, 2020) “Why you shouldn’t give your house to your adult children”

 

Balancing retirement with special needs planning

How Family Businesses Can Prepare Now for Future Tax Changes

The upcoming presidential election is giving small to mid-sized business owners concerns regarding changes in their business and the legacy they leave to family members. The recent article “How family businesses can come out on top in presidential election uncertainty,” from the St. Louis Business Journal looks at what’s at stake.

Tax breaks. The current estate tax threshold of $11.58 million is scheduled to sunset at the end of 2025, when it will revert to the pre-2018 exemption level of $5 million (as indexed for inflation) for individuals. If that law is changed after the election, it’s possible that the exemption could be phased out before the current levels end.

Increased tax liability. These possible changes present a problem for business owners. Making gifts now can use the full exemption, but future gifts may not enjoy such a generous tax exemption. Some transfers, if the exemption changes, could be subject to gift taxes as high as 40%.

Missed opportunity with lower valuations. Properly structured gifts to family members, which benefit from lower valuations (that is, before value appreciation due to capital gains) and current allowable valuation discounts give families an opportunity to pass a great amount of their businesses to heirs tax free.

Here’s what this might look like: a family business owner gifts $1 million in the business to one heir, but at the time of the owner’s passing, that share appreciates to $10 million. Because the gift was made early, the business owner only uses up $1 million of the estate tax exemption. That’s a $9 million savings at 40%; saving the estate from paying $3.6 million in taxes. If the laws change, that’s a costly missed opportunity.

It’s better to protect a business from the “Three D’s”—death, divorce, disability or a serious health issue, by preparing in advance. That means the appropriate estate protection, prepared with the help of an estate planning attorney who understands the needs of business owners.

Consider reorganizing the business. If you own an S-corporation, you know how complicated estate planning can be. One strategy is to reorganize your business, so you have both voting and non-voting shares. Gifting non-voting shares might provide some relief to business owners, who are not yet ready to give up complete control of their business.

Preparing for future ownership alternatives. What kind of planning will offer the most flexibility for future cash flow and, if necessary, being able to use principal? Grantor Retained Annuity Trusts (GRATs), entity freezes, and sales are three ways the owner might retain access to cash flow, while transferring future appreciation of assets out of the estate.

Know your gifting options. Your estate planning attorney will help determine what gifting scenario may work best. Some business owners establish irrevocable trusts, providing asset protection for the family and allowing the trust to have control of distributions.

Reference: St. Louis Business Journal (April 3, 2020) “How family businesses can come out on top in presidential election uncertainty”

 

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Distributing Inherited Assets in Many Accounts

This generous individual may be facing a number of legal and logistical hurdles, before assets in eight separate accounts can be passed to three relatives, says the article “Sorting through multiple inheritance accounts” from the Houston Chronicle. Does the heir need to speak with each of the investment companies? Would it make sense to combine all the assets into one account for the estate and then divide and distribute them from that one account?

If all the accounts were payable to this person upon the death of the brother, then the first thing is for the heir to contact each company and have all funds transferred to one account. It might be an already existing account in their name, or it may need to be a new account opened just for this purpose. The account could be at any of the brother’s investment firms, or it could be with a different firm.

If the accounts are not payable to the heir, but they are to be inherited as part of the brother’s estate, the estate must be probated before the funds can be claimed. In this case, it would be very helpful if the sole beneficiary is also the executor. This would put one person in charge of all of the work that needs to be done.

However, the person eventually will become the owner of all eight accounts. Once everything is in the heir’s name, then the assets can be distributed to the three relatives. There are some tax issues that must be addressed.

First, if the estate is large enough, it may owe federal estate taxes, which will diminish the size of the estate. The limit, if the brother died in 2020, is $11.58 million. If he died in an earlier year, the exemption will be considerably lower, and the estate and the executor may already be late in making federal tax payments. Penalties may apply, so a conversation with an estate planning attorney should take place as soon as possible.

If the brother lived in another state, there may be state estate or inheritance taxes owed to that state. While Texas does not have a state estate or inheritance tax, other states, like Pennsylvania, do. A consultation with an estate planning attorney can also answer this question.

When gifts are ultimately made to the three relatives, the first $15,000 given to each of them during a calendar year will be treated as a non-taxable gift. However, if any of the gifts exceed $15,000, the person will be using up their own $11.58 million exemption from gift and estate taxes. A gift tax return will need to be filed to report the gifts. If the heir is married, those numbers will likely double.

It may be possible to disclaim the inheritance, with the assets passing to the three relatives to whom the heir wishes to make these gifts. An experienced estate planning attorney will be able to work through the details to determine the best way to proceed with receiving and distributing the assets. Depending upon the size of the estate, there will be tax consequences that must be considered.

Reference: Houston Chronicle (March 24, 2020) “Sorting through multiple inheritance accounts”

 

Balancing retirement with special needs planning

Relocating for Retirement, Family … or Taxes?

When the current health crisis finally passes, many people will have spent time considering what they want to do with their remaining years. That may include relocating. For some people, taxes are a real reason to move to a new state, but some states are more tax-friendly than others, says the article “Best States to Die In…For Taxes” from Tucson.com.

No matter where you live, you have to pay federal estate taxes. However, there are eighteen states in the U.S. that require citizens to pay either estate taxes or inheritance taxes or both. The estate taxes are subtracted from an estate before its assets are distributed to heirs. Inheritance taxes are paid by heirs of the deceased, and it doesn’t matter if the heirs live in another state.

Here are the six states with inheritance taxes: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. The good news is that spouses are exempted from having to pay any inheritance taxes, and in New Jersey, it also applies to domestic partners. In some states, children and grandchildren are exempted, but not in Nebraska or Pennsylvania.

For people who live in Nebraska, immediate relatives must pay a 1% tax on inheritance amounts that are more than $40,000. In Pennsylvania, tax rates start at 4.5% for children and lineal heirs. Nebraska has the highest top inheritance tax rate of all the estates, at 18%. The others range from 10% to 16%.

Each state has certain exemptions, based on the amount of the inheritance and the heir’s relationship to the deceased. If you receive an inheritance from someone who lives in one of the inheritance tax states, speak with an estate planning attorney, so that you know what tax is due. State law categorizes heirs into types for the purposes of assigning exemptions and tax rates, and these vary by state.

The worst state to die in from an inheritance tax and estate tax perspective is Maryland, which imposes a 16% tax on inheritances above $5 million for persons who died in calendar year 2019. Until recently, New Jersey had a scaled estate tax that ranged from 0.8% to 16.0% on estates over $675,000, but the state no longer imposes any estate tax on the estate of decedents, who die on or after January 1, 2018.

Many inheritances pass through to spouses and children. The exemptions are generally fairly generous, so many people may not run into this issue with estate or inheritance taxes. However, if your estate includes a home within an expensive real estate market, your family may be in for some surprise taxes.

Meet with an estate planning attorney to learn what your state’s estate and inheritance tax rates are, and plan for the future. If you are in a high tax state, relocating may not be a bad idea. Your heirs will appreciate your planning.

Reference: Tucson.com (March 27, 2020) “Best States to Die In…For Taxes