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Category: Gift Tax

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”

 

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”

 

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”

 

Would an Early Retirement and Early Social Security Be Smart?

For older employees who are laid off as a result of the pandemic, the idea of an early retirement and taking Social Security benefits early may seem like the best or only way forward. However, cautions Forbes in the article “Should You Take Social Security Earlier Than Planned If You’re Laid Off Due to COVID-19?,” this could be a big mistake with long-term repercussions.

In the recession that began in 2008, there were very few jobs for older workers. As a result, many had no choice but to take Social Security early. The problem is that taking benefits early means a smaller benefit.

In 2009, one year after the market took a nosedive, as many as 42.4 percent of 62-year-olds signed up for Social Security benefits. By comparison, in 2008, the number of 62-year-olds who took Social Security benefits was 37.6 percent.

You can start taking Social Security early and then stop it later. However, there are other options for those who are strapped for cash.

There is a new tool from the IRS that allows taxpayers to update their direct deposit information to get their stimulus payment faster and track when to expect it. There is also a separate tool for non-tax filers.

Apply for unemployment insurance. Yes, the online system is coping with huge demand, so it is going to take more than a little effort and patience. However, unemployment insurance is there for this very same purpose. Part of the economic stimulus package extends benefits to gig workers, freelancers and the self-employed, who are not usually eligible for unemployment.

Consider asking a family member for a loan, or a gift. Any individual is allowed to give someone else up to $15,000 a year with no tax consequences. Gifts that are larger require a gift tax return, but no tax is due. The amount is simply counted against the amount that any one person can give tax free during their lifetime. That amount is now over $11 million. By law, you can accept a loan from a family member up to $10,000 with no paperwork. After that amount, you’ll need a written loan agreement that states that interest will be charged – at least the minimum AFR—Applicable Federal Rate. An estate planning attorney can help you with this.

Tap retirement accounts—gently. The stimulus package eases the rules around retirement account loans and withdrawals for people who have been impacted by the COVID-19 downturn. The 10% penalty for early withdrawals before age 59½ has been waived for 2020.

If you must take Social Security, you can do so starting at age 62. In normal times, the advice is to tap retirement accounts before taking Social Security, so that your benefits can continue to grow. The return on Social Security continues to be higher than equities, so this is still good advice.

Reference: Forbes (April 15, 2020) “Should You Take Social Security Earlier Than Planned If You’re Laid Off Due to COVID-19?”

 

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”

 

Why Gifting during Volatile Markets Makes Sense

Gifting assets to a trust for children or grandchildren is often an important part of an estate plan. The recent article “Is Now a Good Time to Make a Gift?” from The National Law Review takes a close look into the strategy of placing non-cash assets into a trust, without exceeding the annual gift tax exclusion amount or the Federal Gift Tax Exemption. If those assets increase in value later, the increases will further enhance the gift for beneficiaries.

Taxes on gifts made to a trust to benefit children and grandchildren are based primarily on the value of the gift. Annual exclusion gifts, that is, transfers of assets or cash that do not exceed the annual gift tax exclusion, are currently set at $15,000 per recipient per year. A married couple may give up to $30,000 per person in any calendar year. Many annual exclusion gifts do not require a Federal Gift Tax Return (Form 709), although it would be wise to speak with an estate planning attorney to make sure that this applies to you, since every situation is different.

Annual exclusion gifts are one way to reduce the overall value of the estate, but they do not reduce the Federal Estate Tax Exemption of the person making the gift.

Gifts in excess of the annual exclusion amount may still avoid gift taxes, if the person making the gift applies their gift tax exemption by filing IRS Form 709. The gift tax exemption is unified with the estate tax exemption, at $11.58 million per person in 2020. Gifts that are bigger than the annual exclusion of $15,000 per year, reduce the $11.58 million exemption for purposes of both the gift tax and the estate tax.

For example, if a person were to make taxable gifts of $1.0 million to a child in 2020, their lifetime gift tax and estate tax exemption will be reduced to $10.58 million. If that person were to die in 2020 when the applicable estate tax exemption is $10.58 million, then only estate assets in excess of the exemption will be subject to estate tax.

Given the uncertainly of the gift and estate tax exemptions, management and timing of these gifts is particularly important. If no legislative action occurs, these generous estate and gift tax exemptions will sunset at the end of 2025. They will return to the 2010 level of $5.0 million, indexed for inflation.

The exemptions need to be carefully used and budgeted, because federal estate tax starts at 18% and rises to 40% on all amounts over the exemption. Like the exemption, these rate rates may be changed by future elections and/or tax law changes.

If you are concerned about an estate becoming taxable, the current decline in asset values makes this a good opportunity to transfer more of the estate into trust for beneficiaries. The transfers can decrease the impact of a reduction in the exemption amount, as well as any changes to the tax rates. The currently reduced value of stocks and many other investments may also present an opportunity to reduce future taxes.

The best way forward would be to have a conversation with an estate planning attorney to review your overall estate plan and how moving assets into trusts during a time of lowered value could benefit the estate and its beneficiaries.

Reference: The National Law Review (April 10, 2020) “Is Now a Good Time to Make a Gift?”

 

What’s the Difference Between an Inter Vivos Trust and a Testamentary Trust?

Trusts can be part of your estate planning to transfer assets to your heirs. A trust created while an individual is still alive is an inter vivos trust, while one established upon the death of the individual is a testamentary trust.

Investopedia’s recent article entitled “Inter Vivos Trust vs. Testamentary Trust: What’s the Difference?” explains that an inter vivos or living trust is drafted as either a revocable or irrevocable living trust and allows the individual for whom the document was established to access assets like money, investments and real estate property named in the title of the trust. Living trusts that are revocable have more flexibility than those that are irrevocable. However, assets titled in or made payable to both types of living trusts bypass the probate process, once the trust owner dies.

With an inter vivos trust, the assets are titled in the name of the trust by the owner and are used or spent down by him or her, while they’re alive. When the trust owner passes away, the remainder beneficiaries are granted access to the assets, which are then managed by a successor trustee.

A testamentary trust (or will trust) is created when a person dies, and the trust is set out in their last will and testament. Because the creation of a testamentary trust doesn’t occur until death, it’s irrevocable. The trust is a created by provisions in the will that instruct the executor of the estate to create the trust. After death, the will must go through probate to determine its authenticity before the testamentary trust can be created. After the trust is created, the executor follows the directions in the will to transfer property into the trust.

This type of trust doesn’t protect a person’s assets from the probate process. As a result, distribution of cash, investments, real estate, or other property may not conform to the trust owner’s specific desires. A testamentary trust is designed to accomplish specific planning goals like the following:

  • Preserving property for children from a previous marriage
  • Protecting a spouse’s financial future by giving them lifetime income
  • Leaving funds for a special needs beneficiary
  • Keeping minors from inheriting property outright at age 18 or 21
  • Skipping your surviving spouse as a beneficiary and
  • Making gifts to charities.

Through trust planning, married couples may use of their opportunity for estate tax reduction through the Unified Federal Estate and Gift Tax Exemption. That’s the maximum amount of assets the IRS allows you to transfer tax-free during life or at death. It can be a substantial part of the estate, making this a very good choice for financial planning.

Reference: Investopedia (Aug. 30, 2019) “Inter Vivos Trust vs. Testamentary Trust: What’s the Difference?”

 

What Does Recent Legislation Mean for the Generation-Skipping Transfer Tax (GSTT) Exemption?

Congress has made some significant changes through the planned sunset of the Tax Cuts and Jobs Act (TCJA) increased exemptions and through the recent changes to retirement planning in the Secure Act.

Think Advisor’s recent article entitled, “Estate Planning Tips and Updates,” looks at some of the most notable of these.

  1. Increased Estate Tax Exemption Amounts. The current applicable exemption amount of $11.58 million each (or $23.16 million for a married couple) lets many people totally avoid transfer taxes. However, the applicable exclusion amount reverts to its prior inflation adjusted amount in 2026. Therefore, if you have a gross estate of $11 million and previously made, say, $7 million of gifts, the rules eliminate any claw back of those gifts, if death occurs in 2026. However, you have no applicable exclusion amount remaining, says the IRS. As a result, after the sunset, you have a gross estate of $4 million and no remaining exemption. With this example, you’d be wise to consider implementing one or more strategies, including gifts and sales to grantor trusts, before the end of 2025 to be certain you fully use the disappearing exemption.
  2. The Increased Generation-Skipping Transfer Tax (GSTT) Exemption. The TCJA also upped the GSTT exemption to $11.58 million each. This allows many people to exempt transfers for several generations, if not in perpetuity, under the laws of certain states. However, they must intentionally draft trusts to establish legal situs in states like Nevada to leverage longer perpetuities periods. This will result in avoiding additional estate, gift and GSTT taxes for longer periods, normally a net positive.
  3. Annual Exclusion Gifts. Regardless of the increased exemption amounts, continued annual exclusion gifts (currently $15,000) are still going to be a crucial component of most estate tax reduction planning, removing the amount of the gift and its future appreciation. The tax-exclusive nature of the gift tax makes gifts more tax-efficient.
  4. Basis Harvesting. The increased exemption amounts often will result in some people with previous trust planning no longer having estate tax issues. These people could look at reforming, amending, or decanting an existing trust to add older generations in a manner to cause inclusion in their estates. This inclusion triggers the basis step-up rules in the code and may dramatically reduce taxes upon a liquidity event, like the sale of a business interest previously gifted or sold over to the trust.
  5. Secure Act Age Changes. For those born after July 1, 1949, the Act raises the beginning age for minimum distributions (RMDs) to 72.
  6. Employer Inducements. The Act increases the current $500 credit for setting up a retirement plan to $5,000 in some situations and provides a $500 credit for three years to encourage the use of auto-enrollment.
  7. Inherited IRAs. The Act substantially restricts the use of “stretch” IRAs. For deaths after December 31, 2019, a recipient of an IRA from the deceased must generally take distributions from the IRA over no more than a 10-year period. However, the new rules exempt accounts inherited by a spouse, a minor child, a disabled or chronically ill person, or anyone less than 10 years younger than the deceased account owner.
  8. Annuities. The “stretch” IRA provisions also apply to annuities with one important exception. Annuities making payments before January 1, 2020, may still pay out over two lives. The new law encourages greater investment in annuities through 401(k) plans, and especially plans offered by smaller businesses, by decreasing the risk associated with offering annuities. As a result, employers offering annuities as investments won’t have fiduciary duties as to those potential annuity investments, assuming they choose an issuer in good standing with the applicable state insurance commission. The Secure Act also offers portability for annuities, if you change jobs. This is a direct transfer between retirement plans.

Reference: Think Advisor (March 25, 2020) “Estate Planning Tips and Updates

How Do I Revoke a Trust on My Home?

There are a number of issues to consider, says nj.com’s recent article entitled “I want to revoke a trust on my house. What do I do?” To revoke a trust on a house, will require the assistance of an experienced estate planning attorney.

The answer to a question about how to get out of a trust on a home is going to be in the terms of the trust itself. However, if the terms of the trust are silent, the answer may be found in the trust laws in the state statutes.

However, if answering the question in general terms, the primary concern is whether the trust is revocable or irrevocable. If the trust is irrevocable, it means that the house can’t be removed from the trust. The exception to this rule is with a court order. Obtaining court approval can be very expensive and time consuming. In addition, there’s no guarantee you’ll get that approval, because courts frequently deny the requests depending on the facts of the case.

The first step is to determine whether the trust is revocable. You will then need to see who you are in relation to the trust.

Without a court order, the only person (or entity) who the trustee can sign a deed transferring a house that’s owned by a trust is the trustee.

The trust is set up to be managed by the trustee, rather than by any of the beneficiaries of the trust. Thus, for any change in the status of the house to occur, the trustee has to be in agreement that this should be done.

Next, let’s look at the reason why the home was initially put in a trust.

If the purpose was to lower estate taxes, it may make sense to remove the house from trust. This is especially the case, if the state no longer has an estate tax, like New Jersey which just got rid of theirs a few years ago, or there was never any state estate tax. An estate rarely meets the threshold for federal estate taxes.

However, if the house was put in the trust for purposes of asset protection as part of a long-term care plan, there aren’t many good reasons to take the house out of trust. The trust can sell the house and hold onto the proceeds or purchase another house without jeopardizing the asset protection plan.

Reference: nj.com (Feb. 4, 2020) “I want to revoke a trust on my house. What do I do?”

 

C19 UPDATE: IRS Postpones Gift and GST Tax Filing Deadline to July 15

The IRS has expanded the list of deadline extensions for federal taxes and tax returns to include gift and generation-skipping transfer (GST) tax returns. An earlier notice had applied only to federal income tax returns and payments (including self-employment tax payments) due April 15, 2020, for 2019 tax years, and to estimated income tax payments due April 15, 2020, for 2020 tax years.

Notice 2020-20 updates earlier guidance to include the gift and GST deadline extensions.

What Are Gift and GST Taxes?

Gift Taxes. The Internal Revenue Code imposes a gift tax on property or cash you give to any one person, but only if the value of the gift exceeds a certain threshold called the annual gift tax exclusion, currently $15,000 per person. You can give away the amount of the exclusion each year without incurring a tax. The giver is responsible for paying this tax, not the recipient.

GST Taxes. The generation-skipping transfer (GST) tax can be incurred when grandparents directly transfer money or property to their grandchildren without first leaving it to their parents. These types of transfers share the same lifetime exemption as the federal estate and gift taxes, and are also subject to an annual exclusion limit of $15,000 per person.

Resource: Financial Planning, IRS postpones deadline for gift and GST taxes due to coronavirus, https://www.financial-planning.com/news/irs-offers-relief-on-gift-and-generation-skipping-transfer-taxes-due-to-coronavirus