Category: Tax Planning

The Estate of The Union Season 2|Episode 4 – How To Give Yourself a Charitable Gift is out now!

The Estate of The Union Season 2|Episode 4 is out now!

The Estate of The Union Season 2|Episode 4 – How To Give Yourself a Charitable Gift is out now!

This is the time of the year when people feel most inclined to provide donations to organizations and charities that mean something to them. The saying goes that “Charity Begins at Home”, but sometimes you can give money to charity and bring it back home too – No Kidding!

In this episode, Brad Wiewel discusses charitable donations and how you can use “give and get” techniques to turn those donations into income and tax deductions for yourself. Just in time for the holiday season. You do not want to miss this one! These are complex estate and tax matters, requiring the guidance of an experienced estate planning attorney for optimal results. If you would like to learn more about charitable giving in your estate planning, please visit our previous posts. 

In each episode of The Estate of The Union podcast, host and lawyer Brad Wiewel will give valuable insights into the confusing world of estate planning, making an often daunting subject easier to understand. It is Estate Planning Made Simple! The Estate of The Union Season 2|Episode 4  – How To Give Yourself a Charitable Gift can be found on Spotify, Apple podcasts, or anywhere you get your podcasts. If you would prefer to watch the video version, please visit our YouTube page. Please click on the link below to listen to the new installment of The Estate of The Union podcast. We hope you enjoy it.

The Estate of The Union Season 2|Episode 4 – How To Give Yourself a Charitable Gift is out now!

 

Texas Trust Law focuses its practice exclusively in the area of wills, probate, estate planning, asset protection, and special needs planning. Brad Wiewel is Board Certified in Estate Planning and Probate Law by the Texas Board of Legal Specialization. We provide estate planning services, asset protection planning, business planning, and retirement exit strategies.

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A Few Ways to Transfer Home to Your Children

A Few Ways to Transfer Home to Your Children

There are a few ways to transfer your home to your children. Kiplinger’s recent article entitled “2 Clever Ways to Gift Your Home to Your Kids” explains that the most common way to transfer a property is for the children to inherit it when the parent passes away. An outright gift of the home to their child may mean higher property taxes in states that treat the gift as a sale. It’s also possible to finance the child’s purchase of the home or sell the property at a discount, known as a bargain sale.

These last two options might appear to be good solutions because many adult children struggle to buy a home at today’s soaring prices. However, crunch the numbers first.

If you sell your home to your child for less than what it’s worth, the IRS considers the difference between the fair market value and the sale price a gift. Therefor., if you sell a $1 million house to your child for $600,000, that $400,000 discount is deemed a gift. You won’t owe federal gift tax on the $400,000 unless your total lifetime gifts exceed the federal estate and gift tax exemption of $12.06 million in 2022, However, you must still file a federal gift tax return on IRS Form 709.

Using the same example, let’s look at the federal income tax consequences. If the parents are married, bought the home years ago and have a $200,000 tax basis in it, when they sell the house at a bargain price to the child, the tax basis gets split proportionately. Here, 40% of the basis ($80,000) is allocated to the gift and 60% ($120,000) to the sale. To determine the gain or loss from the sale, the sale-allocated tax basis is subtracted from the sale proceeds.

In our illustration, the parent’s $480,000 gain ($600,000 minus $120,000) is non-taxable because of the home sale exclusion. Homeowners who owned and used their principal residence for at least two of the five years before the sale can exclude up to $250,000 of the gain ($500,000 if married) from their income.

The child isn’t taxed on the gift portion. However, unlike inherited property, gifted property doesn’t get a stepped-up tax basis. In a bargain sale, the child gets a lower tax basis in the home, in this case $680,000 ($600,000 plus $80,000). If the child were to buy the home at its full $1 million value, the child’s tax basis would be $1 million.

Another way to transfer your home to your children is to combine your bargain sale with a loan to your child, by issuing an installment note for the sale portion. This helps a child who can’t otherwise get third-party financing and allows the parents to charge lower interest rates than a lender, while generating some monthly income.

Be sure that the note is written, signed by the parents and child, includes the amounts and dates of monthly payments along with a maturity date and charges an interest rate that equals or exceeds the IRS’s set interest rate for the month in which the loan is made. Go through the legal steps of securing the note with the home, so your child can deduct interest payments made to you on Schedule A of Form 1040. You’ll have to pay tax on the interest income you receive from your child.

You can also make annual gifts by taking advantage of your annual $16,000 per person gift tax exclusion. If you do this, keep the gifts to your child separate from the note payments you get. With the annual per-person limit, you won’t have to file a gift tax return for these gifts. If you would like to learn more about managing property in your estate planning, please visit our previous posts. 

Reference: Kiplinger (Dec. 23, 2021) “2 Clever Ways to Gift Your Home to Your Kids”

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IRS Announced New Lifetime and Gift Tax Exemptions

IRS Announced New Lifetime and Gift Tax Exemptions

There’s big news from the IRS for people who use gifting as part of their estate planning. The IRS announced new lifetime and gift tax exemptions. The annual exclusion increased from $16,000 in 2022 to $17,000 in gifts in 2023, without needing to use up lifetime gift and estate tax exclusion or paying a gift tax. The article “Lifetime Estate and Gift Tax Exemption Will Hit $12.92 Million in 2023” from Forbes provides details.

The “unified credit,” aka the lifetime estate and gift tax exemption, will also jump to $12.92 million in 2023, up from $12.06 million in 2022. Couples may combine their exemption, so a wealthy couple making gifts in 2023 can pass along $25.84 million.

Here is another way to look at what this change means. If you’ve already maxed out on non-taxable gifts, you can give an extra $1.72 million to heirs in 2023, in addition to making $34,000 per couple ($17,000 x two) in annual gifts to every child, grandchild, siblings, niece or nephew or anyone you’re feeling generous towards.

In addition to making these generous $17,000 gifts, you can also pay an unlimited amount towards someone else’s tuition or medical expenses without any impact to your lifetime exemption. An important detail: the payments must be made directly to the school or the medical provider.

The estate tax is still 40%, but the $12.92 million per-person lifetime exemption is just one of many strategies used to transfer wealth. Others include the use of GRATs and other trusts to leverage the exemption. The bear market provides numerous planning opportunities.

Keep in mind that, while the IRS announced new lifetime and gift tax exemptions for 2023, the $12.92 million exemption is not forever. Under the 2017 Tax Cuts and Jobs Act, the lifetime exemption will sunset in the start of 2026, and the decrease will be more than half its current value.

Whether the estate and gift tax exemption will actually drop so dramatically depends on the politics of Congress and the White House and the budget and deficit pressures of the year. An early version of the Build Back Better proposal would have cut the exemption in half but did not win enough votes to pass.

Another reason to make these lifetime gifts sooner rather than later? As of 2022, seventeen states and the District of Columbia still have state estate taxes and/or inheritance taxes. For wealthy families, these exemptions can make a big difference in estate tax liabilities. If you would like to learn more about tax exemptions in your estate planning, please visit our previous posts. 

Reference: Forbes (Oct. 18, 2022) “Lifetime Estate and Gift Tax Exemption Will Hit $12.92 Million in 2023”

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The Estate of The Union Season 2, Episode 3 – Mis-Titled Assets Can Wreck Your Planning out now!

 

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GRATs are good estate planning strategy

GRATs are good Estate Planning Strategy

The first thing to know—GRATs are not just for the uber-wealthy, despite the title of the article “Here’s how uber-rich pass wealth to heirs tax-free when markets are down” from CNBC. “Regular” people and their families may benefit from using Grantor Retained Annuity Trusts. The second thing to know–GRATs work well when stocks are down in value and are expected to rebound relatively quickly. While no one knows what the markets will do today or six months from today, GRATs are good estate planning strategy for many people.

The GRAT works like this: assets like stocks in a privately-held business are placed into the trust for a specific amount of time—maybe two, five or ten years. Any investment growth passes to heirs and the original owner gets the principal back. This is, of course, a highly simplified description.

The family can avoid or reduce estate taxes at death by shifting future appreciation out of the estate. The investment growth is the tax-free gift to heirs. If there’s no growth, the asset passes back to the owners. Lowered assets likely to return in value over the life of the trust are the most likely to make this strategy work best.

The S&P 500, a commonly used barometer for U.S. stock markets, is down by about 24% as of this writing, making now an excellent time to consider a GRAT.

The GRAT makes the most sense for families who are subject to the federal estate tax. While the federal estate tax is applied to estates is now valued at more than $12.06 million, the federal estate tax is expected to drop precipitously when the Tax Cuts and Jobs Act of 2017 expires on December 31, 2025.

GRATs are said to have been used by some of the nation’s wealthiest people, including Michael Bloomberg, Mark Zuckerberg, the Walton family (of Walmart fame), Charles Koch and his late brother David Koch, Laurene Powell Jobs (the widow of Apple-founder Steve Jobs), Oprah Winfrey and others. However, a GRAT can work for people who are not among the top wealthiest in the country.

In 2026, the estate-tax threshold will be cut in half, unless Congress extends the Act. Individuals with $6 million estates, or $12 million for married couples, should start considering how to transfer their wealth now.

Rising interest rates put another wrinkle in planning for the future. The complex inner workings of GRATs concern interest rates, which must technically exceed a certain threshold—the “7520 interest rate,” also known as the “hurdle” rate—to pass tax free from the estate. This rate is currently up by 4% from October 2021.

Here’s an example of how this applies to a grantor-retained annuity trust. If investments in a two-year trust grew by 6% over two years, a trust pegged to the hurdle rate of October 2021 would allow 5% of the overall growth pass to heirs, but this would fall to 2% for a trust established in October 2022.

GRATs are good estate planning strategy for a variety of people. Your estate planning attorney will be able to explain whether a GRAT is a good fit for your wealth strategy, considering your tax liabilities, the size of your estate and your comfort level with any strategies tied to interest rates and markets. If you would like to learn more about GRATs, please visit our previous posts.

Reference: CNBC (Oct. 10, 2022) “Here’s how uber-rich pass wealth to heirs tax-free when markets are down”

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The Estate of The Union Season 2, Episode 3 – Mis-Titled Assets Can Wreck Your Planning out now!

 

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Factors to Consider when Picking Trustee

Factors to Consider when Picking Trustee

Having your estate planning documents created with an experienced professional is important, as is naming the people who will be putting your plan into action. A key sticking point is often deciding who is the right person for the role, says an article from Nasdaq titled “Estate Planning: 5 Tips to Pick Trustees, Executors and POAs.” It helps to stop thinking about how people will feel if they are not selected and focus instead on their critical thinking and decision making abilities. There are some factors to consider when picking a trustee, executor or power of attorney.

Consider who will have the time to help. Having adult children who are highly successful in their professions is wonderful. However, if they are extremely busy running a business, leading an organization, etc., will their busy schedules allow the flexibility to help? A daughter with twins may love you to the moon and back. However, will she be able to handle the tasks of estate administration?

Take these appointments seriously. Selecting someone on an arbitrary basis is asking for trouble. Just because one child is older doesn’t necessarily mean they are capable of managing your estate. Making a decision based on gender can be equally flawed. Naming agents and executors with financial acumen is more important than giving your creative child the chance to learn how to manage money through your estate.

Don’t make the process more complicated. There are many families where parents name all the siblings to act on their behalf, so no one feels left out. This usually turns into an estate disaster. An odd number of siblings can lead to one group winning decisions by sheer numbers, while aggressive, win-at-all-costs siblings—even if it’s just two of them—can lead to delayed decisions and family divisions.

Name the right person for right now. Younger people who don’t yet have children often aren’t sure who their best agent might be. Picking a parent may become problematic, if the parent becomes sick or dies. Naming a close friend in your thirties may need updating if your friendship wanes. Make it simple: appoint the best person for today, with the caveat of updating your agents and documents as time goes on and circumstances change. Remember, circumstances always change.

Consider the value of a professional trustee or fiduciary. The best person to be a trustee, executor or power of attorney may not always be a family member or friend. If a trustee is one sibling and the beneficiary of the trust is another sibling who can’t manage money, the relationship could suffer. If a large estate includes generational trusts and complex ownership structures, a professional may be better suited to deal with management and tax issues.

The value of having an estate plan cannot be overstated. However, the importance of who will be appointed to oversee and administer the estate is equally important. The success of an estate plan often rests on the people who are assigned to handle their respective tasks.

Consider these factors seriously when picking a trustee or executor. Be candid when speaking with an experienced estate planning attorney about the people in your life and their abilities to manage the roles. If you would like to learn more about the role of a trustee or executor, please visit our previous posts. 

Reference: nasdaq (Sep. 4, 2022) “Estate Planning: 5 Tips to Pick Trustees, Executors and POAs”

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The Estate of The Union Season 2, Episode 3 – Mis-Titled Assets Can Wreck Your Planning out now!

 

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Frequently Asked Questions about Series I-Bonds

Frequently Asked Questions about Series I-Bonds

With series I bonds in the news lately, it is worth considering if they are beneficial to your estate planning. Kiplinger’s recent article entitled “What Are I-Bonds?” compiled answers to some frequently asked questions about series I bonds.

How is the interest rate determined? The composite rate has two parts: (i) a fixed rate that stays the same for the life of the bond; and (ii) an inflation rate based on the consumer price index (CPI). Each May and November, the U.S. Treasury Department announces a new fixed rate and inflation rate that apply to bonds issued during the following six months. The inflation rate changes every six months from the bond’s issue date.

How does interest accrue? They earn interest monthly from the first day of the month of the issue date, and interest is compounded semi-annually. Interest is added to the bond’s principal value. Note that you can’t redeem an I-Bond in the first year, and if you cash it in before five years, you forfeit the most recent three months of interest. If you check your bond’s value at TreasuryDirect.gov, within the first five years of owning it, the amount you’ll see will have the three-month penalty subtracted from it. As a result, when you buy a new bond, interest doesn’t show until the first day of the fourth month following the issue month.

How many I-Bonds can I buy? You can purchase up to $10,000 per calendar year in electronic bonds through TreasuryDirect.gov. You can also buy up to $5,000 each year in paper bonds with your tax refund. For those who are married filing jointly, the limit is $5,000 per couple.

How are I-Bonds taxed? I-Bond interest is free of state and local income tax. You can also defer federal tax until you file a tax return for the year you cash in the bond or it stops earning interest because it has reached final maturity (after 30 years), whichever comes first. You can also report the interest every year, which may be a good choice if you’d rather avoid one large tax bill in the future.

If you use the bonds’ proceeds to pay for certain higher-education expenses for your spouse, your dependents, or yourself, you may avoid federal tax. However, you must meet several requirements to be eligible. Among them, the bond owner must have been at least 24 years old by the issue date and have income that falls below specified limits. Discuss these frequently asked questions about series I bonds with your estate planning attorney. If you are interested in learning more about bonds, and other retirements planning options, please visit our previous posts. 

Reference: Kiplinger (Oct. 11, 2022) “What Are I-Bonds?”

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The Estate of The Union Season 2, Episode 3 – Mis-Titled Assets Can Wreck Your Planning out now!

 

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Include Your Business in Estate Planning

Include Your Business in Estate Planning

Have you made the decision to include your business in your estate planning? Forbes’ recent article entitled “The Importance of Estate Planning When Building Your Business” says that every business that’s expected to survive must have a clear answer to this question. The plan needs to be shared with the current owners and management as well as the future owners.

The common things business owners use to put some protection in place are buy-sell agreements, key-person insurance and a succession plan. These are used to make certain that, when the time comes, there’s both certainty around what needs to happen, as well as the funding to make sure that it happens.

If your estate plan hasn’t considered your business interests or hasn’t been updated as the business has developed, it may be that this plan falls apart when it matters the most.

Buy-sell insurance policies that don’t state the current business values could result in your interests being sold far below fair value or may see the interests being bought by an external party that threatens the business itself.

If your agreements are not in place, or are challenged by the IRS, your estate may find itself with a far greater burden than anticipated.

Your estate plan should be reviewed regularly to account for changes in your situation, the value of your assets, the status of your (intended) beneficiaries and new tax laws and regulations.

There are a range of thresholds, exemptions and rules that apply. Adapting the plan to make best use of these given your current situation is well worth the effort. Talk to an experienced estate planning attorney about your plan.

Include your business in your estate planning. This will provide valuable guidance in terms of how best to set up and manage your broader financial affairs.

Financial awareness can not only inform how you grow your wealth now but also ensure that it gets passed on effectively. The same is also true of your business.

A tough conversation about what happens in these situations can be a reminder to management that over dependence on any key person is not something to take for granted. If you would like to learn more about business succession planning, please visit our previous posts. 

Reference: Forbes (Sep. July 12, 2019) “The Importance of Estate Planning When Building Your Business”

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The Estate of The Union Season 2, Episode 3 – Mis-Titled Assets Can Wreck Your Planning out now!

 

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IRAs can be used to make Charitable Bequests

IRAs can be used to make Charitable Bequests

While death is a certainty, some taxes aren’t. IRAs can be used to make charitable bequests, explains a thought-provoking article titled “Win an Income-Tax Trifecta With Charitable Donations” from The Wall Street Journal. For those who are philanthropically minded and tax-savvy, this is an idea worth consideration.

There are few better ways to leave funds to a charity than through traditional IRAs. The strategy is especially noteworthy now, given the growth in traditional IRA values over the last decade, even with the recent selloffs in bond and stock markets. At the end of 2022’s first quarter, traditional IRAs held about $11 trillion, more than double the $5 trillion in IRAs at the end of 2012.

With the demise of defined benefit pensions, traditional IRAs are now the largest financial account many people own, especially boomers. Therefore, it’s wise to know about applicable tax strategies.

The first advantage is tax efficiency. Donors of IRA assets at death win a three-way tax prize: no tax on the contributions going to the charity, no tax on annual growth and no tax on assets at death.

Compare this to donations of cash or investments, such as a stock held in a taxable account. For example, let’s say Jules wants to leave a total of $20,000 to several charities upon her death. She expects to have more than $20,000 in each of three accounts at this time. One account is cash, the other is a traditional IRA, holding stocks and funds, and the third is a taxable investment account holding stocks purchased decades ago.

A charitable bequest of assets from any of these three accounts will bring a federal estate-tax deduction. However, Jules’ estate will be smaller than the current estate tax exemption of about $12 million, so there are no federal estate taxes to consider.

Jules should focus on minimizing heirs’ income taxes on any assets she’s leaving them and donating traditional IRA assets is the way to go. If she leaves the IRA assets to heirs, they will have to empty the IRA within ten years and withdrawals will be taxable.

Giving IRA assets gets pretax dollars directly to the charities, which don’t pay taxes on the donation. A cash donation would be after tax dollars.

Donating the IRA assets to charity is also typically better than giving stock held in a taxable account. Because of the step-up provision, there is no capital gains on such investment assets held at death. If Jules bought the now $20,000 stock for $5,000, the step-up could save heirs capital gains tax on $15,000 when they sell the shares. If she donates the stock, heirs won’t get this valuable benefit.

Next, IRA donations allow for great flexibility. Circumstances in life change, so a will that is drawn up years before death could be changed over time, to give a bequest of a different size or to a different charity. It’s easier to make these changes with an IRA. One way is to set up a dedicated IRA naming one or more charities as beneficiaries and then moving assets from other IRAs into it via direct (and tax-free) transfers. Beneficiaries and the percentages can be easily changed, and the IRA owner can raise or lower the donation by transferring assets between IRAs.

If the IRA owner is 72 or older and has to take required minimum distributions, the owner can take out donations from different IRAs. Note the funds must go directly to the charity when making the donation. Speak with your estate planning attorney about how IRAs can be used to make charitable bequests. If you would like to learn more about charitable giving, please visit our previous posts. 

Reference: The Wall Street Journal (Sep. 2, 2022) “Win an Income-Tax Trifecta With Charitable Donations”

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The Estate of The Union Season 2, Episode 3 – Mis-Titled Assets Can Wreck Your Planning out now!

 

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Estate Planning should include Consideration of Income Tax

Estate Planning should include Consideration of Income Tax

While estate taxes may only be of concern for mega-rich Americans now, in a relatively short time, the federal exemption rate is scheduled to drop precipitously. Estate planning underway now should include consideration of income tax issues, especially basis, according to a recent article titled “Be Mindful of Income Tax in Estate Planning, Particularly Basis” from National Law Journal.

Because of these upcoming changes, plans and trusts put into effect under current law may no longer efficiently work for income tax and tax basis issues.

Planning to avoid taxes has become less critical in recent years, when the federal estate tax exemption is $10 million per taxpayer indexed to inflation. However, the new tax laws have changed the focus from estate tax planning to coming tax planning and more specifically, to “basis” planning. Ignore this at your peril—or your heirs may inherit a tax disaster.

“Basis” is an oft-misunderstood concept used to determine the amount of taxable income resulting when an asset is sold. The amount of taxable income realized is equal to the difference between the value you received at the sale of the asset minus your basis in the asset.

There are three key rules for how basis is determined:

Purchased assets: the buyer’s basis is the investment in the asset—the amount paid at the time of purchase. Here’s where the term “cost basis” comes from

Gifts: The recipient’s basis in the gift property is generally equal to the donor’s basis in the property. The giver’s basis is viewed as carrying over to the recipient. This is where the term “carry over basis” comes from, when referring to the basis of an asset received by gift.

Inherited Assets: The basis in inherited property is usually set to the fair market value of the asset on the date of the decedent’s death. Any gains or losses after this date are not realized. The heir could conceivably sell the asset immediately and not pay income taxes on the sale.

The adjustment to basis for inherited assets is usually called “stepped up basis.”

Basis planning requires you to review each asset on its own, to consider the expected future appreciation of the asset and anticipated timeline for disposing the asset. Tax rates imposed on income realized when an asset is sold vary based on the type of asset. There is an easy one-size-fits-all rule when it comes to basis planning.

Estate planning requires adjustments over time, especially in light of tax law changes. This is why estate planning should include consideration of income tax issues. Speak with your estate planning attorney, if your estate plan was created more than five years ago. Many of those strategies and tools may or may not work in light of the current and near-future tax environment. If you would like to learn more about tax issues related to estate planning, please visit our previous posts. 

Reference: National Law Review (July 22, 2022) “Be Mindful of Income Tax in Estate Planning, Particularly Basis”

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The Estate of The Union Season 2, Episode 2 – The Consumer's Guide to Dying is out now!

 

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Information in our blogs is very general in nature and should not be acted upon without first consulting with an attorney. Please feel free to contact Texas Trust Law to schedule a complimentary consultation.
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