EHDH Estate Planning

Take Advantage of Tax Laws Now

The pundits are saying that the if Democrats win the White House and possibly Congress, expect changes to income, gift generation skipping transfer and estate taxes. This recent article from Forbes, “Use It Or Lose It: Locking In the $11.58 Million Unified Credit” says that the time to act is now.

Since 2000, the estate and gift tax exemption has taken a leap from $675,000 and a top marginal rate of 55% to an exemption of $11.58 million and a top marginal rate of 40%. However, it’s not permanent. If Congress does nothing, the tax laws go back in 2026 to a $5.6 million exemption and a top marginal rate of 55%. The expectation is that if Biden wins in November, and if Congress enacts the changes published in his tax plan, the exemption will fall to $3.5 million, and the top marginal rate will jump to 70%.

The current exemption and tax rate may be as good as it gets.

If you make a taxable gift today, you can effectively make the current tax laws permanent for you and your family. The gift will be reported in the year it is made, and the tax laws that are in effect when the gift is made will permanently applicable. Even if the tax laws change in the future, which is always a possibility, there have been proposed regulations published by the IRS that say the new tax laws will not be imposed on taxable gifts made in prior years.

Let’s say you make an outright taxable gift today of $11.58 million, or $23.16 million for a married couple. That gift amount, and any income and appreciation from the date of the gift to the date of death will not be taxed later in your estate. The higher $11.58 million exemption from the Generation Skipping Transfer Tax (GSTT) can also be applied to these gifts.

Of course, you’ll need to have enough assets to make a gift and still be financially secure. Don’t give a gift, if it means you won’t be able to support your spouse and family. To take advantage of the current exemption amount, you’ll need to make a gift that exceeds the reversionary exemption of $3.5 million. One way to do this is to have each spouse make a gift of the exemption amount to a Spousal Lifetime Access Trust (SLAT), a trust for the benefit of the other spouse for that spouse’s lifetime.

Be mindful that such a trust may draw attention from the IRS, because when two people make gifts to trusts for each other, which leaves each of them in the same economic position, the gifts are ignored and the assets in the trusts are included in their estate. The courts have ruled, however, that if the trusts are different from each other, based on the provisions in the trusts, state laws and even the timing of the creation and funding of the trusts may be acceptable.

These types of trusts need to be properly administered and aligned with the overall estate plan. Who will inherit the assets, and under what terms?

A word of caution: these are complex trusts and take time to create. Time may be running out. Speak with a skilled estate planning attorney with knowledge of tax law.

Reference: Forbes (July 17, 2020) “Use It Or Lose It: Locking In the $11.58 Million Unified Credit”

How an Experienced Estate Planning Attorney Helps People

People turn to estate planning attorneys, when they are ready to create a set of instructions for what they would like to happen to their assets when they die, explains Vents Magazine’s recent article, “Understanding What an Estate Planning Attorney Does.” The estate planning attorney creates a will, also known as a last will and testament to accomplish this, but that’s just part of what they do.

An estate planning attorney also helps to plan for incapacity, when a person cannot speak for themselves because of an injury or an illness. She also helps you understand estate taxes.

An estate planning attorney will also help to make certain that all of your savings and property are safe and distributed through the proper legal processes.

Estate planning attorneys assist with the power of attorney and health care directives. These documents allow you to designate an individual to decide issues on your behalf, in the event that you become mentally incapable of making decisions for yourself. They can also help you with a guardian who will look after your estate.

It’s important that you select the right estate planning attorney to execute the legal process, as you’ve instructed in your estate plan. You should only retain an attorney with experience in this field of law because other legal counsel won’t be able to help you with these issues—or at least, they may say they can, only to find out later that they’re not experienced in this area.

You also want to feel comfortable with your estate planning attorney because you must disclose all your life details, plans, and estate issues, so she can create an estate plan that’s customized to your circumstances.

By selecting an experienced estate planning attorney, you save your family from unnecessary stress and costs. If there is no will, the entire estate is handled by the courts, which also takes a considerably longer time than if a will was properly prepared. If no estate plan exists, there may also be additional taxes.

Reference: Vents Magazine (December 12, 2019) “Understanding What an Estate Planning Attorney Does”

What’s the Tax Liability for Heirs Who Inherit Retirement Accounts?

A person who is updating their estate plan is wondering what will happen when his robust retirement accounts pass to his children. Retirement accounts like 401(k)s, 403(b)s, traditional and Roth IRAs and others are considered part of a taxable estate, Motley Fool’s recent article, which asks “If I Leave My Retirement Savings to My Heirs, Will They Pay Estate Tax?”

For 2019, this is $11,400,000, and in 2020, the exclusion will be raised to $11,580,000. If you total all of your assets’ value, only the amount in excess of the exclusion will be taxable. Therefore, if you have a $12 million estate and die in 2020, only $420,000 of your assets would be subject to estate taxes.

Let’s look at another example: if your assets, including your retirement savings, total up to $5 million, your heirs won't be required to pay any estate tax whatsoever.

However, while they may not have to pay estate taxes, remember that withdrawals from most retirement accounts (except Roth IRA accounts) will be deemed to be taxable income. Thus, estate tax or no estate tax, if your heirs are in a pretty high tax bracket, inheriting your retirement savings may increase their tax liability.

Don’t neglect to check with an estate planning attorney about your state’s estate and inheritance taxes. There are a handful of states that have their own estate taxes, and their thresholds may be lower than the IRS’s.

There are now six states with an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.

Another reason to update your estate plan is that each state has its own laws about inheritance taxes exemption and rates. If those laws change, your estate plan needs to change with them. Good tax planning is part of a complete estate plan, and your estate planning attorney will have some good ideas for you to protect your heirs.

Reference: Motley Fool (November 8, 2019) “If I Leave My Retirement Savings to My Heirs, Will They Pay Estate Tax?”

Are There Federal or State Taxes on Inheritances?

Inheritances of property or cash are not taxed as income, and in 2019, the estate tax does not come into play, unless the estate is valued at more than $11.4 million. However, there are taxes to be aware of during retirement and while doing estate planning.

Investopedia’s recent article asks “Are Estate Distributions Taxable?” The article explains that the only exception is for income taxes due on withdrawals from retirement accounts that are ordinarily subject to taxes, like traditional IRA accounts.

However, some states do tax inheritances, and to date, those states include Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. None of those states applies the tax to the spouse or children of the deceased. When imposed, the taxes range from about 5% to about 15% of the inheritance.

If an estate executor doesn’t pay income tax before he or she distributes the inheritance, the IRS may impose limited beneficiary taxes on those who inherit.

Right now, the federal estate tax applies only to inheritances above $11.4 million per individual. Estates, just like individuals, are required to file income tax forms. They may also owe taxes in the form of interest payments on accounts.

The estate can pay the taxes due or distribute the taxable income to the heirs. In certain cases, this actually saves the beneficiary money because the entire estate may be in a higher tax bracket than the individual who’s getting just a portion of the inheritance.

An exemption to the estate tax for inheritances up to $5 million was instituted about nine years ago in 2010 and 2011 (but there were special rules for decedents dying in 2010). This exemption has been reaffirmed, and the limits have been raised in subsequent laws passed by Congress. The current rules exempts from estate taxes the first $11.4 million inherited by an individual, and twice that amount if the inheritance is distributed to a couple.

Under the current tax exemption law, only about 2,000 Americans are liable to pay an inheritance tax. However, it is safe to say that these individuals benefit from the services of skilled estate planning attorneys, accountants and financial advisors, who use acceptable and legal strategies to avoid or minimize their tax liability and maximize the assets that are passed to the next generation.

Reference: Investopedia (August 4, 2019) “Are Estate Distributions Taxable?”

When Was the Last Time You Reviewed Your Will?

There have been many changes in recent years to the laws that affect estate plans, and there may be more coming, Wealth Advisor in a recent article—“Tune-Up Your Estate Plan in Light of Changing Conditions.” Do you know if your estate plan still works?

The federal estate tax gift and estate tax exemption amount is now $11.4 million, indexed for inflation, which is an all-time high. A married couple can transfer twice that amount to children or others, or $22.8 million, without any federal gift and estate tax. The federal exemption amount is also now “portable” between spouses. It means that the first spouse to die, can transfer any unused exemption to the surviving spouse, without the need of a “credit shelter trust.”

Note that the enhanced federal exemption amount is scheduled to “sunset” in 2026, returning back down to $5.6 million (indexed for inflation).

As far as state law changes, the New York estate tax exemption amount is $5.74 million. However, that exemption isn’t portable. The estate tax exemption is phased out, if your taxable estate is 5% more than that amount. For a New York taxable estate of about $6 million, there’s no exemption and the New York estate tax is about $500,000. The New York estate tax on a $10 million taxable estate is more than $1 million. Since New York has no gift tax, lifetime gifts don’t decrease the estate tax exemption for state tax purposes. However, gifts made within three years of death, would be clawed back under a pending bill.

In New Jersey, they’ve repealed the estate tax but kept the inheritance tax. Connecticut raised its estate and gift tax exemption amount. In the state of Illinois, the estate tax exemption amount is only $4 million and isn’t portable. This makes flexibility in your estate plan very desirable. For residents in the Land of Lincoln (that’s Illinois), the estate tax savings are less dramatic, since the exemption is smaller than in New York, but the potential savings through proper planning are still major.

Another consideration to note includes the fact that surrogate’s courts and probate courts—which have always moved at a snail’s pace—have become even slower.

Some of these changes may impact your current estate plan. You may want to take advantage of the enhanced federal exemption amount, before it goes away.

Regardless of where you live, talk with an estate planning attorney in your state to find out if your state estate tax is going to take a bite out of your children’s inheritance. Are there any new tax laws or strategies that could keep more of your assets in the family?

Reference: The Wealth Advisor (June 17, 2019) “Tune-Up Your Estate Plan in Light of Changing Conditions”

How Does Portability Work?

In 2010, the idea of making the federal lifetime estate tax exemption portable between married spouses was introduced. It changed how many estate plans are structured. Combined with the increased federal estate tax exemption, this has further changed estate plans.

The Monterey Herald recently reported, in the article “Financial planning: What you need to know about portability,” that the federal lifetime estate tax exemption determines how much wealth a person can leave to their family without being subject to estate tax. The current lifetime estate tax exemption is $11.4 million, which means that you can leave up to $11.4 million to your heirs, without the 40% estate tax on whatever remains.

With individual taxpayers, this is pretty straightforward. However, with couples, it becomes more complicated.

For example, assume a married couple has an estate worth $18 million. The husband dies first without using any of his estate tax exemption. The wife dies two months later, leaving the entire estate to their children. Without portability, it’s “use it or lose it” for the estate tax exemption.

When the husband dies, the entire estate passes to his wife (if she is a U.S. citizen) without any estate tax implications. This is known as the unlimited marital deduction rule. However, when the wife dies two months later, the estate will owe estate tax of $2.64 million, or the value of the estate above the wife’s $11.4 million exemption times the 40% estate tax rate.

That’s why trusts were so essential in pre-portability estate planning. Before portability, any unused estate tax exemption went to fund a bypass trust. The bypass trust was usually set up to provide for the health, education, maintenance, and support of the surviving spouse. The remaining assets went to the surviving spouse in a marital trust. The trust structure helped make sure the estate tax exemption of the first-to-die spouse was used to its fullest, but it also increased the paperwork with estate transfers.

With portability, the unused estate tax exemption transfers to the surviving spouse. In the example, the wife’s lifetime estate tax exemption after her husband’s death would be $22.8 million (her $11.4 million plus his unused $11.4 million.) When she dies two months later, the estate value of $18 million is below the combined lifetime exemption. Voila! No estate tax is owed.

Portability isn’t automatic. For a surviving spouse to claim the deceased spouse’s unused estate tax exemption, the decedent’s executor must file IRS form 706 within nine months of the decedent’s date of death. If you need more time, you can ask for an automatic six-month extension.

Your estate planning attorney will know how to utilize the best in tax planning, to maximize the amount of assets that your family can transfer from one generation to the next.

Reference: Monterey Herald (February 27, 2019) “Financial planning: What you need to know about portability”