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How to determine if you need to worry about estate taxes

8/29/2017

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Among the taxes that are being considered for repeal as part of tax reform legislation is the estate tax. This tax applies to transfers of wealth at death, hence why it’s commonly referred to as the “death tax.” Its sibling, the gift tax — also being considered for repeal — applies to transfers during life. Yet most taxpayers won’t face these taxes even if the taxes remain in place.

Exclusions and exemptions
For 2017, the lifetime gift and estate tax exemption is $5.49 million per taxpayer. (The exemption is annually indexed for inflation.) If your estate doesn’t exceed your available exemption at your death, then no federal estate tax will be due.

Any gift tax exemption you use during life does reduce the amount of estate tax exemption available at your death. But every gift you make won’t use up part of your lifetime exemption. For example:
  • Gifts to your U.S. citizen spouse are tax-free under the marital deduction. (So are transfers at death — that is, bequests.)
  • Gifts and bequests to qualified charities aren’t subject to gift and estate taxes.
  • Payments of another person’s health care or tuition expenses aren’t subject to gift tax if paid directly to the provider.
  • Each year you can make gifts up to the annual exclusion amount ($14,000 per recipient for 2017) tax-free without using up any of your lifetime exemption.

What’s your estate tax exposure?

Here’s a simplified way to project your estate tax exposure. Take the value of your estate, net of any debts. Also subtract any assets that will pass to charity on your death.

Then, if you’re married and your spouse is a U.S. citizen, subtract any assets you’ll pass to him or her. (But keep in mind that there could be estate tax exposure on your surviving spouse’s death, depending on the size of his or her estate.) The net number represents your taxable estate.

You can then apply the exemption amount you expect to have available at death. Remember, any gift tax exemption amount you use during your life must be subtracted. But if your spouse predeceases you, then his or her unused estate tax exemption, if any, may be added to yours (provided the applicable requirements are met).

If your taxable estate is equal to or less than your available estate tax exemption, no federal estate tax will be due at your death. But if your taxable estate exceeds this amount, the excess will be subject to federal estate tax.

Be aware that many states impose estate tax at a lower threshold than the federal government does. So you could have state estate tax exposure even if you don’t need to worry about federal estate tax.

If you’re not sure whether you’re at risk for the estate tax or if you’d like to learn about gift and estate planning strategies to reduce your potential liability, please contact us. We also can keep you up to date on any estate tax law changes.

​© 2017
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Are income taxes taking a bite out of your trusts?

6/21/2017

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If your estate plan includes one or more trusts, review them in light of income taxes. For trusts, the income threshold is very low for triggering the:
  • Top income tax rate of 39.6%,
  • Top long-term capital gains rate of 20%, and
  • Net investment income tax (NIIT) of 3.8%.

The threshold is only $12,500 for 2017.

3 ways to soften the blow

Three strategies can help you soften the blow of higher taxes on trust income:

1. Use grantor trusts. 
An intentionally defective grantor trust (IDGT) is designed so that you, the grantor, are treated as the trust’s owner for income tax purposes — even though your contributions to the trust are considered “completed gifts” for estate- and gift-tax purposes.

IDGTs offer significant advantages. The trust’s income is taxed to you, so the trust itself avoids taxation. This allows trust assets to grow tax-free, leaving more for your beneficiaries. And it reduces the size of your estate. Further, as the owner, you can sell assets to the trust or engage in other transactions without tax consequences.

Keep in mind that, if your personal income exceeds the applicable thresholds for your filing status, using an IDGT won’t avoid the tax rates described above. Still, the other benefits of these trusts make them attractive.

2. Change your investment strategy. 
Despite the advantages of grantor trusts, nongrantor trusts are sometimes desirable or necessary. At some point, for example, you may decide to convert a grantor trust to a nongrantor trust to relieve yourself of the burden of paying the trust’s taxes. Also, grantor trusts become nongrantor trusts after the grantor’s death.

One strategy for easing the tax burden on nongrantor trusts is for the trustee to shift investments into tax-exempt or tax-deferred investments.

3. Distribute income.
 Generally, nongrantor trusts are subject to tax only to the extent they accumulate taxable income. When a trust makes distributions to a beneficiary, it passes along ordinary income (and, in some cases, capital gains), which are taxed at the beneficiary’s marginal rate.

Thus, one strategy for minimizing taxes on trust income is to distribute the income to beneficiaries in lower tax brackets. The trustee might also consider distributing appreciated assets, rather than cash, to take advantage of a beneficiary’s lower capital gains rate.

Of course, this strategy may conflict with a trust’s purposes, such as providing incentives to beneficiaries, preserving assets for future generations and shielding assets from beneficiaries’ creditors.
If you’re concerned about income taxes on your trusts, contact us. We can review your estate plan to uncover opportunities to reduce your family’s tax burden.

​© 2017
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Estate & End-of-Life Planning

2/11/2016

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Perhaps one of the most sensitive topics that tax practitioners face with their clients is in regards to estate and end-of-life planning. Clients will often seek the advice of tax professionals regarding the preparation of a will, incorporating a trust, as well as the use of life insurance. While tax practitioners may not be the source of all expert advice regarding these topics, it is common that tax practitioners will work alongside attorneys and financial planners in planning for the most tax efficient process for distributing their estate and achieving their financial goals. Therefore, it is important that all professionals involved with assisting clients through the estate planning process are well-informed and knowledgeable of the constant changing laws pertaining to estate transfer. With proper estate planning, clients’ are ensured that their loved ones are cared for while beneficiaries of the estate receive as much of their inheritance as possible.

What is an Estate?
An estate includes all property that an individual owns; those types of property typically consist of real property, tangible personal property, and intangible property. In further detail, real property is property such as a primary residence or real-estate, tangible personal property includes vehicles, jewelry, and furniture, and intangible property consists of stocks, insurance, and retirement accounts. There is also different types of estates, for instance, the gross estate consists of all the property that is owned or property that the individual possesses an interest in at the time of that individual’s death. The other type of estate is the probate estate, which consists of only the portion of the estate’s assets that does not have a selected beneficiary. Conversely, a non-probate estate includes those assets with a designated beneficiary. A well-planned and structured estate-plan understands which assets transfer using designated beneficiaries and those assets that will become a part of the probate estate. Assets in the probate estate will then get transferred via a will or in absence of a will the assets will get transferred by state law.

Goals of Estate Planning
Estate planning allows for an individual to possess control of their assets both while they are alive as well as following their death. Therefore, proper estate planning may accomplish three primary goals including:
  1. Provide care for their family as well as a continuation of lifestyle.
  2. Ensure that those who are intended to inherit your assets are those who receive those assets in a quickly manner.
  3. Minimize the amount of uncertainty and taxes and fees paid while reducing the involvement of the court.
  4. Allow for charitable giving as well as succession planning of a business.

Life Events to Consider
Estate planning is a continuous process that requires constant consideration of life events, for instance newborn children, marital changes, health conditions, life event relative to beneficiaries, and economic and legal changes may significantly impact clients’ estates.

Estate Strategies
It is important to understand the estate tax and the numerous strategies available as a part of estate planning. As a part of the 2010 Tax Relief Act estates after 2010 are provided with an exemption of $5.43 million while amounts in excess of the exemption get taxed at an effective tax rate of 40 percent. There is an option to opt-out of the estate tax under the 2010 Tax Relief Act which allows for a modified carryover basis allowing for $1.3 million per decedent and $3 million for a surviving spouse.

Different estate planning strategies may begin first with ensuring the proper documentation that must or may include: wills trusts, power of attorney, and guardianship. Advanced strategies may include concepts such as:
  • Generation-Skipping Transfer Tax
  • Gift Tax and Gift Giving
  • Life Estates
  • Payment on Death Accounts
  • Life Insurance
  • Qualified Personal Residence Trust
  • Marital Trusts
  • General Power of Appointment Trust
  • Qualified Terminable Interest Property Trust
  • Qualified Domestic Trust
  • Bypass Trusts
  • Minor’s Trust
  • Annuities
​
Each of the list concepts possesses its unique advantages and disadvantages which are unique to each unique circumstance. Therefore, as mentioned previously, estate planning serves as an important aspect for all practitioners and clients. As Ben Franklin once stated, there are two certainties in life, death and taxes.
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    Author

    Adam Carr, MBA, EA

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