Monday, April 18, 2016
In order to predict how much your estate will have to pay in taxes, one must first determine the value of the estate. To determine this, many assets might have to be appraised at fair market value. The estate includes all assets including real estate, cash, securities, stocks, bonds, business interests, loans receivable, furnishings, jewelry, and other valuables.
Once your net worth is established, you can subtract liabilities like mortgages, credit cards, other legitimate debts, funeral expenses, medical bills, and the administrative cost to settle your estate including attorney, accounting and appraisal fees, storage and shipping fees, insurances, and court fees. The administrative expenses will likely total roughly 5% of the total estate. Any assets that is bequeathed to charity through a trust escapes taxation, and the value of those assets must be subtracted from the total. Any assets transferred to a surviving spouse are not subject to taxation as long as your spouse is a US citizen.
If the net worth of an estate is less than the Federal and state exemptions, no taxes must be paid. However, the value of assets over the exemptions will be taxed. The amount over the exemptions is referred to as the taxable estate. A testator’s assets are taxed by the state in which the will is probated. Taxes paid by the estate to the state may be deducted for Federal tax purposes. The Federal exemption was $5.43 million in 2015 and is slated to increase in 2016. The top Federal estate tax rate in 2015 was 40%.
If an estate earns money while it is being administered and distributed, for example, if real estate is rented or businesses continue to operate, it will be necessary for the estate to complete a tax return and pay taxes on the income it receives. The net income of the estate can be added to the taxable portion of the estate if it is over the federal or state exemption. It is important to be aware that the laws surrounding estate taxes change frequently and require seasoned professionals to navigate, and to notify you if changes in the laws will affect your estate plan.
Tuesday, February 9, 2016
The role of an executor is to effectuate a deceased person’s wishes as declared in a will after he or she has passed on. The executor’s responsibilities include the distribution of assets according to the will, the maintenance of assets until the will is settled, and the paying of estate bills and debts. An old joke says that you should choose an enemy to perform the task because it is such a thankless job, even though the executor may take a percentage of the estate’s assets as a fee. The following issues should be considered when choosing an executor for one's estate.
Competency: The executor of an estate will be going through financial and legal documents and transferring documents from the testator to the beneficiaries. If there are legal proceedings, the executor must make all necessary court appearances. There is no requirement that a testator have any financial or legal training, but familiarity with these areas does avoid the intimidation felt by lay people, and potentially saves money on professional fees.
Trustworthiness: The signature of an executor is equivalent to that of the testator of an estate. The executor has full control over all of an estate’s assets. He or she will be required to go through all of the papers of the deceased to confirm what assets are available to be distributed. The temptation to transfer assets into the executor's own name always exists, particularly when there is a large estate. It is important to choose a person with integrity who will resist this temptation. It makes sense to utilize an individual who is an heir to fill the role to alleviate this concern.
Availability: The work of collecting rents, maintaining property, and paying debts can take more than a few hours a week. Selecting an executor with significant obligations to work or family may cause problems if he or she does not have the time available to devote to the task. If an executor must travel great distances to address issues that arise, there will be more of a time commitment necessary, not to mention greater expenses for the estate.
Family dynamics: Selection of the wrong person to act as executor can create resentment and hostility among an estate’s heirs. A testator should be aware of how family members interact with one another and avoid picking someone who may provoke conflict. Even the perception of impropriety can lead to a lawsuit, which will serve to take money out of the estate’s coffers and delay the legitimate distribution of the estate.
Tuesday, January 19, 2016
While the terms "estate tax" and "inheritance tax" are often used interchangeably, they are not synonymous. Let's try to clarify the difference.
Estate tax is based on the net value of the deceased owner's property. An estate tax is applied to these assets when they are transferred to the beneficiary. It is important to remember that an estate tax doesn't have anything to do with the beneficiary or that person's resources.
Federal estate tax only affects individuals who die with more than $5.45[s1] million in assets and individuals with such large estates can leave that amount to their beneficiaries without being subjected to a tax liability. Ninety-nine percent of the population will not owe federal estate tax upon their death.
In most circumstances, no federal estate tax is levied against spouses. As of the Supreme Court's recent ruling, this includes gay married couples as well as heterosexual couples. Federal estate taxes can, however, be charged if the spouse who is the beneficiary is not a citizen of the U.S. In such cases, though, a personal estate tax exemption can be used. Even where remaining spouses have no liability for federal estate tax, they may be charged with state taxes in some states, taxes which cannot be avoided unless the couple relocates.
Inheritance tax, as distinguished from estate tax, is imposed by state governments and the tax rate depends on the person receiving the property, and, in some locations, on how much that person receives. Inheritance tax can also vary depending upon the relationship between the testator and the benefactor. In Pennsylvania, for example, a spouse is not taxed at all; a lineal descendant (the child of the deceased) is taxed at 4.5 percent; a sibling is taxed at 12 percent, and anyone else must pay 15 percent.
There are exemptions that can reduce the amount of inheritance tax owed by significant amounts, but it is important that there be proper documentation of such exemptions for them to be applicable. Any part of the inheritance that is donated to charity does not require inheritance tax payment on the part of the beneficiary. Because of the inherent complexities of tax law and the variations from state to state, working with a tax attorney who has expertise with state tax laws s the best way to make sure you take advantage of any possible tax exemptions or avoidance.
Wednesday, August 26, 2015
Before transferring your home to your children, there are several issues that should be considered. Some are tax-related issues and some are none-tax issues that can have grave consequences on your livelihood.
The first thing to keep in mind is that the current federal estate tax exemption is currently over $5 million and thus it is likely that you may not have an estate tax issue anyway. If you are married you and your spouse can double that exemption to over $10 million. So, make sure the federal estate tax is truly an issue for you before proceeding.
Second, if you gift the home to your kids now they will legally be the owners. If they get sued or divorced, a creditor or an ex- in-law may end up with an interest in the house and could evict you. Also, if a child dies before you, that child’s interest may pass to his or her spouse or child who may want the house sold so they can simply get their money.
Third, if you give the kids the house now, their income tax basis will be the same as yours is (the value at which you purchased it) and thus when the house is later sold they may have to pay a significant capital gains tax on the difference. On the other hand if you pass it to them at death their basis gets stepped-up to the value of the home at your death, which will reduce or eliminate the capital gains tax the children will pay.
Fourth, if you gift the house now you likely will lose some property tax exemptions such as the homestead exemption because that exemption is normally only available for owner-occupied homes.
Fifth, you will still have to report the gift on a gift tax return and the value of the home will reduce your estate tax exemption available at death, though any future appreciation will be removed from your taxable estate.
Finally, there may be more efficient ways to do this through the use of a special qualified personal residence trust. Given the multitude of tax and practical issues involved, it would be best to seek the advice of an estate planning attorney before making any transfers of your property.
Monday, January 12, 2015
If you are a parent and you are considering estate planning, one of the most difficult decisions you will have to make is choosing a guardian for your minor children. It is not easy to think of anyone else, no matter how loving, raising your child. Yet, you can make a tremendous difference in your child’s life by planning ahead.
The younger your child, the more crucial this choice is, because very young children cannot form or express their own preferences about caregivers. Yet young children are not the only ones who benefit from careful parental attention to guardianship. Children close to 18 years old will be legal adults soon, but, as you well know, may still need assistance of a parental figure after the fact.
By naming and talking about your choice of guardian, you can encourage a lifelong bond with a caring family. The nomination of guardians is a straightforward aspect of any family’s estate plan. It can be as basic or detailed as you want. You can simply name the guardian who would act if both you and your spouse were unable to or you can provide detailed guidance about your children and the sort of experiences and family environment you would like for them. Your state court, then, can give strong weight to your expressed wishes.
There are essentially four steps to this process. First, make a list of anyone you know that might be a candidate for guardian of your children. It is important to think beyond your sisters and brothers and consider cousins, aunts and uncles, grandparents, child-care providers and business partners. You might also want to consider long-time friends and those you’ve gotten to know at parenting groups as they may share similar philosophies about child-rearing. Second, make a list of factors that are most important to you. Here are some to consider:
- Child-rearing philosophy
- Presence of children in the home already
- Interest in and relationship with your children
- Ability to meet the physical demands of child care
- Presence of enough “free” time to raise children
- Religion or spirituality
- Marital or family status
- Potential conflicts of interest with your children
- Willingness to serve
- Social and moral habits and values
- Willingness to adopt your children
You might find that all or none of these factors are important to you or that there are others that make more sense in your particular situation. The third step is to, match people with priorities. Use the factors you chose in step two to narrow your list of candidates to a handful.
For many families, it is as easy as it looks. For others, however, these three steps are fraught with conflict. One common source of difficulty is disagreement between spouses. But, consensus is important. Explore the disagreements to see what information about values and people is important to one another and use all of your strongest communications skills to understand each other’s position before you try to find a solution that you can both feel good about. Step four is to make it positive. For some parents, getting past this decision quickly is the best way to achieve peace of mind and happiness. For others, choosing a guardian can be the start of an intensive relationship-building process. An attorney who understands where you and your spouse fall on that spectrum can counsel you appropriately.
Thursday, December 4, 2014
Preventing a Will Contest & Preserving Peace in the Family
The purpose of writing a Last Will and Testament is to make sure that you – and not an anonymous probate court judge – have control over the distribution of your property after your death. If one or more family members disputes the instructions in your will, however, then it is possible that a probate court judge may decide how your assets will be distributed.
Protect yourself, your family members and your last wishes by taking steps to prevent a will contest after your death. Will contests (this is the legal term used to describe a family member’s challenge to the contents of a will) can be based on one or more of these claims:
- The will was not properly executed
- The willmaker was under improper or undue influence from a beneficiary
- The willmaker or another person committed fraud
- The willmaker lacked the mental capacity to make the will
There are a number of steps that you can take to help prevent will contests based on any of those claims. It is important to remember, though, that different states have different laws regarding wills and probate. What is advisable in one state may be inadvisable in another, which is why the first suggestion for preventing a will contest is:
- Obtain qualified legal advice regarding your estate plan. Estate planning has become a popular “do it yourself” legal task, but you should at least consider having your will reviewed – if not written – by a qualified estate planning lawyer. Writing your will with the help of an estate planning attorney will also ensure that your will is a properly executed and valid legal document.
- Don’t delay estate planning. Plan your estate while you are in good health – “of sound mind and body.” If you create your will while your physical or mental health is failing, your will becomes vulnerable to claims that it is invalid due to your lack of mental capacity.
- Consider a no-contest clause. A no-contest clause (also called an in terroreum clause) in a Last Will and Testament disinherits anyone who contests the will. Keep in mind, though, that no-contest clauses are valid in some states but not in others.
- Consider using trusts. Trusts are becoming more widely usedin estate planning , and are useful for various situations. A will is a public document once it is filed in probate court, and the public nature of the document can give rise to disputes and will contests. In contrast, a revocable living trust is a personal and private document that does not have to be filed as a public record. Furthermore, lifetime trusts can be used to provide financially for “troublesome” beneficiaries who might otherwise spend through their inheritance. Lifetime trusts are flexible and can link financial inheritance to the accomplishment of goals that you set forth in the trust documents.
- Write your will independently. To avoid claims of undue influence after your death, make sure you write your will in circumstances that are clearly free from interference by family members or other beneficiaries. Avoid having beneficiaries serve as witnesses, for example, and don’t allow beneficiaries to attend your meetings with your estate planning attorney. This is especially important if you are under the care of a family member who is also a beneficiary.
- Be of sound mind and body. At the time you write and sign your will, you can ask your physician to perform a physical examination and certify that you are mentally competent to execute your will. Another option is for your attorney to ask you a series of questions before you sign your will and document that the questions were asked and answered. It may also be a good idea to make a video recording of the process of signing your will, as another way to prove mental competency.
- Answer your family’s questions. Consider sharing your intentions with your family and other beneficiaries. If you explain the reasons for the decisions you made regarding bequests, you may help prevent will contests after your death. Instead or in addition, you may write a letter to your beneficiaries that will be read at the same time your will is read.
- Keep your will dust-free. Once your Last Will and Testament and other estate planning documents are complete, don’t just file and forget them. Review your will with an attorney at least once a year and make any necessary changes in a timely manner.
Tuesday, October 28, 2014
Borrowing from your retirement accounts: Issues to consider
So you have credit card debt, overdue mortgage payments, or suddenly need to buy a new car. We’ve all been there. You need money now, and your retirement accounts continue to climb. Fortunately, many employers allow you to take out loans on these accounts, but should you really begin spending that money before you retire?
On one hand, there are benefits to borrowing from your retirement accounts. You are essentially borrowing your own money, so the payments you make, plus interest, go back into your account. Since it’s your own money, these payments do not affect your credit score, and most 401(k) loans have relatively low interest rates.
However, there are many risks associated with taking money from accounts like your 401(k). It is recommended that you see a financial advisor before making this decision to address the cost and potential ramifications of the loan.
First consider the reason for taking out a loan, and the multiple options that you face. A dire emergency is the only recommended cause for borrowing from these accounts; some plans even require it. If you’re looking to spend the money on something more frivolous, like a family vacation or a new entertainment system, however, you should consider alternate financing options.
The downside to these loans comes in handling the repayment plan. Interest paid to your own account sounds easy enough, but these payments are subject to taxes. Furthermore, once money is borrowed from your retirement account, it is no longer eligible for tax-deferred growth. Payments you make on the loan come from after-tax assets, so the money you repay into your account can end up getting taxed for a second time once you withdraw after retirement.
A standard 401(k) loan allows you to borrow up to half of your balance, with a maximum of $50,000. Normally, you have up to five years to repay the loan. Failure to do so within the five-year period means your loan will be deemed an early withdrawal, and will be subject to taxes as well as a 10% early withdrawal penalty.
If you are looking to borrow money from your retirement accounts, carefully consider your repayment plan in advance. It’s especially important to make certainthat you are secure in your employment; if you leave or lose your job, your loan payments will be due within 90 days. Consider borrowing only if interest on a loan from your retirement plan would be less than that of another loan alternative. A final tip: Continue contributing to your 401(k) while you pay off the loan to lessen the impact on your savings.
Thursday, September 4, 2014
At the end of 2012, the entire country watched as major changes were made to income tax laws with the adoption of the American Taxpayer Relief Act of 2012 (ATRA). The act also made significant changes in estate tax laws.
Estate Tax Portability
One important change is that the estate tax portability law is now permanent. Estate tax portability means that the unused portion of the first-to-die spouse’s estate tax exemption passes to the surviving spouse. The current estate tax exemption is $5.25 million ($5 million with adjustments for inflation). This means that a married couple’s total estate tax exemption is currently $10.5 million. For example, a husband dies with $2 million in separate assets. He has $3.25 million remaining in his estate tax exemption, which passes to his wife, giving her a total of $7.5 million in estate tax exemption. Without portability, the husband’s remaining exemption might have been forfeited if the couple had not implemented special tax planning techniques as part of their estate plans.
How Do You Claim the Portability?
This is where married couples and estate executors can get into trouble. The estate tax portability rule is not automatic. In order to claim the remainder of the first-to-die spouse’s estate tax exemption, the surviving spouse or the deceased spouse’s estate executor must file an estate tax return soon after the death, usually within nine months.
If this filing deadline is missed, then the couple will not get the benefit of estate tax portability. Missing the estate tax filing deadline can result in hundreds of thousands of unnecessary and avoidable estate taxes.
In a recent report in The Wall Street Journal, estate planning experts expressed concern that executors of small estates may be unaware of the estate tax return filing requirement and may believe that an estate tax return is unnecessary if the deceased spouse’s assets fall under the $5.25 million exemption amount. To preserve portability, however, the estate tax return must be filed after the first spouse’s death. Alternatively, married couples can utilize a special trust, referred to as a “credit shelter trust” or “bypass trust” to prevent forfeiture of their individual exemptions. This planning technique must be undertaken when both spouses are still alive.
The Consequences of Failing to File an Estate Tax Return
As a simple example, consider a husband and wife who have a total of $7.5 million in assets, $6 million in a business the husband owns and the remaining $1.5 million owned by the wife. Upon the wife’s death, the estate’s executor files a timely estate tax return and the wife’s remaining $3.75 million in estate tax exemptions passes to the husband. When the husband dies, his entire $6 million business passes to his heirs tax free, even though his personal estate tax exemption is only $5.25 million. If portability is not claimed, then $1 million of the husband’s business will be taxed (the current rate is 40 percent). The husband’s heirs would be required to pay approximately $400,000 in estate taxes which could have been avoided if the wife’s estate executor had filed an estate tax return within the time limit.
Even if both spouses together have assets under the current $5.25 million exemption, it is still a good idea to file an estate tax return after the death of the first spouse. Filing the estate tax return and preserving the portability benefit protects the surviving spouse’s heirs in the event the surviving spouse receives a windfall during his or her lifetime that raises his or her assets above the $5.25 million exemption level.
Tuesday, August 5, 2014
You don’t have to be retired to dip into your Social Security benefits which are available to you as early as age 62. But is the early withdrawal worth the costs?
A quick visit to the U.S. Social Security Administration Retirement Planner website can help you figure out just how much money you’ll receive if you withdraw early. The benefits you will collect before reaching the full retirement age of 66 will be less than your full potential amount.
The reduction of benefits in early withdrawal is based upon the amount of time you currently are from full retirement age. If you withdraw at the earliest point of age 62, you will receive 25% less than your full benefits. If you were born after 1960, that amount is 30%. At 63, the reduction is around 20%, and it continues to decrease as you approach the age of 66.
Withdrawing early also presents a risk if you think there is a chance you may go back to work. Excess earnings may be cause for the Social Security Administration to withhold some benefits. Though a special rule is in existence that withholding cannot be applied for one year during retired months, regardless of yearly earnings, extended working periods can result in decreased benefits. The withheld benefits, however, will be taken into consideration and recalculated once you reach full retirement age.
If you are considering withdrawing early from your retirement accounts, it is important to consider both age and your particular benefits. If you are unsure of how much you will receive, you can look to your yearly statement from Social Security. Social Security Statements are sent out to everyone over the age of 25 once a year, and should come in the mail about three months before your birthday. You can also request a copy of the form by phone or the web, or calculate your benefits yourself through programs that are available online at www.ssa.gov/retire.
The more you know about your benefits, the easier it will be to make a well-educated decision about when to withdraw. If you can afford to, it’s often worth it to wait. Ideally, if you have enough savings from other sources of income to put off withdrawing until after age 66, you will be rewarded with your full eligible benefits.
Tuesday, June 24, 2014
You spend your whole life building your legacy but sadly, that is not always enough. Without careful estate tax planning, much of it could be lost to taxes or misdirected. While a will or living trust is essential for dividing your estate as you wish, an estate tax plan ensures you pass on as much of your legacy as possible.
Understanding estate tax laws
For the past decade, estate tax laws have been a sort of political football with significant changes occurring every few years. The good news is that the 2013 tax act made the basic $5 million estate tax exemption “permanent,” but at a higher rate of 40%, though the law continues to adjust the exemption level for inflation. With this adjustment, the 2013 exclusion is $5.25 million per person ($10.5 million per married couple). The law also retained exclusion “portability” which means that if one spouse dies in 2013, the surviving spouse may pass on the unused portion of the deceased spouse’s exclusion. This portability is not automatic, however. The unused portion needs to be transferred by the executor to the surviving spouse, and a special tax return must be filed within nine months. The surviving spouse does not have to pay estate taxes at this time, they only become due after both spouses have died.
Optimizing your estate plan
One way to maximize the amount you can pass on is through annual gifting while you are alive. An individual is allowed to give $14,000 each year to another individual, tax-free. If you give more than that, it will reduce your basic lifetime exclusion. So, if you give a child $50,000 this year, your basic $5.25 million exclusion will be reduced by $36,000 at the time of your death. You can gift as much as your full $5.25 million exclusion before incurring taxes, although doing so would “exhaust” your estate tax exemption at death. Gift tax rates were raised to 40% in 2013 and are paid by the giver, not the recipient.
An experienced estate tax planning attorney can help minimize potential gift and estate taxes by:
- Identifying taxable assets
- Transforming your wishes into a will or living trust
- Keeping you apprised of federal and state tax law changes
- Establishing an annual gifting plan
- Creating family and charitable trusts
- Setting up IRA charitable rollovers
- Setting up 529 education savings plans
- Helping you create a succession plan for your family business
It’s never pleasant to consider the end of your life, but planning for it will help ensure that the things you care about are cared for. It is one of the greatest gifts you can give your loved ones.
Tuesday, June 17, 2014
Families with significant net worth who have a tradition of philanthropy often consider establishing a charitable foundation as part of their estate plans. While there are a number of advantages to using family foundations as a philanthropic vehicle, families need to seek guidance from estate planning and tax professionals to ensure it is the best option for achieving their objectives.
According to The Foundation Center, there are over 35,000 family foundations in the US, responsible for more than $20 billion in gifts per year. While some foundations have tens of millions in assets, more than half report holdings totaling less than $1 million.
Minimizing various tax burdens is one benefit of creating a family foundation. However, if tax issues are your primary concern, then a different asset management and distribution vehicle will probably better suit your needs. While it is true that family foundations offer certain tax advantages—both in terms of current income tax obligations and future estate tax burdens—family foundations are also under many legal and regulatory obligations. These ongoing obligations mean that your family should choose to build a family foundation only if ongoing philanthropic giving is an enduring family goal.
Non-tax-related benefits of a family foundation include the following:
- Managing the foundation may provide employment for one or more family members
- A family foundation allows founders to involve family members in family wealth management, especially those who lack interest in the family business
- The foundation founder can maintain influence over recipients of charitable giving for generations to come
- A family foundation makes an excellent repository for all charitable giving requests. A formal process can be established to ensure grant applicants are not arbitrary.
- A family foundation can serve as a formal manifestation of a family’s philanthropic culture.
Types of Family Foundations
There are many different types of family foundations, each with certain advantages, disadvantages, and tax and regulatory obligations. The main types of family foundations include:
- Private non-operating family foundations which receive charitable donations from the family, invests those funds and makes gifts to other charitable organizations or individuals.
- Private operating family foundations which actively engage in one or more philanthropic activities, as opposed to making donations to other foundations that perform active charitable work.
- Supporting organizations which are designed to provide financial support to one or more specific public charities
- Publicly supported charities can be seeded with family philanthropic funds but then also take donations from the public. Publicly supported charities must meet specific Internal Revenue Service requirements to maintain their status as publicly supported charities.
Issues to Consider when Establishing a Family Foundation
- How much money do you plan to give to the foundation at its inception?
- Do you anticipate volunteer help from your family to run the foundation, or will the foundation need to pay one or more salaries?
- Does your family wish to support one or more specific charities, or do you want to fund a foundation which can ultimately choose among other charities in specific fields of philanthropic work?
- Does your family want to actively engage in philanthropic work or make gifts to other organizations that are already engaged in such work?
- Does the foundation founder prefer to exert strict control over gifts the foundation makes, or only to generally specify the types of philanthropic work he or she wishes the foundation to support?
Once you and your family have carefully thought through these considerations, you should consult with an estate planning attorney and other tax advisors to determine which type of family foundation most effectively meets your family’s giving objectives.
The Fenelli Law Firm located in Laguna Hills, CA serves clients with estate planning, special needs trusts, planning for children, asset protection, probate & trust administration, conservatorship / guardianships, business succession planning, & corporate entity formation needs throughout Los Angeles, San Diego, and Orange County CA.