What are Three Areas of Giving Not to Skip?

  • Post Author:

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”

What Happens If I Don’t Have an Estate Plan?

  • Post Author:

It’s so much better to have an estate plan than not to. With a will and/or trust, you can direct your assets to those whom you wish to receive a legacy, rather than the default rules of the State of California. This is according to a recent article in the Houston Chronicle’s entitled “Elder Law: Will you plan now or pay later?”

You should also designate an independent financial agent (known as an executor, power of attorney and trustee). You may want to have an estate planning attorney create a special trust to provide for family members who are disabled, along with trusts for minors and even adult children.

Here are three major items about which you may not have considered that may require changes to your estate plan or motivate you to get one. Years ago, the amount a person could leave to beneficiaries (the tax-free exemption equivalent) was much lower. You were also required to either use it or lose it.

For example, back in 1987 when the exemption equivalent was $600,000 per taxpayer, a couple had to create a by-pass trust to protect the first $600,000 upon the first to die to take advantage of the exemption. The exemption is $11.58 million in 2020, and the “portability” law has changed the “use it or lose it” requirement. There may still be good reasons to use a forced by-pass trust in your will, but in some cases, it may be time to get rid of it.

Next, think about implementing planning to have some control over your assets after you die.

You could have a heart attack, a stroke, or an unfortunate accident. These types of events can happen quickly with no warning. You were healthy and then suddenly a sickness or injury leaves you severely disabled. You should plan in the event this happens to you.

Why would a person not take the opportunity to prepare documents such as powers of attorney for property, powers of attorney for health care, living wills, and medical privacy documents?

It’s good to know that becoming the subject of a court-supervised conservatorship proceeding is a matter of public record for everyone to see. There is also the unnecessary expense and frustration of a guardianship that could’ve been avoided if you’d taken the time to prepare the appropriate documents with an estate planning or elder law attorney.

Why would you want to procrastinate making an estate plan and then die suddenly without ever taking the time to make your will? Without valid estate planning documents, like a trust, your family will have to pay more for a costly probate proceeding.

Reference: Houston Chronicle (Jan. 16, 2020) “Elder Law: Will you plan now or pay later?”

Will My Heirs Pay Inheritance Tax?

  • Post Author:
Will My Heirs Pay Inheritance Tax?
Tax return check on 1040 form background

U.S. News & World Report explains in its article, “What Is Inheritance Tax?” that estate taxes and inheritance taxes are often mentioned as if they’re the same thing. However, they’re really very different in concept and practice.

Remember that not every estate is required to pay estate taxes, and not every heir will pay inheritance tax. Let’s discuss how to determine whether these taxes impact you.

Inheritance is considered to be taxable to heirs. Whether heirs need to pay this is based upon the state in which the deceased lived and the heirs’ relationship to the benefactor.

Inheritance tax is a tax imposed by the state on a portion of the value of a deceased person’s estate that is paid by the inheritor of the estate. There is no federal inheritance tax. Currently, there are only six states that impose an inheritance tax, according to the American College of Trust and Estate Counsel. The states that have an inheritance tax are Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.

Inheritance tax laws and exemption amounts are different in each of these six states. In Pennsylvania, there’s no inheritance tax charged to a surviving spouse, a son or daughter age 21 or younger and certain charitable and exempt organizations. Otherwise, the inheritance tax is charged on a tiered system. Direct descendants and lineal heirs pay 4.5%, siblings pay 12% and other heirs pay a hefty 15%.

Whether inheritance tax applies is determined by the state in which the deceased lived. Estate taxes are deducted from the deceased’s estate after death and aren’t the responsibility of the heirs. Some states also charge their own estate taxes on assets more than a certain value. The states that charge their own estate tax are Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington and Washington, D.C.

Decreasing estate taxes are the responsibility of the deceased prior to his or her death. They should work with an estate planning attorney to map out strategies that can lessen or eliminate estate taxes for certain assets.

Remember that inheritance taxes are state taxes. They are imposed by only six states and are the responsibility of the heirs of the estate, even if they live in another state. In contrast, estate taxes are federal and state taxes. The federal estate tax is a 40% tax on assets more than $11.58 million for 2020 ($23.16 million for married couples). This is charged, regardless of where you live. Some states have additional estate taxes with their own thresholds.

Inheritance taxes are paid by the heirs, and estate taxes are paid by the estate. An estate planning attorney can help to find ways to reduce taxes and transfer money efficiently.

Reference: U.S. News & World Report (October 8, 2019) “What Is Inheritance Tax?”

What Does the New SECURE Act Mean for My Retirement?

  • Post Author:

Lawmakers in Washington are providing some essential tools to those trying to put together a financial plan for their retirement, Motley Fool reports, in its recent article entitled “3 Ways the SECURE Act Could Make You Replan Your Retirement.” However, in the process, our legislators also threw some curveballs into the existing legal system. This may provide new opportunities for savers but also may create pitfalls for the unaware. As a result, it’s important to know the three primary ways that the SECURE Act will change the way you think about retirement.

  1. Delaying RMDs from IRAs and 401(k)s until age 72. Many Americans use IRAs, 401(k)s, and other tax-favored retirement accounts to help them save for retirement. These accounts offer deferral on any paying taxes due on the income generated by the investments within the accounts until the funds are withdrawn in retirement. However, Congress didn’t want people to be able to defer taxes on their retirement savings forever, so they created a system of required minimum distributions (RMDs). Under the old law, most people have to start taking withdrawals from IRAs and 401(k)s beginning in the year they turn 70½. The distribution amount is based on the person’s life expectancy, so that they gradually use up the retirement account balances over time. The SECURE Act changes the age at which people are required to take RMDs to age 72. This allows people some extra time before dealing with RMDs and also eliminates the complication of dealing with a half-birthday. You can withdraw money from your retirement accounts at age 70½ if you want to, but the legislation lets you make the choice.
  2. Allowing IRA contributions after age 70½. Under current law, people can’t make IRA contributions once they reach 70½, despite still working. Congress again didn’t want people to keep adding to their retirement accounts when they were already past typical retirement age. However, in reality, many people still work after age 70½. Therefore, allowing them to set money aside in a tax-favored way is only fair. That’s why the SECURE Act’s changed the age to allow further IRA contributions.
  3. Forcing faster withdrawals from inherited IRAs. The third change isn’t as favorable: to help pay for the tax impact of these changes, Congress decided to curtail the rules that let those who inherit retirement accounts to stretch out distributions over their entire lifetimes. The new legislation would still let spouses treat an inherited account as if it belonged to the spouse, but most non-spouse beneficiaries would have to take distributions within 10 years.

With this change, you should review your estate planning to see if changes are necessary to reach the best possible outcome. Ask your estate planning attorney to go over these changes and how they may have an impact upon your estate plan.

Reference: Motley Fool (Dec. 19, 2019) “3 Ways the SECURE Act Could Make You Replan Your Retirement”

What Taxes are Due if I Gift My Home to my Child?

  • Post Author:

It’s not unusual for a senior to consider gifting their home to a married child or to a grandchild. However, there are tax consequences to consider before you do this.

nj.com’s recent article on this subject asks “What should I know about taxes before I gift my home?” The article explains that you can gift your home or any other asset to anyone, provided that person is capable of receiving the gift and takes delivery or ownership of it. However, if the grandchild is a minor, the gift would have to be made either in trust with a trustee or through a Uniform Transfers to Minors Act (UTMA) account that has a custodian, until they attain the age of majority.

The federal government has a gift tax, but not everyone will be subject to the tax. That’s because each year, you can give anyone up to a $15,000 gift tax-free. If you’re married, you and your spouse could each make those gifts, totaling $30,000 per year, per recipient without any gift tax.

Gifts to an individual more than $15,000 per year that aren’t under an exclusion or exemption are subject to federal gift tax. As a result, you must file a federal gift tax return on IRS Form 709. However, it’s not likely that you’ll actually have to pay any gift tax, even though you have to file a return. The reason is that under the federal unified estate and gift tax system, each person has a lifetime exclusion from gift and estate taxes of $11.4 million, over and above the annual $15,000 per person gift tax exclusion. That number is doubled for married couples ($22.8 million). So, you can transfer up to $11.4 million, whether as a gift during your lifetime or as a bequest after your death, before any gift or estate taxes are actually due. Keep in mind, though, that if you make gifts that use up your $11.4 million exemption, that your exemption is reduced by that amount when your estate tax is calculated on your death.

In addition, you can make unlimited gifts to qualified charities without any gift tax consequences. The same is true for gifts to spouses, as long as both spouses are U.S. citizens. Payments of tuition or medical expenses for someone else are also gift tax-free if they’re made directly to the school or the medical care provider.

As far as whether and how to gift your home, there are income tax considerations to consider. If you sell your home and have a capital gain, you may qualify to exclude up to $250,000 of that gain from your income. The exclusion is up to $500,000 if you’re married and file a joint return with your spouse. To qualify for the capital gains exclusion on the sale of your home, you are required to have owned the home and also used it as your principal residence for at least two of the previous five years.

For example, say that you purchased a home for $200,000 and made capital improvements in the amount of $50,000. Your basis in the home is now $250,000. If you sell that home for $500,000, then you will have a capital gain of $250,000 ($500,000 sale price minus $250,000 basis). However, as long as you qualify under IRS principal residence rules, you could exclude the entire $250,000 gain when you sell the residence and therefore have no tax bill to pay.

If you gift the house to a child or anyone else, in most instances, your $250,000 basis would carry over to the recipient. Your child and their spouse would then have a $250,000 basis in the house. If they live in it for two years, then they could have a capital gains exclusion of up to $500,000, as long as they file a joint return, if they then sell it.

If you want to stay in your home, one option is to leave it to your child or grandchild in your will, rather than gifting it now. If your child inherits the house, then their basis in the inherited house would then be its fair market value on the date of your death instead of your original $250,000. This increased basis in the home would decrease the amount of any future capital gains if the daughter subsequently sold the home.

Another option would be to sell the house now to a third party, leverage the capital gains tax exclusion and then gift the money, instead of the home itself, to your child.

The best financial outcome would depend on the individual financial circumstances, future plans, and income tax brackets of the parent and child. There are additional factors to consider, such as the age of the house, its location and condition, whether your child would use it as their primary residence or as a rental and whether you anticipate that the house will increase in value over time.

One final note: if you gift the house to a grandchild, the generation-skipping transfer tax (GSTT) would apply in addition to the gift tax. This is a separate tax system that applies when gifts or bequests are made to a person who is two or more generations below the person making the gift or bequest, like a grandchild or great-grandchild. However, many of the same exclusions that apply for gift tax purposes, also apply for GSTT purposes. So, the odds are you won’t have to pay any GSTT for this specific transfer.

Talk to an experienced estate planning attorney to help you find the best strategy for you and your family.

Reference: nj.com (October 28, 2019) “What should I know about taxes before I gift my home?”

What Will New Acts of Congress Mean for Stretch IRAs?

  • Post Author:

The SECURE and RESA acts are currently being considered in Congress. These acts may impact stretch IRAs. A stretch IRA is an estate planning strategy that extends the tax-deferred condition of an inherited IRA when it is passed to a non-spouse beneficiary. This strategy lets the account continue its tax-deferred growth over a long period of time.

Congress is considering legislation with the SECURE and RESA Acts, that would eliminate the ability of children to create a stretch IRA, one that would let them to stretch distributions from the inherited IRA over their lifetimes. The proposed SECURE and RESA Acts under consideration state that the maximum deferral period will be 10 years. If the beneficiary is a minor, the period would be 10 years or age 21.

If Congress does pass the SECURE and RESA acts, people will need to change the way they financially plan for their retirement accounts. If a parent doesn’t need to spend any of her Required Minimum Distributions, does it make sense to do a gradual Roth IRA conversion and use the RMDs to pay taxes on the conversion? Or should the parent invest the RMDs in a brokerage account?

There are several options in this situation, according to nj.com’s recent article, “With Stretch IRAs on the way out, how can I plan for my children’s inheritance?”

As with many things related to financial and estate planning, the best planning strategy for a parent would depend on her overall finances and what she wants for her children’s inheritance.

The conversion to a Roth may be a good planning move if the parent’s tax bracket makes the income tax rate reasonable. Putting the money in a brokerage account is also an option.

A parent may also want to think about using the RMD proceeds to purchase a life insurance policy held by an irrevocable trust for the benefit of her children.

It’s best to contact an experienced estate planning attorney, so he or she can review the details of the parent’s finances and help her choose the best options for her situation.

Reference: nj.com (October 15, 2019) “With Stretch IRAs on the way out, how can I plan for my children’s inheritance?”

How Does the IRS Know if I Give My Grandchildren Money?

  • Post Author:

A recent nj.com recent post asks, “Will the IRS know if I gift money to my grandchildren?” The article explains that federal and state tax agencies do not have any direct way of knowing how much is being gifted. They rely on taxpayers self-reporting gifts. It’s the honor system.

However, the tax authorities may discover these transfers when you or the recipient are audited, by matching transactions reported for certain assets, or because banks are required to report cash transfers in excess of $10,000. Because it’s pretty simple to avoid paying gift tax, it doesn’t seem worth the risk of getting caught trying to skirt the rules. Understanding the gift tax and working within the system is the best way to avoid issues.

The IRS stipulates that a gift is “the transfer of property by one individual to another while receiving nothing, or less than full value, in return.” A gift is never taxable to the recipient, so only the person making the gift has to consider the gift tax.

The amount you can give will not be subject to gift tax if the gift amounts are less than the annual and lifetime exemptions. The annual gift exemption is currently $15,000 per recipient, which means that you can give up to $15,000 each year to an unlimited number of people with no reporting requirement at all.

You’re supposed to complete a U.S. Gift Tax Return (IRS Form 709) if you exceed the exemption, but don’t panic. Although you are required to file a gift tax return, it is highly unlikely any gift tax will be due. That’s because gifts in excess of the annual exemption must first offset your lifetime exemption before any gift tax is due.

Keep in mind, however, that the IRS can impose penalties if they discover that you failed to file a gift tax return, even if no gift tax was due. Also note that the gift tax is integrated with the estate tax, which applies to amounts transferred upon your death in excess of your remaining lifetime exemption.

If you’re planning on making a gift to help pay a grandchild’s college costs or medical expenses, make the payment directly to the educational or healthcare institution. By making the payment directly to the institution, that payment will not be considered a gift and will not go towards the $15,000 exemption and also will not decrease your lifetime exemption.

Ask your estate planning lawyer about any state gift, estate and inheritance tax implications for any significant transfers you want to make.

Reference: nj.com (October 1, 2019) “Will the IRS know if I gift money to my grandchildren?”

Can I Keep a Loved One’s Inheritance From Their Spouse?

  • Post Author:

A recent nj.com article asks, “How do I protect my niece’s inheritance from her husband?” The article asks about a scenario where someone plans to leave most of her estate to her niece but wants to keep the niece’s estranged husband from getting his hands on the money. Although the default laws may vary state by state, no matter where she resides, she must be proactive and intentional about her gifting to make sure the funds go where she intends them to go.

First, there are tax consequences to consider and keep in mind. In states like New Jersey, the money may be subject to the New Jersey inheritance tax, which is assessed if the decedent is a New Jersey resident, regardless of where the beneficiary resides. The tax is levied based on the relationship of the deceased to the beneficiary. In this case, the niece’s inheritance would be subject to an inheritance tax of 15 to 16%.

Next, the aunt needs to decide the manner in which she wants to leave the assets. One option is for the aunt to leave the assets to the niece outright.

The laws in many states, like Missouri, South Carolina, and New Jersey, say that unless the parties otherwise agree, upon divorce there will be equitable distribution of their marital property. Marital property generally doesn’t include the property received by gift or inheritance, as long as that person didn’t commingle it (in other words, mix it up and combine it) with the marital property.

Because there will be no administrative costs, the most economical way to transfer the property to the niece is for the aunt to leave it to the niece in her will, with instructions for her to keep it separate and apart from her marital property. However, this may not be the best way to leave property to the niece, because once it is given to the niece, it is out of the aunt’s control and it may be mixed up with the marital property, in which case the niece’s husband may be able to have access to it.

If, however, the aunt leaves the inheritance in trust, she can make certain the property isn’t commingled with marital assets by drafting a trust that will keep it separate from the rest of the niece’s property. Further, if the trust is properly prepared by an experienced estate planning attorney, the income from the trust will likely not be used to decrease any spousal support to which the niece may otherwise be entitled from her spouse, in the event that they divorce down the road. The trust can also protect against other events, by instructing to whom funds should be paid upon the premature death of the niece. For instance, the trust can state specifically that the funds should then be held in trust for the niece’s children. That would further prevent her estranged husband from ever being able to make a claim against the funds.

If you are concerned about leaving property to someone you love, but that person is married to someone that you don’t, a trust can help you make sure that the inheritance goes to the actual person you want to receive it. Talk to an estate planning attorney who can provide you with some options.

Reference: nj.com (August 21, 2019) “How do I protect my niece’s inheritance from her husband?”

Details of the New SECURE Act

  • Post Author:

You may have heard some talk about the new SECURE Act. But what are the details and how does it impact you?

The SECURE Act proposes a number of changes to retirement savings. These include changes to parts of IRAs and 401(k)s. Although it is still under review, the Act is expected to be passed in some form after revisions. Some of the changes that the Act makes look to be common sense, like broadening access to IRAs and 401(k)s, as well as including updating the rules to reflect that retirement is now a longer period of life. However, with these changes come potential limitations with stretch IRAs.

Forbes asks in its recent article “Are Concerns Over Stretch IRAs And The SECURE Act Justified?” In general, an IRA is a tax-wrapper for your investments. While the investments stay in the IRA, you do not have to pay any tax on income made from those investments. A traditional IRA is where your contributions can be made tax-free for the time being, with tax due upon withdrawal. Alternatively, you can contribute after-tax dollars and have your distributions be tax-free if you use a Roth IRA. The SECURE act isn’t changing this fundamental process during the lifetime of the person who contributed to the IRA. Instead, it is altering what happens when that person, still has an IRA balance at death.

If you’ve ever spoken with someone who inherited an IRA, you have probably heard of the Stretch IRA. A Stretch IRA can be a great estate planning tool. Here’s how it works: you give the IRA to a young beneficiary in your family. The tax shield function of the IRA is then “stretched,” for what can be decades because the length of the IRA will now extend to the end of the beneficiary’s lifetime. This is important because the longer the IRA lasts, the more your investments can continue to grow. In a sense, this will protect that growth from taxes for a longer period of time.

However, the SECURE Act could change that: instead of IRA funds being spread and distributed to the beneficiary over the lifetime of the beneficiary, they’d be spread and distributed over a much shorter period. Based on the provisions of the SECURE Act as it stands, that period will likely be 10 years. That’s a big change for estate planning because a beneficiary will now have to withdraw that investment within a shorter period of time, be taxed on that income sooner, and lose out on the benefits of letting the investments grow for longer.

It’s good to keep in mind, though, that for a person who uses their own IRA throughout retirement and uses it up or passes it to their spouse as an inheritance—the SECURE Act changes almost nothing. In fact, IRAs are slightly improved for these individuals due to the new ability to continue to contribute after age 70½ and other small improvements. Therefore, most typical IRA holders will be unaffected or benefit to some degree. For many people, the bulk of IRA funds will be used in retirement and the Stretch IRA is less relevant. If you are planning to use the IRA as a distribution for your children or other people to inherit, however, talk to a tax advisor or attorney to understand how the SECURE Act will impact your estate plan.

Reference: Forbes (July 16, 2019) “Are Concerns Over Stretch IRAs And The SECURE Act Justified?”

What Do I Tell My Kids About Their Inheritance?

  • Post Author:

For some parents, it can be difficult to discuss family wealth with their kids. You may worry that when your child learns they’re going to inherit a chunk of money, they’ll drop out of college and devote all their time to their tan.

Kiplinger’s recent article, “To Prepare Your Heirs for Future Wealth, Don’t Hide the Truth,” says that some parents have lived through many obstacles themselves. Therefore, they may try to find a middle road between keeping their kids in the dark and telling them too early and without the proper planning. However, this is missing one critical element, which is the role children want to play in creating their own futures.

In addition to the finer points of estate planning and tax planning, another crucial part of successfully transferring wealth is open, honest, and consistent communication between parents and their children. This can be valuable on many levels, including having heirs learn about, understand, and see the family vision while also bolstering personal relationships between parents and children through trust, honesty and vulnerability.

For example, if the parents had inherited a $25 million estate and their kids would be the primary beneficiaries of their own estate, transparency would be of the utmost importance. While that inheritance might lead the children to believe that they could use all this money for their own plans, careers, and dreams, that might not be the case if the parents had other intentions for this inheritance, such as a charity or a comfortable retirement. This lack of communication might impact the way kids plan for their own futures, whereas an upfront family discussion about how the money would or would not be used for the children’s lives would have equipped the children to plan appropriately for their own futures.

Without having conversations with parents about the family’s wealth and how it will be distributed, the support a child gets now and what they may receive in the future may be far different than what they originally thought. With this information, the child could make informed decisions about their future education and how they would live.

Heirs can have a wide variety of motivations to understand their family’s wealth and what they stand to inherit. However, most concern planning for their future. As a child matures and begins to assume greater responsibility, parents should identify opportunities to keep them informed and to learn about their children’s aspirations, and what they want to accomplish.

The best way to find out about an heir’s motivation is simply to talk to them about it.

Reference: Kiplinger (May 22, 2019) “To Prepare Your Heirs for Future Wealth, Don’t Hide the Truth”