Articles Posted in Estate Tax

Estate taxes issues present headaches for the simplest estates. These potential issues are compounded when the decedent is a celebrity. In the wake of Prince’s untimely death, his estate attorneys will be tasked with the momentous task of valuing his name and likeness. Essentially, someone will set a monetary value on Prince’s profit potential calculated on the day he died. A recent Wall Street Journal article explains that this task will inevitably lead to an IRS battle as the estate attorneys understandably want to make this value as low as possible while the IRS will want a very high number. A similar battle is currently taking place in the U.S. Tax Court in Michael Jackson’s estate.

The U.S. House of Representatives voted earlier this month to repeal the Federal Estate Tax. Republicans have long voiced their opposition over this tax but a vote to repeal hasn’t occurred in over a decade. The measure passed with 240 in favor and only 179 opposed. The vote breakdown was almost entirely on party lines with 7 Democrats joining Republicans in favor of repeal. However, there aren’t enough votes in the Senate and the President would likely veto the repeal so Estate Taxes aren’t going away anytime soon. However, this move sets up a potential repeal in the future especially if Republicans gain more seats in both houses of Congress and the Presidency in 2018.

As previously discussed here, the Estate Tax exclusion amount is currently $5,430,000 (and is indexed for inflation). So, if you die with less than that amount in your estate, you pay no estate taxes. The Tax Policy Center estimates that only 2 out of every 1,000 people who die pay any estate taxes. Most families won’t have to worry about this tax at all. The President’s Budget includes a provision lowering the exclusion amount to $3,500,000 which would open that tax liability for more individuals and families, but the vast majority of Americans would still be entirely unaffected by this tax. It will be very interesting to see what happens to the Estate Tax in the next few years.

We have previously discussed the importance of keeping your estate plan up-to-date. It’s a good rule of thumb to have an experienced estate planning attorney review your documents at least every five years. Out dated documents may have unnecessary provisions that can be very detrimental.

Recently, we are seeing a lot of clients who have an A/B split trust which may be unnecessary for their current situation. Back in the days of low estate tax exemption amounts, A/B Trusts were a convenient and effective way of reducing estate tax liability. However, the current estate tax exemption amount is $5,340,000 in 2014 and will rise to $5,430,000 in 2015. This means that you won’t pay a penny in estate taxes if your estate is less than the exemption amount.

Not so long ago, the estate tax exemption was only $1,500,000 (in 2005) so many trusts had A/B split provisions automatically placed in the document. This is great for reducing estate tax liability but can restrict the use of Trust funds for the Surviving Spouse. Under a trust with a A/B split, when the first spouse dies, 50% of the assets are transferred into a Decedent’s Trust (also called a Trust B) which usually cannot be amended or revoked by the Surviving Spouse. Also, the Surviving Spouse generally does not have access to principal and can only receive the income from the assets in this Trust. It can be difficult explaining to a Surviving Spouse that she doesn’t actually have use of all of the Trust funds when her spouse dies.

However, a benefit of the A/B split is that your Surviving Spouse cannot disinherit your beneficiaries. This is important especially in blended families where both spouses have children from prior marriages. Under the A/B split a Surviving Spouse cannot change the provisions of the Decedent’s Spouses’ Trust and therefore cannot disinherit step-children.

If your assets have changed significantly since your trust was initially created, or you no longer believe that an A/B split Trust is right for you contact an experienced estate planning attorney.
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The IRS recently declared that same-sex married couples will enjoy the same tax treatment as straight couples beginning on September 16, 2013. This is an important decision since the practical realities of life post-DOMA were uncertain. Now, same-sex married persons can file joint returns, amend previous returns and request refunds for the past three years. Additionally, the IRS explained that it will recognize any legal marriage irrespective of the state of residence of the filers. This means that a gay couple in Kansas could travel to Washington and get legally married and this marriage would be recognized by the IRS. When the Kansas couple returns to their home state they must file as a married couple on their federal income tax returns. (They would not be able to file as a married couple for their state tax returns, however.)

There are numerous tax and other important consequences of the Supreme Court’s decision to overturn the Defense of Marriage Act (DOMA). Also, estate planning for same-sex married couples will be easier and less cumbersome than ever before. Some of the effects of the recent decision are discussed below.

“Married” Filing Status for Federal Income Taxes

Same-sex married couples will now file their annual federal income taxes as married, either jointly or separately. Tax preparation should be less expensive and simpler than under DOMA. Married same-sex couples will no longer have to decide which spouse takes which deduction or who claims which dependent child.

The Supreme Court ruled that the Defense of Marriage Act (DOMA) is unconstitutional. The act defined marriage under federal law as between a “man and a woman.” That definition is no longer valid. This means that same-sex couples who are legally married will be treated like any other married couple under federal law.

This does not mean that all states must recognize same-sex marriage. This decision only means that where same-sex marriage is already legal, these couples will be recognized as married under federal law. However, this decision can vastly affect estate planning opportunities and tax advantages for same-sex married couples.

The Supreme Court heard arguments last week regarding the constitutionality of the Defense of Marriage Act (DOMA). The legal arguments focused primarily on the 10th amendment and the freedom of individual states to choose how to define marriage. Ending DOMA would mean that the federal government would recognize any union that an individual state recognizes. For instance, a same-sex married couple from Massachusetts would be treated as a “married couple” under federal law. As the law stands now, that same-sex married couple from Massachusetts is not recognized as married under federal law.

The impact of DOMA on same-sex married couples is vast. DOMA prevents these couples from enjoying federal pension benefits, immigration benefits, gift and estate tax benefits, income tax benefits and many other things that opposite-sex married persons enjoy. Another important impact of DOMA is the effect on estate planning for same-sex married couples.

An opposite-sex married couple’s estate plan is usually pretty straightforward. They create a joint trust, execute some Power of Attorneys and Advance Health Care directives and reciprocal wills. However, estate planning for a same-sex couple is much more complicated. If a same-sex married couple creates a joint trust there are various legal and tax hurdles to overcome. Since the federal government does not recognize the couple as “married” any gifts made between the couple will be subject to federal gift taxes. When the couple funds the joint trust with assets they must trace the genesis of the assets. If one partner contributes more than the other, then there may be some gift tax complications. Furthermore, the Trust would require its own Taxpayer Identification Number since a same-sex couple could not use one of their Social Security Numbers as the identifier for joint assets.

We didn’t fall off the fiscal cliff. In the wee hours of January 1, 2013 Congress finally reached a deal on taxes. The American Taxpayer Relief Act (ATRA) outlines the changes to taxes in 2013. The new laws are similar to those in existence in 2012 with some slight modifications.

Ordinary Income Taxes

Tax rates are 10%, 15%, 25%, 28%, 33%, 35% and an additional 39.6% was added in 2013. This new tax bracket will be assessed for incomes >$400,000 for single filers and $450,000 if married filing jointly.

Qualified Dividends/Long-Term Capital Gains
0%, 15% and a new 20% bracket was added for incomes >$400,000 for single filers and $450,000 if married filing jointly.

Medicare Tax on Net Investment Income
This is a brand new tax of 3.8% for modified adjusted gross incomes >$200,000 for single filers and $250,000 if married filing jointly.

Social Security Payroll Reduction
The 2% reduction enjoyed for the past two years expired January 1, 2013.

Estate/Gift/GST Taxes

40% for Estates/Gift/Generation Skipping Transfers over $5,000,000 adjusted for inflation. (Adjusted amount for 2013 is $5,250,000).
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Our Palm Desert Estate Planning lawyers see too many clients fail to timely update their estate plan. Since Congress has not given us any idea if they will address the tax laws before January 1, 2013, our lawyers are planning for Estate Tax Armageddon. As we have previously posted, the laws for gift and estate taxes are changing at 12:01 A.M. on January 1, 2013 unless Congress passes new legislation. Unfortunately, this means there is only eight more weeks to schedule an appointment with your estate planning attorney to revise your documents.

Engaging in last-minute estate planning can be sloppy and dangerous. Numerous issues can arise having very costly consequences if you don’t timely review and revise your plan. If you’re interested in taking advantage of the life-time gift exemption of $5.1 million, make sure your gift is completed before January 1, 2013. This doesn’t mean you can hand a check to your child and hope that he or she cashes it before New Year’s Day. A safer method is to do a wire transfer that ensures the funds are deposited fully before January 1st. If you’re gifting real property, make sure the deed is signed AND recorded before January 1, 2013.

Don’t miss out on these valuable opportunities by waiting until the last minute to address your estate planning problems. Schedule an appointment with your attorney early so that you have enough time to review, revise and execute new documents before New Year’s Eve.

Our Palm Desert estate planning attorneys continually see clients who have not updated their Will or Trust since it was first established….20 or more years ago. Although out-of-date documents are better than no document at all, current and updated documents are best. Estate tax laws change regularly and so do changes in state laws regarding estates and trusts. We recommend clients review their estate planning documents at least every five years. However, there are some circumstances which necessitate reviews and revisions sooner than the five year mark.

If your immediate family experiences a major event such as a marriage, death or birth, you should review your current documents.

Current estate tax rates and exemption levels are set to end on December 31, 2012 absent an act from Congress. The new law effective January 1, 2013 is dramatically different than our current laws.

When you buy or sell a home you need to revisit your estate plan and make sure you update your documents to reflect this change. If you have a trust, make sure that all new pieces of real estate are vested properly.

Whether you sold a business and are expecting significant financial gains or realized considerable losses, you need to review your plan. Some estate planning mechanisms may no longer work for your changed financial status.
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