Orlando Estate & Elder Law

Dynasty Isn't Just a TV Show

The temporary raising of the estate and gift tax exemptions has given wealthy Americans a small window that could help their families for generations.

A long time ago, lawmakers were concerned about the ability of one wealthy person to control how assets were managed after they passed away. In English common law, a host of complicated rules were developed to make it so that assets could no longer be controlled from the grave and that heirs were given full control.

These rules became part of the laws in the U.S. after the revolution. Today, however, their biggest impact is typically in the headaches they cause law students who must learn them. The old rules have steadily been replaced.

Today, there is a type of trust that can last indefinitely to pass money down between generations of a family. With the raising of the gift and estate taxes, these “dynasty trusts” could be a great deal for many wealthy people as Bloomberg discusses in "Heirs of Heirs of Heirs of Heirs Love Dynasty Trusts."

Married couples can put up to just over $22 million into a dynasty trust today without triggering tax liability. If those assets are invested wisely, the proceeds from the investments can be used by the family for a long time, perhaps even forever.

Heirs do not have to pay any capital gains on the trust assets until an asset is sold.  However, they most likely will likely be required to pay income taxes on any distributions.

People with enough money to create a dynasty trust might want to consider the option while they have it. However, these trusts are only available in a few states, so it is important to consult an experienced estate planning attorney to set it up.

For more information about estate planning in Orlando, FL (and throughout the rest of Central Florida), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Reference: Bloomberg (June 10, 2018) "Heirs of Heirs of Heirs of Heirs Love Dynasty Trusts."

Long-term Estate Tax Clawbacks Possible

The new tax law has left an important estate tax issue up to the IRS to determine. That is what to do if the estate tax exemption reverts to its previous level and the deceased has gifted more than that amount.

The recently passed tax reform bill required Congress to make several compromises because of budget limitations in the amount the bill could add to the deficit and avoid a possible filibuster by Democratic senators.

Those limitations prevented a complete elimination of the estate tax, as had long been proposed by Republicans in government.

The estate tax exemption has now been doubled.  However, this could not be made permanent and the exemption is scheduled to revert back to its previous level in 2026.

This creates a potential issue for some estates, as Wealth Management discusses in "Clawback Under New Tax Law."

The issue is what to do if someone in 2018 uses the doubled exemption to make gifts and thus uses up their lifetime exemption under the current law, but then passes away after the exemption limits have reverted to previous levels.  The exemption limit to use for the estate is unknown. It is possible that gift amounts over the exemption limit in place at the time the person passes away, could be clawed back into the estate for estate tax purposes.

Instead of deciding how to handle this issue, Congress has authorized the IRS to decide what to do.

It is possible the agency will decide that there should be clawbacks. Therefore, for now people need to be wary and talk to advisors before gifting too much.

For more information about estate planning in Orlando, FL (and throughout the rest of Central Florida), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Reference: Wealth Management (Dec. 28, 2017) "Clawback Under New Tax Law."

Death and Taxes Remain Inevitable

When planning around gift and estate taxes, it is important to understand that your own expected longevity plays an important role.

Estate planning attorneys frequently tell people that they need to create estate plans before they become senior citizens. Attorneys also encourage people to do their planning before death is looming.

There are several reasons for this.

The most commonly cited reason is that you never know what might happen. Anyone can have a fatal accident anytime, so it would be a good idea to have made plans.

However, there are other reasons why planning ahead is important.  This includes preparing for end-of-life expenses, as well as the rules surrounding eligibility for Medicaid to pay for nursing home care.

One reason not mentioned very often is taxation. It is important, as the Wills, Trusts & Estates Prof Blog mentions in "Federal Estate and Gift Taxes Are a Mortality Risk."

Both federal and state tax authorities are aware that if a person knows he or she will pass away soon, there is a strong incentive to rearrange financial affairs to get around estate taxes. People may be tempted to give their money away on their deathbeds, in order to shrink their estates below the estate tax exemption limit.

For that reason, tax codes include provisions that gifts made within specified time periods before a person passes away are still considered part of the estate. Other tax code provisions similarly anticipate things a dying person might be tempted to do to rearrange their finances.

Because of these issues, it is important to plan ahead for the estate tax.

Your plan needs to be in place before you ever think it will take effect.

For more information about estate planning in Orlando, FL (and throughout the rest of Central Florida), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Reference: Wills, Trusts & Estates Prof Blog (Dec. 11, 2017) "Federal Estate and Gift Taxes Are a Mortality Risk."

IRS's Under Audit

The Treasury Inspector General for Tax Administration has recently recommended that the IRS needs to do a better job of scrutinizing estate and gift tax returns.

It is not common to think of the IRS as being too lenient or not diligent enough in its work. The public perception of the agency tends to be that it is too hard-nosed. However, it is also sometimes portrayed as being unfair.

It does not audit everyone.

Not every tax return is thoroughly scrutinized. How the IRS chooses what to look into, is often questioned.

It has recently been called into question by the government official responsible for providing oversight of the agency's processes, as the Wills, Trusts & Estates Prof Blog reports in "IRS Faulted on Scrutiny of Estate and Gift Tax Returns."

The Treasury Inspector General for Tax Administration issued a report that criticized the IRS for its handling of estate and gift tax returns. In part, the report faults the IRS for the way in which it scrutinizes those returns and suggests that the process is not fair to taxpayers.

What that means, however, is not that the IRS should look at fewer returns. It means that they should look at more returns to make sure everyone is filing them appropriately.

The IRS has agreed to make the changes that the inspector general suggested.

If the IRS is going to start scrutinizing more estate and gift tax returns, then the people filing those returns need to be even more diligent than they already are.

Make sure everything is filed properly and that the information is accurate.

For more information about all aspects of estate planning in Orlando and all of Central Florida, please check out my website.  While you are there, be sure to sign up for our monthly informational newsletter.

Reference: Wills, Trusts & Estates Prof Blog (Oct. 15, 2017) "IRS Faulted on Scrutiny of Estate and Gift Tax Returns."

Could Louise Linton Jeopardize Tax Reform?

While Americans wait to see what Congress will do with tax reform, the Secretary of the Treasury's wife might have imperiled some planned reforms.

Millions of Americans are currently keeping their estate and financial plans in a sort of limbo. They are waiting to see what tax reforms will come out of Congress this autumn.

Potential changes to the estate tax, gift tax, capital gains tax, deductions, corporate taxes and more could all have great impact on the estate plans of Americans.

These tax changes have the potential to make many estate plans obsolete, so some people are now holding off on making new plans.

A social media post might now change the public debate about what the tax reforms should include, as the Washington Post discusses in "Here's how Louise Linton could change the tax debate."

Louise Linton is the wife of the Secretary of the Treasury, Steve Mnuchin. She posted a picture of the two of them getting off a government-owned plane.  She labeled the picture by listing all of the designer fashion items that she was wearing.

A single mother of three responded to this with "Glad we could pay for your little getaway."

Instead of letting that go, Linton responded by berating the woman repeatedly about how much in taxes she and her husband have paid and how many sacrifices they have made.

Who is right in this debate is not the important issue.

Linton's response was seen as the worst possible response of a tone death, entitled rich person.

 It has the potential to turn the public mood against the tax reforms that her husband is proposing  which would benefit the wealthy, such as eliminating the estate tax.

For more information about estate planning and updates on the unfolding and ever-changing tax reforms in Orlando, FL (and throughout the rest of Central Florida), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Reference: Washington Post (Aug. 23, 2017) "Here's how Louise Linton could change the tax debate."

Give Now Or Later?

It is traditional for parents to give any inheritances for their children in their estate plans for the children to receive after they pass away. However, some people prefer giving that money to their children before they pass away.

People who have more income than they need for their own expenses, normally do one or more things with their extra money. They invest it, give it to charity or spend it on luxury items they do not really need.

Any money they then have left after they pass away, is typically left to their children in their estate plans. That is what is traditionally done with wealth. It is transferred to the next generation.

However,  The New York Times recently had an article by a man who has chosen to do something else with his extra money. The article is titled "Why I Am Giving My Children Their Inheritances Now."

The author and his wife are not wealthy, but they make enough to be comfortable and have money left over. They do not wish to spend their extra money on vacations or luxuries. Instead, they have decided to give their extra money to their adult children now.

As a result, their children can use their “inheritance” to meet their current needs or to invest it for their retirements, if they prefer to do that.

This is something that many people would not be interested in doing. On the other hand, anyone interested in doing this should go about it carefully.

Why?

There are possible gift tax implications that need to be considered.

For more information about estate planning and gifting of all sorts in Orlando, FL (and throughout the rest of Central Florida), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Reference: New York Times (June 9, 2017) "Why I Am Giving My Children Their Inheritances Now."

Think Gift Tax When Reforming Estate Tax

With Congress expected to take up major tax reform soon, there has been a lot of talk about what will happen to the estate tax. Little focus has been given to the gift tax, but it also is important.

The gift tax is often thought of as a check on those who would seek to avoid the estate tax. The two taxes are normally set with about the same exemptions, limits and rates. This leads to the impression that the sole purpose of the gift tax is to make it more difficult for people to avoid the estate tax by gifting all of their assets away.

While that is one of the purposes, it is not the only one.

With Congress set to possibly repeal the estate tax, it is important to understand what that might also mean for the gift tax, which Bloomberg recently discussed in "Gift Tax Tweaks Could Lead to Unsavory Avoidance Tactics."

The gift tax also prevents people from avoiding income taxes.

With no gift tax, property could be gifted tax-free to a child to lower tax burdens. It could then be gifted back when needed. This would suggest that the gift tax should remain, even if the estate tax is eliminated.

However, it is not that simple.

If there is no estate tax, then instead of gifting property to a family member, money could be loaned at very generous terms. The amount of the loan could then be given to the family member in an estate plan, effectively allowing the gift to be tax-free.

It is not clear what Congress will do with the gift tax at this point.

The initial plan for tax reform included repeal of the estate tax, but was silent on the gift tax.

For more information about estate planning in Orlando, FL (and throughout the rest of Central Florida), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Reference: Bloomberg (April 10, 2017) "What Is Community Property and What Are Community Property Trusts?"

What You Can Do With a QPRT

Qualified personal residence trusts are not as popular of an estate planning tool as they used to be but in some circumstances they can still be used beneficially.

Due to relatively high estate tax exemptions and relatively low interest rates, qualified personal residence trusts have dropped out of favor in estate planning. They just are not as useful for as many people as they used to be.

However, people who expect to have estates with values over the estate tax exemption or who have homes that could rapidly rise in value can still benefit from a QPRT as long as everyone in the family is on the same page about what should happen to the home.

Recently, Barron's discussed some of the benefits and drawbacks of QPRTs in "Holding Vacation Homes in Trust."

A QPRT is an irrevocable term-limited trust that can help to stretch your gift tax exemption. When a residence is put into the trust the value of the residence is locked in for tax purposes.

The owner can still live in the home and is responsible for it. The residence can even be sold as long as another residence is then put in the trust.

When the term of the trust ends the trust beneficiaries become the new owners of the residence. However, if the current owner passes away before the term of the trust is over, the purpose of the trust is defeated and the home becomes part of the estate.

Major drawbacks of a QPRT?

Once the trust is ended the current owners can only continue to live in the home if they pay fair market rent and the trust beneficiaries who are the new owners are responsible for upkeep. Thus, if the beneficiaries are not financially independent and able to pay for upkeep, a QPRT is normally not a good option.

If the beneficiaries wish to sell the residence, they might have to pay more in taxes than if they had inherited the home through other means.

Consequently, a QPRT is only a good idea when the beneficiaries would like to keep the home.

For more information about estate planning in Orlando, FL (and throughout the rest of Central Florida), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Reference: Barron's (Nov. 4, 2016) "Holding Vacation Homes in Trust."

Giving Your Business Away

Some business owners prefer to retain control over their businesses until they pass away. Others would rather retire and let younger family members assume ownership. There are a couple of different options to do that.

Business succession planning is sometimes considered merely part of the general planning for the owner's estate. However, many people who have family businesses prefer to have younger family members run the business long before the current owner passes away. Those owners seek options for other family members to gain ownership of the business in a cost-friendly way.

Recently, the Insurance Journal discussed to ways to do that in "Gifting Agency Stock & Grantor Retained Annuity Trusts."

The options discussed are:

• Gifting – A business owner can take advantage of the gift tax exemption and give stock in the company to other family members. This would need to be done with a careful plan over many years as the individual gift tax exemption in a single year is only $14,000. Owners must also be aware of the lifetime gift tax exemption of $5.45 million (double for married couples), which makes gifting an entire business away only an option for smaller companies.
• Grantor Retained Annuity Trusts – These are fairly complicated trusts that should only be considered with the advice of an attorney. They allow a business owner to transfer ownership to the trust and receive an annuity for a set period of time. After that time runs out, the assets in the trust transfer to the trust beneficiaries.

Whatever you do, this kind of planning should only be undertaken with the advice and assistance of a qualified estate planning attorney.

Please see my website for information on business succession planning.

Reference: Insurance Journal (May 23, 2016) "Gifting Agency Stock & Grantor Retained Annuity Trusts

A Family Limited Partnership Could Be For You

A family limited partnership can be used to lower your tax burden and transfer wealth to future generations of your family.

One reason people seek the advice of estate planning attorneys is to lower their potential estate tax burdens in a way that does not limit their ability to manage their assets. People might be aware, for example, that the gift tax exemption allows them to give assets to family members, which lowers the value of their own estates. However, it has the drawback of losing control over the gifted assets.

With proper estate planning people can take advantage of the gift tax exemption and retain control over the gifted assets.

One way to do that is by setting up a family limited partnership as New Jersey 101.5 discusses in "Benefits of a limited family partnership."

In a family limited partnership the general partner owns a 1% share of the partnership and the other 99% is given to other family members. The general partner, however, has full control over the management of the partnership and its assets. 

Because ownership is limited to family members assets transferred through a family limited partnership receive a discount for gift tax purposes. Essentially the gift tax exemption can be stretched further than if assets are given away directly.

The family limited partnership can be used to give family members extra income now or to allow wealth to grow for later use.

Because family limited partnerships have tax consequences both for the person creating one and potentially for the other family members involved it is important to seek the advice of a qualified attorney when founding and managing the partnership.  If you would like to discuss this or other planning options, please contact my office for a consultation.

Reference: New Jersey 101.5 (May 18, 2016) "Benefits of a limited family partnership."