How to Take Care of Federal Gift and Estate Tax Exemptions In 2019

The Tax Cuts and Jobs Act still has significant impact on the process of estate planning. This means that many estate planning attorneys have had to adapt and re-strategize the best way for clients to take advantage of these federal gift tax and estate exemptions.

One-third of respondents in the recent TD Wealth study identified that clients have benefitted from creating trusts to protect assets. Other estate planning lawyers have pursued options like minimizing future capital gains tax consequences and making gifts. All of these strategies can be accomplished by using tools such as trusts.

Rather than giving a child an outright bequest or gift, many are parents are instead choosing to use a trust as a way to protect assets from what could be future claims in a divorce. This asset protection planning strategy also has benefits from protecting the items placed inside a trust, when properly funded, from being attacked by creditors who file lawsuits.

Estate planning looks not just at the impact of state and federal taxes, but also at how you will pass down your legacy. Many tools are available to you to help accomplish your individual estate planning goals- talk to an attorney to learn more.

Many people making use of an estate planning attorney’s services still benefit from asset protection planning strategies and estate planning strategies that allow for meaningful gifts named to beneficiaries without compromising privacy, safety and security.

How to Make Sure Your Power of Attorney Actually Works

Estate planning
A durable power of attorney is an important document for protecting yourself. However, from an institution’s point of view it is important to consider what they would look at in determining whether or not a durable power of attorney is actually valid. A power of attorney could be a rescinded one as a result of a falling out or it could even be forged.
Financial institutions will typically take several steps to determine whether or not a power of attorney is valid in order to protect themselves from liabilities associated with a lawsuit. If you are going to put together your own durable power of attorney, there are several steps you can take to increase your chances of this being viewed as a valid document.
First of all, verify whether your institution has a form of their own that they would prefer you use. Filling this out gives them much more comfort in obeying an agent’s orders. Secondly, introduce the agent in your durable power of attorney to your local financial institution so that they know one another already. If an agent is unable to get approval on a power of attorney, request more information to learn why. This could be an ideal opportunity to change the wording on your document.
After you’ve hired a Virginia estate planning  or elder law attorney, it might also make sense to have them talk to your institution’s legal department. Sometimes, staff may be misinterpreting what the firm’s requirements actually are. In order to have a durable power of attorney honored that is currently being questioned as invalid, a lawsuit may be necessary. Guardianship may also be a last resort in these situations. Thankfully, consulting with an experienced estate planning attorney can help you avoid this problem altogether.

There are ways to avoid possibility of IRS audit

The English language has its share of beautiful words, ones that are a pleasure to hear and practically poetry all by themselves.
“Audit” is not one of them, according to the investment advice website Motley Fool. It is, in fact, one of the more frightening words around, a recent posting noted.
“Audit is one of the scariest words in the English language for many American taxpayers,” the article begins (http://www.fool.com/investing/general/2016/01/14/7-tax-tips-to-avoid-an-irs-audit.aspx). “While it’s true that a tax audit can be a serious inconvenience, the fact of the matter is that the overall chance of being audited is slim. About 1 percent of all tax returns are selected for a closer look. The even better news is that you may be able to further reduce your risk for an audit with these seven suggestions.”
These recommendations included:
1. Report all of your income. First and foremost, failing to report income from a W-2 or 1099 is an easy way to get audited.
2. Over-document your tax breaks. If you have any tax deductions or credits that could be considered unusual, be sure to thoroughly document every penny you claim.
3. Be careful when claiming business use of a vehicle. If you are self-employed or own a business, you are allowed to take a deduction for the business use of your vehicle. While there is nothing wrong with this, claiming that you use your vehicle for business 100 percent of the time is sure to raise some eyebrows.
4. Try to avoid filing an amended return. If you forget to claim a deduction or credit, or need to make any other corrections after you file your return; you have the option of filing an amended tax return. Try to avoid this situation if possible.
5. Check your numbers, and then check them again. Mathematical or typographical errors are a major red flag.
6. File electronically. Granted, it is 2016 and most taxpayers now file their returns electronically. However, there are still a significant number of people who use paper forms, particularly older taxpayers and those with simple (1040EZ) returns. The problem with using paper forms is that it’s much easier to make an error that will catch the eye of the IRS.
7. Be honest. This should be obvious, but the best way to avoid an audit is to be 100 percent honest when filling out your tax return.
“If you’ve done your homework, you don’t need to fear an audit.”

In Some States, Irrevocable Trusts Aren’t Necessarily Irrevocable

Estate tax return

Estate tax return

Irrevocable sounds so very final, but in some states, appearances can be deceiving.
According to a National Law Review article, people who created lifetime irrevocable trusts to avoid estate taxes don’t have to live with them irrevocably, in some instances.
“The assets in the irrevocable trust pass upon death free of estate tax,” according to the item “To achieve the estate tax advantages, the client needs to give up control, which necessarily means the trust is irrevocable.
However, changes in life or in the law oftentimes make the trust provisions less desirable.”
An example given in the article is if the create of the trust, for whatever reason, wants to change the trustee or even the location of the trust, along with the change in how the money will be disposed after death.
“Fortunately, a number of states now allow irrevocable trusts to be amended, even without court involvement,” the story states.
Legally acceptable means of amending provisions without court approval, called “decanting” and “nonjudicial reformation,” can change what might originally have appeared permanent.
“The dilemma is whether these changes could jeopardize the estate tax advantages the client desired and obtained at the creation of the trust,” the article goes on.
“The good estate tax news is that the IRS has issued a number of Private Letter Rulings that indicate estate and generation skipping tax advantages will still apply even if an irrevocable trust is modified. Of course, the devil is in the details, in determining what types of changes are appropriate and the method in which the changes can be done under state law. But at least in the estate tax world, what is irrevocable may be irrevocable only in part.”

Tax Law Revisions Allow Couples To Say ‘I Love You’ In Estates

Time was, one from Column A and one from Column B and a couple’s estate planning was pretty much a done deal.
Times change.
According to a recent article on the investment website Morningstar.com, changes in tax laws may have rendered an estate planning approach made famous by actor Humphrey Bogart obsolete.

“For decades, lawyers routinely recommended A/B estate plans for married couples,” according to the story by attorney and award-winning journalist Deborah L. Jacobs .
“Many clients dutifully followed their advice, even though these plans can be convoluted. However, A/B plans that were put in place years ago could have negative tax consequences. If you haven’t reviewed your estate plan recently, it might be time.
“A key component of the A/B plan is dividing an estate into two major parts, a classic technique used by Hollywood icon Humphrey Bogart. In his will, signed eight months before he died in 1957, Bogart left all of his personal possessions to his wife, Lauren Bacall, outright. Bogart provided that after gifts to two of his servants were dispensed, half of the rest of his estate would go into a trust to benefit Bacall (Part A). Taxes would come out of the other half of the estate. Whatever remained after taxes were paid would go into a separate trust (Part B) for the couple’s two children, who were young at the time. This is called a bypass, or credit-shelter, trust. Because the funds did not belong to Bacall, they would be sheltered from tax on her estate. Such arrangements were designed to preserve the first spouse’s estate tax exemption, which would be lost if it wasn’t used when that person died.”
However, Jacobs goes on to say that changes in tax law that took effect in 2013 “make another alternative more appealing for couples that are in stable first marriages and trust each other to manage their joint wealth.”
“These couples can leave all their assets to each other directly in ‘I love you’ wills,” the article continues. “Then, the survivor can carry over the spouse’s exemption, a process tax geeks have dubbed ‘portability.’ At 2015 rates, this system enables married couples to transfer $5.43 million apiece, $10.86 million together, tax-free. Just as under the old law, you can leave a citizen spouse or a charity an unlimited amount, without worrying about tax.”
“Many A/B plans are less attractive today than they once were because the federal estate tax exemption is now so large that the credit-shelter trust is not likely to save heirs any estate tax and is potentially going to cost them income tax,” Walter R. Morris, a lawyer with Wyatt Tarrant and Combs in Lexington, Ky., was quoted as saying.

Choice Of Executor Vital Part Of Estate Planning

Making a will and keeping it up to date are only part of what people need to do to ensure their wishes are properly carried out after death.

Wife showing where to sign to her husband

Wife showing where to sign to her husband

Selecting the right executor for an estate is also vital.
That message was brought home in a recent Forbes magazine article, which the writer referred to as a “tale of caution.”
“The cast includes a 73-year-old high-school-educated homemaker named executor of a nonagenarian cousin’s will, an attorney who was battling brain cancer, seven distant relatives and three charities all due a piece of a $12.5 million estate, and an Internal Revenue Service bill for $1.2 million in penalties and interest for failure to file an estate tax return and pay taxes on time levied on the estate,” according to the story. “In an appeal to the U.S. Court of Appeals for the Sixth Circuit filed in February, the executor is trying to recover the $1.2 million. The question at hand: was her failure to file the return and pay the tax on time due to reasonable cause and not willful neglect?”
“What’s the lesson? Even if you have an expert, you have to pay attention to the matters at hand,” the article quotes Jon Hoffheimer, a lawyer who the court appointed to administer the estate as a co-fiduciary with the executor in question after it became clear that she wasn’t up to the task.
Most people, the story goes on to point out, choose a friend or relative as executor, while relying on an estate attorney to ensure a proper will is on file.
“But it’s the executor who bears the ultimate responsibility to make sure it’s done, on time,” the article notes.
The best approach, professionals in the story advise, is to clearly list all the duties of an executor under the terms of the will and have that person sign the document long before these actions have to be taken.

Irrevocable Trust Could Have Saved Fuss Over Novelist’s Estate

The late Tom Clancy’s novels showed he had a remarkable grasp of military strategy.

His muddled estate shows he did not bring the same kind of acumen to his own personal financial affairs, according to a recent article on the website insurancenewsnet.com.
Clancy passed away in Baltimore on Oct. 1, 2013. He was 66. Even after his death, the writer’s estate continued producing bestselling books and video games.
It also produced a great deal of rancor among his survivors, some of which could have been avoided by better estate planning, according to the article.
“Less than a year after Clancy passed away, a heated battle over his estate unfolded in a Maryland probate court,” states the story. “The estate, which is estimated to be worth $83 million and could gain even greater value as Clancy’s works continue to be produced and sold, is being contested by Clancy’s widow and his adult children who were born to his former first wife. Among the probate issues being deliberated in court, there’s a monetary amount adding up to $18 million in state and federal taxes, which Clancy’s widow is petitioning to transfer over to the late author’s four adult children.
“Furthermore, The Wall Street Journal reported on the existence of a family trust set up by Clancy to leave his widow about 66 percent of his estate. However, Clancy’s widow claims that the wrongful execution of the estate caused a miscalculation that called for $6 million in taxes assigned to the family trust. There also appears to be will left by Clancy as well as a codicil executed a few months before the author passed away. Apparently, Clancy’s widow also sought to replace the executor of estate, who in Maryland court is known as a personal representative, since the current attorney serving in that capacity wishes to spread the tax burden equally amongst all heirs.”
“It seems as if Tom Clancy did not plan his estate as carefully as the highly organized military operatives in his novels,” Rocco Beatrice, Managing Director of Estate Street Planners, LLC, a financial planning firm focusing on asset protection, wealth management and estate planning, was quoted as saying. “It appears that Clancy left a will that created separate trusts for his widow and his four children from his first marriage, and the presence of a codicil suggests that he may have changed his mind at one point. With this in mind, it is not too surprising to learn that the Clancy estate is now going through probate.
“The fact that there is probate battle over estate taxation tells us that Clancy did not use an irrevocable trust, which could have prevented the current courtroom fight and the unwelcome media attention into his family’s finances.”

Estate Planning Also Has Its Trends

Estate planning, like pretty much everything else in life, is subject to trends, as pointed out recently by the website wealthmanagement.com.
The article serves as another means of advising that estate plans are far from static, but must keep up with changing times and changing laws.
The website article focused on four of these emerging trends.
They were:

  • Self-settled trusts. “The sizes of the gift and generation-skipping transfer tax exemptions, $5.34 million each, have resulted in the increased popularity of self-settled trusts. Currently, 15 states allow for self-settled trusts, and 14 of these states also allow for dynasty trusts. Grantors are more comfortable with self-settled trusts because grantors can also be a permissible beneficiary of an irrevocable trust that they establish for their family. As long as there’s no pre-existing understanding or arrangement between the grantor and the trustee, the assets aren’t transferred fraudulently, and there are no exception creditors.”
  • Discretionary Interests. “Another trend deals with discretionary interests and spendthrift clauses. It emanates from the recent Casselberry case in Florida, in which the court stated: ‘ … if disbursements are wholly within the trustee’s discretion, the court may not order the trustee to make such disbursements. However, if the trustee exercises its discretion and makes a disbursement, that disbursement may be subject to the writ of garnishment.’ As a result of this case, Florida lawyers are seeking a solution for similar third-party discretionary trusts.”
  • State Income Taxes. “Another key development is state income taxes as they relate to trusts. There are many different state income tax models for taxing trusts. Rising state income taxes have also resulted in an increased interest in private placement life insurance, providing investment flexibility as well as a mechanism for tax-free deferral and withdrawals.”
  • Foreign Grantor Trusts. “Up until recently, foreign families set up trusts in the United States only if they owned real estate and/or had green card/citizen children and/or grandchildren in the United States. These international families are now establishing U.S. situs trusts, even if they have no ties to the United States. These vehicles are typically foreign grantor trusts with U.S. trustees, generally holding an offshore entity, which in turn holds the offshore property. If there’s not any U.S. property, there’s no U.S. tax.”

List Of ‘Where Not To Die’ Updated For 2015

In the somewhat macabre Forbes magazine’s annual list of “where not to die in 2015,” some changes are noted over the recommendations for the current year.

Location of state of XY (see filename) in the ...

(Photo credit: Wikipedia)

Since most people probably think there is no such thing as a good place to die at all, the focus for the publication’s ongoing series tends to be on life’s other main inevitability, taxes. “The tally of death tax jurisdictions remains the same for 2015, 19 states plus the District of Columbia, but eight states are ushering in changes in 2015,” according to the article. “The states are lessening the death tax bite by increasing the amount exempt from the tax, indexing the exemption amount for inflation, and eliminating ‘cliff’ provisions that tax the first dollar of an estate.”
The biggest changes, the story noted, were made in New York and Maryland.
“The Maryland legislature acted first. The new law gradually increases the amount exempt from the state estate tax from $1 million this year, to $1.5 million in 2015, $2 million in 2016, $3 million in 2017, and $4 million in 2018. Finally, in 2019 it will match the federal exemption, which is projected to be $5.9 million.
“Still there’s a big catch in Maryland for some: even if no estate tax is due, depending whom you leave your assets to at death, a separate inheritance tax may be assessed. Spouses, children and their spouses and children, parents and siblings are all exempt from the state inheritance tax, but a niece or aunt or friend, for example, would owe the inheritance tax at a rate of 10 percent. Maryland and New Jersey are the only two states that have an inheritance tax in addition to an estate tax.”
The changes in New York were described in the article as “sweeping.”
In New York, lawmakers decided to more than double the exemption for deaths after April 1 of this year, from $1 million to $2,062,500. The exemption in the Empire State will also increase over time, to eventually match the federal exemption, reaching $5,250,000 by April 1, 2017.
“Other states where the exemption amounts are climbing include Tennessee, Minnesota and Rhode Island,” according to the article. “Tennessee’s estate tax is on its way out; the exemption is $5 million for 2015, and it’s repealed as of Jan. 1, 2016. Minnesota’s exemption is climbing steadily; it will be $1.4 million in 2015, going up to $2 million in 2018. Rhode Island bumped its exemption amount from $921,655 this year to $1.5 million in 2015. The $1.5 million will be indexed for inflation. Also a big deal: Rhode Island eliminated a “cliff” so the tax only kicks in on amounts above the $1.5 million exemption amount.
“Other states indexing their exemptions for inflation like Rhode Island are Washington, with a base exemption of $2 million, and Hawaii and Delaware, which both match the federal exemption amount.”

The Heart, As Well As The Head, Plays Role In Estate Decisions

Good estate planning goes behind the numbers to take the individuals involved into account.
When it comes to giving gifts to family and loved ones through a will or while still alive, there are tax implications to be taken into consideration, but a host of other factors come into play, as well.
A recent article on the Motley Fool website dealt with the subject in some detail.

Money (Photo credit: 401(K) 2013)

Money (Photo credit: 401(K) 2013)

“You’re in your golden years, and you’re thinking hard about estate planning,” Paula Pant, a contributor to WiseAdvisor, wrote in the article. “You want to leave gifts for your heirs, but should you wait until you pass away? Or should you give some money to them now?
“Gift tax versus estate tax – gift tax is the tax imposed by the federal government on any transfer of property to an individual without any compensation in return. ‘Property’ in this sense includes both tangible property, like art or furniture, and intangible gifts like stocks and cash.”
Pant goes on to point out that currently the law allows a lifetime gift limit of $5.34 million, after which taxes of 40 percent are imposed. But there’s also the added complication of an annual exemption $14,000 to consider.
A good estate planner will help people make up their minds from a purely financial perspective which options are the best for taking care of heirs.
Exceptional estate planning will help clients come to grips with the pros and cons to either approach Pant points out in her Motley Fool contribution.
For giving heirs money now, these include:

  • You get to see them enjoy it. If you’d prefer to see your gifts in action, giving your heirs the money now gives you a chance to see the difference it makes in their lives.
  • You can advise how they spend it. If you’d prefer to see your gifts in action in a specific way, giving the money while you’re still alive gives you a chance to let your heirs know how you’d prefer they spend it.
  • You can give the gift in the form of paying for something. If you really want to ensure the money is spent on the thing you want it to be spent on, you can pay for something rather than giving your heirs the money for it.
  • You can stop giving them money if you see them falling off the rails.

The factors that weigh in favor of waiting until you pass away include:

  • You may need the money later. What if you find that you need the money to pay for your own expenses during your lifetime?
  • Your heirs might appreciate it more and spend it more wisely. By waiting until you’ve passed away, you give your heirs a chance to ‘make their own way in the world’ at a younger age. Rather than relying on an annual cash infusion from you, your heirs will be older and more responsible when they receive the inheritance. This might cause them to appreciate the gift more, as they will have experienced the task of earning money.

“Which should you choose?” Pant asks. “Should you give your heirs gifts now? Or wait? Ultimately, there’s no ‘right’ answer. This is a personal choice.”