Gift Tax

Property Transfers and Gift Taxes: Estate Planning Basics

As we age, our needs change. That includes our needs for the property that we own. For one person, the family home was rented to the daughter and her spouse as a “rent-to-own” property. This is generous, since it gives the daughter an opportunity to build equity in a home. The parent had questions about what kind of a deed would be needed for this transaction, and if any gift taxes need to be paid on the gift of the house and a separate parcel of land. The answers to these estate planning basics are presented in the article “Dealing with property transfers and gift taxes” from Chicago Tribune.

Estate Planning Basics
Property transfers and gift taxes are basic components of estate planning that everyone should consider.

For starters, there are tax advantages while the person is living, since the home is an investment for the owner, as described above. On the day that the home is deeded over to the daughter, she will own the home at the cost basis of the parent. Here is why. The IRS defines the “cost basis” of a real estate property as the price that the owner paid for it, plus the cost of purchase and any fees associated with the sale plus the cost of any new materials or structural improvements.

When you give someone a home, they receive it at the price that was paid for it plus these costs.

Let’s say this person paid $50,000 for the family home, and it’s now worth $100,000. If you give the home to a family member, it’s as if she paid $50,000 for it, not $100,000. There may be tax consequences when she goes to sell it, but that’s in the distant future.

It’s different if the home is inherited. In that case, if the house was valued at $100,000 on the date that the owner died, the heir’s cost basis would be $100,000. However, if the heir sold the property on the exact same day (this is an unlikely scenario), there would be no tax owed on the sale for the heir.

This is a very simplified explanation of how a home can be passed from one generation to the next. It would be best to speak with a good estate attorney, who can evaluate all the factors, since every situation is different. One simple suggestion might be to put the property into a living trust, in which case the daughter will still pay rent to the parent, but then would inherit the property when the parent died.

The estate planning attorney could use the same living trust for the separate parcel of land. Once the home and the land are deeded into the living trust, the owner can state her wishes for how the properties are to be used.

As for the basic estate planning question of gift taxes, anyone can give anyone else $15,000 per year, with no need to file any forms with the IRS or pay any taxes. If you give someone more than $15,000 in one year, the IRS requires a gift tax form with the federal income tax return.

A meeting with an estate planning attorney is the best way to ensure that the transfer of a family home to a family member is handled correctly and that there are no surprises.

Reference: Chicago Tribune (April 23, 2019) “Dealing with property transfers and gift taxes”

How Do I Include Charitable Giving in My Estate Plan?

One approach frequently employed to give to charity, is to donate at the time of your death. Including charitable giving into an estate plan, is great way to support a favorite charity.

Baltimore Voice’s recent article, “Estate planning and charitable giving,” notes that there are several ways to incorporate charitable giving into an estate plan.

Charitable Giving
Incorporating charitable giving in your estate plan is one of the most common ways to give to charity.

Dictate giving in your will. When looking into charitable giving and estate planning, many people may start to feel intimidated by estate taxes, thinking that their family members won’t get as much of their money as they hoped. However, including a charitable contribution in your estate plan will decrease estate tax liabilities, which will help to maximize the final value of the estate for your family. Talk to an experienced estate attorney to be certain that your donations are set out correctly in your will.

Donate your retirement account. Another way to leverage your estate plan, is to designate the charity of your choice as the beneficiary of your retirement account. Note that charities are exempt from both income and estate taxes. In choosing this option, you guarantee that your favorite charity will receive 100% of the account’s value, when it’s liquidated.

A charitable trust. Charitable trusts are another way to give back through estate planning. There is what is known as a split-interest trust that lets you donate assets to a charity but retain some of the benefits of holding the assets. A split-interest trust funds a trust in the charity’s name. The person who opens one, receives a tax deduction when money is transferred into the trust. However, the donors still control the assets in the trust, and it’s passed onto the charity at the time of their death. There are several options for charitable trusts, so speak to a qualified estate planning attorney to help you choose the best one for you.

Charitable giving is a component of many estate plans. Talk to your attorney about your options and select the one that’s most beneficial to you, your family and the charities you want to support.

Reference: Baltimore Voice (January 27, 2019) “Estate planning and charitable giving”

How Do I Calculate Estate Taxes?

Handling the affairs of a loved one’s estate can be stressful and difficult. However, to receive the full benefit of the gift a loved one leaves you, it’s critical to be prepared for the taxes that gift may incur. This is the advice in Investopedia’s article, “Estate Taxes: How to Calculate Them.” The article explains the potential tax liability, upon transfer of an estate after death.

The high rate of the federal estate tax (40%) motivates most people to calculate their potential estate tax beforehand. It’s a good idea to figure the amount you might owe in estate tax before something happens, instead of leaving your family to deal with the consequences afterwards.

Estate tax is calculated on the federal and state level. Florida does not have an estate tax, however, there are now still several states that have their own estate tax: Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington, as well as the District of Columbia.

The federal estate tax starts when the fair market value of your assets hits $11.18 million per individual. Each state that has an estate tax has its own minimum on when the estate tax kicks in, ranging from $675,000 to $1 million. As a result, you can be eligible to pay the state estate tax, the federal, or both. Because the estate tax is determined based on the current market value of your assets instead of what you paid for them, calculating that number can be more complex.

There’s no need to include any property you intend to leave your spouse or an eligible charitable organization. Initially, you’ll need to calculate the value of the gross estate. Debt, administrative fees, and assets that will be left to charities or a surviving spouse will then be deducted from the total market value of those assets.

Next, add any gifts, including gifts that fall above the gift tax exemption. The $11.18 million exemption includes gifts (it’s a way of keeping people from giving away their fortune before their death to avoid estate taxes).

If the loss of a loved one is imminent, preparing for the tax burden of estate transference ahead of time, can make the grieving process a little easier and can be a comforting distraction.

You can also prepare for taxes on your own estate to lessen the burden of the friends and family you leave behind. If you have questions, speak to an experienced estate planning attorney.

Reference: Investopedia “Estate Taxes: How to Calculate Them”

Where Do I Start as an Executor if There’s a House in the Estate?

Handling an estate can be a monumental task. The Greater Baton Rouge Business Report explains the details in its article that asks “So you inherited a house … now what?

For instance, an executor’s immediate worry might be the safety of the house. One of the first questions an heir might ask, is whether there’s a security company involved that has a contract for monitoring. If so, contact the company to see where to call should there be a security breach and change the security passwords. Another suggestion is to change the locks on the house, because who knows who has been given keys to the home over the years. Siblings might want to place valuable items in safety deposit boxes or remove them from the house, as soon as they can.

The key to this entire process among heirs is communication. Keep everyone up-to-date. This alone will reduce the risk of misunderstanding, mistrust and frustration in the family.

Different interests among siblings often creates tensions after inheriting a house. A house may have sentimental value to the heirs, but the executor must stay objective about the situation. Reducing the house to cash by selling it and dividing the proceeds, typically makes the most financial sense.

It’s costly to maintain a house in an estate and insurance and court proceedings can also be expensive. Come to an up-front agreement on terms of the sale, when drafting an estate plan, because disagreements among siblings can sometimes lead to costly and lengthy court proceedings.

Heirs might decide to keep a house, especially if it’s a beach house or mountain retreat. You’ll then need someone to be the manager. One way to accomplish this is to establish a limited liability company (an LLC) with the other heirs. This gives the heirs a more stable, corporate management structure, while allowing for more flexibility. Place a year’s worth of cash to cover of expenses into the LLC and sign an agreement between heirs that states what happens with repairs, renting the property and other scenarios.

If you do sell, the sooner you sell it and the closer to the time of death, the less likely you’ll have to pay taxes on any appreciation since the time of death and have to worry about what the value was at the date of death. Inherited assets get a new tax basis, known as the date-of-death value. Use a qualified real estate appraiser to value the property, because the beneficiaries need to know the house’s most recent value to calculate capital gains tax later, should they choose to sell it.

Reference: Greater Baton Rouge Business Report (November 13, 2018) “So you inherited a house … now what? Here’s some advice

Fitting a 529 Plan into Your Estate Plan

529 college savings plans are a great way to fund a college education and they can now also be used for other educational needs. However, they can also be part of your estate plan.

Before exploring a new use for a 529 plan, let’s start with how it has been traditionally used. A 529 is a college investment program, sponsored by state governments and administered by an investment company, as explained by the Cary Citizen in a recent article, “529s and Estate Planning: What’s the Connection?”

MP900439346The investment options are generally mutual fund portfolios, age-based asset allocations that become more and more conservative as the beneficiary gets closer to college age. Some plans also offer static portfolios, with predetermined allocations that stay consistent over time.

Withdrawals from a 529 are tax-free, provided they’re used for qualified college expenses. Nonqualified withdrawals are subject to ordinary income taxes and a 10% additional federal tax penalty. The good news is that the eligibility to contribute to a 529 plan isn’t restricted by age or income.

As far as your taxes, a contribution to a 529 plan is considered a completed gift from the contributor to the beneficiary named on the account. That's good news from an estate tax planning perspective because a contributor can, therefore, potentially reduce the size of her taxable estate using a 529 plan. In 2018, contributions can be up to $15,000 per beneficiary annually and $30,000 per beneficiary, if you contribute jointly with a spouse without any federal gift tax implications.

Along the same lines, if you’d like to decrease the size of your taxable estate more quickly, you can make five years’ worth of gifts in a single year, provided you don’t make any additional gifts to the same beneficiaries for the remainder of that period. Therefore, you can accelerate your contributions and gift $75,000 per beneficiary as an individual or $150,000 per beneficiary, if done jointly with a spouse. However, if you use this strategy, a prorated portion of the contribution may be considered part of your estate, if you don’t live beyond the five-year period.

Whether you contribute annually or on an accelerated basis, a 529 plan can give you a lot of flexibility as part of your estate plan. For example, although the money in the account is considered a gift to the beneficiary, you still have control over how it’s invested. If the beneficiary doesn’t attend college, you can name a new beneficiary who’s a relative of the original beneficiary.

Many families find that they are facing both planning for retirement and saving for college at the same time. The 529 could help with both goals.

Reference: Cary (NC) Citizen (October 31, 2018) “529s and Estate Planning: What’s the Connection?”

What If I Don’t Want to Give My Kids My Assets?

Just because Warren Buffet wants billionaires to sign his giving pledge, doesn’t mean you have to.  However, not everyone wants to leave everything to their kids.

There are many reasons why some parents simply don’t want to give all, or a large portion of their assets to their children. Type “A” personality parents who made every sacrifice to grow their wealth, may be disappointed with kids who aren’t at all motivated. A family may also be fragmented by politics, or disappointed in their children’s selection of partners.

25204256865_58d1892fa3_oAmerica is about to see a massive transfer of wealth from baby boomers, who’ve stockpiled an estimated $30 trillion. The “Me Generation” will probably spend some of its fortune, but there’ll be a lot remaining to pass along to their heirs. Research shows that between 2031 and 2045, as much as 10% of U.S. wealth could change hands every five years.

Think Advisor’s recent article, “Who Leaves an Inheritance, Who Doesn't,” says that some people are more inclined to leave an inheritance than others. The reasons for doing so aren’t all intuitive.

In an effort to better understand what influences an individual’s intention to leave an inheritance, researchers at Kansas State University analyzed data from the 2016 Survey of Consumer Finances. The survey is given every three years by the Federal Reserve. It gathers data about U.S. household balance sheets, income, expenditures, key demographics and attitudes. After controlling for net worth, household income and other demographic characteristics, KSU used a binary logistic regression model to parse out the variables associated with the expectation of leaving an inheritance.

The results revealed the traits that are closely linked to leaving an inheritance and those that aren’t. They found that children aren’t a significant predictor of whether a person is likely to leave an inheritance. Likewise, owning cash-value life insurance or being a habitual saver doesn’t seem to play a role in an individual’s bequest rationale.

The top predictor most associated with passing on wealth is an individual’s own expectation of receiving an inheritance. The survey found that people who expected to receive an inheritance were nearly 16% more likely to leave money to their heirs. However, those who actually did receive an inheritance, were 7% more likely to want to do the same for their own family.

It is not a shock, but a second leading predictor is a person’s attitudes about leaving an inheritance to others. Those respondents who ranked this goal as important, are 9.5% more likely to expect to leave an inheritance, as opposed to those who said it wasn’t important.

One interesting note: people who own businesses place a high value on inheritances. Perhaps the same drive that fuels the acquisition of wealth to attain a luxurious retirement, also pushes individuals to want to provide for their families.

In the end, what families leave to their children is just as much about values, family lore and a sense of belonging, as the asset left for children and the grandchildren.

An estate planning attorney can help you create a plan that addresses the assets you’d like to leave for the family members, charitable giving, a plan to manage estate taxes and a means to pass along more intangible and meaningful assets, like values and principles.

Reference: Think Advisor (October 19, 2018) “Who Leaves an Inheritance, Who Doesn't”

Expect to Keep Working? You Still Need a Succession Plan

If you’re a business owner who loves what you do, you consider your business to be one of your biggest achievements after your family and enjoy the challenges it presents. As for retiring, why should you?

Some business owners are reluctant to even consider selling the business or retiring. They don’t make a succession plan, says The San Antonio Business Journal in the article, “Plan your exit even if you never plan to leave your business,” and that can lead to a disaster for their family and their employees. That’s something the business owner needs to consider—and why even if they plan on working, until they are carried out, they need a succession plan.

Bigstock-Couple-running-bookshop-13904324Decrease your taxes. Whether you ultimately decide to sell your business, transfer ownership or die working, you probably don't want to pay more taxes than you have to. There are two ways exit planning can help minimize taxes, even if you truly want to work until you die. If your business value increases, your estate can benefit from a step-up in basis, if your ownership transfers pursuant to your estate plan. This saves your estate or beneficiaries from paying duplicate taxes on the entire business value.

The lifetime exclusion for gift and estate taxes is now to the point where most small and mid-sized business owners don’t need to pay estate taxes, if owners have created an appropriate estate plan. Your exit plan lets you leverage these benefits, since estate planning is a vital component in proper exit planning.

Protect your values. If you created a work culture that’s so unique and strong that it helps your company stand out in the marketplace or your business gives back to the community through charity work, exit planning lets you pursue and preserve your progress toward those objectives. Exit planning strategies can foster the culture you’ve built, protect the employees who made the business a success, and help you build the legacy you want. Exit planning can help keep your chosen values front and center and protect its value, even without your presence.

Growing your business. Everyone wants their business to grow in value, but many business owners get to a point where they can’t grow the company any more, by simply doing the same things they’ve been doing. However, exit planning concentrates on building business value, whether you exit or not. These activities can help you increase your business’ growth potential, by emphasizing value drivers. Those are the aspects of your business that make it attractive to buyers. When it’s done the right way, installing value drivers can make your ownership even more fulfilling—concentrating on certain value drivers can let you focus on only your favorite tasks within the business and delegate your least favorite responsibilities to other qualified employees.

You may keep working until the very end, or you may encounter a life event that makes you rethink how much of your time you want to devote to the business. Either way, a succession plan is like an estate plan for your business. It protects your family at home and your work family. Both will appreciate you doing so.

Speak with an estate planning attorney who can help you with your personal and business plans for the future.

Reference: The San Antonio Business Journal (October 16, 2018) “Plan your exit even if you never plan to leave your business”

How Did One of the Wealthiest Men in the World Address His Estate Plan?

We may never know how one of the founders of Microsoft structured his estate plan. His finances were addressed wisely, and his legacy will likely continue for many years, if not many generations.

Paul Allen left Microsoft back in the 1980s, when he had to fight a mild form of a lymph node cancer, so he had many years to put his financial house in order. According to a recent article from Wealth Advisor, “Paul Allen Had A $20 Billion Estate Plan (The IRS Can't Touch),” those who knew him know that he had a long-term plan. His money has been working for him for many decades, and he had very little control of it.

Paul-Allen-007-e1391194838233Allen was rich, so he spent his life engaging in a wide range of interests, like venture capitalism, research, real estate development, yachting, sports and music. His fortune flowed through a holding company. Subsidiaries of Vulcan Inc. ran his investments, as well as his charities, sports teams and high-tech toy collections. Vulcan isn’t a conventional family office, so there’s no division between the principal and his interests on the “family” side and the day-to-day operations on the “office” side. That makes it much harder to separate Allen’s personal estate from his corporate interests. He was sole owner of the company, but the company owned everything else.

The cancer came back 10 years ago. He licked it then, but probably took that as a wake-up call to be sure the operations would continue without him. Execs at his company have mentioned his plan for continuity. Therefore, Vulcan will look exactly the same without him, as it did when he was running it.

Vulcan invested billions into reshaping Seattle, purchasing real estate and sometimes selling it for big profits. He owned the local sports teams and a few of the museums. Vulcan also ran the most prominent local movie theater. On the business level, Vulcan was the vehicle through which he bought into the start-up companies that he liked.

Allen was never married, and his sister and her children were his only close family. His sister was a key employee at Vulcan, but Paul kept control and full ownership. She moved to the family foundation side. Her three 20-something children are probably well off, and the older ones have already worked for family businesses. The youngest is still in school. These children will most likely find spots at Vulcan, but whether they ever own the company in their own right is unknown.

The unanswered question is how he set things up to keep the IRS at bay. He maintained full ownership and control of the company. There is no obvious trust, and the private equity structure of the firm ensures that there has not been a lot of information shared with the general public.

It should be noted that Allen had signed the giving pledge, where the world’s billionaires promise to give most of their wealth away. Handing formal ownership of the firm to the foundation satisfied that commitment. The firm would continue unchanged, following Allen’s directives to invest in things that mattered to him and fund causes that mattered to him. We may never know more than that.

Reference: Wealth Advisor (October 22, 2018) “Paul Allen Had A $20 Billion Estate Plan (The IRS Can't Touch)”

Can You Calculate Your Own Estate Taxes?

Here’s a complex area that people tend to ignore, until it’s too late to do anything about it. Better solution: speak with an estate planning attorney while changes can still be made.

Even if you are not one of the top wealthiest people in the world, you still may find yourself grappling with estate taxes. If you know that you will be the recipient of an estate, you may need to have a candid conversation about the taxes that may result, and how to minimize them, if possible, beforehand. There’s more to be learned about the potential tax liability when an estate is transferred from the article “Estate Taxes: How to Calculate Them” from Investopedia.

MP900385209The high rate of the federal estate tax (40%) motivates most people to calculate their potential estate tax beforehand. It’s a good idea to figure the amount you might owe in estate tax before something happens, instead of dealing with the consequences afterwards.

Estate tax is calculated on the federal and state level. There are now still several states that have their own estate tax: Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington, as well as the District of Columbia.

The federal estate tax starts when the fair market value of your assets, hits $11.18 million per individual. Each state has its own minimum on when the estate tax kicks in, ranging from $675,000 to $1 million. As a result, you can be eligible to pay the state estate tax, the federal, or both. Because the estate tax is determined based on the current market value of your assets instead of what you paid for them, calculating that number is more complex.

There’s no need to include any property you intend to leave your spouse or an eligible charitable organization. Initially, you’ll need to calculate the value of the gross estate. Debt, administrative fees, and assets that will be left to charities or a surviving spouse will be deducted from the total market value of those assets.

Next, add any gifts, including gifts that fall above the gift tax exemption. The $11.18 million exemption includes gifts (it’s a way of keeping people from giving away their fortune before their death to avoid estate taxes).

If the loss of a loved one is imminent, preparing for the tax burden of estate transference ahead of time, can make the grieving process a little easier and can be a comforting distraction.

Don’t neglect to prepare for any taxes that may be incurred by your own estate. Think of it as a kindness you do for your loved ones, so they are not left with unexpected costs. An experienced estate planning attorney can help ensure that your estate tax planning is done correctly.

Reference: Investopedia “Estate Taxes: How to Calculate Them”

Say This Five Times Fast: State Estate Tax Exemption

An unintended consequence of the Trump tax cuts basically eliminating the federal estate tax, is that several states that tied their state estate tax to the federal estate tax are running into problems.

States that used the federal estate tax to set their own estate tax rates have found that new tax law has hurt their estate tax revenue. According to this article from Forbes, “States Rebel, Won't Conform To Trump Estate Tax Cuts,” these states are rolling back exemption amounts.

TaxConnecticut, a state that used to have one of the toughest estate tax structures, may have the most generous exemption out of the states that still impose their own death taxes. There are 17 states and the District of Columbia that continue to impose either an estate tax or inheritance tax, with Maryland being the one state with both. Let’s look at what some specific states are doing:

The District of Columbia. The estate tax exemption in DC would have gone up from just $2 million to $11 million (indexed) in 2018. However, the city council dropped the exemption to $5.6 million in June, retroactive to January 1, 2018. This change is part of the budget being reviewed by the DC mayor and is expected to be approved. The exemption will be indexed beginning next year, using a special formula.

Hawaii. The Aloha State’s estate tax exemption for 2018 will be $5,490,000. That’s identical to what it was for 2017. However, the state legislature has amended Hawaii’s estate tax law, so the threshold amount matches federal law as it existed on December 21, 2017 (before the tax cuts). That’s $5 million, adjusted for inflation from 2011. The revision was signed into law by the governor this past summer.

Maryland. To keep this state’s estate tax exemption from rising from $4 million this year to $11 million (indexed) in 2019, state legislators agreed to a new fixed dollar amount for the Maryland estate tax exemption for 2019 and beyond of $5 million. The legislation does add portability, which allows a surviving spouse take advantage of their late spouse’s unused exemption. Their inheritance tax remains the same.

Maine. The state’s House and Senate recently voted on a compromise that will tie the Maine estate tax exemption to federal law, as of December 31, 2017 ($5.6 million for 2018). The governor allowed the tax bill to become law without his signature. He explained that he wouldn’t sign it, because it didn’t abolish the estate tax. Therefore, the Maine estate tax threshold is $5.6 million for 2018, with inflation adjustments starting in 2019.

Connecticut. In the fall of 2017, just before the Republican tax cuts, Connecticut modified its estate tax law to phase in its estate and gift tax exemption to match the federal exemption by 2020. The latest change—signed into law in June—lengthens the phase-in to 2023.

Before the year is out, make an appointment with your estate planning attorney to be sure that your estate plan’s tax strategy still works in your favor.

Reference: Forbes (August 31, 2018) “States Rebel, Won't Conform To Trump Estate Tax Cuts”

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