Typically, people take it for granted that there will not be any tax when they sell their personal residence. Technically, there is a tax, but the government also offers a limited exclusion under Section 121 of the Internal Revenue Code.
For individuals who sell their primary residence, you can exclude the first $250,000 of gain. After that, it is subject to a capital gains tax. For married couples, you can exclude the first $500,000 of gain.
In order to qualify for the exclusion, you must have OWNED and USED the residence as your principal residence for 2 of the last 5 years ending with the date of sale (it does not have to be consecutively). If the home was previously used as a rental property, in a business or for another non-qualified use, there may be longer holding requirements or a reduced exemption amount.
One common estate planning tool that many attorneys create is a revocable living trust. A revocable living trust, also known as just a Living Trust, is device to manage a person’s assets during life and after death. While the Grantor is alive, the Grantor can manage his or her trust funds as the Grantor wishes. When the Grantor passes, it acts like a Will but with the added benefit of avoiding probate. If a person sets up a revocable trust, it is highly recommended to transfer all real estate into this trust, including the primary residence.
Another common estate planning tool, particularly for individuals doing Medicaid planning or VA benefit planning, is to move the primary house to an irrevocable trust, which is set up as an intentionally defective grantor trust (IDGT). An IDGT is a type of trust that is outside a Grantor’s estate for estate tax purposes while simultaneously requiring the Grantor to be taxed on the income earned in the Trust.
Under Internal Revenue Code Treasury Regulation 1.121-1(c)(3)(i), if a residence is owned by a trust, for the period that a taxpayer is treated under sections 671 through 679 (relating to the treatment of grantors and others as substantial owners) as the owner of the trust or the portion of the trust that includes the residence, the taxpayer will be treated as owning the residence for purposes of satisfying the 2-year ownership requirement of section 121, and the sale or exchange by the trust will be treated as if made by the taxpayer.
So, the long winded answer to the question is, yes, if a trust owns a primary residence and it is set up correctly, it can qualify for the Capital Gains Tax Exclusion under Section 121 of the Code.
Monday, June 10, 2013
Wednesday, June 5, 2013
IRS FATCA Form 8938 and the FBAR Form TD F 90-22.1
For US citizens and US permanent residents, you must file Form 8938 (also known as the FATCA Form) if your overseas investment assets are above $50,000 for an individual or $100,000 for a married couple (filing jointly) at year end. Additionally, on any given day during the year if your assets are above $75,000 for an individual or $150,000 for a married couple (filing jointly), you will also be required to file the FATCA Form. (If you are married but file separate tax returns, follow the rules for an individual.)
For US Citizens living abroad, you must file the Form 8938 if your overseas investment assets are above $200,000 for an individual or $400,000 for a married couple (filing jointly) at year end. Additionally, on any given day during the year if your assets are above $300,000 for an individual or $600,000 for a married couple (filing jointly), you will also be required to file the FATCA Form.
The IRS has listed a helpful chart of what assets count towards the reporting threshhold. Note, ownership of foreign real estate outside of the United States does not need to be reported on the FATCA Form if you own it directly, but it does need to be reported if you own it through a foreign entity.
The FATCA Form should not be confused with Form TD F 90-22.1 (FBAR). The FBAR form relates strictly to foreign bank accounts that hold more than $10,000 at any time during the year for ALL foreign bank accounts. This can be a real problem for individuals who own small accounts held in multiple countries that fluctuate greatly against the US Dollar.
A good rule of thumb is that if must file a FATCA Form 8938, you should almost always be filing a FBAR Form as well.
The penalties for failure to file Form 8938 can be quite high. If you do not file an accurate Form 8938 in a timely manner, there is a $10,000 penalty. If the IRS asks for a FATCA form and you refuse to comply, they may assess you with a $50,000 penalty for noncompliance. Form 8938 should be filed along with your income tax Form 1040.
The penalties for failure to file the FBAR Form can also be quite high. If you do not file an accurate FBAR in a timely manner, they may assess up to a $10,000 penalty for each non-willful violation or the greater of $100,000 or 50% of the highest account balance for willful violations. The FBAR must be filed by June 30th - there is no ability to extend this deadline.
Finally, other individuals subject to the US taxing authority may also be required to complete the FATCA form.
For US Citizens living abroad, you must file the Form 8938 if your overseas investment assets are above $200,000 for an individual or $400,000 for a married couple (filing jointly) at year end. Additionally, on any given day during the year if your assets are above $300,000 for an individual or $600,000 for a married couple (filing jointly), you will also be required to file the FATCA Form.
The IRS has listed a helpful chart of what assets count towards the reporting threshhold. Note, ownership of foreign real estate outside of the United States does not need to be reported on the FATCA Form if you own it directly, but it does need to be reported if you own it through a foreign entity.
The FATCA Form should not be confused with Form TD F 90-22.1 (FBAR). The FBAR form relates strictly to foreign bank accounts that hold more than $10,000 at any time during the year for ALL foreign bank accounts. This can be a real problem for individuals who own small accounts held in multiple countries that fluctuate greatly against the US Dollar.
A good rule of thumb is that if must file a FATCA Form 8938, you should almost always be filing a FBAR Form as well.
The penalties for failure to file Form 8938 can be quite high. If you do not file an accurate Form 8938 in a timely manner, there is a $10,000 penalty. If the IRS asks for a FATCA form and you refuse to comply, they may assess you with a $50,000 penalty for noncompliance. Form 8938 should be filed along with your income tax Form 1040.
The penalties for failure to file the FBAR Form can also be quite high. If you do not file an accurate FBAR in a timely manner, they may assess up to a $10,000 penalty for each non-willful violation or the greater of $100,000 or 50% of the highest account balance for willful violations. The FBAR must be filed by June 30th - there is no ability to extend this deadline.
Finally, other individuals subject to the US taxing authority may also be required to complete the FATCA form.
Receiving Gifts or an Inheritance from Relatives Overseas
If you live in the United States and receive a gift from a family member who lives overseas who is not a US citizen, you should be aware that the IRS requires the US beneficiary to file Form 3520 to report the gift. You are also required to file Form 3520 if you are receiving money as part of an inheritance or a distribution from a foreign trust.
The requirement to report the gift, bequest or trust distribution kicks in for assets valued at more than $100,000. All gifts, bequests and trust distributions received during the calendar year must be aggregated if they come from related parties. So, if you receive $70,000 from your mother and $50,000 from your father (both of whom live in a foreign country and are not citizens of the US), you will be required to complete the Form 3520. However, if you receive a gift of $95,000 from your parents and $10,000 from a friend, you will not have to report it.
Payments by a foreign person for qualified medical or tuition payments do not count against the $100,000 threshhold provided the payments are made directly to the health care provider or school.
The penalties for failure to file Form 3520 can be quite high. If you do not file an accurate Form 3520 in a timely manner, you may be penalized 5% of the amount of the foreign gift for each month for which the failure to report continues (not to exceed a total of 25%). The return is due when you file or income tax.
If you receive a gift of foreign property, money in a foreign bank account or a foreign business interest, do not forget that you may also need to file a IRS Form 8938 (FATCA Form) and the FBAR Form in addition to the Form 3520.
Finally, there are special rules for gifts from individuals who ceased to be a US Citizen or green card holder after June 16, 2008. There are also special rules for gifts received from foreign corporations or foreign partnerships as gifts from those entities in excess of $14,723 (adjusted annually for inflation) must be reported as well.
The requirement to report the gift, bequest or trust distribution kicks in for assets valued at more than $100,000. All gifts, bequests and trust distributions received during the calendar year must be aggregated if they come from related parties. So, if you receive $70,000 from your mother and $50,000 from your father (both of whom live in a foreign country and are not citizens of the US), you will be required to complete the Form 3520. However, if you receive a gift of $95,000 from your parents and $10,000 from a friend, you will not have to report it.
Payments by a foreign person for qualified medical or tuition payments do not count against the $100,000 threshhold provided the payments are made directly to the health care provider or school.
The penalties for failure to file Form 3520 can be quite high. If you do not file an accurate Form 3520 in a timely manner, you may be penalized 5% of the amount of the foreign gift for each month for which the failure to report continues (not to exceed a total of 25%). The return is due when you file or income tax.
If you receive a gift of foreign property, money in a foreign bank account or a foreign business interest, do not forget that you may also need to file a IRS Form 8938 (FATCA Form) and the FBAR Form in addition to the Form 3520.
Finally, there are special rules for gifts from individuals who ceased to be a US Citizen or green card holder after June 16, 2008. There are also special rules for gifts received from foreign corporations or foreign partnerships as gifts from those entities in excess of $14,723 (adjusted annually for inflation) must be reported as well.
Friday, May 24, 2013
Can an Attorney for an Estate who is also an Executor Double Dip?
I am frequently asked whether an attorney who is acting as an executor for an estate can receive both an executor's commission and legal fees for representing the estate. Although this may sound like a conflict of interest, the short answer in New Jersey is yes, it is specifically allowed under New Jersey Statute 3B:18-6.
As a practical matter, the attorney's fees are also subject to guidelines as to reasonableness. Unlike Pennsylvania and Florida, were it is common practice to charge a legal fee which is a percentage of the estate, in New Jersey, it is far more common to charge an hourly rate. So, if an attorney charges a fixed fee, and there was not a lot of legal time involved, a court could reduce the attorney fee.
As a practical matter, the attorney's fees are also subject to guidelines as to reasonableness. Unlike Pennsylvania and Florida, were it is common practice to charge a legal fee which is a percentage of the estate, in New Jersey, it is far more common to charge an hourly rate. So, if an attorney charges a fixed fee, and there was not a lot of legal time involved, a court could reduce the attorney fee.
Thursday, May 16, 2013
New Estate Administration Comedy
In the spirit of the great film, Brewster's Millions, Fox TV has come out with a new comedy called The Goodwin Games. You can see the first episode on Hulu if you want. I'm always a sucker for wacky Will scenarios, and this seems to fit right in. It appears to be about a father who is trying to get his family together after he dies by making them fight over his fortune. The father set up a series of games for the children to play, and the winner gets the full inheritance.
Most likely it will turn out to be a nice twist on the traditional estate litigation that people often encounter in that instead of fighting it out in court, the heirs have to compete in various children's games (as well as get their lives in order) to be able to inherit anything at all.
Most likely it will turn out to be a nice twist on the traditional estate litigation that people often encounter in that instead of fighting it out in court, the heirs have to compete in various children's games (as well as get their lives in order) to be able to inherit anything at all.
Monday, April 22, 2013
Major Changes to Tax Law in New Budget Proposal
Recently, President Obama announced his proposed budget for 2014. Included in the budget are some major changes to the recently enacted "permanent" estate tax exemption laws. If you recall, a few short months ago, a fiscal cliff deal was enacted that provided for a $5,000,000 exemption from the federal estate and gift tax (indexed for inflation).
Among the recommendations in the proposed budget include a return to a federal estate and gift tax exemption of $3,500,000. This exemption amount would not be indexed for inflation. There is also a recommendation to increase the tax rate on estates over the exemption threshhold from 40% to 45%.
Furthermore, the proposed budget recommends certain changes that would curtail the use of many popular estate planning options (particuarly Grantor Trusts and Dynasty Trusts). In particular, there would be restrictions on the ability to do a technique known as a short-term GRAT, and trusts longer than 90 years would be subject to a generation skipping-transfer tax again.
Other major changes include a cap on tax deferred retirement contributions, reducing future Social Security benefits by recalculating benefits under a chained CPI formula, a minimum alternate tax of 30% on households earning more than $1,000,000 per year, and capping itemized deductions at 28%.
It is unlikely that most of these changes will ever go into affect and is more likely an opening salvo in a negotiation strategy. However, it does provide insight as to the types of taxes the President wants raise and the planning options that are in jeopardy.
Among the recommendations in the proposed budget include a return to a federal estate and gift tax exemption of $3,500,000. This exemption amount would not be indexed for inflation. There is also a recommendation to increase the tax rate on estates over the exemption threshhold from 40% to 45%.
Furthermore, the proposed budget recommends certain changes that would curtail the use of many popular estate planning options (particuarly Grantor Trusts and Dynasty Trusts). In particular, there would be restrictions on the ability to do a technique known as a short-term GRAT, and trusts longer than 90 years would be subject to a generation skipping-transfer tax again.
Other major changes include a cap on tax deferred retirement contributions, reducing future Social Security benefits by recalculating benefits under a chained CPI formula, a minimum alternate tax of 30% on households earning more than $1,000,000 per year, and capping itemized deductions at 28%.
It is unlikely that most of these changes will ever go into affect and is more likely an opening salvo in a negotiation strategy. However, it does provide insight as to the types of taxes the President wants raise and the planning options that are in jeopardy.
Thursday, February 14, 2013
Creating a Trust for Personal Injury Settlement
Victims of a personal injury have many burdens to bear. Most people can expect to deal with the stress of a lawsuit, loss of income, coping with with injuries and physical therapy. However, one item that many people are not prepared to deal is a sudden influx of money from a settlement or trial verdict that good personal injury attorney will help them receive.
For some, they are just not used to handling large sums of money, and a traditional trust can be created so that the recepient of the money can handle it jointly with a trusted family member or potentially a corporate trustee.
For individuals who are disabled to the point where they will qualify for SSI and Medicaid, receipt of a large personal injury award will jeopordize a person's ability to qualify for government benefits unless that money is placed into a special needs trust. This type of trust is typically known as a First Party Special Needs Trust, a Self Settled Special Needs Trust or a (d)(4)(A) Trust.
Administration of Special Needs Trusts can be very complex because those trusts are limited in what they can pay for by statute. Special Needs Trusts can generally not pay for food, shelter, electricity, gas or water and it may not pay for anything that can be converted into food, shelter, electricity, gas or water. Additionally, cash should almost never be distributed to a beneficiary from the trust and there are special rules about a trust owning a home.
One very important rule about Special Needs Trusts is that the beneficiary of the trust, the victim of the personal injury, can never ever act as Trustee. This means that just as you are receiving the money, you need to give up all control of it. This is not an easy thing to do psychologically, especially if you know that the trust is going to be limited in what it can pay for.
The goal at this point is to find somebody that you can truly trust to manage the money and look after the your best interests, If you do not know of anyone, a good attorney should be able to help you find a corporate trustee or independent trustee that can be counted on.
For some, they are just not used to handling large sums of money, and a traditional trust can be created so that the recepient of the money can handle it jointly with a trusted family member or potentially a corporate trustee.
For individuals who are disabled to the point where they will qualify for SSI and Medicaid, receipt of a large personal injury award will jeopordize a person's ability to qualify for government benefits unless that money is placed into a special needs trust. This type of trust is typically known as a First Party Special Needs Trust, a Self Settled Special Needs Trust or a (d)(4)(A) Trust.
Administration of Special Needs Trusts can be very complex because those trusts are limited in what they can pay for by statute. Special Needs Trusts can generally not pay for food, shelter, electricity, gas or water and it may not pay for anything that can be converted into food, shelter, electricity, gas or water. Additionally, cash should almost never be distributed to a beneficiary from the trust and there are special rules about a trust owning a home.
One very important rule about Special Needs Trusts is that the beneficiary of the trust, the victim of the personal injury, can never ever act as Trustee. This means that just as you are receiving the money, you need to give up all control of it. This is not an easy thing to do psychologically, especially if you know that the trust is going to be limited in what it can pay for.
The goal at this point is to find somebody that you can truly trust to manage the money and look after the your best interests, If you do not know of anyone, a good attorney should be able to help you find a corporate trustee or independent trustee that can be counted on.
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