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.
Thursday, May 16, 2013
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.
Tuesday, January 8, 2013
Probate In New Jersey - When There Is A Will
One of the questions I frequently get is: What is involved with probate in New Jersey?
In some jurisdictions, I know attorneys go out of their way to help their clients avoid the probate process by creating trusts and titling assets so that they can be transferred automatically on death. In New Jersey, probate usually is not that costly or difficult - at least compared to places like California, New York, Pennsylvania and Florida.
Part of the reason for this is that New Jersey requires attorneys to charge a reasonable fee, and not a percentage of the estate. Additionally, the New Jersey does not charge much for filing a Will or for any other administration fees. Moreover, in almost every county that I've had to deal with, the local Surrogate has been tremendously helpful in trying to assist us through the process. I know I frequently call the Mercer County Surrogate's Office, which is a wealth of information.
So, going back to what is involved, each estate is highly unique. However, here are some good steps to take:
1) Deal with the family and make funeral arrangements. An executor does not have to pay for the funeral. Whoever pays can be reimbursed by the Estate later on.
2) Identify valuable assets and the Will and secure them for safe keeping. (This may include searching the house and possibly even changing locks if you think that someone may access the property unlawfully.)
3) Identify the decedent's next of kin and obtain contact information for them. You will need this when applying to be executor.
4) After the Original Will has been found, identify who the Executor is. If the Executor is not alive or not willing to serve, steps must be taken so that a backup can be named. If the Original Will cannot be found, there is a process for a having a copy approved by the Court.
5) Take the Will to the Surrogate in the County where the Decedent resided. Be aware that no Will can be probated in New Jersey until ten (10) days have passed since the Testator has died. An Executor can go down to the Surrogate with all the paperwork within the first ten days, but the Letters Testamentary won't be released until that time frame has expired.
6) Once the Executor receives Letters Testamentary (also known as Short Certificates), he can transfer assets from the name of the Decedent into estate accounts for the Decedent. New Jersey automatically puts a lien on a Decedent's bank accounts, brokerage assets and real estate when a person passes away. Banks will only release 50% of the assets to pay bills of the estate until they receive a tax waiver from the New Jersey Division of Tax.
7) Shortly after qualifying as Executor, you must mail out a notice of probate to all people named in the Will AND all immediate next of kin, regardless of whether they are named in the Will or not. This can be problematic if you wish to cut an heir out or cannot locate an heir. I would also be a good reason to create an estate plan that will avoid probate. If a charity is named as a beneficiary, then a notice must be sent to the Attorney General's office.
8) If the Executor did not already have access to a safe deposit box, he can do so at this point.
9) Within eight (8) month of the Decedent's date of death, the Executor must file a New Jersey Inheritance Tax Return and pay any taxes due. Typically an inheritance tax return must be filed if assets are transferred to someone other than a spouse, civil union partner, child, grandchild, parent or charity. There is a 3 year lookback.
10) Within nine (9) months of the Decedent's date of death, the Executor must file a New Jersey Estate Tax Return and pay any taxes due. A New Jersey Estate Tax Return must be filed if the TAXABLE estate is in excess of $675,000. Note, the taxable estate can be different from the probate estate because the taxble estate may also include life insurance, retirement benefits, and joint accounts. If the taxable estate is above $5,000,000 (indexed for inflation), a federal estate tax return must also be filed. (It might be advisable to file this return in most situations on the death of the first spouse to pass on the Deceased Spouses unused tax exemption.)
11) The Executor must arrange for income tax returns to be filed and pay any taxes due.
12) The house must be cleaned and potentially sold or transferred.
13) If there is real estate located in other jurisdictions, the Executor must do an ancillary probate.
14) Other duties could include dealing with any business interests or intellectual property rights, assisting beneficiaries with any claims they might have for life insurance or retirement benefits, investigating the validity of claims against the estate and researching the proper title to assets.
15) The executor should prepare an accounting for the estate. This includes what the assets of the estate are, income, expenditures and distributions. Unless the matter is contested, an informal accounting will usually suffice.
16) Conduct child support searches on all beneficiaries.
17) After the tax returns are filed and the estate receives tax waivers and all bills are paid, the Executor can transfer the assets of the estate as directed in the Will.
18) Simultaneous with the transfers from the estate, an Executor should obtain a release and refunding bond. This acts as a waiver to release the Executor from liability and a means by which the executor can retrieve the inheritance back in the event that new bills arise for the estate.
An executor is not required to hire an attorney to help out with an estate admistration, but it can make the process much smoother.
In some jurisdictions, I know attorneys go out of their way to help their clients avoid the probate process by creating trusts and titling assets so that they can be transferred automatically on death. In New Jersey, probate usually is not that costly or difficult - at least compared to places like California, New York, Pennsylvania and Florida.
Part of the reason for this is that New Jersey requires attorneys to charge a reasonable fee, and not a percentage of the estate. Additionally, the New Jersey does not charge much for filing a Will or for any other administration fees. Moreover, in almost every county that I've had to deal with, the local Surrogate has been tremendously helpful in trying to assist us through the process. I know I frequently call the Mercer County Surrogate's Office, which is a wealth of information.
So, going back to what is involved, each estate is highly unique. However, here are some good steps to take:
1) Deal with the family and make funeral arrangements. An executor does not have to pay for the funeral. Whoever pays can be reimbursed by the Estate later on.
2) Identify valuable assets and the Will and secure them for safe keeping. (This may include searching the house and possibly even changing locks if you think that someone may access the property unlawfully.)
3) Identify the decedent's next of kin and obtain contact information for them. You will need this when applying to be executor.
4) After the Original Will has been found, identify who the Executor is. If the Executor is not alive or not willing to serve, steps must be taken so that a backup can be named. If the Original Will cannot be found, there is a process for a having a copy approved by the Court.
5) Take the Will to the Surrogate in the County where the Decedent resided. Be aware that no Will can be probated in New Jersey until ten (10) days have passed since the Testator has died. An Executor can go down to the Surrogate with all the paperwork within the first ten days, but the Letters Testamentary won't be released until that time frame has expired.
6) Once the Executor receives Letters Testamentary (also known as Short Certificates), he can transfer assets from the name of the Decedent into estate accounts for the Decedent. New Jersey automatically puts a lien on a Decedent's bank accounts, brokerage assets and real estate when a person passes away. Banks will only release 50% of the assets to pay bills of the estate until they receive a tax waiver from the New Jersey Division of Tax.
7) Shortly after qualifying as Executor, you must mail out a notice of probate to all people named in the Will AND all immediate next of kin, regardless of whether they are named in the Will or not. This can be problematic if you wish to cut an heir out or cannot locate an heir. I would also be a good reason to create an estate plan that will avoid probate. If a charity is named as a beneficiary, then a notice must be sent to the Attorney General's office.
8) If the Executor did not already have access to a safe deposit box, he can do so at this point.
9) Within eight (8) month of the Decedent's date of death, the Executor must file a New Jersey Inheritance Tax Return and pay any taxes due. Typically an inheritance tax return must be filed if assets are transferred to someone other than a spouse, civil union partner, child, grandchild, parent or charity. There is a 3 year lookback.
10) Within nine (9) months of the Decedent's date of death, the Executor must file a New Jersey Estate Tax Return and pay any taxes due. A New Jersey Estate Tax Return must be filed if the TAXABLE estate is in excess of $675,000. Note, the taxable estate can be different from the probate estate because the taxble estate may also include life insurance, retirement benefits, and joint accounts. If the taxable estate is above $5,000,000 (indexed for inflation), a federal estate tax return must also be filed. (It might be advisable to file this return in most situations on the death of the first spouse to pass on the Deceased Spouses unused tax exemption.)
11) The Executor must arrange for income tax returns to be filed and pay any taxes due.
12) The house must be cleaned and potentially sold or transferred.
13) If there is real estate located in other jurisdictions, the Executor must do an ancillary probate.
14) Other duties could include dealing with any business interests or intellectual property rights, assisting beneficiaries with any claims they might have for life insurance or retirement benefits, investigating the validity of claims against the estate and researching the proper title to assets.
15) The executor should prepare an accounting for the estate. This includes what the assets of the estate are, income, expenditures and distributions. Unless the matter is contested, an informal accounting will usually suffice.
16) Conduct child support searches on all beneficiaries.
17) After the tax returns are filed and the estate receives tax waivers and all bills are paid, the Executor can transfer the assets of the estate as directed in the Will.
18) Simultaneous with the transfers from the estate, an Executor should obtain a release and refunding bond. This acts as a waiver to release the Executor from liability and a means by which the executor can retrieve the inheritance back in the event that new bills arise for the estate.
An executor is not required to hire an attorney to help out with an estate admistration, but it can make the process much smoother.
Thursday, January 3, 2013
Estate Tax Portability Here to Stay
It occurs to me that other than a few minor modifications to the federal estate tax rate, very little has changed with respect to the law as it existed in 2012. This means that estate tax portability is here to stay. Portability is the term given when a surviving spouse receives a deceased spouse's unused estate tax exemption (also know as DSUE). Whether or not portability would last under a new deal was a hotly debated topic.
For anyone who has had a spouse die in 2012 and has been waiting to see what will happen with the law, it would be highly advisable to file a federal estate tax return (Form 706) to port your spouse's unused exemption amount. Even if the surviving spouse does not have more than $5,000,000 in assets, it does not mean that his or her assets will not grow, that he or she will not win the lottery or inherit money from a wealthy relative before passing.
Additionally, as mentioned in an earlier post on same sex couples being entitled to the unlimited marital deduction, if you are in a same sex marriage, you should also considering filing a protective Form 706 as the state of the law is in flux right now.
For anyone who has had a spouse die in 2012 and has been waiting to see what will happen with the law, it would be highly advisable to file a federal estate tax return (Form 706) to port your spouse's unused exemption amount. Even if the surviving spouse does not have more than $5,000,000 in assets, it does not mean that his or her assets will not grow, that he or she will not win the lottery or inherit money from a wealthy relative before passing.
Additionally, as mentioned in an earlier post on same sex couples being entitled to the unlimited marital deduction, if you are in a same sex marriage, you should also considering filing a protective Form 706 as the state of the law is in flux right now.
Wednesday, January 2, 2013
Summary of Tax Law Changes 2013 (Fiscal Cliff Deal)
As you know by know, the Congress and the President have final agreed to a fiscal cliff deal. While I haven't had a chance to read all 157 pages of the American Taxpayer Relief Act of 2012 yet, here is what I can gather from most major news sources:
1) The federal estate tax, gift tax and the federal generations skipping transfer (GST) tax will continue to have $5,000,000 exemptions, indexed for inflation. The estate tax, gift tax and GST tax exemption amounts were $5,120,000 for 2012. It will be $5,250,000 for 2013 after the most recent inflation adjustment. The highest rate will go up from 35% to 40%. This is a permanent change to the law.
Note: Technically there are mulitiple rates for estates under $5,250,000. This will not affect most people, but it can affect non-resident aliens with significant assets in the US or people who are otherwise not entitled to the full estate tax exemption.
2) The income tax rates for 2013 are:
Married Filing Jointly Single
10% Bracket $0 - 17,850 $0 - 8,925
15% Bracket $17,850 - 72,500 $8,925 - 36,250
25% Bracket $72,500 - 146,400 $36,250 - 87,850
28% Bracket $146,400 - 233,050 $87,850 - 183,250
33% Bracket $233,050 - 398,350 $183,250 - 398,350
35% Bracket $398,350 - 450,000 $398,350 - 400,000
39.6% Bracket $450,000 and up $400,000 and up
The change here was an increase in the top rate for married couples earning $450,000 or more and individuals earning $400,000. For Head of Household, I believe it is $425,000. The amounts here have been indexed for inflation for 2013.
3) Payroll taxes will increase to 6.2%, reverting back to the levels of 2010.
4) There will also be a phaseout of personal exemptions for individuals earning more than $250,000 and couples earning more than $300,000. Head of Household limit is $275,000. These appear to be indexed for inflation.
5) Permanently indexes Alternative Minimum Tax (AMT) for inflation.
6) Capital Gains Tax Rates for 2013 go from 15% to 20% for individuals earning $400,000 or more and couples earning $450,000 or more. It will stay at 15% for everyone else. (Caveat: It is unclear to me at this stage whether the $400,000 & $450,000 threshhold refers to all earnings or simply earnings from dividends and capital gains.)
7) Extenstion for 5 years of the child tax credit and $2,500 tax credit for college tuition.
8) Extension for 1 year of the accelerated "bonus" depreciation on business investments.
9) Extension of tax free distributions from individual retirement plans for charitable purposes.
In other news, the 2503(b) annual exclusion amount was will increase from $13,000 to $14,000 as it was indexed for inflation. This is not as part of the Fiscal Cliff deal.
---------------
Revised on January 11, 2013. Indexing brackets for inflation.
1) The federal estate tax, gift tax and the federal generations skipping transfer (GST) tax will continue to have $5,000,000 exemptions, indexed for inflation. The estate tax, gift tax and GST tax exemption amounts were $5,120,000 for 2012. It will be $5,250,000 for 2013 after the most recent inflation adjustment. The highest rate will go up from 35% to 40%. This is a permanent change to the law.
Note: Technically there are mulitiple rates for estates under $5,250,000. This will not affect most people, but it can affect non-resident aliens with significant assets in the US or people who are otherwise not entitled to the full estate tax exemption.
2) The income tax rates for 2013 are:
Married Filing Jointly Single
10% Bracket $0 - 17,850 $0 - 8,925
15% Bracket $17,850 - 72,500 $8,925 - 36,250
25% Bracket $72,500 - 146,400 $36,250 - 87,850
28% Bracket $146,400 - 233,050 $87,850 - 183,250
33% Bracket $233,050 - 398,350 $183,250 - 398,350
35% Bracket $398,350 - 450,000 $398,350 - 400,000
39.6% Bracket $450,000 and up $400,000 and up
The change here was an increase in the top rate for married couples earning $450,000 or more and individuals earning $400,000. For Head of Household, I believe it is $425,000. The amounts here have been indexed for inflation for 2013.
3) Payroll taxes will increase to 6.2%, reverting back to the levels of 2010.
4) There will also be a phaseout of personal exemptions for individuals earning more than $250,000 and couples earning more than $300,000. Head of Household limit is $275,000. These appear to be indexed for inflation.
5) Permanently indexes Alternative Minimum Tax (AMT) for inflation.
6) Capital Gains Tax Rates for 2013 go from 15% to 20% for individuals earning $400,000 or more and couples earning $450,000 or more. It will stay at 15% for everyone else. (Caveat: It is unclear to me at this stage whether the $400,000 & $450,000 threshhold refers to all earnings or simply earnings from dividends and capital gains.)
7) Extenstion for 5 years of the child tax credit and $2,500 tax credit for college tuition.
8) Extension for 1 year of the accelerated "bonus" depreciation on business investments.
9) Extension of tax free distributions from individual retirement plans for charitable purposes.
In other news, the 2503(b) annual exclusion amount was will increase from $13,000 to $14,000 as it was indexed for inflation. This is not as part of the Fiscal Cliff deal.
---------------
Revised on January 11, 2013. Indexing brackets for inflation.
Wednesday, December 26, 2012
IRS Not Issuing Tax IDs At End Of 2012
I went to the IRS website today and noticed that they are not issuing tax IDs for new businesses or trusts from December 27th, at 4pm until January 2 of 2013.This will make it particulary difficult to make a year end gift to a newly created trust or LLC as they will not be able to open up bank accounts without the EIN. The IRS is officially saying that they are shutting down the website for maintenance, however, I personally wonder if it is to stop the flow of year end gifts in light of the apparent return to a $1,000,000 gift tax exemption.
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