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Monday, December 28, 2009

So, Will there be a Federal Estate Tax in 2010?

On December 3, the House of Representatives passed a bill to permanently extend the Federal Estate Tax Exemption (H.R. 4154). The current exemption is $3.5 Million per person, or $7 Million for a couple, with a 45% tax on the decedent's assets over the exemption amount.

As of yesterday though, the Senate has yet to act, which means that the law passed by President Bush in 2001 remains in effect. If Senate does not pass bill to deal with this by New Year's, that will mean that on January 1, 2010 there will be no federal estate tax - maybe.

Why do I say maybe? Because it is still very likely that Congress will act after the new year to reinstate the tax, and make it retroactive to January 1st. They've done it before, with the permission of the Supreme Court. (see U.S. v. Carlton)

Even more troubling, the repeal would only be for one year, and then the exemption amount would come crashing back down to One Million Dollars (indexed for inflation) in 2011. This does not make for easy planning and will most adversely affect individuals who have children from one relationship and are now married to a different person. People who are in this situation should seek out an estate planning attorney immediately because it is likely the formulas in their Wills may cause a disastrous result. Many formulas can be read so that either the children from the prior relationship are completely cut out or the new spouse is completely cut out. There is an easy fix to this by setting caps on how much a spouse or child can get, but I reiterate - many old formulas will not work.

Most estate planning practitioners that I know still strongly believe that the government will pass a law to keep some form of estate tax - mainly because we find it hard to believe that the government will give up so much money from the people who can most easily afford to pay it. However, for those of you who have been completely ignoring the issue, it is time to start paying attention because a complete repeal of the federal estate tax will actually have a large capital gains tax consequence.

To understand this capital gains tax consequence, you must first understand and appreciate the incredible importance of "Basis". If the federal estate tax is indeed repealed, executors will be entitled, for an individual decedent, to allocate to the decedent's assets up to $1.3 million in basis plus the sum of the decedent's unused capital loss carryovers, net operating loss carryovers and unrealized losses on property owned at the date of death (IRC Section 1022(b)). No asset may be increased in excess of fair market value though.

In addition to the $1.3 million basis increase available to all beneficiaries of an estate, the executor
may allocate another $3 million of basis to assets passing to a surviving spouse. (This benefit only applies to heterosexual couples.)

As a practical matter, the repeal of the estate tax will most negatively affect those few individuals who have a lot of highly appreciated assets and those individuals who might not have had to file a return at all. The reason that it negatively affects the people who might not otherwise had to file a return is because I believe that a return will have to be filed to properly allocate basis to your assets. This will result in extra attorney fees for many.

The pessimist in me says that the government will wait until about August of 2010 or so and make a retroactive law, making estate planning and administration most cumbersome and costly.

Understanding Basis

If you want to sell an asset, particularly a valuable asset, no one should do so without first understanding what the tax consequences of that sale might be. The tax that most often affects the sale of a valuable asset (in a non-business setting), is the capital gains tax. To understand this capital gains tax consequence, you must first understand and appreciate the incredible importance of "Basis".

An asset's basis is often referred to as the amount an asset cost when you buy it. For example, if you buy stock at $20 and sell it at $100, the basis of the stock is $20 and the gain on the sale is $80. If the stock was held for an appropriate time amount, the gain would be considered capital gain and taxed at the capital gains tax rate.

Now, the basis in an asset can change for a variety of reasons. For example, let's say that the stock that you bought split, you would have to split the basis in the stock in the same way that the stock split. Additionally, let's say the asset is a house, or some other type of depreciable asset. Every time you depreciate the asset, the basis is reduced. If, on the other hand, you make capital improvements to the asset, like putting an addition on to a house, that increases the basis of the asset.

So, let's assume that you buy a rental property for $200,000. You spend $100,000 improving it, depreciate it by $80,000, and then ultimately sell it for $750,000. The basis in the property would be $220,000 ($200,000 + $100,000 - $80,000). The gain would be $530,000, and most likely taxed at the capital gains rate of 15%.

Another major factor in determining the basis in property is whether, under current law, a person holds that asset at the time of his or her death. Currently, when a person dies, the heirs take the assets of the decedent with a basis equal to fair market value. (Often times this is called a step up in basis - but that is a bit of a misnomer as the basis can actually be lower in a bad economy.)

So for example, let's say that Dad dies owning a house that he purchased for $350,000, and at the time of his death it is worth $550,000. If the heirs sell the house shortly after his death for $560,000, there is only $10,000 of gain, not $210,000 of gain because of the increase in basis due to Dad's death.

Now let's complicate matters. Dad and Mom own that same property that they bought for $350,000. Dad dies when the value of the property is $400,000 and Mom dies when the value is worth $550,000. The basis in the property will be determined by whom the property was left to. If Mom inherited the property from Dad and then died, the basis of the property is the full $550,000.

If Dad left the property to daughter, and the other half the property went to daughter when Mom died, the basis will be split. The basis will be $475,000 in the hands of daughter. (1/2 of the property with a $200,000 basis as a result of Dad's death and 1/2 of the property with a $275,000 basis as a result of Mom's death.)

I emphasized "under current law" earlier because that may all change on January 1, 2010. In 2001, President Bush passed a law that eliminates the federal estate tax and eliminates the fair market date of death basis rule. There will be another form of capital gains tax exemption that will go into affect that I review in another post.

Lost in the debate over the estate tax is the importance of the rule revaluing property so that it takes on a date of death basis. One of the big problems that people have is keeping proper records of the basis of their assets. Sometimes, assets can be passed down for generations before they are sold. If the owner cannot provide proof of an assets basis, the government will assume the basis is Zero, causing a potentially very large tax.

So while keeping track of the basis of your assets was always important, it may be even more important to safeguard your paperwork pertaining to your valuables if the estate tax is truly repealed.

Thursday, December 3, 2009

A Good Time to Buy that First House – But How?

Many experts think this is a great time to buy a new house, especially if you are a first time home-buyer. Interest rates are low and home values are depressed. The problem, however, with this credit crunch is having enough cash for the down-payment. There are programs out there so that you can buy a home with almost no money down, but that can lead to the monthly payment of Private Mortgage Insurance (PMI), which is expensive, and opens the homeowner to the possibility of owing more than the home is worth if the value declines.

In order to put have an adequate down-payment, many prospective homeowners will consider dipping into their IRAs, 401(k)s or 403(b)s for the down payment. Tapping into these retirement accounts options have significant drawbacks and the cost of such withdrawals should be carefully considered.


Best features:

* You can withdraw up to $10,000 without a 10% early withdrawal penalty. (A husband and wife can each withdraw $10,000 to make a $20,000 down-payment.)
* You may withdraw for immediate family such as a spouse, child, grandchild, parent or other ancestor.


* The withdrawal amount will be taxable as ordinary income.
* There is no ability to re-contribute money.
* Funds can only be used towards: buying, building or rebuilding the primary residence; and any usual or reasonable settlement, financing or other closing costs.


401(k)s and 403(b)s function in very similar fashion to each other. There are 2 ways to access your retirement fund to purchase a home: withdrawing it outright, or taking a loan out against it. It is usually a far better option to borrow against a 401(k)/403(b) than to withdraw from it due to the pitfalls.

1. If you withdraw money from your 401(k)/403(b):

Best features

* You do not have to be a first-time homebuyer to withdraw 401(k)/403(b) funds (any financial hardship as described by the IRS will suffice).


* You need to be purchasing a primary residence, as withdrawals are only permitted under “hardship” circumstances. (The government considers the need to purchase a primary residence as a hardship circumstance.)
* The withdrawal amount will be considered taxable income.
* You will be assessed a 10% early withdrawal penalty if you are under age 59.5.
* You lose the compounding interest.
* You may also be prohibited from making any additional contributions for a period of one year.

2. If you borrow against your 401(k)/403(b):

Best Features

* You may borrow the lesser of $50,000 or ½ of your account balance. However, if ½ your account balance is less than $10,000, it may be possible to borrow $10,000.
* A loan from a 401(k) allows you time to pay it back. (This is usually at prime + 1% and the typical payback period is 10-15 years, but it may be as long as 30 years.) A 403(b) typically has a payback period equal to the duration of the first mortgage. However, you should check the specific payback period identified in your plan.
* There is no penalty for borrowing against your 401(k).
* Assuming that you pay the loan back in a timely manner, there are no adverse income tax consequences to receiving the loan.


* If you lose your job, any unpaid loan amount would either be due in a period as short as 60 days. If you do not pay back the loan, the unpaid amount will be considered income, which is then both taxable and possibly also subject to a 10% early withdrawal penalty.
* Most plans prevent you from contributing extra savings until the loan is repaid.


While IRA, 401(k) and 403(b) funds could be used to fund the deposit on a first time home purchase, the tax drawbacks and risks are significant. You will want to consider how use of these funds will affect your retirement and your estate and the tax implications before taking such drastic measures. Obviously, if you are in your 20s with many years until retirement, and perhaps not at the peak of your earning potential, the use of your IRA and/or 401(k) and/or 403(b) funds can help you buy a piece of the American dream. However, if you are looking towards retirement or the rate of return on these funds makes withdrawing funds a particularly costly proposition, it is best to look elsewhere for your down-payment.

Special thanks to Nancy McMillin in the preparation of this post.

Wednesday, December 2, 2009

Special Needs Planning in NJ - Part 4 of 4

Special Needs Trusts and Supplemental Needs Trusts

In Part IV of this Series, I want to discuss the role of Special Needs Trusts and Supplemental Needs Trusts in estate planning.

"Special Needs Trusts" and "Supplemental Needs Trusts" are terms to describe trusts designed to provide benefits to a person in a way that will preserve the public benefits that he or she is entitled to receive. The person who benefits from the trust is called the beneficiary.

Each special needs trust can be intended to protect different public benefits. Most commonly, special needs trusts are intended to permit Supplemental Security Income (SSI) and Medicaid recipients to receive some additional services or goods. Other common benefits include vocational rehabilitation, subsidized housing and food stamps. The trusts are always created as discretionary trusts, which means that money can only be paid out in the discretion of the trustee. The trustee can NEVER be the special needs person.

There are actually few rules governing Supplemental Needs Trusts (also commonly known as third-party special needs trusts). Since government benefits are available only to those with financial need, the most important rule is that the beneficiary should never be entitled to the money in the trust. If the trustee has complete discretion whether to make distributions for the beneficiary, the trust principal and income will usually not be counted as available to the beneficiary for purposes of obtaining government benefits.

The most important rule for special needs trusts is that the trust may not provide food, shelter, any asset which could be converted into food or shelter (including cash), or any items or services that are available from public benefit programs, to the beneficiary. In other words, the trust can provide for physical therapy, medical treatment, education, entertainment, travel, companionship, clothing, furniture and furnishings (such as a television or computer), and some utilities (like cable television and a telephone, but not electricity, gas or water). Distributions of cash to the special needs person outright are almost never permitted.

There are dozens of different ways to draft a Supplemental Needs Trust. In addition, the administration of a special needs trust can be extremely difficult. A seasoned lawyer, familiar with public benefits programs and special needs trust provisions, should always be involved in preparation of a third-party special needs trust. While many legal matters can be undertaken without a lawyer, or with a lawyer with general background, special needs trusts are complicated enough to require the services of a specialized practitioner.

Sometimes a person may be entitled to public benefits, but he or she has too many assets to qualify for those benefits. This is common for people like accident victims or disabled children who inherit money. In such cases, it is often possible and advisable to place assets into a special needs trust to gain, regain or continue eligibility for government benefits. Because the person is using their own money to fund the trust, there are numerous restrictions regarding how the money can be used.

Self-settled special needs trusts are much more complicated than their third-party equivalents. Usually (but not always), a self-settled special needs trust must comply with a federal law first enacted in 1993. That law requires that most self-settled special needs trusts actually be established by a judge, a court-appointed guardian or the parents or grandparents of the beneficiary (Social Security regulations may limit creation of trusts to the first two categories in most circumstances). In addition most self-settled special needs trusts will have to include a provision repaying state Medicaid agencies for any benefits, payable upon the death of the beneficiary.

In summary, Special Needs Trusts and Supplemental Needs Trusts are both Discretionary Trusts. A Special Needs Trust is established using funds of Special Needs Person. A Supplemental is established using funds of someone other than Special Needs Person. A Special Needs Trust requires that the government be paid back for Medicaid liens upon death of the Special Needs Person There is no government payback upon the death of Special Needs Person in a Supplemental Needs Trust.

Special Needs Trusts and/or Supplemental Needs Trusts are all part of a larger strategy to make sure a special needs person's financial and personal needs are met. For individuals who cannot afford these types of trusts, many charities, like Plan NJ, do have pooled funds to which you can contribute. These pooled funds offer you less control, but it does provide for a means of taking care of your loved one.

Tuesday, December 1, 2009

Special Needs Planning in NJ - Part 3 of 4


In Part III of this Series, I want to discuss estate planning issues for parents of a special needs child.

A typical estate plan for parents without a special needs child includes:
  1. Will;
  2. Financial Power Of Attorney;
  3. Health Care Power of Attorney;
  4. Advanced Health Care Directive; and
  5. Naming Beneficiaries of Retirement Plans.
The parent of a special needs child must also do everything possible to avoid giving money outright to the Special Needs Child. This includes arranging for care and financial resources for the Special Needs Child.

In order to do everything possible to avoid giving money outright to the Special Needs Child, there are certain steps that can be taken:

1) Setting up a special trust for the Special Needs Child that will not be counted against the child's income for purposes of eligibility for government programs;
2) Redoing beneficiary designation notices on life insurance contracts and retirement plans; and
3) Telling family members to either leave money to a special needs trust for the child or specifically exclude the Special Needs Child from their Wills.

There are also specific arrangements that need to be made to ensure that your special needs child is cared for after your passing. This includes:

1) Arranging for a guardian to be named for the Special Needs Child;
2) Arranging for government services (SSI, SSDI, Medicaid, etc.); and
3) Arranging for living arrangements for the child.

Parents of special needs children always have a lot to deal with, but much of this planning should be done shortly after you find out that you have a child with special needs. Most importantly, life insurance planning should be done as soon as possible. If you wait too long, you may no longer qualify for insurance - and special needs parents, more than most, need to guarantee that money will be there after they pass.

Thursday, November 26, 2009

Special Needs Planning in NJ - Part 2 of 4


In Part II of this Series, I want to discuss why formal guardianship is important and how to go about being recognized as the legal guardian of a special needs individual.

Until the person turns 18, a parent can legally make decisions for the child. However, once a person turns age 18, he or she is an adult. As an adult, a person is entitled, and in fact obligated, to make his or her own decisions. If that person needs help making his or her own decisions, but is still competent, that person can execute a Power of Attorney.

If the person is not competent to make their own decisions, then another person can only have the legal authority to act on behalf of the incapacitated person if a court appoints them as Guardian.

The Guardian can:
1) make health care decisions for the child;
2) handle the finances of the child;
3) enter into contracts on behalf of the child;
4) deal with government agencies on behalf of the child; and
5) make decisions regarding living arrangements.

What is the process for naming a guardian?

Step 1: Determine if there is a need for a Guardianship, or if there is a better alternative (such as a Power of Attorney).

Step 2: Meet with an attorney to discuss all the information needed to help the attorney file any legal paperwork on your behalf. (E.g. Who will be the guardian, who would be a good backup guardian, what is the disability of the child, what are the living arrangements and needs of the child, who are the doctors, caregivers, does the child have any money in his/her name, etc.)

Step 3: Get the doctors to sign affidavits confirming child's inability to handle his or her own affairs.

Step 4: File the paperwork with the Court to have the child declared an incapacitated person and have the Court order an attorney be appointed for the child.

Step 5: Work with the Court appointed attorney to make sure that they have the information they need to file a report with the Court. The attorney for the child will need to interview the child and the proposed guardians.

Step 6: The court appointed attorney will need to file a report with the court either recommending guardianship, limited guardianship or that no guardian be appointed.

Step 7: The Judge will then rule on the matter.

If the guardianship is uncontested, the process usually takes about two months and can cost about $3,000 to $6,000. If the guardianship is contested by either the child or another person who wishes to act as guardian, the costs can become quite high. Accordingly, it is usually best to make sure that the child and immediate family members are in agreement with the guardianship plans.

Tuesday, November 24, 2009

Special Needs Planning in NJ - Part 1 of 4


Many parents of a special needs child have an overwhelming concern: How (and by whom) will their child be taken care of when I die? In this series, I would like to explore the options that exist to ensure that your child will be provided for.

In order to understand the planning options available to your child, you first need to understand the government benefits that might be available to your child. There are 5 types of government benefits commonly available:

1. Supplemental Security Income (SSI) – provides money for low-income individuals who are disabled, blind or elderly and have few assets. SSI eligibility rules form the basis for most other government program rules, and so become the central focus for much special needs trust planning and administration. You must live in the United States or the Northern Mariana Islands to get SSI. Non-citizen residents may be able to get SSI. Once a person qualifies for SSI, he or she is automatically eligible for Medicaid in New Jersey and most other states.

To qualify you must have little or no income and few resources - the value of the things you own must be less than $2,000 if you are single or less than $3,000 if you are married. The value of your home does not count. Usually, the value of your car does not count. And the value of certain other resources, such as a burial plot, may not count either.

To get SSI, you also must apply for any other cash benefits you may be able to get.

The amount a person is entitled to receive in 2009 is:

Person living alone or with others in own household $ 705.25
Person living with spouse who is not eligible for SSI $ 1,018.36
Person living in someone else's household and receiving
support and maintenance $ 493.65
Person living in licensed residential health care facility $ 884.05
Person living in public general hospital or Medicaid
approved long-term health facility $ 40.00
Couple living alone or with others in own household $ 1,036.36
Couple living in someone else's household and receiving
support and maintenance $ 767.09
Couple living in licensed residential health care facility $ 1,730.36

The above includes both federal and state payments.
The benefit is reduced dollar for dollar for any other income the beneficiary may receive. This means that once an SSI beneficiary's income reaches a certain level, his or her SSI benefit will terminate.

2. Social Security Disability Income (SSDI) - provides money for individuals with a disability who qualify for Social Security based upon their own work history or the work history of such person's parents.

The SSDI program pays benefits to adults who have a disability that began before they became 22 years old. The government considers this SSDI benefit as a “child’s” benefit because it is paid on a parent’s Social Security earnings record. For a disabled adult to be entitled to this “child” benefit, one of his or her parents:

• Must be receiving Social Security retirement or disability benefits; or
• Must have died and have worked long enough under Social Security.


a. SSI is a needs based program and SSDI is an entitlement program. There is no “means” test for SSDI eligibility.

b. SSDI can be a much higher income level than SSI, and with no payback.

c. Under both SSI and SSDI, the child must not be doing any "substantial" work, and must have a medical condition that has lasted or is expected either to last for at least 12 months or to result in death.

d. In order to qualify for SSI, individuals must first apply for SSDI if eligible as SSI is a last benefit of last resort. A person switching to SSDI from SSI can still qualify for Medicaid.

3. Medicaid - is a benefit program available to low-income individuals which makes payments directly to health care providers for medical needs over and above what Medicare will pay. The largest health and long term care program operated and funded by the government – in this case, the federal government. The fixed monthly income cap for Medicaid in 2009 is $2,022.

4. Medicare - is a federal program that makes payments directly to hospitals, doctors and drug companies. People can qualify for benefits if they are 65 and over (and are entitled to receive Social Security benefits, whether or not they have actually retired) and those who have been receiving SSDI for at least two years.

Part A - Covers most medically necessary hospital, skilled nursing facility, home health and hospice care.

Part B - Covers most medically necessary doctors' services, preventative care, durable medical equipment, hospital outpatient services, laboratory tests, x-rays, mental health care, home health care and ambulance services. (There is a monthly premium for Part B based upon a person's income.)

Part D - Covers prescription drugs.

Medicaid v. Medicare

Medicaid differs from Medicare in three important ways:

1) Medicaid is run by state governments (though partially funded by federal payments);

2) it is available to those who meet financial eligibility requirements rather than being based on the age of the recipient, and

3) it covers all necessary medical care (though it is easy to argue that Medicaid’s definition of “necessary” care is too narrow).

Because Medicaid is a “means tested” health care program and Medicare covers a smaller portion of long-term care costs, maintaining continuous Medicaid availability is often the central focus of special needs trust administration.

5. SCHIP - State Children's Health Insurance Program. This program has higher income eligibility limits and provides health insurance for many who earn too much to qualify for other programs.

Tuesday, November 3, 2009

Pennsylvania Intestacy Law - When a Pennsylvania Resident Dies Without a Will

If a Pennsylvania resident dies without a Will, that person is said to have died "intestate". The Pennsylvania intestacy scheme is governed by statute (20 Pa.Cons.Stat. 2101 et. seq.). Where the money goes depends in large part who survives the decedent.

Many people think that as soon as they get married that if they die, everything that they own will go to their surviving spouse. THIS IS NOT TRUE!
1) Scenario 1: A person is only survived by a spouse - If the decedent is survived by a spouse and does not have any surviving parents or issue (children or other lineal decedents) then the surviving spouse receives the entire estate.

2) Scenario 2: A person is survived by a spouse and parent(s)
- If the decedent is survived by a spouse and at least one parent, but no issue, then the surviving spouse receives the first $30,000 and one-half of the balance of the probate estate. The balance would go to the surviving parent(s).

3) Scenario 3: A person is survived by a spouse and children from the marriage to the spouse - If the decedent is survived by a spouse and only children from their marriage, then the surviving spouse receives the first $30,000 and one-half of the balance of the probate estate. The balance would go to the surviving issue of the decedent. In most cases, the distribution will be made equally to a person's children, but if a child is not then living, then that deceased child's share shall go equally to that deceased child's children.

For example, let's assume Joey died with $300,000 and he is survived by his wife and one son. He also had one daughter, who died before him, but she had two children of her own. The widow would get $180,000 ($30,000+$150,000), the son would get $60,000 (1/2 of ($300K-$180K)) and each of the grandchildren would get $30,000 (1/4 of ($300K-$180K).
4) Scenario 4: A person is survived by a spouse and at least one child from another relationship - If the decedent is survived by a spouse and at least one children from another relationship, then the surviving spouse receives only one-half of the balance of the probate estate. The balance would go to the surviving issue of the decedent.

5) Scenario 5: Person is not survived by a spouse - If the decedent does not have a spouse, then his or her probate estate will first go to surviving issue, if any; then to surviving parents, if any; then to surviving siblings (or their issue), if any; then to surviving grandparents, if any; then to surviving aunts, uncles (or their children); if any. If none of these individuals survive the decedent, then the decedent's assets go to the Commonwealth of Pennsylvania.

You may have noticed that I used the term "probate estate" over and over in this entry. That is because the probate estate does not cover life insurance, retirement benefits, annuities, joint accounts, pay on death accounts or other moneys that are payable as a result of a contract. These assets are called "non-probate" assets and they do not pass according to the instructions of a Will nor do they pass via the intestacy laws. You must look to the terms of those documents to see who is entitled to what. Accordingly, when administering an estate, one must consider all assets - probate and non probate. If no beneficiary is named, then they do pass through the probate estate.

Unless you wish your assets to go according to the Pennsylvania intestacy scheme, you should draft a will so that your money can be distributed the way that you want when you pass.

Wednesday, July 29, 2009

Links to Important US-Japanese Tax Treaties

It is not always easy to find the treaties between America and Japan, so I have decided to post them here in case you would like to read them for yourself.

Here is the
US-Japan Income TaxTreaty (2003) courtesy of the IRS.

This is an official version of the US-Japan Estate & Gift Tax Treaty (1954) thanks to the Ministry of Foreign Affairs of Japanese.

Estate tax liability for Non-Citizen Non-Residents of America

In this real estate market, some foreign investors may be tempted to buy property in the United States on the cheap. Overall, this may be a good idea, but I wish to caution you about one potential tax trap: When a person who owns property in America dies, and that person is not a citizen and is not a permanent resident alien, there will be a United States Estate Tax due based in part on the value of that property. What's worse is that the tax rate starts at 18% and quickly goes up to 45%!

American citizens and permanent resident aliens can pass on $3.5 million worth of assets before the estate tax hits. Non-citizen non-residents only have a tax exemption of $13,000, which shelters $60,000 worth of assets. (See Section 2102 of the Internal Revenue Code.)

So, let's assume you have a Japanese citizen (living in Tokyo) who owns a rental property in New York, and that property is valued at $500,000. Upon the death of the owner, a federal estate would be due in the amount of $57,800. Due to the credit, this is less than an 18% effective tax rate. Still, it may come as a rather large shock for those unfamiliar with US tax laws.

Even though Japan has a treaty with the United States, estate and gift tax treaties uniformly exempt real estate - so the country where the property is located gets to tax that property.

As long as you are alive though, you can still do planning to minimize or avoid this outcome by engaging in gift and trust planning.

Wednesday, July 22, 2009

Weird Wills

I happened to come across this interesting site at www.trutv.com which has a section that posts "Weird Wills". As a bit of a practical joker, I think my favorite is the Will of Charles Vance Millar.

Speaking of unusual Wills, if you haven't seen the movie "Brewster's Millions" - I highly recommend it as it deals with three subjects I love - baseball, estate planning, and practical jokes.

Tuesday, June 30, 2009

What Happens When a Bond Holder Dies?

I just came across this useful web site by the US Treasury Department, so I thought I'd pass along the information: US Treasury- Death of a Bond Holder

The important thing that you should know is as follows:
  • If only one person is named on a savings bond, and that person is deceased, the bond becomes the property of their estate.
  • If both people named on a bond are deceased, the bond is the property of the estate of the person who died last.
  • If one of two people named on a bond is deceased, the surviving person is automatically the owner as if that survivor had been the sole owner from the time the bond was issued.

Monday, June 22, 2009

United Kingdom Inheritance Tax Update

The United Kingdom currently imposes an inheritance tax on assets in excess of £300,000 (slightly less than $500,000 based upon today's currency rates) when a person dies. The governing party, the Tories, had vowed to increase that threshold to £1,000,000. However, according to The Telegraph, due to the worldwide financial slowdown and mounting debt, it appears that they will not be able to keep that promise.

Thanks to the Wills, Trusts & Estates Prof Blog for bringing this to my attention.

Thursday, May 21, 2009

New Jersey Tax Amnesty 2009

For those of you who may have had trouble with the NJ taxman, there is some relief. New Jersey is offering "Amnesty" of sorts to those who still owe money. The benefit is that the government is willing to waive penalties, some interest and collection costs in an effort to get the money now. You will obviously still owe the base amount of the tax and some interest.

If you have the money (or credit on your credit card) and you agree you owe the taxes, this is certainly a good time to settle up. If you do not agree or do not have the money to pay now, you must still try and explore your other legal options.

For more information about the "Amnesty", you should go to: taxamnesty.nj.gov

Tuesday, April 28, 2009

It's Looking More and More Like We Will Keep the $3.5 Million Estate Tax Exemption

With all the talks about the Democrats negotiating a budget in a way to avoid a filibuster on health care, one should not overlook the fact that the budget includes an extension of the current Federal Estate Tax Exemption. Under current law, there is an federal estate tax exemption of $3.5 Million this year, there is no estate tax in 2010 and the estate tax is scheduled to return with only a $1 Million exemption (indexed for inflation) in 2011.

With the budget deficits mounting, there is no practical way the government will give up that revenue and everyone involved despises the uncertainty of the law. So, the extension of the $3.5 exemption will provide certainty to both estate planners and the number crunchers in D.C. It should be noted that it appears the 45% tax on estates over the $3.5 Million threshold will remain intact also.

Who has an Estate and Gift Tax Treaty with the US?

I just noticed a helpful link at the IRS that gives a nice chart detailing which countries have an Estate and Gift Tax Treaty with the US: Estate and Gift Tax Treaties.

Wednesday, March 11, 2009

Change to New York Power of Attorney Form

On January 27th of this year, New York changed its law regarding the requirements necessary to have a valid financial power of attorney. Some the more important changes include:
  1. Two people must now witness the Grantor's signature;
  2. The agent must now sign the power of attorney and have his/her signature notarized;
  3. If you want your agent to make gifts for tax planning (or any other purpose), you must execute a Major Gift Rider; and
  4. You may now have an independent person act as a monitor for the agent.
These changes become effective September 1, 2009. (NOTE - Original bill noted an effective date of March 1.)

Thanks to the Wills, Trusts & Estates Professor Blog for bringing this to my attention. Thanks to Frank Farkas of the Jewish Association for the Aged for bringing the change of the effective date to my attention.

Friday, February 20, 2009

Perfect Time to do Estate Planning for that Vacation Home

Sometimes in a bad economy, opportunities present themselves. One great planning opportunity that currently makes a lot of sense is a special trust known as a QPRT (Qualified Personal Residence Trust). A QPRT is great way to pass on wealth to your heirs in a tax efficient manner and without affecting your more liquid assets.

Here's generally how it works:
1) The owner of a property places a personal residence (or vacation home) in trust. The owner can continue to live in and use the property for a set number of years. At the end of the term, the property goes to whomever the owner wants, typically the owner's child or into another trust for the benefit of the child.
2) This gift is a legally enforceable promise to make a gift of the property to the child in X years from now. So, if the house is worth $500,000, and you promise to give it to your daughter 7 years from now, it is not really a $500,000 gift due to the time/value of money. The actual amount of the gift depends upon a variety of factors including the age of the donor and the current interest rate.
3) This plan can produce large estate tax savings. Giving away property while you are alive is an estate planning tax strategy known as an estate freeze. You are giving away property now so that future growth occurs in the estate of your heirs, rather than in your own estate. A QPRT leverages this strategy so that you are combining a discounted gift with an estate freeze.
  • Assume the following hypothetical. A wealthy 70 year old woman (worth $3,500,000) lives in New Jersey and has one adult son. She owns a shore home worth $1,000,000. Now, upon this woman's death, in New Jersey, she may bequeath $675,000 before having a NJ estate tax. Under current federal law, she can bequeath $3,500,000 before she has a federal estate tax. There is no limit to what she may gift away during life according to NJ, but the federal limit is $1,000,000. After that, there is a federal gift tax.
  • This woman decides to give away her shore home, worth $1,000,000, to her daughter. She structures the transaction so that the term of the QPRT is 7 years. This results in a taxable gift for federal gift tax purposes of $657,300 based upon the woman's age, the term of the trust and the March 2009 Section 7520 rate. There is no NJ gift tax.
  • Now, let's fast forward 7 years and 1 day, when the woman passes. I will assume the value of the shore property increased to about $1,300,000 and the rest of her estate only modestly increased from $2.5 Million to $2,700,000. If she had not given anything away, then at the time of her death her estate would have equaled $4,000,000. Assuming that the federal estate tax exemption remains at $3,500,000 and the New Jersey Estate tax exemption remains at $675,000, then her estate would have a combined estate tax liability of approximately $505,400 ($225,000 federal and $280,400 New Jersey). By making this gift via a QPRT, we completely elimiate the federal estate tax and the New Jersey estate tax would be reduced to approximately $155,600 - a savings of $349,800. (To compare with an outright gift of property, the combined estate tax would be $245,600, a savings of only $259,800.)
Traps to be wary of:
1) Be careful about giving away highly appreciated real estate unless you are quite sure the donees plan to keep it in the family for a long time. This is because the donees receive the gift with a carryover basis and could be subject to a very large capital gains tax upon the sale of the property.
2) Do not use this technique if the donor is in poor health. Setting up a QPRT is most effective when the donor survives the term of the trust. If the donor does not survive, then the property is included in his gross estate for both federal and state estate tax purposes.
3) For the same reason as Trap #2, it is best not to set up too long of a term. The longer the term, the greater the risk that the donor will pass. In my opinion, a term longer than 10 years usually produces a risk that outweighs the benefits of obtaining a discount on the gift. This is especially true now that the federal estate tax exemption has increased.
4) If the donor is married, it is usually best to set up two QPRTs, with the wife giving away her half in one QPRT and the husband giving away his half in the other. This technique increases the chance that at least one person will survive the term.
5) This technique works even better when there is a high interest rate, so if the owner has an estate subject to the federal estate tax, the best time to do a QPRT is when the value of the property value is low, but the AFR (applicable federal rate) is high.

In conclusion, this is still a great time to do gift planning, but you should consider doing so with assets that are not as liquid.

Note: QPRT calculations done courtesy of Adam Epstein at Bernstein Wealth Management.

Wednesday, February 11, 2009

Beware the Compromise Tax

One area of estate administration that often gets overlooked on tax returns is the compromise tax. When a decedent transfers assets that are subject to a contingency or are otherwise difficult to value, the taxing jurisdiction and the estate must compromise on the tax due.

There are a variety of reasons an asset may be difficult to value, but the most common reason is because the asset is subject to a lawsuit. For example, if Decedent died owning a 60% interest in a closely held company, it is relatively easy to determine the value (although people may disagree as to the true value). If however, Decedent's surviving business partner claimed that Decedent really only owned 20% and that Decedent "cooked the books", Decedent's estate will be very difficult to determine until the matter of Decedent's true ownership is resolved. The government, however, wants its money now. This is one area in which the estate and the taxing authority can compromise on the tax due. Oftentimes, this type of situation is difficult to avoid even with great planning.

As for transferring assets subject to a contingency, this is something that can be planned for. Let's say there is a man who wants to leave money in trust for his wife, or Civil Union Partner, and then when the wife or Civil Union Partner dies, the money will go to the man's brother. In a states like New Jersey and Pennsylvania, the transfer to the brother would give rise to an inheritance tax of about 15%. So the question then becomes how do we value the likelihood that the brother will receive the money. In essence, we will have to use life expectancy measurements for the surviving wife or Civil Union Partner to determine that person's interest, and then we can determine the remainder interest. This can get very complex depending upon what, if any, rights to principal the survivor has - hence, a compromise tax.

So when does all this knowledge become really important? When filing the tax return, if the proper amount of taxes are not remitted, then large interest and penalties will be due.

New Jersey Estate Administration Update

I just got back from an interesting lecture sponsored by the Mercer County Estate Planning Council. The keynote speaker was a representative from the New Jersey Department of Inheritance and Estate Taxation. Unfortunately I can't remember his name, but he mentioned a few things that I thought were important enough to highlight and share.

It turns out that approximately 50% of all estate and inheritance returns that get filed are audited. They are especially aggressive in auditing returns in which the decedent owned a business, if there are valuation discounts claimed, if a compromise tax is made, or if the numbers just don't add up. (Note: For more on the compromise tax, please see: Beware the compromise tax.)

The other noteworthy item the representative mentioned that they are more aggressively going after estates where no tax return is filed. They receive information about taxable estates from insurance companies who pay out death benefits and from the Surrogate when wills are probated.

Monday, February 9, 2009

Gifting to US residents - who pays the gift tax?

I am frequently asked some variation of this question: "My father is a citizen of country X, and wants to make a gift to me. Is there any tax?"

I then get to give a lawyer's favorite answer. It depends.

It depends:

  1. Where is the person making the gift (the "Donor") domiciled?
  2. What is the citizenship of the donor?
  3. Is the donor a permanent resident alien of the US?
  4. Where is the person receiving the gift (the "Donee") domiciled?
  5. What is the citizenship of the donee?
  6. How much is being transferred?
  7. Is it being transferred all at once, or over time?
  • Is it real estate, stock or some other type of property?
  • If it is real estate or stock, where is it located?
  • As a general rule: If the donor is a US citizen or a permanent resident alien, then the gift is subject to US tax laws. It will then be considered a taxable gift if it exceeds the annual exclusion amount. As of 2009, this is $13,000. If the donor is neither a US citizen nor a permanent resident alien, and the gift is being made from assets outside of the US, then US tax law will not apply. In such a case, we must look to the citizenship and domicile of the donor and donee plus we must look where the property is located to determine which tax law applies.

    There is a special rule for real estate and stock. This is a three step process:
    1. If the real estate or stock is located in America, it is subject to US gift tax regardless of where the donor or donee live.
    2. If the real estate or stock is not located in America, we must then determine the whether there is a gift tax treaty with the country where the property is located and the Donor and/or the Donee. If there is a treaty, gifts of real property are usually governed by the law of the country where the property is located, regardless of the citizenship of the donor or donee.
    3. However, if the property is located outside of the US, and there is no treaty, or if the treaty is silent regarding taxing rights, then it gets to be much trickier and no rule can suffice. A knowledgeable attorney and tax adviser must look at the laws relevant to the donors, donees and property to determine which country's tax laws apply. Keep in mind, more than one country might have the right to tax this transaction.
    For example, let's say a Japanese national wishes to make a cash gift ¥11,100,000 (or about $110,000) to her daughter who lives in America, then Japan has a right to tax this gift. Under Japanese law, a person receiving the property (the donee) will be taxed on the transfer. (Note: I am assuming the daughter is still a Japanese citizen) A gift of this amount would be entitled to a tax exemption of ¥1,100,000 and the remaining ¥10,000,000 would be subject to a tax of ¥2,750,000 (or about $27,000).

    Another example would be where a citizen of India makes a gift of US real estate to their child in America. Since the property is in the US, and there is no gift tax treaty between the US and India, the United States has the sole right to tax this gift. If the house was worth $263,000, then $13,000 of the gift would be tax free. The remaining $250,000 will be subject to a US gift tax of over $70,000. See Section 2511 of the Internal Revenue Code. (In this case, although a donor is normally responsible for the tax, the donee will become responsible as the US does not have the right to collect from a citizen of India. However, if the donee does pay the tax, it will be considered another taxable gift.)

    The bigger the gift, the harder it is to completely eliminate the tax. However, regardless of which country has the legal authority to tax the gift, most gifts can be structured in ways to reduce or eliminate the taxes with proper planning.

    Gift planning can be especially valuable if the donor is over the estate or inheritance tax threshold in the United States or the donor's home country. By making planned gifts, this reduces the overall tax and could save anywhere from 5 cents on the dollar to 55 cents on the dollar.

    Most of the planning can be done with little cost or no cost. Feel free to contact us if you would like more information.

    Monday, January 26, 2009

    No MRD for most IRAs in 2009

    In case you hadn't heard already, there is a recently enacted law in which most beneficiaries of an IRA (inherited or otherwise) can choose to NOT take their minimum required distribution (MRD) for calendar year 2009. (There are some exceptions for people who were supposed to take their MRD in 2008 and were postponing it until 2009.)

    Note, this law also applies to beneficiaries of ROTH IRAs, 401(a),401(k) and 403(b) plans. The purpose is to help people save money in this dreadful economy. (Although, as a practical matter it seems to be a benefit only to the wealthiest few as poorer beneficiaries will likely have withdraw it anyway. So, the government may have been better off not offering this tax break as it could really use the revenue.)

    You should consult with your plan administrator if you have any questions regarding your ability to avoid taking your MRD this year.

    Monday, January 19, 2009


    On January 9, 2009, Representative Pomeroy introduced a bill, H.R. 436, that will cap the federal estate tax exemption at $3,500,000. A few thoughts on this bill:

    1) For individuals with estates over $3.5 million, the tax on the excess will be as follows:
    a) There will be a 45% tax on the an estate over $3.5 million, but under $10 million.
    b) There will be an additional 5% surcharge on estates over $10 million (this surcharge will be eliminated when the estate hits about $41.5 million)

    2) There is no provision for COLA adjustments;

    3) The notion of carryover basis is repealed. In other words, we will maintain the common practice of valuing assets at the value they had on the Decedent's date of death. (I won't go into a long diatribe about this other than saying that getting rid of the estate tax and instituting a system of carryover basis coupled with a capital gains tax is a very difficult system to implement mechanically as people often do not maintain good records regarding the basis that they have in property - especially for property held for generations.)

    4) There are no provisions for carry over of a decedent's exemption amount to a surviving spouse; and

    5) The bill aggressively attacks valuation discounts for minority discounts of non-business assets.

    As discussed before, it is highly likely that some form of this bill will pass in which the federal estate tax stabilizes at $3.5 million dollars. As for the other features, those are still open to negotiation.

    Monday, January 12, 2009

    'Tis the Season to be a Snowbird

    Ah, the weather outside is frightful.
    And Florida is so delightful.
    You've packed up your things to go...
    Let it snow, let it snow, let it snow.

    Seriously, weather aside, have you ever wondered why so many older wealthy people retire to Florida. Well, maybe this answer will help - a relatively affluent person can buy a second house in Florida with the tax savings ALONE!

    Let me give you an example: Let's assume that you have a couple in their 70's with about $4 Million in Assets. They have an IRA of $1 million, brokerage assets of $1,000,000, Life Insurance of $1,000,000, a house worth $600,000 and miscellaneous other assets of $400,000. They are leaving everything to their children.

    If this couple died as residents of New Jersey, EVEN WITH adequate estate planning other than a life insurance trust, there would still be a NJ estate tax of about $210,000 on the second to die of the husband and wife.

    If this couple died as residents of Pennsylvania, EVEN WITH adequate estate planning other than a life insurance trust, there would still be a PA inheritance tax of about $135,000 on the second to die of the husband and wife. (Note, with a $4 million dollar estate, a small state inheritance tax may be due on the first to die in order to avoid a much larger federal estate tax on the second to die.)

    If this couple died as residents of New York, EVEN WITH adequate estate planning other than a life insurance trust, there would still be a NY inheritance tax of about $190,000 on the second to die of the husband and wife.

    If this couple died as residents of Florida, then there is ZERO Florida estate or inheritance tax.

    Now, factor in the additional benefits. In addition to lower property taxes in Florida, Florida is also the only one of these three states not to have an income tax. (It should be noted though that Pennsylvania does exempt IRA distributions from the state income tax.) So, let's make an additional assumption that this couple lives another 20 years and that they take out about $1 million dollars from the IRA during that time. (I'm not going to get into the time value of money.) This would produce an aggregate state income tax of approximately $70,000 for NY and $65,000 for NJ.

    In total, moving to Florida would help save:
    • $275,000 for a NJ resident;
    • $260,000 for a NY resident; and
    • $135,000 for a PA resident.
    Now, these savings may not purchase a mansion, but you can certainly find a nice house (especially in this real estate market) with the tax savings from moving. Obviously, the wealthier you are, and the more you have in your IRA, the better the result.

    An attorney licensed to practice in Florida plus your home state can help you move down to Florida in a way that will be most cost efficient. This includes preparing the appropriate estate planning documents in Florida, mitigating the necessity for ancillary probate in the your original home state, and properly setting up your other legal documentation to prove that you are a Florida domiciliary.


    DISCLAIMER: All the usual disclaimers found elsewhere on this Blog plus a disclaimer that all tax calculations are approximate and made for tax year 2009.