Tag: income tax planning

Valentine’s Day

Posted on | by Mercy Kurian

Question:  I just got remarried but I have children from a previous marriage. If something were to happen to me, how do I take care of my spouse during his lifetime but ensure that my assets go back to my children after his death?

RLG advice: So you’ve found love again and are navigating the adventure of a second marriage with kids from a previous chapter. Kudos! Let’s chat about some friendly advice on how to make sure your wishes are honored and everyone gets their fair share.

Step 1 – Get your Valentine a gift of a Last Will & Testament or Revocable Living Trust!: Of critical importance to you who has seen Cupid more than once, is to get your Will or Revocable Living Trust – what we call your foundational estate planning documents – signed asap!  In your documents you will state that what passes to your spouse will go in trust (a QTIP or Qualified Terminal Interest Property trust) so that when your spouse passes, the assets can revert to your children. By spelling out “the-what, the-who, the-when and the-how” in a Will or a Rev Trust, you are giving your loved ones the greatest gift of all – the gift of time that they would have otherwise lost dealing with a messy estate where state law determines who should inherit your assets.

Step 2: Don’t underestimate the power of titling of accounts. Remember your Will can be beautifully laid out but it will only control what is in your own name alone i.e your probate assets. However, for those accounts you own jointly with your spouse or if the account has beneficiaries designated (i.e. non probate), then such accounts will pass directly to the joint tenant or named beneficiary outside of your Will or Rev Trust.

Step 3: Deeds must also be re-titled differently. You and your new spouse need to have a frank conversation on what should happen to the family home when you are both gone.  Is this a home you bought together? Is this home yours but he moved into after you got married?  If the end goal is that your children should benefit from this when you are not around, then titling of the deed becomes critical.  If the deed has the magic words “husband and wife” or “married couple” at the end of your names, then the house get a “Tenancy by the entirety will automatically pass to your wife, outside of probate and your children will be out of luck. ).  Talk to your new spouse and figure out whether it makes sense to keep title in your name alone so you can either dictate what happens to it in your Will or Trust, or if you agree to create mirror image Wills that you both agree not to change upon the death of one, this could also ensure that your children will be the final beneficiaries under either Will.

  1. Don’t forget the Elective Share. The law in NJ provides that unless you both had contractually agreed to not receive anything from the other spouse’s estate, if you disinherit your spouse in your estate planning documents, your spouse has a claim for his or her Elective Share against your estate. This means that the disinherited spouse has the right to receive upto 1/3rd of your augmented estate (i.e. probate and non-probate assets). So before you decide to omit your spouse without your spouse’s consent and waiver, you will need to make sure that your spouse is properly provided for with your other assets and everyone is treated equitably.
  2. Communication is critical: Grab a cup of coffee and sit down for a heart-to-heart with your spouse (and if your kids get along with your new spouse, then bring them into the conversation too). Talk to them about your dreams, concerns, and expectations. Then, turn those dreams into reality with legally binding documents like wills and trusts. It’s like making a promise with a seal of approval! Unfortunately, the best laid plans can fall prey to expensive and lengthy court battles when disgruntled beneficiaries make claims that this is not what the deceased wanted.  Explaining things to family during lifetime and supporting that with documentation can bring closure to your grieving family.

Remember, estate planning is about giving your loved ones the gift of time which in turn creates peace of mind and a happy home for everyone. This Valentine’s Day, give the gift of love, laughter, and a happy home to your family!

 

 

 

 

Things we still need to be grateful for in 2019…!

Posted on | by Mika D'Angelo

This Thanksgiving, there are several things that we need to be grateful for—and hey, we are after all an estate planning firm, so naturally we’re talking from the estate planning perspective.

 

Many of you may already know that we are currently in a taxpayer favorable environment and so it behooves us all to at least take notice, if not take advantage of, some of the planning techniques that are still around for the foreseeable future. Changes may occur in the administration a lot sooner than we all anticipated, so the “wait and see” approach is now no longer prudent—being thankful for the current environment may mean acting now rather than later. Some of the tax law changes that are being talked about will directly impact YOU. It isn’t only the wealthiest people who need to pay attention; the moderate to high net worth client may have big changes waiting around the corner [fn: our definition of moderately wealthy is anyone who has or might soon have a net worth of 3.5 million dollars and above if single and over 7 million dollars if married (and U.S. citizens)].

 

The current gift exemption is the highest it’s ever been—but it might be going down:

 

Currently, our lifetime tax exemptions for gifting are $11.4 million per person; $22.8 million for a married couple (2019 amounts). This is both an estate and gift tax exemption, which means that if you don’t gift anything during your lifetime, your estate has this entire amount as an exemption upon your death for estate tax purposes. However, there are proposals in Congress to lower this amount—some to as low as $1 million for the gift exemption and $3.5 million for the estate exemption. While this may not be an immediate concern to most of us, it might become critical for those who are in the $3.5 to $7 million range in asset net worth as planning opportunities for those in that net worth range might be extremely limited.

 

Grantor trusts are highly tax efficient—but they may no longer be an option:

 

Until now, estate planners have been able to successfully set up irrevocable trusts as an estate planning strategy; these trusts remove an asset from a client’s name while allowing them to still take advantage of the client’s income tax brackets instead of the trust’s compressed tax brackets due to certain provisions in the tax code. However, now it seems like grantor trusts may no longer be a viable planning vehicle due to ongoing talks that the grantor trust may be eliminated. If that truly is the case, planning NOW ahead of those changes may be vital to avoid paying increased taxes as part of your estate.

 

GRATs remove taxes on asset appreciation—but they may also disappear:

 

Grantor retained annuity trusts (or GRATs) are commonly used as planning techniques to minimize taxes on certain taxable estates; they allow clients to pay taxes on the transfer of an asset upfront, meaning that any appreciation in the asset’s value will pass ownership at the end of the trust’s term tax-free. However, these may no longer be around by the end of 2020. This also means that wealthier clients may not be able to sell, loan or transfer assets to these trusts either, thereby removing these popularly used techniques from the planning vocabulary.

 

Irrevocable life insurance trusts (ILITs) allow clients to make large lifetime gifts—but they may be affected by the annual exclusion:

 

Until now, we have always recommended that grantors try to utilize unlimited annual exemptions per donee trust beneficiary so large annual premiums to trust would not need to be reported as eating into a client’s lifetime gift amount. However, there’s some talk about limiting the annual exclusion amount to $20,000 per year per donee and $10,000 per year per donor in total, so that strategy may be turned on its head. Estate planners need to think about the future of such strategies and what impact these changes will have on clients who have large premiums coming out this year into the trusts.

 

So what does this mean?

 

Not much for those with estates that fall well under the estate tax threshold as of right now (or even if there’s a decrease in exemption). But for those moderately wealthy and high net worth clients, it may be wise to start planning with the horizon in mind. Taking advantage of the high gift exemptions now might be a good idea, but doing it in such a way that it is protected inside of a trust is prudent. There is a lot of opportunity for families with either less wealthy parents or more wealthy children to allow them to either utilize their exemptions or their children’s exemptions to ensure planning strategies are implemented now (well before the 2020 storm happens) for maximum benefits no matter what comes in the future. This is especially true where spouses may need to transfer assets to one another to allow for enough time to pass between such transfers (i.e. 2019-2020) so that planning strategies for both spouses’ assets can be implemented.

 

For those clients with irrevocable life insurance trusts or ILITs, they might want to take advantage of paying the future premiums in advance of any changes to avoid being impacted negatively by the new annual gift exemptions proposed by the Democratic party in Congress.

 

Finally, while there is no guarantee that any of these above changes are going to be written into law, and we certainly do not want the tax tail to wag the estate planning dog, we can be both thankful and mindful at once. We currently have in place the highest recorded exemptions in history and access to a number of crucial strategies to preserve our clients’ assets. So if any of the information above concerns you and you want to benefit from implementing some of these techniques to grandfather them into your estate plan ahead of a potentially-changing tax regime, then we hope you will call our office right away so we can put into motion a plan that you can be thankful for—in 2020 and well beyond.

Things I Learned at Heckerling

Posted on | by Rekha Rao

Two weeks ago, I was fortunate to be able to attend the 52nd Heckerling conference on Estate Planning.  This is a conference where the best & brightest minds in estate planning deliver tips & strategies on the latest planning techniques.  It was even more fortuitous for me, as a first-time attendee, that this year’s conference was all about the new tax code which went through a complete overhaul late last year.

This new law informally referred to as the Tax Cuts and Jobs Act of 2017 is also officially known as:

“H.R. 1 – An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018.”  It was numbered Public Law 115-97.

Heckerling did not disappoint!  As Jonathan Blattmacher, the guru of estate planning put it (and I summarize), the change up of the tax environment presents a unique & exciting opportunity to those attorneys who may want to master these new laws and gain a competitive edge over the older and more experienced attorneys who had become comfortable with the old tax regime.  Here is what I learned:

 

  • • The new mantra is income tax savings rather than estate tax savings. While moderately wealthy and high net worth (“HNW”) clients still need to keep thinking about estate tax savings & creditor protection with 2026 in mind[1], for the vast majority whose assets are well below the newly increased thresholds ($11.18m exemption per person; $22.36m for a married couple), we ought not to be too concerned about estate tax savings but rather we need to focus on income tax reduction techniques;
  • • Having said that, the estate tax conversation has not completely gone away for the moderately wealthy and HNW clients who need to plan quickly and prudently in light of the very real possibility that the law may very well in fact sunset in 2025 (or earlier if there is a legislative change). A relatively young client with $5m in his or her estate right now can easily be looking at an estate over $10m estate in 2025 which in turn, translates to a sizeable taxable estate especially if the exemption limits drop considerably;
  • • Roth IRAs should be looked at as the golden goose that keeps on giving. The compounding interest and income tax free nature upon withdrawals makes Roth IRAs not only attractive but critical to amassing wealth, says Natalie Choate the Queen of Retirement Accounts.  More importantly, there are several tips & techniques that can be taken advantage of, if your income is over the income cap for Roth contributions;
  • • The lack of being able to take State and Local Tax (or SALT) deductions on our federal taxes is concerning to those of us living in high income tax states; however, the new law also presents interesting opportunities to get around this problem, especially with the use of nongrantor trusts;
  • • Conversions from partnerships or S corps to C corps for some individuals or businesses may make practical sense for some businesses to get the lower effective tax rate for corporations; having said that, this needs to be explored careful since the conversion could be a taxable event as well as irrevocable; and
  • • Businesses that are providing a service (i.e. doctors, lawyers and accountants, but interestingly not engineers or architects), don’t enjoy the same benefits as regular corporations under this new tax law; but here too, there may be some planning techniques that could be utilized to bypass this restriction.

All in all, it was definitely an exciting time to be part of this conference this year.  The strategies we had been implementing for so many years need to be revisited and changed based on the current tax climate.  Our earlier conversations that focused on the gift & estate tax will now need to include capital gains, cost basis and income tax planning as well.  And finally, now more than ever, it is important for all us – the financial planner, the CPA and the estate planning attorney – to put our heads together to provide a comprehensive team approach to a client’s wealth building and preservation goals.  These plans need to maximize income tax efficiency, utilize the available estate & gift tax exemptions prudently and at the same time fulfil the client’s personal succession planning goals.

[1] The new tax law is scheduled to sunset in 2025