Monday, December 26, 2011

Missouri Taxes

For those of us who live in Missouri the article here might be of interest.  Especially for those who take yoga classes and for those who smoke!  On a serious note, I do not think the state tourism commission has caught on to my idea for increasing population growth in our state.  Missouri is one of the few states that has NO INHERITANCE tax of any kind.  So, if you want to pick a tax jurisdiction to die in, we are one of the best states in which to expire! 

Saturday, December 17, 2011

IRS Offers Year End Tax Planning Advice

It is nice that our government actually does something to help out taxpayers at the end of the year.  Go to the link here for the IRS web page for free year end tax advice. This is otherwise known as IR-2011-18.  Happy Holidays from all of us! If you need futher help, feel free to give us a call at (314) 241-3963.

Monday, June 20, 2011

Prenuptial Agreements

When one marries a second time it is critically important to protect one's wealth through a Prenuptial Agreement. This is a contract between two parties entered into upon the advice of counsel that sets forth the rights a spouse will have after one is legally married. A typical Prenuptial Agreement will set forth what is considered "Separate Property" and what property will be deemed to be "Marital Property". Separate Property is wealth that the future spouse waives his or her rights to upon death or divorce. When someone says "I do" a spouse gains legally enforceable rights to take against a will or a living trust by virtue of the marriage contract. The only way to protect against a second spouse upsetting the apple cart for the heirs is to have the spouse waive those rights before the marriage. This has to be done upon advice of counsel and full disclosure. A Prenuptial Agreement needs to be signed long before the date of the marriage ceremony so as to avoid any undue influence that might give someone the right to void the agreement at a later time. Married couples need to promise their current spouses that they will enter into Prenuptial Agreements if they decide to remarry after one becomes a widow or widower.

Friday, June 17, 2011

Estate Planning for One's Social Media

While traditional estate planning deals with one's physical assets such as bank accounts, stocks and bonds, brokerage accounts, real and personal property, etc. the mark of a good estate plan goes beyond these matters to reflect a client's goals, legacy and history for future generations. Today one's social media may record more about a person's hopes, dreams and goals than ever before. So what happens to your Twitter, Facebook or Linked-In accounts when someone dies?

Facebook has a page here whereby one's Facebook page can be memorialized for friends of the deceased Facebook owner. Comments can be left on the wall for the family. The same link can also be used to close the account.

Twitter has a policy that sets forth the requirements for saving a deceased's public tweets or deleting them. They require the following information:

  1. Your full name, contact information (including e-mail address), and your relationship to the deceased user;

  2. The username for the Twitter account, or a link to the profile page of the Twitter account.

  3. A link to a public obituary or news article.

One can either contact them at or mail or fax at:

Twitter, Inc.
c/o: Trust & Safety
795 Folsom Street, Suite 600
San Francisco, CA 94107

Fax: 415-222-9958

Linked-In has a very simple "Verification of Death Form" here. One can opt to submit the form on-line or via Fax.

As with a person's other property, one's estate planning may include instructions on how one wishes their intangible property to be used even after one's death. Social media may do more to preserve one's photos, videos and conversations for future generations than ever before possible.

Wednesday, May 25, 2011

When you make a Charitable Gift - Get a Receipt at that time!

The IRS recently issued an e-mail advice that when a taxpayer fails to obtain a contemporaneous written acknowledgment from the charity to whom the taxpayer has made a gift, the taxpayer cannot later claim an income tax deduction even if the charity files an amended Form 990 for the year of contribution for purposes of identifying the gift. See more here.

Saturday, May 21, 2011

A Window of Opportunity

The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 which was passed and signed into law in December of 2010 gives affluent individuals a gift, estate and generation-skipping tax exemption of $5M for the tax years 2011 and 2012. On December 31, 2012, these exemptions are scheduled to expire. The new amounts going forward could be as low as $1M. At the same time, the present estate tax rate of 35% is scheduled to increase to a whopping 55%!

Savvy planners are telling clients that there is currently an 18 month "Window of Opportunity" to shift wealth to the next generation on an extremely tax advantaged basis.

  1. What happens if someone gives away $5M in 2011 and dies in 2013 when the estate tax is only $1M?

The answer is "We don't know?" The way the Tax Act was written in 2010 there is a possibility that Congress could attempt to "claw back" into the taxable estate gifts made in 2011 and 2012 that were in excess of the estate tax basic exclusion amount then in effect (i.e. $1M). Other commentators are convinced that this will not happen. The way we look at it, even if the claw back were to occur, the appreciated earnings of the gifted amounts would escape estate tax taxation at a potential 55% and the taxpayer would be no worse off if he or she had done nothing.

2. If I give my money away have I lost all control over the assets of the gift?

There are two basic ways one can make a gift: (1) outright; or, (2) in trust. Outright gifts are just that....a donor writes a check to a child and proceeds become the child's outright as soon as the check clears. The child can do whatever he or she wishes with the proceeds. Outright gifts are cheap and easy. But, they offer no asset protection or oversight of the gifted funds. A gift into a trust is a gift with strings attached to it. The donor can condition how the proceeds are to be used by placing the proceeds with a Trustee for the benefit of the child who is known as a beneficiary, i.e the one who "benefits" from the trust. A trust can be crafted to be as "liberal" or "restrictive" as the donor wishes. The main advantage to a gift in trust is that the proceeds can be protected from a beneficiary's predators, creditors and spouses. This asset protection of the gift is a huge benefit. It is even possible with proper drafting to make the donor one of a class of beneficiaries (the donor, the donor's spouse, the donor's children and grandchildren) of an Irrevocable Trust.

3. If I make a gift of appreciated securities doesn't the donee get the donor's income tax basis in the assets that are transferred?

If one's estate is less than $1M dollars there is no need to make gifts for estate tax purposes as the heirs will receive a "step-up" in the basis of the inherited property to the full fair market value as of the taxpayer's death. When one makes a gift of appreciated securities or real estate, the donee of the gift does get the donor's lifetime income tax basis along with the gift. That is why it is always better to gift cash than highly appreciated securities that would get the step-up at the time of the owner's death. Another option is to make a transfer of appreciated securities to what is known as an "intentionally defective grantor trust" a/k/a as an "IDGT". Why would anyone want a defective trust? It is a quirk in the tax code that one can make a gift for gift tax purposes of property transfered to an IDGT; but, for income tax purposes the donor continues to pay the income taxes on the property inside the IDGT. Why would a donor want to to do this? Because, every time the donor pays the tax on the IDGT it is the same as making a transfer for value to the grantor trust; but, the payment of the income taxes is NOT deemed to be a gift for gift tax purposes. In essence, the proceeds inside the IDGT can appreciate on a "tax free basis" because the IDGT is not paying the income tax on the growth inside the IDGT with its assets. If the Trustee of the IDGT sells stock, the capital gains tax on the sale is paid by the donor of the securities and reported on the donor's income tax return. Often the amount of wealth transferred in this manner will more than offset the capital gains taxes paid by the donor even if the children did not receive a "step-up" tax basis.

4. What is the effect of gifting to a "Dynasty Trust"?

When a donor gifts assets into a "Dynasty Trust" for the benefit of children, grandchildren and future children yet to be born by allocating their Generation Skipping Tax Exemption to such a gift, the benefit of avoiding taxes as each generational level is leveraged. If a taxpayer does not use one's Generations Skipping Tax ("GST") exemptions, the exemptions are generally wasted. The government gives these exemptions to everyone. It truly is a case of use it or lose it.

Let's say Taxpayer X does NOT use his GST exemption when he dies with a $5M estate in 2011. There will be no estate tax on the transfer of his wealth to his son Y at the time of his death . But, let us say son Y dies in 2013 when the estate tax rate is 55% over everything over $1M. The tax on the son's estate is 55% of $4M = $2,200,000; which in turn passes to Y's daughter Z. Z dies the following the year with a taxable estate of $2,800,00 [$5M - federal estate taxes of $2,200,000] at which time her estate owes $990,000 in Federal Estate Taxes on her taxable estate which passes to her children. So to pass Taxpayer's X original $5M estate down to two generations, his heirs will have paid a whopping $3, 190,00 in Federal Esate Taxes.

Use the same fact pattern with Taxpayer X as above. However, this time Taxpayer A creates a $5M dynasty trust with his estate at the time of his death and allocates his GST exemption to the dynasty trust so that there is no tax. When his son B dies in 2013 there is NO estate tax on the dynasty trust because the son B does not own the Dynasty Trust! Instead, the entire proceeds of the Dynasty Trust are held for the lifetime of Son B's daughter, C. If daughter C dies a year later, again the entire $5M (plus earnings) of the Dynasty Trust will pass estate tax free to C's children inside the Dynasty Trust. The tax savings over three generations can be as high as 65%. While it is true that Taxpayer A will have to pay some professional fees to create the Dynasty Trust, the tax savings pale in contrast to any expenses of administration of such Dynasty Trusts. Dynasty Trusts can be great "rainy day" fund to protect future beneficiaries from the effect of predators, creditors and spouses.

Monday, April 25, 2011

Sharing the Estate Plan with Family Members

Parents are often reluctant to share financial and estate planning information with the children as they become adults. Generally, many parents are concerned that if the next generation becomes to fixated on what they will inherit some day that this may prove detrimental to their own independence and self sufficiency. A recent study confirmed that wealthy parents were afraid to share to much information with their children.

While no two families are the same, when each generation can do their estate planning with knowledge of what is going to happen in the future, there are opportunities to do things that otherwise go unnoticed. For example, if a child knows that there is will be a substantial inheritance someday, that knowledge could free up the child to consider gifting and multi-generational planning to take advantage of things such as the utilization of generation skipping transfer taxes. Through the use of dynasty trusts one can transfer wealth down to future generations on a tax free basis that can bless many future generations of one's heirs.

With proper drafting a trust can reflect the goals and desires of parents to foster independence and business entrepreneurship without, at the same time, creating a sense of entitlement that could impair a beneficiary's future development. We have seen success stories where families plan together and achieve a much improved estate plan that benefits a far greater number of members that when each generation plans in secret.

Monday, January 17, 2011

Current Planning to Avoid the Future Health Care 3.8% "Surtax"

A new 3.8% surtax on certain investment income of taxpayers becomes effective January 1, 2013 as part of the health care reform act. While that is nearly two years away, it is not too early to start planning for it now because there are certain things one can do to help reduce or eliminate this new income tax.

Understanding the Tax

The 3.8% investment income surtax, also known as the health care surtax or "Medicare tax", applies to tax year ending after December 31, 2012. The surtax is:

  1. For individuals, 3.8% of the lessor of:
  • net investment income for such taxable year; or,
  • the excess, if any of:

a. the modified adjusted gross income for the year, over

b. the threshold amount.

  1. For trusts and estates, 3.8% of the lesser of:
  • the undistributed net investment income for the year; or,
  • the excess, if any of:

a. the adjusted gross income (as defined in Code Section 67 (e) for the year, over

b. the dollar amount at which the highest tax bracket in Section 1(e) begins for the year ($11,200 in 2010).

Three Key Numbers

There are three numbers that determine how this surtax will affect a client:

  1. Net Investment Income. This is the sum of gross investment income over allocable investment expenses. For purposes of this surtax, investment income includes interest, dividends, capital gains, annuities, rents, royalties and passive income. Investment income does not include active trade and/or business income; any of the income sources listed above (e.g., interest , dividends, capital gains, etc.) to the extent it is derived in an active trade and/or business; distributions from IRA's and other qualified retirement plans; or any income taken into account for self-employment tax purposes. For the sale of active interest in a partnership or S corporation, gain is included as investment income only to the extent net gain would be recognized if all of the partnership/ S corporation interests were at fair market value.
  2. Modified Adjusted Gross Income ("MAGI"). Here, MAGI is the sum of adjusted gross income (the number from the last line on page 1 of Form 1040) plus the net foreign income exclusion amount.
  3. Threshold Amount.
  • Married taxpayers filing jointly............................$250,000
  • Married taxpayers filing separately....................$125,000
  • All other individual taxpayers..............................$200,000
  • Trusts and Estates......................(Beginning of the top bracket ($11,200 for 2010).

Who will pay the new Surtax?

Here is a quick formula to determine if the the 3.8% surtax will apply:

  1. MAGI less than or equal to the threshold amount = no tax
  2. MAGI greater than the threshold amount = Tax is 3.8% of the lesser of investment income; or MAGI threshold amount

Note that the surtax liability is determined on income BEFORE any tax deductions (page 2 of Form 1040) are considered. As a consequence, a client with lots of deductions could be in the lowest tax bracket and yet have investment income that is subject to the surtax! Also, because the capital gains rate has increased to 20% in 2011, with the 3.8% surtax in 2013 the effective capital gains rate will become 23.8%.

Planning Tip: Start adjusting trust and estate investments now to reduce income in 2013 and beyond.

Planning Considerations: For taxpayers who could be hit by the surtax, look for ways to invest income and MAGI:

  • The 3.8% surtax does NOT apply to distributions from IRAs and other qualified retirement plans, and contributions to these plans provide tax-deferred growth. Therefore, taxpayers may wish to increase contributions to IRAs, 401(k) plans, 403(b) plans and 457 plans. However, be aware that required minimum distributions for those over 70 and 1/2 will increase MAGI as those distributions are considered ordinary income.
  • The 3.8% surtax does not apply to distributions from Roth IRAs. However, Roth conversion income will count toward MAGI. Thus, 2011 and 2012 Roth conversions can help to avoid the surtax by reducing post 2012 MAGI from required minimum and other plan distributions in 2013 and beyond.
  • Because income from tax-exempt and tax-deferred vehicles like municipal bonds, tax deferred non-qualified annuities, life insurance and non qualified deferred compensation are not included in investment income, investments in these vehicles should be more favorable.
  • Charitable Remainder trusts should be more appealing because they permit taxpayers to defer income over a period of time, enabling them to stay under the threshold amount.
  • Charitable lead trusts will become more popular to shift investment income to a CLT which in turn will be offset by the "above the line" charitable deduction.
  • Installment sales will be popular to smooth income.
  • Oil and gas (with 95% initial investment deduction, 15% depletion allowance and IDC deduction on passive oil and gas) will continue to be attractive investments.
  • For eligible estates and electing trusts, select the proper year to reduce the surtax. For example, Frieda dies in January 2012. Her estate elects a November 30, 2012 year end. Result: The surtax will not apply to her estate until the year beginning December 1, 2013, providing 11 additional months without the surtax.

Roth IRA Conversions today reduce future MAGI

As stated earlier, required minimum distributions from a traditional IRA are exempt from the surtax; but, they increase MAGI. This can effectively create a 43.4% effective tax rate on IRA distributions in later years (39.6% income tax plus 3.8% surtax on investment income made surtaxable by the IRA distribution).

Planning Tip: Converting to a Roth prior to 2013 can reduce MAGI in 2013 and beyond and thereby reduce or eliminate surtax exposure.

Monday, January 3, 2011

2011-2012: The Time to Plan

Congress has given those who plan estates a wonderful 2 year window before the possible return of the estate tax in 2013. The 2010 Tax Act kicked the can of Bush tax cuts down the road for two years. In addition, Congress increased the size of the exemptions from tax. The new limits are set to expire on December 31, 2012. But, in the meantime, here are the current limits:

  1. Gift Tax Exemption: Individuals can now make lifetime gifts up to a $5M and exclude the transfer from tax by filing a Federal Gift Tax return allocating one's lifetime gift tax exemption.
  2. Generation Skipping Transfer ("GST") Tax Exemption: Individuals can now set up trusts for younger beneficiaries and use a $5M GST lifetime exemption. This is a "use it" or "lose it" exclusion. Once a person dies, this exemption disappears.
  3. Annual Exclusion Gifts: In addition to the use of one's lifetime exemptions, an individual can also make annual exclusion gifts of up to $13,000 per year per donee without any adverse tax consequences.
  4. Estate Tax Exemptions: An individual can die in the next 2 years and not pay any Federal tax on estates of less than $5M. In addition, for spouses dying in 2011 and 2012 it will now be important for the personal representative of a deceased person's estate to file a gift tax return passing along a deceased spouse's Unused Spousal Exclusion Amount to one's spouse. Effectively, the surviving spouse could then have up to $10M worth of estate tax exemption. However, the GST tax exemption cannot be transferred in this manner.

This means that families with wealth who wish to plan ahead can do some extraordinary things to benefit future generations. The use of an Irrevocable Life Insurance Trust ("ILIT") which can be funded with life insurance creates opportunities for tremendous tax leverage for future generations. Clients who have illiquid assets, such as a family business or a farm, can use an ILIT to balance out distributions between multiple beneficiaries.

Another strategy that received a reprieve was the use of the Grantor Retained Annuity Trust ("GRAT"). This strategy coupled with an ILIT can make intergenerational wealth transfers a significant part of giving what one has, to whom one wishes, the way one wishes, at the lowest possible tax impact. Those who choose to plan in the next two years will benefit their families significantly over those who do nothing.

The time to do this planning is now! Every day one waits you run the risk of losing these opportunities.