Recently, Bernie Sanders presented his proposed tax reform legislation, which outlines drastic changes to the estate and gift tax exemption. While it is our hope that this proposed law will not be enacted, it seems best to “plan for the worst and hope for the best,” given the unpredictable political climate, and the possible changes that may be made if a watered-down version of this potent proposed law passes. The good news is that the proposed reduction of the estate tax exemption amount from $11,700,000 to $3,500,000 would not occur until January 1, 2022.
The same timing applies for the proposed reduction of the gift tax allowance to only $1,000,000, which means that people will not be able to gift more than $1,000,000 after 2021 without paying gift tax.
Also, the proposed increase in the estate tax rate to 45% once a deceased person’s taxable estate exceeds $3,500,000, and 50% and higher when the amount subject to tax exceeds $10,000,000, will not apply until 2022.
In addition to the above exemption and tax changes, gifting of up to $15,000 per year per person will be limited to $30,000 per donor per year for gifts to irrevocable trusts or of interests in certain “flow-through entities” beginning in 2022.
The tougher news for many clients is that some of the primary tools and strategies that we have used in the past will not be available in the future, beginning upon the date that President Biden signs the bill into law if this occurs. Once that happens, we will not be able to fund or have assets sold to Irrevocable Trusts that can be disregarded for income tax purposes, and we will also not be able to use valuation discounts or Grantor Retained Annuity Trusts (GRATs) in most circumstances, although those arrangements put into place before the new law is passed will be grandfathered as long as they are not added to or altered after the law is passed, as presently written.
This is an important CALL TO ACTION for families having assets expected to exceed $3,500,000 per person to take a serious look at their present planning situation in order to determine whether to take immediate steps to avoid death taxes. In particular, clients who have irrevocable trusts may want to act without delay to extend any notes that may be owned by them to the longest period practical, and to sell assets that may go up in value, and exchanges for assets that may be more suitable to be owned by these trusts, given that exchanges and changes made after a new law is passed may not be possible.
We have been inundated with estate tax planning since the beginning of last year and are generally operating at capacity. If you wish to complete an estate tax plan that you have started with us or to further develop or act upon an estate tax planning structure you already have in place, please let us know immediately, and confirm that you can provide us with updated asset and entity information so that we can avoid any delays in putting whatever you would like to do into action before new law may pass. We will give first priority to clients who contact us without delay and have plans in place or in progress.
If your estate value is $3.5M or over, act now and don't wait!
One of President Trump’s most prominent items on his ‘to do’ list as the Nation’s 45th President was to repeal the estate tax (also called the death tax) to stimulate economic growth and “Make America Great Again!” Whether or not President Trump manages to repeal the estate tax, however, Trusts remain the best estate planning tools for the following reasons:
1. Protect Minor Beneficiaries
2. Protect All Beneficiaries
More reasons why Trusts remain the best estate planning tools for estate planning will be forthcoming in my next Blog – stay tuned!
The primary death tax concern in most estate planning situations is the federal estate tax. Generally speaking, federal estate tax is based on the dollar value of the trust-estate of the decedent, is due nine (9) months after the date of death, and is taxed at a forty percent (40%) tax bracket. The good news is that the federal estate tax equivalent exemption for deaths occurring in the 2015 calendar year is Five Million Four Hundred Thirty Thousand Dollars ($5,430,000.00). In other words, if the net taxable estate is Five Million Four Hundred Thirty Thousand Dollars ($5,430,000.00) or less, there is no federal estate tax. Also the federal estate tax equivalent exemption is indexed for inflation, so theoretically the amount of the exemption should increase each calendar year. Because of the large dollar amount of the exemption, federal estate tax is oftentimes not a major factor in the estate plan of many people.
However, there is a potential second death tax when a person dies. Some U. S. states levy their own death tax called an inheritance or estate tax. Currently six (6) states have an inheritance tax, fifteen (15) states have an estate tax, and two (2) states have both. Most eastern states have an inheritance or estate tax, while most western states, including Nevada, have no inheritance or estate tax. The two (2) western state exceptions are Washington and Oregon.
Unlike the federal estate tax, state inheritance tax is based on the amount a beneficiary inherits and the beneficiary’s relationship to the decedent. Also inheritance tax is usually the personal liability of the beneficiary. With inheritance tax, there are often different rates and different exemption amounts for spouses, children or siblings. State inheritance or estate tax rates are lower than the federal estate tax rate of forty percent (40%). The state with the highest maximum estate tax rate is Washington at twenty percent (20%) followed by eleven (11) states with a maximum rate of sixteen percent (16%). Nebraska has the highest maximum inheritance tax rate of eighteen percent (18%) followed by Kentucky and New Jersey at sixteen percent (16%).
What happens if the decedent dies a resident of the state of Nevada where there is no inheritance or estate tax, but the beneficiary is a resident of New York where there is estate tax? Which state law controls, Nevada or New York? With one exception, the state law of the residence of the decedent at the time of death, not the state law of the residence of the beneficiary, controls as to the applicability of state inheritance or estate tax. In the above example, Nevada law controls since it was the residence of the decedent at the time of death so there would be no state inheritance or estate tax. The one exception is real estate located in another state. In the above example if the decedent owned real estate in New York or some other state that has an inheritance or estate tax, the state law where the real estate is located would control at least as to that real estate.
In summary, although federal estate tax is oftentimes not a major estate planning consideration due to the amount of the federal estate tax exemption under current federal law, one must not overlook possible state inheritance or estate tax. This is particularly true if one owns real estate outside the state of Nevada.
Unlike the federal estate tax, state inheritance tax is based on the amount a beneficiary inherits and the beneficiary’s relationship to the decedent. Also inheritance tax is usually the personal liability of the beneficiary. With inheritance tax, there are often different rates and different exemption amounts for spouses, children or siblings. State inheritance or estate tax rates are lower than the federal estate tax rate of forty percent (40%). The state with the highest maximum estate tax rate is Washington at twenty percent (20%) followed by eleven (11) states with a maximum rate of sixteen percent (16%). Nebraska has the highest maximum inheritance tax rate of eighteen percent (18%) followed by Kentucky and New Jersey at sixteen percent (16%)
What happens if the decedent dies a resident of the state of Nevada where there is no inheritance or estate tax, but the beneficiary is a resident of New York where there is estate tax? Which state law controls, Nevada or New York? With one exception, the state law of the residence of the decedent at the time of death, not the state law of the residence of the beneficiary, controls as to the applicability of state inheritance or estate tax. In the above example, Nevada law controls since it was the residence of the decedent at the time of death so there would be no state inheritance or estate tax. The one exception is real estate located in another state. In the above example if the decedent owned real estate in New York or some other state that has an inheritance or estate tax, the state law where the real estate is located would control at least as to that real estate.
In summary, although federal estate tax is oftentimes not a major estate planning consideration due to the amount of the federal estate tax exemption under current federal law, one must not overlook possible state inheritance or estate tax. This is particularly true if one owns real estate outside the state of Nevada.
It is hard to believe that we are already at the end of 2013. It has been an exciting year for estate planning. In the first week of 2013, congress passed new legislation making the estate laws tax permanent. In many cases, the new laws have allowed for many families to simplify their estate plan.
As the year comes to a close, it is a good time to complete a quick tune-up of your estate plan to make sure you are ready for the New Year. Here is a short tune-up list to cover some of the basics:
We hope that each of you have a happy New Year!
Corey J. Schmutz, Esq.
With portability, the estate tax concerns of most clients have been alleviated. However, in some cases, the generation skipping transfer tax (“GSTT”) problem remains unsolved, because the portability provisions of Internal Revenue Code (“IRC”) § 2010(c) do not port or transfer the GST exemption of the deceased spouse (“Decedent”) to the surviving spouse (“Survivor”).
Portability and its new developments have caused many estate planners to move away from drafting the previously oft used “A-B trust” or “two trusts.” Instead, estate planners have increasingly employed the disclaimer trust – a trust where all of the trust assets stay in one trust unless the Survivor decides for estate tax or non-tax reasons to disclaim assets to the equivalent of a bypass trust. Because of portability, the disclaimer trust will satisfy the estate tax objectives of many married clients without the necessity of creating an “A-B trust.” However, the disclaimer trust will not fully satisfy the needs of every client. This is particularly the case for those clients who may be subject to the GSTT.
For these clients instead of employing the pure disclaimer trust, they can either revert back to using the traditional “A-B” trust or consider creating a QTIP trust and making a reverse QTIP election. Depending on the nature of the client’s assets and the domiciliary of the client, however, it may be more advantageous from an income tax perspective to avoid the bypass trust in the traditional “A-B” trust regime. In these circumstances, use of a QTIP trust with a reverse QTIP election could be a fruitful solution.
By making a reverse QTIP election under IRC § 2652(a)(3) over a properly executed QTIP trust (with an inclusion ratio of zero), the Decedent is deemed to be the transferor of the assets passing under the QTIP trust for GSTT purposes. In other words, no QTIP election is deemed to have been made for purposes of GSTT. Therefore, the Decedent’s GSTT exemption can be allocated to the QTIP trust even though the trust is includable in the Survivor’s estate for estate tax purposes. Effectively, then, the Decedent is able to port his or her GSTT exemption to the Survivor (to the extent the QTIP trust is funded). In this way, married clients who may be subject to GSTT may avail themselves to the benefits of portability while also maximizing their GSTT exemption. This solution may result in greater usage of the reverse QTIP election.
Interesting article in November 2013 Nevada Business Magazine. http://www.nevadabusiness.com/2013/11/estate-tax-changes-require-immediate-attention/
A question often presented to me by some clients is whether or not there is an inheritance tax imposed upon the client’s beneficiaries after his or her death. Both in Nevada and federally, there is no tax imposed upon a beneficiary who receives a deceased person’s property. Currently, there are a minority of states that do impose such a tax. The tax rate usually depends upon who inherits the property, and property passing to a decedent’s spouse or to other close relatives is typically taxed at a very low rate or not taxed at all.
Inheritance tax should not be confused with estate tax. The difference between inheritance and estate tax is a matter of who is responsible for paying the tax. Estate taxes are levied on the total value of a decedent’s property and must be paid out before distributions are made to the decedent’s beneficiaries. Whereas, the inheritance tax is calculated separately for each individual beneficiary, and the beneficiary is responsible for paying the tax. Fortunately, Nevada does not impose an estate tax upon a decedent’s property. Federally speaking, there is an estate tax, but there are significant exemptions that currently exist.
If you should have further questions regarding estate tax, inheritance tax, or estate planning matters please feel free to contact the attorneys at Jeffrey Burr.
The recent Supreme Court decision in Windsor v. U.S., a case taking issue with the treatment of federal estate taxation for a married same-sex couple, has effectively struck down Section 3 of the Defense of Marriage Act, most often referred to as DOMA, retroactively. Due to this decision, married same-sex couples can now enjoy a number of federal tax advantages including:
According to the current IRS rules, the determination of whether a couple is married is a matter of state law of the couple’s current residence. Without further guidance at this time, a same-sex couple married in a state which allows same-sex marriage, but not currently residing in a state which does not recognize such marriage, like Nevada, may not be considered married for federal taxation purposes. It is anticipated that the IRS will issue guidance on these issues. Many experts take the position that it is very likely that the IRS will recognize any legally performed same-sex marriage no matter where the couple might currently reside.
At Jeffrey Burr, we can assist same-sex couples, married or otherwise, evaluate their estate planning needs and tailor a plan accordingly. Feel free to contact the law firm of Jeffrey Burr for a free consultation.
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