Monday, January 30, 2012 Gifting the House For $1: Good Idea or Not?
Many people ask us if it is a good idea to give their home to their children. While it is relatively easy to do, giving away your house can have major tax consequences, among other negative results.
GIFT TAX ISSUES: When you give anyone property valued at more than $13,000 in any one year, you have to file a gift tax form. Also, under current law you can gift a total of $5.12 million over your lifetime without incurring a gift tax. If your residence is worth less than $5.12 million, you likely won't have to pay any gift taxes, but you will still have to file a gift tax form. Congress may change the gift tax exemption, which is now scheduled to revert to $1 million in 2013 unless Congress acts.
CAPITAL GAINS TAX ISSUES: While you may not have to pay gift taxes on the gift, if your children sell the house right away, they may be facing steep taxes. The reason is that when you give away your property, the tax basis (or the original cost) of the property for the giver becomes the tax basis for the recipient. For example, suppose you bought the house years ago for $150,000 and it is now worth $350,000. If you give your house to your children, the tax basis will be $150,000. If the children sell the house, they will have to pay capital gains taxes on the difference between $150,000 and the selling price. The only way for your children to avoid the taxes is for them to live in the house for at least two years before selling it. In that case, they can exclude up to $250,000 ($500,000 for a couple) of their capital gains from taxes.
Inherited property does not face the same taxes as gifted property. If the children were to inherit the property, the property's tax basis would be "stepped up," which means the basis would be the current value of the property. However, the home will remain in your estate, which may have estate tax consequences.
PA INHERITANCE TAX ISSUES: In Pennsylvania, there is no gift tax. However, to avoid PA Inheritance Taxes (the rate is 4.5% for assets passed to children or grandchildren), you must live at least one year from the time the gift was made. Often times, 4.5% of inheritance tax is worth paying rather than gifting the house in this manner, due to the risks involved.
ASSET PROTECTION ISSUES: By transferring your house to your children, you are making all of their future financial and family problems YOUR problems. That means the house could end up being taken away due to creditor problems, bankruptcy, litigation, or divorce. Would you want your son-in-law to get part of your house while you're still living?
MEDICAID/LONG-TERM CARE ISSUES: Beyond the tax consequences, gifting a house to children can affect your eligibility for Medicaid coverage of long-term care. There are other options for giving your house to your children, including putting it in a trust or selling it to them. Before you give away your home, consult with an elder law firm such as our law firm, where we can advise you on the best method for passing on your home.
CONCLUSION: "Gifting the house for $1" is a phrase that's tossed around quite a bit, and several families go ahead with this planning. As you can see, casual planning like this is fraught with potential landmines. Be careful. There are options out there to transfer the house properly. Speak with an estate planning or elder law attorney about this type of planning.
Monday, December 12, 2011 Estate Tax Update / 4 Common Estate Planning Questions
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Q&A: Four Commonly Asked Estate Planning Questions
1. Most of my assets are jointly titled, or they are qualified accounts with beneficiaries named. So do I still need a Will? Having a Will is still a necessity, but it can be more or less important to you depending on your estate. A Will is always needed to make sure an Executor is named, and take care of assets that are not titled jointly or with beneficiaries. It always makes sense to have a Will no matter what your circumstances.
2. How can I plan for avoiding Pennsylvania Inheritance Taxes? Most assets are subject to PA Inheritance Tax. However, one asset that's typically not subject to PA Inheritance Tax is life insurance. Life insurance also provides liquidity upon death to pay taxes, fees, etc. The inheritance tax rates are 0% between spouses, and 4.5% to kids and grandkids.
3. I have two kids, can't I just name both of them as Co-Executors? That may seem harmless, but could cause big problems for your estate later on. Putting two or more people in charge of one task is a recipe for conflict. Would it make sense to have two CEO's in charge of a company? Both children can be treated equally under the Will while one serves as Executor. Bottom line: Choose one primary, and two backup Executors.
4. What is the "Five Year Lookback Period"? When a client is in a nursing home or will be heading there and wants to qualify for Medicaid, federal law requires that any gifts made within the five previous years be accounted for. A gift made within five years could cause a penalty (based on a formula) that will prevent one from receiving benefits for a certain period of time. Qualifying for Medicaid is become increasingly complicated, and the best advice is to plan early while you're still healthy.
Have more questions? Email us at info@jawatlaw.com.
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Latest News on the Federal Estate Tax
What's happening with the federal estate tax? Recently, a Democratic Congressman proposed a bill in the House of Representatives to lower the federal estate tax to a $1 Million exemption per person. Currently, the exemption is $5 Million. If the bill passed, many more people would be hit by the tax.
The bill has no chance of passing, and the estate tax exemption will remain at approximately $5 Million for 2012. However, we will be watching 2013 closely, when the current law expires. Congress and the President will need to act at some point in 2012 to avoid the estate tax going back to $1 Million in 2013. Who knows what Congress will do... or when they will do it. We'll keep a watch and keep you updated.
Article Link: McDermott Tries To Rewrite Estate Tax
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Monday, November 28, 2011 Evaluate Your Estate Plan
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2012 is quickly approaching, and there is no better time than now to re-evaluate your estate planning goals.
Estate planning can be broken down into three distinct areas: tax planning, legacy planning, and long-term care planning. Which area is the most important to you? Once you determine that, you can update your plan based on your goals.
Tax Planning
Tax planning has not been at the forefront in the last few years for most families. The federal estate tax exemption is $5 Million per person, and $10 Million per married couple, so only a small percentage of individuals are affected. However, you should be aware that in 2013, the estate tax exemption will revert to $1 Million per person unless Congress acts. 2013 will come sooner than we think, and while both political parties have an incentive to come together on taxes, all bets are off. Keep reading our newsletter to keep posted on federal estate taxes.
Legacy Planning
Legacy Planning is an important component of estate planning for many families today. Legacy planning ensures that your plan is crafted carefully so that any conflicts in the family are avoided, and that your children, grandchildren or other beneficiaries are protected against themselves and others.
Long-Term Care Planning
Excessive long-term care costs are a concern for many families today. As people live longer and long-term care costs rise (much faster than inflation), the question becomes how you protect your estate from being spent down completely on health care costs. There are proven asset protection strategies that help to preserve part of your estate. The earlier you plan (i.e., while you're still healthy), the better.
Your Next Steps
I recommend that you sit down with your family and review your estate plan every year. You may find that minor or major changes need to be made. Perhaps you were more interested in tax planning a few years ago, but now realize you need to focus on long-term care costs and how to protect assets against those costs. Once you decide changes need to be made, make sure to implement those changes as soon as possible.
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Monday, November 21, 2011 Executors; Estate & Gift Tax Update
THE ROLE OF THE EXECUTOR... The Executor is the CEO of an estate. The individual or institution filling that role is, in essence, the owner of your estate when you pass on, and has a “fiduciary duty” to do what is in the best interests of your beneficiaries, the people you leave your stuff to.
Executors and trustees (if you have a living trust instead of a Will) need to be careful and diligent about their work, and consider hiring outside assistance (attorney, CPA, etc.) as needed to ensure accountings are filed correctly, and inheritance tax and estate tax returns are prepared properly.
Transparency is key when you are an Executor. For instance, sharing a full accounting and a copy of the Will with the beneficiaries goes a long way.
Also, if an estate has creditors, you must be diligent in ensuring they receive proper notice. If an Executor fails to give proper notice to creditors and the Executor distributes the estate, there is a possibility that the creditor could later appear, make a demand, and hold the Executor personally liable.
Being Executor is not impossible to handle without a lot of outside help, especially for simple estates. But where there are complexities, beneficiaries with some conflict, creditors, etc., it makes good sense for your estate for the Executor to consider outside assistance. Remember, the Executor has a legal obligation and a fiduciary obligation.
FEDERAL TRANSFER TAX UPDATE... The so-called “super-committee” had apparently floated the ideas of changing the gift tax and federal estate tax before the year is out. Fun rumor, but not going to happen, as we have heard over the weekend that Congress is... surprise, surprise… deadlocked!
The gift tax exclusion stays basically the same in 2012. You can make $13,000 annual gifts to as many people as you want, no tax due and no filing needed. Over $13k, you have a $5.12 million lifetime gifting exemption. Anything above $13k, you need to file a Gift Tax Return (IRS Form 709). Any gift over $5.12 Million in 2012 is taxable at a 35% rate. This will potentially change again in 2013. Now is the time to make large gifts.
The federal estate tax remains at a $5.12 Million exemption in 2012, affecting very few people. Anything above $5.12 Million, or $10.24 Million for a married couple, is taxed at 35%. Again, 2013 could see major changes in this scheme.
The Pennsylvania Inheritance Tax rates will remain the same in 2012.
Of course, we’ll keep you updated on any changes.
Have a Happy Thanksgiving! Best wishes to you and your family.
Monday, November 14, 2011 Estate Planning Misconceptions
This week, we have selected five common estate planning misconceptions that we often hear from our clients.
1. Gifting the house for $1 to my kids is always good idea
Gifting your house to your kids may save some inheritance tax dollars, but there will be no “step up in basis” if the kids try to sell the house after you pass on. To put it simply, there may be more taxes due than if you just left the house in your name. Additionally, once the kids own the house, you’re on the hook if they get into any sort of creditor or marriage trouble.
2. I only need a simple will, or no will at all
Every provision in your will is important. You want your will to be perfect, otherwise it could spell trouble for your family later on. You need to speak with an attorney about what type of estate planning tool you need.
3. I don’t need a will because all of my assets have beneficiaries on them
It always makes sense to have a will, regardless if anything will pass through the will. Inevitably, we find the will always disposes of some assets.
4. A power of attorney is just a form and is the same for everyone
Powers of attorney are subject to the most lawsuits because of this assumption. Your power of attorney needs to be carefully tailored so there aren’t too many powers.
5. I can’t gift more than $13,000 per year
As it stands now, you have a $5 Million lifetime gifting exemption through 2013. You can make the $13k gifts each year without paying taxes or filing gift tax returns. Anything over $13k is not taxed, but must be accounted for. Anything above $5 Million is taxed at 35%. For years, the lifetime exemption was $1 Million, so the $5 Million jump presents a great opportunity for wealthy individuals and families to make transfers.
Estate planning should be undertaken with a qualified estate planning attorney. Everyone needs to engage in estate planning to ensure they leave a legacy that's free of conflict and confusion. For a complementary estate planning consultation, please call our office at (215) 706-0200.
Was this week’s blog entry helpful to you? If so, we encourage you to forward it on to friends and family members who you think may find it informative as well.
Have a great week!
Monday, October 24, 2011 Did Steve Jobs Have An Estate Plan?
Even several weeks after his death, people are still talking about Steve Jobs and his contributions to the technological advances we've made in the last 30 years. Just last week, there was a memorial for Apple employees, shutting down every Apple store for a couple of hours, to celebrate the life of Steve Jobs. I remember using the Mac Classic, a black and white Apple computer from the 1980’s, and being fascinated by what was then advanced technology (no WiFi, no Facebook, no internet but still great!). People are going to be talking about Steve Jobs for a long time.
As your estate planning attorney, I was intensely curious about what type of estate plan Jobs created. We have plenty of wealthy individuals who have not engaged in estate planning, and their affairs are simply a mess. People like Elvis Presley, Sammy Davis Jr. and others lost a huge amount of their estate to unnecessary taxes because they didn’t plan properly. We can learn a lot from their mistakes. But we can also learn from those who actually did take the time to plan, like Steve Jobs. To be honest, the less we can learn about their estate plan, the better their estate plan probably was!
To read more about what Steve Jobs did and didn’t do, check out the Forbes article on his estate plan here.
Every estate plan is different. Most people don’t have the wealth that Steve Jobs had. Nonetheless, everyone needs a plan that works for them and avoids disputes, excessive taxes, and unhappy heirs. If Steve Jobs didn’t put the proper plan in place, we will surely find out sooner or later.
Have a great week!
Monday, February 07, 2011 IRA Inheritance Trusts
The most substantial asset in someone’s portfolio is often their IRA. An IRA (Individual Retirement Account) is a tax-deferment or savings device. Whatever is left over is then passed on to the beneficiaries you designated on a form attached to the IRA.
Here’s a typical scenario… Mom wants to leave her $300,000 IRA to her child, who is 25 years old. Mom dies and child receives the IRA, since the child is the designated beneficiary. In this scenario, the child now has the option to let the IRA continue to grow tax-deferred (or tax-free if it’s a Roth IRA). By doing this, the child allows the account to grow substantially, because the younger you are, the smaller the required distributions. However, the child could cash the IRA out at this point, and spend all of the funds on foolish things.
Establishing an IRA trust is the best way to allow the IRA investments to grow substantially, control the distribution of your beneficiary so he or she can’t withdraw all of it at once, and also protect the asset from the beneficiary’s creditors, predators, divorcing spouses, etc. Also, if two or more beneficiaries are dividing the one IRA, an IRA trust can be set up so that each beneficiary uses his or her own life expectancy. A 3 year old grand-child will have to withdraw a lot less on an annual basis than a 25 year old child.
A will or even a standard living trust does not protect one’s IRA from any of the above. A stand-alone retirement trust, or IRA Inheritance Trust, is necessary. It must be designed carefully to comply with the IRS rules.
If you are interested in learning more about the IRA Inheritance Trust, please contact my office today at (215) 706-0200. Monday, January 17, 2011 Does a Living Trust Make Sense in 2011?
Does a living trust make sense?
The term ‘living trust’ is tossed around a lot in the estate planning world and means different things to different people.
Clients and prospective clients sometimes believe that a living trust is necessary to ‘avoid probate’ and to ‘avoid estate taxes’.
Some attorneys believe everyone needs a living trust, no matter what the circumstance.
Both of these assertions are incorrect.
Living trusts ARE a will substitute that allows you, a trustee, to place your assets in a trust, and remain in control of those assets while you are living. The living trust allows you to provide detailed instructions upon how the assets will be distributed upon your death. The living trust can last for years and allows you to give what you want, to whom you want, when you want. For instance, once you pass away, you could instruct the person who takes over as trustee for you to pay your daughter a small sum annually and provide for your daughter for her health care or education needs at anytime.
Living trusts do NOT help a family avoid estate taxes or inheritance taxes. Actually, living trusts can help reduce federal estate taxes if you are affected by the tax (which most people aren’t today), but a Will can do the exact same thing. Therefore, if using a living trust only to save taxes, this is simply an incorrect reason to use a trust. Living trusts today provide a great mechanism for planning through generations… tax saving is not a consideration for most clients.
Regarding probate… Any asset placed within a living trust avoids the probate process. But to completely avoid probate, you must re-title all of your assets into the name of the living trust, and must do so anytime you acquire new assets.
Does it make sense to avoid the probate process? If you own property only in Pennsylvania, you might be better off allowing your estate to be probated. Probate in Pennsylvania is relatively straightforward, although there are several considerations and reasons that you may wish to avoid probate even in Pennsylvania. Sometimes, administration of your estate can occur more smoothly if you have a fully funded living trust. Some people like the idea that they will never need to publicize their will, or deny the government even a small fee. Call it the American spirit!
Another consideration in avoiding probate is that for many clients, at least half of their assets have already avoided probate because the asset, perhaps an IRA or an annuity or a life insurance policy have beneficiary designations. That means those assets go directly to those beneficiaries without probate. Same goes for any jointly held asset (joint with the right of survivorship).
Does a living trust make sense for you? Make sure when you are doing your estate plan that a living trust is at least discussed. It may or may not make sense for you depending on the circumstances.
Call for your complementary consultation today at (215) 706-0200 to find out if a living trust makes sense for you. Friday, December 17, 2010 Federal Estate Tax Now Certain
Good news for most of our clients: The Federal Estate Tax exemption for 2011 and 2011 will be $5 Million per person and $10 Million for a married couple. Any assets over that amount will be taxed at a 35% rate. That means the vast majority of people are not affected by the Federal Estate Tax.
If your assets are nowhere near the $5/$10 Million amount, and you have an old credit shelter/A-B trust when the exemption was much lower, you need to immediately have your estate planning documents revised.
Keep in mind that this is the rate for the next two years. As we get into 2012, it could get interesting.
Stay Tuned... Monday, December 13, 2010 Do I Need A Revocable Living Trust?
Revocable Living Trusts are a substitute to a Last Will & Testament, but for many Pennsylvanian’s, living trusts aren’t necessary for an effective estate plan.
Historically, many people have planned with a living trust to (a) avoid probate and (b) save on federal estate taxes.
Pennsylvania is one of a number of states that has simplified their probate process over the years. Probate in Pennsylvania is mostly handled by your executor and attorney outside of court, unless someone challenges your will or the distribution of your assets. Other states, like Florida and California, still have more burdensome probate processes that require court supervision.
Federal estate taxes fluctuate, but the rates that Congress is discussing for 2011 and 2012 mean that far less than 1% of people will ever be affected by such a tax. The White House and Congress are proposing an estate tax exemption of $5 Million. That means you will not be affected by the tax until you have over $5 Million in assets. Regardless of whether you are affected or not, a living trust does no better than a will with a testamentary trust in saving on tax dollars.
Because probate is simpler in Pennsylvania and living trusts are not tax avoidance tools, many people in Pennsylvania have wills as their fundamental estate planning tool. However, a living trust does have benefits for certain cases. You should seek an estate planning attorney to help educate you about what tools you need for your estate plan. Estate planning is a very individualized field of law, and the tools you need depends on your family, your circumstances and your goals.
Let our firm assist you: Our firm offers a complementary estate plan review and consultation. Please call us today at (215) 706-0200 or email us.
Pass the word on: If you know someone who can benefit by reading this blog, please forward it on to them, or subscribe your friend or family member through this link. Tuesday, December 07, 2010 Federal Estate Tax Breaking News
Under the bipartisan compromise between the White House and republicans, the federal estate tax will return in 2011 and 2012.
The exemption amount will be $5 million per person, or $10 million for a married couple. That means that as an individual, you must have over $5 million of assets to ever be hit by this tax. Once you are over that exemption amount, the amount over the limit is taxed at a 35% rate.
So far, this is only a deal in theory, and has not been passed by either house, nor signed by the President.
Assuming this compromise becomes law...
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The good news: The vast majority of people aren't going to be hit by this tax.
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The bad news: Congress has punted on creating a coherent, long term tax structure yet again. By only extending the tax cuts for two years, they have promised more uncertainty in the near future. As a client of our firm, we will keep you updated on any tax changes that could effect your plan.
Your estate planning documents should be updated to reflect the new federal estate tax once the legislation is passed into law. If your estate planning documents are more than a few years old, and you had a A-B or credit shelter trust in place, these should be reviewed because they likely will not work as you intended. Please call our office today at (215) 706-0200 for your complementary review. Monday, November 01, 2010 Protect and Stretch Your IRA's
You cannot engage in estate planning today without considering your Individual Retirement Account(s) (your IRA's) and other retirement accounts. Ironically, we often find that these are the most significant assets in a person's estate, and yet these assets are given the least attention.
Even worse, most estate planning attorneys don't help you plan in conjunction with your IRA's. Why? Because they haven't been trained how to help you in this area. Instead, most attorneys will tell you that your IRA passes outside of your will or living trust, and that the IRA asset will go directly to the beneficiary or beneficiaries you've chosen... case closed.
Most estate planning attorneys do not understand that it doesn't have to be that way! Without better planning, your heirs can withdraw the entire IRA principal, which doesn't allow for growth of the funds. Further, if the IRA is significant in value and you distribute it outright, it is exposed to your heirs creditors, spouses, and themselves (think: are your children spendthrifts?).
By having your IRA distributed to a trust, you are ensuring much greater creditor protection, protection from divorce, spendthrift children, etc. You're telling your heirs that you love them and want the best for them.
Furthermore, a trust encourages (if not mandates) that heirs only take the required minimum distributions of the IRA. If set up correctly, these required distributions are measuring on the life of your heir. For example, want to leave your IRA to a 4 year old grandchild? That grandchild's required distributions will be a lot less than a 40 year old, allowing great "stretch" opportunities.
Few attorneys understand the complex rules and requirements to ensure this is all done correctly. Many will say you can't put the IRA into a trust. That is incorrect. We've been trained by nationally recognized experts on this subject, and we can assist you in making sure all of the pieces of your plan fit together.
One more thing… why is this area complex? Mostly because the IRS wants to encourage people to spend down their IRA's. Therefore, the tax laws discourage people from passing on an IRA in such a way that allows for the asset to be a wealth transfer tool. It's not that you can't do it. It's just that the IRS makes it tricky for attorneys to do. Proper language must be used on the beneficiary designation form and in the trust.
Need a review of your IRA and your estate plan? Let us assist you.
Let our firm assist you: Our firm offers a complementary estate plan review and consultation. Please call us today at (215) 706-0200 or email us.
Pass the word on: If you know someone who can benefit by reading this blog, please forward it on to them, or subscribe your friend or family member through this link.
Monday, October 18, 2010 Top 10 Signs It's Time To Review Your Plan
Your estate plan should be reviewed on a regular basis. Here are ten signs that it is time to review it. If you are not sure whether your plan needs to be altered, get in touch with our office at anytime.
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Your plan was crafted over five years ago.
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You moved to a different state.
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You got re-married, or got divorced.
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You’ve been blessed with grandchildren.
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You no longer talk to one of your kids, or you have reconnected with your child.
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You are now widowed.
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You have acquired significant assets, or lost substantial assets.
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You don’t feel that your plan really meets the test for a good estate plan: “Give what you want, to whom you want, when you want and how you want.”
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You have over $1 million in assets, or you and your spouse together have over $2 million in assets, which means there may be pending estate tax implications for you.
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You’re worried about your kids, either because they spend too much, they are in a high risk profession, they may get divorced, etc.
In general, any time that an event occurs that changes your life or your family should prompt you to review your plan. We are pleased to provide a complementary consultation to you if you wish for our office to review your plan.
Let our firm assist you: Our firm offers a complementary estate plan review and consultation. Please call us today at (215) 706-0200 or email us.
Pass the word on: If you know someone who can benefit by reading this blog, please forward it on to them, or subscribe your friend or family member through this link. Monday, September 20, 2010 Living Trust?
Do you really need a living trust? Living trusts, also known as Revocable Living Trusts (RLT's) have been an on and off fad in Pennsylvania for at least the last fifteen years.
There appears to be a resurgence in the discussion about living trusts. Think Suze Orman, or the mailers you probably get emphasizing the absolute necessity of a living trust.
A living trust is not a silver bullet, and they are not for everyone, particularly in Pennsylvania. Certain states, like California or Florida, have a probate process that is much more burdensome than the one in Pennsylvania. Pennsylvania's probate process is much simpler, and is not court supervised.
In other words, if you are only interested in having a living trust to avoid probate, and you live in Pennsylvania, you may be spending a lot of money on something you really do not need.
Another misconception is that a living trust will allow a person to avoid taxes. This is categorically untrue. Any tax saving or tax reduction strategies can be carried out and executed with a will just as easily as with a living trust.
Because probate is simpler in Pennsylvania and living trusts are not tax avoidance tools, many people in Pennsylvania have wills as their fundamental estate planning tool.
A living trust does have benefits for certain cases. You should seek an estate planning attorney to help educate you about what tools you need for your estate plan. Estate planning is a very individualized field of law, and the tools you need depends on your family, your circumstances and your goals.
Let our firm assist you: Our firm offers a complementary estate plan review and consultation. Please call us today at (215) 706-0200 or email us.
Pass the word on: If you know someone who can benefit by reading this blog, please forward it on to them, or subscribe your friend or family member through this link. Monday, August 23, 2010 Comprehensive Estate and Retirement Planning
An estate plan completed by a law firm, by itself, is simply the legal documents that are drawn up to make sure your wishes are valid when you become incapacitated and when you die.
However, an effective estate plan should be part of your overall retirement plan and wealth management plan.
When our clients want to make sure their estate plan is seamless with their retirement plan, income plan and tax plan, we work with Franklin Retirement Solutions, a firm that specializes in retirement planning. Together, we can make sure all of the pieces of your plan fit together.
Here's just one of many examples of how a "piece meal" plan can go wrong: Client X has a financial advisor, who doesn't know the estate planning attorney. Client X has a special needs child. Client X asks attorney to protect assets for the special needs child, and attorney drafts both a will and sets up a special needs trust. Client X dies, and estate realizes that assets were not allocated properly (as a special needs child, putting assets directly into this child's name is a really bad idea). Client X's financial advisor was not aware of rules for special needs persons that are on public benefits. As a result, Client X's son almost lost his public benefits.
By combining your financial planning and estate planning, your plan becomes a lot more effective. Most of our clients love having access to a financial planner, tax planner, Medicare supplement/Long-term care insurance specialist, and more.
To summarize, here are a few advantages of planning with this approach:
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All parts of your plan work together
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Ensures your plan will be reviewed and, if needed, updated more often
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Provides a more seamless transition to your heirs, since your affairs are in order.
We find that this type of planning is extremely beneficial to middle class clients. To learn more about our comprehensive approach to estate and retirement planning, please give our office a call today at (215) 706-0200.
Thursday, August 05, 2010 What's up with the Federal Estate Tax?
2010 has been quite a year already... The U.S. Congress has failed miserably at giving us direction on what the tax landscape will look like come 2011. Folks, we're only five months away from 2011, believe it or not. And in 2011, the federal estate tax comes back with a roar. If Congress does nothing, many more people will potentially be effected by the tax. For married couples, you will be able to pass on about $2 Million to your heirs, estate tax free. If your estate is worth more than $2 Million, every dollar past the $2 Million mark will be taxed at a 55% rate. $2.5 million estate? Count on your heirs paying Uncle Sam $275,000.
Congress has not stepped up to the plate at this point, and there have been no meaningful committee votes or full member votes on any estate tax fix. A couple of senators and house members have spoken up, but that's not enough when you have 535 such members. Therefore, I am not optimstic right now that there will be a fix come 2011. If you think your estate is worth around $1 million or more if you're single, or $2 million or more if you're married, you need to start thinking about planning now. There are things we can do to minimize the estate tax if you were effected by it.
Here are a couple of great articles I've found this morning on the federal estate tax.
The best time to plan is now. Please do not hesitate to reach out to my firm to get started on planning. Call us at (215) 706-0200. Wednesday, June 23, 2010 Do I Need a Living Trust?
What are living trusts?
A living trust is a valid will substitute in the Commonwealth of Pennsylvania. During your lifetime, you have the ability to place your assets in a trust, designate a trustee (usually yourself while you’re living), a successor trustee (someone to take the job after you pass away), and beneficiaries. A living trust can be superior to a will, depending on the needs, goals and size/complexity of the estate of a particular client. However, living trusts are not for everyone, particularly in Pennsylvania.
Why do people create living trusts?
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Avoid Probate: Many people create living trusts to avoid probate, the process of proving your will. However, Pennsylvania’s probate process is much simpler compared to other states. Pennsylvania probate is not a court-supervised process, and only takes a relatively short amount of time to become appointed executor. Yes, there are probate fees for the County (probably in the range of $300-$1,000, depending on the size of the estate) but they are relatively modest. Therefore, avoiding probate (assuming you only own property in Pennsylvania) is not a good reason, by itself, to create a living trust.
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Asset Protection: You can’t protect yourself from creditors, spouses, etc. by creating a living trust. But you can potentially protect your children, heirs and other beneficiaries from themselves and from others. A living trust can never guarantee asset protection, but can help fend off predators and creditors, depending on the situation. In addition, the living trust must be set up in a particular way, with limitations on your beneficiaries, in order to effectively protect the assets.
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Seamless Transition: A living trust, if funded during your lifetime, can provide a smoother transition from one generation to the next. With a living trust, you have the potential to carefully lay out a distribution scheme in which the assets can flow to beneficiaries quicker.
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Privacy/Avoid Potential Estate Challenges: A living trust set up properly and funded with all of your probate assets can avoid probate completely, and therefore, is subject to privacy from the public. A potential beneficiary or anyone for that matter can challenge the validity of a trust, but it is much more difficult to do so since they don’t have easy access to the document.
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Control From The Grave: A living trust allows a grantor to control an inheritance long after they pass away. For instance, you can spread out an inheritance over 20 years, or only for certain needs, such as education or health. However, we can do the same thing in a will with a testamentary trust.
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Reduce/Avoid Taxes: Actually, this is a myth. A living trust does not do a better job than a will or any other testamentary device in avoiding death taxes, estate taxes or inheritance taxes. You can take advantage of the marital deduction and unified credit through a will with a testamentary trust and it will have the same effect. Don’t get sold on creating a living trust solely for tax benefits.
Do you recommend a living trust?
Living trusts are expensive to create, and we do not recommend creating one unless you have legitimate concerns about:
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Privacy
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Estate challenges
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Asset protection
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Assets in more than one state
Those concerns, coupled with the desire to avoid probate are good reasons to create a living trust.
If you want to know more about what tools make sense for your estate, whether it is large or small, contact our office today at (215)706-0200 or info@jawatlaw.com. We offer complementary initial consultations to determine if we’re a good fit. Tuesday, January 12, 2010 Life Insurance TrustsHave you considered an Irrevocable Life Insurance Trust (ILIT)?
There is a common misconception that life insurance proceeds are not subject to estate tax. While the proceeds are received by your loved ones free of any income taxes, they are countable as part of your taxable estate and therefore your loved ones can lose over forty percent of its value to federal estate taxes. As you probably know, there is no federal estate tax in 2010 as of now. However, don't count on that being the norm -- In this economy, you can be sure the federal estate tax will be back in 2011 to raise revenue for the federal government.
An Irrevocable Life Insurance Trust keeps the death benefits of your life insurance policy outside your estate so that they are not subject to estate taxes. There are many options available when setting up an ILIT. For example, ILIT's can be structured to provide income to a surviving spouse with the remainder going to your children from a previous marriage. You can also provide for distribution of a limited amount of the insurance proceeds over a period of time to a financially irresponsible child. In general, life insurance is a valuable estate planning tool for many families, as it provides a source of liquid cash to handle estate administration upon the passing of your loved one.
If you are interested in discussing ILIT's as part of your estate plan, please contact us. Wednesday, December 16, 2009 Gift TaxThe IRS recently announced that the annual gift tax exclusion will stay the same in 2010 at $13,000.??If you're married, each spouse gets an exclusion so a married couple can gift $26000 to each individual without creating a tax liability or necessity for reporting.
With proper gift planning, a family could transfer a significant amount of money to their children and grandchildren while saving money on federal estate taxes. With the estate tax potentially going back to only a $1 Million exemption in 2011, gifting may make sense to more clients. Reducing your estate tax is complicated, and you should consult a qualified attorney to determine whether you are liable for the estate tax, and how to reduce your liability if necessary.
Also note that gifting is not for everyone. For instance, the chance that senior citizens need Medicaid is typically increased and gifting in this instance can disqualify you from certain government benefits. Thursday, December 10, 2009 Trust Planning and 2011Here is some food for thought: If Congress doesn't pass a permanent federal estate tax fix soon, we are looking at perhaps 2010 staying at the $3.5 Million exemption, as it is more likely that they'll pass a one year fix. That's already passed the House and I think the Senate will probably pass it too. But I get the feeling we're going to be back to a $1 Million exemption in 2011, because quite simply, the federal government needs revenue. They cannot sustain a $12 Trillion and growing deficit by lowering or eliminating taxes.
What does this mean for you? If you are worth at least $.5 Million or more, you must seriously consider trust-based planning. Proper planning with trusts, particularly for married couples, can reduce and (sometimes permanently) delay estate taxes, depending on how the trust is designed.
The key takeaway is that trust-based planning is something you ought to be considering now, even if you don't consider your estate to be valuable. Depending on your estate, your $.5 Million could easily grow during your lifetime and pass the taxable threshold. You should know that living trusts are not away to avoid income taxes or estate taxes. But, with proper planning, it is possible that we can make sure you don't pay more estate taxes than you have to, and we can use sophisticated tools to delay the payment of those taxes. The bottom line is, these are times of uncertainty. A will-based plan for any estate cannot account for the uncertainty as well as a proper trust-based plan can. Monday, December 07, 2009 Last Chance To Save on Taxes in 2009Thinking about making that charitable gift sometime soon? Now is the time to do it, before December 31. This is one of several tax-saving strategies that you can apply during the month of December, so that come April 15, you can rest a bit easier at night. Check out the article from Forbes magazine, detailing the federal tax saving strategies
here
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