If you die with an estate greater in value than $675,000, your estate will pay New Jersey Estate Tax. In the past, the State’s estate tax was based on and equal to the credit that the federal government would give to an estate for estate tax paid to a state. Wow! That sounds complicated, right?
Well, not really. What that means in English is this, if an estate had to pay $10,000 to New Jersey for estate tax, the federal government would give the estate a $10,000 credit against the federal estate tax that the estate owed to the feds; accordingly, if the total federal estate tax would have been $100,000 without the credit, then the estate would owe New Jersey $10,000 and the feds $90,000. The state estate tax did not increase the overall tax liability of the estate.
On July 1, 2002, that all changed. Since a new federal tax law—passed in June 2001—increased the credit that the federal government gives an estate against federal estate tax and eventually eliminates the federal estate tax and since that same law reduces the credit that the federal government will give to an estate for estate tax paid to a state and eventually eliminates the credit, New Jersey’s estate tax would have disappeared, along with hundreds of million dollars revenue. So, on July 1, 2002, New Jersey passed a new law that freezes the State’s estate tax at the rate that existed on December 31, 2001.
Now, even though the federal government provides a reduced—and eventually no—credit for state estate tax paid, New Jersey will continue to receive its revenue. For some estates, this new law could actually increase the overall tax liability, notwithstanding the federal governments sweeping tax law, which was sold as the death to death taxes.
So, now that you know about New Jersey’s new tax law, how do you plan for it? New Jersey’s elder law attorneys have been discussing the planning options for several months now. Here are some of the options:
Relocate. One suggestion is that you move to another state where the estate tax isn’t so onerous or where there is no state estate tax. I don’t view this option as viable for two reasons. One, I think it’s unlikely that anyone—or at least very few people—would relocate in the twilight years of their life after having lived in a state for most, if not all, of their life just to avoid a death tax. Secondly, the state to which the person moves may—and probably will—change its estate tax law in a manner similar to the manner in which New Jersey modified its law.
Gifts. If you give assets away, the reasoning goes, those assets won’t be included in your estate for purposes of calculating the estate tax. The catch is, the gift must have been made three years prior to the date of death. If the gift was made within three years of death, then the gift is brought back into the estate for purposes of calculating the New Jersey Estate Tax. So, not only would the decedent have lost the benefit of the asset gifted during his/her life if he failed to live for three years after making the gift, the gift still would not escape the estate tax. Gifting is an option, but not a great option.
Credit Shelter Trust. Briefly, a married couple can draft trusts into their Wills that protect each spouse’s applicable exemption against the federal estate tax. In English, if the federal government gives a credit equal to $2,000,000 against federal estate tax, then the credit shelter trust will receive $2,000,000 of assets on the death of the first spouse. If the federal credit were $3,500,000, the trust will receive $3,500,000 on the spouse’s death, and so on.
If the credit against the State death tax is now frozen at $675,000, a trust could be drafted into the couple’s Wills that will be funded with $675,000, and the remainder of the estate of the deceased spouse can pass to the surviving spouse. This type of trust preserves each spouse’s credit against New Jersey Estate Tax and $675,000 of the federal credit.
What I think everyone can agree on is, the new law requires an estate plan to be reviewed if the estate is greater in value than $675,000.
Saturday, November 29, 2008
Tuesday, November 25, 2008
Probate Basics
The legal process of transferring of property upon a person's death is known as "probate." Although probate customs and laws have changed over time, the purpose has remained much the same: people formalize their intentions as to the transfer of their property at the time of their death (typically in a will), their property is collected, certain debts are paid from the estate, and the property is distributed.
Probate Administration
Today the probate process is a court-supervised process that is designed to sort out the transfer of a person's property at death. Property subject to the probate process is that owned by a person at death, which does not pass to others by designation or ownership (i.e. life insurance policies and "payable on death" bank accounts). A common expression you may have heard is "probating a will." This describes the process by which a person shows the court that the decedent (the person who died) followed all legal formalities in drafting his or her will. What is often taught about the probate process is how to avoid it. The movement to avoid probate is primarily motivated by the desire to avoid probate fees. It is, in fact, quite possible to avoid the probate process completely. There are three primary ways to avoid probate and its protections: joint ownership with the right of survivorship, gifts, and revocable trusts. The probate system, however, exists for the protection of all the parties involved and the focus of this article is what occurs in probate.
What Happens in Probate?
The probate process may be contested or uncontested. Most contested issues generally arise in the probate process because a disgruntled heir is seeking a larger share of the decedent's property than that he or she actually received. Arguments often raised include: the decedent may have been improperly influenced in making gifts, the decedent did not know what they were doing (insufficient mental capacity) at the time the will was executed, and the decedent did not follow the necessary legal formalities in drafting his or her will. The majority of probated estates, however, are uncontested. The basic process of probating an estate includes:
• Collecting all probate property of the decedent;
• Paying all debts, claims and taxes owed by the estate;
• Collecting all rights to income, dividends, etc.;
• Settling any disputes; and
• Distributing or transferring the remaining property to the heirs.
Usually, the decedent names a person (executor) to take over the management of his or her affairs upon death. If the decedent fails to name an executor, the court will appoint a personal representative, or administrator, to settle the estate. The administrator will fulfill many of the same duties listed above.
Typically, people may leave property to any person they wish, and may make such designations in their will. However, in certain situations, depending on the relationship to the decedent and the laws of the state, the decedent's wishes may have to be overridden by the court. For example, in most states, a spouse is entitled to a certain amount of property. Furthermore, creditors may have a claim on the property of the estate. Each jurisdiction usually prescribes how long an estate must be open to give creditors an adequate time frame in which to present claims to the estate. The more complex and sizable the estate, the longer and more time-consuming this process can be.
The probate process itself also carries with it a number of costs that are usually paid out of estate assets. These costs include:
• Fees of the personal representative;
• Attorneys' fees; and
• Court costs.
Probate Administration
Today the probate process is a court-supervised process that is designed to sort out the transfer of a person's property at death. Property subject to the probate process is that owned by a person at death, which does not pass to others by designation or ownership (i.e. life insurance policies and "payable on death" bank accounts). A common expression you may have heard is "probating a will." This describes the process by which a person shows the court that the decedent (the person who died) followed all legal formalities in drafting his or her will. What is often taught about the probate process is how to avoid it. The movement to avoid probate is primarily motivated by the desire to avoid probate fees. It is, in fact, quite possible to avoid the probate process completely. There are three primary ways to avoid probate and its protections: joint ownership with the right of survivorship, gifts, and revocable trusts. The probate system, however, exists for the protection of all the parties involved and the focus of this article is what occurs in probate.
What Happens in Probate?
The probate process may be contested or uncontested. Most contested issues generally arise in the probate process because a disgruntled heir is seeking a larger share of the decedent's property than that he or she actually received. Arguments often raised include: the decedent may have been improperly influenced in making gifts, the decedent did not know what they were doing (insufficient mental capacity) at the time the will was executed, and the decedent did not follow the necessary legal formalities in drafting his or her will. The majority of probated estates, however, are uncontested. The basic process of probating an estate includes:
• Collecting all probate property of the decedent;
• Paying all debts, claims and taxes owed by the estate;
• Collecting all rights to income, dividends, etc.;
• Settling any disputes; and
• Distributing or transferring the remaining property to the heirs.
Usually, the decedent names a person (executor) to take over the management of his or her affairs upon death. If the decedent fails to name an executor, the court will appoint a personal representative, or administrator, to settle the estate. The administrator will fulfill many of the same duties listed above.
Typically, people may leave property to any person they wish, and may make such designations in their will. However, in certain situations, depending on the relationship to the decedent and the laws of the state, the decedent's wishes may have to be overridden by the court. For example, in most states, a spouse is entitled to a certain amount of property. Furthermore, creditors may have a claim on the property of the estate. Each jurisdiction usually prescribes how long an estate must be open to give creditors an adequate time frame in which to present claims to the estate. The more complex and sizable the estate, the longer and more time-consuming this process can be.
The probate process itself also carries with it a number of costs that are usually paid out of estate assets. These costs include:
• Fees of the personal representative;
• Attorneys' fees; and
• Court costs.
Sunday, November 9, 2008
President-elect Obama's tax plan
Tax-Plan Highlights
Here are some of the details of President-elect Obama's tax plan.
INCOME TAX
Maintain current tax rates of 10% to 28% for most Americans. Reinstate top tax rates of 36% and 39.6% on joint income of more than $250,000 ($200,000 for individuals).
CAPITAL GAINS/DIVIDENDS
Maintain maximum rate of 15% for most taxpayers. Boost top rate to 20% for investors with income of more than $250,000. Under current law, taxpayers in the two lowest income-tax brackets pay zero capital gains in 2008, 2009 and 2010. Eliminate capital-gains taxes on start-ups and small businesses to encourage innovation.
RETIREMENT ACCOUNTS
Suspend mandatory distributions for those 70½ and older. Permit taxpayers to withdraw up to $10,000 from retirement accounts penalty-free; withdrawals would still be subject to income taxes.
NEW TAX CUTS
Tax credit of up $1,000 to offset Social Security taxes for low-wage earners. Eliminate income tax for seniors making less than $50,000. Double the tax credit for college expenses to $4,000. Create a 10% mortgage tax credit for those who don't itemize. Provide a $1,000 rebate funded by a windfall-profits tax on oil companies to offset high energy costs.
AMT
Maintain current exemption and index to inflation.
ESTATE TAX
Set exclusion at $3.5 million per person ($7 million per couple); keep rate at 45%.
SOCIAL SECURITY
Maintain current wage base of $106,800, indexed for inflation. Impose additional tax of 2% to 4% paid by employers and employees on earnings exceeding $250,000 -- but delay implementation for at least ten years.
CORPORATE TAX
Keep top rate at 35%; close corporate loopholes.
Here are some of the details of President-elect Obama's tax plan.
INCOME TAX
Maintain current tax rates of 10% to 28% for most Americans. Reinstate top tax rates of 36% and 39.6% on joint income of more than $250,000 ($200,000 for individuals).
CAPITAL GAINS/DIVIDENDS
Maintain maximum rate of 15% for most taxpayers. Boost top rate to 20% for investors with income of more than $250,000. Under current law, taxpayers in the two lowest income-tax brackets pay zero capital gains in 2008, 2009 and 2010. Eliminate capital-gains taxes on start-ups and small businesses to encourage innovation.
RETIREMENT ACCOUNTS
Suspend mandatory distributions for those 70½ and older. Permit taxpayers to withdraw up to $10,000 from retirement accounts penalty-free; withdrawals would still be subject to income taxes.
NEW TAX CUTS
Tax credit of up $1,000 to offset Social Security taxes for low-wage earners. Eliminate income tax for seniors making less than $50,000. Double the tax credit for college expenses to $4,000. Create a 10% mortgage tax credit for those who don't itemize. Provide a $1,000 rebate funded by a windfall-profits tax on oil companies to offset high energy costs.
AMT
Maintain current exemption and index to inflation.
ESTATE TAX
Set exclusion at $3.5 million per person ($7 million per couple); keep rate at 45%.
SOCIAL SECURITY
Maintain current wage base of $106,800, indexed for inflation. Impose additional tax of 2% to 4% paid by employers and employees on earnings exceeding $250,000 -- but delay implementation for at least ten years.
CORPORATE TAX
Keep top rate at 35%; close corporate loopholes.
Saturday, November 1, 2008
2008 Year End Estate and Trust Taxes and Planning: Before It's Too Late!
Although year-end tax planning generally focuses on income taxes, a thorough year-end tax assessment should include reviewing your estate plan and estate tax situation as well. In 2008, the highest marginal estate tax rate is 45 percent. If your estate is large enough to be subject to this tax, you can begin planning to reduce or eliminate that tax liability. Without proper planning, the estate tax can consume a substantial portion of your estate, leaving less property for your loved ones.
1. How Do I Know If My Estate Is Subject to Estate Tax?
The estate tax generally is based on the fair market value of a person’s estate at death. However, every estate is entitled to an exclusion that effectively exempts a certain amount of property from the tax. This exclusion amount currently is scheduled to increase over time and is illustrated in the chart below:
Based on the estate tax exclusion, in 2008 an individual can pass $2 million to the next generation estate tax-free. A husband and wife can pass up to $4 million estate tax-free if their estate is properly structured and their assets are properly titled.
Although everyone has an estate tax exclusion, it could be wasted if an estate plan is not properly structured or assets are not titled properly. The key is to make sure that an individual has assets at least worth the exclusion amount in his or her name or in a trust that is included in his or her estate for estate tax purposes. If a husband and wife own all of their assets jointly (or one spouse owns the majority of the assets and the other spouse owns little or no assets), they run a good chance of wasting one of their exclusions, thereby subjecting more property than necessary to estate tax.
To ensure full utilization of both spouses’ exclusions, each spouse should have at least $2 million in their name or a trust that is included in their estate for estate tax purposes.
For married couples, the estate tax law also provides an unlimited marital deduction. This deduction allows an individual to leave an unlimited amount of assets to a surviving spouse (either outright or in certain types of trusts) without incurring an estate tax on the death of the first spouse. Proper marital deduction planning allows an individual to defer estate tax until the death of the surviving spouse.
In order to determine if your estate is subject to estate tax, review the assets you own and determine what they are worth. What you own is broader than just your security portfolio. Your estate generally includes real property, the death benefit of life insurance (unless you do not have any “incidents of ownership” with respect to the policy), IRAs and other retirement plan benefits. Add the value of these assets up. If they total less than $2 million, your estate should not generally be subject to estate tax, assuming you did not make any taxable gifts during your life. If your estate is worth more than the estate tax exclusion, you may want to consider meeting with your professional tax advisor to determine what opportunities are available to reduce this tax in a way that is consistent with your overall estate planning goals and objectives.
2. What’s All This I Heard About Estate Tax Repeal?
In 2001, tax legislation was enacted that repealed the estate tax. However, this repeal is being phased in over time. In 2008, we still have an estate tax. The exclusion chart shows how the phase-out of estate tax repeal is scheduled to occur. It is based on an increasing amount an individual can leave without incurring an estate tax (i.e., the estate tax exclusion). As of now, the estate tax is set for complete repeal only in 2010 only because a sunset provision in the tax legislation repealed the estate tax for just one year. The estate tax is scheduled to be fully reinstated in 2011 (with an exclusion amount of only $1 million), unless Congress acts to make the repeal permanent. To date, Congress has not been successful in passing legislation that would make estate tax repeal permanent. There are numerous proposals floating around Washington that seek to minimize the burden of the estate tax short of complete repeal. One proposal that has gained attention would increase the estate tax exclusion amount to $5 million per individual (as opposed to $2 million per individual) and tie the estate tax rate to the capital gain rate for smaller estates or two times the capital gain rate for larger estates. It is important to remember that no one knows if the estate tax will be repealed or whether a compromise proposal will even be reached. Therefore, proper planning is still essential.
3. What About Family Limited Partnerships?
Many people have created family limited partnerships for estate, asset protection or other purposes. From an estate tax perspective, assets are put into an FLP and, in return, limited partnership interests are received. These limited partnership interests have traditionally generated discounts for gift and estate tax purposes because they are not marketable and provide no control over the management and operation of the FLP. Because of the discounts, the limited partnership interests are worth “less” than the limited partnership interests’ proportionate value of the underlying assets in the FLP. Since the limited partnership interests are not as valuable as the FLP’s assets, less estate or gift tax would ultimately be due.
The IRS has been challenging the estate tax benefits that have traditionally been available to FLPs. These challenges have culminated in a series of successful court cases for the IRS. The IRS has had success in cases where the facts indicate, among other things, that the person who established the FLP either controlled the partnership or had an express or implied agreement that he or she would benefit from the FLP property if needed. These cases tended to involve transactions in which substantially all of a person’s assets were transferred to an FLP and there was no real or business purpose to engage in the planning other than to generate estate tax discounts.
If you have engaged in estate planning that includes an FLP, it would be prudent to review the impact of this recent string of cases on your plan. This review should include not only determining if there are any problems posed by the creation or operation of your partnership, but also what, if any, remedies can be pursued if a problem exists.
4. What Should I Be Thinking About Before Dec. 31, 2008?
a. Annual Exclusion Gifting
If an individual is subject to the estate tax, one manner to reduce that future liability is by making gifts. If gifts are made while you are alive, the gifted property, plus any appreciation generated by that gifted property, would be removed from your estate for estate tax purposes.
The tax law provides every individual with an annual gift tax exclusion. Under this exclusion, the first $12,000 of gifts ($24,000 for married couples who elect to split gifts) made by a donor to each donee in calendar year 2008 is excluded from the amount of the donor’s taxable gifts. Utilizing these exclusions can save both transfer tax for the donor and family income taxes because the annual exclusion makes the transfer free of gift tax. Estate tax can be saved because both the value of the gift and post-transfer appreciation will not be included in the donor’s estate. Subject to the kiddie tax rules, family income tax savings can be realized when income-producing property is given to family members in lower-income tax brackets.
To take advantage of annual exclusion gifting for 2008, you must act no later than Dec. 31, 2008, by making a completed gift. Unused annual exclusions cannot be carried over to future years.
Planning Point: A gift must be “complete” in order to get an annual exclusion credit. Typically, a gift is complete when the donor gives the property to the donee. However, care must be taken when gifts are made by check. If a gift of a check is made near the end of 2008 and the donor wants to take advantage of the exclusion for that year, the donee must deposit the check before year-end so there is no doubt when the gift was made. Direct deposit of funds into the donee’s account would be even better.
b. 529 Plan Gifting
Contributions made to a 529 Plan are treated as gifts and will therefore use some or all of an individual’s annual exclusion. However, because of a special provision in the tax law, an individual is allowed to make a lump sum contribution of up to $60,000 to a 529 Plan for any number of donees and treat the contribution as if it was made ratably over a five-year period. If a person makes this election, he or she will not exceed the $12,000 per year gift tax exclusion. In effect, he or she will be using future annual exclusions so the amount that can be gifted in future years by annual exclusion gifting will be reduced. The benefit of making a lump sum contribution is that there is more money in the 529 Plan available for growth.
5. What Should I Be Thinking About Before April 15, 2009?
a. Make Annual Exclusion Gifts Early in the Year
For those individuals who are making annual exclusion gifts, there is no reason to wait until the end of the year to make the gifts. Beginning Jan. 1, 2009, a person can begin making annual exclusion gifts for 2009. The benefit of making the gifts early in the year is that any appreciation on the gifted property during the year would not use up any of your annual exclusion.
b. Funding Your Revocable Living Trust
Many clients have revocable trusts as part of their estate plan. One of the main reasons people establish revocable trusts is to avoid the cost and delay of probate. However, simply signing a revocable trust is not enough. A person’s assets need to be re-titled in the name of the trust to avoid probate. If you have a revocable trust as part of your estate plan, it is a good idea when you are gathering all of your income tax information to review your brokerage statements, 1099s and other tax statements to see how your assets are titled. It could be that you have an estate plan that looks good on paper but will not achieve the probate avoidance results you anticipated because your assets are not titled appropriately.
c. Complex Trusts and Estates Can Choose the Tax Year for Deducting Distributions
Complex trusts and estate distributions made within the first 65 days of 2009 may elect to be treated as paid and deductible in 2008. As a result, fiduciaries do not need to make payments in 2008 for those payments to be deductible in that year. They can wait until 2009, when the 2009 tax picture should be clearer, to decide whether the payments should be imputed back to 2008 or treated as 2009 payments. If an estate or complex trust elects to treat a 2008 distribution as paid in 2008, the distribution is taxable to the beneficiary in 2008.
Of course, there are many more strategies that a person might want to consider implementing as part of his or her estate plan. As always, the key is proper planning. The end of the year is a good time to review your estate plan to determine if it still meets your goals and objectives and maximizes all estate tax planning opportunities available. If you have never executed an estate plan, the end of the year also is a good time to begin the process.
1. How Do I Know If My Estate Is Subject to Estate Tax?
The estate tax generally is based on the fair market value of a person’s estate at death. However, every estate is entitled to an exclusion that effectively exempts a certain amount of property from the tax. This exclusion amount currently is scheduled to increase over time and is illustrated in the chart below:
Based on the estate tax exclusion, in 2008 an individual can pass $2 million to the next generation estate tax-free. A husband and wife can pass up to $4 million estate tax-free if their estate is properly structured and their assets are properly titled.
Although everyone has an estate tax exclusion, it could be wasted if an estate plan is not properly structured or assets are not titled properly. The key is to make sure that an individual has assets at least worth the exclusion amount in his or her name or in a trust that is included in his or her estate for estate tax purposes. If a husband and wife own all of their assets jointly (or one spouse owns the majority of the assets and the other spouse owns little or no assets), they run a good chance of wasting one of their exclusions, thereby subjecting more property than necessary to estate tax.
To ensure full utilization of both spouses’ exclusions, each spouse should have at least $2 million in their name or a trust that is included in their estate for estate tax purposes.
For married couples, the estate tax law also provides an unlimited marital deduction. This deduction allows an individual to leave an unlimited amount of assets to a surviving spouse (either outright or in certain types of trusts) without incurring an estate tax on the death of the first spouse. Proper marital deduction planning allows an individual to defer estate tax until the death of the surviving spouse.
In order to determine if your estate is subject to estate tax, review the assets you own and determine what they are worth. What you own is broader than just your security portfolio. Your estate generally includes real property, the death benefit of life insurance (unless you do not have any “incidents of ownership” with respect to the policy), IRAs and other retirement plan benefits. Add the value of these assets up. If they total less than $2 million, your estate should not generally be subject to estate tax, assuming you did not make any taxable gifts during your life. If your estate is worth more than the estate tax exclusion, you may want to consider meeting with your professional tax advisor to determine what opportunities are available to reduce this tax in a way that is consistent with your overall estate planning goals and objectives.
2. What’s All This I Heard About Estate Tax Repeal?
In 2001, tax legislation was enacted that repealed the estate tax. However, this repeal is being phased in over time. In 2008, we still have an estate tax. The exclusion chart shows how the phase-out of estate tax repeal is scheduled to occur. It is based on an increasing amount an individual can leave without incurring an estate tax (i.e., the estate tax exclusion). As of now, the estate tax is set for complete repeal only in 2010 only because a sunset provision in the tax legislation repealed the estate tax for just one year. The estate tax is scheduled to be fully reinstated in 2011 (with an exclusion amount of only $1 million), unless Congress acts to make the repeal permanent. To date, Congress has not been successful in passing legislation that would make estate tax repeal permanent. There are numerous proposals floating around Washington that seek to minimize the burden of the estate tax short of complete repeal. One proposal that has gained attention would increase the estate tax exclusion amount to $5 million per individual (as opposed to $2 million per individual) and tie the estate tax rate to the capital gain rate for smaller estates or two times the capital gain rate for larger estates. It is important to remember that no one knows if the estate tax will be repealed or whether a compromise proposal will even be reached. Therefore, proper planning is still essential.
3. What About Family Limited Partnerships?
Many people have created family limited partnerships for estate, asset protection or other purposes. From an estate tax perspective, assets are put into an FLP and, in return, limited partnership interests are received. These limited partnership interests have traditionally generated discounts for gift and estate tax purposes because they are not marketable and provide no control over the management and operation of the FLP. Because of the discounts, the limited partnership interests are worth “less” than the limited partnership interests’ proportionate value of the underlying assets in the FLP. Since the limited partnership interests are not as valuable as the FLP’s assets, less estate or gift tax would ultimately be due.
The IRS has been challenging the estate tax benefits that have traditionally been available to FLPs. These challenges have culminated in a series of successful court cases for the IRS. The IRS has had success in cases where the facts indicate, among other things, that the person who established the FLP either controlled the partnership or had an express or implied agreement that he or she would benefit from the FLP property if needed. These cases tended to involve transactions in which substantially all of a person’s assets were transferred to an FLP and there was no real or business purpose to engage in the planning other than to generate estate tax discounts.
If you have engaged in estate planning that includes an FLP, it would be prudent to review the impact of this recent string of cases on your plan. This review should include not only determining if there are any problems posed by the creation or operation of your partnership, but also what, if any, remedies can be pursued if a problem exists.
4. What Should I Be Thinking About Before Dec. 31, 2008?
a. Annual Exclusion Gifting
If an individual is subject to the estate tax, one manner to reduce that future liability is by making gifts. If gifts are made while you are alive, the gifted property, plus any appreciation generated by that gifted property, would be removed from your estate for estate tax purposes.
The tax law provides every individual with an annual gift tax exclusion. Under this exclusion, the first $12,000 of gifts ($24,000 for married couples who elect to split gifts) made by a donor to each donee in calendar year 2008 is excluded from the amount of the donor’s taxable gifts. Utilizing these exclusions can save both transfer tax for the donor and family income taxes because the annual exclusion makes the transfer free of gift tax. Estate tax can be saved because both the value of the gift and post-transfer appreciation will not be included in the donor’s estate. Subject to the kiddie tax rules, family income tax savings can be realized when income-producing property is given to family members in lower-income tax brackets.
To take advantage of annual exclusion gifting for 2008, you must act no later than Dec. 31, 2008, by making a completed gift. Unused annual exclusions cannot be carried over to future years.
Planning Point: A gift must be “complete” in order to get an annual exclusion credit. Typically, a gift is complete when the donor gives the property to the donee. However, care must be taken when gifts are made by check. If a gift of a check is made near the end of 2008 and the donor wants to take advantage of the exclusion for that year, the donee must deposit the check before year-end so there is no doubt when the gift was made. Direct deposit of funds into the donee’s account would be even better.
b. 529 Plan Gifting
Contributions made to a 529 Plan are treated as gifts and will therefore use some or all of an individual’s annual exclusion. However, because of a special provision in the tax law, an individual is allowed to make a lump sum contribution of up to $60,000 to a 529 Plan for any number of donees and treat the contribution as if it was made ratably over a five-year period. If a person makes this election, he or she will not exceed the $12,000 per year gift tax exclusion. In effect, he or she will be using future annual exclusions so the amount that can be gifted in future years by annual exclusion gifting will be reduced. The benefit of making a lump sum contribution is that there is more money in the 529 Plan available for growth.
5. What Should I Be Thinking About Before April 15, 2009?
a. Make Annual Exclusion Gifts Early in the Year
For those individuals who are making annual exclusion gifts, there is no reason to wait until the end of the year to make the gifts. Beginning Jan. 1, 2009, a person can begin making annual exclusion gifts for 2009. The benefit of making the gifts early in the year is that any appreciation on the gifted property during the year would not use up any of your annual exclusion.
b. Funding Your Revocable Living Trust
Many clients have revocable trusts as part of their estate plan. One of the main reasons people establish revocable trusts is to avoid the cost and delay of probate. However, simply signing a revocable trust is not enough. A person’s assets need to be re-titled in the name of the trust to avoid probate. If you have a revocable trust as part of your estate plan, it is a good idea when you are gathering all of your income tax information to review your brokerage statements, 1099s and other tax statements to see how your assets are titled. It could be that you have an estate plan that looks good on paper but will not achieve the probate avoidance results you anticipated because your assets are not titled appropriately.
c. Complex Trusts and Estates Can Choose the Tax Year for Deducting Distributions
Complex trusts and estate distributions made within the first 65 days of 2009 may elect to be treated as paid and deductible in 2008. As a result, fiduciaries do not need to make payments in 2008 for those payments to be deductible in that year. They can wait until 2009, when the 2009 tax picture should be clearer, to decide whether the payments should be imputed back to 2008 or treated as 2009 payments. If an estate or complex trust elects to treat a 2008 distribution as paid in 2008, the distribution is taxable to the beneficiary in 2008.
Of course, there are many more strategies that a person might want to consider implementing as part of his or her estate plan. As always, the key is proper planning. The end of the year is a good time to review your estate plan to determine if it still meets your goals and objectives and maximizes all estate tax planning opportunities available. If you have never executed an estate plan, the end of the year also is a good time to begin the process.
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