It's no secret that retirement accounts come in all shapes and sizes ... from the account that is strictly set aside to generate retirement income to an account earmarked for heirs. For those intending to bequeath their individual retirement account funds to survivors, a change in Internal Revenue Service regulations in January of 2001 (followed by an April 2002 revision) created a wealth-transfer strategy that actually allows for the tax benefits of an IRA to be "stretched" beyond the lifetime of the person who established the IRA.
In the past, IRS law had required non-spouse beneficiaries to completely withdraw IRA assets either within five years of the originator's death or heretofore remaining life expectancy. The stretch IRA allows for the IRA to be passed down several generations over the life expectancies of non-spousal beneficiaries like grandchildren, great-nieces, nephews and others.
The biggest advantage to establishing the stretch IRA is its earning power. The smaller required minimum distributions to younger, non-spouse beneficiaries and the extended time for the investments in IRAs to grow at a compounded, tax-deferred rate allow for the payouts to substantially increase. For example, at an 8 percent annual return, $100,000 inherited by a 20-year-old could translate into distributions totaling $2.9 million during the course of the beneficiary's life expectancy.
Financial institutions should be aware of the stretch IRA for customers for whom it is applicable. It has been around for a while but, surprisingly, it's not being utilized as much as it could be. To make it work, encourage clients to work with estate planning attorneys who have stayed current with these laws.
There are some rather tricky areas in terms of structuring the stretch IRA. For example it is imperative that the IRA remain in the name of the original holder for non-spouse beneficiaries to avoid tax consequences. They cannot simply roll it into their own IRA without tax implications.
"Look-through trust options" add additional flexibility and control for stretch IRAs. There are two effective trust dispositive provisions that "stretch" distributions. The "option" method allows the named beneficiary the option of choosing the amount and timing of the distribution of IRA assets over and above the annual required minimum distribution. The "trustee discretion" method allows for the trustee to distribute additional amounts if the trustee deems advisable in terms of health, education, support and welfare.
Stretch IRAs enhance the element of control a holder can exercise over the disposition of retirement assets. There is no down side for incorporating a stretch IRA into one's financial plan, and the upside can provide ongoing income for several generations.
Sunday, February 5, 2006
Thursday, January 5, 2006
Special Needs Planning
One of the best parts of my practice is when I have the opportunity to assist parents of a child with special needs. A concern of all parents, (but especially parents of special needs children) is what will happen to their child/children if something happens to them (parents become disabled or die) and they are unable to care for their child/children.
A typical scenario for parents considering their estate planning is how to leave their estates to their children. When the children are still minors it is best to do so in a trust for the benefit of the child. Then (if the parents so choose) the trust assets may be distributed directly to the child at a time when the parents feel the child is an adult and will be responsible with the money.
Parents of children with special needs must consider other factors. A major difference is that the need for care may continue for the special needs child's entire life and will often incorporate social and government programs and benefits. These programs and benefits may become negatively effected or lost if the child is given money or directly inherits any money from the parents or other individuals. Thus it is very important that parents, grandparents, siblings, and other family and friends find alternatives for leaving gifts or their estates to children with special needs.
One very popular and very effective solution is to use a special needs trust which is specifically designed to address these unique issues and concerns.
A typical scenario for parents considering their estate planning is how to leave their estates to their children. When the children are still minors it is best to do so in a trust for the benefit of the child. Then (if the parents so choose) the trust assets may be distributed directly to the child at a time when the parents feel the child is an adult and will be responsible with the money.
Parents of children with special needs must consider other factors. A major difference is that the need for care may continue for the special needs child's entire life and will often incorporate social and government programs and benefits. These programs and benefits may become negatively effected or lost if the child is given money or directly inherits any money from the parents or other individuals. Thus it is very important that parents, grandparents, siblings, and other family and friends find alternatives for leaving gifts or their estates to children with special needs.
One very popular and very effective solution is to use a special needs trust which is specifically designed to address these unique issues and concerns.
Monday, July 11, 2005
Tax Bite: New Jersey Has Increased its Death Tax
Everyone has heard of the Federal estate tax, sometimes referred to as the “death tax,” but did you know that New Jersey also has an estate tax? And, did you also know that the New Jersey estate tax has recently been changed to prevent a reduction in that tax which would otherwise have occurred as a result of the 2001 reductions in the Federal estate tax?
The Background: Federal tax law changes made in 2001 call for a gradual increase in the Federal estate tax exemption equivalent (the amount which each individual can pass to his/her heirs without incurring Federal estate tax). In 2001 the Federal exemption equivalent was $675,000. Today, the exemption equivalent is $1.5 million, remaining at that level through 2005. It then increases to $2 million in 2006, 2007 and 2008, and to $3.5 million in 2009. The Federal estate tax is eliminated in 2010, but then returns in 2011 with an exemption equivalent of $1.0 million.
The N.J. estate tax, just like the Federal estate tax, is a “death tax” based upon the value of the deceased individual’s estate. It should not be confused with the N.J. inheritance tax which is another “death tax” but is based upon the relationship between the deceased individual and the beneficiary.
Prior to July 1, 2002, if there was no Federal estate tax due, then there would also be no N.J. estate tax. However, if an estate owed a Federal estate tax, then a portion of the Federal estate tax liability would be paid to New Jersey in the form of the N.J. estate tax and the balance would be paid to the Federal government. The N.J. estate tax did not increase the estate’s death tax liability, but rather, resulted in a “sharing” of the Federal estate tax between the Federal government and New Jersey.
The Change: As a result of the gradually increasing Federal estate tax exemption equivalent, New Jersey was facing potential losses in revenue, since there would be no N.J. estate tax until estates exceeded the increased Federal exemption equivalent. To avoid this loss of revenue, New Jersey amended its estate tax law to provide that the N.J. estate tax will be calculated based upon the Federal estate tax as it existed in 2001 (when the Federal exemption equivalent was $675,000).
The Impact: This change in the N.J. estate tax particularly impacts married couples whose estate tax planning includes Wills incorporating so-called “credit shelter trusts” also referred to as A“by-pass trusts” (i.e., a trust funded with the full amount of the Federal exemption equivalent available to the first spouse to die). If such a trust is funded with an amount greater than $675,000, there will be an immediate N.J. estate tax, whereas prior to the change, no N.J. estate tax was due. In short, where previously taking full advantage of the Federal exemption upon the death of the first spouse to die resulted in no Federal or state estate tax liability, now doing so results in an immediate N.J. estate tax which could range between $64,400 (2004-2005) and $229,200 (2009). In light of the changes, both in the Federal and New Jersey estate taxes, it is important to revisit existing estate plans and reexamine existing Wills and Trusts. Failing to do so could result in an unplanned tax bite.
The Background: Federal tax law changes made in 2001 call for a gradual increase in the Federal estate tax exemption equivalent (the amount which each individual can pass to his/her heirs without incurring Federal estate tax). In 2001 the Federal exemption equivalent was $675,000. Today, the exemption equivalent is $1.5 million, remaining at that level through 2005. It then increases to $2 million in 2006, 2007 and 2008, and to $3.5 million in 2009. The Federal estate tax is eliminated in 2010, but then returns in 2011 with an exemption equivalent of $1.0 million.
The N.J. estate tax, just like the Federal estate tax, is a “death tax” based upon the value of the deceased individual’s estate. It should not be confused with the N.J. inheritance tax which is another “death tax” but is based upon the relationship between the deceased individual and the beneficiary.
Prior to July 1, 2002, if there was no Federal estate tax due, then there would also be no N.J. estate tax. However, if an estate owed a Federal estate tax, then a portion of the Federal estate tax liability would be paid to New Jersey in the form of the N.J. estate tax and the balance would be paid to the Federal government. The N.J. estate tax did not increase the estate’s death tax liability, but rather, resulted in a “sharing” of the Federal estate tax between the Federal government and New Jersey.
The Change: As a result of the gradually increasing Federal estate tax exemption equivalent, New Jersey was facing potential losses in revenue, since there would be no N.J. estate tax until estates exceeded the increased Federal exemption equivalent. To avoid this loss of revenue, New Jersey amended its estate tax law to provide that the N.J. estate tax will be calculated based upon the Federal estate tax as it existed in 2001 (when the Federal exemption equivalent was $675,000).
The Impact: This change in the N.J. estate tax particularly impacts married couples whose estate tax planning includes Wills incorporating so-called “credit shelter trusts” also referred to as A“by-pass trusts” (i.e., a trust funded with the full amount of the Federal exemption equivalent available to the first spouse to die). If such a trust is funded with an amount greater than $675,000, there will be an immediate N.J. estate tax, whereas prior to the change, no N.J. estate tax was due. In short, where previously taking full advantage of the Federal exemption upon the death of the first spouse to die resulted in no Federal or state estate tax liability, now doing so results in an immediate N.J. estate tax which could range between $64,400 (2004-2005) and $229,200 (2009). In light of the changes, both in the Federal and New Jersey estate taxes, it is important to revisit existing estate plans and reexamine existing Wills and Trusts. Failing to do so could result in an unplanned tax bite.
Tuesday, December 17, 2002
Estate Tax Is Repealed?
By Parag P. Patel, Esq.
Last year, after ten years of debate, Congress passed legislation that will repeal the federal estate tax, a tax imposed on the assets left by the nation's wealthiest residents. The full repeal, however, will not take place for ten years. It is possible that Congress could revive the tax in some form before then. And in 2011, the whole tax bill will expire unless Congress votes to renew it. In the meantime, estate tax rates will go down and exemptions will go up.
What Is Next for Estate and Gift Tax:
As of 2002, the estate tax affects only people who die leaving a taxable estate of more than a million dollars. (In 2001, estate tax was assessed on those who died leaving a taxable estate of more than $675,000.) The estate tax threshold will continue to rise until 2010, when it will be repealed. The exact dates and amounts of the changes are shown below. Congress did not repeal the federal gift tax, although it raised the lifetime exemption and lowered the maximum tax rate. The lifetime gift tax exemption has gone up to $1 million and will stay there (unlike the estate tax exemption). Therefore you will be able to make a total of $1 million of taxable gifts over your lifetime before owing any federal gift tax. In addition, as of 2002 you can make an unlimited number of $11,000 gifts of cash or other property each year, completely tax-free. (Before 2002, you could give only $10,000 to an individual recipient in a calendar year.)
How the estate tax will go away:
Year Estate tax exemption Gift tax exemption Highest estate and gift tax rate
2002 $1 million $1 million 50%
2003 $1 million $1 million 49%
2004 $1.5 million $1 million 48%
2005 $1.5 million $1 million 47%
2006 $2 million $1 million 46%
2007 $2 million $1 million 45%
2008 $2 million $1 million 45%
2009 $3.5 million $1 million 45%
2010 Tax repealed $1 million Top individual income tax rate (gift tax only)
If you are married, estate tax most likely applies when the second spouse dies. (When the first spouse dies, everything left to the survivor passes tax-free.) But if the second spouse dies owning property worth more than the estate tax exemption, estate tax will be due. If you and your spouse together own more than $1 million (the current estate tax exemption), you should seriously consider using a credit shelter trust, making gifts during life, or using another tax-minimization strategy.
Last year, after ten years of debate, Congress passed legislation that will repeal the federal estate tax, a tax imposed on the assets left by the nation's wealthiest residents. The full repeal, however, will not take place for ten years. It is possible that Congress could revive the tax in some form before then. And in 2011, the whole tax bill will expire unless Congress votes to renew it. In the meantime, estate tax rates will go down and exemptions will go up.
What Is Next for Estate and Gift Tax:
As of 2002, the estate tax affects only people who die leaving a taxable estate of more than a million dollars. (In 2001, estate tax was assessed on those who died leaving a taxable estate of more than $675,000.) The estate tax threshold will continue to rise until 2010, when it will be repealed. The exact dates and amounts of the changes are shown below. Congress did not repeal the federal gift tax, although it raised the lifetime exemption and lowered the maximum tax rate. The lifetime gift tax exemption has gone up to $1 million and will stay there (unlike the estate tax exemption). Therefore you will be able to make a total of $1 million of taxable gifts over your lifetime before owing any federal gift tax. In addition, as of 2002 you can make an unlimited number of $11,000 gifts of cash or other property each year, completely tax-free. (Before 2002, you could give only $10,000 to an individual recipient in a calendar year.)
How the estate tax will go away:
Year Estate tax exemption Gift tax exemption Highest estate and gift tax rate
2002 $1 million $1 million 50%
2003 $1 million $1 million 49%
2004 $1.5 million $1 million 48%
2005 $1.5 million $1 million 47%
2006 $2 million $1 million 46%
2007 $2 million $1 million 45%
2008 $2 million $1 million 45%
2009 $3.5 million $1 million 45%
2010 Tax repealed $1 million Top individual income tax rate (gift tax only)
If you are married, estate tax most likely applies when the second spouse dies. (When the first spouse dies, everything left to the survivor passes tax-free.) But if the second spouse dies owning property worth more than the estate tax exemption, estate tax will be due. If you and your spouse together own more than $1 million (the current estate tax exemption), you should seriously consider using a credit shelter trust, making gifts during life, or using another tax-minimization strategy.
Saturday, March 17, 2001
Discriminatory Taxation: Greencard and H-1 Estate Planning
By Parag Patel Esq.
Non-US citizens (greencard holders or H-1 visaholders) are severely discriminated against by US estate tax laws.
Since estate taxes are based on the size of your estate. It is estimated that without proper planning, you will lose 15 percent to 75 percent of your estate, because the government will take it. Estate taxes alone are 55 percent of an estate worth over $3 million.
For both US citizen spouses, a $1,000,000 exemption is available. If the estate plan is properly structured, a $2 million exemption is available per couple. H-1 visaholders have a smaller $60,000 exemption and a $120,000 exemption per couple.
Furthermore, a large number of people have non-US citizen spouses (either greencard holders or H-1 visaholders) and these couples are adversely affected by discriminatory tax laws.
US citizens distribute unlimited amounts of property to their spouses (through lifetime gifts and/or transfers at death) by reason of the unlimited marital deduction. The theory behind the unlimited marital deduction is one of tax deferral, not tax avoidance. This is because the marital deduction only postpones collection of the estate tax, with the assumption that property received by a spouse under the marital deduction will ultimately be included in the gross estate of the surviving spouse.
To prevent the loss of tax revenue from a non-US citizen, who may decide to "take-the-money-and-run" back to a foreign country and beyond the reach of the IRS after the death of their spouse, the tax law denies any estate tax marital deduction for property passing to non-US citizen spouses.
Thus, there are only three choices available:
- set up a Qualified Domestic Trust (QDOT), a trust that provides the non-US citizen surviving spouse with distributions of income from the trust assets.
- to pay estate taxes on first death
- to become a US citizen
In light of all of the above, sophisticated estate planning for non-US citizens is strongly recommended and a competent tax attorney should consulted.
Non-US citizens (greencard holders or H-1 visaholders) are severely discriminated against by US estate tax laws.
Since estate taxes are based on the size of your estate. It is estimated that without proper planning, you will lose 15 percent to 75 percent of your estate, because the government will take it. Estate taxes alone are 55 percent of an estate worth over $3 million.
For both US citizen spouses, a $1,000,000 exemption is available. If the estate plan is properly structured, a $2 million exemption is available per couple. H-1 visaholders have a smaller $60,000 exemption and a $120,000 exemption per couple.
Furthermore, a large number of people have non-US citizen spouses (either greencard holders or H-1 visaholders) and these couples are adversely affected by discriminatory tax laws.
US citizens distribute unlimited amounts of property to their spouses (through lifetime gifts and/or transfers at death) by reason of the unlimited marital deduction. The theory behind the unlimited marital deduction is one of tax deferral, not tax avoidance. This is because the marital deduction only postpones collection of the estate tax, with the assumption that property received by a spouse under the marital deduction will ultimately be included in the gross estate of the surviving spouse.
To prevent the loss of tax revenue from a non-US citizen, who may decide to "take-the-money-and-run" back to a foreign country and beyond the reach of the IRS after the death of their spouse, the tax law denies any estate tax marital deduction for property passing to non-US citizen spouses.
Thus, there are only three choices available:
- set up a Qualified Domestic Trust (QDOT), a trust that provides the non-US citizen surviving spouse with distributions of income from the trust assets.
- to pay estate taxes on first death
- to become a US citizen
In light of all of the above, sophisticated estate planning for non-US citizens is strongly recommended and a competent tax attorney should consulted.
Sunday, March 7, 1999
Estate Tax Marital Deduction: Don't "Overqualify"
By Parag P. Patel, Esq.
This article is for my clients who mistakenly believe that they do not need estate planning advice because they plan to leave all their assets to their spouse and will have no estate tax liability due to the marital deduction. In this regard, it's important to understand one danger the marital deduction poses in estate planning: that of "overqualifying" for it.
There are no limits on how much of a marital deduction your estate can qualify for. Thus, if your entire estate goes to your surviving spouse, your estate will owe no federal estate tax. Many people take this simple approach. In the long run, however, it can cost your family hundreds of thousands of dollars in extra estate taxes. Here's what's involved.
Every individual is entitled to a "unified" credit entitling him to transfer $650,000 in cash or property free of federal estate or gift taxes ("transfer" taxes). A husband and wife, therefore, should be able to transfer to their children (or other beneficiaries) a total of $1,300,000 in assets free of transfer taxes: $650,000 each. If the first of them to die leaves everything to the surviving spouse, however, he will have failed to take advantage of his unified credit. At the later death of the spouse, her credit will "shelter" $650,000 in assets passing to the children, but the remainder of the "parental" estate will be taxed.
Example (1). Husband dies with an estate of $2 million which he leaves in its entirety to his surviving spouse Wife. Husband's estate has no estate tax liability due to the marital deduction. Wife dies later with the $2 million comprising her estate. After applying her unified credit, the estate tax bill will be roughly $600,000.
Example (2). The facts are the same as above except that Husband leaves only $1,350,000 to Wife and $650,000 to their children. Here, Husband's estate will still owe no estate tax due to the combined effect of the marital deduction and unified credit. At Wife's later death, her estate is $1,350,000, instead of $2 million in the earlier example. Now, after applying her unified credit, the estate tax bill will be roughly only $300,000. By having Husband keep $650,000 from qualifying for the marital deduction, roughly $300,000 in estate taxes are avoided.
Property passing to the spouse: One reason an estate may overqualify for the marital deduction is there are ways for property to go the spouse automatically that is, not via the taxpayer's will or through his probate estate. Two common examples are jointly owned property and life insurance.
If a married couple owns property jointly with survivorship rights, the surviving spouse obtains complete ownership by operation of law outside the estate. Under the estate tax rules, half the value of the property is included in the gross estate but qualifies for the marital deduction since it goes to the surviving spouse. Similarly, if the surviving spouse is the beneficiary of life insurance which is included in the estate, the marital deduction applies.
Accordingly, to avoid "overqualifying" for the marital deduction, it is important to know what property is already targeted to go to the surviving spouse. Then steps can be taken within your estate plan to make sure enough assets are set aside to take advantage of the unified credit.
If you are hesitant to remove $650,000 of your assets from your spousal bequest for fear of leaving your spouse with insufficient property to meet her needs after your death, special arrangements can be made to achieve your goals. One way is to place assets in trust with your spouse receiving the income interest for life and with your children receiving the assets at the spouse's death. The trust can be set up to avoid qualifying for the marital deduction at your death, thus avoiding inclusion in your surviving spouse's estate at her death.
My experience indicates that for most clients this is an issue. If you have an estate plan, review your documents to ensure proper estate tax planning is in place. If you have no estate plan, you should talk to an estate planning attorney to minimize your estate tax bill and maximize your estate assets for your family.
This article is for my clients who mistakenly believe that they do not need estate planning advice because they plan to leave all their assets to their spouse and will have no estate tax liability due to the marital deduction. In this regard, it's important to understand one danger the marital deduction poses in estate planning: that of "overqualifying" for it.
There are no limits on how much of a marital deduction your estate can qualify for. Thus, if your entire estate goes to your surviving spouse, your estate will owe no federal estate tax. Many people take this simple approach. In the long run, however, it can cost your family hundreds of thousands of dollars in extra estate taxes. Here's what's involved.
Every individual is entitled to a "unified" credit entitling him to transfer $650,000 in cash or property free of federal estate or gift taxes ("transfer" taxes). A husband and wife, therefore, should be able to transfer to their children (or other beneficiaries) a total of $1,300,000 in assets free of transfer taxes: $650,000 each. If the first of them to die leaves everything to the surviving spouse, however, he will have failed to take advantage of his unified credit. At the later death of the spouse, her credit will "shelter" $650,000 in assets passing to the children, but the remainder of the "parental" estate will be taxed.
Example (1). Husband dies with an estate of $2 million which he leaves in its entirety to his surviving spouse Wife. Husband's estate has no estate tax liability due to the marital deduction. Wife dies later with the $2 million comprising her estate. After applying her unified credit, the estate tax bill will be roughly $600,000.
Example (2). The facts are the same as above except that Husband leaves only $1,350,000 to Wife and $650,000 to their children. Here, Husband's estate will still owe no estate tax due to the combined effect of the marital deduction and unified credit. At Wife's later death, her estate is $1,350,000, instead of $2 million in the earlier example. Now, after applying her unified credit, the estate tax bill will be roughly only $300,000. By having Husband keep $650,000 from qualifying for the marital deduction, roughly $300,000 in estate taxes are avoided.
Property passing to the spouse: One reason an estate may overqualify for the marital deduction is there are ways for property to go the spouse automatically that is, not via the taxpayer's will or through his probate estate. Two common examples are jointly owned property and life insurance.
If a married couple owns property jointly with survivorship rights, the surviving spouse obtains complete ownership by operation of law outside the estate. Under the estate tax rules, half the value of the property is included in the gross estate but qualifies for the marital deduction since it goes to the surviving spouse. Similarly, if the surviving spouse is the beneficiary of life insurance which is included in the estate, the marital deduction applies.
Accordingly, to avoid "overqualifying" for the marital deduction, it is important to know what property is already targeted to go to the surviving spouse. Then steps can be taken within your estate plan to make sure enough assets are set aside to take advantage of the unified credit.
If you are hesitant to remove $650,000 of your assets from your spousal bequest for fear of leaving your spouse with insufficient property to meet her needs after your death, special arrangements can be made to achieve your goals. One way is to place assets in trust with your spouse receiving the income interest for life and with your children receiving the assets at the spouse's death. The trust can be set up to avoid qualifying for the marital deduction at your death, thus avoiding inclusion in your surviving spouse's estate at her death.
My experience indicates that for most clients this is an issue. If you have an estate plan, review your documents to ensure proper estate tax planning is in place. If you have no estate plan, you should talk to an estate planning attorney to minimize your estate tax bill and maximize your estate assets for your family.
Tuesday, February 17, 1998
Keeping Tax Papers
By Parag Patel, Esq.
Keep anything related to your tax return for at least three years after you file. Keep anything related to your tax return, such as W-2 and 1099 forms, and receipts and canceled checks for deductible items, for at least three years after you file. In general, the IRS has up to three years after you file your tax return to complete an audit of you. That is why you want to keep records substantiating your tax return data a minimum of three years. For example, if you filed on April 15, 1998 for 1997, keep those records until at least April 16, 2001.
To be completely safe, you'll want to keep your records for six years. The IRS can audit you for up to six years after you filed a return if it suspects that you underreported your income by 25% or more.
Keep records showing purchases of real estate, stocks and other investments for at least three years after you sell the asset. If you are audited, you must be able to show your taxable gain or loss. If you have rolled-over gains from the sale of a residence, which was allowed under the previous tax law, keep records of every purchase and sale made, until you sell your current home.
Keep anything related to your tax return for at least three years after you file. Keep anything related to your tax return, such as W-2 and 1099 forms, and receipts and canceled checks for deductible items, for at least three years after you file. In general, the IRS has up to three years after you file your tax return to complete an audit of you. That is why you want to keep records substantiating your tax return data a minimum of three years. For example, if you filed on April 15, 1998 for 1997, keep those records until at least April 16, 2001.
To be completely safe, you'll want to keep your records for six years. The IRS can audit you for up to six years after you filed a return if it suspects that you underreported your income by 25% or more.
Keep records showing purchases of real estate, stocks and other investments for at least three years after you sell the asset. If you are audited, you must be able to show your taxable gain or loss. If you have rolled-over gains from the sale of a residence, which was allowed under the previous tax law, keep records of every purchase and sale made, until you sell your current home.
Saturday, August 17, 1996
Estate Planning: Not Only for the Rich
By Parag Patel, Esq.
Estate planning is not only for the Rockefellers of the world. Increasingly, Indian Americans who think of themselves as comfortably middle class are accumulating enough personal assets to make their heirs liable for estate taxes. In the United States, estate taxes are the highest and most progressive of the government's tax rates where the highest estate tax rate is 60%.
With such high estate tax rates, estate planning becomes a serious concern, particularly for Indian Americans, one of the wealthiest minority groups in the United States. In this article, I wish to briefly explain the estate tax and identify some classic problems one should avoid while making estate planning decisions.
All U.S. citizens as well as any person owning property located in the U.S. may be required to pay estate taxes on the transfer of property at death. The estate tax is simply an excise tax on the transfer of property at death. The effect of the estate tax is to impose a tax on the decedent's net wealth (total fair market value of assets less debts and expenses) that passes to his or her heirs.
The federal estate tax is currently imposed only on taxable estates exceeding $600,000. However, most states levy estate taxes on smaller estates, for instance, New York, Ohio and Iowa, start taxing estates at the first dollar.
The difficulty with having an estate large enough to tax is that you have to do estate planning, a process so complicated that you often need a professional attorney and/or financial planner help. However, the following tips identify some classic problems to avoid when making estate planning decisions.
The $10,000 annual gift.
Most people know about this provision, but few people are sure about it. The $10,000 annual gift simply is the amount that you are permitted to make each year to another individual and have no gift tax payable (the gift tax and estate tax have the same schedule). Each year a donor may give $10,000 ($20,000 if a spouse joins in the gift) per donee with no federal gift tax consequences. In addition, a donor can pay certain medical and educational expenses of the donee without gift tax liability
The $10,000 annual gift must be a “present interest” gift meaning the recipient must have some control of the $10,000 for some period of time. It is common to take advantage of the uniform transfer act account in order to make the simplest type of gift because no legal documents are required. Using these gift tax exclusions to the maximum extent annually for every child, grandchild, and other close relative continues to be one of the best estate planning strategies.
Giving away the house.
If you are over 55, you get a one-time exclusion from capital gains taxes on gains up to $125,000 on the sale or exchange of your principal residence.
In other words, if you gift your house to your kids you lose this tax break (your kids will not benefit from this provision) and may pay gift taxes on the value of the home. Instead, keep the house, through your will leave it to your children, and its value will be rolled into your total estate.
Even better, sell your home to your children. This option allows you to get the one-time capital gains exclusion and increases your children's basis in your home (you could still help them with financing or the down payment). Alternatively, you can sell the house, pocket the gain, and gift the proceeds at $10,000 annually without any tax consequences.
Leaving it all to your spouse.
There is an unlimited deduction for the value of all property included in your gross estate that passes to your spouse (spouse must be a U.S. citizen otherwise a trust may be necessary).
However, when the surviving spouse dies federal estate taxes will imposed on the taxable estate exceeding $600,000. Solutions to this problem requires professional advice.
These strategies are only a few common strategies utilized in effective estate planning. In the future, expect more tax and legal information for self-employed individuals, real estate investors and self-employed individuals.
Estate planning is not only for the Rockefellers of the world. Increasingly, Indian Americans who think of themselves as comfortably middle class are accumulating enough personal assets to make their heirs liable for estate taxes. In the United States, estate taxes are the highest and most progressive of the government's tax rates where the highest estate tax rate is 60%.
With such high estate tax rates, estate planning becomes a serious concern, particularly for Indian Americans, one of the wealthiest minority groups in the United States. In this article, I wish to briefly explain the estate tax and identify some classic problems one should avoid while making estate planning decisions.
All U.S. citizens as well as any person owning property located in the U.S. may be required to pay estate taxes on the transfer of property at death. The estate tax is simply an excise tax on the transfer of property at death. The effect of the estate tax is to impose a tax on the decedent's net wealth (total fair market value of assets less debts and expenses) that passes to his or her heirs.
The federal estate tax is currently imposed only on taxable estates exceeding $600,000. However, most states levy estate taxes on smaller estates, for instance, New York, Ohio and Iowa, start taxing estates at the first dollar.
The difficulty with having an estate large enough to tax is that you have to do estate planning, a process so complicated that you often need a professional attorney and/or financial planner help. However, the following tips identify some classic problems to avoid when making estate planning decisions.
The $10,000 annual gift.
Most people know about this provision, but few people are sure about it. The $10,000 annual gift simply is the amount that you are permitted to make each year to another individual and have no gift tax payable (the gift tax and estate tax have the same schedule). Each year a donor may give $10,000 ($20,000 if a spouse joins in the gift) per donee with no federal gift tax consequences. In addition, a donor can pay certain medical and educational expenses of the donee without gift tax liability
The $10,000 annual gift must be a “present interest” gift meaning the recipient must have some control of the $10,000 for some period of time. It is common to take advantage of the uniform transfer act account in order to make the simplest type of gift because no legal documents are required. Using these gift tax exclusions to the maximum extent annually for every child, grandchild, and other close relative continues to be one of the best estate planning strategies.
Giving away the house.
If you are over 55, you get a one-time exclusion from capital gains taxes on gains up to $125,000 on the sale or exchange of your principal residence.
In other words, if you gift your house to your kids you lose this tax break (your kids will not benefit from this provision) and may pay gift taxes on the value of the home. Instead, keep the house, through your will leave it to your children, and its value will be rolled into your total estate.
Even better, sell your home to your children. This option allows you to get the one-time capital gains exclusion and increases your children's basis in your home (you could still help them with financing or the down payment). Alternatively, you can sell the house, pocket the gain, and gift the proceeds at $10,000 annually without any tax consequences.
Leaving it all to your spouse.
There is an unlimited deduction for the value of all property included in your gross estate that passes to your spouse (spouse must be a U.S. citizen otherwise a trust may be necessary).
However, when the surviving spouse dies federal estate taxes will imposed on the taxable estate exceeding $600,000. Solutions to this problem requires professional advice.
These strategies are only a few common strategies utilized in effective estate planning. In the future, expect more tax and legal information for self-employed individuals, real estate investors and self-employed individuals.
Wednesday, July 17, 1996
Estate-Planning Preserves Medical Practice Value
By Parag Patel, Esq.
SUMMARY: Exposing a medical practice to probate often costs the heirs of the assets thousands of dollars due to the practice’s diminished value since the patients find new doctors before the practice can be sold and attorneys’ fees for handling the probate. With proper estate planning, an estate can be protected from costly legal outlays. With the appropriate trust, heirs can be given immediate control of the practice and be empowered to sell the practice while it is still viable and worth its maximum value. A Professional Corporation Trust allows doctors to pass on control of the trust to their heirs. With a Revocable Living Trust, in the event of the death of either spouse, the trust continues to own the property under the control of the survivor and thus avoids probate. Revocable Living Trusts also give several income tax advantages. The main goal in estate planning should be to avoid probate. Probate is costly, time consuming, and very difficult, especially if there is no will.
Often when a doctor dies, especially a solo practitioner, the value of the practice dwindles while the business is tied up in the courts for probate. Probate is the legal process for administering one’s assets and liabilities upon his or her death. Assets subject to probate may be held frozen for months or even years. Exposing the practice to probate often costs the heirs thousands of dollars. This is due to the diminished value of the practice as the patients find new doctors before the practice can be sold and fees for the attorney handling the probate continue to mount up.
Probate can be avoided with proper estate-planning. You can protect your estate from costly legal outlays and give your heirs immediate control of the practice with the appropriate trust. By transferring control of the practice to your heirs at the time of death, you effectively empower them to sell the practice while it is still viable and worth its maximum value.
Unfortunately, doctors, like other busy professionals, often have not planned for the disposal of their estates. Even if they have a will, and most do not, the estate goes into probate. Once in probate, the court takes control of the estate. Generally, it takes one-to-two years to settle the estate at a cost between 5 to 10 percent of the gross estate value--up to $65,000 on a $650,000 estate.
There is a better way. For instance, the heirs of a radiologist received thousands of dollars more because of estate-planning that utilized various trusts. First, by incorporating the practice and placing ownership of the corporation stock in a Professional Corporation Trust, it allowed the heirs to take control of the practice immediately after the demise of the doctor. A Professional Cooperation Trust allows doctors to pass on control of the trust to their heirs. As a trustee of the corporation, they cannot practice medicine unless they are licensed, but they can sell it. In this case, the heirs were able to sell the business quickly for $40,000 more than they could have if they were required to wait two years for probate to settle the estate.
Second, the heirs avoided probate cost. The total estate was worth $1,000,000, so the savings was thousands. A Revocable Living Trust was designed that covered both the husband and wife to protect this client's home, cars, stock investments and personal possessions. In the event of the death of either one, the trust continued to own the property under the control of the survivor and thus avoided probate. When the doctor died, the Revocable Living Trust also gave the surviving spouse the maximum marital deduction for estate-tax purposes.
Ordinarily, an estate valued at over $600,000 will be subject to a federal estate tax, but by putting it in a trust, it enjoys a $1,200,000 federal estate-tax exemption. Yet, the surviving spouse still has the right to live in the home, use income in the stocks and dispose of any of the assets. When the surviving spouse dies, the estate is passed on to the heirs tax-free without being subject to probate.
Often, doctors think that estate-planning is for the well established, successful doctors. That is wrong. Even the heirs of a new doctor who is deeply in debt will benefit from being provided for by a Revocable Living Trust. If the doctor should die, at least the estate is organized in writing as to how things should be handled. Whatever has been accumulated will be available to the heirs without going through probate.
Besides the benefit of maintaining control of the practice with a professional corporation, this trust gives you several income-tax advantages. You can take lease deductions for purchasing equipment and office furniture by buying them and leasing them to your Professional Corporation Trust. You can also have the trust pay for your family's medical-reimbursement plan. If your practice is licensed as a sole proprietorship, you will not enjoy these tax advantages.
It is critical for doctors who have larger estates to provide for some liquidity so the heirs can take care of things without being penalized with additional tax. One of the best ways of doing this is with a Life Insurance Irrevocable Trust. It is set up so that the trust owns the life insurance, but it can pay the beneficiary without adding tax value to the estate when the trust is designated for meeting taxes.
Professionals should take steps to protect their wealth. Once you have decided that you need to take action, the first thing that you need to do is list all of your assets. Write them down--the equity in your home, the amount of your bank account and the value of stocks, bonds, insurance policies, IRAs, jewelry and automobile. As a doctor, you also should include the fair market price of your practice. Large medical equipment suppliers may evaluate your practice and provide this information as a courtesy for doing business with them. The market valuation need not be exact.
Then write down what you want to happen to these items should you die. How do you want them to be distributed? Do you want everything to go to your spouse, your children, your temple or your government? Ask yourself, ‘Do I want to reduce my taxes? Do I want to reduce the settlement cost? Do I want to provide a special fund for my children's education?’
If you answered yes to these questions, then you may need a Revocable Living Trust that will avoid probate and reduce the taxes. As a doctor, you need to incorporate and own that professional corporation in a Professional Corporation Trust. If part of your estate is going to be taxable upon your death, you may need to have an Irrevocable Life Insurance Trust. If you have an extremely large estate, other alternatives such as gifts to charities or other methods allowing you to get funds out of your estate without tax can benefit you.
Your main goal should be to avoid probate. Probate is costly. It is very time-consuming for the courts to ensure that your debts are paid and your will is executed properly. Probate is even more difficult if you do not have a will.
Another reason that you should avoid probate is that you will not want to expose your beneficiaries to the schemes of “investment counselors” who search the public records of probate proceedings for new clients.
Some people think that by holding all assets in joint tenancy with the right of survivorship that they have solved the problem of passing on their estate. There are some real dangers withholding assets this way. First, each party is exposed to the debts and liabilities of the other. A lawsuit judgment against only one party could take the full jointly held property. Second, even though it avoids probate on the first person's death, property must go through probate upon the second person's death or if there is a common disaster and both parties are killed.
Wills and holding assets in joint tenancy do not avoid probate, but with a Revocable Living Trust you can do just that. By establishing a Revocable Living Trust, you simply retitle your assets to the name of your trust. It's like putting your assets into a safety deposit box. The trust holds the title to your property. You are the trustee of your trust. As trustee, you can retain complete control over all your assets. You can add, subtract or dispose of assets in your trust, just as you can add, take out or empty items from your safety deposit box. You still are in full control.
When you die, your trust lives on. In your Revocable Living Trust, you name a successor trustee to administer and distribute your estate. You describe how you want your trust divided. You select the time and circumstances when your beneficiaries will receive your trust assets.
Most attorneys charge from $800 to $1,500 to establish a trust. Do-it-yourself kits also are available. Establishing a trust either way is a real bargain when you consider the legal fees for probate and the advantages that a trust gives you over a will.
The cowboy philosopher Will Rogers said, “Anyone who dies with a will ought to come back to see all the trouble he has caused.” Rogers' statement of long ago is the truth. Nearly everyone has a horror story about probate. Generally, all of them wish they had known about trusts.
SUMMARY: Exposing a medical practice to probate often costs the heirs of the assets thousands of dollars due to the practice’s diminished value since the patients find new doctors before the practice can be sold and attorneys’ fees for handling the probate. With proper estate planning, an estate can be protected from costly legal outlays. With the appropriate trust, heirs can be given immediate control of the practice and be empowered to sell the practice while it is still viable and worth its maximum value. A Professional Corporation Trust allows doctors to pass on control of the trust to their heirs. With a Revocable Living Trust, in the event of the death of either spouse, the trust continues to own the property under the control of the survivor and thus avoids probate. Revocable Living Trusts also give several income tax advantages. The main goal in estate planning should be to avoid probate. Probate is costly, time consuming, and very difficult, especially if there is no will.
Often when a doctor dies, especially a solo practitioner, the value of the practice dwindles while the business is tied up in the courts for probate. Probate is the legal process for administering one’s assets and liabilities upon his or her death. Assets subject to probate may be held frozen for months or even years. Exposing the practice to probate often costs the heirs thousands of dollars. This is due to the diminished value of the practice as the patients find new doctors before the practice can be sold and fees for the attorney handling the probate continue to mount up.
Probate can be avoided with proper estate-planning. You can protect your estate from costly legal outlays and give your heirs immediate control of the practice with the appropriate trust. By transferring control of the practice to your heirs at the time of death, you effectively empower them to sell the practice while it is still viable and worth its maximum value.
Unfortunately, doctors, like other busy professionals, often have not planned for the disposal of their estates. Even if they have a will, and most do not, the estate goes into probate. Once in probate, the court takes control of the estate. Generally, it takes one-to-two years to settle the estate at a cost between 5 to 10 percent of the gross estate value--up to $65,000 on a $650,000 estate.
There is a better way. For instance, the heirs of a radiologist received thousands of dollars more because of estate-planning that utilized various trusts. First, by incorporating the practice and placing ownership of the corporation stock in a Professional Corporation Trust, it allowed the heirs to take control of the practice immediately after the demise of the doctor. A Professional Cooperation Trust allows doctors to pass on control of the trust to their heirs. As a trustee of the corporation, they cannot practice medicine unless they are licensed, but they can sell it. In this case, the heirs were able to sell the business quickly for $40,000 more than they could have if they were required to wait two years for probate to settle the estate.
Second, the heirs avoided probate cost. The total estate was worth $1,000,000, so the savings was thousands. A Revocable Living Trust was designed that covered both the husband and wife to protect this client's home, cars, stock investments and personal possessions. In the event of the death of either one, the trust continued to own the property under the control of the survivor and thus avoided probate. When the doctor died, the Revocable Living Trust also gave the surviving spouse the maximum marital deduction for estate-tax purposes.
Ordinarily, an estate valued at over $600,000 will be subject to a federal estate tax, but by putting it in a trust, it enjoys a $1,200,000 federal estate-tax exemption. Yet, the surviving spouse still has the right to live in the home, use income in the stocks and dispose of any of the assets. When the surviving spouse dies, the estate is passed on to the heirs tax-free without being subject to probate.
Often, doctors think that estate-planning is for the well established, successful doctors. That is wrong. Even the heirs of a new doctor who is deeply in debt will benefit from being provided for by a Revocable Living Trust. If the doctor should die, at least the estate is organized in writing as to how things should be handled. Whatever has been accumulated will be available to the heirs without going through probate.
Besides the benefit of maintaining control of the practice with a professional corporation, this trust gives you several income-tax advantages. You can take lease deductions for purchasing equipment and office furniture by buying them and leasing them to your Professional Corporation Trust. You can also have the trust pay for your family's medical-reimbursement plan. If your practice is licensed as a sole proprietorship, you will not enjoy these tax advantages.
It is critical for doctors who have larger estates to provide for some liquidity so the heirs can take care of things without being penalized with additional tax. One of the best ways of doing this is with a Life Insurance Irrevocable Trust. It is set up so that the trust owns the life insurance, but it can pay the beneficiary without adding tax value to the estate when the trust is designated for meeting taxes.
Professionals should take steps to protect their wealth. Once you have decided that you need to take action, the first thing that you need to do is list all of your assets. Write them down--the equity in your home, the amount of your bank account and the value of stocks, bonds, insurance policies, IRAs, jewelry and automobile. As a doctor, you also should include the fair market price of your practice. Large medical equipment suppliers may evaluate your practice and provide this information as a courtesy for doing business with them. The market valuation need not be exact.
Then write down what you want to happen to these items should you die. How do you want them to be distributed? Do you want everything to go to your spouse, your children, your temple or your government? Ask yourself, ‘Do I want to reduce my taxes? Do I want to reduce the settlement cost? Do I want to provide a special fund for my children's education?’
If you answered yes to these questions, then you may need a Revocable Living Trust that will avoid probate and reduce the taxes. As a doctor, you need to incorporate and own that professional corporation in a Professional Corporation Trust. If part of your estate is going to be taxable upon your death, you may need to have an Irrevocable Life Insurance Trust. If you have an extremely large estate, other alternatives such as gifts to charities or other methods allowing you to get funds out of your estate without tax can benefit you.
Your main goal should be to avoid probate. Probate is costly. It is very time-consuming for the courts to ensure that your debts are paid and your will is executed properly. Probate is even more difficult if you do not have a will.
Another reason that you should avoid probate is that you will not want to expose your beneficiaries to the schemes of “investment counselors” who search the public records of probate proceedings for new clients.
Some people think that by holding all assets in joint tenancy with the right of survivorship that they have solved the problem of passing on their estate. There are some real dangers withholding assets this way. First, each party is exposed to the debts and liabilities of the other. A lawsuit judgment against only one party could take the full jointly held property. Second, even though it avoids probate on the first person's death, property must go through probate upon the second person's death or if there is a common disaster and both parties are killed.
Wills and holding assets in joint tenancy do not avoid probate, but with a Revocable Living Trust you can do just that. By establishing a Revocable Living Trust, you simply retitle your assets to the name of your trust. It's like putting your assets into a safety deposit box. The trust holds the title to your property. You are the trustee of your trust. As trustee, you can retain complete control over all your assets. You can add, subtract or dispose of assets in your trust, just as you can add, take out or empty items from your safety deposit box. You still are in full control.
When you die, your trust lives on. In your Revocable Living Trust, you name a successor trustee to administer and distribute your estate. You describe how you want your trust divided. You select the time and circumstances when your beneficiaries will receive your trust assets.
Most attorneys charge from $800 to $1,500 to establish a trust. Do-it-yourself kits also are available. Establishing a trust either way is a real bargain when you consider the legal fees for probate and the advantages that a trust gives you over a will.
The cowboy philosopher Will Rogers said, “Anyone who dies with a will ought to come back to see all the trouble he has caused.” Rogers' statement of long ago is the truth. Nearly everyone has a horror story about probate. Generally, all of them wish they had known about trusts.
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