Sunday, March 31, 2013
2013 Death and (uhmm...no Taxes?)
6:23 pm hst
As of Jan. 2, the federal estate and gift tax exemption amount has been permanently increased.
If you pass away in 2013 and your lifetime and after-death transfers are less than $5.125 million, your estate passes to your
loved ones, free from all federal estate and gift taxes.
This is a huge change for the estate planning
community. Not too many years ago, the exemption amount was only $600,000. As a result, most estate planning was tax-driven.
If you were married, you got a joint trust when the value of your estate was below the exemption amount, and separate trusts
when your estate was above the exemption amount.
All the estate planner had to do was grab the
“right” form out of the form book, slap your name on it and, voilà, you had an estate plan. This has been
traditional estate planning for years.
Consequently, the new law really has turned traditional estate planning
on its head.
I have read a number of articles lately by experts in the field extolling how traditional estate
planners are going to have to change to survive; estate planning can no longer be tax-driven. According to these writers,
there now needs to be reasons to do estate planning other than tax planning.
I read these articles
with both concern and amusement. Concern, because the new law has triggered such a sounding of the alarm claiming the focus
of estate planning has to change away from taxes to something else. At Zahaby Law Offices LLLC, although taxes may be an important
component of an estate plan, taxes are rarely the primary focus of a plan.
These writers confirm
many people, including many estate planners, see estate planning as death planning. Many of our clients think of estate planning
the same way before coming into our office.
However, estate planning also is life planning. For our clients, by
the time we draft an estate plan, there are numerous reasons to do the plan, other than estate taxes.
At Zahaby Law Offices
LLLC, we use a little different definition of estate planning than most estate planners.
Our definition of
estate planning is:
• I want to control my property while I am alive and well.
• I want to plan
for myself and my loved ones if I become mentally disabled.
• When I am gone, I want to give what I
have to whom I want, when I want, the way I want.
Because of this, the new law has affected us
and the way we do planning very little. With this definition of estate planning, mental disability is not overlooked.
I believe that everyone
over the age of 18 who is not legally incapacitated, no matter how large or small his or her estate, should have at least
a will-based plan, which consists of a durable financial power of attorney, a durable power of attorney for health care and
a will. Most people with any assets would also benefit from a trust.
So what are some of
the reasons you would want to set up an estate plan if it does not have to do with taxes? Well, here are just a few:
• Maintain control
of your assets while you are alive and well.
• Provide for you and your loved ones upon your mental disability.
• Choose who
will manage your assets upon your mental disability.
• Choose who will make your personal and
health care decisions upon your mental disability.
• Plan for your long-term health care,
including decisions regarding life support and nursing home care.
• Avoid guardianships
and conservatorships, the living probate.
• Assure that your wishes and directions are carried out.
• Choose who
will manage your assets upon your death.
• Teach fiscal responsibility to your children and grandchildren
who might not be capable or experienced in managing assets.
• Protect your children from a prior marriage.
• Provide for
the needs of your surviving spouse.
• Provide for the education and special needs of your children
• Protect assets you leave to your beneficiaries from lawsuits, divorcing spouses, new
spouses, bankruptcy and other claims.
• Keep matters private among the family.
• Avoid death
• Prevent or discourage challenges to your plan.
• Reward or encourage
your beneficiaries who make intelligent life decisions, and prevent depletion of your estate by those who do not make wise
• Recognize the differing needs and abilities of your children; fair is not necessarily
• Provide for your pets.
• Provide for your favorite charities.
As you can see, you
have a whole lot of reasons to do estate planning, other than taxes.
Friday, October 26, 2012
What is The IRA Inheritance Trust®?
9:07 am hst
As more "baby boomers" are retiring and rolling over large
401(k) and other retirement plans to IRAs, proper tax and estate planning for IRAs have become increasingly important.
When an IRA owner becomes age 70 1/2, he or she must soon begin to take
required minimum withdrawals ("RMDs") and pay federal and state income taxes on those withdrawals at his or her
highest rate brackets (unless the IRA is a "Roth", in which case the withdrawals may be income tax free).
Effective January 1, 2003, the IRS changed its RMD rules, allowing a
non-spouse beneficiary (for example, a child) to take or "stretchout" the taxable RMDs over a much longer period,
using his or her own life expectancy rather than the shorter life expectancy of the original IRA owner (the parent). This
means that money inside an inherited IRA may now compound much longer, tax-deferred.
For example, let's take a child age 45 (at the time of his parent's death) who inherits a $200,000 IRA and
withdraws only RMDs. If the IRA grows, from both income and principal appreciation, at the rate of 6% a year, then 30 years
later when the child is age 75, the child will have taken over $400,000 in RMDs and still have almost $300,000 left in the
IRA to use over his or her later years or pass down to his or her children (the original IRA owner's grandchildren).
To sum it up, the original $200,000 inherited IRA became worth over
$700,000 to that family! (And that doesn't include the future value of the RMDs if they're placed into an investment account.)
If we assume the IRA will be worth over $200,000 when the owner passes, or will earn a higher rate of annual return, or will
go to a younger beneficiary, that IRA may eventually be worth well over $1 Million!
In other words, IRAs may now be a huge part of a family's financial future, perhaps for generations - - and
now large IRAs require a higher level of tax and estate planning - - which you can be well-positioned to provide before your
This New IRA Tax "Stretchout" is Not Automatic!
IRA owners and their professional advisors “assume” that the IRA beneficiaries will make the right “stretchout”
decisions, or at least seek the advisor’s help before they take withdrawals. Unfortunately, we have found, after handling
thousands of estates, this is often not the case when the IRA owner dies.
The beneficiaries are not prohibited from withdrawing more than the RMDs and may instead decide to cash out
the IRA earlier than required, blowing the stretchout. This happens because beneficiaries are:
aware of the RMD rules and their choices.
- See themselves listed as beneficiaries
on an account and immediately transfer it into their own names.
- Go to the custodian
asking what to do, are given a check and then immediately cash and deposit it in their own accounts.
- Do what they think (wrongly) is a tax-free rollover to their own IRAs. Just can't wait to get their hands
on the IRA money or are influenced by a spouse or some other third-party to grab and spend it!
Yanking the IRA money out too quickly - - resulting in what we call the "blowout"
- - may force a family to pay all of the taxes up front and lose over one-third of the IRA's future value - - literally throwing
away hundreds of thousands of dollars, or even millions!
Even if the IRA Owner Has Smart, Responsible Beneficiaries and Thinks the "Stretchout" Is Not a
Concern, Consider This…
the IRA beneficiary will properly do the RMD “stretchout” and pay the taxes gradually over his or her lifetime.
A lot can still go wrong.
When a beneficiary receives an
inheritance directly, as is the case when an individual is named directly as the beneficiary of an IRA, his or her inheritance
can then be exposed to a number of significant problems:
- The wrong
people may later inherit the IRA (the child, as initial beneficiary, could name his or her spouse as next beneficiary and
that spouse's next husband or wife or that spouse's children of another marriage could inherit the account!)
- The beneficiary, his or her spouse or children may have poor spending habits (be "spendthrifts"!).
- The beneficiary may lack good money management/investment skills.
- A beneficiary's spouse may take some or all of the IRA in a DIVORCE! (The income tax
laws, allowing an IRA transfer in a divorce to be tax-free, actually encourage the spouse to grab it and keep in mind the
statistical chance of a divorce is now over 50%!).
- If the beneficiary
is too young, elderly or disabled, he or she may not be able to properly manage his or her own affairs - - without unwanted
- A beneficiary who now or later in life receives
needs-based government benefits (like MediCaid nursing care benefits or supplemental disability income) may not qualify for
or lose those benefits.
- In most states (including California),
an IRA is not creditor protected and can be grabbed in a lawsuit, even a bogus one that forces a beneficiary to settle.
In other words, an inherited IRA not only needs to take advantage of
"stretchout" but needs protection too - - the kind that a trust can provide (which now leads us to the significance
of the IRS' approval of our IRA Inheritance Trust® stategy).
The IRS Previously Hasn't Liked Trusts as IRA Beneficiaries - - Until Now!
In its RMD regulations and previous rulings, the IRS has made it very
difficult for an IRA inherited through a trust to both qualify for maximum tax “stretchout” using each primary
beneficiary’s own life expectancy and also achieve the higher level of asset protection afforded by a trust that may
accumulate the RMDs and hold them for future distribution. Generally, one benefit had to be traded off for the other.
The new IRA Inheritance Trust® now permits the IRA owner and his
or her family to enjoy maximum “stretchout” and protection benefits at the same time. The protective features
of this trust have previously been tested and proven over many years of court decisions. And now, finally, the IRS has approved
the income tax “stretchout” feature as well (see PLR 200537044). This new standalone IRA beneficiary trust is
not the “garden variety” that has existed for some time, but rather represents a huge breakthrough. The IRA Inheritance
Trust® is the most advanced “next generation” trust that solves many earlier, tricky drafting problems associated
with maximizing both the stretchout and protection benefits.
Pension Protection Act of 2006 Makes the IRA Inheritance Trust® Even Better!
Effective January 1, 2007, the Pension Protection Act (PPA) significantly widened the
application of the IRA Inheritance Trust® to people who may never have considered this valuable planning tool before.
Previously, this Trust had no application to a company retirement plan
- - 401(k), 403(a), 403(b), 457, pension or profit-sharing plan, etc. - - unless and until the worker/participant reached
normal retirement age and took an “in service” distribution or retired, and then rolled over the company plan
into an IRA. The reason why is that company plans’ own rules usually forced a non-spouse beneficiary to take the entire
taxable distribution in 1 to 5 years, overriding the income tax “stretchout” rules available to IRAs.
Now, if someone has more than $150,000 in company plans, is still working
but has not reached normal retirement age, or has retired but left these moneys in the company plan, this plan participant
can take advantage of the stretchout and protection benefits for his or her family available through the IRA Inheritance Trust®.
The PPA permits non-spouse beneficiaries of company plans, or a Trust
established on the beneficiaries’ behalf, to do a rollover into an “inherited IRA” after the plan participant
passes away. In other words, a company plan participant can set up the IRA Inheritance Trust® now, make it the beneficiary
of the plan and let the IRA rollover occur later!
haven’t seriously considered the IRA Inheritance Trust® for a client because he or she is still working, or has
retired but still has money in the company plan, you definitely need to look into it right away!
Who Should Get an IRA Inheritance Trust®?
For anyone who has IRAs (including those owned by his or her spouse) and/or 401(k) or
other retirement plans that total over $200,000 - - this IRA Inheritance Trust® is virtually a "no brainer"
Simply stated, the income tax reduction and asset
protection planning that this trust now provides may save a million dollars or more for that IRA owner’s (or retirement
plan participant's) family!
Wednesday, September 19, 2012
IRS Issues Draft Form 706
On Aug. 16, the Internal Revenue Service released a draft version of a revised Form 706 (the 706), “United
States Estate (and Generation Skipping Transfer Tax) Return.” www.irs.gov/pub/irs-dft/f706--dft.pdf. It didn’t release instructions. The revisions implement two major changes in the law. First is the allocation of a decedent’s unused estate tax exemption to his surviving spouse under Internal
Revenue Code Section 2010(c)(4) beginning in 2011, the portability of the deceased spouse unused exemption (DSUE) under Treasury
Regulations Section 20.2010-2T. Second is the filing of protective refund claims for unresolved claims for debts and administration
expenses to take into account post-death events under the revisions to Treas. Regs. Section 20.2053-1 that apply to the estates
of decedents dying after Oct. 19, 2009.
10:25 am hst
Conceptually, the DSUE revisions are the most remarkable. They allow the filing of the return when it’s
not required. The executor makes the portability election simply by filing the 706; the executor isn’t required to make
a specific election. Rather, a check-the-box option is provided for opting out of portability. The draft form permits other
elections to be made, including the qualified terminable interest property (QTIP) election for marital deduction purposes
and the election to apply the decedent’s generation-skipping transfer tax exemption to the QTIP property. The election
to take administration expense deductions for either estate or income tax purposes will also be required. The revisions may
force consistent positions to be taken for state tax purposes for decedents in states imposing estate taxes. And, the revisions
introduce the concept of estimated valuation for estate tax purposes in limited circumstances when property qualifies for the marital or charitable deductions.
Part 6 of the 706 addresses portability, on a new p. 4. The option to elect out is at Part A. The actual computation
of DSUE being ported to the surviving spouse is at Part C. And the calculation of DSUE available to claim by the estate of
the surviving spouse is set forth at Part D, taking into account the DSUE received from the most recent deceased spouse and
the DSUE received from one or more other deceased spouses and used by the current decedent. The result is then carried to
line 9b of the tax computation on p. 1.
The DSUE arising when property passes to a qualified
domestic trust (QDOT) for the decedent’s surviving spouse who’s a non-citizen of the United States becomes tentative,
subject to re-computation after the application of the tax due under IRC Section 2056A in the subsequent administration of
the QDOT. (See Section B of Part 6.)
The estimated valuation provision, referenced on almost
every schedule and at Parts 1 and 5 of the 706, is likely to be of limited use. While the regulations refer to a range of
estimated values being provided in the instructions to the 706, Treas. Regs. Section20.2010-2T(7)(ii)(B), the instructions
aren’t yet available. Estimated valuation only applies to property qualifying for either a marital deduction or a charitable
deduction when the value doesn’t affect the value passing to any other beneficiary or any elections to be made. (Treas.
Regs. Section 20.2010-2T(7)(ii)(A).) For bank and brokerage accounts, the actual valuation of the property is likely to be
readily available. For other assets, valuation may be required for other reasons, including establishing basis for income
tax purposes or for the application of state death taxes. An alternative tax planning strategy for charitable bequests is to give the asset to the surviving spouse, so that he may then make the donation and claim
a deduction for income tax purposes.
Schedule PC, “Protective Claim for Refund,” provides a permissive
method to preserve a claim for deduction under Treas. Regs. Section 20.2053-1(a)(5) for “unresolved claims” against
the estate for either administration expenses or for debts. Schedule PC is required: (1) to be completed separately for each
unresolved claim or expense that may not become deductible under IRC Section 2053 until the limitations period has expired;
and (2) to be filed in duplicate.
Schedule PC has three parts. Part 1 requests general
information concerning the estate, including the number of protective claims being filed with the 706. Part 2 requests information
about the specific claim being reported, including the amount in controversy, the parties, the basis for and a description
of the claim, its status and copies of relevant pleadings or other documents. Given the information requested and the space
provided on Schedule PC, attachments to substantiate the claim will likely be needed. No provision is made for a computation
of the amount of tax reduction or refund due, consistent with the regulatory provision that the protective claim doesn’t
need to state a particular dollar amount or demand an immediate refund.
Schedule PC appears
designed to be filed with the 706 and as a separate, stand-alone filing. It anticipates multiple filings with respect to specific
claims, with subsequent filings reporting either partial payment or complete resolution of the claim. (See Part 2, lines b
and c.) Once a claim is resolved, the regulations indicate that the resolution is to be reported within a reasonable time.
At Part 3, Schedule PC provides for a listing of any Schedules PC or Forms 843, Claim for Refund, previously filed with respect
to the unresolved claim. A necessary step in the estate administration process will be filing refund claims to follow up on
the estate’s payment of contingent expenses and liabilities as they get resolved. Since Form 843 does provide for the
computation of the refund amount due, in contrast to Schedule PC, it may be the preferred form to file. Hopefully, the instructions
will provide guidance on the coordination of filing these different forms.
Tuesday, September 4, 2012
Estate Planning for Same-Sex Couples and Domestic Partners
Estate Planning for Same-Sex Couples and Domestic Partners
7:40 am hst
While few people enjoy talking about death or disability, basic estate planning is essential for “domestic partners.”
Environment in states where lesbian and gay couples cannot legally marry, the relationships of same-sex
partners are governed generally by contract law. Because of the confusing patchwork of rights afforded to same-sex couples
across state lines, having a comprehensive plan in place covering all aspects of planning is vital.
Estate planning is the
process of compiling a list of assets and obligations and making decisions in a will about how the estate will be distributed
after death. If an individual does not have a will, living trust, or any other legal designation for transferring property,
his or her property will be distributed under the state’s intestacy laws, generally requiring that property pass to
certain specified family members, such a spouse, children, or parents.In
order to protect each other, couples should plan ahead. If the relationship is not recognized by the law, the partners are
not related to each other and intestacy rules will not apply. Lack of proper planning could result in an individual’s
partner being evicted from their home, denied access to shared possessions, or having to wage legal battle against relatives.
Estate and Gift Tax
Under federal law, a married person can transfer unlimited assets to his or her spouse by gift during
his or her lifetime or by bequest at death with no federal gift or estate tax consequences. The same deductions are not available
to same-sex couples. With the passage of the same sex marriage bill, the State of Maryland could soon offer the same protections
from Maryland estate taxes for same-sex married couples. Until that law is enacted, it is important to plan for the potential
imposition of estate or inheritance tax.
Assets Requiring Special Planning
The distributions of retirement plan
assets are generally controlled by the beneficiary designations made by the plan participant.There are strategies available to stretch
out the distributions and resulting income taxes, but not all are available to unmarried partners. A surviving spouse may
roll over a deceased spouse’s retirement plan into his or her own plan, but this option is not available to unmarried
partners. This may result in the distributions (and resulting taxes) beginning sooner than would have been required by a surviving
Life insurance may be a useful tool for unmarried
individuals. Life insurance trusts are useful for a variety of estate planning needs. Properly employed, the proceeds of a
life insurance policy can avoid both income and estate taxes. The proceeds of life insurance are paid to the named beneficiary(ies).The proceeds can be used
to pay estate taxes for someone who did not want to make gifts during life. Also, naming a domestic partner as the beneficiary
in a life insurance policy or life insurance policy owned by a trust may protect their right to inherit if there is a possibility
that a will might be contested.
Powers of Attorney
A financial power of attorney requires that the person choose an agent to make decisions regarding financial
matters and property. This is essential to protect your assets in the event you become physically or mentally unable to handle
financial matters. By naming a partner as your agent for making financial decisions, he or she can act on your behalf to pay
expenses, collect benefits, watch over your investments and file taxes should you be unable. Without this, family members,
rather than your partner, may gain controlling interest in your affairs.
is important for unmarried partners to have legal documents such as wills and powers of attorney in place, and review all
beneficiary designations. Without these documents, partners may not be able to take care of one another in the event of illness
and the survivor may be left with nothing at the first partner’s death. Estate planning is often an uncomfortable topic
to discuss with loved ones. However, properly preparing for such contingencies will bring peace of mind to you and your family.
Tuesday, June 26, 2012
Estate Planning Ain't Just Tax Planning
by Conrad Teitell in Philanthropy Tax E-Letter
11:59 am hst
For information about Conrad Teitell’s publications and lectures visit: taxwisegiving.com. For information about Cummings & Lockwood visit: cl-law.com.
“If you turn on your television and nothing
is happening, do not call a repairman. You have tuned into the U.S. Senate.” — David Brinkley
We know what the taxes on ordinary income, dividends and capital gains are
for 2012. We also know what the increased taxes will be for 2013, if Congress takes no action by the end of this year.
We also know what the gift, estate and generation-skipping transfer
(GST) taxes are for 2012 —and the increased taxes scheduled for 2013, if Congress doesn’t extend the 2012 rules.
We don’t know what Congress will do, if anything, in a lame
duck session after the election; nor what it might do, retroactively, next year.
Getting down to brass tax. Nobody, including Congress, knows what all these taxes will or won’t
be in 2013. So, let’s look at the non-tax aspects of estate planning for the super-rich, merely-rich, comfortable and
Just what is estate planning?
I heard one professional say that estate planning is the orderly and systematic transfer of a client’s wealth and assets
into fees and commissions. That’s estate planning for him. But what about the rest of us?
Simply put, modern-day estate planning addresses how to provide for yourself, your family and
the charitable causes that are important to you right now — in a meaningful way. It also involves providing for retirement,
possible mental or physical incapacity— and providing for your family and continuing your philanthropic legacy after
Estate Planning Essentials
□ Determine your current and estimated down-the-road needs, including retirement and the possibility
□ Make a list of your assets—including cost basis, current fair
market value and how they are owned (separate property, joint property, tenancy in common, community property). How much income
do they pay? Should they be held or sold? Should the type of ownership be changed?
□ List your
debts (including potential federal estate and any state estate taxes) and the assets your estate will use to pay them.
□ Decide on what you wish to pass on to others. Consider the strengths and weaknesses of potential
beneficiaries and their current and future needs.
□ Charitable gifts during life and
by will are an important part of many estate plans. So are charitable plans that pay you and others life income before the
charity gets the gift. You’ll find that the tax laws enable you to be a philanthropist at wholesale cost.
□ Determine who would be appropriate fiduciaries—trustees, executors, guardians for minors and holders of
durable powers of attorney or health-care proxies.
□ Consider the pros and cons of transferring
some assets during your lifetime.
□ Plan for the continuation, sale or transfer of
a business with minimum erosion from taxes and mismanagement.
□ Maintain an up-to-date will
or living trust that will carry out your wishes and minimize administration expenses and taxes on your estate.
□ Review your life insurance and pension plans, including beneficiary designations and payment options.
□ Be sure to have a current living will.
□ Maintain an up-to-date durable health
care power of attorney (a health-care proxy) that empowers the named person to make health care decisions for you if you are
incapable of doing so.
□ Maintain a current durable power of attorney or
trust for financial matters that grants another individual or trust company the power to act on your behalf should you become
□ The 2012 unified gift and estate tax exemption is $5,120,000 per person
and twice that per couple. The GST tax exemption is also $5,120,000 per person. The tax rate for those taxes is 35 percent.
If Congress doesn’t act, the unified exemption and the GST exemption will be $1 million starting in 2013 with a 55 percent
rate (60 percent for a part of larger estates). Caution: With marital and credit shelter trusts
that are often keyed to formulas, major distortions to an estate plan can result if the recent higher exemptions and possible
future lower exemptions (or estate tax repeal) aren’t taken into account.
of unused exemption: Under earlier law, couples had to do complicated estate planning to claim their entire exemption ($7
million for a couple in 2009, for example). For 2011 and 2012 the executor of a deceased spouse’s estate can transfer
any unused exemption to the surviving spouse obviating the need for a credit shelter trust. But, for some estates, portability
won’t be the best plan; and portability only applies for 2011 and 2012. What happens in 2013 and beyond if that law
is not extended?
□ For those individuals who can afford it, take advantage of the $13,000
annual-per-donee gift tax exclusion ($26,000 for married individuals). Gifts that qualify for the annual exclusion don’t
reduce the $5,120,000 unified gift and estate tax exemption or the GST tax exemption. Also, remember the additional annual
exclusions for tuition (paid directly to the educational institution) and for medical expenses (paid directly to the health-care
provider). Caution: Some advisers believe that if the unified gift and estate tax exemption is reduced in 2013 below
the current exemption, part of that exemption could be “clawed back.”
individuals should still consider tax-saving techniques, such as family limited partnerships. And, for some individuals, qualified
personal residence trusts, grantor retained annuity trusts and life insurance trusts can make good tax sense.
□ Consider trusts for yourself and beneficiaries to provide protection from creditors.
□ Keep good financial and tax records.
□ Disclaimers and powers of appointment
can often play an important role in estate plans. They provide flexibility in dealing with a shifting tax picture and changed
family and financial circumstances.
□ Review your plan periodically. Keep an eye on
the ever-changing tax laws, while also taking into account any changed personal, family and financial circumstances.
□ Finally, remember to go about the business of enjoying life.
© Conrad Teitell 2012. This is
not intended as legal, tax, financial or other advice. So, check with your adviser on how the rules apply to you.