Salt Lake City Estate Planning

Estate Planning Challenges In The Wake Of Expiring Tax Laws

The current scheduled changes in the estate and gift tax rates and exemptions have me struggling to come up with some good titles for people with a net worth of $4 to $15 million. How about “midmillionaires,” or “midmills” for short?

In the upcoming year many favorable tax laws are set to expire, and the political winds are blowing with great uncertainty- especially as the election season heats up. Estate planners in particular find themselves on shifting sands when it comes to reading the tea leaves for their clients.

Who do estate planners think are most susceptible to the legal and tax currents this year? Peter Reilly at Forbes has given them a name: the “midmills,” short for the “midmillionaires.” According to Reilly in his article titled Beating The Possible Estate Tax Increase Without Switching To Cat Food - The Midmill Dilemma, this group of taxpayers has a fairly high net worth- somewhere between $4 and $15 million. So, what kind of estate planning should they pursue? After all, the current exemption amount to the estate tax, which is unified with your lifetime gift exemption, is only set at $5.12 million until December 31, 2012. Unfortunately, next year is uncertain.  

The good news is that Peter Reilly is not one to just acknowledge problems. He’s a census-taker too. Consequently, Reilly has compiled the opinions of various Forbes columnists and has weighed in himself. At least one thing is clear: no one is certain about “Midmill Dilemma.” In the end, the dilemma comes down to you, your risk aversion, and the kinds of assets you have.

Regardless of whether one has a few millions at stake or not, we’re all in the same boat. Proper estate planning is a necessary tool for everyone, even when we’re not sure what Congress will throw at us. Talk to a competent estate planning attorney for advice on how to best prepare for potential changes that could be coming. 

Reference: Forbes (May 2, 2012) Beating The Possible Estate Tax Increase Without Switching To Cat Food - The Midmill Dilemma

Consider A “Gun Trust’ For Your Firearms

Traditional estate planning can be problematic when dealing with firearms. The documents used to manage your bank accounts often instruct people to violate laws that pertain to the transfer, possession, and use of firearms. A Gun Trust is an estate planning document that has been designed to help you acquire, manage, use, and transfer firearms, including those restricted by the NFA, while protecting your family and friends from inadvertent violations of state and federal laws.

 

Do you have any firearms that are collectible and likely expensive? Do you have any firearms that are subject to federal regulations on ownership and use? If yes, then careful planning may be required to avoid running afoul of tax and regulatory laws upon your incapacity or death.

Planning to give away your estate property is often about understanding your loved ones and family members, but proper planning is also about understanding the assets you are giving and the snares to avoid. You own different assets in accordance with different laws, so you must take these elements into consideration when giving them away.

Many firearm owners take great pride in their collection and also hope to pass them along to their loved ones. Failing to plan for the legal ownership transfer, however, can result in accidentally triggering illegal transfers. Accordingly, if you own a firearm or even a firearm collection you plan to leave to family or loved ones, then a “gun trust” may be in order. A recent article in AmmoLand, titled A New Breed of Gun Trusts – Protecting Firearms Collectors & Their Collections, makes this point very clearly.

A properly written gun trust can skirt tax and regulatory pitfalls. When drafted correctly, trusts are very powerful and specially-tailored legal tools for giving all sorts of unique assets. If you are interested in creating a gun trust or would just like additional information, contact a competent estate planning attorney. 

Reference: AmmoLand (April 30, 2012) A New Breed of Gun Trusts – Protecting Firearms Collectors & Their Collections

Good News For Transferring Business Interests

The Tax Court has just passed a new technique that closely-held businesses owners —and wealthy families — can use to pass assets to heirs with a minimal amount of taxes and complications. The ruling in the case, Wandry v. Commissioner, is stirring up excitement among experts.

Just between us, isn’t it nice when the IRS loses a case to a taxpayer? For example, the little-guy victory in the landmark case of Wandry v. Commissioner affirms and simplifies a very powerful tool for passing on wealth, especially for the business owner.

While the case and the estate planning tool in the crosshairs have been the subject of previous articles, The Wall Street Journal provided a new explanation of the two in an article appropriately titled “Shielding the Family Business.”

The basic plan for wealth transfer when there is a business involved is to give it in pieces, and that’s precisely the plan that benefits from Wandry v. Commissioner. Giving away the entire business outright is a good way to take a tax hit, since it will invoke a gift tax when you cross certain thresholds during the year and in your lifetime.

There’s currently a lifetime exemption of $5.12 million and an annual exclusion of $13,000. Nevertheless, it’s easy for a business to be worth more than $5.12 M, and using that exclusion in full will drain what you have available against the estate tax later at death. However, by their very nature and structure, business interests are especially amenable to piecemeal ownership transfer. This is because ownership of the business, and therefore the underlying assets owned by the business, is an abstraction, and you can simply gift your interests in the business without a tax hit. For example, you can chip away by giving a usefully small amount, say, $13,000 per year per individual (or whatever number Congress and the IRS set for that year), without gift taxes.

Of course, gifting business ownership is not entirely ideal. Fortunately, that’s what the Wandry v. Commissioner case tries to fix. Gifting exactly $13,000 is pretty easy by simply writing out the figures and name on a check. On the other hand, with an abstraction like business ownership, the gift depends on the value of the business and, more to the point, on the value that you and the IRS agree or disagree about.

If you give $13,000 of ownership on the basis of your valuation, but the IRS adds up $15,000 based on its own valuation, then the IRS might also think you owe a tax (or, alternatively, that your gift/estate tax exemption should erode by that much). As you might have guessed, that’s exactly what happened in the Wandry case. Unfortunately for the IRS, the court held that the Wandrys had clearly intended to give their annual exemption amount and, if there is a new appraisal and higher valuation of the gift, then the excess wasn’t intended to be gifted in the first place.

Obviously, there is much more to this case and more guidance to be gleaned for the business owner. I would recommend reading the original article if you are or will be transferring interests in your business. As always, make sure you engage qualified legal counsel before taking action.

Reference: The Wall Street Journal (April 30, 2012) “Shielding the Family Business”

Reducing Taxes By Minding Your Cost Basis

The cost of being lazy about cost-basis elections seems particularly high right now, given that the markets have generally been trending upward as the new regulations have gone into effect.

Investing and taxation can be tricky things, especially if you have been investing for some time. This can get even trickier when you transfer assets to loved ones or contemplate doing so.

Taxation hinges on a few fundamental numbers, one of which is the cost basis. Given some interesting changes to the law governing cost basis, you may need to rethink your plans.

If you have investment accounts, then you likely are aware of some of the changes that have begun to take effect and will continue to roll out through 2013. One of the most obvious changes was recently addressed in a Morningstar article titled “Beware the Default Method for Cost-Basis Elections.” Are you aware of the difference between the old style of cost basis election and the new possibilities your brokerage firm or mutual fund company can offer?

Essentially, the old system of electing a cost basis was typically in the hands of the investor since they had to track and record their own cost basis on various investments. This meant averaging out the cost basis when selling various stocks at tax time. Now the cost basis is directly reported to the IRS from the firm/broker.

Companies tend to offer the default means of reporting, but since information is going directly to the IRS, this also means there is enough information for specific-share identification in the cost basis election. The Morningstar article offers some interesting math to support why this actually can be advantageous for the crafty planner.

The bottom line is that any trimming you can safely accomplish can secure more favorable capital gains taxation. Why? Because this cost basis carries over into another magic taxation number, the stepped-up basis, when investment assets are transferred. In short, small numerical changes add up and may affect your overall wealth-transfer planning. For more information about how to keep more of your money by paying less in taxes, contact a competent attorney.  

Reference: Morningstar (March 26, 2012) “Beware the Default Method for Cost-Basis Elections”

Expatriates Get A Tax Swat Upon Exit

U.S. citizens or long-term residents who expatriate after June 16, 2008, are treated as having sold all their worldwide property for its fair market value the day before leaving the U.S.

As far as the IRS is concerned, permanently leaving the country is something on the order of dying, because the tax burden is the same.

Here’s the deal: When you expatriate and renounce your US Citizenship, the IRS will treat you as though you sold all of your worldly assets at their fair market value the day before leaving. Consequence: The IRS will tax all such worldly assets as a “capital gain.” Accordingly, this tax event is known as the “exit tax.”

There are certain exclusions, to include the cases involving dual-citizenship or expatriation before age 18.5. Why? Because in either case you wouldn’t qualify as a “covered expatriate.” Additionally, you can escape this taxation if you have an overall value of less than $651,000 of (supposed) income.

Still, if you’re hoping to spend your golden years abroad, then it’s unlikely you will escape the grasp of the IRS by the above exclusions. Nevertheless, planning just might limit how much the IRS can take.

If nothing else, this kind of complete appraisal of your property is consistent with your overall estate planning. So, for those considering expatriation even remotely, why not kill two birds with one stone and make a full inventory of your assets right now. In addition, some strategic gifting may help lower the amount of your assets subject to the “exit tax” should you elect to pull the proverbial trigger.

For more background reading on this subject, consult a recent article in Forbes titled Tax Expatriates: We'll Always Have Paris.

Reference: Forbes (May 1, 2012) “Tax Expatriates: We'll Always Have Paris”

The Disinheritance Dilemma

The motives for cutting a relative out of an estate range from the most primal — hate, abandonment, regret — to the most rational — preservation of wealth and tax considerations.

Planning what to leave behind to loved ones can be a difficult matter since, even with taxes out of the picture, it means explaining your choices and your hopes. On the other hand, planning to specifically disinherit can be all the more difficult.

Inheritance and disinheritance are emotionally charged concepts. The motivations that go into disinheritance are especially complex, as discussed in a recent article in The Trust Advisor titled Why Are Family Members Disinherited?.

Teaching point: If you are considering disinheritance, then it is also important to think about what that means, both for yourself and the excluded heir. There are many reasons to disinherit, some more reasonable than others and some worth abandoning upon meditative reflection.

Still, if you must disinherit, then consider explaining your basis for that decision. While it is your choice and right, your legal documents must be clear and withstand (oftentimes) inevitable legal challenge by the affected heir. For help and information regarding disinheritance, talk with and estate planning attorney. 

Reference: The Trust Advisor (April 15, 2012) “Why Are Family Members Disinherited?”

Business Owners – Exiting Gracefully

The wealth of many boomers is tied up in businesses they own. And that can be a problem when it comes time to retire.

If you’re a small business owner, then you probably speak of your business and your life in the same breath. There’s nothing wrong with that. In fact, you are in good company.

All told, your business is one of the biggest challenges and accomplishments in your life. That said, it’s rare that the business is the only fulfilling thing in your life – there’s family, for one. In addition, do you really want to continue working in and on your business until the day you die, with no retirement or with old-age eventually getting in the way?

With your life and your business so intertwined, it makes it all the more necessary to plan properly.

A recent article in the Wall Street Journal took up this matter in a recent article titled Preparing to Leave. I recommend this article to your reading list because it both warns of mistakes and offers solutions.

To whet your thirst, here are the “mistakes” identified:

1. Creating a business that’s too dependent on the owner.
2. Ignoring the tax benefits of planning ahead.
3. Incorrectly valuing the business.
4. Rushing to accept a rich number.
5. Hiring your brother in law to do the deal.
6. Underestimating the emotional impact of selling a business.

Like one of the old movie matinees, I am going to leave your pondering the solutions to these “cliffhangers.”

In the end, only you know when to hold’em and ergo when to fold’em when it comes to the continuation of your business. However, don’t delay. You, your loved ones and others dependent on the business will be glad you didn’t. For help passing on the torch with your business, contact a competent attorney. 

Reference: The Wall Street Journal (April 29, 2012) “Preparing to Leave”

Death & (Income) Taxes

Death and taxes may be equally inevitable, but the taxman demands the last word. Death does not excuse a final accounting with the IRS. In fact, taxes can further complicate the lives of survivors.

Of the two certainties in life – that is, of death and of taxes –the taxman always gets the grim last word. End-of-life taxes are, moreover, easily among the most onerous. For many loved ones, writing those last few checks to the IRS can be especially tough … and seem to never end. Enter the postmortem income tax return.

The death taxes are one thing, and inheritance taxes are generally another, since they are paid by the inheritor. However, as a recent article in Kiplinger makes clear, there usually is one final income tax return to file for the decedent. I recommend the article, titled Death and Taxes, for your reading.

The burden of filing this final income tax return is something you assign in your will, usually to the executor or administrator, or failing that it falls upon a survivor. Regardless, do not neglect that duty if you occupy one of those roles. Why? Because it is just basic estate planning and administration.

If you are planning your estate or if you are administrating one, this burden is not one to be taken lightly. To make matters worse, the fiduciary is on the hook for any sins of commission or omission. If ever there was a time to retain appropriate legal, accounting and tax advice, then this is one of them.

Bottom line: The income taxes likely are the least of your taxation concerns with the estate, inheritance, gift, and generation-skipping taxes all vying for attention. Unfortunately, that doesn’t diminish the importance of income taxes.

Even if an estate will not be subject to extra taxation, this last rite to the IRS has to be observed. Talk to a competent tax attorney for advice on reducing possible tax liability. 

Reference: Kiplinger (March 2012) “Death and Taxes”

The Separation of Church … And Estate

For many people, estate planning isn't just about financial assets and other practical concerns. It's also about honoring their religious beliefs and passing those values on to family members. However, doing so can be very tricky ground.

Planning your estate may seem like a simple matter of deciding who gets your stuff when you’re gone. What if you are a person of great faith and religious conviction? How does a person of faith plan for his or her estate when life (and especially life beyond) is so much more than mere “stuff”?

The problem of mixing religion and estate planning – that is, the problem of doing it well – is a issue taken up by the Wall Street Journal in an article titled Joining Church and Estate.

If your decisions during life are guided by your faith, then likely your estate decisions will be too. For example, end-of-life, disposition of remains and even charitable giving decisions are oftentimes determined by ones religious beliefs. These are personal decisions that directly impact you and collaterally impact others.

However, an entirely different matter, and one that can be the source of much trouble, are the religiously motivated decisions you may make in regards to others.

Given the numerous alternative planning strategies and tools available to plan your estate, it is possible to make (or attempt to make) religious decisions for your heirs. This is where problems can arise.

In the extreme, you can move beyond encouraging to requiring the observance of certain religious principles, rituals, or lifelong membership in the given religion to secure any inheritance. As the Wall Street Journal article illustrates, this is where problems can arise. In short, requiring heirs to uphold religious principles they do not share can work to undermine them.

The article discusses some particularly poignant examples, and real life court battles, but as a general principle it may be worth avoiding this type of planning. For more detailed information on how best to incorporate your religious beliefs into your estate plan, talk to a competent estate planning attorney. 

Reference: The Wall Street Journal (April 30, 2012) “Joining Church and Estate”

Talking With Your Aging Parents About Finances

Have you ever tried to talk to your aging parent about finances and been told to take a hike? “Just mind your own business. I’ll be fine”.

Taking care of an elderly loved one can be difficult, especially when they are nervous about meeting their own future needs. It’s worse when the issue is money, either for current finances or future planning. Has your elderly loved one ever told you to butt out and not worry?

This is a position many adult children with aging parents will have to face. If you’re in this situation (or fear you may be one day) a recent article in Forbes titled Has Your Aging Parent Told You to "Mind Your Own Business"? is worth a read.

For many Depression-era survivors and baby-boomers, money is an important symbol of control. In addition, for elderly parents who don’t have “enough” money, talking to them about their financial futures can be troubling. In essence, it dis-empowers them. Ironically, this is all the more reason it should be discussed (especially if they will be in need of medical care).

As with every dark cloud, there is a silver lining. Discussions about assets can easily segue into revealing concerns over the meaning of money, and the proper disposition of family assets, or even a family business. 

In the end, there is a psychology to old age and money. I recommend the original article and the examples therein. Practically speaking, however, your parents might have a point – have you taken care of our own (estate planning) business yet? Perhaps if you have your own house in order, you will have more credibility when addressing these issues with your parents.  

For help and information about your own estate plan or how to help an aging parent with his or her estate plan, contact a competent attorney with expertise in elder law. 

Reference: Forbes (April 17, 2012) “Has Your Aging Parent Told You to "Mind Your Own Business"?”