Ok, so it's been a little while. But, if you haven't noticed, there has been a lot going on lately, and the life of a tax lawyer this time of year can be a little busy.
For those of you living under a rock, there is a new tax bill that has been passed by the Senate and is scheduled to be voted on by the House today. There are lots of provisions, but I will focus on the transfer tax portions of the trust.
Under the new tax law -
1. Everyone will be entitled to a $5,000,000 exemption from the estate tax. This exemption will be "unified", which means that an individual can give away a combination of $5,000,000 during life or at death before paying any estate tax. In 2009, a person could give away $3,500,000 at death, but only $1,000,000 during life.
2. The rate of tax for any transfers in excess of $5,000,000 is $35%. This is down from 45% in 2009.
3. The estate tax exemption is "portable." This means that if a person dies and does not use his or her entire $5,000,000 exemption, his or her spouse can use the unused portion. Under prior law, it was possible to use both spouses exemptions, but it required relatively sophisticated planning.
4. For an individual who died (or will die) in 2010, his or her estate has the option of no estate tax and a carryover basis, or an estate tax as outlined above and a stepped-up basis.
So, what does this mean for us in TN? I think the two most important issues to consider for people in TN are the increased gift tax exemption and the portability of estate tax exemption.
1. With a new $5,000,000 exemption from the gift tax, an individual could on Jan. 1, 2011 make a $5,000,000 gift and pay no federal estate tax. This is a great result. We must not forget, though, that TN has its own gift tax, and there is no exemption from the TN gift tax. This means that a $5,000,000 gift would generate $463,400 of tax. This is a pretty big pill to swallow, and most taxpayers will not want to pay this tax.
2. Although the estate tax exemption will be portable, the $1,000,000 exemption from the TN inheritance tax is not portable. Accordingly, in order to take advantage of both spouses' exemptions, it will still be necessary to create a bypass trust at the first death.
While the new tax act appears to be a great deal for the wealthy, it also creates some very interesting issues for people dying in TN.
Thursday, December 16, 2010
Friday, October 8, 2010
End of Year Gifts
This is a good article about end of year gifting.
The federal gift tax rate for gifts in 2010 is (just) 35%, which is really low compared to historical rates. Under current law, the rate increases to 55% on January 1, 2011. Accordingly, for taxpayers whose net worth is sufficiently high that they will likely be subject to estate tax regardless of any law changes, taxable gifts this year could be a really good planning tool. This is especially true for older clients or clients in poor health.
Of course, you should wait until the end of the year (read December 31) to make these gifts, because if you die before the end of year, then the gift tax paid will have been wasted.
The federal gift tax rate for gifts in 2010 is (just) 35%, which is really low compared to historical rates. Under current law, the rate increases to 55% on January 1, 2011. Accordingly, for taxpayers whose net worth is sufficiently high that they will likely be subject to estate tax regardless of any law changes, taxable gifts this year could be a really good planning tool. This is especially true for older clients or clients in poor health.
Of course, you should wait until the end of the year (read December 31) to make these gifts, because if you die before the end of year, then the gift tax paid will have been wasted.
Thursday, October 7, 2010
States are in Favor of the Estate Tax
As I stated in a previous post, I was at the Southern Federal Tax Institute in Atlanta last week, which has a wonderful two-day estate planning program. There were many interesting things said, but one of the things that caught my attention the most related to the reinstatement of the federal estate tax in 2011.
Prior to the Bush tax cuts, the federal estate tax code allowed each decedent a "state death tax credit," which was a credit against the decedent's federal estate tax liability. The purpose of the credit was to give taxpayers a credit for any amounts paid in state death taxes. (Although this was the purpose, the state death tax credit was a specific formula provided in the tax code and was not actually related in any real way to the amount of state death tax a decedent actually paid.)
Most states had a death tax (or inheritance tax or estate tax, etc.) equal to the state federal death tax credit. Accordingly, the state death tax credit really just provided the states with some of the federal estate tax revenue, and did not actually reduce the total estate tax owed by a decedent. For example, let's assume that a decedent owed $100 in federal estate taxes, not including the state death tax credit, and was entitled to a $20 state death tax credit. Without the state death credit, the decedent would owe $100 to the IRS. With the state death tax credit, the decedent would $80 to the IRS and $20 to the state where she died. So, in both scenarios, the decedent was out $100. The only thing that changed was where it went.
When the Bush tax cuts came in, the state death tax credit was repealed. This meant that the death tax revenue for many states went away as well. If the estate tax is reinstated next year as currently scheduled, the state death tax credit comes back too, which means that many states will start receiving estate tax revenue again.
I have always known that the return of the estate tax would benefit many states, but what I did not realize, and learned at SFTI, is that many states are actually lobbying Congress to allow reinstatement of the estate tax as currently scheduled.
Prior to the Bush tax cuts, the federal estate tax code allowed each decedent a "state death tax credit," which was a credit against the decedent's federal estate tax liability. The purpose of the credit was to give taxpayers a credit for any amounts paid in state death taxes. (Although this was the purpose, the state death tax credit was a specific formula provided in the tax code and was not actually related in any real way to the amount of state death tax a decedent actually paid.)
Most states had a death tax (or inheritance tax or estate tax, etc.) equal to the state federal death tax credit. Accordingly, the state death tax credit really just provided the states with some of the federal estate tax revenue, and did not actually reduce the total estate tax owed by a decedent. For example, let's assume that a decedent owed $100 in federal estate taxes, not including the state death tax credit, and was entitled to a $20 state death tax credit. Without the state death credit, the decedent would owe $100 to the IRS. With the state death tax credit, the decedent would $80 to the IRS and $20 to the state where she died. So, in both scenarios, the decedent was out $100. The only thing that changed was where it went.
When the Bush tax cuts came in, the state death tax credit was repealed. This meant that the death tax revenue for many states went away as well. If the estate tax is reinstated next year as currently scheduled, the state death tax credit comes back too, which means that many states will start receiving estate tax revenue again.
I have always known that the return of the estate tax would benefit many states, but what I did not realize, and learned at SFTI, is that many states are actually lobbying Congress to allow reinstatement of the estate tax as currently scheduled.
Wednesday, October 6, 2010
WTH Is Going on with the Estate Tax?
As most everyone knows by know, there is no federal estate tax this year. As part of the 2001 Bush tax cuts, the estate tax was gradually repealed starting in 2001 until complete repeal in 2010. Because of the Congressional budget rules (of which I will spare you), the Republicans did not have enough votes to make the repeal permanent. Instead, without further Congressional action, the estate tax is reinstated beginning next year. In addition, upon reinstatement, the federal estate tax exemption is only $1,000,000 per person (whereas it as $3,500,000 per person last year) and the top rate increases to 55%.
Most everyone thinks that we will have an estate tax next year, but that Congress will act and not allow the exemption to return to $1,000,000. (Of course, this time last year, I counseled clients that there was no way Congress would allow the estate tax to be repealed for a year. So, frankly, no one really knows.) But, the consensus also seems to be that it will be next year before Congress takes action. First, nothing will take place before next month's elections. Then, the universal belief is that the Republicans (who favor repeal) will make substantial gains in Congress this year. Because of this, the Republicans will likely be able to strike a better deal by waiting until the beginning of next year when all their new people are in office, rather than trying to pass some lame-duck legislation before the end of the year. Accordingly, it could be January, February or later before we get any Congressional action, and who knows, maybe nothing will happen.
Most everyone thinks that we will have an estate tax next year, but that Congress will act and not allow the exemption to return to $1,000,000. (Of course, this time last year, I counseled clients that there was no way Congress would allow the estate tax to be repealed for a year. So, frankly, no one really knows.) But, the consensus also seems to be that it will be next year before Congress takes action. First, nothing will take place before next month's elections. Then, the universal belief is that the Republicans (who favor repeal) will make substantial gains in Congress this year. Because of this, the Republicans will likely be able to strike a better deal by waiting until the beginning of next year when all their new people are in office, rather than trying to pass some lame-duck legislation before the end of the year. Accordingly, it could be January, February or later before we get any Congressional action, and who knows, maybe nothing will happen.
Sunday, September 26, 2010
SFTI
Sorry guys that I haven't posted in a few days. I will be in Atlanta for the Southern Federal Tax Institute most of the week and I should learn about quite a few worthy topics to post about.
Friday, September 10, 2010
Valuation, Valuation, Valuation - Part 1
Not unlike the famous question, "What are the three most important things in real estate?", one could easily argue that the three most important things in estate planning are valuation, valuation and valuation. The estate and gift taxes are taxes on the transfer of property. Accordingly, it doesn't take a rocket scientist (or an overeducated lawyer) to see that the lower the value of the property being transferred, the less tax that will be paid.
Based on this simple idea, estate planning lawyers spend a lot of time trying to lower the value of property for transfer tax purposes without actually lowering the value. As you might expect, the IRS doesn't like this very much, and many (and maybe most) of the tax cases in the estate and gift area over the past several years have involved valuation, and primarily a technique called family limited partnerships (FLPs).
It's actually a misnomer to call FLPs a technique. An FLP is just a partnership like any other partnership, which just happens to be owned by members of the same family. Many FLPs are operating businesses, like the family restaurant, hardware store or beauty salon. Where FLPs got their (bad?) name, though, is where they do not hold operating businesses, but instead hold investments assets or other family assets that might not be typically held in a partnership.
The idea (and some might say abuse) goes like this - I will take my brokerage account that has a quantifiable value (and recently has been sinking like brick) of let's say $100. I then form a partnership and contribute the account to the partnership. Now, I don't own a brokerage account anymore. Instead, I own an interest in a partnership that owns a brokerage account. I have placed lots restrictions on this interest that I now own. For example, I cannot get my money back without consent of the other partners and I can't sell the interest without consent of the other partners. By placing these restrictions and others on my interest, such interest is now worth something less than $100. So, when I make a gift of this interest to my daughters, I pay tax on the discounted value of the interest and not $100. As these things typically go, a long time passes and the FLP makes a distribution or is dissolved, and then my daughters receive my original $100, but I paid tax on the lower amount.
So, now that you have the technique down, in Part 2 I will discuss some of the abuses and the IRS attacks on those abuses.
Based on this simple idea, estate planning lawyers spend a lot of time trying to lower the value of property for transfer tax purposes without actually lowering the value. As you might expect, the IRS doesn't like this very much, and many (and maybe most) of the tax cases in the estate and gift area over the past several years have involved valuation, and primarily a technique called family limited partnerships (FLPs).
It's actually a misnomer to call FLPs a technique. An FLP is just a partnership like any other partnership, which just happens to be owned by members of the same family. Many FLPs are operating businesses, like the family restaurant, hardware store or beauty salon. Where FLPs got their (bad?) name, though, is where they do not hold operating businesses, but instead hold investments assets or other family assets that might not be typically held in a partnership.
The idea (and some might say abuse) goes like this - I will take my brokerage account that has a quantifiable value (and recently has been sinking like brick) of let's say $100. I then form a partnership and contribute the account to the partnership. Now, I don't own a brokerage account anymore. Instead, I own an interest in a partnership that owns a brokerage account. I have placed lots restrictions on this interest that I now own. For example, I cannot get my money back without consent of the other partners and I can't sell the interest without consent of the other partners. By placing these restrictions and others on my interest, such interest is now worth something less than $100. So, when I make a gift of this interest to my daughters, I pay tax on the discounted value of the interest and not $100. As these things typically go, a long time passes and the FLP makes a distribution or is dissolved, and then my daughters receive my original $100, but I paid tax on the lower amount.
So, now that you have the technique down, in Part 2 I will discuss some of the abuses and the IRS attacks on those abuses.
Wednesday, September 1, 2010
Mickey Mouse is in Support of the Estate Tax!
Read Abigail Disney's Op-Ed in the USA Today in support of the estate tax here.
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