Cheryl Chapman Henderson, LLC

Why is This the Golden Age of Tax-Free Gift Giving?

There's a time limit on this opportunity for tax-free giving. It expires after the tax year 2025 (unless Congress alters the expiration date). The sooner you exploit this, the more you can give—plus, the more you give away, the smaller your estate gets. It means there is less chance that your estate will have to write a check to the IRS.

 The Street’s recent article, “This Is the Golden Age of Tax-Free Gift Giving,” says the federal government has taxed estates since 1924, and as recently as 2001, the threshold when taxes kicked in was $675,000. This exemption level from taxation has been increased ever since. However, a big increase came from the Tax Cuts and Jobs Act, which took effect in 2018. The Act doubled the exemption level and indexed it to inflation. Anything above the new limits is taxed at 40%. It’s $11.4 million for singles and $22.8 million for married couples in 2019.

Although the exemption for estates is sky-high for now, it never hurts to reduce your estate with gifts to your loved ones. While this is nice for them, it’s also good just-in-case planning. If you were to die in 2026, just after President Elizabeth Warren lowers the exemption to $100,000, your heirs would be pretty upset and would see some hefty estate taxes. However, right now, a spouse can get the entire estate tax-free, regardless of its size. Inheritances are also generally not taxable income for beneficiaries. There’s also the portability of the exemption level between spouses.

As far as the "annual exclusion," the tax-free gift you can give amounts to $15,000. While you can't carry over an unused portion to the next year, there is a multiplier effect for couples with several beneficiaries. For example, both spouses could each give the maximum to a child, or $30,000 total. In addition, they could then do the same thing for the child's own spouse, for another $30,000.

A smart gifting strategy is to place the gift in a trust, so the funds are protected from the beneficiary's creditors (even a former spouse). The givers can also maintain some control over the uses of the money.

For the very generous, the donor could put the proceeds into a "donor" trust (also known as a "grantor" trust), where he or she is responsible for any taxes on income that the gift generates.

However you look at it, right now is the golden age of estate planning and gift giving. Talk with your estate planning attorney to learn how you can make the most of it for your family.

Reference: The Street (February 7, 2019) “This Is the Golden Age of Tax-Free Gift Giving”

What Does the Tax Cuts and Jobs Act Mean for My Estate Plan?

What Does the Tax Cuts and Jobs Act Mean for My Estate Plan?

If you haven’t reexamined your estate plan in light of the changes in the Tax Cuts and Jobs Act, do so now, says The Kansas City Star in its article “Talk to estate attorney about impacts of Tax Cuts and Jobs Act.”

A big change in the tax law is the doubling of the federal estate tax exemption from $5.49 million per person in 2017 to $11.18 million per person in 2018 (or $22.36 million per couple). In 2019, the federal estate tax exemption is $11.4 million per person (or $22.8 million per couple).

You should review any wills or trusts drafted prior to the passing of the 2017 legislation. If the trusts use formulas tied to the federal estate tax exemption, then there could be unintended ramifications because of the new larger exemption amount.

You should also look at trusts drafted prior to 2011 when portability was introduced. This legislation allows for “portability” of the deceased spouse’s unused estate exemption. Therefore, the surviving spouse’s estate can now use any exemption amount that wasn’t used by the first deceased spouse’s estate.

The Tax Cuts and Jobs Act didn’t change the step-up of basis. However, the unintended effects of this “non-event” are potentially more significant now. When the decedent dies, the heir’s cost basis of many assets becomes the value of the asset on the date of their death. Thus, highly appreciated assets that avoided income taxes to the decedent, could also avoid or minimize income taxes to the heirs.

Maintaining the ability for assets to receive a step-up in basis is a more important part of estate planning now, because of the larger federal estate tax exemption. However, note that beneficiaries who inherit assets from a bypass or credit shelter trust upon the surviving spouse’s death don’t benefit from a “second” step-up of basis. Instead, the basis of the heir’s inheritance would be the original basis on the first spouse’s death.

As a result, bypass trusts are much less useful than in the past and could have negative income tax impacts for the heirs. This is particularly true, if the assets appreciated significantly after the first spouse’s death or if there was a relatively long amount of time between spouses’ deaths. If your current trust establishes a bypass trust at your death, you might want to ask your estate attorney about restructuring how the bypass trust is funded for the larger federal estate tax exemption.

If you haven’t looked at your estate planning documents with an estate attorney recently, do it in 2019.

Reference: The Kansas City Star (February 7, 2019) “Talk to estate attorney about impacts of Tax Cuts and Jobs Act”

Are You in the "Sandwich Generation"?

“Have you ever wondered if you are part of the sandwich generation?”

The “sandwich generation” is a generation of people, who are usually in their 30s and 40s. They are caring for their aging parents while supporting their own children. If this sounds like you, then this means you’ve got a lot to worry about. Even if you are not taking financial responsibility for your parents, you are dedicating time and energy, usually willingly.  However, that means there’s less of both for you, your family and your career.

The Press-Enterprise’s article, “3 tips for anyone in the sandwich generation,” offers the following tips to make the “sandwiching” easier on you and your family:

1. Talk About Money Issues. Discuss finances with your children and parents. Perhaps you could go with them to meet with their estate planning attorney. He or she can make sure your parents have all the proper estate planning documents, such as a will, trust, living wills and powers of attorney.

This legal professional will create a plan to lessen or avoid estate taxes and work to ensure that your life's savings and assets are protected from your beneficiaries' creditors after your death and that your legacy is assured.

Estate planning attorneys are accustomed to working with families and navigating the issues between adult children and their aging parents. There is little chance that yours is a unique situation.  It does not mean it is easy, but a skilled attorney will be able to help you and your family deal with whatever situation you face, with dignity and compassion.

2. Get (More) Help. You may get support or assistance to help your parents, your kids, or even yourself. Odds are good that your parents will be reluctant to accept help, so start the process yourself. This could involve hiring a housekeeper for yourself to free up some of your time for things that are more important.

This will give you more time, and your parents won’t feel you are using your finances to assist them. If you have friends and relatives that offer help, take them up on it. Don’t try to do everything yourself.

If your children are old enough, you can also get them involved. Children are surprisingly capable, and sometimes grandparents are more comfortable having grandchildren help with minor chores around the house, where their children’s own actions may seem intrusive.

3. Don’t Feel Guilty. It’s impossible to get to everything. Be sure to take it one day at a time and to take care of yourself.

Reference: (Riverside CA) Press-Enterprise (June 28, 2018) “3 tips for anyone in the sandwich generation”

 

Should My Parents Give Me Title to All of Their Property Before They Die?

“There's a big difference between gifted and inherited assets, and it could cost you in taxes.”

What if parents at retirement age, insist on transferring their assets under their children’s name to avoid estate taxes when they pass away? If they have a primary home, an investment property, and savings accounts that total south of $1 million, are there really any tax advantages to making the changes?

nj.com’s recent article, “This estate planning mistake could mean huge tax bill,” cautions against these drastic moves. These transfers have serious tax consequences, and most of them are not good.

Seniors frequently transfer assets to their children to be eligible for Medicaid, avoid probate, and eliminate estate and inheritance taxes. In New Jersey, until this year, residents were potentially subject to three taxes at death: the federal estate tax, the New Jersey inheritance tax, and the New Jersey estate tax. In 2016, and for the 15 years before that, the New Jersey estate tax was imposed on transfers to children, only if the total estate exceeded $675,000. In 2017, that amount was increased to $2 million. Beginning in 2018, the New Jersey estate tax was repealed.

There is also the inheritance tax in New Jersey, which wasn’t repealed. That tax is only imposed upon inheritances by individuals other than “Class A” beneficiaries. A spouse, child, grandchild, and parent all qualify as “Class A' beneficiaries.” If the child in this example inherits those assets from his parents, there would be no New Jersey inheritance tax. The federal estate tax is not an issue, because it doesn’t apply until an estate exceeds $11.8 million (or $22.36 million for a couple).

There could be the significant harm in making the transfers now rather than waiting for the parents’ deaths. The tax basis of any asset held until death is stepped-up to fair market value. Therefore, if the parents owned the property for many years, paid significantly less than it is worth today, and the building has been completely depreciated, then their tax basis is probably significantly lower than the fair market value.  However, if it were sold today, there would be a significant capital gains tax to be paid. That’s the difference between the sales proceeds received and the owners’ tax basis.

If parents gift the property to the children during their lifetimes, then the kids take the property with a carry-over basis—they’d have the same basis the parents had and would have the same capital gains tax due when sold. However, if the parents hold on to the investment property until their deaths, the children inherit the property with a stepped-up basis. The children could sell the property the next day and completely avoid any capital gains tax. Another option is to hold on to the property after the parents' death and begin to depreciate the building again to decrease any taxes the kids would pay on any rental income. It works the same way for the parents’ primary residence.

Don’t allow parents to make these kinds of decisions, without speaking to an experienced estate planning attorney in your state. They will know the long and short-term tax consequences and help the family plan properly.

Reference: nj.com (April 10, 2018) “This estate planning mistake could mean huge tax bill”

What’s the Best Way to Make a Gift to Family?

“What taxes will be owed if you gift money to family?”

Questions often come up when gifting to children. What are the consequences to the giver and to the recipient? An article from nj.com, “Gift tax consequences for you and your heirs,” begins with the big picture, then looks at the annual gifting amounts and what it means for your taxes and for those of your children.

The IRS considers a gift to be any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) isn’t received in return. However, there are exceptions to this rule. Generally, the following gifts are not taxable:

• Gifts that aren’t more than the annual exclusion for the calendar year;
• Tuition or medical expenses you pay for someone (the educational and medical exclusions);
• Gifts to your spouse;
• Gifts to a political organization for its use; and
• Gifts to qualifying charities are deductible from the value of the gift(s) made.

The federal estate and gift tax exemption is $5.49 million per person this year, which means that a person can leave and/or gift a total of $5.49 million person can leave and/or gift a total of $5.49 million to their heirs without paying federal estate or gift tax. The cutoff will typically increase with inflation each year. Accordingly, the amount will be $5.6 million beginning on January 1, 2018.

Making a gift or leaving your estate to your heirs doesn’t impact your federal income tax. You can’t deduct the value of gifts you make, except for gifts that are deductible charitable contributions.

You must then consider your state taxes. Take, for example, New Jersey. The Garden State has an estate exemption of $2 million in 2017. The state’s estate tax is planned to be repealed entirely in 2018, and New Jersey doesn’t impose a gift tax.

There is a federal annual gift tax exclusion amount that doesn't count toward the lifetime gift exemption. That annual gift tax exclusion amount is $14,000, and has been so since 2013. As a result, a person can give away $14,000 to as many people as he or she would like without a tax issue. Note: That amount is increasing to $15,000, beginning on January 1, 2018.

There’s no gift tax return to be filed, if the annual gifts total $14,000 or less to each individual donee.

If you have questions or are unsure of the current law and how it would impact you, speak to an experienced estate planning attorney.

Reference: nj.com (October 5, 2017) “Gift tax consequences for you and your heirs”

When Do I Start Succession Planning for My Business? How About Yesterday?

“The day you open for business is not a minute too soon to think about your long-term exit strategy–a written plan, including provisions for increasing the value of your business at least five to 10 years ahead of your exit date.”

As a by-product of succession planning, you get a template for running a better business. It’s beneficial to start these preparations right away.

Springfield (MO) Business Journal’s recent article, “Starting a business? Plan your exit now,” advises that you begin with creating a culture of success with your employees, especially the key people. That means fostering an ownership mentality, so they see their critical role in the company’s long-term success and their role in helping that to continue in the future, long and short term.

One of the first steps is to identify who will take over, whether that’s a partner, family member, employee or a purchaser from the outside. For death-of-owner planning, you should draft a buy-sell agreement with an experienced attorney. A buy-sell agreement will include a purchase price formula. That formula needs to be revisited as conditions change.

 The next step is to decide how the buy-sell agreement will be funded. A common option is life insurance. The business owner is the insured, and the successor-owner is the beneficiary. This policy can provide necessary and immediate cash for the successor-owner to purchase the business from a surviving spouse.

If you want an employee or family member to take control at your retirement or death, start with their training and/or experience now in order to get them adequately prepared. You may also consider “stay-put” agreements to keep key managers and employees around to help with the transition to new ownership. You may want to consider a “stay bonus”, in addition to regular pay as an incentive.

Every “death-of-owner” planning scenario also applies to exit plans from the sale of the business. Here are five other contingency planning items:

1. Disability, illness or injury of the owner. With disability/income replacement insurance for the owner, think about business overhead expense insurance. That insurance helps make sure the bills are paid and the doors stay open while you’re out.
2. Death or disability of a key employee. Consider the expense of replacing a top manager or salesperson temporarily or permanently. What revenue would potentially be lost during the transition? Look into key-person life insurance and/or key-person disability insurance.
3. Resignation of a key employee. With an executive bonus plan, a “golden handcuff” can help. One way is to contribute to a cash-value life insurance policy on behalf of the employee. The life insurance component gives the employee’s family important financial protection if she dies, and the cash value can supplement retirement savings one day, if she does not die. This will let the employee see how much she means to the business. Vesting terms in a written agreement will also make the program even stronger, because if she departs before the vesting period is complete, she’ll lose some or all the benefits.
4. Commercial property and casualty insurance. These policies can include business continuation provisions to cover expenses and payroll during any downtime after a catastrophe.
5. Estate planning. From both the perspective of your family and your business, review your estate plan with your attorney to be certain you’ve addressed all aspects of your plan: estate tax and gift tax, probate avoidance, your will, trusts, powers of attorney and any other estate planning documents.

Start your planning now to address potential pitfalls with your business to experience a smooth, successful business transition.

Reference: Springfield (MO) Business Journal (October 2, 2017) “Starting a business? Plan your exit now”

Garmin Heir Uses Grantor-Retained Annuity Trust in Stock Transactions

“Garmin International Inc. founder Gary Burrell’s son moved more than $19 million of the company’s stock in a string of insider transactions earlier this month.”

Jonathan Burrell of Kansas City is listed as the second-largest beneficial owner of Garmin stock with about 14.5% of outstanding shares. He has total beneficial ownership of more than 27 million shares, according to a September 13 filing with the SEC. Much of this stock is held by various family trusts. Burrell is a trustee of many of these family trusts.

The Kansas City Business Journal’s recent report, “Founder's son moves more than $19M in Garmin stock,” says that in September, Burrell made four insider transactions: On Sept. 1 he moved 844,800 shares from several grantor-retained annuity trusts (GRATs) created by his mother, Judith Burrell, into her revocable trust. He’s a co-trustee for both of those trusts.

Burrell sold 127,000 shares on September 11 from the grantor-retained annuity trusts (GRAT) for a total value of $6.64 million. A day later, he sold another 127,000 shares. Finally, on September 13, Burrell sold another 126,000 shares. That adds up to a total of about $19.83 million in stock.

The grantor-retained annuity trusts—or “GRATs”—are an estate planning tool used to retain the right to get back assets over time.

Estate planning attorneys will tell you that the assets that are put in will appreciate rapidly, and the more appreciation there is, the more will pass through free of estate and gift tax to beneficiaries. A liquidation of assets within the GRAT could be due to an investment decision to sell that particular stock and isn’t necessary for the trust itself.

The term for Burrell’s GRATs isn’t given, but once the annuity term ends, the remaining assets can be distributed free of gift taxes.  However, in the event that the donor doesn’t survive the annuity term, some of the assets would be subject to the estate tax. In some instances, a shareholder might create multiple short-term GRATs of about two to eight years to close as many as possible. More than 10 million shares are in the GRATs established by Judith Burrell, according to the SEC filing.

A portion of the shares (8.7 million) are in several charitable lead annuity trusts. These trusts will disburse funding to charity for a set amount of time. If the investment returns are better over time, the remainder passes to beneficiaries tax-free. It’s not clear who the charitable beneficiary is here; although Gary Burrell has donated a large amount—over $50 million in one year—he’s been silent about his philanthropy.

Reference: Kansas City Business Journal (September 25, 2017) “Founder's son moves more than $19M in Garmin stock”

Clearing Up Misconceptions about Giving

“The Internal Revenue Service has very specific rules for gifting that can be beneficial to the giver, when used properly.”

Questions frequently come up during estate planning about making monetary gifts to others. They include:

• How much of my money can I give away each year?
• What are the taxes for gifting?
• Does the recipient have to pay tax on the money they get?

The Newark Advocate’s recent article, “Clarifying gifting tax misconceptions,” explains that in 2017, a person can give up to $14,000 per recipient per year without having to file a Form 709 gift tax return. A married couple may give $14,000 each or $28,000 total per recipient each year.

There aren’t any restrictions on the amount of money that you can give someone.  However, if you give more than $14,000 per person, it must be reported as a gift. The giver must file a 709 gift tax return for that year to report the exceeding amount.

A common misunderstanding in this area is that someone has to pay tax on the amount recorded. This is not true. The gift amount simply is counted against and reduces the person’s federal estate tax exemption amount. That amount is $5.49 million per individual in 2017.

 Since the gift tax and estate tax exemptions are intermixed, if you gift $1 million over and above the annual gift exclusion amount throughout your lifetime, at your death, your federal estate tax exemption amount would be reduced to $4.49 million. Your estate would have to pay a tax at 40% on the assets above $4.49 million. If, during your lifetime, you use up your $5.49 million gift exemption, you’ll need to pay tax on any additional reportable gifts you make.

Remember, however, that a deceased spouse can pass their unused estate tax exemption to their surviving spouse. As a result, the survivor could have a maximum of $10.98 million of estate tax exemption at death, if it wasn’t previously used up due to taxable gifts reported on the Form 709 return.

Therefore, just give no more than $14,000 per person per year and you won’t have to be concerned about filing a gift tax return or decreasing your allotted federal estate tax exemption amount.  Regardless of the amount, the recipient does not have to pay tax on the gift received.

Reference: Newark Advocate

Should I Use a Trust to Avoid Probate?

“The vilification of probate extends nationwide and affects everyone’s perceptions.”

Progressive states like California have led the charge in finding and implementing methods and techniques to avoid probate, reports The PV Democrat in its recent article entitled “Avoiding probate - panacea or problem.”

We’ve seen numerous articles that discuss the role of trusts in estate planning, which frequently advise you to make every effort to avoid probate. But this isn’t always the right answer.

Probate is a court process that’s designed to protect your intentions for the distribution of your assets after death. It gives finality to creditor claims against the estate and authorizes the probate court to insure compliance with a decedent’s wishes. It requires that an individual’s financial assets be defined, insures that they’ll be given to the proper persons and provides a procedure for protecting the distribution that was planned by the decedent.

There are some risks in using a trust rather than going through probate. They include these items:

Legal Contests. When someone is left out of a trust or if the trust assets are improperly restricted in their use, then he or she can initiate a contest. Undue influence is frequently alleged when a trust is created just before death.

Probate Protections. A will requires two or more witnesses, written testimony of the witnesses and must be notarized in some states.  However, a trust can be created with just a signature and even implied in some instances with no written document. Therefore, it may be easier to create an improper trust than an improper will.

The Potential for Mistake and Misuse. If the document is a trust, a transfer on death account (TOD), a joint ownership or a simple deed, it is easier to have an elderly loved one sign a single document like a trust, instead of trying to have him or her pass the scrutiny of two witnesses and a notary, as required for a will.

The use of estate planning techniques other than a will and probate may often be simpler and perhaps easier to implement and administer after death.  However, they need to be carefully planned and completed well in advance of death. Otherwise, it can mean family conflicts and court challenges. Work with an experienced estate planning attorney and see if a trust is right for your situation.

Reference: (Pauls Valley OK) PV Democrat ((September 27, 2017) “Avoiding probate - panacea or problem”

 

Does Your State Impose an Inheritance Tax?

“Using gifts during your lifetime to avoid the inheritance tax may be a smart idea, but it's not without possible risks.”

New Jersey is one of the few states that still imposes an inheritance tax, says NJ.com in the article titled “How to avoid the inheritance tax.” The inheritance tax isn’t based on the size of the estate—but rather on who receives the proceeds.

New Jersey doesn’t impose an inheritance tax on transfers to a parent, grandparent, spouse, domestic partner, child, step-child or grandchild. These are all Class "A" beneficiaries. However, an inheritance tax is imposed on transfers to a niece or nephew, who are considered Class "D" beneficiaries. The tax rate is about 15 or 16%, depending on the amount transferred.

An important point to remember is that all transfers made within three years of death, are presumed to be “in contemplation of death.” These transfers may also be subject to inheritance tax. In addition, transfers designed to take effect at or after death are included in a person's estate for inheritance tax purposes.

One way to get around some inheritance taxes is to gift funds to your relatives during your lifetime. You can make outright gifts or pay for a family member’s medical costs or educational expenses. Inheritance taxes can also be avoided with an irrevocable trust in some situations. With this type of trust, you must give up control and use of the assets placed in a trust.

An individual can make annual gifts of $14,000 per person without any gift taxes. If the annual gift exceeds $14,000, the excess amount will utilize a portion of the individual's estate and gift tax exemption of $5.49 million.

There is no limit on gifts used to pay for someone's medical or educational expenses, if payment goes directly to the medical provider or school.

Reference: NJ.com (July 14, 2017) “How to avoid the inheritance tax”