Tag: estate planning

Now Is the Time To Revisit Your Estate Plan

Posted by Maria T. Rollins on August 20, 2020

COVID-19 has made estate planning even more complicated. Here’s what you need to know now.

The physical and financial health challenges caused by the COVID-19 pandemic gave us time to rethink our priorities and expectations. Estate planning is one area that has received a lot of attention, and for good reason. Here are three basic areas to review as you reassess your estate plan:

Document review: Are the papers in place?

The COVID-19 crisis has caused many people to recognize that things can happen unexpectedly that turn your life upside down. Review your estate plan — or create one if you don’t have one in place. The documents that should be reassessed include the following:

Your health care directive. This document, which is sometimes called by different names, memorializes your wishes concerning your medical treatment should you become ill or incapacitated. It includes directives about your end-of-life wishes as well as other decisions about your care and treatment. It also names the individuals you want to act on your behalf if you are incapacitated and gives them the right to access your medical records. The latter point is especially important because without a legal document in place, privacy laws may prevent a hospital or doctor from releasing your records to them.
Your durable power of attorney. This document allows you to designate an agent to access your assets and act on your behalf regarding financial decisions if you are incapacitated.
Your will and trusts. Reviewing these documents is especially important if there have been changes in your family or financial situation since the documents were originally executed.

Financial review: Make sure you’re on track

Historically low interest rates make this a good time to review the financial aspects of your estate plan. Some tax planning strategies have become more advantageous because of the current financial and economic environment. These include:

Considering intra-family loans to children or certain trusts. The interest rate for these loans uses the applicable federal rate, which is the lowest interest rate that can be charged on a loan. The proceeds of the loan can be used for purposes ranging from purchasing company shares to funding a mortgage. There are pros and cons to these loans that need to be considered, but overall they can be very attractive at current interest rates.
Creating one or more grantor-retained annuity trusts allows the grantor to transfer assets to a trust for a term of years in exchange for an annual annuity. This annuity is taxed at the IRC § 7520 rate, which is based on the AFR.
Converting a traditional IRA to a Roth IRA is another consideration, since the income tax on the conversion is based on the IRA’s value at the time of conversion. Doing the conversion when the assets’ value is lower can substantially reduce the income tax cost.

Seek expert advice

All these aspects are complicated. Before making any decisions, be sure to discuss your specific situation with your financial and legal advisors. Your specific goals and circumstances will guide the decisions that are best for you, your family and your beneficiaries. But one thing is certain — when the times change, your circumstances do too. Remember, KRS CPAs is available to help with your estate planning.

How to Avoid the Top 10 Estate Planning Errors

Posted by Maria T. Rollins on November 25, 2019

Myths and misconceptions about estate planning abound.

Here are the most common mistakes to avoid and help your family save thousands of dollars in unnecessary taxes and probate fees: How to Avoid the Top 10 Estate Planning Errors

Beneficiary omissions — Not naming contingent beneficiaries or failing to review beneficiaries often enough. This may subject your estate to probate, creditors and delays.
No stretch IRA — No contingent beneficiary on an IRA may mean there is no stretch IRA, a valuable tax break that enables someone who inherits an IRA to draw out distributions over his or her life expectancy if the original beneficiary has died.
Forgetting to change an ex-spouse on an IRA — Your new spouse becomes your beneficiary the day you get married, but not in an IRA. This can have disastrous consequences for your new spouse and family.
Leaving assets directly to a minor without dealing with guardianship issues — Who will handle their inheritance? The phrase “for their benefit” welcomes a whole host of potentially abusive interpretations.
Ownership mistakes and imbalances — If too many assets are in one spouse’s name, it could wreak havoc with tax planning. One spouse may have a much larger IRA and own a vacation house in his or her name only. By shifting the house or investment to the other spouse, the estate becomes more equalized, possibly reducing taxes.
Not having a residuary clause — A residuary clause covers items not named in a will or included in a trust. These can include items you don’t yet own but will before your death. Sometimes there are things you might not even know you own.
Not planning for the unexpected — There are a multitude of things that could happen, such as a sudden decline in your spouse’s health or a change in your assets. You can address this by having assets go to a trust. You can control how, to whom, and when money gets distributed.
Not dealing with your own mortality — Don’t leave your family ruined because you don’t want to admit to yourself you are going to die someday. Don’t make matters worse by failing to plan.
Not updating your will — Many changes take place within a family or business structure. Ensure the assets you leave behind are given to the people you intended to have them.
Not planning for disability — An unexpected long-term disability can affect your personal and financial affairs in many ways. Decisions such as who will handle your finances, raise your children, or make health care decisions on your behalf are essential. It may be necessary to appoint a power of attorney or create a living trust to work on your behalf if you’re unable to do it for yourself.

Estate plans maximize value

You can benefit from having an estate plan. Not only can it help maximize the actual value of the estate you pass on to your heirs and beneficiaries, but you’ll also have an opportunity to make informed decisions while you are still alive concerning how your assets should be handled when you pass.

KRS has your back on estate planning

It’s never too early to start thinking about estate planning. KRS CPAs offers unbiased financial and tax guidance to help you realize your specific goals and vision. Contact us today for a complimentary initial consultation.

KRSCPAS.com is accessible from your mobile device and is loaded with tax guides, blogs, and other resources to help you succeed. Check it out today!

Estate Planning for Those Under 40

Posted by Maria T. Rollins on October 8, 2019

The earlier you start planning, the more choices you’ll have

Get started on estate planning while you're young saves hassles later We all live as if we have decades ahead of us, dealing with the present — we can’t know the future. And that’s why now is a great time to get a jump on estate planning.

Do your family and loved ones know what accounts you have, where your financial information is and what your wishes are? Now is the time to tell them. If you start now, your plan will help keep your loved ones from becoming stressed if you suddenly become disabled or pass away.

Learning about estate planning

You can begin to educate yourself about estate planning. For instance, what should you be looking for in an estate planning attorney? You can interview several to see whom you feel most comfortable with. You can also explore estate planning strategies: Some organizations have free small-group events to share an understanding of the basics of estate planning.

You can start formulating how you’d want to be memorialized — how about creating a recording to share with your loved ones to help them by making the tough decisions in advance?

Getting started on your plan

Estate planning isn’t just for wealthy people — you don’t have to wait until you build up more savings. You may have a child or spouse who is financially dependent on you, so you don’t want to ignore your estate plan. Take these steps to be proactive:

Designate beneficiaries.
Designate a health care proxy to make medical decisions for you if you can’t.
Review asset titling — titling assets jointly with rights of survivorship is an easy way to ensure that your property passes to your heirs without delay.
Consider establishing a trust — in many ways these can be even more effective tools than wills.
Do some tax planning — although the federal estate tax affects only the wealthiest people, there are other tax issues, including state estate taxes.
Select guardians to care for minor children.
Plan ahead — an accident can result in an inability to make legal decisions; a durable power of attorney will name someone to act in your place if you are incapacitated.

Documents for your plan

Among the documents that are part of an estate plan, consider a will, life insurance, and a power of attorney. You can think of a will as a road map outlining how your property will be distributed if you’re disabled or die. Meet with an attorney and tell her or him what your assets are, who you want to leave them to, and that you want it all to be simple.

In crafting a will, name a trusted friend or family member as the executor to help shepherd your estate through any court-supervised process, such as probate. You may want to consider life insurance, particularly because you haven’t accumulated lots of money yet. You’d want your family to have assets to live on. You can choose a less expensive option such as a term policy for a set number of years.

We’ve got your back on estate planning

It’s never too early to start thinking about estate planning. KRS CPAs offers unbiased financial and tax guidance to help you realize your specific goals and vision. Contact KRS managing partner Maria Rollins at mrollins@krscpas.com or 201.655.7411 to discuss your situation.

Estate and Gift Tax Update: No Clawback After Increased Transfer Limit Expires

Posted by Gerald A. Shanker on December 3, 2018

Estate and Gift Tax Update: No Clawback After Increased Transfer Limit Expires The Tax Cuts and Jobs Act of 2017 (“TCJA”) increased the lifetime estate and gift tax amount that may be transferred free from $5 million to $10 million per taxpayer, indexed for inflation. This increased exemption applies to transfers made between January 1, 2018 and December 31, 2025. On January 1, 2026, the lifetime exemption reverts to $5 million.

The IRS recently announced that the 2019 inflation adjusted exemption amount is $11.4 million, which allows a married couple to shield $22.8 million from transfer tax.

Because the increased tax exemption was temporary, there was uncertainty whether gifts exceeding $5 million made under these provisions would be clawed back into the estates of decedents dying after the 2025 expiration of the increased exemption amount. In other words, if you made a $10 million gift in 2025 and died in 2027 when the exemption is $5 million, would your estate owe tax on the $5 million excess?

On November 25, 2018, the IRS answered this question with the issuance of proposed regulations, which indicate that gifts made before January 1, 2026, will not be clawed back to the estates of decedents dying after December 31, 2025. The issuance of these proposed regulations strengthens a tremendous opportunity for the tax-free transfer of wealth, including ownership interests in closely held businesses.

Gifting closely held business interests

For those considering gifting closely held business interests, the process is more complicated than gifting assets such as marketable securities, the fair market value of which is readily determinable. To gift a business ownership interest, a valuation of the business and the gifted interest must be performed by a qualified business appraiser. Although 2025 is distant, those who wait until the last minute may encounter problems obtaining the required business valuation. You may recall 2016, when the IRS proposed rules eliminating valuation discounts in estate and gift valuations. There was a mad rush to get valuation reports completed, with limited capacity to complete this work.

We’ve got your back

If you have a large estate, this is a tremendous opportunity to save transfer taxes, which get to a 40% tax rate very quickly. If your estate includes a closely held business, you would benefit by starting the process sooner rather than later. Once this opportunity is gone, it will be gone for good. Contact your advisors today to get the process going.

Estate Tax Implications for Foreign Investors in US Real Estate

Posted by Simon Filip on June 14, 2018

Estate taxes for US persons

An estate of a US citizen or resident alien is subject to an estate tax based upon the value of the worldwide property, owned or subject to certain rights or powers by the decedent on the date of death. The estate tax rate for 2018 is 40% for taxable estates in excess of an $11.18 million exemption, which is adjusted annually for inflation. Estate Tax Implications for Foreign Investors in US Real Estate

A US estate may also deduct from the taxable estate a marital deduction equal to the value of property left to a surviving spouse. The amount of lifetime taxable gifts during the decedent’s life is also included in calculating the gross estate.

Non-resident aliens and their estate taxes

While US citizens and residents are subject to worldwide estate and gift taxation on their gratuitous transfers, non-residents (persons who are neither US citizens nor US domiciliaries) are only subject to the US estate tax on property that is situated, or deemed situated, in the United States.

The gross estate of a Non-Resident Alien (“NRA”) includes all tangible and intangible property situated in the US, in which the decedent has an interest at the time of his death or over which he has certain rights or powers.

The taxable estate of an NRA is taxed at rates up to 40% of the value of estate in excess of a $60,000 exemption. Additionally, the estate of an NRA is generally not allowed a marital deduction unless the surviving spouse is a US citizen.

US property included in an NRA’s estate includes US real property owned or under his control and interests in US partnerships (including those holding positions in real property).

It is important to note the US does have estate tax treaties with multiple countries including Canada, France, Germany, Greece, Italy, Japan, and the UK, amongst others. These treaties may provide estate tax relief to residents of treaty jurisdictions.

Non-citizen spouse

When your spouse is not a US citizen, the unlimited marital deduction is unavailable. This is true regardless of whether or not the decedent is an American citizen. The result is the $11.18 million exemption is unavailable and the entire estate transferred to a non-citizen spouse would be subject to estate tax. With advance planning, the non-citizen spouse estate tax implication can be reduced or eliminated.

Planning to reduce estate taxes

There are several structures that will avoid or minimize the US estate tax of a Non-Resident Alien:

The property can be held in the name of a foreign corporation.
The property can be held in an irrevocable trust or a trust whose assets would not be included in the settlor’s gross estate for US estate tax purposes.
The title can be held in a two-tier structure with the property in the name of an American company (US real property Holding Corporation) whose shares are held by an offshore company.

Although these structures are intended to avoid the US estate tax, the structures may result in the unintended consequence of higher taxes on sale, rental income, and, in some jurisdictions, franchise taxes.

We’ve got your back

If you are a Non-Resident Alien, we can help you plan so that your estate pays no more tax than necessary, while avoiding those unintended consequences. Contact Simon Filip, the Real Estate Tax Guy, at sfilip@krscpas.com or 201.655.7411 today.

Will Your Taxable Gain Be Calculated Properly? Make Sure You Are Using The Correct Basis

Posted by Simon Filip on September 14, 2016

The rules for basis, or the value of an asset used for computing tax gain or loss when an asset is sold or transferred, can be complicated. Here’s what you need to know.

Background on Basis

When a taxpayer sells an asset, such as shares of stock, capital gains tax may be owed on the difference between the purchase price (basis) and the sales price. For inherited assets, taxpayers receive “step up” tax basis to the value at the time of the benefactor’s death. The Internal Revenue Code allows certain inherited property to receive a new tax basis equal to the fair market value of the property as of the date of death. This means if appreciated inherited property is sold immediately, there will be no capital gain, or later, all pre-inheritance appreciation is excluded from taxation.

taxable gains differ for inherited versus gifted assets Property gifted during a taxpayer’s lifetime receives a carryover basis, that is, the gift recipient takes the same basis as that of the donor. This means the recipient of the gift takes the same tax basis in the property as it had when owned by the decedent. Consequently, the increase in value of the property that occurred during the decedent’s lifetime is subject to federal and state taxes when the property is sold.

Basis for Real Estate

Current law provides that the income tax basis of real estate owned by a decedent at death is adjusted (“stepped up” or “stepped down”) to its fair market value at the date of the decedent’s death. Real estate which is gifted causes the donees to have the same tax basis in the gifted real estate as that real estate’s basis would have been in the hands of the donor. There is an exception if the tax basis is greater than the fair market value at the time of the gift.

Partnership Interests

Adjustments to basis do not only occur as a result of death. When a taxpayer purchases an existing partner’s partnership interest, the amount paid becomes the basis for the purchaser’s partnership interest (“outside” basis). The new partner assumes the seller’s share of the partnership’s adjusted basis in its property (“inside” basis), commonly referred to as stepping in the shoes of the partner or capital account. If the partnership’s assets have appreciated substantially, the difference between the new partner’s inside and outside basis can be substantial.

The disparity between the inside basis and outside basis can deprive the incoming partner from depreciation deductions. To remedy this situation, the partnership may make a 754 election, which allocates the purchase price or fair market value of the partnership interest to the new partner’s share of partnership assets. If this election is made, additional depreciation and amortization resulting from the basis adjustment is specially allocated to the new partner, giving him or her additional tax deductions. A 754 election must be made by the partnership. Once made, it is binding on all future transfers of partnership interests.

The rules related to tax basis in assets upon death and purchase are complex and should be reviewed with a tax adviser. Contact me at sfilip@krscpas.com if I can assist you.

Treasury Proposes New Tax Regulations to Limit Discounts in Intra-Family Wealth Transfers

Posted by Gerald A. Shanker on August 15, 2016

Proposed Regs Would Impact Family Limited Partnerships

A popular tax saving technique used by wealthy taxpayers involves transferring assets such as real estate or securities to a family limited partnership, followed by a gift of partnership interests to family members. For estate and gift tax purposes, the value of partnership interest transfers are discounted, that is the transfers are reported for less than the value of the underlying partnership assets.

Discounts are permitted because partnership interests transferred are minority interests and also subject to significant restrictions, such as restrictions on transferability of the partnership interest. Although the Internal Revenue Service has contested these discounts, Federal Courts have consistently allowed discounts in the 30% to 35% range for cases with the correct fact pattern.

Last week, the Treasury issued proposed regulations which, if adopted, would severely limit taxpayers’ ability to discount for intra-family wealth transfers. As they would affect family limited partnerships, the proposed regulations would require that in family controlled entities, many of the restrictions giving rise to discounts would be disregarded, effectively eliminating such discounts. If discounts are eliminated, property transfers would be at fair market value of the underlying property, potentially resulting in increased federal estate and gift taxes.

Now Is the Time to Transfer Wealth to Family Members

The proposed regulations are subject to a 90-day public comment period, and will not go into effect until the comments are considered and then 30 days after the regulations are finalized. If you have a federally taxable estate and are considering wealth transfers, now is the time to do it. Although there is uncertainty whether the proposed regulations will be adopted, and if they are adopted what the final version will say, the window may be closing on an opportunity for intra-family wealth transfers at a greatly reduced transfer tax cost.

If your estate is close to being taxable, act quickly and contact your tax advisors. Once this window is closed, it may never open again.

Prince Died Without a Will – Why Estate Taxes Get Complicated

Posted by Maria T. Rollins on August 5, 2016

What happens to the estate when someone dies without a will?

Usually when a famous person dies, news of their death travels fast, far and wide. Living relatives and those claiming to be relatives will come forward staking their claim on estate assets.

If you die without a will or trust, you have died “intestate” and state law will determine how your assets are distributed. State law will provide a hierarchy of beneficiaries to which an intestate estate will be distributed. The state intestate succession law will only apply to those assets that would have passed through your will, known as “probate” assets, which you owned at the time of your death.

For example, some accounts you own may have named designated beneficiaries, such as an IRA or life insurance policy. Such assets will be distributed to the named beneficiaries. Also, joint assets and “paid on death” accounts will also pass to the joint or paid on death holder even if there is no will.

If you die without a will in New Jersey, determining who gets what depends upon factors such as: do you have a living spouse, children, parents or other close relatives. It can get complicated with blended families, children from multiple marriages, half and whole siblings and their decedents. Click here to see the NJ intestate succession law. In NJ, if you die without a will and do not have any close family your property will “escheat” to the state coffers.

Dying without a will is costly

Unless your estate is insubstantial, if you die without a will the Surrogate Court will appoint an estate administrator. It is the administrator’s responsibility to secure your assets, pay any debts and taxes as well as search for any heirs. Administrators will be paid by the estate for their services.

Prince’s estate could be worth in excess of $150 million and most likely will earn millions over years to come. At the time of his death, he was known to have a sister and half-siblings. His parents were deceased and he had two ex-wives. Rumors surfaced that he may indeed have a child born out of wedlock and at least one individual claimed he was Prince’s son. Under Minnesota inheritance law all siblings are treated equally. Without a will and clear instructions as to how Prince wanted his assets to be distributed, most likely there will be a will contest over the estate. Litigation is expensive. The attorneys are sure to benefit along with the State and Federal governments due to the lack of estate planning and tax minimization strategy he could have had in place.

Who should have a will?

If you want your assets to be distributed in a manner of your choosing, you will need a will or a living trust. Your will appoints an “executor” who you choose to be in charge of securing your assets, filing and paying any taxes, and distributing your assets as you have instructed. Of great importance, a will makes it easier for your loved ones to work it all out.

If you have minor children your will can provide for the guardianship of those children. A will can also provide an opportunity for estate planning, potentially reducing estate or inheritance taxes. You may believe your estate is not large enough to require a will. That may not be so true in a state like New Jersey that taxes estates in excess of $675,000 in addition to collecting an inheritance tax on certain family member beneficiaries. The process of preparing a will can also provide an opportunity to review designated beneficiaries on any retirement accounts and life insurance policies, and to determine if you have adequate life insurance coverage.

At KRS, we work with individuals in developing tax minimizing strategies for current taxes as well as estate tax planning, estate administration and estate tax compliance. Visit our website to download our executor’s checklist for more information regarding the estate administration process.

Family Limited Partnership May Result in Significant Estate Tax Reduction

Posted by Gerald A. Shanker on August 1, 2016

When Natale Giustina died in 2005, he owned a 41% limited partner interest in a partnership named Giustina Land & Timber Co. Limited Partnership. The partnership owned 47,939 acres of timberland and had 12 to 15 employees. It earned profits from growing trees, cutting them down, and selling the logs. The partnership had continuously operated this business since its formation in 1980.

All limited partners in Giustina Land were members of the same family, or trusts for the benefit of members of the family. The partnership agreement provided that a limited partner interest could be transferred only to another limited partner or to a trust for the benefit of another limited partner unless the transfer was approved by the two general partners.

Although this case has a long history, the final decision determined the value based entirely on the partnership’s value as a going concern, which is the present value of the cash flows the partnership would receive if it were to continue operations. To put it another way, the value was determined based on the cash that a partner would receive from company operations rather than would might be received if the partnership assets were sold and the proceeds distributed to the partners.

For twenty-five years, general partners Larry Giustina and James Giustina ran the partnership as an operating business. The court was convinced that these two men would refuse to permit someone who was not interested in having the partnership continue its business to become a limited partner. Therefore, the only cash flow available to limited partners is the cash flow from operations. In determining the value of the partnership, the court applied a 14% capitalization rate to $6,333,600 projected normalized pre-tax cash flows to arrive at a value of $45,240,000. This value is over $105 million less than the value of the partnership assets.

Why the taxpayer prevailed

Valuation cases, especially those involving family partnerships, are very fact specific. The taxpayer prevailed in this case because the business had operated continuously for twenty-five years, and there was no indication that it would not continue to operate. The asset value was not considered the valuation because the only way that a limited partner could receive the asset value was on the dissolution of the partnership, which the court concluded was unlikely.

The taxpayer’s position in this case was strengthened by the fact that the partnership had been operating a business for twenty-five years. There is no requirement that a partnership operate for this length of time, however, a partnership formed shortly before death or asset transfer may be more susceptible to successful IRS challenge. Also, to be respected by the IRS, a family partnership must have a business purpose. Tax reduction does not qualify as a business purpose.

With proper planning, a family limited partnership may be an effective option to reduce estate and gift taxes. However, there are many technical requirements. If you are interested in establishing a family limited partnership, you should consult a tax professional.