Mark A. Bregman, Estates and Trusts Lawyer


President Obama’s So Called Trust Fund Tax Proposal

I usually refrain from commenting about proposals making changes to the tax code that, in my opinion, have no chance of passing in the current Congress.  But I am making an exception in this case because within the majorly flawed proposal is a kernel of truth that is intriguing.

As background, you should be aware that every March when the President submits his budget to Congress, the “Green Book” contains tax proposals.  Anyone who cares about this is aware that every year the President, not just Obama, but Presidents before him, include proposals that commentators like to rate from likely, to possible, to dead on arrival.  Most proposals to change the tax code are DOA.  President Obama’s favorites include eliminating zero out GRATs, reducing the applicable exclusion amount, and raising the estate tax rate.  Without commenting on the efficacy of any single proposal, I call such proposals wishful thinking at best and campaign fund raising programs at the most cynical.

It is within this context that the most recent proposal must be evaluated.

It is woefully misnamed because it has nothing to do with trusts.  In fact, it will promote even more trusts.  The catch-phrase “trust fund loophole” is politic-speak for taxing rich trust funders.  It certainly caught the attention of a lot of you.

The proposal, wrapped in so much doubletalk, is actually quite elegant, but so ill-conceived as to be meaningless in its present form.

The proposal treats death as a recognition event.  Appreciated assets would be subject to capital gains taxation at the death of the owner.

Retirement accounts would not be affected.  The proposal affects folks with appreciated assets other than retirement accounts.

This proposal is already the system used in Canada which has no estate tax.  However, the President’s proposal did not propose eliminating the estate tax.  Therein lays the tale.

Taxing appreciated assets and net worth is unfair.  Taxing appreciated assets at death in place of an estate tax would affect each estate differently, better for some, worse for others, but undoubtedly it would raise a significant amount of revenue because the step-up basis rule is one of the biggest “loopholes” in the tax code.  Despite the distaste for paying taxes, the plan would likely have a positive impact on the economy because it removes the incentive for holding onto appreciated assets solely waiting for the step-up basis at death.  It would also benefit some older small business owners who would no longer be trapped in their businesses because of the promise of avoiding taxes if they die owning the business.

The reaction has been swift and it now appears that it was purely a political ploy unlikely to get any traction.  Some commentators suggest it is an advance push against Republican efforts to repeal the estate tax.

Whatever it is, it certainly stirred the pot and increased awareness of the tax system.

Now would be an ideal time to check in with your tax and legal advisors and determine if your current plan is tax efficient and what you intend.

Posted in Tax News on February 1st, 2015 · Comments Off on President Obama’s So Called Trust Fund Tax Proposal

Expiring Tax Cuts and New Taxes

As of January 1, 2013, the Bush era tax cuts will expire and whether we go over the fiscal cliff or not, there are issues of concern to all investors, including retirees.

The 15% tax rate on dividends will expire and recipients will pay tax on those dividends at their marginal tax rate up to 39.6% for the wealthiest among us. Most of you will not reach that top tax bracket, but you face higher taxes on your dividends than at any time in the past 10 years.

The Alternative Minimum Tax (AMT) still has not been “fixed” and is a concern to all taxpayers with investment income.

Individuals earning more than $200,000 or couples earning more than $250,000 will be subject to a medicare surcharge of 3.8% on their investment income with few exceptions. Some taxpayers will be subject to a lower rate. Investment income is broadly defined to include dividends, interest, and capital gains.

Capital gains will be taxed at 20% instead of 15% for most taxpayers.

It is important to recognize these changes are critically important to each of you on a micro level because you will pay more taxes. If you have highly appreciated stocks or other property that can be sold before the end of the year, and you were already considering selling the assets next year, you should consider accelerating your plans and make the sale this year to take advantage of the lower rates. A capital gain harvested this year will be taxed at only 63% of the rate next year for high income taxpayers. A capital gain of $100,000 will incur federal and state tax this year of $20,000, but if sold after the first of the year, the tax will be $28,800.

If it sounds like this change may affect you, consult your tax advisor and your financial advisor before deciding what to do.

Do not rely on this post for your tax advice, this is just a shout out to get the full explanation addressed to your specific situation from someone you trust to advise you about taxes.

Remember although this is a serious concern to you personally, it is probably a good thing for the long range health of the economy. Next week, I will depart from my strict policy of staying away from predicting the future direction of the economy and describe why these are necessary changes to the future of a stable economy.

I remain anxious to help you make sure your estate plan is current and meets your intentions. I can also help with designing gifting and tax advantaged charitable gifting plans. If interested in discussing such issues, call me.

Posted in Tax News on November 26th, 2012 · Comments Off on Expiring Tax Cuts and New Taxes

What does the 2010 tax bill mean for 2011 estate taxes?

By now everyone knows that the President has signed a tax bill.  The question now on everyone’s mind is exactly what did he sign, and what does it mean to you?

  • Lower payroll taxes in 2011 and the historically low rates of taxes on dividends are good for all of us (not so good for our children and grandchildren, but that’s rant for another day).
  • A 2 year estate tax law will allow the debate to be re-opened during the 2012 Presidential election campaign, but if no new compromise is reached, the rate of taxation will return to the 2001 level of 55% on most estates, 60% on others, and the exemption amount will return to $1,000,000.
  • The estates of decedents dying in 2010 can elect either the new 2011 tax system or the 2010 tax system with a carryover basis.  This corrects a basic inequity that created a notch problem for estates greater than 1.3 million dollars, but less than 3 million dollars.
  • A maximum rate of 35% on both estates and gifts reduces the impact on many estates, but it remains an issue to be considered in planning.
  • For decedents dying in 2011 or 2012, the exemption amount is $5,000,000.
  • For the first time a concept known as “portability” has been introduced which means that a surviving spouse will pay no estate tax as long the survivor’s total estate is less than $10,000,000.  Although this seemingly simplifies planning for couples with a gross estate of more than 5 but less than 10 million dollars, it unfortunately acts as a disincentive for those families and others to complete comprehensive planning that can confer far greater legacy and tax benefits than the default plan.
  • Also for the first time since 2004, the gift tax exemption and estate tax exemption have been reunified, allowing lifetime gifts up to 5 million dollars per person.  For many families this will present unique gifting opportunities that should be completed in the next 2 years.
  • New rules for generation skipping transfers (GST) clarify how 2010 gifts can be handled; guidance that was sorely lacking and created great uncertainty for many families that wanted to make gifts in trusts for grandchildren.  Increased exemption amounts will allow significant amounts of money to reach dynasty trusts at considerable benefit for long term planning.  The gifting and GST rule changes were perhaps the most unexpected and create the greatest opportunities for future tax savings.

Without a crystal ball no one can predict what all this means for 2013 and beyond, but undoubtedly you will hear of many plans and opportunities in the weeks and months to come.  With the lowest income tax rates in a generation and the highest deficits and debts in the history of our country driven by the ever growing entitlement programs and the loss of good middle class manufacturing jobs, it is a near certainty that the new favorable system will be under attack again in 2012.

Look for news of upcoming live presentations I will be giving to answer questions and describe some forward thinking that will keep you informed of what you should or shouldn’t be concerned about in the near term.

This will be my last post for 2010.  Happy holidays to everyone and a prosperous and well planned new year!

Death and Taxes in 2010

Much has been written and discussed about the absence of an estate tax in 2010.  The debate about what Congress may do rages on and is spiced up with stories about the death of George Steinbrenner and others like the Texas billionaire Dan Duncan, but the little publicized truth is that the 1 year repeal of the estate tax actually imposes both taxes and legal fees on much more modest estates.

As part of the repeal, Congress also repealed the step-up in basis rules and substituted carryover basis rules, which means that any beneficiary who decides to sell the assets they inherited will have to pay tax on the gain—the difference between the amount the decedent originally paid for the asset and the amount the beneficiary receives for the asset.  As you may imagine, this will result in capital gains taxes on many middle class Americans.

There is a limited exception that could protect many small estates, but only if the value of the estate is under $1.3 million. You may think that you have nothing to worry about, that $1.3 million is a lot of money, but you would be surprised at how many “small” estates are actually large estates.  When you take into consideration the value of a home, retirement or savings accounts, a small investment here and a small investment there… the value adds up pretty quickly.

Every estate larger than $1.3 million that fails to file the required report is subject to a $10,000 penalty.  The report must be filed without regard to whether there is any property that benefits from the step up or not. The report must be filed with the decedent’s last income tax return due on April 15, 2011.  In addition to the report to the IRS, the estate must send a copy of the report to every beneficiary or heir that received property as a result of the death, presumably including recipients of life insurance proceeds and IRAs even though no basis adjustments would apply to those assets.

These rules are complicated.  They are not intuitive, require much attention to detail in a timely manner, and carry severe penalties for non-compliance.  The 1 year repeal of the estate tax in 2010, while a windfall for the über wealthy, will be a burden and expense on more modest estates.  If you have a family member who died in 2010 with more than $1.3 million in property (including a home, life insurance and retirement accounts) transferred as a result of the death, you have only a short time to comply and avoid the serious financial penalties.

It’s a big job, and you don’t have to do it alone.  Call me for help today.

Why Your Estate Plan Is Out of Date

Like most estate planning lawyers, all through the first decade of the 21st century, I thought we would not see a return to the $1,000,000 exemption.  As a consequence, the excellent estate plans I’ve been drafting for the past 9 years are now out of date. Under the new and unexpected tax laws these plans simply won’t provide the protection for which they were designed… unless they undergo an update process.

Now, all is not lost. The trusts my firm created are still solid trusts, and for married couples will continue to shelter the maximum amount of assets from estate taxes; but the flaw is that very little attention was paid to what happens to estates greater than $1,000,000, but less than $3,500,000 ($7,000,000 for married couples).  Most families with assets valued in that range (including retirement accounts and life insurance proceeds payable on death) needed no or very little estate tax planning.

However, it appears likely that the exemption level will remain at $1,000,000 beginning in 2011 with no relief in sight.  Even into the first quarter of 2010, most commentators thought Congress would act, but despite frequent news from Washington about the changes, knowledgeable commentators now almost unanimously believe there is no change coming in the foreseeable future.

More important than listening to pundits, however, is looking at the law; and right now the law is that everything transferred as a result of your death will be subject to a 55% estate tax.  I am ethically bound to inform you of the law as it exists and morally obligated to offer you reasonable solutions to potential problems.  Almost all of my clients believe paying 55% of the value of their assets over $1,000,000 is an unacceptable result.

That’s it in a nutshell.  You have a beautiful estate plan drafted using the best tools available at the time of the drafting, but the planning is going awry due to unexpected conditions, and you should act now to protect your assets.

What can be done?  There are numerous tactics and strategies available that can provide you some protection.  Purchasing life insurance, if you can, is one, and a more aggressive gifting program is another.  Integrating the ownership of your assets with the next generation is another good strategy.  Each of these suggestions, and all others, have an actual economic or social cost associated with them—It is up to you to decide what to do.

Clients participating in my annual maintenance program (soon to be retooled as the Family Protector Program to better describe the reason why such a program is necessary) will hear more about these solutions when you meet with me.  All others (or if you don’t want to wait) call me now for a discussion about these issues.  It will be an hour well spent.

Forever to Never Retirement Accounts

Does never paying income tax on your retirement income sound too good to be true?  Well believe it, because on or after January 4, 2010, anyone can convert their traditional IRA to a Roth IRA, pay the taxes in 2 installments in October 2011 and October 2012 and never again pay income tax on any amount ever withdrawn from the account.

Should you do it?  Kiplinger’s explains the benefits of the Roth IRA.  With stocks down from historical highs and tax rates at all time historical lows, now is the best time to convert to this long term investment strategy.  Read Kiplinger’s explanation of when to switch.

Before 2010, high earners were prohibited from establishing or converting to a Roth account, but no more.  And for 1 year only, the tax can be paid in 2 installments, stretching the due date on half of the taxes due until the extended due date of their 2011 tax return!

But wait, there’s more information that hasn’t been widely disseminated!  If the value of the account goes down before the extended due date on the 2010 return, you can reconvert back to a traditional IRA, pay no tax until the money is withdrawn and then convert the lower amount back to a Roth account the following year.

If you believe the value of the stretch out over your lifetime outweighs the benefit of paying the tax over 2 years, 22 and 34 months after you’ve converted, think about this – If your tax and financial advisors haven’t told you (1) about this opportunity and that (2) income taxes are at an all time historically low rate and headed nowhere but up, you should ask.

Because of the unique features of Roth IRAs, no minimum required distributions during your lifetime, MRD for your beneficiary, no taxes on any of the money withdrawn from the account, you have a once in a lifetime opportunity to make a tax decision that will benefit you, your spouse, and your descendants by protecting your nest egg from ever being subject to income tax again.  And by paying the tax in advance at the lowest historical rates, you are also reducing potential estate taxes.

With all of these benefits, shouldn’t you at least be considering a Roth IRA?