ESTATE TAX REPEAL? LET’S KEEP PLANNING!

michael w. hoffmanDonald Trump’s surprise election gives us a tremendous amount of hope that the federal estate tax might finally be repealed. This concept runs in the face of candidate Clinton’s proposal to reduce the estate and gift tax exemption amounts and increase the tax rates from 40% to 65%.

While we do not want to celebrate too early, a critical message is that estate planning should continue with fervor! The Donald Trump phenomenon, which results in a Republican Presidency and a Republican Congress, gives us a great deal of confidence that tax reform will be among the items addressed early in Trump’s administration. Tax reform could and should include the repeal of the federal estate and gift taxes, and the elimination of the generation skipping transfer tax that has been hanging over our heads since 1976.

However, this will take some time, and the reality is that the U.S. still has huge deficits that must be serviced with tax revenue. Granted, the percentage of the federal revenue coming from death taxes is minimal, but there is also the argument that the tax on the transfer of wealth is “fair” in a system that allowed the accumulation of such wealth. This theory is combined with the tempering affect that the death tax has on the growth of family dynasty wealth (taking from the rich to provide for the poor).

It is likely that the current federal estate and gift tax laws will be replaced by a system more popular in other parts of the world, such as the capital gains calculation that takes place in Canada, Great Britain and other western civilizations. In those countries, at death, the difference between the tax basis of property and its fair market value will be subject to a tax similar to the capital gains tax that would have occurred had the decedent sold the appreciated assets. This accomplishes the practical role of allowing tax basis to be stepped up to fair market value at the death of an owner, and replaces the estate and gift tax revenue with a fair method of taxing growth as it is done in the income tax arena. Of course, there will have to be exemptions and exceptions made for family farms and businesses so these types of assets would not have to be leveraged or sold in order to pay Uncle Sam. All of these details, and many more, will have to be worked out by Congress and the U.S. Treasury Department (IRS).

In the meantime, it appears that some of the more popular techniques that we have been implementing over the last 20 or so years will become even more popular. The use of trusts has long been an important aspect of estate planning. Trusts can own property outside of a taxable estate, trusts can allow an orderly transition of control through the naming and choice of trustees, trusts can protect property from creditors and divorce, trusts avoid probate, and trusts provide significant income tax savings flexibility for current and future beneficiaries.

An important trust that we use in estate planning is the Family Trust, where parents set up trusts for their kids while they are alive, as opposed to waiting until both parents are deceased, and begin funding those trusts with assets by way of gift and otherwise, to remove property from the parents’ taxable estates.

One type of Family Trust that we often use is to make the trust a grantor trust for federal income tax purposes. That means for income tax purposes the IRS ignores the existence of the trust and all the taxable income and deductions associated with the Family Trust continue to be reported on the grantor’s individual income tax return. In our practice, we refer to these Family Trusts as “Defective Grantor Trusts”, or DGTs.

One of the features that allows a trust to be a grantor trust during the grantor’s lifetime is the ability to substitute property in the trust with other property from the grantor. This has been a popular benefit of using DGTs because the trust can hold appreciating assets, removing the appreciation from the grantor’s estate, but those appreciated assets can be swapped for cash or other assets, allowing the low-basis, highly-appreciated assets to come back into the grantor’s estate before death, in order to allow a step-up in tax basis at death for income tax purposes. This has always been kind of “have your cake and eat it too”, removing appreciating assets out of your estate, but retaining the ability to get those assets back in order to achieve an increase in tax basis at death. So, one of the things that we have tried to accomplish with our estate planning clients is to assist them in monitoring the assets in their Family Trusts, to determine if and when it would be desirable to substitute those highly appreciated assets for other assets out of our clients’ taxable estates. Of course, timing is everything, and there is always the risk that the substitution might not occur timely, but at least our clients have retained that flexibility.

Now, with the chance of repeal of our federal estate tax, the strategy with these same grantor trusts might change. In other words, since only appreciated assets would be subject to a capital gains tax at death, it may become more important than ever to remove these appreciated assets from the estate, put them in a grantor trust, and leave liquid, high basis assets in the parents’ taxable estates. Then, if the next President and/or Congress were to reinstate a federal estate tax, we can easily shift strategy and look to exercise the substitution power that exists with the DGTs.

Remember that we still have the evil overhang of the proposed 2704 regulations (see prior articles) which will eliminate much of the discounting that we have enjoyed for valuation purposes when gifting or selling hard to value assets to Family Trusts. These proposed rules will become effective, according to the IRS, 30 days after they become final. While we don’t know when these proposed regs will become final, it does take typically 12 to 18 months for these regulation projects to become completed. The regs were proposed in early August, so we are still “under the gun” for those clients who have situations that warrant this type of estate planning.

So, let’s be happy with the potential repeal of the estate tax but be realistic in what that means. If anything, as new rules evolve, we should be focusing on flexible estate planning now, more than ever, as future tax reform will create new tax regimes. For instance, if the new tax rules no longer encompass the concept of a $5,500,000 exemption per person, will all that exemption that was not used before the estate tax is repealed be lost forever? So, while President-Elect Trump goes about changing our tax system to make us more competitive in the world, and he is ”draining the swamp”, let us pay attention to details and reap the benefits of continuous planning.

For more information about this or any other estate planning topic, please contact us directly at 404-255-7400 or email us at info@hoffmanestatelaw.com.

Estate Planning Is in a Pressure Cooker!

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Not only has the IRS threatened to change the rules of valuing gifts, which will have a significant impact on many estate planning techniques used over the last several decades, the presidential elections will have a huge impact over whether the estate and gift tax law survives, or becomes extremely more expensive and complicated.

After an agonizing wait, the IRS issued Proposed Regulations on August 4th that will eliminate many of the valuation discounts applicable for family-owned businesses and wealth in general. These new rules will become effective thirty days after publication of final regulations, which are expected in the next 12 months.

That means gifts prior to the effective date of the regulations may continue taking into account all applicable valuation discounts and used over the last several decades, and those family business owners who postpone these estate planning techniques of transferring wealth to trusts for future generations will be hurt economically under the new rules. While we do not know for sure what the final regulations will say, the question is obvious, is any further postponement worth the risk?

Additionally, there is a substantial difference between the two presidential candidates’ tax policy proposals, particularly relating to the estate and gift tax. Donald Trump proposes to eliminate the estate and gift tax. Mrs. Clinton, however, proposes to reduce the estate tax exemption (which will be $5,490,000 in 2017) to $3,500,000 (per person) with no adjustment for inflation. She proposes to reduce the lifetime gift tax exemption from $5,490,000 (2017) to $1,000,000, with no adjustment for inflation.

This situation is reminiscent of the concern in 2012 when we feared the exemptions may go from $3,500,000 to $1,000,000. Many clients scurried to take advantage of estate and gift tax advantages before year-end. Those clients, by the way, are generally laughing all the way to the bank as not only have they moved significant wealth out of the gift tax system, but the statute of limitations on the IRS’ ability to review the substance of those transactions has just about expired.

Mrs. Clinton is not done there! She proposes to raise the current estate tax rate from a flat 40% to 45% on estates under $10,000,000, 50% for estates from $10,000,000 to $50,000,000, 55% for estates from $50,000,000 to $500,000,000, and 65% for estates for over $500,000,000. While this seems shocking, the maximum estate tax margin rates when I began practicing in 1976 was technically 77%!

Obviously, the double attack from the IRS and the potential Clinton Administration will raise havoc in the estate planning circles. Be ready to react relatively quickly as these proposals threaten to become reality.

For more information regarding this or any other estate planning concern, please contact us at 404-255-7400 or email us at info@hoffmanestatelaw.com.

Tax Law Changes Make Estate Planning Tougher

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If the IRS has its way, one of our prime estate planning techniques will soon be obsolete.

Earlier this month, the Treasury Department released proposed regulations under Section 2704 of the Internal Revenue Code that will severely undermine valuation discounts, which are commonly used by us and other estate planners to reduce the value of assets that are gifted or sold pursuant to a client’s estate planning.

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Planning 2016: Sophisticated Charitable Giving

mary_croppedSignificant tax savings can be achieved through a properly planned program of gifts to charity. Although a contribution may be motivated by humanitarian reasons, it is nevertheless wise to take the tax considerations into account when making a contribution. Charitable giving can be divided into two general categories. First, there are donations that are made on a regular basis and involve relatively small amounts. Second, there is the large extraordinary donation often associated with estate planning. Different planning concepts govern each type of donation.

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Multi-State Record Keeping

Doug Image CroppedAs our society becomes increasingly mobile and the economy causes taxpayers to work in multiple locations, it is important to understand the impact of state income taxation when you live and work in different states.  Many retirees establish their state residency in Florida or one of the other states without state income taxes.  Successfully managed, it keeps their non-earned income from being taxed at the state level.

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Changes in Overtime Pay Regulations

IAN M. FISHERSmall business owners may be in for a shock later this year when new Department of Labor Regulations governing overtime go into effect. On December 1, 2016, a Final Rule by the Wage and Hour Division will go into effect, causing approximately 4.2 million currently exempt workers to have a right to time and a half pay from their employers.

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A Lesson Learned from the Bobbi Kristina Tragedy

We have all seen the headlines about Bobbi Kristina Brown, the daughter of the illustrious Whitney Houston, and her tragic death.  After being found unconscious in the bathtub of her Roswell, Georgia townhome, she was admitted to the hospital and placed in a medically induced coma for months before being transferred to hospice and subsequently passing away.  Her death is tragic for many reasons: her young age, the eerie similarities between her death and her mother’s, the allegations of domestic abuse, and the immediate fight among family members to gain control over her care and her assets.  With proper estate planning, at least the last tragedy would have been avoided.

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Update On The IRS Regulations Project

michael w. hoffmanLast July, I wrote in my column that the IRS made it known that it would issue proposed regulations as early as September (2015) which would severely restrict valuation discounts for transfers among related entities (such as transfers of limited partnership or LLC interests to other family members or trusts).  Not surprisingly, here we are in the spring of 2016 and there are no regulations.

Early this month, an IRS representative spoke at the ABA Tax Section meeting and spoke about upcoming IRS guidance.  She predicted that in the next couple of months the IRS would issue 5 or 6 new regulations, the first of these being the proposed regulations under Section 2704, which would place further restrictions on valuation discounts.  While we don’t know what the scope of these new restrictions will be, we are certain that they will have a significant impact on valuing property transferred between related family entities.  As I expressed last year, our concern is exacerbated by the fact that the IRS will likely make these rules effective retroactively to the date of the proposed regulations.

The judicious use of valuation discounts has long been a responsible tenant in estate planning.  Whether it’s getting the “biggest bang for the buck” out of annual gift tax exclusions, use of your one-time lifetime applicable exclusion amount (currently $5,450,000 in 2016), or reducing actual estate or gift taxes, applying appropriate discounts has always been pertinent to accurately determine the fair market value of the property being transferred.

For instance, if Father owned a piece of property worth $100 and gifted 50% of that property to Daughter, the valuation of the undivided one-half interest might only be $40, as opposed to the mathematical value of $50.  In a similar vein, if gifts of limited partnership interest or non-voting LLC membership interests in family enterprises are gifted, appropriate valuation discounts for things like lack of control and lack of marketability are applicable.

If the new regulations change the rules and re-define how property is valued for gift and estate tax purposes, the impact will be huge.

As one of my colleagues recently wrote, “The first (regulation project issued this spring) will be new proposed regulations under Section 2704, with time estimates of ‘very, very shortly’ and ‘this spring, before summer’.”  If you have put off any estate planning concerning freezing or gifting, time is of the essence.  If you are planning to include the many benefits of family limited partnerships and family limited liability companies, or merely gifts of fractional interests, as illustrated in the example above, you may want to get with your advisor immediately.

For further information regarding this or any other estate planning concern, please visit Hoffman & Associates at www.hoffmanestatelaw.com, call us at 404-255-7400, or send us an email.

IRS Warns of 2016 Tax Scams

douglas mcalpineWe posted last year about bogus phone calls claiming to be from the IRS.  The article below highlights the more recent techniques being used as the scammers adapt their methods and provides information on what you should do if contacted. Please do not hesitate to contact us with any questions or concerns at 404-255-7400.

Consumer Alert: Scammers Change Tactics, Once Again

WASHINGTON — Aggressive and threatening phone calls by criminals impersonating IRS agents remain a major threat to taxpayers, but now the IRS is receiving new reports of scammers calling under the guise of verifying tax return information over the phone.

The latest variation being seen in the last few weeks tries to play off the current tax season. Scam artists call saying they have your tax return, and they just need to verify a few details to process your return. The scam tries to get you to give up personal information such as a Social Security number or personal financial information, such as bank numbers or credit cards.

“These schemes continue to adapt and evolve in an attempt to catch people off guard just as they are preparing their tax returns,” said IRS Commissioner John Koskinen. “Don’t be fooled. The IRS won’t be calling you out of the blue asking you to verify your personal tax information or aggressively threatening you to make an immediate payment.”

The IRS reminds taxpayers to guard against all sorts of con games that continually change. The IRS, the states and the tax industry came together in 2015 and launched a public awareness campaign called Taxes. Security. Together. to help educate taxpayers about the need to maintain security online and to recognize and avoid “phishing” and other schemes.

The IRS continues to hear reports of phone scams as well as e-mail phishing schemes across the country.

“These schemes touch people in every part of the country and in every walk of life. It’s a growing list of people who’ve encountered these. I’ve even gotten these calls myself,” Koskinen said.

This January, the Treasury Inspector General for Tax Administration (TIGTA) announced they have received reports of roughly 896,000 phone scam contacts since October 2013 and have become aware of over 5,000 victims who have collectively paid over $26.5 million as a result of the scam. Just this year, the IRS has seen a 400 percent increase in phishing schemes.

Protect Yourself

Scammers make unsolicited calls claiming to be IRS officials. They demand that the victim pay a bogus tax bill. They con the victim into sending cash, usually through a prepaid debit card or wire transfer. They may also leave “urgent” callback requests through phone “robo-calls,” or via a phishing email. They’ve even begun politely asking taxpayers to verify their identity over the phone.

Many phone scams use threats to intimidate and bully a victim into paying. They may even threaten to arrest, deport or revoke the license of their victim if they don’t get the money.

Scammers often alter caller ID numbers to make it look like the IRS or another agency is calling. The callers use IRS titles and fake badge numbers to appear legitimate. They may use the victim’s name, address and other personal information to make the call sound official.

Here are some things the scammers often do but the IRS will not do. Any one of these five things is a tell-tale sign of a scam.

The IRS will never:

  • Call to demand immediate payment over the phone, nor will the agency call about taxes owed without first having mailed you several bills.
  • Call or email you to verify your identity by asking for personal and financial information.
  • Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.
  • Require you to use a specific payment method for your taxes, such as a prepaid debit card.
  • Ask for credit or debit card numbers over the phone or email.
  • Threaten to immediately bring in local police or other law-enforcement groups to have you arrested for not paying.

If you get a phone call from someone claiming to be from the IRS and asking for money or to verify your identity, here’s what you should do:

If you don’t owe taxes, or have no reason to think that you do:

  • Do not give out any information. Hang up immediately.
  • Contact TIGTA to report the call. Use their “IRS Impersonation Scam Reporting” web page. You can also call 800-366-4484.
  • Report it to the Federal Trade Commission. Use the “FTC Complaint Assistant” on FTC.gov. Please add “IRS Telephone Scam” in the notes.

If you know you owe, or think you may owe tax:

  • Call the IRS at 800-829-1040. IRS workers can help you.

Stay alert to scams that use the IRS as a lure. Tax scams can happen any time of year, not just at tax time. For more, visit “Tax Scams and Consumer Alerts” on IRS.gov.

Each and every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. These are your Taxpayer Bill of Rights. Explore your rights and our obligations to protect them on IRS.gov.

 

 

Tax Extender Deal Signed

IAN M. FISHERChristmas came a week early for many taxpayers in 2015.

On Friday, December 18, President Barack Obama signed into law a tax and spending package containing numerous tax breaks for individuals and businesses.

Of particular interest to many Hoffman & Associates clients may be the Conservation Easement Enhanced Incentive. In 2014, there was a provision in Sec. 170 of the Internal Revenue Code that allowed the value of qualified conservation contributions to be deducted up to 50 percent of a taxpayer’s contribution base (similar to AGI) and carried over to 15 succeeding tax years. For qualified farmers or ranchers, the deduction limit was 100 percent of the contribution base.

However, that enhanced incentive ended at the end of 2014 without Congress’s action and the easement limit reverted to 30 percent of a taxpayer’s contribution base and 5 years of carryover. As part of the now signed tax extender deal, the enhanced incentive is now permanent. The bill completely deletes the language in the code section that makes the enhanced incentive expire, so taxpayers now have peace of mind when considering conservation easements going forward.

Some other tax breaks included in the package include the following:

  • IRA charitable rollover, which means once a taxpayer reaches age 70 1/2, he or she can make direct gifts from his or her IRA to charities of up to $100,000 per year. This would be more beneficial than taking withdrawals and then gifting to charity.
  • Research and Development Credit, which incentivizes small businesses and startups to invest in research and development by allowing them the use of this credit against alternative minimum tax or even payroll taxes in some limited instances.
  • Reduced S Corporation Built-In Gains recognition period, which is important for C corporation owners who are interested in converting to S Corporations. Under previous law, the corporation had to hold appreciated assets for 10 years or it would be taxed on their gains. Now, that holding period has been reduced to 5 years.
  • Itemized deduction for state and local sales tax in lieu of income taxes. This could be beneficial if a taxpayer made a large purchase during the year that is greater than his or her state income tax obligation. This is particularly useful for taxpayers who live in states without a State income tax, such as Florida.
  • Enhanced Sec. 179 Deductions, which allow businesses to deduct full purchase price of qualifying equipment and/or software purchased during the tax year. Businesses may deduct up to $500,000 of qualifying expenses on up to $2,000,000 of equipment. These were set to drop to $25,000 and $200,000 had this not been included in the tax extender bill.
  • Once the Sec. 179 cap is reached, bonus depreciation was also made permanent in this tax deal. What that means is a taxpayer can deduct 50% of the depreciation in the first year instead of the normal 20%.

 To illustrate this in conjunction with the enhanced Sec. 179 deductions, let’s say a company bought $750,000 worth of new equipment. They would be able to deduct the following:

  • $500,000 – Sec. 179 deduction ($250,000 remaining after Sec. 179 deduction)
  • $125,000 50% Bonus first year depreciation (of the remaining $250,000)
  • $25,000 normal 20% depreciation (20% of the $250,000-$125,000)

 

  • $650,000 Total First Year Deduction ($500,000+$125,000+25,000)
  • $227,500 Cash Savings, assuming 35% tax rate

The tax extender bill contained numerous other provisions benefitting both individual taxpayers and businesses. If you have any questions about them, please feel free to contact Hoffman & Associates.

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