What Assets Pass Under My Will?

cassandra f. ceronThe foundation of most Georgia estate plans is a Will. Your Will is the legal document that dictates how your probate assets are distributed upon your death. But what are your probate assets? The easiest way to answer this question is to first define non-probate assets.

Non-probate assets are assets that pass outside of the probate estate to a named beneficiary (or beneficiaries) and independently of your Will. These are assets that pass by operation of law or under the terms of a contract.

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Musings from the CEO – Summer 2014

Mike HoffmanI saw a headline the other day that declared “Why You Should Update Your Estate Plan”. Now, there is a topic that I could write a book about!

I have heard statistics that up to 80% of Americans either have no Will, or some attempt at a Last Will and Testament that is sorely inadequate. The basic core documents that everyone needs are a Will, a General Power of Attorney (that kicks-in upon disability or incapacity), and a Health Care Directive. Once these documents are in place, they need to be reviewed periodically. Obviously, tax laws and family circumstances change. Also, more and more people move because of job changes, they retire to another part of the country, or they move closer to their kids and grandchildren.

A little over two years ago, the $5,000,000 estate tax exemption became “permanent”. This does not mean that it won’t change, and in fact, it does change by going up a little bit each year. Going from $600,000 (the exemption in the ‘90’s) to $5,000,000 took most of us off the estate tax paying rolls and did change the focus of a lot of estate planners. We generally pay more attention to income tax matters than we did before. For instance, if a married couple has over $10,000,000 of exemption available, rather than trying to get everything out of their taxable estates, we would like for at least that much property to go to their heirs from their estates (after death), therefore, with a brand new income tax basis.

I read that one commentator expressed that an estate plan is not meant to be put in a time capsule and to be opened and dissected at death. An estate plan will change and evolve. There are many things that can be accomplished with a comprehensive estate plan. Not only are we saving estate taxes, income taxes, and probate costs, we are protecting assets, providing sound management of assets, and taking care of other responsibilities.

How are we leaving assets to our spouse and descendants? Can we be better stewards of our wealth by considering appropriate planning techniques, such as trusts?

It is important to periodically check the ownership and beneficiary designations of life insurance policies to make sure that these liquid assets will be handled appropriately. It is extremely important to review beneficiary designations on IRA accounts and other retirement plan assets. Not only do you want to make sure the assets go where you intend, but you want to maximize potential tax savings.

The ownership of all assets ought to be reviewed periodically. There are several types of joint ownership that have different consequences for estate planning and tax purposes. It is not just deeds for real property that should be checked, but it’s also important to understand how the titling of your investment accounts can affect the treatment of your assets at death.

If you own property in other jurisdictions, such as a house at the beach or in the mountains, this can complicate probate matters for the family. It is a relatively simple matter to use one of several techniques to remove that particular asset from your probate estate, potentially saving a great deal of time, money and aggravation for your spouse and descendants.

Most family/closely-held businesses do not have a succession plan or an exit strategy. This is particularly concerning when it is that family business that created the wealth. Will the business suffer a potential loss of value to the family when the patriarch or matriarch is no longer in the picture?

There are countless reasons why you should update your estate plan. First and foremost, make sure you have an estate plan. A failure to plan is a plan to fail.

 

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

In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose. The information contained herein is provided “as is” for general guidance on matters of interest only. Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services. Before making any decision or taking any action, you should consult a competent professional advisor.

2012 Year End Newsletter

Dear Tax Clients:

With the year coming to an end, as always, there becomes a heightened sense of emphasis on financial and tax planning. This is true now more than ever with the future of America’s tax code being so uncertain and with many tax cuts taxpayers have taken for granted for over a decade set to expire in 2012.  Knowing this, we at Hoffman & Associates, would like to help you by providing some general reminders, items of interest for the current tax year and some valuable planning tips for changes we are likely to see in the future. We hope these notes, as well as some general estate planning and business items that are of importance, will help you prepare for your 2012 taxes as well as for the future. However, as every taxpayer paints a different picture, we recommend contacting one of our tax and legal experts for reassurance or with any question you may have.

Individuals

Tax planning for individuals for both the 2012 year-end and forward will be complicated for a multitude of reasons, with the most important being that most of the Bush-era tax cuts are set to expire at year end.  This casts doubts about the renewal of many tax extenders, like the AMT patch, and makes the possibility of across-the-board tax hikes, including the new 3.8 percent “medicare” tax on investment income and .9 percent increase one earned income, a likelihood. Individual taxpayers will want to be sure to make the most of the favorable tax savings opportunities while they are available in 2012 because they may not see such favorable tax rules in the coming years.  Although Congressional action between now and the end of the year may cause more tax changes, we have summarized below some year-end tax reminders and tips.

Annual Reminders

  • Estimated Payments – Make your 4th Quarter Georgia estimated payment in December instead of waiting until January 2013, unless you are in an AMT situation (see “Current Year Items of Interest”).
  • Tax Withholdings – If you have not had enough withheld from your 2012 pay, or you have missed an estimated payment, you can opt to have more tax withheld from your paycheck before year end in order to cover this potentially costly mistake.
  • Sell Your “Losers” – Don’t forget to offset any 2012 capital gains. Married taxpayers can take up to a $3,000 capital loss ($1,500 for single filers). Be careful to avoid “wash sale” rules by not buying the same stock within 30 days before or after the original sale; otherwise the losses won’t count.
  • Retirement Plan Contributions – Have you made your contributions to your retirement plans for 2012? The deadline for all types of IRA contributions is April 15th, 2013, you can make these contributions before the end of the year.

Items Set to Expire in 2012

  • Consider Converting Your IRA – With an expected tax increase post-2012 and into the future, you may want to consider converting your Traditional IRA to a Roth IRA. You would owe tax on the IRA amount currently, to the extent it exceeds basis, but upon retirement when tax rates are expected to be higher, all the distributions from the Roth, if the holding period is met, would be tax free.   The conversion of traditional IRA’s to Roth IRA’s is not an all or nothing proposition.  Also, the maneuver is particularly attractive if you are experiencing an extraordinary low income or loss year.
  • Alternative Minimum Tax – Unless action is taken in Congress, the exemption for AMT in 2012 will decrease to $33,750 for individuals and $45,000 for married couples. Favorable legislation passed in the House and Senate earlier in the year indicating action will be taken to increase these amounts has yet to be enacted. Therefore, taxpayers should not assume this change will take place and should be prepared if there is no increase.
  • American Opportunity Tax Credit – This enhancement to the Hope Education Credit that allows for a credit of up to $2,500 per student for the first four years of post-secondary education expires after 2012.  If not made permanent by Congress in 2013, it will revert back to the less generous Hope Scholarship credit (maximum credit of $1,950 and available for only two years).  In contrast, the still available Lifetime Learning Credit is a per taxpayer per year credit and can be claimed for an unlimited number of years.
  • Student “Above-the-Line” Expense – The Qualified Higher Education Expense deduction for tuition and fees expired last year.  For those who will are paying off student loans, the student loan interest deduction after 2012 will be limited to five years and phased out at lower AGI levels.
  • Social Security Payroll – Most taxpayers can expect a smaller paycheck in 2013 due to Social Security Payroll taxes withheld reverting back to their normal amounts. The social security wage base for this additional 2 percent is $113,700 in 2013 (up from $110,100 in 2012) and also applies to self-employed individuals, whose self-employment tax on social security will revert back to 15.3 percent in 2013 (up from 13.3 percent in 2012).

Tax Planning Opportunities

  • Child Tax Credit – The child tax credit for 2012 is $1,000 per eligible child, but going forward will be reduced to $500. Taxpayers should plan ahead for this reduction as the refundable amount also will be limited for those with at least three qualifying children in 2013.
  • Increasing Tax Rates – The current percentage rates of 10, 15, 25, 28, 33 and 35 are set to  revert to the pre-Bush tax cut rates of 15, 28, 31, 36 and 39.6 percent. President Obama has  proposed to keep the current structure, but replace the 33 and 35 percent rates with the 36 and 39.6 percent rates for higher income tax payers. Because of potential tax hikes across the board, taxpayers should discuss their income projections and tax plan for 2013 with both their financial advisor and tax preparer to ensure adequate estimates and withholdings, especially since the 39.6 percent top rate does not include the 3.8 and .9 percent Medicare taxes.
  • Capital Gains/Losses and Dividends – Beginning in 2013, the tax rates for long-term capital gains and qualified dividends will change. The rates will move from zero percent for taxpayers in the 10 and 15 percent brackets and 15 percent for everyone else to 10 percent for taxpayers in the 15 percent bracket and 20 percent for everyone else, respectively. Dividends will be taxed at ordinary income tax rates (top rate of 39.6 percent, or 43.4 percent if the 3.8 percent Medicare tax applies.  Individuals should consider accelerating capital asset sales and C Corporations may want to declare and distribute special dividends before year-end).
  • 3.8 Percent Medicare Contribution Tax – 2013 also brings a new 3.8 percent “unearned income Medicare contribution” tax. The tax will target higher-income individuals, estates and trusts and will be assessed on the smaller of net investment income (NII), which is investment income minus allocable expenses, or the amount by which  an individual taxpayer’s modified adjusted gross income (MAGI) is over $200,000 ($250,000 for married couples). For estates and trusts, this tax applies to the lesser of undistributed NII or adjusted gross income (AGI) in excess of $11,950 for 2013. Estates and trusts should consider distributing NII to beneficiaries whose MAGI threshold is much higher.  Individual taxpayers, and certain estates with passive rental income, whose NII exceed MAGI and AGI thresholds, should re-do their triple net leases so they can actively participate in the management of their rental properties and avoid this 3.8 percent tax.  Income from taxable IRAs, social security and alimony is not investment income, but increases MAGI and could subject your NII to this tax.  Consider investing in tax-exempt bonds or funds which are neither included in AGI nor MAGI for investment income purposes.
  • Personal Exemption Phaseout and Pease – The personal exemption phaseout (PEP) and Pease (a limitation on itemized deductions) were repealed through 2012, but could be reinstated in 2013. A reinstatement of the PEP and Pease means taxpayers that have an adjusted gross income of certain amounts (estimates of the phaseout are said to begin at $178,150 for singles and $267,200 for those married filing jointly) will lose any advantage of personal exemptions and itemized deductions. Note that medical and investment interest expenses, gambling and casualty or theft losses are not subject to the Pease limitation.  Therefore, taxpayers should consider making additional gifts to charity this year.  Paying state income or real estate taxes in 2012 is a good idea too, unless you are subject to the AMT.
  • Medical Expense Deductions – As provisions for personal exemption phaseouts and limitations on itemized deductions are set to kick in, so is an increase to the threshold for the itemized medical deduction. Currently, medical expenses must exceed 7.5 percent of a taxpayer’s adjusted gross income (AGI) before they qualify as a subtraction to AGI. Beginning in 2013, the threshold will increase to 10 percent of AGI; however, individuals who are age 65 and older will be exempt from this increase through 2016.  If possible, taxpayers under 65 years old should take advantage now of the current 7.5 percent of AGI threshold by accelerating elective unreimbursed qualifying medical expenses.

Estate Planning

Estate planning is another important aspect of your financial well-being. This is an area of tax that is often convoluted and constantly changing. Some important and potentially drastic changes are set to expire in 2012. We have listed below the changes that we believe will have the most impact on our clients.

  • Estate and Gift Tax – The 2012 estate and gift tax rate is 35 percent with an exemption of $5.12 million. This will revert back to $1 million in 2013 as the maximum tax rate reverts back to 55 percent. Also, the portability rule allowing an individual’s estate or spouse to make the election on a timely filed federal estate tax return to utilize the “deceased spouse’s unused exclusion” amount (DSUE Amount) is set to expire.  If made, the surviving spouse’s unused estate and gift tax exemption amount available for gifting before the 12-31-12 expiration date, could be in excess of $10,000,000.  Therefore, individuals with significant assets should consider taking advantage of the higher gift and generation-skipping exclusions now.
  • 2012 Annual Gift Tax Exclusion – The annual exclusion for gifts free of any gift tax is $13,000 this year ($14,000 beginning in 2013) (married couples can gift up to $26,000) to each individual. Married donors can gift up to $26,000 in 2012 ($28,000 in 2013) per donee.
  • Year End Donations – When gifting to charitable organizations consider gifting securities that have appreciated. As long as you have held the securities more than a year, you take a deduction for their market value.

Business Planning

Business tax planning, like individual tax planning, will become just as difficult to plan for in the coming years because of the expiring tax incentives. The tips and changes we believe will be the most significant to our clients are listed below.

  • 2012 Section 179 Expense – Typically, for business property with a useful life of more than one year, the cost must be depreciated (deducted ratably over several tax years).  IRC Section 179 allows the business to fully expense the cost of eligible-tangible personal property in the year purchased.  The maximum amount in 2012 that may be expensed is $139,000 with a $560,000 investment ceiling placed on the purchase of all otherwise qualifying expenses.  In 2013, both the Section 179 expense and investment ceiling are scheduled to drop to $25,000 and $200,000, respectively.
  • Bonus Depreciation – Fifty percent first year bonus depreciation is allowed for the cost of new qualified property with a recovery period of 20 years or less placed in service (i.e., ready for use and not merely purchased) in 2012, but will expire at year end. Businesses should take advantage of these favorable expensing rules now while they are still available.
  • Dividends – Closely-held C Corporations may want to declare and distribute special dividends this year so shareholders may take advantage of the lower expiring tax rates and to avoid the 3.8 percent Medicare tax on investment income.

Additional Items to Note

  • IRS “Phishing” Scams – As was noted in last year’s letter, the IRS continues to battle cons taking advantage of taxpayers. They stress that the IRS does not solicit taxpayer information via e-mail and that any emails received from the “IRS” requesting personal information should be deleted immediately.
  • Audits – Taxpayer audits continue to be a problem for individual taxpayers. As the Federal government continues to struggle financially, the automatic notices for audits and penalties are sent out at a staggering rate. Please let us know if you receive any notice from the IRS as we are prepared to help you if you have any issues.

 As always, we encourage you to feel free to contact us with any concerns or questions you may have about your taxes.

HAPPY HOLIDAYS!

HOFFMAN & ASSOCIATES, ATTORNEYS-AT-LAW, L.L.C.

In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose.  The information contained herein is provided “as is” for general guidance on matters of interest only.  Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services.  Before making any decision or taking any action, you should consult a competent professional advisor.

SELF-CANCELING INSTALLMENT NOTE (SCIN)

The Self-Canceling Installment Note (“SCIN”) is a planning technique usually used in a sale of an asset to either a trust or directly from an older family member to a member or members of a younger generation.  Basically, the older generation sells the asset in exchange for an installment note with a term shorter than the seller’s life expectancy, which is found in Internal Revenue Service (IRS) Tables.  The SCIN is a valuable tool because, if the seller dies before the term of the note, the remaining balance is completely canceled and is not included in the seller’s estate.

The SCIN is best structured as requiring interest-only annual payments until a balloon principal payment is due at the end of the term.  By deferring the principal payment until the end of the term, the amount canceled upon death will include the entire principal amount of the promissory note.

Of course, the IRS would not allow this transaction without a modification of the terms of the note to make it an arms-length transaction between the parties.   So, either the principal amount or the interest rate must be increased to make this a bona fide transaction.  The older the seller is, the greater the mortality risk premium will be.  However, with long-term interest rates being at historical lows right now, the time has never been better for an estate-freezing transaction using a SCIN.

For example, using October’s rates, a 55-year-old person could sell assets using a 28-year SCIN with a balloon payment and an interest rate of only 2.695%.   If the seller died before the end of the term, the value of the entire principal amount would be transferred to the trust without incurring any estate tax.

These low rates make a SCIN not only a good idea for clients looking to freeze some of the value of their estates, but there is also opportunity for clients who have already entered into DGT sales (see other articles on website that describe DGT sales as a popular estate planning/freezing technique) to refinance with a SCIN, possibly at lower rates and the self-canceling feature.

 

For more information regarding estate planning, business law or tax controversy and compliance, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com or call us at 404-255-7400.

 

In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose.  The information contained herein is provided “as is” for general guidance on matters of interest only.  Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services.  Before making any decision or taking any action, you should consult a competent professional advisor.

Grantor Retained Annuity Trust (GRAT)

Another advanced estate planning technique is known as a grantor retained annuity trust (a “GRAT”). GRATs  are created by transferring one or more high yield assets into an irrevocable trust and retaining the right to an annuity interest for a fixed term of years or for the shorter of a fixed term or life.  When the retention period ends, assets in the trust (including all appreciation) go to the named “remainder” beneficiary.  In some cases other interests, such as the right to have the assets revert back to the transferor’s estate in the event of the transferor’s premature death, may also be included.

GRATs provide a fixed annuity payment, usually based on a fixed percentage of the original value of the assets transferred in trust.  For example, if $500,000 is placed in trust and the initial annuity payout rate is 6%, the trust would pay $30,000 per year, regardless of the value of the trust assets in subsequent years.   If income earned on trust assets is insufficient to cover the annuity amount, the payments will be made from principal.  Therefore, the transferor is assured of steady consistent payments throughout the term of the GRAT.    At the same time, all income and appreciation in excess of that required to pay the income beneficiary is accumulated for the benefit of the remainder beneficiary free of gift tax and without using the transferor’s lifetime gift tax exemption.

 The gift tax value of the transferred assets is determined at the time the trust is created and funded by subtracting the value of the annuity interest from the fair market value of the assets transferred to the trust.   The annuity interest is generally valued based on the 7520 rate published by the IRS.    Therefore, if the return on the GRAT assets over the term of the GRAT is greater than the 7520 rate, it may be possible to transfer assets to the remainder beneficiary when the trust terminates that far exceed the gift tax value of the transferred assets.

The one drawback of a GRAT is that GRAT assets will be included in the transferor’s estate if he/she passes away during the term of the GRAT.  Therefore, the GRAT is a bet to live strategy – the transferor is betting that he/she will survive the term of the GRAT to reap its estate and gift tax benefits.

There may be other non-tax reasons to form a GRAT as well.   A GRAT can help you ensure succession. For example, if a client wants specific assets, such as stock in a closely held corporation, other business interest, land, or family compound to go to one child rather than another, or the client does not want a former spouse, creditor, or someone who contests his/her Will to be able to obtain that asset, a GRAT can be used to implement such a contingency.

 

For more information regarding estate planning, business law or tax controversy and  compliance, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com or call us at 404-255-7400.

 

In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose.  The information contained herein is provided “as is” for general guidance on matters of interest only.  Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services.  Before making any decision or taking any action, you should consult a competent professional advisor.