Musings from the CEO (Spring 2013)

Estate Planning has evolved significantly over the last several years.  In recent months, we have seen the estate tax exemption become “permanent” at $5,250,000 per person, and it will continue to adjust with inflation.  We have also seen the lifetime gift tax exemption and generation-skipping transfer tax exemption be permanently increased to keep pace with the “new” estate tax exemption.  An obvious effect of this development is that a significant number of estates will be able to pass to the next generation without transfer taxes.  A married couple can now pass at least $10,500,000 of wealth to their children before their estates are hit with the still significant 40% tax rate.

Congress has also made “portability” permanent, which means that any unused exemption when the first spouse dies is carried over to the estate of the surviving spouse.  Prudent planning generally does not rely on portability, since it is sabotaged by the subsequent marriage of the surviving spouse and does not apply to generation-skipping transfer tax.

The focus of seasoned estate planning techniques will continue for the more wealthy.  Estate planning should become less costly and complicated for most Americans, however, Hoffman & Associates will still focus on a significant use of dynasty trusts for a plethora of reasons.  These include not only potential estate tax savings, but also income tax flexibility, asset protection from creditors, preservation of family wealth in the bloodline, protection from divorce, and simplifying probate.  Dynasty trusts, however, are under scrutiny and threat as the Obama Administration pushes its agenda.  While most states are extending the period of time that trusts can hold property, there are proposals to limit that duration for transfer tax (and other?) purposes.

Joe Nagel’s article in this Newsletter is a good reminder to us of the many reasons for estate planning, most of which are not focused on taxes.  We want to be good stewards of our assets.

At Hoffman & Associates our practice will continue to focus on estate planning techniques and working with clients to accomplish their estate planning objectives, with significant focus on succession planning for family businesses and asset protection.

We are seeing an increased focus on elder law matters.  As our client base gets older and the imminent demographics of the country are affected by the baby boomers and their parents, medical technology and a focus on general health issues constantly increase our life expectancies.

As income tax rates continue increasing, we are witnessing a rekindling of our clients’ focus on income tax planning.  This is “back to the basics” for a tax planning firm like Hoffman & Associates.  We continue to focus on important decisions about retirement plans, social security, tax deductions, and the tax sensitive nature of investments on behalf of our clients.

Kim Hoipkemier’s article this month highlights a focus area of Hoffman & Associates, namely, Estate Planning for Women.  Again, demographics, the economy, education and corporate America recognizes that women continue to live longer, earn more, and prosper, with the ever increasing responsibility to juggle and manage family and wealth.

Finally, at Hoffman & Associates we have begun a new area of service for our clients, as their situations demand new and flexible assistance to help them manage their daily financial lives.  The Hoffman Family Office (HFO) services include record keeping, bill paying, bookkeeping, budgeting, investment analysis, insurance analysis/shopping, and family philanthropy matters.  Whether it is the overwhelmed widow, the busy corporate executive, or the family that wants to responsibly out-source some of their financial tedium to their trusted advisors, we want to fill the vacuum by providing such help from the Firm they have trusted with so many other important areas of their planning and financial well-being.  Carolina Gomez of our office has been busy defining the areas where HFO can make a difference, and is ready to talk to you about any area you think HFO may be of assistance.

These are interesting times, and I choose to believe we are at the beginning of good times.  While we are clawing out of a recession, and Washington, DC has us constantly on pins and needles, the economy is generally getting better, unemployment is generally not increasing, and our clients generally are in an upswing in their attitudes and well-beings.  We want to be here for those who need assistance, whether it is planning for them or an elderly family member, assisting with the growth and success of their business, or simply to put their mind at ease that they have satisfactorily addressed planning considerations within their realm of influence.  Let us hear from you!

 

 

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.

What the New Tax Law Means to You

As you probably know, Congress avoided the so-called fiscal cliff by passing – at the 12th hour –the American Taxpayer Relief Act of 2012 (the 2012 Tax Act), signed into law by the President on January 2, 2013. The 2012 Tax Act makes several important revisions to the tax code that will affect estate planning for the foreseeable future. What follows is a brief description of some of these revisions – and their impact:

  • The federal gift, estate and generation-skipping transfer tax provisions were made permanent as of December 31, 2012. This is great news for all Americans; for more than ten years, we have been planning with uncertainty under legislation that contained built in expiration dates. And while “permanent” in Washington only means that this is the law until Congress decides to change it, at least we now have more certainty with which to plan.
  • The federal gift and estate tax exemptions will remain at $5 million per person, adjusted annually for inflation. In 2012, the exemption (with the adjustment) was $5,120,000. The amount for 2013 is expected to be $5,250,000. This means that the opportunity to transfer large amounts during lifetime or at death remains. So if you did not take advantage of this in 2011 or 2012, you can still do so – and there are advantages to doing so sooner rather than later. Also, with the amount tied to inflation, you can expect to be able to transfer even more each year in the future.
  • The generation-skipping transfer (GST) tax exemption also remains at the same level as the gift and estate tax exemption ($5 million, adjusted for inflation). This tax, which is in addition to the federal estate tax, is imposed on amounts that are transferred (by gift or at your death) to grandchildren and others who are more than 37.5 years younger than you; in other words, transfers that “skip” a generation. Having this exemption be “permanent” allows you to take advantage of planning that will greatly benefit future generations.
  • Married couples can take advantage of these higher exemptions and, with proper planning, transfer up to $10+ million through lifetime gifting and at death.
  • The tax rate on estates larger than the exempt amounts increased from 35% to 40%.
  • The “portability” provision was also made permanent. This allows the unused exemption of the first spouse to die to transfer to the surviving spouse, without having to set up a trust specifically for this purpose. However, there are still many benefits to proper estate planning using trusts, especially for those who want to ensure that their estate tax exemption will be fully utilized by the surviving spouse.
  • Separate from the new tax law, the amount for annual tax-free gifts has increased from $13,000 to $14,000, meaning you can give up to $14,000 per beneficiary, per year ($28,000 for a married couple) free of federal gift,  estate and GST tax – in addition to the $5 million gift, estate, and GST tax exemptions. By making annual tax-free transfers while you are alive, you can transfer significant wealth to your children, grandchildren and other beneficiaries, thereby reducing your taxable estate and removing future appreciation on assets you transfer. And, you can significantly enhance this lifetime giving strategy by transferring interests in a limited liability company or similar entity because these assets have a reduced value for transfer tax purposes, allowing you to transfer more free of tax.  Gifting to Family Trusts allows the tremendous advantage of gifting to one destination, while using the annual gift exclusions for all of your descendants.

For most Americans, the 2012 Tax Act has removed the emphasis on planning for worst case scenarios and put it back on the real reasons we need to do estate planning: taking care of ourselves and our families the way we want. This includes:

  • Protecting you, your family, and your assets in the event of incapacity;
  • Ensuring your assets are distributed the way you want;
  • Protecting your legacy from irresponsible spending, a child’s creditors, and from being part of a child’s divorce proceedings;
  • Providing for a loved one with special needs without losing valuable government benefits; and
  • Helping protect assets from creditors and frivolous lawsuits; and from estate depletion to fund nursing home costs.

For those with estates less than the $5.25 million exemption amount, trusts should still provide much valued asset protection.  However, those who are less concerned about asset protection may want to review options for unwinding previous transactions to the extent possible and, at a minimum, review their estate plan to ensure proper income tax planning (see below).

For those with larger estates, ample opportunities remain to transfer large amounts tax free to future generations, but it is critical that professional planning begins as soon as possible. With Congress looking for more ways to increase revenue, many reliable estate planning strategies may soon be restricted or eliminated.   REVENUE RAISING PROPOSALS INCLUDE 1) LIMITING THE BENEFITS OF GRANTOR TRUSTS, 2) LIMITING THE DURATION OF ALLOCATION OF GST EXEMPTION, 3) IMPOSING A MINIMUM 10 YEAR TERM FOR GRANTOR RETAINED ANNUITY TRUSTS (“GRATS”), AND 4) REDUCING THE AVAILABILITY OF ENTITY BASED VALUATION DISCOUNTS.  These are all tools that can reduce your estate tax exposure but that may not be available much longer.  Thus, it is best to put these strategies into place now so that they are more likely to be grandfathered from future law changes.

Further, as is well publicized, the 2012 Tax Act included several income tax rate increases on those earning more than $400,000 ($450,000 for married couples filing jointly).  Combined with the two additional income tax rate increases resulting from the healthcare bill, income tax planning for individuals is obviously now more important than ever.

What hasn’t been as publicized is that trusts (only those trusts not taxed as grantor trusts) and estates will be subject to these new taxes and higher tax rates on income above $11,950.   Proper income tax/distribution planning for trusts and estates will be essential going forward to minimize these burdensome tax increases.

Income tax basis planning will also be more important.  Many trusts hold highly appreciated, low tax basis assets. Reverse DGT transactions – purchasing low basis assets back from grantor trusts – can be used to obtain a step up in basis at death.  Trusts may be able to be amended and/or restated to allow a Trust Protector to identify low basis assets and take certain actions that would cause them to get a step up in tax basis at your death.   For assets not already in trust, Alaska Community Property Trusts can be utilized to get a double step up in tax basis at both spouse’s deaths.

The good news is that if you have been sitting on the sidelines, waiting to see what Congress would do, the wait is over.  We have increased certainty with “permanent” laws and you can have some comfort that the rules won’t drastically shift from year to year.  Unfortunately, for those of you with larger estates, planning techniques that can be utilized to reduce estate tax exposure are still on the chopping block – so don’t wait to plan.  For all clients, income tax planning, including income tax basis planning, should be a focus this year.  As always, the ultimate goals of estate planning, including protecting family assets and providing for loved ones, do not change.  Make sure you have a good plan to meet these goals. Schedule an appointment today by calling 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.

Tax Law Changes in the News

Stay up to date and informed about changes in tax law.  Highlighted in this article are some of the most recent.

Form 706 In Final Form:  On October 11, the IRS  issued the 2012 estate tax return (Form 706) in final form.  New on this form is the  portability election.  With portability, if an individual dies and does not utilize his or her applicable exemption amount,  the unused portion transfers to the surviving spouse if so elected by the deceased spouse’s personal representative.

According to regulations issued in June of 2012, executors choosing to make a portability election must estimate the total value of the gross estate based on a determination made in good faith and with due diligence. The instructions on Form 706 will provide ranges of dollar values, and every executor must identify the particular range within which the best estimate of the total gross estate falls.  An amount corresponding to this range will be included on the Form 706, which must be filed in order to execute the applicable exemption amount.  However, since this form is newly released, it is recommended that clients consult a tax professional and file extensions for early 2012 deaths.

New Tax Laws: Georgia’s Jobs and Family Tax Reform Plan is a comprehensive reform of how taxes are collected in Georgia.  The plan eliminates both the sales and ad valorem tax on automobiles and replaces them with a one-time title fee that is paid when the title is transferred from one owner to another.

The bill also phases out taxes assessed on energy used in manufacturing, so Georgia is now at an advantage in allocating new manufacturing in this state.  For example, Caterpillar added 1,400 jobs because of the phase out of such tax.

The bill also levels the playing field between retailers by requiring online retailers to collect and remit sales tax, just as brick and mortar stores do now.

Finally, the bill caps retirement income exclusion for senior citizens at $65,000 for a single filer and $130,000 for joint filers.

The Georgia Tax Tribunal Act provides a low cost mechanism for Georgia citizens to resolve tax disputes with the Department of Revenue.  The Tribunal, which will come into existence on January 1, 2013, ensures Georgians will be able to come before an expert to handle challenges to state tax assessments and denials of state tax refund claims.

 

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.

Musings from the CEO

In my last column, I discussed the current fate of estate and gift tax law.  The emphasis is on the prospective most significant increase in tax rates and lowering of individual exemptions that we have seen in our lifetime.  For those individuals with large estates, this creates a sense of urgency for estate planning to be done between now and the end of 2012.

Today, I’d like to bring it down a notch and discuss more traditional estate planning concepts that apply to a broader cross section of individuals/clients.

I am a firm believer in trusts, hence the moniker a “trust and estate lawyer”!  For the vast majority of our clients that means leaving their estates to their spouse, but directly to trusts that are created by their Wills.  These trusts are most often controlled by, and for the benefit of, the surviving spouse.  When property eventually goes to children, we believe that in most cases it is far more beneficial to have trusts created for your children, regardless of age, that will last for their lifetime.

If the document creating the trust (Will or trust agreement) is properly drafted, your spouse or child can be the trustee of his or her trust, effectively exerting all of the control over assets that they would have had if they inherited property outright.  However, the estate tax savings for future generations, the potential avoidance of generation skipping tax, the income tax flexibility, the protection from creditors, the protection from divorce, the preservation in the family, and the avoidance of probate are some of the reasons that it is desirable to allow the property to flow from generation to generation in trusts, as long as there are any significant assets worth protecting.

The 2010 tax law introduced the concept of “portability”.  This simply means that if one spouse dies and his or her estate does not use all of their estate tax exemption, the remaining unused portion can be carried over to the surviving spouse to be used in that estate.  There are numerous limitations and weaknesses in relying on portability, and we suggest that clients continue to have Wills that leave property to surviving spouses in trust(s), generally a combination of a Credit Shelter Trust and a QTIP Marital Trust.

Life insurance trusts are very common in many estate plans.  It almost always seems to be a good idea to get life insurance out of estates now.  As we get older, our clients acquire a lot of insurance for estate liquidity purposes.  If we maintain insurability, it is always good to have these policies reviewed to make sure that you are allocating resources as prudently as possible.  There may be situations where it would be prudent to prepay premiums.

Another method of reducing an otherwise taxable estate would be to consider a Roth conversion of a traditional IRA as a technique to get taxes out of a taxable estate, in a situation that would otherwise involve an asset (the traditional IRA) that will be subject to both income taxes and estate taxes upon the death of the owner.

Clients with more modest estates need to combine estate planning with Medicaid planning.  What can be done to protect assets if one of the spouses has to go into a nursing home?  First of all, both spouses should have a current Health Care Directive as a necessary part of their estate planning documents.  Considerations should be made to move investments to the name of the healthier spouse.  The healthier spouse’s Will can create a special needs trust in the event that he or she predeceases the spouse with health and living assistance concerns.

A part of estate planning should consider the need for long term care insurance.  The sweet spot to acquire long term care insurance seems to be when a couple is still in their 50’s.

The couple can consider a lifetime QTIP Marital Trust.  This would combine estate tax planning with Medicaid planning.  The lifetime QTIP is a method to protect the home in the event of Medicaid stepping in.  We also have a technique referred to as an Irrevocable Income Only Trust (IIOT) which can be established to start the five year look back rule for Medicaid.  Finally, once a spouse is moved to a nursing home, continued planning should be done for the independent spouse.

Besides Wills that create trusts for the surviving spouse and lifetime trusts for descendants, the Irrevocable Life Insurance Trust to remove life insurance proceeds from anyone’s taxable estate, the Health Care Directive, and any “special” trusts created for Medicaid planning, everyone should have a comprehensive General Power of Attorney.  These power of attorney forms should be “durable” so that the document remains in force after disability or incapacity.  In Georgia, these documents can be drafted so that they do not spring into effect until they are needed.

Remember that the more you plan, the more you save and the smoother the probate process will be for your loved ones.  The old adage is that “…we haven’t got an estate tax, what we have is, you pay an estate tax if you want to; if you don’t want to, you don’t have to.”

If you have any questions about estate planning, please contact Hoffman & Associates at (404) 255-7400.