A SPLIT DECISION… YOU AND THE IRS

 

This is not a catchy story, just a practical tax-related one that most people do not yet know about.

Less than two weeks ago we finally got forms to report estates for people dying in 2010… THEN THEY CHANGED THE LAW!

On December 17 the estate exemption was reinstated effective January 1, 2010. The federal estate tax exemption was set at $5 million per person. This will be federal law for two years. Estates can choose to remain under the old 2010 law, but that is not advisable for most estates (run the numbers and compare!) The Washington State exemption remains at $2 million per person; I have idea if or when that will change.

When a spouse dies, if the Will or Trust contains tax planning, there is an opportunity to claim two estate tax exemptions. In other words, married people, through a "trust split" written into their Will or Living Trust, can effectively use two exemptions and keep all assets available for the surviving spouse. The complicating factor is that the federal and state exemptions are NOT the same number in Washington State.

Let me illustrate with two examples. THIS IS NOT LEGAL OR TAX ADVICE – CONSULT YOUR OWN LEGAL OR TAX COUNSEL USING YOUR FACTS!

Let's say we have a combined Washington estate (both spouses added together) of $2.2 million. The estate plan says give all to survivor unless he/she disclaims. Survivor's share of estate is kept in his or her name or Survivor Trust share; disclaimed amounts are allocated to a separate Shelter Trust that uses the decedent's exemption…

There are two basic choices:

I. Survivor keeps all. Here, when survivor dies, under current law $200,000 might be subject to Washington State inheritance tax. Estimated TAX IS $20,000.

OR

II. Survivor disclaims $200,000 or more to reduce taxable future estate to $2 million. Survivor could disclaim the fully allowable $1.1 million (½ of the community property).

a) Survivor must establish a trust share to own those disclaimed assets. This is a small hassle.

b) Survivor will also have to annually file an IRS Form 1041 to report income tax on the Shelter Trust.

c) Under current estate tax law, no tax at death of Survivor. WOULD SAVE $20,000 Washington Inheritance Tax. Is the hassle worth it to you?

d) You could gift assets or spend them on yourself instead.

 

NOW, what if the combined estate is $5 million?

SAME PLAN DESIGN; but if Survivor keeps all when survivor dies, under current law $3,000,000 would be subject to Washington State inheritance tax when he or she dies. Estimated TAX IS $390,000.

OR

Survivor disclaims $2,000,000 to fully fund the Shelter trust without triggering a tax now. This is LESS than ½, but completely uses the State and most of the Federal exemptions.

1) Survivor must establish a trust share to own those disclaimed assets. This is a small hassle.

2) Survivor will also have to annually file an IRS Form 1041 to report income tax on the Shelter Trust.

3) Under current estate tax law, no tax at death of Survivor.

4) Is it worth it to you? SURE LOOKS LIKE IT TO ME. Split!

Use current state exemption of $2mm for that amount to go to Shelter Trust to avoid triggering a state tax now and both state and federal later. (Note that you COULD overfund and pay only state inheritance tax of $50,000 to hopefully avoid a combined state and federal tax later.)

If you suffered the loss of a spouse in 2010, I want to offer my sincere condolences. Keep in mind that your loved one did this planning to benefit you and future heirs too. It was a thoughtful and unselfish act and another nice memory of someone who thought of others.

223,000,000 GUNS OR SO… THINK THIS MIGHT BE A PLANNING ISSUE?

Folks are on both sides of the issue of gun ownership. We all know that there are a lot of things in life that are dangerous: cars, chainsaws, rugby, commercial fishing… and guns.

Lately I have been pondering the issue of individual responsibility. I often people cite their "constitutional rights" as if that was the total equation concerning gun ownership. But it seems to me that rights and responsibility for their exercise go hand in hand.

On to a concept fairly new for me: the gun trust. It's usually a living trust used to purchase a suppressor or other regulated firearm without the necessity of going through the local Chief Law Enforcement Officer for permission… often denied without much chance to fight it. With a trust you can apply directly to the BATFE for a tax stamp.

Some gun shops give out trusts for free to promote sales, without considering the consequences. You may even be tempted to draft your own or to download a trust from the Internet. Talk about DANGEROUS… Let me explain a bit.

About a year ago I overheard a discussion about a "free living trust" that would simplify the process of acquiring a suppressor, short barreled rifle, or something similar regulated by federal law. Sounds good, right? I mean the trust was "free…"

I did some research and discovered a number of firearms-related issues. The major one I call the "Accidental Felony."  With 223,000,000 or so firearms in this country, and people passing away each year, guns go from owner to owner very often. Consider that a well-meaning friend or family member that follows the terms of your estate plan might possess or transfer a firearm WITHOUT COMPLYING WITH LOCAL, STATE AND FEDERAL LAW. If the transferee of the firearm is unable to legally possess it… you can see how the problem gets bigger and bigger.

For example, failing to observe the Gun Control Act of 1968, Title II, concerning "National Firearms Act" firearms can result in 10 years in prison and a fine of $250,000… per count. Other similar laws are on the books for every type of firearm. These laws are nothing to ignore. Again, somebody can accidentally violate them.

In Washington State persons other than felons and some other prohibited categories can own any type of rifle. Here's another example… you can own any rifle like an AR-15. It is the civilian version of the M-16 and is semi-automatic like many other types of rifle. However, some states call it an "assault rifle" and prohibit private ownership. What if you, from Washington, give it to your brother in your Will… he lives in the other state… next, what if he was convicted of domestic violence… which prohibits his ownership of ANY firearm under federal law in my example…

See the accidental problems that simple, legal ownership followed by transfer of a gun can cause?

 

CONSIDER THIS:

1. Firearms are part of the American ethos, part of the landscape.
    
2. Often, firearms are heirlooms and some have significant financial value too.
    
3. Local, state, and federal laws abound; they are not really in synch. They affect possession, ownership, transfer etc. etc. of all classes of firearms... which makes it VERY DANGEROUS to simply distribute them via a normal Will or normal Living Trust. These tools contain NO SPECIFIC GUIDANCE on how to do so without committing the "accidental felony."
    
4. Many gun stores give away free living trusts merely to expedite their sale of an NFA item. The ones I have seen are amateurish at best, defective and void at worst. What a questionable practice, and one that creates danger for customer AND gun shop AND innocent parties who rely on them in future…

SO WHAT IS A GUNDOCX TRUST AND WHY DID I CREATE IT?How do you allow others to use your firearm without breaking the law? What if your spouse goes to sell, give away, or loan your firearm when you are travelling, or you are disabled, or you pass on? Can I own a machine gun in another state, legally, when I live in this state which doesn't permit me to own it?

I created GunDocx to deal with all of these issues, and more. Attorney Foss Hooper joined my team of one, and we invented a complete trust system to help you acquire, possess, and transfer your precious firearms collection during your life and thereafter, REDUCING AND HOPEFULLY ELIMINATING THE CHANCE OF SOMEONE COMMITTING THE ACCIDENTAL FELONY.

GunDocx is one of a growing family of special purpose trusts available from Brislawn Lofton, PLLC. Special Needs, IRA Preservation, Asset Protection, Minor Child Auto and Charitable Income Trusts are only a few of them. Give me a call or send an email if you have an issue that cries out for creativity… we just may have something that will delight you.

The Tax "Deal" - the Forecast is Dark Clouds on the Horizon

My fellow member of WealthCounsel, Richard Wohltman of Alexandria, VA,  posted this relevant commentary on the Tax “Deal” currently being ushered through Congress. 

There has been a lot of talk this month about the "deal" to extend the Bush tax cuts. That "deal" also includes a substantial increase in the amount that can pass to your heirs without paying any federal estate tax. The 'exemption amount' will be increased to $5,000,000 per person.

The stated reason for that increased exemption amount is to help 'small' business owners and family farmers pass the business or farm to their heirs without having to pay estate taxes. It also means that all but a very limited number of multi-millionaires will have to file and pay federal estate tax.

Dark Clouds are Forecast.

There really are dark clouds on the horizon even if the "deal" is passed by Congress before the end of the month. The increase in the exemption is going to add billions of dollars to the federal deficit. The Treasury is going to have to borrow that money and we are all going to have to pay taxes or have benefits reduced just to pay the interest on those loans. And the day will come when the loan will have to be paid in full.

There is a more pressing problem, however, for estate planning. The "deal" only lasts two years! At the end of 2012 we will find ourselves right back where we are now -- facing a stupendous increase in the number of estate tax returns and tax payments when the exemption amount falls to just $1,000,000 starting January 1, 2013. The problems from the end of the Bush tax cuts (and the increased exemption amount from the "deal") return in 2o13. The uncertainty of how all of the estate and gift taxes will be interpreted once the large exemption disappears is the big grey cloud on the horizon for estate planners.

Estate planning attorneys have been hoping for some stability in estate tax policy so plans can be designed based on a clear expectation of how estate taxes will be calculated when death occurs. That stability disappeared with the Bush tax cuts. Estate planning attorneys all knew we were faced with the potential return to the 'old rules' with only a $1,000,000 exemption in 2011 and had to plan for the return of the middle class taxable estate. The same lack of stability continues since we can only look at what happens at the end of the next two years.

What does all this mean to you?

Don't think that the "deal" will make your estate planning easier just because you don't have Five or Ten Million Dollars. The vast majority of our clients require extra tax planning if the exemption returns to 1 Million Dollars.

Your estate planning lawyer must assume that the lower exemption will return and is forced to include options to address the substantial estate tax liability that will return in 2013. Your estate plan will continue to require more complication just to protect your family and your business with the automatic termination of the "deal" in 2013.

Where's the silver lining?

Just remember, if there is a silver lining in every grey cloud, that doesn't mean that the grey cloud is gone.  Don't let the proposed silver lining blind you to the limits inherent in any "deal" that lasts only two years!

The Federal Estate Tax Lapsed for 2010

The federal estate tax lapsed for 2010, and barring no action by Congress it was scheduled to return on Jan. 1 with an exemption of $1 million per person and a maximum rate of 55 percent. 

I have good news to share with you.  The long wait for action to address the unknown status of the federal estate tax may be approaching an end.  In a December 6, 2010 online posting by the New York Times, they reported that President Obama announced a tentative deal with Congressional Republicans on Monday.

An excerpt of the article appears below, and a link to the full article is included.  The accompanying photo by Joshua Roberts of Reuters appeared with the article.

Mr. Obama made substantial concessions to Republicans. In addition to dropping his opposition to any extension of the current income tax rates on income above $250,000 for couples and $200,000 for individuals, he agreed to a deal on the federal estate tax that infuriated many Democrats. The deal would ultimately set an exemption of $5 million per person and a maximum rate of 35 percent — a higher exemption and far lower rate than many Democrats wanted.

http://www.nytimes.com/2010/12/07/us/politics/07cong.html?pagewanted=1&_r=1&nl=todaysheadlines&emc=a2

 

But the NY Times article also cautioned that the deal is not supported by all parties.  So resolution may be within sight, but it is not yet a finalized deal. 

“The House Democrats have not signed off on any deal,” Representative Chris Van Hollen of Maryland, who has been representing House Democrats in formal negotiations on the tax issue, said Monday night. “We will thoroughly review and discuss the proposed package in the caucus.”

Some senior Democrats said an agreement by Mr. Obama to accede to Republican demands on the estate tax could lead to a revolt among lawmakers.

With this positive news in the air, it may be time to schedule a meeting to adjust your estate plans to maximize the impact of this likely change in the federal estate tax law.  Call me for an appointment, or leave a comment with a question below.