New Tax Laws and YOU

Unless you live under a rock, deep in a cave, you have heard about the new tax act that Congress is putting together. This is not a political commentary on that act. More importantly a few things to remember:

– With regards to estate tax very few people reading this need to worry about that element of the new tax act as it is set to bump the estate tax exemption from $5.45m to $10.9m. That is per person. So if you are a married couple with over $21.8m then your loved ones would still pay estate tax after your death. Also, it should be noted that the law sunsets so could go back to $5.45m per person or whatever else Congress feels like. However, for all practical concerns the estate tax is dead.
– However, there are still income tax concerns after death as relates to the step-up in basis. It is possible that people with funded A/B or “bypass” trusts should talk to an attorney about getting a probate court order to revoke that irrevocable trust!?
– Likewise, the same applies for Qualified Personal Residence Trusts (QPRTs) that might not be needed anymore. Again, they can be revoked in probate court.
– Lastly, plain old living trusts are still necessary to avoid probate after death in California as full probate kicks in at $150,000 of gross assets.

So, the apparent death of the estate tax does not mean you should ignore your estate plan as you could leave your loved ones a bad tax surprise and could leave them in probate court. Call your estate planning attorney your estate reviewed in light of the new tax act coming down the pipe from Washington DC.

My best wishes to you and yours this holiday season.


PATH – Protecting Americans From Tax Hikes Act of 2015

We in the tax and estate planning world love acronyms so no surprise the governments newest tax law is called “PATH” which stands for Protecting Americans from Tax Hikes act of 2015.   I like to blog about estate taxes primarily but as the focus in estate planning moves toward incomes taxes I like to mention them as well when I can.  Here’s a link to the government website:

Protecting Americans From Tax Hikes Act of 2015

Frankly a lot of the stuff in there doesn’t apply to most of my clients.  For example I saw that it gives permanent extension of certain provisions related to non-US shareholders in RICs. I had to look up what a RIC is!  It appears to be a “regulated investment company” so now I have learned something new for the day!

Other areas of importance to few of my clients include provisions that impact foreign controlled corporations, non-US investment in US based real estate, and a lot of provisions related to the tax treatment of sales in REITs and other technical aspects of REITs.

However, the one that several of my wealthier clients may like to hear is that the ability to make charitable contributions from your retirement account, and treat it as your distribution for the year, has been made permanent.  This has been an on-again off-again law in recent years but it’s now permanent. If you want to take advantage of this you need to do so immediately!  The gifts must be made by December 31, 2015 to take advantage of the law for this year.  However, now that it’s permanent you can use it toward your 2016 mandatory distributions next week!  Of course, I always wonder what “permanent” means to the people who make the laws in Washington DC!?

Happy new year!



NEW IRS Form 8971 – BASIS reporting

HOT OFF THE PRESSES:  The Internal Revenue Service has released a draft of a new Form 8971 for reporting basis information in accordance with new IRC section 6035 for assets held by a decedent and reported on a federal estate tax return (Form 706) filed on or after August 1, 2015. The form says it is to be signed by the “executor” of the estate but I believe a “trustee” can sign also. In any event it is likely part of your fiduciary duty and you should talk to your accountant about this when you file a form 706 “estate tax return.”  Also, remember that estate tax returns are to be filed within 9 months of death but you can ask for a 6 month extension if you file for it within the first 9 months. The link above goes right to the sample form.

2016 Gift and Estate Tax Exemptions

The IRS recently released the tax adjustments for 2016. As our firm focuses on gift and estate tax planning I wanted to share the relevant numbers with you.

The annual gift exemption remains at $14,000. As a reminder that is the amount each person can give away, each year, to any individual, and all without tax.  This can be given to relatives or friends. So, for example, if grandma and grandpa are worried that they will have an estate subject to estate tax at death they can write $14,000 checks to every child, every grandchild, etc…. In fact, grandma and grandpa can EACH write those checks so it’s really $28,000 in total.  That is the total of all gifts for the year so it’s not a bad idea to write your checks for just under $14,000 to allow for birthday and holiday gifts!

The federal gift and estate exemption (that is what you can give away at death or during life in excess of the $14k gifts mentioned above) is up to $5,450,000. This is up from $5,430,000 in 2015. It’s important to note that this tax does not effect very many people but some people accidentally slip into it.  This is a tax on all assets you own at death. This includes IRAs, 401ks, and other retirement plans in addition to your home, banks, stocks, etc…. Also, it includes the death benefit in life insurance that you own at death.

There are more numbers on the IRS website for Rev Proc 2015-53 at this link.  On that page you can see the income tax adjustments as well.

Here’s to a happy holidays in 2015 and an even better 2016 to you and yours!  -John

2016 Federal Gift and Estate Tax Exemptions

I just learned of estimated gift and estate tax exemption for 2016. Again, this is just an estimate but comes from a reliable source. They project that the federal gift and estate tax exemption will be $5,450,000 ($5.45m) which is up from this year’s $5,430,000.  They project that the annual gift tax exclusion will remain at $14,000. If you have questions about how you can best utilize these exemptions in your estate plan contact us to discuss. -John

Reverse Estate Planning to get a step up in basis

I heard a great presentation recently by a CPA. He was talking about, what he calls, “reverse estate planning.” Say what? Well, we all know that the focus in estate planning has changed from estate taxes (death taxes) to capital gains tax (income taxes). This CPA had a great idea to improve people’s basis. As he explained we can each give away $5.43m right now. Most of us will never get close to that much in assets. Thus, using our federal gift tax exemption is not as taboo as it used to be. That is, assuming we believe Washington D.C. when they say these laws are “permanent.”

Let’s back up a little bit. Under current laws when a person dies the assets they own receive a step up in tax basis for capital gains purposes. So, if you own a property worth $500,000 but purchased for $100,000 you have a $400,000 gain on sale when you sell it. However, if you die, owning that property, your basis (actually your heir’s basis) steps up to the date of death value; i.e. $500,000. They can then sell it for $500,000 and pay ZERO TAX.

This expert’s idea is to look at your dying parent’s, grandparents, or other loved ones a bit differently. Yes it’s sad but you know those loved ones love two things: 1) YOU and 2) helping family avoid taxes! That’s universal, right!?

The plan is you have this property with $100,000 basis. It can be stock, real estate, or anything else. At least one year before death you gift it to grandma, mom, dad, whoever it is. Obviously, you have to trust that they will give it back to you when they die via their will or trust.

As long as they live that year, so it’s not deemed a “death bed gift,” you will get a full step up in basis. That’s right! You just saved yourself $100,000 in taxes approximately! WOW!

Obviously, this is a very technical procedure with pitfalls. It’s not to taken lightly. Talk to your tax adviser and your estate planning attorney.

Good luck with your estate planning… and REVERSE ESTATE PLANNING!


IRS Gift and Estate Tax Exemptions for 2015

The IRS released their gift and estate tax exemption numbers for 2015 a few months back. In case you missed it they are:

GIFT TAX: It remains at $14,000 per donor per donee.  So a husband and wife can do a “split gift” and give $28,000 to any indivudual (family or otherwise).

ESTATE and GIFT TAX: This exemption bumps up to $5,430,000 in 2015. That is, each person can give away this amount during life, or at death, or in combination. If your net worth might exceed this at death plan ahead with estate planning. There are many ways to maximize the value of each “dollar” given so that $5,430,000 can be much more!

Talk to a qualified estate planning attorney so that your estate gets planned correctly.

Happy new year!  -John

Estate tax exclusion 2014

The IRS has released their inflation adjusted numbers for 2014. The estate tax exclusion has gone up to $5.34m for 2014.  The annual gift exclusion remains at $14,000. Below is the text straight from the IRS website:

2014 Inflation Adjustments

IR-2013-87, Oct. 31, 2013

WASHINGTON — For tax year 2014, the Internal Revenue Service announced today annual inflation adjustments for more than 40 tax provisions, including the tax rate schedules, and other tax changes. Revenue Procedure 2013-35 provides details about these annual adjustments.

The tax items for tax year 2014 of greatest interest to most taxpayers include the following dollar amounts.

  • The tax rate of 39.6 percent affects singles whose income exceeds $406,750 ($457,600 for married taxpayers filing a joint return), up from $400,000 and $450,000, respectively. The other marginal rates – 10, 15, 25, 28, 33 and 35 percent – and the related income tax thresholds are described in the revenue procedure.
  • The standard deduction rises to $6,200 for singles and married persons filing separate returns and $12,400 for married couples filing jointly, up from $6,100 and $12,200, respectively, for tax year 2013. The standard deduction for heads of household rises to $9,100, up from $8,950.
  • The limitation for itemized deductions claimed on tax year 2014 returns of individuals begins with incomes of $254,200 or more ($305,050 for married couples filing jointly).
  • The personal exemption rises to $3,950, up from the 2013 exemption of $3,900. However, the exemption is subject to a phase-out that begins with adjusted gross incomes of $254,200 ($305,050 for married couples filing jointly). It phases out completely at $376,700 ($427,550 for married couples filing jointly.)
  • The Alternative Minimum Tax exemption amount for tax year 2014 is $52,800 ($82,100, for married couples filing jointly). The 2013 exemption amount was $51,900 ($80,800 for married couples filing jointly).
  • The maximum Earned Income Credit amount is $6,143 for taxpayers filing jointly who have 3 or more qualifying children, up from a total of $6,044 for tax year 2013. The revenue procedure has a table providing maximum credit amounts for other categories, income thresholds and phaseouts.
  • Estates of decedents who die during 2014 have a basic exclusion amount of $5,340,000, up from a total of $5,250,000 for estates of decedents who died in 2013.
  • The annual exclusion for gifts remains at $14,000 for 2014.
  • The annual dollar limit on employee contributions to employer-sponsored healthcare flexible spending arrangements (FSA) remains unchanged at $2,500.
  • The foreign earned income exclusion rises to $99,200 for tax year 2014, up from $97,600, for 2013.
  • The small employer health insurance credit provides that the maximum credit is phased out based on the employer’s number of full-time equivalent employees in excess of 10 and the employer’s average annual wages in excess of $25,400 for tax year 2014, up from $25,000 for 2013.

Details on these inflation adjustments and others not listed in this release can be found in Revenue Procedure 2013-35, which will be published in Internal Revenue Bulletin 2013-47 on Nov. 18, 2013.

Federal AFRs October 2013

Here is the latest from the IRS for the AFR (applicable federal rates) for October 2013.

REV. RUL. 2013-21 TABLE 2
Adjusted AFR for October 2013
Period for Compounding
Annual Semiannual Quarterly Monthly
adjusted AFR .32% .32% .32% .32%
adjusted AFR 1.78% 1.77% 1.77% 1.76%
adjusted AFR 3.50% 3.47% 3.46% 3.45%

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10.0John Bernard Palley
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