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%

How permanent are the 2013 estate tax laws?

If President Obama’s 2014 budget is any prediction of the future the 2013 “permanent” estate tax law changes are not very permanent. Or, put another way, only politicians would call them permanent!  I have read, in recent days, that President Obama is proposing going back to 2013 estate tax levels. That would mean a $3.5m exemption and a 45% tax rate. Read more on this web site HERE.

Step-up in basis – The Basics

A person asked me the other day to explain the step-up in basis rules. This can be very complicated so I will digest down to the very basic elements. Let’s say dad buys a house for $25,000 in 1966.  Let’s say that house is now worth $300,000.  If dad sells the house while he is alive he can likely qualify for the $250,000 exemption upon sale. That is, if he sells the house for $300,000 with a basis of $25,000 (let’s assume no adjustments to basis) he has a $275,000 gain on sale. However, he has the $250,000 exemption if he has lived in the personal residence for two of the last five years. That leaves only $25,000 subject to tax upon sale. Between federal and state capital gains tax you are probably talking 25-30% in California so $5k-$10k in tax to be paid.

The problem that some people create is they try to outsmart the law and avoid attorney fees. They come up with a master plan to avoid probate and avoid attorney fees. They will simply transfer the house from dad to son now, before death.  Ok, there is a $5,240,000 gift tax exemption so the transfer is without gift tax as the house is only worth $300,000. However, what happens when son sells?  Son receives dad’s basis of $25,000 and thus he is facing a $275,000 gain on sale. You can do the math… BIG TAX BILL!

The best answer, in most cases, is to let the house transfer from dad to kids at his death. By doing this the kids will receive a STEP-UP IN BASIS!  A step-up in basis happens when a property transfers at death. It gives the inheritors the decedent’s date of death value as their basis. Thus $300,000 is the new basis. If the property is then sold for $300,000 there is ZERO TAX upon sale!


Still waiting on new estate and gift tax laws

I just read this article in the Sacramento Bee that I found interesting.  It focuses on the income tax side and what the two sides are working on in DC. They claim they are close. The bigger question for me, and my clients, is what will the gift and estate tax exemptions be!?

I’ll be interested to find out. I’ll keep posting as I hear more….


Federal AFR Rates – November 2012

Right from the horse’s mouth, so to speak, here are the November 2012 AFR rates straight from the IRS website:
Section 1274.–Determination of Issue Price in the Case of Certain Debt Instruments Issued for Property

(Also Sections 42, 280G, 382, 412, 467, 468, 482, 483, 642, 807, 846, 1288, 7520, 7872.)    Rev. Rul. 2012-30
This revenue ruling provides various prescribed rates for federal
income tax purposes for November 2012 (the current month). Table 1
contains the short-term, mid-term, and long-term applicable federal rates
(AFR) for the current month for purposes of section 1274(d) of the Internal
Revenue Code. Table 2 contains the short-term, mid-term, and long-term
adjusted applicable federal rates (adjusted AFR) for the current month for
purposes of section 1288(b). Table 3 sets forth the adjusted federal longterm rate and the long-term tax-exempt rate described in section 382(f).
Table 4 contains the appropriate percentages for determining the low income housing credit described in section 42(b)(1) for buildings placed in  service during the current month. However, under section 42(b)(2), the
applicable percentage for non-federally subsidized new buildings placed in
service after July 30, 2008, and before December 31, 2013, shall not be
less than 9%. Finally, Table 5 contains the federal rate for determining the
present value of an annuity, an interest for life or for a term of years, or a
remainder or a reversionary interest for purposes of section 7520.


REV. RUL. 2012-30 TABLE 1
Applicable Federal Rates (AFR) for November 2012
Period for Compounding
Annual Semiannual Quarterly Monthly

AFR .22% .22% .22% .22%
110% AFR .24% .24% .24% .24%
120% AFR .26% .26% .26% .26%
130% AFR .29% .29% .29% .29%


AFR .89% .89% .89% .89%
110% AFR .98% .98% .98% .98%
120% AFR 1.07% 1.07% 1.07% 1.07%
130% AFR 1.16% 1.16% 1.16% 1.16%
150% AFR 1.34% 1.34% 1.34% 1.34%
175% AFR 1.57% 1.56% 1.56% 1.55%


AFR 2.40% 2.39% 2.38% 2.38%
110% AFR 2.65% 2.63% 2.62% 2.62%
120% AFR 2.89% 2.87% 2.86% 2.85%
130% AFR 3.13% 3.11% 3.10% 3.09%


REV. RUL. 2012-30 TABLE 2
Adjusted AFR for November 2012
Period for Compounding
Annual Semiannual Quarterly Monthly
adjusted AFR .24% .24% .24% .24%
adjusted AFR .98% .98% .98% .98%
adjusted AFR 2.84% 2.82% 2.81% 2.80%
REV. RUL. 2012-30 TABLE 3
Rates Under Section 382 for November 2012
Adjusted federal long-term rate for the current month 2.84%
Long-term tax-exempt rate for ownership changes during the
current month (the highest of the adjusted federal long-term
rates for the current month and the prior two months.) 2.87%



REV. RUL. 2012-30 TABLE 4
Appropriate Percentages Under Section 42(b)(1) for November 2012
Note: Under Section 42(b)(2), the applicable percentage for non-federally
subsidized new buildings placed in service after July 30, 2008, and before
December 31, 2013, shall not be less than 9%.
Appropriate percentage for the 70% present value low-income
housing credit 7.38%
Appropriate percentage for the 30% present value low-income
housing credit 3.16%
REV. RUL. 2012-30 TABLE 5
Rate Under Section 7520 for November 2012
Applicable federal rate for determining the present value of an
annuity, an interest for life or a term of years, or a remainder or
reversionary interest 1.0%

Estate Planning Window Closing….

As the year progresses toward December 31st one of the biggest estate planning opportunities in modern history is getting set to expire.  The Bush era tax cuts, as modified in December 2010, created an unprecedented FIVE MILLION DOLLAR GIFT TAX EXEMPTION.  This exemption, now $5,120,000, is set to expire at year end.

The estate tax can quickly eat 50% of your assets of death… even if you have a living trust. Yes, a living trust does not, in and of itself, avoid estate tax! You need to do more if you have a potentially taxable estate. As of today you would need to have more than $5,120,000 to be estate taxable but that number is set to shift to $1,000,000 on January 1, 2013. Yes, just one million and that includes life insurance and retirement accounts!

If your total estate may be worth more than $1,000,000 on January 1, 2013 then you need to look at your estate plan NOW!  THIS YEAR. Do not wait!