ESTATE TAX UPDATE:
FEATURING NEW PLANNING
STRATEGIES UNDER TC&JA
ARTHUR J. WERNER, ESQ.
Werner-Rocca Seminars
(215) 545-4181
[email protected]
[email protected]
718.544.1929 718.544.1540
137-34 71st Avenue, Flushing, NY 11367
1
o The exemption increased To $10,000,000, adjusted for
inf lation as of 2012
o The inflation adjusted exemption in 2018 is
$11,180,000
o This amount is doubled if the post‐mortem election
of “Portability” is made
o The estate tax was NOT repealed
o Step‐up in basis(FMV at DOD) is retained (IRC §1014)
2
o Like the estate tax, the exemption is increased to
$10,000,000, adjusted for inf lation as of 2012
o Thus, the actual exemption in 2018 will be $11,180,000
o The gift tax was NOT repealed
o Carry‐over basis(donor’s basis at date of gift) was
retained (IRC §1015)
o The annual exclusion was retained (2018: Note that the
cost of living adjustment increases the annual
exclusion to $15,000 per donee)
3
o Like the estate tax and the gift tax, the
exemption is increased To $10,000,000,
adjusted for inf lation as of 2012
o Thus, the actual exemption in 2018 will be
$11,180,000
o The generation skipping transfer tax was NOT
repealed
4
Estate Tax Rate History
Year Estate Tax Exclusion Highest Marginal Bracket
2001 $ 675,000 55%
2002 $1,000,000 50%
2003 $1,000,000 49%
2004 $1,500,000 48%
2005 $1,500,000 47%
2006 $2,000,000 46%
2007 $2,000,000 45%
2008 $2,000,000 45%
2009 $3,500,000 45%
2010 ‐0‐ 0
2011 $5,000,000 35%
2012 $5,120,000 35%
2013 $5,250,000 40%
2014 $5,340,000 40%
2015 $5,430,000 40%
2016 $5,450,000 40%
2017 $5,490,000 40%
2018 $11,180,000 40%
5
Gift Tax Rate History
Year Gift Tax Exclusion Highest Marginal Bracket
2001 $ 675,000 55%
2002 $1,000,000 50%
2003 $1,000,000 49%
2004 $1,000,000 48%
2005 $1,000,000 47%
2006 $1,000,000 46%
2007 $1,000,000 45%
2008 $1,000,000 45%
2009 $1,000,000 45%
2010 $1,000,000 35%
2011 $5,000,000 35%
2012 $5,120,000 35%
2013 $5,250,000 40%
2014 $5,340,000 40%
2015 $5,430,000 40%
2016 $5,450,000 40%
2017 $5,490,000 40%
2018 40%
$11,180,000
6
“Portability”
What is spousal “Portability” of the “Exclusion”?
If the first spouse does not fully use his/her
“exclusion”, then the surviving spouse inherits
the deceased spouse’s “exclusion”
An election must be made on a timely filed
IRS Form 706
Was made permanent in the fiscal cliff
legislation (American Taxpayer Relief Act of
2012)
7
Portability Defined
When a decedent is survived by a spouse,
the amount of the unified credit available to
that decedent's estate for estate tax purposes
that is not used by that decedent's estate is
"portable" – that is, it can be used for gift or
estate tax purposes by the surviving spouse.
8
Legislative History
Portability of the unified credit was first
enacted for two years by the Tax Relief,
Unemployment Insurance Reauthorization,
and Job Creation Act of 2010, effective
January 1, 2011
Portability of the unified credit was made
permanent by the American Taxpayer Relief
Act of 2012.
9
Portability Effect
A timely filed Portability election transfers the
unused "basic exclusion amount," to a surviving
spouse.
The "basic exclusion amount" is thus similar to
an exemption, and it is often referred to as an
"exemption."
The “basic exclusion amount” applies to the total
of estate and gift tax transfers.
The “basic exclusion amount” is subject to cost of
living adjustments
10
Due Date of the Portability Election
The statute allows the DSUE amount to be made
available to the surviving spouse only if the
predeceased spouse's executor elects portability
on a federal estate tax return.
The normal time prescribed for filing a federal
estate tax return is nine months after the date of
the decedent's death, although the executor may
claim an automatic extension of six months,
making the extended due date 15 months after the
date of the decedent's death.
11
Due Date of the Portability Election (cont.)
Under IRC §6018, an estate tax return is not required unless the
decedent's gross estate exceeds the basic exclusion amount
(reduced by the amount of taxable gifts since September 9, 1976).
But even if no estate tax return is required for estate tax purposes,
an estate tax return may still be filed solely to elect portability,
and under IRC §2010(c)(5)(A) that is the only way portability can
be elected.
Thus, for an estate that is smaller than the filing requirement, it
might be said that the return is not "prescribed" (required) to
comply with the estate tax law, but it is "prescribed" if a
portability election is desired.
12
Reasons NOT to Elect Portability
Second Marriages
Financial Immaturity
Lack of Trust in Surviving Spouse
Growth of Assets
Asset Protection Issues
13
Gift Tax
2017 annual exclusion ‐ $14,000
$28,000 if non‐donor spouse agrees to split
2018 annual exclusion ‐ $15,000
$30,000 if non‐donor spouse agrees to split
Carryover basis + Gift Tax paid (IRC §1015)
Tuition payments and medical payments not
a gift (IRC §2503(e) )
Planning Considerations
Making lifetime gifts has myriad benefits,
including the ability to grow the transferred
assets free of gift, estate and GST taxes for
multiple generations.
Those who have already used their lifetime
exemptions from the gift and GST taxes will
have the ability to “top up” their prior gifts
as the exemptions are indexed for inf lation.
15
Planning Considerations (cont.)
In addition, there continue to be opportunities to
transfer assets to future generations without making
a taxable gift, including through the use of grantor
retained annuity trusts (GRATs), sales of assets to
intentionally‐defective” grantor trusts, and charitable
lead annuity trusts (CLATs).
These techniques can be particularly effective in a
low‐interest‐rate environment like the current one.
16
Planning Considerations (cont.)
Particularly because it is now permanent, portability of the
estate tax exemption offers useful planning opportunities after
the death of the first spouse to die.
Its use requires the filing of a federal estate tax return at the
first spouse’s death and an affirmative election on that return.
Portability does have limitations, however.
For example, the deceased spouse’s unused estate tax
exemption amount is not indexed for inf lation; the first
spouse’s GST exemption is not portable; and portability is
not currently available for state estate tax purposes.
17
Planning Considerations
(cont.)
While portability provides a helpful safety
net for married couples who have not
created an estate plan while both spouses
are living, for all the reasons described
above, it is not a substitute for thoughtful,
affirmative planning.
18
Planning Considerations (cont.)
Because many states (including New York,
Connecticut, and Massachusetts) have
“decoupled” their state estate taxes from the
federal tax, the 2012 Act does not affect most
state estate tax issues.
Understanding your specific state law is
VERY important!
19
GST Issues
Should clients be encouraged to fully use their
GST exclusion in 2018?
Dynasty Trust considerations
Certain States have abolished the Rule Against
Perpetuities
Benefits of Delaware and Alaska Asset
Protection Trusts
Advantage of unification of GST and Gift Tax
exclusions
20
GST Planning
GST Identification (transfers that avoid estate tax)
Transfer to a Skip Person/Skip Trust
Skip person is greater than one generation
removed from transferor (determined by
relationship or if not related by age > 37 and 1/2
years)
Skip Trust: skip persons hold all beneficial
interests
21
GST Planning (cont.)
Form of Transfer (direct or indirect)
Direct Skip: A transfer made to a skip person or a
skip trust
Taxable Termination: The event/time in which all
of the remaining interests (such as in a trust) are
held by skip persons
Taxable Distribution: A distribution made (such as
from a trust) to or for the benefit of a skip person
Predeceased Parent Rule
Step up if parent of skip person is deceased at
the time the transfer is made
22
Selected Internal Revenue Code Sections
23
IRC §2031
Definition of Gross Estate
All Assets
Valuation at “Best Use Fair Market Value”
Date of Death Valuation (unless AVD Exception)
24
IRC § 2032
Alternate Valuation Method (6 Month Rule)
Five Requirements
All assets must be valued in accordance with the rule
The value of the total gross estate must decrease
The estate tax must decrease
25
IRC § 2032 (Continued)
If any estate assets are transferred within six months of
the date of death of the Decedent and if AVD is used,
the value of the assets so transferred is determined on
the date of transfer
AVD can not be used for valuing assets that decrease in
value due to waste (rather than market condition)
26
IRC § 2033
Property Owned Outright
Probate Assets
Transfer by Will or Operation of Law
27
IRC § 2034
Dower or Courtesy Interests
Surviving Spouse’s Right to Elect Against a Will
State law Issues
28
IRC § 2035
Certain Property Transferred Gratuitously Within
Three Years of Death
Three Year “Look‐Back” Rule
29
IRC § 2036
Gratuitous Lifetime Transfers Where the
Decedent Retained the Income or Control over
the Income
30
IRC § 2037
Gratuitous Lifetime Transfers Conditioned on
Surviving the Decedent
31
IRC § 2038
Gratuitous Transfers in Which the Decedent
Retained the Right to Alter, Amend, or Revoke the
Gift
32
IRC § 2039
Annuities or Similar Arrangements Purchased by
the Decedent and Payable for Life to Both the
Annuitant and the Specified Survivor
33
IRC § 2040
Jointly Held Property Where Another Party Will
Obtain the Decedent’s Interest at Decedent’s
Death by Survivorship
Spousal Rule
Non‐Spousal Rule
34
IRC § 2041
General Powers of Appointment
The right to say who can receive assets held in trust,
either during life or at the time of death
35
IRC § 2042
Life Insurance in Which the Decedent Possessed
Incidents of Ownership or Which was Payable to
or for the Benefit of the Decedent’s Estate
36
IRC § 2044
Assets Which Have Qualified for “Qualified
Terminable Interest Property” (QTIP) Treatment
and Must be Included in the Surviving Spouse’s
Estate
37
IRC §§ 2053 and 2054
The “Deductions”
Funeral Expenses
Administration Expenses
Estate
Non‐Probate
Debts of the Decedent
Losses During Administration
38
IRC § 2055
Transfers for Public, Charitable, and Religious
Uses
The “Unlimited Charitable Deduction”
39
IRC § 2056
Bequests to Qualified Surviving Spouses
The Surviving Spouse and the Decedent must have been
legally married (as per state law) immediately prior to
the Decedent’s death
The Surviving Spouse must be a citizen of the United
States
40
IRC § 2058
State Death Tax Deduction
2012 Tax Act extended this code section
41
New York Synopsys
For 2018, the federal estate tax exclusion is $11,180,000 The
federal estate tax rate on estates in excess of the exemption
amount is 40%
New York increased its estate exemption effective April 1,
2014. The top tax rate is 16%. Increases in the exemption
amount phased in as follows:
April 1, 2014 ‐ $2,062,500
April 1, 2015 ‐ $3,125,000
April 1, 2016 ‐ $4,187,500
April 1, 2017 ‐ $5,250,000
January 1, 2019 and beyond – The then current federal
exemption
42
New York Estate Tax Schedule
e:
43
The “Exemption Cliff”
The New York State exemption is phased out if a taxable
estate exceeds 105% of the exemption amount ($5,512,500).
This is referred to as the New York State “Exemption Cliff ”.
If the estate exceeds $5,512,500, the estate gets no New York
State exemption and is taxed on the first dollar of the
estate.
As a result, the tax liability to New York State on a
$5,512,500 estate is $452,300 (an effective marginal rate of
173%). In other words, it is not simply the excess over
the exemption that is subject to the tax, but the entire
value of the estate that is taxed.
44
The “Santa Clause”
For clients whose estates are slightly above the 105%
“Exemption Cliff ”, there is a solution known as the
“Santa Clause”.
If the client’s Will includes charitable bequests equal
to the amount of the estate in excess of the New York
State exemption, the family would net more funds
than without this charitable bequest.
45
t:
“Santa Clause Example”
Net to Net to
Family Family
w/o Charitab w/ Charitabl
le Bequest e Bequest
Gross Estate $5,512,500 $5,512,500
Bequest to - -
Charity of 0 262,500
amount
over Tax
Exemption
Taxable 5,512,500 5,250,000
Estate
NYS Estate 452,300 0
Tax
Net to Family 5,060,200 5,250,000 46
No “Portability” for New York
New York State does not allow portability in
calculating the New York State estate tax.
This means that if the first spouse’s exemption is not
fully used to shield $5,250,000 in assets from estate tax
upon that first spouse’s death, the unused exemption
does not pass to and cannot be used by the surviving
spouse’s estate.
47
Solution for No New York “Portability”
A client can create a trust which states that upon the
first spouse’s death, said trust would benefit the
surviving spouse.
The Trust would be funded with assets in value up to the
New York State exemption.
The assets in this trust (known as an “Exemption Trust”)
will not be taxable to the first spouse’s estate as it is
shielded by his or her exemption.
More importantly, the assets in the trust (plus all
subsequent appreciation in value) will not be counted as
part of the surviving spouse’s taxable estate.
48
“Pick‐Up” Tax
The New York Estate Tax is a “pick‐up” tax. This means
New York essentially relies on federal estate tax law to
define the taxable estate (with some minor
exceptions).
“Includable Gifts”
Gifts of New York property (real or personal) made after
March 31, 2014 are subject to New York Estate Tax if they
were made within three years of the date of the death of
the decedent
49
Application of Tax
The New York Estate Tax applies to probate and non‐
probate property (such as life insurance proceeds, IRAs
and qualified plans, accounts with POD or TOD
beneficiaries, and jointly titled accounts).
50
New Jersey Synopsys
Commencing January 1, 2018, New Jersey repealed
their Estate Tax.
New Jersey continues to have an Inheritance Tax.
51
New Jersey Inheritance Tax Rates
Beneficiary or Transferee Tax Rate for Each Beneficiary or Transferee
Class A No tax is due
Class C
First $25,000....................................No tax is due
Next
$1,075,000......................................................11%
Next
$300,000.........................................................13%
Next
$300,000.........................................................14%
Over
$1,700,000......................................................16%
Class D First
Class E $700,000........................................................15%*
Over
$700,000.........................................................16%
No tax is due
52
Application of Tax
The New Jersey Inheritance Tax applies to probate and
non‐probate property (such as life insurance proceeds,
IRAs and qualified plans, accounts with POD or TOD
beneficiaries, and jointly titled accounts).
53
Connecticut Synopsys
Connecticut has both an estate tax and a gift tax
Tax is similar (but not identical) to the Federal estate
and gift tax
54
Connecticut Estate Tax
Applies to resident and non‐resident estates
Estate Tax Exclusion
2018: $2,600,000
2019: $3,600,000
2020 and beyond: The then current Federal Estate Tax
exemption
Resident Estate
Decedent was domiciled in Connecticut
Non‐resident Estate
Decedent was not domiciled in Connecticut but Decedent, at
time of death, owned real or personal property in
Connecticut
55
Connecticut Gift Tax
Applies to Connecticut taxable gifts made by a resident
or nonresident of Connecticut on or after January 1,
2005
Connecticut resident – all real and tangible personal
property located in Connecticut ad intangible personal
property wherever located
Nonresident of Connecticut ‐ all real and tangible
personal property located in Connecticut
Annual exclusion (currently $15,000) applies
56
Connecticut Estate and Gift Tax Table
57
58
Tax Cut and Jobs Act of 2017
Made domicile planning more important due to :
Limitation on state and local income tax deduction to
$10,000
Limitation on home mortgage interest deduction to
interest on $750,000 of acquisition indebtedness
59
The State Attitude
States do not see the “humor” in domicile planning
Certain States are aggressive in what they see as their
right to enforce domicile
California
New York
60
The Effect of Domicile on Estate
and Financial Planning
Domicile Defined ‐ “A fixed, permanent, and
principal home to which a person, wherever
temporarily located, always intends to return”
61
Significance of Domicile
Disposition of Property
Appointment of Fiduciaries
Impact of Death Taxes
Asset Protection Issues
62
Types of Domicile
Domicile of Origin
Domicile of Choice
Domicile by Operation of Law
63
Domicile Planning Checklist
Residence
Registration
Banking
Memberships
Credit Accounts
Securities
64
Domicile Planning Checklist (cont.)
Personal Property
Wills and Testamentary Interests
Other Legal Documents
Taxes
65
66
Charitable Giving Options
Outright Gifts
Estate Bequests
Beneficiary Designation Gifts
Life Insurance Gifts
Charitable Gift Annuities
Traditional IRA/Qualified Plan Gifts
67
Charitable Giving Options (cont.)
Zero Estate Tax Gift
Charitable Trusts
Private Foundations
Wealth Replacement
Donor Advised Funds
68
69
Durable Power of Attorney
In the event of the incapacity of an individual,
decisions must be made with regard to that person’s
financial affairs
Courts favor spouses and blood relatives
Older clients, in considering who to place trust in, and
in determining terms and conditions, need to be very
thorough and specific
70
Durable Power of Attorney (cont.)
Issues that the Durable Power of Attorney can address:
Gifting of assets
Income Tax decisions and strategies
Financial planning strategies
Management of assets and affairs
71
Durable Power of Attorney (cont.)
The party, while he or she is competent, must
nominate an individual (or individuals) to act or his or
her behalf
Referred to as either an “Attorney‐in‐Fact” or as an
“Agent”
Otherwise, court will appoint a Guardian
72
Health Care Directives
Similar to the incapacity of an individual, medical
decisions must sometimes be made with regard to the
hospital care of an individual
73
Health Care Directives (cont.)
In the absence of a document spelling out who should
be making decisions regarding hospital treatment, life
support, and other critical medical decisions a court of
law will appoint a person to act on behalf of the
medically incapacitated party.
74
Health Care Directives (cont.)
Courts generally will appoint a spouse or a blood
relative
If this is not the desired result, an older client must be
more formal and create a document nominating a third
party
Note – Advanced Health Care Directive is also used
75
76
Taxability of Withdrawals
Other than Roth accounts, income when withdrawn
Capital gains and qualified dividends comes out as
ordinary income
10% early withdrawal tax if withdrawn prior to 59½
Taxed to the beneficiary if participant dies
Convert Regular IRAs to Roth
No AGI limit
Prior to 2010, AGI limit was $100,000
Warning: fully taxable in year of conversion
Roth Conversion Planning
Any dollar amount may be converted
Rollover prior non‐deductible IRAs
Caution: separate 5‐year holding periods apply for
conversion contributions
Recharacterizing Conversions
The Tax Cuts and Jobs Act eliminated the
recharacterization option
Observation: Consider making multiple Roth
conversions over time so that a “dollar cost
average” advantage takes hold
Required Minimum Distribution
Generally at 70½, but some exceptions
E.g., still working, beneficiary owners
Uniform Lifetime Table (Pub. 560)
Simple uniform table to calculate amount
Payout period based on joint life of owner and
beneficiary 10 years younger
Beneficiary determined much later
9/30 of year following year of death
Spousal Options: Inherited IRAs
Elect to treat deceased spouse’s IRA as surviving
spouses own IRA
Any time after death if sole beneficiary
Base RMD on surviving spouse’s age
Base RMD on decedent’s age at death
Withdraw within 5 years of death
Non‐Spouse Beneficiary Allowed
Qualified Plan Rollover
Distribution options available to non‐spouse
beneficiaries. Take
Immediate lump sum distribution
Distribution within 5‐years after death
Rollover to “inherited IRA.”
Non‐Spouse Inherited IRA RMD
If Owner died after RMD began, longer of:
Beneficiary’s remaining life expectancy
Decedent’s remaining life expectancy
If Owner dies before RMD began
Beneficiaries age
“Inherited IRA” Rollover Rules
Direct trustee‐to‐trustee transfer
Distributions can’t be delayed to 70½
Beneficiary may name new beneficiary
But, no additional rollover allowed
Roth Contribution Plans
Roth 401(k) retirement plan
Roth 403 (b) tax‐shelter annuity plan
Roth 457 government plan
Qualified Roth Plans
Qualified Roth plan requirements
Separate records
Separate designated Roth account
No co‐mingling of Roth and non‐Roth funds
Roth IRA v. Designated Roth
No AGI limits for designated Roths
No ordering rules for distributions
RMD required for designated Roths
High‐income benefit
Report separately on W‐2
Employee deferral only, no company contributions
Rollover into Roth Accounts Option
§401(k), 403(b) and 457 plans may allow Roth rollover
Cannot set up Roths specifically for rollovers
Rollover will creates tax
Warning: 10% early‐withdrawal penalty if distribution
made in first 5 years
Plan must allow rollover option
RMDs required from designated Roths
Contact Information
Werner‐Rocca Seminars, Ltd.
(215) 545‐4181
www.werner‐rocca.com
Art Werner – art.werner@werner‐rocca.com
Anthony Rocca – [email protected]
Follow us on Twitter @ILectureCPAs or
@WernerRocca
90
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EMPLOYEE/INDEPENDENT
CONTRACTOR
ROBERT E. MCKENZIE
SAUL EWING ARNSTEIN & LEHR LLP
Robert E. McKenzie Arnstein & Lehr 1
LLP
Misclassified Workers
2009 TIGTA report says IRS still needs to do
more to identify misclassified workers
TIGTA recommends that IRS develop an
agency-wide employment tax program to
coordinate the decision-making process and
efforts among its business divisions. Also
recommends that the IRS conduct a formal
compliance study to measure the current impact
of worker misclassification on the tax gap.
IRS concurred with the findings in the audit
report. & will coordinate an agency-wide
employment tax program.
Robert E. McKenzie Arnstein & Lehr 2
LLP