All of the Trump era tax cuts expire in 2025. One of the primary ones is the Estate Tax Exemption amount was raised from $5 Million per person to $10 Million per person ($20 Million per couple). If you’re estate is above $10 Million, now might be a good time to start making gifts. The IRS has issued guidance stating that if you made gift before 2025, the gift will be honored. (Of course Congress can always change that). There are a number of Trust options available to you to allow you to keep the income from the property and give away a remainder. Also with interest rates jumping up 1000% in 2022 (0.44% to 4.8%) , some planning techniques should be explored sooner rather than later as the Federal Reserve continues to tighten the money supply.
Category Archives: estate tax
Tax planning Pre-Biden
If as has been alleged, Biden wins this election and the Democrats somehow get control of both houses of congress, Estate and Gift taxes will go up. Two areas where they have mentioned increases (1) lowering the Unified Credit Exemption from $11 Million to $5 Million. This would mean that individuals worth more than $5 Million or couples worth more the $10 Million will lose some benefits they currently have under the tax code. (2) Raising the Estate and Gift Tax rates to higher levels. What are some strategies to consider before the end of the year?
A. Dynasty Trusts. Make gifts now before the exemption is reduced. If you create a trust for your children and your grandchildren now (not you), you can create you can give up to $11 Million ($22 Million for couples) tax free to be used by your children and grandchildren. If you wait, you can only give $5 Million ($10 Million per couple). So, if you’re really rich, now is the time to make generation skipping gifts.
Another target is preferred capital gains rates. I do believe that will be watered down to a degree, but assume the rate goes from 20% to 30%, then what do you do. (1) You can harvest capital gains now, wait 30 days and reinvest. (2) Utilize a charitable remainder trust over multiple generations. It gives you a small charitable deduction, but allows capital gains to not be taxed unless taken out. So, again, this allows you some ability to make gifts to your children now and keep benefits for yourself, and allows for deferral of capital gains until they are distributed.
Go Fund Me and the Tax Grinch
In this Holiday Season, I’ve been seeing lots of requests to give through GoFundMe. Whenever money changes hands the Government is not far behind seeking its cut. So, let’s tax example. Missy needs a new liver and the surgery will cost $500,000. She has no insurance and asks her friends to help through a GoFundMe site. She has some very generous friends and receives $200,000. So, how does the IRS view this largess.
Is it a tax deductible gift? No. Its akin to passing the hat at the funeral.
Is it subject to gift tax? If the amount given is in excess of $14,400, then it you have to file a gift tax return not that you would owe any such taxes.
Is it subject to income taxes? That’s the tricky part. The amounts given were probably gifts given out of generosity or out of love and affection. But, in some cases the IRS has taken the position that it is income. A couple of things you has to be wary of.
First, I would not recommend deducting medical expenses on your tax return if they were financed out of a GoFundMe account. That’s double dipping.
Second, if the GoFundMe money is not used for a deductible purpose, it might be income. If it is used for lawyer’s fees or rent or it in essence replaces a lost wage because you lost your job or to fund a project from which you will use funds to live on, then perhaps its income.
One other question, is who set up the GoFundMe page in the first place? If it was the recipient, then the Service may take the position that it was income and not only income but earned income subject to self-employment taxes. For example long term disability payments are considered earned income. If they were used for medical, report the receipt and then deduct the medical, that way, you avoid the potential of being audited later.
Hopefully, the IRS will clarify the rules on this. The mantra is be careful.
Estate Taxes and those pesky Pay on Death Accounts
Let’s say granny wanted to avoid probate and also keep her FDIC insurance exposure low and ran around to fifty banks buying CD’s and names children and grandchildren as pay on death beneficiaries of each account. There is no will and no probate of her estate and no executor qualified.
So, one of the POD beneficiaries figures out that granny was maybe worth over $5 Million and there is a necessity to file an estate tax return.
So he goes to Head in the Sand Credit Union and asks for details of any CD’s owned by the decedent and even gets his siblings to give him a notarized permission to find out the information in the accounts.
HITSCU says, “no way” we cannot accept that permission slip and we have to follow our own procedures and protect their privacy.
This little cautionary tale, points out the problem with pay on death accounts. Yes, they avoid probate, but they also create a mess in trying to locate the decedent’s assets when there may be an estate tax due. In such situations a revocable trust is more beneficial as the owner and provides more centralized control of the assets if granny wants to avoid probate.
Portability of Estate Tax Exemption
Susie and Nate have an estate of $5 Million. Everything is in joint name and Nate dies in January, 2012. Since Susie inherited everything, she figured no estate tax return was needed. She went to see Joe Probate, a local probate attorney, and he confirmed, “nuthin to probate”, he said. Susie went merrily on her way. In January, 2013, the estate tax exemption went down to $1 Million. Susie died in June of 2013. Her kids go to Joe Probate again, and he says, go see the accountant in town, that the estate is over $1 Million, so there is a potential estate tax. So, when they go to the Accountant, the accountant asks where was Nate’s Federal Estate Tax Return for 2012. The kids shake their heads, they ask Joe Probate, he says none was required. However, because Susie never filed an estate tax return for Nate, she did not capture his portability rights. She could have claimed, 1/2 of his property on a timely filed Federal Estate Tax return for Joe (15 months for portability return). Because she failed to do so, her estate will not get to use his estate tax exemption. Had she filed that return her kids would have had to pay an estate tax upon her death of $660,000. Instead, they will have to pay an estate tax of $2 Million. So it is very important for anyone dying in 2011 and 2012 to file those Federal Estate Tax returns within 15 months of the date of death.