Tax

IRS Announcement: Estate Tax Closing Letters Will Now Only Be Issued Upon Request

Due to the increased volume of federal estate tax return filings in order to make the “portability election,” the IRS has announced that estate tax closing letters will only be issued upon request by the taxpayer. This change in IRS policy started on June 1, 2015.

What is the “Portability Election” and How is the Election Made?

The “portability election” refers to the right of a surviving spouse to claim the unused portion of the federal estate tax exemption of their deceased spouse and add it to the balance of their own exemption. The portability election went into effect for deaths occurring on or after January 1, 2011.

To properly make the election, a surviving spouse must file a federal estate tax return within nine months of the date of a spouse’s death, although a six-month extension of time to file the return can be requested. Filing an estate tax return is required to make the election even if the value of the deceased spouse’s estate does not exceed the federal estate tax exemption.

A Portability Example

The easiest way to understand how portability works is through an example. Let’s say Carol and Bob are married, all of their assets are jointly titled with rights of survivorship, their total estate is valued at $4 million, and neither spouse made any taxable gifts during their lifetimes. If Bob dies in 2015, none of his $11.4 million federal estate tax exemption will be needed since Carol will automatically inherit the entire estate through rights of survivorship. In addition, a federal estate tax return will not otherwise be required for Bob’s estate since it is valued under $11.4 million.

Nonetheless, if Carol wants to pick up Bob’s unused $11.4 million exemption and add it to her own exemption so that she can pass on up to $22.8 million when she dies, she can timely file an estate tax return for Bob’s estate and make the portability election with regard to Bob’s unused exemption. While this is a lot of money, these numbers are only good for 2019. The Federal Estate Tax Exemption changes all the time, which makes updating your estate plan so crucial!

What is an Estate Tax Closing Letter?

An estate tax closing letter is a document issued by the IRS after it determines that an estate tax return has been accepted as filed or that all required adjustments have been completed. In other words, the closing letter provides written proof from the IRS that all federal estate tax liabilities have been satisfied. An estate tax closing letter is often necessary to sell or distribute property.

New Rules for Issuance of Estate Tax Closing Letters

Prior to June 1, 2015, the IRS automatically issued estate tax closing letters. However, the IRS recently announced the following on its website in response to the increased number of federal estate tax return filings for the sole purpose of making the portability election:

“For all estate tax returns filed on or after June 1, 2015, estate tax closing letters will be issued only upon request by the taxpayer. Please wait at least four months after filing the return to make the closing letter request to allow time for processing. For questions about estate tax closing letter requests, call (866) 699-4083.”

The portability election provides another strategy that estate planning attorneys can use to lessen the burden of death taxes on your family. Like any other tax or legal strategy, you should seek competent advice to select the strategies that will work in your situation.

Who Should be Your Successor Trustee?

If you have a revocable living trust, you probably named yourself as trustee so you can continue to manage your own financial affairs, but eventually, someone will need to step in for you when you are no longer able to act due to incapacity or after your death. Your successor trustee plays an important role in the effective execution of your estate plan.

The Key Takeaways:

Because successor trustees have a lot of responsibility, they should be chosen carefully.
Successor trustees can be your adult children, other relatives, a trusted friend, or a corporate or professional trustee.

Responsibilities of A Successor Trustee

At Incapacity: If you become incapacitated, your successor will step in and take full control of your trust for you – making financial decisions involving trust assets, even selling or refinancing assets, and other tasks related to your trust’s assets. Since your trustee can only manage assets that the trust owns, it’s vitally important that you fully fund your trust. Your successor may also be involved in paying bills and helping to ensure you get the care you need.

After Death: After you die, your successor acts similar to an executor of an estate. The successor takes an inventory of your assets, pays your final bills, sells assets if necessary, has your final tax returns prepared, and distributes your assets according to the instructions in your trust. Like incapacity, the successor trustee is limited to managing assets that are owned by the trust, so fully funding your trust is vitally important.

Your successor trustee typically acts without court supervision, which is why your affairs can be handled privately and efficiently – and probably one of the reasons you have a living trust in the first place. But this also means it will be up to your successor to get things started and keep them moving along.

An Important Consideration

Your successor will be able to do anything you could with your trust assets, as long as it does not conflict with the instructions in your trust document and does not breach fiduciary duty.

It isn’t necessary for the successor trustee to know exactly what to do and when, because your attorney, CPA, and other advisors can help guide him or her, but it is important that you name someone who is responsible and conscientious.

Who Can Be Successor Trustees

Successor trustees can be your adult children, other relatives, a trusted friend or a professional or corporate trustee (bank trust department or trust company). If you choose an individual, you should name more than one in case your first choice is unable or unwilling to act.

What You Need to Know:

Your successor trustee should be someone you know and trust, someone whose judgment you respect and who will also respect your wishes.

When choosing a successor, keep in mind the type and amount of assets in your trust and the complexity of the provisions in your trust document. For example, if you plan to keep assets in your trust after you die for your beneficiaries, your successor would have more responsibilities for a longer period of time than if your assets will be distributed all at once.

Consider the qualifications of your candidates, including personalities, financial or business experience, and time available due to their own family or career demands. Taking over as trustee for someone can take a substantial amount of time and requires a certain amount of business sense.
Be sure to ask the people you are considering if they would want this responsibility. Don’t put them on the spot and just assume they want to do this.
Trustees should be paid for their work; your trust document should provide for fair and reasonable compensation.

Rest assured, we can help you select, educate, and advise your successor trustees. You are not alone. If you have any questions or concerns, please feel free to schedule an appointment with us.

Why a Spendthrift Trust Can Be a Great Solution for Your Heirs

There are many tools that can be used when putting together your estate plan. One such tool is a trust.

A trust is a fiduciary arrangement, established by a grantor or trustmaker, which gives a third party (known as a trustee) the authority to manage assets on behalf of one or more persons (known as a beneficiaries). Since every situation is different, there are different types of trusts to ensure the best outcome for each beneficiary. One type of trust, known as a spendthrift trust, is commonly used to protect a beneficiary’s interest from creditors, a soon-to-be ex-spouse, or his or her own poor management of money. Generally, these trusts are created for the benefit of individuals who are not good with money, might easily fall into debt, may be easily defrauded or deceived, or have an addiction that may result in squandering of funds.

Spendthrift Trust Basics

Put simply, a spendthrift trust is for the benefit of someone who needs additional assistance managing or protecting his or her money.

The spendthrift trust gives an independent trustee complete control and authority to make decisions on how the funds in the trust may be spent and what payments to or for the benefit of the beneficiary are necessary according to the trust document. Under a spendthrift trust, the beneficiary is prohibited from spending the money before he or she actually receives distributions. These restrictions prevent the beneficiary from squandering their entire interest or having it garnished by the beneficiary’s creditors. The trustee controls the assets in the trust, including managing and investing the funds, once the trust is made irrevocable. Most trusts become irrevocable after the grantor has passed, but some are irrevocable from the start.

Creating a Spendthrift Trust

A spendthrift trust is created essentially in the exact same manner as any other trust. However, the vital difference of a spendthrift trust is that the trust instrument must contain the right language to invoke the law’s protection. A knowledgeable estate planning attorney can provide guidance on how to best structure this provision, so it meets your family’s needs.

Like any trust, the benefits of a spendthrift trust can help avoid the delay and expense of probate as well as provide tax benefits and peace of mind. Of note, there are several states that limit a grantor from naming his or herself as a beneficiary under a spendthrift trust for the purposes of avoiding creditors.

Estate Planning Help

Creating a spendthrift trust is invaluable because it can give you peace of mind that your loved ones will be taken care of after your passing. If you are considering creating a spendthrift trust, or have any other estate planning questions, call or contact us today to explore your options.

What to Expect from Estate Planning in 2018

2017 is now fading into the rearview mirror. As we all look ahead to 2018, let’s consider a few things to watch regarding estate planning, so you and your family can be completely protected.

The death tax. The death tax has been in a state of flux ever since the early 2000s when the Bush administration’s first tax cuts changed the exemption and tax rates. The recently-passed Tax Cuts and Jobs Act is the latest significant change. Starting January 1, 2018, the estate tax exemption amount will double to $11.2 million per person (married couples have $22.4 million of combined exemption). Like the current exemption, this amount will adjust annually for inflation. However, this enhanced exemption expires on December 31, 2025, at which time it will return to an amount similar to the $5.49 million per person exemption we’ve had in 2017. Similar to what happened when the Bush tax cuts phased in (and were scheduled to expire) during the 2000s, we’ll face the same situation over the coming years – the law provides a deadline and timetable, but political activity may result in something entirely different. Regardless of your stance on this new tax law, if you have a plan based around the now-old rules, it’s time to visit with us, so we can make sure the plan still meets your needs and goals while maximizing the benefit to your family, charities, or other beneficiaries.
Incapacity planning. What happens if you don’t die? Historically, much of estate planning focused on what happened to your assets after your death. With cognitive impairment at near epidemic proportions, you must plan for the contingency that you don’t die and instead require assistance managing your affairs. Depending on your circumstances, this could range from a relatively simple matter of ensuring you have a trusted person authorized to make decisions to extensive planning to become eligible for help paying for nursing home care. Either way, now is the time to work with us to ensure that your plan protects you, even if you don’t die.
Giving your family lifelong financial security. Although you may not have a “large” amount of wealth now, you probably have an IRA or a life insurance policy. A modest IRA or life insurance policy could be the foundation for lifelong financial security for your family. To make this a reality, you need to set up your affairs with the proper structures to ensure money avoids costs, taxes, and the risk of financial immaturity or ignorance. We are here to help you ensure that the savings you’ve spent a lifetime building will be there for your family.
Fixing broken or old trusts. Many people have inherited assets from parents, aunts, uncles, and others through a trust. Some of these trusts may use old strategies or be expensive or difficult to administer. The law recognizes that old trusts may need some refreshing. There are many options available to modernize an old trust, and the best way to get started is to meet with us so we can explore which option is best for you and the trust you inherited.

2018 will likely be an exciting, dynamic year. No matter where you are on the estate planning journey, carve out some time to talk with us to make sure that you and your family are fully protected. Contact us or give us a call today.

How to Minimize Legal Fees After Death

Death is a costly business. Aside from funeral expenses, legal fees can take a big chunk out of how much is left for your loved ones after you’re gone.

But it doesn’t have to be this way. Careful planning can minimize the legal fees your loved ones will pay after you die. Here’s how:

Make an estate plan – The cost of creating an estate plan will be far less than the legal fees your loved ones will have to pay if you don’t have one. But be careful – don’t try to write your own will or revocable living trust. Do-it-yourself or online plans often fail to include valuable cost, tax, and legal fee saving opportunities. You need the advice and assistance of an experienced estate planning attorney to create an estate plan that will work when it’s needed and minimize legal fees after your death.
Maintain your estate plan – Once you’ve created your estate plan, don’t stick it in a drawer and forget about it. Instead, fine tune your plan as your life and your finances change. Otherwise, when your plan is needed, it will be stale and out of date and will cost your beneficiaries time and legal fees to fix it. In a worst case scenario, a stale plan could lead to expensive and emotionally draining litigation between your family members. Regular maintenance of your estate plan makes it easier to carry out when needed.
Have a debt plan – Make a plan for paying off your debts and taxes after you die. This should include setting aside funds that your loved ones will have easy access to (for example, set up a joint bank account or a payable on death account) so that they won’t have to use their own assets to pay your bills until your will can be probated or the successor trustee of your trust can be appointed. If your estate is taxable, then make sure you have enough assets that can be easily liquidated to pay the estate tax bill. Life insurance can be another option for providing easy access to cash and paying estate taxes, but it’s important that you align your life insurance plan with your estate plan to get the maximum benefit.
Let your loved ones know where your estate plan and other important documents are located – If your loved ones don’t know where to find your health care directive, durable power of attorney, will, or revocable living trust, then their hands will be tied if you become incapacitated or die. While you don’t need to tell your loved ones what your estate plan says, at the very least you should tell someone you trust where your estate plan and other important documents are being stored. You should also make a list of the passwords for your computer and accounts you manage online and a contact list for all of your key advisors (such as your attorney, accountant, life insurance agent, financial advisor, banker, and religious advisor).

Following these practical tips will save your family valuable time and money during a difficult time.

The Sun Has Risen Again. How You and Your Family Can Benefit from a (Legal) Late Portability Election.

The concept of “portability” is still relatively new in the law of estate planning, having become available only after 2011. Since then, it’s been both a blessing (for its tax saving benefit) and a curse (because of rules that seemed to be constantly shifting). Fortunately, the IRS has recently clarified some important deadlines about portability.

How can a portability election benefit you and your family? It could help save hundreds of thousands of dollars of estate and gift taxes for your family if you lost your husband or wife in the last few years. Although the exact mechanics of the tax are involved, portability makes it much easier for estate planners and tax professionals to save taxes for you and your family. However, portability is not automatic (even under the new regulations), so you must take some action.

Why should I care?

Portability allows a surviving spouse to inherit and use the estate tax exemption from a deceased spouse. If you’re planning isn’t as good as it could otherwise be, portability can save hundreds of thousands of dollars of estate and gift taxes. For those who are proactively planning, it also makes crafting your trust or will much more flexible so we can tailor the plan to you and your family’s needs, rather than to the needs of the IRS.

What’s new with portability?

Under a new IRS revenue procedure, you now have additional time to take advantage of portability. In the past, you had only 15 months after the death of a loved one to file for portability. Now, you now have two years after the passing of a spouse to file for portability, making this option much easier to use than before.

The IRS also knows that the rules have shifted and been confusing for everyone over the last few years. So there’s a unique opportunity to file a late portability estate tax return, as long as you meet certain requirements and have it submitted by January 2, 2018.

Of course, if you have a substantial estate (over $5.49 million) or are not a US citizen or resident alien then the traditional 15-month rule will continue to apply to you. Also, like any legal or tax issue, it’s always a good idea to obtain qualified assistance as early as possible so you can have the widest possible set of options and best possible outcome.

What do I need to do now?

If you’ve lost your spouse after 2011 and hadn’t yet spoken with an estate planning attorney about your options, now is the time. As the stock market and housing markets have recovered in the last few years, it might be worth a second look to see if a portability election is right for you and your family, even if you decided against one before.

Although available now, you can’t rely on this relief being available forever – January 2, 2018, will be here before you know it. Now is the time to give us a call to discuss whether a portability election can help you and your family save taxes. We look forward to hearing from you.

How a Community Property Trust Could Save You from Heavy Taxation Down the Road

When it comes to your family’s legacy, every dollar you can save from tax collection counts. One way to keep your assets out of the hands of the IRS is the formation of community property trusts.

How does a community property trust (CPT) work?

CPTs save you money on taxes by adjusting or “stepping up” the basis of the entire property after the death of one member of the couple. When you and your spouse invest in property jointly — be it real estate, stocks, or other assets — it becomes what’s called community property if you live within nine applicable states. However, there are two states, Alaska and Tennessee, where community property can be utilized via the creation of a community property trust, even if you do not live in Alaska or Tennessee.

When couples work with their estate planning attorneys to create these trusts, they can take advantage of a double step-up on the property’s basis. The basis of the property is stepped-up to its current value for both members of the couple’s halves. This is different from jointly owned property which only receives the step-up on one-half of the property. That means capital gains taxes are much lower because the taxed amount is reduced thanks to the stepped-up basis. Community property helps couples reduce their income taxes after the death of a spouse.

Getting to know your basic CPT terminology

First, let’s start with a few quick definitions of the financial terms you will need to know to get a sense of whether or not a community property trust is right for you.

Community property: Assets a married couple acquires by joint effort during marriage if they live in one of the nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

Community property trust: A particular type of joint revocable trust designed for couples who own low-basis assets, enabling them to take advantage of a double step up. Tennessee or Alaska are the two places you can form these trusts.

Basis: What you paid for an asset. The value that is used to determine gain or loss for income tax purposes. A higher basis means less capital gains tax.

Stepped-up basis: Assets are given a new basis when transferred by inheritance (through a will or trust) and are revalued as of the date of the owner’s death. The new basis is called a stepped-up basis. A stepped-up basis can save a considerable amount of capital gains tax when an asset is later sold by the new owner.

Double step-up: Because of a tax loophole, community property receives a basis adjustment step-up on the entire property when one of the spouses dies. So if a surviving spouse sells community property after the death of their spouse, the capital gain is based on the increase in value from the first spouse’s death (where the basis got adjusted on both spouses’ shares) to the value at the date of the sale. This allows the survivor to save money on capital gains tax liability.

One of the best parts of estate planning is that you get out so much more than you put in. In just a short amount of time, we can implement a community property trust that could save your spouse and family tens of thousands of dollars down the road. We are here to help make sure as little of your hard-earned property as possible ends up lost to taxation. Give us a call today, and set yourself up for a better tomorrow.

The Pros and Cons of Probate

In estate planning circles, the word “probate” often comes with a starkly negative connotation. Indeed, for many people — especially those with larger estates — financial planners recommend trying to keep property out of probate whenever possible. That being said, the probate system was ultimately established to protect the property of the deceased and his/her heirs, and in a few cases it may even work to an advantage. Let’s look briefly at the pros and cons of going through probate.

The Pros

For some estates, especially those in which no will was left, the system works to make sure all assets are distributed according to state law. Here are some potential advantages of probating an estate:

It provides a trustworthy procedure for redistributing the property of the deceased if no will was left.
It validates and enforces the intentions of the deceased if a will exists.
It ensures taxes and claimed debts are paid on the estate, so there’s a finality to the deceased person’s affairs, rather than an uncertain, lingering feeling for the beneficiaries.
If the deceased was in debt, probate gives only a brief window for creditors to file a claim, which can result in more debt forgiveness.
Probate can be advantageous for distributing smaller estates in which estate planning was unaffordable.

The Cons

While probate is intended to work fairly to facilitate the transfer of property after someone dies, consider bypassing the process for these reasons:

Probate is a matter of public record, which means personal family and financial information become public knowledge.
There may be considerable costs, including court, attorney, and executor fees, all of which get deducted from the value of the estate.
Probate can be time-consuming, holding up distribution of the assets for months, and sometimes, years.
Probate can be complicated and stressful for your executor and your beneficiaries.

Bottom line: While probate is a default mechanism that ultimately works to enforce fair distribution of even small estates, it can create undue cost and delays. For that reason, many people prefer to use strategies to keep their property out of probate when they die.

A skilled estate planning attorney can develop a strategy to help you avoid probate and make life easier for the next generation. For more information about your options, call or contact us today to schedule a consultation.

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