08 Apr

Get Your Exercise Tax Planning With Nonqualified Stock Options

In Taxes by admin / April 8, 2013 / 0 Comments

Estate Planner Jul-Aug 2000

Nonqualified stock options, whether in a “dot com” company or in an “old economy” company, can be valuable assets. But to make sure you don’t lose too much of that value to Uncle Sam, you need to understand the tax ramifications and plan accordingly.

You normally receive nonqualified stock options for the performance or future performance of services. Section 83 of the Internal Revenue Code governs the income tax consequence of property you receive in connection with services. But for these purposes, the receipt of a stock option is not considered receipt of property if the option doesn’t have a readily ascertainable fair market value at its grant. (If it does, a taxable event may result from the grant.)

But when you exercise the stock option and receive the stock, a transfer of property occurs and Section 83 may apply. Generally, when the option is exercised, the difference between the share value at the date of exercise and the exercise price will be taxed to the option holder as compensation income (unless there are restrictions on the property received).

Once the option is exercised, the compensation portion of the transaction is complete and the employee then holds the property as investment property (assuming it is a capital asset in his or her hands.) The option holder’s basis in the option will be the cost of the option, consisting of the sum of the exercise price plus the amount of compensation income recognized by the employee under Section 83.

Let’s take a closer look at how Section 83 affects nonqualified stock options.

Determining Ascertainable Fair Market Value

Four conditions must be met for your option (which is not actively traded on an established market) to have a readily ascertainable fair market value:

1. The option is transferable by you as the option holder.

2. The option is exercisable immediately in full by you.

3. Neither the option nor the underlying property is subject to any restrictions that have a significant effect on the option value.

4. The fair market value of the option privilege is readily ascertainable.

Even if the option’s value becomes readily ascertainable between the date of the grant and the exercise date, you still do not recognize income until you exercise the option. Under Section 83, the difference between the share value at the date of exercise and the exercise price generally will be taxed to you as compensation income (unless there are restrictions on the property received).

This closes out the compensation aspect of the transaction and you then hold the stock as investment property (assuming it is a capital asset in your hands). Your basis will be the cost of the option (the sum of the exercise price plus the amount of compensation income you recognized).

Determining Risk of Forfeiture

As part of your tax planning, you may defer income recognition on the exercise of stock options until the actual sale if the stock received is subject to substantial risk of forfeiture and transferability restrictions. Two questions are helpful in determining whether your stock meets these conditions:

1. Are the required services “substantial?”

2. Are the forfeiture conditions likely to be enforced against you, as the employee?
Services may be considered substantial if you have to perform them to keep the shares of stock. If you have the right to decline to perform such services without forfeiting the stock, then they may be considered insubstantial.

What if your employer transfers stock in connection with your performance of services as an employee? Under the terms of the transfer, you are subject to a binding commitment to resell the stock to the corporation if you terminate your employment for any reason before the expiration of a two-year period from the date of the transfer.

In this example, your rights in the stock would be subject to a substantial risk of forfeiture during the two-year period. The compensation element of the stock received under the options remains open until the restrictions on transferability lapse and the forfeiture provisions no longer apply.

Making a Section 83(b) Election

You can elect under Section 83(b) to close the compensation element of the transaction at the time you receive the shares of stock from your employer. When you make the election, you will recognize income on the difference between the value of the shares and the option price. If there is no difference, then you will not recognize compensation income. Any appreciation — from the time of the election until the time of the later sale — is potential capital gain. You must make the election within 30 days after the property transfer. If there is a chance the value of the property will appreciate, making a Section 83(b) election is generally advantageous. After you make the election, any increase in the value of the shares received under a nonqualified stock option will be taxed at the lower capital gains rates, rather than as ordinary income. If no election is made, when the restriction lapses, the full value of the property (less any amount paid for the property) will be taxed as ordinary income.

Receiving the Most From Your Nonqualified Stock Options

If you receive nonqualified stock options from your employer, be aware of the tax ramifications of Section 83 when you exercise the option. With a clear understanding of how Section 83 affects nonqualified stock options, you can realize a greater return.

08 Apr

Minimize Income Tax Issues With Proper Estate Planning

In Taxes by admin / April 8, 2013 / 0 Comments

Estate Planner Sept-Oct 2000

To assure that your estate plan will work as you intend, don’t overlook income tax issues your loved ones may face after you are gone. A problematic issue to consider is that some assets you own at death may constitute deferred income — also known as income in respect of a decedent (IRD). The most obvious examples of IRD are regular individual retirement accounts (IRAs) and retirement plans. If you are a doctor, lawyer, accountant or own an unincorporated business, you may have significant IRD in the form of uncollected fees or accounts receivables. These types of assets will remain subject to income tax after your death, either by your estate or your beneficiary.

Allocating assets among your beneficiaries to reduce income tax is a key part of a smart estate plan. You may already be familiar with the advantages of deferring income tax during your lifetime with assets such as traditional IRAs. An important goal of estate planning is to allow your family to continue that deferral after you are gone. Let’s take a closer look at how IRD can affect your estate planning.

Not All Assets Are Treated Equally 

When deciding how to distribute your assets upon your death, keep in mind that not all assets are treated equally.

For example, suppose you leave your house to your son and leave your interest in a deferred compensation plan to your daughter. Even if both assets have the same market value at your death, your daughter may receive much less because the assets received are subject to income tax. Your son will receive a step-up in basis on the house as of the date of your death. When he sells the house, he will not owe capital gains tax. IRD assets are not entitled to a step-up in basis.

If you have sufficient assets in your estate, you’ll want to fund the trust that qualifies for the marital deduction with IRD assets rather than with your credit shelter trust. Doing so doesn’t waste credit shelter funds on income tax. Use other assets for the credit shelter trust. In addition, paying income tax with the marital share may reduce the estate tax ultimately paid by the surviving spouse at death.

Benefits under a deferred compensation plan that you have not yet paid income tax on is another type of IRD. Roth IRAs are not IRD because you fund them with after-tax dollars and they continue to grow income tax free.

Another example of assets that are not treated equally are IRAs. For example, if you leave a regular IRA to one child and a Roth IRA with the same value to another child, whoever receives the Roth IRA will realize a larger payoff. Why? Because a regular IRA has a built-in income tax liability and the Roth IRA is income tax free. In addition, if your child continues to hold the Roth IRA, the growth in its value will also be income tax free.

In contrast, income tax can be deferred on a regular IRA if it continues to be held, but any increase in the IRA’s value will also be subject to income tax. (An additional advantage of receiving a Roth IRA is that distributions are not required to begin at age 701/2, unlike a regular IRA.)

The disadvantages of receiving IRD assets are offset somewhat because your beneficiaries can receive an income-tax deduction based on the amount of federal estate tax paid on the IRD asset. Be careful to fairly apportion this deduction among your beneficiaries. For example, if you leave $1 million of IRD assets to your daughter through a beneficiary designation and $2 million of non-IRD assets to your son through your will, your son may receive a $1 million estate tax bill, while your daughter may be able to shelter the income and receive the deduction.

Play by the Rules

An important part of planning for IRD assets is to ensure that your beneficiaries can defer payment of income tax as long as possible. When planning your estate, keep in mind these general rules regarding IRD:

When giving a specific amount, be sure enough non-IRD assets are available to fund it. Otherwise, income tax may be triggered. For example, if your will provides that you leave $10,000 to your friend and the bequest is satisfied with an IRD asset, your estate could owe income tax.

Many estate plans use a formula to provide that your applicable exclusion amount (currently $675,000) will pass to one trust and the balance will pass to a marital trust for your spouse. The use of these formulas can sometimes trigger IRD on the funding of the trust. To avoid triggering IRD, provide that a specific fraction of your assets be used to fund the trusts rather than a specific amount.

Avoid naming your estate — rather than specific persons — as beneficiary of IRD. If your estate receives the asset first and it passes to a beneficiary, then income tax may become due immediately.

Lessen the Impact of Income Tax On Your Beneficiaries

Planning for estate tax can be difficult enough. Factoring in income tax significantly increases planning complexity. By learning how to allocate IRD affected assets, you can greatly lessen the impact of income tax on your beneficiaries.

08 Apr

Too much information? Consider disclosure rules when designing trusts

In Trusts And Wills by admin / April 8, 2013 / 0 Comments

Estate Planner May-June 2006

Trusts are an integral part of many estate plans, and often there are advantages to keeping the trust’s terms – or even its existence – confidential. Why? Perhaps your beneficiary is immature or reckless. Or you may be concerned that knowledge of the trust would cause your beneficiary to become dependent on it and fail to pursue his or her own ambitions.

There are many legitimate reasons for keeping a trust quiet. But in many cases, state law interferes with this goal by requiring a trustee to disclose information about the trust to its beneficiaries.


The Uniform Trust Code (UTC), which has been adopted in many states, requires the trustee of certain trusts to disclose detailed information about a trust to any “qualified beneficiary” who requests it. Qualified beneficiaries include not only those who may receive a distribution under the trust (your children, for example), but also those who might benefit if a “first-in-line” beneficiary’s interest terminates (your grandchildren, for example).

The UTC also requires you to notify each qualified beneficiary of his or her rights to information, making it nearly impossible to keep the trust a secret from your beneficiaries.

The purpose of the UTC’s disclosure provisions is to help avoid fraud or mismanagement on the part of trustees by allowing beneficiaries to monitor the trust’s financial activities and performance. Some states that have adopted the UTC allow you to waive the trustee’s duty to disclose. Others allow you to name one or more third parties to receive required disclosures and protect the beneficiaries’ interests.

An alternative strategy

If applicable law doesn’t provide a mechanism for avoiding disclosure to your child or other beneficiary, an alternative strategy is to grant your spouse or someone else a power of appointment over the trust. The person who holds the power of appointment can then redirect trust assets to your child if needed.

This solves the disclosure problem, because you don’t have to name your child as a trust beneficiary. The primary disadvantage of this approach is that the power holder has no legal obligation to honor your intentions.

Put your trust in trusts

Trusts are commonplace in estate plans. Before you create a trust or if you’re concerned about the confidentiality of your trusts, be sure to consider the law in your state.


08 Apr

Preparing for the Unexpected: Appoint a Successor Trustee in Case You Become Incapacitated

In Living Trusts,Trustees by admin / April 8, 2013 / 0 Comments

Estate Planner May-Jun 2001

Among a living or revocable trust’s benefits is that you can draft it to manage your assets without court involvement should you become incapacitated. Generally, the trust’s creator also acts as its trustee. But who becomes trustee if you are declared disabled? To answer this question, let’s examine circumstances that may occur if you become incapacitated.

Declaring Incapacitation

Typically, a trust should provide a definition of incapacity and specify how the successor trustee will take over for the disabled trustee. The trust may also mandate that an attending physician, committee, court finding, or your spouse or child determine your incapacity.

And though you may worry about giving your spouse or child the power to declare you disabled, doing so may simplify and diminish the cost of using a court proceeding or physician. In the event that you disagree with the declaration, the court can protect your rights and allow you to manage your own affairs.

For example, Ed is the acting trustee of his revocable trust with approximately $3 million in assets. He has four children and eight grandchildren. The trust provides that his attending physician, Dr. Goodhealth, is to determine his incapacity and ability to serve as trustee.

But what if Ed suffers a stroke while traveling, and his family can’t reach Dr. Goodhealth? A physician at the emergency room — who is unfamiliar with Ed’s medical history — may treat him but refuse to sign a document attesting to his incapacity. Without a certification of disability, Ed’s successor trustee may not be able to make critical business or investment decisions, or make last-minute annual exclusion gifts to reduce Ed’s taxable estate.

If no other trust mechanism exists for determining Ed’s incapacity, his family may have to file a court action to declare Ed disabled. This can be costly and may not timely resolve the problem because of court-imposed notice requirements and waiting periods. And though Ed’s family can file a petition for guardianship immediately, they may have to wait up to a month before a judge rules on the disability.

Take Control Of Who Becomes Trustee

To avoid needing a physician to determine incapacity, some jurisdictions allow your successor trustee, a family member or committee to make the decision. In the case of Ed, his trust instrument may specify that his family can immediately attest to his disability and Ed’s successor trustee can then take control of the trust.

If you are uncomfortable with a family member having the power to determine your incapacity, you can name a special trustee. You can even empower the special trustee to make gifts. As further protection, you can name a co-trustee to act with authority and to act alone if you become disabled.

Be Prepared

When creating a revocable or living trust, you act as its trustee. But what if you become incapacitated? Plan ahead to specify who will take over as trustee. In addition, include in your trust document who — such as your attending physician, committee or a court finding — should declare you disabled. If you have an existing trust that you would like us to review, or have questions about a prospective one, please give us a call.

08 Apr

Don’t Get Penalized for Substantial Valuation Understatements

In Valuation by admin / April 8, 2013 / 0 Comments

Estate Planner Mar-Apr 1997

Many of the techniques currently used for estate planning rely on minimizing the value of transferred assets. Discounts are most commonly sought for lack of control, lack of marketability and minority interests. The Internal Revenue Service (IRS), however, imposes penalties for substantial estate and gift tax valuation understatements.

Outright gifts of parcels of real estate, marketable securities or stock in closely held businesses are often less than optimal. Instead, before gifts are made, it can be better to segment or combine assets and place them in family limited partnerships (FLPs) or limited liability companies (LLCs) and convert them to nonvoting or noncontrolling interests, or funnel them through grantor retained annuity trusts. The same type of planning is also used in anticipation of valuing an asset for estate tax purposes.

Reports circulate of cases where a combined 55%, 65% or even 85% discount from fair market value was allowed, or where everyone takes at least a 25% discount. Accordingly, you may be tempted to view discounting as less than an exact science. It is at this point, however, that you need to be mindful of the penalties for substantial estate and gift tax valuation understatements.

What Is an Understatement?

The valuation understatement can apply when the value of any property reported on a gift or estate tax return is 50% or less of what the court determines to be the current value of property. The IRS imposes a penalty of 20% of the amount of tax underpayment and increases the penalty to 40% for reported understatements of 25% or less of the current value.

For example, you place an interest in a closely held business into an FLP with an interest in real estate, at a combined value of $2 million. You make a gift of a 2.5% FLP interest. For gift tax purposes, you take a 60% minority-interest and lack-of-marketability discount, and value the gift at $20,000 ($50,000 x 40%). You and your spouse split the gift, each claiming a $10,000 annual exclusion gift.

The IRS contests the valuation, and the case goes to court. The court finds that the fair market value of interests that went into the FLP was actually $2.5 million and that the proper discount for the minority interest was 25%. This results in the gifted 2.5% interest being valued at $46,875, making the split gifts each about $23,438. The valuation understatement is by more than 50%, and the IRS could add a penalty of 20% of the tax underpayment.

Reasonable Cause

The penalty for valuation understatement is not imposed if there was reasonable cause and you acted in good faith. In several recent cases the courts have held that the IRS abused its discretion by refusing to grant a waiver of the valuation penalty for reasonable cause.

In one case, the taxpayer had relied on the advice of an accountant with valuation experience and on the opinion in a prior tax court case. In another case, the taxpayer had relied on an appraiser’s opinion, and, even though the court was critical of the appraisal, it held that the taxpayer had substantive support for its position and reasonable cause existed. In a third case, the taxpayer relied on the advice of the company’s long-time outside counsel and accountant, even though the taxpayer had agreed to higher valuations for the same property on prior gift tax audits. The court noted that the IRS audits did not bind either party as to valuation in future years.

Support Your Valuations

Gifts to family members or for valuing assets on an estate tax return are not required to be supported by a qualified appraiser. Nevertheless, a good appraisal can provide reasonable cause for the waiver of an undervaluation penalty. At minimum, the valuation process should involve the advice of an experienced and competent accountant or lawyer.

08 Apr

Is Fair Market Really Fair?

In Valuation by admin / April 8, 2013 / 0 Comments

Estate Planner Sept-Oct 1998

Have you made a gift today, one that you did not know you made? If so, you or your estate may be called upon years from now by the Internal Revenue Service (IRS) to account for gift taxes plus interest and penalties. The changes made in the tax law in 1997 affected the safety provided by the statute of limitations. Under current law, there is no statute of limitations for gifts made in connection with transactions that are not adequately disclosed to the IRS.

If you want to avoid making an unintentional gift, be sure you always obtain fair market value in exchange for anything you transfer to a family member (except for transfers to your spouse which qualify for the marital deduction).

Hypothetical Fair Market Value

What is the concept of fair market value, what does it involve and who determines it? The generally accepted definition of fair market value is “the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.”

For federal tax purposes, the definition remains the same for income tax issues as well as estate, gift and generation-skipping transfer tax issues. The definition applies to transfers to charity as well as to transfers to family members. In order to understand and work within this definition of fair market value, the elements of the definition need to be considered.

The price at which property would change hands — This is the hypothetical sale price. Generally, the sale is presumed to be for cash. The hypothetical would insist that the buyer is able to borrow the requisite cash in order to pay the seller. For example, in a home sale, the seller receives cash because the buyer enters into a mortgage arrangement with a lender. Because the seller is deemed to receive cash, the price received by the seller will not need to be adjusted to reflect assumption of any risk or the time value of money and related interest rate.

Between a willing buyer and a willing seller — For purposes of valuation, it is irrelevant who are the actual seller and buyer since you must look to hypothetical persons. When you are dealing with unique property, this becomes the most difficult part of the hypothetical sale. Is there really a willing buyer for a 5% interest in a closely held family business or in a family limited partnership? And, is there really a willing seller when Dad ordinarily would not sell at any price? Nevertheless, we have to assume the existence of two states of mind, one that an imagined owner of the property is in fact a willing seller and second that an imagined holder of cash is a willing buyer.

Neither being under compulsion to buy nor sell — A foreclosure sale would not be indicative of fair market value as the price would generally be artificially low since the seller is under a compulsion to sell. Accordingly, we have to assume a situation where the seller wants to sell, but not too badly; and, the buyer wants to buy, but he really does not have to.

Both having reasonable knowledge of relevant facts of the applicable valuation date — It is important that you assume that both parties have reasonable knowledge of the property. The appropriate standard of reasonable knowledge is not what is actually known by the seller or by the buyer on the valuation date. Instead, you must consider the facts that are discernible through reasonable investigation on the valuation date.

After all, acquired information is not supposed to count, but hindsight is difficult to ignore. For example, assume that a painting which was being valued for gift purposes could be a forgery. The fact that the painting is later determined to be authentic is not a factor on the valuation date, but the possibility of it being a forgery is knowledge which both buyer and seller are assumed to have.

Know Your Facts

The hypothetical fair market value must take place in the marketplace. This generally will be where the property being valued is most likely to be offered for sale to the public. This usually will be the retail market and not the wholesale market.

Please call us if you need advice on ascertaining the fair market value of property. You need to document the considerations and the hypothetical negotiations that resulted in the final figure, since you may be called upon to justify your valuation.

08 Apr

Why Everyone Needs a Will

In Trusts And Wills,Wills by admin / April 8, 2013 / 0 Comments

Estate Planner May-Jun 1997

Young people, single people, people without children and people with less than $600,000 in assets often think that they don’t need wills. The fact is, everyone needs a will. Let’s look at some common questions about wills.

Q: Does everyone have an estate?
A: Yes, if you own anything at all. The term applies not just to real estate, but also to cash, cars, furniture, books, insurance and retirement plans — all property.

Q: What happens if I die without a will?
A: Your state’s laws of descent and distribution take over.

Q: Why not let state laws take over?
A: State laws are impersonal — they don’t make exceptions, they may deplete your estate unnecessarily, and they are written to predict your desires (without knowing them) concerning choosing your administrator and guardian of your surviving minor children. The state also cannot make charitable gifts.

Q: Doesn’t joint ownership make a will unnecessary?
A: No. That’s a common misconception. Joint ownership may not eliminate estate taxes and may even create gift taxes. It may also deny you complete control over your property while you’re still living. Joint ownership is a poor will substitute, but can work well in conjunction with a will.

Q: Do I need a will if my estate is small?
A: Yes, the smaller the estate, the more important that it be settled quickly — delays usually mean more expense. Besides, your estate may be larger than you realize. Don’t think of your property in terms of what it cost originally. Its value may have increased substantially. A will also may cut probate costs, waive bonding requirements, and name heirs and legatees.

Q: Can I name my spouse as executor?
A: Yes. Or name a close relative or friend, or the trust department of a bank or other corporation.

Q: Can an executor refuse to serve, before or after accepting the position?
A: Yes. This can occur due to ill health, travel or the press of other business and is one reason it’s wise to name an alternate executor. The trust department of your bank may be your best choice to act as executor because it will always be able to serve.

Q: What does the executor do?
A: The executor’s role, in general, is to probate your will; collect your property; file necessary tax returns, including income tax returns and federal estate tax returns; pay any claims made by creditors; dispose of your property in accordance with the will; and close the probate estate.

Q: Is there a danger that my bequest may not be distributed as planned?
A: Yes. This may occur due to an incorrect or unofficial name in your will. Use an additional identifier, such as “friend,” “sister” or “town of residence” designation.

Q: How many witnesses does my will require, and must they read the will and know its contents?
A: State laws differ on the required number of witnesses, who merely must attest that you have said it is your will and have signed it in their presence.

Q: Is it legal for a witness also to be a beneficiary of the will?
A: Yes, but it’s not advisable because it may result in the witness not receiving property left to him or her.

Q: Once I have a will, should I ever have to change it?
A: Probably, because even the best wills often become outdated. Review your will periodically in light of changes in marital status, financial status or interests. Updating your will may require nothing more than a simple amendment (codicil).

Q: Am I required to change my will when moving to another state?
A: Most states recognize a will drafted in a state where you previously resided (if the will was properly executed in that state). But it is always a good idea to have your will reviewed by an attorney in the state of your new residence.

Q: Once my will is completed, where should I keep it?
A: Sign only one copy and keep it in your office, home or bank safe-deposit box, or ask your attorney to keep it for you. Retain an unsigned duplicate, so you can easily check it periodically to see if it needs updating.

Q: Is there anything else I need to know about wills?
A: An article like this can only cover the main points. Each person’s circumstances and wishes are different, so consult an attorney about your will.

08 Apr

5 Will Advantages

In Trusts And Wills,Wills by admin / April 8, 2013 / 0 Comments

Estate Planner Jan-Feb 1997

1. Provides standardized procedures and court supervision.

2. Often provides for shorter creditor claims limitation period.

3. Saves the grantor time and money during lifetime by avoiding the costs associated with a living trust, including recording fees, attorney as fees for drafting documents, and transfer fees.

4. Provides protection for disabled or incompetent interested parties through probate process.

5. Provides procedures to financially protect the surviving spouse through elective share.

08 Apr

Do You Need a Living Trust or a Will?

In Trusts And Wills by admin / April 8, 2013 / 0 Comments

Estate Planner Jan-Feb 2000

Two types of documents can form the basis of your estate plan to transfer your assets to your family upon your death. A will is the traditional method for designating distribution of assets held in your name alone. A living trust acts as a substitute for a will and avoids probate. Both documents may minimize estate tax. Whether you should have a living trust or a will depends on many individual factors.

Weighing the Options

A will’s biggest disadvantage is that it must go through probate in a state court to establish its validity. The probate court supervises the administration of the estate and the distribution of assets. Recent changes in many states provide for minimum involvement by the court under most circumstances. Because the procedure varies from state to state, probate may be expensive and time consuming in some states but not in others. If you die owning real estate located in more than one state, a probate may be required in each state.

A living trust can avoid probate when you die because the trust’s successor trustee takes title to the trust assets and distributes them according to your wishes as expressed in the trust document. But probate will be avoided only for assets in the trust.

This means that to avoid probate, you must move assets in your name alone into the name of your trust. In addition, you are the grantor and may also be the trustee and beneficiary. A living trust is considered revocable — you can change or cancel it at any time.

The Specifics

You can keep modest and frequently accessed assets — such as checking accounts — in your own name or place them in the trust. Assets in your name alone that are not transferred to the trust will pass through a “pour-over” will into your trust when you die. This type of will is used to ensure that all of your property is distributed according to the terms of the trust.

Even if some assets pass through a pour-over will, you can still avoid probate in many states through the use of a procedure that applies to small estates. For example, the laws in some states may provide that assets valued at $50,000 or less may avoid probate by using an affidavit indicating to whom the assets should be delivered. When presented with such an affidavit, a bank would turn over the account that was held by the decedent to the person named in the affidavit.

Living Trust Advantages

A living trust has several advantages over a standard will:

  • A trust is usually easier to amend than a will because in most states no witnesses are required to execute a trust agreement.

  • A trust provides greater privacy because a will filed with the court after death becomes a public record available for inspection.

  • A living trust allows you to plan for your incompetence without court involvement. You name a successor trustee to act in your place if you become disabled and unable to manage your affairs. Without a trust, the court must appoint a conservator or guardian to administer your assets if you do not have a power of attorney. Guardianship requires court supervision and may require approval of all expenditures for you. Procedures for appointing a guardian vary from state to state. Powers of attorney do not require court involvement but often are suspect and if improperly drafted may not give your family needed flexibility.

  • In some states, revocable trust assets are not subject to the after-death claims of your creditors unless the transfer was in fraud of the creditor’s rights. Instead, probate assets must settle these claims. Because the power to revoke the trust is available only to you, the grantor, that power terminates on your death. This may leave creditors with little authority to assert claims against trust assets.

  • It is more difficult for heirs or beneficiaries to initiate and win a lawsuit against a living trust. Heirs or trust beneficiaries can contest a trust based on undue influence or lack of capacity. The longer the trust has been funded and in existence, the more difficult it is to contest. A will is more likely to be attacked successfully partly because it doesn’t take effect until your death. On the other hand, a living trust may provide less protection of the assets from the surviving spouse’s nursing home bills.

Seek Professional Advice

If you would like assistance in determining whether a living trust or will is right for you, please let us know. Our professionals can help answer any questions that may arise when deciding between these two important estate planning methods.

08 Apr

2001 Estate Tax Relief Act – Estate and Gift Tax Changes

In 2001 Tax Changes by admin / April 8, 2013 / 0 Comments

July 27, 2001

You may have heard that Congress has changed the rules of the estate and gift tax as part of the 2001 Tax Relief Act. In an effort to keep our clients well informed, this letter summarizes and sets forth a few general implications of the new law so that you can determine (with our help if you like) what effect, if any, the new tax law will have on your current estate plan.

I. Summary of the New Law

Congress tinkered with two basic elements of the estate tax: (1) the “free amount” and (2) the top estate tax rates. By “free amount” we mean the amount that can be transferred to someone other than your spouse without any estate tax having to be paid. The new law gradually increases the free amount and reduces the top estate tax rates over the next nine years, finally repealing the estate tax (but not gift tax!!) in the year 2010. Curiously, the estate tax repeal is only for one year. That is, the House, the Senate and the President need to agree in the year 2010 to extend the repeal, and if they are unable to do so, the estate tax is reinstated pursuant to the laws in effect as of 2001! In short, if you survive the next nine years, the free amount drops back to $1,000,000, and the maximum estate and gift tax rates return to 55%.

The increased free amounts and reduced top rates are phased in over the next nine years as follows:

Top Estate Tax Rate
Estate Tax “Free Amount”
Gift Tax “Free Amount”
50% $1,000,000 $1,000,000
49% $1,000,000 $1,000,000
48% $1,500,000 $1,000,000
46% $1,500,000 $1,000,000
45% $2,000,000 $1,000,000
45% $2,000,000 $1,000,000
45% $2,000,000 $1,000,000
45% $3,500,000 $1,000,000
Repeal Repeal $1,000,000
55% $1,000,000 $1,000,000

You will note that while the estate tax “free amount” increases beyond the $1,000,000 mark in 2004, the gift tax “free amount” stays at $1,000,000. Also, keep in mind that gift tax is not repealed in the year 2010 and at such time there will be a flat gift tax rate of 35%. Finally, the generation skipping transfer tax “free amount” increases in the same manner as the estate tax “free amount” and is repealed for one year only, along with the estate tax, in 2010.

The trade off for repeal of the estate tax was the loss of a step-up in income tax basis at death. Current law provides that capital gains tax is washed away upon death (i.e., in most instances your heirs do not have to pay capital gains tax on the pre-death appreciation of assets that are sold after your death). This changes for persons dying in the year 2010, when property acquired from a decedent will retain the decedent’s tax basis. This is known as “carryover” basis. When the recipient of the property eventually sells it, he or she will need to compute the gain using the decedent’s adjusted basis. The legislation contains two major exceptions to carryover basis. First, each estate receives a $1.3 million increase in basis. Second, an estate is entitled to an additional basis increase of up to $3.0 million for property passing to the surviving spouse.

II. Estate Planning Implications of New Law

  • Planning is difficult when the law is changing and its future is uncertain. There are more variables now. Not only is the law scheduled to change nearly every year between now and 2011, but there is additional uncertainty over whether and when Congress will make additional changes to the law. Remember, 2004 and 2008 are Presidential election years.

  • We recommend you continue lifetime giving programs (i.e., hedge your bets against the reinstatement of the estate tax in 2011). We do not, however, recommend you pay gift tax unless you are unlikely to live until 2010. Keep in mind that your gift tax free amount increases to $1,000,000 in 2002 but does not thereafter increase. I know some of you have given away your entire current $675,000 estate and gift tax free amount. Come January 1, 2002, you will be able to give another “big” gift of $325,000. If you are unlikely to need this amount, gifting it in 2002 will leverage the benefit of this increase, in that all appreciation on this amount will occur outside of your estate.

  • Lifetime charitable gift planning is unlikely to change, since much of it is income tax driven. Charitable remainder trusts will still be valuable tools for eliminating the tax on appreciated assets, while at the same time converting those assets into a lifetime income stream.

  • Detailed planning for carryover basis in 2010 is probably premature in most cases, but begin record keeping that will aid in the proof of basis (i.e., knowing the basis of your assets is going to be more important than ever).

  • Unrelated to the Tax Relief Act, the IRS changed the rules with respect to retirement plan beneficiary designations and minimum distribution elections (required when a person turns 70 ½) in early January of this year. Many of you will benefit from the new rules; therefore, reviewing the beneficiary designation on your IRAs and qualified retirement plans is particularly timely, especially for those of you with big retirement accounts (to the extent they may still be considered “big” after the stock market “correction” of 2000-?)

Generally, we recommend you come in for an estate plan review every 3-5 years or at any time there is a significant change to your family, health or finances. Given the sweeping new changes to the law, we recommend you visit us sooner rather than later so that we can ensure your estate plan is still appropriate for you and your family. While most of the plans we have created in the past ten plus years are appropriate for the next nine years, each case is different and warrants careful review. If you wish to schedule a visit, please call our Office Manager at (206) 583-0155 ext. 0.