Patinelli & Chang, LLP

What You Need to Know about Trusts for Estate Planning

“Trusts fall into one of two main categories. The first category is composed of those that are established while the grantor (one who establishes the trust) is alive and are termed inter vivos (while living) trusts.”

There are many different kinds of trusts used to accomplish a wide variety of purposes in creating an estate plan. Some are created by the operation of a will, and they are known as testamentary trusts—meaning that they came to be via the last will and testament. That’s just the start of a thorough look at trusts offered in the article “ON THE MONEY: A look at different types of trusts” from the Aiken Standard.

Another way to view trusts is in two categories: revocable or irrevocable. As the names imply, the revocable trust can be changed, and the irrevocable trust usually cannot be changed.

A testamentary trust is a revocable trust, since it may be changed during the life of the grantor. However, upon the death of the grantor, it becomes irrevocable.

In most instances, a revocable trust is managed for the benefit of the grantor, although the grantor also retains important rights over the trust during her or his lifetime. The rights of the grantor include the ability to instruct the trustee to distribute any of the assets in the trust to someone, the right to make changes to the trust and the right to terminate the trust at any time.

If the grantor becomes incapacitated, however, and cannot manage her or his finances, then the provisions in the trust document usually give the trustee the power to make discretionary distributions of income and principal to the grantor and, depending upon how the trust is created, to the grantor’s family.

Note that distributions from a living trust to a beneficiary other than the grantor, may be subject to gift taxes. Those are paid by the grantor. In 2019, the annual gift tax exclusion is $15,000. Therefore, if the distribution is under that level, no gift taxes need to be filed or paid.

When the grantor dies, the trust property is distributed to beneficiaries, as directed by the trust agreement.

Irrevocable trusts are established by a grantor and cannot be amended without the approval of the trustee and the beneficiaries of the trust. The major reason for creating such a trust in the past was to create estate and income tax advantages. However, the increase in the federal estate tax exemption means that a single individual’s estate won’t have to pay taxes, if the value of their assets is less than $11.4 million ($22.8 million for a married couple).

Once an irrevocable trust is established and assets are placed in it, those assets are not part of the grantor’s taxable estate, and trust earnings are not reported as income to the grantor.

The downside of an irrevocable trust is that the transfer of assets into the trust may be subject to gift taxes, if the amount that is transferred is greater than $15,000 multiplied by the number of trust beneficiaries. However, depending upon the size of the grantor’s estate, larger amounts may be transferred into an irrevocable trust without any gift tax liability to the grantor, if the synchronization between gift taxes and estate taxes is properly done. This is a complex strategy that requires an experienced trust and estate attorney.

Trusts are also used to address charitable giving and generating current income. These trusts are known as Charitable Remainder Trusts and are irrevocable in nature. There is a current beneficiary who is either the donor or another named individual and a remainder beneficiary, which is a qualified charitable organization. The trust document provides that the named beneficiary receives an income stream from the income produced by the trust assets, and when the grantor dies, the remaining assets of the trust pass to the charity.

Speak with your estate planning attorney about how trusts might be a valuable part of your estate plan. If your estate plan has not been reviewed since the new tax law was passed, there may be certain opportunities that you are missing.

Reference: Aiken Standard (May 17, 2019) “ON THE MONEY: A look at different types of trusts”

Estate Taxes, Death and an Other Certainties

“Let’s identify the major ones that normally need to be dealt with, as well as what should be done to either plan ahead or plan shortly after a death occurs.”

As the old saying goes, “Nothing is certain but death and taxes.” Many people don’t have the faintest idea of just how extensive those taxes can be, says Pittsburgh Post-Gazette in the article “Death and taxes—and taxes and taxes.” For all the headlines and noise about federal estate taxes, those are the last ones most of us have to think about.

The federal estate tax is a non-event, unless you belong to the upper one percent of wealthy Americans. The federal tax is paid, based on the value of the assets owned by the decedent at the time of death. It also includes any assets that are controlled by the decedent at the time of death. The first $11.4 million is now excluded from any taxes due for an individual, and $22.8 million for a couple.

Before the Tax Cuts and Jobs Act of 2017, this exemption was roughly $5 million, so many more people had to pay it. The levels are expected to go back to the pre-2018 amount at the end of 2025, unless the law changes before that time.

This is an important point to remember: the tax laws change, and anytime tax laws change, your estate plan should be reviewed to ensure that it is still going to work the way you intend.

In some states, like Pennsylvania, there are still inheritance taxes. Only six states have inheritance taxes, and only 12 states still have an estate tax. Your estate planning attorney will know what your state’s inheritance and estate taxes are and can help you plan, so that your family is not overly burdened when it comes time to pay these taxes.

Inheritance taxes are generally based on the value of the assets owned or controlled by the decedent. It is independent of the obligation to file an income tax return for the estate.

The decedent’s representative, usually the executor, is responsible for filling all state, local and federal income tax returns for the portion of the year, in which the decedent was still living.

When a person passes and their last will and testament is admitted to probate, the executor receives an employer identification number (EIN) from the IRS. If the decedent died owning a trust, the trustee must obtain an EIN. Once the EIN is obtained, the IRS sends a letter notifying you of the due date for the income tax return for the estate or the trust. These are known as “fiduciary income tax returns.” They must be filed every year for the year that the estate or trust exists.

Note that the tax returns involve federal capital gains tax and how assets purchased before death will be treated for tax purposes, when they are sold after death. Usually these are real estate and investments. There are a LOT of taxes to consider, each has a unique due date and there may be ways to pay some taxes that will have an impact on other taxes, depending upon the situation.

The key, and an estate planning attorney can help with this, is to create a plan that takes all the taxes into consideration and plans out a strategy to minimize taxes, ensure that everything is paid on time, and prepare for the taxes to be paid.

Ideally, all this planning takes place before someone dies, as part of their estate plan, so that their loved ones are not left figuring out all of the different tax liabilities and how to pay them.

Reference: Pittsburgh Post-Gazette (March 25, 2019) “Death and taxes—and taxes and taxes”

Now Is a Good Time to Revisit Your Estate Plan

“There still are many sound nontax reasons to revisit estate planning and possibly update your prior documents.”

Even with the doubling of the individual estate gift and GST tax exemptions to about $11.2 million per person (and double the amount for married couples), you still need a will, says Forbes in a useful article titled “7 Reasons to Revisit Your Estate Plan, Trump Tax Law Aside.”

A will serves as the primary vehicle to convey your intentions for your assets and explain your legacy. The provisions of the will can be used to designate how assets will be transferred, whether outright to beneficiaries, to existing trusts or into a new trust that is created under the provisions of the will. If you use the will to create a testamentary trust, the will is where you specify the age for distributions to the beneficiaries and other important details. The will is also how you convey your wishes to make a gift to specific institutions and who should receive family heirlooms.

The executor or personal representative of the estate is the person or institution in charge of managing your affairs, after you have passed. The executor gathers all the information about your estate, including assets and debts, filing taxes and administrative tasks. That person is named in the will.

If you have minor children, or a child with a disability, you want to choose a guardian and a successor guardian. If you do not, the court will appoint someone to rear your child(ren), and that may not be the person you would have wanted. Your spouse is always the obvious choice, but there are instances where both parents die unexpectedly, with no plans in place for their children.

There are many different types of trusts used to accomplish different things. They can be used to control assets and their distribution, which is particularly important when minor children are in the family. Trusts should be used when there is an individual in the family with a disability, an addiction or other issues who cannot manage their finances on their own.

Tax planning is a major part of any will. For a long time, estate planning attorneys focused on how assets were titled, so that the first of a married couple to pass would be able to fully use their estate tax credit.  However, the relatively new concept of “portability,” which allows any unused credit from the first spouse to pass to be used for the benefit of the second spouse, eliminates the need for any unused estate tax credit to go into a bypass trust.

Not only do you need a will, but this year you should consider reviewing your wil,l if you have not done so. The new tax law may have eliminated or reduced some estate tax liability, but it has not eliminated the need for mindful and proactive estate planning.

Reference: Forbes (March 15, 2018) “7 Reasons to Revisit Your Estate Plan, Trump Tax Law Aside”

Revisit Your Gifting Plans

With the new tax laws in place, you should revisit any gifting plans that you previously made.

With the passage of a new tax law that doubles the estate tax exemption, there has been a lot of talk about what that means for current estate plans and how people might plan differently to take full advantage of the new exemption limits.  However, one thing that often gets lost in the discussion, is what it means for currently existing gifting plans.

Gifting is usually done to shrink an estate as much as possible to lower the eventual estate tax burden. However, that may not be necessary now for some people as My San Antonio points out in "How gifting of ranch land to family can increase taxes owed."

Some people will have no need to continue gifting programs designed to shrink an estate below the former exemption limit, so it will not make sense to continue those programs. However, that comes with a caveat.

The estate tax exemption limits are scheduled to revert to their previous levels in 2026. Many experts do not think that Congress will extend the exemption beyond then. That could mean that if someone lives past 2025, then a lot of gifting years have been wasted and more estate tax could ultimately be due.

Whether continuing a gifting program is a good idea, depends on an individual's personal circumstances.

Talk to an estate planning attorney about what you should do.

Reference: My San Antonio (Jan. 29, 2018) "How gifting of ranch land to family can increase taxes owed."

Talking to an Attorney About the New Tax Law

Now is a good time to take advantage of the new tax law and review your estate plan. There are some questions that you should ask your attorney before making any new plans.

Whenever there are significant changes made to tax laws, it is important to review your estate plan to make sure you still have a plan that best benefits you under the law. Even minor changes to tax laws can have an impact on estate plans.

The tax changes recently signed into law are no exception.

Now is the time to go to an estate planning attorney and make sure your estate plan is still optimal for you and your family. There are a few things you will want to discuss with your attorney.

Recently, Forbes offered some suggestions of things to talk to your attorney about in "5 Questions to Ask Your Estate Planner After the New Tax Law," including:

·         You need to know if the new law effects your estate plan at all. The estate tax exemption limit has been doubled and you will want to know what that means for your estate.

·         If you are married, you will want to discuss what the new law means for spousal “portability” and how that could impact you and your spouse.

·         Many states tie their state estate tax exemption to the federal exemption and you will want to discuss whether yours is one of them.

·         Have the attorney review your plan to make sure it is still optimal for what you want to do, given the new laws.

·         Before leaving the attorney's office, ask the attorney when you should come back and review your plan again. Estate plans should always be periodically reviewed with an expert, in case there are other changes to the law that need to be addressed.

Reference: Forbes (January 9, 2018) "5 Questions to Ask Your Estate Planner After the New Tax Law."

Charities Nervous about New Tax Law

The new tax law has important changes for charitable deductions that have many charities worried donations will decrease.

When Congress first began talking about changing the tax laws, charities were particularly concerned about the changes made to deductions. The primary worry was that any increase in the standard tax deduction would result in fewer people donating to charity and then itemizing those deductions to get a tax break.

The new law did pass with an increase in the standard deduction. At the same time, it also limits the deductions that can be taken for state and local taxes leading to fewer itemized deductions.

Lowering tax rates for individuals, also limits the value of donating to charity for tax deductions.

As a result of these three changes, Forbes reports that 21 million people will no longer take charitable deductions on their taxes in "21 Million Taxpayers Will Stop Taking Charitable Deductions Under the New Tax Law."

The tax law also doubles the estate tax exemption which could limit the number of charitable bequests that are made.  However, just because people are no longer taking charitable deductions on their taxes, does not mean they will stop giving to charity.

Many donations are made for reasons that have little to do with tax planning and much more to do with generosity.  

If you would still like to leave money in your estate plan for charity, do not let the new laws stop you. Talk to an estate planning attorney about getting an estate plan that reflects your generosity.

Reference: Forbes (Jan. 11, 2018) "21 Million Taxpayers Will Stop Taking Charitable Deductions Under the New Tax Law."

New Tax Law Creates New Advantages

 

It might be wise to take a fresh look at your estate plan for new options.

Many estate plans will need to be changed to take advantage of the new tax laws, according to the Wills, Trusts & Estates Prof Blog in "A Gift from the New Tax Act: Kill That Trust."

One of the key changes for estate planning purposes, is that the estate tax exemption has been doubled.

Thais means people with estate plans that created trusts for the sole purpose of limiting their estate tax exposure may want to revisit their plans. They might now be better off revising those trusts or even getting rid of them altogether.

An estate law attorney can advise you on creating an estate plan that fits your unique circumstances and may include a trust or dealing with the doubling of the estate law exemption.

Reference: Wills, Trusts & Estates Prof Blog (Dec. 26, 2017) "A Gift from the New Tax Act: Kill That Trust."

 

Tax Law Changes and Charities

Tax proposals currently working their way through Congress could have a big impact on charitable donations, if a couple of the proposals make the final bill.

The Senate and the House of Representatives have both passed their own version of a tax reform bill. The two chambers are far enough apart in their plans that they will have to negotiate in a conference committee to reconcile their bills and then vote on them again.

As they go through that process, the media is looking at how some of the proposals might have an impact on certain groups. One group that could be heavily affected are charities, as two proposals could make it less likely that people will donate to them as Reuters reports in "New U.S. law could curb charitable donations."

One thing the final bill might do is double the standard tax deduction people can take instead of itemizing their deductions. That would make it less likely that people will give to charities at the end of the year to lower their tax bills.

The other worry for charities is the gradual repeal of the estate tax that has been proposed.

Wealthy people often give to charities as a way to shrink the size of their estates to avoid the tax. If that is the sole motivation for giving, then charities could lose out.

Charities are probably right to worry for now.  However, there is no guarantee that either of these proposals will be included in a final bill.  

Reference: Reuters (Nov. 30, 2017) "New U.S. law could curb charitable donations."

Tax Inflation Changes for 2018

The IRS recently announced what the annual inflation changes will be for some important taxes for estates and those who are planning their estates.

Every year the Internal Revenue Service adjusts tax exemptions and deduction limits to keep them in alignment with inflation. The changes that are made can have a big impact on estate plans, even if the actual adjustments are relatively small.

 The IRS recently announced some of those important changes. They could make a difference for people planning their estates, according to the Wills, Trusts & Estates Prof Blog in "Estate Planning Inflation Adjustments for Tax Year 2018 & 2017-2018 Priority Guidance Plan."

Changes include: (SUBJECT TO CHANGE SINCE CONGRESS MAY PASS NEW LAW)

·         Lifetime gift tax exemption increased to $5.6 million.

·         Annual gift tax limit increased to $15,000.

·         Annual gift tax limit to a foreign spouse increased to $152,000.

·         Estate tax exemption increased to $5.6 million.

·         Failure to file a return within 60 days of due date, to result in a penalty of $215 or 100% of amount due, whichever is lower.

If you have questions about how these changes could impact your estate plan, visit an estate planning attorney.

Reference: Wills, Trusts & Estates Prof Blog (Nov. 8, 2017) "Estate Planning Inflation Adjustments for Tax Year 2018 & 2017-2018 Priority Guidance Plan."

How the Elderly Can Prepare for Tax Reform

While it is not yet certain what might be contained in the anticipated federal tax reform legislation or even if anything at all will pass, there are a few things that retirees can do to prepare for changes.

Whenever Congress is talking about reforming taxes, the best advice is usually one word long: wait.

Tax reform is promised so often without anything of much importance passing, that it is usually not a good idea to make big estate planning changes until legislation actually passes.

Now, however, with Republicans controlling both chambers of Congress and the White House,  many people are eager to prepare for the promised tax reforms currently being discussed.

For people in retirement, there are some things that could be done to prepare as USA Today reports in "Retirees: 4 ways you can start planning for possible tax law changes now."

These things include:

·         One of the changes being talked about is eliminating the deduction for state and local taxes. Therefore, people who live in high tax states, might want to start considering moving to a more tax-friendly state.

·         Congress has discussed increasing the standard deduction. That might make it a good time to create a donor-advised fund to take advantage of current tax law and then donate to the fund later, as necessary.

·         While there is talk of eliminating the estate and gift taxes, do not plan for it. Even if they are eliminated, they can always come back later.

Reference: USA Today (Oct. 13, 2017) "Retirees: 4 ways you can start planning for possible tax law changes now."