Estate Planning Updates for 2018

Below are some of the recent highlights regarding estate planning changes that have recently been implemented.

Estate Tax Exemption: Prior to the recent tax bill, the estate tax regime provided for an estate tax exemption of $5 million, which was adjusted annually. The adjusted exemption for 2017 was $5,490,000. However, the new tax bill doubles the adjusted exemption for 2018 to $11,200,000. 

Additionally, one of the most beneficial items in the tax code is the annual gift exclusion. The adjusted figure was 2017 is $14,000 per beneficiary, which had not been raised since the beginning of 2013. However, for 2018, the IRS has announced that such exclusion will be adjusted to $15,000, per beneficiary.

As a final note, I would like to address the Proposed 2704 Regulations for the final times. As a quick background, toward the end of 2016, the Treasury Department proposed regulations that sought to eliminate traditional (and significant) discounts for estate tax purposes available to family controlled entities. As expected, It was recently announced that the current administration will now proceed with the proposed regulations.    

Proposed GOP Tax Plan - Estate Tax

As the end of the year approaches, we believe that individuals should be cognizant of the estate tax provisions within the current administration’s proposed tax plan that may potentially be implemented in the coming year.

When it comes to the estate tax, the administration has been adamant that they intend to eliminate it altogether. However, as will be explained below, the tax plan as currently proposed, does not immediately eliminate the estate tax, and such elimination (if any) may ultimately not be in effect for long. Additionally, even the current House of Representatives and Senate still do not agree on such issue.  

Under the House’s proposed bill, the estate tax will be phased out over a six-year period. During this phase-out period, the estate tax exemption would be doubled for the years 2018-2023 to an inflation-adjusted $10 million, from the current $5 million inflation-adjusted amount. (The inflation adjusted exemption for 2018 is set to be $5.6 million). Alternatively, the Senate’s proposal provides for the same increased exemption without the full abolishment of the estate tax in 2024. An additional (obvious) factor here is that if the estate tax is fully eliminated in 2024, a new administration will be incoming, bringing with them the potential for additional changes.

Although over the short-term, the recently proposed tax bill seems to alleviate much of the burden that results from the current estate tax regime, we strongly urge clients to continue with their planning. Please do not hesitate to contact Morris Law Group should you have any questions regarding the proposed tax bill.          

Tax Relief for Victims of Hurricane Irma

On September 12, 2017, the IRS announced relief in the form of extensions, for the victims of Hurricane Irma. Specifically, filing deadlines (original or extended) falling on or after September 4, 2017 and before January 31, 2018 will be postponed to January 31, 2018.

The relief applies to individuals who reside in the following counties: Broward, Miami-Dade, Palm Beach, Charlotte, Clay, Collier, Duval, Flagler, Hillsborough, Lee, Manatee, Monroe, Pinellas, Putnam, Sarasota and St. Johns.

The following tax returns will be included in the relief:

-Individual Income Tax Returns;

-Corporate Income Tax Returns;

-Estate and Trust Income Tax Returns;

-Partnership Returns;

-S-Corporation Returns;

-Trust Returns;

-Estate, Gift and GST Tax Returns;

-Annual Information Returns of Tax Exempt Organizations;

-Employment and Certain Excise Tax Returns.    

Additionally, if you receive a late filing or late payment notice that falls within the postponement period, you should immediately contact the IRS at the phone number written on the notice and the penalty will be abated upon proper explanation. Please do not hesitate to contact our office if you are unsure if this extension applies to you. 

Deadline Approaching for Challenging Property Taxes

Every August, property owners in Florida receive updated tax assessment figures from the local tax authority. This is done through a Truth in Millage (TRIM) Notice. The purpose of the TRIM Notice is to explain any proposed changes in the millage rate of each taxing authority, and to inform the property owner of the assessed value.

An important procedure that is often overlooked by taxpayers is the property tax petition. Specifically, local counties allow property owners to contest their assessed value before an independent appeals board known as the Value Adjustment Board.

However, in order to be eligible for appeal, you must file for the petition prior to the deadline established by your county. Please pay close attention to the deadlines below for the local South Florida counties:

1)      Palm Beach County: September 15, 2017

2)   Broward County: September 18, 2017

3)   Miami-Dade County: Due date varies; date is listed on the actual TRIM notice. 

The failure to file a petition for appeal prior to the due date will result in the loss of the ability to petition your assessment for the year. Since the dates listed above are rapidly approaching, it is crucial that you file the petition as soon as possible should you wish to appeal your property tax assessment. Should you need assistance with your appeal, please call Morris Law Group for a referral.

Grantor Retained Annuity Trust (GRAT)

Individuals with taxable estates are always looking for efficient ways to plan for the eventual estate tax. One such planning technique is through a Grantor Retained Annuity Trust (GRAT).

A GRAT is a trust by which the person making the contribution (the “grantor”) makes a transfer of property to the trust and retains an annuity (equal to a fixed percentage of the value of the initial trust assets) for a specified term of years. At the end of the period, the remaining trust property transfers to the beneficiaries which the grantor designates in the trust instrument.

For gift tax purposes, the value of the gift by the grantor would equal the total value of the assets transferred to the GRAT less the present value of the grantor’s retained annuity payment for the period of time that the grantor designates.  The present value of an annuity is based on the amount of the annuity selected, the initial term selected, and the interest rate in effect for the month of the transfer (determined by the IRS.).  The trust could be established to reduce the taxable gift to zero or close to zero (i.e., a “zeroed out” GRAT). 

The benefit of the GRAT is that if the investment return of the GRAT exceeds the interest rate used to determine the value of the grantor’s retained interest and the grantor survives the GRAT term, the investment return in excess of the interest rate will escape gift tax.  The current interest rate set by the IRS. is 2.4% (for August 2017).  This interest rate is relatively low by historical standards and makes the current time a good time to utilize a zeroed out GRAT.  Thus, the GRAT is particularly beneficial where the assets transferred to the GRAT have the potential to readily appreciate in value over the period of time selected. 

However, a disadvantage of a GRAT is that if the grantor fails to outlive the term of the annuity, the remaining GRAT assets will be included in the grantor’s estate for estate tax purposes, thereby eliminating some or all of the potential estate planning benefits of the GRAT. 

If you are looking for creative and efficient ways to reduce your potential estate tax exposure, please do not hesitate to contact Morris Law Group to discuss if a GRAT is the right planning technique for you. 

Life Insurance Reviews

Life insurance is an extremely important asset for a myriad of reasons, most of all the financial security that it provides to your family in the event of an untimely death. For individuals with a high net worth, life insurance provides significant help for payment of the estate tax. In addition to the financial security it provides for your family, life insurance is also an excellent vehicle to hold assets during lifetime especially in Florida, where it is statutorily protected from creditors.

Although the benefits of life insurance are obvious, it is an asset that can be extremely frustrating especially when not monitored closely and often. This post will focus on the ways in which you can more effectively monitor your life insurance policies in order to obtain the maximum overall benefit.

The first and most apparent factor that should be monitored is the premium. It is possible that your policy can be over-funded and premiums may be lowered or no longer necessary at all to cover the policy costs for the duration of coverage. Alternatively, you may realize that you need to increase annual premium payments in order to fund the policy for the duration of coverage.

An additional factor that should be monitored is the allocation of the cash value. People often forget that whole life insurance policies do contain an investment aspect which can affect the bottom line of the policy. If your policy has been fully funded it may be advisable to re-allocate the cash value to a more conservative asset allocation in order to reduce any risk. On the other hand, if your policy is under-funded, you can re-allocate to a more aggressive asset allocation in order to increase the cash value.

Finally, some policies can simply be too expensive, in which case it may be possible for some of the incidental benefits to be reduced. Likewise, if the policy is not too expensive it may be possible to add on additional benefits as part of your current policy.

Regardless of your financial situation, a life insurance policy is an asset that should not be ignored. Additionally, should you have any questions about your life insurance or the need for life insurance as part of your overall estate planning, please do not hesitate to contact the Morris Law Group.    

Investment LLC's

The next topic in our continuing theme of asset protection is the use of LLC’s for investment assets. For many individuals, investment accounts are the most significant assets they own. Therefore, such accounts are always one of the first assets that creditors wish to attach in the event of a lawsuit. This is true even though some of the investment accounts may be titled in names that have inherent protection built in, such as tenancy by the entirety accounts in Florida.

An investment LLC is an easy entity to form, and its sole function is to serve as the owner of your investment accounts. To enhance the protection of the LLC, we recommend that the LLC have more than one member (a multi-member LLC). A typical setup is for the entity to be owned equally by a husband and wife’s trusts. Additionally, each member of the LLC may serve as a manager and have full control of the investment assets.

Since more than one member owns the LLC, the underlying assets cannot be attached by an individual member’s personal creditors. The sole remedy available to such a creditor would be to obtain a charging order against the member’s LLC interest and only be paid if the LLC distributes assets to that member.

    

If you are an individual with significant investment assets, please do not hesitate to contact our office to ensure that such assets receive the best possible protection. 

Split Dollar Life Insurance

Spit dollar life insurance is a highly effective estate planning technique for high net worth individuals. It is essentially a strategy in which an individual can utilize a series of separate annual loans in order to make premium payments for his or her life insurance policies. This arrangement is also common for employers who provide life insurance for highly compensated employees as a supplemental benefit.   

Split dollar life insurance is especially useful for those individuals who would like to have their life insurance policies owned in an irrevocable trust, yet do not have the necessary annual exclusion amount available (currently $14,000 per year per beneficiary) to pay the full premium amount.

The strategy works as follows. Prior to the premium payment, an individual will enter into a loan agreement with the irrevocable trust for the stated applicable federal interest rate (AFR). This process will continue each year until the death of the insured.

Upon the insured’s death, the lending party will be paid off from the amount of the death benefit. The remaining death benefit will pass to the irrevocable trust or other designated beneficiaries tax-free.

If you are an individual who would like to purchase additional life insurance or believe that split dollar planning would be beneficial, please do not hesitate to contact the Morris Law Group.  

Warning – IRS to Hire Private Debt Collectors

In today’s society, scams involving the impersonation of IRS collection agents have become extremely common. In fact, nearly everyone has personally received calls from a person or machine claiming to be an IRS collection agent.

Unfortunately, beginning this year, the IRS will implement a new program that uses private debt collection companies to collect past-due amounts when the IRS no longer has sufficient resources to pursue collection. This new program will create a whirlwind of uncertainty for taxpayers, as they are already skeptical of such calls.

In order to prepare for this new program, it is important to know the following. The IRS is required to give notice to each taxpayer and his or her representative that an account has been transferred to a private debt collector, which will be followed up by a separate letter from the collection agency.

So far the IRS has chosen four private agencies to carry out the new program. The agencies must abide by the Fair Debt Collection Practices Act (FDCPA). The four private agencies are Conserve (Fairport, NY); Pioneer (Horseheads, NY) Performant (Livermore, CA); and CBE Group (Cedar Falls, IA). Additionally, pursuant to the FDCPA, the private agencies may not partake in any act that is deemed harassment.

Although this new program has enabled private debt collection with regard to overdue taxes, it is important to remain vigilant. Should you receive a call from a debt collector posing as the IRS absent a previous notification letter from both the IRS and the private agency, it is most likely a scam.   

Trump Tax Plan

This post will focus on the key pieces of the 2017 Tax Reform for Economic Growth and American Jobs; otherwise known as the Trump Administration’s tax reform plan, released on April 26, 2017.

The four primary objectives of the plan are: 1) to grow the economy and create jobs; 2) simplify the Internal Revenue Code; 3) provide tax relief to American taxpayers; and 4) lower the tax rate on businesses.

The first method of individual income tax reform is through reduction of the number of tax brackets. The number of applicable tax brackets will be reduced from 7 to 3, with remaining brackets of 10%, 25% and 35%. However, the specific income thresholds for each bracket are still to be determined. At the current time, the most important aspect of this specific change is the reduction of the highest individual tax rate from 39.6% to 35%.

Additionally, the proposed tax reform references the following items which will have a direct impact on individual taxpayers:

1) The standard deduction will be doubled from $12,700 to $25,400;

2) Repeal of the 3.8% net investment income tax;

3) Repeal of the alternative minimum tax

4) Additional provisions to be provided for child and dependent care expenses; and

5) Repeal of the “death” tax. 

Please stay tuned throughout the next few months as the administration will hold listening sessions with stakeholders to receive input and work with Congress to develop the details further. However, in the interim, please do not hesitate to contact our office should you have any questions about the proposed Trump tax reform.   

Federal Gift Tax Return Deadline Approaching

The purpose of this post is to advise you that you may be required to file a Federal gift tax return (IRS Form 709). If you made a gift during 2016, the below summary may be critical to your tax planning.

  

The due date for a 2016 gift tax return is April 18, 2017, the same due date as your 2016 individual income tax return. This date can be extended by extending the time to file your individual income tax return using Form 4868 or Form 2350. This due date can also be extended by filing a Form 8892 to request an automatic 6-month extension if you do not request an extension for your individual income tax return. However, neither of these methods will extend the time to pay gift or GST taxes due.

Outright Gifts of Cash or Property

All gifts of cash or property (in excess of $14,000) to an individual other than a spouse require a gift tax return. As a result of the gift, your lifetime estate and gift tax exemption ($5,450,000 in 2016) will be reduced by the value of the gift that exceeds the $14,000. However, no gift tax will be due with the return unless you have fully used your lifetime estate and gift tax exemption.  

Gifts of Cash or Property in Trust

When you gift cash or property to a trust, including a life insurance policy (or premium payments to be made on a life insurance policy), you are making a gift to the trust=s beneficiaries. If the gift to the trust=s beneficiaries does not exceed $14,000 per beneficiary, and Crummey notices are properly used, a gift tax return may not be required unless the trust is structured as a generation-skipping transfer (AGST@) tax trust. If a gift is made to a GST trust, it may be advisable to allocate the donor=s GST exemption to the trust. While this allocation is automatic, it is advisable to either opt out of the automatic allocation rules for record keeping purposes, or, file a return showing the allocation of the GST Exemption. If a gift to a trust exceeds $14,000 per beneficiary, a gift tax return is required to be filed.

Most CPA’s are willing and able to prepare gift tax returns. However, many prefer not to due to the complex rules that apply to the allocation of GST exemption and other special disclosures. Due to such complexities, we prefer to review all gift tax returns prepared by our client’s accountants to ensure they align with your estate planning goals.

If you have gifted cash or property in excess of the filing threshold during 2016, please do not hesitate to contact our office should you need assistance with the preparation or review of a gift tax return.  

Intestacy in Florida

In a recent poll held by USA Today, it was determined that more than 60% of Americans do not have a will. Furthermore, nearly one-third of the individuals polled said that they don’t feel the urgency to do so. Since this seems to be a common issue in society, this post will focus on what happens to an individual’s property if they die intestate (without a will) in the state of Florida.

The key factors are whether the person who dies (the “decedent”) is survived by a spouse, children or both. The decedent’s property will be distributed in the following order:

• If the decedent is survived by a spouse and has no lineal descendants, the entire estate will pass to the surviving spouse.
• If the decedent is survived by a spouse and lineal descendants, and all are joint lineal descendants of the decedent and surviving spouse, the entire estate will pass to the surviving spouse.
• If the decedent is survived by a spouse and lineal descendants, and any of the lineal descendants is not also a descendant of surviving spouse, then: one-half of the estate will pass to spouse; and one-half will pass to the descendants, per stirpes.
• If the decedent is survived by lineal descendants, and not a spouse, the estate is shared by the descendants, per stirpes.
• If the descendant is not survived by descendants or a spouse, the entire estate will pass to the decedent’s parents. If the parents do not survive, the estate will pass to the decedent’s brothers and sisters and their descendants, per stirpes. If none of the previously named people survive, the estate will pass to the heirs of the decedent’s grandparents, per stirpes, with one-half to the maternal side and one-half to the paternal side.

Although it can be argued that intestate distribution is better than nothing, it can lead to your property being divided in a manner not consistent with your wishes. As illustrated by the steps above, it is even possible for your property to pass to a person you have never known.

Additionally, the lack of a will can cause severe problems if you have minor children. Absent a will, there may be no record of your intent to appoint a guardian for your minor children. In such a case, this decision will rest with a judge. Furthermore, the distribution of your homestead property is subject to a different set of convoluted and complex rules if you are survived by minor children.

Whether you have a large or small estate it is extremely important to have some form of a will. If you are an individual without a will, we strongly advise you to contact our office to begin the assembly of an estate plan. 

Apparent End to the Proposed IRC Section 2704 Regulations

Today’s post will shed light on two of the main Wealth Preservationist topics throughout the last few months. Specifically, the proposed IRC Section 2704 Treasury Regulations (see posts dated August 15, 2016 and November 29, 2016); and tax implications of the Trump Administration (see posts dated December 6, 2016 and December 20, 2016).

After months of uncertainty regarding the proposed regulations, it appears that the election and inauguration of Donald Trump means the end for the proposed regulations. As a quick recap, the proposed IRC Section 2704 Regulations sought to eliminate traditional (and significant) discounts for estate tax purposes available to family controlled entities.

The primary reason for the apparent end to the regulations is the failure of the IRS to exclude active businesses from the reach of the proposed regulations, rather than target the investment based family controlled entities that serve no active business. This failure to make an exception for active businesses led to significant public backlash as success of family controlled businesses can be vital to creation and sustainment of jobs within this country.

Although owners of family controlled entities benefit from the apparent end to the proposed regulations, business succession is still an extremely important component of one’s estate plan. If you are an individual with a family controlled entity, it may be advisable to contact our office to ensure that such business is properly incorporated to fit within your overall estate plan. 

Trust Protectors

When discussing estate plans with clients, they are usually familiar with the concept and duties of a Trustee. However, most clients, even those with existing estate plans, are not familiar with the concept of a Trust Protector, a position which may be equally as important.

A Trust Protector is an individual named in the trust, typically in a non-fiduciary capacity, with a power to act under a specifically enumerated list of powers that are not available to the Trustee. The specific powers available to the Trust Protector are predetermined by the grantor at the time the trust is drafted. They can be customized to ensure that the Trust Protector has enough power to act in the necessary scenarios while also ensuring that the Trust Protector does not have too much power over the trust agreement.  

Specific powers commonly include the power to amend or modify certain provisions of the trust; the power to change the situs of the trust; and the power to remove and appoint a trustee. However, once the trust agreement is signed, the powers of the Trust Protector are locked, as the Trust Protector does not have the ability to expand his or her own powers (however, he or she may reduce his or her own powers).  

      

The position of Trust Protector is extremely important within an irrevocable trust since irrevocable trusts are generally not amendable. If an irrevocable trust does not have a Trust Protector, the ability to make changes to the trust is limited and must meet certain requirements per statutes which may result in a time consuming and costly court proceeding.

Although, the position of Trust Protector is most commonly used in irrevocable trusts, we also highly recommend their use in revocable trusts; as such trusts will eventually become irrevocable upon the death of the grantor. If you have an existing revocable trust agreement which does not contain Trust Protector Provisions, it may be advisable to contact our office to include such position into your estate plan.