Category Archives: Tax

Gifting in a Time of Uncertainty

Posted on June 18, 2020 by | Leave a comment

Many are gifting their assets to family members, friends, and their communities in order to assist them through these difficult times. As discussed below, the timing of such gifts may benefit the donor as much as the recipient.

Some basics: Gift taxes and estate taxes are linked in the federal tax system. In other words, these taxes share the same basic exclusion amount (BEA) that an individual is allowed in computing their federal gift and estate tax. The current BEA adjusted for inflation is $11.58 million per individual. This means each taxpayer can transfer up to $11.58 million tax free in any combination of lifetime gifts or testamentary gifts (gifts made after death, e.g., by will or trust).

There is an important general exception: federal law allows an unlimited number of annual gifts an individual can make tax free. The current annual gift tax exclusion amount is $15,000 per donee (recipient). Taxpayers can make annual exclusion gifts to as many donees as they would like before reducing or utilizing any of their BEA.

A important recent legislative amendment: Beginning on January 1, 2018, the BEA was increased from $5 million to $10 million as adjusted for inflation. Under the current federal tax code, on January 1, 2026, the BEA—which is now $11.58 million—will revert or “sunset” back to $5 million as adjusted for inflation. Thus, the current federal tax code permits an individual or their estate to utilize the current, increased BEA to shelter from gift and estate taxes an additional $5 million of transfers made during the eight (8) year period beginning on January 1, 2018, and ending on December 31, 2025.

But what happens if you die after December 31, 2025, having transferred more than $5 million in lifetime and testamentary gifts?

Enter an IRS special rule: On November 26, 2019, the IRS adopted a special rule to address just such question. The rule precludes the IRS from recapturing or “clawing back” all, or a portion, of the benefit of the increased BEA used to offset gift tax by persons who make taxable gifts during the increased BEA period, and die after December 31, 2025. The rule ensures that a decedent’s estate is not inappropriately taxed with respect to gifts that were sheltered from gift tax by the increased BEA when made.

But what if a decedent failed to take advantage of the current increased BEA?

The critical fine print: The special rule also makes clear that the increased BEA is a “use or lose” benefit and is available to a decedent who survives the increased BEA period only to the extent that the decedent “used” it by making gifts during the increased BEA period.

*PLEASE BE ADVISED that the foregoing only provides a basic overview of particular provisions within the federal tax code and corresponding regulations, and it not intended to be relied upon for any individual’s specific circumstances. You should consult with an experienced tax professional for personalized guidance.

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Posted in Charitable Planning, Estate Planning, Estate Tax, Gift, Tax

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The Coronavirus Stimulus Bill — How It May Affect Your Financial and Tax Planning

Posted on April 9, 2020 by | Leave a comment

On March 27, 2020, Congress passed the $2 trillion CARES (Coronavirus Aid, Relief and Economic Security) Act, which provides for direct payments and loans to individuals and businesses, and establishes several provisions which may have a significant impact on your financial and tax planning.

New Tax Filing Deadlines:  For the 2019 tax year, the original filing and payment due date of April 15, 2020 has been extended to July 15, 2020. The new deadline also applies to contributions to a Traditional IRA, Roth IRA, SEP IRA, or HSA. For those making estimated tax payments for the 2020 tax year, such payments are still due on the original due dates, except for the first quarter payment. We strongly advise you to contact your accountant or tax adviser to understand how these new deadlines impact your personal and business tax obligations, and to determine when you should file your return, especially if you are expecting a refund.

Cash Payments for Individuals:  Individuals will receive a rebate payment of $1,200 ($2,400 for a joint return) plus $500 per qualifying child. It appears likely that such payment will be provided in the form of direct deposit or check based upon your most recently filed return or, if you did not file a return because you are a Social Security recipient, your 2019 Social Security information. The payment will be reduced by 5% of your adjusted gross income that exceeds $150,000 for joint returns, $112,500 for head of household returns, and $75,000 for single returns. In other words, the payment is completely phased out at an adjusted gross income of $198,000 or more for married filers and $99,000 or more for single filers.

Unemployment:  For those who have lost their job, the federal government will give unemployed workers an extra $600 a week for four (4) months, in addition to state benefits.

Required Minimum Distributions:  The CARES Act allows for a one (1) year waiver in required minimum distributions (RMDs) for defined contribution plans under §403(a), §403(b), IRAs, and Section 457 plans. The intended purpose of this provision is to give taxpayers a chance to let their IRAs recover. Also, inherited IRAs or retirement plan accounts required to be depleted within five (5) years can skip the 2020 year, thereby extending the required timeframe to six (6) years.

Needed Distributions:  For those needing to utilize retirement savings during these times, the CARES Act waives the 10% penalty on early distributions for 2020 coronavirus-related purposes, up to a maximum of $100,000. This applies to a variety of circumstances, including without limitation, persons, spouses, dependents diagnosed with COVID-19 and persons experiencing financial difficulties as a direct result of the disease.

Qualified Plan Loans:  The amount you can borrow from your retirement plan is temporarily increased to either $100,000 or 100% of the vested account balance, whichever is less. This will be in effect for 180 days, starting on March 27, when the Act was passed. If an existing retirement plan loan comes due between March 27 and December 31, 2020, you have a one (1) year extension to pay it.

Charitable Deductions:  Even if you do not itemize deductions, you can take an above-the-line deduction of up to $300 for charitable cash contributions made to §501(c)(3) organizations on your 2020 tax return. If you can itemize deductions on your 2020 return, the 60% adjusted gross income limitation for charitable contribution deductions is suspended, letting you deduct as much as 100% of your 2020 adjusted gross income.

Deducting Business Losses:  Under the CARES Act, you are permitted to use business losses to claim refunds on your returns, suspending some of the provisions in the Tax Cuts and Jobs Act of 2017.

Small Businesses:  Employers with fully or partially closed businesses due to the coronavirus lockdown, or whose gross receipts declined by more than 50% when compared to the same quarter in the previous year, are eligible for a refundable credit against payroll taxes equal to 50% of qualified wages paid to employees. Depending on the number of workers employed, the credit is limited to $10,000 of wages per employee for the period of March 13 through December 31 and must be reduced by any credits claimed under the Families First Coronavirus Response Act. The Payroll Protection Program provides federally guaranteed loans to small businesses with no more than 500 employees, as well as sole proprietors, independent contractors, and other self-employed individuals. Employers with fewer than 500 employees are required to provide paid sick leave or family leave to employees forced to stay home due to quarantining, caring for a family member or caring for a child whose school or daycare location is closed. Employers will be eligible for a refundable credit against the payroll portion of the tax on the qualified paid sick leave and qualified family leave.

In sum, the CARES Act provides many avenues of relief, and we encourage you to contact your tax adviser or legal counsel for further information. If you have any questions, Woodburn and Wedge is here to assist you.

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Posted in Charitable Planning, Estate Planning, Tax

Gift Taxes in a Nutshell

Posted on January 15, 2016 by | Leave a comment

Title Deed with keys

When does my generosity, or my desire to give gifts during my life, trigger the application of federal tax laws regarding gift taxes? Consider the following scenarios:

  • Declan wants his daughter Fiona to receive his residence at his death. He and his late wife purchased the property for $30,000 in the early 1950s. He signs and records a deed in 2015 that conveys the property to himself and Fiona as joint tenants. As of the date of the conveyance, the property is worth $300,000. He continues to reside there and to pay all property taxes, insurance and maintenance.
  • Teresa opens a bank account in 2014 and transfers $500,000 to the account. She names herself and her son Juan as joint tenants with right of survivorship at the time she opens the account. Under the account terms, both Teresa and Juan have the right to withdraw the entire amount of the bank account at any time. Juan does not withdraw any funds from the account the first year. He withdraws $40,000 in 2015 to pay his college tuition.

Has Declan or Teresa made a taxable gift? If so, when was the gift made and for how much? Could either of them have achieved the same result but avoided the gift tax rules?

The gift tax is a tax imposed on certain gifts made during life. Not every gift is taxable. The IRS allows a generous annual exemption, currently $14,000, per donee. This means you may give up to $14,000 each year to an unlimited number of recipients without having to file a gift tax return. (The amount was established at $10,000 and is increased periodically for inflation; it has been $14,000 since 2013). Also, you may give unlimited gifts to your spouse (if a U.S. citizen) or to §501(c)(3) charities without incurring a tax. You may also pay tuition for education and medical bills on another’s behalf without tax consequence if you pay such amounts directly to the educational institution or health care provider.

Even if you make gifts that are taxable, Congress has provided for a unified credit that allows you to make otherwise taxable gifts throughout life and at death up to a sum total of $5,450,000 (for those who die in 2016) without paying a gift or estate tax. The credit is “unified” in the sense that it is applied both to gifts made during your life time and to gifts made at death from your trust or estate, up to the maximum credit. Each year the unified credit is adjusted upward for inflation. Gifts made above that amount are taxed at a whopping 40%.

Returning to our examples, the fact is that both Declan and Teresa have made taxable gifts that require a gift tax return to be prepared and filed with the IRS; and both could have avoided this result with some good legal advice and planning.

Declan has made a taxable gift of one half the value of the real property, or $150,000, to Fiona. He can count the first $14,000 toward the annual exclusion, but he still must file a gift tax return for the remaining $136,000. Even worse, since the transfer was made during his life time, if and when Fiona sells the house after his death she will have to pay a capital gains tax on the increase in value from the $30,000 purchase price. Had Declan conveyed the property to her at his death, she would have received a step up in basis, meaning the base price for considering a capital gains tax would have been the value at his date of death, rather than the value of the original purchase in the 1950s. This would have been a huge tax savings to Fiona. It would also have eliminated the requirement of the gift tax return.

Teresa makes a gift of $40,000 to Juan in 2015 when he withdraws that amount from the account. She must file a gift tax return for the gift, after offsetting the amount of the annual exclusion. The joint bank account is treated differently than a joint tenancy in real property; until and unless Juan withdraws money from the account over and above any contribution he may have made to the account, there is no gift because Teresa can still withdraw the whole amount. Here, Teresa could have paid Juan’s school directly for the tuition without any gift tax consequence.

Note that for both Declan and Teresa, assuming no previous gifts have been made, no actual tax is due because the unified credit will cover these relatively modest amounts; but the hassle and cost of preparing the gift tax return could have been avoided. Moreover, if either has an estate that will exceed the unified credit at the time of death, these gifts will have negative consequences for their estates.

If you are thinking of making a large gift, it is well worth consulting with your accountant or estate planning lawyer to ensure you take advantage of the gift and estate tax rules to minimize or eliminate your tax liability.

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Posted in Community Property, Estate Planning, Estate Tax, Gift, Tax

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5 Reasons Parents Should Discuss Their Estate Plans with Children

Posted on March 25, 2015 by | Leave a comment

Gift to Grandchildren“What should I tell my children?,” is a common question I hear after clients execute their estate plans.  Few people enjoy discussing their own mortality.  And few parents speak openly to children about what will unfold financially after the parents die.  Parents may fear that by speaking about their estate planning it could ignite a family fight over who will receive what.  Further, many of my clients worry that children may become entitled and lose motivation to be financially responsible.

However, open communication can benefit both generations.  The parents can explain their decisions and the children can better plan their lives.  Further, children can provide feedback about their needs or lack thereof.  Also, parents and children can discuss tax considerations and develop more efficient plans.

Here are five reasons to tell children what is included in your estate plan before you die:

1. You can calm angered heirs.

Resentment among related heirs runs rampant after discovering Dad and Mom’s final wishes for the distribution of their estate.  Talking over the rationale for making unequal distributions can smooth ruffled feathers.  I have seen clients give more to children who have more children of their own as opposed to a child with no offspring.  I have clients who leave a greater share of their estate to a financially irresponsible child in trust so the child will not deplete the assets but they task a responsible child with making the distributions. Such an arrangement can be doubly painful for the financially prudent child. I have also seen heirs who resent their parents for leaving significant bequests to charities.  Parents can explain these decisions during their lifetimes, in their own words, to alleviate angry or bitter feelings.

2.  You can save hassles and prevent mistakes.

Children will be emotionally spent following the death of a parent.  If they have to search far and wide for estate planning documents and assets, they will be psychologically, physically and financially spent too.  Parents should let children know where to locate estate planning documents and what to expect within those documents.  If children are surprised by the deceased’s wishes, they may not execute those wishes properly.

3.  You may benefit your children’s lives now.

Parents should devote time to listening to and learning from their children about their financial wherewithal and work ethic.  Holding regular meetings or open dialogues would provide a golden opportunity for the parent to share their plans with the children.  Parents may withhold assets from children during financial struggles as part of a “tough love” approach. Yet, this approach can be viewed as stingy and cause children to question why Mom and Dad chose to withhold assets during the child’s difficulties.

4. Children might give you a better idea

Many of my clients hold significant wealth in a home or business.  I have had numerous clients wrongfully assume that their children want to keep the valuable home or operate the business.  I have come to expect that parent business owners do not discuss with their children whether the children want to keep the business.  Placing stipulations on the continued operation of a business or keeping a valuable real property in trust may not be the desire of the heirs.  Recently, I dissuaded a client out from keeping a family cabin in the Sierra Nevada mountains in trust for his children’s lifetimes.  One child resides in another county and the other child works as a very busy professional in another state and has not been to the cabin in six years.  Seek your heirs input.

5. You may save children taxes

You should consider whether children need additional assets.  Also, be mindful of the type of asset you are passing down to a child.  Consider the difference between an IRA account in which future distributions will be taxed and a rental real estate property with an existing mortgage.  A beneficiary working as a school teacher will likely appreciate the additional income from the IRA much more than a beneficiary working as a highly-paid physician.  For even greater tax savings, you may be able to make asset transfers directly to grandchildren and skip the children altogether.

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5 Ways to Transfer the Family Business

Posted on March 12, 2014 by | Leave a comment

The following article on business succession planning appeared in the February 10, 2014 issue of Northern Nevada Business Weekly:

JCM ProfileAs a business owner, you will have to decide when will be the right time to step out of the family business and how you will accomplish a successful transition. There are many estate planning tools you can use to transfer your business. Selecting the right tool will depend on whether you plan to retire from the business or keep it until you die.

The transfer can be an emotional minefield where some family members are participants in the business and others are non-participants.  Those participants may feel “obligated” to stay in the family business when they would rather do something else.  In addition, the transfer can be complicated due to estate taxes, gift taxes and capital gains taxes.

Moreover, sometimes the family business is only profitable enough to support one child, even though the non-participants may believe the business’ finances should support them. Or, only some or none of your children may have the abilities or skills to run the business.

Transfer of the family business is further complicated when – as is frequently the case – the family business represents all or nearly all of the parents’ wealth.  Passing the business on to one or more children, while treating all your children fairly, is not easy.

Transparency and communication are vitally important. To achieve the best result, the entire family should receive (1) an explanation of your plan and why you are undertaking a particular strategy; (2) sincere, personal discussions clarifying that you love them equally; and (3) a promise that you are doing your best to be fair to all, while ensuring the future viability of the business.

Here are the 2014 tax exclusion and exemption amounts to consider when analyzing the various alternatives available for the transfer of a family business:

  • The annual exclusion for gifts is $14,000 per donee (meaning husband and wife can each gift $14,000 to a recipient); and
  • The federal gift and estate tax exemption for transfers during life or at death is $5,340,000.

Business sale to the participating child through an installment sale.  This is considered one of the simplest methods of transferring the family business to a child or children.  You can sell shares or partnership interests to a family member.  The benefit of this method is that installments payments can be made over time, which provides an income for you after your retirement. Another benefit is that the purchasing child can better manage his or her cash flow and does not have to come up with a large sum of money at once. However, you will incur capital gains if the business sells for more than what you have invested.    

Gift the business to some children and give cash to the others. Gift taxes are likely to be incurred with this strategy. A more practical concern than paying gift taxes is the fact that you may not have sufficient cash to equalize the value of the business assets going to your other children. This dilemma can be solved with a sizeable life insurance policy which names the non-participant children as beneficiaries. There are various ways to handle the life insurance, including setting up an irrevocable life insurance trust so that the life insurance benefits are not included in your estate for estate tax purposes.

However, if you gift your business, your child will not benefit from the step-up in basis to the current fair market value that is allowed when the business is purchased or inherited. For capital gains tax purposes, your child will step into your shoes and own the business at the basis that you own the business. Assuming the business increases in value over time, your child’s capital gains taxes will be higher. Of course, if the business is never sold, capital gains taxes may not be a concern.

Divide the business: the participating children receive the operating company and the non-participants receive the land and/or buildings used by the business. You could retain the real estate but provide that your children who are not participating in the business inherit it. By retaining control of the real estate during your lifetime, you could collect rent from the operating business to provide income. Later, your children who inherit the facilities could charge rent to their siblings running the operating company. How well your children work together under this strategy depends on family dynamics.

GRAT or GRUT. A more sophisticated business succession tool is a grantor retained annuity trust (GRAT) or a grantor retained unitrust (GRUT). GRAT/GRUTs are irrevocable trusts to which you transfer appreciating assets while retaining an income payment for a set period of time. At either the end of the payment period or your death, the assets in the trust pass to the other trust beneficiaries (the remainder beneficiaries). The value of the retained income is subtracted from the value of the property transferred to the trust (i.e., a share of the business), so if you live beyond the specified income period, the business may be ultimately transferred to the next generation at a reduced value for estate tax or gift tax purposes.

Intentionally defective grantor trust.  Another sophisticated technique is use of an intentionally defective grantor trust (“IDGT”).  The trust is intentionally defective so the grantor pays the income tax on the assets that are no longer considered part of the estate.  You create the IDGT, lend the trust money to buy an asset (the business) you expect will appreciate significantly. In return for lending the trust money, you receive interest payments for a set number of years. The lower the interest rate, the less the trust must repay you — and the more your heirs stand to benefit.

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Posted in Estate Planning, Gift, Tax, Trusts, Wills

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