A-Z of Estate Planning

M – “M” stands for MARRIAGE. Perhaps more than any other single factor, MARRIAGE, RE-MARRIAGE, and DIVORCE (See, DIVORCE, above) can have a significant impact on the amount of taxes owing on an estate.  Under current tax law, a married couple can leave a combined estate of $22,400,000 and not be subject to estate tax. (This assumes the couple has not used any portion of their lifetime gift exclusion at the time of their respective deaths).  For an individual, that amount is cut in half.  RE-MARRIAGE, especially where there are stepchildren from a prior marriage, can require careful drafting of the estate plan to ensure children from the first marriage are not overlooked.

N – “N” stands for NEW TAX LAW.  As mentioned earlier, the tax law that took effect this year, and will remain in effect until the end of 2025, doubled the amount of an estate that will be subject to tax at an individual’s death.  This will have a significant effect on estate and tax planning during this time, and is anticipated to have a positive impact on the transfer of family businesses that have, in the past, faced difficulties passing the business to the next generation due to tax burdens.

O – “O” stands for ­OUT-OF-STATE-PROPERTY. If you own property outside the state where you establish your trust or where you reside, it is important, when funding the local trust with OUT-OF-STATE property that the deed transferring the property meets the requirements of recording where the real property is located.  If it does not, there is the risk that the property may end up in probate, rather than in your trust. 

To Be Continued ....................

A-Z Estate Planning

J-"J" stands for Joint Ownership. A married couple who lives in a community property state will enjoy a step up in basis for a home they own jointly. For example, if a couple pays $100,000 for a home, and when the first spouse dies, it is worth $200,000, the living spouse's new basis in the home is now $200,000.  If she later sells it, and for some reason tax is owed, her taxable gain would be calculated using the $200,000 stepped-upped basis, thus saving money.  If however, a home is owned jointly by two people not married, the survivor could inherit the property under Nevada law without passing through the probate process: however, the survivor's basis would remain the original $100,000 from the earlier example; there would be no step-up in basis. This unfortunate outcome could be avoided with planning.

K – “K” stands for 401(k).  The term “401(k)” is a general term many people use to refer to their widely known by many people as the retirement program they have at their workplace.  The term itself is actually a section of the Internal Revenue Code that regulates employer-sponsored retirement plans that can qualify for special tax treatment if conducted according to the IRS Code and Regulations.  Your 401(k) retirement plan can play a very important role in your estate plan, but if handled improperly can have negative tax consequences for your beneficiaries.   For example, it is generally not a good idea to name your trust as a beneficiary of your 401(k) plan, but rather, simply name direct beneficiaries of your plan, and allow your trust to operate separately and control its assets separately.

L – “L” stands for LIMITED LIABILITY COMPANY (LLC).  Many individuals pass away as owners of an interest in Limited Liability Companies.  Depending on the operating agreement of the LLC, some or all of your interest in the LLC can be funded into your trust during your life.  There are certain procedures both at the LLC level and, perhaps, at the state level that will need to be followed to ensure this is done properly and with the greatest effect.

A-Z Estate Planning

G-"G" stands for GENERATION SKIPPING TAX. When a person dies and transfers their assets to their heirs (traditionally, their children ) the government imposes a tax on that transfer, something usually called an estate tax.  Those children would then later transfer some or all of those assets to their children. When this occurred, there would be another transfer/estate tax imposed on the same asset, effectively, the same asset was taxed twice.  In an attempt to avoid this double tax, some individuals simply skipped the first transfer to their children and left some assets to their grandchildren instead, effectively "skipping a generation" and a level of tax.  The government caught on and imposed a tax on transfers that skip generations.

H-"H" stands for HEIR. When someone dies the person who is legally entitled to that individual's assets and property is the HEIR.

I-"I" stands for IRREVOCABLE, IRS,IRAs, and ILITs. An IRREVOCABLE trust is a special kind of trust that has serious implications, and should not be undertaken without seeking advice from an attorney and a tax advisor.  These kinds of trusts have their uses, but fit only a small fraction of the public.  The IRS governs the tax effects of the choices made in and through your estate.  Poor planning can result in wild swings in tax exposure (greater or lesser) of your estate.  Many, many people have IRAs. An Irrevocable Life Insurance Trusts, better known as an ILIT is a tool to pay off estate taxes by purchasing life insurance in the amount of the taxes estimated to be owing at the time of death.  In this way, the beneficiaries inherit most, if not all, the estate without having to pay tax from it.

To Be Continued......

A-Z Estate Planning

D- "D" stands for DIVORCE, which can play an important role in estate planning, especially if there are stepchildren.  See, Q tip in coming posts.

E-"E" stands for ESTATE and EIN.  The value of the assets in your ESTATE when you pass away will determine how much your ESTATE will owe in taxes. Removing assets from your ESTATE before you die can help eliminate taxes.  Your living trust/your ESTATE will not generally need an " EMPLOYER Identification Number (EIN) until you pass away.

F-" F" stands for FUNDING your trust. If your attorney or financial advisor determines that you should have a trust, it is vital to the existence of the trust that it has assets transferred (FUNDED) into it.  A trust without assets has no legal effect, and your assets will be forced to pass through the public PROBATE process.

To Be Continued.................

A-Z Estate Planning

A- "A" stands for ASSETS that will be in your estate at the time of your death.  Effective estate planning can help eliminate the amount of tax owed on these ASSETS if that is your goal.

B-"B" stands for BASIS, or what you paid for an asset in your estate, minus expenses you incurred in obtaining the asset. Proper estate planning can take advantage of a bump-up in BASIS and help taxes owed by your beneficiaries.

C- "C" stands for CHILDREN and /or CHARITY. There are numerous ways to leave your estate to your CHILDREN to protect them from creditors (a Bad "C" word) or, perhaps, from inheriting too much too soon. Gifts to CHARITY can be an effective tool to save on taxes.

To Be Continued.....................

Tax Return

Just a reminder for those taxpayers who file a late return: Under the IRS's First Time Abatement Program you may qualify for an OK to waive late filing and late payment penalties. You must pay or make arrangements to pay the tax due.  Your last three years tax return must have been filed and paid timely.  Let us know if we can assist you in requesting this relief.

Audited by the IRS? What should you do?

Should I represent myself or my company if audited by the IRS?

The simple answer from a Tax attorney NO!!!!

If you do you will tell the Auditor something you should not.  With that being said if you receive an IRS notice stating you owe a small amount of money due to an error you should talk to a qualified CPA or Attorney and ask if it's worth fighting.  They should let you know.  I tell all prospective clients to do a cost-benefit analysis.  Also if you do owe money and you do know you owe pay the amount owed.

What if I can't afford the amount owed?

The IRS usually will let you make payments, but they will charge you interest.