Estate Taxes

February 14, 2012

U.S. Senate Proposal to Alter Inherited IRA Rules

Policy changes at the state and federal levels often have implications on New York estate planning. For example, we have frequently discussed the uncertainty that exists over the estate tax. Exemption levels and tax rates may very well hinge on exactly who wins various federal elections in November. While it may dominate headlines, the estate tax is not the only policy with implications for local residents’ estate planning. For example, yesterday Bloomberg Businessweek discussed the latest news regarding proposed legislation that would impact inherited IRAs.

Inherited Individual Retirement Accounts (Inherited IRAs) are accounts left to a beneficiary after the owner’s death. As the name implies, these are accounts that an individual has contributed to over a lifetime in order to provide financial resources upon retirement. More often than not a spouse is named as the beneficiary. The IRA offers a variety of tax benefits depending on how the account is “cashed out.” As it currently stands, a beneficiary can stretch the ultimate income tax payment over a lifetime. Because of this benefit, our New York estate planning attorneys know that IRAs often act as an important way for individuals to pass on assets to loved ones while saving on taxes.

However, some federal lawmakers are seeking to limit the tax benefits of Inherited IRAs for beneficiaries. Various proposals are being offered, but in general they all seek to prevent beneficiaries from stretching out the income tax payment over a lifetime. Instead, some legislators have proposed changing the law so that those who inherit the IRA have to distribute (cash out) the sum over five years. The practical effect of the change is that beneficiaries would be required to pay more taxes on the income from that inherited account. All versions of the change thus far would exempt spouses from this requirement.

February 7, 2012

Will Estate Tax Limbo End This Year?

by Ettinger Law Firm

Last week we discussed the uncertain future of the estate tax. It was noted that the issue would likely hinge on the outcome of the 2012 elections. As with all legislation, action usually requires support from sufficient members of Congress and the President. Therefore, the rates and exemption levels for the estate tax would likely depend on the partisan affiliation of most members of Congress and the White House. Each New York estate planning attorney at our firm appreciates that the uncertainty over the issue presents complications for those families who are hoping to create strategies to minimize their estate tax burden. The idea of waiting for the outcome of an election is cold comfort for prudent planners who are working to provide for contingencies and bring stability to the process as soon as possible.

Some policy insiders are now suggesting that estate planning lawyers will not need to wait long after the election to see what happens next with the estate tax. According to a report in Advisor One, the consensus opinion among those most familiar with Washington thinking on the issue believe that Congress will decide what to do with the issue this year–in the lame-duck session in December.

We’ve previously explained how, without any action, the current tax rate (created as part of the so-called “Bush tax cuts”) would expire at the end of 2012. That means that by January 1, 2013 the rate would be 55% (up from 35%) and at a $1 million exemption level (down from $5 million).

February 3, 2012

Like Groundhog Day: Mistakes Retirees Make Over and Over

by Ettinger Law Firm

Yesterday was Groundhog Day–that storied time when a prognosticating animal is supposed to tell us how many more weeks of winter we have left this season. According to most reports, yesterday the nation’s most famous groundhog, Punxsutawney Phil, saw his shadow and scurried back out of the cold. Apparently this is a sign of many more weeks of winter to come. Punxsutawney Phil was made a national celebrity in the early 1990s after being spotlighted in the popular Bill Murray movie titled “Groundhog Day.” The film has gained legendary status among some, as it chronicles the exploits of Murray who wakes up in Punxsutawney every single morning on February second, forced to relive Groundhog Day over and over.

Our New York estate planning lawyers know a few things about repetition. That is because when it comes to planning for one’s financial future, many local families seem to make the same mistakes over and over again. Yesterday CBS News published a Groundhog Day special report listing seven money mistakes that retirees consistently make. Many of the items on the list are quite familiar to the New York retirement attorneys at our firm.

For example, the first mistake is putting off estate planning altogether. The story’s author noted that “failing to create a financial or estate plan isn’t just a matter of missing out on investment opportunities or tax advantages. It can get you in trouble later in retirement when you’re no longer at the top of your game mentally.” It is always comforting to push off thinking about potential mental challenges in the future, but failure to account for it only leads to heartache for one’s family. Nearly 50% of the nation’s population over eighty years old suffers from some sort of cognitive impairment. A host of challenges are created if planning is not done before the problems set in.

February 1, 2012

Four Possible Estate Tax Scenarios

by Ettinger Law Firm

Uncertainty is almost always attached to discussions about the estate tax. As our New York estate planning attorneys have often shared, it is vital for those of certain income levels to pay close attention to the prevailing political winds to understand if estate tax changes might apply in their situation. When a New York estate plan is crafted it will take into account the current estate tax scenario. However, what is true now may not be true in the future. It is for this reason that estate planners must remain in close contact with clients to ensure modifications to a plan are made if necessary.

When it comes to the estate tax, many prognosticators make various predictions about what we can expect in the future. For example, a story this week at Producer’s Web suggested that the future of the federal estate tax depends almost entirely on what will happen in the upcoming November elections. The author suggests that there are four possible scenarios.

1) If Congressional gridlocked continues after the election then the new law may be allowed to sunset. This means that that there will be a $1 million estate tax exemption and a 55 percent tax rate. This would take effect January 1, 2013.

December 28, 2011

Farm Assets Protected By Estate Plan

by Ettinger Law Firm

Western Farm Press published a story yesterday reminding readers of the importance of conducting proper estate planning. The publication, geared toward those in the agricultural industry, explained that many farms had been saved that otherwise would have been split up because of savvy planning ahead of time. The story reminded readers of a basic principle that ourNew York estate planning lawyers wholeheartedly endorse. It noted that planning is important regardless of the size of one’s estate so that “if something happens to you today, your assets will go where you want them to go, to the people you want to have them.”

In the context of farms, it is particularly important to consider the tax implications of asset transfers upon death. It was explained that many farms have been lost when one party in the operation dies, leaving others unable to pay the taxes that come due. Estate taxes are hard to pay without selling the very property that one acquires. Farmers are often asset and land rich, but cash poor. That means that those who inherent a farm are often required to sell the land itself to come up with the cash needed to pay the tax bill. Estate tax issues may not be a problem for those in certain income brackets, but there remains constant volatility in the area. For many families their tax liability could change dramatically from year to year depending on what the laws happen to be at the time that one passes on.

Regardless of estate tax concerns, however, there are many basic estate and inheritance planning issues that are important for farmers to consider. The story suggests that it is helpful to think of one’s estate as in either accumulation mode, conservation mode, or transfer mode. The younger generations are often still acquiring assets, while older community members are likely to want to preserve what they have or pass it along. Estate planning helps most clearly with preservation and transfer.

December 7, 2011

Favorable Tax Rates and Tools May Soon End

by Ettinger Law Firm

This week Barron’s–a publication of the Wall Street Journal–discussed how many favorable tax breaks, rates, and regulations are either set to expire or may soon be eliminated by policymakers. It was explained how those at the top of the income ladder have seen a steady stream of tax cuts over the past ten years. Under President Bush the top income tax level was cut, the capital-gains tax was slashed, and dividend tax rules were changed. Our New York estate planning lawyers know that there were also many alterations to trusts, gift rules, and other wealth transfers issues over the past decade.

However, many speculate that changes will now be made in the other direction as policymakers look for ways to tackle growing debt and budget deficits. As one observer explained, “acting now on any kind of tax break is wise given the mood in Congress these days.” For example, perhaps that largest benefit set to expire is the $5 million gift and estate tax exclusion. The exclusion allows couples to essentially give away $10 million tax-free. The rates are currently set to revert back to $1 million at the end of 2012 unless legislative action is taken. This alone should be motivation for some families to focus immediate attention on their estate planning.

Other tax-saving tools may also not last indefinitely. For example, Grantor Retained Annuity Trusts (GRATs) are popular for some. GRATs are created for a set term (often two to five years) with an annuity stream from the trust being given to the one who set it up over that term. When the term expires the remainder above a set interest rate goes to heirs. When an experienced estate planning attorney helps create the trust, it can be “zeroed out” so that the annuity stream is set such that there are no gift tax consequences. However, there are currently discussions about changing GRATs. They may soon require a ten year term and zeroing out may no longer be allowed.

December 2, 2011

Editorial Calls for Repeal of the Estate Tax

by Ettinger Law Firm

Local residents with a taxable estate over $5 million need to conduct New York estate planning to ensure that they are best positioned to save on estate taxes. The estate tax is essentially a tax on one’s right to transfer property at death, and it can result in substantial liability for those with large estates. However, there are seemingly endless political debates about who should be taxed and at what level. The law in this area changes with surprising regularity. For example, in 2004 the tax applied to all those with taxable estates over $1.5 million. A few years later that threshold amount was increased to $2 million. In 2010 the tax was eliminated altogether. While it currently stands at $5 million, it is unclear whether policymakers will change that figure in the coming years. Of course, our New York estate planning attorneys closely monitor all estate tax developments, as these laws are important factors in our work helping residents conduct inheritance planning.

Criticism of the estate tax and the political wrangling around it is common. For example, a Forbes editorial last week called for repeal of the tax entirely. Pointing to the seeming randomness of the rates, the article author noted that “over the past ten years the federal estate tax rules have bordered on the ridiculous.” The author explained that planning plays a crucial role in helping residents legally avoid much estate tax liability. Proper planning can actually pay dividends for entire families. He wrote that “with a little bit of planning, not only would the estate of a person who died in 2010 be excludable from estate tax, but the future estate of the surviving spouse would be free of estate tax as well.” At the end of the day, the amount of tax paid often hinges on whether or not an individual has prepared a proper estate plan ahead of time or not.

Currently the estate tax generates about 2% of the annual federal revenue. The editorial author suggests that it would be logical to shift the tax system so that the 2% is paid as part of a more progressive income tax system. He specifically suggests increasing tax rates for capital gains and qualified dividend income. It is argued that even slight alterations to these taxes could generate $200 to $250 billion in additional revenue from those making more than $300,000 annually. The goal of this tax shift, claims the proponent, would be to provide a more logical taxation system that is easier to administer without sacrificing much needed public revenue at a time of tight budgets.

November 7, 2011

An Estate Planning “Perfect Storm”

by Ettinger Law Firm

Investment News published a story yesterday declaring that the current financial, political, and social climate made it a “perfect storm” for estate planning. It was explained how tax policy proposals, low interest rates, and a relatively weak economy make now a particularly worthwhile time for local families to take steps to plan for their long-term financial future. Our New York estate planning attorneys continue to help many local families do just that. As one observer explained in the article, “If individuals are trying to transition assets to the next generation, we currently have a perfect storm–in a good sense–to do it.”

Any time is a good idea to visit a professional and make future financial preparations. However, it may be particularly valuable to do so now, because planning strategies currently available might soon be gone. For one thing, large estate tax and gift tax exemptions now make it possible for individuals to transfer up to $5 million (or $10 million for couples) tax free. However, it is unlikely that the current tax scheme will remain–it is only a matter of what changes will be made and when. Observers have noted that estate rules have been changed 19 times in the last quarter century alone.

The current climate may present particularly attractive options encouraging some families to make major decisions to save on taxes and pass on assets. But many advocates explain that the tried and true planning tools that have long been available often remain the best way for many community members to accomplish their long-term estate planning goals. For example, while it may be favorable to give large gifts in the current environment, many families are uncomfortable making extremely large gifts. Instead, their goals may be best met by making smaller gifts under the $13,000 annual exemption amount. Those families can then save on estate taxes down the road by setting up trusts that distribute money more conservatively along the way.

November 1, 2011

Federal “Super Committee” May Target Gift Tax in Deficit Reduction Scheme

by Ettinger Law Firm

The gift tax has implications in a variety of New York estate planning situations, from deciding the best way to provide aid to loved ones to conducting business succession planning. As with many other tax issues, timing is important because lawmakers at the federal and state level can change these rates. While the risk of rate changes always exists, there has been significant discussion as of late about a variety of potential changes involving the 12-member federal “Super Committee.” The Super Committee has been charged by Congress with reducing the federal deficit by $1.5 trillion over the next ten years. To do so, the group will have to enact a combination of spending reductions and tax changes. No matter what combination they ultimately decide upon, it is highly likely that their work will have effects on local residents crafting their New York estate plan.

For example, last week the Wall Street Journal’s Market Watch published a story explaining proposed changes to gift tax exclusions. The specific committee meetings are mostly private, so some of the recent thoughts on the committee’s actions are speculative. However, it is known that one of the President’s proposed recommendations to the committee includes reducing the estate, gift, and generation-skipping transfer tax thresholds. The proposal would reduce the tax-free gift threshold to its 2009 level of $1 million. Currently the tax-free threshold is supposed to stay at $5 million until the end of 2012. However, many are speculating that the committee may decide to return the exclusion back to $1 million a year early as a cost-saving measure.

The story’s author summarizes the changes by noting, “Overall tax planning and gift tax thresholds that are now available could be at risk for families…not much good can come from the committee’s recommendations from a wealth preservation perspective.” Clearly, the potential actions by this group may make it important for some local residents to take long-term financial actions now. Our New York estate planning attorneys urge all community members who may be affected by these changes to visit with a professional to either create a plan or update an existing one. Depending on the advice received, it may be prudent to accelerate planned lifetime gifts, review estate-tax funding mechanisms, or otherwise revise estate plans.

August 30, 2011

Estate Tax Issues Continue to Plague Married New York Same Sex Couples

by Ettinger Law Firm

Thousands of same sex New York couples have wed since the state became the sixth to legally allow such unions last month. At the time our New York estate planning attorneys noted how the change means that these couples are no longer required to pay state taxes on domestic partnership benefits, will gain access to worker’s compensation benefits, can bring wrongful death lawsuits on behalf of their spouse, and can file joint state tax returns. In addition, surviving same sex spouses are no longer subject to New York estate taxes on assets they receive from their partners at death.

However, the fight for equality continues. Same sex marriages are specifically repudiated at the federal level through the Defense of Marriage Act (DOMA). This has significant repercussions on the estate planning needs of married same sex couples. These couples cannot file joint tax returns or joint bankruptcy petitions. Upon the death of one spouse the other cannot inherit veterans benefits or Social Security benefits. Also, property passing to a surviving spouse is subject to federal estate taxes.

Our New York estate planning lawyers work with families on plans that account for both state and federal tax and asset transfer issues. We understand the complexities that same sex couples continue to face when preparing for the future as a result of the divergence in the law at the state and the federal levels. These inequalities led several area publications to issue joint appeals last week calling for DOMA to be declared unconstitutional. For example, the Syracuse Post-Standard noted that “the law discriminates by denying homosexual spouses significant federal benefits that flow automatically to heterosexual spouses.”