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Will The Government Shutdown Affect Your Estate Planning?

October 3, 2013,

News this week is dominated by one topic: the federal government shutdown. Like most others, you may be wondering how (or if) the developments out of D.C. will affect you.

The Background
The shutdown itself is caused by Congress's failure to pass an appropriations bill allowing for the spending of money to fund day-to-day government operations. More specifically, Republicans in the House of Representatives are refusing to pass a bill that includes funding for the Affordable Care Act. Usually disagreements about these issues are handled separately from daily government funding, but the House GOP has combined the issues and refused to budge, leading to the shutdown.

The Consequences
From the closing of the national parks and postponement of National Institute of Health trials to thousands of furloughed employees, the temporary shuddering of the federal government directly affects the daily life of millions. Now, three days into the shutdown, the average New Yorker may still have have not felt any direct impact. The mail still arrives, the garbage is still collected, kids go to school, and (unless you are a federal employee) you still go to your job.

While your estate planning is unlikely to be impacted by this situation, one area where everyone may be affected is taxes. Most notably, what is the Internal Revenue Service (IRS) doing in the middle of this shutdown?

Taxpayer Effects
A story this week from the Journal of Accountancy discusses the current status of the IRS in the midst of the controversy.

The articles discusses how the IRS's usual contingency plan calls for the processing of returns throughout, but at this time "tax refunds will not be issued until normal government operations resume." At the same time, the IRS plans to continue various cases--liens, bankruptcies, seizures--to prevent statute of limitation issues.

Relatedly, federal courts will stay open for at least ten days to handle business, but if the shutdown lingers longer, then no court proceedings will occur. Please note, however, that this does not affect state court proceedings.

Most other IRS activity will stop during the shutdown, including audits, examinations, and responses to taxpayer questions. All told, about 86,000 IRS employees will stop working, with administrative services put on hold.

As a practical matter, if this shutdown lasts for only a few days more, then there may not be any long-term effects. However, all of these assessments will need to be re-evaluated if the shutdown is prolonged and commonly-used services remain out of reach for residents.

GRATs - A Good Idea in this Low Interest Rate Environment?

August 6, 2013,

A post over at Think Advisor last week provides some helpful insight into one financial and estate planning tool which might be appropriate for some New York residents. The tool is know as a GRAT - Grantor Retained Annuity Trust. As with many other trusts, one key purpose of the GRAT is to minimize tax liability, particularly for those with significant assets.

How It Works
The basic concept behind the GRAT is straightforward. Assets are placed in trust. The grantor (person creating the trust) then retains the right to receive fixed payments from the trust. Those payment can last either for a set period of time designated in advance or over the grantor's life. At the end of the trust's life the assets placed in the trust then fall to the beneficiaries.

Timing: Why to Consider it Now
Grantor Retained Annuity Trusts have been available for quite some time. However, there has been a push by some in recent years for increased use of the GRAT. This renewed interest is based two factors, current interest rates and the political dynamic which may close the window of their availability.

1) Interest Rates - For the past few years, interest rates have been quite low. As financial advisors often explain, a GRAT can be particularly valuable in a low interest rate environment. Here's why: the 'taxable" portion of the transfer into the GRAT is based on the value of the property minus the estimated value that the grantor will retain as part of the annuity. The larger the retained estimate, the lower the taxable amount. Therefore, in a low interest rate environment, the portion of the transfer that is taxable will ultimately be lower. As the Think Advisor article points out, in some cases, this scenario can effectively reduce a tax liability to zero.

2) Politics - On top of the benefit with today's interest rates, there may be a push for use of GRATs now because the ability to use this tool may be taken away. Recent federal proposals have included elimination of the benefits available in these types of trusts. Therefore, if the GRAT is a good fit in your situation, it is important to act now.

There are many other issues to consider with regard to GRATs, like the possible need to combine with a life insurance trust. For help understanding the many different types of financial and estate planning tools that might be available to meet the needs of your family, please contact our estate planning attorneys today.

Forbes on Gifting - When an Inheritance Can't Wait

June 24, 2013,

One of the most common questions that local families ask related to estate planning and assets protection involve gifts: Whether to give them, when to give, how much, and in what form.

Of course, no two situations are identical, and so it is impossible to list a set of rules regarding when and how large-scale gifting should be done in every case. However, a Forbes article this week on the topic provides a good starting point for New York families to familiarize themselves with the basic concept and major issues to consider.

Helping Children Now
Providing significant gifts to others while alive--usually adult children--is often pursued for one of two reasons: (1) As a prudent step to save on estate taxes; (2) In order to help children who need an immediate financial boost. The underlying purpose for the gift affects the manner in which its given, when, and how.

For one thing, federal tax rules allow a married couple to give $28,000 away annually without a tax burden. Therefore anything over that may implicate gift taxes, requiring discussions about alternatives forms in which to give the assets to minimize paying in to Uncle Sam. Importantly, providing in-kind gifts for tuition and/or medical expenses do not apply to these gifting limits. In other words, paying directly for education expenses, for example, is much more advantageous than providing cash to be used for such payments.

The form of the gift is critical. Perhaps your child could use cash, but providing a cash gift may provide less benefit than handing over an asset that may appreciate in value, like stocks or bonds. Depending on you (and your children's tax bracket), transferring an asset like that may lower the family's overall tax burden when the asset is sold. In addition, depending on the age of the children receiving the gift, the "kiddie tax" issue must be considered. Essentially, this means that "unearned income" from children (under 19 or under 24 if in college) is taxed at the parents rate (instead of their own, presumably lower, rate).

Finally, it is also vital not to forgot how much a gift will affects your own long-term planning. It is not prudent to transfer too many assets, placing one's own retirement on less secure footing. Keeping a holistic approach to the gift is critical.

The Forbes article explicitly explaining that have the aid of an estate planning attorney is absolutely critical. For help on these issues in New York City, Albany, White Plains, Fishkill, and any other community throughout the state, please reach out to our team today.

Federal "Super Committee" May Target Gift Tax in Deficit Reduction Scheme

November 1, 2011,

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.

Under the current schedule the Super Committee is expected to present its recommendations to Congress on November 23rd. Congress will then have a month to take action on the proposal, and no amendments will be considered. If Congress does not pass the measure as proposed then automatic spending cuts will be triggered.

See Our Related Blog Posts:

Proposed Tax Policy Changes May Affect Future Options For Estate Planners

Economic Uncertainty Leads to Rise in Estate Planning Interest