What 2020 Tax Changes May Bring for Wealthy Families – Annapolis and Towson Estate Planning

What happens in the political landscape in 2020 could have an impact on wealthy individuals, in a positive and a negative way. The biggest impact may be changes in estate and income taxes. With income taxes, the tax brackets are indexed, so they will go higher in 2020. There are also new IRS thresholds, so people will need to be aware of these changes.

The article “What Wealthy Clients Need to Know About 2020 Tax Changes” from Financial Advisor offers a look at what’s coming next year.

The tax rates were generally lowered, and thresholds increased. The top bracket for married couples in 2017 was 39.6% for couples whose taxable income was higher than $470,700. In 2020, that same bracket is 37%, with a new income threshold of $622,051.

There are more holiday gifts from the IRS. The estate exemption increases to $11.58 million in 2020, although the annual exclusion for gifts stays at $15,000. The maximums for retirement account contributions have also been increased.

The mandated penalty for not having health insurance is gone. Therefore, anyone who has the income to self-insure without having a policy that is ACA-qualified won’t have to pay a penalty. However, that varies by state: California enforces a tax penalty for people who do not have health insurance.

A major consideration for 2020 is the higher standard deduction. This may mean more strategic planning for which years people should itemize. Some experts are advising that taxpayers bunch their deductions, so they can itemize. One strategy is to do this every other year.

Many nonprofits are advising their donors to plan their charitable giving to take place every other year for the same reason.

With the stock market continuing to hit record highs, it may also make sense for people to transfer highly appreciated securities to donor advised funds.

Another potentially big series of changes that is still pending is the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. The legislation is still pending, but it is likely that some form of the bill will become law, and there will be further changes regarding retirement accounts and taxes. The bill passed the House in the spring, but it still pending in the Senate.

Reference: Financial Advisor (December 2, 2019) “What Wealthy Clients Need to Know About 2020 Tax Changes”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

What Happens to Estate Tax Benefits After 2025? – Annapolis and Towson Estate Planning

You may recall that the 2017 Republican tax reform legislation roughly doubled the estate and gift tax exemption.

This means starting in 2019, people are permitted to pass on, tax-free, $11.4 million from their estate and gifts they give before their death. Couples can pass on twice that amount, or $22.8 million.

These higher levels expire in 2026, but those who make large gifts while the exemption is higher and die after it goes back down, won’t see the estate tax benefit eroded, the IRS announced recently via new regulations.

“As a result, individuals planning to make large gifts between 2018 and 2025 can do so, without concern that they will lose the tax benefit of the higher exclusion level once it decreases after 2025,” the agency said in a press release.

Yahoo Finance’s recent article, “IRS Says Millionaires Can Keep Estate Tax Benefits After 2025,” says that the exemption increase was a big priority for Republicans in the 2017 tax overhaul.

This exemption decreased the number of individuals who’d be subject to the 40% estate tax by about two-thirds.

The exemption was $5.5 million prior to the law change.

However, Democrats are looking to reverse those changes, if they sweep the House, Senate and White House in the 2020 national elections.

Nearly every Democratic presidential candidate would like to see the estate tax apply to a greater number of wealthy families.

Senator Bernie Sanders has called for the estate tax, to begin when fortunes are worth at least $3.5 million. He has also proposed rates as high as 77%.

Reference: Yahoo Finance (November 22, 2019) “IRS Says Millionaires Can Keep Estate Tax Benefits After 2025”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Will We Have to Pay Gift Taxes if We Give a Rental Property to Our Son? – Annapolis and Towson Estate Planning

Older couples frequently invest in real estate. Many manage rental properties as an income stream.

Let’s say that a couple jointly bought a rental property worth $120,000 this year with their adult son. The son started his own limited liability company (LLC) and is a single owner. The parents plan to transfer the property to him, so he can use the rental income from the business for college expenses.

A common question is whether there will be any tax implication for the parents, if they move the property to their son’s LLC. The Washington Post’s recent article, “How to avoid gift taxes when shifting ownership of rental property to offspring,” answers that question by first assuming that the parents and the son purchased the rental property together in their own names. The son recently set up the LLC to use as the holding company for this rental property and other real estate properties he may own.

As far as gift tax implications, the couple have the ability to give their son $30,000 this year without having to file any federal gift tax forms or having any effect on their federal income taxes. Each person has the ability to gift another individual up to $15,000 a year without any IRS issues or the filing of forms. If each parent gave their son $30,000 this year and $30,000 next year, then that would effectively transfer their share of the property to him.

We’ll also assume that when they purchased the property, the parents paid closing costs and may have had other expenses while they’ve owned the property. Those expenses would play a part when calculating the tax basis of the property.

Assuming that the parents and their son each paid $60,000 for the property, when the son transfers the property from all the owners’ names into the LLC, the parents may have a taxable event for IRS purposes. That’s because the parents are effectively giving away ownership of their share of the property to their son. He’ll now own the property on his own. If the son signs a promissory note to the parents for $60,000 at the time of the transfer to the LLC, he’ll have an obligation to repay them the money for their share over the next six months. They could forgive $30,000 of the debt immediately and then they could forgive the other $30,000 in the new year. Their son would probably owe a little interest, but he could probably pay that from the income he receives from the rent.

This is just one solution to the transfer. There are many others, and some are much more complicated. Speak with an experienced estate planning attorney to review these issues and explore some other ideas that could work to everyone’s benefit.

Reference: The Washington Post (November 11, 2019) “How to avoid gift taxes when shifting ownership of rental property to offspring”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

What Should I Do If I Strike it Rich? – Annapolis and Towson Estate Planning

There’s nothing quite like getting an unexpected sum of money. That happiness can be magnified when the amounts are six, seven, eight digits or more.

However, the greater the amount you receive, the greater your stress.

Investopedia’s recent article, “Tips For Handling Sudden Wealth” reports that there’s even a stress-related disorder called “Sudden Wealth Syndrome.”

This stress results in the recipients doing things that will threaten their good fortune and may leave them worse off than before they got the money.

Let’s look at few ideas to help you hang onto that new wealth:

  1. Tally your money. Take the time to carefully review all the documentation associated with the windfall. Note the areas you don’t understand and talk with your attorney.
  2. Create a comprehensive financial and life plan. Don’t settle for a cookie-cutter solution. Look for customization that takes into account your circumstances, your goals and your desired legacy.
  3. Be wary of friends and family. A downside of sudden new wealth is that new friends and estranged family members may come out of the woodwork. One idea is to pay yourself a salary, which can put some distance between you and these people.
  4. Don’t buy big ticket items, until you’re comfortable with the advice and understand your new financial position. You should address your taxes on the gain, pay down debts or take a small vacation. However, don’t make too many changes all at once. Talk to your advisors.

More money can mean more problems. Use these tips and consult with your attorney, when deciding what to do with your newfound riches.

Reference: Investopedia (June 25, 2019) “Tips For Handling Sudden Wealth”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

How Can I Upgrade My Estate Plan? – Annapolis and Towson Estate Planning

Forbes’ recent article, “4 Ways To Improve Your Estate Plan,” suggests that since most people want to plan for a good life and a good retirement, why not plan for a good end of life, too? Here are four ways you can refine your estate plan, protect your assets and create a degree of control and certainty for your family.

  1. Beneficiary Designations. Many types of accounts go directly to heirs, without going through the probate process. This includes life insurance contracts, 401(k)s and IRAs. These accounts can be transferred through beneficiary designations. You should update and review these forms and designations every few years, especially after major life events like divorce, marriage or the birth or adoption of children or grandchildren.
  2. Life Insurance. A main objective of life insurance is to protect against the loss of income, in the event of an individual’s untimely death. The most important time to have life insurance is while you’re working and supporting a family with your income. Life insurance can provide much needed cash flow and liquidity for estates that might be subject to estate taxes or that have lots of illiquid assets, like family businesses, farms, artwork or collectibles.
  3. Consider a Trust. In some situations, creating a trust to shelter or control assets is a good idea. There are two main types of trusts: revocable and irrevocable. You can fund revocable trusts with assets and still use the assets now, without changing their income tax nature. This can be an effective way to pass on assets outside of probate and allow a trustee to manage assets for their beneficiaries. An irrevocable trust can be a way to provide protection from creditors, separate assets from the annual tax liability of the original owner and even help reduce estate taxes in some situations.
  4. Charitable Giving. With charitable giving as part of an estate plan, you can make outright gifts to charities or set up a charitable remainder annuity trust (CRAT) to provide income to a surviving spouse, with the remainder going to the charity.

Your attorney will tell you that your estate plan is unique to your situation. A big part of an estate plan is about protecting your family, making sure assets pass smoothly to your designated heirs and eliminating stress for your loved ones.

Reference: Forbes (November 6, 2019) “4 Ways To Improve Your Estate Plan”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Death Is Very Taxing — What you Need to Know – Annapolis and Towson Estate Planning

When a person dies, their assets are gathered, their debts are paid, business affairs are settled and assets are distributed, as directed by their will. If there is no will, the intestate laws of their state will be used to determine how to distribute their assets. A big part of the process of settling an estate is dealing with taxes. A recent article from Wicked Local Westwood, titled “Five things to know about taxes after death,” explains the key things an executor or personal representative needs to know.

The Deceased Final Income Tax Returns. Yes, the dead pay taxes. The personal representative is responsible for filing the deceased final income tax return for both the year of death and prior year, if those returns have not been filed. The final income tax return includes any income earned or received by the decedent from January 1 of the year of death through the date of death. It’s common for a deceased person who is ill during the last months or year of their life to fail to file tax returns, so the executor needs to find out about the decedent’s tax status. Failure to do so, could lead to the representative being personally liable for paying those taxes.

Filing a Federal Estate Tax Return. The personal representative must file a federal estate tax return, if the value of the estate assets exceeds the federal estate tax exemption, which is $11.4 million in 2019. Even if the value of the estate does not exceed the federal estate tax exemption amount, a federal estate tax return should be filed if the decedent is survived by a spouse. This way, the deceased’s unused exemption can be used by the spouse at their death. Note that the filing deadline for the federal estate tax return is nine months after the date of death. An estate planning attorney can help with this.

Fiduciary income tax returns. A personal representative and trustee may have to file fiduciary income tax returns for an estate or a trust. The estate is a taxpayer and the representative must get a tax identification number and file a fiduciary income tax return for the estate, if income is earned on estate assets or received during the administration of the estate. A revocable trust becomes irrevocable after the death of the trust creator. A tax identification number must be obtained, and a fiduciary income tax return must be filed for any income earned by trust assets.

Estate taxes and trust taxes can become complex and confusing for people who don’t do this on a regular basis. An estate planning attorney can be a valuable resource, so that taxes are properly paid and to make the most of any tax planning opportunities for estates, trusts and their beneficiaries.

Reference: Wicked Local Westwood (Nov. 5, 2019) “Five things to know about taxes after death”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

What Are the Rules About an Inheritance Received During Marriage? – Annapolis and Towson Estate Planning

A good add-on to that sentence is something like, “provided that it is kept separate from marital assets.” To say it another way, when an inheritance or any other exempt asset (like a premarital asset) is “commingled” with marital assets, it can lose its exempt status.

Trust Advisor’s recent article asks, “Do I Have To Divide The Inheritance I Received During My Marriage?” As the article explains, this is the basic rule, but it’s not iron-clad.

A few courts say that an inheritance was exempt, even when it was left for only a short time in a joint account. This can happen after a parent’s death. The proceeds of a life insurance policy that an adult child beneficiary receives are put into the family account to save time in a stressful situation. You may be too distraught to deal with this issue when the insurance check arrives, so you or your spouse might deposit it into a joint account. However, in one case, the husband took the check and opened an investment account with the money. That insurance money deposited in the investment account was never touched, but the wife still wanted half of it when the couple divorced a few years later. However, in that case, the judge ruled that the proceeds from the insurance policy were the husband’s separate property.

The law generally says that assets exempt from equitable distribution (like insurance proceeds) may become subject to equitable distribution if the recipient intends them to become marital assets. The comingling of these assets with marital assets may make them subject to a division in a divorce. However, if there’s no intent for the assets to become martial property, the assets may remain the recipient spouse’s property.

Courts will look at “donative intent,” which asks if the spouse had the intent to gift the inheritance to the marriage, making it a marital asset. Courts may look at a commingled inheritance for donative intent, but also examine other factors. This can include the proximity in time between the inheritance and the divorce. Therefore, if a spouse deposited an inheritance into a joint account a year before the divorce, she could argue that there should be a disproportionate distribution in her favor or that she should get back the whole amount. Of course, the longer amount of time between the inheritance and the divorce, the more difficult this argument becomes.

Be sure to speak with your estate planning attorney about the specific laws in your state. If there is a hint of trouble in the marriage, it might be wiser to simply open a new account for the inheritance.

Reference: Trust Advisor (October 29, 2019) “Do I Have To Divide The Inheritance I Received During My Marriage?”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

New IRS Regulations Won’t Claw Back Estate Tax Benefits – Annapolis and Towson Estate Planning

The IRS published regulations on Friday that there will not be a claw back in the event exemptions are reduced in 2026, when the current tax levels expire. We recommend clients consider making lifetime gifts to use some of the federal estate tax exemptions before the exemption is reduced.

Please feel free to give us a call if you would like to discuss this further.

IRS Says Millionaires Can Keep Estate Tax Benefits After 2025

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

What is a Special Needs Trust? – Annapolis and Towson Estate Planning

Supplemental Security Income and Medicaid are critical sources of support for those with disabilities, both in benefits and services.

To be eligible, a disabled person must satisfy restrictive income and resource limitations.

That’s why many families ask elder law and estate planning attorneys about the two types of special needs trusts.

Moberly Monitor’s recent article, “Things to know, things to do when considering a special needs trust,” explains that with planning and opening a special needs trust, family members can hold assets for the benefit of a family member without risking critical benefits and services.

If properly thought out, families can continue to support their loved one with a disability long after they’ve passed away.

After meeting the needs of their disabled family member, the resources are kept for further distribution within the family. Distributions from a special needs trust can be made to help with living and health care needs.

To establish a special needs trust, meet with an attorney with experience in this area of law. They work with clients to set up individualized special needs trusts frequently.

Pooled trust organizations can provide another option, especially in serving lower to more moderate-income families, where assets may be less and yet still affect eligibility for vital governmental benefits and services.

Talk to an elder law attorney to discuss what public benefits are being received, how a special needs trust works and other tax and financial considerations. With your attorney’s counsel, you can make the best decision on whether a special needs trust is needed or if another option is better based on your family’s circumstances.

Reference: Moberly Monitor (October 27, 2019) “Things to know, things to do when considering a special needs trust”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Do I Need a Beneficiary for my Checking Account? – Annapolis and Towson Estate Planning

When you open up most investment accounts, you’ll be asked to designate a beneficiary. This is an individual who you name to benefit from the account when you pass away. Does this include checking accounts?

Investopedia’s recent article asks “Do Checking Accounts Have Beneficiaries?” The article explains that unlike other accounts, banks don’t require checking account holders to name beneficiaries. However, even though they’re not needed, you should consider naming beneficiaries for your bank accounts if you want to protect your assets.

Banks usually offer their customers payable-on-death (POD) accounts. This type of account directs the bank to transfer the customer’s money to the beneficiary. The money in a POD bank account usually becomes part of a person’s estate when they die but is not included in probate when the account holder dies.

To claim the money, the beneficiary just has to present herself at the bank, prove her identity and show a certified copy of the account holder’s death certificate.

You should note that if you are married and have a checking account converted into a POD-account and live in a community property state, your spouse automatically will be entitled to half the money they contributed during the marriage—despite the fact that another beneficiary is named after the account holder passes away. Spouses in non-community property states have a right to dispute the distribution of the funds in probate court.

If you don’t have the option of a POD account, you could name a joint account holder on your checking account. This could be a spouse or a child. You can simply have your bank add another name on the account. Be sure to take that person with you because they’ll have to sign all their paperwork.

An advantage of having a joint account holder is that there’s no need to name a beneficiary because that person’s name is already on the account. He or she will have access and complete control over the balance. However, a big disadvantage is that you have to share the account with that person, who may be financially irresponsible and leave you in a bind.

Remember, even though you may name a beneficiary or name a joint account holder, you should still draft a will. Speak with a qualified estate planning attorney to make sure about all your affairs, even if your accounts already have beneficiaries.

Reference: Investopedia (August 4, 2019) “Do Checking Accounts Have Beneficiaries?”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys