Will My Heirs Need to Be Ready to Pay Estate Taxes? – Annapolis and Towson Estate Planning

Estate taxes all depend on how on much a person is planning to give to heirs.

Motley Fool’s recent article asks “If I Leave My Retirement Savings to My Heirs, Will They Pay Estate Tax?” The article tells us that retirement accounts like 401(k)s, 403(b)s, traditional and Roth IRAs and others are a part of your taxable estate.

However, unless the total assets of your estate plus any taxable gifts you’ve already given are more than the lifetime exclusion amount, your estate won’t owe estate taxes.

For 2019, this is $11,400,000, and in 2020, the exclusion will be raised to $11,580,000. If you total all of your assets’ value, only the amount in excess of the exclusion will be taxable. Therefore, if you have a $12,000,000 estate and die in 2020, only $420,000 of your assets would be subject to estate taxes.

Let’s look at another example: if your assets, including your retirement savings, total up to $5 million, your heirs won’t be required to pay any estate tax whatsoever.

However, while they may not have to pay estate taxes, remember that withdrawals from most retirement accounts (except Roth IRA accounts) will be deemed to be taxable income. Thus, estate tax or no estate tax, if your heirs are in a pretty high tax bracket, inheriting your retirement savings may increase their tax liability.

Don’t neglect to check with an estate planning attorney about your state’s estate and inheritance taxes. There are a handful of states that have their own estate taxes, and their thresholds may be lower than the IRS’s.

There are now six states with an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania.

Each state sets its own inheritance tax exemption, and inheritance tax rates. However, these rates are subject to change at any time with changes to the laws in those states.

Reference: Motley Fool (November 8, 2019) “If I Leave My Retirement Savings to My Heirs, Will They Pay Estate Tax?”

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

Do My Heirs Need to Pay an Inheritance Tax? – Annapolis and Towson Estate Planning

U.S. News & World Report explains in its article, “What Is Inheritance Tax?” that estate taxes and inheritance taxes are often mentioned as if they’re the same thing. However, they’re really very different in concept and practice.

Remember that not every estate is required to pay estate taxes, and not every heir will pay inheritance tax. Let’s discuss how to determine whether these taxes impact you.

Inheritance can be taxable to heirs. However, this is based upon the state in which the deceased lived and the heirs’ relationship to the benefactor.

Inheritance tax is a state tax on a portion of the value of a deceased person’s estate that’s paid by the inheritor of the estate. There’s no federal inheritance tax. Currently, there are only six states that impose an inheritance tax, according to the American College of Trust and Estate Counsel. The states that have an inheritance tax are Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania.

Inheritance tax laws and exemption amounts are different in each of these six states. In Pennsylvania, there’s no inheritance tax charged to a surviving spouse, a son or daughter age 21 or younger and certain charitable and exempt organizations. Otherwise, the Keystone State’s inheritance tax is charged on a tiered system. Direct descendants and lineal heirs pay 4.5%, siblings pay 12% and other heirs pay a cool 15%.

Inheritance tax is determined by the state in which the deceased lived. Estate taxes are deducted from the deceased’s estate after death and aren’t the responsibility of the heirs. Some states also charge their own estate taxes on assets more than a certain value. The states that charge their own estate tax are Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington and Washington, D.C.

Decreasing estate taxes are the responsibility of the deceased prior to his or her death. They should work with an estate planning attorney to map out strategies that can lessen or eliminate estate taxes for certain assets.

Remember that inheritance taxes are state taxes. They are imposed by only six states and are the responsibility of the heirs of the estate, even if they live in another state. In contrast, estate taxes are federal and state taxes. The federal estate tax is a 40% tax on assets more than $11.4 million for 2019 ($22.8 million for married couples). This is charged, regardless of where you live. Some states have additional estate taxes with their own thresholds.

Inheritance taxes are paid by the heirs and estate taxes are paid by the estate. An estate planning attorney can help to find ways to reduce taxes and transfer money efficiently.

Reference: U.S. News & World Report (October 8, 2019) “What Is Inheritance Tax?”

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

Why Should I Pair my Business Succession and Estate Planning? – Annapolis and Towson Estate Planning

A successful business exit plan can accomplish three important objectives for a business owner: (i) financial security because the business sale or transfer provides income that the owner and owner’s family will need after the owner’s exit; (ii) the right person where the business owner names his or her successor; and (iii) income-tax minimization.

Likewise, a successful estate plan achieves three important personal goals: (i) financial security for the decedent’s heirs; (ii) the decedent (not the state) chooses who receives his or her estate assets; and (iii) estate-tax minimization.

Business owners will realize that the two processes have the same goals. Therefore, they can leverage their time and money and develop their exit plans into the design of their estate plans. The Phoenix Business Journal’s recent article “Which comes first for Arizona business owners: estate planning or exit planning?” explains that considering exit and estate planning together, lets a business owner ask questions to bring their entire picture into focus. Here are some questions to consider:

  1. If a business owner doesn’t leave her business on the planned business exit date, how will she provide her family with the same income stream they would’ve enjoyed if she had?
  2. How can a business owner be certain that her business retains its previously determined value?
  3. Regardless of whether an owner’s exit plan involves transferring part of the business to her children, does her estate plan reflect and implement her wishes, if she doesn’t survive?
  4. If an owner dies before leaving the business, can she be certain that her family will still get the full value of the business?

Another goal of the exit planning process is to protect assets from creditors during an owner’s lifetime and to minimize tax consequences upon a transfer of ownership.

Because planning exits from both business and life are based on the same premises, it can be relatively easy to develop a consistent outcome. There isn’t only one correct answer to the “estate or exit planning” question. A business owner must act on both fronts since a failure to act in either case creates ongoing issues for owners and for their businesses and families.

Reference: Phoenix Business Journal (October 8, 2019) “Which comes first for Arizona business owners: estate planning or exit planning?”

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

Should We Include Our Children in Our Charitable Giving Plans? – Annapolis and Towson Estate Planning

Transferring wealth to the next generation is a major part of estate planning, but few people discuss their philanthropic goals with their heirs.

CNBC’s recent article, “Don’t expect Mom and Dad to clue you in on your inheritance,” says that 8 out of 10 financial advisors said that “some” or “hardly any” of their clients involve the next generation in family philanthropy, according to a recent survey from Key Private Bank.

It would great for the older generation to get their children involved in the process because they frequently don’t see eye to eye on philanthropic causes. As a result, it’s rare for a person to get their children and grandchildren involved in philanthropy. That’s one of the biggest mistakes parents make when they think of wealth transfer planning and preparing their children to be responsible heirs.

The IRS will allow you to transfer up to $11.4 million ($22.8 million if you’re married) to your heirs, either in gifts during your lifetime or in bequests at death, without the 40% estate and gift tax. Remember that charitable bequests are deductible, lower your gross estate and reduce the estate tax bill.

Donor Advised Funds are tax-advantaged accounts that people can open at a brokerage firm and fund with cash, securities and other assets. It’s important to establish the charitable vehicle, like a donor advised fund, during your lifetime.

It’s best to be open about your own values and the causes you want to support.

Children would like to participate in their inheritance beyond the financial assets. They also should understand what values were important for Mom and Dad.

Listen to your children and grandchildren because younger generations bring a different view to the charitable giving conversation. Getting them involved early will also prepare them to be good stewards.

One more thing: try not to rule from the throne. As your heirs get older and devote themselves to different causes, try to step back. Let them drive the charitable effort. Give them guidance and support.

Reference: CNBC (September 18, 2019) “Don’t expect Mom and Dad to clue you in on your inheritance”

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

Will the IRS Say It’s a Gift, If I Sell My House to my Son at a Great Price? – Annapolis and Towson Estate Planning

If a parent sells his home to his adult child at half the appraised price, this would be considered a gift, says nj.com in the article “I’m selling my home to my son at a discount. Is it considered a gift?”

The amount of the gift would be the excess of the value subtracted from the amount paid. In this example, if the bank-appraised value of the property is $700,000, and the parent is selling it for $340,000, the $360,000 will be treated as the amount of the gift.

The gift must be reported to the IRS on IRS Form 709 by April of the following year. However, there’s probably no gift tax due.

The gift tax is a tax on the transfer of property by one person to another while receiving nothing, or less than full value, in return. The tax applies whether the donor intends the transfer to be a gift or not.

In this case, because the value is a gift under the available federal annual gift exclusion, when applied, that relieves the son of taxes on the gift. The federal basic exclusion amount will be applicable.

An individual can gift $15,000, adjusted for cost of living over time, to a person each year without reporting the gift. However, if the gift to a single person is more than $15,000, then the IRS Form 709 must be filed to report the gift.

When reporting the gift, the value of the gift is applied against the available federal basic exclusion amount of the donor (the person making the gift). Only if the gift value is more than the available federal basic exclusion amount is there a tax that’s due.

The current federal basic exclusion amount is $11.4 million per person.

Reference: nj.com (September 17, 2019) “I’m selling my home to my son at a discount. Is it considered a gift?”

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

What are the Details of the New SECURE Act? – Annapolis and Towson Estate Planning

The SECURE Act proposes a number of changes to retirement savings. These include changes to parts of IRAs and 401(k)s. The Act is expected to be passed in some form. Some of the changes look to be common sense, like broadening access to IRAs and 401(k)s, as well as including updating the rules to reflect that retirement is now a longer period of life. However, with these changes come potential limitations with stretch IRAs.

Forbes asks in its recent article “Are Concerns Over Stretch IRAs And The SECURE Act Justified?” You should know that an IRA is a tax-wrapper for your investment that is sheltered from tax. Your distributions can also be tax-free, if you use a Roth IRA. That’s a good thing if you have an option between paying taxes on your investment income and not paying taxes on it. The IRA, which is essentially a tax-shield, then leaves with more money for the same investment performance, because no tax is usually paid. The SECURE act isn’t changing this fundamental process, but the issue is when you still have an IRA balance at death.

A Stretch IRA can be a great estate planning tool. Here’s how it works: you give the IRA to a young beneficiary in your family. The tax shield of the IRA is then “stretched,” for what can be decades, based on the principle that an IRA is used over your life expectancy. This is important because the longer the IRA lasts, the more investment gains and income can be protected from taxes.

Today, the longer the lifetime of the beneficiary, the bigger the stretch and the bigger the tax shelter. However, the SECURE Act could change that: instead of IRA funds being spread over the lifetime of the beneficiary, they’d be spread over a much shorter period, maybe 10 years. That’s a big change for estate planning.

For a person who uses their own IRA in retirement and uses it up or passes it to their spouse as an inheritance—the SECURE Act changes almost nothing. For those looking to use their own IRA in retirement, IRAs are slightly improved due to the new ability to continue to contribute after age 70½ and other small improvements. Therefore, most typical IRA holders will be unaffected or benefit to some degree.

For many people, the bulk of IRA funds will be used in retirement and the Stretch IRA is less relevant.

Reference: Forbes (July 16, 2019) “Are Concerns Over Stretch IRAs And The SECURE Act Justified?”

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

Filing Taxes for a Deceased Family Member – Annapolis and Towson Estate Planning

If you are the executor of a loved one’s estate, and if they were well-off, there are several tax issues that you’ll need to deal with. The article “How to file a loved one’s taxes after they’ve passed away” from Market Watch gives a general overview of estate tax liabilities.

Winding down the financial aspects of the estate is one of the tasks done by the executor. That person will most likely be identified in the decedent’s will. If the family trust holds the assets on behalf of the deceased, the trust document will name a trustee. If the person died without a will, also known as “intestate,” the probate court will appoint an administrator.

The executor is responsible for filing the federal income tax for the decedent’s estate if a return needs to be filed. Income generated by the estate is taxed. The estate’s first federal income tax year starts immediately after the date of death. The tax year-end date can be December 31 or the end of any other month that results in a first tax year of 12 months or less. The IRS form 1041 is used for estates and trusts and the due date is the 15th day of the fourth month after the tax year-end.

For example, if a person died in 2019, the estate tax return deadline is April 15, 2020 if the executor chooses the December 31 date as the tax year-end. An extension is available, but it’s only for five and a half months. In this example, an extension could be given to September 30.

There is no need to file a Form 1041 if all of the decedent’s income producing assets are directly distributed to the spouse or other heirs and bypass probate. This is the case when property is owned as joint tenants with right of survivorship, as well as with IRAs and retirement plan accounts and life insurance proceeds with designated beneficiaries.

Unless the estate is valued at more than $11.2 million for a person who passed in 2018 or $11.4 million in 2019, no federal estate tax will be due.

The executor needs to find out if there were large gifts given. That means gifts larger than $15,000 in 2018-2019 to a single person, $14,000 for gifts in 2013-2017; $13,000 in 2009-2012, $12,000 for 2006-2008; $11,000 for 2002-2005 and $10,000 for 2001 and earlier. If these gifts were made, the excess over the applicable threshold for the year of the gift must be added back to the estate, to see if the federal estate tax exemption has been surpassed. Check with the estate attorney to ensure that this is handled correctly.

The unlimited marital deduction privilege permits any amount of assets to be passed to the spouse, as long as the decedent was married, and the surviving spouse is a U.S. citizen. However, the surviving spouse will need good estate planning to pass the family’s wealth to the next generation without a large tax liability.

While the taxes and tax planning are more complex where significant assets are involved, an estate planning attorney can strategically plan to protect family assets when the assets are not so grand. Estate planning is more important for those with modest assets as there is a greater need to protect the family and less room for error.

Reference: Market Watch (June 17, 2019) “How to file a loved one’s taxes after they’ve passed away”

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

What Are Some Advantages of Making Lifetime Gifts? – Annapolis and Towson Estate Planning

There are several non-tax advantages of making lifetime gifts. One is that you’re able to see the recipient or “donee” enjoy your gift. It might give you satisfaction to help your children achieve financial independence or have fewer financial concerns.

WMUR’s recent article, “Money Matters: Lifetime non-charitable giving,” explains that lifetime giving means you dictate who gets your property. Remember, if you die without a will, the intestacy laws of the state will dictate who gets what. With a will, you can decide how you want your property distributed after your death. However, it’s true that even with a will, you won’t really know how the property is distributed because a beneficiary could disclaim an inheritance. With lifetime giving, you have more control over how your assets are distributed.

At your death, your property may go through probate. Lifetime giving will help reduce probate and administration costs, since lifetime gifts are typically not included in your probate estate at death.  Unlike probate, lifetime gifts are private.

Let’s discuss some of the tax advantages. First, a properly structured gifting program can save income and estate taxes. A gift isn’t taxable income to the donee, but any income earned by the gift property or capital gain subsequent to the gift usually is taxable. The donor must pay state and/or federal transfer taxes on the gift. There may be state gift tax, state generation-skipping transfer tax, federal gift and estate taxes, as well as federal generation-skipping transfer (GST) tax.

A big reason for lifetime giving is to remove appreciating assets from your estate (i.e., one that’s expected to increase in value over time). If you give the asset away, any future appreciation in value is removed from your estate. The taxes today may be significantly less than what they would be in the future after the asset’s value has increased. Note that lifetime giving results in the carryover of your basis in the property to the donee. If the asset is left to the donee at your death, it will usually receive a step-up in value to a new basis (usually the fair market value at the date of your death). Therefore, if the donee plans to sell the asset, she may have a smaller gain by inheriting it at your death, rather than as a gift during your life.

You can also give by paying tuition to an education institution or medical expenses to a medical care provider directly on behalf of the donee. These transfers are exempt from any federal gift and estate tax.

Remember that the federal annual gift tax exclusion lets you to give $15,000 (for the 2019 year) per donee to an unlimited number of donees without any federal gift and estate tax or federal GST tax (it applies only to gifts of present interest).

Prior to making a gift, discuss your strategy with an estate planning attorney to be sure that it matches your estate plan goals.

Reference: WMUR (April 18, 2019) “Money Matters: Lifetime non-charitable giving”

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