IRS Sets Federal Estate, Gift Tax Limits for 2017

The Internal Revenue Service (IRS) recently announced its federal estate and gift tax limits for 2017. These limits will have a significant impact on many Americans’ estate planning strategies for the coming year.

The federal estate and gift tax exemption will increase to $5.49 million per individual in 2017, compared to $5.45 million in 2016. A married couple will be able to protect up to $10.98 million from federal estate and gift taxes.

Meanwhile, the annual gift exclusion will remain steady at $14,000 in 2017. Individuals are able to make tax-free gifts of up to $14,000 per person for a single year. Contact our Newton estate planning lawyers for help to determine how much you can afford to give away.

How does the IRS determine federal estate and gift tax limits?

If you own a small business or have a large estate, it is important to be aware of these exemption limits. If your estate is worth more than the exemption limit, your estate will be subject to federal estate taxation at a rate of up to 40 percent. This can mean your heirs could lose a significant portion of their inheritance to the federal government.

President-Elect Donald Trump has stated he wishes to repeal the federal estate tax altogether and implement a new plan for estates worth more than $10 million. It’s not yet clear if he will be able to get such a measure through Congress, however.

If you live in Massachusetts, you also need to consider state estate taxes. If the value of your estate exceeds $1million in Massachusetts, you will owe a Massachusetts estate tax.

How do you avoid federal and state estate taxes?

There are a number of strategies you can employ to avoid federal and state estate taxes. Making gifts during your lifetime is one of those strategies. You can make an unlimited number of gifts up to $14,000 per person per year, without those gifts being taxed.

Additionally, if you are married, both a husband and wife can make $14,000 gifts per person. This means you can essentially make gifts of $28,000 to as many people as you want, tax-free, so long as the gifts are split between both spouses.

3 Important Strategies to Reduce Your Estate Tax Obligation

If you are a top 1% earner in the U.S., it’s important to know that an individual’s estate is subject to estate taxes if it contains more than $5.45 million dollars in assets as of 2016.

These estate taxes, at a rate of 40 percent, can be costly — and so you should meet with an experienced estate tax planning lawyer to make sure you are truly protecting the best interests of you and your loved ones.

Some of the strategies that can reduce or eliminate your estate tax obligations through the estate planning process are:

1) Maximize Spousal Exemptions and Trusts

U.S. tax law allows for tax-free transfers to a spouse. To that end, you and your spouse can draw up a revocable living trust stipulating that if one of your passes away, the other one will inherit the assets and property in the estate.

For example, let’s say Tom and Sarah are married and have an estate worth $8 million dollars. If Tom leaves his half to Sarah when he dies, she would receive all of that money without paying estate taxes. The problem with this scenario, however, is that Sarah would now have an estate worth more than the $5.45 million dollars exemption amount when she passes away, which means her estate will be subject to estate taxes if no further planning were done.

Working with an experienced estate tax lawyer ahead of time, Tom and Sarah can establish two separate living trusts of $4 million each. When Tom passes away, his estate would use up his $5.45 million dollar estate tax exemption, and when Sarah dies, her estate also has a $5.45 million dollar exemption. As a result, the total tax obligation for both estates would be $0.

2) Make Use of Tax-Free Gifts

You can make gifts, especially if you know who you would like to receive certain assets and have no reason to believe that will change in the future.  The best assets to gift to others are those that will appreciate in value because they will not increase the value of your estate. As of 2016, an individual may give up to $14,000 ($28,000 for couples) per year to as many individuals as they would like. So, if you have three children and seven grandchildren, you and your spouse could give away up to $280,000 each year, without paying gift or transfer taxes.

3) Establish an Irrevocable Life Insurance Trust (ILIT)

Your life insurance policy is generally counted toward the total value of your estate. Fortunately, you can prevent this by transferring ownership of your policy to an irrevocable life insurance trust (ILIT), provided that you live for at least three years after you make this transfer.

Another benefit is that you may keep the ILIT as the beneficiary of your life insurance policy, setting it up so that your spouse, kids or grandchildren are given access to periodic distributions.

Report: High-Net-Worth Individuals Often Suffer from ‘Estate Planning Fatigue’

A recent survey from CNBC has found that nearly 40 percent of high-net-wealth individuals with assets exceeding $1 million have not engaged in any form of estate planning.

Many lawyers and financial experts believe one of the top reasons for these high numbers is what they call “estate planning fatigue.” With all of the changes to federal estate tax laws over the past decade, many wealthy people have simply grown tired of constantly updating their wills and other estate planning documents.

Additionally, a higher federal estate tax exemption amount of $5.45 million — recently increased with inflation — has also left slightly fewer people thinking that estate planning is a necessity to avoid costly taxes. Estate taxes can be a problem for Massachusetts residents, which levies its own estate tax if a person leaves an estate worth more than $1 million.

More Than Just a Tax Issue

Consulting with an estate planning lawyer does much more than allow high-net-worth clients to prevent paying unnecessary estate taxes. Your attorney can help you engage in a comprehensive process that covers your valuable assets, outlines your wishes, provides for your beneficiaries, and offers detailed guidance on the types of end-of-life medical treatments you would like to receive.

Without an estate plan, loved ones are often left guessing as to what the deceased individual would have wanted. That’s never an ideal situation, especially for people who are already dealing with the emotional burdens of a family member’s passing. Also, this can be extremely problematic for high-net-worth individuals who leave behind millions of dollars of assets without a revocable living trust or will, causing unnecessary litigation and family disputes.

If you have minor children, you need a will to appoint someone who you trust and is willing to raise your kids as their guardian if you and your spouse both pass away. Additionally, you should set up a living trust for any assets you would like your children to inherit, and appoint a trustee to manage those assets until your kids reach a certain age to prevent them from squandering their inheritance.

Another important aspect of the estate planning process – particularly for high-net-worth individuals – is establishing a financial power of attorney, naming a person you trust to manage your assets if you are unable to do so due to incapacity or traveling outside the country. This individual will be able to pay your taxes and bills, borrow money, invest funds and manage various transactions on your behalf when necessary.

There is also the advance healthcare directive, often referred to as a “living will,” which provides clear guidance on which end-of-life medical treatments you would and would not like to receive in certain scenarios. You should leave detailed instructions on resuscitation orders, organ donation and a variety of other medical actions. The end-of-life drama of Casey Kasem shows the importance of properly planning for high-net-worth individuals.

October 2016 Client Advisory: Potentially the Biggest Changes to Estate Tax Planning in 25 Years

Dear Clients and Friends:

You may have heard about IRS proposed changes that would substantially alter the way in which interests in family controlled businesses, real estate and investment holdings and other transfers are valued for gift and estate tax purposes.  These changes will make it far more difficult for Clients to minimize estate taxes.

Proposed IRS Regulations: 

The IRS has issued proposed Regulations that would dramatically affect estate planning by eliminating or significantly curtailing valuation discounts taken on transfers of family interests.  For Clients looking to reduce their future estate tax, currently allowable discounts are extremely helpful in minimizing the gift tax consequence of family transfers.  As planners, we seek to reduce for transfer tax purposes the value of family assets by structuring entities utilizing all discounts for lack of control and lack of marketability that have historically applied.  The discounts enable a person to leverage the maximum amount of assets that can be protected from estate tax without triggering a gift tax to do so.

The proposed Regulations, if enacted, would be effective prospectively.  Hearings on these Regulations are scheduled for December 1 and planning consummated prior thereto should not be affected.  We expect that the Regulations will not be enacted until sometime next year but the safer course would be to do planning this calendar year.

What’s at Stake:

Here is an example as to how discounts work currently.  Client X has an estate which includes a $10M business or $10M worth of real estate.  He gifts 40% of the business or the real estate entity (that we would create) to a trust for the benefit of Client’s spouse and children so that future appreciation will not be included in Client’s estate. The gross value of the 40% interest in the business or real estate entity transferred is $4M.  Since the new trust will be a minority stockholder and cannot cause a sale of the entity or a redemption of the trust interest, the non-controlling interest is worth less than the proportionate value of the underlying assets.  Also, the value should be reduced to reflect the difficulty of marketing or selling the non-controlling interest.  As a result of these discounts, the value of the 40% interest transferred to the trust for gift tax purposes may be $2.4M not the $4M, resulting in a reduction of the taxable estate by $1.6M.  This is the type of discounting that the IRS seeks to stop.

In this example, not only would $1.6M in value be removed from the taxable estate of the Client but all future appreciation in the value of the ownership interest held by the trust would not be included in the Client’s estate.

Also, in addition to saving estate taxes, the trust that will be the recipient of the transfer could be structured to accomplish these other objectives:

  1. To permit the Client’s spouse to be a lifetime beneficiary thereby giving access via the spouse to all the income of the transferred assets during the life of the spouse;
  2. To create a multigenerational trust to protect trust property from death taxes and spouses and other creditors of children and grandchildren for generations; and
  3. Where appropriate, to permit the Client to be added into the trust as a beneficiary in the future so that funds could thereafter be distributed to the Client.

Note, if the Democrats win the White House and their estate tax proposals are enacted, many more estates will be subject to the federal estate tax and at higher rates.  More estate tax planning will be then necessary and we may not have the opportunity to utilize discount planning.

Many estate planners, including us, believe that these IRS Regulations are overreaching and will be scaled back but there is no certainty that this will happen.  Also, Congress is looking at these Regulations and considering legislation to limit their applicability.

What Should You Do?

Clients with taxable estates should consider whether or not transfers should be made to reduce the estate tax burden. Circumstances should be reviewed now to determine if it is appropriate to take advantage of the significant discounts that are still available.

Recent Death of Prince Shows the Need for Thoughtful Estate Planning

The death of the renowned musician Prince at age 57 shocked the world. It also brought into focus for many of us the need for us to be mindful about our own estate planning. Not only was Prince’s death untimely and unexpected, it was the death of a celebrity with a substantial estate who died without a will.

The Ubiquitous Need for Estate Planning

Though most of us would assume that Prince, with all of his wealth and status, would have sought sound financial advice and proper estate planning, his situation is not as uncommon as it may seem. A recent survey by Rocket Lawyer showed that a whopping 64 percent of Americans don’t have wills.

His passing reminded us that it is not only the retired or elderly who should plan for the disposition of their assets after they’re gone. Some of us may still believe that wills are only essential if one has a sizable estate. This is not the case, however. Dying intestate (without a will) creates difficulties for those you leave behind, regardless of the size of your estate.

Where will Prince’s money go?

Because Prince’s parents were already deceased at the time of his death, and because Prince himself was unmarried and without children, his estimated $300 million estate will be divided among his closest relatives, one full sister and many half-siblings. His full sister has filed court documents to probate his estate and administer the distribution of his assets. Apparently, Prince did not have a good relationship with all of his half-siblings, but since he left no will, and according to law, they all stand to inherit considerable money.

Proper Estate Planning While You’re Thinking of It

No matter what your age, as long as you have accumulated assets, you should meet with an experienced estate planning attorney to ensure that your affairs are in order. The  following are some examples of estate planning documents that you may wish to incorporate into your plan to ensure that your wishes are carried out:

  • Durable power of attorney naming someone to make financial decisions if you become incapacitated
  • Health Care Proxy, Living Will, or Advance Healthcare Directive naming someone to make health care decisions if you become incapacitated and setting forth your wishes
  • Last Will and Testament stating how you would like your assets distributed and also designating a guardian for any children under the age of 18
  • Living Trust to avoid court involvement (probate) and setting forth the distribution terms for the beneficiaries at your death
  • Beneficiary forms to indicate who will receive your 401(k)s, IRAs, life insurance, etc.
  • POD (payable on death) forms to indicate who will receive your bank accounts

Because not only death, but other changes, are inevitable and unpredictable, it is essential that your estate plan includes changes in your circumstances — such as marriage or divorce, births or deaths in the family, etc. Don’t forget that events that occur in your children’s, siblings’, or parents’ lives may also affect your estate plan.

In order to ensure that all your estate is in order, that you have considered all your options, and that the arrangements you make are legally binding and financially sound, you should consult with an experienced estate planning attorney.

Why is estate planning for your business so important?

If you are a business owner, you are probably overwhelmed as it is. You might feel you are too busy to think about what will happen to your business when you die. So, you push these thoughts out of your mind and resolve to consider it when you have more time. However, putting off estate planning for your business can seriously reduce your business’ worth, prevent your wishes from being carried out and even cause the business you worked so hard to develop to close it’s doors.

There are a lot of ways proper estate planning can help your business.  Here are a few:

If you die without an estate plan for your business, it will pass to your heirs as determined under the laws of intestacy.  Proper estate planning can help prevent your business from falling into the hands of unintended or inexperienced beneficiaries and allow it to remain in the hands of the person you have chosen.

Estate planning also allows you to keep the particulars of your business intact and ensure that your business runs the way you envisioned it for years to come. You don’t want anything to change the brand you have worked so hard to create and business principals you believe so much in.

Estate planning for your business can also minimize the taxes that may be due upon your death. Without proper planning, if you have assets in excess of $5.45 million dollars federally and $1 million dollars in Massachusetts, your estate would owe substantial estate taxes.  Proper planning, such as the use of a trust, can help you reduce and possibly avoid these taxes.

Estate planning for your business also gives you peace of mind. You know that anything can happen at any time. If you have planned, your business will continue without interruption should something happen to you.

If you are a business owner, you should speak with an estate planning attorney about your business as soon as possible.

What is Medicaid and am I eligible?

Many clients come to us with questions concerning Medicaid. So what is Medicaid? Medicaid, or MassHealth in Massachusetts, is a state and federally funded program that provides health coverage for individuals with low income and assets. MassHealth also assists with the cost of long-term care in a nursing facility and will provide the following services at home:  personal care attendant, adult day care, home health services, etc.

MassHealth Eligibility Requirements (for applicants over age 65)

MassHealth has different qualifications for eligibility depending on whether the applicant is seeking benefits at home or in a long-term care facility.

To qualify for MassHealth coverage at home (community MassHealth), as a single applicant, there is an income threshold of $981 per month and an asset limit of $2,000. For a couple, where only one spouse requires MassHealth benefits, there is an income threshold of $1,328 per month, and an asset limit of $3,000. Additional income and assets may be retained if an applicant requires additional medical assistance.

To qualify for MassHealth coverage in a long-term care facility, as a single applicant, the asset limit is $2,000; however, for a couple where only one spouse requires MassHealth, the spouse in the community can keep assets totaling $119,220. There is no income limit. The applicant’s income is paid to the facility each month with a few allowable deductions.

CLIENT ADVISORY October, 2015 – Trust for Child included in Child’s Marital Estate in a Divorce

Dear Clients and Friends:

On August 27, 2015, the Massachusetts Appeals Court ruled that a husband’s interest in a lifetime trust can be included in the marital estate and be subject to division in a divorce proceeding.  The case, Pfannenstiehl v. Pfannenstiehl, has significant ramifications for those clients seeking to protect their children’s inheritances from divorces.

In the case, the husband was the beneficiary of a lifetime trust established by his father that gave the trustees the discretion to make distributions to the husband based on an ascertainable standard of comfortable support, health, maintenance, welfare and education.  For four years the trustee made significant distributions to the husband based upon such standard of payment until just before the divorce was filed.  The Appeals Court held that the ascertainable distribution standard obligated the trustees to distribute trust assets to the husband to satisfy his needs and that the distributions he received were part of the “husband income stream.”  On such basis, the Appeals Court ruled that the husband’s trust interest is part of the marital estate and subject to division with his wife in his divorce despite the existence of a spendthrift provision in the trust and despite the fact that there were other beneficiaries of the same trust.    Importantly, the court distinguished the case from those cases involving a wholly discretionary trust with no ascertainable distribution standard.  The court has ruled that wholly discretionary trusts with no standard are not included in the marital estate in a divorce.

While this issue will be appealed, it underscores the importance of establishing lifetime wholly discretionary trusts for children and grandchildren when clients wish to protect gifts and inheritances they make to children and grandchildren from divorces.  Since 2009, in those estate plans where our clients have chosen to implement multigenerational lifetime trusts for children and descendants, we have included wholly discretionary distribution provisions for each trust share.  If you have questions about whether your existing plan contains wholly discretionary lifetime trusts for your children or if you would like to learn more about this planning, please contact us.