Stapleton Elder Law

Discovering Additional Assets After Estate Taxes Have Been Filed

Whether you are filing tax returns for the living or the dead, you need to follow the rules. Penalties for failing to amend an estate tax return can include criminal and civil penalties.

Here's an ethical dilemma. You learn that your late mother had a safe with $100,000 cash in it after the estate has been finalized. Do you pocket the cash and tell no one, or add it to her assets? The temptation is obvious, but the right and legal thing to do is correct the error.

New Jersey 101.5 says in its recent article, "Why it's important for executors to report all estate assets," that the executor of an estate must prepare and file the necessary returns. In doing this, he or she has to collect, value and report all of the assets of the estate.

If a failure to include the cash in the inventory of the estate assets keeps the estate below the reporting threshold and no return was filed, the unpaid tax on the cash will accrue interest. Plus, the estate and executor may be subject to penalties for nonpayment, as well as facing civil and criminal penalties if this failure to file is deemed fraudulent.

Unlike cases where a return is filed, there's no statute of limitations where assets are not reported; the assets haven't been disclosed, and the tax authorities haven't been given an opportunity to review and evaluate reported information.

Even if the failure to file is an honest mistake, if the estate is audited, the executor can be personally liable for the unpaid tax, interest and penalties because he has distributed the estate's assets.

If you properly prepared but filed the return late, if one was never filed or if one was filed but the cash not reported, taking care of this should give a person peace of mind that it's likely to be a pretty small tax cost.

An experienced estate attorney will be able to help you fix this error before it becomes a serious problem for you and your family.

Reference: New Jersey 101.5 (April 5, 2016) "Why it's important for executors to report all estate assets"

To learn more about estate planning and estate administration, please visit our website. 

An Increase in Estate and Gift Tax Exemptions in 2016

According to the IRS, there will be increases to tax exemptions for estate and lifetime gift tax exemptions in 2016.

By law, every year the IRS must determine exemption limits for federal estate tax and the lifetime gift tax based on inflation. And every year, estate planning attorneys wait to hear the IRS' announcement of what the exemptions will be for the coming year.

For 2015, the exemptions were set at $5.43 million for a single person and $10.86 million for a married couple. The exemptions for 2016 have been raised to $5.45 million for a single person and $10.9 million for a married couple.

It is important to note that the gift tax exemption is the total amount of gifts that may be made during a person's lifetime. The amount that may be given to any individual in a single year in 2016 will remain the same as it is in 2015 at $14,000.

Forbes reported on this announcement in "IRS Announces 2016 Estate and Gift Tax Limits: The $10.9 Million Tax Break."

To take advantage of these exemptions you will want to speak with qualified attorneys and accountants to make sure all paperwork is filed properly.

For example, the higher exemption only applies to married people if a surviving spouse files correctly when his or her spouse passes away. There are also certain gifts that do not count against the limits if properly made, including gifts for medical and educational expenses if made directly to the provider.

Thus if your spouse passes away or you’re considering giving someone a sizable gift, consult with an expert so the estate can transfer and the gift can be made with as little applicable tax as possible. To learn more about taxes and gifting as it relates to your estate plan, please visit our website. 

Reference: Forbes (October 22, 2015) "IRS Announces 2016 Estate And Gift Tax Limits: The $10.9 Million Tax Break."

 

 

Looking for Revenue Sources, Some Savvy Retirement Loopholes May Be Changed

Savvy individuals, estate planning lawyers and financial advisors are not averse to finding unintended benefits when Congress makes changes to laws regarding retirement accounts and Social Security payments. Unfortunately, when too many of these techniques are discovered and shared widely, the government sees revenue slipping away. Three of these loopholes have drawn the attention of various government agencies and may be changed in the near future. 

A recent Reuters article, titled “3 Retirement Loopholes That Are Likely to Close,” discusses some of the loopholes that can be found, as an unintended result, due to changes in law.

Back-Door Roth IRA Conversions. Congress created this loophole by lifting income restrictions from conversions from a traditional IRA to a Roth IRA, but not placing such restrictions from the contributions to the accounts. As a result, those whose incomes are too high to put after-tax money directly into a Roth IRA so it can grow tax-free are instead able to fund a traditional IRA with a non-deductible contribution and then convert it to a Roth. Taxes are usually expected in a Roth conversion, but this work-around doesn’t cause much liability, the article explains, provided the contributor doesn’t have other money in an IRA.

President Obama’s 2016 budget proposed that future Roth conversions be limited to pre-tax money only, which would close the loophole for most back-door Roth IRAs.

The Stretch IRA. People who inherit an IRA can choose to take distributions over their lifetimes, and wealthy families converting IRAs to Roths also can potentially provide tax-free income to their heirs for decades because Roth withdrawals are generally not taxed. This loophole irks some lawmakers who believe that retirement funds should be for retirement, rather than an on-going generational inheritance.

Most of the recent tax-related bills introduced in Congress contain a provision to kill the stretch IRA and replace it with a law requiring beneficiaries other than spouses to withdraw the money within five years. Anyone thinking about a Roth conversion for the benefit of his or her heirs should speak with an experienced estate planning attorney and decided if this strategy makes sense if those heirs have to withdraw the money within five years, the article advises.

Social Security and “Aggressive” Tactics. President Obama’s budget also proposes getting rid of “aggressive” Social Security claiming strategies. These tactics can let upper-income beneficiaries maneuver the timing of the collection of Social Security benefits in order to maximize their delayed retirement credits. The President didn’t say which strategies he is eyeing, but the article cites experts who believe he may be alluding to the “file and suspend” and “claim now, claim more later” techniques.

“Claim Now, Claim More Later”

Married people can now claim a benefit based on their own work record or a spousal benefit of up to 50% of their partner’s benefit—dual-earner couples may be able to do both! Those individuals who choose a spousal benefit at full retirement age (age 66) are now able to switch to their own benefit when that maxes out at age 70. This is the “claim now, claim more later” technique. It can up a couple’s lifetime Social Security payout by tens of thousands of dollars, according to the article.

“File and Suspend”

This trick is used typically when one member of a couple has to file for retirement benefits for the other partner to get a spousal benefit. A person who reaches full retirement age also has the option of applying for Social Security—then immediately suspending that application so the benefit continues to grow—with their spouse still claiming a spousal benefit.

Talk to your estate planning attorney about retirement options and strategies as we move into 2016.

Reference: Reuters (June 30, 2015) “3 Retirement Loopholes That Are Likely to Close”

Please visit our website to learn more about your retirement options. 

Fundamentals of Estate Planning: The Generation-Skipping Transfer Tax

Of all the hated taxes in the U.S. tax code, the estate tax is handily the single most hated tax, particularly among wealthy families who must pay it. In an effort to preserve wealth across generations, these families rely on the use of complex strategies to transfer wealth to grandchildren, great-grandchildren and other descendants.  The Generation-Skipping Transfer Tax, or GSTT, was created by Congress specifically to close the perceived loophole.

In “Generation-Skipping Tax: What It Is and How to Avoid It,” The Motley Fool explains the idea behind the GSTT: general estate tax principles say that most people leave money to their spouses first, then to their children if they have any, then to grandchildren, and then to more distant descendants. The estate tax allows an unlimited deduction for marital gifts. However, in the children's generation, typically there is a tax. And when the child passes away, the IRS takes another bite by taxing the grandchildren.

The GSTT levies a second tax on gifts made to grandchildren or those who are more than 37½ years younger than the person making the gift or bequest. This is to make sure those gifts are treated consistently with the policy behind the estate tax. The GSTT applies the same 40% tax rate to gifts that the regular estate tax applies to direct inheritances. In effect, the GSTT lines up the tax liability so that the grandchildren receive the same amount of assets as they would have if their inheritance had come straight from their parents instead of their grandparents.

The article explains that outright gifts to grandchildren, called “direct skips,” are typically subject to GSTT, but the tax can also apply in more complex scenarios. “Indirect skips” occur when a trust that is created for multiple generations begins to see vested interests held by grandchildren and distant relatives. In such a case, the GSTT can become due— not only when a trust is set up—but also years or even decades later when remote relatives find themselves primary beneficiaries.

Lastly, there are also instances where a person can make what would otherwise be a generation-skipping gift without treating it as one for the taxes. The article notes that the most common is the "deceased parent" rule, which makes sense in normal estate planning. Most people will leave an equal amount to each of their children when they pass away; however, if one child dies before them, they will usually assign that share to that child’s children. Thankfully, the GSTT doesn’t disrupt this logical gift to the grandchildren when their parent has already passed away at the time of the gift.

Because the generation-skipping tax is about the scariest parts of estate tax law, most folks like to steer clear of it if they can. Speak with an estate planning attorney to find out more about the GSTT and other tax-decreasing strategies.

Reference: The Motley Fool (June 28, 2015) “Generation-Skipping Tax: What It Is and How to Avoid It”

Please visit our website to learn more about taxes and estate planning. 

 

 

Estate Tax Burden – Which Is the Worst State to Die In?

Sixteen states and the District of Columbia levy an estate tax, with some taking a bigger piece of your estate than others. For this reason, it is critical to understand which states are going to take more out of your beneficiaries’ pockets when you die. So which states are the most costly?

Does your state have an estate tax? While the federal applicable exclusion for this tax (also called an inheritance or death tax) is $5.43 million in 2015 or $10.86 million for a married couple, many states have much lower thresholds. This casts a much wider net—meaning there’s a better chance that your estate will be subject to your state’s inheritence tax.

An article in The Times of Trentontitled, “N.J. ranks among worst states to die from an estate tax perspective,” points out that some states don’t index their exemption amount for inflation, which gradually increases the number of taxpayers affected.

Sixteen states and DC have an estate tax, with some taking a bigger chunk of your estate than others. That’s why it’s important to understand which states are going to take more out of your beneficiaries’ inheritance when you pass away.

Which state is Number One?
New Jersey! Of all of the states, New Jersey has the distinction of having the lowest exemption level for estate taxes ($675,000). Estate tax rates range from 4.8% to 16% of the total estate.

But wait! There’s more: not only does the Garden State levy an estate tax, it’s also one of only two states to assess a tax against the beneficiary in certain circumstances. The state also has a three-year look-back on gifts considered to be in contemplation of death—this could trigger more inheritance taxes!

Remember that spouses are exempted from paying estate or inheritance tax, and in some states, this exemption applies to civil unions.

So it is really at the death of the surviving spouse when assets are passed to other beneficiaries that estate taxes come to the forefront. Too many people wait until it is too late to establish a plan that addresses these taxes.

Develop an estate plan to help to reduce future estate taxes. Speak to your estate planning attorney to determine the most appropriate approach for you.

Reference: The Times of Trenton (April 25, 2015) “N.J. ranks among worst states to die from an estate tax perspective”

To learn more about estate taxes, please visit our website. 

 

 

Retirement and Estate Planning: Unmarried Couples vs Married Couples

Although some couples remain unmarried to protect their estates, that strategy backfires if you end up paying estate taxes. If you choose not to marry, you and your partner need to educate yourselves on your estate planning and retirement options.

If you’re married, you’re able to inherit an unlimited amount of assets from your spouse—without paying any state or federal estate taxes. In addition, you’re permitted to give an unlimited amount of assets to your spouse while you’re alive without filing a gift-tax return.

This exemption doesn’t extend to unmarried couples. Estates of up to $5.43 million are exempt from federal estate taxes. Some states, however, have lower thresholds for their estate or inheritance taxes.

A recent article in Kiplinger’s Personal Finance, titled “Retirement: Estate planning for unmarried couples,” explains that the tax code is also kinder to married couples as far as inherited IRAs. A spouse who inherits an IRA is allowed to roll the account into his or her own IRA, and a surviving spouse can delay taking required minimum distributions until age 70½. As he or she waits to take the RMD, the account will continue to grow tax-deferred. A spouses can also roll an inherited Roth IRA into their own Roth, and they’re not required to take RMDs.

Not so for unmarried partners.

An unmarried partner who is named as an IRA beneficiary can roll the account into an inherited IRA and take distributions based on his or her life expectancy.

Questions about estate taxes can be answered thoroughly by an experienced estate planning attorney. Talk to him or her to devise the best strategy for your specific situation.

 Reference: Kiplinger’s Personal Finance (April 12, 2015) “Retirement: Estate planning for unmarried couples”

 

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Don’t Make These Two Estate Planning Mistakes!

"The costliest errors are ones we make ourselves, often without realizing how much damage we're doing."

"Estate planning is intertwined with the financial plan," a newsmax.com article explained, and it’s no secret that many individuals fail to prepare for retirement. When doing an estate plan, the article offers some sound advice:

• Make sure an estate planning attorney examines every major financial document;
• Sign a healthcare proxy, living will and power of attorney; and
• Discuss all estate issues with your family, even if it’s uncomfortable

Those that do plan on their own make some major mistakes, and here are two:

1. Skimping on savings. The article cites a recent retirement survey in which about 50% of the near-retirees who were asked what they could have done to better prepare for retirement said they should have saved more. The more and earlier you start saving, the more your money can grow.
2. Overpaying for investments. The more you pay in investment fees, the less you have to benefit from compounding.

"The costliest errors are ones we make ourselves, often without realizing how much damage we're doing," the author notes.

Don’t make any major or minor mistakes when it comes to your future. Talk to an experienced estate planning attorney.

Reference: newsmax.com (April 10, 2015) “USA Today: Don't Neglect Estate Plan as Part of Retirement Strategy”

Please visit our website to learn more about Estate Planning and how you can avoid making costly mistakes!

Baby Boomers Are Neglecting Their Estate Planning

"If you are looking at Baby Boomers, they are looking at what their cash flow will be in retirement," says Carol Kroch, managing director, wealth and philanthropic planning at Wilmington Trust in Wilmington, Del. "Can they do the things they want to do? Can they retire? Can they keep the house? They are not focused on death."

Failure to consider wills and estate planning is a frequent issue, and not just for Baby Boomers. People usually think that it’s something they can put off and deal with later.

USA Today recently published an article, titled “Big retirement mistake: Boomers with no estate plan,”that offers several tips for people who might be lagging behind in their retirement savings. The article emphasizes that there are three very important things to think about when you start your estate planning (this week!):

1. Your property and financial assets;
2. Your children (if they are not adults); and
3. Medical decisions.

“Just because you are doing good retirement planning doesn't mean you are doing good estate planning, unless you address all three areas,” the article cautions, and sets out some important things to remember when you create your estate plan:

• Work with an established estate planning attorney to help you protect the safety of your financial plan.
• Get comfortable with the laws in your state, as each state has its own probate laws. Again an estate planning attorney is your best bet here.
• Update all of your beneficiaries. Retirement plan and life insurance beneficiaries don’t pass through your will.  These are totally separate and will pass based on your beneficiary designation.

Talk with an experienced estate planning attorney to review these points and others as you create your strategy for the future.

Reference: USA Today (April 8, 2015) “Big retirement mistake: Boomers with no estate plan”

Please visit our website to learn more about proper estate planning for your retirement. 

 

What Happens to Debts When a Loved One Dies?

Anyone can die leaving debt behind. Spouses and families should help prepare or revise estate plans to address current credit issues and create an action plan for the possibility of remaining debt after the borrower dies.

If you aren’t sure what to do with a loved one’s debts after they pass – or what to tell others to do with your own debts – you may want to read a recent article in The Huffington Post titled “Debt and the Deceased: How Should Spouses and Heirs Proceed?”

Be honest about your financial situation. It’s not that easy for some family members to discuss debt issues, especially older Americans who hoped for better at the end of their lives. Even so, parents and their adult children or spouses should thoroughly talk about any outstanding debts that could affect the borrower's estate.

Get qualified advice. It’s easy to see that a young couple probably has a different set of debt issues than a retired couple. The article advises borrowers to speak with a qualified estate planning expert for ways to extinguish or manage debt issues as part of current financial and estate planning.

Organize your documents. The article urges you to consolidate all of your loved ones’ important financial documents in one centralized location. Ideally, all of the asset, debt, and tax documents would be included in an organized filing system… and it needs to be kept current!

See what needs to be repaid. It’s important for borrowers and their executors to know what categories of the deceased's debts will most likely need to be repaid after his or her death and which ones might be canceled. Some types of unsecured debt held in the deceased's name alone, such as credit cards or federal student loans, typically may be discharged, but the executor will often have to specifically request the discharge, rather than it happening automatically at death.

Educate the executor. The article reminds us that collection agencies have the right to try to collect on any outstanding debt they are hired to pursue—even when the survivors may not be legally bound to pay the debt. You’ll need to know what debt is left behind and whether the estate or individual family members might be liable. An experienced estate planning attorney can help. Once this is done, the executor should be told of this, and if possible, the borrower should leave good notes about how the executor should respond.

Be prepared and review estate plans to address current credit issues and create an action plan for any remaining debt after the borrower dies.

Reference: The Huffington Post (April 1, 2015) “Debt and the Deceased: How Should Spouses and Heirs Proceed?”

Visit our website to learn more about estate planning. 

 

Estate Administration and Taxes

Before an estate can be closed, all of the proper taxes must be paid. For those who do not have previous experience administering an estate, this can be a daunting task, especially if they do not know what taxes need to be filed.

An executor has two basic functions. The first is to marshal the assets of the estate. That is, the executor must locate and document the assets. The executor must also then distribute the assets. This is actually three functions in one.

The executor must pay the debts of the deceased out of the estate assets, pay the taxes and then distribute the remainder to any heirs. Many new executors get tripped up on the taxes as they do not know what taxes need to be paid. Problem: the executors may be held liable for any tax deficiencies owed by the estate.

The Wills, Trusts & Estates Prof Blog recently published a helpful list of taxes for estate administrators titled "Tax Issues When Closing an Estate."

Here are some of the practical pointers included in this list:

• Filing a final 1040 - An income tax return needs to be filed for the last tax year the deceased was alive. This should cover the period from January 1 until the date of death.
• Filing the estate's income tax returns - If the estate earns money after the deceased passes away, the estate is responsible for paying income taxes on that money.
• Filing an estate tax return - If any estate tax is due, then an estate tax return must be filed.
• Miscellaneous - Many estates have several other tax issues to deal with that executors should consult with experts about.

If you are administering an estate and have any questions about taxes, see an experienced attorney about what you need to do. The fees for the attorney are a legitimate estate expense, and can protect you from liabilities flowing from your role as executor.

Reference: Wills, Trusts & Estates Prof Blog (February 17, 2015) "Tax Issues When Closing an Estate."

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