Wills, Trusts & Estates Prof Blog

Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

A Member of the Law Professor Blogs Network

Thursday, March 26, 2015

Covering Your Basis

InvestmentWhen selling an asset such as a stock, you owe capital gains tax on the difference between the sale price and what you paid for it, which is your cost basis.  Yet, if you inherit certain assets, including marketable securities, you can “step up” their tax basis to whatever they were worth at the benefactor’s death.  This means highly appreciated inherited stock can be sold immediately with no capital gains, or later, when all the gains before you inherited are not counted.

Step-up became a more significant concept after the legislative deal Congress passed in 2013, which made permanent a generous exclusion from estate and gift tax.  In the same tax bill, Congress raised the top rate on long-term capital gains. 

There are several ways to minimize capital gains tax.  One includes making charitable donations.  For gifts of marketable securities to a public charity, donors are entitled to an income tax deduction for up to 30 percent of adjusted gross income if the stock is held for more than a year. 

Another tax-planning tool is to convert a Traditional IRA to a Roth.  Although you must pay income tax on the amount you are converting, after that no income tax is assessed on distributions by you or your heirs.  Moreover, any withdrawals by you or your heirs do not get added to taxable income. 

Finally, married couples who live in a community property state have a basis advantage.  Most of what you acquire once you are married and living in a community property state, you and your spouse are each considered a half-owner.  Thus, when the first spouse dies, both halves of the property get a step up in basis, effectively minimizing capital gains tax if the surviving spouse sells the property.

See Deborah L. Jacobs, What Every Investor Needs to Know About Basis, Morningstar, March 25, 2015.

March 26, 2015 in Estate Administration, Estate Planning - Generally, Estate Tax, Gift Tax, Income Tax | Permalink | Comments (0) | TrackBack (0)

Monday, March 9, 2015

PLR on GST and Gift Tax Consequences of Trusts Selling Farm

Gavel2A recent IRS private letter ruling considered the Generation-Skipping Transfer Tax, Gift Tax, and Estate consequences of a proposed sale of a farm owed by two trusts. The two trusts had different grantors, but essentially the same beneficiaries. The trusts had worked out a proposed sale of the farm to a limited partnership, which was owned by a descendent of both trusts' grantors.

In Private Letter Ruling 201509002, it was found that the trusts would not lose their GST tax-exempt status as a result of the sell, the sale would not be considered a taxable gift, and would not add to the amount the beneficiaries must claim in their estates

See Dawn S. Markowitz, GST Tax Exemption Preserved in Sale of Farm, Wealth Management, March 4, 2015.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.

March 9, 2015 in Estate Tax, Generation-Skipping Transfer Tax, Gift Tax, New Cases, Trusts | Permalink | Comments (0) | TrackBack (0)

Wednesday, March 4, 2015

CLE on Planning Techniques for Large Estates

CLEThe American Law Institute Continuing Legal Education (ALI CLE) is presenting a CLE entitled, Planning Techniques for Large Estates, on April 8 – 10, 2015 in Scottsdale, AZ and via webcast.  Here is why you should attend:

 Planning for large estates continues to be a technically demanding and dynamic area of practice. Don’t miss the best opportunity in 2015 to fine tune your knowledge and stay up-to-date! 

Attend this highly-rated course and get the latest information and planning techniques specifically for large estates. Learn, network, and strategize with your peers and a highly experienced faculty of trust and estate practitioners from across the country.

Featuring in-depth discussions of estate and gift tax issues and planning techniques, this year’s topics include:

  • business succession planning
  • charitable planning issues
  • legislative developments and outlook
  • remainder interest purchase planning techniques
  • postmortem estate planning
  • valuation issues
  • ethics and privileges
What You Will Learn

Get the tools you need to advise your clients on the latest wealth planning and tax strategies. Led by a nationally recognized faculty of trust and estate experts, this advanced course addresses the most sophisticated problems and considerations unique to planning large estates.

Whether you are a new or returning attendee, this program will keep you on the leading edge of wealth planning and estate practice. New topics this year include:

  • Business Succession Planning: Keeping It in the Family
  • Striking the Balance: Fiduciary Income, Net Investment Income, Capital Gains, and Other     Non-Transfer Tax Consequences of Transfer Tax Planning
  • Generation Skipping Transfer Tax Planning
  • Legislative, Valuation, and Other Developments 2015
  • Creative Uses of Remainder Interest Purchase Planning Techniques
  • A Potpourri of Charitable Planning Issues (and Traps) You Might Have Never Thought About Before

Discussions are based on changing fact patterns and solutions, rather than simply principles of law or statutory provisions. Each topic is explored in depth, presenting key issues, alternative approaches, and practical planning strategies.

March 4, 2015 in Conferences & CLE, Estate Planning - Generally, Estate Tax, Gift Tax | Permalink | Comments (0) | TrackBack (0)

Tuesday, February 17, 2015

Tax Issues When Closing An Estate

Estate tax return

When a loved one dies, the resulting tax issues must be handled.  The person to handle these issues is typically identified in the decedent’s will as executor of the estate.  However, if there is not a will, the probate court will appoint someone to be the administrator.

An executor’s job is to identify the estate’s assets, pay off its debts and then distribute whatever is left to the rightful heirs and beneficiaries.  He or she is also required to file any necessary tax returns and pay taxes.  If this is handled incorrectly, the IRS can come after the executor personally for tax underpayments.  Below are four major steps to be considered:

  1. Filing the Final 1040.  The 1040 covers the period from Jan. 1 through the date of death.  If the decedent was unmarried, the final 1040 is prepared in the usual fashion.  When there is a surviving spouse, the final 1040 can be a joint return filed as if the decedent were still alive.  Also, look out for medical expenses, as large uninsured medical expenses must be treated differently for tax purposes. 
  2. Filing the Estate’s Income-Tax Return.  Once the individual has died, any income generated by his or her holdings after death is now part of the estate and that income is subject to taxes. 
  3. Filing the Estate Tax Return.  The federal estate tax return is filed on Form 706.  If the decedent did not make any sizable gifts before dying, no estate tax is due and no 706 form is required.  If sizable gifts were made, anything over $14,000 is added back to see if the estate tax exemption is surpassed. If so, then there will be a 40% federal estate tax on the excess. 
  4. Miscellaneous Details.  If you’ll be filing Form 1041 and/or Form 706, you need to get the estate a federal employer identification number (EIN). Next, you should file Form 56 (Notice Concerning Fiduciary Relationship), which notifies the IRS that you’ll be acting on behalf of the estate regarding tax matters.  You should also open a checking account in the name of the estate with funds transferred from the decedent’s accounts.  The executor has the legal power to do this.

See Bill Bischoff, 4 Tax Issues to Consider When You Close an Estate, Market Watch, Feb. 17, 2015.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.

February 17, 2015 in Estate Administration, Estate Planning - Generally, Estate Tax, Gift Tax | Permalink | Comments (0) | TrackBack (0)

Monday, February 16, 2015

Rules for Noncash Charitable Deductions

Charity 3

Over the years the rules on giving have tightened.  If you want to claim itemized deductions for noncash charitable donations on you 2014 Form 1040, brace yourself.

Because unscrupulous taxpayers once made a habit of claiming bogus and inflated charitable write-offs, the federal government has tightened up over the years.  Unfortunately, innocent taxpayers are penalized as a result.  Below is a quick summary of the rules that apply to the most-common types of noncash charitable donations:

  1. For a donation of a noncash item worth less than $250, you need a receipt from the charity.  You must have the receipt in hand by the time you file your return, however, don’t file it with your return.
  2. TO deduct a donated noncash item worth $250 to $5,000, you need a contemporaneous written acknowledgement from the charity that meets IRS guidelines. 
  3. To deduct a donated noncash item worth $501 to $5,000, you need the written acknowledgement plus written evidence that supports the time’s acquisition date, its fair market value, how much it cost, etc.  Fill out this in formation on IRS Form 8283 and keep the written evidence with your tax records.
  4. For donated clothing and household items, the general rule says you can only claim deductions for stuff that is in “good condition or better.” However, you can deduct the fair market value of an item that's not in good condition or better if you attach a written qualified appraisal that values the item at more than $500.
  5. For a noncash item worth over $5,000, you generally need what is listed in Rules 2 and 3 plus a written qualified appraisal.
  6. Special restrictions apply to donations of vehicles, planes, and boats. The most important thing to know is that your charitable write-off will usually be limited to the amount of sales proceeds when the charity sells the vehicle, plane or boat.

See Bill Bischoff, 7 Tax Rules That Apply to Noncash Charitable Donations, Morningstar, Feb. 16, 2015.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.

February 16, 2015 in Estate Planning - Generally, Gift Tax | Permalink | Comments (0) | TrackBack (0)

Tuesday, February 10, 2015

How the President's Tax Proposals Are Affecting Estate Planning

Estate tax2

In President Obama’s proposal for the fiscal year 2016 budget, he keeps many of his past proposes that include restoring transfer taxes and curtailing various estate planning techniques.  The President is also introducing some bold, new ideas.  Some of the proposals in the budget that would affect estate planning include:

  • Eliminating the Stepped-Up Basis at Death and Treating Transfers of Appreciated Property as Sales.  Under this new proposal, the donor or deceased owner of an appreciated asset would realize a capital gain at the time the asset is gifted or bequeathed to another.  The gain would be taxable income to the donor or the deceased’s estate. 
  • Restoring the Estate, Gift, and Generation-Skipping Transfer Tax.  This proposal has been on the President’s radar for quite some time.  In 2009, the top tax rate was 45%. The exemption amounts were $3.5 million for estate and GST taxes, and $1 million for gift taxes, with no indexing for inflation. Portability of the deceased spouse’s unused estate and gift tax exemptions would remain available. 
  • Restrictions on Grantor Retained Annuity Trusts (GRATs).  This would require GRATs to have a minimum ten-year term and a maximum term of the annuitant’s life expectancy plus ten years.  Moreover, the proposal would also require that a GRAT’s remainder interest at the time of creation have a minimum value of the greater of 25% of the value of the assets contributed or $500,000.
  • Expanding the Definition of “Executor.”  The Tax Code would expressly define an executor as applicable for all tax purposes, including authorization for the executor to handle the decedent’s pre-death tax liabilities.
  • Extending Liens on Estate Tax Deferrals for Certain Estates.  For estate tax deferrals where the estate consists largely of an interest in a closely held business, the proposal would extend the §6324(a)(1) estate tax lien through the entire deferral period, instead of the current ten-year period from the date of death. 

See Michelle L. Vesole, So Much for a Permanent Estate Tax Regime: The President’s Tax Proposals Affecting Estate Planning, Bloomberg BNA, Feb. 9, 2015.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.

February 10, 2015 in Estate Planning - Generally, Estate Tax, Generation-Skipping Transfer Tax, Gift Tax, Trusts | Permalink | Comments (0) | TrackBack (0)

Saturday, February 7, 2015

Senator Roberts Asks For Guidance on IRS Gift Audit Plans

Tax QuestionsU.S. Senator Pat Roberts (R-Kan.) asked a question of IRS Commissioner John Koskinen regarding 2011 gift tax audits of individuals who had contributed to political organizations, at Tuesday's U.S. Senate Committee on Finance hearing. Even though the IRS has since stopped audits of contributions, Senator Roberts expressed concern over a lack of guidance from the IRS on how future audits and enforcement will be handled and asked when guidance should be expected to be provided by the IRS. A two minute video of the question and answer can be seen here.

See Post Staff, Sen. Roberts Presses IRS Commissioner on Gift Tax Enforcement, Salina Post, Feb. 4, 2015.

February 7, 2015 in Gift Tax | Permalink | Comments (0) | TrackBack (0)

Friday, February 6, 2015

Tom Brady Faces the IRS

Tom Brady

The Super Bowl champions, New England Patriots, will likely be celebrating their win for quite some time.  Yet, Tom Brady’s celebration might be short lived.  The 2015 Chevy Colorado truck Brady won as Super Bowl MVP is considered a taxable prize under the Internal Revenue Code, section 74.  It is taxed at Tom Brady’s marginal income tax rate of 39.6 percent.   

According to ESPN, Brady has decided to gift the truck to Patriots rookie cornerback Malcolm Butler, who made the astounding interception last Sunday night.  Fortunately, this is not a taxable event for Butler, since gifts are never taxed to the recipient.  Brady is not as lucky, as he will have to pay gift tax on this transaction (assuming this is his only gift this year).  The tax code only allots $14,000 tax free from any one person to any one person before assessing a donor level tax on the gift. 

Not only will Brady owe income tax and gift taxes on his MVP prize, but he will also get hit with taxes from his game check, which is about $97,000. 

See Ryan Ellis, IRS is Coming After Tom Brady’s Super Bowl MVP Truck, Forbes, Feb. 4, 2015.

February 6, 2015 in Estate Planning - Generally, Gift Tax, Income Tax | Permalink | Comments (2) | TrackBack (0)

Estate Planning Strategies Targeted in President's Comprehensive Plan

Tax3The comprehensive plan by President Barack Obama within the FY2016 budget includes significant tax changes, which will remove the availability of common estate and tax planning strategies. The plan suggests reducing the estate tax exemption to $3.5 million. Additionally the changes put the existence of GRATs, annual exclusion gifts, and generation-skipping trusts at risk.

See Ashlea Ebeling, Obama Budget Would Upend Estate Plans, Forbes, Feb. 5, 2015.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.

February 6, 2015 in Current Affairs, Current Events, Estate Planning - Generally, Estate Tax, Gift Tax | Permalink | Comments (0) | TrackBack (0)

Thursday, February 5, 2015

Frugal Man Leaves Behind Large Bequest

Ronald Read

Ten years ago, Ruth Marx knitted a hat for Ronald Read because she thought he could use some help making it through the winter.  Marx recalls Read being cautious with his money; and at one point, saw him looking for downed wood on a parcel of land where his family once lived. 

When Read died June 2, 2014 at the age of 92, he had stock holdings and property valued at almost $8 million, most of which was left to Brattleboro Memorial Hospital and Brooks Memorial Library.  “People were stunned that he had that much money,” Marx said.  “I bought some old fence wiring from him once because I thought he could use the money.” 

Read was a quiet and private man, not one to flaunt his wealth.  Read’s attorney said he enjoyed picking stocks and “over time these investments grew substantially.”  Read’s unrestricted gift of $1.2 million is the largest single bequest the Brooks Memorial Library has ever received and will bolster the library’s endowment.  Brattleboro Memorial Hospital received $4.8 million from Read’s estate, and like the Brooks Library, is the largest gift the hospital has ever received. 

See Howard Weiss-Tisman, Frugal Benefactor Leaves Millions to Brattleboro Memorial Hospital and Brooks Memorial Library, Brattleboro Reformer News, Feb. 5, 2015.

Special thanks to Alyssa York (Texas Tech University School of Law) for bringing this article to my attention. 

February 5, 2015 in Estate Administration, Estate Planning - Generally, Gift Tax | Permalink | Comments (0) | TrackBack (0)