Wills, Trusts & Estates Prof Blog

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

A Member of the Law Professor Blogs Network

Monday, July 21, 2014

529 Plans for Grandparents


Many grandparents want to help their grandchildren pay for college, but do not know the best way of going about it.  According to a Fidelity Investments study, nearly half of grandparents expect to contribute to their grandkids’ college savings, with more than a third expecting to give $50,000 or more.  While very generous and thoughtful in nature, these contributions can also have significant tax and estate planning benefits for grandparents. 

A 529 plan is a college savings investment account that provides tax-free growth as long as the money is put toward tuition and most types of college expenses such as fees and books.  Grandparents can use 529 accounts to procure tax deductions or diminish the value of their taxable estates. 

One way to showcase 529 accounts is to highlight their advantages over other savings strategies.  For example, grandchildren who receive Series EE bonds as gifts can later be inundated with federal income taxes on the interest if they do not use funds for college.  Contrastingly, a 529 plan provides for tax-free distribution.  It also allows grandparents to give the funds to another grandchild if the intended recipient does not go to college. 

One of the caveats of a 529 plan is that it could make a grandchild ineligible for financial age.  This is because once the money is withdrawn for the beneficiary, it will count as income that schools use to determine financial aid awards.  However, grandparents can avoid this problem by waiting until their grandchild’s junior or senior year to distribute the money. 

See Robyn Post, Your Practice—Selling Grandparents on the Perks of 529 College Savings Plans, Reuters, July 18, 2014.

July 21, 2014 in Elder Law, Estate Planning - Generally, Gift Tax, Income Tax | Permalink | Comments (0) | TrackBack (0)

Section 7520 Rates for August

RatesThe IRS has released the updated Section 7520 rates, which are used for charitable contributions. The updated August rates can be seen here.

See, IRS Updates Applicable Federal Rates for August 2014, Charitable Planning, July 18, 2014.

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

July 21, 2014 in Estate Planning - Generally, Gift Tax, Income Tax | Permalink | Comments (0) | TrackBack (0)

Friday, July 18, 2014

Article on ESBTs After the Sale of S Corporation Shares


Chris D. Saddock (Saddock Co., Dallas) recently published an article entitled, Qualifying a Grantor Trust as an ESBT After the Sale of S Corporation Shares, Probate & Property Vol. 28 No. 4, 58-60 (July/August 2014).  Provided below is a portion of the article’s introduction:

Often successful small businesses look to the S corporation as a mechanism for avoiding the corporate tax while taking advantage of a corporate entity structure.  Statutory restrictions on S corporation ownership, however, may significantly limit the shareholder’s asset protection and estate planning opportunities.  Specifically, to maintain an S election, stock must be held by a U.S. citizen or a qualified entity.  Only three types of trusts are qualified to hold S corporation shares: grantor trusts, qualified Subchapter S trusts (QSSTs), and electing small business trusts (ESBTs.) 

July 18, 2014 in Articles, Estate Planning - Generally, Income Tax, Trusts | Permalink | Comments (0) | TrackBack (0)

Tuesday, July 15, 2014

The Ins and Outs of Social Security

Social security 1

Like tax loopholes, Social Security benefits are not palpable and require knowledge, familiarity, and understanding of intricate rules and regulations.  There are various tactics that can be used to maximize Social Security retirement benefits.  For example, one of the most popular strategies is the file-and-suspend strategy.  This strategy has been touted for years as a way for married individuals to maximize their benefits as a couple. 

For those unfamiliar with the strategy, it allows a couple at full retirement age to increase each individual’s worker’s benefit by 8% annual delayed retirement credits for each year that the benefit start date is deferred until age 70—while triggering a spousal benefit for one individual.  This is accomplished when one of the spouses applies for their worker’s benefit and subsequently files a notice to suspend payment of benefits.  This permits the other spouse to file for their spousal benefit which will equal 50% of the filing and suspending spouse’s benefit. 

It is also possible for single individuals to take advantage of the file-and-suspend strategy.  The benefit of filing and suspending retirement benefits if you are single is that it enables you to go back to the Social Security Administration before age 70 to request payment of a retroactive lump sum of monthly benefits that you would have received had you started collecting benefits when you reached full retirement age.  The key is to be aware of strategies that will work in your situation and to implement them in a timely manner.

See Robert Klein, Social Security Loophhole’s Huge Windfall Opportunity, Market Watch, July 10, 2014. 

July 15, 2014 in Estate Planning - Generally, Income Tax, New Legislation | Permalink | Comments (0) | TrackBack (0)

Keogh Plans Are Not Extinct

Keogh plan

At one time the Keogh plan was the hottest retirement planning commodity around.  Today however, Keoghs are regarded by many as relics.   Nonetheless, this type of plan may still hold value for some practitioners.

As a review, the Keogh plan was intended to provide a feasible option for unincorporated small business owners who were otherwise restricted or closed out of qualified retirement plans.  There are two main types of Keogh plans: the defined contribution Keogh and the defined benefit Keogh.  For the defined contribution Keogh, the maximum deductible contribution in 2014 is equal to the lesser of $52,000 or 15% of earned income.  With the defined benefit Keogh, the limit is based on actuarial computations.  The plan may provide an annual retirement benefit equal to the lesser of 100% of earned income for the three highest-paid years or a specific dollar amount adjusted for inflation. 

Be aware that in computing “earned income” for a plan, your earnings from self-employment are reduced by your contributions and one-half of the self-employment tax you pay.  Also not the maximum amount of compensation allowed for this calculation is limited in 2014 to $260,000. 

Due to subsequent tax law modifications and the emergence of solo 401(k) plans the Keogh plan is not as prevalent as it was in past years.  Yet the plans are not extinct, and have the ability to provide a fast way for unincorporated business owners to build up a nest egg. 

See Ken Berry, Retirement Plans for Small Businesses: The Keogh Plan Is Not Extinct, CPA Practice Advisor, July 11, 2014.

July 15, 2014 in Estate Planning - Generally, Income Tax, Non-Probate Assets | Permalink | Comments (0) | TrackBack (0)

Monday, July 14, 2014

Your First IRA Distribution


The deadline for the required minimum distribution for an IRA is April 1st of next year. 

By law you must begin withdrawing money from a regular IRA and other retirement plans “when you reach age 70 ½.”  The IRS website indicates that the deadline for that distribution is “April 1 of the year following the calendar year in which you reach age 70 ½.”

Yet waiting until next year may not be the best option.  “For each subsequent year after your required beginning date, you must withdraw your RMD by Dec. 31.”  It is recommended that you check to see how the distributions will affect your tax planning before withdrawaling any money.  

See Tom Herman, The Deadline for Your First Required IRA Distribution, The Wall Street Journal, July 13, 2014.    

July 14, 2014 in Estate Planning - Generally, Income Tax, Non-Probate Assets | Permalink | Comments (0) | TrackBack (0)

Sunday, July 13, 2014

ABC's of the AMT

Empty pockets

While many individuals do not look upon taxes favorably, the Alternative Minimum Tax (AMT) has a particularly beastly reputation.  The original intent of the AMT was to prevent wealthy individuals from using loopholes to avoid paying their share of taxes by taking to many deductions or write-offs. 

However, over the years what was once considered “high income” is now upper middle class, and the AMT has not been adjusted accordingly.  Thus, earners who are not necessarily very wealthy will be hit with the tax bill. 

Generally, you may be subject to the AMT if your income falls between $150,000 and $750,000.  Your chances of paying the tax increase if you have a high gross income relative to your taxable income, have a large number of dependents, hold incentive stock options, and have large deductions on your Schedule A. 

If you are unsure whether the AMT will apply to you, you can consult an accountant or an attorney that will help you find out before tax time, therefore you can find ways to strategize and minimize your exposure to the tax. 

See Kate Ashford, How Much Do You Know About The Alternative Minimum Tax? Forbes, July 11, 2014.

July 13, 2014 in Estate Planning - Generally, Income Tax | Permalink | Comments (0) | TrackBack (0)

Thursday, July 10, 2014

7 Indicators Your Estate Plan Is Outdated


Estate planning is not something we should do once and then completely disregard.  With unpredictable futures and ever changing laws, it is imperative that estate plans are frequently updated.  Below are some indicators that your estate plan may be outdated:

  1. You have had a birthday. Any time you have had a birthday that makes you reflect on your future and your family, you should consider revisiting your estate plan to ensure your current preferences are adequately represented. 
  2. Buying major assets. If you have bought real estate or another asset that has changed your financial status, it might be a good time to check in with your estate-planning attorney. 
  3. Death of a child or fiduciary.  Update your estate plan to remove the deceased person’s name.  If you do not, years from now your personal representative or successor trustee will have to get original death certificate for the deceased person. 
  4. Marriage or divorce. Any changes in marital status will require significant changes to your estate plan. 
  5. Started, purchased, or sold a business. Meet with your estate-planning attorney to ensure that your estate plan is structured properly to deal with the business if you become disabled and put together a business exit plan.  If you’ve sold a business, make sure sale proceeds are titled in your name. 
  6. Moved to a new state. State laws dictate what estate planning documents you need to include and how they need to be signed.  Different states impose different estate taxes so you want to be up to date on the taxable status of your estate.
  7. A beneficiary or fiduciary has gotten married or divorced. It is important to keep in touch with your fiduciaries so you know about changes in their lives as that may change your preferences about what your estate plan dictates for the future of your family and loved ones. 

See Bonnie Bowles, 7 Reasons Your Estate Plan May Be Outdated, Examiner, July 8, 2014. 

July 10, 2014 in Estate Planning - Generally, Estate Tax, Income Tax, Non-Probate Assets, Trusts, Wills | Permalink | Comments (0) | TrackBack (0)

Tuesday, July 8, 2014

IRS Help Line Needs Help

Help lineIf you have questions regarding your IRA, the IRS help line may not be the first place to go. 

Taxpayer advocate Nina Olson reports that every year, very few taxpayer calls are answered by the IRS.  In 2012, only 61 percent of calls were answered.  Yet, this is likely to be unsurprising as the IRS lacks the funds to do everything Congress demands of it and therefore, customer service has suffered as a consequence. 

Last week, Commissioner John Koskinen warned the IRS Nationwide Tax Forum that without additional funding, the level of phone service next year will drop to 53 percent.  While President Obama has done his part in asking Congress to raise the agency’s $11 billion budget, there will not be any additional funding. 

See Roberton Williams, IRS Help Line Is Out Of Service, Forbes, July 7, 2014. 

July 8, 2014 in Current Affairs, Estate Planning - Generally, Income Tax | Permalink | Comments (0) | TrackBack (0)

Monday, July 7, 2014

5 Questions To Ask Yourself Before Gifting

Gift 2

While gifts can serve as effective estate planning tools, they can also cause problems, both for the donor and the recipient.  Below are a few questions to ask yourself before making a gift:

  1. Why are you making the gift? Are you gifting as an expression of love or is it for tax planning and long-term care purposes?  If it is the latter, make sure there is a benefit to the transfer.  If the value of your assets totals less than the estate tax threshold in your state, your estate will pay no tax. 
  2. Are you keeping enough money? If you are making large gifts, you may need to do budgeting to make sure that you will not run short for your basic needs.
  3. Is it really a gift?Are you expecting the money to be paid back or for the recipient to perform some task for you?  Make sure that the beneficiary of your generosity is on the same page as you.
  4. Are you sure it is a gift? A gift may not really be a gift is if you expect the recipient to hold the funds for you or let you live in or use a house that you have transferred.  These are “gifts with strings attached.” 
  5. Is the gift good for the recipient? If the recipient has special needs, the funds could make her ineligible for various public benefits, such as Medicaid, Supplemental Security Income or subsidized housing.  Making many gifts to the same person may create a dependency that interferes with the recipient learning to stand on his or her own two feet. 

See 5 Questions to Ask Before Making Gifts for Medicaid or Tax Planning, Elder Law Answers, June 27, 2014. 

July 7, 2014 in Elder Law, Estate Planning - Generally, Gift Tax, Income Tax | Permalink | Comments (0) | TrackBack (0)