As the year draws to an end, now is a good time to review your existing tax situation and estate planning in general. More specifically, this is also a good time to look at your annual gifting strategies in order to avoid missing some important tax opportunities.

Gift tax basics: Generally a gift tax is imposed on the value of property transferred less the value of property received in return. There are four major exceptions to this rule. First, during a calendar year, the first $14,000 worth of gifts to each separate person is excluded from taxation. In addition, a husband and wife may elect to “split gifts,” allowing the two of them to make any combination of gifts of $28,000 to an individual, tax free.

Second, certain tuition and medical payments are excluded from taxation if made directly to the school or health care provider. Third, most gifts made to a spouse are excluded from taxation. Lastly, a total of $5,490,000 of otherwise taxable gifts during life, and bequests made at death, can be excluded from taxation (gifts excluded from taxation under the first three rules do not count toward the $5,490,000 limit).

Importance of making completed gifts by Dec. 31: First, the $14,000 (or $28,000 if gift splitting) annual exclusion from gifts described above is computed based on the calendar year. Therefore, if you do not use up your $14,000 exclusion by the last day of calendar year 2017, you lose your opportunity to take advantage of your annual exclusion for the year. In addition, under current law there is a $5,490,000 lifetime exemption from gift tax for 2017. If you are going to make taxable gifts, it is better to make them sooner rather than later, for tax purposes. This is because all of the future appreciation on the property gifted will be excluded from the donor’s taxable estate for estate tax purposes.

Timing of gifts: Generally, a gift is considered made when there is a completed and irrevocable transfer of the property. In other words, the gift is complete when the donor relinquishes all dominion and control over the transferred property.

For gifts made by check to a charity, the IRS has adopted a “mailbox rule” allowing individuals to deduct charitable gifts made by check, if the check is deposited in the U.S. Mail or otherwise delivered to the charity, before the stroke of midnight on New Year’s Eve. If you drive past the mailbox on New Year’s Eve, make sure someone else sees you drop the stamped envelope in the box!

Gifts made by check to anyone other than a charity are considered complete when the check is cashed. It is important that the donee of a gift check deposits that check before New Year’s Eve, or else the gift may be final next year.

Gifts of securities are considered complete when title to the security actually changes; you need to give your broker time to complete these transfers.

For assignments of partnership or LLC interests, the gift is considered complete when the executed assignment document is delivered to the donee.

Cost basis of gifted property: Generally, for purposes of determining gain or loss on the sale or other disposition of property by a donee, the Internal Revenue Code provides a “carry-over” basis rule. This rule gives the donee a basis equal to the adjusted basis of the donor, subject to two major exceptions. First, if the donee subsequently sells the property for a loss, the donee’s basis is equal to the fair market value of the property at the time of the gift (if this amount is less than the donor’s adjusted basis). Second, the donee’s basis may be increased by the portion of the gift tax paid that is attributable to the net appreciation in the gifted property. Many donors will give appreciated securities to charity, and cash to family members, to minimize the capital gains tax cost.

Legal documents to complete by Dec. 31: If you are planning to transfer partnership units or LLC membership units by year end, assignment documents need to be prepared by your attorney and executed prior to Dec. 31. In addition, deeds transferring real estate also need to be prepared and executed prior to year end. If you wish to make a transfer to a trust for a minor beneficiary, the trust needs to be executed by year end.

A word about estate tax repeal: Congress’ final tax bill does not fully repeal the estate tax but doubles the exemption. Therefore, all of the estate/gift tax planning we have been doing for decades will continue to be important. The bottom line for year-end gifting is that this law is unlikely to alter any plans for this year.

The benefits of paying legal bills by Dec. 31: Under the existing law effective this year, a portion of legal fees for estate planning may be deductible as an expense paid for the management, conservation, or maintenance of property held for the production of income. However, this deduction (and all other miscellaneous itemized deductions) is being removed by the pending tax bill. Therefore, paying legal bills before by Dec. 31, 2017, is of extra importance this year, as the payment is unlikely to be deductible in coming years.

For more information, please contact a member of Greensfelder’s Trusts & Estates Group.

One of the many memorable scenes from the movie classic “Ferris Bueller’s Day Off” takes place when Ferris and his friends drop off a Ferrari in a downtown Chicago parking garage. In the scene, Cameron doesn’t trust the car’s safety with the parking attendant, who says to them somewhat indignantly, “Relax … you fellas have nothing to worry about. I’m a professional.” The screen then cuts to the parking attendant and his buddy zooming off in the Ferrari as Ferris and the group go on their way.

I find myself often giving the same message to clients when describing the idea of involving a corporate fiduciary in their trusts/estates. However, unlike the parking attendant in the movie, a corporate fiduciary really can be counted on to protect your precious assets.

Here are 10 reasons to consider using a corporate fiduciary:

1. Obedience: follows the terms of the will or trust closely to honor your intentions.
2. Knowledge: knows the rules and procedures to follow in administering trusts/estates, from beginning to end.
3. Experience: has experience in dealing with all sorts of real world situations that may affect a beneficiary, which could range from buying a house to fighting substance abuse.
4. Resources: has significant resources available to help best manage a trust/estate.
5. Efficiency: helps minimize mistakes or errors being made by non-professional individuals who do not know what they are doing, which could add further complication and costs to legal proceedings.
6. Advice: in many cases, will have a team of advisors with different specialties to help serve various aspects of the trust/estate, including in-house experts who will manage the investment of the assets to help preserve and grow them for your family for a long time.
7. Consistency: can provide a sense of continuity in the administration of trusts, due to the longevity of institutions versus the inevitable rotation of individuals serving as successor fiduciaries.
8. Impartiality: is not partial in the handling of duties and won’t play favorites, unlike some family members who may be easily swayed in their decision making because of family relationships.
9. Protection: has a lower risk of losing assets due to theft or wrongdoing by unscrupulous individuals; but also is required to be adequately insured in the event of any loss of assets.
10. Professionalism: takes its responsibilities seriously and may be held to a higher standard of care due to its level of expertise and skills.

Yes, corporate fiduciaries charge for their services, which makes some clients uneasy, but most states’ laws allow any fiduciary, including individuals, to receive compensation for services. In fact, using a corporate fiduciary could even reduce costs because as part of their overall services they might assume tasks customarily handled by other advisors, such as accountants and lawyers.

More importantly, choosing any fiduciary is a serious task, mainly because of the heavy responsibilities and burdens that come with the job. Employing the experience of a corporate fiduciary can be an effective tool in shifting the burdens of administration away from your loved ones, allowing them to put more focus on their quality of life, which Ferris Bueller would certainly appreciate.

This is the first in a series of posts that will focus on the benefits and uses of corporate trustees. Please stay tuned for future Preservation posts on this topic.

The Internal Revenue Service has released the Applicable Federal Rates (AFRs) for December 2017. AFRs are published monthly and represent the minimum interest rates that should be charged for family loans to avoid tax complications.

Here are the rates for December 2017:

The Section 7520 interest rate for December 2017 is 2.6 percent. The Section 7520 interest rate is the interest used in a common estate tax planning technique called a “grantor retained annuity trust” or “GRAT.” In general, the lower the interest rate, the more effective the transaction is for reducing estate taxes.

For more information, see the full listing from the IRS here.

On Nov. 2, 2017, House Republicans released their long-awaited tax reform bill called “The Tax Cuts and Jobs Act.” The bill contains sweeping changes in a variety of areas and expands upon, and in some cases changes, what was included in the “Unified Framework for Fixing Our Broken Tax Code,” released in September 2017 (discussed here).

Unlike the framework, there is much more detail in the bill about the possible future of the estate tax, generation-skipping transfer (GST) tax, and gift tax. The following is a brief summary of the estate planning-related changes proposed in the bill.

Estate tax

The applicable exclusion amount will be doubled from $5 million (as of 2011) to $10 million, which, as before, is indexed for inflation. This means that in 2018, an individual would have the ability to transfer $11.2 million estate tax free instead of the $5.6 million that will be allowed under current law. The estate tax rate will continue with a highest marginal rate of 40 percent for estates in excess of the applicable exclusion amount. This will continue through 2023, and in 2024, the estate tax will be repealed in total.

GST tax

As with the estate tax, the GST tax exemption amount will be doubled from $5 million (as of 2011) to $10 million, indexed for inflation. This means that in 2018, $11.2 million would be able to be transferred GST tax free instead of the $5.6 million that will be allowed under current law. This too will continue through 2023 with the GST tax at a flat rate of 40 percent. In 2024, the GST tax will be repealed.

Gift tax

The gift tax will continue with the annual exclusion amount being $14,000 (for 2017), and a lifetime exemption amount increased to $10 million, both indexed for inflation. Thus, under the bill, in 2018 the annual exclusion will continue at $15,000 per year, as under current law, but an individual would be able to transfer $11.2 million gift tax free as opposed to $5.6 million. The gift tax rate would continue with a highest marginal rate of 40 percent through 2023. However, the gift tax would not be repealed in 2024 like the estate tax and GST tax. The top gift tax rate will be lowered to 35 percent beginning in 2024, and the lifetime exemption amount will continue to be indexed for inflation.

Basis step-up

As with the current law, assets included in the decedent’s estate will continue to receive an adjustment to basis at death, even after the estate tax is repealed.  

The bill likely will see many changes as it continues through the legislative process. On Nov. 6, 2017, the House Ways and Means Committee will start a multi-day “mark-up” of the bill. The Senate will start a similar process in the next few weeks led by the Senate Finance Committee. Both chambers hope to pass a final bill by year end.

We will continue to monitor the situation and will let you know of any new developments.

October 16–22 is National Estate Planning Awareness Week. During this week, many people are reminded that estate planning involves the creation of documents such as trusts, wills, financial powers of attorney, and health care powers of attorney to allow for the handling of their financial and health care decisions during life and after death. There are other aspects of estate planning that deserve to be highlighted as well that are no less significant than the creation of these basic documents.

Below are some of the areas of estate planning we can help with:

• Reviewing documents every five years or after a major life event (marriage, divorce, interstate move, death of a family member, birth of a family member) to ensure they remain consistent with your intent
• Formation of closely held businesses
• Business succession planning
• Prenuptial and postnuptial agreements
• Charitable giving, including the creation of a foundation
• Modification of irrevocable trusts
• Tax planning (income, estate, gift, generation skipping transfer tax)
• Planning for special needs individuals
• Advising trustees and other fiduciaries regarding proper trust administration
• Planning for non-citizen spouses
• Guardianships and conservatorships, for minors and for incapacitated adults who do not have financial and health care powers of attorney documents in place
• Administration of trusts and estates
• Filing estate and gift tax returns and fiduciary income tax returns

The Trump Administration, along with the Senate Committee on Finance and the House Committee on Ways and Means, on Sept. 27, 2017, released the “Unified Framework for Fixing Our Broken Tax Code.” The framework is a consolidation of earlier proposals including the 2018 budget plan and the one-page memo previously released, as well as the Tax Reform Tax Force Blueprint released by House Republicans in 2016.

The framework generally provides as its goal changes to the tax code to provide tax relief for middle-class families, allow for simplified “post card” tax filing, tax relief for businesses, an end to incentives that ship jobs and capital and tax revenue overseas, and seeks to broaden the tax base by stopping special interest tax breaks and closing certain loopholes.

However, also like the other proposals, the framework is short on details. As it states, the proposal is meant to provide a template for the tax-writing committees to prepare tax reform legislation.

The complete proposal can be found here.

With respect to estate tax repeal, the proposal provides only the following: “Death and Generation-Skipping Transfer Taxes: The framework repeals the death tax and the generation-skipping transfer tax.”

As we have seen with the other proposals, left unaddressed is what exactly is meant by the “death tax,” the future of the gift tax, whether or not a carry-over basis regime would be implemented in the absence of an estate tax, or if capital gain could be recognized at death. (See this earlier Q&A on the future of the estate tax).

In addition, there is much uncertainty as to whether a tax reform plan can even be passed in the near future – especially after several failed attempts at repealing the Affordable Care Act (Obamacare). Despite being the minority party in the House and Senate, the Democrats retain the ability to filibuster legislation, requiring compromise on both sides. However, it is possible the Republicans could ultimately pass tax reform as budget reconciliation legislation, which, under what is called the Byrd rule, would need to sunset after 10 years (recall President George W. Bush’s sunset provision on his 2001 tax reform). Under the Byrd rule, any reconciliation legislation that increases the federal deficit beyond a 10-year term is subject to a point of order that can only be waived by 60 votes. As a result, a budget reconciliation bill with any hope of passing will provide for only a 10-year budget, resulting in a 10-year sunset.

Thus, even if the estate tax is repealed, the repeal will likely not be permanent. This will require that any planning consider that the estate tax may not be gone permanently, possibly opening the door to different, creative planning opportunities in light of the 10-year window.

We will continue to monitor the situation and will let you know of any new developments.

In many cases, determining the beneficiaries of your estate plan is simple. If your spouse survives you, your assets go to your spouse. If your spouse doesn’t survive you, your assets are split equally among your children. But choosing who will ultimately receive your assets and in what proportions is only part of the process. Another part of it is deciding how the beneficiaries receive those assets.

Most people initially assume they will give assets to their spouse and children outright to keep it simple. For example, if your spouse survives you, your assets go outright to your spouse. If your spouse doesn’t survive you, then your assets are split equally among your children, to be distributed to them outright. Another option is to give assets to your beneficiaries in a continuing trust – meaning that you name a trustee to own the assets, invest them, and distribute them to the beneficiary over time according to the trust’s terms. After discussing the advantage of trusts with their attorneys, many people even give assets to their beneficiaries in lifetime trusts – trusts that last for the lifetime of their respective beneficiaries. The terms for these trusts can be written directly into your estate plan; they do not have to be created separately.

There are significant advantages to leaving assets to your beneficiaries in trust, some of which are set forth below.

Protection in Divorce. In most states, including Missouri and Illinois, an inheritance is not subject to division as marital property in divorce. However, with an outright distribution, it is easy for inherited assets to find their way into joint accounts or to become combined with other joint assets to become “commingled” and as a result, subjecting them to division as marital property. However, with a lifetime trust, it is much easier to keep the inherited assets separate from marital property, as the assets that remain in trust must remain in separate accounts that are titled in the name of the trust.

Protection from Creditors. A discretionary lifetime trust that contains a spendthrift provision, a clause prohibiting the assignment of the interest to creditors, will generally protect the trust assets from attachment by the beneficiary’s creditors. Assets held outright are not protected from the owner’s creditors.

Continued Control over the Disposition of the Assets. You can continue to have some say in where the assets go upon the death of the beneficiary of a lifetime trust. That is, you can continue to protect your legacy by, for example, directing that the remaining assets go only to your descendants or to charities. To provide some flexibility, you can give your beneficiary the ability to alter how those assets are divided and distributed by giving the beneficiary the power to appoint, or direct, the assets as they wish if the beneficiary desires that certain of your descendants need more than others (for example, a beneficiary with special needs).

Incapacity of the Beneficiary. In the event of a beneficiary’s incapacity, assets held by a beneficiary outright may be subject to a court-ordered conservatorship. However, with a lifetime trust, the trustee will continue to be able to administer the assets for the beneficiary, without court involvement. If the beneficiary was the initial trustee, the successor trustee simply takes over when the beneficiary can no longer serve.

Tax Benefits. If there is a risk that the beneficiary’s estate may be subject to estate taxes, a properly structured lifetime trust will allow the assets to pass to the beneficiary’s descendants without the beneficiary paying estate tax. Assets held outright are always subject to estate tax.

Beneficiary as Sole Trustee. The foregoing advantages will continue to apply even if the beneficiary is named as the sole trustee of his or her lifetime trust. While this is not always prudent planning, this will give the beneficiary much more control over the assets while not giving up the advantages of a trust.

What’s the catch? There are some differences in how a trust, as opposed to an outright inheritance, must be administered. Most of the differences are related to the trustee’s duties and legal requirements, such as filing separate income tax returns for the trust each year, managing the investments of the trust prudently, keeping accurate accounting records, and following the terms of the trust closely. Because of these additional requirements, and at times additional costs, lifetime trusts are not right for every situation or beneficiary. That said, for many beneficiaries, the benefits of trusts can far outweigh the costs or burdens of administration.

Other benefits, like planning with retirement benefits or structuring lifetime trusts to help those with special needs to qualify for governmental benefits, are also available. Please contact the attorneys in our Trusts & Estates group if you would like to discuss in more detail how you can incorporate discretionary lifetime trusts into estate planning.

The Internal Revenue Service has released the Applicable Federal Rates (AFRs) for October 2017. AFRs are published monthly and represent the minimum interest rates that should be charged for family loans to avoid tax complications.

Here are the rates for October 2017:

The Section 7520 interest rate for October 2017 drops to 2.2 percent. The Section 7520 interest rate is the interest used in a common estate tax planning technique called a “grantor retained annuity trust” or “GRAT.” In general, the lower the interest rate, the more effective the transaction is for reducing estate taxes.