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What You Need to Know About Estate Taxes

Most Americans don’t have to worry about federal estate and gift taxes. However, if you’re even moderately wealthy and want to transfer wealth to your children and grandchildren, you’ll want to know how to protect your ability to pass wealth to the next generation. A recent article from Woman’s World, “If You’re Rich, Read This—Your Estate Taxes Could Be at Stake (And Your Kids at Risk of Losing Their Inheritance” provides a good overview of estate taxes. If any of these issues are relevant to you, meet with an experienced estate planning attorney to learn how your state’s tax laws may impact your children’s inheritance.

A well-created estate plan can help you achieve your goals and minimize tax liability. There are three types of taxes the IRS levies on gifts and inheritances.

Few families worry about federal estate taxes for now. However, this will change in the future, and planning is always wiser. In 2023, the federal estate tax exemption is $12.92 million. Estates valued above this level have a tax rate of 40% on assets. People at this asset level usually have complex estate plans designed to minimize or completely avoid paying these taxes.

An estate not big enough to trigger federal estate taxes may still owe state estate taxes. Twelve states and the District of Columbia impose their own state taxes on residents’ estates, ranging from 0.8 percent to 20 percent, and some have a far lower exemption level than the federal estate tax. Some begin as low as $one million.

Six states impose an inheritance tax ranging between 10 percent and 18 percent. The beneficiary pays the tax, even if you live out of state. Spouses are typically exempt from inheritance taxes, which are often determined by kinship—sons and daughters pay one amount, while grandchildren pay another.

Taxpayers concerned about having estates big enough to trigger estate or inheritance taxes can make gifts during their lifetime to reduce the estate’s tax exposure. In 2023, the federal government allows individuals to make tax-free gifts of up to $17,000 in cash or assets to as many people as they want every year.

A couple with three children could give $17,000 to each of their children, creating a tax-free transfer of $102,000 to the next generation ($17,000 x 3 children x 2 individuals). The couple could repeat these gifts yearly for as long as they wished. Over time, these gifts could substantially reduce the size of their estate before it would be subject to an estate tax. It also gives their heirs a chance to enjoy their inheritance while their parents are living.

It should be noted that gifts over $17,000 in 2023 count against the individual estate tax limit. Therefore, your federal estate tax exemption will decline if you give more than the limit. This is why it’s essential to work with an estate planning attorney who can help you structure these gifts and discuss other estate tax and asset protection strategies.

Reference: Woman’s World (April 5, 2023) “If You’re Rich, Read This—Your Estate Taxes Could Be at Stake (And Your Kids at Risk of Losing Their Inheritance”

Will Proposed Tax Hikes Have an Impact on My Estate Planning?

President Biden’s tax proposals are at the center of what the White House estimates is a $3 trillion deficit-reduction plan. They will be immediately rejected by Congressional Republicans. However, the ideas set up Democrats’ approach to the debt-ceiling fight later this year, as Republicans are gearing up to ask for spending cuts.

A major change would almost double the rate of the capital-gains tax, and applying an additional surcharge to fund Medicare, which would mean taxes on investments could rise to almost 45%.

Bloomberg’s recent article entitled, “In Biden’s Tax-the-Rich Budget, Capital-Gains Rates Near 45%,” examines the details of the tax proposals in the budget request that the White House released recently.

Capital Gains. The budget proposal would jump the capital-gains rate to 39.6% from 20% for those earning at least $1 million to equalize the taxation of investment and wage income. President Biden also wants to up the 3.8% Obamacare tax to 5% for those earning at least $400,000 to support the Medicare Trust Fund. As a result, the richest would pay a 44.6% federal rate on investment income and other earnings. The plan also calls for taxing assets when an owner dies. This would end a tax benefit that let the unrealized appreciation go untaxed when transferred to an heir.

Corporate Taxes. Trump’s 2017 corporate tax cut would get significantly rolled back, bringing the top rate to 28% from 21%. The proposal also calls for increasing the taxes US companies owe on their foreign earnings to 21%, doubling the 10.5% included in Trump’s tax law.

Carried Interest. The carried-interest tax break used by private equity fund managers to lower their tax bills would be struck under the Biden plan. Under current law, investment fund managers can pay the 20% capital-gains rate on a portion of their incomes that would otherwise be subjected to the 37% top individual-income rate.

Rich Retirement Accounts. The plan would close a loophole that allows the wealthy to accumulate savings in tax-favored retirement accounts intended for middle earners. In addition, Biden would limit the amount taxpayers with incomes over $400,000 can hold in Roth individual retirement accounts.

Estate, Gift Taxes. Bolstering the tax rules on estate and gift taxes would make the system harder for the wealthy and trusts to avoid taxes.

Reference: Bloomberg (March 9, 2023) “In Biden’s Tax-the-Rich Budget, Capital-Gains Rates Near 45%”

How Do Inheritance and Estate Taxes Work?

The federal estate tax has continued to increase. In 2023, the federal estate tax only applies to estates worth more than $12.92 million. For a married couple, the exemption is $25.84 million, explains a recent article from The Alliance Times-Herald, “Estate, Inheritance Taxes.” Some people believe there should not be a federal estate tax, since anyone with enough assets to pay it also has the resources to avoid paying it.

Every year, married couples can give away a large amount of tax-free gifts to other people, including family members. The annual gift tax limit is currently $17,000 per person, so a married couple may gift $34,000 in annual tax-free gifts, reducing the value of their taxable estate ad benefiting their beneficiaries.

Estate taxes can also be avoided through the use of trusts. Most trusts give the surviving spouse rights to the assets with no estate tax on the assets put into the trust. For example, the surviving spouse may draw income from the trust, live in the house, etc. When the surviving spouse dies, the trust assets are then distributed to beneficiaries.

A charitable trust names a charitable organization as the beneficiary of the trust assets. Assets in the charitable trust can include cash, stocks, real estate and other property. Extremely high-net-worth families benefit from the use of foundations to own assets.

A Family Limited Partnership (FLP) is useful, since it allows family members to pool assets and then shift them to other family members. This is commonly seen in privately held family businesses and agriculture. Assets in an FLP transferred to others are removed from the estate, with significant estate tax savings. They are also used as a strategy to transition family farms from one generation to the next. The older generation manages the operation at first, and the younger generation, over time, can take over the operation.

Six states are still collecting inheritance taxes, Pennsylvania and Nebraska among them. Inheritance taxes are not calculated on the estate’s total but on the amount paid to each person who receives something from the estate.

Inheritance taxes are levied on property inherited from parents, siblings, extended family and non-relatives. Only spouses are exempt. Tax amounts are typically based on the kinship relationship between the beneficiary and the deceased.

Families don’t have to be extremely wealthy to use trusts to protect assets from state estate taxes. They are also helpful when the family wishes to maintain their privacy, since assets held in trust do not go through probate and will not become part of the public record.

For families with privately owned businesses of any size, an experienced estate planning attorney can help create a Family Limited Partnership to work with the rest of the family’s estate plan. This will ensure the family business passes to the next generation without conflicting with the estate plan.

Reference: The Alliance Times-Herald (March 22, 2022) “Estate, Inheritance Taxes”

Protecting Digital Assets in Estate Planning

The highly secure nature of crypto assets results largely from the lack of personally identifiable information associated with crypto accounts. Unfortunately, this makes identifying crypto assets impossible for heirs or executors, who must be made aware of their existence or provided with the information needed to access these new assets.

The only way to access crypto accounts after the original owner’s death, as reported in the recent article “Today’s Business: Cryptocurrency and estate planning” from CT Insider, is to have the password, or “private key.” Without the private key, there is no access, and the cryptocurrency is worthless. At the same time, safeguarding passwords, especially the “seed” phrases, is critical.

The key to the cryptocurrency should be more than just known to the owner. The owner must never be the only person who knows where the passwords are printed, stored on a secreted scrap of paper, on a deliberately hard-to-find thumb drive, or encrypted on a laptop with only the owner’s knowledge of how to access the information.

At the same time, this information must be kept secure to protect it from theft. How can you accomplish both?

One of the straightforward ways to store passwords and seed phrases is to write them down on a piece of paper and keep the paper in a secure location, such as a safe or safe deposit box. However, the safe deposit box may not be accessible in the event of the owner’s death.

Some people use password managers, a software tool for password storage. The information is encrypted, and a single master password is all your executor needs to gain access to secret seed phrases, passwords and other stored information. However, storing the master password in a secure location becomes challenging, as information cannot be retrieved if lost.

You should also never store seed phrases or passwords with the cryptocurrency wallet address, which makes crypto assets extremely vulnerable to theft.

This information needs to be stored in a way that is secure from physical and digital threats. Consider giving your executor, a trusted friend, or relative directions on retrieving this stored information.

Another option is to provide your executor or trusted person with the passwords and seed phrases, as long as they can be trusted to safeguard the information and are not likely to share it accidentally.

Passwords and seed phrases should be regularly updated and occasionally changed to ensure that digital assets remain secure. If you’ve shared the information, share the updates as well.

A side note on digital assets: the IRS now treats cryptocurrency as personal property, not currency. The property transaction rules applying to virtual currency are generally the same as they apply to traditional types of property transfers. There may be tax consequences if there is a capital gain or loss.

Properly safeguarding seed phrases and other passwords is essential to estate planning. Include digital assets in your estate plan just as a traditional asset.

Reference: CT Insider (March 18, 2023) “Today’s Business: Cryptocurrency and estate planning”

Get These Estate and Tax Items Done Before It’s too Late

This year, tax day falls on April 18 because of the weekend and because the District of Columbia’s Emancipation Day holiday takes place on April 17. Don’t let these extra days go to waste, says a recent article from Investment News, “Top things for estate planners to do before Tax Day 2023.”

Now that the SECURE 2.0 Act has taken effect, there’s much to do before the April 18 deadline. Taxpayers should review their wills and trusts to confirm that their wishes are effectively stated. However, there’s more this year. Asset valuations, family circumstances and changed laws are all reasons to review these documents. While you’re preparing taxes and reviewing net worth statements is also an excellent time to review IRA Required Minimum Distributions (RMDs), and beneficiary designations and make an appointment to review your estate plan in light of current estate planning laws.

Current federal estate, gift and generation-skipping transfer tax exemptions are currently $12,920,000, while the current federal generation-skipping transfer tax exemption is also $12,920,000. This changes dramatically on January 1, 2026, when both numbers will be cut in half. Therefore, planning needs to be done well before the dates when these exemptions shrink.

Wealthy married couples may consider using the Spousal Lifetime Access Trust. This allows the couple to gift their increased exemptions before the reduction in 2026. If the trust is drafted properly, spouses will remain in a similar economic position as long as both spouses are alive and married to each other. The SLAT benefits the donor’s spouse, while also taking advantage of these high exemptions. For example, Betty creates and gifts assets to a SLAT. Depending on the terms of the SLAT, her husband Barney will receive income and possibly principal. While Barney is still alive and married to Betty, their lifestyle remains intact.

When Barney dies, all amounts payable to Barney end and the trust assets pass to the following or remainder beneficiaries named in the document. They may receive the trust assets outright or in further trusts. For example, the assets are held in trust for Betty’s children for their lives, and Betty’s GST is allocated to the SLAT. If the trust is created in this way, the children receive income and principal during their lives, and the trust may continue for Betty’s grandchildren without being taxed in their respective estates.

The IRS has issued guidance stating that, with certain exceptions, most completed gifts made now will not be subject to a clawback if the taxpayer dies after exemptions are reduced.

Various states have their own additional estate, gift and/or inheritance taxes and exemptions.  Your estate planning attorney will be able to explain what state-specific laws apply to your situation.

For families whose wealth is tied up in real estate property, assets can be titled differently to lower taxable estates. For example, transferring a home to a Qualified Personal Residence Trust can remove the asset from the taxpayer’s estate, while only a fraction of the home is counted as a gift. However, after the QPRT term, the grantor must pay rent to keep the home outside their estate.

For commercial property, contributing the property to an entity and then making gifts of partial interests in the entity may be helpful. However, the gifts of a portion of the entity may qualify for discounts for lack of control and marketability.

These are just a few steps to be taken before tax day 2023 and before the high exemption levels revert to pre-JCTA levels. Your estate planning attorney will know which steps are more effective for your family.

Reference: Investment News (Feb. 27, 2023) “Top things for estate planners to do before Tax Day 2023”

What Strategies Minimize Estate Taxes?

The gift and estate tax benefits from the Tax Cuts and Jobs Act (TCJA) are still in effect. However, many provisions will sunset at the end of 2025, according to a recent article “Trust and estate planning strategies” from Crain’s New York Business.

The most important aspect for estate planning was the doubling of the estate, gift and generation-skipping transfer tax exemptions. Adjusted for inflation, the current federal estate, gift and GST exclusion is $12.92 million in 2023. This is more than double the pre-TCJA amount, which will return in 2026, unless Congress makes any changes.

While these levels are in effect, there are strategies to consider.

  • Maximize gifting up to the 2023 annual exclusion of $17,000 per taxpayer, or $34,000 for married couples.
  • Depending on the value of the entire estate, consider strategies to keep it below the current exemption among of $12.92 million or $25.84 (married). If the estate is less than the exemption amount, no federal estate tax will need to be paid.
  • Plan charitable giving, including charitable IRA rollovers to make the most of the deduction on 2023 income tax returns. Qualified charitable distributions made directly from an IRA could be used to satisfy Required Minimum Distributions (RMDs) and exclude them from taxable income.
  • Set up 529 Plan accounts for children and/or grandchildren and consider making five years of annual exclusion gifts. Take into account any gifts made during the year to children and/or grandchildren when doing this.
  • Submit tuition or any non-reimbursable medical expenses directly to the school or medical provider to avoid having these amounts count towards the annual or lifetime gift tax exemption.
  • Discuss the use of a Grantor Retained Annuity Trust (GRAT), an irrevocable trust created for a certain period of time. Assets are placed in the trust and an annuity is paid out every year. When the trust expires and the last annuity payment is made, assets pass to beneficiaries outright or remain in a trust for beneficiaries.
  • Ask your estate planning attorney if a Qualified Personal Residence Trust is a good fit for you. This is an irrevocable trust allowing homeowners to transfer their home at a significantly discounted rate.
  • Explore intrafamily lending, which is used to transfer partial earnings to family members without lowering the lifetime estate tax exemption or triggering gift taxes.
  • Re-evaluate insurance coverage, which can provide opportunities to defer or avoid income taxes, or both, and provide assets to pay estate taxes or replace assets used to pay estate taxes.

Not all of these steps will be appropriate for everyone. However, understanding the options and discussing with your estate planning attorney will ensure that you are using the most effective strategies to achieve wealth preservation.

Reference: Crain’s New York Business (Feb. 13, 2023) “Trust and estate planning strategies”

What Is an Estate Planning Checkup?

The start of the year is the time to review and revisit your estate plan. Just like going to the doctor and dentist for regular exams, it’s basic self-care. A recent article from Kiplinger, “Need an Estate Planning Checkup? Now is the Perfect Time,” advises having an annual checkup with your estate planning attorney before anything goes wrong.

Estate planning is about people. It ensures that loved ones will be protected when we are no longer here. It names someone we trust to administer our estate and follow our wishes. It also ensures that no one is left out or no one is wrongfully included.

After the holiday season of family gatherings is a good time to review the family situation. Children have grown into adulthood. Perhaps they’ve married and had children. What we planned to leave for them as minors may be different now. If your family suffered a loss last year, it may be time to reallocate funds or change beneficiaries.

This is the time to evaluate who you have named as an executor or entrusted with powers of attorney. They may have had their own health issues, suffered memory loss, or undergone their own life changes. These should also be reviewed when creating a new will or trust.

Property values have probably changed over the years. Real estate acquired decades ago may have appreciated far more than anticipated. If the intent is to leave equal shares of assets to beneficiaries, the new value of the property needs to be considered.

Depending on your assets, you may need to engage an expert to provide current valuations for real property, artwork and any other high-value assets. If you expect to see significant changes in the coming year, from selling property or making other adjustments, don’t wait until next year to order a new valuation. The more current your numbers, the better your estate plan.

Tax laws have changed a great deal in recent years. An experienced estate planning attorney will allow you to maximize the estate that you leave. Estate tax and gift taxes have been adjusted for inflation, so you may be able to leave larger gifts to children and grandchildren.

Your estate plan checkup should include a review of recent tax law changes, and a look at the legal environment for the coming year. Discuss how aggressive you want to be with your estate planning. The same goes for life changes which may have legal consequences. All of this needs to be discussed in a candid manner with your estate planning attorney.

You may leave your meeting with a to-do list, or you may find your estate plan still works. Either way, you’ll feel better after your estate plan checkup.

Reference: Kiplinger (Jan. 30, 2023) “Need an Estate Planning Checkup? Now is the Perfect Time”

What’s the Most Common Debt for Retirees?

A recent survey of about 2,000 American retirees between the ages of 62 and 75 found many of them burdened with debt.

Some likely ran out of time to pay off their debts before retiring. Others may have entered the red or simply deepened their debt level after leaving work.

Money Talks News’ recent article entitled “This Is the Most Common Debt Among Retirees — by Far” provides the most common type of debt retirees report — along with other debts that are part of retirement for many people.

  1. Credit card debt. Retirees who said they had this type of debt in 2022 was 40%, compared to 42% in 2020. Credit card debt is almost always expensive, but it’s much worse if you don’t have a regular paycheck to help you pay bills.
  2. Mortgage. Retirees who said they had this type of debt in 2022 was 30%, with no report for 2020. A home loan is one of the few types of borrowing that can be classified as “good debt.” Many experts suggest paying off a mortgage before retirement. but others argue against such a strategy.
  3. Auto loans. Retirees who said they had this type of debt in 2022 was 23%, and in 2020, it was 30%. Unless you saved a bunch, an auto loan is hard to avoid, retired or not. As a result, about a quarter of retirees still are paying off this type of loan.

Retirees said they also are carrying these types of debt in 2022:

  • Medical debt: 11%
  • Home equity loan: 7%
  • Student loan: 4%
  • Business loan: 1%

Reference: Money Talks News  (Jan. 9, 2023) “This Is the Most Common Debt Among Retirees — by Far”

What Is Needed in Estate Plan Besides a Will?

Having a will is especially important if you have young children, says FedWeek’s recent article entitled “Estate Planning Doesn’t Stop with Making a Will.”  In your will, you can nominate guardians, who would raise your children in the event neither you nor your spouse is able to do so.

When designating a guardian, try to be practical.

Remember, your closest relatives—like your brother and his wife—may not necessarily be the best choice.

And keep in mind that you’re acting in the best interests of your children.

Be sure to obtain the consent of your guardians before nominating them in your will.

Also make sure there’s sufficient life insurance in place, so the guardians can comfortably afford to raise your children.

Your estate planning isn’t complete at this point. Here are some of the other components to consider:

  • Placing assets in trust will help your heirs avoid the hassle and expense of probate.
  • Power of Attorney. This lets a person you name act on your behalf. A “durable” power will remain in effect, even if you become incompetent.
  • Life insurance, retirement accounts and payable-on-death bank accounts will pass to the people you designate on beneficiary forms and won’t pass through probate.
  • Health care proxy. This authorizes a designated agent to make medical decisions for you, if you can’t make them yourself.
  • Living will. This document says whether you want life-sustaining efforts at life’s end.

Be sure to review all of these documents every few years to make certain they’re up to date and reflect your current wishes.

Reference: FedWeek (Dec. 28, 2022) “Estate Planning Doesn’t Stop with Making a Will”

What Happens When Property Is Owned Jointly and an Owner Dies?

When property is owned jointly, the property may pass automatically to the other owner, passing without going through probate, according to a recent article titled “Everything you need to know about jointly owned property and wills” from TBR News Media

Your will only concerns assets in your name alone without a designated beneficiary. Let’s say you have a joint checking account with another person. On your death, the account automatically becomes the property of the surviving owner. This is outside of probate, and any directions in your will won’t apply.

Real estate is most commonly owned jointly, in several different ways and each with its own set of laws.

Joint Tenancy or Joint Tenancy with Rights of Survivorship. On the death of a joint owner, the owner’s share goes to the surviving joint owner. Simple. The main advantage is the avoidance of probate, which can be costly and take months to complete.

Tenancy by the Entirety. This type of joint ownership is only available between spouses and is not used in all states. A local estate planning attorney will be able to tell you if you have this option. As with Joint Tenancy, when the first spouse passes, their interest automatically passes to the surviving spouse outside of probate.

There are additional protections in Tenancy by the Entirety making it an attractive means of ownership. One spouse may not mortgage or sell the property without the consent of the other spouse, and the creditor of one spouse can’t place a lien or enforce a judgment against property held as tenants by the entirety.

Tenancy in Common. This form of ownership has no right of survivorship and each owner’s share of the property passes to their chosen beneficiary upon the owner’s death. Tenants in Common may have unequal interests in the property, and when one owner dies, their beneficiaries will inherit their share and become co-owners with other Tenants.

The Tenant in Common share passes the persons designated according to their will, assuming they have one. This means the decedent’s executor must “probate” the will and file a petition with the court. However, a Tenant in Common may be able to avoid probate if their share of the property is held in trust, in which case the terms of the trust and not their will controls how the property passes at death. In this case, there’s no need for any court involvement.

There may be capital gains consequences when transferring ownership interests during and after life. Such gifts should never be made without speaking with an estate planning attorney. One of the more common errors occurs when the testator fails to account for the different types of ownership and how assets pass through the will. A comprehensive estate plan, created by an experienced estate planning attorney, ensures that both probate and non-probate assets work together.

Reference: TBR News Media (Dec. 27, 2022) “Everything you need to know about jointly owned property and wills”

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