Archive for the ‘Law’ Category

Tax Reform Highlights

The most significant change to the US tax code in 30 years (since 1986) was approved by Congress and signed by the President just in time for Christmas…

Image result for overhaul  Image result for overhaul     Image result for enacted

SO, WHAT DOES IT CHANGE?

Corporate (permanent) and Pass Through Entity (temporary) Income Tax:

Corporate Tax Rates are reduced from 35% to 21%.

Business Income from Pass Through Entities: provides for a 20% deduction for individuals and trust and estates on domestic qualified business income from pass-through entities.

  • Effectively reduces the top tax rate for those eligible to 29.6% (f
  • Wages paid to owners and certain income from specified service businesses (i.e. attorney and accounting firms) are excluded from the deduction.

Individual Income Tax: Temporary (most)

Individual Tax Top Rate is reduced from 39.6% to 37%.

Other Individual Tax Rates are changed as follows:*

Standard Deduction for Single Individuals is increased from $6,500 to $12,000.

Standard Deduction for Married Couples is increased from $13,000 to $24,000.

Personal Exemption is reduced from $4,050 to $0.

For Those Who Itemize:

State and Local Tax Deduction and Real Property Taxes – capped at $10,000.

Cap on Deduction for Mortgage Interest decreases from $1,000,000 to $750,000 (mortgages prior to 2018 are grandfathered under the $1,000,000 limit).

Home Equity Line (HELOC) – interest no longer deductible, whether new or existing loans.

Charitable Contribution Deduction – AGI limit for cash contributions is increased from 50% to 60%.

Alimony – not deductible to the payor and not taxable to the payee after 2019.  Applies to divorce or separation agreements executed (or modified) after December 31, 2018.

All other deductions are disallowed, e.g., unreimbursed employee expenses, investment advisory fees, tax preparation fees, etc.

Individual Mandate for Health Insurance: Eliminates the coverage/penalty requirements as of 2019.

Transfer Tax:

Gift/Estate/GST Tax Exemptions: doubles the basic exclusion amount from $5 to $10 million.

  • For 2018, the inflation adjusted amount will equal around $11.2 million (or $22.4 million per married couple.
  • On January 1, 2026, the basic exclusion amount will return to $5 million, as indexed for inflation from 2010 to 2026.
  • “Clawback” unlikely.

What doesn’t it change?

Individual Income Tax:

Long Term Capital Gains and Qualified Dividends is retained at 0%, 15% and 20% (top rate).

Net Investment Income Tax is retained at 3.8%.

Gain on Sale of Principal Residence – Exclusion still allowed for gain up to $250,000 (single) and $500,000 (joint) on sale of principal residence.

Transfer Tax:

Transfer Tax rate (Gift, Estate and GST) is retained at 40%

Step Up in Basis remains unchanged.  Meaning estate assets will continue to receive an income tax basis step up (or down) to the asset’s fair market value at a decedent’s death.

Almost all of these changes will sunset in 2026.  The corporate changes are permanent.

(*chart credits to MBAF)
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Women are Better at Estate Planning then Men

Joke Wallpapers - Wallpaper Cave

I stumbled upon this joke:

Dan was a single guy living at home with his father, and working in the family business. When he found out he was going to inherit a fortune when his sickly father died, he decided he needed a wife with whom to share his fortune.

One evening at an investment meeting, he spotted the most beautiful woman he had ever seen. Her natural beauty took his breath away. “I may look like just an ordinary man,” he said to her, “but in a short time my father will die, and I’ll inherit 20 million dollars.” 

Impressed, the woman obtained his business card and three days later, she married his father.

 

 

“Durable Power of Attorney”

sunshine-stealth-by-attorneycavanaughEvery complete estate plan should include a Durable Power of Attorney.  A Durable Power of Attorney is a document where you give another person the authority to act on your behalf.  This person is called the attorney-in-fact. 

The attorney-in-fact will have the legal authority to make certain decisions on your behalf (similar to them “stepping into your shoes” for that decision”).   Even though another person has the authority to make decisions on your behalf, does not mean that you cannot make such decisions for yourself.  The Power of Attorney is only giving another person the right to act on your behalf in case you are otherwise occupied or unable to handle your affairs.

For example, if you are in the hospital, the person you name as yourhusband-by-jorielom attorney-in-fact can take care of important legal and financial matters for you, e.g., paying bills, depositing checks, etc.

The Durable Power of Attorney can take effect immediately or upon your incapacity (“Springing Durable Power of Attorney”).

The Durable Power of Attorney can be revoked by you at any time for any reason.

A Durable Power of Attorney cannot be executed if you are mentally incapacitated because at the time of execution you must know and understand what you are doing.

If you do not have a Durable Power of Attorney and you are unable to handle your affairs (e.g., become incapacitated), your loved ones will be required to go to court to get authorized to handle your affairs.  The court case can be lengthy and costly, as well as emotionally draining.  Therefore, taking the time now to execute a Durable Power of Attorney is worth the minimal effort it takes.

The “Revocable Trust”

zacharias-legal-document-collection-by-idt-downtown-campusA Revocable Trust is an instrument that can help you avoid probate.  Probate is the process where a court oversees the distribution of your assets at your death (i.e., the property/money that belonged to you at the time of your death).  Probate can be a very expensive process depending on the size of your estate and the expense of an attorney.

You can revoke or amend your Revocable Trust at anytime, which means you can take back the property held in trust or you can change the terms of the Trust.  Please understand that because you have total control over the property in the Trust your creditors can get to the property during your life, though it may be more difficult for the creditors to reach the property because a legal action must be initiated by the creditor.

For a Revocable Trust to be effective in avoiding probate, you must transfer assets to the Trust during your lifetime, as the Trust must be the legal owner of the assets at your death, not you.  Many people create Revocable Trusts, but never transfer their assets to them; therefore, making the Trust ineffective for probate avoidance purposes.

Another benefit to a Revocable Trust is its ability to provide creditor and spouse protection for the beneficiaries.  If you have children and are worried about their spouse or their debts a Revocable Trust could be a very useful tool to protect the property held in Trust from the beneficairy’s spouse and creditors.

Another very important aspect of a Revocable Trust is Privacy!!  A Will becomes public record when you die.  Also, a Revocable Trust lets you plan for your disability whereas a Will is only effective at your death.

legal-research-by-gwilmore(Please see my blogpost “Why You Need a Will”. Usually when planning with a Revocable Trust, we also draft a Pour Over Will to make sure any assets that remained outside the Trust are transferred to the Trust at your death and the Will also controls the guardianship of your minor children).

Flickr credits: IDT Downtown Compus Library and  gwilmore

Federal Transfer Taxes

irs3Federal Transfer Taxes include the estate tax, gift tax and generation skipping transfer tax (the “Three-Part Transfer Tax System”). Changes were made to the Three-Part Transfer Tax system by the Economic Growth and Tax Relief Reconciliation Act of 2001 (the “Act”), which was signed into law by President Bush on June 7, 2001. The Act had the effect of reducing transfer taxes (by decreasing the rate of tax and increasing the exemption amount) from December 31, 2001 through December 31, 2009, with a “repeal” of the estate tax and generation skipping transfer tax in 2010. The repeal will only be effective for deaths occurring during calendar year 2010, i.e., no estate or generation skipping transfer (“GST”) tax will be due for persons dying in year 2010.

For calendar years after 2010, the estate and GST tax system in effect prior to the Act will be reinstated. However, the gift tax will not be repealed, but rather the exemption for lifetime gifts made after December 31, 2001 is increased to $1 million and remains at that level for all future years. The following is an explanation of the Three-Part Transfer Tax ystem “pre-Act” and “post-Act”; an explanation of both systems is necessary, because the pre-Act law will be reinstated as of January 1, 2011 unless a new Act is signed into law by President-elect, Obama.

irs21Pre-Act Law:

The Three-Part Transfer Tax System is based on the value of property and money transferred to others, either during lifetime or at death. Two components of this Three-Part System Transfer Tax System, the gift tax and the estate tax, are part of a unified method of transfer taxation whereby the aggregate value of both lifetime and death-time gifts was subject to a single graduated tax. Viewed as a unified system, the federal gift tax begins at 18% on the first $10,000 of taxable gifts and increases to 55% for the aggregate value of transfers in excess of $3 million. The “unified credit” permits an individual to make taxable transfers by gift during life or at death to the extent of $1 million in value without having to pay the federal gift and/or estate tax on such transfers. However, the first dollar subject to the payment of the gift or estate tax would be taxed at a rate of 37%.

Any federal gift tax payable on lifetime transfers generally must be paid by April 15thirs4 of the year following the year of the gift, or, with respect to federal estate taxes, within nine months after the date of death. Extensions to filing the transfer tax return are permitted upon a showing of reasonable cause.

In addition to federal gift and estate taxes, the third component of the Three-Part System Transfer Tax System is the generation-skipping transfer tax (“GST” tax). The GST tax is imposed on a transfer of property from one generation to another generation that is two or more generations below the transferor’s generation. For example, if you give assets directly to your grandchild, such gift would be subject to the GST tax. The GST tax is a flat 55% and it is in addition to the gift tax imposed on lifetime gifts or the estate tax imposed on bequests made at death. The GST tax was designed to prevent individuals from avoiding federal estate tax on each generation by only providing family members with life interests in a perpetual trust. Similar to the unified credit for the gift and estate tax, there is a separate lifetime exemption of $1 million from the GST tax for each individual.

Post-Act Law: A summary of the changes to the Three-Part Transfer Tax System is provided in the following chart (please note the exemption for federal gift tax has not changed, it is and will remain $1,000,000):

Year

Estate Tax and GST Tax Exemption for Death Time Transfers

Maximum Estate, Gift and GST Tax Rate

2009

$3,500,000

45%

2010

Estate & GST taxes repealed

highest individual income tax rate will apply for gift tax only

2011

$1,000,000

55%

Due to these changes, your estate planning documents IRS Building should be reviewed every few years as the exemption amounts change to ensure that the tax planning contained therein continues to apply to your individual situation. President-elect Obama has indicated his desire to maintain the $3,500,000 exemption for estate and GST Tax. Please note the estate and gift tax are still unified, e.g., if you make 1 million dollars of lifetime gifts and use your entire $1,000,000 gift tax exemption, then you will only have 2.5 million of the estate tax exemption remaining at your death.

“The Importance of a Will”

lastwill1If you want to decide who receives your property and/or money at your death and who will be the guardian of your minor children if you die, THEN you NEED a WILL!

Regardless of how much money you have, executing a Will ensures that whatever you do own will be distributed to the person or persons of your choosing.  If you die without a Will, then the State where you reside will determine who receives your money and property.

Even more importantly, you NEED a Will if you have minor children.  Without a Will the guardianship of your child(ren) will be handled though an expensive, complicated and possibly emotional court case.  The court will ultimately decide who will be the guardian of your child(ren).  By executing a Will, you can choose who will raise your child(ren), not the courts.

lastwill2

Once you execute a Will you should review it every coupe of years.  You can revoke or amend your Will at any time.

Greater than 1/2 of Americans do not have a Will.  Do not be one of them.

There are many online companies offering quick and cheap Wills.  However, if you have a size-able or complicated estate you should consult an attorney to make sure your estate is handled in the best manner possible at your death.  Also, to receive the best tax planning you should consult an attorney.

Flickr credits: Isabella Perry (“Last Will & Testament”) and SPAM_King (“Man with Last Will”)

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