Paul Walker, star of the popular movie franchise The Fast and The Furious, died suddenly in 2013. In what seems to be a sad twist of fate, he died in a tragic car accident and was only 40 years old.
When someone we know, or feel like we know, dies in the prime of their life, we can’t help but relate. He was in excellent health, at the top of his professional career, and conceivably had years and years left to live. Most of us and our clients feel like we also have years and years, but as this story demonstrates, we all need to be financially and legally prepared.
It’s too early to know if Mr. Walker was prepared by having an estate plan in place, but if statistics are any indication, he probably did not. This is particularly sad because he had a minor daughter, Meadow Walker, in his care. Not only was he supporting her financially, but she had recently moved to California to live with him.
By all accounts, Paul was a loving and devoted father. It was said that he even accepted or rejected movie roles based on his daughter’s schedule. His desire to stay close so he could raise her full-time was strong.
Paul was like most parents that way. But, I wonder if he was like most parents who thought he had plenty of time to establish and implement his estate plan.
Without an estate plan plan in place, Meadow will most likely move back with her mother, who lives in another state. She will also likely inherit her father’s sizable estate, at age 18, outright and unrestricted.
If this devoted father had put a Will and Trust in place, he probably would have designated someone responsible to administer his estate until Meadow matured enough to be able to make financially responsible decisions.
Unfortunately, history has shown that making outright gifts of large amounts of money to a very young adult child can be a disaster. Instead of using the money for college or investing the money so that it will be available during one’s whole lifetime, an 18-year-old may often squander an inheritance on luxury cars, vacations, parties….or worse.
The lesson for all of us, and our clients, is that no matter how healthy or wealthy we are, we should take steps to make sure our family will be cared for, financially and legally, if we are no longer able to do it. Putting a Will or Trust in place, to help our loved ones carry on without us, is critical whether clients have the estate of a movie star or are of much more modest means.
If you or your clients would like to learn more about estate planning options and wealth transfer planning strategies, please call us at (610) 977-2443 to arrange a free consultation to discuss the particular estate planning needs for your clients.
Charitable giving in the United States exceeded $316 billion in 2012, so it is no surprise that this continues to be a popular topic when it comes to year-end tax planning. Religious organizations were the major recipients, receiving 32% of the total.
Being charitable has its rewards, both tangible and intangible, but one of them is that a tax deduction is generally available to individuals who itemize deductions on their individual 
income tax returns. While there may be concerns regarding the deductibility of charitable contributions, it should continue to be an important part of year-end tax planning strategies for your clients in 2013. That being said, a tax strategy in and of itself is not a reason to be charitable. A deduction or tax incentive is merely a byproduct of that generosity.
Below are some important guidelines and five (5) ways to engage in charitable giving by the end of this year to be eligible for a potential tax savings. We will then review the impact of the “Pease” limitation on itemized deductions, that applies to high-income individuals and its effect on the deduction for charitable giving.
General Guidelines and Ways to Implement:
Gifts to qualified charitable organizations (see the IRS website for a listing of qualified charities) are deductible on Form 1040, U.S. Individual Income Tax Return, Schedule A, Itemized Deductions. More specifically, contributions to public charities are deductible up to 50% of adjusted gross income (AGI). Gifts to private foundations, on the other hand, are deductible up to 30% of AGI. Deductible contributions constitute a tax savings of the total deduction at the individual’s top marginal income tax bracket. For example, an individual who donates $1,000 and whose marginal tax bracket is 28% would be eligible for a reduction in tax liability of $280.
- Cash Gifts. Many people who consider contributing to a charitable organization automatically think about a cash gift to a local or national organization. This is ideal for clients who may not own appreciated investments, are seeking to be charitable, and who desire to receive a tax deduction. Be careful to note any adjustments that may need to be made to the contribution amount (generally provided by the organization). For example, clients who attend a charity dinner and purchase a $500 ticket, where the fair market value (FMV) of the meal or event was $100, would be entitled to deduct $400 ($500 – $100). Essentially, the deduction would be the amount for which the individual received no benefit, which is the amount representing the individual’s charitable intent.
- Gifts of Appreciated Investments. This can include stocks, bonds, mutual funds, and exchange-traded funds (ETFs). The major benefit of making this type of donation is that in addition to the tax deduction, the client will not recognize a long-term capital gain on the appreciated investment. Remember, however, the asset itself must be gifted to the organization directly. Selling it and giving the cash will not provide the same result. An additional advantage to this strategy is avoiding the new 3.8% net investment income tax. Many high-income taxpayers are subject to this surtax.
- Gifts of Other Appreciated Assets. While this requires a professional appraisal, clients should consider donating appreciated real estate, art, hedge fund investments, or partnership interests to achieve their philanthropic desires. To do this responsibly, both you and your client may want to discuss the intended gift with the donee organization to determine its capacity to receive such a gift. Without such a conversation, a donation that was originally intended to assist a charitable organization may become an undue burden. Many organizations have gift acceptance policies that would facilitate the process.
- Charitable Contributions Directly from an Individual Retirement Account (IRA). The American Taxpayer Relief Act of 2012 (ATRA), P.L. 112-240, extended the qualified charitable distribution provisions for 2012 and 2013. As a result, individuals age 70½ or over may make a charitable contribution directly to a qualified charity from their IRA. This gift will also satisfy any required minimum distribution for the year of the gift. This means the otherwise taxable distribution would become a nontaxable qualified charitable distribution. An IRA owner can exclude from gross income up to $100,000 of a qualified charitable distribution made for a year. Remember that the distribution must be made directly to the charitable organization—it cannot be received by the IRA owner first, which would create a taxable event.
- Consider a Private Foundation or Donor-Advised Fund. If charitable giving has become a major part of a client’s financial plan, consider these additional options for giving. At the most basic level, a donor-advised fund is an account in a public charity, whereas a private foundation is its own charitable organization. Considerations such as level of charitable activity, control over charitable donations and investments, administration, and flexibility will assist clients in determining whether this is an option that makes prudent sense as part of an overall financial and charitable giving plan.
Pease limitation’s effect on charitable contributions:
ATRA revived and modified the Pease limitation (named for the member of Congress who sponsored the original legislation) on itemized deductions for higher-income taxpayers. (The Pease limitation was eliminated for 2010 through 2012.) Under the new Pease limitation, if a taxpayer’s AGI exceeds an applicable amount based on filing status, the amount of the taxpayer’s itemized deductions otherwise allowable for the tax year is reduced by the lesser of 3% of the excess of adjusted gross income over the applicable amount or 80% of the amount of the itemized deductions otherwise allowable for that tax year. For these purposes, itemized deductions do not include medical expenses, investment interest, casualty and theft losses under Sec. 165(c)(2) or (c)(3), and gambling losses under Sec. 165(d). The new Pease limitation “applicable threshold” levels for 2013 are $250,000 for single individuals and $300,000 for married couples filing jointly.
It is important to note that for the majority of clients, the limitations are based on the client’s AGI, not the amount of their itemized deductions. Therefore, it is difficult to attribute the limitation to one deduction over another. A simple example illustrates the limitation’s effect.
Example: A married couple whose AGI is $1 million have $80,000 of potential itemized deductions. The amount above the AGI threshold, $700,000 ($1 million – $300,000), is subject to the 3% limitation; that is, $21,000 ($700,000 × 3%). The couple can now deduct only $59,000 ($80,000 – $21,000) of their itemized deductions. In this scenario, any additional deductible expense over and above the $80,000 would be fully deductible because the maximum limitation of $21,000 is applied without regard to specific deductions.
As part of year-end tax planning for clients in 2013, it is important to have a discussion with clients about their philanthropic desires. Charitable organizations depend on Americans’ generosity, and this is an excellent way to give back while saving taxes at the same time.
How We Can Help You and Your Clients:
If you would like more information about estate planning and charitable giving strategies in order to help your clients to achieve their wealth transfer and charitable giving goals, please visit the Resources section of our website.
To schedule a meeting with Phil Levin at The Levin Law Firm, to discuss the trust and estate planning needs of your clients, please contact Laura or Ginni directly at (610) 977-2443.
The American Taxpayer Relief Act of 2012 permanently increases the top income tax rate from 35% to 39.6% for unmarried taxpayers with income over $400,000 and married taxpayers with income over $450,000; permanently increases the top tax rate for capital gains and qualified dividends from 15% to 20%; caps itemized deductions and phases out the personal exemption for unmarried taxpayers earning $250,000 or more and for married couples earning $300,000 or more; and makes permanent the $5 million gift and estate tax exemption (as indexed for inflation). Add to those changes the 3.8% health care tax on investment income under the Patient Protection and Affordable Care Act of 2010, and there will be a shift in focus to income tax planning.
Following are some of the ways that permanent life insurance will play an important role under the new laws:
- Tax-deferred investments will become increasing popular. Permanent life insurance not only provides tax deferral and tax-free access to cash values (via policy loans and withdrawals up to basis), it also provides an income tax free death benefit. And, if the policy is wrapped inside an irrevocable trust, the death benefit will also be estate tax free. Moreover, particularly for conservative investors, the internal rate of return on life insurance is generally quite competitive.
- Charitably-inclined individuals will consider donating appreciated securities (rather than cash) to charities to avoid the 23.8% capital gains tax on the appreciation. The donor can then use cash to purchase life insurance, which offers tax-free growth and tax-free access to cash values (via policy loans and withdrawals up to basis); and the charitable deduction can help to offset the cost of purchasing the policy.
- With the higher capital gains tax, charitable remainder trusts will be more attractive to potential donors. As such, the income tax savings from using a CRT can be used to pay premiums on a life insurance policy as a “wealth replacement” vehicle for the donor’s children.
- The increase in income taxes will likely increase the demand for non-qualified deferred compensation arrangements. Deferring income for high wage earners until retirement, when they may be in lower tax brackets, may be beneficial. Life insurance remains one of the most popular methods of “informally” funding a non-qualified deferred compensation plan.
- With fewer decedents being subject to estate taxes because of the $5 million exemption ($5.25 million for 2013), an irrevocable life insurance trust (ILIT) may be viewed as less costly and complex than the other planning acronyms (GRATs, SLATs, IDGTs, QPRTs, CLATs, etc.). An ILIT funded with permanent insurance on the grantor’s life, with the grantor’s spouse as the primary beneficiary, will provide an inflation hedge, estate liquidity (if needed), estate tax savings (if needed), plus income tax benefits and financial/retirement planning options. The trustee will be able to use the policy’s cash values for the spouse’s benefit (who can then share those distributions with the grantor).
- The higher gift and estate tax exemption will assist in funding ILITs without the inconvenience of having to use Crummey withdrawal powers. For existing ILITs, consider having the beneficiaries sign a one-time statement waiving the right to future Crummey powers.
In addition to the above, life insurance will continue to provide its traditional uses (e.g., estate liquidity for large estates, buy-sell funding, estate equalization for children not active in a family business, family protection, etc.). But, with the increase in income taxes for the “wealthy”, life insurance now becomes an income tax planning tool as well.
Please feel free to call The Levin Law Firm at (610) 977-2443 to discuss particular client situations and to schedule an appointment for your clients who need to establish and update their estate plans.
On New Year’s Day, Congress approved the first permanent set of estate, gift, and generation-skipping transfer (GST) tax rates and exemptions in twelve (12) years. Despite speculation and attempts over several years focused on options ranging from total repeal to a return to pre-2001 law, the law now made permanent by Congress and the President is identical to 2012 law, as detailed below, except that the compromise top marginal transfer tax rate will become 40 percent rather than 35 percent.
The Senate approved this legislation in a bipartisan 89-8 vote a few hours after 2013 had begun. The House of Representatives approved it an hour before midnight in a much less bipartisan 257-167 vote, with twice as many Democrats as Republicans supporting it, and the President signed the legislation into law on January 3, 2013, enacting a budget deal which averted income tax increases for most Americans.
Forty Percent Rate
The new 40 percent top tax rate is up from the 35 percent rate of 2010 through 2012, but less than the 45 percent rate of 2009 law that had been the position of the Obama Administration. Indeed, 40 percent is the precise midpoint of those two positions, which had marked the boundaries of the debate.
Unified Exemption
The exemption remains at $5 million, indexed for inflation since 2011, which places it at $5.25 million for gifts made by individuals during life and for the estates of decedents dying in 2013. In addition to the lifetime exemption, individuals can also gift $14,000 per person in 2013, known as the annual gift tax exclusion, and which does not impact the lifetime gifting exemption.
With unified estate and gifts tax exemptions maintained at their 2011 and 2012 levels, we now know that the rush to make large gifts at the end of 2012 may not have been necessary. But there was no way to know that until a few hours after it was too late, when Congress finally acted. And if the timing of some of the gifts was dictated by the January 1 “sunset” that was on the books when 2012 ended, our sense is that those year-end gifts provided younger generations with access to family wealth, either outright or in trust, effectively removing any future appreciation in transferred assets from the reach of gift and estate taxes. Of course, Congress can make future changes to the estate tax law, and while permanence at last is a welcome relief, we know that it lasts only until Congress chooses to make more changes.
Portability
The December 2010 legislation introduced the “portability” of the exemption for gift and estate tax purposes, whereby the exemption not used by the first spouse to die would be available for use by the surviving spouse for gift tax purposes and the surviving spouse’s executor for estate tax purposes (but not for GST tax purposes). While, Treasury Regulations published in June 2012 provided considerable clarity and welcome guidance regarding portability, Congress and the President have now made portability permanent.
Other Tax Law Measures
Although estate and gift taxes are the principal focus of our analysis, because of their obvious importance to estate planning, it is well known that the New Year’s Day legislation was a part of a broad rescue from a “fiscal cliff” by modifying and making permanent the “Bush tax cuts”.
Significant tax legislation signed into law by President Obama on January 3 include:
- For most individuals, the law permanently extends the lower federal income tax rates that have existed for the last decade. That means most clients will continue to pay tax according to the same six tax brackets (10%, 15%, 25%, 28%, 33%, and 35%) that applied for 2012.
- Reinstatement of the 39.6 percent individual income tax rate and 20 percent capital gains tax rate for taxable income over $450,000 for joint filers and $400,000 for single individuals;
- Return of the phaseout of personal exemptions and itemized deductions, but with higher thresholds for itemized deductions;
- Restoration of the IRA charitable rollover for 2012 and 2013 for individuals over 70½, with special rules for IRA distributions made in December 2012 and for charitable rollovers made in January 2013; and
- Indexing the individual alternative minimum tax (AMT) exemption for inflation, in effect making the annual AMT “patch” permanent.
We will continue to closely monitor and advise you of any new and significant changes which impact your clients.
As always, we look forward to working with you in the New Year and welcome your questions.
Please feel free to call The Levin Law Firm at (610) 977-2443 to discuss particular client situations and to schedule an appointment for your clients who need to establish and update their estate plans.
5 Components of a Good Estate Plan
A well-designed estate plan should also appoint financially responsible individuals to serve as Executors and Trustees, to act on behalf of the client in the event of their passing, in order to ensure that the right property distributes to the proper party, at the correct time.
All estate plans should include, at minimum, five (5) vital estate planning documents set out below:
- Last Will and Testament;
- Trust for Minor Children;
- Durable Financial Power of Attorney;
- Health-Care Power of Attorney; and
- Updated Beneficiary Designations
Last Will and Testament – A Will is the legal document which sets out the terms and provisions for the distribution of property in the event of death. If your client does not have a valid Will, state intestacy law will determine how their property is distributed. A Will also appoints one or more Executors to carry out the wishes of your clients. Wills are especially important for clients who have minor children because a Will can also designate a Guardian to handle the job of raising a child, as well as managing assets for children until they attain specified ages. However, a Will only handles the distribution of probate property, which are assets held in the individual name of your clients. Many types of property pass outside the probate process, including jointly-owned property, property managed in trust, life insurance proceeds, and property with a designated beneficiary, such as annuities, IRAs, and 401(k) plans. These non-probate assets distribute by contract, not under the terms of a client’s Last Will and Testament.
Trusts – A Trust is an agreement in which the client appoints a Trustee to invest, manage and distribute property to one or more beneficiaries. Trusts often are designed to have one class of beneficiaries during those beneficiaries’ lives and another set — often their grandchildren — who continue to benefit after the first group has passed away. There are many different reasons for setting up a trust. The most common reasons are to provide asset management, and insulate assets from the potential claims of creditors and predators of a beneficiary. When clients establish a Revocable Living Trust during their lives, the Trust can terminate at their death or continue in trust for one or more designated beneficiaries. Trusts can often save time and money for the beneficiaries. A Trust can also be very useful since assets invested in a Revocable Living Trust avoid probate upon death and provide valuable asset management benefits, wherein you can be appointed as Investment Advisor by your clients for their surviving family members, if they desire.
Testamentary trusts can also result in significant tax advantages for your client’s spouse and other family members. These trust-based plans often include “Credit Shelter Trusts” and “Life Insurance Trusts”. Clients often establish trusts to protect their property from creditors or to help them qualify for Medicaid, if future long-term care expenses are an important concern. Unlike Wills, a trust is a private confidential document, which is not probated upon the death of a client. Provided the trust is well- drafted, another major advantage of trusts is their continuing effectiveness and continuity of investment management, even if the donor becomes ill, incapacitated, or passes away.
Durable Financial Power of Attorney – Powers of Attorney are the legal documents which allow your clients to avoid a guardianship proceeding by appointing a responsible person to serve as Agent, in order to make necessary financial decisions on their behalf. More specifically, a Power of Attorney allows a person selected by your client to act for purposes of making financial decisions if the client ever becomes incapacitated. Without a durable financial Power of Attorney, a family member may need to petition the court to appoint a guardian. That court process takes time, costs money, and a judge may not choose the guardian your client would prefer if given the choice. In addition, under a guardianship proceeding, a court-appointed representative may have to seek court permission to take planning steps that could easily have been implemented immediately under a durable financial Power of Attorney.
Health-Care Power of Attorney and Medical Directives – A Medical Directive may encompass a number of different documents, including a health care proxy, a durable Power of Attorney for health care, a living will, and medical instructions. Both a health care proxy and a durable Power of Attorney for health care designate an individual to make health care decisions if the client is unable to do so. A living will instructs providers to withdraw life support if the client is terminally ill. Health-Care Powers of Attorney generally include a living will, but will also provide specific instructions if your clients are unable to direct their own health care decisions.
Beneficiary Designations – Although not necessarily a direct part of an estate plan, at the same time clients establish their estate plan, they should make sure their retirement plan beneficiary designations are up-to-date. If a beneficiary is not designated, the distribution of benefits may be controlled by state or federal law or according to the terms of a particular retirement plan. Some plans automatically distribute money to a spouse or children. Other plans may distribute funds to a retirement plan holder’s estate, which could have negative tax consequences. The best method for distributing assets from annuities, life insurance, qualified plans, and IRAs is to designate a beneficiary.
If you would like to discuss a particular client situation, or arrange a consultation on behalf of your client, please contact The Levin Law Firm directly at (610) 977-2443.
