Gift Tax Archives - Lonich Patton Ehrlich Policastri

Tax and Estate Planning for Same-Sex Couples

August 1, 2014/in Estate Planning, In the Community, Probate /by David Patton

Earlier this week, the U.S. Court of Appeals for the 4th Circuit struck down Virginia’s same-sex marriage ban, saying that withholding the fundamental right to marry from same-sex couples is a form of segregation that the Constitution cannot tolerate.

In June 2013, the Supreme Court of the United States in United States v. Windsor, held that the federal government must recognize same-sex marriages and that it is up to state Legislatures to define marriage within state boundaries. Since then, numerous law-suits challenging the constitutionality of state DOMAs on equal protection and due process grounds have prevailed in various federal and state courts. Currently, 19 states, including California, plus the District of Columbia recognize same-sex marriage (recognition states), while 40 states prohibit it (non-recognition states).

The prevailing prediction is that a Supreme Court guarantee of a right to marriage is on its way. American support for same-sex marriage is at a new high of 55 percent, and California support is at 61 percent and increasing, if the trends continue. It is important for all couples to create an estate plan. Additionally, it is important for same-sex couples to be aware of the potentially complicated issues that arise when they move across state lines.

Same-Sex Couples Living in California

Same-sex married couples now living in California enjoy the same benefits and burdens under state and federal law as married opposite-sex couples. Before Windsor and IRS Revenue Ruling 2013-17 (which extended federal tax benefits to married same-sex couples, regardless of their state of residency), many married opposite-sex couples likely took this preferential treatment for granted.

Some of these benefits include:

Property transferred between spouses incident to a divorce is not subject to income or gift tax;
Spousal support (alimony) payments are tax deductible to the paying spouse;
Child support payments are not subject to income tax;
Spouses receive a community interest in 401(k) accounts and other retirement plans; and
Spouses receive all community property and anywhere from one-third to all of the deceased spouse’s separate property for intestate (when a person dies without a will or other non-probate instrument) inheritance purposes.

All couples should be aware of their legal rights at marriage, divorce, and death. It is important for both same-sex couples and opposite-sex couples to consider pre-marital agreements, estate plans, and any tax consequences that arise from marriage or divorce.

The Marital Status of Migrating Same-Sex Couples

When a same-sex couple moves out of California, their marital status will depend on the other state’s law with regards to various issues including, state tax filing status, intestate succession, guardianship and conservatorship appointments, and adoption and artificial reproductive technologies. In other words, a non-recognition state may not recognize the otherwise valid same-sex marriage.

If and when the Supreme Court guarantees a right to marriage, moving across state lines will no longer be an issue for same-sex couples. However, in the interim, it is important to be aware of the possible legal consequences.

For example, under Florida law, the definition of “heir” does not include same-sex spouses for intestate inheritance purposes. This means that a same-sex couple that was married in California, but permanently living in Florida, will not inherit from each other under the Florida intestate system. Some courts in non-recognition states are willing to recognize same-sex marriage in certain contexts through the doctrine of comity, which is where a court gives deference to another state’s laws. However, most surviving spouses want to avoid litigation because it can be a headache, requiring time, money, and mental energy.

In some cases, it might be worthwhile for same-sex spouses to opt out of the intestate system with non-probate instruments, such as estate plans. A same-sex couple’s estate plan needs to be drafted with precision, specifically naming beneficiaries, rather than using general terms such as “spouse.” This becomes especially important if a same-sex couple moves to a non-recognition state, where the court may not interpret a same-sex spouse to qualify as a spouse or heir. If any other blood related heirs of the deceased spouse were to contest the non-probate instrument, they could end up inheriting property that would have gone to the same-sex spouse in California or another recognition state.

If you are a same-sex couple and are considering marriage, or need to create or update an estate plan, please contact our California Certified Family Law Specialists. Our attorneys have decades of experience handling complex family law and estate planning matters and offer a free consultation.

Please remember that each individual situation is unique and results discussed in this post are not a guarantee of future results. While this post may include legal issues, it is not legal advice. Use of this site does not create an attorney-client relationship.

Estate Tax Portability: A Valuable Asset You May Not Know You Had

March 27, 2014/in Estate Planning, Probate /by Michael Lonich

Have you heard about the “portability provision?” Believe it or not, your estate (or your spouse’s estate, if you were to pass first) could benefit tremendously if the executor of your estate elects this provision. In short, the portability election allows the transfer of any unused estate tax exclusion amount of the first spouse to die (commonly referred to as the “deceased spouse’s unused exemption” or “DSUE”) to the surviving spouse, who can then utilize the remaining amount to benefit his or her gift or estate tax purposes. Essentially, this provision operates as a safety net for couples with joint assets exceeding the exemption amount for the estate of the first spouse to die because the surviving spouse can reduce his or her estate or gift tax liability. Depending on the size of the estate, electing this provision can mean saving a significant amount on estate taxes.

Although this portability provision technically expired after 2012, Congress passed the American Tax Relief Act of 2012 (“ATRA”), which made the “portability” of the applicable exclusion amount between spouses permanent. This favorable estate tax rule should be incorporated into estate plans because as previously mentioned, the potential impact of the portability provision can be quite substantial.

For example, suppose the following: A husband and wife each own $2 million individually and $3 million jointly with rights of survivorship, bringing their estate to a total of $7 million in assets. Suppose their wills instruct that all assets pass first to the surviving spouse and then to the couple’s children. If the husband dies in 2014, his $2 million in assets is covered by the unlimited marital deduction. His $5.34 million exemption remains unused (his DSUE). When the wife dies, her estate can use that leftover DSUE amount, in addition to the exemption for the year in which she dies, to shelter the remaining $7 million of assets from tax. ATRA has permanently set the top estate tax rate at 40 percent. As such, if the wife died later in 2014, $1.66 million in assets would have been subject to estate tax without the portability provision. Therefore, the family saves $664,000 in federal estate tax (40% of $1.66 million).

Not only is the portability provision an excellent tool to use for estate and gift planning considerations, the provision can also be used as a negotiation tool during marital agreement negotiations. The portability provision can be viewed as a highly valuable asset that attorneys and their clients should consider when drafting marital agreements. However, there are also certain limitations to be aware of. For example, the executor of a deceased spouse’s estate must elect portability for the provision to take effect, and the election must be made on an estate tax return filed within nine months of death.*

If you or your loved ones are in the planning stages of creating an estate plan, take the necessary steps to ensure that you and your family members are maximizing the benefits available to you by an experienced, knowledgeable estate planning attorney guide you through the process. Estate planning laws are constantly evolving and having a trusted estate planning attorney by your side can prove to be invaluable. The attorneys at Lonich Patton Erlich Policastri have decades of experience handling complex estate planning matters, including wills and living trusts, and we are happy to offer you a free consultation.

Please remember that each individual situation is unique and results discussed in this post are not a guarantee of future results. While this post may detail general legal issues, it is not legal advice. Use of this site does not create an attorney-client relationship.

Sources: http://www.bizactions.com/n.cfm/page/e120/key/259853661G1005J3585631N0P0P2268T2/;http://www.forbes.com/sites/lewissaret/2014/02/25/estate-tax-portability-and-marital-agreements-a-new-consideration/

The Disclaimer: An Arrow in the Savvy Planner’s Quiver

March 21, 2014/in Estate Planning /by Michael Lonich

We won’t all be lucky enough to inherit a large sum of money upon the death of a loved one. But, if you do, you may want to consider disclaiming that inheritance under special circumstances. When you disclaim an inheritance, you are refusing to accept it.

Some of you reading this are probably thinking, “You’ve got to be crazy if you think I am ever going to flat out refuse any money that I have coming to me.” Nevertheless, for others who already own plenty of property or are looking to reduce gift or estate or gift taxes, disclaiming an inherited gift could be in the best interests of you and your family.

Let’s say you already have a healthy estate of several million dollars when your father dies, leaving $400,000 to be split evenly between you and your sister. You know that your sister, a single mother, could really use the money and you would like to help her out. In this situation, disclaiming could be beneficial for in two ways.

First, by disclaiming your half of the gift, the entire $400,000 can be transferred directly to your sister. This kind gesture ensures that the person who really needs the property can have it with little difficulty or complications, since a disclaimant never truly owns the property. Furthermore, disclaiming a large gift could help minimize the size of your estate for the benefit of your family at the time of your death. Estates beyond a certain size have to pay steep estate taxes* before your money can go to your beneficiaries. By disclaiming gifts you don’t need, your family can avoid those taxes and enjoy more your hard-earned wealth.

Second, by disclaiming your half of the gift, you will not have to pay gift taxes on any amount you want to give to your sister. In 2014, the IRS limits the amount of cash that can be given tax-free to a particular individual. In this situation, if you were to accept the $200,000 and then try to give it to your sister as a cash gift, any amount over $14,000 given to your sister in a given year would count towards your lifetime gift limit.** Any amount of cash gifts which exceed that limit—$5.34million in a lifetime—will be subject to a gift tax of up to 40 percent. Ouch. To keep things simple and tax-free, disclaiming the inheritance is your best bet.

Deciding whether or not to disclaim is a big decision that can have serious benefits or consequences. In order to make the decision that is best for you and your family, speak with an experienced estate planning attorney before you act. If you need estate planning advice, call Lonich Patton Erlich Policastri to schedule a free half-hour consultation. Our attorneys are passionate about estate planning and have decades of experience handling complex estate planning matters, including wills and living trusts. If you are interested in developing an estate plan or reviewing your current estate plan, contact the experienced estate planning attorneys at Lonich Patton Erlich Policastri for further information.

Please remember that each individual situation is unique and results discussed in this post are not a guarantee of future results. While this post may detail general legal issues, it is not legal advice. Use of this site does not create an attorney-client relationship.

*To learn more about estate taxes, click here: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Estate-Tax

**This is known as the “annual gift exclusion.” For those who are interested in learning more about the exclusion, click here: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Gift-Tax

Gift Taxes: How Much Your Generosity Could Cost You

February 20, 2013/in Estate Planning /by Michael Lonich

Should you liquidate your trust to take advantage of the new federal estate tax exemption? You may not need to. Not immediately, anyway. As 2012 came to a close, there was some worry that the generous federal tax gift exemption would fall off of the fiscal cliff, leaving many estates vulnerable to the 35% federal estate tax for gifts. To the delight of many taxpayers and estate planners alike, the federal tax provision allowing an individual to give tax-free gifts totaling up to $5 million over his or her lifetime, is now permanent.* This “unified credit” may also be applied to an individual’s estate at death if it is not utilized before death.

If your estate isn’t large enough to cover a gift of $5.12 million during your lifetime, you may be delighted to know that the annual gift tax exclusion has also survived. So, any taxpayer may make a tax-free gift of $13,000 a year per recipient. For example, in 2013, a father can give $13,000 to his daughter, $13,000 to his grandson, and $13,000 to his neighbor, all tax free. Slowly making these tax-free gifts is a great way to ensure that your taxable estate is worth less than the federal estate tax threshold of $5.25 million when you pass, effectively insulating your loved ones from an estate tax of 40% down the road.

No matter what the size of your estate, it is smart to have a plan for the future. The attorneys at Lonich Patton Erlich Policastri have decades of experience handling complex estate planning matters including wills and living trusts. If you are interested in developing an estate plan or reviewing your current estate plan, contact the experienced estate planning attorneys at Lonich Patton Erlich Policastri for further information.

Please remember that each individual situation is unique and results discussed in this post are not a guarantee of future results. While this post may detail general legal issues, it is not legal advice. Use of this site does not create an attorney-client relationship.

*See http://www.irs.gov/pub/irs-pdf/p950.pdf for a detailed explanation of the gift exemptions.

Estate Taxes Cause Some to Plan their 2010 Death

November 22, 2010/in Estate Planning /by Michael Lonich

Estate Taxes Cause Some to Plan their 2010 death.

Recently the AP press reported, U.S. Rep. Cynthia Lummis says her constituents are planning to die just to avoid estate taxes.[1] Currently, there is no estate tax for individuals who pass away in the year 2010. However, if legislators do not act quickly then the estate tax will revert back to a one million dollar exclusion with a 55% top rate. Many had speculated with recent current events that Congress would not be able to pass any estate tax legislation prior to the November elections. Now that the November elections are finished, it is hopeful that some guidance will be given to the future of estate taxes.

Sometimes the Estate Tax is nicknamed the Death Tax. In reality the tax is imposed on the inheritance of wealth. For much of the country a one million dollar exclusion is generally enough to exclude their inheritances from being taxed. However, in the Silicon Valley area where detached single family homes are nearly a million dollars this exclusion can be used up rather quickly.

Bay Area Estate Value Much Higher then Average

Take for example, an estate valued at $1.5 million dollars. Although mere mention of the word million suggests this is not the type of estate that affects the majority of the population. It is actually very common in the Bay Area. Home values in the Bay Area are much higher than national average values. In a recent report, Cupertino, CA median home value is over $1,000,000.00. The median home value in Sunnyvale, CA is reportedly over $750,000.00. Since the value of a home is much more in California the one million dollar exclusion does not allow for much of the estates to transfer without tax.

Practical Calculation How Estate Tax is Applied

To calculate the Estate Tax on $1.5 million dollar estate, we must examine the Estate Tax Tables below.

Estate Tax Rates Table
Subject to Exemptions and Maximum Tax Rates Table
Estate Amount Exceeding:	Up to:	Is taxed at a rate of:
$1,000,000	$1,250,000	41%
$1,250,000	$1,500,000	43%
$1,500,000	$2,000,000	45%
$2,000,000	$2,500,000	49%
$2,500,000	$3,000,000	50%
$3,000,000	$10,000,000	55%
$10,000,000+	$17,184,000	60%
$17,184,000+		55%

Exemptions and Maximum Tax Rates
Year	Estate Tax Exemption	Highest Rate
2003	$1 million	49%
2004	$1.5 million	48%
2005	$1.5 million	47%
2006	$2 million	46%
2007	$2 million	45%
2008	$2 million	45%
2009	$3.5 million	45%
2010	N/A (taxes eliminated)	0%
2011	$1 million	60%

In 2010, the estate would incur no estate tax and the inheritance would be the full 1,500,000.00.

In 2011, the estate would have a $1,000,000.00 exclusion, and the balance would be taxed. The table below shows my tax calculation on a $1,500,000.00 estate in the year 2011.

Tax Rate	Calculation	Tax	Total Inherited
0%	1,000,000 exclusion		$ 1,000,000.00
$1,000,000-$1,250,000 @ 41%	41% of $250,000.00	$ 102,500.00	$ 147,500.00
$1,250,000-$1,500,000 @ 43%	43% of $250,000.00	$ 107,500.00	$ 142,500.00
		$ 210,000.00	$ 1,290,000.00

In 2010, the estate would be free of estate tax but in 2011 the estate tax would be $210,000.00. Estates of even higher values would have even more drastic tax differences in 2011. Simply put a 2 million dollar estate would have to pay nearly a million dollars in estate taxes.

This is only a theoretical computation and many people are hopeful that Congress will pass new estate tax legislation, while others argue that estate tax relief is not an important issue. Although there is no way to be certain if Congress will act, many believe that the only certain thing in life is death and taxes. However, no one says that you have to pay the maximum tax rate. In fact, each individual is permitted a $13,000.00 gift tax exemption per year. That is only one of the many ways an attorney can assist in your estate planning.

For more information about Estate Planning, please contact us. Please remember that each individual situation is unique and results discussed in this post are not a guarantee of future results. While this post may include legal issues, it is not legal advice. Use of this site does not create an attorney-client relationship.

[1] CHEYENNE, Wyo. (AP) — U.S. Rep. Cynthia Lummis says some of her Wyoming constituents are so worried about the reinstatement of federal estate taxes that they plan to discontinue dialysis and other life-extending medical treatments so they can die before Dec. 31. The Associated Press: US rep.: Estate tax rise has some planning death, http://www.google.com/hostednews/ap/article/ALeqM5iE6x5QNARlHHqT8EKF-KUYWflVpg?docId=01c363eeccd542fe9dc9f9742699686b (last visited Nov. 4, 2010).

Posts

Tax and Estate Planning for Same-Sex Couples

Estate Tax Portability: A Valuable Asset You May Not Know You Had

The Disclaimer: An Arrow in the Savvy Planner’s Quiver

Gift Taxes: How Much Your Generosity Could Cost You

Estate Taxes Cause Some to Plan their 2010 Death

Free 30-Minute Family Law or Estate Planning Consultation

Contact Us