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Wealth Matters: Estate Planning Under the New Tax Law

April 26, 2013 by Leave a Comment

Consider the people who fill out forms designating who inherits assets like an insurance policy and then never go back and revise the forms when, for instance, they divorce and remarry. And then, there are the parents who have not determined who will serve as guardians for their children.

“Even though you have less than $10 million or even if you have more, you really want to guide the family as best you can,” said Stuart Kessler, a certified public accountant and director at the accounting firm CohnReznick.

Having just filed tax returns, many people may not want to think about how the changes to the tax code under the American Taxpayer Relief Act, passed in early January, could affect them.

But if they don’t, they may be shocked come next year’s tax season. Or worse they may end up making financial plans based on a cursory understanding of what the changes mean for them and regret it later.

Over the next couple of weeks, I am going to look at how the tax changes could sway people’s thinking on estate planning, investments and insurance and why people need to think clearly about how they are responding.

This week, I’m looking at estate planning, where the focus over the last decade has been on the exemption amount and the tax rate above it. The exemption rose steadily and the tax rate fell from 2001 until 2010, when the estate tax disappeared for most of that year. When the tax returned in 2011 and 2012, the exemption was set at a historically generous $5 million indexed for inflation and a 35 percent rate above that.

The American Taxpayer Relief Act made the exemption permanent at the 2011 level, indexed for inflation, and set the tax for anything exceeding that amount at 40 percent. It also kept the exemptions and taxes the same for gifts made in a person’s lifetime.

Here is a look at why people at different income levels need to pay attention to their estate plans.

THE NECESSITY OF FEAR When his nephew was about to marry in March, Mr. Kessler took the young man to lunch and offered advice: draft a will. While not exactly a romantic thought, it was a practical one. And Mr. Kessler said he often pressed clients with far less than $10 million to do the same — and to revisit it often.

“They feel they’ve set this in motion and don’t have to deal with this for 10 years,” he said. “I’m not crazy about that idea. I usually bug them in three years.”

It is easy to imagine a family with a modest amount of money having a child with a spending or substance abuse problem or a checkered marital history who would benefit from having an inheritance put into trust.

But there are simpler issues that could be overlooked if people figured there was no longer a need to think about an estate plan.

One is the beneficiary designation form, which determines who gets assets like a retirement account or an insurance policy. Many times, people fill out these forms when accounts are opened and then forget about them, even as the account or insurance policy grows or people’s life situations change. That form overrides a will.

People with dependent children also need an estate plan to make sure they have life insurance and guardians for their children. “That’s one of the major issues here,” Mr. Kessler said. “Forget about when the kids get the money. It’s, Who’s going to take care of them?”

Some states intervene when a person dies without a will — and charge fees accordingly to sort things out. In California, a will alone is not enough to avoid the state’s getting involved in the probate process, said Andy Katzenstein, a partner in the personal planning department at Proskauer, a law firm.

A better plan, he said, would be to set up a revocable, or living, trust that holds the assets. It has the added advantage of keeping prying eyes out of someone’s affairs.

“Michael Jackson’s will is being probated,” Mr. Katzenstein said. “He actually had a living trust, but he didn’t put his assets in it.”

Article source: http://www.nytimes.com/2013/04/27/your-money/estate-planning-under-the-new-tax-law.html?partner=rss&emc=rss

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Today’s Economist: Bruce Bartlett: Our Long-Term Fiscal Future Is Better Than It Looks

November 13, 2012 by Leave a Comment

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Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take.”

Despite Republican propaganda to the contrary, the long-term fiscal problem of the United States is principally that revenues are too low. If fixing this problem required a legislated tax increase, the nation would be in serious trouble, because Republicans will forever block it as long as they have the ability. Fortunately, they handed Barack Obama the power to permanently fix our fiscal problem if he has the courage and skill to use it.

Today’s Economist

Perspectives from expert contributors.

The core problem, from the Republicans’ point of view, is that they stupidly enacted temporary tax cuts during the George W. Bush administration. Their expiration creates a bludgeon that could eventually beat sense into them on the tax issue.

At the time the tax cuts were enacted, I recall arguing with my longtime friend Grover Norquist that temporary tax cuts were a really bad idea. Supply-side theory has always held that permanent tax changes are vastly more powerful than temporary changes, I told him. He didn’t disagree, but said the Bush tax cuts were de facto permanent because Democrats would never have the guts to permit them to expire; they would be renewed forever. People and businesses will know that, Mr. Norquist said.

That was a foolish position for political and economic reasons. People and businesses don’t make the sorts of changes in their behavior that would give the economy a supply-side boost unless they have confidence that today’s tax regime will be in place when the payoff from increased work, saving or investment is realized.

A perfect example is the research and development tax credit. Economic theory is clear that R.D. needs to be subsidized because the social benefits greatly exceed what businesses can capture from it, thus leading to less R.D. than necessary to sustain growth. For this reason, Congress created the R.D. credit in 1981.

But the credit has never been permanent. It has expired every few years and expires again at the end of this year. Academic studies show that even though it may be de facto permanent, the fact that it isn’t actually permanent in law greatly inhibits its effectiveness.

Corporations can’t risk taking it into account when calculating rates of return on planned R..D, for it might have expired when they need it down the road. The credit ends up being a bonus for what they would do anyway without the credit.

For this reason, Republicans and Democrats support making the R.D. credit permanent. Congress always refuses, because renewal of the credit is a great way to shake down corporate lobbyists for campaign contributions. The lobbyists don’t mind, because when the credit is renewed they can demonstrate that they have added to the company’s after-tax bottom line. In Washington, this is called a win-win – except for the economy, which doesn’t get the R.D. that it needs.

A key reason that the tax-rate reductions of the Bush administration failed to have any stimulative effect is because they came with expiration dates from Day 1. Republicans insisted on cutting them on a partisan basis, without negotiating with Democrats. Consequently, they lacked the votes in the Senate to overcome the so-called Byrd Rule, which limits legislation that raises the deficit to a maximum of 10 years when budget reconciliation procedures are used.

Republicans needed to use those procedures to enact their tax cuts, in order to overcome a Senate filibuster by Democrats. Permanent tax changes would have required bipartisanship, which the Republicans rejected.

In 2010, Republicans congratulated themselves that their strategy was working when they refused to negotiate with President Obama because he demanded that tax cuts for the rich be allowed to expire. Faced with an earlier “fiscal cliff” on Jan. 1, 2011, he caved to Republican intransigence and agreed to a two-year extension of all the Bush tax cuts. That extension expires at the end of this year, and President Obama has renewed his demand that taxes on the rich be allowed to rise.

Republicans like the House speaker, John Boehner of Ohio, are talking bravely about holding the line on taxes, and Mr. Boehner has dismissed the demand for higher tax rates for the rich.

But the economic and political dynamics this year are much different than they were two years ago. Then, Republicans were coming off a huge electoral victory; this year they have suffered a huge political defeat.

In December 2010, the economy was too fragile to take risks, even temporarily. President Obama had no choice but to cave. Today, the president’s hand is greatly strengthened, the economy is much stronger, and he is running out of time to get America’s fiscal house in order on his watch. Republicans are chastened by their defeat, and he will never hold a stronger hand against them than he does now. Therefore, taking the risks with the tax cuts, at least temporarily, is now a viable option.

If things go bad because of Republican inflexibility, the political dynamics change completely in January. At that point, Republicans have to accept whatever tax cut Obama is willing to support to replace the Bush tax cuts in whole or part. His veto pen would be enough to force Republicans to negotiate in good faith for a change, even if Democrats didn’t control the Senate.

Any 2013 tax cut that would offset the effect of allowing the Bush tax cuts to expire can easily be made retroactive. The Internal Revenue Service can delay changing withholding tables for average wage earners if it chooses, on the assumption that their tax cuts will be preserved under any possible compromise, thus forestalling any impact from the fiscal cliff on the vast majority of Americans.

And here’s the kicker. All President Obama has to do is insist that whatever retroactive tax cuts are enacted next year be temporary. Not only will this mitigate the impact of higher taxes for the same reason that temporary tax cuts are limited in their impact, but he will have another opportunity in a year or two to bludgeon Republicans back to the negotiating table, where their adamant opposition to higher taxes will again be negated by an automatic tax increase absent Congressional action.

Revenues are just 15.8 percent of gross domestic product, compared with a postwar average of 18.5 percent, which even Mr. Norquist accepts as a long-term goal. The sooner we get there, the sooner we can get the national finances on track toward sustainability.

Because Republicans now lack the power to prevent legislated tax increases, the nation is no longer held hostage to their stubborn opposition to any tax increase whatsoever, which has torpedoed every serious effort to reduce the trajectory of debt since 2010.

That is why I am optimistic about our fiscal future.

Article source: http://economix.blogs.nytimes.com/2012/11/13/our-long-term-fiscal-future-is-better-than-it-looks/?partner=rss&emc=rss

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Bucks: Tax Changes for Gay Married New Yorkers

August 3, 2011 by Leave a Comment

The Cost of Being Gay

A look at the financial realities of same-sex partnerships.

Chang W. Lee/The New York TimesA couple waiting to be married in Brooklyn on July 24.

Now that gay marriage is legal in New York, legally wed couples will be subject to new state tax rules, which affect everything from income and sales taxes to estate planning.

While New York recognized same-sex unions performed elsewhere before the state started issuing marriage licenses of its own last month, that recognition did not extend to tax matters. Now it does.

The new tax rules, in fact, apply to all legally married gay couples who are living in New York, even if they were married outside the state.

Of course, since the federal government does not recognize same-sex unions, that equal recognition still does not apply for federal tax purposes. So couples will need to maintain a double identity of sorts: one for the state, another for the federal government.

So how will couples’ tax lives change? And what do they need to do differently? The state tax department recently issued guidance for these couples, outlining some of their rights and responsibilities. The changes went into effect on July 24 as part of the broader marriage equality law.

Income Taxes Married couples must now file their state income tax returns using a married filing status, even though they must continue to file as either singles or heads of households on their federal returns.

As a result, same-sex couples are likely to spend more time — and money, if they hire an accountant. That is because they are going to need to fill out their federal return twice: They must file their official return as individuals, but they must also complete a dummy federal return as if they were married so that they can compute their New York taxes.

Couples who were married as of Dec. 31, 2011, will be considered married for the entire year, which means they must file their 2011 returns as married. That said, the law is not retroactive, so you can’t amend a prior year’s return, or file a 2010 return that is on extension, using a married filing status (even if you were married at the time).

Going forward, gay couples may also want to consider changing the amount of state tax that is withheld from their paychecks in light of their new filing status. To make any changes to withholding, members of same-sex couples can file a new state withholding allowance form (known as IT-2104) with their employers.

But they should run the numbers before they do. Married couples who earn more than $75,000 each and plan on filing a joint return may want to continue to keep their “single” withholding so that they don’t end up owing the state money in April because of the marriage penalty, said Tina Salandra, a New York accountant with expertise in same-sex couples’ issues. The penalty causes married couples to owe more money than if they filed their returns separately.

There is a loophole that may allow couples to avoid being pushed into the higher bracket, however. Same-sex spouses can file their state tax returns using “married filing separately” status, which uses the same tax rates as if they were single, Ms. Salandra said.

“Married heterosexuals cannot usually file as separate unless they also file this way on their federal tax return,” she said, noting that federal tax brackets for married filing separately status is the costliest way to file. “Consequently, until the federal government recognizes same-sex marriage, there may be a tax advantage in New York State for married same-sex taxpayers.”

The same advantage exists for same-sex couples in New Jersey and Connecticut, she added.

Health Insurance Taxes Workers with same-sex spouses are taxed on the value of their partner’s health benefits because the federal government does not recognize their unions. But legally wed gay couples will no longer owe that tax at the state level, so they should be sure to provide proof of their marriage to their employers so that the companies can stop withholding those taxes and recognize the new spousal status.

Sales Tax Certain family members don’t have to pay sales and use taxes if they sell a car to a relative. So starting on July 24, the sale of motor vehicles between same-sex spouses, or between a same-sex spouse and his or her spouse’s child, are exempt from sales and use taxes, according to the state tax department’s Web site.

To claim this exemption, complete this form and submit it to the New York State Department of Motor Vehicles when registering the vehicle.

Estate Taxes Opposite-sex married couples can transfer an unlimited amount of assets to each other during life and after death, all without tax consequences. Now, married same-sex couples will gain some of those benefits, at least at the state level.

Under the new state law, surviving spouses can inherit an unlimited amount of assets without having to pay state estate taxes, which are typically owed on assets that exceed $1 million (This applies to same-sex spouses who died on or after July 24, whether or not a federal estate tax return is filed.)

Of course, these rules still don’t apply at the federal level. So if an estate exceeds the $5 million federal threshold, a surviving same-sex spouse may owe federal estate taxes. And if the couple gives each other large gifts, there may be federal gift tax implications.

But the new state tax law provides a big benefit. When calculating the size of an estate that belongs to a same-sex spouse, the survivor will now be able to use the same deductions and valuations as if their marriage were recognized for federal purposes, which can help reduce the size of the estate. Even though the spouse is entitled to inherit an unlimited amount of assets free of state estate taxes, a smaller estate can help them — and any additional heirs — in other ways.

For instance, if the couple had property that they held jointly, only half of the property’s value will be included in the estate. If that reduces the size of the estate below the $1 million threshold, that means the surviving spouse will not have to file an estate tax return. “If the gross estate is under $1 million, then there’s no tax and also no filing — a considerable savings of time, effort and attorney/accounting fees,” said Ron Meyers, an estate planning lawyer in New York.

It can also help in situations in which the deceased person wanted to leave property to someone other than a spouse.  Let’s say Adam and John jointly own a $1 million home. Only half of that will be included in the surviving spouse’s estate, reducing the overall size of the estate. That could lower the amount of assets that are subject to taxes, as well as the overall tax rate. So any gifts passed on to a niece, for instance, are likely to be subject to less tax.

In addition, when computing the size of their estate for state tax purposes, same-sex spouses are also entitled to engage in what is known as “gift splitting,” something that married couples are allowed to do on their federal estate tax returns.

The big advantage of gift splitting for opposite-sex married couples is that it allows them to give away twice the amount of money that they could give as individuals — all while avoiding federal gift tax implications. Normally, individuals are allowed to give up to $13,000 a year to as many people as they want. As married couples, they could give away $26,000 to each person. (New York State does not have a gift tax.)

Even though the federal law does not recognize same-sex marriage, surviving spouses will be able to apply those rules when calculating the size of their estates for state purposes. This could help shrink the estate’s size, and perhaps any taxes owed on gifts left to heirs other than the spouse.

First, some background: individuals are currently allowed to give away up to $5 million while they are alive. Any gifts that exceed the $13,000 per person exemption eat into that amount. And any portion of the lifetime exemption that is used is subtracted from your estate tax exemption (now $5 million) after you die.

So here’s how gift-splitting will help same-sex spouses: If Adam gives his nephew $23,000, that means that $10,000 of that gift will eat into his $1 million lifetime exemption. If Adam is married to Steve, that means he can split half of this gift to his spouse, using only $5,000 of his lifetime exemption.

“That works nicely if Adam is wealthier, because it uses up less of his exemption, while using up more of Steve’s, which would otherwise be an unused resource,” Mr. Meyers added.

Now that their marriages are recognized at the state level, same-sex couples with substantial assets will require less complex estate plans. But that does not mean they can ignore these matters altogether.

“Complex analysis is still necessary, due to the disjunction of New York law with federal and other states’ laws,” he added. “But the marital exemption is a greater tax break, achieved by the mere act of marriage, more than any of the more complex structures that would have been necessary before.”

How will the new tax rules affect your financial life?

Article source: http://feeds.nytimes.com/click.phdo?i=96455ae87e6fb3f729300aac1db1f2d2

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