McManus’ Insight on Modern Estate Planning Featured in NJBIZ Wealth Issue

Last week, McManus & Associates Founding Principal John O. McManus was featured in NJBIZ‘s Wealth Issue. The piece, “A GUIDING HAND – McManus: Estate planning is increasingly complex,” includes a Q&A with John and highlights his insights on trends in how the ultra-wealthy protect their assets and their families.
NJ Biz header
John pic - NJ BIZ

A GUIDING HAND: McManus: Estate planning is increasingly complex

By NJBIZ STAFF, July 7, 2016 at 10:29 AM

John McManus has spent more than 25 years as a guiding hand for high net worth families and individuals, but it was an experience with his own family that helped shape his career.

When his grandfather died in 1974, he left behind the legacy of a moving and shipping business he had built in New York City. His will had been prepared by “a lawyer who was incredibly smart, but not an expert in this area” — and the estate took 20 years to settle.

“I learned from that to say, ‘If I ever get involved in law, I would want to do things where I’m helping people avoid those crises, where the whole family devolves and disintegrates,’” McManus said. “And that, in effect, happened on my grandfather’s level.”

Today he serves as founding principal of McManus & Associates, a New Providence-based law firm specializing in trust and estate planning that serves some of the state’s wealthiest residents.

“We are an estate planning, asset protection and family office firm, where we give advice and consultation to affluent people on how to save on estate tax, on how to — in an organized way — orderly transfer their assets to the next generation and do that in an asset-protected way,” McManus said. “(We also) advise them on philanthropic issues and share with the various families what we’re learning from other families — what good ideas they’re putting together and try to make it a fluid distribution of information.”

NJBIZ spoke with McManus about trends in estate planning and how the wealthy manage and protect their assets.

NJBIZ: The estate tax is one of the hottest issues of the day right now, but you must live and breathe it every day. What should people know about the tax in New Jersey, relative to other states?

John McManus: The issue that happens for people is that they say, ‘If I am not so anchored to New Jersey because I’m spending time in London, I’m spending time in Jackson, Wyoming, I’m spending time in Southern California and I’m spending time in Palm Beach or in Miami, why would I want to choose as my jurisdiction a state that has the highest tax rate? So, we’ve been seeing that.

We haven’t seen people just mass migrate out of this area. (David) Tepper is a large pronouncement of that. Others are saying, ‘My business is here. Even though I’d like to call myself a Florida resident, I can’t avoid the very important contacts and the amount of time I need to be in New Jersey.’

So, it’s much more relevant when people get to the point when they’re either about to sell their business, so they’re moving it, or when they’re close to retiring and they don’t need to put as many hours in, in New Jersey.

NJBIZ: You’ve had your firm for 25 years and you’ve been doing this for even longer than that. What are some of the trends and changes in estate planning that you’ve been seeing?

JM: I would tell you the biggest trend is that in the past, if you had $600,001, you were paying federal estate tax, and that’s just not that long ago. Today, you can have a $5 million net worth and be exempt from federal estate tax, and if you’re not in the New York metropolitan area, you can be exempt from state estate tax as well. So, it leaves a significant portion of the population exempt from paying estate tax. That’s awesome news for that group. Some would argue it’s highly disproportionate and not fair. On the other hand, when we’re dealing with the IRS, if we have just wiped out a large block of people that they would otherwise be going after for estate tax issues, now that leaves a more concentrated sum.

So, we saw the smoke coming down the tracks and we knew this was coming, so we moved our practice to doing more complex stuff and to addressing people that had net worth in excess of the exemption amounts. And that has made all the difference in the world.

So when we could do great work avoiding the estate tax for the ($1 million) to $20 million clients, now we realize that our best work and our most sophisticated work is for the group beyond that.

NJBIZ: Can you give us some examples of how you’re advising clients in estate planning and protecting their wealth?

JM: The best thing that people need to understand and the best example I could give you is that (heading into 2011), we were all afraid that the amount of money that you could give away — or that if you passed away — anything over $1 million, was going to be subject to a (55 percent) tax. So when you add life insurance and when you add your IRA and you add your house, even mom and dad can eclipse all of that. So there was a huge rush to the door to get assets into trust. And we did scores and scores of them at that time. …

(So, in late 2010), President Obama negotiates with the Republicans a deal that clearly was not to his advantage, and the exemption, which was down to $1 million, settled back up at $5 million, and all of these people had put assets into trusts and they were at the golf clubs telling their spouses and telling their friends, ‘We wasted all of our effort doing that.’ And the other people who didn’t get to it were all laughing.

But 2012 was one of the better years in the market. So if you put $5 million into trust in 2011, that $5 million became $6 million by the end of 2012. So now you have $6 million off your balance sheet. The person that did nothing, that $5 million they had is now at $6 million, but they could still only give ($5 million) away. So they missed that delta, that extra million dollars, which was growing inside the trust. The result was that, that strategy alone saved that group of people $500,000 in estate tax.

So, the best part about estate planning is to give assets into trust and let them grow, because then all of the growth is what avoids estate tax.

NJBIZ: We know wealthy people often have international ties and overseas assets to consider. What about that piece of it?

JM: The most important trend — and this has been a trend for several years — right now is that the U.S. government is firing up age-old reporting requirements that they have largely left untouched. And that goes to when you have assets offshore, you have to not only report the income tax on it, you have to report the asset value. So, clients historically had just moved assets offshore to help pay for grandma and grandpa’s thatched roof or dirt floor in their old family place. Or people emigrated here and they want to send money to help. It’s been a basis of this wonderful country for the past 200 years — always sending money. But now we found people taking advantage of growing economies, whether it’s China or it’s India or it’s Brazil, where now it’s not just moving assets offshore to help family members — it’s moving assets offshore to invest in those economies. That’s No. 1.

No. 2 is that sometimes those assets are ill-gotten. They’re in cash businesses, which is not an unreasonable thing for first generations who don’t have significant education, they’re choosing the first way they can to make money and sometimes taxes aren’t always paid on (that cash). So what a neat opportunity to take those assets, load them up in a suitcase and bring them overseas. The U.S. government says, ‘Enough.’ And the U.S. government’s view on this is, ‘If you have assets offshore and you don’t tell us about it, and we find out about it, it’s no longer a civil issue where you’re going to pay penalties and interest — you’re going to go to jail.’ As my father-in-law likes to say — he’s a first-generation immigrant — we can’t catch many of you, but the ones we catch, we cut their head off, put it on a stake in the middle of the town square as a gentle reminder that this is what happens when we catch you.

So the sophisticated people right now are spending a lot of time making sure that, wherever they have assets outside the U.S. perimeter, they are focused on reporting requirements.

NJBIZ: What else is there to consider?

JM: Clients who are receiving assets from their noncitizen, nonresident foreign family members — in the past, if they passed away, they may have left the country home in France or in Asia to their child. The rule has always been the same, but today, if you inherit an asset overseas, no tax, as long as they are noncitizen nonresidents, but you must let the U.S. government know that you’ve received it. Why? Because if your parents have a million-dollar bank account in Lichtenstein, they lived there and they died, that account is now on your balance sheet and the U.S. government wants to know that you’re paying tax. So no tax on the way in on the gift, but once it’s inside your estate, you now have to pay the tax, and the only way they’re going to assure that you do that is you’ve got to report the receipt of that gift.

What we’re doing is helping clients create trusts, not that we can avoid tax, but we can avoid estate tax through having it in a multigenerational vehicle. Clients are also wealthy, first-generation immigrants who are involved in finance, or the children of that, often have roots overseas so they’re making gifts of charity back to the countries of their origin. So we’re helping them maybe set up a side-by-side fund here in the U.S., where if you make the gift to this fund, it’s a charitable donation because it’s a U.S.-based charity and then that charity sends the money overseas.

NJBIZ: Estate planning is complex enough by itself, but we take it that wealthy people have other things to worry about.

JM: If one would ask, ‘What are people concerned about when they’re on that level?’ I would say that they have their own stresses, and life is very, very complicated. There is no downtime for people of the highest level of wealth, because they’re concerned about their families, they’re concerned about taxes, they’re concerned about government intrusion, they’re concerned about kidnapping. They’re concerned about large lawsuits, they’re concerned about an evacuation of assets from their hedge funds. Today, hedge funds, even the most powerful ones, are seeing with these markets that are providing at the current amount lukewarm returns that, very sophisticated investors who are in hedge funds are grumbling. And we’re dealing with some of the smartest investors in the world who are managing these hedge fund interests, but the fear is what happens if partners start to demand their money?

So, it may not be the easiest to say, ‘I feel bad for these people,’ but there are real issues.

NJBIZ: What other types of issues?

JM: They’re concerned about cyberattacks, for example. … The typical wisdom right now is that we cannot stop cyberattacks, but what we must be able to do is two important things: As soon as the breach takes place, be able to rally quickly and get assets protected and freeze the attack. No. 2: We have to have a public statement that we can get out to our investors and to the world as to the breach and what we’ve done immediately to address this issue. So that’s a very important piece that I think customers are concerned about.

Another piece that people are concerned about is that wealthy people travel a lot. In the U.S., we don’t have a problem with kidnapping, but when you go to Brazil, there’s problems with kidnapping. When you go to certain places in Africa … there are real risks with kidnapping. So we have clients that are invoking international security groups that are with boots and checking those areas and making sure that, if we can’t necessarily stop the kidnapping, we can do a search for that area. When you and I travel, we may check with the Department of State and find out if a country is on a watch list. These guys are actually sending people to those communities and doing research within that area to find out what’s going on. And then they may have somebody on the perimeter. We have one of our clients right now that’s interviewing that group because he’s got family members that are going to be overseas. And for him, at that level of net worth, why wouldn’t you want to invest in something like that?

NJBIZ: Just to bring it full circle, at least estate planning is something that they can control. Is there anything else we should know about that process?

JM: I think the biggest thing that this group does and that we do the most is creating trusts that are designed to have an organized, disciplined path of wealth transfer through the generations. That’s No. 1. No. 2, it’s helping to avoid the estate tax and, No. 3 is setting a structure in place so that the generations beyond here do not just think they have been blessed with largess, because our clients don’t want their children to feel that they’re entitled, and by putting assets in trust, it says, more that you’re a steward of these assets and your job is to grow them and compound them for the generations beyond you than to just think that you can do nothing.

Warren Buffet said, ‘Enough that you feel that you can do everything, but not so much that you can do nothing.’ And it’s a great quote.

sidebar NJBIZ

Posted in Media Clips Tagged , , , , , , , ,

Bankrate and WealthManagement Highlight McManus’ Guidance on Tax and Estate Planning for Gay and Lesbian Couples

bankrate logoBankrate, which has more than 2.75 million readers, recently published a story based on McManus & Associates’ “Same-sex marriage tax and estate planning tips.” As the story points out, thousands of gay and lesbian couples are celebrating wedding anniversaries this year and, this month, another momentous date. June 26 was the day last year that the Supreme Court declared same-sex marriage legal throughout the United States. From the article:

“The Internal Revenue Service had been accepting jointly filed federal tax returns from same-sex couples married in states that sanctioned their vows since the High Court struck down the Defense of Marriage Act in 2013. The 2015 Supreme Court decision in Obergefell v. Hodges, however, made taxes less of a hassle for gay and lesbian married couples at the state and federal levels regardless of where they live.”

As Bankrate Reporter Kay Bell puts it, “The historic 2015 marriage ruling also opened up a new world of estate planning for same-sex married couples.” She goes on to share insight from John O. McManus:

“Today, there are opportunities and protections within reach for same-sex couples that were unavailable during most of American history,” says John O. McManus, founding principal of the New York/New Jersey-based estate planning law firm McManus & Associates.

As the Supreme Court same-sex marriage ruling anniversary approaches, McManus offers some estate planning tips.

Marital deduction plus portability

Same-sex married couples can now take advantage of the unlimited marital deduction from federal estate tax and gift tax for transfers between spouses. This means that, in most cases, one spouse can leave an unlimited amount to his or her surviving spouse without any federal estate tax ramifications.

In addition, the portability provisions of federal gift and estate tax laws generally allow a surviving spouse regardless of gender to use any portion of his or her deceased spouse’s unused applicable estate and gift exclusion amount. This amount is adjusted annually for inflation. For 2016, the amount that skips these taxes is $5.45 million per spouse.

Greater gift splitting

Same-sex married couples also now can enjoy the benefits of gift splitting, says McManus.

The annual gift exclusion amount currently is $14,000. Now a same-sex husband or wife can, with the consent of his or her husband or wife, give a total as if each spouse contributed half of the amount.

This combining of individual allowances lets married couples increase their total gift tax exemption amount.

Generally, gift splitting requires the filing of a Form 709 Gift Tax Return. However, says McManus, if the split gifts total $28,000 or less to each gift recipient, only the donor spouse is required to file a gift tax return.

To read Bell’s full article for Bankrate, click here.

trusts and estates logo

WealthManagement.com also featured a byline slideshow by John O. McManus on same-sex planning in its Morning Memo on Monday. The newsletter links to “Top 10 Tax and Estate Planning Considerations for Same-Sex Couples” on the publication Trusts & Estates’ website. Click through the slideshow for a quick download on key opportunities now available to gay and lesbian couples in light of the historic U.S. Supreme Court decision in Obergefell v. Hodges.

Morning Memo - Same-sex

Posted in Guidance, Media Clips Tagged , , , ,

McManus Teams Up with Forbes to Shed Light on Elder Financial Abuse

forbes-logo-pngForbes Writer Ashlea Ebeling recently brought a very important topic to light with the help of John O. McManus and one of his clients: elder financial abuse. In her new article “Inside A Lottery Scam,” Ebeling tells the harrowing story of a McManus & Associates client, who – in her 90’s – was targeted strategically and relentlessly by unscrupulous phone fraud. From the piece:

“There was a man who was very friendly, very charming.” So begins the tale of a socialite widow from New Jersey horse country who lost nearly $1 million in a lottery scam. Call her Penny. She’s ashamed. “I can’t believe I was so ignorant; nobody can condemn me more than I do myself,” she told me on the line with her lawyer, John O. McManus of New Providence, N.J. “What’s funny is I’m a penny picker-upper; when I think of the amount of money that I gave away to an unknown person, it’s unbelievable,” she says.

How did the scammer convince Penny to part with a lot more than just pennies? “If she sent money, the caller said, she would have a chance to win big.” She started sending checks in hopes of hitting the sweepstakes jackpot, which would give her more money to make a big impact on the community by setting up a charitable foundation to honor her husband and carry on their family tradition of giving.

McManus & Associates was handling the administration of Penny’s late husband’s estate when a representative from Peapack-Gladstone Bank called to say there were suspicious transfers going from Penny to someone in North Carolina for various large amounts. From the story:

When McManus, her accountant, and a representative from the bank questioned Penny, she was tight-lipped. The other banks—worried that she would take her money elsewhere–wouldn’t take a stand. She had threatened to close the accounts…Only when the police came to Penny’s house and told her they confirmed that someone was committing fraud, did she tell the caller to stop.

Elder financial abuse is a widespread problem, with fraudsters stealing billions of dollars from seniors every year. However, planning can protect you and your family, the way that Penny is now protected with the help of McManus & Associates. From the Forbes write-up:

The solution in her case: McManus helped her set up a revocable trust, with Penny and his firm as co-trustees, and her accountant as a backstop. The idea is that the banks now have an excuse to reach out to McManus and not feel they’re in a compromised position of betraying their customer. “We as a firm have become far more paternalistic,” he says.

A revocable trust can be set up at any time, and you can name a trusted relative or friend as co-trustee. A simpler option is to authorize someone you trust as an emergency contact on your financial accounts should something seem amiss. And consider granting that someone you trust “view-only access” to your accounts.

McManus teamed up with Ebeling and Forbes to help others avoid Penny’s pain:

“What we’re trying to do is send a cautionary tale to your mom, my mom, Penny’s friends and their children,” McManus says, adding, “Here is an extreme example to warn those who think it just can’t happen to their family.”

To read more details on the financial elder abuse case in which Penny was a target, read Ebeling’s full Forbes story here. For help setting up a revocable trust to protect your loved ones, contact McManus & Associates at 908-898-0100.

Posted in Media Clips

Bankrate Relays Investment Ideas from McManus in Feature Slideshow

bankrate logoBankrate, which has more than 2.75 million readers, recently turned to McManus & Associates Founding Principal John O. McManus for advice on investments and IRAs. His thoughts are included in the publication’s feature slideshow, “Traditional or Roth IRA: Find out which IRA is better-suited for high-return investments.” From the slideshow:

Pay upfront, watch Roth explode later

Do you benefit from having an extra-long time horizon? Then going full throttle in the Roth IRA is apropos, says John O. McManus, founding principal of McManus & Associates in New York City.

“If you can take a long-term view, opt for a Roth IRA and take an aggressive approach with asset allocation and investing,” he says.

“Roth IRAs buy you a lot more time to allow the market to recover, absent the mandatory distributions of traditional IRAs. Create a self-directed Roth IRA and pour significant capital in it to build horsepower. Then smartly pursue alternative investments to generate the biggest returns,” he says.

“Private equity and real estate are the 2 best areas where real leverage can be achieved with a Roth IRA. The idea is to pay your taxes up front, then really watch returns from your investments explode.”

To view the full slideshow, click here. And to discuss your investment strategy with McManus & Associates, give us a call at 908-898-0100.

Posted in Media Clips Tagged , , , ,

McManus Weighs in on “Ways the Rich Waste Their Money” for GOBankingRates

GoBankingRates logoToday GOBankingRates, which has nearly 350,000 readers, launched an interesting slideshow, “21 Ways the Rich Waste Their Money.” For #6 and #7 on the list, journalist Lia Sestric shared two examples of wasteful spending flagged by John O. McManus, founding principal of McManus & Associates. From the slideshow intro:

When you’re rich, you have more money than you know what to do with. But unfortunately, sometimes having too much money can lead to waste.

From the slideshow, here are two ways some rich people waste their money, compliments of McManus:

  1. Buying Ridiculously Expensive Cars for Kids

Estate planning attorney, John McManus of McManus & Associates, said there’s no reason to buy outrageously expensive, exotic vehicles for teenagers and young adults — especially those who have a record of making bad judgment calls. “A 21-year-old is still developing the frontal lobe of the brain where all the judgment and discerning ability lies,” he said.

Although certain luxury cars might become classics, some might not be worth the hefty price tag in the end thanks to depreciation. “The disproportionate majority of exotic cars more typically depreciate instantly when they roll off the lot,” said McManus. “Even if they don’t, the slightest accident can impact value permanently, sometimes to pennies on the dollar.”

  1. Trying to Launch Their Kids’ Sports Careers

All parents want the very best for their children, and rich people have the money to make it happen. And those who want their kids to launch a career in sports are willing to pay the big bucks to make their dreams a reality.

“Club team dues alone can be $3,000 to $5,000 a year, plus tournaments, private training and out-of-state travel, including flights across the country,” said McManus. But spending thousands of dollars on club teams and sports for a young child can be a total waste of money if the child doesn’t even want to be an athlete.

Here are expanded thoughts from McManus:

[6.] Wealthy individuals buying outrageously expensive exotic vehicles for still-developing young adults is one of the single greatest abuses often tied to the privilege of affluence—one that I hope to see infrequently in my practice. There is no sufficient reason to lavish a $250,000 Aston Martin on an 18-year-old or even a 22-year-old college graduate. The suitor for this 3,500 pound missile should not be a 21-year-old still developing the frontal lobe of the brain where all the judgement and discerning ability lies. Further, while certain exotics such as the DB11 may become an instant classic, the disproportionate majority of exotic cars more typically depreciate instantly when they roll off the lot; even if they don’t, the slightest accident can impact value permanently, sometimes to pennies on the dollar.

For the 21 year old who demonstrates advanced capacity to drive within the speed limit—a rare occurrence since the slightest touch of the gas rockets the vehicle to 65 MPH—this only ameliorates part of the risk: these exotics have very low clearance and their undercarriage can be torn apart pulling off the street heading up an inclined driveway or approaching a speed bump without aplomb and great caution or the inexact science of delicately approaching the curb in favor of scraping the nose underneath by getting too close. Further, law enforcement, not to mention new acquaintances, attracted to glitter and bling, develop the “mistaken” impression that one’s child is spoiled, flush with cash, and, of course, above the law not inoculated from affluenza. Red vehicles, often the color of the exotics, are pulled over more than any other color. These realities should paint the picture of a stop sign in parents’ minds. It’s not arbitrary that auto insurance companies charge male drivers under the age of 25 more for insurance; statistically speaking, they’re involved in more car accidents. Teens and 20-Somethings think it’s cool to drive fast; the rich should not strap their kids to a 3,000-pound rocket and expect to protect their investment and, even more so, their child.

[7.] While some rich folks feel like they have plenty to burn, spending gobs of money on a child’s club or academy sports career, frequently starting in early elementary and continuing into early adulthood, is an extravagance, more times than not. Club team dues alone can be $3,000 to $5,000 a year, plus tournaments, private training and out-of-state travel including flights across the country. Clubs justify that it is necessary for greater visibility of your child for their future careers, but more frequently the top motive is to get greater visibility for the club, to increase membership, and garner more fees. It’s a rare event that challenging and diverse competition can’t be had within just a few hours of travel. From traveling teams to high-dollar private coaches, clinics and tournaments, many wealthy families wrap up their dollars and time away from family and siblings in athletic development for years, only to be met with a career-ending injury, a burned-out teen, or the reality that playing professional or getting recruited just isn’t in the cards. One brilliant and thoughtful coach said, “If you want to see your child a success in life, get them a tutor for their studies and worry less about this team sport” – that is rarely professed.

Certainly, playing sports offers an invaluable learning experience for young people and can contribute to a well-rounded adolescence, but parents should do a gut check every year to ensure they’re not throwing dollars or family time (with the whole family) down the drain to live vicariously through their children. Vacations are missed, resentment is bred and thousands of dollars may be irretrievable.

To see Sestric’s full slideshow for GOBankingRates, click here.

Posted in Media Clips Tagged , , ,

MarketWatch Publishes Article on Cutting Capital Gains Authored by McManus

Sidebar_Logo_Marketwatch

 

5 ways to protect your estate from capital gains taxes

Published: Dec 25, 2015 6:04 a.m. ET

Traditional estate planning is being turned on its head

By JOHN O. MCMANUS

The time-honored approach to estate planning is being turned on its head by significant tax law changes that have taken effect in recent years.

Long-term capital gains tax rates now range from 25% to 33% (when you add together the top federal, state and local rates and Obamacare’s Medicare surtax). So now that the federal estate tax exemption is $5.43 million ($10.86 million for a couple’s combined exemptions), many Americans may no longer be exposed to federal estate taxes, making taxes on income and capital gains more prominent.

In fact, some legal practitioners who spent the first half of their careers zealously transferring assets out of their clients’ estates to avoid estate taxes now expect to spend the second half pushing assets back into their clients’ estates because the estate planning paradigm has changed.

What are the best ways to strategize around capital gains taxes to keep them as low as possible?

Rundown of the tax rules for gifts

To answer that, it helps to first understand the rules about gifts and taxes.

If you give assets to family members or put them into a trust to minimize estate taxes and the assets have appreciated significantly, when they’re sold, the gain (the amount that is taxed) is the difference between your original purchase price and the sale price at the current market value.

That purchase price is known as your “cost basis” (adjusted for any stock splits and dividends). With residential real estate, basis can increase depending on capital improvements to the property; for commercial real estate, basis can be adjusted due to depreciation. Examples of assets with a low basis: Exxon stock your grandfather gave you years ago when he was alive or the Brooklyn brownstone you bought in the 1970s that has appreciated in value by several million dollars.

Without strategic planning, $33,000 in capital gains taxes may be due when an asset is sold with a $100,000 gain, leaving the net proceeds at just $67,000.

When the owner of an asset passes away, the asset’s basis can shift upward, which shrinks the amount of gain that will eventually be taxed upon its sale. The basis then gets reset to the fair market value at the date of death. This is called a “step-up” in basis, and it is essential to many income and gains tax planning strategies. When assets are included in an estate, the Internal Revenue Service (IRS) gives you a capital-gains tax break because of the step-up in basis upon death.

5 capital-gains cutting strategies

Here are five ways you might be able to reduce your capital gains taxes through timely estate planning strategies:

First, consider undoing a trust. Assets that were gifted into trust are not part of an estate, but putting them back into the estate could avoid capital gains taxes.

For example, once a home has been given by a parent to a child and put into trust, the parent can’t live in the home without a lease and scheduled rent payments. But if you decide to live in the home without paying rent, terminate the lease, and create an agreement saying your intention is to undermine the previous trust transfer, the home gets clawed back into the estate.

Second, consider ”upstream gifting.” This is a strategy that involves transferring an asset up the generational chain to an older family member (like your parent) or a trust for the benefit of the older family member. This allows the asset to achieve a step-up in basis at the time of the parent’s death (inherited assets receive a step-up upon death but gifts have no step-up). Upon the parent’s passing, he or she would leave the asset back to the child who made the gift or to his or her descendants. The asset could then be sold, with the new high basis at current market value, free of capital gains tax, on the one condition that the parent survived the transfer from the child by at least one year.

Third, if you and your spouse have highly-appreciated assets, you could consider using a special type of trust. It’s a Joint-Exempt Step-Up Trust (JEST) or an Estate Trust or, if you live in Alaska or Tennessee, a Community Property Trust. Each lets the surviving spouse sell an appreciated asset without the imposition of any capital gains tax after the first spouse’s death. In effect, they provide the benefit of a step-up in basis to current market value upon the passing of the first spouse, so the surviving spouse can sell the appreciated asset without owing any capital gains tax.

These are valuable strategies because it is quite common for assets to be jointly owned between spouses, and the typical step-up in basis upon the death of the first spouse would apply to only 50% of the asset, rather than its full market value at the time.

Just make certain there is a separate side agreement saying this property is treated as community property.

Fourth, take advantage of the home sale tax exclusion. It lets homeowners exclude up to $250,000 of capital gain ($500,000 for a married couple) when they sell if they’ve owned and lived in the home for at least two out of the past five years before the sale.

Fifth, if you have a real-estate investment or artwork you bought as an investment, use a 1031 Exchange. This is a strategy that lets you delay capital gains taxation by rolling over the sale proceeds from the original asset into a new, similar property or piece of art — known as a “like-kind” investment. The new investment takes the original basis, which is carried over based on the original basis of the asset.

When it comes to your estate plan, it may be time to say “out with old and in with the new.”

John O. McManus is founding principal of McManus & Associates, a trusts and estates law firm based in New Providence, N.J.

This article is reprinted by permission from NextAvenue.org, © 2015 Twin Cities Public Television, Inc. All rights reserved.

http://www.marketwatch.com/story/5-ways-to-protect-your-estate-from-capital-gains-taxes-2015-12-25

###

Posted in Media Clips Tagged , , , , , ,

Forbes Confers with McManus on Intra-Family Loans

Forbes

 

Are intra-family loans now a steal? According to a recent story from Ashlea Ebeling of Forbes, the answer is a resounding “yes!” John O. McManus recently spoke with Ebeling on the topic, of which you should take note. From the article:

The terrifically low rate you can use for a short-term intra-family loan is just 0.56% for loans up to three years. Go out up to 9 years and the rate is 1.68%. For loans of 10-years-plus, it’s just 2.61%.

As Ebeling points out, intra-family loans are a good option for parents and grandparents who want to help buttress future generations with buying a house or opening a professional practice, for example. And what if you were to loan $1 million to a family member who then uses it for a private equity investment that doubles to $2 million? From the story:

“I’ve just made $1 million on her balance sheet instead of mine,” explains John McManus, an estate lawyer in New Providence, N.J. who just helped a developer father loan his son the money to invest in distressed commercial real estate in Newark.

Ebeling explains that there’s a new sense of urgency with interest-rate sensitive techniques such as intra-family loans, as the Fed will soon increase rates.

For those who wish to capitalize on the opportunity, McManus shares an important point: If you make a loan to your kids, you need clear terms and documents to back it up. An excerpt from Ebeling’s article:

“People aren’t fastidious about paying the loans back. If you’re not paying it back, then the IRS says you’ve made a gift,” McManus says. He recommends terms that require the kids to pay interest on an annual basis and tells clients to put reminders on their calendars to remind their kids to pay. In a pinch, parents can give kids annual exclusion gifts (for 2016, you can give $14,000 to as many individuals as you’d like without triggering gift taxes) to help them pay the interest. Another technique is loaning them a little extra so they’ll have the money in reserve to pay the interest. Note: Any interest the kids pay is taxable income to you, but if you’ve lent a child less than $10,000 in total, you don’t have to charge interest.

For more tips on intra-family loans, head on over to Forbes and read Ebeling’s full article “Tax-Free Transfer: Intra-Family Loans Are A Steal Now.” For help with setting up an intra-family loan and to take advantage of other estate planning techniques, contact McManus & Associates at 908-898-0100.

Posted in Media Clips Tagged , , , , ,

InvestmentNews Features McManus Column for The Tax-Conscious Adviser

Below is an advice column on capital gains tax strategies by John O. McManus that was published by InvestmentNews for its regular feature, “The Tax-Conscious Adviser.”

Investment News

 

 

tax concious adviser

Estate plans require a fresh look

Thinking around bequests shifts as capital gains tax and estate tax exemption rise

Nov 29, 2015 @ 12:01 am

By John O. McManus

Significant tax law changes mean it’s time to dust off your estate plan. Long-term capital gains tax rates now range from 25% to 33%, with the combination of the top federal, state and local rates and the Medicare surtax. This hike in capital gains tax rates, coupled with the greater federal estate tax exemption, calls for a fresh look at planning strategies.

With the current $5.43 million federal estate tax exemption ($5.45 million for 2016), many people may no longer be exposed to federal (and possibly state) estate taxes. Thus, maneuvering around capital gains tax becomes the primary concern.

While basis is typically the purchase price less adjustments, basis can change or jump upward significantly upon inheritance, which is called a “step-up in basis.” With a step-up in basis, the value of the asset is determined to be the market value of the asset at the time of the step-up.

Historically, practitioners moved assets out of the individual’s estate while that individual was alive to avoid estate tax. However, when assets are gifted during a lifetime, the step-up in basis is not deployed. When assets are included in an estate, they may be subject to estate tax (in today’s environment, not always), but certainly the assets in the estate enjoy a step-up in basis and significant gains tax can be avoided.

UNDERMINE PRIOR GIFTS

How does one employ a step-up in basis when assets have already been irrevocably transferred during lifetime, theoretically surrendering the opportunity to obtain a step-up in basis? One strategy may be to intentionally undermine a prior gifting plan so that assets can be included in the estate to achieve the step-up in basis upon death, particularly if those assets would not otherwise be subject to estate tax.

Next, transferring an asset “up-stream” to a trust for the benefit of the donor’s parents allows an asset to get a step-up in basis upon the parents’ death and then the asset passes back to the donor or his or her descendants in trust. The asset could then be liquidated free of capital gains tax.

Another potentially avoidable problem is tied to older Americans each owning a half interest in their primary residence. After one spouse passes away, the surviving spouse may wish to sell the real estate, but only half of the property received the step-up obtained from the deceased spouse. Trying to move the entire residence to the infirmed spouse’s name prior to death is clever, but the IRS has significant restrictions. What you can do is employ a community property trust with a home (or situs) in Alaska or Tennessee, a joint-exempt step-up trust (JEST), or estate trust while both spouses are not facing imminent death. These moves can provide the benefit of a step-up in basis on the entire residence upon the passing of the first spouse, so the surviving spouse can sell the appreciated asset without the imposition of any capital gains tax.

The tax code permits owners of homes to exclude up to $250,000 of capital gain if they have owned and lived in their home for at least two years out of the five years before a sale. For a married couple, the amount is $500,000. With this strategy, one may be able to exclude some or all of the gain that is taxed on the sale of one’s principal residence. If a surviving spouse sells the home in the year their spouse passes away, they can still file jointly and use both exemptions.

1031 EXCHANGE

When working with investment property including residential rentals, a 1031 exchange enables one to postpone the capital gains taxation by rolling over the sale proceeds into a new investment. A separate corporation needs to be set up to receive the sale proceeds and make the new purchase (all within a short period of time of each other), but it is a wonderfully effective strategy.

Finally, when gifts of appreciated long-term assets are made to charity, no capital gains taxes are owed, because they are donated to charity, not sold in the donor’s name. If you’re holding securities with a loss, it’s better to sell them first, then take the capital loss for tax purposes, and thereafter donate the cash. A charitable remainder trust allows you to make the gift, retain an annuity stream back to the donor in a tax-efficient manner and later contribute it to a charitable entity run by the family making donations to favorite charities.

John O. McManus is an estate planning attorney and the founding principal of McManus & Associates.

http://www.investmentnews.com/article/20151129/FREE/311299996/estate-plans-require-a-fresh-look

###

Posted in Media Clips Tagged , , , , , ,

John O. McManus Featured Expert for Next Avenue (PBS)

The following article written by John O. McManus first appeared on Next Avenue (PBS).

Next Avenue logo

 

 

5 Ways to Keep Capital Gains Taxes Down

How traditional estate planning is being turned on its head

By John O. McManus

November 23, 2015

FEATURED EXPERT

The time-honored approach to estate planning is being turned on its head by significant tax law changes that have taken effect in recent years.

Long-term capital gains tax rates now range from 25 percent to 33 percent (when you add together the top federal, state and local rates and Obamacare’s Medicare surtax). So now that the federal estate tax exemption is $5.43 million ($10.86 million for a couple’s combined exemptions), many Americans may no longer be exposed to federal estate taxes, making taxes on income and capital gains more prominent.

In fact, some legal practitioners who spent the first half of their careers zealously transferring assets out of their clients’ estates to avoid estate taxes now expect to spend the second half pushing assets back into their clients’ estates because the estate planning paradigm has changed.

What are the best ways to strategize around capital gains taxes to keep them as low as possible?

Now that the federal estate tax exemption is $5.43 million, taxes on income and capital gains have become more prominent.

Rundown of the Tax Rules for Gifts

To answer that, it helps to first understand the rules about gifts and taxes.

If you give assets to family members or put them into a trust to minimize estate taxes and the assets have appreciated significantly, when they’re sold, the gain (the amount that is taxed) is the difference between your original purchase price and the sale price at the current market value.

That purchase price is known as your “cost basis” (adjusted for any stock splits and dividends). With residential real estate, basis can increase depending on capital improvements to the property; for commercial real estate, basis can be adjusted due to depreciation. Examples of assets with a low basis: Exxon stock your grandfather gave you years ago when he was alive or the Brooklyn brownstone you bought in the 1970s that has appreciated in value by several million dollars.

Without strategic planning, $33,000 in capital gains taxes may be due when an asset is sold with a $100,000 gain, leaving the net proceeds at just $67,000.

When the owner of an asset passes away, the asset’s basis can shift upward, which shrinks the amount of gain that will eventually be taxed upon its sale. The basis then gets reset to the fair market value at the date of death. This is called a “step-up” in basis, and it is essential to many income and gains tax planning strategies. When assets are included in an estate, the Internal Revenue Service (IRS) gives you a capital gains tax break because of the step-up in basis upon death.

5 Capital-Gains Cutting Strategies

Here are five ways you might be able to reduce your capital gains taxes through timely estate planning strategies:

First, consider undoing a trust. Assets that were gifted into trust are not part of an estate, but putting them back into the estate could avoid capital gains taxes.

For example, once a home has been given by a parent to a child and put into trust, the parent can’t live in the home without a lease and scheduled rent payments. But if you decide to live in the home without paying rent, terminate the lease, and create an agreement saying your intention is to undermine the previous trust transfer, the home gets clawed back into the estate.

Second, consider “upstream gifting.” This is a strategy that involves transferring an asset up the generational chain to an older family member (like your parent) or a trust for the benefit of the older family member. This allows the asset to achieve a step-up in basis at the time of the parent’s death (inherited assets receive a step-up upon death but gifts have no step-up). Upon the parent’s passing, he or she would leave the asset back to the child who made the gift or to his or her descendants. The asset could then be sold, with the new high basis at current market value, free of capital gains tax, on the one condition that the parent survived the transfer from the child by at least one year.

Third, if you and your spouse have highly-appreciated assets, you could consider using a special type of trust. It’s a Joint-Exempt Step-Up Trust (JEST) or an Estate Trust or, if you live in Alaska or Tennessee, a Community Property Trust. Each lets the surviving spouse sell an appreciated asset without the imposition of any capital gains tax after the first spouse’s death. In effect, they provide the benefit of a step-up in basis to current market value upon the passing of the first spouse, so the surviving spouse can sell the appreciated asset without owing any capital gains tax.

These are valuable strategies because it is quite common for assets to be jointly owned between spouses, and the typical step-up in basis upon the death of the first spouse would apply to only 50 percent of the asset, rather than its full market value at the time.

Just make certain there is a separate side agreement saying this property is treated as community property.

Fourth, take advantage of the home sale tax exclusion. It lets homeowners exclude up to $250,000 of capital gain ($500,000 for a married couple) when they sell if they’ve owned and lived in the home for at least two out of the past five years before the sale.

Fifth, if you have a real estate investment or artwork you bought as an investment, use a 1031 Exchange. This is a strategy that that lets you delay capital gains taxation by rolling over the sale proceeds from the original asset into a new, similar property or piece of art — known as a “like-kind” investment. The new investment takes the original basis, which is carried over based on the original basis of the asset.

When it comes to your estate plan, it may be time to say “out with old and in with the new.”

http://www.nextavenue.org/5-ways-to-keep-capital-gains-taxes-down/

###

Posted in Media Clips Tagged , , , ,

McManus Speaks to Year-End Tax Planning Strategies for Investment News

Investment News

 

Reporter Greg Iacurci tackled year-end tax planning strategies in a recent piece for Investment News. To help identify where the focus of advisers should be, Iacurci spoke with John O. McManus, estate planning attorney and founder of McManus & Associates.

The Investment News story, “Year-end tax planning strategies advisers should be considering,” encourages exploration of end-of-year tax considerations now, with just two months left in 2015. As Iacurci points out, “tax rules are largely unchanged,” so “tactics employed last year will more than likely still be relevant.”

Two important considerations? Tax-loss harvesting and moving assets into trust to avoid gains tax. From the article:

Financial markets haven’t been particularly strong this year, which provides an opportunity for advisers to do tax-loss harvesting, according to John McManus, founder of McManus & Associates.

Tax-loss harvesting involves selling assets that have incurred losses in taxable accounts to offset taxes due to gains elsewhere in the portfolio. It’s a strategy advisers especially turned to following recent bouts of market volatility.

“Given the markets have been flat, for sure you should be picking through your portfolio to find the pieces that have losses and harvest those,” Mr. McManus said.

Through Oct. 29, the S&P 500 index was up 1.5% for the year.

Market performance this year also creates a tax opportunity from an estate-planning standpoint, Mr. McManus added.

For example, there’s a federal tax exemption for assets up to $5.43 million, and anywhere from $675,000 to $5 million at the state level, when transferred upon death. For assets beyond these thresholds, tax rates are 40% and roughly 10%, respectively, Mr. McManus said.

However, clients can essentially accelerate the exemption by establishing a trust during their lifetime, forfeiting the exemption they would have gotten at death.

“This year, since the markets are flat, we’re poised to probably see some [market] growth going forward, so give the assets [to the trust] before the growth takes place,” Mr. McManus said. That way, there wouldn’t be any estate taxes on gains in the trust.

For more important strategies that should be examined to help minimize your tax burden going into the last two months of the year, read the full Investment News story here.

To take advantage of asset preservation opportunities before they expire with the New Year, contact McManus & Associates at 908-898-0100.

Posted in Media Clips Tagged , , , , , , ,