Conference Call: Tax and Estate Planning Considerations for Same-Sex Couples

Nearly a year ago, on June 26, 2015, the U.S. Supreme Court ruled in Obergefell v. Hodges, delivering a historic decision in favor of State recognition for same-sex marriage. Exactly two years prior to this decision, in United States v. Windsor, the U.S. Supreme Court struck down the constitutionality of Section 3 of the Defense of Marriage Act (DOMA), which defined marriage for federal purposes as existing only between one man and one woman.

“In its most basic terms, recognition of same-sex marriage equates to the simple fact that a spouse is now a spouse, irrespective of gender, in the eyes of the law,” commented McManus. “Today, there are opportunities and protections within reach for same-sex couples that were unavailable during most of American history.”

Recently, during a conference call with clients, McManus & Associates Founding Principal John O. McManus shed light on the far-reaching effects of these Supreme Court decisions.

LISTEN HERE for details: “Top 10 Tax and Estate Planning Considerations for Same-Sex Couples”

Top 10 Tax and Estate Planning Considerations for Same-Sex Couples

  1. Gender-blind: First and foremost, when discussing the changes born of the recognition of same-sex marriage, the overarching theme is that there is no need to draft estate planning documents any differently for same-sex couples. In the eyes of the federal and state governments, same-sex and opposite-sex married couples are afforded the same tax benefits.  Whether a Will was executed before the date of Obergefell (6/26/15) makes no difference. The law that applies is the law at the date of the Testator’s death. Pursuant to Obergefell, states MUST recognize same-sex marriage.
  2. Unlimited Marital Deduction:  Same-sex couples that marry are eligible to take advantage of the unlimited marital deduction for federal estate and gift tax. Prior to Obergefell, same-sex couples had to rely on their applicable exclusion amount with regard to providing for the surviving spouse. It is important for same-sex couples to review with their wealth planning and tax advisors any existing estate planning in order to best utilize the tax-saving vehicles available to them.
  3. Portability:  In addition to the unlimited marital deduction, the surviving spouse is entitled to the portability provision under federal estate and gift tax law. Pursuant to the portability provision, a surviving spouse may preserve, and thereafter utilize, any portion of the deceased spouse’s unused applicable exclusion amount. One benefit of portability is to allow the surviving spouse to make tax-free gifts in order to reduce the estate tax owed upon the survivor’s death. For more information on portability, please see an in-depth discussion of the top 10 possibilities of portability:
  4. Gift Splitting: Each individual is given the right to make gifts on a tax-free basis for federal gift and generation skipping transfer tax. The annual exclusion amount is currently $14,000. Now same-sex couples can enjoy the benefits of gift splitting, whereby one spouse can gift from their own assets, with the consent of the other spouse, in order to utilize both of their annual exclusion amounts (currently $28,000 maximum to any individual) resulting in the gifting spouse’s applicable lifetime gift tax exemption amount remaining intact. Generally, gift splitting requires the filing of a Form 709 Gift Tax Return; however, if the split gifts total $28,000 or less to each donee, only the donor spouse is required to file a gift tax return.
  5. Beneficiary Designation of Retirement Benefits:
    1. Retirement account assets of a deceased same-sex spouse can now be “rolled over” into the surviving spouse’s account without the requirement of a mandatory minimum distribution or lump sum distribution. This is a positive development because prior to the recognition of same-sex marriage this roll-over was not possible.
    2. With regard to an ERISA covered plan, the Windsor decision made it possible for the same-sex spouse of a participant in the plan to automatically be the beneficiary. The participant is now required to obtain consent from his or her spouse if that spouse is not the desired beneficiary of the plan.
    3. All state-level employment benefits should be reviewed and updated with the same-sex spouse information in order to take advantage of the rights and benefits available to the same-sex spouse. Review employer’s benefits policies – spousal benefits granted to same sex couples.
    4.         Also review prenuptials and other marital agreements.
  6. Insurance:  Insurance planning may have been part of same-sex planning prior to the Obergefell decision. All policies, along with beneficiary designations, should be reviewed in conjunction with the new planning concepts for a streamlined flow of assets upon both the first death and the death of the surviving spouse.
  7. Review previously filed federal tax returns:  Same-sex spouses may amend previously filed federal estate, gift, and income tax returns from single to married status, subject to the statutory limitations period of three years from when the tax return was originally due or filed (if on extension) or two years from the date the tax was paid, whichever is later. Married couples living in states that did not recognize same-sex marriages prior to Obergefell may be able to amend filed state income tax returns for the years 2012, 2013, or 2014, depending on the law of the state.
  8. Natural Born and Adopted Children: A child, whether born or adopted into the same-sex union, needs to be specifically identified throughout the estate planning documents. The relationship of the child to the adoptive parent or parents or birth parent in a same-sex married couple can be cause for contest at the death of the legal parent if not planned for ahead of time.
    1. If a child is born to one spouse, the other spouse should strongly consider adoption of the child to legalize the relationship. If there is no legal relationship between the child and the spouse of the natural parent, a relative of the natural parent could fight for custody if the natural parent dies or fails to care for the child.
    2. The same issue applies to a child who is only adopted by one spouse. Same-sex couples may consider co-parent adoption to ensure that both parents have rights regarding child custody and guardianship.
    3. If a partner has a child and the other partner plans to adopt that child, he or she is eligible to receive an adoption tax credit. This credit is not available for a spouse adopting his or her spouse’s child. If a couple is planning to marry and an adoption is part of the big picture, it may be more advantageous for the adoption to take place before the couple marries.
  9. Non-Citizen Spouse May Consider Becoming a Citizen:  Non-citizen same-sex spouses are afforded the opportunity to become U.S. citizens on the basis of their marriage to a spouse of the same sex who is a U.S. citizen. This eligibility should be considered carefully, taking all ramifications into account. For example, as a U.S. citizen the individual would be taxed by the U.S. on their worldwide income.

Also, expatriating from the U.S., renouncing your U.S. citizenship, and returning to your native country can be an expensive proposition. To expatriate, you generally must prove five years of U.S. tax compliance. If you have a net worth greater than $2 million or average annual net income tax for the five previous years of $160,000 or more, you must pay an exit tax. It is a capital gain tax as if you sold your property when you left. In addition, the U.S. State Department has raised the fee for renouncing U.S. citizenship from $450 to $2,350.

  1. Review current estate plan:
    1. Due to the tax-saving venues opened to same-sex couples, it is beneficial for the couple to review all existing plans in order to maximize federal and state estate, gift, and income tax planning.
    2. Beneficiary designations for insurance and retirement benefits should be reviewed in order to align the designations accordingly.
    3. Re-title any property with joint ownership to ownership by the couple as tenancy by the entirety. In community property states, the couple may want to convert separately-owned property to community property in order to receive a step up in basis upon the death of the survivor of the spouses.
    4. Confirm that definitions in the estate planning documents correctly reflect relationships, for example “spouse,” “husband,” “wife,” and/or “children,” whether naturally born or adopted.
    5. Determine if there is a necessity for a “no contest” clause to be incorporated in the event family members disapprove of the same-sex couple’s lifestyle or decisions regarding the estate plan.
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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

McManus Pens Letter to the Editor Responding to New York Times Story on Privilege

New York Times graphic

Recently, the New York Times ran a story by Nelson D. Schwartz, titled “In an Age of Privilege, Not Everyone Is in the Same Boat (A1, April 24).” John O. McManus – McManus & Associates’ founding principal who grew up in the Bronx but has worked with high net worth families for 25 years – penned the Letter to the Editor below in response:

To the Editor:

Marketers see countless opportunities embodied by those striving to scale our country’s caste system of privilege – but their target audience is mistaken about from where happiness springs eternal. For many years, I was the poster child for this market: making every effort to rise to the top, circling that zip code of privilege. Starting life in the Bronx, there was nothing more coveted than a future exodus and the concomitant elbow-rubbing with the financial elite. For the past 25 years, I have represented high net worth families as an estate planning lawyer. The journey has been deeply rewarding, but – unlike what I had imagined as a kid – I’ve discovered that the richness of life is not universal among, nor exclusive to, this financially homogeneous group. Rather than exerting unending effort to be included in the newest club of privilege, I’m learning that sharing the wealth with the less advantaged may be the greater source of enduring satisfaction.

To read Schwartz’s full article for the New York Times, click here.

Posted in Letters to the Editor Tagged , , , , , ,

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.

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3 Last-Minute Income Tax Strategies

Photo credit: Lendingmemo

Photo credit: Lendingmemo

Scrambling as we approach April 18th? Here are three last-minute tax strategies to harness for proper management of the deadline.

If you need additional time to file your personal income tax return, file an extension:

The deadline to file your tax return is April 18, 2016 (April 19, 2016, if you live in Maine or Massachusetts).

If you cannot file your return on time, apply by the due date of the return for an extension.  You can receive an automatic six-month extension for your personal income tax return if you file Form 4868 by the tax filing deadline.  (If you are mailing the extension, you should mail it certified with a return receipt, so that you have proof of the mailing date.) The extension gives you until October 17, 2016 to file your 2015 return.

This extension is for filing only and does not allow you more time, without penalty, to pay your tax liability for 2015.  Although the extension will be allowed without payment, you will be subject to interest charges and possible late payment penalties on 2015 taxes not paid by April 18th (or April 19th in Maine or Massachusetts).

If the amount paid with Form 4868, plus withholding and estimated tax payments for 2015, are less than 90% of the amount due, you will be subject to a late payment penalty (one-half of 1% of the unpaid tax per month).

If you are out of the country on the tax filing due date:

You do not get an automatic extension for filing your tax return due to being out of the country on the filing due date.

The only exceptions are for US citizens and US residents who live and have their main place of business outside of the US, and for military personnel stationed outside the US.  If you qualify, you will be allowed an automatic, two-month extension until June 15, 2016, without the need to request it.  However, interest will be payable from the original April 18th/19th due date on any unpaid taxes.  If you cannot file within this two-month period, you should get an additional four-month extension by filing form 4868 by June 15, 2016.  Also, a late payment penalty may be imposed on any tax liability not paid by June 15, 2016.

Extension of time to file returns other than personal income tax returns:

An estate or trust, which has a due date of April 18th/April 19th, can apply for an automatic five-month extension, using Form 7004 (until September 15, 2016).

A private foundation has a filing due date of May 15, 2016 and can apply for an automatic three-month extension, using Form 8868 (until August 15, 2016). It can also file for an additional three-month extension if it provides an adequate explanation why the return cannot be filed by the extended due date.  The IRS will evaluate the application based on the organization’s efforts to fulfill the filing requirements, rather than on the convenience of their tax professional.  The IRS instructions provide that, if the foundation’s tax professional is unable to complete the return by the due date for reasons beyond its control, such as the financial statements or books and records require further review and analysis, the IRS will generally grant the additional three-month extension.

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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.

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Many Millionaires Are Down on the Stock Market – Should You Be?

Last Friday, Brian O’Connell penned a piece for TheStreet on what millionaires being down on the stock market means for regular investors. Here are thoughts from John O. McManus, founding principal of McManus & Associates:

With the wealthy keeping a tight rein on their dollars, the market remains flat to down. Because millionaires feel poorer, they’re spending less on creature comforts, which can cause the economy to slow. We saw this in the Great Recession – fewer vacations and pricey dinners, less frequently cut lawns and cleaned pools, and fewer wallets opened for cars, high-end fashion, jewelry and more. When millionaires are soured on the market, regular investors should view this as a red flag, because the rich tend to spend the most on guidance from top-notch advisors and can afford to be patient and invest for the long-haul. If millionaires are pulling out of the market or not investing, there’s no reason regular investors should do the opposite. That said, many millionaires may still be invested in the market, because they can afford to take a long view.

Click here to read O’Connell’s story, “Why So Many Millionaires Are Down on the Stock Market And What That Means to Main Street Retirees.”

How should your investment strategy shift in light of a shaky stock market? Set up a time for a discussion with McManus & Associates by giving us a call at 908-898-0100.

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MarketWatch Publishes Article on Cutting Capital Gains Authored by McManus



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


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, © 2015 Twin Cities Public Television, Inc. All rights reserved.


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Forbes Confers with McManus on Intra-Family Loans



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.

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