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

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

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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


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.”


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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.

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Educational Focus Series: Top 10 Possibilities of Portability

A significant opportunity presented by Uncle Sam, portability was first introduced as part of Tax Relief Unemployment Reauthorization and the Job Creation Act of 2010. It was scheduled to sunset on December 31, 2012 but was made permanent with passage of the American Taxpayer Relief Act of 2012. McManus & Associates, a top-rated estate planning law firm with offices in New York and New Jersey, today released the “Top 10 Possibilities of Portability.” Part of the firm’s Educational Focus Series, the discussion was led by Founding Principal and AV-rated Attorney John O. McManus, who shared guidance on transferring unused federal estate tax exemption amounts and the critical steps that must be taken to utilize this important estate and income tax tool.

LISTEN HERE: “Top 10 Possibilities of Portability”

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“Portability is one of the single best gifts that the IRS has given us,” commented McManus. “When people have failed to otherwise use gift tax exemptions, they now have the opportunity to pick up their late spouse’s exemption.”

In general, portability allows a surviving spouse whose husband or wife died after January 1, 2011 to use the Deceased Spouse’s Unused federal estate tax Exemption, otherwise known as DSUE. When one owns assets less than his or her lifetime exclusion amount and passes away first, portability has the potential to correct issues associated with unbalanced asset ownership between spouses and inefficient estate documents that leave all assets to the surviving spouse.

 Top 10 Possibilities of Portability

  1. Time is of the essence. To take Uncle Sam up on his offer, the decedent’s estate must make an election for portability on a timely-filed estate tax return.
    • The IRS may grant a reasonable extension of time to make an election if the taxpayer provides evidence to establish they acted reasonably and in good faith, and that granting relief will not prejudice government interests. Most often an extension of time to make an election is granted if the estate was not required to file a return.
    • The time limit on when the IRS can review the first deceased spouse’s estate tax return is extended until the statute of limitations runs out on the surviving spouse’s estate tax return (starting at 9 months and extension goes to 15 months).
    • The executor with counsel must include the computation of the DSUE amount for which the portability election is to be made.
  2. Executor in charge. Electing portability is the responsibility of an executor.
    • If there is no appointed executor, the “executor” for this purpose is any person in actual or constructive possession of property of the decedent (a “non-appointed executor”).
    • Multiple appointed executors are all required to sign an estate tax return in order for the return to be valid. There is no exception made for a return electing portability.
  3. Who makes the cut? DSUE can be used only by a citizen or permanent resident surviving spouse (not a non-resident alien), during his/her lifetime or at his/her death.
    • Portability is not available if the decedent was not a U.S. citizen or resident, unless otherwise provided by treaty.
    • If a decedent leaves property to a non-citizen spouse in a qualified domestic trust (QDOT), the DSUE amount of the decedent may be included in the surviving spouse’s applicable exclusion amount only after the QDOT assets have been distributed, the death of the surviving spouse, or early termination of the QDOT.
    • A non-US citizen surviving spouse is not able to use the DSUE amount from the deceased spouse to make lifetime gifts except in a situation in which the QDOT has been entirely distributed to the surviving spouse in a year prior to the surviving spouse’s year of death, the surviving spouse has become a U.S. citizen, or the gift was made by the surviving spouse in the year of death.
    • Same-sex surviving spouses who did not file for portability for a death after December 31, 2010 and before January 1, 2014 may file Form 706 and elect for portability retroactively, provided that the executor was not required to file an estate tax return.
  4. The ins and outs of portability. DSUE can be used during one’s lifetime and reported on Form 709 Gift Tax Return, or it can be used at death and reported on Form 706 Estate Tax Return.
    • Only the last deceased spouse’s unused exemption amount is portable. If the surviving spouse remarries and the second spouse dies, the surviving spouse can only use the DSUE of the second deceased spouse.
    • However, the surviving spouse may use the first deceased spouse’s DSUE by making lifetime gifts while the first deceased spouse is the surviving spouse’s last deceased spouse (second spouse has not died).
    • Portability does not apply to the generation skipping tax (GST) exemption outside of trust as this exclusion is separate from the unified transfer tax credit available for estate and gift taxes.
    • The ported DSUE does not index for inflation, which contrasts with the possibility to shelter from estate tax all growth in a credit shelter trust
  5. “Lifetime gifting” – pass it down. Use DSUE to make lifetime gifts, especially if the surviving spouse remarries.
    • Gift assets into grantor trusts for descendants up to the unused federal exemption amount, which would pass state estate tax-free.
    • Be careful in states that have a gift tax (Connecticut and Minnesota).
    • Grantor trusts allow the surviving spouse as the grantor to pay income tax to further grow the assets in trust.
    • The surviving spouse would need to give up control of the assets in trust, but could still borrow against those assets, as well as ”direct” the assets by appointing and removing trustees
  6. Continue to place trust in trusts. Portability is a valuable estate planning tool, but it does not negate the need for trusts to capture state estate tax exemptions and for asset protection.
    • Since state exemptions are not portable, continue to fund credit shelter trusts with the state estate tax exemption amount ($675,000 in NJ; $3,125,000 in NY; and $2,000,000 in CT). Within the credit shelter (state exclusion) trust, the state estate tax exemption is captured (sheltered) for the first deceased spouse’s estate so that both spouses fully utilize the state exemption amount lowering estate tax on their combined estates.
    • All growth in the credit shelter trust will also pass estate tax-free to the remainder beneficiaries (i.e. the children).
    • Amounts above the state exemption should also be in trust (a QTIP (marital) trust) as opposed to outright to provide asset protection for the surviving spouse against attack from third parties. Having the surviving spouse serve as trustee allows for flexibility.
  7. Look before you leap! Planning considerations have shifted with changed tax rates. The traditional strategy of funding a family trust and a marital trust for the surviving spouse now demands more in-depth analysis.
    • The capital gains tax rate has increased and is now a higher rate than state estate tax.
    • Instead of funding into a traditional credit shelter trust with only a step-up at the first spouse’s death, it may be better to fund certain assets into a GST exempt QTIP trust and get a second step-up at the surviving spouse’s death, as well as a GST exempt transfer. A GST-exempt QTIP would also provide for asset protection. This trust will be included in the surviving spouse’s estate but can utilize the ported DSUE to reduce federal estate tax on the second spouse’s death.
    • Low-basis assets (which will experience significant tax on sale) can then be captured in the estate of the surviving spouse to get a second step-up in basis on the surviving spouse’s death.
    • The DSUE will ensure that no federal estate tax will be due on the surviving spouse’s estate provided the total estate is under $10.86MM
    • A less significant state estate tax cannot be avoided, but the step-up in basis on the assets in the surviving spouse’s estate could save over $1.0MM in tax on the gains.
  8. All things considered… How and when to use portability should be evaluated on a case-by-case basis because estate plans are not one-size-fits-all.
    • A surviving spouse who has a DSUE amount should take this into account when negotiating a premarital agreement with a new spouse, and either obtain compensation for the DSUE amount that will be lost (since the new spouse impacts the amount to be ported) or have the new spouse create a lifetime credit shelter trust with assets comparable to the DSUE surrendered from the earlier spouse.
    • There must be an independent fiduciary (executor) who will elect what is in the best interests of the estate, as there may be inherent competing interests.
    • For some individuals, the portability election should be referenced in the estate plan. A provision directing the executor or trustee to elect portability of any unused exemption could be prudent, particularly if it is a second marriage and the children do not want their surviving step-parent to have the exemption or other situation where family tension is likely.
  9. States have yet to follow in the footsteps of Uncle Sam. Portability is not applicable on the state level.
    • Currently, there is no portability for the state estate tax exemption amount.
    • It is still necessary to capture the state estate tax exemption amount in a trust to ensure that both spouses’ state exemptions are maximized.
    • New York has been explicit that its move to equalize the state exemption with the federal exemption does not include portability.
    • Even when combining exemptions, there will likely still be a state estate tax.
  10. Should it stay or should it go now? It’s important to recognize that portability may not last forever.
    • Portability could disappear if the tax law changes; however, it attracted strong bipartisan support in Congress.
    • If portability is eventually repealed or modified, those who rely on it as an estate planning device could pay millions in unnecessary taxes if they have not already made the election.
    • Balancing the use of portability and trusts for the surviving spouse may provide the best protection against estate tax moving forward.
    • There must be a keen analysis performed after death to address the long term consequences, and if possible a pre-mortem analysis performed to assure that investment positions are still properly held.

For first-class assistance with estate and income tax planning, call McManus & Associates at 908-898-0100.

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McManus Raises Concern about Reverse Mortgages in Investment News Article

investmentnewslogoGreg Iacurci, reporter for Investment News, recently explored reverse mortgages, a type of home equity loan for borrowers age 62 and older that allow homeowners to access part of their home equity in cash. For his story, “Advisers like reverse mortgages, but only in unique circumstances,” Iacurci interviewed John O. McManus, founding principal of McManus & Associates, who shared some words of caution.

While reverse mortgages may be an ok option for clients who plan to stay in their home indefinitely and who could use some supplemental income, McManus warned against draining one of your most valuable assets to pass down to children or other loved ones. From the article:

Further, for those looking to leave an inheritance for children, borrowers should expect not to be able to bequeath the home, John McManus, founding principal of McManus & Associates, said.

“It’s particularly destructive if you need to transfer assets down to your children, and they need the money,” Mr. McManus said, giving the examples of an indigent or special needs child, or a child living at home.

What is a reverse mortgage? Iacurci explains:

Reverse mortgages are a type of home equity loan for borrowers age 62 and older that allow homeowners to access part of their home equity in cash. The loan amount depends on home value (capped at $625,500), interest rate and age of the borrower. Unlike with traditional loans, there’s no monthly payment — rather, the principal and accrued interest come due when a borrower dies or moves.

Money can be accessed through a line of credit, monthly installments, a combination of those options, or a lump sum. Fixed interest rates are only available via a lump sum.

Advisers say that reverse mortgages can be a useful financial planning strategy, but one that should only be used in very specific circumstances. According to Iacurci, “Consensus thinking on reverse mortgages is that it’s a strategy mainly for clients who know they’ll stay in their home for the remainder of their lives.”

To read more about the pros and cons of reverse mortgages, read Iacurci’s article here.

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VIDEO: John McManus Presents Estate Planning 101 at FAE

John O. McManus recently presented on Estate Planning Basics at the Foundation for Accounting Education (FAE). Sharing compelling client examples and colorful analogies to aid understanding, McManus discussed Wills, Revocable Living Trusts, Durable Powers of Attorney, Health Care Proxies, and Living Wills.

In addition to learning about essential estate planning vehicles, watch video of the presentation below for answers to important questions related to estate tax planning and planning for incapacity.

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McManus Interviewed by The Washington Post on Money Milestones

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Washington Post Reporter Jonnelle Marte recently interviewed McManus & Associates Founding Principal John O. McManus on financial goals that people should aim to achieve in their 40s. Jonnelle’s piece, “5 Money Milestones to Hit While You’re in Your 40s,” was published last week and re-published by Tulsa World on Sunday.

McManus’ insight informs two milestones from the article: one related to wills & estate planning and the other life insurance. From the story, here’s Milestone #4:

4. Update your will and estate plan: A few things may have changed since you last reviewed your will. You might have had another child, gotten divorced or been newly married. These changes would make it time to update your will to make sure your home, savings and other assets will go to the appropriate people after you die, Turner says. “If your ex-spouse is the beneficiary for your retirement plan you want to change that,” Turner says, adding that people should double check the beneficiaries for your 401(k) and life insurance policies.

The rules for how a person’s estate will be broken up after death vary from state to state, says Peter Creedon, a financial adviser in Mount Sinai, N.Y. For instance, some states may pass assets on to a domestic partner while other states will not, Creedon says, making the will the best method for explaining who should inherit assets. Talk to a lawyer or financial adviser about getting the documents in order. People with simple situations may get by using online services such as LegalZoom, which will create a will for prices starting at $69.

Parents should name guardians and put together a plan for what should happen to their children if they died, says John O. McManus, a trusts and estates lawyer in New York City. Those instructions can include guidelines for medical treatment and preferences on what type of school they would like their child to attend, he says. Parents who have amassed a sizeable amount of savings — think millions — may want to create a trust that would help them pass the money on to their children in a tax efficient way, he says.

And here’s Milestone #5:

5. Review your life insurance: At this age, buying life insurance can be about more than just protecting your children and your spouse. Business owners — especially those who have had some success — may want to buy a life insurance policy to help protect their businesses, McManus says. A spouse or a child inheriting a business worth more than $5 million may need to pay taxes on that transfer and the bill may be due in less than a year, he says. If they don’t have the cash on hand to cover the tax bill, they may be forced to liquidate the company to cover the tax bill, he says.

A life insurance policy could provide the funds to cover that tax bill and allow the family to keep the business intact, McManus says. Single people with small businesses may not have to worry about this, he adds, since smaller estates may not be subject to federal taxes.

If you don’t own a business, a life insurance policy is still good for protecting your family and your assets. If one spouse dies, the coverage could help the other spouse financially when it comes to paying the mortgage and supporting the children. And it isn’t just the working spouse who needs to be covered, advisers say. A life insurance policy can help pay for child care and other costs if a stay-at-home parent dies.

Head on over to The Washington Post to read Marte’s full article. For help with updating your will, reviewing your life insurance policy and other money milestones throughout your life, reach out to McManus & Associates at 908-898-0100.

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McManus Weighs In on Critical Healthcare Issue during NPR Episode

The Leonard Lopate Show covers issues of interest to New Yorkers, from contemporary art to current events. It’s in the NPR family and is produced by WNYC.

Yesterday, the radio show explored the extremely important topic “How to Access the Best Healthcare” with guest Leslie Michelson, author of The Patient’s Playbook: How to Save Your Life and the Lives of Those You Love. The episode, which focused on how to be a smarter health care consumer, was introduced with the fact that 400,000 Americans die every year from preventable medical errors. And many others “receive less than optimal care, even though it’s readily available to them and their insurance will cover it.” With priceless advice on how to avoid being a victim of this crisis, Michelson discussed how to choose the right doctor, coordinate the best care, and make good medical decisions.

John O. McManus, who has decades of experience ensuring that families are prepared and protected when faced with dire medical situations, called in during the show to add a key observation: It’s critical to name people who will step in and act on your behalf, if you are ever incapacitated. Without choosing representatives to serve as our advocates, we’re left at the mercy of the medical community.

In response to John’s point, Leslie said, “I couldn’t agree with you more…the best [health]care in the world doesn’t go to the wealthiest people; it goes to the people who are the savviest healthcare consumers.”

Listen to the full episode for more detailed advice from Leslie Michelson.

Call McManus & Associates at 908-898-0100 to discuss legally appointing healthcare representatives for you and your family members. Only advance planning will enable these advocates to help when it’s needed most.

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CAPITAL GAINS TAX: The Top 10 Current Issues and Planning Opportunities

The rise in capital gains tax rates and the higher federal estate tax exemption have shifted the estate planning paradigm. Across the nation, long-term capital gains tax rates now range from 25% to 33%, with the combination of the top federal, state and local rates, along with the Medicare surtax. This demands a fresh look at current planning strategies.

When assets are included in an estate, they are subject to estate tax, but the assets enjoy a step-up in basis for income-tax purposes. Gains tax can then be avoided. However, if there is no estate tax because the gross estate assets are below the estate tax exemption amount, then it may make sense to keep assets inside the estate.

Many estate planning attorneys have spent the first half of their careers getting assets out of their clients’ estates, but now they might spend the second half of their careers getting assets back into their clients’ estates (for those individual estates under $5.43MM or joint estates under about $11MM).

As part of McManus & Associates’ Educational Conference Call series, John O. McManus this month examined how to shift gears in light of new, unique opportunities. We invite you to listen to the recording to find detailed information on the Top 10 issues and planning opportunities related to capital gains tax.

LISTEN HERE: “Top 10 Current Issues and Planning Opportunities with Capital Gains Tax”

  1. The Basics of Basis. Cost basis is the original acquisition value of an asset for tax purposes (usually the purchase price or the inherited price), adjusted for stock splits, dividends and return of capital distributions. This original value is used to determine the capital gain – and becomes the difference between the asset’s cost basis and the current market value.
    1. Assets with a high basis include cash (which actually has no basis) and recently purchased assets that have not yet appreciated.
    2. Assets with a low basis include Exxon stock your grandfather gave to you and a Brooklyn brownstone purchased in the ‘60’s that have significantly appreciated.
  2. Striking while the Step-Up’s Hot. A step-up in basis is the readjustment of the value of an appreciated asset for tax purposes. With a step-up in basis, the value of the asset is determined to be the higher market value of the asset at the time of transfer, not the value at which the original party purchased the asset.
    1. When an asset is gifted to an individual or to a trust, there is a carryover of the original basis – meaning there is no step-up in basis. Although the asset is now outside the grantor’s estate for estate tax purposes, upon the sale of the asset, there will be capital gains tax to be paid.
    2. When an asset is included in a decedent’s estate, the asset receives a step-up in basis to the date of death value at that time. The asset can be sold to avoid any capital gains tax.
  3. Transfer Up to Get Capital Gains Down. Transferring an asset “upstream” to your parents or a trust for the benefit of your parents will enable the asset to get a step–up in basis upon the parents’ death.
    1. At that time, the parents would leave the asset back to the client or the client’s descendants in trust, and the asset could then be liquidated free of capital gains tax.
    2. Don’t forget that you use part of your lifetime exemption based on the value of the upstream gift.
  4. Remember the Second Half of Estate Planning Attorneys’ Careers? Assets previously gifted by clients directly to family members or in trust for estate tax minimization purposes may have appreciated significantly, causing unintended capital gains tax consequences for their loved ones.
    1. With the current $5.43MM federal estate tax exemption, clients may no longer have exposure to estate taxes. Thus, they may consider intentionally undermining the prior gifting plan to cause the asset to be included in their estate, achieving the step-up in basis on death.
    2. If we prepared your trust, we provided an asset substitution provision, which allows you to swap low basis assets out of the trust back into the estate. This would allow a step-up in basis upon death.
  5. Speeding up the Process when You Want to Sell Now. For older clients who wish to sell highly appreciated assets in the near-term, several trust strategies can provide the benefit of a step-up in basis upon the passing of the first spouse.
    1. For jointly held assets, if the surviving spouse were to sell after the first spouse’s passing, the survivor would still owe capital gains tax on his or her remaining 50% interest in the asset.
    2. Community Property Trusts with a situs in Alaska or Tennessee, Joint-Exempt Step-Up Trusts (JEST), and Estate Trusts are all planning vehicles that are structured to allow for the surviving spouse to sell an appreciated asset without the imposition of any capital gains tax after the first spouse’s death. Make certain that there is a separate side agreement that the property is treated as community property
  6. Tinkering with the Taxation of Capital Gains in a Trust. For non-grantor trusts, long-term capital gains are not included in distributable net income (DNI) and are taxed at the top marginal rate.
    1. The trust itself may allow for the trustee to have discretionary powers to distribute principal, as well as the power to shift capital gains to income for inclusion in DNI.
    2. An alternate for the power to adjust is the use of the state unitrust statute. A unitrust generally allows a fiduciary to calculate the trust’s income as a percentage of the trust’s assets, as of either the beginning of the year or averaged over some period (NY provides for unitrusts while NJ does not).
    3. However, NJ does allow for a safe harbor power to adjust; a trustee is permitted to adjust the distribution to the income beneficiary (from 3%-5% of the FMV of the trust’s assets in any accounting period). This adjustment must be deemed to be responsible and fair to all of the trust’s beneficiaries.
    4. If possible, utilize a grantor trust and have all income, deductions, and credits, including capital gains, taxed to the grantor at a presumably lower individual income tax rate.
    5. Consider switching the situs of the trust to a state that does not have state gains tax.
  7. Spending Time to Save Money. You may be able to exclude some or all of the gain that is taxed on the sale of your principal residence. The  tax code permits owners of homes to exclude up to $250,000 of capital gain ($500,000 for a married couple) if they have owned and lived in their home for at least two years out of the five years before a sale.
    1. Find better assets to gift than your personal residence.
    2. If you receive a house as a gift and then reside in it as your primary residence for two years, you may be able to reduce or eliminate the capital gains tax on the carryover basis.
  8. The IRS’s Gift for Giving Back. When gifts of appreciated long-term assets are made to charity, no capital gains taxes are owed, because the securities are donated, not sold.
    1. The deduction is limited to 30% of your adjusted gross income (AGI) instead of the usual 50% limit for donations of cash and short-term property made to public charities—though you can still carry forward unused deductions for five years.
    2. If you choose to deduct your cost basis only, you can raise the limit to 50% of your AGI. But if you’re holding securities with a loss, it’s better to sell first, take the capital loss for tax purposes, and then donate the cash.
    3. A Charitable Remainder Trust and a Private Operating Foundation may provide similar relief from capital gains tax.
  9. The 411 on a 1031 Exchange. A 1031 Exchange is a way to delay capital gains taxation by rolling the sale proceeds of the original asset into a new investment in a like-kind asset.
    1. This is traditionally used as a strategy for real estate, but it also works for artwork.
    2. The new investment takes the original basis, which is carried over based on the original basis of the asset.
    3. If the owner dies with the asset in his estate, there is a step-up in basis with little to no capital gain upon sale soon thereafter.
  10. Consider the Tax-Free Possibilities. Two special savings accounts are given a pass by the IRS in terms of taxation.
    1. Contributions to a Roth IRA are after-tax and, as such, all future growth and distributions are tax-free.
    2. Contributions to a 529 College Savings Account also grow tax-free and withdrawals for educational expenses are tax-free.



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McManus Guidance on How Parents Can Help Protect Young-Adult Children Featured in College Series

Colleen Moriarty, a seasoned health and lifestyle writer and a staff writer for, recently tapped McManus & Associates for advice on important legal documents that should be put in place for children who are already 18 or will soon be of legal age before they head off to school. Her article, “Help Your Child Stay Safe at College”, is part of a series called Off to College 2015: The First Six Weeks.

Moriarty’s article opens by shedding light on the importance of planning ahead to protect college-bound children, because, as McManus points out:

“If an accident, emergency, mental health crisis or trouble with substance abuse should arise after your son or daughter’s 18th birthday, you have little or no legal right to step in without legal documents that explicitly give you that authority.”

Before adult children become big men and women on campus, which legal documents should they strongly consider completing to provide parents with the authority to act with respect to their medical, legal and financial needs if they get sick or hurt, or are otherwise unable to handle their own affairs? A helpful graphic from the story:

graphic for college series blogAccording to McManus, “without these executed documents, colleges, clinics and hospitals will not release a student’s medical records — even to parents — if the student is over the age of 18…Without a back-up decision maker in place [meaning a parent or other designated adult], there is a risk of inadequate, inappropriate or insufficient medical care if your child is incapacitated.”

Of note, these legal documents cannot be signed until the age of 18, and they can be revoked at any time.

So how should a parent discuss the need for such legal documents with their newly adult child? McManus shared personal experience to convey his thoughts:

“Being the child of an attorney, my daughter pored through these documents to find out exactly what powers she was giving. She signed because she realized that they could keep her safe if she got into an accident or had a medical emergency while at college. The piece that I emphasized with her was that her mother and I would only step in if she was in danger – and that’s danger with a capital ‘D’.”

To see the list of DOs and DON’Ts for parents when it comes to working with a child to get these documents in place, find the full article here.

To ensure that the correct documents (forms vary by state) are properly executed to adequately protect your adult child, call McManus & Associates at 908-898-0100 or send an email to

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The Art of Gifting: Top 10 Issues with Owning and Gifting Artwork

Owning artwork is not only a cultural indulgence, but the sophisticated (and the lucky) possess artwork as an investment that can provide a handsome return. Auction houses, most recently Christie’s, have seen record-setting bids as fine art wrestles to take its position as an asset class equal to equities, commodities, and other hard assets. In light of the increase in capital gains tax combined with the collector’s desire to reduce the imposition of income tax and estate tax, the field is ripe for sophisticated planning.

As part of it Educational Conference Call series, John O. McManus this month discussed strategies to addresses the hard and soft issues surrounding the ownership and transfer of art. We invite you to listen to the recording to find detailed information on the Top 10 issues with owning and gifting artwork that follows, whether you’re an artist, dealer, investor or collector.

LISTEN HERE: “Top 10 Issues with Owning and Gifting Artwork”

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