Tag: income taxes

Top 10 Income Tax Considerations for Estate Planning in 2019

Income tax planning should go hand-in-hand with efforts to preserve and compound your estate. John O. McManus today discussed with clients key opportunities to maximize income tax savings.

Listen to the discussion and review important points below:

  1. Review Your Plan: Given the significant tax law changes on the State and Federal level over the past several years, it is important to review existing Wills and Trusts to ensure that income tax efficiency is maximized.
  • Evaluate cost basis of assets gifted to irrevocable trusts, which will not receive a step-up in basis.
  • Determine whether irrevocable trusts have swapping or decanting powers.
  • Re-visit the use and implementation of Testamentary Credit Shelter Trusts (see below).
  1. Basis and Testamentary Credit Shelter Trusts: It is important to preserve the flexibility to benefit from a step-up in basis upon the surviving spouse’s death.
  • Credit Shelter Trusts, which utilize State and Federal estate tax exemptions, typically do not allow for assets to receive a step-up in basis upon the surviving spouse’s death.
  • Since the estate tax exemptions have dramatically increased in the past decade, fewer families are impacted by estate tax.
  • This means that a Credit Shelter can do more harm than good because:

o   the children would not have been subject to estate tax even without a Credit Shelter Trust.

o   the children will have to pay capital gains on the assets of the Credit Shelter Trust when they sell them.

  • If it becomes evident that estate tax is not a concern, a power can be included in the Credit Shelter Trust to cause the assets to be included in the surviving spouse’s estate upon his or her death to achieve the step-up in basis.
  1. Paying Retirement Accounts Forward: If you inherit a qualified retirement account, you should consider disclaiming it to the next generation in order to extend the tax-deferred appreciation of the investments.
  • If you do not require the use of the retirement account investments inherited from a parent, a disclaimer within 9 months of the date of death can provide a significant tax benefit.
  • The required minimum distributions of the IRA will be based on your children’s ages, meaning the required minimum distributions will be significantly less and allowing for more assets to remain in the account to appreciate in value income tax-free.
  1. Using Assets as Leverage for Gifting: Using appreciated assets as leverage can provide for a wealth transfer opportunities to minimize estate tax without sacrificing a step-up in basis upon death.
  • It is common to gift significant assets as part of a wealth transfer plan to minimize future estate tax.
  • However, in doing so, the assets do not receive a step-up in basis upon the donor’s death.
  • If the family sells the assets soon after, the estate tax benefits are muted because the capital gains tax must be paid.
  • As an alternative, explore financing for the asset and gifting the cash to a protected, multi-generational irrevocable Trust.
  • The cash will then be invested, with any growth taking place outside of the estate and realizing the desired estate tax benefit.
  • The asset will remain in the estate to gain the step-up in basis and only the value of the equity in the property would be subject to estate tax.
  1. NINGs and DINGs: There may be significant tax-savings opportunities to eliminate the imposition of State income tax on capital gains by establishing a Trust in Delaware or Nevada.
  • If you anticipate having the opportunity to sell a closely-held business or appreciated stock holding, you will have a significant State income tax (and on your Federal return, you will no longer be able to deduct that tax paid).
  • By forming a specially-designed Trust in Delaware or Nevada and hiring a trust company located there to administer it, you can then fund the Trust with the asset that will be liquidated.
  • Since the asset is intangible and is considered to be custodied outside the state of your residence, the State cannot impose income tax on the gain.
  • The Trust can also be structured so that it will not be subject to State or Federal Estate tax after your death.
  1. Upstream Gifting: The sale of an appreciated asset to a specially-designed Trust for the benefit of a parent can provide post-liquidation tax benefits.
  • If there is high capital gains tax exposure for an investment that will be sold at some point during your lifetime, you might consider selling the investment to a Trust for the benefit of a parent.
  • By selling the investment, you do not use any of your estate tax exemption and you would hold a promissory note, the payment of which could be made by income generated by the investment.
  • The parent would be granted a power that would cause the Trust to be taxed as part of his or her estate.
  • Therefore, upon the parent’s death the investment would receive a step-up in basis, and it can subsequently be sold with minimum capital gains tax.
  1. 199A Qualified Small Business Deduction: The creation of non-grantor trusts for the benefit of separate beneficiaries can be used to expand the amount of Qualified Business Income that is deductible when income limits are exceeded.
  • Following the enactment of the tax law in 2018, taxpayers are entitled to a 20% deduction on qualified business income (QBI) from partnerships, LLCs, and S-Corporations.
  • If a single person’s taxable income exceeds $157,500 or a married couple’s taxable income exceeds $315,000, the deduction for QBI is then limited to 50% of the W-2 wages paid by the business or 25% of W-2 wages plus 2.5% basis of depreciable property.
  • A possible strategy is to establish non-grantor trusts (i.e. trusts specially designed so the creator is not considered to be the income tax owner) and transferring interest in the entity to the trusts.
  • Since each Trust is a separate taxpayer, all QBI in connection with the trusts’ share of the income would benefit from the full deduction presuming that each Trust’s taxable income does not exceed the $157,500 threshold.
  1. Qualified Small Business Stock: The creation of non-grantor trusts can be used to increase the exclusion on capital gains when Qualified Small Business Stock (QSBS) is sold.
  • QSBS is a shares in C-Corporation holding less than $50MM in assets and which have been held more than 5 years.
  • The tax code currently provides an exclusion on capital gains of $10MM or 10 times the cost basis, whichever is greater, when QSBS is sold.
  • For the sale of QSBS in which capital gains exceeds the thresholds, the transfer of the shares to non-grantor trusts will provide a separate capital gains exclusion for each trust (once again, because each trust is considered to be a separate taxpayer).
  1. Property Tax Deduction: The creation of non-grantor trusts can increase the Federal income tax deduction for property taxes paid.
  • The Federal income tax deduction for state and local taxes paid (including property tax) is currently capped at $10,000.
  • As a possible solution, a residence can be transferred to a LLC and then the membership interest in the LLC can be gifted to a separate Trust for the benefit of each child.
  • Each Trust would have the ability to deduct up to $10,000 in property taxes for Federal income tax purposes.

o   This means that if you establish one Trust for each child and retain an equal percentage ownership in the LLC, you would keep your personal $10,000 property tax deduction and get an additional $10,000 property tax deduction for each Trust created.

o   This concept could be extended to other beneficiaries, including grandchildren and other family members to further increase the amount of property taxes which would be deductible.

  • An important consideration is that each Trust should hold investment assets which generate sufficient income for which the property taxes could be used to offset the gain, interest, dividends, etc.
  1. Income Tax Opportunities in Real Estate: Cost segregation and Opportunity-Zone Funds are tools that are becoming more prominent and all real estate investors should develop a familiarity with them.
  • Cost segregation allows accelerated depreciation for certain components of a property, meaning that taxable income can be offset to a much greater degree.
  • While the regulations for Opportunity Zone Funds are not completely finalized, these may be a viable investment vehicles to defer capital gains of all types.

o   In order to qualify for the deferral of income tax, the amount of capital gains must be invested in a Fund within 180 days of a sale.

o   Remaining invested in the Fund for 5-7 years can eliminate up 15% of the original capital gain.

  • In order to be eligible for the 5 or 7 year basis readjustments, investments in a Fund must be made by the end of 2021 or the end of 2019, respectively.

o   Remaining invested for 10 years eliminates capital gains on all of the appreciation after the investment in the Fund.

o   The original capital gains that was deferred must ultimately be realized by December 31, 2026 and the tax will then be due.

Conference Call: 11 Financial Tasks to Kickstart Your Wealth Building in 2019

When the calendar turns to January, the clock is reset for many estate planning opportunities.

McManus & Associates Founding Principal and AV-rated Attorney John O. McManus recently shared his recommended estate planning checklist for January to maximize the value of your assets, cover your financial bases, take advantage of current exemption levels, and get a head start on deadlines.

Listen to the discussion and see an outline below:

 

1.       Fund your children’s trusts so that the trusts can benefit from a full year of appreciation.
2.       Make charitable gifts to your foundation so that it will also benefit from appreciation during the year.
3.       Review the grants made by your foundation to confirm that they are qualified 501(c)(3) organizations; start researching new charities to expand your class of grantees (while still maintaining your donative intent).
4.       Consider making gifts to 529 plans for your children and or between your grandchildren to take advantage of a full year of appreciation.
5.       Meet with McManus & Associates or your accountant as soon as possible to provide critical financial information to begin your tax returns.
6.       Make substantial gifts a part of your estate plan, thereby empowering your spouse before Congress reduces the gift tax exemption from $11 million.
7.       Consider hiring your children and spouse or other family members for the family business and pay an amount that will fund a Roth IRA.
8.       Perform an audit of your life insurance policies, including their cash values and performance, as well as their suitability and sufficiency of coverage.
9.       Review your beneficiary designations (which will override any testamentary direction under your will) to make sure they coincide with your intentions (as provided in your will).
10.     Review your medical coverage and plan choices; also, review your tax withholdings if you expect your income to change significantly.
11.     Schedule a meeting with McManus & Associates to review your fiduciaries and agents named in your estate plan to determine their suitability and continued qualifications.

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).

Trusts & Estates, WealthManagement.com Publishes Guest Article from McManus on Coordination of Income Tax and Estate Planning

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Combine Income Tax Preparation and Estate Planning

Coordination is key

Apr 1, 2015 John McManus Trusts & Estates

When tackling a jigsaw puzzle, you’ve likely taken the “divide and conquer” approach, separating the larger puzzle into more manageable sections. Eventually, you bring the different areas of focus together to put the finishing touches on the full image.

Wealth management is the same. Estate planning emphasizes an array of complex matters spanning death taxes, asset protection, incapacity, guardianship and family missions. Compartmentalizing can be helpful, but advisors must remember to bring the pieces of the puzzle back together in the end. It’s critical that strategies to maximize the value of your clients’ estates are coordinated with their retirement, financial and income tax planning.

Firm’s Tax Experts Hold Conference Call on Income Tax Preparation

McManus & Associates can prepare your Income Tax Returns. For many years, the firm has been completing tax returns for clients and has learned that keeping income tax planning under the same roof enables a more refined level of specificity in estate planning for your family. Want to hear more about how you can benefit from McManus & Associates’ Income Tax Planning Practice? Listen to the firm’s recent conference call with clients (link below) and contact us at 908-898-0100/212-753-9000.

LISTEN HERE: “Preparing Your Tax Returns”

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Conference Call: Top 10 Considerations for Domestic Asset Protection Dynasty Trusts

State laws vary rather widely regarding the jurisdiction of trusts and trust assets. Certain jurisdictions have laws that are generally more favorable in their treatment of trusts for purposes of asset protection, access to trust-owned assets and creditor protection. As part of McManus & Associates’ Educational Focus Series, Founding Principal John O. McManus shares expert guidance on the top 10 things to consider when deciding where to site your trust.

LISTEN HERE: “Top 10 Considerations for Domestic Asset Protection Dynasty Trusts”

Top 10 Considerations for Domestic Asset Protection Dynasty Trusts

 During the discussion, you’ll find answers to the 10 questions below:

  1. What is a self-settled trust? When can the grantor list himself or herself as a beneficiary?
  2. How do state income taxes affect the choice of situs for my trust?
  3. What variation is there in state legislation regarding creditors and Statute of Limitations?
  4. Are certain exemptions made for specific types of creditors?
  5.  What are the standards for proving fraudulent transfers?
  6.  What role do the courts play regarding actions involving a Trust?
  7. Does the state require an Affidavit of Solvency upon the transfer of assets?
  8. How does the rule against perpetuities affect choice of situs?
  9. Discussing observations of trustee fees in each of the most favorable states.
  10. What are some of the other miscellaneous trust enhancements in the most favorable states?

We would love to learn more about your asset protection needs. Send us an email at reception@mcmanuslegal.com or give us a call at 908.898.0100.