Articles Posted in Estate Taxes

As we begin our way through 2022, understanding various federal tax issues can help make the most of your estate planning this year. Because the federal legislature might pass regulations that alter these laws sometime during 2022, it’s important to understand critical federal tax laws you might want to utilize now. Before acting on any of these regulations, however, it’s often wise to speak with an attorney who is up to date with these changes and can make sure that you engage in actions that best benefit your situation. 

# 1 – Lifetime Exclusion Amounts

Starting January 1, 2022, the amount of federal estate and gift tax exclusion in addition to the generation-skipping transfer tax has increased to $12,060,000 from $11,700,000. Remember, this amount is doubled for married couples.  These threshold amounts are poised to decrease substantially at the beginning of 2026, though. 

In times of economic uncertainty, estate plans can benefit substantially from flexibility. As the country both continues to recover from the COVID-19 pandemic as well as face the challenges brought on by new strains of COVID-19, it’s a good idea to consider how to make your estate plan flexible. Not to mention, looming changes brought on by changes to tax law also make it a good idea to consider flexibility while creating an estate plan.

What SPA Trusts Do

Special power of appointment (SPA)  trusts (or as they are sometimes called SPAT trusts) is a type of irrevocable trust in which either the creator or settlor of the trust grants appointment power to another person. The person who receives these powers functions in a non-fiduciary role to direct the trustee to make distributions to anyone except for the person who made the appointment of powers.

The Status of Estate and Gift Taxes in 2022

In 2021, Congress, as well as the Executive branch, proposed revisions to the tax code that if passed would have substantially changed estate planning. If these changes had been made, some proposals would have been put on the side, while the frequency of use for other estate planning strategies would have increased. 

Some estate planning proposals would have lowered the amount of estate and gift tax exemptions from the current level of $12.06 million a taxpayer to around half the amount. While no guarantee exists that such changes will be made at any time in the future, those interested in making the most of their estate plan should still understand how the law is written as well as what steps they can take to anticipate these looming changes. 

While ninety percent of American businesses are family owned, only about thirty percent of them continue to the next generation. Half of those again make it to the third generation. The most common reason: lack of a business succession plan.
There are many reasons owners fail to plan. In addition to confronting the issues of age and mortality, the business owner also faces potentially giving up his or her life’s work – often a venture started, nurtured and grown by him or her over many years.
Business succession planning should start while the entrepreneur is young enough to spend time monitoring the next generation, be it family or otherwise. Around the age of sixty should allow enough time, say five to ten years, for the process to begin and develop.

On the heels of top Senate Republicans introducing legislation to fully repeal the federal estate tax, former Democratic presidential candidate Senator Bernie Sanders recently proposed to expand the estate tax on America’s wealthiest families. The proposal would create a 77 percent tax on the estates valued over $1 billion, a policy that would affect as little as 0.2 percent of Americans.

Senator Sanders’ proposal would levy a 45 percent tax on the value of estates between $3.5 million and $10 million, increasing gradually to 77 percent for estates valued at more than $1 billion. Under the current tax system, assets in estates valued over $11 million for individuals and $22 million for married couples are taxed at 40 percent.

The plan’s summary claims the measure would take  in an estimated $2.2 trillion in revenue rom the families of all 588 billionaires in the country with a combined net worth of more than $3 trillion. Senator Sanders is one of many would be nominee for the Democrat ticket for the 2020 presidential election putting forth ideas on taxing America’s wealthiest families to bridge what the party sees as a growing economic equality gap in the country.

Comprehensive estate planning is a long-term process. It is not complete simply because the many pieces of your estate plan have been considered and put into place. Your estate plan must be reviewed periodically, and with so much at stake it must also be protected. In addition to taking important basic precautions to protect your estate plan, you may also benefit from an additional form of protection by enlisting a trust protector.

What is a trust protector?

For estate plans that have a trust in place, and especially for those with several different trusts in place, it is important to ensure that trusts are administered in a legal way that meets your goals for establishing the trust. When you establish a trust, you must also designate a trustee. Trustees are entrusted with administering a trust according to the terms of the trust and the goals you have established for that trust.

There are two main types of trusts: revocable and irrevocable. Basically, each trust is self-explanatory on the surface. For the most part, you have unfettered ability to revoke or amend a revocable trust. In contrast, it is extremely difficult and sometimes impossible to revoke or even amend an irrevocable trust. On the surface, it appears – and is true – that a revocable trust provides the creator of such trust with greater flexibility in modifying that trust to meet their comprehensive estate planning goals. However, irrevocable trusts still play an important role in estate planning and it is important to understand their benefits to make an informed choice about the type of trust that might be right for you.

Avoiding Probate

While most trusts will avoid probate, irrevocable trusts established during your lifetime will definitely be able to avoid probate. This will ultimately save you and your loved ones time and money by allowing a trust to take effect immediately as it has been designed to do. Your loved ones will be able to access an irrevocable trust according to its structure without having to wait for the courts to approve a Will or other documents related to probate of the deceased person’s estate.

It is important to remember that whether your estate is subject to probate or not, you should make sure that you have designed a comprehensive estate planning strategy that effectively distributes all of your assets so that your family is not forced to rely on the state to make important decisions regarding the distribution of your estate. At the same time, smaller estate may be eligible for a process known as voluntary administration in New York. This process is also called disposition without administration or small estate proceeding, but regardless of what it is called it is important to understand the process especially if it may be applicable to you.

Basics of Voluntary Administration

Voluntary administration can take place whether or not the deceased person has left a Last Will & Testament. Typically, only personal property is eligible for distribution through voluntary administration. This means that if a deceased person solely owned real property such as a home that you plan to sell, then such property would not be eligible for voluntary administration and would presumably exceed the value of the small estate threshold. Currently, the New York small estate threshold is set at $30,000 which means that any estate valued over that amount will still be required to go through probate. Generally, any interested party may file to become the voluntary administrator of a deceased person’s estate that qualifies for voluntary administration.

STATE SPECIFIC PROTECTIONS

        The current aggregate value of retirement assets in America is roughly $21 trillion, with individual retirement accounts (IRAs) amounting to the largest single investment asset.  While many, if not most, types of retirement assets and accounts are protected against creditors, the IRA is not necessarily one of them.  The various protections for IRA are dependent on the amount, how long ago you put the money into your account and the state or jurisdiction you live in.  Employer sponsored plans are covered by protections found in federal law, so it is much easier to talk about what protections exist for such plans.  The Employer Retirement Income Security Act of 1974 (ERISA) created a large host of protections for employees, including protections against creditors, except when the creditor is the Internal Revenue Service (IRS) or a spouse or former spouse for debt incurred through domestic relations.  

The protections found under ERISA have expanded over time through both Congressional action and judicial interpretation of the law.  ERISA plans must provide periodic updates to the employees, information about the plan features, creates fiduciary responsibilities for the plan administrators as well as things such as an appeal process for certain decisions that the employee disagrees with.  One large collective group of accounts that are not protected, however, are IRAs.  IRAs, as the name implies, are owned by an individual and thus do not fall under the protections of ERISA.  Most protections for IRAs are found in state law.  

VERY SIMPLE CONCEPT

This blog examined the dynasty trust in the past but it is time to reexamine certain aspects of the dynasty trust.  The dynasty trust is a trust designed primarily to avoid the generation skipping transfer tax when a person wants to leave money to their grandchildren or great grandchildren (or even generations beyond that).  Before getting into the nuts and bolts of what a dynasty trust is, it is best to outline some of the basic tax issues inherent in the generation skipping transfer tax.  

Grandfather wants to leave an asset to his son, with the intention that he will leave it to his son and for him to leave it to his son and so on.  Just to make the dollar figures simple, let us assume that it worth $10 million.  For further simplicity, let us also assume that grandfather’s estate already went through the federal (and state) estate tax exemption.  That means that son has to pay the current top estate tax rate of 40%, which means that the asset is no longer worth $10 million.  Instead it is only worth $6 million.  For further simplicity, father’s estate also passed through all of his estate tax exemption, so instead of the asset being worth $6 million when it passes to the grandson, it is now worth $3.6 million in light of the 40% estate tax.  And the process goes on and on.  

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