Year End Tax Planning

As we have discussed in our prior newsletters, and as summarized in numerous news articles about the impending "fiscal cliff," important tax changes will occur January 1, 2013 unless Congress takes action
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$5,120,000 Gift and Estate Tax Exemption Ends. In 2012, each U.S. citizen and resident has a $5,120,000 gift and estate tax exemption. In 2013, that exemption will be $1 million unless Congress acts. If one makes a $5 million gift (assuming no prior taxable gifts) in 2012, no gift tax would be due, but that gift will be taken into account in computing the estate tax at the donor’s death. If the exemption had decreased, estate tax would be due. However, such a gift will be effective to remove all future income and appreciation on the gifted assets from the donor’s estate. We had suggested that clients may want to consider the creation of a "Lifetime Credit Shelter Trust" that could benefit the donor’s spouse and children. If each spouse wants to create such a trust for the benefit of each other, they must be careful to avoid the "Reciprocal Trust Rule" because if the rule were applied and a donor is deemed to create a trust for the donor’s benefit, all of the trust property would be included in the donor’s estate under Code §2036(a). Usually, in order to avoid the Reciprocal Trust Rule when both spouses create an irrevocable life insurance trust, we have recommended creating the two trusts at least six months apart. That is no longer possible at this late date in 2012. It would still be possible for one spouse to create an irrevocable trust for the benefit of spouse and descendants, and the other spouse to create an irrevocable trust only for the benefit of the descendants. IF YOU WANT US TO WORK WITH YOU TO CREATE SUCH A TRUST, YOU MUST CONTACT US BY NOVEMBER 15, 2012. Preparing the trust agreement(s) with the desired terms and obtaining necessary appraisals of the gifted assets require time. DO NOT WAIT UNTIL THE HOLIDAYS TO CONTACT US.
Generation-Skipping Transfer Tax Exemption. If Congress fails to act, the GST exemption will be $1,430,000 based upon increases for inflation from 2001. The tax rate will be 55% (the 2013 top estate tax rate), up from 35% in 2012.
Increase in Capital Gains tax rates. In 2012, the tax rate on capital gains is 15%. In 2013, if Congress fails to act, the maximum long-term capital gain rate will be 18% on assets held more than five years and 20% on assets held less than five years, but more than one year.
Increase in tax rate on dividends. In 2012, qualified dividends are taxed at a 15% rate. In 2013, if Congress fails to act, all dividends will be taxed as ordinary income. Because dividends are taxed in 2012 at the same rate as long-term capital gains, it was not important whether a distribution from a corporation was characterized as a dividend or a redemption. That distinction will again become important when the rates are different.
Increase in tax rates generally. The Bush tax cuts will expire at the end of 2012. The tax rates under the 2001 Act ranged from 10% to 35%. In 2013, if Congress fails to act, the rates will range from 15% to 39.6%.
3.8% surtax on investment income. In addition, starting in 2013, a 3.8% surtax will apply to the lesser of (1) net investment income or (2) the excess of modified adjusted gross income over the threshold amount: $250,000 for joint filers, $125,000 for married filing separately and $200,000 for other taxpayers. For estates and trusts, the tax is 3.8% of the lesser of (1) undistributed net investment income or (2) the excess of adjusted gross income over the dollar amount at which the highest income tax bracket applicable to an estate or trust begins (Only $11,650 in 2012).
Annual Exclusion Gifts. For some good news, the gift tax annual exclusion that is $13,000 per donee in 2012 is expected to increase to $14,000 per donee in 2013. DON’T WAIT TO MAKE YOUR ANNUAL EXCLUSION GIFTS FOR 2012. Go ahead and make them now, and then make your 2013 annual exclusion gifts in January.
Estate Tax Statistics. As reported by Jonathan Blattmachr to the ACTEC listserv, 4,600 estate tax returns were filed in 2011, down nearly 70% from 2010, which was down 55% from 2009. Net estate tax receipts was $3 billion in 2011, down from $13 billion for 2010 and $20+ billion for 2009.

Another Appeals Court Strikes Down DOMA

The Second Circuit in Edith Schlain Windsor v. U.S. (CA 2 10/18/2012) Docket No. 12-2335-cv(L), held that a surviving spouse in a legally married same sex couple is entitled to the federal estate tax marital deduction, and therefore a refund of estate taxes paid. The Court struck down the Defense of Marriage Act (DOMA) that prohibits the federal government from recognizing legally married same sex couples for federal benefit purposes. A few other courts this year have also found DOMA to be unconstitutional, but some court watchers believe that this is the case that the U.S. Supreme Court may accept for review. One reason is that Justice Elena Kagan may have had to recuse herself from the other cases, but she was not involved in this one when she was White House counsel.

2013 Gift Tax Annual Exclusion

According to RIA Checkpoint’s analysis of the inflation numbers, the gift tax annual exclusion amount will increase to $14,000 per donee in 2013. Keep that in mind as you are planning your annual exclusion gifts. You can make gifts of $13,000 per donee in 2012, and in January, it looks like you can make gifts of $14,000 per donee. The IRS is required to officially release the 2013 inflation adjustments by December15, 2012.

Orange Book Forms - The Must Have Tool for Colorado Trust & Estate Practitioners

Laurie Hunter and Josie Faix are speaking at the October 4, 2012 CLE hosted by CLE in Colorado, Inc. and the Colorado Bar Association entitled "Orange Book Forms - The Must Have Tool for Colorado Trust & Estate Practitioners". Laurie is speaking on the "Most Commonly Used Forms" including Financial Powers of Attorney, Parent's or Guardian's Delegation of Powers, Appointment of Guardian by Signed Legal Writing, Medical Durable Power of Attorney, Advance Directive for Medical/Surgical Treatment, and Gifting Issues to Watch Out for When Using These Forms. Josie is speaking on Revocable Trusts including Single Person, Married Couple and Joint Trusts, and Issues to Watch Out for When Using These Forms.

Tax Changes 1/1/2013

As a reminder, if Congress fails to act, there will be significant tax changes in 2013. If you want to meet with us to plan in advance of these changes, do NOT WAIT UNTIL DECEMBER. The most important changes include the following:

Individuals: 10% bracket disappears, and 15% bracket is smaller; top rate is 39.6%. Long-term capital gain max rate is 20% (18% for assets held more than 5 years) – instead of 15% now. Dividends are taxed at same rate as ordinary income (instead of 15%). Standard deduction for married filing jointly will be 167% (instead of 200%) of single taxpayers’ deduction. Itemized deductions for higher income taxpayers will be reduced by 3% of AGI. Personal exemptions are phased out for higher-income taxpayers.

Estate Tax: $1 million exemption (instead of $5.12 million); top tax rate of 55% (instead of 35%); 5% surtax on higher estates; reinstated state death tax credit; reinstated QFOBI deduction; and the more favorable installment payment rules will disappear. No more portability of the deceased spouse’s exemption.

Gift Tax: $1 million exemption (instead of $5.12 million); top tax rate of 55% (instead of 35%).

Generation-Skipping Transfer (GST) Tax: $1,430,000 exemption (adjusted for inflation; instead of $5.12 million); tax rate of 55%; the more favorable automatic allocation rules and severance of trusts will disappear.

Contested Wills - When Intent is in Dispute

Greg Washington and Alison Zinn are speaking at the September 21, 2012 CLE hosted by CLE in Colorado, Inc. and the Colorado Bar Association entitled "Contested Wills - When Intent is in Dispute". Greg is going to fill in as the moderator of the program (since Herb Tucker is currently in Trial) and he will also be co-presenting "Tort Claims in Probate and Related Insurance Coverage Issues" with Greg Giometti. Alison will be presenting "Case Law and Legislative Updates for Probate, Trust and Protected Proceedings for 2011-2012", and will also fill in for Herb Tucker and co-present "The Pros and Cons of Video Taping Will Executions" with Keith Lapuyade.

Favorable PLR on Grantor Trusts

Although a Private Letter Ruling only applies to the taxpayer involved, and cannot be used as precedent, the IRS analysis can be instructive. In PLR 201235006 (August 31, 2012), the IRS stated that a sale of a life insurance policy at its gift tax value from one grantor trust to another grantor trust would not be a "transfer for value" for income tax purposes. While life insurance proceeds are usually exempt from income tax to the beneficiary, if the policy had been sold or was subject to any other "transfer for value," the proceeds are subject to income tax. The IRS also concluded in the PLR that the insured’s power to reacquire the assets of the grantor trust in exchange for assets of equivalent value (a common power included in a trust to make it a grantor trust) would not be considered an incident of ownership over the policy for estate tax purposes. If the insured dies owning any incidents of ownership in a policy on the insured’s life, the proceeds are included in the insured’s estate. This ruling clarified that such a power in an "Irrevocable Life Insurance Trust" would not cause the proceeds to be included in the insured’s estate.

Who Inherits Your itunes Library?

Recently the Wall Street Journal published a small piece on bequeathing digital media along with other personal property.  The article examines the increasing trend of our accumulation of more and more digital media such as mp3’s, mp4’s, and digital books and magazines.  And, we spend a lot of money on these things.  But, what happens to them when we die?  Can they be passed down or do they die with us?

The crux of this issue is – what do we actually own?  In most circumstances, when it comes to digital content, we own a license to use the digital file but we do not own the content itself.  The case law concerning this issue is virtually non-existent – but it is coming.  Estate planners are beginning to see this issue crop up and a few are getting creative.  According to the WSJ, David Goldman, a lawyer in Jacksonville, says he will launch software next month called DapTrust that will help estate planners create a legal trust for their clients’ online accounts that hold music, e-books, and movies.  This is only one potential solution in what may be becoming a digital nightmare.  Tech pros are calling for regulation reform and digital giants like Apple and Amazon are looking to lock down their property.  The key will become licensing agreements and increasing consumer demand to hold onto property that may be ready to die with them.

See also, itunes Library.

Your 18 Year Old Is An Adult Too -- Medical Power of Attorney

Although we like to think of our children as "babies" forever, upon reaching age 18 that child is now an adult in the eyes of the law. If a child is 18 or older and becomes incapacitated, the parent does not have the legal right to direct care or even receive information about the child's condition. This catches most parents off guard, and they are surprised to learn that they, as parents, do not have an automatic right to direct a child's care. Only an agent under a medical power of attorney or a court-appointed guardian can direct the care of another adult. If a child is 18 or older and does not have a medical power of attorney naming an agent to direct medical care, a parent is forced to petition the court for guardianship, which is time-consuming and expensive and requires a court appearance. We strongly recommend your child who is 18 or older execute a medical power of attorney naming an agent to act on his or her behalf during any incapacity, as well as a HIPAA authorization which authorizes doctors and hospitals to give health information about your child to the authorized agent. Go to our website to read more or call our office to discuss.

Pitfalls of “Do-It-Yourself” in Estate Planning

In tough economic times, many of us are trying to reduce expenses in any way we can. Fewer dinners out, "stay-cations" and clipping coupons may be part of a strategy to shrink a household budget. There are some who will attempt to create their own estate plans, or update their existing plans, in order to save money. Sometimes our "do-it-yourself" efforts can result in expensive, unintended consequences.

Adam "MCA" Yauch, a member of the musical group the Beastie Boys, died this spring in New York. His attorney-prepared Will contained a specific provision regarding the prohibition of using Mr. Yauch’s name or likeness in any advertising. But at some point after he executed his Will, Mr. Yauch, in his own handwriting, inserted in his Will the part of the following excerpt that appears in bold: "in no event may my image or name or any music or any artistic property created by me be used for advertising purposes." This handwritten addition may lead to controversy, as Mr. Yauch, while having every right to restrict his publicity rights, may have no right to restrict the use of the Beastie Boys catalogue, which is governed by the laws of copyright. Also, the New York court may hold that such handwritten addition does not satisfy the legal requirements for execution of a codicil (an amendment to a Will) and the addition may be removed.

Although Mr. Yauch’s intention in handling his own estate planning revision was probably not aimed at cost-savings, the failure to consult a professional to assist with this change may lead to litigation for his estate; an expensive result for any estate. And if the New York courts hold the provision invalid, Mr. Yauch’s intentions, to whatever extent he could legally proscribe them in his Will, are left unfulfilled.

Lesson learned? If a change you want to make to your estate plan is important to you, seek guidance from a professional to ensure it will be legally binding. Saving your family from uncertainty or, at worst, litigation, may be well worth the expense.

For more information, go to Adam Yauch.