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March 2020 - In This Issue:
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IRS IS REACHING OUT TO SOME
THREE MISTAKES IN PORTABILITY PLANNING
TRUSTS FOR SPECIAL NEEDS
ARTICLES OF INTEREST
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The winter is coming to an end, and with spring comes new fragrances and pollens outside. To fully embrace the new season, some decide to clean their homes inside as well, moving everything and doing a full clean and assessment of what should be kept or thrown out.
We collect treasures over our lifetimes that represent memories, and letting go of those treasures can be hard.
A recent article from the
Journal of Gerontology: Series B, titled "The Material Convoy after 50" discusses how people divest themselves of possessions as they age. The article can be found
here.
David J. Ekerdt and Lindsey A. Baker through analysis of data from a national panel conclude that "After age 50, people are progressively less likely to divest themselves of belongings. After age 70, about 30% of persons say that they have done nothing in the past year to clean out, give away, or donate things, and over 80% have sold nothing."
Although the authors suggest that with a larger set of possessions, "their continued keeping can be a predicament for oneself and others," they explore many reasons why less is divested as we age. Their reasoning which we find compelling are:
The longer we live, the more possessions we accumulate that signify our identity and "The ongoing collection of belongings can secure continuity of the self in the face of aging and vulnerability."
As we age, we feel less up to the task of assessing value and divesting where there isn't any: "a major reason for less possession management is the rising risk of poor health at older ages that can limit the capacity to carry out the cognitive, physical, social, and emotional tasks of divestment."
We've divested already: "Most obviously, people may have already divested (perhaps by having moved) and so are content with their collection of belongings."
At Garden State Trust Company, we deal with inter-generational wealth transfer and help people make the transition easier for their beneficiaries. Here are some questions to consider when you're deciding if something should be kept for a beneficiary:
With regard to perceived and useful value: Have I used this possession in the last five years? Would any of my beneficiaries use this possession, or do they have something already that replicates it's use they prefer?
Having been involved with the settlement of many, many estates over the years, without a doubt, the challenge of dealing with the distribution of personal possessions among family members almost always causes the most conflict.
Wishing you a wonderful spring season full of happiness and good times!
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IRS IS REACHING OUT TO SOME
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In a February notice the IRS announced an expansion of a program in which agents make unannounced face-to-face visits to high-income taxpayers who have not filed their tax returns for 2018 and earlier years. "High income" generally means $100,000 and up. The notice did not specify whether the calls would be at the taxpayer's home or place of business.
Such taxpayers typically will have been contacted earlier by mail, and so they should be aware of tax trouble. Real IRS revenue officers will always provide two forms of official credentials, and both include a serial number and photo of the IRS employee. Taxpayers have the right to see each of these credentials.
In contrast to this program, the IRS does not make telephone calls to taxpayers. Anyone who receives a call purporting to be from the IRS demanding immediate tax payment should hang up the phone; it's an imposter running a scam. Three Pennsylvania residents were recently indicted for wire fraud for impersonating IRS agents, for example. Another tip-off is a demand that the tax be paid in gift cards--that is not how the IRS works.
(March 2020)
© 2020 M.A. Co. All rights reserved.
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THREE MISTAKES IN PORTABILITY PLANNING
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The increase in the amount exempt from federal estate tax to $10 million per taxpayer (plus inflation adjustments) has been a game changer for estate planners. Nearly as important, when it comes to estate plans for married couples, is the advent of the portability of the estate tax exemption, the Deceased Spouse's Unused Exemption (DSUE). By simply filing an estate tax return at the death of a spouse, even if no estate tax is due, the estate tax exemption for the surviving spouse may roughly double. Such a filing is not required, but it would be a good precaution to take. The future course of the family fortune as well as the federal transfer tax regime are difficult to predict, so any step that could save substantial tax dollars in the future should at least be considered.
Don't accidentally elect out of portability
Failure to file an estate tax return for the first spouse to die will forfeit the DSUE for the survivor. The estate tax return must be filed within nine months of death, but a six-month extension may be granted. Timely filing Form 4768 will gain an estate an automatic six-month extension. Estates smaller than the statutory threshold for filing may apply for a discretionary extension of time even beyond the normal 15-month period.
Don't assume that no estate tax planning will be needed
If total family wealth is about $10 million, a couple may assume that a single federal exemption amount will be sufficient to shield the family fortune from the federal estate tax. Thus, they might decide to forego planning for the portability election as not worth the expense of hiring a professional to file an otherwise unnecessary estate tax return.
There are two potential defects with this plan. First, the amount exempt from federal estate tax could be sharply reduced in the future--it is scheduled to fall roughly in half in 2026 already, and some Democratic presidential candidates advocate for accelerating that change.
Second, the surviving spouse may live for decades, and may not consume all of the income from that $10 million. If asset appreciation plus savings comes to just 7.2% annually, the family fortune will grow to $20 million in ten years, $40 million in 20 years. Inflation adjustments to the exempt amount are unlikely to keep up with that.
Don't lose the DSUE through remarriage
A surviving spouse may have a DSUE only from his or her most recently deceased spouse. Assume, for example, that widow with $12 million in assets has a $5 million DSUE through her late husband. She remarries a widower who has $10 million, and through a prenuptial agreement they waive their marital rights to each other's assets. The second husband dies, leaving his entire estate to his descendants, using up his estate tax exemption. The widow's DSUE from her first husband will be extinguished. Her heirs then may be exposed to substantial estate taxes.
It is entirely possible that when she consulted her lawyers about the pre-nup, they might have recommended against the marriage at all, considering the tax consequences.
Summing up
The advent of portability, coupled with larger exemptions, has allowed much greater flexibility in estate planning. However, that is not quite the same thing as simplicity. There remains a wealth of considerations to weigh in finding the best way forward in a challenging environment.
(March 2020)
© 2020 M.A. Co. All rights reserved.
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Providing support without jeopardizing benefits
Parents and grandparents of a child with a lifelong disability, such as autism, have a special estate planning challenge. On the one hand, they want to provide the financial support that the child never may be able to provide for himself or herself. On the other hand, they want to protect the child's eligibility for the full range of government support programs, including health care.
Distributing assets outright to a special needs person is likely to result in a disqualification for government benefits. Completely disinheriting the child is not a good idea, because government benefits alone may not be enough. Giving property to other family members with the "understanding" that it will be used for the benefit of the special needs person may work for some families, but there are risks. For example, such assets will be vulnerable to creditors, including potential ex-spouses should there be a divorce.
The better course, for many families, is to establish a "third-party" special needs trust. A "first-party" special needs trust is one established for oneself, with one's own assets. The assets of first-party trusts must be used to repay state Medicaid agencies that have paid for medical services. No such requirement applies to third-party trusts that are created for others.
This is a complicated area of law, and the rules vary from state to state, so the advice of a lawyer well-versed in special needs trusts will be essential.
Funding the trust
A special needs trust has to be fit into the estate plan as a whole. Very often the parents of a special needs child will provide that child with an enhanced share of the estate. For example, if there are three children, the estate may be divided 40-30-30, or 50-25-25.
Another approach is to divide the estate equally but supplement the provision for the special needs child with a life insurance policy, perhaps a second-to-die policy if both parents are living. This can be an affordable way to be confident that the special needs trust will be funded at an adequate level for the child's entire life.
Choosing the trustee
In general, a family member should not be the sole trustee of a special needs trust. A professional trustee or a corporate trustee, such as a bank trust division or a trust company, is a better choice. The trustee will be given sole and absolute discretion in making distributions. Therefore, the trustee needs to be familiar with the legal requirements of special needs trusts and with government benefit programs. Investment management skills are a must if the trust is intended to last for many years. It's also important that the trustee be free of conflicts of interest, which someone who is a remainder beneficiary of the trust would have.
To provide guidance for the trustee, the parents should prepare a letter that explains the purposes of the trust and the needs of the child. This can cover the child's likes, dislikes, needs and preferences, and other information that will be essential to make the trust plan a success. Special needs organizations have prepared samples of such "letters of intent" to provide a starting point for parents taking this path.
© 2020 M.A. Co. All rights reserved.
Any developments occurring after February 1, 2020, are not reflected in this article.
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856-251-1300
908-287-7188
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Because of the rapidly changing nature of tax, legal or accounting rules and our reliance on outside sources, Garden State Trust Company makes no warranty or guarantee of the accuracy or reliability of information contained herein nor do we take responsibility for any decision made or action taken by you in reliance upon information provided here or at other sites to which we link. ©2017. All rights reserved.
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