Tax Implications

Effective Ways to Shift Future Appreciation from a Taxable Estate – GRATs and IDGTs

May 9, 2023 | by Chepenik Trushin LLP

Large estates may be subject to the federal estate tax, which in 2023 applies a 40% tax on all wealth exceeding $12.92 million for individuals, or $28.94 million for married couples. High-net worth individuals often seek ways of reducing their estate tax liability on their already-amassed wealth, which is frequently done by applying “discounts” to their assets through a complicated web of valuation laws. There are other ways, however, to shift future appreciation of a valuable asset out of an estate, thus avoiding further taxation on a substantial increase in the value of an existing asset, such as a business or piece of real estate.

The strategy, in general, involves transferring the asset out of one’s estate, either by gift or sale, for a certain amount of money, thereby “freezing” the asset’s value. Once the asset is out of the estate, it is free to appreciate as much as possible, without the transferring taxpayer owing any further tax liability on the extra value. Through this strategy, a taxpayer owning a business worth $50 million could potentially save millions of dollars in estate taxes if that business grows to be worth $150 million in the following years. This strategy is not aimed at reducing estate tax on wealth already accumulated; rather, it is for minimizing tax on future wealth that would otherwise accumulate, leading to higher estate tax. Two vehicles, the GRAT and the IDGT, are most commonly used in these scenarios.

GRAT

Gifting property during life vs. after death: which is better?

December 22, 2022 | by Chepenik Trushin LLP

The estate tax, commonly referred to as the “death tax,” affects only certain estates with a taxable value beyond a set figure. For 2023, any estate exceeding a taxable value of $12.92 million is taxed at a rate of 40.00%. While this does not give cause for concern to the vast majority of individuals, these figures can and do change. The estate tax is often a topic of discussion in political debate and frequently changes. As recently as 2017, the amount to trigger estate tax was just under $5.5 millon. In 2008, the amount was $2 million. Future years could see a reduction in the presently-set amount, which could encompass individuals currently exempt from estate tax liability.

This variability poses concern from an estate planning perspective. While a relatively modest estate may be exempt from estate tax one year, it may very well be subject to the tax in another year. Thus, the higher the value of an estate, the more at-risk it is over time of owing an estate tax. To account for this, estate planners have utilized numerous strategies to reduce an estate before death and minimize potential estate tax liability. One such strategy is gifting property away on an annual basis during the testator’s life.

Individuals may gift a set amount of money each year without triggering any tax consequences. The federal government sets an annual exclusion that allows for a certain amount to be gifted tax-free each year to individual recipients. For 2023, the annual exclusion is $17,000 per recipient. In other words, if a mother gives $17,000 to each of her seven children in 2023, then $119,000 is removed from her ultimate estate tax-free. If such gifts are made on an annual basis (subject to each year’s gift tax exclusion amount, which may vary from year-to-year as the estate tax might), the mother can reduce her taxable estate substantially during her life, saving potentially millions of dollars in estate tax upon her death.

Your legal responsibilities as a named personal representative in estate planning documents

April 7, 2022 | by Chepenik Trushin LLP

Est. of Pounds v. Miller & Jacobs, P.A., No. 4D21-1362, 2022 WL 39211 (Fla. 4th DCA 2022).

If a will does not specify who should serve as personal representative of an estate, parties can fight over this position through litigation. But what happens if one person obtains a settlement on behalf of an estate, and then another person is appointed as personal representative? The court answered this question in Estate of Pounds v. Miller & Jacobs, P.A., No. 4D21-1362, 2022 WL 39211 (Fla. 4th DCA 2022), giving us insight into why these situations are problematic and why good estate plans need to be carefully drafted.

The decedent died in a motorcycle accident, leaving behind his minor child as the sole heir of the estate. The child’s mother and the decedent’s mother both showed interest in serving as personal representative of the estate, which comes with certain perks, such as earning a personal representative fee, and responsibilities, including distributing estate property. The child’s mother was not married to the decedent.

Cryptocurrencies, Bitcoin and Death

November 11, 2021 | by Chepenik Trushin LLP

What Happens to my Bitcoin when I die? Estate Planning and Digital Currencies

Cryptocurrencies have gained significant popularity over the last decade, appealing to the masses due to their decentralized nature, virtual anonymity, and enhanced security.[1] For Federal income tax purposes, cryptocurrency is treated as property, and longstanding tax principles apply to all transactions involving cryptocurrency.[2] Thus, anyone who owns cryptocurrency should be treated like other assets and be addressed in an estate plan.

However, these currencies pose certain challenges for estate planning. Like securities, the value of cryptocurrencies can fluctuate with great volatility due to market pressures. In addition, the virtual currency cannot be kept in a physical bank account. This lack of physical presence poses issues if the holder did not properly take steps to track and pass on his or her cryptocurrency.

Tax planning, Estate planning, Trust documents – Be proactive now and do not regret indecisiveness in 2021

April 15, 2021 | by Chepenik Trushin LLP

Bernie’s “For the 99.5% Act”: Is It Time to Start Thinking about Tax Planning?

For the year 2021, each individual has $11,700,000.00 of estate tax credit (or $23,400,000.00 for married couples), otherwise known as the “applicable exclusion amount.” For estates that exceed the applicable exclusion amount, the tax rate is up to 40.00% of the amount in excess of the applicable exclusion amount. The current estate tax credit is scheduled to maintain that level, indexed for inflation, until December 31, 2025, at which point the applicable exclusion amount will be reduced to approximately $6,000,000.00 ($12,000,000.00 for married couples). However, since the Biden administration proposed major estate tax reform, there has been much discussion about whether the estate tax credit will be reduced earlier.

On March 25, 2021, Senator Bernie Sanders introduced the “For the 99.5% Act,” which proposed, among others, the following tax reforms:

Handwritten Wills and the Importance of Witnesses – What you need to know because it is complicated

March 15, 2021 | by Chepenik Trushin LLP

Larry King’s Handwritten Will Ordeal

The recent passing of the broadcasting legend, Larry King, has resulted in his family not only mourning him but also fighting amongst themselves over his true last wishes. Larry, together with his wife, Shawn Southwick King, had executed estate planning documents in 2015, where he named her the personal representative of his estate. However, the couple faced some difficulties and Larry filed for divorce in August 2019. Just two months later, he executed a new handwritten will, leaving his entire estate valued at $2 million dollars to his five children. Two witnesses also signed their names to the hand-written will.

Larry’s eldest son, Larry King Jr., submitted the 2019 will to the court and has petitioned to be appointed the temporary administrator of Larry’s estate. However, Shawn has filed an objection to the 2019 will, claiming that the will is invalid and that Larry King Jr. exerted undue influence over his father towards the end of his life, and insisting that the 2015 will is the valid one.

President Biden’s potential move on Estate Tax – What you need to know now

February 18, 2021 | by Chepenik Trushin LLP

2021 Biden Administration Proposed Tax Changes: Will My Estate Be Subject to Estate Tax?

Over the course of the last several decades, the federal estate tax credit has increased to the point that only very high net-worth individuals and families need to concern themselves with estate tax planning. For the year 2021, the “applicable exclusion amount” is $11,700,000.00 per individual (23,400,000.00 for married couples). The gift tax exclusion amount is the same, that is, each individual may give $11,700,000.00 during their lifetime without incurring any gift tax. If the sum of lifetime gifts and assets transferred at death is greater than the applicable exclusion amount, then such transfers will be taxed at a rate as high as 40%.

However, the Biden administration has proposed a reduction of the applicable exclusion amount to $3,500,000.00 per person for estates, $1,000,000.00 for lifetime gifts, and increase the tax rate to up to 45%. Such a change is made more likely by the fact that, in January, the Democratic party has consolidated power in both branches of the U.S. Congress. Last year, there was even fear that, if such a change came in to effect at any time during 2021, congress could make the change retroactive to January 1, 2020, prompting many families to make gifts before the end of the year to ensure their use of the current applicable exclusion amounts.

Irrevocable Trusts, Revocable Trusts – A guide to understanding in Florida laws

January 15, 2021 | by Chepenik Trushin LLP

I Made an Irrevocable Trust a Long Time Ago: Can I Change it Now?

People make irrevocable trusts for many reasons, one major reason being tax planning. In order to make a completed gift for tax reasons, a donor has to part with control over the gifted asset, and making a gift to a trust that is irrevocable is one of the ways this can be accomplished. But that if your circumstances change, or tax laws change, and you would like to modify or terminate an irrevocable trust? Can a trust still be modified if it is irrevocable?

The answer is yes, if certain conditions are met. Florida statutes specifically allow for modification of irrevocable trusts in certain circumstances. For instance, by court order (Fla. Stat. § 736.0410), to modify tax provisions (Fla. Stat. § 736.04114), or where the trustee and all beneficiaries unanimously agree (Fla. Stat. § 736.0412), just to name a few. But there are certain situations where none of the Florida statutes apply. For instance, a modification under Fla. Stat. § 736.0412 by agreement of trustees and beneficiaries can only be accomplished if the settlor has passed away and only with respect to a trust that was made irrevocable after January 1, 2001. That leaves some situations that are not covered by the Florida statute.

Elder law, Medicaid planning and Special Needs Trusts: What happens when Medicare will not pay for long-term medical care costs?

December 10, 2020 | by Chepenik Trushin LLP

Needs Based Government Assistance and Special Needs Trusts

It is never too early to start Medicaid planning. The goal is to focus on paying for long-term medical care and protecting your assets. By planning for Medicaid to pay for an amount of long-term care, it allows seniors to pass on their wealth while still maintaining long term medical care. With careful planning and the assistance of an attorney, you may be able to receive needs-based government benefits without having to deplete your assets, and ensure that and your children will be able to receive such government assistance if needed.

There are selected categories of people in Florida who may be eligible for Medicaid benefits, such as the elderly (age 65 and above), pregnant women, and people with certain disabilities. There are also a few other requirements to be eligible for Florida Medicaid, such as being a resident of the State of Florida, a U.S. national, citizen, permanent resident, or legal alien; having a financial situation that is considered low income or very low income; and owning assets below a certain threshold. If you are one of the selected categories of people who qualify for Medicaid, there is planning that can be done to help you meet the other requirements. However, there is a 5 year look-back rule regarding any uncompensated transfers that you make, so it is best to plan early and anticipate your future need.

Real property and wills – Educate yourself on the implications of Probate proceedings

August 27, 2020 | by Chepenik Trushin LLP

Does My Will Control My Joint Property?

There are several different ways to hold real property with another individual in Florida. The three main ones are: 1) tenancy in common, 2) joint tenancy with a right of survivorship, and 3) tenancy by the entirety. The way co-ownership of real property is classified may have significant impacts on the disposition of an estate after one of the owners dies.

In Florida, the default classification of real estate ownership is known as tenancy in common. If a property title lists only the names of owners without specifying another classification, there is a presumption that the property is a tenancy in common (unless the individuals are married). Additionally, unless specifically stated otherwise, tenants in common own equal shares of the property. When a tenant in common dies, the real property passes according to that person’s estate plan. This type of ownership will ensure that the property will flow through the owner’s estate. However, unless this property is held by a mechanism that can avoid probate proceedings (e.g. a Revocable Trust), it must go through the time consuming, expensive and public probate process to transfer title to the heirs.