Taxes

There are many reasons why one would want to withdraw money from an investment real estate. Some of these reasons include: no longer willing to manage the property, no longer needing the income tax benefit, desiring liquidity or desiring diversification in one’s investments.

1. The easiest way of monetizing a real estate property is selling it. However, with a sale come a host of costs. These costs include brokerage fees and income taxes (both federal and state). Depending on the level of appreciation and on prior depreciation deductions, the gain can be quite substantial and may result in a net amount received that is significantly less than the sale price.

2. There are methods of minimizing the income taxes on the sale of the property. These methods include:

           a.    An installment sale. This is a method of sale where at least one payment occurs after the year in which the disposition took place. Under this method, gain is not taxed when the disposition occurs, gain is recognized gradually as the payments are received.

           b. Borrowing against the property. If one wants to create liquidity while retaining ownership of the property, one can borrow against it. There are no tax consequences to this method. Cash can be used for other purposes.

            c. Like-kind exchange under 1031. This method provides a tax-deferral mechanism. No federal gain or loss is recognized where a real estate property held for use in a trade or business or for investment is exchanged for another “like-kind” property. There are several specific steps that must be taken to qualify for the exemption under section 1031. 

            d. Contributing property to a Charitable Remainder Trust (“CRT”). If one is at least somewhat charitably inclined, one can contribute property to this trust, where specified payments are made to a non-charitable beneficiary for a number of years and the remainder goes to charity. There are many tax advantages to this transaction, the main one being that upon a sale of the property by the CRT, no federal income taxes are due.

Disclaimer: This article only offers general information.  Each situation is unique. It is always helpful to talk to a specialized attorney, to figure out your various options and ramifications of actions.  As every case has subtle differences, please do not use this article for legal advice. Only a signed engagement letter will create an attorney-client relationship. ATTORNEY ADVERTISING

Basis is the cost of purchasing the asset. For real estate, it is the cost, plus any closing costs and improvements made later. Basis is important, because upon the sale of the property, capital gains liability is calculated based on the difference between the sale price and the basis.

Carry Over Basis: If the asset is gifted from the donor to the donee during the donor’s life, the donee inherits the basis of the donor. Imagine a house that was purchased for $100,000 40 years ago, and is now worth $1.5MM. If the owner gifts the house outright to her son, the son will inherit the mother’s basis of $100,000, and when he later sells it, he will have to pay capital gains taxes on $1.4MM.

Step Up Basis: property that transfers at death is stepped up to the fair market value of the property on the date of death. If the house above was transferred at death to the son, the son can later sell it for $1.5MM without paying any capital gains taxes.

Flexibility is Crucial: there are multiple methods of giving up outright possession of the asset, while retaining some powers that enable the asset to “step up” at death. One method is a life estate (in a real estate property). Another method is keeping a testamentary power of appointment in a trust. Yet another method is retaining the right to income from the asset.

Disclaimer: This article only offers general information.  Each situation is unique. It is always helpful to talk to a specialized attorney, to figure out your various options and ramifications of actions.  As every case has subtle differences, please do not use this article for legal advice. Only a signed engagement letter will create an attorney-client relationship. ATTORNEY ADVERTISING

What is a gift: In general, a gift is the value of the property transferred in excess of the value of any consideration received therefore.

What is the current gift tax rate: The current federal gift tax rate (similar to the current federal top estate rate) is 40%. However, this rate is only applied after the applicable exclusion amount.

Who is responsible for paying the taxes: The donor who makes the gift is responsible to pay the tax. If the donor fails to pay the tax when due, then the donee is also liable for the tax.

What are the current exclusions:

Federal: In 2015, the federal exclusion amount is $5,430,000. This means that one can gift during one’s lifetime up to $5,430,000 and no federal gift taxes will be due.

Annual: But it gets even better! In addition to the federal exclusion amount, there is also an annual gift tax exclusion of $14,000 per donee per year. This means that if a husband and wife have 3 children, they can gift to them $14,000 x 3 x 2 = $84,000 per year, without filing a federal tax return or paying any gift taxes.

Other: Payments of tuition to a qualifying educational institution (but not for books, room or board), payments for medical care directly to a provider or for medical insurance, or gifts made to political organizations also qualify for an exclusion. No gift tax return needs to be filed for these types of gifts.

Spousal: There is an unlimited marital spousal deduction for all gifts between US citizen or resident spouses. As an alternative to an outright gift, the donor spouse can make a gift to a living trust which meets the Qualified Terminable Interest Property (QTIP) requirements to that the gift qualifies for the marital deduction.

Disclaimer: This article only offers general information.  Each situation is unique. It is always helpful to talk to a specialized attorney, to figure out your various options and ramifications of actions.  As every case has subtle differences, please do not use this article for legal advice. Only a signed engagement letter will create an attorney-client relationship. ATTORNEY ADVERTISING

Current Tax Rates: The top federal estate tax return is 40%. The top New York State estate tax return is 16%.

Federal Estate and Gift Tax Exclusion: In 2015, the federal estate and gift tax exclusion is $5,430,000. That means that no federal taxes will be due for gifts made during one’s lifetime that in total did not exceed this amount. Similarly, no federal taxes will be due for estates whose assets do not exceed this amount, even where assets are passed to children or other non-spouse beneficiaries.  

The New York State has an exclusion of $3,000,000. This number is set to increase annually, until it reaches the federal exclusion in 2019. The New Jersey State has the smallest estate tax exclusion in the country of $675,000.

Portability of Spousal Estate Tax Exemption: if a predeceased spouse did not fully utilize his or her $5,430,000 estate tax exemption, the surviving spouse can utilize the unused exemption of her predeceased spouse.  This benefit, however, is only available for federal returns, and not for New York State returns.

Marital Deduction: No estate tax is due on any property which passes from the decedent to his or her surviving spouse. However, this deduction is only available as long as the surviving spouse is a United States citizen. If the spouse is not a US citizen, then, to take advantage of this deduction, property should pass to a “Qualified Domestic Trust” for the benefit of the surviving spouse, at which point it becomes fully deductible. However, there are a lot of requirements that need to be fulfilled for the QDT.

Step Up in Basis: the basis of a property acquired from a decedent is its fair market value (FMV) at the time of death. The income tax benefit is always a consideration when planning for estate taxes. When the beneficiary sells the property, his capital gains tax will be calculated on the difference between the market value at the time of sale and the FMV at the time of sale. If these are close in time, little or no capital gains taxes may be due.

• When a husband and wife own property as tenants by the entirety, one half of the property is included in the deceased spouse’s estate, resulting in a step up in basis as to one-half of the property.

• Where there is a joint tenant other than a husband and wife, there is a full inclusion in the estate of the first to die and a corresponding 100% income tax step up, unless the survivor can prove that she supplied part or all of the consideration.

• When an owner reserves a life estate in real property and transfers the remainder to another party, there is a 100% tax step up in basis upon the life tenant’s demise.

Disclaimer: This article only offers general information.  Each situation is unique. It is always helpful to talk to a specialized attorney, to figure out your various options and ramifications of actions.  As every case has subtle differences, please do not use this article for legal advice. Only a signed engagement letter will create an attorney-client relationship.

In the past, the IRS has denied valuation discounts for fractional undivided interests in the work of art. As a result, shared ownership in a painting was not entitled to a tax discount during estate value calculation.

In a recent case, Estate of Elkins v. C.I.R. 140 TC 86 (2013), 764 F.3d 443 (5^th Cir. 2014), a Tax Court and a Fifth Circuit Court of Appeals appear to consider express restrictions on sale and use. Unfortunately, no decision on the ultimate discount value was given. However, the law is likely to develop on this issue further.

As a result, art owners who are willing to relinquish a part of their ownership to children, grandchildren or other family members, may now use this discount method to achieve substantial estate tax savings.

The information in this blog was adopted from the following article

 https://news.artnet.com/market/estate-tax-on-inherited-art-collections-323840

Disclaimer: This article only offers general information.  Each situation is unique. It is always helpful to talk to a specialized attorney, to figure out your various options and ramifications of actions.  As every case has subtle differences, please do not use this article for legal advice. Only a signed engagement letter will create an attorney-client relationship.

In 2015, a US citizen may gift during life or bequeath at death as much as $5.43MM without paying federal estate taxes. A foreign national, however, has an estate tax exemption of only $60,000. If a foreign national owns a $2MM house in US that they want to pass upon their death to heirs, the heirs will end up paying federal estate tax of $740,000 (plus additional state estate taxes).

To reduce the taxes, a foreign national can utilize the annual gift tax exemption of $14,000. This number is similar to the US citizens and the gift can be given to an unlimited number of beneficiaries, therefore Crummey trusts are very appropriate.

In addition, a foreign national can make gifts to a spouse. However, unlike a US citizen who can gift or bequeath an unlimited amount of money to a spouse without triggering an estate tax, a foreign national is limited to $147,000 of lifetime gifts to a spouse. Any amount greater will trigger a gift or an estate tax.

Canadians, however, benefit from a treaty that allows them the same exemption as US citizens.

Disclaimer: This article only offers general information.  Each situation is unique. It is always helpful to talk to a specialized attorney, to figure out your various options and ramifications of actions.  As every case has subtle differences, please do not use this article for legal advice. Only a signed engagement letter will create an attorney-client relationship.

In the past, when the federal estate tax threshold was $1MM, most estate planners concentrated on reducing or eliminating the estate taxes. The goal was to transfer out of the estate as soon as possible.

Today’s estate tax threshold: Today, the individual federal estate tax threshold is $5.4MM. The New York State estate threshold is $3MM (and set to rise until 2019, when it will reach the federal threshold). For a couple, no federal estate taxes are anticipated until the estate reaches $10.8MM. As a result, for the vast majority of people, the focus has shifted to reducing income taxes.

Maximizing step up: In order to reduce income taxes, a plan has to be devised which maximizes the step up in basis (and avoids a step-down in basis). An outright transfer to an irrevocable trust takes out an asset from the estate (thus eliminating the future estate taxes), but at the same time this transfer may prevent an income tax benefit upon death.  The dilemma is whether to transfer the asset outright, to transfer it to a trust while retaining some indicia of ownership (thus retaining the asset in the estate), or to keep the asset in one’s name outright.

Example: Suppose you bought a building 10 years ago for $200,000. The building is currently worth $1.5MM. At the time of your demise, the building will likely be worth $3MM.

• If the building will be retained in your estate, there will likely not be any estate taxes or capital gains taxes for your heirs.

• If the building is transferred out of your estate during your life and later sold for $3MM by your heirs, they will likely have to pay federal capital gains taxes at 20% of $560,000.  Furthermore, New York State has a capital gains tax as well, with the maximum rate of 8.82%, for an additional tax of $246,960. Thus, the total taxes that will need to be paid by the heirs in New York on this property will be approximately $806,960!

There are methods of modifying trusts under the New York State law, even if the trusts are irrevocable. Your trust may need to be modified or decanted, in order to take advantage of the favorable income tax treatment achieved through the step up in basis.

Disclaimer: This article only offers general information.  Each situation is unique. It is always helpful to talk to a specialized attorney, to figure out your various options and ramifications of actions.  As every case has subtle differences, please do not use this article for legal advice. Only a signed engagement letter will create an attorney-client relationship.

Why estate planning: In general, there are many reasons why people engage in estate planning. Those include: death time tax mitigation, avoidance of probate, smooth transition of property at death, and making sure the deceased’s dispositive wishes are followed. Asset protection is an additional aspect of estate planning, which safeguards the assets from the risks they would otherwise be subject to.

What is asset protection: The goal of asset protection is generally to deter litigation. At the same time, the plan must be flexible enough to provide options to the client and to change over time in response to changing laws.  However, asset protection will not aid the client in the avoidance of taxes and it will not aid the client in the fraudulent hiding of assets.

Timing is crucial. There is no one particular planning tool that will aid every client in protecting the assets. Every situation is unique. The main lesson, however, applies to everyone: planning must be done in advance of litigation. Protecting or transferring assets after there are claims, may expose the client and the attorney to criminal and civil liability.

What one can be sued for: In general, one can never be sure what one will be sued for. If a person is a sole proprietor, then he can be sued for his business. If there is a corporation or an LLC, the corporate veil can be pierced. If one is a general partner, the partnership’s debts may cause personal issues. And generally, there is a “deep pocket syndrome” in America, where lawyers often base their analysis on whether the opposing party can pay a judgment.

Tools of asset protection: Gifting, joint ownership, insurance, corporations, family limited partnerships, domestic trusts, foreign trusts.

Result of asset protection: The client will divest himself of assets and still retain a degree of control over the property. As a result, if  / when in the future a cause of action accrues, there will be little incentive for the opposing side to sue, because there will be little or no assets to pursue.

Disclaimer: This article only offers general information.  Each situation is unique. It is always helpful to talk to a specialized attorney, to figure out your various options and ramifications of actions.  As every case has subtle differences, please do not use this article for legal advice. Only a signed engagement letter will create an attorney-client relationship.

Resident Trust: In general, a Trust is considered a Resident Trust and the Trustee must file New York State income tax, if the Trust was created by a New York State Testator or Grantor. What that means is if the property was being transferred to a Trust from a person who was domiciled in New York State, then the Trust is a Resident Trust and will be taxed according to New York State rules.

Exempt Resident Trust Exemption. New York will not tax the income from the Resident Trust if, during a particular year, it had no New York State domiciled trustees, the entire corpus of the Trust was located outside of New York and all income and gains of the trust were derived from sources outside of the State of New York. Thus, if the Trust has only intangible assets, such as stocks and bonds, and all the Trustees are domiciled outside of New York, the Trust will meet the exemption and will not be taxed based on New York State rules.

New York beneficiaries exemption . Unfortunately, even if the Trust qualifies for an exemption, all distributions from the Trust to New York resident beneficiaries will be taxed by the New York State. This tax can be avoided by either not distributing money from the Trust, or distributing money to other beneficiaries who are not New York residents.

Disclaimer: This article only offers general information.  Each situation is unique. It is always helpful to talk to a specialized attorney, to figure out your various options and ramifications of actions.  As every case has subtle differences, please do not use this article for legal advice. Only a signed engagement letter will create an attorney-client relationship.

Many people think that if they put their money in a joint account, the survivor will automatically inherit the funds and no further claims can be laid on that money. Unfortunately, as the survivors often discover to their great chagrin, it often does not work like this easily. The other heirs, including spouses and legatees under the will, as well as the IRS and other creditors of the estate, may all have higher priority claims to these funds.

Presumption: In general, if there is ‘survivorship language’ included in the joint bank account signature card, there is a presumption that the money should go to the surviving party upon the death of the first account holder. However, this presumption can easily be rebutted with direct proof that no joint tenancy was intended, or circumstantial proof that joint account had been opened for convenience only. If the court will determine that the account was for convenience purpose only, then the funds in the account will belong to the estate and may be used to first satisfy the estate’s debts and other bequests.

Testator’s Behavior: When determining the purpose for which the account was opened, the court will first examine the decedent’s behavior in regards to this account. The court will look at the testamentary plan – did the Will give the money to the joint account holder alone or did the testator provide for other people?  If the only remaining money is in the joint account, and there are explicit gifts given to other people, the court may infer that the account was joint only for convenience purposes. In that case, the funds are likely to be given back to the estate to satisfy the other bequests.

The court will also examine the signature requirement – whether or not both signatures were required in order to withdraw money. If both signatures were required, the court is likely to conclude that the account was for convenience purpose only. Similarly, the court will inquire about who had the control of the checks during the decedent’s lifetime. Full control of the withdrawals by the decedent will likely mean that the account was joint for convenience purposes only and the money should belong to the estate.

Survivor’s behavior: The court will also look at the behavior of the surviving account holder during the life of the decedent. The court will inquire whether or not the survivor ever withdrew from or deposited money into the account. The court will also inquire whether or not the survivor knew about the decedent’s testamentary plan. Lack of access to the funds or lack of knowledge about the plan will likely mean that the funds will be brought back into the estate.

Summary:  As you can see, placing money in a joint account is not an easy panacea that people often hope it will be. When creating a testamentary plan, it helps to talk to an attorney, to determine whether the distribution of your funds will be what you intend it to be.

Disclaimer: This article only offers general information.  Each situation is unique. It is always helpful to talk to a specialized attorney, to figure out your various options and ramifications of actions.  As every case has subtle differences, please do not use this article for legal advice. Only a signed engagement letter will create an attorney-client relationship.

Every person has a lifetime gift and estate tax exemption of $5.43MM (this number rises with inflation). Generally, most gifts made during a lifetime are counted towards this lifetime exemption.  If lifetime gifs exceed $5.43MM, a gift tax is due. If the sum of lifetime gifts and the money remaining in the estate exceeds $5.43MM, an estate tax is due. There are some gifts, however, that are not counted towards this exemption, and can be made without filing a gift tax return.  

Annual Exclusion:

A person is permitted to give annually up to $14,000 of assets per donee without this money being counted toward his indexed lifetime gift tax exemption.  A couple is allowed to give up to $28,000 per year per donee. For example, if you are married and you have 3 children, you and your spouse are allowed to give them 3 * 28,000 = $84,000 per year without filing a gift tax return.

A gift amount greater than $28,000 will not necessarily incur a tax liability, but it is required to be reported on a gift tax return and it will be counted toward a lifetime gift tax exemption. For example, if you gave $1MM in 2014 to your son, $986,000 will be reported on your gift tax return filed in 2014. No taxes will be due that year, but your lifetime gift tax exemption will be reduced to $4,356,000.

Whether or not you or your estate will actually owe any taxes on the gifts made over the annual exclusion will depend on your lifetime gift amounts. Currently, the lifetime gift tax exemption is $5.43 million per person. If the sum of your gifts made over the annual exclusion amount and the amount remaining in your estate at the time of death is over $5.43MM, then federal estate taxes will be due.

What can you give as a gift: The gift does not necessarily have to be in cash and does not have to equal the total value of the asset. For example, people gift fractional interest in businesses (LLCs, corporations), stocks, real estate, art work, etc. A fractional gift may be quite useful in terms of valuation because discounts for the lack of control and lack of marketability may also be applied.

Currently, there is no limit to the number of recipients. Therefore, if you have 20 children and grandchildren, you may gift up to $280,000 per year to them. However, the current proposal from the Obama administration would limit this amount to $50,000 a year. It is unclear whether this proposal would pass.

Medical and Educational Expenses

One can also give unlimited payments directly to qualified medical and education providers. Therefore, a grandfather can pay for his grandson’s college education, without having to file a gift tax return. The only stipulation is that the donor must give the money directly to a medical provider or school.

Gifts to Spouse

All gifts made to a spouse, both during the life and from your estate after the death, are federally tax free. However, the spouse must be a US citizen in order to take advantage of this law. Gifts to a spouse who is a non-US citizen are also possible, but with limited exemptions.  

Gifts to Charitable Organizations

Gifts to qualified charitable organizations are exempt from the Gift Tax.

Why would you want to make gifts during your lifetime?

1. The main reason is to reduce the size of your estate. Currently, the lifetime exemption is $5.43MM, a number which most people feel comfortable that they will never reach. However, this number may decrease (as it has in the past). Currently, the Obama administration proposes to reduce the lifetime exemption amount to $3.5MM. The number may be decreased even further. All gifts made as part of the annual exclusion amount are not counted in the estate, and will not incur the estate taxes (currently 40%).

2. Another reason to gift an asset is to shift the income to a person with a lower tax bracket. If the gift is of a property which generates income, the income tax will have to be  paid by a donee.

3. Another reason is to plan for the property that has the potential of high appreciation. If one owns stock of a closely held corporation that is currently worth $1MM but may be worth $10MM in the near future, it may be quite advantageous to transfer the stock (either to a child or to a trust) before the appreciation occurs. This way, only the $1MM of the lifetime gift exemption will be used, and no federal estate taxes will be due on the higher amount.

What are the disadvantages of making lifetime gifts?  

The main disadvantage is the lack of control. After all, you are giving up the assets. Your donees are free to sell, spend or transfer these assets, and you are not entitled to the income.  

Another disadvantage is the loss of the step up in basis. All completed gifts retain the basis of the donor. Therefore, if you gift a real estate with a basis of $100,000 that later appreciates to $1MM, the donee will retain the basis of $100,000 and may have to pay high capital gains taxes at the time of the sale.

A significant disadvantage for making lifetime gifts is Medicaid planning. If there is a potential that one may have to go into a nursing home in the next 5 years, then very careful planning must be done, because Medicaid may impose a long penalty.

This article only offers general information.  Each situation is unique. It is always helpful to talk to a specialized attorney, to figure out your various options and ramifications of actions.  As every case has subtle differences, please do not use this article for legal advice. Only a signed engagement letter will create an attorney client relationship.