Estate Planning

Income Tax Planning: In general, non-U.S. residents are taxed only on U.S. sourced income.  If the income is considered to be effectively connected with a U.S. trade or business (“effectively connected income” or “ECI”) then that income is taxed at graduated rates on a net income basis. If, instead, the income is “fixed, determinable, annual or periodic” (“FDAP”) then it is subject to a flat 30% tax on gross income (or lower if there is an income tax treaty). FDAP income usually consists of interest, dividends, rents and royalties. Interest on U.S. bank deposit is exempt from U.S. tax for non-U.S. residents.

Estate and Gift Tax Planning.

Assets subject to gift and estate tax:  For U.S. residents the tax applies to property and assets situated everywhere in the world.   In contrast, non-U.S. residents are subject to a gift and estate tax only on U.S. real and tangible personal property.

Gift Tax Exclusions: Similar to a U.S. resident, a non-U.S. resident can make a tax-free annual gift up to $14,000, can make unlimited charitable gifts, and can make unlimited gifts on behalf of donees directly to educational or medical institutions.

Gifts to spouse. The amount of gift tax exclusion  depends on the citizenship of the donee spouse. A citizen spouse may receive unlimited gifts of U.S. assets from his spouse.  A non-citizen spouse can only receive $148,000 per year prior to a tax being imposed.

Estate Tax. U.S. citizens and residents have a $5.45MM estate tax exemption from federal taxes.  In contrast, a non-U.S. resident is permitted only a $60,000 exemption. All property situated in the United States and owned at the death of a non-U.S. resident is included in the U.S. taxable estate, including retirement assets and stocks. Some assets, such as bank accounts and life insurance proceeds, are excluded.

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

The very first question to determine during planning is whether a non-citizen individual is considered a U.S. resident for income tax purposes and for estate tax purposes.

For income tax purposes, a non-citizen is considered a U.S. resident if the individual meets any one of these tests: (1) green card test or (2) the substantial presence test (present in US for at least 31 days during the current year and at least 183 days for three prior years using a weighted average calculation). If an individual is considered a U.S. resident for income tax purposes, he will be taxed on the worldwide income.

For estate and gift taxes, a non-citizen is considered a U.S. resident if the individual intends to establish a domicile in the United States. A domicile is a person’s permanent place of abode in which the person intends to remain indefinitely or to which the person intends to return. One can have multiple residences, but only one domicile.  This question is a subjective inquiry where many factors are considered, including income tax filing status, jurisdiction of the driver’s license, visa status, and location of person’s family and friends. The burden of proof is on the taxpayer to establish his domicile.

The difference in the outcome between U.S. residents and non-U.S. residents is huge: U.S. residents have an estate and gift tax exemption of $5.45MM, while non-U.S. residents have an estate tax exemption of only $60,000.

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

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

Approximately 50% of life insurance policies owned by seniors are allowed to lapse without any benefits being paid out. There are many reasons for this lapse: some can no longer afford the premiums while others feel that they no longer need the proceeds in the event of death.

A recent charitable organization called “Insuring a Better World Fund” (IABWF) was formed to aggregate and administer insurance policies for the benefit of charities. IABWF does not purchase the policies. However, the consumer will be entitled to a charitable deduction based on the fair market value of the donated policy.

There are several criteria which must be complied with before IABWF accepts the policy: the consumer must be above 65, information about health must be provided, policy must have a death benefit value of above $400,000 and the policy must have been purchased more than 3 years prior.

Once the policy is transferred, IABWF will pay the premiums and administer the policy. After the consumer’s death, and after the premiums and expenses have been reimbursed, the death benefit will be distributed to the charities selected by the consumer.

The end result is that the charity receives a substantial amount of money, while the consumer receives a charitable 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

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

A researcher at Ohio State University found that Americans who receive an inheritance save about half of it and spend, donate or lose the rest. However, almost 30% of Americans who receive the inheritance had negative savings rate within 2 years of receiving the inheritance, meaning that they spent it all.

There are strong similarities in these spending habits with people who receive lottery winnings. Apparently, lottery winners save only 16 cents of every dollar won and have dramatically higher bankruptcy rates within 5 years after winning.

Of course, the inheritance that people receive may not be a large amount of money. The median inheritance for the past 30 years was $11,340. For those people who inherit $100,000 or more, the percentage of people who spent it all within two years dropped to 19%.

If you receive an inheritance (or a lottery winning) – be careful. I’ve seen bad financial advisors who have only their own interests at heart. I’ve also seen bad “friends” who convince unsophisticated people to invest in their ‘brilliant’ business schemes. There is no perfect answer about what to do with the money. But not spending it immediately would probably be the best advice!

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

Property partnership may end for a variety of reasons. One common category of circumstances when real estate litigation occurs involves siblings who inherit property from their parents and have different wishes.

Multiple problems can arise.   One sibling may want to live in the property while the other one wants to rent it out. Alternatively, one sibling may want to cash out and sell the property while the other may want to keep it. The sibling who wants to keep the property may not have the money to buy the other sibling out. Furthermore, the siblings may not agree on the property’s value.

One alternative for establishing the value of the property is to hire three appraisers and take the average of their given values. Of course, the appraisers cost money.

The better alternative is to structure your bequest in a way that avoids potential conflicts amongst the siblings. No parent wants to believe that their children will fight after their death, but unfortunately it happens all the time. First, Wills and Trusts can be written such that the real estate will be given to one child while the other assets will be given to the other. Another alternative is to provide in your Will or a Trust that real estate should be sold within a year of death and proceeds should be distributed equally amongst the beneficiaries.

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

Medicaid imposes a transfer penalty that can last for up to 5 years for all uncompensated transfers made prior to the application for nursing home Medicaid. This provision makes crisis planning for nursing home not efficient. Yet many people are reluctant to transfer their assets ahead of time and impoverish themselves, because, of course, no one knows when nursing home will be needed.

One way of avoiding the nursing home penalty is to prove to Medicaid that the transfer was made not for the purpose of Medicaid giving. For example, grandmother has a history of gifting large amounts of money to grandchildren, and continues doing so for several years while being in good health. If, at some point, she has a stroke and has to go to a nursing home, Medicaid will deny her application, claiming that the money gifted was an uncompensated transfer. The family can then appeal and try to prove to an administrative judge that the transfers were done while she was in good health and not as part of Medicaid planning.

This is an affirmative defense, meaning that the burden is on the family to prove their point, not on Medicaid to prove the opposite. If there is no evidence that grandmother was in good health while gifting the money, and if there is no pattern of gifting the money, the petition will likely be denied.

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

In a recent New York case, a Will provided for disposition of 2/3 of the property (leaving property to decedent’s siblings, nieces and nephews) and was silent about the disposition of the remaining 1/3. In re Isasi-Diaz, NYLJ, Mar. 28, 2014, p. 35 (Sur. Ct., N.Y.Co.) (Mella, S.)  The attorney-draftsman provided an affidavit to the court, explaining that he made a mistake, that the decedent provided him with instructions about the disposition of her entire estate, but he made an error while drafting the Will.

The court denied the petition for reformation. The court reviewed the express language of the Will. The court also relied on the well-established New York rule that extrinsic evidence will not be admissible to contradict the unambiguous expressions of the decedent. As a result, since the Will was unambiguous about disposing only a portion of the estate, the court ruled that it could not rewrite the Will based on extrinsic evidence.

The takeaway: please review your documents prior to signing them. Attorneys are human and make mistakes. You should always request to review your documents prior to signing and actually spend the time reading them to ensure that they reflect your wishes. Do not be afraid to change or add things, since this is your document! Do not be afraid to ask questions!

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

Plaintiff tried to bring a personal injury lawsuit against a College on behalf of his daughter, acting under authority of a Power of Attorney. The Power of Attorney was found and printed from the internet, and was not prepared by an attorney.

The defendant argued that the plaintiff lacked authority to bring the action, because the Power of Attorney was invalid as it did not comply with the statutory requirements of GOL 5-1501B(1)(d). The Court agreed with the defendant and dismissed the lawsuit, finding that the document did not contain the exact wording required by the statute. Berrian v. Siena College, 2015 NY Slip Op. 05431 (App. Div. 2d, June 24, 2015)

Morale of the Story: the Power of Attorney document looks very easy to prepare. A lot of people think that they do not need an attorney to do it. And yet a very large percentage of these documents later turn out to be invalid, either because a wrong form was used or because it was not signed in the right places. Talk to an attorney when executing this document!

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