Aaron Charles Gregg

Before They’re Gone—Estate Planning Strategies

“If you have not already been inundated with invitations to webinars, articles and newsletters regarding the estate planning you should consider doing before new legislation passes, you undoubtedly will receive these over the next few months.”

As Congress continues to hammer out the details on impending legislation, there are certain laws still in effect concerning estate planning. The article “Last Call for SLATs, GTRATs, and the Use of the Enhanced Gift Tax Exemption?” from Mondaq says now is the time to review and update your estate plan, just in case any beneficial strategies may disappear by year’s end.

Here are the top five estate planning items to consider:

Expect Exemptions to Take a Dive. Estate, gift, and generation-skipping transfer tax exemptions are $11.7 million per person and are now scheduled to increase by an inflationary indexed amount through 2025. Even if there are no legislative changes, on January 1, 2026, this number drops to $5 million, indexed for inflation. Under proposed legislation, it will revert to $6,020,000 and will continue to be indexed for inflation. This is a “use it or lose it” exemption.

Married Couples Have Options Different Than Solos. Married persons who don’t want to gift large amounts to descendants have the option to gift the exemption amount to their spouse using a SLAT—Spousal Lifetime Access Trust. The spouses can both create these trusts for each other, but the IRS is watching, so certain precautions must be taken. The trusts should not be identical in nature and should not be created at the same time to avoid application of the “reciprocal trust” doctrine, which would render both trusts moot. Under proposed legislation, SLATs will be includable in your estate at death, but SLATs created and funded before the legislation is enacted will be grandfathered in. If this is something of interest, don’t delay.

GRATs and other Grantor Trusts May be Gone. They simply won’t be of any use, since proposed legislation has them includable in your estate at death. Existing GRATs and other grantor trusts will be grandfathered in from the new rules. Again, if this is of interest, the time to act is now.

IRA Rules May Change. People who own Individual Retirement Accounts with values above $10 million, combined with income of more than $450,000, may not be able to make contributions to traditional IRAs, Roth IRAs, and defined contribution plans under the proposed legislation. Individuals with large IRA balances may be required to withdraw funds from retirement plans, regardless of age. A minimum distribution may be an amount equal to 50% of the amount by which the combined IRA value is higher than the $10 million threshold.

Rules Change for Singles Too. A single person who doesn’t want to make a large gift and lose control and access may create and gift an exemption amount to a trust in a jurisdiction with “domestic asset protection trust” legislation and still be a beneficiary of such a trust. This trust must be fully funded before the new legislation is enacted, since once the law passes, such a trust will be includable in the person’s estate. Check with your estate planning attorney to see if your state allows this strategy.

Reference: Mondaq (Sep. 24. 2021) “Last Call for SLATs, GTRATs, and the Use of the Enhanced Gift Tax Exemption?”

Do You Need a Revocable Trust or Irrevocable Trust?

“Trust funds are not just for the ultra-rich. These sophisticated estate-planning tools can make just as much sense for middle-class Americans who own a home and have a net worth of at least $100,000.”

There are important differences between revocable and irrevocable trusts. One of the biggest differences is the amount of control you have over assets, as explained in the article “What to Consider When Deciding Between a Revocable and Irrevocable Trust” from Kiplinger. A revocable trust is often referred to as the Swiss Army knife of estate planning because it has so many different uses. The irrevocable trust is also a multi-use tool, only different.

Trusts are legal entities that own assets like real estate, investment accounts, cars, life insurance and high value personal belongings, like jewelry or art. Ownership of the asset is transferred to the trust, typically by changing the title of ownership. The trust documents also contain directions regarding what should happen to the asset when you die.

There are three key parties to any trust: the grantor, the person creating and depositing assets into the trust; the beneficiary, who will receive the trust assets and income; and the trustee, who is in charge of the trust, files tax returns as needed and distributes assets according to the terms of the trust. One person can hold different roles. The grantor could set up a trust and also be a trustee and even the beneficiary while living. The executor of a will can also be a trustee or a successor trustee.

If the trust is revocable, the grantor has the option of amending or revoking the trust at any time. A different trustee or beneficiary can be named, and the terms of the trust may be changed. Assets can also be taken back from a revocable trust. Pre-tax retirement funds, like a 401(k) cannot be placed inside a trust, since the transfer would require the trust to become the owner of these accounts. The IRS would consider that to be a taxable withdrawal.

There isn’t much difference between owning the assets yourself and a revocable trust. Assets still count as part of your estate and are not sheltered from estate taxes or creditors. However, you have complete control of the assets and the trust. So why have one? The transition of ownership if something happens to you is easier. If you become incapacitated, a successor trustee can take over management of trust assets. This may be easier than relying on a Power of Attorney form and some believe it offers more legal authority, allowing family members to manage assets and pay bills.

In addition, assets in a trust don’t go through probate, so the transfer of property after you die to heirs is easier. If you own homes in multiple states, heirs will receive their inheritance faster than if the homes must go through probate in multiple states. Any property in your revocable trust is not in your will, so ownership and transfer status remain private.

An irrevocable trust is harder to change, as befits its name. To change an irrevocable trust while you are living takes a little more effort but is not impossible. Consent of all parties involved, including the beneficiary and trustee, must be obtained. The benefits from the irrevocable trust make the effort worthwhile. By giving up control, assets in the irrevocable trust may not be part of your taxable estate. While today’s federal estate exemption is historically high right now, it’s expected to go much lower in the future.

Reference: Kiplinger (July 14, 2021) “What to Consider When Deciding Between a Revocable and Irrevocable Trust”

What Is the Required Minimum Distribution for 2021?

“Whether you need to take required minimum distributions to live or find them to be a nuisance, here are some tips to make the most of withdrawing these funds.”

There have been a number of changes to the requirements for RMDs—Required Minimum Distributions—from traditional retirement accounts, says a recent article titled “2 Essential Strategies for Taking Your RMDs” from Kiplinger. In 2019, the age for RMDs was raised from 70½ to 72. In 2020, they were waived altogether because of the pandemic. Now they’re back, and you want to know how to make good decisions about them.

Most people take the default approach, taking a lump sum of cash at the start or the end of the year. This is not the best approach. Investment markets and your own need for income are better indicators for how and when to take your RMD. If you can at all avoid it, never take an RMD from a declining market.

You can take your RMD anytime during the calendar year, from January 1 to December 31. If it’s the first time you’ve taken an RMD, you get a bonus: you can wait until April 1 of the year after your 72^nd birthday. The RMD is calculated, by dividing the account balance on December 31 of the preceding year by your life expectancy factor, based on your age. You can find it in the IRS’s Uniform Lifetime Table.

2021 distributions will be bigger, and not just because of the market’s 2020 performance. Instead, distributions will be bigger because of how the accounts are designed, with RMDs becoming a larger percentage over time. It starts as a small percentage and eventually becomes the entire account, which is then depleted. Remember, the sole purpose of the RMD is to force retirees to take money out of their retirement accounts and pay taxes on the money.

Many retirees take RMDs because they need the money to live on. Here’s where money management gets tricky. It’s far easier to take smaller amounts of money at regular intervals, kind of like a paycheck, than taking a big amount once a year. We’re creatures of habit and are used to receiving income and managing it that way.

Distributions on a regular basis also fosters a better sense of how much money you have to live on, encouraging you to create and adhere to a budget.

If you don’t need the income, taking money through regular installments also has an advantage. It’s like the opposite of dollar-cost averaging. Instead of putting money into the market in small increments over time to even out market ups and downs, you’re taking money out of the market at regular intervals. You’re not cashing out at the market’s lowest point, or at the highest. And if you’re reinvesting RMDs in a taxable account, this strategy works especially well.

Reference: Kiplinger (June 10, 2021) “2 Essential Strategies for Taking Your RMDs”

Michael Jackson Estate’s Big Win against IRS in Tax Court

“A ruling that Michael Jackson’s image and likeness at the time of his death were worth about $157 million less than the IRS estimated warns the agency not to look too far down the road, when assessing the value of a celebrity’s estate.”

Estate planning lawyers agree: the recent victory of Michael Jackson’s estate in U.S. Tax Court is a clear signal that the IRS should be more cautious when assessing the value of an estate’s assets. In the article from Bloomberg Tax, “Michael Jackson Estate’s Tax Win a Warning to Aggressive IRS,” one attorney says it is reasonable to think that the court reacted negatively to the IRS’ being overly aggressive.

It’s also possible that the IRS’ memory of the pop star’s pre-death fame was based on Jackson’s post-death popularity.

The dispute, which began in 2013, attracted wide attention and exposed a big disparity in how the IRS and the Jackson estate valued the pop star’s image and likeness, which was only one part of his estate. While the estate looked at current income and revenue, the IRS took a far more opportunistic approach, eyeing the income from future shows and merchandise.

The $157 million difference came down to the IRS’s inclusion of revenue streams that the Tax Court concluded were not foreseeable at the time of the entertainer’s death. Revenues from the Cirque du Soleil show, a movie and branded merchandise were created only after Michael Jackson died.

When Jackson died in 2009, there had been severe damage to his image, including allegations of sexual abuse of children and eccentric behavior. He was cleared of charges, but the damage to his image took a toll on his popularity. His notoriety undercut the value of his name and likeness while he was alive.

The sole expert witness offered by the IRS was problematic as well. He was found to have lied multiple times and refused to answer questions directly through his testimony, which the Tax Court did not like.

The case may increase interest in changing estate tax laws, given the difficulty of valuing speculative assets based on what was reasonably foreseeable at the time of a person’s death. It may be better to take a “wait and see” approach, rather than guessing at what the person might be worth in the near and distant future.

That approach might put some estates in limbo for years, forcing executors to retain assets during that time. When beneficiaries want to receive their inheritance immediately, this could present problems for executors.

One advisor says that a rational approach would be for estates to exclude likenesses or the ability to exploit a name and image, and then have distributed assets taxed after death at ordinary income rates.

For celebrities and those with a high value estate, expect more scrutiny from the IRS. The IRS is looking for revenue, and any high-profile assets will attract attention.

Non-celebrities should take heed as well. The IRS is looking for revenue, and an estate plan with strong tax planning will protect families from onerous federal and state estate taxes.

Reference: Bloomberg Tax (May 5, 2021) “Michael Jackson Estate’s Tax Win a Warning to Aggressive IRS”

What’s Happening to the Estate Tax?

“Under current rules, the federal estate tax won’t ever affect you, unless you’re quite wealthy. However, that could change rapidly, even if you are far from rich.”

Proposals now being considered by President Biden may expand the number of Americans who will need to pay the federal estate tax in one of two ways: raising rates and lowering qualifying thresholds on estates and increasing the liability for inheriting and selling assets. It is likely that these changes will raise revenues from the truly wealthy, while also imposing estate taxes on Americans with more modest assets, according to a recent article “It May Be Time to Start Worrying About the Estate Tax” from The New York Times.

Inheritance taxes are paid by the estate of a person who died. Some states have estate taxes of their own, with lower asset thresholds. As of this writing, a married couple would need to have assets of more than $23.4 million before they had to plan for federal estate taxes. This historically high exemption may be ending sooner than originally anticipated.

One of the changes being considered is a common tax shelter. Known as the “step-up in basis at death,” this values the assets in an estate at the date of death and disregards any capital gains in a deceased person’s portfolio. Eliminating the step-up in basis would require inheritors to pay capital gains whenever they sold assets, including everything from the family home to stock portfolios.

If you’re lucky enough to inherit wealth, this little item has been an accounting gift for many years. A person who inherits stock doesn’t have to think twice about what their parents or grandparents paid decades ago. All of the capital gains in those shares or any other inherited investment are effectively erased, when the owner dies. There are no capital gains to calculate or taxes to pay.

However, those capital gains taxes are lost revenue to the federal government. Eliminating the step-up rules could potentially generate billions in taxes from the very wealthy but is likely to create financial pain for people who have lower levels of wealth. A family that inherited a home, for instance, would have a much bigger tax burden, even if the home was not a multi-million-dollar property but simply one that gained in value over time.

Reducing the estate tax exemption could lead to wealthy people having to revise their estate plans sooner rather than later. Twenty years ago, the exemption was $675,000 per person and the tax rate was 55%. Over the next two decades, the exemption grew and the rates fell. The exemption is now $11.7 million per person and the tax rate above that amount is 40%.

Lowering the exemption, possibly back to the 2009 level, would dramatically increase tax revenue.

What is likely to occur and when, remains unknown, but what is certain is that there will be changes to the federal estate tax. Stay up to date on proposed changes and be prepared to update your estate plan accordingly.

Reference: The New York Times (March 12, 2021) “It May Be Time to Start Worrying About the Estate Tax”v

Thinking Ahead for 2020 Elections

“Planning for changes to the estate tax and the valuation discount for small businesses can be challenging. Here’s how to take advantage of them now.”

Trying to anticipate changes in the tax codes is like trying to time the stock market—a nearly impossible task. Most tax pundits guessed right, when they said that President Trump was going to cut corporate tax rates in 2017, but the doubling of estate and gift tax exemptions to more than $23 million was a surprise. So was the elimination of deductions for state and local taxes, as reported in The New York Times article “2 Strategies to Consider Ahead of the 2020 Election.”

With a presidential election coming up this fall, the challenge of predicting the impact of changes that may affect taxpayers and their estate planning has already begun. Candidates are talking about big changes, like health insurance, climate change and infrastructure. They are also talking about changes to wealth tax, but what no one has covered yet are changes like lowering exemptions and raising rates for estate and gift taxes and ending the valuation discount for closely held family businesses. This is a tax break that lets families transfer their businesses for far less than they are worth.

This valuation can impact any small business that owners expect to transfer to heirs. The current exemption levels for estate and gift taxes are so high now, that this tax only applies to very few people. However, if the exemption levels and tax rates change, that could become a problem for business owners.

The estate tax is now in effect until 2025, with exemptions at $11.58 million for an individual, and double that amount for a couple. Everything above that is taxed at a rate of 40%. Lowering the exemption and increasing the tax rate are on some candidate’s agendas, both to raise revenue and address income inequality.

The estate tax is a big target. This is because if the exemption were lowered, it would generate a good amount of income, and impact a relatively small group of Americans. The likelihood of this happening will depend on election results, both at the presidential and congressional levels.

The months before the election occurs may be a good time to take advantage of the high tax exemptions and valuation discounts, just in case they change. This would let business owners pass more of their wealth to heirs free of tax, and could also settle some business issues now, not later, when the owners die.

However, identifying short and long-term goals should be done before making any significant decisions. In some states, like Connecticut, it may not be necessary to plan so aggressively, because the state’s estate and gift tax exemptions are lower than federal ones. It should be noted, however, that the exemptions are set to become equal in 2023.

Eliminating the valuation discount had been proposed by the Treasury Department and the IRS under President Obama, when these discounts were seen as being overly generous. A few months after taking office, President Trump issued an executive order for the Treasury to withdraw the regulation to eliminate the discount. However, the statute is still on the books and could be easily reinstated.

This is an example of the importance of reviewing estate plans on a regular basis and creating estate plans that have enough flexibility to withstand change. Speak with your estate planning attorney to ensure that your estate plan is prepared, whatever the results of the 2020 elections may be.

Reference: The New York Times (Feb. 14, 2020) “2 Strategies to Consider Ahead of the 2020 Election”

Life Insurance Is a Good Estate Planning Tool but Needs to Be Done Carefully

“Life insurance may play a vital role in an estate plan, because insurance proceeds can be counted on to provide liquidity when it’s needed.”

With proper planning and the help of a seasoned estate planning or probate attorney, insurance money can pay expenses, like estate tax and avoid the need to liquidate other assets, says FEDweek’s recent article entitled “Errors to Avoid in Using Life Insurance for Estate Planning.”

As an example, let’s say that Reggie passes away and leaves a large estate to his daughter Veronica. There’s a big estate tax that’s due. However, the majority of Reggie’s assets are tied up in real estate and an IRA. In light of this, Veronica might not want to proceed directly into a forced sale of the real estate. However, if she taps the inherited IRA to raise cash, she’ll be required to pay income tax on the withdrawal and forfeit a very worthwhile opportunity for extended tax deferral.

If Reggie plans ahead, he could purchase insurance on his own life. The proceeds could be used to pay the estate tax bill. As a result, Veronica can retain the real estate, while taking only minimum required distributions (RMDs) from the inherited IRA.

If the insurance policy is owned by Veronica or by a trust, the proceeds probably won’t be included in Reggie’s estate and won’t increase her estate taxes.

Along these same lines, here are some common life insurance errors to avoid:
Designating your estate as beneficiary. When you make this move, it puts the insurance policy proceeds into your estate, exposing it to estate tax and your creditors. Your executor will also have to deal with more paperwork, if your estate is the beneficiary. Instead, name the appropriate people or charities.

Designating just a single beneficiary. You should name at least two “backup” beneficiaries. This will decrease any confusion, if the primary beneficiary predeceases you.
Throwing the copy of your life insurance policy in the “file and forget” drawer. You should review your policies at least once every few years. If the beneficiary is an ex-spouse or someone who’s passed away, make the appropriate changes and get a confirmation from the insurance company in writing.

Failing to carry adequate insurance. If you have a youngster, it undoubtedly requires hundreds of thousands of dollars to pay all her expenses, such as college bills, in the event of your untimely death.

Talk to a qualified and experienced estate planning attorney about the particulars of your situation.

Reference: FEDweek (Dec. 12, 2019) “Errors to Avoid in Using Life Insurance for Estate Planning”

How Can I Avoid Inheritance Tax for my Step-Grandchild?

“Taxes in New Jersey are no pretty thing, and after you die, the state will once again try to get its cut of the inheritance tax.”

nj.com’s recent article, “How can I avoid the inheritance tax for step-grandchildren?” explains that the New Jersey Inheritance Tax is a tax imposed on inheritances, depending on the relationship between the deceased and the inheritor, or beneficiary. The relationship between the deceased and the inheritor can be placed into four different categories, and depending upon the category, a tax may be imposed.

Most inheritors fall into Class A. This category includes a spouse, child, parent, grandparent, stepchild, and grandchild. The next most common category is Class C—siblings and daughters-in-law or sons-in-law, and the surviving spouse of a deceased child are included here. Class E beneficiaries include charities, religious institutions and other exempt organizations. Finally, there’s Class D. These beneficiaries includes anyone who’s not a member of another class. In case you’re wondering, there’s no longer a Class B.

Class A beneficiaries will not see any inheritance tax. For Class C, the first $25,000 is exempt and the rate on amounts in excess of that begins at 11% and goes up to 16%. Class D rates range from 15 to 16%. There’s no inheritance tax for Class E.

Step-grandchildren are considered Class D beneficiaries, despite the fact that grandchildren and stepchildren are Class A beneficiaries. You can avoid the tax, by leaving life insurance death benefits to a step-grandchild, because these benefits aren’t subject to New Jersey’s inheritance tax. If the step-grandchild is the step-child of your child or the child of your step-child, leave the bequest to your child or your step-child and make an unenforceable request that she use the bequest for that step-grandchild.

Another option is to make a gift to the step-grandchild, while you’re living. If the gift is made more than three years before your death, then it won’t be subject to the inheritance tax. However, if it’s within that three-year period, there’s a presumption that the gift was made in contemplation of death, so it will be subject to inheritance tax.

You could avoid this, by making a lifetime gift to your child or stepchild, even within the three-year period preceding death, and request that they use it for the benefit of the step-grandchild. The only issue here is that it's not an enforceable obligation. Otherwise, the gift will be deemed to have been made to the step-grandchild and subject to the three-year gift in contemplation of death rule.

If you have real estate outside of New Jersey, you may want to leave some of that property to the step-grandchild, because out-of-state real estate isn’t subject to New Jersey’s inheritance tax.

Reference: nj.com (October 31, 2019) “How can I avoid the inheritance tax for step-grandchildren?”

What’s the Latest on Paul Allen’s Estate?

“The many, wide-ranging constituencies for Allen’s endeavors—from Seattle and Portland sports fans to connoisseurs of fine art and pop culture to nonprofits, real-estate investors and academic and scientific leaders—have questions: What will be kept and what will be sold? What form will the promised philanthropy take and what will its focus be? When will it all happen?”

Paul Allen wanted to give away most of the $20 billion-plus fortune he accumulated as Microsoft co-founder, technology investor, real estate magnate and NFL and NBA team owner.

However, about a year after his death, the plans he made are still a closely guarded secret, and its execution is a complex, high-stakes work in progress.

The Seattle Times’s recent article, “What’s happening to Paul Allen’s billions? A year after his death, it’s complicated” says that it can take years to unwind holdings like Allen’s.
The process of giving away as much as $10 billion or more of his estate falls to Jody Allen, trustee, sister and, with her family, sole heir.

Jody Allen “has responsibility for preserving and implementing Paul Allen’s vision for generations to come,” says her biography on the website of Vulcan, the business they co-founded that serves as the hub of the Allen empire.

Jody’s specific intentions are not known outside of her inner circle. However, the expectations are great, based in large part on Paul and Jody Allen’s record of philanthropy. Paul gave away about $2 billion, while he was alive.

The sale of Allen’s cash-consuming assets, like yachts or space ventures, is a regular task in cleaning up an estate, so that when it’s time to distribute cash, there’s liquidity.

However, this clean-up can take several years for estates of this size. Estates have up to 15 months from the date of death, including extensions, to file estate tax returns.
The executor must pay estimated taxes, which can be up to 52% of assets not going to charity.
Any major distributions usually must wait until after state and federal tax officials sign off.

Reference: The Seattle Times (November 26, 2019) “What’s happening to Paul Allen’s billions? A year after his death, it’s complicated”

What Do I Need to Know About Owning Property with Someone Other than My Spouse?

“It's very common for spouses to title property they own together as ‘joint with right of survivorship.’ When one passes, the other owns the property outright. It’s simple, easy and automatic. However, it can get messy when the other joint owner isn’t your spouse.”

Have you ever considered owning property jointly with a family member, friend, or a business associate? Inside Indiana Business’ recent article, “Risky: Property Owned with a Non-Spouse,” says that you should think about the negatives, such as loss of control, unknown creditor issues and tax consequences.

Loss of Control. When you choose to co-own an asset with another person, you can enter into a legal ownership agreement known as “joint tenants with rights of survivorship” or “JTWROS.” When one of the owners dies, the surviving owner automatically becomes sole owner of the property. However, you give up some control of ownership, when you own property in this way. For example, you can’t direct your portion to go to a spouse or a child after your death in your will or other estate planning documents. OK, you can, but your co-owner’s ownership title takes precedence over your estate documents. As a result, she will become the sole owner. You can also lose some control over the property, if the non-spouse co-owner transfers her interest in the property to another individual without your consent. It’s also tough to remove a co-owner from the property title without his or her full cooperation.
Creditors. Another issue with jointly held property is that it’s subject to creditors’ claims against both owners. If your brother, as a co-owner of your cabin, has financial troubles and files for bankruptcy, his ownership in the cabin could possibly be claimed by a creditor. He could also be forced to sell it to pay off his debts. So, unless you can buy out his ownership in the cabin, you may now own the property with a stranger.
Potentially Higher Taxes. Adding a non-spouse as co-owner of an asset, allows for a simple property transfer at your passing. However, it could also mean both a gift tax to you and an increased capital gain tax for your heir. By adding a non-spouse to the property title, you’re making a gift to the new joint owner. Therefore, based on the current value of the property being gifted, you could be liable for gift tax. In addition, the heir of the property may have to pay increased capital gain taxes. Property transferred at death receives a step-up in basis. This means the heir’s cost basis is equal to the fair market value of the property at your death, instead of your cost basis (the amount you paid for the property). Receiving a step-up in basis reduces the heir’s capital gain on the appreciation of the property when it’s sold. However, if you add a co-owner, only your interest in the asset has the benefit of stepped-up basis at your death, not the entire property. When the property is sold, this may mean a higher capital gain tax.
JTWROS vs. Tenants in Common. When deciding to co-own an asset with another person, you can also enter into an ownership agreement known as “tenants in common.” Here’s a key difference: holding property JTWROS with another person means that when one owner dies, the other owner receives the property outright and automatically. When owning property as tenants in common with another person, when one owner dies, the owner’s heirs receive his share in the property. A co-owner can again transfer his interest in the property without approval as the other co-owner. This loss of control may place you in a difficult position.
When considering property ownership with another party, look at the pros and cons of both JTWROS and tenants in common. The cons usually outweigh the pros. However, if owning property with a non-spouse is what you want, discuss this with a qualified estate planning attorney.

Reference: Inside Indiana Business (December 1, 2019) “Risky: Property Owned with a Non-Spouse”