Hi, How Can We Help You?

Blog Posts

SECURE Act

At the end of 2019, Congress passed the most sweeping change to retirement rules in over a decade called “Setting Every Community Up for Retirement Enhancement Act” (SECURE Act), this legislation went into effect on January 1, 2020, and impacts retirement and estate planning rules.

Here are the biggest takeaways from the Act:

Required Minimum Distributions (RMD) Start at Age 72

The rules delay the age at which you must begin taking your RMDs from your Traditional IRA.

If you are already taking them, continue doing so. The new rules do not affect you. If you were born between January 1 and June 30, 1949, you are subject to the old rules and must take your first RMDs before 2020-year-end. However, if you were born on July 1, 1949 or later, you can delay taking distributions until you turn age 72.

You Can Now Contribute to a Traditional IRA After Age 70½

If you are earning income, you can continue making contributions to your Traditional IRA after you retire if you wish. This change is great news for anyone who wants to continue working and growing their retirement savings for a rainy day. (There is no age cap for Roth IRA contributions, therefore, no change).

“Stretch” IRAs Are Gone As We knew Them (For Most People)

For beneficiaries of inherited IRAs after January 1, 2020, you are no longer able to “stretch” distribution payments over your own lifetime. Under the new rules, most beneficiaries of inherited IRAs must withdraw the full account balance and pay taxes on the distributions within 10 years. (Fortuitously, if you are presently enjoying an inherited IRA, you’re grandfathered in under the old rule and safe from this requirement).

Nevertheless, certain individuals will qualify for limited exemptions under the new law such as your surviving spouse, minor children, chronically ill or disabled beneficiaries and beneficiaries less than 10 years younger than the participant.

401(k)s May Start Including Annuities

The new law paves the way for employers to start offering annuities within 401(k) plans by adding additional “safe harbor” protection for employers.While annuities can add great cash flow options for some employees seeking retirement income, they’ll need to seek advice from a financial advisor before purchasing one within a 401(k). Be careful, as this is a potential trap that could have fees that are 3% or more if participating in an annuity in your plan. I have seen it recommended you should avoid the use of a tax-deferred investment inside a tax-deferred retirement plan. This could cost you and your employees thousands of dollars over the course of savings you have for retirement. BE CAREFUL!

401(k) Plans Become More Accessible to Businesses and Employees

Many small businesses find it expensive and burdensome to provide 401(k) plans to their employees.The new law makes it simpler and safer for small employers to team up to offer “multi-employer” plans. Beginning in 2021, employers who provide 401(k)s to full-time employees will be required to offer access to qualifying part-time employees. You’ll need specialist here as it gets complicated. BE CAREFUL!

New Parents Can Take Out Penalty-Free Distributions For Births and Adoptions

Now new parents can withdraw up to $5,000 (or $10,000 for married couples) from their qualified retirement accounts without an early withdrawal penalty if done within one year of the date of birth or adoption. (This withdrawal is subject to ordinary income tax)

Miscellaneous Tax Remedies

The medical expense deduction threshold is back at 7.5% of Adjusted Gross Income for 2019 and 2020.

529 college savings plans can now be used for apprenticeships and up to $10,000 of student loan repayments.

Children’s unearned income, traditionally taxed at a much higher trust tax rate, is now taxed at the parents’ top marginal tax rate.

The tax deduction for up to $4,000 in qualified tuition and fees is now available again.

Review/Amend Your Revocable Living Trust (RLT) or IRA Inheritance Trust (IRAIT)

Depending on the value of your retirement account, you may have directed the distribution of your accounts in your RLT, or you may have created an IRAIT that would handle your retirement accounts at your death. Your trust may have included a “conduit” provision, and, under the old law, the trustee would only distribute required minimum distributions (RMDs) to the trust beneficiaries. Basically, forcing the continued “stretch” based upon the beneficiary’s age and life expectancy. A conduit trust protected the account balance, and only RMDs–much smaller amounts–were to vulnerable income tax, creditors and divorcing spouses.

With the SECURE Act’s passage, a conduit trust provision is greatly limited because the trustee will be required to distribute the entire account balance to a beneficiary within ten years of your death. If we drafted the IRAIT for you there is an accumulation toggle provision integrated in your IRAIT. This was integrated there to provide your beneficiaries with solid asset protection from creditors and divorcing spouses. This still works as planned if implemented within the first 10 years following your death.

We should,however, discuss the benefits of an “accumulation trust,” an alternative trust structure through which the trustee can take any required distributions and continue to hold them in a protected trust for your beneficiaries. In any case when a distribution comes out to the trust it is subject to income tax, but with a pure “accumulation trust” it is about protecting your loved ones from their future decisions and their influencers.

Additional Trust Considerations

For most Americans, a retirement account is the largest asset they will own when they pass away. If we have not done so already, it may be beneficial to create a trust to handle your retirement accounts. While many accounts offer simple beneficiary designation forms that allow you to name an individual or charity to receive funds when you pass away, this form alone does not take into consideration your estate planning goals and the unique circumstances of your beneficiary. A trust is a great tool to address the mandatory ten-year withdrawal rule under the new Act, providing continued Asset protection of a beneficiary’s inheritance.

Review Intended Beneficiaries

With these changes to the law, now is a great time to review and confirm your retirement account planning including beneficiary designations. Whichever estate planning strategy is appropriate for you, it is important that your beneficiary designation meshes with that planning. If your intention is for the retirement account to go into a trust for a beneficiary, the trust must be properly named as the primary beneficiary. If you want the primary beneficiary to be an individual, he or she must be named. Ensure you have listed contingent beneficiaries as well.

If you have recently married or divorced, you will need to ensure the appropriate changes are made because at your death, in many cases, the plan administrator will distribute the account funds to the beneficiary listed, regardless of your relationship with the beneficiary or what your ultimate wishes might have been.

Bottom Line: Rules Change, but the Essentials of Planning Are Static

The SECURE Act offers opportunities to potentially maximize your planning yet is froth with new pitfalls to avoid. Be sure to work with someone who carefully analyzes how the rules could impact you and your retirement or estate planning needs.

In the meantime, if you have any questions, please give the office a call at (866) 696-1123 or hit “reply” to this email and I’m happy to help.

Read More

Bloodline Preservation Trust

The Bloodline Preservation Trust capable of providing the appropriate instruction for future generations and ongoing protection of...

Read More

Domestic Asset Protection Trusts v. Prenuptial Agreements

RANDALL H. BORKUS, JD, JAMES W. COLLINS, JD, AND RICHARD J. SHAPIRO, JD
WEALTHCOUNSEL MEMBERS SINCE 2011

Divorce is an unfortunate reality these days as 40% – 50% of first marriages and 60% of second marriages end in divorce.’ Without appropriate planning, a spouse seeking divorce will likely be entitled to an equitable portion of marital property, which includes business interests, liquid assets, gifts, employment income, and in some cases, inheritances and other assets held prior to the marriage. Therefore, it is important for couples contemplating marriage to find ways to clearly communicate their wishes with regard to their assets and in­come before the wedding day. If the couple fails to adequately address these issues, decisions may be left to the discretion of the judge during the course of what is often an expensive, exhausting, and time-consuming divorce proceeding.

PRENUPTIAL AGREEMENTS

Historically, individuals concerned about protecting assets acquired before marriage used traditional pre­nuptial agreements. Prenuptial agreements are good, but there are numerous personal and legal issues that deter couples from actually executing a prenuptial agreement. In fact, a recent survey found that only approximately 3% of all married or engaged couples have executed a prenuptial agreement.2

 

Even for those relatively few couples who have ex­ecuted a prenuptial agreement, there is no guarantee that the agreement will stand up to a legal challenge if the relationship sours. Statutory and case law im­poses stringent requirements upon prenuptial agree­ments, both technically and procedurally. Absent appropriate care and attention to detail, prenuptial agreements are susceptible to challenges and may be invalidated by the court. Each party should be rep­resented by independent counsel to avoid conflicts of interest as well as accusations of duress or coer­cion in the process. Additionally, a strong prenuptial agreement will include a full disclosure of the assets and liabilities of each prospective spouse on sched­ules attached to the executed prenuptial agreement. Furthermore, the agreement must be fair at the time of execution, and it “may be invalidated if the party challenging the agreement demonstrates that it was the product of fraud, duress, or other inequitable con­duct.”3 Fairness will be determined by a judge or a jury, which may result in a popularity contest in the courtroom. In some states, prenuptial agreements are completely disregarded in divorce proceedings.

 

One common mistake that renders an agreement vulnerable is when a couple waits too long before dis­cussing a desire for a prenuptial agreement. In the most extreme case, the party demanding the prenup­tial agreement thrusts an agreement upon the other party “on the steps of the church or synagogue” on the day of the wedding. While such a scenario is per­haps a bit of an exaggeration, prenuptial agreements are often invalidated if executed too close in time to the wedding ceremony.4

 

As a practical matter, asking a future spouse to enter into a prenuptial agreement often causes discomfort to blossoming love relationships. The person being asked to enter into a prenuptial agreement may well interpret such a request as implying that their future spouse does not trust them, or that their future spouse expects the marriage to fail. As a result, many couples are reluctant to even talk about such agreements5.  Moreover, the requirement for full and accurate finan­cial disclosure deters many couples who might oth­erwise consider a prenuptial agreement from enter­ing into a signed agreement. The bottom line is that while many couples are delighted to share their lives together when entering into a marriage, they may feel uncomfortable sharing information about their net worth.

 

AN ALTERNATIVE: THE DOMESTIC ASSET PROTECTION TRUST

Because of the issues and complications surrounding prenuptial agreements, many couples are looking for alternatives to protect assets obtained prior to mar­riage and protect future inheritances. Asset protec­tion trusts give couples a great alternative to the tra­ditional prenuptial agreement. While asset protection trusts can be formed domestically or off-shore, es­tablishing and administering foreign asset protection trusts has become very expensive. And, in addition to the high cost, most people are uncomfortable with sending their assets offshore.

 

A much better alternative may be a domestic asset protection trust (DAPT) sitused in one of the fifteen states that authorize the use of self-settled asset pro­tection trusts in some form.6 One state offering a par­ticularly favorable statute is Wyoming.7 Wyoming law8 permits the creation of a self-settled trust that pro­vides a more surefire alternative for protecting one’s assets from a claim by a future spouse than the tradi­tional prenuptial agreement.

 

DAPTs are powerful trusts that protect assets from potential unknown creditors, which by definition in­cludes a future divorcing spouse. Moreover, a DAPT allows the creator to name himself or herself as a po­tential beneficiary in many cases—hence the name “self-settled” trust. Unfortunately, some jurisdictions are so pro-creditor — Illinois, for instance — that indi­vidual asset protection is not given consideration in the state’s courts.9

 

BLOODLINE PRESERVATION TRUST

One way to mitigate the negative jurisprudence ap­plied in some states is to utilize a fairly new type of DAPT set up by a third party for the benefit of another individual known as a “Bloodline Preservation Trust” (“BPT”).10 The BPT concept is simple. You choose an asset protection jurisdiction, but unlike a traditional DAPT, the trust creator is not a beneficiary of the trust. The BPT is set up for the benefit of the creator’s spouse, descendants and/or family members. A trust structured in this manner is, by definition, a third-party trust. This allows the creator to avoid the legal uncertainty that is inherent with a self-settled domes­tic asset protection trust formed in jurisdictions that have not enacted statutes permitting self-settled as­set protection trusts.

 

In their various forms, DAPTs are effective against a future divorcing spouse and other creditors, provided that the funding of the trust does not violate the ap­plicable fraudulent transfer law.11 So, to be an effec­tive asset protection tool for a prospective spouse, it is imperative that the DAPT be created and fund­ed before the marriage. Significantly, in establishing a DAPT, there are no requirements that the creator or beneficiary of the DAPT disclose to their future spouse a plan to create a DAPT, or disclose the assets funded in the trust.

 

An individual contemplating marriage can establish a DAPT in a state permitting such trusts and, upon the dissolution of the marriage, shield those assets from any equitable distribution. This technique is appealing to many individuals who desire to protect their assets from their future spouse — and the unpredictability of a judge’s discretion — quietly and with less hassle. Not only is a properly structured and implemented DAPT far less likely to be subject to legal attack than a prenuptial agreement, but the creator also avoids having to engage in “the conversation” with the fu­ture spouse — which at best is uncomfortable, and at worst can lead to the breakup of the relationship when the prospective spouse sputters, “you don’t trust me otherwise you wouldn’t ask me to sign this!”

 

DAPT REQUIREMENTS

As with any estate planning technique, a DAPT must meet certain criteria to be valid. At minimum, the do­mestic asset protection trust:

  • Must be irrevocable;
  • Should appoint a trustee (or trustees) with the discretion to administer the trust;
  • Must appoint a trustee, whether corporate or indi­vidual, that is a qualified trustee of the jurisdiction in which the trust is formed; and
  • Must contain a spendthrift clause, which restricts the transferability of a beneficiary’s interests in the trust property.12

 

Additionally, in exchange for restricting the use of the trust assets, those who establish DAPTs receive sev­eral benefits. First, because the assets gifted to the DAPT constitute trust property, the creator may pro­tect those assets against claims made by future credi­tors of the creator, including a future spouse. Further­more, unlike other types of irrevocable trusts where the grantor gives up all rights to the assets funded to the trust, a grantor or creator of a DAPT retains a beneficial interest in the trust while protecting the as­sets from future unknown creditors. Therefore, a po­tential spouse can establish a domestic asset protec­tion trust that is fully discretionary, receive financial benefit from the trust during his or her lifetime, and protect the trust assets from a bad marriage that is solemnized after the creation of the trust.

 

LAYERED STRATEGIES

Finally, certain individuals contemplating marriage and establishing a DAPT would benefit from further enhancing this already powerful strategy by layering or combining additional levels of asset protection. Individuals with a significant amount of assets, and/ or those holding certain “high-risk” classes of assets such as real estate holdings or business interests, might consider combining underlying entity struc­tures with the DAPT. Specifically, one could create an LLC (Limited Liability Company) under the laws of an asset-protection oriented state (again, Wyoming be­ing a good example). The individual would then trans­fer specified assets into the LLC, with the LLC struc­ture providing the individual with protection against liabilities associated with the assets transferred into the LLC. The individual would in turn have the LLC membership interests owned by the DAPT. The layer­ing and stacking of strategies would present consid­erable additional barriers to a would-be creditor or divorcing spouse.

 

TAKEAWAYS

Given the flexibility and protection afforded by DAPTs, it is essential that professionals discuss the many ben­efits of these trusts with clients who are contemplat­ing premarital planning. If a client combines a DAPT executed before marriage with a prenuptial agree­ment, their personal asset protection is even stronger. Alternatively, if discussing a prenuptial agreement with a future spouse makes a client too uncomfort­able, a DAPT can be a safe and less offensive way to protect one’s assets while simultaneously maintaining the love and trust everyone desires when contemplat­ing nuptial vows.

 

(ENDNOTES)

  1. How common is divorce and what are the reasons?, <http:// www.divorce.usu.edu/htm/lesson-3>; see also American Psycho­logical Association, <http://www.apa.org/topics/divorce/>.
  2. Sanette Tanaka, The Growing Popularity of the Prenup, WALL STREET JOURNAL, October 31, 2013, available at http://www.wsj. com/articles/SB10001424052702303615304579157671554066120.
  3. Cioffi-Petrakis v. Petrakis, 103 A.D.3d 766, 766, 960 N.Y.S.2d 152 (2d Dep’t, 2013).
  4. See, e.g., In Re Marriage of Bernard, 204 P.3rd 907 (Wash. 2009) and Peters-Riemers v. Riemers, 644 N.W.2d 197 (N.D. 2002) (in both cases the courts refused to enforce a prenuptial agreement presented to a spouse just days before the wedding)
  5. Jeff Landers, Skittish About a Prenup? Like It Or Not, You Al­ready Have One, FORBES, July 17, 2013, available at http://www. com/sites/jefflanders/2013/07/17/skittish-about-a-prenup-like-it-or-not-you-already-have-one/
  6. Nevada, South Dakota, Ohio, Tennessee, Alaska, Wyoming, Del aware, Missouri, New Hampshire, Hawaii, Rhode Island, Utah. Vir­ginia, Mississippi, and Oklahoma.
  7. Effective as of July 1, 2007, the Wyoming Legislature enact­ed legislation permitting individuals to establish asset protection trusts in Wyoming, formally known as a Qualified Spendthrift Trust, which can provide certain protection from creditors, liabilities and judgments.
  8. The Wyoming DAPT can be created by anyone living in any ju­risdiction, so long as the trust states that it is: (i) a qualified spend­thrift trust under Wyoming Statute § 4-10-510 et. seq., (ii) expressly incorporates the law of Wyoming to govern the validity, construc­tion and administration of the trust, and (iii) is administered by at least one Qualified Trustee.
  9. Rush Univ. Med. Center v. Sessions, E. 2d                  , 2012 IL 112906, 2012 WL 4127261 (III, Sept. 20, 2012); The Illinois Supreme Court in 2012 held in the Rush University case that a self-settled trust was void as against public policy. Fortunately, this result should be easily averted using the BLOODLINE PRESERVATION TRUST.
  10. BLOODLINE PRESERVATION TRUST, Reg. No. 4,073,124, Reg­istered Dec. 20, 2011, Int. CI.: 36; First used 10-1-2010; Most all prac­titioners agree that Domestic Asset Protection Trusts formed in the states that have Domestic Asset Protection Trust statutes are powerful tools when formed and funded correctly. Despite the high probability of success, there is a way to dramatically increase the odds of success; it is Hybrid form of Domestic Asset Protection Trust known as the Bloodline Preservation Trust (“BPT”).
  11. See, e.g., Wyoming Statute § 34-14-201. “Uniform Fraudulent Transfer Act.”
  12. See, e.g., Wyoming Statute § 4-10-510.

 

ABOUT THE AUTHORS

polo

Randall H. Borkus is a co-founder and Partner of Borkus Collins Law, PA., a law firm with offices in the Chicago area and Sarasota, Florida. Randall is an attor­ney and consultant with a background in taxation and finance. His primary focus is on family asset preservation planning, income tax planning, estate planning, and providing guidance to entrepre­neurs, financial advisors, accountants, insurance wholesalers, CPAs, business professionals, and other attorneys. Ran­dall enjoys exploring dance steps and traveling with his wife Janis.

 

 

James Wjames-collins-his-res-suit-tie. Collins is a co-founder and Partner in Borkus Collins Law, PA.. Jim is a nationally recog­nized author and speaker in the estate planning field, and his primary focus is on estate plan­ning, estate/gift/income tax planning, asset protection planning, charitable planning, and providing valuable educa­tion and collaboration to financial advi­sors, CPAs, insurance professionals, and other allied professionals. Jim enjoys time with his family and a long history of involvement in distance and endurance/ extreme running events.

 

 

rich_shapiro
Richard Shapiro, a partner in the Goshen, New York law firm of Blustein, Sha­piro, Rich & Barone, LLP, concentrates his practice in the areas of estate and business planning, elder law, and spe­cial needs planning. He is a graduate of Cornell University (B.S., 1985) and the University of Pennsylvania (J.D., 1988)

Read More

Act Now! There’s Still Time to Avoid the New IRS Regulations That Might Raise Taxes on Your Family’s Inheritance

The IRS recently released proposed regulations which effectively end valuation discounts that have been relied upon for over 20 years. If the IRS’s current timetable holds, these regulations may become final as early as January 1, 2017. Although that date isn’t set in stone, we expect that the regulations will be final around that time or shortly thereafter.

With New Regulations Looming, What Should You Do Now?

As we mentioned before, the timetable isn’t set in stone. Luckily, there’s still a narrow window of time to implement “freezing” techniques under current, more favorable law, to save taxes and protect your family’s inheritance.

Depending on your circumstances, some options are going to be a better fit than others, and we want to make sure you get the best outcome possible. Some of these “freezing” techniques involve the use of a family business entity to own and operate your family fortune, in combination with one or more special tax-saving trusts. These plans provide numerous benefits including asset protection, divorce protection, centralized management of assets, and more – in addition to the tax savings.

Unfortunately, these types of plans can take 2-3 months to fully implement and time is running short.

So, here’s your action plan.

First, schedule an appointment with us as soon as possible. We’d like to get a time on the calendar so that we can take a look at the options that are available to you under current law between now and the end of this year.

Second, find your estate planning portfolio and take a look at it. If we prepared your plan, you’ll have clear outlines that represent your current plan, making it easy to review. (If you can’t find it, let us know and we will send information that will help you.) If someone else prepared your plan, you might have a graphic summary or some other type of summary. Regardless of who prepared your plan, now’s a great time to review your plan. When we meet, we want to make sure that anything we do to help you protect your family’s inheritance from the IRS still achieves your overall planning goals – and not just the tax-saving goals.

Our firm is available to assist you with the immediate implementation of your wealth transfer plan using valuation discounts that are still available under current law. Please call our office now at 866-696-1123, or you can e-mail us at randall@borkuslaw.com and jim@borkuslaw.com

Randall Borkus & Jim Collins

Read More

Are You Listening Hard or Hardly Listening?

There are some universal, timeless truths in this brief piece regarding which we all need fresh reminders and wake-up calls on a regular basis.  Allow me to set the stage with a personal memory.  I grew up in a home in the Midwest where my father owned a small meat market and grocery store.   I began discovering the “joy” of hard work at a very early age.  So much for child labor laws!

I can still hear in my mind the banter and stories of the “old timers” who used to come into the store.  Truly, some of them said the same thing every time, and many of them separately would say the same things that many of the other old timers said.  You have to know……….this was a very small Midwestern town where everyone knew everyone else.

One of these sage greetings that were often offered came in the form of a question rather than a simple hello:  “Are you working hard, or hardly working?” Yeah, I know, you’ve heard it to haven’t you!   Recently I have been thinking about that same question, but with a twist, applied to trying to have a meaningful conversation with another person:  “Are you listening hard, or hardly listening?”

You see, another setting we all recognize and a frustration we have all encountered is trying to have a “conversation” with someone who continually interrupts you, who doesn’t let you finish a sentence, whom you can tell is thinking about what they want to say next the entire time rather than truly listening to you.  Now I don’t want to throw anyone under the bus, but you would only have to pause about 10 seconds to come up with a couple of acquaintances who fit that profile.

Said another way, it is the truly dramatic difference between “hearing” someone and “listening” to someone.  If someone later says to you “Sure, I heard you,” there is no guarantee there that they listened to you, now is there?  It has often been observed that the good Lord gave us two ears but only one mouth, and that this balance is intentional!

Everyone needs to know they are heard and listened to.  You and I need to know that we are heard and listened to.  And allow me please to apply this to the laboratory of counseling, and especially the counseling that is so necessary in my world of estate planning and counseling.  I absolutely MUST hear and listen to my clients hopes, fears, dreams, and aspirations.  I MUST hear and even feel what keeps my clients awake at 2:00 AM night after night.  These are the things we only learn by purposeful, intentional listening.

It really is not much of an art form to check off a few answers from clients to stock questions on a sterile list or form document and then transfer those answers to a “one size fits all” estate planning document that pretends to address the myriad of issues my clients face.  In fact, there is an incredible difference between “estate planning by word processing” and “estate planning by counseling.”  Truly, I am only interested in the latter!

This has been a bit of a personal piece and a personal application to my walk in life.  I would challenge you to apply the same to who you are, to your relationships, “how you roll” as you interact with people, etc.  Are you listening hard, or hardly listening?

Read More

A “Tax Day Primer”: A Brief Recap and Hope in New Jersey

By Attorney James W. Collins, Borkus Collins Law, PA.  April 15, 2016

 

The manner in which the various states in the U.S. handle their state level estate tax (aka “death tax”) and inheritance tax, in addition to the federal estate tax realities that affect citizens in all states, is an ever changing circus of complexity.  One state that is currently considering changes in its approach is New Jersey, and we will return to that shortly.

Prior to the “first Bush tax act” in 2001 (the “Economic Growth and Tax Relief Reconciliation Act,” or EGTRRA) the federal government would essentially “share” a percentage of their federal estate tax revenues with the states, which was commonly known as a “pickup” system.  One eventual result of EGTRRA was that the feds were no longer required to be in such a sharing mood, and by the end of 2004 the federal government no longer shared such revenue with the states, instead replacing the pickup system with a credit against federal estate tax for actual state level estate taxes paid.

Faced with this loss of revenue, many states “decoupled” from the previous pickup regime that no longer did them as much financial good as they would like, and instead instituted their own state level estate taxes.  With many varieties and changes along the way, it has been common for these state level estate taxes to vary between 5% and 16%.  Some states have even imposed a “cliff” system where if a decedent’s assets are above a certain level, whatever credit or exemption for state level estate taxes that would otherwise apply is ignored and the state estate tax is computed from dollar one of the estate.  Yikes!

The result was that a number of states now had both a federal estate tax and a state level estate tax.  To add insult to injury, two states (Maryland and New Jersey) still have the distinction of also imposing an “inheritance tax” on top of these two estate tax bites, which results in three tax bites at the apple!  Note that while both federal and state estate taxes are imposed on the assets of a decedent, the inheritance tax, if applicable, is imposed on the recipient or beneficiary of the decedent’s assets.  It is important to keep our language straight here.

Fast forward to today.  We have now watched various states experiment with their responses to what unfolded under EGTRRA beginning in 2001 for some 15 years, and the pendulum has swung wildly. For example, a number of states in recent years have watched their retirees flee to other states that do not impose a state level estate tax.  As a result, a recent trend has been for individual states to “soften” this blow and either eliminate or significantly change their state level estate and inheritance tax regimes.

This brings us back to New Jersey, which currently has the distinction as mentioned above, along with Maryland, of imposing (1) the federal estate tax, (2) the New Jersey estate tax, and (3) the New Jersey inheritance tax.  Further, New Jersey has the lowest exemption amount for state level estate tax of any state in the nation.  When a decedent dies, only the first $675,000 of assets is exempt from New Jersey estate tax!  Compare this, for example, to the fact that for federal estate tax purposes in 2016 the first $5.45 million is exempt from federal estate tax.

The key point here is that estate planning attorneys, financial advisors, and other allied professionals absolutely must stay abreast of what is happening in our 50 states.  New Jersey is finally seriously considering changes, as a bill has recently been introduced that, if implemented as the bill has been presented, could phase out New Jersey state level estate tax in about 5 years.  See the following link for one example of information on this initiative:  http://www.njbiz.com/article/20160301/NJBIZ01/160309989/senate-panel-advances-estate-tax-phaseout-retirement-income-reform-bills

Another very helpful resource is the following state death tax chart which is regularly updated and helps to keep us abreast of what is going on in the states:  https://www.mcguirewoods.com/news-resources/publications/taxation/state_death_tax_chart.pdf   Note that changes are afoot and continue to unfold in D.C., Maryland, Minnesota, New York, and other states.  The words “stay tuned” seem to apply here.

As a kid, I loved roller coasters.  The ride itself was unpredictable, and if it was your first time on a particular roller coaster you were unaware of where the next turn or dip would take you.  Couple that with the sense of disorientation after you step off the roller coaster and you are in touch with what both attracts some to and repels others from roller coasters.  I have pretty much had this same sensation watching the wild and crazy ride outlined above over the last 15 years, and the ride isn’t over yet!

Read More

Big Changes May Be On The Horizon

An IRS attorney from the Estate and Gift Tax Office of Tax Policy created quite a stir at the American Bar Association’s Section of Taxation meeting in May. The IRS attorney noted the Service’s intent to release new proposed regulations by mid-September that would likely include new “disregarded res...

Read More

How to Properly Title Your Inherited IRA

This short article will shed light on the titling of an inherited IRA and the maneuvering of retirement assets through the disclaimer process.  First and foremost, it is always recommended that you work with a competent, educated, and experienced advisor to keep your retirement funds safe and secure...

Read More

Annuities Can Be Complicated…

First, for income tax purposes, if the beneficiary is an irrevocable trust, the annuity must be paid within 5 years of H’s death, unless the annuity has been annuitized.  However, if the RLT is the owner, the incapacity of H will leave the successor trustee in control of the annuity.  That may be preferable to the DPOA.  As long as the beneficiary is an individual, the 5 year rule is avoided.

Second, for asset protection purposes, if the annuity is owned by an irrevocable trust, a judgment creditor of H may not attach the annuity, assuming the trust is not self-settled. Funding the annuity, and avoiding a self-settled trust is very family, fact specific.  Under section 72(u), if an irrevocable trust purchases an annuity and the trust holds the annuity as the agent of an individual, H, the annuity may report under the normal rules.

Third, if H is the owner, as to the beneficiaries, you may want to consider a designation that enables the proceeds to pass to a trust if the beneficiary needs Medicaid or other asset protection.

Read More

How to Stop Worrying About Running Out of Money in Retirement

Many retirees today worry about having enough money for their retirement. Of special concern is if there will be enough money to provide for the surviving spouse. This is called “shortfall risk,” and it is a valid concern. People are living longer and health care costs continue rising, especially long-term care which many seniors will need. In addition, the recent recession has given us setbacks in investments and record low interest rates. When combined, these issues can have a serious effect on retirement savings and projected income. But there are some things you can do now to help manage your shortfall risk and protect your assets.

The Key Takeaways

  • The fear of running out of money in retirement is a valid concern due to increased longevity, increasing health care costs, low interest rates and the recent recession.
  • Using experienced advisors who specialize in certain areas can help you increase your retirement income as well as preserve, grow and protect your assets.

The Role of Specialists

A retirement specialist can help you determine the best strategy for taking distributions from an IRA, 401(k) and other retirement accounts; the tax implications involved; how to continue to grow your savings; when to start taking Social Security benefits; and how to plan for out-of-pocket medical and long-term care costs. An estate planning attorney can help you shield your family and your assets from probate court interference at incapacity and death, unintended heirs, unnecessary taxes and lawsuits. Other specialists can be brought in as needed, for example when life insurance is used to provide an inheritance for a child who does not work in the family business.

What You Need to Know

The financial advisor who helped you grow your retirement nest egg may not be the best choice to help you determine how to take your money out. Likewise, your business attorney is probably not the best choice to do your estate plan. An innocent error by a well-meaning but inexperienced advisor can result in a costly and often irreversible mistake.

Actions to Consider

  • Be open to new products and strategies that you may not have considered in the past. For example, consider trusts combined with investments and property to manage the conflicting demands of income, spending, taxes, distributions and transfers.
  • Explore new long-term care options from insurance companies. These include:
    • Asset-based long-term care (a single deposit premium; if not needed for long-term care, the benefit amount is paid tax-free to your beneficiary);
    • Life insurance accelerated death benefit (allows you to access the death benefit before you die for long-term care expenses);
    • Home health care doublers (a guaranteed lifetime income contract that doubles your income for up to five years if you need long-term care).
  • Delay taking Social Security benefits. If you delay benefits until age 70 and live past age 79, your lifetime income will be more than if you start taking benefits at Full Retirement Age (66-67).

A revocable living trust will avoid court interference at both incapacity and death. This is why more people prefer a living trust over a will.

Read More