Saturday, June 29, 2013

Cheqbook Cloud Bookkeeping Hits the Market / A new small business-focused cloud bookkeeping product has been launched by Cheqbook, offers color-coded alerts and categorization for all entries.

Seth Fineberg for Accounting Today writes: A new small business-focused cloud bookkeeping product has been launched by Cheqbook, a Hawaii-based company that offers color-coded alerts and categorization for all entries.  


Though the product itself was essentially in production for the past two years, mostly used inside of founder Doug Levin’s CPA firm Levin & Hu CPAs, Cheqbook went through several updates based on user feedback before its recent official launch. He claims it is currently being used by 250 companies, mainly those with $1 million or less in annual sales, and is currently planning marketing strategies and different ways to reach accountants.
Like many small business-focused cloud bookkeeping products, Levin claims Cheqbook is squarely aimed at “frustrated QuickBooks users” as well as those that do not feel some of the other cloud accounting and bookkeeping products on the market are the right fit for their business.
“Our main idea is that there’s tremendous promise with cloud accounting. I had tried others and they seemed to me to take longer to figure out and so I went back to using QuickBooks Pro, but had some frustrations there based on how it categorizes new entries,” said Levin. “If you are a smaller company, even with some of the newer products on the market, there are complications with how new entries come in and you want it to be simple so you can focus on your business; that’s what I think we’ve done.”
Cheqbook’s system tells users what transactions need attention in color coding, based on their own unique history. Also, on the top right of the user screen there is a “score” by color to show users how accurate their books are (or are not), designed so that even if users haven’t visited their books in a while, they will immediately see what needs the most attention.
“As a small business, you most likely are not employing one of the smartest people to manually key in the transactions or have the money to hire a professional bookkeeper,” said Levin. “One of our advisors, a former CFO, looked at the product and he said ‘you did what Intuit couldn’t do in a decade.’ To be able to sort through hundreds of transactions and rip through them in five minutes, I think that’s the biggest value.”
Cheqbook co-founder and chief marketing officer Tommy Russo also explained that they are enhancing their search engine optimization efforts as well as planning to reach out to accounting firms in the coming weeks but, for now, their main focus is on the product.
“Word of mouth is helping, but as with any accounting software it’s all about how it works and for accountants it’s about what they’re going to ask,” said Russo. “We want to eventually have a certification program too and position ourselves as an open table for accountants with geographic targeting so when a business signs up there’s a list of accountants for that area.”
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ExactCPA has written about Cheqbook before....click here.
Posted on 5:06 AM | Categories:

Offshore Accounts: Are They a Good Idea?

Arden Dale for the Wall St Journal writes: Wealthy investors might have heard they can reduce taxes or protect an estate from lawsuits by stashing money in offshore accounts in exotic locales, such as the Cayman Islands or the British Virgin Islands.
But while there is nothing illegal about properly reported offshore accounts, there often is no great advantage to them either, financial advisers say. Investors can accomplish the same goals and have fewer hassles with a domestic account or trust.
Lately, the federal government has cracked down on Americans who evaded taxes using undeclared bank accounts in Switzerland and elsewhere.
Switzerland, once the venue of choice to open a secret account, is now the place to avoid, after an ongoing Internal Revenue Service investigation forced many Americans to report previously secret Swiss accounts and pay back taxes and penalties.
Tax authorities have since eyed banks in Singapore and other Asian countries.
Wealth manager John Smith says he gets questions on offshore accounts about a half a dozen times a year, typically from investors worth $20 million or more.
"When they're socializing or networking, these sorts of conversations will start to come up," says Mr. Smith, who works at Balasa Dinverno Foltz in Itasca, Ill., which manages $2.5 billion.
Yet offshore accounts don't make sense for most investors, he says. For one thing, Americans now have to do more reporting on offshore assets, adding to the administrative headaches of owning them.
By the end of June, for example, those with accounts worth more than $10,000 must make a tax filing that repeats some information they already reported this year. Foreign banks also are under pressure to report on their American clients to the Internal Revenue Service.
Offshore accounts also tend to cost more to establish and maintain than domestic accounts, Mr. Smith says, and sometimes the accounts have fewer investment options.
To set up one, investors might need to enlist the help of a specialist, says Joan K. Crain, a senior director at BNY Mellon Wealth Management.
"I very quickly say, 'You need to talk to an attorney who is experienced in the area of international tax planning,' " says Ms. Crain, who typically doesn't broach the subject with U.S. citizens or permanent residents.
As an alternative, a domestic trust can be a better choice for someone who wants to protect assets from creditors, Mr. Smith says. For example, a doctor who wants to shield his home and other belongings from malpractice lawsuits can set up a domestic asset-protection trust in Delaware and a number of other states that allow them rather than something offshore.
Liability insurance also can be a better line of defense than offshore accounts, some advisers say.
Still, some investors insist on going offshore, though preferred locations for the accounts are constantly changing.
One client of Ms. Crain, for example, was worried about lawsuits and set up a trust several years ago to hold a U.S.-managed investment account.
At the time, the man's tax lawyer favored the British Virgin Islands as an offshore site. When Ms. Crain bumped into him recently, that had changed.
"He said, 'BVI is still good, but I'm using Nevis now,'" she says.
Posted on 5:06 AM | Categories:

How Gay Marriage Ruling Gave $36,000 in Benefits to a Client

Paula Vasan for Financial-Planning.com writes:  On the morning after the demise of the Defense of Marriage Act, Vikki Lenhart of Hart & Patterson Financial Services conducted a financial assessment for one of her same-sex married clients and realized they were entitled to $36,000 in additional Social Security income.


"This couple are ages 69 and 67 and are a few years away from retirement,” Lenhart explains. “Both are high earners so the plan all along was to have them defer collecting Social Security benefits until 70, when their benefit amount would reach its highest amount. We were thrilled to let them know that after the DOMA ruling, there was a better option for them to implement. We informed them of the strategy that allows one of them to begin collecting spousal benefits immediately, while their future benefit amounts based on their own earnings records continue to defer.”

Lenhart estimates that this change would generate $14,500 a year for the next two and a half years until the younger spouse turns 70, when she would then switch to her own higher benefit amount. “This is $36,000 in additional income they hadn’t planned on…that previously wasn’t available and there is no downside to them. There are so many stories like this -- so many options for same-sex married couples that many people aren't aware of,” according to Lenhart.
Hart & Patterson Financial Services, an all-women Amherst, Mass.-based advisory firm, which works largely with same-sex couples, was founded two decades ago by Lorraine Hart and Cheryl Patterson, who were married in 2004, the year that same-sex marriage became legal in Massachusetts, the first state in the United States to do so. Today, the firm consists of 10 female employees, half of which are gay. 

The firm advises 230 households around the U.S., a majority of which reside in Massachusetts and 35% of which is gay/lesbian. "We are incredibly fortunate to work with employees who are truly like family to us, and to work with clients whom we respect and enjoy. Gay, straight, young and old makes up our client base, and we are thankful every day for their relationship with us. It gives us great personal pleasure as a couple married in Massachusetts in 2004 and who will celebrate 25 years as life partners to witness and be part of this historic change,” Patterson told Financial Planning.  

Here are specific ways Lenhart and Patterson say the DOMA ruling has impacted the advisors at their firm, and how the decision has the potential to change the lives of hundreds of thousands of same-sex clients in the U.S.
  • Advantage of annuities and other guarentees: “Peace of mind comes from knowing that everything is in order for our loved ones in case of a disability or incapacity or death,” Lenhart says. “Prior to the historic changes that occurred this week regarding the changes to DOMA, our married gay clients were at a distinct disadvantage regarding the ability to leave assets and income streams as efficiently to their surviving spouses as was the case for married heterosexual clients. Now, for gay married couples who reside in states where gay marriage is legal, annuities that offered spousal guaranteed income options were without exception offered to married heterosexual couples but very few offered that opportunity to married gay clients.” 
  • Social Security: Same-sex couples who are married in a state where marriage is legal are now entitled to spousal and survivor benefits which can amount to thousands of dollars in additional income over a lifetime. Regarding spousal benefits specifically, there are a number of planning strategies that are now on the table and will allow couples to maximize their collective benefits. The ‘file and suspend’ strategy is one of many. To name just a few of the other benefits, for couples who have minor dependent children, the child may also be eligible for benefits at the time one spouse claims benefits. In addition, same-sex couples who end up divorcing would be eligible for benefits based on their ex’s record as long as their marriage lasted at least 10 years, they are not currently married, they are 62 or more, and their ex is entitled to retirement or disability benefits.      
  • Entitlement to government and military pension and health care benefits: Same-sex couples who are entitled to a pension through their military service or government employment will have the peace of mind that this income stream will continue to their spouse when they pass away. Prior to this change, married same-sex couples often spent a great deal of money on life insurance policies in order to provide a lump sum to their spouse because they knew their spouse would be denied spousal income benefits. Going forward, many gay couples will be able to significantly reduce or eliminate this coverage for this purpose. In addition, the spouse would have access to health care benefits, worth thousands of dollars of savings.
  • Ability to file joint federal tax returns: Prior to the Supreme Court’s decision in United States vs. Windsor, when the court struck down Section 3 of DOMA, same-sex couples married under the law of their resident state were not allowed to file a joint federal return. The impact of any general credits and deductions were reduced because only one spouse could claim part of the credit or deduction. Aside from the simplification of preparing only one set of returns rather than being forced to file as different statuses, the Married Filing Jointly status will allow same-sex couples to share rather than the divide available credits and deductions. A couple in which one spouse earns a great deal more than the other will likely see a deduction in the total tax due. 
  • Federal estate taxes: The impact of the Supreme Court’s Windsor decision will be most useful to same-sex couples in the area of estate and gift taxes. A married couple is considered one economic unit; assets can be passed back and forth between the spouses without any gift tax consequences and all assets left to a surviving spouse are exempt from estate taxes. Prior to the court’s determination that DOMA is unconstitutional, any movement of assets between same-sex spouses were taxable if it was above the annual gift tax exclusion amount and assets left to a surviving spouse were taxed at the regular estate tax rate.
  • Family and Medical Leave Act: Same-sex married couples residing in states that recognize gay marriage will have the benefits of the Family and Medical Leave Act extended to them from large companies and public agencies. These benefits include up to 12 weeks of unpaid leave for the birth or adoption of a child and caring for an ill parent or child.
Posted on 5:05 AM | Categories:

Dealing With a Brave New Financial World / In the Wake of the Supreme Court's Ruling, Same-Sex Couples Need to Overhaul Their Plans. Here's What Experts Advise

Kelly Greene for the Wall St. Journal writes: The Supreme Court's ruling on same-sex marriages might not be the financial panacea many people were expecting.
Other considerations aside, same-sex couples not yet wed have to decide now whether doing so would help or hurt them financially. Figuring out the right answer could require a detailed analysis of their tax situation and property holdings.
The upside: Married same-sex couples should be able to tap federal benefits including spousal Social Security, pensions and rollovers of individual retirement accounts and 401(k)s—along with dividing those assets in divorce without an extra tax bill. Marital status is a factor in more than 1,100 federal benefits, according to one count.
Steve Branton, a San Francisco financial planner, says he is looking forward to telling one couple he works with that the change in the law has boosted their odds of having a sustainable income throughout retirement by 10%.
"Now I can say, 'You guys have a much better outlook,' so they may feel better about saying they can retire next year rather than in five years," Mr. Branton says.
But having to file joint tax returns as a married couple could cost some families thousands of dollars a year, depending on their income and deductions. And if one spouse needs long-term care, the other could wind up paying for it, rather than the patient qualifying for Medicaid assistance, says Kyle Young, a financial adviser in Short Hills, N.J.
The outlook is further clouded by the uncertainty in many places as to whether such unions will count: Most state governments still haven't legalized same-sex marriage. And even though the court on Wednesday struck down the Defense of Marriage Act of 1996, which denied federal benefits to lawfully married same-sex couples, individual states so far aren't required to sanction such marriages.
For same-sex couples in states where gay marriage remains illegal, the striking of the federal prohibition means they will continue to follow two sets of rules, especially when dealing with their finances.
"We're having the whether-to-wed conversation with clients more these days," says Scott Squillace, an estate-planning lawyer in Boston who works with many same-sex couples.
The Supreme Court's ruling "removes from the books an egregiously bad law. But other than that, it doesn't help me," says Robert Nead, a 67-year-old retired American Express AXP -0.48% executive who married his partner, an advertising art director, in 2004 in Massachusetts. Although their careers were in New York and they still own an apartment there, they have retired to Pennsylvania, where their marriage isn't legally recognized.
So far, only 12 states—Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont and Washington, along with Washington, D.C.—now issue marriage licenses to same-sex couples or plan to do so soon.
California did so for part of 2008, and the Supreme Court's refusal to rule on that state's Proposition 8 ban on gay marriage could clear the way for the state to resume same-sex marriages.
About 114,100 same-sex couples are legally married, according to a U.S. Census analysis by the Williams Institute on Sexual Orientation Law and Public Policy at the UCLA School of Law.
Many other states allow civil unions among same-sex couples or grant some state-level spousal rights through domestic partnerships, with about 108,600 same-sex couples in them in all.
Legal experts are trying to figure out whether such couples can tap federal benefits without getting married. Another 407,300 same-sex couples are in no union whatsoever, according to the Census analysis.
With so many changes in the offing, here are some strategies that same-sex couples should consider.
Prepare for trickier tax returns.
Same-sex married couples could now be hit with the so-called marriage penalty on their federal income taxes, particularly double-income couples with good incomes who make roughly the same amount.
Janis Cowhey McDonagh, a partner at accounting firm Marcum in New York, works with two men who make a lot of money and have no children. "They save a lot by filing single," and typically file their return later in the year, she says. "But we ran their return this year and said, 'You need to file before the end of June, because the option to file single may go away at the end of the month.' "
Still, for couples in which one spouse has a much bigger paycheck than the other, filing jointly could result in savings. That is because the tax brackets for filing jointly are higher than for single taxpayers, meaning a larger portion of income is likely to be in a lower tax bracket than would have been the case if the higher-income earner filed as an individual, says Mark Luscombe, an analyst at tax publisher CCH, a unit of Wolters Kluwer WTKWY +0.76% .
In another same-sex married couple with whom Ms. McDonagh works, one spouse makes more than $1 million a year, which is significantly more than the other.
They usually file their return by April 15. But this year, they filed an extension for their 2012 return. Now that they can file jointly, they should save $95,000 in income tax, she says.
Same-sex couples who married years ago also could benefit from amending past returns, which is allowed for the previous three years, says Nicole Pearl, a lawyer and partner in McDermott Will & Emery's private-client group in Los Angeles. Amending is optional, meaning it only makes sense if a couple could recoup tax they had paid previously.
One caveat: There is a chance that the Internal Revenue Service could refuse to recognize the same-sex marriages of couples who live in states where they aren't legal, some legal experts say.
Recalibrate your benefits.
After meeting with an accountant, the next stop for many same-sex couples should be their employee-benefits office at work.
"The most common benefit for people is that they will no longer have to pay tax on the health benefit you get for a same-sex spouse or domestic partner," says Lee Badgett, research director at the Williams Institute.
Until now, the Internal Revenue Service has considered health insurance for such partners to be "imputed income," costing the average couple about $1,000 in extra tax payments every year, she says.
Jonathan Lewis, 32 years old and the director of student engagement at Wheelock College in Boston, emailed his human-resources office Thursday asking to have the health-insurance tax removed. "The individual portion is tax-free, but I'm taxed on the difference between that and the family portion," he says.
Same-sex spouses should have access to long-term-care insurance discounts for couples as well, says Mr. Young, the New Jersey financial adviser. Employers with group coverage generally extend that benefit to spouses as well, he adds.
Revamp your estate plan.
A man and woman who marry traditionally have been able to pass assets between each other in life or death without any gift or estate tax, says Laura Zwicker, head of law firm Greenberg Glusker's private client group in Los Angeles.
"Same-sex couples haven't had that luxury," she says.
In fact, the case at the crux of the Supreme Court's Defense of Marriage Act ruling involved New York resident Edith Windsor, who would have been exempt from estate tax of $363,000 had her late spouse been male.
Since they haven't been considered married under federal law, same-sex couples until now have been subject to the federal gift- and estate-tax limits.
Generally, any gift of more than $14,000 a year, or $5.25 million in a lifetime, would be taxable. And any assets left upon death worth more than $5.25 million would be subject to estate tax.
It has left such couples with a tangle of property to unravel, Ms. Zwicker says. "Same-sex couples often come to us with already commingled assets trying to figure out if they need to do gift-tax reporting," she says. "They want to know if the earning spouse can provide for the nonearning spouse without having to pay tax."
Winning the federal exemptions could reap well-off same-sex couples big savings. In California, given the "crazy" home values, the $5.25 million exemption "is going to be enormous," Ms. Zwicker says.
It also means that they can cut down the complexity of their planning, switching to plain-vanilla bypass trusts traditionally used by married couples to double the assets they can leave to their families, and "cutting down 50-page wills that say, 'If this, then that,'" Ms. McDonagh says.
Don't forget about state estate taxes—and health-care proxies.
The Supreme Court ruling still leaves couples subject to any state-level taxes and complications in places that don't recognize their marriages.
Mr. Nead, who lives in Pennsylvania with his spouse, 58-year-old Thomas Augusta, says they drew up a wide-ranging estate plan that cost $5,800 and amounted to 6 inches of paperwork. "It gave us not as many rights as a $40 marriage license, but it simply had to be done," he says.
The couple anticipates owing Pennsylvania estate tax, since their marriage isn't recognized there, of 15% of every dollar in assets one partner leaves to the other, Mr. Nead says.
Several years ago, they considered buying life insurance to help the surviving spouse pay the estate tax, but the premiums would have cost thousands of dollars a year, so they decided it wasn't worth it, he says.
One note: Even couples who live in states that recognize same-sex marriage should take extra care with health-care powers of attorney naming their partners, lawyers say, just in case one spouse winds up hospitalized in a state where same-sex marriage isn't legal.
Mr. Lewis and his spouse, Jonathan Adler, have put together extensive documents that they store online and can access through Web links and PIN codes they keep on cards in their wallets.
They plan to keep those powers intact, since they frequently visit family in Florida, where same-sex marriage isn't recognized, they say.
"It's been an astounding amount of legal paperwork for being in our 30s," says Mr. Adler, a 34-year-old psychology professor at Olin College of Engineering in Needham, Mass.
The couple spent this past week with friends in Washington, D.C., awaiting the Supreme Court's decision with their 11-week-old son. "Now that we have a kid," Mr. Adler says, "the way we're affected is magnified."
Posted on 5:05 AM | Categories:

Don’t let them talk you out of a Roth conversion

Dana Anspach for Market Watch writes: Imagine there was this fantastic financial tool that could save you money in taxes, and leave your surviving spouse in a more secure situation later in retirement, but everyone told you this tool was only for young people — so you ignored it.


Or maybe, just maybe, someone evaluated the use of it for you, but they said based on your expected marginal tax rate now and in retirement, it probably wouldn’t be of great benefit to you.
Now, suppose they were dead wrong.
What is this tool? It’s the Roth IRA and it is being grossly underutilized.
With a Roth IRA you put money in after tax (sorry, no deduction on your tax return) and it grows tax-free. You have the option to convert existing traditional IRA or 401(k) assets to a Roth, pay taxes during the year of the conversion, and from that point on it grows tax-free.
There are plenty of online calculators that you can use to evaluate the benefits of a Roth conversion but they are all missing the most important aspects of this amazing financial tool, and frankly, I’m getting frustrated about it.
Here are five things that are missing from the traditional IRA versus Roth analysis.
1. Social Security taxation
There is a complex formula that determines the portion of your Social Security benefits that are subject to taxation. Roth distributions don't count in this formula. Traditional IRA distributions do. This is important because once you reach age 70 1/2 you are required to take distributions from a traditional IRA, but not from a Roth. I explain the compounding effect of this in the next section.

2. Required minimum distributions (RMD)
Each year past age 70 1/2, you are required to withdraw a higher proportion of your traditional IRA. This withdrawal is taxable income. It flows into the formula that determines how much of your Social Security is subject to taxation. In your 70s, if you haven't planned for this, you may find yourself paying a much heftier tax bill than you anticipated. Each dollar you contribute to deductible plans today increases your potential RMD later — which means it increases your deferred tax liability. Shifting money to a Roth, either through contributions or conversions, can lead to an improved outcome as measured in terms of sustainable retirement income, taxes paid in retirement and expected assets to leave to the next generation.

3. Filing status change upon loss of a spouse
In retirement, the odds are about 21% that both of you live to 84 and about 72% that one or the other of you does. The odds of becoming a sole surviving spouse for several years are high. When you lose a spouse, your tax filing status changes. You will still have required minimum distributions and now the Social Security tax formula and federal tax rates will be calculated using single rates and threshold amounts. This means a bigger tax bite for a sole surviving spouse in retirement. Roth conversions can help avoid this later-life tax whammy.

4. Medicare Part B and D premiums
With Medicare Part B and D premiums, the more income you have, the higher your premiums. Required minimum distributions count as income. Many people may start off underneath the threshold limits, but once they reach 70 1/2 their income will be higher and now they may be paying an extra couple thousand a year in Medicare premiums. Roth conversions can help avoid this later life cost.
5. Effect on capital gains tax rate
If you can keep your taxable income low in retirement you will also pay tax on capital gains and qualified dividends at a lower rate. If you do your planning right, you might even be able to realize gains during a year or two where you fall into the 0% capital gains tax rate. This is another hidden benefit to having low required minimum distributions from traditional IRA accounts.

Benefits of a Roth conversion

When I run retirement projections I like to use conservative assumptions. I care that you make it in a worst-case scenario. I typically use a real rate of return of 2%, so I assume 3% inflation and a 5% return on retirement accounts (both tax-deferred and Roth.)

I evaluate the benefits of the Roth conversion based on these returns and assuming tax rates are indexed to inflation, but Social Security and Medicare premium thresholds are not. I default males to longevity of age 85 and females to 90. I quantify the potential tax savings, increase in available spending in retirement, or increase in wealth transfer value.

Then I look at what happens if one spouse passes sooner, or investments earn a return higher than 5%. Wow! The benefits of the Roth at that point are incredible. And what if tax rates rise? The Roth will look even better.

The timing of when to do a Roth conversion and the analysis as to whether you should really be making designated Roth contributions instead of deductible 401(k) contributions is complex. There are a lot of moving parts.

I can tell you, more times than not, the Roth looks much better than you would think. Overall, I think people are getting bad advice on the superhero powers of a Roth IRA. It's time for that to change.

If you want detailed research on this topic check out the paper “Roth versus traditional accounts in a life-cycle model with tax risk,” by Marie-Eve LaChance, Journal of Pension Economics and Finance, December 2012.  
Posted on 5:05 AM | Categories:

Estate Planning Opportunities Arising from Recent Landmark Supreme Court Decisions Concerning Marriages of Same-Sex Couples

Katten Muchin Rosenman LLP writes: On June 26, 2013, the US Supreme Court (the “Supreme Court”) struck down Section 3 of the federal Defense of Marriage Act (DOMA) as unconstitutional in the case of United States v. Windsor (“Windsor”). In a related case, the Supreme Court also dismissed an appeal from the federal district court ruling that struck down California’s Proposition 8 (which overturned marriages of same-sex couples in California) as unconstitutional in the case of Hollingsworth v. Perry (“Perry”), leaving intact the district court’s ruling that Proposition 8 is unconstitutional and cannot be enforced. This advisory summarizes the estate and income tax planning opportunities and other topics for consideration arising from the Windsor and Perry decisions. Married same-sex couples should consult with their advisors in light of their particular facts and circumstances in order to take maximum advantage of the change in the law. Unmarried same-sex couples should now consider whether to marry. 
In Windsor, Edith Windsor and Thea Spyer, a same-sex couple, were married in Canada in 2007 after having been together in New York for over forty years. New York law did not permit marriages between same-sex couples at the time but recognized marriages of same-sex couples performed in other jurisdictions. Spyer died in 2009, and Windsor inherited all of Spyer’s estate as Spyer’s surviving spouse. However, because of DOMA, which defines “marriage” as “a legal union between one man and one woman as husband and wife” and “spouse” as “a person of the opposite sex who is a husband or a wife”, the federal government refused to recognize the couple’s marriage for federal estate tax purposes. As a result, Windsor’s inheritance from Spyer was not entitled to the unlimited marital deduction from federal estate tax that would have been available had Windsor and Spyer’s marriage been recognized by the federal government. After paying the estate taxes owed on her inheritance as a result of DOMA, Windsor sued for a refund of the estate taxes on the grounds that DOMA unconstitutionally discriminated against same-sex married couples. Windsor prevailed in the US District Court for the Southern District of New York and also in the US Court of Appeals for the Second Circuit. The Supreme Court has now agreed with Windsor, holding that “DOMA seeks to injure the very class [of married same-sex couples] New York seeks to protect. By doing so it violates basic due process and equal protection principles applicable to the Federal Government.” The Supreme Court further explained that DOMA’s “demonstrated purpose is to ensure that if any State decides to recognize same-sex marriages, those unions will be treated as second-class marriages for purposes of federal law.” 
In Perry, two same-sex couples wished to become married in California. Though the California Supreme Court held in 2008 that the California Constitution required the State of California to recognize marriages of same-sex couples, California voters passed Proposition 8 later the same year, amending the California Constitution to provide that only “marriage between a man and a woman is valid and recognized in California.” As a result of Proposition 8’s passage, the two couples were unable to marry. They sued the California governor, attorney general and various other state and local officials responsible for enforcing California’s marriage laws (the “California officials”), claiming that Proposition 8 violated their rights to due process and equal protection under the US Constitution. In the US District Court for the Northern District of California (the “district court”), the California officials refused to defend Proposition 8, but the private parties who were the proponents of Proposition 8 (the “Proposition 8 proponents”) successfully intervened to defend the measure. After the district court held that Proposition 8 was unconstitutional, the California officials declined to appeal the decision and the Proposition 8 proponents appealed. The US Court of Appeals for the Ninth Circuit upheld the district court’s ruling that Proposition 8 was unconstitutional. The Supreme Court dismissed the appeal from the district court on the grounds that the Proposition 8 proponents lacked standing to appeal because they were merely private parties and were not properly authorized under state law to defend the constitutionality of Proposition 8. As a result of the Supreme Court’s ruling, the district court’s ruling that Proposition 8 is unconstitutional remains in place and California soon will be required to permit same-sex couples to marry. As a result of the Windsor decision, such marriages also will be entitled to federal recognition. 

Estate Planning Opportunities Arising from Windsor 

The Supreme Court’s ruling in Windsor requires the federal government to recognize marriages of same-sex couples. Note, however, that the Supreme Court limited the scope of its decision to “lawful marriages”. Therefore, the decision likely will not be interpreted to require the federal government to recognize so-called “marriage equivalent” status that is not actually “marriage” under state law, i.e., civil unions, domestic partnerships and registered domestic partnerships. The District of Columbia and thirteen states permit marriages of same-sex couples. Those states are California (effective once the stay issued by the Ninth Circuit is lifted pursuant to the Perry decision, which is likely to be imminent), Connecticut, Delaware (effective July 1, 2013), Iowa, Maine, Maryland, Massachusetts, Minnesota (effective August 1, 2013), New Hampshire, New York, Rhode Island (effective August 1, 2013), Vermont and Washington. 
Another unresolved issue is whether the Supreme Court’s decision applies to married same-sex couples who lawfully married in a jurisdiction that permits marriages of same-sex couples (e.g., New York), but who are domiciled and/or resident in a state that does not permit or recognize such marriages (e.g., Texas). Accordingly, until these issues are resolved as a result of subsequent litigation, legislation and/or regulation, it is not clear whether Windsor will be interpreted also to apply to same-sex couples with a marriage-equivalent status (but not marriage) or married same-sex couples who are domiciled and/or resident in a state that does not permit and/or recognize marriages of same-sex couples. 
Against that background, at a minimum, married same-sex couples domiciled and/or resident in states that permit and/or recognize marriages of same-sex couples likely will be entitled to the more than 1,000 benefits available to married opposite-sex couples under federal law. Some of those 1,000 benefits present immediate estate planning opportunities, including the following: 

1. Review estate planning documents to ensure that the amount and structure of any spousal bequests remain appropriate. 

Federal recognition of marriages of same-sex couples leads to the availability of the unlimited marital deduction from federal estate tax and gift tax for transfers between same-sex spouses. Existing estate planning documents may have been drafted with the assumption that any gift or bequest to a spouse of the same sex over and above the individual’s applicable exclusion amount from federal estate tax and/or federal gift tax (the “Applicable Exclusion Amount” —currently $5,250,000, adjusted annually for inflation) would be subject to federal estate tax (currently at a maximum rate of 40%). However, that assumption is no longer true. Indeed, such gifts and bequests, if properly structured, are now entitled to the unlimited marital deduction. In addition, under the so-called “portability” provisions of federal gift and estate tax laws, under certain circumstances a surviving spouse of the same sex will also be entitled to use any portion of the deceased spouse’s unused Applicable Exclusion Amount (the “DSUE”), allowing the surviving spouse to make additional tax-free gifts and/or reduce the amount of estate taxes owed upon the surviving spouse’s death (note, however, that DSUE does not increase the surviving spouse’s applicable exemption from the federal generation-skipping transfer tax (“Federal GST Exemption”)). Accordingly, a married same-sex couple may wish to modify their estate planning documents to provide that any assets included in their estates in excess of the Applicable Exclusion Amounts will pass to the surviving spouse, either outright or in a properly structured marital trust for the spouse’s benefit, thus deferring all federal estate taxes until the death of the surviving spouse.
Estate planning documents may also be revised, if appropriate, to include a separate marital trust that is designed to permit a spouse to use any of the individual’s unused Federal GST Exemption that remains after the individual’s death. 

2. Review retirement account beneficiary designations and joint and survivor annuity elections to ensure that they remain appropriate. 

A surviving spouse is entitled to roll over a decedent spouse’s retirement account into the surviving spouse’s retirement account without being required to take minimum distributions or lump sum distributions until such time as the surviving spouse ordinarily would be required to take minimum distributions (usually upon reaching age 70½). As a result of the Windsor decision, this benefit is now available to married same-sex couples. Accordingly, married same-sex spouses should consider naming each other as the beneficiary of his or her retirement accounts in order to defer income tax on the rolled over retirement account as long as possible. 
With regard to any retirement plans that are covered by the Employee Retirement Income Security Act of 1974 (ERISA), the spouse of a participant in such a plan may automatically be a beneficiary of the retirement plan as a result of the Windsor decision. Accordingly, if a participant in an ERISA-covered plan (e.g., a 401(k) plan) wishes to designate someone other than his or her spouse as a beneficiary, such participant will need to obtain the consent of his or her spouse to make such a designation effective. Prior to Windsor, consent was not needed from a spouse of the same sex. However, afterWindsor, such consent is now required. Separately, if a participant previously made an election to waive joint and survivor annuity benefits after the date of the marriage, the participant may be able to make a new election at this time, and a new election may be required in order to be valid if the marriage is newly recognized under Windsor

3. Consider replacing individual life insurance policies with survivor policies. 

Many same-sex spouses previously purchased individual life insurance policies of which the other spouse is the beneficiary (either directly via beneficiary designation or indirectly through a life insurance trust) in order to provide the surviving spouse with sufficient liquid assets that may be used to pay federal estate taxes due upon the death of the first to die. With the unlimited marital deduction and DSUE now available to married same-sex couples, as explained above, there may be little or no need for such liquidity upon the death of the first spouse to die. Thus, a married same-sex couple should consider replacing such individual policies with so-called “survivor” or “second-to-die” policies that pay benefits only upon the death of the surviving spouse. Such policies will still provide liquidity to children or other beneficiaries of the married same-sex couple and are generally less expensive than individual policies having the same death benefits. 

4. Consider splitting gifts between spouses. 

Until now, each spouse could make gifts only up to the annual exclusion amount from federal gift tax and/or federal generation-skipping transfer tax (the “Annual Gift Tax Exclusion Amount” and the “Annual GST Exclusion Amount”, respectively—each currently $14,000) without using any portion of his or her Applicable Exclusion Amount. Going forward, however, each spouse may now make gifts from his or her own assets and, with the other spouse’s consent, have such gifts deemed to have been made one-half by the other spouse for purposes of federal gift tax and GST tax laws. Both spouses acting together in this way currently may give up to $28,000 to any individual without using any portion of either spouse’s Applicable Exclusion Amount (note that the Annual GST Exclusion Amount does not always apply to gifts made in trust). 

5. Amend previously filed federal estate, gift and income tax returns and/or file protective claims as appropriate. 

Gifts made to spouses. If one spouse previously made taxable gifts to the other spouse and reduced the donor’s Applicable Exclusion Amount by the amount that the gift exceeded the Annual Gift Tax Exclusion Amount and/or the donor’s Federal GST Exemption by the amount that the gift exceeded the Annual GST Tax Exclusion Amount, it may be possible to amend the donor’s prior gift tax returns (subject to the limitations period discussed below) and retroactively claim the marital deduction for the gifts made in those years, thus increasing the donor’s Applicable Exclusion Amount and/or reclaim the Federal GST Exemption used. By doing so, the donor may make additional tax-free gifts and/or reduce federal estate and/or GST taxes due upon his or her death. Similarly, any gift taxes or GST taxes actually paid may be refundable. 
Gifts made to third parties. To the extent that either spouse previously used a portion of his or her Applicable Exclusion Amount and/or paid gift taxes or GST taxes by making gifts to third parties over and above his or her Annual Gift Tax Exclusion Amount and/or Annual GST Exclusion Amount, it may be possible to amend prior federal gift tax returns in order to retroactively split such gifts with the other spouse, thus increasing the donor’s Applicable Exclusion Amount and/or Federal GST Exemption. Again, doing so will allow the donor to make additional tax-free gifts and/or reduce federal estate taxes and GST taxes due upon the donor’s death. Similarly, any gift or GST taxes actually paid may be refundable. 
Inheritances from decedent spouses. In cases where a decedent spouse’s estate paid federal estate taxes on assets that were inherited by a surviving spouse of the same sex, it may be possible to amend the decedent spouse’s federal estate tax return (subject to the limitations period discussed below) and retroactively claim a refund for the estate taxes paid. If the decedent spouse’s estate did not pay estate taxes and he or she died in 2010 or a subsequent year, under the portability provisions of federal estate tax laws, the surviving spouse may be able to claim the deceased spouse’s DSUE, thus allowing the surviving spouse to make additional tax-free gifts and/or reduce the amount of estate taxes owed upon the surviving spouse’s death (note, however, that DSUE does not increase the surviving spouse’s Federal GST Exemption). 
Income taxes. Both spouses may also amend prior year income tax returns to change their filing status from single to married filing jointly and obtain a refund if the amount of tax owed based on their married filing status is less than that owed based on their prior single status. 
Retroactivity. The extent to which married same-sex couples will be allowed to amend prior tax returns depends on the extent to which Windsor is applied retroactively and whether the applicable limitations period has passed with regard to each tax return (i.e., ordinarily three years from the date the tax return was originally due or filed (if on extension) or two years from the date the tax was paid, whichever is later). For example, it may no longer be possible to amend a 2009 individual income tax return due on April 15, 2010, that was not put on extension, but individual income tax returns for 2010, 2011 and 2012 likely may be amended. That said, it is conceivable that the Internal Revenue Service (IRS) will permit amendments as far back as the year of the marriage on the basis that neither spouse lawfully could have amended his or her tax returns prior to theWindsor decision. In either case, it will take some time for the IRS to develop policies and procedures to implement Windsor, and amended returns should be filed in accordance with applicable published guidance from the IRS, if available. In any situation where the limitations period is about to expire for a particular tax return, a married same-sex couple should consider filing a protective claim for a refund with the IRS in order to preserve the ability to obtain such a refund after the IRS has provided a means to amend the return. 

6. Reside in a state that permits and/or recognizes marriages of same-sex couples. 

If a married same-sex couple was lawfully married in a jurisdiction that permitted the marriage but now reside in a state that does not permit and/or recognize the marriage, that couple should consider moving to a state that either permits marriages of same-sex couples or recognizes such marriages lawfully performed in other states if they wish to be certain to enjoy the federal benefits now potentially accorded to marriages of same-sex couples. 

7. Non-citizen spouses should consider seeking permanent residency and/or becoming citizens. 

Until now, non-citizen spouses were not eligible for citizenship or permanent residency on the basis of their marriage to a spouse of the same sex who was a US citizen. As a result of the Windsor decision, however, non-citizens may be eligible for permanent residency and/or citizenship on that basis. Though there are many benefits to becoming a permanent resident or citizen, there are also numerous tax and non-tax consequences that should be carefully considered before making such an important decision. 

Estate Planning Opportunities Arising from Perry 

California will now be required to permit marriages of same-sex couples, but other states that do not permit and/or recognize marriages of same-sex couples will not be required to do so. California married same-sex couples will enjoy all of the benefits available to married couples under federal law and thus should consider the above recommendations. In addition, married same-sex couples in California should consider the following recommendations: 

1. Amend previously filed California income tax returns and/or file protective claims as appropriate. 

Married same-sex couples may be permitted to amend prior year California income tax returns to change their filing status and obtain a refund for any income taxes that were overpaid. Note that the normal limitations period for amending California returns expires four years after the original due date of the return (or the actual filing date if the return was put on extension) or one year from the date the tax was paid, whichever occurs later. If the limitations period for any particular tax return is about to expire, a married same-sex couple should consider filing a protective claim for a refund until such time as the State of California provides appropriate guidance for amending prior returns. Note that, as discussed above with regard to the limitations period for federal tax returns, it is conceivable that a married same-sex couple may be permitted to amend their returns through the first year of their marriage. 

2. Amend previously filed tax returns and/or file protective claims with other states as appropriate. 

Married same-sex couples may also be entitled to amend prior gift tax and/or estate tax returns filed with other states that recognized marriage but not marriage equivalents (e.g., California registered domestic partnerships) at the time in question and receive a refund of taxes paid and/or reclaim any state gift tax and/or estate tax exemption. Again, the limitations period (if one applies) for amending such returns will vary by state. If the limitations period for any particular tax return is about to expire, a married same-sex couple should consider filing a protective claim for a refund until such time as the state provides appropriate guidance for amending prior returns.
Posted on 5:05 AM | Categories:

I Inherited a Roth IRA. Now what?

Dan Moisand for MarketWatch writes: When you inherit retirement plans, the rules for how those funds are taxed and the options available to the beneficiary vary based on the type of account and whether the beneficiary is a spouse or not.


Today I explain to a non-spouse beneficiary some of the rules that apply to inheriting a Roth IRA. I also answer a reader question about one way to increase her Social Security payments even though she started taking benefits early at a reduced rate.
Q. My Dad is 74, and he has a ROTH IRA as well as a 401(k). When he passes away, my mom will inherit the retirement accounts, and then we his sons will. My question is can I, as a non spouse beneficiary, rollover the ROTH IRA into my personal ROTH IRA? — C.B.
A. No you cannot roll the Roth IRA money into your personal Roth IRA. Only spouses may do that. If your mother rolls the Roth IRA into her own Roth IRA, it is treated as though she had always been the owner of those funds, so those funds will continue to be exempt from Required Minimum Distributions (RMD), an attractive feature of Roth IRA's. Also, she would name the beneficiaries. It is important to check that the beneficiary designations on all accounts match the wishes of the current account owners.
The beneficiary designation trumps anything written in one's will or trust agreements. I saw a case in which the wife had a small IRA that named her church as primary beneficiary. When her husband died, she rolled his account into her IRA but did not change her beneficiary designation. When she passed away, the church was entitled to all of the funds. This was an unpleasant surprise to the beneficiaries.
You have two basic options as a non-spouse inheritor; take a lump sum or, transfer the funds into an account titled as an “inherited Roth IRA.” Taking the lump sum is pretty simple. The lump sum you receive is not subject to tax. Once you get your check, if you wish to invest any part of it, it will be taxed just like funds in any other non-retirement account.
Most inheritors with an eye on the long term prefer to rollover the money to an inherited Roth IRA. The assets continue to grow untaxed, you can choose your own beneficiaries and withdrawals are tax free.
You cannot, however, let all the account just sit in the inherited Roth IRA. By Dec. 31 of the year after the year in which the owner died, you must have begun taking required minimum distributions (RMD) annually. If you don't make the RMD by that deadline, you will need to have withdrawn all the assets by the end of the fifth year after the year of death.
The RMD you will be subject to is based upon the IRS's single life expectancy table. The value of the account on Dec. 31 of the year death is divided by the beneficiary's life expectancy listed on that table to obtain the first RMD amount. For example, if you are 55 at the time, the table says your life expectancy is 29.6, you would divide the Dec. 31 value by 29.6. In the following year, you use the following Dec. 31 value and divide by one less year (28.6). The next year, use the value as of the next Dec. 31 and 27.6.
You mentioned you had brothers. There is one more step to consider. If your mom lists more than one person as beneficiary, you should have the shares of the account separated into individual inherited Roth IRAs by Dec. 31 of the year following the year of death. This enables each beneficiary to use their own life expectancy. Otherwise, distributions are calculated based upon the oldest beneficiary's age causing distributions to occur faster than necessary.
This can be particularly important with non-Roth retirement money like a 401(k) in which distributions are taxable. Generally, beneficiaries wish to have the smallest RMD's possible in order to control taxation better. A beneficiary can always take more than the RMD but the lower the minimum, the more flexibility in tax planning.
Again, make sure all the beneficiary designations on all accounts reflect the owner's wishes. It should be noted that the rules are different if any of the beneficiaries are beneficiaries through a trust that is named as beneficiary of a retirement account. Naming a trust can be helpful but if not done correctly, can result in an acceleration of taxation.
Also, to accommodate an account holder's specific wishes, many attorneys prepare customized beneficiary designations. Not all 401(k) plans will accept customized beneficiary designations so many will roll those funds into a traditional IRA.
Posted on 5:05 AM | Categories:

New 2013 Estate Tax Laws Warrant Exclusion And Portability In Planning

Jaburg Wilk writes: The new estate laws are challenging to comply with and will require most high net worth individuals to review their existing plan. One of the major issues is how the trust is divided on the death of the first spouse, and who makes certain elections. There are other critical decisions that need to be made to protect assets and minimize or delay estate taxes.
Prior Exclusion and 2013 Change
Estate tax was temporarily repealed under the Bush administration. With that exception, estate planning for married couples has been consistent since 2001. The estate tax rates have increased and exclusion from estate taxes per person ("Lifetime Exclusion")[1] increased from $1,000,000 in 2001 to $3,500,000 in 2009. The Lifetime Exclusion was scheduled to return to $1,000,000 per person in 2013, with the highest marginal Estate Tax rate returning to 55%.  Instead the Obama Administration and Congress agreed to keep the increased Lifetime Exclusion, subject to an inflation adjustment as set forth in the following schedule.[2]
Lifetime Exclusion Amount
Lifetime Exclusion
Year
Amount
Highest Marginal Tax Rate

2010
$5,000,000 per person
0% [3]

2011
$5,000,000 per person
35% [4]

2012
$5,120,000 per person
35%

2013
$5,250,000 per person (inflation adjusted)
40% [5]
Exclusion Planning
Planning under the 2013 changes for the Lifetime Exclusion allows the surviving spouse flexibility and minimizes taxes on the death of the first spouse. However, to take full advantage of the new estate tax laws require careful planning.
EXCLUSION PLANNING EXAMPLE 1
Under 2013 laws, husband ("H") and wife ("W") live in a community property state and have a combined community property estate of $8,000,000.  H dies in 2013 and because he has no estate plan, his share of the community all passes to W.[6] H's share of the community property is $4,000,000 and W's share of the community property is $4,000,000. Because of the unlimited marital deduction, upon H's death there is no estate tax. However, on W's death, presuming that there is no change in estate value, there is a taxable estate of $8,000,000.
Result on H's Death:  No Estate Tax. All assets go outright to W. W can use them all and give then to anyone she wants, even a new spouse.
Result on W's Death:  W can use her Lifetime Exclusion of $5,250,000, leaving a taxable estate of $2,750,000.  Estate tax is $1,045,800.
EXCLUSION PLANNING EXAMPLE 2
H and W live in a community property state and have a combined community property estate of $8,000,000. H and W prepared a Revocable Living Trust ("RLT") prior to 2010 and all of their property has been transferred into the RLT.  In 2013, H is the first spouse to die. H's $4,000,000 share of the community property estate is allocated to an "Exclusion Trust" to use up part of H's Lifetime Exclusion. W's $4,000,000 share of the community property estate is allocated to a "Survivor's Trust".
Result on H's Death: No estate tax.  H did not use $1,250,000 of his Lifetime Exclusion, because of the size of H's taxable estate.  All community property assets are stepped up (or stepped down) in basis to fair market value as of the date of H's death.
Exclusion Trust during W's Lifetime:
  • W can be the sole beneficiary and the Trustee[7]
  • W can receive all the income and principal for her heath, support, maintenance and                education
  • W, on one day each year, can have the right to withdraw an amount equal to the       greater of 5% of the trust estate or $5,000.
  • Upon the death of W, the amount in the Exclusion Trust is not included in W's estate       for estate tax purposes
  • The Exclusion Trust passes as provided in the RLT after the death of W[8]
  • W can be given a limited power of attorney to change the provisions for H's and W's       children, grandchildren, etc. and their spouses
  • Otherwise, cannot be amended or modified by W.
Survivor's Trust during W's Lifetime
  • W is the sole beneficiary and the trustee.
  • W receives all the income and principal at any time she desires
  • W can change the beneficiaries, including to a new spouse
  • W can modify or amend the Survivor's Trust
    • If W does not make changes, Survivor's Trust passes on W's death as provided in the RLT after the death of W
Result on W's death.  Assume assets in Exclusion Trust have doubled in value and are worth $8,000,000. The $4,000,000 in appreciation is not subject to Estate Tax on W's death. Assuming that the Exclusion Trust is distributed outright to H's and W's children, when the appreciated assets are sold, they will have an income tax gain (possibly a capital gain) on the appreciation of $4,000,000.  There is no Estate Tax on W's death if the fair market value of the assets in the Survivor's Trust is less than or equal to W's Lifetime Exclusion of $5,250,000.[9]
THE ADVENT OF PORTABILITY and DSUEA
Upon the death of the first spouse ("Decedent"), an election can be made to elect to carry over to the surviving spouse ("Survivor"), the Deceased Spouse's Unused Exclusion Amount ("DSUEA"). The DSUEA was made a permanent provision in estate tax law in 2013. The concept of allowing the Survivor to use a DSUEA from the prior Decedent is commonly referred to as portability. If the Survivor remarries and the Survivor dies before the Survivor's new spouse, the Survivor still gets the benefit of the DSUEA from the Decedent plus the Survivor's Exclusion that is available on the Survivor's death.
Computation and Election of DSUEA
DSUEA is the lesser of:
  • the Decedent's Lifetime Exclusion or
  • the excess of Decedent's remaining Lifetime Exclusion
over the sum of Decedent's taxable estate + adjusted taxable gifts made by Decedent during Decedent's lifetime.[10]
The DSUEA election is made at the time of the Decedent's death via a timely filed Estate Tax Return (including any extensions.)[11] The Survivor can use the DSUEA against the Survivor's taxable estate plus the Survivor's Lifetime Exclusion.
PORTABILITY EXAMPLE 1
H made a taxable gift in 2010 of $1,000,000.  H used $1,000,000 of his Lifetime Exclusion against the 2010 gift, so H did not pay any 2010 gift taxes. H died in 2013 with a taxable estate of $3,000,000.  H is survived by W and all of H's estate went to his children from a prior marriage. The 2013 Lifetime Exclusion is $5,250,000.  Of this amount, H's DSUEA is $1,250,000. An Estate Tax Return is filed for H, taking a DSUEA election of $1,250,000 and H has no estate tax due.
PORTABILITY EXAMPLE 2
W remarries after H's death. W also dies in 2013 with an estate of $1,000,000.  W has her own Lifetime Exclusion of $5,250,000. She also has a DSUEA of $1,250,000 from H for a total of $6,500,000. She only uses $1,000,000 of her own Lifetime Exclusion.  An Estate Tax Return is filed and a DSUEA election is taken for W so the DSUEA may be available for her second spouse. If W's estate had been larger, she could have used her Lifetime Exclusion plus the DSUEA from H. However, W's total DSUEA is limited to $5,250,000. If W's new surviving spouse does not remarry or dies before he remarries again, he will be able to use W's DSUEA.  If W's new husband dies before W, she will lose H's DSUEA. She will only have any DSUEA of her second husband.
Planning With DSUEA
For simplicity, H and W may want to use only a Survivor's Trust for the Survivor and eliminate the Exclusion Trust.
Benefits include:
  • Ease of administration.
  • Eliminates the need for one trust upon the death of Decedent.[12]
  • Eliminates need for accountings or reports to remainder beneficiaries.
  • Step-up in basis of assets on death of both spouses.[13]
  • Gives Survivor total flexibility in ultimate distribution of the estate.
  • Survivor has the opportunity to use entire Lifetime Exclusion of Decedent on Survivor's death.
  • Helps use of Lifetime Exclusion in estates with large retirement funds.[14]
  • Planning for the personal residence and exclusion of gain may be easier, especially if the house is a large asset in the estate.[15]
Other Considerations:
  • An Estate Tax Return must be filed to capture Decedent's DSUEA.
  • If there is appreciation on the assets from the Decedent' death until Survivor's death, the appreciation on Decedent's estate cannot be excluded from Survivor's estate.[16]
  • Decedent cannot control the ultimate distribution of Decedent's assets.[17]
  • A comparison of eventual tax rates needs to be made, especially with the new 3.8% tax on net investment income. [18]
  • There are other techniques that can be used to hold the Decedent's estate in a trust for the benefit of the Survivor for life, with the remainder for Decedent's children.  The provisions of this type of trust are similar to the provisions of an Exclusion Trust.  DSUEA rules apply with the use of a lifetime trust for Survivor that qualifies for the "unlimited marital deduction".[19]
  • DSUEA is not indexed for inflation. By eliminating the Exclusion Trust, there may be the loss of sheltering appreciation after the death of Decedent from the estate of Survivor.
  • DSUEA may not apply to state inheritance laws if Decedent has substantial assets in a state that has inheritance taxes.[20]
  • If DSUEA planning is to be utilized, additional provisions need to be added to the documents directing the appropriate elections be made and provide for the payment of the costs related to the additional provisions.
CONCLUSION
Although Congress may have intended to make estate planning easier by eliminating the need of using an Exclusion Trust to obtain the benefit of using the Lifetime Exclusion for spouses, tax and non-tax planning issues must be considered when creating and implementing an estate plan.  Key considerations include:
Is it likely that your property will appreciate in value between the deaths of the spouses?
  • Are the capital gains and estate tax rates likely to change?
  • Will capital gains rates always be lower than estate tax rates?
  • There is an election that can be made on the death of the first of you to give you       maximum flexibility AND it has to be made by an independent person.  Is this       acceptable to either and/or both spouses?  With this technique, you can protect the  assets of the deceased spouse for his or her children and you can get a step-up or  possibly a step-down in basis on the death of the second spouse[21]
  • Will either you or your spouse remarry after one of you dies?
This article only addresses some of issues of the estate tax laws.  It is important that you consult with a qualified tax planner to determine how to best structure your estate plan under the new estate and income tax laws that are effective in 2013.

[1] The "Lifetime Exclusion" has sometimes been referred to as the "Lifetime Exemption".
[2] President Obama's 2014 budget proposal includes a reduction of the Lifetime Exclusion to $3,500,000, with no mention of indexing for inflation.
[3] A discussion of the specific laws that were in effect in 2010 and the impact of an election not to be subject to the Estate Tax for a person dying in 2010 are beyond the scope of this Article.
[4] The Lifetime Exclusion of $5,000,000 was subject to an annual inflation adjustment starting and 2011, and remains in effect under the new Estate tax laws effective January 1, 2013.
[5] The Estate Tax in 2013 for a taxable estate over $1,000,000 is $345,800 plus 40% of the excess over $1,000,000. Obama's 2014 budget proposal increases this rate to 45%.  It is possible through planning that a person could have used up their Lifetime Exclusion through a gifting program during their lifetime.  Although the Estate Tax and the Gift Tax are two separate Tax systems, there is one combined Lifetime Exclusion for both.
[6] This may be different under a particular state statute if the deceased died intestate, especially if there are children from a prior marriage and children that are born to H and W together.
[7] This is a very common scenario. Depending on the particular circumstances, children can be the beneficiary of all or a part of the Exclusion Trust.  There can also be different Trustees or Co-Trustees, including professional or corporate Trustees.  A discussion of these alternatives and other planning techniques are beyond the scope of this Article.
[8] If this is a second marriage, the balance of H's half of the community property can be preserved for H's children from a prior marriage through the use of an Exclusion Trust and other planning.
[9] There is a new step-up in the income tax basis of the assets in the Survivor's Trust to the fair market value of the assets as of the date of W's death.
[10] The Lifetime Exclusion can be used against gifts made by a Decedent during Decedent's lifetime.  If large gifts are made during lifetime, the appreciation on the gift is excluded form Decedent's estate.  When the estate is calculated, the gifts (at the taxable amount when they were made) are added back to the estate to calculate the taxable estate (assets at death plus gifts made during lifetime).  The result of the calculation allows the Decedent to use unused Lifetime Exclusion at death.
[11] An Estate Tax Return (Form 706) is due nine months after the date of death of the Decedent.  A six-month extension can be made to extend the due date of 706 to 15 months after the date of Decedent's death.
[12] Also eliminates the necessity and expense of filing a trust income tax return on the Exclusion Trust.
[13] This also could include a step-down in basis if assets have gone down in value between the deaths of both spouses.
[14] Trusts are generally not the preferable beneficiary of retirement accounts from an income tax point of view, unless very complex rules are complied with.
[15] If a portion of a personal residence is used to fund an Exclusion Trust, there may be a loss of deductions for mortgage interest and property taxes; there may also be a loss of a portion of the exclusion of gain on the sale of the house.
[16] If the Exclusion Trust is used in a otherwise non taxable estate, an Estate Tax Return is not required to be filed.
[17] This is particularly important where Decedent and Survivor have children for prior marriages to protect Decedent's children's interests in Decedent's Estate.
[18] This article does not contain a detailed analysis of the new tax rates.  The estate tax rate has a marginal 40% rate for taxable estates;  the highest income tax marginal rate is 39.6%; capital gains rates are generally 20%;  individual state taxes and the Medicare tax need to be taken into account in determining whether there should be planning for a total step-up in basis.
[19] Marital deduction trust planning is beyond the scope of this Article. The same estate tax consequences can be achieved as giving Decedent's estate outright to Survivor or in a Survivor's Trust for Survivor.
[20] Many states follow the federal estate tax system; however it is up to the state as to what parts of the federal law are enacted. Arizona does not have an estate tax.
[21] Discussion of this technique is beyond the scope of this Article.

Posted on 5:04 AM | Categories: