Thursday, January 29, 2015

Inherent Unfairness In The Proposed Closing Of The “Trust Fund Loophole”

In November of 2014, I wrote a blog entitled Income Tax Basis Adjustment of Trust Assets at Death of Trustor.  The blog discussed how under long-standing tax law, an asset of a decedent or of the decedent’s revocable trust or estate receives a new basis for income tax gain and loss purposes equal to the value of asset as of the date of death of the decedent.  For example, if the decedent or the decedent’s revocable trust died owning Apple stock with a value of $115.00 per share on the date of death, if and when the stock was sold by the trust or its beneficiaries any taxable gain is equal to the excess of the sale price over $115.00 per share.  This is true even though the decedent may have purchased the stock at $90.00 per share during his or her lifetime, and $90.00 per share was the decedent’s basis in the asset.  As noted by Attorney Collins Hunsaker in his recent blog entitled President Obama’s Tax Plan and the “Trust Fund Loophole, President Obama wants to eliminate this income tax basis adjustment of an asset to the value on the date of death, and instead require that the income tax basis remain the decedent’s basis even after death.  Mr. Obama touted this in his most recent State of the Union Speech, and labeled it the closing of the “trust fund loophole”.  If such a proposal was enacted into law, if and when the stock was sold by the trust or its beneficiaries in the above example, any taxable gain would be equal to the excess of the sale price over $90.00 per share, the decedent’s basis, and not the $115.00 per share, the value as of the date of death. 

So what is unfair about that? After all, that is what the decedent’s income tax basis was when he or she was alive.  Why should the beneficiaries obtain an increase in the income tax basis to the value on the date of death just because a death occurred?  The answer is federal estate tax.  When one dies, the decedent’s estate and trust is potentially subject to federal estate tax depending on the value of the estate and trust assets.  If federal estate tax is due as a result of the death of the decedent, the tax rate is 40% and generally the tax must be paid within 9 months of the date of death.  Federal estate tax is based on the value of the assets as of the date of death, not the decedent’s basis in the assets.  Accordingly, to subject the decedent’s estate, trust and beneficiaries to federal estate tax based on the value of the assets as of the date of death, it is only consistent from a tax point of view to adjust the asset basis to the same value for income tax purposes if and when the asset is sold, namely the value of the asset on the date of death.  To do otherwise has traditionally been viewed as unfair and inconsistent. As opposed to closing the “trust fund loophole”, arguably the adoption of such a proposal would allow the government “to have its cake and eat it too” tax-wise.   

-Attorney John R. Mugan

 

Friday, January 23, 2015

President Obama’s Tax Plan and the “Trust Fund Loophole”

Last November, Attorney John Mugan wrote a blog titled “Income Tax Basis Adjustment of Trust Assets at Death of Trustor”.  I would suggest one reads this blog to gain an understanding as to how income tax can largely be avoided at the time of death applying the long standing Internal Revenue Code rule more commonly referred to as the “step-up” basis rule. 

It is rumored that President Obama would like Congress to reexamine this rule.  In a New York Times article (Obama Will Seek to Raise Taxes on Wealthy to Finance Cuts for Middle Class) dated January 17, 2015, Julie Hirschfeld Davis wrote:

The centerpiece of the plan, described by administration officials on the condition of anonymity ahead of the president’s speech, would eliminate what Mr. Obama’s advisers call the “trust-fund loophole,” a provision governing inherited assets that shields hundreds of billions of dollars from taxation each year.”

The proposed elimination of “step-up” basis rule has already proven to be a highly contested issue among political pundits.  Although it is difficult to know for certain as to whether or not President Obama will be successful in his efforts to push through legislation that would cause the elimination of this rule, many believe that a GOP led Congress will impede his efforts. 

If you find this topic of interest, I would recommend that you take a look at the article “Obama Plan to Lower Middle Class Tax at Expense of Rich is Non-Starter for GOP” for another writer’s perspective.

-Attorney Collins Hunsaker

 

Tuesday, January 13, 2015

New Year’s Resolutions

There’s a lot of talk this time of year about resolutions, goals, and changes that people want to make in their lives.  The best joke that I heard on this subject was one fellow who said that for his new year’s resolution, he’d like to keep his computer screen at 1280 x 1024.  I’d like to throw out a serious suggestion for a goal for 2015; but I won’t be asking you to improve your health through exercise or better eating.
 
Estate Planning.  That’s a broad category, but I have two targets:  1) those who need to implement their first estate plan; and 2) those who need to review and update their existing estate plan.
Initial Estate Planning:  This one’s pretty obvious, and for those that fit into this category, you know who you are.  It may be an awkward topic or it might scare you to talk about estate planning.  But it’s not as bad as it might seem.  Just get it done and you will feel better and more prepared for the future.
Review and Update:  This category scares me because I am afraid that there are still a lot of people that need to have their old estate plan reviewed.  A trust originally drafted and signed in the ‘90’s or early 2000’s, likely needs to be updated.  We at JEFFREY BURR have talked a lot about this with newsletters to our clients, letters discussing estate tax updates, and this blog.
Our concern is that a lot of these old trusts may have language requiring the surviving spouse to divide and allocate the entire trust estate between two separate sub-trusts.  These divisions into sub-trusts were originally intended to reduce or eliminate the impact of the federal estate tax.  But the estate tax laws were significantly changed in 2012.  The 2012 estate tax changes made permanent a much higher exemption amount ($5 million per spouse – indexed for inflation), and the idea of portability of the estate tax exemption was introduced.  Portability allows a surviving spouse to claim and preserve a deceased spouse’s $5 million exemption regardless of the details of their estate planning or even without having a Will or Trust in place.  And the increase in the exemption amount means that far fewer people will be impacted by the federal estate tax. 

The combined result of these changes is that married clients with an estate less than $10 million may be able to greatly simplify their trust by removing the requirement to divide the trust.  While this administrative burden to divide the trust upon the death of the first spouse may no longer provide a tax advantage, it may be a mandatory requirement of the trust contract and the surviving spouse may have few options other than to fulfill the mandatory obligation to divide and operate the trust as two or three trusts after the first spouse’s death. 
Please make an appointment with your estate planning attorney to have your trust reviewed.  It won’t take too long because most attorneys will be able to quickly identify if an update is warranted and 2015 is a great year for a checkup if you haven’t had one in a while.

Wednesday, December 31, 2014

What are the Differences Between a Last Will, a Living Trust and a Living Will?

People are often confused about the differences between a Last Will, a Living Trust and a Living Will.  Although these things may sound alike, they all serve different purposes. 

A Last Will lets you dictate who receives your property, provides instruction for the handling of your remains upon death, and if you are a parent of a minor child allows you to nominate a guardian.

A Living Trust, like a Last Will, allows you to dictate who receives your property.  The major difference between a Living Trust and a Last Will is that a Living Trust typically avoids Probate upon the death of the Settlor – the creator of the Living Trust.  Thus, the property you place in a Living Trust passes free of court involvement to your beneficiaries.  A Living Trust is also known as Revocable Trust or a Family Trust.

A Living Will has nothing to do with the distribution of your property.  Rather a Living Will indicates your wishes as it relates to artificial life support.  During times of incapacity, the Living Will may provide peace of mind to your loved ones as they will know your wishes relating to end of life treatments.  A Living Will is also known as an Advanced Directive or Directive to Physicians.

The attorneys at JEFFREY BURR have extensive experience implementing these documents into a person’s estate plan.  Please feel free to contact our offices for a free 30 minute consultation.

-A. Collins Hunsaker

Wednesday, December 3, 2014

December AFR's announced

The Section 7520 rate is 2.0%
December AFRs Annual Semi-annual Quarterly Monthly
Short-term 0.34% 0.34% 0.34% 0.34%
Mid-term 1.72% 1.71% 1.71% 1.70%
Long-term 2.74% 2.72% 2.71% 2.70%

Wednesday, November 26, 2014

Income Tax Basis Adjustment of Trust Assets at Death of Trustor

When a person (“Trustor”) establishes a revocable living trust during his or her lifetime for the Trustor’s benefit and transfers assets of the Trustor into the Trust, the income tax basis of the Trust asset remains the same as when the assets were owned by the Trustor individually.  For example, if the Trustor transfers real estate with an income tax basis of $350,000.00 and Apple stock with an income tax basis of $100.00 per share into the Trust, the income tax basis of these Trust assets remains the same during the Trustor’s lifetime.  In the event the Trust sells the real estate for $375,000.00 and the Apple stock at $115.00 per share during the Trustor’s lifetime, there would be capital gain of approximately $25,000.00 on the real estate sale ($375,000.00 sale price minus $350,000.00 income tax basis and sale expenses) and $15.00 per share capital gain on the Apple stock sale ($115.00 sale price minus $100.00 income tax basis and sale expenses). 
 
However, what if the Trust sold the assets after the Trustor’s death?  Upon the death of the Trustor, these Trust assets acquire a new income tax basis equal to the fair market value of the asset on the date of Trustor’s death.  This is commonly referred to as the “stepped up basis”.  The reason for the adjustment is that federal estate tax is based on the value of the assets as of the date of death.   If we take the above example and assume the value of the real estate was $375,000.00 and the value of the Apple stock was $115.00 per share on the date of Trustor’s death and the Trust sold the assets after the Trustor’s death for $375,000.00 and $115.00 per share, there would be no capital gain.  Accordingly, it is very important that the fair market value of the Trust assets are determined as of the date of death, particularly when Trust assets are not sold for a number of years after the date of death of the Trustor.
 
So how does one establish the date of death values?  The best proof of the value of the Trust assets as of the date of death is a federal estate tax return (Form 706) filed with the IRS.  If the return is accepted by the IRS, the income tax basis is the value of the asset as reported on the return.  However, many trusts and estates are not required to file federal estate tax returns.  In that case, written real estate appraisals as of the date of death should be obtained, a written record of the average of the high and low bid price for the stock on the date of death obtained, et cetera.  The Jeffrey Burr law office has over thirty (30) years of experience in administering trusts when a Trustor dies, and the attorneys and support staff of the Trust Administration Department can assist in establishing and documenting the stepped up basis of the Trust assets for future use. 
 
 

Monday, November 17, 2014

JURISDICTION OF THE NEVADA PROBATE COURT

Jurisdiction is the power of a legal body (a court) to hear and make a judgment or ruling on a case.   The Nevada Probate Courts are only able to hear and adjudicate probate cases that come within its jurisdiction.  The Nevada Probate Court’s jurisdiction is set forth in NRS 136.010:

  1. Wills may be proved and letters granted in the county where the decedent was a resident at the time of death, whether death occurred in that county or elsewhere, and the district court of that county has exclusive jurisdiction of the settlement of such estates, whether the estate is in one or more counties.
  2. The estate of a nonresident decedent may be settled by the district court of any county in which any part of the estate is located. The district court to which application is first made has exclusive jurisdiction of the settlement of estates of nonresidents.

In other words, the Nevada Probate Court may hear and make rulings on cases where (1) the Decedent was a resident of Nevada at the date of death or (2) the Decedent was a non-resident but owns property located within the State of Nevada.

Three simple examples illustrate the Nevada Probate Court’s jurisdiction: 

  1. Decedent A was a resident of Colorado and owned a vacation home in Las Vegas, Nevada.  The Nevada Probate Court has jurisdiction over Decedent A’s probate because the Decedent owned real property in Nevada.
  2. Decedent B is a resident of Nevada at the date of Death.  The Nevada Probate Court has jurisdiction over Decedent B’s probate because Decedent B was a Nevada resident.
  3. Decedent C is a resident of Texas and has no assets in the state of Nevada.  However, Decedent C’s children are Nevada residents.  The Nevada Probate Court does not have jurisdiction over Decedent C’s probate because Decedent C was not a Nevada resident and did not own and property in the state of Nevada.

Should you have any questions regarding the Nevada Probate Court’s jurisdiction, feel free to contact our office.