mhaven.net Death & Taxes
Only two things are certain… mhaven.net
Topics we will cover… • Types of Tax: Estate, Gift, Inheritance, GST & Income mhaven.net • Estate Planning Alternatives • Preparing the Fiduciary Return • Preparing the Estate Tax Return • Preparing the Gift Tax Return
Estate Tax • Assessed upon value of decedent’s holdings mhaven.net • FMV determined at DOD or AVD (can be elected only if valuation decreases tax liability) NOTE: AVD cannot be elected at death of 1 st spouse if marital exemption used to eliminate estate tax liability • $5 million exemption (portable between husband/wife in 2011 & 12) • Form 706 due 9 months after DOD; can be extended 6 months (Form 4768) • Tax liability must be paid 9 months after DOD
History of Estate & Gift Taxes • Taxes imposed & repealed in 1800’s to finance wars mhaven.net • Taxes in 1900’s imposed to prevent the accumulation and transfer of large estates • Estate Tax enacted in 1916 introduced DOD valuation, funeral & administrative expenses, “small estate” exemption & graduated rates • Gift Tax temporarily introduced in 1918 (repealed in 1926) & re-introduced in 1932
History (cont’d) • 1948: 50% marital deduction mhaven.net introduced (later increased to 100%) • 1976: Estate & gift tax exclusions merged & converted to the Unified Estate & Gift Tax Credit (a.k.a. applicable exclusion) • 1981: The annual gift tax exclusion raised to $10,000 • 1986: GST enacted in its current form • 1997: Applicable exclusion raised to $1M, then raised incrementally to $3.5 million by 2009 (unlimited by 2010), finally re-set to $5M in 2010 & 2012
History of Estate Tax Rates mhaven.net
mhaven.net The only difference between death and taxes is that death doesn’t get worse every time Congress meets. -Will Rogers
Gift Tax • Gift = Transfer for inadequate consideration mhaven.net – Payments to 3 rd parties – Interest-free loans – Below-market sales – Irrevocable transfers to trust – Creation of joint tenancies NOTE: Payment for tuition & medical expenses; direct transfer to political organization ≠ Gift • Assessed on value of property transferred when complete
Example of Below-market Loan (Gift Tax) Dad loans Son $200,000 to make down-payment on home. mhaven.net The loan is to be repaid in 5 years, without interest… IRS presumes that Son should have been charged a fair rate of interest (computed at applicable federal rate) Dad is liable for gift tax on interest that should have charged but wasn’t Dad also liable for income tax on imputed interest while Son may claim deduction for interest “paid” If Dad later for gives Son’s debt, he will be liable for gift tax on loan principal
Gift Tax (cont’d) • $13,000 annual exclusion ($5 million lifetime exclusion) mhaven.net NOTE: Gift-splitting available to citizen spouses, but must file individual returns • Form 709 due April 15 th if: – Gift > $13K – Future interest – Over $136K to non-citizen spouse – Partial interest to charity • Gift tax is cumulative – tax on each successive gift is computed on total value of all gifts made
When is gift “complete”? (Gift Tax) mhaven.net Transferred Withdrawn • Real property • Bank, savings, credit union accounts • Mutual funds • Brokerage accounts • Stocks and bonds • U.S. government bonds
Inheritance Tax • Legacy or Succession Tax charged mhaven.net to heir • Assessed by state in which decedent was domiciled (not resident) • State may assess Pick-up Tax instead (calculated as percentage of federal tax liability) NOTE: Since federal credit for state tax repealed in 2004, many states no longer assess pick-up tax
Generation-Skipping Tax • Assessed on value of property transferred to skip person (≥ 2 mhaven.net generations below transferor ) • NOT skip persons: – Grandchild, if transferor’s child is deceased – Spouses & former spouses – Charitable trusts • Reported on Form 709 if made during lifetime; Form 706 if made at death • $5 million exemption (not portable) • Rate = top estate tax rate (35%), not graduated NOTE: GST often exceeds estate tax that would have been computed at graduated rates if property had been transferred & taxed at each generation
Income Tax • Report income attributable to decedent on mhaven.net Form 1040; income attributable to estate on Form 1041. • Marginal tax rates for estate are comparable to those for individual taxpayers, but effective tax rate is higher since brackets are narrower 10% 15% 25% 28% 33% 35% Single <8,375 <34,000 <82,400 <171,850 <373,650 >373,650 Married Joint <16,750 <68,000 <137,300 <209,250 <373,650 >373,650 Estates/Trusts N/A <2,300 <5,350 <8,200 <11,200 >11,200
What’s due when… mhaven.net January 1 st June 14 th December 31 st Date of Death Form 1040 Form 1041 Individual Income Tax Return Fiduciary Income Tax Return due for 165 days due for 200 days Max. Tax Rate: 35% on inc > $374K Max. Tax Rate: 35% on inc > $11K Personal Exemption: $3,700 Personal Exemption: N/A Standard Deduction: $5,800 Standard Deduction: N/A Form 706 Estate Tax Return due if assets valued > $5M in 2011 Max. Tax Rate: 35% of Net Estate
mhaven.net When a man on his deathbed was asked what he wanted done with his ashes after being cremated, he answered: Just put them in an envelope and mail them to the IRS. Make sure to write on the envelope, ‘Now you have everything!’
Review of Estate Planning Options • Intestacy Statutes – Apply if decedent dies without will mhaven.net • Will - Specifies decedent’s wishes, but cannot supersede statutory rights of heirs or used to dispose of non-probate assets • Revocable Trust – Used to transfer assets to beneficiaries without probate & ensure grantor’s assets can be managed in event grantor is disabled/incapacitated • Joint Tenancy – Allows property to pass directly to surviving co- owner (1/2 basis step-up) • Estate can also be reduced by gifting or donating assets
Marital Estate Planning • A-B Trust mhaven.net – Use “A” Trust to temporarily shelter property at death of 1 st spouse (unlimited marital deduction) – Use “B” Trust to permanently shelter assets up to decedent’s applicable exclusion amount • A-B-C Trust – Used to pass property to surviving spouse & preserve estate assets for third-party beneficiaries • Qualified Domestic Trust – Used to defer estate tax due upon death of 1 st spouse until death of surviving non-citizen spouse
Special Needs • Third-party trusts established by relative or mhaven.net court-appointed guardian for benefit of disabled beneficiary without jeopardizing eligibility for Medicaid • Property may not be bequeathed to pet, but can be transferred to trust with human beneficiary responsible for animal’s care
Fiduciary Duties • Personal Representative must act on behalf of another mhaven.net – Executor: Named in will to manage affairs of decedent – Administrator: Court-appointed to manage affairs of decedent – Trustee: Named in trust document – Guardian : C harged with care of another – Conservator : C ourt-appointed to manage affairs of living person – Custodian: Must safe-guard assets • Duty of Loyalty – avoid conflicts of interest & self-dealing • Duty of Care – act prudently & cannot delegate fundamental responsibilities
Selecting Fiduciary • Executor/trustee faces a “job” mhaven.net which requires honor, honesty & integrity • Select 1 0r 2 successor representatives • State law may require personal representative to be licensed or registered NOTE: Bank employees, investment advisors, attorneys, CPAs & EAs still exempt from registration in CA if acting within scope of employment/practice
Planning Documents • Power of Attorney – allows one person (principal) to authorize mhaven.net another (attorney-in-fact) to act on his behalf – Durable remains effective after principal is incapacitated – Springing become effectives when principal becomes disabled – Healthcare used to appoint an agent to make health care decisions – Only valid during lifetime – Form 2848 used for federal tax matters • Will Supplements – used to provide instructions not included in will/trust (e.g. identify personal property to be given to specific individuals) • Ethical Wills – used to bequeath values & beliefs
The Fiduciary Return (Form 1041) • Must file if gross income > $600 (estate) or any taxable mhaven.net income (trust) • Trusts must use calendar year; estates may use fiscal year • 6-month extension available (Form 7004) • No estimated tax payments due for 1 st 2 years after DOD (estate) or tax liability < $1,000 (trust) • Exemptions – Estate: $600 – Simple Trust: $300 – Complex Trust: $100
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