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Biden’s Tax Proposal and the “Step-Up in Basis”: What it Means for Your Estate Plan or Trust

A commonly utilized tax law in estate planning considerations, known as the “step up in basis,” may be in jeopardy. The “step-up,” derived from section 1014 of the Internal Revenue Code, gets applied to the cost basis of property when it is transferred upon death of the transferor. This mechanism has been a beneficial way to minimize the capital gains tax of one’s heirs, especially for property that has greatly appreciated over time. For example, if someone buys a home for $100,000 dollars, and fifty years later the owner sells the home at a time when the home has appreciated in value to $1,000,000, there would be a capital gain of $900,000, to which a long-term capital gains tax rate of 20.00% is applied. However, if the owner dies owning the home, and the home is transferred upon the homeowner’s death at a time when the home has appreciated in value to $100,000, the step up in basis converts the original cost basis to the fair market value of the transferred property at the time of the homeowner’s death. Thus, if the persons inheriting the property were to immediately sell it for $1,000,000, there would be zero capital gain, because the basis is equivalent to the sale price. The step-up in basis has allowed for taxpayers to save tremendous amounts of money on capital gains tax. Note that, although it is often referred to as a “step-up” in basis, it could be a “step-down” if the value of the property a the time of death is less than what the owner purchased it for.

However, the Biden Administration has proposed to eliminate the step-up in basis. In short, this means that heirs will have to pay capital gains tax on inherited assets based upon the cost basis of the donor’s purchase price. According to Biden’s proposed tax plan, there would still be an exemption for capital gains on the first $1,000,000 of capital gains ($2,000,000 for married couples), but gains above the $1,000,000 ($2,000,000 for married couples) will not receive step-up in basis treatment.

2021 Biden Administration Proposed Tax Changes: Will My Estate Be Subject to Estate Tax?

Over the course of the last several decades, the federal estate tax credit has increased to the point that only very high net-worth individuals and families need to concern themselves with estate tax planning. For the year 2021, the “applicable exclusion amount” is $11,700,000.00 per individual (23,400,000.00 for married couples). The gift tax exclusion amount is the same, that is, each individual may give $11,700,000.00 during their lifetime without incurring any gift tax. If the sum of lifetime gifts and assets transferred at death is greater than the applicable exclusion amount, then such transfers will be taxed at a rate as high as 40%.

However, the Biden administration has proposed a reduction of the applicable exclusion amount to $3,500,000.00 per person for estates, $1,000,000.00 for lifetime gifts, and increase the tax rate to up to 45%. Such a change is made more likely by the fact that, in January, the Democratic party has consolidated power in both branches of the U.S. Congress. Last year, there was even fear that, if such a change came in to effect at any time during 2021, congress could make the change retroactive to January 1, 2020, prompting many families to make gifts before the end of the year to ensure their use of the current applicable exclusion amounts.

Contracts to Create a Will

A last will and testament must be the consequence of a person’s free will (which is why they are aptly referred to as “wills”). Nevertheless, a person may execute a contract during life to include certain terms and/or beneficiaries in their will in exchange for goods or services.

Enforcing a contract to create a will is more complex than enforcing a normal contract. With these types of agreements, it may be impossible to tell whether the testator lived up to his or her side of the bargain until their estate plan is revealed after their death. Additionally, the terms of a will do not come into effect until death, so there may not technically be a breach of the contract until the decedent’s death. Further, if you were supposed to be a part of the decedent’s estate plan, but were not included, it’s possible you may never even receive notice regarding the administration of the decedent’s estate.

Does My Will Control My Joint Property?

There are several different ways to hold real property with another individual in Florida. The three main ones are: 1) tenancy in common, 2) joint tenancy with a right of survivorship, and 3) tenancy by the entirety. The way co-ownership of real property is classified may have significant impacts on the disposition of an estate after one of the owners dies.

In Florida, the default classification of real estate ownership is known as tenancy in common. If a property title lists only the names of owners without specifying another classification, there is a presumption that the property is a tenancy in common (unless the individuals are married). Additionally, unless specifically stated otherwise, tenants in common own equal shares of the property. When a tenant in common dies, the real property passes according to that person’s estate plan. This type of ownership will ensure that the property will flow through the owner’s estate. However, unless this property is held by a mechanism that can avoid probate proceedings (e.g. a Revocable Trust), it must go through the time consuming, expensive and public probate process to transfer title to the heirs.

COVID-19 – Buying Life Insurance to protect your children, but what happens when you name them as the beneficiaries?

During these uncertain times, people are attempting to prepare for the worst. This is especially true for those who have minor children. The fear of getting infected with the virus, developing a serious illness that could potentially lead to death, and leaving their children unprotected is very real. Thus, individuals are opting to buy life insurance to make sure their children are taken care of in the event of their death.

But what happens when you die and your minor children are the beneficiaries under your life insurance policy? Since minors cannot legally manage property, the court will appoint a guardian to handle the money for the benefit of your children until they reach the age of majority—a guardianship proceeding. Alternatively, life insurance companies will sometimes ask you to name a custodian, which will create a custodianship account under the Florida Uniform Transfers to Minors Act (“UTMA”), also until the age of majority.

What if Your Beneficiaries Predecease You?

When preparing a will, people assume that the beneficiaries that they name will outlive them. Unfortunately, testator’s live beyond the life of their beneficiaries all the time. What happens to the gift left for someone who is now deceased?

The original common law understanding was that if a beneficiary predeceases the testator, the specific gift to that beneficiary would “lapse,” and therefore fall back into the residuary estate of the testator. However, in some instances, Florida “Anti-Lapse statutes” may change this result. In Florida, barring any contrary intent appearing in the will, if the devise is to the testator’s grandparent or any descendant of a grandparent, and the devisee predeceases the testator, the devise passes onto the devisee’s surviving descendants. Thus, a lapse is avoided when the specific gift is to the testator’s grandparents or descendant of grandparents. However, a devise to anyone who is not a grandparent or descendant of a grandparent would still lapse if that devisee predeceased the testator, unless a contrary intent appeared in the will.

Is it a Gift or a Loan? Your intention matters for your Estate Planning

Have you ever given your child money to help them with school or a car or rent? How about loaning money to a friend? Is the intention to give a gift or a loan? How these transactions affect your estate planning may not be your first thought, but a good estate planner will take these transactions into account.

A transaction is a gift under section 2512(b) of the Code whenever there is a transfer for less than adequate and full consideration. If you never expect the other person to pay you back, then the transfer was a gift. At this stage it is important to remember that a gift should be properly reported on a gift tax return. Now what if you have made a large gift to one of your children during your lifetime, but you would like to treat your children equally upon your death? You may wish to acknowledge in your will or trust the gift you made to your child during your lifetime as an advancement of that child’s share. This would reduce your child’s share by that amount and give that same amount to your other children.

Understanding Fiduciary Access to Digital Assets Under Florida Fiduciary Access to Digital Assets Act

Social networking, e-mail, and digital platforms are here to stay; unfortunately, we are not. Internet users must plan for the management and disposition of their assets in similar ways that they make plans for tangible property.

Florida statutes define a digital asset as “an electronic record in which an individual has a right or interest.” When a user with digital assets passes away or becomes incapacitated, a representative may want access to these digital assets to collect financial records of the decedent, to prevent identity theft, or even for sentimental reasons. There are various state and federal privacy laws, however, that may prevent one from acquiring this information. Amongst these laws is the Florida Fiduciary Access to Digital Assets Act. The Act applies to a fiduciary acting under a will, trust, or power of attorney executed before, on, or after July 1, 2016 Fla. Stat. § 740.08. Chapter 740 generally prevents access to electronic information and assets without specific authorization from a user, even if a general grant of authority has been given to a fiduciary. As such, if the user desires that the agent have access to electronically stored information digital information or digital assets, they must curate the operating document to include a special authorization to that effect.

FLORIDA CHARITABLE TRUSTS: ALTERNATIVE BENEFICIARIES AND CY PRES DOCTRINE

Due to applicable tax exemptions and tax deductions, charitable trusts are a great tool for preserving the value of your property intended for charitable purposes and for reducing taxes payable by your remaining estate (intended for purposes other than charitable ones). Naturally, the main goal when setting up a charitable trust will be the fulfillment of the philanthropic objective of your choice. While the law comes to aid with mechanisms to fill in the blank spaces in the will or trust agreement, well-meant but poorly executed provisions in the documents may defend these mechanisms and obstruct the desired purpose.

Charitable purposes may include relief of poverty; advancement of arts, sciences, education, or religion; promotion of health, governmental, or municipal purposes. Fla. Stat. 736.0405(1).  This list is, of course, non-exhaustive. A specific charitable purpose and beneficiary organization will usually be designated in the document. Even if it is not, the court will select one or more charitable purposes or beneficiaries that will be consistent with the settlor’s original intent, at least to the extent it can be ascertained. Fla. Stat. 736.0405(2). But what if the agreement names a purpose and a beneficiary, but the beneficiary does not exist? Or exists at the time the agreement is made, but ceases to exist before it is supposed to take the bequest? Or what if the stated purpose is impossible to fulfill? In those situations the cy pres doctrine applies to help execute the bequest in accordance with the general spirit of the will or trust agreement.

The New Tax Bill

At the end of last year, Congress passed the most significant tax reform since 1986 and unsurprisingly, it aroused many controversies. Its supporters are convinced that the bill is a big success for workers, pointing out positive changes already in effect, such as Wal-Mart raising its employee’s hourly rate. On the other side of the barricade, the opponents fear that the bill will have quite the opposite effect —that it will better benefit the company shareholders rather than its employees (numerous buybacks were announced in December). In the following months, we may witness attempts on the state level to mitigate some of the effects of the new federal law. While it is too soon to evaluate whether the bill will bring about the desired economic growth long-term, it is the right time to get acquainted with the most significant changes. Importantly, none of these changes will affect the 2017 taxes.

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