Gifts

Effective Ways to Shift Future Appreciation from a Taxable Estate – GRATs and IDGTs

May 9, 2023 | by Chepenik Trushin LLP

Large estates may be subject to the federal estate tax, which in 2023 applies a 40% tax on all wealth exceeding $12.92 million for individuals, or $28.94 million for married couples. High-net worth individuals often seek ways of reducing their estate tax liability on their already-amassed wealth, which is frequently done by applying “discounts” to their assets through a complicated web of valuation laws. There are other ways, however, to shift future appreciation of a valuable asset out of an estate, thus avoiding further taxation on a substantial increase in the value of an existing asset, such as a business or piece of real estate.

The strategy, in general, involves transferring the asset out of one’s estate, either by gift or sale, for a certain amount of money, thereby “freezing” the asset’s value. Once the asset is out of the estate, it is free to appreciate as much as possible, without the transferring taxpayer owing any further tax liability on the extra value. Through this strategy, a taxpayer owning a business worth $50 million could potentially save millions of dollars in estate taxes if that business grows to be worth $150 million in the following years. This strategy is not aimed at reducing estate tax on wealth already accumulated; rather, it is for minimizing tax on future wealth that would otherwise accumulate, leading to higher estate tax. Two vehicles, the GRAT and the IDGT, are most commonly used in these scenarios.

GRAT

Gifting property during life vs. after death: which is better?

December 22, 2022 | by Chepenik Trushin LLP

The estate tax, commonly referred to as the “death tax,” affects only certain estates with a taxable value beyond a set figure. For 2023, any estate exceeding a taxable value of $12.92 million is taxed at a rate of 40.00%. While this does not give cause for concern to the vast majority of individuals, these figures can and do change. The estate tax is often a topic of discussion in political debate and frequently changes. As recently as 2017, the amount to trigger estate tax was just under $5.5 millon. In 2008, the amount was $2 million. Future years could see a reduction in the presently-set amount, which could encompass individuals currently exempt from estate tax liability.

This variability poses concern from an estate planning perspective. While a relatively modest estate may be exempt from estate tax one year, it may very well be subject to the tax in another year. Thus, the higher the value of an estate, the more at-risk it is over time of owing an estate tax. To account for this, estate planners have utilized numerous strategies to reduce an estate before death and minimize potential estate tax liability. One such strategy is gifting property away on an annual basis during the testator’s life.

Individuals may gift a set amount of money each year without triggering any tax consequences. The federal government sets an annual exclusion that allows for a certain amount to be gifted tax-free each year to individual recipients. For 2023, the annual exclusion is $17,000 per recipient. In other words, if a mother gives $17,000 to each of her seven children in 2023, then $119,000 is removed from her ultimate estate tax-free. If such gifts are made on an annual basis (subject to each year’s gift tax exclusion amount, which may vary from year-to-year as the estate tax might), the mother can reduce her taxable estate substantially during her life, saving potentially millions of dollars in estate tax upon her death.

Trust Decanting in Florida

December 23, 2021 | by Chepenik Trushin LLP

Can an Irrevocable Trust be Changed? Trust Decanting under Florida Law

You do not have to be a Sommelier to be familiar with the concept of decanting wine. “Decanting”, the pouring of wine from its original bottle into a different vessel – is a technique utilized for two contemporaneous purposes: to separate the wine from any sediment that has formed it its original container, and to aerate the wine to enrich its flavors. It may be surprising, however, to learn that a similar legal concept exists for Trusts, and is valuable for similar circumstances.

As its name suggests, “Trust Decanting” is when a trustee creates a new trust, moving all the assets from the initial trust into the second trust, to either correct a mistake or unintended result—the hypothetical “sediment” that the initial trust may have incurred, or to strengthen the original purpose of the trust.

“Step-Up in Basis”, a tax law, is it fading away? What you need to know in 2021-2022

June 9, 2021 | by Chepenik Trushin LLP

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.

President Biden’s potential move on Estate Tax – What you need to know now

February 18, 2021 | by Chepenik Trushin LLP

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.

Enforcing a contract to create a Will is complex – read the details

November 4, 2020 | by Chepenik Trushin LLP

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.

Real property and wills – Educate yourself on the implications of Probate proceedings

August 27, 2020 | by Chepenik Trushin LLP

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.

What to know under Florida law during COVID-19 – Naming your kids as beneficiaries of life insurance policies

June 19, 2020 | by Chepenik Trushin LLP

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 happens when your chosen beneficiary, heir or personal representative (PR) dies before you do?

January 17, 2020 | by Chepenik Trushin LLP

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.

Giving money to a child, a loved one, a relative or a friend – your intentions do matter

July 1, 2019 | by Chepenik Trushin LLP

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.