Recently in Estate and gift taxes Category

Should you give some of your LLC away?

October 10, 2013, by


father walking daughter.jpgCPA Lars got rich uncle Nils's real estate into family partnerships in the early days of that device's popularity. Being in the financial business with a lot of wealthy clients, Lars got exposed to the advantages. Even the early limited partnerships offered asset protection, at least for those limited partners who weren't also the general partner. When limited liability companies were authorized they offered even the general partner (now to be called the manager) a shield. Lars has helped Nils to convert his LPs to LLCs with little cost or tax effect.

LLCs also offer a good way of making gifts to save estate taxes. The founder is usually a manager, and can keep control of the investment despite having given away shares of ownership. Part of the appeal is in the valuation of the gifts. A 5% interest in an LLC with a $2 million building would seem to be worth $100,000. But you couldn't sell it for that, because a new 5% owner would have little control over the fate of his investment, and a scant market for unloading it. So an appraiser might say it's a $70,000 gift, thus saving $30,000 of the donor's gift tax exemption. Some call this a "discount," but it's just the reality of the value of the interest given.

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Should your second home be in a residence trust?

September 19, 2013, by


puget sound.pngLars has already decided (just two blogs ago) not to put his main home in a residence trust. The main reason is his children would lose the step-up in basis they would otherwise get by inheriting the house from him and Kyra, if they received it by gift instead, via the trust. An inheritance gets a step-up; a gift does not. None of the kids seems a likely candidate for living in the house after Lars and Kyra are gone, so it would be sold. This would incur capital gains tax that would largely offset the estate tax savings of a residence trust.

It's a little different with the beach place. Lars thinks the family would like to keep it long-term. At least he hopes so; he likes to think of little feet wading in the salt water there, many years from now. Back to tax thinking here: if the place isn't sold, the loss of step-up isn't a problem, so maybe a residence trust is a better idea for the beach? They're not just for primary residences; it's legal to do one with a second home.

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What should be your primary residence?

September 12, 2013, by


palm desert.jpgLars and Kyra are semi-wealthy, having a net worth between $5 million and $10 million. This exceeds their combined State estate tax exemption of $4 million. Washington has one of the highest estate tax rates in the nation, starting at 10% and progressing to 20%. Most other states don't even have an estate tax. Should Lars and Kyra consider changing their primary residence?

They aren't the best candidates, mainly because CPA Lars is still working. The months some people are down south avoiding the rain, he's up here reviewing tax returns. He doesn't mind this. He thinks he'd have trouble getting into the mentality of spending half the year away, rain or no. Remarkably, Lars has never been to Palm Springs or Palm Desert, where many of his clients go. His other place is on Puget Sound, where he and Kyra go many weekends and a week or two in the summer. But for some of Lars's clients, a change in residence is more realistic.

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Should you put your home in a residence trust?

August 29, 2013, by


schedule d 1040.pngLars the CPA has talked with a lot of clients about personal residence trusts. They're one of the better ways to get assets out of one's estate. You put your home in a trust that lasts for say ten years. During the term you still essentially own it. At the end of the ten years the house belongs to a second-stage trust for your kids, out of your taxable estate, and you rent the place from them.

You do have to report a gift at the beginning, using some of your Federal gift and estate tax exemption. But it's in a discounted amount, due to the ten-year deferral of the gift. The gift of a $600,000 house might be reported as a $400,000 gift, saving $200,000 of exemption. And while the renting-from-the-kids part might seem a little daunting financially, it's usually not that bad. Market rent on a nice home isn't usually much more than paying the expenses, which you'd be doing anyway. So there isn't much effect on one's cash flow or liquidity.

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With all these income tax problems, why have a bypass trust?

August 22, 2013, by

may december.bmpLars has been cataloging (see last week) bad income tax effects of a bypass trust established from the estate of the first spouse to die, for the lifetime benefit of the surviving spouse. The main reason lawyers and clients put this arrangement into Wills and Living Trusts, is to preserve the estate tax exemption of the first estate. There's even now an estate tax reason why this seems less useful, in addition to the income tax factors Lars has listed: we now have "portability" of the Federal estate tax exemption, allowing the surviving spouse to go forward owning the exemption of the deceased spouse to the extent it isn't saved in a bypass trust.

So with all these negatives, why have a bypass trust arrangement? Let's deal with the last-noted first. Yes we have portability of the Federal exemption but reliance on it has three weaknesses. First, it can be lost by remarriage. Second, even if it is retained it protects only the flat amount of the exemption, where a bypass trust shields from future estate tax not only its initial funding but also any appreciation in its value during the surviving spouse's lifetime. So if it's funded with $5 million of stocks and real estate that double in value, then $10 million avoids estate tax when the surviving spouse dies. Third, the State estate tax (at least in Washington) has no portability feature, so the first exemption is lost if there is no bypass trust.

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Some bad things about trusts: income taxes (2 of 2).

August 15, 2013, by

nice house.jpgAs Lars has seen over years of practice as a CPA, one particular kind of trust provides a good illustration of the negative effect of income taxes. It's the bypass trust established from the estate of the first spouse to die, for the lifetime benefit of the surviving spouse. It's also called a credit trust, even sometimes an A-B trust. It's common for wealthier couples to have the first estate go in a trust like this, rather than passing to the surviving spouse outright.

A bypass trust is likely to have the option to accumulate income, rather than distributing it all to the beneficiary. This is good for saving estate taxes (as we'll discuss next week), but it can also cause the trust to run quickly into the highest income tax rates.

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Some bad things about trusts: income taxes (1 of 2).

August 8, 2013, by


irs form 1041.bmpDedicated but also fortunate Lars is trustee of the family trust that has an investment bet with rich Uncle Nils. See the quarterly accounts of the race, for instance the last on the 4th of July. His CPA firm does a lot of tax returns for trusts, especially since Lars has developed a modest expertise in helping clients and their attorneys with estate planning. Lars likes estate planning: people and their money and their wishes, and ideas and arrangements for carrying them out.

A few things he sees in the 2012 Federal tax changes, though, are bad for trusts. He's still sorting them out, but they're pretty clearly unfavorable. The main problem is that income tax rates have gone up, with the top at 39.6% for ordinary income and 20% on long-term capital gains. The top rate doesn't kick in until one (or a couple) reaches $250,000 of taxable income, but for trusts it only takes $11,950 of accumulated income to get there. (If a trust distributes its income, it is taxed to the beneficiary who receives it.)

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Washington State estate tax changes -- annoying? (2 of 2)

August 1, 2013, by

coffee at the beach.bmpBack at the beach house after his early Sunday walk, Lars makes himself a cup of coffee, goes to the table on the deck, and continues to think about taxes. Really. Kyra isn't up yet. He actually likes instant coffee, Nescafe; it reminds him of their trip to Greece, where it served as the American coffee equivalent. Not many are like him.

Anyway, one of the things the State legislature, desperate for revenue, did this year was to increase the top rate from 19% to 20%, on amounts above $9,000,000. Lars has heard at seminars that Washington already had one of the highest if not the highest rates already. Twenty percent is a meaningful tax, he concludes on this.

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Washington State estate tax changes -- annoying? (1 of 2)

July 25, 2013, by

gravel beach 3.jpgOur CPA friend Lars is walking the crunchy beach another Sunday early, this one cloudy but it will break by noon. He's trying to put the recent Washington State estate tax changes in perspective.

The one that got the most press was the supposed closing of a loophole for old estates. Let's say George died in 1999, and left his portion of the estate in trust for Mildred's benefit, to then go on to their children after Mildred's lifetime. The present Washington estate tax wasn't in existence then; it was enacted in 2005. The Washington Supreme Court found in the recent Bracken case that upon Mildred's death say in 2011, her estate was taxable but George's was not.

The Department of Revenue decried this result and managed in the latest legislature to push through a bill that does tax George's estate under the 2005 law, contrary to the Supreme Court decision. Apparently the few estates that were tried together in the Bracken case will escape, but all others are (retroactively) taxed, if the new law holds up.

Lars has worked over the last few years on several such estates and is aware of a few methods by which the tax may be avoided, despite the new law.

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Reflections on the tax law changes: gifts are still good.

March 14, 2013, by

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Lars has seen a lot in his three decades as a CPA. One thing he's learned is that in taxes, investments, and estate planning, the most dangerous clients aren't the ones who need a lot of guidance, but rather the ones who don't need any. The ones who know it all. It tends to run in certain occupations.

Take the subject of tax-saving gifts, for instance. There are a lot of untruths and one big favorable set of truths, more so now with the new law. Here are some of the assertions he hears:

"I can only give $10,000 a year." This is the annual gift tax exclusion (actually $14,000 now), the amount one person can give any other person each year without using any lifetime gift tax exemption. But it's not really the limit. One still doesn't pay any tax as one uses the lifetime exemption (now $5,250,000 for each giver).

"OK, but I don't want to use my lifetime exemption. I want to save it for my estate." Well, it would save it not to make gifts, but once you have given away those stocks or that real estate, all future income and appreciation on the gift occurs out of your taxable estate. So it pays to use it as one can afford to.

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Reflections on the tax law changes: moving is a late-game option.

March 7, 2013, by

ca golf course.jpg
Our CPA friend Lars and his rich Uncle Nils are having one of their regular dinners at the oddly named restaurant Guy. Nils has heard that the State of Washington's legislature, desperate for funds, is talking about doubling the already-high estate tax rate for its residents. He's thinking about moving.

Nils has been on the internet and describes some of his findings to Lars. A minority of states impose an estate tax. Washington's tax starts at 10% on estates over $2 million, and goes up to 19% for larger amounts. It's one of the highest in the nation.

Nils knows a couple of guys who have already declared other states their home now. Some states are better than others. California has an income tax that significantly undermines the benefit of moving, unless one manages to do it just before one dies. Nevada is better, with neither an income tax nor an estate tax, but few people seem to be talking about moving there.

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Reflections on the tax law changes: income taxes favor investment.

February 28, 2013, by

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Lars is a tax guy. This has been a good skill for him. He likes it, kind of a math-like career foundation that makes him useful, earns him a good living, and has forced him (he recognizes) to develop people skills in order for things to go well. He's gotten more interested in estate planning and estate taxes in recent years, but income taxes have been his bread and butter for most of his career.

What Congress did at the beginning of January is an interesting combination of income taxes and estate planning stuff. It's mostly good for those who are wealthy or want to get there. There is still a favorable tax rate for capital gains (generally a maximum of 20%, compared with 39.6% on ordinary income), and the lower rate was also maintained for qualifying dividends. Of course there is policy justification for taxing dividends at lower rates; theoretically at least the corporation's income has already been taxed. But it's still a good deal for those who have stocks, like Lars. His portfolio will grow a little faster over time as a result.

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Reflections on the tax law changes: bypass trusts still useful.

February 21, 2013, by

future husband.jpg
Our friend Lars and his wife Kyra have a Living Trust with a bypass trust arrangement. This means that the share of the first spouse to die, is to be held in trust for the lifetime benefit of the surviving spouse. One of the benefits of this trust is that it would preserve the estate tax exemption of the first estate. There is a new conventional wisdom that bypass trusts aren't needed now that we have portability, by which the surviving spouse inherits the unused portion of the deceased spouse's exemption whether there is a trust or not.

Lars isn't buying this new thinking. If his estate goes outright to Kyra, she inherits his now $5,250,000 unused exemption to add to her own, but can lose it if she remarries. So a possible result is preserving no exemption of the first estate. If instead a $5,250,000 trust is established and grows in value to $10,000,000 during the surviving spouse's lifetime, the first estate gets that much exemption.

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Reflections on the tax law changes: state estate taxes more important.

February 14, 2013, by

rocky beach.jpg

Our CPA friend Lars is on one of his crunchy early Sunday walks on the rocky beach. It's light by 7 now. Kyra is sleeping in. Lars can't, or at least would rather walk and think.

CPAs do more income tax work than estate work, but as he and his clients have matured and become more wealthy, he's taken a special interest in gift and estate taxes, and other aspects of estate planning. This morning he's trying to psych out the meaning of the recent Federal tax law changes for him and his practice.

One thing that has happened, at least in Lars's State of Washington, is that state estate taxes have become more important. The main reason is pretty obvious: the State exemption (in Washington) is $2 million per estate; the Federal is now $5,250,000. For a married couple those numbers are doubled, if there is proper planning. At these levels, Lars's rich Uncle Nils still has to worry about the Federal estate tax, but he's in a small minority. Lars and many of his clients fall between $4 million and $10 million, where only the State estate tax is a concern.

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What's up with Congress?

December 27, 2012, by

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Saturday, December 22nd. Lars is at his CPA office, making sure details are worked out for a few clients making year-end gifts. Nobody knows what Congress will do with the estate and gift tax laws in 2013. The gift tax exemption might drop from $5 million per giver to $1 million, but Lars doesn't think that's probable.

One of Lars's clients is a newly-widowed woman whose husband had a successful business. She's not old, but she's not young. She has been trying, with Lars's help, to determine whether to make large gifts of company stock or other assets, to her children before year-end. This ain't right that she has to wrestle with this so soon after her husband died, Lars muses. Even if Congress puts something together this last week of the year, the widow has still been burdened with worried uncertainty.

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