Archive for the ‘portability’ Tag
New Tax Impacts for Trusts with Capital Gains – Part I
Filed under: Trusts and Estates | Tags: 1040, B trust, bypass trust, Capital Gains, control, credit shelter trust, estate tax exemption, gifting trust, irrevocable trust, petition, portability, private, probate, revocable living trust, revocable trust, Social Security Number, tax, trust administration
Leave a comment Originally published in the Cedar Street Times
November 1, 2013
In order to discuss the new challenge trustees have regarding capital gains, let us first review some basics regarding revocable and irrevocable trusts.
A revocable living trust is a trust created during your lifetime that spells out what you want to happen with, and who you want to control, your assets if you become incapacitated or pass away. This is the most common type of trust, and many people set these up because it has many advantages over just having a will upon death: the chief reasons are that it provides more control, has more tax advantages, it is more private, it is faster, and it is less expensive than the default court process called probate.
I would say the one major drawback of a trust administration process compared to probate is that you do not have the standardized court oversight and genuine closure that you have with the probate process. If there are difficult problems with trust administration, it often stems from that fact that most people appoint one of the recipients of their assets (beneficiaries) as the person responsible for carrying out the trust terms (the trustee).
Money does strange things to people, and I have witnessed it lead to families ripped apart when the non-trustee siblings start questioning the integrity of the sibling appointed as trustee. Generally, beneficiaries want their money yesterday! And they do not understand that it still takes a good bit of time, effort, and expense to handle everything. That said, I would still choose to have a trust 98 percent of the time, instead of just a will. If there are concerns about the solidarity of the beneficiaries, a corporate trustee could always be a solution.
Another characteristic of a revocable living trust is that it can be changed or even scrapped at anytime while you are alive – hence the name “revocable.” As a result of this control feature, of being able to terminate the trust and retain the assets, the trust is disregarded as a separate taxpaying entity, and you just report all the eligible income and expenses of the trust on your personal 1040. Everything gets reported under your Social Security Number instead of having a separate taxpayer identification number.
Now let us turn the tables and speak about irrevocable trusts. These are trusts that generally cannot be changed once they are created. (Of course, nothing is set in stone, and well drafted trusts with trust protector language can assist in making changes, or if all the beneficiaries agree and the court approves a petition, changes or even revocation of an irrevocable trust are possible!)
An example of an irrevocable trust would be your revocable living trust after you pass away. At that point, your wishes regarding the disposition of your assets are irrevocable – locked-in as you specified – and the trustee must carry out your wishes. Often a revocable living trust will contain provisions to set up other trusts. For married couples, it has been very common to create an irrevocable trust called a bypass trust, (aka credit shelter trust, ‘B’ Trust, etc.).
Prior to some new “permanent” laws passed in January ($5 million indexed-for-inflation estate tax exemption with portability), it was important for estate inheritance tax reasons for many people to create bypass trusts. For most people estate inheritance tax will not be a concern now, but bypass trusts, or similar types of trusts, can still be important for controlling where the deceased spouse’s assets end-up, especially in blended family situations with children from prior marriages. In other words, dad doesn’t want mom to disinherit the children he had from a prior marriage once he dies!
Another type of common irrevocable trust is a gifting trust. These are commonly created by a parent or a grandparent to permanently move assets out of their estate and into a trust for the benefit (or future benefit) of a child or grandchild with certain stipulations and protections governing the assets in the trust. We saw a lot of these set up in 2012 due to the uncertainty of the estate tax laws and the possibility of missing an opportunity to save estate inheritance tax down the road.
Due to the fact that you have relinquished a lot of control with an irrevocable trust, and it will no longer be included in your estate, the taxing authorities view this trust as a separate tax paying entity. This means it has its own tax return each year and gets its own taxpayer identification number.
In two weeks we will begin discussing the new tax rate changes and their impacts on trusts.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Spouse/Parent Passed Away? Consider “Portability” Due to New Laws
Filed under: Trusts and Estates | Tags: Death Tax, Estate Tax, Form 706, Inheritance Tax, portability
Leave a comment Originally Published in the Pacific Grove Hometown Bulletin
October 19, 2011
If your spouse passes away in 2011 or 2012 (or you have a parent that is in this situation), you need to understand and consider the tax concept of “portability,” otherwise it could potentially cost the heirs dearly. Last month, the IRS released forms and guidance for the 2011 Form 706 – United States Estate Tax Return requiring anyone who wants to reserve a future benefit through portability to file an estate tax return, even if you will owe no estate tax. This could affect people with estates valued as low as $1 million. IRS news release IR-2011-97 states, “The IRS expects that most estates of people who are married will want to make the portability election, including people who are not required to file an estate tax return for some other reason.”
You may recall the news buzz last year surrounding Congress’ inability to act which led to no estate tax in 2010 – the impossible happened in the eyes of estate and trust attorneys and tax professionals when the estates of several billionaires such as George Steinbrenner paid no estate tax! When Congress finally took some action after the fact, they could not undue what was done, but they did pass some laws which affect 2011 and 2012 by providing a $5 million estate tax exemption to each spouse. They also created a new concept that says any unused portion of the first spouse’s exemption could be saved, and used in the surviving spouse’s estate. This would give the surviving spouse an even higher exemption (protection from paying death taxes). It also adds protection to people who simply failed to do proper estate planning.
Complications arise because the estate tax exemption will revert to $1 million in 2013 with a 55 percent tax rate. This means that 55 percent of everything in your taxable estate over $1 million will go to the federal government unless democrats and republicans can actually agree “millionaires” should retain more of their estate during a time when the government desperately needs money. Yikes! Certainly you want to avoid this confiscatory tax if possible.
Let us assume you filed a Form 706 when the first spouse passes in 2011 or 2012 simply for portability of the unused exemption to the second spouse. Technically, portability is set to expire at the end of 2012, but there is discussion that this new concept will be preserved or “grandfathered” to those who file 706s for 2011 or 2012. If that is the case, then even if the estate tax exemption remains at $1 million, you would have available all the unused exemption from the first spouse’s passing. This could be a massive benefit. Assume the second spouse’s estate is worth $1.5 million. They would pay $275,000 in tax (1,500,000 – $1,000,000 exemption = $500,000 taxable * 55%). Of course if they had filed the 706 and preserved $500,000 or more of unused exemption from the first estate they would pay $0 tax.
The problem is, we do not really know what is going to happen, and we can only make educated guesses. Although they are not simple filings, the cost of preparing a 706 in this situation should be thought of as an insurance policy against estate tax: By comparison, a small cost with potential huge savings. Be aware that many tax professionals have not cultivated a strong interest in preparing this less frequently filed return. You have nine months from the date of passing to file a 706 and you can obtain a six month extension.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Travis H. Long, CPA, Inc. Blog 