Everyone should have an estate plan, whether it’s a simple will or a detailed and complex one with trusts and strategies for multiple generations. The more care and thought put into the plan, says a recent article, “5 Common Estate Planning Mistakes to Avoid” from Kiplinger, the better the outcome. There are some common mistakes you can avoid with a little foreknowledge.

Failing to plan for incapacity. People think about creating wills and trusts with their mortality in mind. However, incapacity planning is just as important, in some cases, more important, than death. A good estate plan identifies the people authorized to make important decisions on your behalf concerning finances, health care and other important issues. It also empowers them to do so with powers of attorney. Once you are unconscious or otherwise incapacitated, you can no longer legally assign someone else to act on your behalf. Preparing for others to make decisions for you should not be overlooked.

Neglecting funeral and burial wishes. If you were kind enough to purchase a burial plot and make funeral plans, don’t make your children have to conduct a scavenger hunt. Talk with them about it and tell them where they can find the deed to your plot and the contract with the funeral home. Name a point person who will be in charge of the funeral and burial arrangements and make sure they know your wishes. If you want to be cremated, make it clear to loved ones. The more information you share before your death, the more likely your wishes will be followed.

Not considering the tax implications of transferring property. Don’t leave your loved ones a huge tax bill. It may seem generous to gift property to heirs during your lifetime. However, in many instances, giving when you have passed will create a far smaller tax burden. If your estate planning attorney also understands taxes, he or she can work with you to determine how to minimize taxes and maximize your gifts.

Name back-ups for key decision makers. The unthinkable happens. Spouses perish in the same accidents. If no secondary beneficiary has been named, who inherits the estate? Name additional and alternative beneficiaries in case of unfortunate occurrences. You should name a backup executor, financial power of attorney and health care agent. If a person named in your estate documents cannot fulfill their role because of death, incapacity or other reason, the court will name substitutes.

Forgetting to clarify and update beneficiary designations. If your will says you want all of your children to get an equal share of your estate, but one child is on a joint investment account and another is on a Payable Upon Death checking account, you’ve created potential disputes. It’s important to list out the beneficiaries, their asset shares and create a directive to your bank to set the interests in your accounts upon your death. Your bank may require you to change how accounts are titled to achieve your goals. Therefore, you should take care of this while you are living, so you can make any needed changes.

BOOK A CALL with me, Ted Vicknair, Louisiana Board Certified Estate Planning and Administration Specialist, Louisiana Board Certified Tax Law Specialist, and Louisiana CPA to learn more about estate planning in Louisiana, incapacity planning, and Louisiana asset protection.

If you liked this article, “Top Five Estate Planning Mistakes” read also these additional articles: What Do You Need to Do When a Spouse Dies? and What If Estate Is Beneficiary of an IRA? and Will Making a Gift Conflict with Medicaid? and Does a Beneficiary have to Pay Taxes on 401(k)?

Reference: Kiplinger (Oct. 20, 2022) “5 Common Estate Planning Mistakes to Avoid”

While estate taxes may only be of concern for mega-rich Americans now, in a relatively short time, the federal exemption rate is scheduled to drop precipitously. Estate planning underway now should include consideration of income tax issues, especially basis, according to a recent article titled “Be Mindful of Income Tax in Estate Planning, Particularly Basis” from National Law Journal.

Because of these upcoming changes, plans and trusts put into effect under current law may no longer efficiently work for income tax and tax basis issues.

Planning to avoid taxes has become less critical in recent years, when the federal estate tax exemption is $10 million per taxpayer indexed to inflation. However, the new tax laws have changed the focus from estate tax planning to coming tax planning and more specifically, to “basis” planning. Ignore this at your peril—or your heirs may inherit a tax disaster.

“Basis” is an oft-misunderstood concept used to determine the amount of taxable income resulting when an asset is sold. The amount of taxable income realized is equal to the difference between the value you received at the sale of the asset minus your basis in the asset.  For example, if you purchased property (or any investment such as stock or a collectible) for $20,000 in 1995, your “basis” is $20,000.  If the asset is worth $100,000 today, your “built-in gain” is $80,000 ($100,000 – $20,000), and that is the amount of income (capital gain) that you have.

There are three key rules for how basis is determined:

Purchased assets: the buyer’s original basis is the investment in the asset—the amount paid at the time of purchase. Here’s where the term “cost basis” comes from.

Gifts: The recipient’s basis in the gift property is generally equal to the donor’s basis in the property (called “carryover basis”).  The giver’s basis is viewed as carrying over to the recipient. This is where the term “carry over basis” comes from, when referring to the basis of an asset received by gift.

Inherited Assets:  The basis in inherited property is usually set to the fair market value of the asset on the date of the decedent’s death. Any gains or losses after this date are not realized. The heir could conceivably sell the asset immediately and not pay income taxes on the sale.  The adjustment to basis for inherited assets is usually called “stepped up basis.”  In other words, if you die with that property worth $100,000, your heirs will get the property with a new “stepped-up basis” of $100,000.  Accordingly, planning for this is very important, and failing to get the step-up can result in dire consequences for your heirs.  The federal long-term capital gains rate is 20% and the top Louisiana state income tax rate is 6%.  So gains are most often taxed at approximately 26%.  Therefore, the step-up for that example property alone is worth $20,800 (($100,000 – $20,000) X 26%).  In other words, failure to qualify for the step-up can cost your heirs $20,800 on that $100,000 asset.

Here is the takeaway: Having an estate planning attorney that is also a good tax attorney makes sense to make sure your estate qualifies for the step-up. Basis planning requires you to review each asset on its own, to consider the expected future appreciation of the asset and anticipated timeline for disposing the asset. There is no easy one-size-fits-all rule when it comes to basis planning.

Estate planning requires adjustments over time, especially in light of tax law changes. Many of the strategies and tools used long ago may or may not work in light of the current and near-future tax environment.  Speak with your estate planning / tax attorney, if your estate plan was created more than five years ago.   If you don’t have an estate planning attorney that understands federal tax law, make sure you also consult with a CPA.

BOOK A CALL with me, Ted Vicknair, Louisiana Board Certified Estate Planning and Administration Specialist, Louisiana Board Certified Tax Law Specialist, and Louisiana CPA to learn more about estate planning in Louisiana, incapacity planning, and Louisiana asset protection.

If you liked this article, “Pay Attention to Income Tax when Creating Estate Plans” read also these additional articles: How Changes to Portability of the Estate Tax Exemption May Impact You and What Healthy Snack Is Best for My Long-Term Health? and Who will Receive Naomi Judd’s Estate? and The Biggest Health Mistakes Seniors Make

Reference: National Law Review (July 22, 2022) “Be Mindful of Income Tax in Estate Planning, Particularly Basis”

On July 8, 2022, the Internal Revenue Service issued new guidance that allows a deceased person’s estate to elect “portability” of their unused gift and estate tax exemption for up to five years after their death. So, if your spouse passed away less than five years ago, you may be able to file an estate tax return to transfer their unused estate tax exclusion to yourself.  More about portabilty is discussed in this article entitled “The Portability of the Estate Tax Exemption” by The Balance

What Is Portability, and How Does One Get It?

Portability is a way of transferring the amount of the gift and estate tax exemption that a deceased spouse did not use to the surviving spouse. It is only available to married couples.

To get the benefit of portability, the executor of an estate must file a federal estate tax return. Previously, this return had to be filed within two years of a person’s date of death, assuming an estate tax return was not required sooner. Because so many estates kept missing this window, the IRS decided to extend it to five years.

Let’s say your spouse has passed away, and you are the executor of their estate. If the total value of your spouse’s assets in their estate is below the threshold for federal estate taxation, you may assume that no estate tax return needs to be filed. While this is technically correct, if you do not file an estate tax return, there is no way to transfer over your spouse’s unused estate tax exclusion for your benefit.

The federal gift and estate tax exclusion as of 2022 is $12.06 million per person ($24.12 million for married couples). A person can give away — either during their lifetime or at death — up to this amount, tax-free.

In the above example, if your spouse’s estate were worth $2 million, that would leave an unused exemption of $10.06 million, which you could add to your own $12.06 million exemption, should you ever need it. But you must file an estate tax return for your spouse and complete the section of Form 706 currently entitled “portability of deceased spousal unused exclusion.”

Now Is a Good Time to Consider If You Could Benefit From Portability

The current federal gift and estate tax exemption will be reduced by half in 2026. So, if you have a spouse who died in the past five years, you should consider as soon as possible whether electing portability makes sense.

To be eligible, the deceased spouse must have been a U.S. citizen or permanent resident on the date of their death, and the executor must not have been otherwise required to file an estate tax return based on the value of the total estate and any taxable gifts. If an estate tax return was filed within nine months after the spouse’s death or an extended filing deadline, the portability option may also not be available.

For families with some wealth, this option could result in hundreds of thousands of dollars or more in tax savings. Many families might not have an estate tax problem now, under the gift and estate tax exclusion of 2022. However, if the second spouse dies after 2026, that spouse’s estate could owe hefty taxes. Portability allows you to plan ahead to avoid this problem.

Large Estates Should Not Rely on Portability

Remember this: portability can often be a fix it” provision depending on your estate tax situation.  It is usually better to plan your estate with an “A-B” provision in a testamentary trust, allowing for a estamentary “exemption trust” with a testamentary “marital trust”.  This is because for high net worth individuals who risk going over exemption threshholds, a good plan adopted beforehand can remove all future appreciation as well as all future income on the exemption amount from future estate taxes.  In other words, the preferred estate tax planning approach is to remove $12.06 from the estate tax, as well as all future income and appreciation on that $12.06 million.  You can’t do this with portability unless some of the predeceasing spouse’s exemption is not utilized on that spouse’s estate tax  return.  For a predeceasing spouse whose estate is not large enough to soak up the entire exemption amount, however, portability is a must.

BOOK A CALL with me, Ted Vicknair, Louisiana Board Certified Estate Planning and Administration Specialist, Louisiana Board Certified Tax Law Specialist, and Louisiana CPA to learn more about estate planning in Louisiana, incapacity planning, and Louisiana asset protection.

If you liked this article, “How Changes to Portability of the Estate Tax Exemption May Impact You” read also these additional articles: What Healthy Snack Is Best for My Long-Term Health? and Who will Receive Naomi Judd’s Estate? and The Biggest Health Mistakes Seniors Make and Remember Medicare’s Important Deadlines and Medicaid Crisis Plans for Long Term Care Costs

Reference: The Portability of the Estate Tax Exemption

The estate tax exemption won’t always be so high. The runup in housing prices may mean capital gains taxes become a serious issue for many people. There are solutions to be found in estate planning, including one known as an “Upstream Power of Appointment” Trust, as explained in the article “How to Use Your Estate Plan to Save on Taxes While You’re Still Alive!” from Kiplinger.

The strategy isn’t for everyone. It requires a completely trustworthy, elderly and less wealthy relative, such as a parent, aunt, or uncle, to serve as an additional trust beneficiary. First, here is some background information:

Basis: This is the amount by which a price is reduced to determine the taxable gain. This is often the historical cost of an asset, which may be adjusted for depreciation or other items. Estate planning attorneys are familiar with these terms.  Generally, if you purchased your house for $100,000, and you didn’t have any additions to the house, then your “basis” is $100,000.

Step-up (in-basis): Again, assume your bought a house for $100,000.  If you sell it for $400,000 the day before you die, your taxable gain would be $300,000. Often, this taxable gain is excluded if you are the homeowner selling your home if you meet the conditions under the Internal Revenue Code.  However, the same rule does not apply to your children.  If they were to sell the house for $400,000, they would have a taxable gain of $300,000 (because they did not own and live in the home on your date of death).  If you owned the home on your death, Section 1014 of the Internal Reveune Code, known as the “step up in basis”, works to adjust the basis from $100,000 to $400,000, the fair market value on your date of death.  In other words, with the step up your heirs woud have a new basis of $400,000 eliminating any built in capital gain.  So the benefit is that there would be no capital gain on the sale and no taxes owed.  That capital gain would be approximately $78,000, calculated as 26% X $300,000.  The 26% is the top long term federal capital gain rate plus a 6% Louisiana state income tax rate.

So even though your estate may not be subject to the estate tax, don’t be penny wise and pound foolish when it comes to your estate income tax planning.

Lifetime estate tax exemption: This is currently at $12.06 million per person or $24.12 for married couples. This is the amount of assets which can be passed to children or others free of any federal estate tax. However, the number will take a deep dive on January 1, 2026, when it reverts back to just under $6 million, adjusted for inflation. Plan for the change now, because 2026 will be here before you know it!

Upstream planning involves transferring certain appreciated assets to older or other family members with shorter life expectancies. Since the person is expected to die sooner, the basis step-up is triggered sooner. When the named person dies, you obtain a basis step-up on the asset, saving income taxes on depreciation and saving capital gains on a future sale of the property.  There are other things to consider in such planning, such as medicaid qualification.  In other words, upstream planning may disqualify the older relative from medicaid benefits, so consider such planning carefully.

Most Americans aren’t worried about paying estate taxes now, but no one wants to pay too much in income taxes or capital gains taxes.

To make this happen, your estate planning attorney will need to give an elderly person (let’s say Aunt Rose) certain ownership rights to the asset, such as a usufruct for life.  In other states, a general power of appointment would work, but Louisiana law does not recognize powers of appointment.  If the asset is included in Aunt Rose’s gross estate, then there would be a step up in basis on her death.

Don’t do this lightly, as ownership rights carry legal implications.  Can you protect yourself, if Aunt Rose goes rogue?

While the Internal Revenue Code (“IRC”) rule doesn’t require Aunt Rose to get your permission to control or change distribution of the property, a trust can be crafted with a provision to effectuate the desired result. The IRC doesn’t require Aunt Rose to know about this provision. This is why the best person for this role is someone who you know and trust without question and who understands your wishes and the desired outcome.

So the answer to the question of “Can Estate Planning Reduce Taxes?” is Yes!  Proper planning with an experienced estate planning attorney is a must for this kind of transaction. All the provisions need to be right: the beneficiary need not survive for any stated period of time, you should not lose access to the assets receiving the basis increase, you want a formula clause to prevent a basis step down if the property or asset values fall and you want to be sure that assets are not exposed to creditor claims or any other liabilities of the person holding this broad power.

BOOK A CALL with me, Ted Vicknair, Louisiana Board Certified Estate Planning and Administration Specialist, Louisiana Board Certified Tax Law Specialist, and Louisiana CPA to learn more about estate planning in Louisiana, incapacity planning, and Louisiana asset protection.

If you liked this article, “Can Estate Planning Reduce Taxes?” read also these additional articles: Addressing Property in Another State in Estate Planning and What Should I Know about Burial Insurance? and Does Potential IRS Change Have an Impact on Estate Plan? and Understanding the Issues of Elder Law

Reference: Kiplinger (July 3, 2022) “How to Use Your Estate Plan to Save on Taxes While You’re Still Alive!”

The new federal regulation would require many people who inherit money through traditional IRAs, as well as 401(k)s, 403(b)s, and eligible 457(b)s to withdraw funds from the accounts every year over a 10-year period, according to The Wall Street Journal.

Money Talks News’ recent article entitled “How an IRS Change Could Hurt Your Heirs” says that the change would apply to most beneficiaries other than spouses, and would apply to those who inherited money after 2019.

Children 21 and older, grandchildren and most others who get money from an affected account would need to follow the new regulations or rules.

The proposed change would require beneficiaries to take minimum taxable withdrawals every year for 10 years from their inheritance in situations where the original account owner died on or after April 1 of the year of his or her 72nd birthday.

These withdrawals, technically known as required minimum distributions (RMDs), must deplete the account within the 10-year period.

Heirs would pay a penalty of 50% on any RMD amounts they didn’t withdraw according to the schedule defined by the new IRS rules.

The proposed change has the potential to leave your heirs less wealthy. The reason is because the money you bequeath to heirs would have less time to grow in tax-advantaged accounts before they would be forced to withdraw it.

Over time, this can make a big difference in how much money they accumulate from the initial amount you leave them.  In addition, this could allow any creditors of your beneficiaries to seize the mandatory payments, making it harder to asset protect these accoutns without a retirement trust.  In such cases, a retirment turst may still be a good idea.

The proposed rules are designed to clarify changes resulting from the federal Secure Act of 2019.

If the IRS moves forward with the changes, the new rules will add to the growing number of reasons why it makes sense for some people to consider putting money into a Roth IRA instead of a traditional IRA.

With a Roth IRA, the account owner pays taxes upfront As a result, heirs won’t owe any taxes on the money they inherit. Therefore, the new rules wouldn’t apply to Roth IRAs.

BOOK A CALL with me, Ted Vicknair, Louisiana Board Certified Estate Planning and Administration Specialist, Louisiana Board Certified Tax Law Specialist, and Louisiana CPA to learn more about estate planning in Louisiana, incapacity planning, and Louisiana asset protection.

If you liked this article, “Does Potential IRS Change Have an Impact on Estate Plan?” read also these additional articles: Understanding the Issues of Elder Law and What are the Advantages of a Business Trust? and What Is the Best Asset Protection? and What Happens If My Partner Dies and We’re Not Married?

Reference: Money Talks News (May 13, 2022) “How an IRS Change Could Hurt Your Heirs”

Business owner’s heads are frequently filled with a steady stream of questions concerning day-to-day activities. Long-range planning questions about how to expand the business, set business priorities, identify vulnerabilities, etc., are lost in the flood of events requiring immediate action. However, business owners need to keep both details and the big picture in mind, according to a recent article “5 Ways Business Owners Can Use Trusts to Benefit Their Company” from Entrepreneur.

Three key questions for any business owner are: how can I minimize taxes, protect assets and what kind of legacy do I want to leave with my business? All three questions can be answered with two words: estate planning. Within estate planning, trusts are a well-known tool to tackle and solve these three issues.

A trust is a legal entity created when one party (the settlor) gives another party (trustee) the right to hold title to property or assets for the benefit of a third party (beneficiaries). Trusts are used to provide protection for assets for individuals and businesses. For business owners, trusts protect beneficiaries and thwart potential creditors (including previous spouses) from gaining direct access to assets held within the trust.

If set up properly, all future growth of assets transferred to an irrevocable trust occurs outside of the estate. It will apply to your lifetime exemption, but all future growth occurs estate tax free. Let’s say a business owner transfers a business worth $3 million into an irrevocable trust and years later, the company is sold for $17 million. The increased value is not subject to estate taxes, saving family members a significant amount of money.  But the potential loss of the “step up” in income tax basis should always be considered in estate tax planning.

It should be noted these types of trusts needs to be created with an experienced tax and estate planning attorney to achieve the desired goals.

Assets in a trust maintain privacy. For companies and individuals who live in the public eye, placing assets in trust means only the settlor and trustee need to know about the assets. A person who lives in a small city and owns a few restaurants may not want their personal financial matters to become known when they die. Wills become public documents when the estate is probated; trusts remain private.

Litigation arising from sales of small businesses are among the most common legal actions filed against business owners. By removing assets from ownership, the business owner receives another layer of protection. You can’t be sued for assets you don’t own.

Trusts are used in succession planning and should be created to align with business legacy objectives, whether the plan is to sell the company to outsiders, key employees or keep it in the family. Succession plans must be properly documented. This is done with the estate planning attorney, CPA and financial advisor working in tandem. A succession plan should also address the goals for the business owner’s life after the business is sold or transferred. Do they want to remain on the board of directors, do they require income from the business to maintain their costs of living?

Minimizing taxes. Preparing for a liquidity event is an excellent reason to consider creating a trust. Depending upon its structure and the laws of the estate, a business owned by a trust may minimize or avoid state income taxes on a substantial portion of the estate income tax.  With an a non-grantor irrevocable trust, however, the compressed income tax brackets should be taken into account in your income tax planning.

A succession plan, like an estate plan, needs to be created long before it is needed. Ideally, to answer the question “What are the Advantages of a Business Trust?”, a succession plan should be created as soon as possible after a business is established (or even before) and revised as time goes on. When the company attains certain milestones, the plan should be updated.

BOOK A CALL with me, Ted Vicknair, Louisiana Board Certified Estate Planning and Administration Specialist, Louisiana Board Certified Tax Law Specialist, and Louisiana CPA to learn more about estate planning in Louisiana, incapacity planning, and Louisiana asset protection.

If you liked this article, “What are the Advantages of a Business Trust?” read also these additional articles: What Is the Best Asset Protection? and What Happens If My Partner Dies and We’re Not Married? and What Does a Blended Family Need to Know about Finances? and Shocking! 8 Things That Can Spark a Will Contest

Reference: Entrepreneur (June 17, 2022) “5 Ways Business Owners Can Use Trusts to Benefit Their Company”

Let’s get this out of the way: preparing for death doesn’t mean it will come sooner. Quite the opposite is true. Most people find preparing and completing their estate plan leads to a sense of relief. They know if and when any of life’s unexpected events occur, like incapacity or death, they have done what was necessary to prepare, for themselves and their loved ones.

It’s a worthwhile task, says the recent article titled “Preparing for the certainties in life: death and taxes” from Cleveland Jewish News and doesn’t need to be overwhelming. Some attorneys use questionnaires to gather information to be brought into the office for the first meeting, while others use secure online portals to gather information. Then, the estate planning attorney and you will have a friendly, candid discussion of your wishes and what decisions need to be made.

Several roles need to be filled. The executor carries out the instructions in the will. A guardian (called a “tutor” under Louisiana law) is in charge of minor children, in the event both parents die. A person named as your attorney in fact (or agent; “mandatary” under Louisiana law) in your Power of Attorney (POA) will be in charge of the business side of your life. A POA can be as broad or limited as you wish, from managing one bank account to pay household expenses to handling everything. A Health Care Proxy is used to appoint your health care agent to have access to your medical information and speak with your health care providers, if you are unable to.

Your estate plan can be designed to minimize probate. Probate is the process where the court reviews your will to ensure its validity, approves the person you appoint to be executor and allows the administration of your estate to go forward.

Depending on your situation, probate can be a long, costly and stressful process.

Part of the estate planning process is reviewing assets to see how and if they might be taken out of your probate estate. This may involve creating trusts, legal entities to own property and allow for easier distribution to heirs. Charitable donations might become part of your plan, using other types of trusts to make donations, while preserving assets or creating an income stream for loved ones.

Minimizing taxes should be a part of your estate plan. While the federal estate tax exemption right now is historically high $12.06 million per person, on January 1, 2025, it drops to $5.49 million adjusted for inflation. While 2025 may seem like a long way off, that is only 2-1/2 years from today’s date.  If your estate plan is being done now, you might not see it again for three or five years. Planning for this lowered exemption number today makes sense.

Reviewing an estate plan should take place every three to five years to keep up with changes in the law, including the lowered estate tax. Large events in your family also need to prompt a review—trigger events like marriage, death, birth, divorce and the sale of a business or a home.

BOOK A CALL with me, Ted Vicknair, Board Certified Estate Planning and Administration Specialist, Board Certified Tax Law Specialist, and CPA to learn more about estate planning, incapacity planning, and asset protection.

If you liked this article, “How Do I Plan for Taxes after Death?” read also these additional articles: How to Find a Great Estate Planning Attorney and What Happens Financially when a Spouse Dies? and What the Latest Dementia Study Says about Links with Certain Medicines and What Fruit Is Best for My Heart?

Reference: Cleveland Jewish News (May 13, 2022) “Preparing for the certainties in life: death and taxes”

When one of the spouses dies, the surviving spouse can make what is known as a portability election.

This means that any unused federal gift or estate tax exemption can be transferred from the deceased spouse to the surviving spouse.

Ag Web’s recent article entitled “It’s So Important to Elect ‘Portability’ for Your Farm Estate” explains that this is an election that has to be made proactively, after the death of the first spouse.

You’ll have to file a Form 706 federal estate tax return within two years of death at the latest, even though there’s no tax owed. Under current federal law, portability is available for farm couples to implement through the end of 2025. This the opportunity then “sunsets,” and the provision will no longer be available.

This could really be a multi-million-dollar mistake, if it’s not elected.

Even after two years, the surviving spouse can elect portability (through the end of 2025). However, he or she will incur considerable expense in the process.

You can still file for it, but you’ll pay a user fee that costs about $12,000. You’ll then have to pay an attorney to prepare the paperwork, and that’s probably another $10,000 to $15,000.

As a result, you’re going to pay between $25,000 and $50,000. However, if you’d just filed it within two years of your spouse’s death, you could have avoided those expenses.

Before portability was an option, it was common for husbands and wives to each own about the same amount of assets, or at least the amount of assets that could fully soak up and use each person’s exemption.

Therefore, many farm families are used to seeing farms titled one-half with the husband, one-half to the wife – as Louisiana community property.  That is because in the old days, if you didn’t use the wife’s exemption to cover her assets (if she died first), it would just expire.

Now, with portability, all the assets can flow through to the surviving spouse.

At the first spouse’s death, the survivor files that portability election and then has two exemptions to cover assets.

BOOK A CALL with me, Ted Vicknair, Board Certified Estate Planning and Administration Specialist, Board Certified Tax Law Specialist, and CPA to learn more about estate planning, incapacity planning, and asset protection.

If you liked this article, “What Is Portability and Can I Use It with Farm?” read also these additional articles: What Is Federal Estate Tax Exemption? and Can I Protect My Inheritance from Divorce? and What Assets are Not Considered Part of an Estate? and Will Your Business Die When You Die?

Reference: Ag Web (April 18, 2022) “It’s So Important to Elect ‘Portability’ for Your Farm Estate”

Community property refers to property acquired by one or both spouses during the marriage, provided the spouses live in a state that has a community property framework, says The Milwaukee Business Journal’s recent article entitled “Is what’s mine, ours? Understanding community property.”

There are not many community property states. That is because most states have adopted common law of property laws. The only community property states are Louisiana, Arizona, California, Idaho, Nevada, New Mexico, Texas, Washington and Wisconsin. Several other states’ laws allow residents to “opt-in” to a community property regime. These states are Alaska, Tennessee, Kentucky and Florida.

While community property laws in the nine community property states differ in a number of ways, they all classify property either as community property—which is owned one-half by each spouse, or separate property, that which is solely owned by one spouse.

For example, in Louisiana, community property is referred to as being under the “community regime”, the default property regime for married persons in Louisiana.  Community property is property acquired during the marriage, and it usually includes the income from separate property (unless a declaration is paraphernality is signed and delivered to the other spouse).

Separate property is generally property acquired prior to the marriage, as well as gifts/inheritances during the marriage.  Significantly, any income from separate property is generally community property.  For example, if you have $100,000 in a bank account before the marriage, and the account earns 5% interest (resulting in $5,000 of income) during the marriage, and at the end of the year $105,000 is in the bank account, $5,000 is community property, and the original $100,000 is separate property.  This is important because over time, a separate property bank account may lose its character as separate property if you are not careful.  To change this result, you need to sign and deliver a “declaration of paraphernality” to your spouse to make sure that the income (the $5,000 in this hypothetical) is classified as your separate property.

Any property acquired during the marriage is deemed to be community property, and any property, of either spouse is presumed to be community property (unless the property claiming it is separate can prove that it is separate). In a common law property regime, property is owned by the spouse whose name is on the title.

In answering the question”What Does ‘Community Property’ Mean?”, it is important to remember that a basic feature of a community property legal framework is that title does not indicate ownership. Therefore, if a married couple deposits income earned during their marriage into an account titled only in the husband’s name, it is still owned one-half by the wife despite the fact that her name is not on the account.

Also, when answering the question, “What Does ‘Community Property’ Mean?”, remember that whether assets are classified as community property or separate property can have a significant effect on a couple’s life, including issues in estate planning, income and estate tax planning and creditors’ rights.

As far as estate planning, each spouse can only dispose of one-half of community property at his or her death. Under Section 1014 of the Internal Revenue Code, community property also gets a “double step up in basis,” which means that built-in appreciation on community property is eliminated at the death of the first spouse to die.  This is a great tax benefit of living in a community property state.  For example, if a husband and wife purchased land for $50,000 many years ago and it is now worth $200,000, there is a $150,000 “built in” capital gain which is potentially taxable income.  However, upon the death of the husband (with the wife surviving), both the husband’s half (valued at $100,000) and the wife’s half (also valued at $100,000) gets a step-up in basis to $200,000 eliminating the capital gains tax on both halves.  If the wife inherits to husband’s half, she can sell the proeprty for $200,000 and will not have to pay federal or Louisiana state income taxes on the sale.  This is because $200,000 sale price minus $200,000 new “stepped up”  basis equals $0 taxable income.

Finally, the classification of an asset as community or separate property can affect whether a creditor of one spouse can recover from that asset.

Importantly, should one of the spouses need to apply for Medicaid long term care assistance, a needs based program, even if the non-applicant is the one that has significant seprate property (with the applicant spouse being significantly poorer), Medicaid will still count the seprate property assets of the non-applicant spouse.  This is why long term care planning is important for everyone, even those who have significant separate property and those that have entered into premarital agreements.

Ask an experienced estate planning attorney who understands Medicaid qualification as well as federal and state income tax law about how community property laws may affect your financial and estate planning.

BOOK A CALL with me, Ted Vicknair, Board Certified Estate Planning and Administration Specialist, Board Certified Tax Law Specialist, and CPA to learn more about estate planning, incapacity planning, and asset protection.

If you liked this article, “What Does ‘Community Property’ Mean?” read also these additional articles: Can My Ex Get Some of My Estate?  and Will Eating More Fish Help Me Stay Healthy? and What’s the Best Way to Mess Up Estate Plan? and How Does a Trust Fund Work?

Reference: Milwaukee Business Journal (Jan. 1, 2022) “Is what’s mine, ours? Understanding community property”

The expanded estate and gift tax exemptions expire at the end of 2025, which is not as far away as it seemed in 2017. For 2021, the lifetime exemption for both gift and estate taxes was $11.7 million per individual, and in 2022, an inflation adjustment boosted it to $12.06 million per person. The increase is set to lapse in 2025, according to the article “Estate and Gift Taxes 2021—2022: What’s New This Year and What You Need to Know” from The Wall Street Journal.

However, in 2019 the Treasury Department and the IRS issued “grandfather” regulations to allow the increased exemption to apply to earlier gifts, if Congress reduces the exemption in the future.

Let’s say Josh gives assets of $11 million to a trust to benefit heirs in 2020. The transfer had no gift tax because it was under the $11.58 million for 2020. If Congress lowers the exemption to $5 million per person and Josh dies in 2023, when the lower exemption is in effect, as the law now stands, the estate will not owe tax on any portion of his gift to the trust, even if $6 million is above the $5 million lifetime limit in effect at the time of his death.

Current law also has investment assets held at the time of death exempt from capital gains tax, known as the “step up in basis.” If Robin dies owning shares of stock worth $100 each, originally purchased for $5 each and held in a taxable account, the estate will not owe capital gains tax on the $95 growth of each share. The shares will go into Robin’s estate at their full market value of $100 each. Heirs who receive the shares have a cost basis of $100 as the starting point for measuring taxable gains or losses when they sell.

The annual gift tax exemption has risen to $16,000 per donor, per recipient, for 2022. A generous person can give someone else assets up to the limit every year, free of federal gift taxes. A married couple with two married children and six grandchildren could give away as much as $320,000 to their ten family members, plus $32,000 to other individuals, if they wished.

Annual gifts are not deductible for income tax purposes. They also do not count as income for the recipient. Gifts above the exclusion are subtracted from the giver’s lifetime gift and estate tax exemption. However, a married could use “gift splitting” to let one spouse make up to $32,000 of tax-free gifts per recipient on behalf of both partners. A gift tax return must be filed in this case to document the transaction for the IRS.

If the gift is not cash, the giver’s cost basis carries over to the recipient. If someone gives a family member a share of stock worth $1,000 originally acquired for $200, neither the giver nor the recipient owes tax on the gift. However, if the recipient sells, the starting point for measuring taxable gain will be $200. If the share is sold for $1,200, for instance, the recipient’s taxable gain would be $1,000.

For some families, “bunching” gifts for five years of annual $16,000 gifts to a 529 education account makes good sense. A gift tax return should also be filed in this case. Your estate planning attorney will be able to guide you in creating a gifting strategy to align with your estate plan and minimize taxes.

BOOK A CALL with me, Ted Vicknair, Board Certified Estate Planning and Administration Specialist, Board Certified Tax Law Specialist, and CPA to learn more about estate planning, incapacity planning, and asset protection.

If you liked this article, “What are the Current Gift Tax Limits?” read also these additional articles: No Will? What Happens Now Can Be a Horror Show and What Does Study Say About Dementia and Mortality? and How Does Gift Tax Exclusion Work? and What Can I Do Instead of a Stretch IRA?

Reference: The Wall Street Journal (March 10, 2022) “Estate and Gift Taxes 2021—2022: What’s New This Year and What You Need to Know.”