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Estates & Trusts

Better Late Than Never!

By Estates & TrustsNo Comments

In January 2013, Congress passed the American Taxpayer Relief Act of 2012. The act made permanent many of the “Bush-era” tax cuts for low- and middle-income individuals, as well as making the following permanent changes regarding the estate and gift taxes:

  • The unified lifetime transfer tax exclusion was permanently fixed to $5 million, adjusted for inflation ($5,250,000 in 2013), with a maximum tax rate of 40%.
  • Portability of Deceased Spousal Unused Exclusion (DSUE) amounts between spouses was made permanent.
  • Trusts are subject to maximum income tax rates of 39.6% for federal purposes and 13.3% for California purposes.
  • “Qualified” dividends are now taxed at a maximum rate of 20% for trusts with taxable income over $11,950 (indexed for inflation).
  • Long-term capital gains are now taxed at a maximum rate of 20% for trusts with income over $11,950 (indexed for inflation).

Beginning in 2013, the new 3.8% Medicare net investment income excise tax applies to trust investment income over $11,950 (indexed for inflation). Net investment income includes interest, dividends, capital gains, and all types of passive income, including rents and royalties, less investment expenses.

The passage of California Proposition 30 increased taxes on trusts with taxable income of $250,000 and above beginning with tax year 2012.

With these items in mind, we are reminding our fiduciary clients that the following best practices have become even more important in 2013’s changed environment:

  • Careful distribution management:  If the trustee has discretion over distributions to beneficiaries, consider managing distributions to maximize the amount of income taxed at the beneficiary level. Thresholds for the Obamacare taxes and increased capital gains rates are much higher for individuals than for trusts.
  • Portfolio reassessment: As we previously suggested, trustees should be working closely with investment advisors to ensure that the trust’s investment mix continues to be appropriate considering the current tax environment and the goals of the trust.

Gift Planning for Individuals:
The lifetime gift exemption for individuals for 2013 is $5,250,000, with a maximum rate of 40%. The annual exclusion for 2013 has been adjusted for inflation to $14,000.

  • Remember that tuition paid directly to a college or medical expenses paid directly to a service provider do not count as taxable gifts.
  • Consider the implications of any impending graduations on the Section 529 college savings  plans you have set up for your descendants: is there another student in the family that can use funds set aside for a graduate that isn’t continuing his or her education? Should the plan be cashed out and distributed to the donor or the beneficiary?
  • Does a new graduate need help purchasing a home? In a continued low interest rate environment, intra-family loans continue to be an attractive way to allow the younger generation to utilize family assets without incurring any transfer tax consequence.

2012 Estate, Gift, and Trust Planning

By Estates & TrustsNo Comments

While many commentators believe that the “Bush tax cuts” will not sunset completely, it is generally agreed that income tax rates are likely on their way up.

Under current law, as of January 1, 2013:

  • The unified lifetime transfer tax exclusion will be reduced to $1 million with a maximum tax rate
    of 55%;
  • Trusts will be subject to maximum income tax rates of 39.6% for federal purposes and 13.3%
    for California purposes;
  • “Qualified” dividends will be taxed at ordinary income rates instead of 15% as they are now;
    and
  •  Long-term capital gains will be taxed at a maximum 20% rate.

Beginning in 2013, the new 3.8% Medicare net investment income excise tax will apply to trust investment income over $11,650. Net investment income includes interest, dividends, capital gains, and all types of passive income, including rents and royalties, less investment expenses.

The passage of California Proposition 30 will increase taxes on trusts with taxable income of $250,000 and above beginning with tax year 2012.

With these items in mind, we are discussing several planning techniques with our fiduciary clients:

Income Acceleration:
Due to the application of the Medicare investment income tax to trusts at very low income levels and the likelihood of increased tax rates, trustees may want to consider accelerating income into 2012 to realize tax savings. Income acceleration may include:

  • Selling appreciated assets to harvest unrealized capital gains before January 1;
  • Incentivizing early payments of rents and other receipts by the trust’s tenants or customers;
  •  Electing out of installment sale treatment for any 2012 sales whose proceeds are to be
    collected over multiple years;
  • For fiduciaries of the estates of decedents who passed away in 2012, considering the election
    of a fiscal year ended November 30;
  •  For all fiduciaries of decedents’ estates, considering the distribution of any noncash assets
    that will satisfy pecuniary bequests before the end of the 2012 fiscal year.

Deduction & Credit Deferral:
A deduction may be worth more in 2013 than it is in 2012. Strategies for deferring deductions for trusts may include:

  •  Bunching deductions into 2013 by postponing bill payments until January;
  • Considering the timing of paying property taxes;
  •  Paying the last state estimated tax installment for 2012 taxes in January 2013;
  •  Revisiting the trust’s distribution strategy for 2013: can more income be passed out to
    beneficiaries (and taxed at a lower rate) in order to reduce the trust’s tax burden? Will income
    passed out to beneficiaries reduce the total tax burden or increase it?

We also recommend that trustees speak with the trust’s financial advisors and investment managers at least annually to consider whether a shift in the trust’s investment portfolio is appropriate. Doing so this year could make an especially significant impact on the trust’s financial future.

Gift Planning for Individuals:
The lifetime gift exemption for individuals for 2012 is $5,120,000, with a maximum rate of 35%. If Congress doesn’t act, the 2013 lifetime gift exemption amount will be $1,000,000, with a maximum rate of 55%.

  • Consider making outright gifts and gifts in trust before the end of the year to utilize as much of
    the gift exemption as possible.
  • Many parents and grandparents have made loans to their descendants for the purchases of
    homes, cars, and other large assets. Consider forgiving those loans before the end of the
    year – it’s an excellent way to use some of your exemption.
  •  Remember that tuition paid directly to a college or medical expenses paid directly to a service
    provider do not count as taxable gifts.
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