The Coming Post-Election Tax Code Changes Mandate Timely Planning

Donald Trump has promised to rewrite the U.S. tax code, much like Ronald Reagan did in 1986.  With a Republican House and Senate, a tax code overhaul is likely.  Trump’s plan is likely to include:

  • Reduction in income tax rates for individuals and corporations. If enacted, the U.S. would shift from one of the highest corporate income tax rates in the world, to one of the lowest (from 35% to 15%).  For individuals, the highest tax bracket is now 39.6%, plus the 3.8% net investment tax, for a total of 43.4%.  Under the Trump plan, the highest rate would be 33%.
  • Elimination or significant reduction of estate and gift taxes.
  • Restructuring of tax on offshore income, including deemed repatriation and 10% tax on deferred offshore profits.
  • Elimination or partial repeal of the Affordable Care Act (Obamacare), including repeal of the 3.8% tax on net investment income.
  • Carried interest may be taxed as ordinary income.
  • Income earned through flow-through entities (LLCs and S-Corps) to be taxed at 15% rather than higher individual rates.

Apart from the Trump tax plan, Republican legislators have also offered their own plan which also calls for reduction of taxes.

The above are proposals, not yet law.  We can assist you in anticipating the coming tax changes, and planning ahead.  Some suggestions include:

  • Take charitable deductions now, rather than in 2017, when tax changes could likely make deductions less valuable. The current income tax rates are known and will probably be higher than in 2017.
  • If we can expect reductions in income tax and capital gains tax rates next year, consider whether to utilize tax deductions and losses in 2016 and postpone or defer gains and income until 2017.
  • Consider an enhanced role for life insurance and an Irrevocable Life Insurance Trust (ILIT). Insurance proceeds are not taxable as income to the beneficiary.  Growth within an insurance policy is not subject to income and capital gains tax.  If the estate tax will be repealed, insurance could be completely tax-free.  (State estate taxes may still apply.)  Insurance could thus play an enhanced roll in family planning, legacy planning, liquidity and tax-minimization.  An ILIT would add further benefits, including asset protection, creditor protection and extended wealth management for child beneficiaries.

How to Lower Your Estate Tax Liability on the Federal and State Levels

In early 2013, Congress clarified the estate tax landscape and made permanent certain provisions of estate tax law, such as the exemption from estate tax for the first $5.45 million of one’s estate, indexed annually for inflation. There has been no such clarity on the state levels, which remain a patchwork of different estate tax laws.

On the federal level, in addition to the exemption of $5.45 million each year indexed for inflation, the 40% estate tax rate is, for now, standard.  In addition, portability between spouses of an unused exemption is also now allowed.  Congress can change these laws in the future, as it has in the past.  In addition, in this election year, estate tax rates and exemptions are campaign topics and are subject to revision by a new administration.  However, at least for now, the federal estate tax regime is clear and as a result, we as tax practitioners have a better ability to plan for clients when the law is clear.

However, estate taxes on the state level are much more variable.  In New Jersey, the threshold for estate tax is only $675,000, the lowest in the U.S., and at a huge variance from the $5.45 million federal exemption.  The threshold in Connecticut is $2 million, cut from $3.5 million in 2011.  The threshold in New York is currently $3.125 million, will rise to $4.18 million on April 1, 2016 and to $5.25 million in 2017.  Ultimately, the NYS exemption will be at parity with the federal exemption amount in 2019.  In a significant quirk, a New York tax law anomaly known as “the cliff” sets the estate threshold to zero (i.e., no exemption from estate tax at all) if one’s estate is valued at $3,281,250 or more.  In other words, in New York, there is no estate tax for estates lower than $3.125 million and complete estate tax on the entirety of the estate, with no threshold and no exemption, for any New York estate valued in excess of $3,281,120.

Thus, depending on the value of one’s estate, and one’s residence, one’s estate may owe considerable state estate tax even if it is exempt from federal estate tax.

Some states have no estate tax and no income tax.  For this and other reasons (sunshine?) such states, which include Florida and Nevada, attract migration from high-tax states such as New York, New Jersey and Connecticut.

There are various strategies that one may utilize to lower one’s taxable estate on both federal and state levels.  Some of the strategies proven to reduce estate taxes are:

GRAT – If you contribute assets into a Grantor Retained Annuity Trust, you could receive a regular payment akin to an annuity over many years, and then when the trust term ends, the appreciated assets pass to your heirs, are not considered part of your estate and will not be subject to estate taxes.

QPRT – If you contribute your personal residence into a Qualified Personal Residence Trust, you may still live in the residence for a term of years, and when the trust term ends, the home is removed from your estate while passing to your heirs and will not be subject to estate taxes.

FLP – After contributing your assets into a Family Limited Partnership in return for general and limited partnership interests, you may then, over time, gift your limited partnership interests to your heirs while retaining the general partnership interest (thereby continuing to control the FLP), and thus remove the value of the limited partnership interests from your estate.  FLPs also provide the additional bonus of excellent asset protection.

CRUT – By contributing appreciated assets to a Charitable Remainder Unitrust, you are entitled to a charitable deduction, regular payments from the trust back to you during the trust term, and at the end of the term the assets pass to the charity, are not subject to income tax and are removed from your estate.

ILIT – If you own or control life insurance policies, the IRS deems their death benefit to be in your estate and subject to estate tax, even though you will never receive the death benefit during your life.  If you contribute these life insurance policies to an Irrevocable Life Insurance Trust, you may remove the insurance policies from your estate.  Your family members may receive the death benefit from the trust, free of any estate tax.

Dynasty Trust – Such a trust allows the preservation of assets for one’s immediate and remote descendants, along with offering asset protection from creditors, as well as delay of the estate tax bite for many generations.  The trust can distribute income to beneficiaries, but principal is preserved, asset-protected and grows tax-free.

These strategies are not only for the mega-wealthy.  We have successfully utilized these strategies for clients of means at various levels who are concerned with leaving as much of their hard-earned assets for their heirs with as little as possible going to the IRS and state tax authorities.  These are equally attainable goals with a $5 million estate as they are at $50 million.

Moreover, these strategies are affordable, especially considering the amount of tax savings they offer.

Of course, if you want to move to Florida or Nevada, go for it.  But if you’re considering a move for estate tax reasons, first consider these various strategies to lower your estate tax liability without having to relocate.

FBAR Reporting for Foreign Annuities, Life Insurance and Trusts

We remind readers that FinCEN Form 114 (formerly TD 90-22.1), the Report of Foreign Bank and Financial Accounts (the “FBAR”), for calendar year 2013, is due by June 30, 2014.  The FBAR must be filed electronically.

As we advised previously, in 2011, the U.S. Treasury Department issued revised regulations regarding the FBAR.  The FBAR filing now applies to foreign annuity policies and foreign life insurance policies that are owned by U.S. taxpayers, and to some beneficiaries of foreign trusts.  If you are subject to the FBAR filing requirement, the 2013 FBAR is due by June 30, 2014.

The FBAR is required to be filed by a U.S. person who has a financial interest in, or signature or other authority over, any foreign financial account (including bank, securities or other types of financial accounts), if the aggregate value of the financial account(s) exceeds $10,000 at any time during the calendar year.

1. Foreign Annuity Policies

The 2011 FBAR regulations extend the FBAR requirement to foreign annuity policies that have a cash surrender value and are owned by U.S. persons.  Under the new regulations, such annuity policies are considered a “foreign financial account”, reportable via the FBAR by the policy owner, which is usually the U.S. client. Such annuities are reportable even if they are deferred annuities and there are no present annuity payments.

2. Foreign Life Insurance

A foreign life insurance policy is now reportable as a “foreign financial account” if the insurance policy is owned by a U.S. person and the policy has a cash surrender value.  The reporting requirement applies to the policy owner, if he/she is a U.S. person.  It does not apply if the policy is owned by a foreign trust rather than a U.S. client. (Note, however, that a client who is a beneficiary of a foreign trust may still be subject to the FBAR, see 3 below.)

3. Foreign Trusts

The 2011 FBAR regulations extend the FBAR requirement to some U.S. beneficiaries of foreign trusts, such as foreign insurance trusts.  The new regulations apply to U.S. beneficiaries of a foreign trust who have a reportable financial interest in the trust.  A U.S. person has a reportable financial interest if the U.S. person had more than a fifty percent (50%) present beneficial interest in a trust’s assets or if the U.S. person received more than fifty percent of the current income of the trust.  The beneficial interest in the assets of the trust must be a “present” beneficial interest for the FBAR to apply.  A beneficiary of a purely discretionary trust, i.e., where trust distributions are made solely in the discretion of a trustee does not have a “present” interest.  However, with respect to the trust income, a beneficiary who receives more than fifty percent of trust’s “current” (i.e., annual) income has a financial interest that is reportable on the FBAR.

Under prior FBAR regulations, there was ambiguity as to whether a discretionary trust beneficiary was subject to the FBAR.  Beneficiaries of a foreign discretionary trust may only receive distributions at the discretion of the foreign trustee.  The new rules clarify that only a present beneficial interest gives rise to the FBAR and only beneficiaries who receive more than fifty percent of a trust’s current income are subject to the FBAR.

4. Additional Important Points

• Even if the annuity policy or insurance policy was cancelled in 2013, and the trust account closed during 2013, if they existed at any point during 2013, an FBAR is required.

• The requirement to file the FBAR exists irrespective of whether you filed IRS Form 8938, Statement of Specified Foreign Financial Assets.  This is yet another IRS form to report foreign assets, including foreign annuity policies, foreign life insurance policies, and interests in foreign trust.  We’ve written about IRS Form 8938, here.  Form 8938 is due with your annual tax return.

•  The June 30, 2014 deadline is the deadline for receipt of the FBAR by the Treasury Department.

•  Even if you have an extension for filing your tax returns, the 2013 FBAR is still due by June 30, 2014.  There are no extensions for the FBAR deadline.

•  The FBAR is now required to be filed electronically.

It is crucial to preserve the integrity of your offshore planning and to maintain its tax compliance by abiding by all IRS rules and regulations.  Please contact us for more information.

 

2013 Year End Notes, Part 4: Asset Protection Considerations

Asset Protection for Financial Professionals, Hedge Fund Managers and Investment Advisors

During 2013, we have seen the growth of a new group of clients interested in asset protection: investment advisors, hedge fund managers and other financial professionals.  This group is faced with an increase in lawsuits brought by litigious investors against their financial advisors and those charged with making investment decisions.  As investors seek to blame others for investment losses, they are now suing fund managers and investment advisors personally, in addition to the fund itself or the advisor’s employer.  In the past, it was routine to sue the fund or financial institution; naming the fund manager or investment advisor personally is relatively new, but a phenomenon that we are seeing in increasing numbers. Continue reading

FBAR Disclosure Applies to Foreign Annuity Policies, Foreign Life Insurance Policies and Foreign Trusts; Deadline is June 30, 2012

This is a reminder that the Report of Foreign Bank and Financial Accounts (“FBAR”), T.D. 90-22.1, for calendar year 2011, is due by June 30, 2012.
As discussed previously << http://www.assetlawyer.com/wordpress/?p=955>>, the U.S. Treasury Department in 2011 issued revised regulations regarding the FBAR.  The FBAR filing now applies to foreign annuity policies and foreign life insurance policies that are owned by U.S. taxpayers, and to some beneficiaries of foreign trusts.  If you are subject to the FBAR filing requirement, the 2011 FBAR is due by June 30, 2012.
The FBAR is required to be filed by a U.S. person who has a financial interest in, or signature or other authority over, any foreign financial account (including bank, securities or other types of financial accounts), if the aggregate value of the financial account(s) exceeds $10,000 at any time during the calendar year.

This is a reminder that the Report of Foreign Bank and Financial Accounts (“FBAR”), T.D. 90-22.1, for calendar year 2011, is due by June 30, 2012.

As discussed previously, the U.S. Treasury Department in 2011 issued revised regulations regarding the FBAR.  The FBAR filing now applies to foreign annuity policies and foreign life insurance policies that are owned by U.S. taxpayers, and to some beneficiaries of foreign trusts.  If you are subject to the FBAR filing requirement, the 2011 FBAR is due by June 30, 2012.

The FBAR is required to be filed by a U.S. person who has a financial interest in, or signature or other authority over, any foreign financial account (including bank, securities or other types of financial accounts), if the aggregate value of the financial account(s) exceeds $10,000 at any time during the calendar year.

Foreign Annuity Policies

The 2011 FBAR regulations extend the FBAR requirement to foreign annuity policies that have a cash surrender value and are owned by U.S. persons.  Under the new regulations, such annuity policies are considered a “foreign financial account”, reportable via the FBAR by the policy owner.  Such annuities are reportable even if they are deferred annuities and there are no present annuity payments.

Foreign Life Insurance

A foreign life insurance policy is now reportable as a “foreign financial account” if the insurance policy is owned by a U.S. person and the policy has a cash surrender value. The reporting requirement applies to the policy owner, if he/she is a U.S. person.

Foreign Trusts

The 2011 FBAR regulations extend the FBAR requirement to some U.S. beneficiaries of foreign trusts, such as foreign insurance trusts. The new regulations apply to U.S. beneficiaries of a foreign trust who have a reportable financial interest in the trust. A U.S. person has a reportable financial interest if the U.S. person had more than a fifty percent (50%) present beneficial interest in a trust’s assets or if the U.S. person received more than fifty percent of the current income of the trust. The beneficial interest in the assets of the trust must be a “present” beneficial interest for the FBAR to apply. A beneficiary of a purely discretionary trust, i.e., where trust distributions are made solely in the discretion of a trustee does not have a “present” interest. However, with respect to the trust income, a beneficiary who receives more than fifty percent of trust’s “current” (i.e., annual) income has a financial interest that is reportable on the FBAR.

Under prior FBAR regulations, there was ambiguity as to whether a discretionary trust beneficiary was subject to the FBAR. Beneficiaries of a foreign discretionary trust may only receive distributions at the discretion of the foreign trustee. The new rules clarify that only a present beneficial interest gives rise to the FBAR and only beneficiaries who receive more than fifty percent of a trust’s current income are subject to the FBAR.

Foreign trusts also give rise to filing IRS Forms 3520 and 3520-A as well as new IRS Form 8938.

Please also note the following with respect to the FBAR requirement:
  • Even if the annuity policy or insurance policy was cancelled in 2011, and the trust account closed during 2011, if they existed at any point during 2011, an FBAR is required.
  • The requirement to file the FBAR exists irrespective of whether you filed new IRS Form 8938, Statement of Foreign Financial Assets.  Please see our discussion regarding new Form 8938.
    Ownership of investment instruments and contracts issued by a foreign entity, including foreign annuity contracts and insurance policies, are reportable on Form 8938 as well as on the FBAR.
  • The June 30, 2012 deadline is the deadline for receipt of the FBAR by the Treasury Department (unlike IRS Forms which must be postmarked by, e.g., April 15).
  • Even if you have an extension for filing your tax returns, the 2011 FBAR is still due by June 30, 2012. There are no extensions for the FBAR deadline.
  • A new FBAR form was issued in January 2012. Even though the new FBAR form is substantially similar to the prior version, you should use the new form.
  • It is crucial to preserve the integrity of your offshore planning and to maintain its tax compliance by abiding by all IRS rules and regulations.

Please contact us with any questions.

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