Gallet, Dreyer & Berkey, LLP
As the year draws to a close, we offer valuable planning tips to our clients, colleagues, and friends of the firm regarding their assets, tax, and estate concerns.
Foremost, there are still some time-sensitive ways to save taxes that could result in much more money for your family.
As the year comes to a close, we offer some planning tips to our clients, colleagues and friends of the firm regarding their assets, tax and estate concerns.
Foremost, there are some time-sensitive ways to save taxes that could result in much more money for your family.
The tax law changed significantly at the end of 2017, and by now we’ve had at least one tax year to consider and react to the new laws. We have previously written about some of the more important changes in the new tax law, e.g., pass-through deductions for S-Corps., LLCs and partnerships, and the increased standard deduction ($12,200 for single filers and married filers filing separately, $24,400 for married filers filing jointly). Contact us with any questions.
The following noteworthy events occurred in 2019 regarding the new laws:
Of significant concern to our clients in states such as New York, New Jersey and Connecticut, Congress put a limit on deductions for state and local taxes (“SALT”). Previously, these deductions were unlimited (although restricted under the Alternative Minimum Tax, AMT). Under the new law, taxpayers can only deduct up to $10,000 per tax return for SALT (i.e., a single filer has a $10,000 limit to the deduction, and a married couple filing jointly has the same $10,000 limit as the single filer).
We have been monitoring attempts to overcome this new law and preserve greater SALT deductions. Some local governments in 2018 attempted to convert local property taxes to charitable contributions which may then be deductible. The IRS in 2019 introduced regulations to bar such work-arounds. New York, New Jersey and Connecticut have sued to overturn the IRS rules, and the case is pending in federal court in the Southern District of New York.
In September 2019, a federal judge dismissed a lawsuit brought by New York, New Jersey, Connecticut and Maryland that challenged the $10,000 SALT deduction as a federal attempt to force local tax policies. The judge disagreed, stating that “the cap, again like every other feature of the federal Tax Code, is a part of the landscape of federal law within which states make their decisions as to how they will exercise their own sovereign tax powers.” For now, the SALT limitations are law.
The good news, however, is that the IRS stated that it would not challenge proper tax planning undertaken under the current tax law, once the law changes in 2025 (or earlier, such as following presidential and Congressional elections in 2020). “Individuals planning to make large gifts between 2018 and 2025 can do so without concern that they will lose the tax benefit of the higher exclusion level once it decreases after 2025,” the IRS stated in a press release. This gives an opportune cover. Contact us now to explore estate tax planning while the opportunity exists and has been blessed by the IRS. This should give clients the security to engage in proper tax planning without fear of IRS audit.
As a result of the changes to the tax law implemented at the end of 2017, the exemption from the federal estate tax has never been higher. Currently, the estate tax does not apply to estates valued less than $11.4 million per person. However, this exemption will expire in 2025 (or perhaps following House, Senate and White House elections in 2020), which means that now is the time to take advantage of the high exemption amount, before it is lowered (a figure of $3.5 million per person and an estate tax rate of 77% have been suggested by current presidential candidates). As a further indication that the current favorable climate for tax planning may not last long, in October 2019, legislation was introduced in the House of Representatives to lower the exemption amount, known as the “For the 99.8% Act” (identical to the legislation introduced by Senator Bernie Sanders).
An additional benefit to acting now: the IRS has announced that proper tax planning undertaken currently will not be challenged once the law changes in 2025 (or earlier). “Individuals planning to make large gifts between 2018 and 2025 can do so without concern that they will lose the tax benefit of the higher exclusion level once it decreases after 2025,” the IRS stated in a press release. This gives an opportune cover. Contact us now to explore estate tax planning while the opportunity exists and has been blessed by the IRS.
This method to reduce estate taxes utilizes discounted transfers of interests in closely held entities (FLPs, LLCs, family corporations) to family members. Such “leveraged gifting” has been an extremely important, effective and common method used to reduce or eliminate estate taxes.
People who own Family Limited Partnerships (FLPs) or LLCs should consider gifting limited partnership interests (or LLC membership interests) in order to decrease the value of their estate for tax purposes. As long as you retain your General Partner (GP) interests, you will continue to control all assets within their partnership. Yes, you can escape the estate tax and still control the assets.
Also, don’t forget about the annual gift exclusion, which allows you to gift up to $15,000 ($30,000 for a married couple) by the end of 2019 to as many people as you choose.
We can advise you as to appropriate FLP discounts, prepare the appropriate documents, as well as the partnership valuation and gift valuation calculation letters (necessary for the IRS). Please contact us with any questions regarding your year-end tax planning.
[1] In 2020, the exclusions go up: $11,580,000 for individuals and $23,160,000 for married couples.
If you own or control a life insurance policy, then the proceeds of the policy may be included in your estate at death and subject to estate tax. This comes as a surprise to many people who are under the impression that life insurance is tax-free. To avoid estate tax, we use an Irrevocable Life Insurance Trust (ILIT). We create an independent trust, with an independent trustee, who will own and control the insurance policy. Ideally, the trustee solicits and pays for the insurance policy with trust funds, and the trustee administers the trust and its insurance policy, including paying the premiums as they become due. Pre-existing Insurance policies may be conveyed to the insurance trust, but subject to a three-year look-back period (i.e., if the transferor of the policies to the trust lives for three more years, the trust is then said to own the policy fully and the policy will be removed from the taxable estate of the transferor).
When the insured person dies, the insurance company pays the proceeds of the policy into the trust. The trustee will then distribute the funds to the beneficiaries of the trust, who are usually the family of the insured. We can draft the trust with specific terms (e.g., mandatory distributions to pay for college; asset protection provisions to protect the trust from creditors and ex-spouses).
The tax savings are significant. The insurance policy is not considered to be within the estate of the insured (because an independent trustee owned, paid for and controlled the policy), and therefore not subject to estate tax. The receipt of the insurance proceeds by the trust beneficiaries is not taxable to them. In this manner, life insurance is tax-free.
There are many rules to understand and traps to avoid. For example, if a relative of first degree (spouse, sibling, parent or child) is named the trustee of the insurance trust, the IRS might argue that the trustee is too close to the insured and the insured is deemed to control the policy. The IRS may argue that the policy is still within the estate of the insured and the death benefit subject to estate tax. In addition, the trustee has to give annual notice to the beneficiaries of the trust, by what is known as a “Crummey” letter, named after an important court case. Experienced tax and estate planning attorneys can guide you through these requirements and tax traps.
We draft Life Insurance Trusts as part of comprehensive tax, estate and asset protection planning. Contact us for additional information.
A friend recently shared with me the reasons why he moved his family from New York City to suburban Connecticut. He had lived in New York City for many years and paid significant sums of money in state and local taxes – – significant, he emphasized – – and when his daughter was medically diagnosed to need educational accommodations, her needs fell on the deaf ears of the local school system. The family moved to a big house in Connecticut, where the taxes were significantly lower and the school there was not only receptive, but eager to help them.
Another friend moved to Florida, and plans on selling his business in a year or two, in order to avoid state income taxes on that sale. Florida will not tax that sale. His former state, New Jersey, a high tax state, would. There is nothing immoral or illegal about taking such steps to lower one’s tax liabilities. As Justice George Sutherland of the United States Supreme Court wrote: “[T]he legal right of a taxpayer to decrease the amount of . . . what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be avoided.” Gregory v. Helvering, 293 U.S. 465 (1935). FN 1.
The exodus from high tax states like New York and New Jersey increased in 2018 and 2019, after the tax law changed and the federal deduction for state income taxes was capped at a measly $10,000. This cap had a significant negative impact on taxpayers in high-tax states, and the removal of this long-standing deduction caused many people to leave.
Even Donald Trump, it was reported this week, filed a “declaration of domicile” in Florida, purporting that he moved from New York, presumably for tax reasons.
It is likely that all three of the people above may face an audit from the high-tax states from which they moved. Whether the reason for a move is to find greener pastures, to benefit one’s family, or to lower one’s taxes, the former state will not look favorably on the loss of tax revenue. New York City and New York State are particularly aggressive in auditing the tax returns of people who claim to have moved to a different state. In an audit, it will be up to the taxpayer to prove that he or she no longer has a tax nexus to the former state. Simply buying property in a new state is not enough. There are a multitude of factors that are used to establish tax residency. In a 2018 lawsuit, a taxpayer was found to still have a New York domicile even though the taxpayer spent more than 183 days at his condo in Florida.
Our attorneys understand the tax laws and residency requirements. We can assist you before the move, in implementing a plan ahead of time to support your new residency and break from your high tax state. We can also defend you in an audit from the state that is challenging your new residency and seeks to continue to tax you.
Contact us for more information.
[1] See also: Commissioner of Internal Revenue v. Newman, 159 F.2d 848 (2d Cir. 1947): “Over and over again, courts have said that there is nothing sinister in arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich and poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions” (dissenting opinion, Judge Billings Learned Hand).
For U.S. based taxpayers, the due date for the 2018 federal income tax return (IRS Form 1040) is April 17, 2019. The IRS will begin to accept tax returns on January 29, 2019. For the 2018 income tax return, following the Tax Cuts and Jobs Act (TCJA) passed in December of 2017, taxpayers will experience the most significant changes to U.S. tax law since 1986.
Here are some of the more important tax changes that may be relevant to our readers and clients:
We have been monitoring attempts to overcome this new law and preserve greater SALT deductions. Some local governments in 2018 attempted to convert local property taxes to charitable contributions which may then be deductible. The IRS has already indicated its opposition to such strategies. Some municipalities (e.g., Scarsdale, New York) have abandoned such attempts.
The doubling of the estate tax exemption is a significant and rare opportunity to protect more assets from the reach of the estate tax and to instead pass on to one’s heirs. This opportunity, coupled with the IRS’ withdrawal of proposed anti-discounting rules, warrants consideration of family limited partnerships and leveraged gifting, dynasty trusts and other strategies to preserve assets and transfer wealth for your beneficiaries.
Other tax changes occurred for corporations and foreign income. We can help explain these (and other) new tax law changes, how they may impact your specific situation, and how to legally minimize your taxes. Contact us for a consultation.
While major changes are likely on the Federal level following national elections last month (see our post here on tax changes post-elections) including the repeal of the federal estate tax, many states will still retain their own estate tax. Readers should keep in mind that on the state level, the exclusions from state estate taxes can be much lower than on the federal level. In New York, the current estate tax exemption is $4,187,500.00 and rises to $5,250,000 on April 1, 2017. New York estates valued at 105% (or greater) of the exemption lose the exemption entirely. In Connecticut, the exemption is now $2 million and the estate tax ranges from 7% to 12%, depending on the amount above the Connecticut estate tax exemption. (Connecticut, along with Minnesota, are the only two states in America which also impose a gift tax.)
On September 30, 2016, New Jersey Governor Chris Christie and New Jersey legislators announced an agreement to repeal the New Jersey Estate Tax. The exemption from New Jersey Estate Tax will be raised from $675,000 currently to $2,000,000 for 2017, and the estate tax is to be repealed in 2018. This will likely make New Jersey an appealing jurisdiction (like Florida) for clients from an estate tax perspective.
Contact us to discuss estate tax minimization strategies.
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:
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: