tax planning lawyer

Recent Tax Law Changes and Challenges

December 26, 2019 By Asher Rubinstein, Esq.

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.

Year-End 2019 Tax and Estate Planning: Limited Time to Use Current Law to Avoid Estate Tax and Get Assets to Your Heirs Rather than the IRS

December 24, 2019 By Asher Rubinstein, Esq.

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.

Leveraged Gifting to Get Even More to Your Heirs

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.

You can lower the value of your taxable estate and pass up to $11,400,000 ($22,800,000[1] for a married couple) to your heirs, tax free.

If you own an FLP, you can gift Limited Partnership (LP) interests to your heirs, and take advantage of discounting, to get even more out of your estate, tax-free. In some cases, as much as $44,000,000 worth of FLP interests can be conveyed to your heirs and escape the estate tax.

You can keep your General Partner (GP) interests and still control the FLP and its assets, even if you gift all of the Limited Partnership (LP) interests.

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.

It’s Tax Time Again – an Overview of the New Tax Law Changes

January 21, 2019 By Asher Rubinstein, Esq.

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:

The top rate has dropped from 39.6% to 37.1%, and takes effect at $600,000 of taxable income for married couples (rather than $480,000). For single taxpayers, the top rate takes effect at $500,000 (rather than $427,000).

The standard deduction is now $24,000 per married couple and $12,000 for single taxpayers. Last year (for the 2017 income tax return), it was $13,000 and $6,500, respectively. This simplifies filing for many people, but eliminates the specific deductions for mortgage interest and charitable donations. This will affect purchases of homes, obtaining a mortgage and making charitable donations.

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, beginning for tax year 2018, 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 has already indicated its opposition to such strategies. Some municipalities (e.g., Scarsdale, New York) have abandoned such attempts.

The estate and gift tax threshold has doubled to $11.2 million per individual and $22.4 million for a married couple. However, this increased threshold is currently set to lapse in 2025 and revert to prior exemption amounts (unless Congress acts to extend or make permanent these exemption thresholds).

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.

For divorce and separation agreements signed after 2018, alimony payments will no longer be tax deductible, and recipients of alimony will not have to report the alimony payments as income.

Pass-through business entities (including LLCs, S-Corps and partnerships) may now enjoy a deduction of 20% of net income, but subject to many new rules. For instance, the deduction is phased-out for taxpayers with more than $157,000 of income for single filers ($315,000 for joint filers) and does not apply to lawyers, doctors, accountants, consultants, investment advisors and owners of service businesses. The new rules are complex. Contact us for assistance.

Despite campaign promises to the contrary, the 3.8% surtax on net investment income (the so-called “Obamacare Tax”) was not repealed. This tax takes effect at $250,000 of adjusted gross income (AGI) for married taxpayers and $200,000 for single filers. As a result, taxpayers would owe 23.8% rather than 20% on long-term capital gains and dividends.

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.

Changes To State Estate Taxes

December 7, 2016 By Asher Rubinstein, Esq.

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.

The Coming Post-Election Tax Code Changes Mandate Timely Planning

December 5, 2016 By Asher Rubinstein, Esq.

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.

Year-End 2016 Tax Planning, Year-End Gifting & 2017 Tax Changes

December 1, 2016 By Asher Rubinstein, Esq.

Each year, we begin our end-of-year suggestions with a reminder to clients who own FLPs, LLCs and family business ventures, that they should take advantage of year-end gifting to lower estate taxes. This year the message is even more crucial, because discounted gifting of family enterprises is about to go away entirely. The recent election results will not alter (at least for now) this change in tax law.

Take Advantage of Year-End Gifting to Lower Estate Tax – Before the Law Changes: New IRS Regulations Eliminate the Ability to Discount the Value of FLP and LLC Gifts to Family Members

In August 2016, the IRS finally issued proposed regulations that will eliminate (or severely limit) the ability to discount the value of transfers of interests in closely held entities (FLPs, LLCs, family corporations) to family members. Such “leveraged gifting” has been an extremely important and common method used by estate planners to eliminate estate taxes.

The proposed regulations will undergo a ninety day comment period and a public hearing on December 1, 2016. Shortly after that, the IRS will publish final regulations which will take effect within thirty days after publication[1]. These proposed regulations were expected and we have previously written about them here.

Readers are strongly urged to contact us to implement gifts of FLP and LLC interests to their heirs before the changes take effect. Clients with FLPs should consider gifting limited partnership interests in order to decrease the value of their estate. As long as clients retain their General Partner (GP) interests, clients will continue to control all assets within their partnership. Yes, you can escape the estate tax and still control the assets.

In summary:

– You can lower the value of your taxable estate, and pass up to $5,450,000 ($10,900,000[2] for a married couple) to your heirs, tax free.

– If you own an FLP, you can gift Limited Partnership (LP) interests to your heirs, and take advantage of discounting, to get even more out of your estate, tax-free (up to $21,800,000 in 2016).

– You can keep your General Partner (GP) interests and still control the FLP and its assets, even if you gift all of the Limited Partnership (LP) interests.

Also, don’t forget about the annual gift exclusion, which allows you to gift up to $14,000 ($28,000 for a married couple) in 2016 to as many people as you choose.

We realize that gifting and discounting are not simple concepts, and we welcome your questions. We can advise you as to appropriate FLP discounts, prepare memoranda of gift for you[3], 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]This fall, two bills were introduced in the U.S. House of Representatives and Senate to derail the proposed IRS regulations, further illustrating the uncertain nature of our tax law.

^[2] Under current law, in 2017, the exclusions go up: $5,490,000 for individuals and $10,980,000 for married couples.

^[3] A recent tax court case has made it imperative that the documents transferring the LP interests be worded very carefully. These documents be prepared by qualified tax counsel.

New IRS Regulations Eliminate the Ability to Discount the Value of FLP and LLC Gifts to Family Members

August 17, 2016 By Asher Rubinstein, Esq.

This month, the IRS finally issued proposed regulations that will eliminate (or severely limit) the ability to discount the value of transfers of interests in closely held entities (FLPs, LLCs, family corporations) to family members.

Such “leveraged gifting” has been an extremely important and common method used by estate planners to eliminate estate taxes.

The proposed regulations will undergo a ninety day comment period and a public hearing on December 1, 2016. Shortly after that the IRS will publish final regulations which will take effect within thirty days after publication.

These proposed regulations were expected. We have previously written about them here and here.

While we do not venture into political discussion, we point out that Hillary Clinton has stated that she will reduce the estate tax exclusion from $5,450,000 per person ($10,900,000 for a married couple) currently in effect, to $3,500,000 per person ($7,000,000 for a married couple) and reduce the gift tax exemption from $5,450,000 per person to $1,000,000 per person. She will also increase the gift/estate tax to 45%. (Donald Trump has proposed to eliminate the gift/estate tax entirely.)

Readers who have not yet completed their estate planning are strongly urged to contact us to implement gifts of FLP and LLC interests to their heirs before the changes take effect.

Please contact us with any questions.

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

February 24, 2016 By Asher Rubinstein, Esq.

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.

The Effect of Rising Interest Rates on Estate Planning Strategies

January 6, 2016 By Kenneth Rubinstein, Esq.

The Federal Reserve Board raised interest rates at the end of 2015 and predicted that it will continue to raise rates several times in 2016. Affluent taxpayers need to review their estate planning strategies to determine what strategies should be implemented before interest rates rise and what strategies will be most advantageous after interest rates rise.

Before Interest Rates Rise:

The most advantageous estate planning strategy to consider during a low interest rate regime is the use of intra-family loans. Parents may lend investment funds to children or grandchildren and they may also sell assets (e.g., equity in private businesses, real estate) to children or to trusts for the benefit of children (e.g., Intentionally Defective Grantor Trusts), taking back promissory notes that will be repaid over time. Future appreciation of the assets will inure to the children/borrowers while the repayment installments will provide a stream of income to the parents/lenders. These strategies depend upon the assets earning sufficient income to support the repayment installments plus the interest. Interest must be charged (and paid) to avoid an IRS claim that the loan is nothing more than a disguised gift, subject to gift tax. The minimum interest rate that will avoid such an IRS claim depends upon the interest rate paid by the government on mid-term federal notes. Obviously, the lower the interest rate, the easier for this strategy to succeed. Taxpayers should therefore consider implementing such loan strategies now, before interest rates rise.

After Interest Rates Rise:

Strategies that provide a stream of annuity payments to a grantor will benefit most from a rising interest rate environment. The two most common strategies are Grantor Retained Annuity Trusts (“GRAT”s) and Charitable Remainder Trusts (“CRT”s).

In a GRAT an asset that is expected to appreciate significantly is contributed to a trust for a term of (at least two) years. The grantor receives a stream of annuity payments for the term. The annuity payments equal the value of the asset contributed to the GRAT plus a market based interest rate. At the end of the term the asset (which has presumably appreciated) plus any income retained in the GRAT (i.e., income earned in excess of the annuity payments) go to the beneficiaries/heirs tax free. Obviously, the higher the interest rate, the higher the annuity payments to the grantor and the lower the initial value of the asset contributed to the GRAT may be.

A CRT is a trust that is exempt from tax on income that it earns because it provides for a final remainder distribution to charity. The grantor contributes an asset to the CRT (usually a highly appreciated asset) which the CRT may sell free of tax. During the term of the CRT (which may be up to twenty years or for the lifetime of the grantor and/or his/her family members) the trust must make annual distributions to the term beneficiary (usually the grantor and/or his/her family members). The idea is to structure the size of those distributions so that over the term of the CRT, 90% of the initial asset contribution plus its assumed appreciation is distributed to the term beneficiary and 10% of the initial contribution (the remainder) is left for charity. The higher the prevailing interest rate is at the creation of the CRT, the higher the annual distributions will be to the term beneficiary.

Various combinations and permutations of the above strategies (GRATs, GRUTs, CRATs, CRUTs, SCINs, etc.) are available in order to maximize their effectiveness depending upon a particular taxpayer’s situation. The above descriptions have been significantly simplified to provide general information about the strategies that are available. These strategies should be discussed and implemented with qualified tax counsel.