How to Avoid Lumping

May 23rd, 2011 by Fairlane Raymundo. Comments Off

There are many cases when a spouse unknowingly lumps his or her estate into the estate of surviving spouse that results to bigger taxes.

For example, John Doe indicates in his will that he is leaving his estate, worth $1 million, to his spouse Mary Doe. Mary Doe indicates in her will that she is leaving her estate, worth $1 million, to his spouse John.

Let us assume John Doe dies first. He will not have to pay any federal tax because he is well within the limit which qualifies him to avail of the unlimited marital deduction which provides, generally, that John’s estate gets a deduction for anything he leaves to his surviving spouse. Now, Mary owns a total of $2 million worth of estate and that is over the limit and she has no surviving spouse to bequeath it to. She would need to pay the government about half a million dollars.

There are several ways to avoid the taxes:

The Louisiana federal law allows legally married couples to leave each other the lifetime usufruct of their estates. In this case, no tax is due after the first death and the exemption amount does not get lumped into the surviving spouse’s estate for federal estate tax purposes.

If you reside outside of Louisiana, you can also leave a provision on your will that the surviving spouse is entitled to the lifetime income from the deceased spouse’s estate.

Set up a revocable living trust with similar provisions as described above.

If none of those precautions were taken, Mary can disclaim some or all of the inheritance she got from John Doe. The disclaimed assets will automatically go to his next nearest of kin which should be his children. This option will require a lot of paper work, obviously but it is effective since the money will still be turned over to people who are most likely to get the inheritance anyway.

It is important that you plan your estate early to determine how you can legally give the money you worked so hard for to the people that matter to you. Remember that you can always leave your children’s or spouse’s inheritance via a trust, an annuity, or structured settlement.

What Happens if Trust Beneficiary Dies

May 10th, 2011 by Fairlane Raymundo. No Comments »

A trust is one of the most popular ways an inheritance is passed on to the next generation because of the security that it provides. It assures the person who created the trust that the money will be managed safely and will not be accessible to just anyone.

Although, the beneficiary could ultimately get the money lump sum, it will not be without discomfort and the courts will have to get involved which also adds to the safety nets.

One of the major concerns of a trust is what will happen if the beneficiary of the trust dies especially if the person is the sole beneficiary.

There are several factors that could affect what will happen.

1. What is written on the trust? A well drafted trust should have been able to anticipate events like this. There should be a provision that details how the trust is going to be managed if something like this happens.

2. State / Federal Law. If the trust is silent on the matter, the court will have to decide on how it is going to be managed and the court will most likely defer to what the law says about the matter. Each state has a different ruling on this matter. It could be one of the following:

Ultimately, you need to make sure that your trust provides for such a scenario and different other scenarios. Don’t write the provisions of your trust yourself. Hire a lawyer that will write it for your especially if you have a significant estate.

Analysis on the Increase of EstateTax-Free Limit

May 6th, 2011 by Fairlane Raymundo. No Comments »

Deborah L. Jacobs reported via Forbes how people who will be leaving a considerable amount of estate should start giving away to their kids their assets in order to avoid hefty estate taxes and just allow their kins to enjoy their assets and not pass it on to the government in the form of taxes.

President Obama signed an overhaul of the estate tax raising the tax-free limit on lifetime gifts from $1 million to a hefty $5 million ($10 million for married couples) before a gift tax applies. Because of this, the rate is a maximum of 35%. The new law means you can access the $5 million limit during life, when you die or some combination of the two. If you don’t use some part of it, the surviving spouse can use it. This is the portability rule. However, the executor of the estate of the first spouse to die must file an estate tax return, even if no tax is due.

This is going to expire though if Congress doesn’t change or renew it before the end of 2012 when this offer expires. If that happens, the portability rule will go away, the exemption will revert back to $1 million and the tax rate will increase to 55%.

Another way that estate taxes may be avoided is by converting all or part of a traditional IRA into a Roth IRA could be a useful estate planning technique. Just make sure you don’t need your traditional IRA for your own living expenses.

The value of the Roth will still be considered a part of your gross estate but there are no required minimum distributions which means you can grow your account larger than the limit of the traditional IRA rules and let your beneficiaries make withdrawals without having to pay income tax.

Since you are paying the income tax, your gross estate value will dramatically reduce. Actually, you are prepaying the income tax that your gift will incur freeing your beneficiary from this legal obligation. This could be particularly advantageous to the heirs in situations where there’s no taxable estate to speak of anyway, because in such instances there would be no future income tax deduction available to the beneficiaries for previously paid estate taxes.

Family limited partnership: Explained

May 5th, 2011 by Fairlane Raymundo. No Comments »

An FLP is another effective strategy of bequeathing assets to your kins without having to pay huge amount of taxes.

The most traditional arrangement is for the parents to give their family member a share of the business or the property via the limited partnership interests. Limited partners don’t have a seat in the board or in the management of the business, can’t sell or borrow against their interests, valuation discounts arising from lack of liquidity and marketability will apply for gift tax purposes. Additional valuation discounts may apply to the assets themselves (for example, illiquid small business, undivided interests in real estate, etc.).

Last year, NYTimes reported:

While family partnerships have been around for decades, their popularity increased in the late 1990s as the technique gained broader acceptance. But now, with continued scrutiny by the Internal Revenue Service, some people are taking another look.

The major virtue of family limited partnerships is that they’re a great vehicle for lowering estate taxes because you can discount the value of the assets in them. But if that was the only reason you set one up, you could be in trouble with the I.R.S.

Also, if you discounted the value of the partnership too drastically, you could find yourself at odds with what the I.R.S. will allow. An appraiser may tell you the value of the partnership can be reduced by 70 percent, but the I.R.S. may not agree. Tony Roth, head of wealth planning and investment strategies at UBS Wealth Management, said the I.R.S. had seemed to settle on a discount of 25 percent in cases it had litigated. (One of the problems is that the I.R.S. has not given strict guidance on what you can and cannot do.)

The key is to have a legitimate business interest — beyond the discounts — for setting up the family limited partnership. One example might be jointly managing the collective wealth of a family to gain access to better managers. Another might be operating an illiquid asset like a family business or a portfolio of buildings. A family can also use a partnership as a stealth prenuptial agreement since all the assets are wrapped up in the partnership and not easily dividable.

More Ways on How to Gift Down Your Estate Without Liquidity

May 4th, 2011 by Fairlane Raymundo. No Comments »

Here are a couple of more ways on how you can decrease or altogether avoid paying high estate taxes to allow those you want to bequeath your assets to maximum value of your properties.

Crummey power trust

One of the most used strategies is the lowering of the value of the estate by giving away the property $13,000 at a time. Let us assume you and you husband have five children and 10 grandchildren. You and your husband can start giving each of them $13,000 every year. Under existing law, a husband and wife can each give up to $13,00 to any number of people every year. That means that every year, the value of your estate will go down by $130,000.

The difficulty is when your properties are mostly immoveable assets. There is also some exceptions you need to be aware of. With a minor’s trust (under section 2503(c) of the Internal Revenue Code) or a custodial account (UTMA or UGMA), the gift counts for purposes of the annual exclusion even though the minor doesn’t get control of the assets until age 21.

This is a very flexible strategy but requires an incredible amount of future planning. If you don’t want your children and grandchildren to have access to the money right away, you may put it in a trust. You can control when and how the beneficiary ultimately receives control of the assets.

Irrevocable life insurance trust

This is probably the most popular one among all the options stated here. Life insurance may be used to monetize real properties or family business or as a wealth replacement vehicle to provide for family members in the face of estate tax liabilities or charitable bequests.

A life insurance is generally income tax free to the beneficiary, they’re included in the decedent’s gross estate as long as the decedent owns the policy. For as long as the trust owns the policy, the proceeds are outside the estate and will pass free of both income and estate taxes. It is recommended that the trust purchases the policy, because the transfer of an existing policy within three years of death will bring the proceeds back into the estate.

How to Gift Down Your Estate Without Liquidity

May 3rd, 2011 by Fairlane Raymundo. No Comments »

The volatility of the market, continuing changes in the federal and state laws are two of the things that increase the concerns of many elderlies. They know that a huge part of their estate may have to end up with the IRS. The simplest solution is to think ahead. Read below and use these strategies to maximize the benefits of your estate.

Qualified Personal Residence Trust (QPRT)

A QPRT will transfer your residence to a trust for the purpose of a gift but will continue to allow you to live there for a number of years. The value of the gift tax will be calculated at the present value of the remainder interest. Value will be put on the rights to live in the house and that value will be deducted from the gift. In case the value of the property increases in the following years, this will not be included in you estate.

However, remember that QPRT strategy is only recommended when interest rates are higher so that lower gift tax will be calculated. Also, the longer the term of the QPRT, the smaller the gift will be for tax purposes. But, the grantor must outlive the trust’s term or the value of the home will be brought back into the gross estate, so you’ll need to plan accordingly for this trade-off.

Grantor Retained Annuity Trust (GRAT)

With a GRAT, you are transferring your assets to a trust over a given number of years. It’s not a one time transfer. During the transfer phase, you will receive an annuity from the trust and, at the end of the term, the remaining assets pass to the beneficiary.

Because of the annuity payments, you will get lower gifts value for gift tax purposes, which is determined at the time of transfer into the trust. This is an effective strategy only when the assets in the trust perform better than the discount rate, this can be an extremely effective transfer strategy because it is only through this that you will be outperforming the hurdle rate. Also, this is advisable if you have assets that have very low value now but will most likely appreciate in the next couple of months or years.

What Happens if Someone Dies Without a Will?

April 24th, 2011 by Fairlane Raymundo. No Comments »

Many people do everything they could to protect their properties from taxes and other people that might be able to access their money, liquidated or otherwise. Yet, there are still many people who don’t take the time out to leave a last will and testament. Without a last will and testament in place, the loved ones you leave behind could be left to the mercy of the state and the court system. As a result the distribution of your estate’s assets could look completely different from what you actually had in mind. What’s more, your heirs may be forced to pay heavy taxes on the property they do inherit, and in some cases these taxes could cause serious financial hardships.

Remember that you need to plan for your death as much as you plan for your life if you want to make sure that the people who matter to you are the ones that will enjoy what you worked for and also to protect your property from taxes and legal problems. That’s why it is absolutely essential to first create a solid last will and testament.

So what happens when a spouse dies without a will?

There are different rules in different states.

In Louisiana for example, your said that properties purchased during the marriage will left to the surviving spouse. This usufruct will last until the surviving spouse either dies or remarries. The surviving spouse may sell it but only with the children’s signature. The proceeds will be given to the surviving spouse in full. If the surviving spouse is not the parent of the children of the deceased spouse, the children of the deceased spouse may force the usufructuary to post bond in order to protect the interest of the naked owners. defines Usufruct as the legal right to use and derive profit or benefit from property that belongs to another person. Usufruct originates from civil law, where it is a real right of limited duration on the property of another. The holder of an usufruct, known as the usufructuary, has the right to use and enjoy the property, as well as the right to receive profits from the fruits of the property.

In Connecticut, stated:

If you die without a will (known as dying “intestate”) in Connecticut, your assets will be divided amongst your immediate family. Your spouse will receive your entire estate if you have no children or parents. If you have a parent or parents but no children, your spouse will receive the first $150,000 plus three-quarters of the balance of your estate. If all of your children are also your spouse’s children, your spouse will receive the first $100,000 plus one-half of the balance of your estate. If you have children that are not also your spouse’s children, your spouse will receive one-half of your estate.

It is best that you consult a lawyer so you can plan the future of those who you will leave behind. Remember that there many ways for your loved ones to make the most out of your properties. You may opt to set up a trust or a structured settlement.

Understanding the Concept of “Next of Kin” in the US

April 23rd, 2011 by Fairlane Raymundo. No Comments »

We have mentioned the term “next of kin” on this blog. Most often, we indicate the importance of next of kin when a person dies with an estate. If the person dies without a will, the person’s next of kin will inherit his estate. If the person dies with a will, it will still have to satisfy the minimum requirement of the law that protects the rights of children, spouses or other relatives.

The next of kin is the person or persons most closely related to another person, the relative or relatives entitled to share in the personal property of one who dies intestate. The civil law system in the United States states that a claimant’s degree of kinship is the total of:

The order of priority of kinship:

If you want to determine your degree of relation from someone, begin with the decedent and trace every relation the person has before you. Follow the line that connects the decedent with the other person. Each person that must be passed through before reaching the final person adds one degree to the total, including the final person.

In case there are multiple relations with the same degree, those connecting through a nearer ancestor are more closely related to the descendent.

Remember that even when children and parents, grandchildren and siblings, great-grandchildren and nephews, respectively, are the same number of relationships away, children, grandchildren, great-grandchildren, will be the priority when determining who should inherit the properties left behind. Furthermore, all of the living descendants of the decedent’s parent will take priority, before the living descendants of grandparents take. For example, a nephew will take before an uncle.

What is A Pour-Over Will?

April 22nd, 2011 by Fairlane Raymundo. No Comments »

A pour-over will is a type of last will and testament that has only one beneficiary. It is called a pour-over will because it simulate the act of transferring one content to another. The pour-over will transfers assets to the trust to ensure that these assets will be subject to the distribution plan in the trust and will also receive the benefit of trust’s tax reduction provisions.

However, it is limited to the probate assets. These are the assets not mentioned or covered in a trust, joint tenancy, inherited by a surviving spouse, and not in an IRA or 401K. Probate assets are usually titled in the name of the person who just died and is turning over his assets to those who he left behind. Probate assets can also be found in situations in the person intentionally or unintentionally leave certain assets out of the trust to avoid inconvenience in dealing with certain kinds of property. For example, some states and insurance companies make it very difficult to buy, sell, or insure vehicles held in a Trust. Assessing the value of certain properties may be difficult too especially for properties that depreciate in value. If it is real estate, on the other hand, it will be subject to a property tax re-assessment.

In even rarer situations, rare and valuable items may also be left out of the will. Comic collectors might have bought comics when they were kids. The value of those have already appreciated by now but since items like those are not usually included in a trust, they may have been left out of the trust.

If the person who intentionally or accidentally has left property out of the Trust dies without a Will, then the property that is not included in the Trust, or transferred through some other estate planning device, will pass according to the state laws on what is called “intestate succession”. This does not required the left out property to be transferred through the provision of the trust. To prevent this from happening, the pour-over will is created. It covers any property that was (intentionally or inadvertently) left out of the Trust during the deceased’s life. By the terms of the pour-over Will, all the property the deceased owned at death is “caught” and is “poured-over” into the existing Trust.

The Trust Settlement Process

April 21st, 2011 by Fairlane Raymundo. No Comments »

Setting up a trust goes through different stages. Below is a broad stroke of the process. Information found below are helpful especially to those who will serve as the executor of the trust.

Step 1: Giving Notices of Administration
The California Probate Code was amended in 1997 to require the trustee to give notice of administration to beneficiaries and legal heirs of the settlor upon the settlor’s death so that any party involved can prepare or if there is anyone who wishes to contest will have 120 days to do so. Trusts may be contested on the grounds of undue influence, lack of capacity and/or fraud.

Step 2. Identifying Trust Assets and Obtain Titles
The trustee is to check and re check what assets are owned by the trustee upon death. This should include structured settlements, annuities, shares, investments, private properties, real properties, collectibles, and others. Titles and other proof of ownership must also be secured. This is critical so that the distribution among parties concerned is final and fair.

Step 3. Protecting and Grow Trust Assets
The trustee should take immediate steps to protect the assets against loss. If, for example, the assets include several bank account, the trustee must make sure that no one else has access to the account and withdraw its contents. If there are collectibles such as antiques, comics, books and others, these should be separately insured and put in a secure place for storage.

The trustee must also take steps to invest the assets and make it grow while it is being administered to ensure that beneficiaries will get the most the assets.

Step 4. Getting the Bottomline
The value of unliquidated assets must be determined. This is necessary to be able to efficiently distribute it to claimants or cover taxes or debts that must be paid. Appraisals are significant for future income tax reporting because, with some exceptions, the cost basis of an asset included in a decedent’s estate is adjusted to its fair market value on the date of death.

Once values are determined, debts and taxes must be paid. Whatever is left are the ones that will be bequeathed to the claimants.

Step 5. Accounting for the Trust
The trustee is required to keep the beneficiaries of the trust reasonably informed of the progress of administration of the trust and also to account for it in a special format prescribed by law.

Step 6. Preparing a Plan of Distribution
Most trust documents as well as state law give the trustee wide discretion to determine the exact manner in which the trust is to be distributed. The trustee is usually authorized to retain or sell any or all of the trust assets, distribute in cash or in kind or partly in cash or in kind, and to make non pro rata distributions. This usually requires the preparation of deeds, assignments and other transfer documents which actually transfer title to trust assets to the beneficiaries.

Step 7. Distributing the Trust
This is the final step, the trustee must make sure the execution goes as planned.