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.

Estate Planning for ‘Traditional’ and ‘Non-Traditional’ Couples

April 28th, 2011 by Fairlane Raymundo. No Comments »

For purposes of this article, I am going to define a traditional couple as a relationship between a man and a woman who are in their first marriage and the only children they have are children of the marriage. This is just for this article and does not, in any way, expresses our view of what “a couple” is. Estate planning for traditional couples usually consist of having a Will, Financial Power of Attorney, Medical Power of Attorney and Advanced Health Care Directive.

Traditional estate planning usually means that one spouse leaves money to the other. A trust is the preferred means of inheritance as it allows more flexibility in terms of taxes that needs to be paid. The surviving spouse is usually the executor and trustee of the trust. If the couple does not create a Will, the default scenario is that the state’s intestacy scheme will send the money to the surviving spouse – but without any trust or tax planning. When the surviving spouse dies, everything is left to the couple’s children. No problem shall arise if the couple is in their first marriage and has no other children outside of this marriage.

However, a trust is advisable when there are other factors within the marriage or if the marriage is non-traditional as defined in this article such as:

Couples like these must make sure that certain documents are prepared and filed such as Wills, Financial Powers of Attorney, Medical Powers of Attorney and Advanced Health Care Directives. You might also look into other options such as the set-up of trust, annuity or structured settlement. However, while the documents stay the same, the methodology is very different.

For same sex marriage and common law couples, remember that not every state recognizes the legality of same sex marriage. This means that you will not enjoy tax exemptions extended to couples and most other benefits. If one partner dies without a Will, the state intestacy law will not direct that the money to go to the surviving spouse. Futher, the surviving spouse will also have no rights to administer their partner’s estate or act as a guardian absent written instruction.

Even in states where same sex marriage is already allowed, you still need to plan your finances since most states will still not extend the unlimited marital deductions that apply to heterosexual couples. Planning must also be done to minimize state estate taxes and state inheritance taxes if the couple is thinking about moving to another jurisdiction.

For families where there are children outside of the current marriage, planning is still needed. The law will not always provide for the spouse first and then for the children. Special planning is needed to ensure that both the needs of the surviving spouse and children from the current and prior relationship are addressed. This often involves setting up irrevocable life insurance trusts or segregating assets.

Types of Generation Skipping Transfer Tax

April 27th, 2011 by Fairlane Raymundo. No Comments »

There are three types of Generation Skipping Transfer or GST tax. This will help you plan your estate better.

Direct Skips

IRC 2612(c) defines a direct skip as a transfer to a person that was missed in the inherritance that is subject to estate or gift tax. An example is an inheritance by a grandchild from his maternal grandfather whose parent is still living is a direct skip. If, for example, the grandfather decides to put the inheritance to a trust and is given only to one grandchild, that is also considered a direct skip.

If the transfer skips two or more generation, that will still be considered a single skip as per the Treas. Reg. 26.2612-1(a)(1), 26.2612-1(f). This applies to situations when someone leaves a trust to his great grandchild. That means the child and the grandchild is skipped. The law will consider this a single skip.

Taxable Terminations

A taxable termination is a termination of an interest held in trust unless:

Taxable terminations generally occur when a property interest in trust enjoyed by a non-skip person beneficiary terminates (either at a set time period or on the death of the non-skip person) and passes to a skip person or persons without the interest being included in the estate of the non-skip person for estate tax purposes.

This is applicable when someone leaves an inheritance in the form of a trust to his daughter. If the daughter dies, the trust will be passed on to the daughter’s child, the daughter’s death is a taxable termination. The creation and funding of the trust is not itself subject to GST tax.

Taxable Distributions

This is when the income is made by a trust to a skip person. If a grandfather puts up a trust for his daughter and grandchildren, the trust pays out income to one of those grandchildren, that payout is a taxable distribution.

The type of GST tax will also determine when the tax should be paid and who is legally obligated to pay it.

Generation Skipping Transfer Explained

April 26th, 2011 by Fairlane Raymundo. No Comments »

Internal Revenue Code of 1986, otherwise known as the generation-skipping transfer (GST) tax code, stopped taking effect in 2010 but reappeared in its entirety as of 2011, unless Congress takes further action.

Traditionally, one would leave their estates to their children. The children are then required to pay estate taxes. And when the children would pass on the estates to their children, they would have to pay estate taxes again. Some of the rich families realized that they can go around this by leaving their properties or estates to their grandchildren in order to skip one generation of estate taxes. The Congress put the GST tax to prevent this by taxing transfers to related individuals more than one generation away and to unrelated individuals more than 37.5 years younger. But GST can also apply in non-family situations such when a beneficiary of a gift or estate is 37.5 years younger than the donor.

Beginning 2010, the exemption amount is unlimited; in other words, there is no generation-skipping tax exemption.

First of all, you must realize that there are three important parties in a GST.

Transferor. This is the original owner of the property, the one who will pass on the estate and is the first one to decide whether it is going to be a GST. If a transferor splits the gift with a spouse, each spouse is a transferor as to half of the transfer (IRC 2652(a)(2)). Further, if a person has a taxable power of appointment over property, exercising, releasing or letting the power lapse will make the holder of the power the transferor for GST purposes. (IRC 2652(a)). Finally, if a gift is made to a spouse that qualifies for the marital deduction (either outright, or in a marital trust under Section 2056(b)), the transferor is the donor spouse when he or she passes the property on.

Therefore, if a grandfather makes a gift to his grandson, he is the transferor. If the grandfather makes the gift to a trust, first for the benefit of his son, then for the benefit of his son’s children, and the son has no taxable power over the trust (like a general power of appointment), the transferor is the grandfather. If the son had a general power, however, thus including the trust assets in the son’s estate for estate tax purposes, the son, and not the grandfather, is the transferor.

Skip Persons and Non-Skip Persons. A skip person is the party that is two or more generations below the generational assignment of the transferor while the non-skip person is anyone other than a skip person.

Taxable Transfers. This is simply the types of interests that are being transferred that could end up in the hands of the skip persons. Transfers that can be subject to GST tax come in three types: direct skips, taxable terminations, and taxable distributions.

Come back tomorrow for more of these.

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.