the informational website of
Lisa
Nachmias
Davis
Davis O'Sullivan &
Priest LLC - Attorneys at Law
Elder Law, Estate Planning & Probate, Nonprofit Organizations
Priest LLC
129 Church Street
Suite 805
New Haven, CT
06510
203-776-4400
Fax: 203-774-1060
ESTATE AND TAX PLANNING
(last updated January 4, 2011)
What
was this "Tax Compromise" anyway? I'm sure you can read
countless explanations of the eleventh-hour tax legislation at the end
of 2010. Here are a few estate tax highlights that may
matter to YOU:
- Federal estate tax is BACK: retroactive to 1/1/2010,
federal estate tax will be due if a person with more than $5 million
leaves that money to anyone other than a spouse or a charity (certain
special trust exceptions apply). This is "estate tax," not a
"death tax" -- everybody dies -- not everybody
has an "estate" that can be taxed! (There are exceptions to
prevent a Constitutional argument by the executors of billionaires who
died in 2010.)
- If a person leaves $5 million to his/her spouse, his/her spouse can actually pass on $10 million without estate tax. This is known as "portability." Translation: if you live in a state with no STATE estate tax, you might not need those pesky "bypass" or "credit shelter trusts" to avoid "wasting" each spouse's exemption!
- If we ever have inflation again, these amounts will go up
-- they will be indexed for inflation.
- If estate tax is due, the rate will be 35%. This is a lot less than it used to be. There will also be a deduction for state taxes -- but not a credit, as there was before 2001.
- Starting in 2011, the exemption is the same for assets that pass at death or during your lifetime. (In 2010, it's only $1 million for gifts.)
- You may not even know that in 2010 the "step up" in basis was lost and now is back -- that is what prevents your heirs paying capital gains tax when they sell the house, stock, etc. they inherited. The "step up" means that inherited property is treated as if your heirs bought it at the value it held on your death, and when the property is sold, your heirs only pay tax on the appreciation since your death.
The Death Tax by Another Name -
Connecticut's Probate Fee.
They won't call it a "tax" because they'd have to admit it is a tax
that is a real death tax -- it applies to EVERYONE who dies in
Connecticut, even someone who dies homeless and penniless. It's
the probate fee that is paid to the probate court where the person
resided at death, and which is imposed when the CT estate tax return is
due -- six months after death. "But my estate is too small for a
CT estate tax -- this won't apply to me, will it?" Sure it
will. The CT estate tax return for "non-taxable" estates must be
filed within six months of death. If it is not filed, INTEREST ACCRUES
ON THE TAX THAT WOULD HAVE BEEN ASSESSED WHEN IT WAS TIMELY FILED -- at
0.5% per month. Imagine joint bank accounts of $50,000, a life
insurance policy of $25,000, and a retirement account of $25,000.
No probate is required -- right? WRONG. The CT Estate tax return
for non-taxable estates must be filed within six months, reporting
assets of $100,000 -- and a "fee" of $465 is due, payable within thirty
days. Suppose nobody files the return, and a year passes.
If my computations are right, the recipients will owe over $30 in
interest. The only exception to the late filing interest:
estates of $40,000 or less ($500,000 or less if some passes to a
surviving spouse). That's an exemption for the interest -- not
for the death tax, oops, I meant to say, probate fee. For more
details, here's
what the Probate Courts have to say about it. Update
on Retirement Plans. Minimum
distributions are back -- since 2010. However, the tax reform bill does allow tax
exemption on distributions from retirement plans that pass entirely to
a charity. No deduction, but tax exemption, which amounts
to a 100% deduction. This doesn't apply to gifts used to purchase
charitable gift annuities. Reminders: any beneficiary, not only a
spouse, may have the right to "roll out" an inherited IRA or interest
in
a retirement plan, to his or her own IRA, choosing the account
custodian and the successor beneficiaries.
Recurring problems, however: CHECK YOUR BENEFICIARY DESIGNATIONS
frequently. Custodians have been known to change them without
notice,
to ignore additional beneficiaries, and to reinstate expired
beneficiary designations. And one more thing -- if you have
to draw down retirement accounts to pay medical bills, remember that
Connecticut does NOT have a medical expense deduction against the
Connecticut income tax. (It does, however, have a waiver
of tax (PDF) for persons who received Medicaid assistance to pay
for long-term care in a nursing home or at home, and who are unable to
pay taxes.)
Med-Ed: Even with an economic downturn,
there are still plenty of folks worried about the gift tax (which kicks
in at $1 million for federal gift tax, only $2 million for
Connecticut). Read my article "summarizing" the long-standing tax
rule exempting from the whole gift and estate tax regime any direct payment of someone else's tuition
or medical care expenses -- the "med-ed" deduction. In case
you have been sleeping for 5 years.....Connecticut Gift Tax
Repealed (on gifts up to $3.5 million)! Effective
1/1/2005, Connecticut's
legislature has repealed the gift tax for lifetime gifts totally up to
$3.5 million. Since there is no penalty for failure to file a gift tax
return when no tax is due, this will relieve many people from the need
to file. Connecticut was formerly the only state that had a gift
tax that operated separately from its estate tax. For gifts over
$3.5 million, the excess is taxed.
How to
Administer a Life
Insurance Trust. In these uncertain times, we don't know
whether or not there will be more or less estate tax in the
future. Life insurance trusts are still relevant: (1) for
those who fear future increases in state or federal estate tax; (2) for
those who want to protect assets from creditors that may turn up at
your death; and even (3) for those who want to "leverage" a gift to
heirs that will be protected against long-term care expenses.
These trusts often include as a feature the requirement that notices be
sent to beneficiaries annually in order to escape inclusion in the
total gifts made during life. Here is help for those of you named
as Trustees of "life
insurance trusts" but unwilling to fork over the fee your attorney or
accountant charges to handle the procedures required to get the right
tax
result. Little do you know that the fee may still represent a
loss
to your attorney! Click HERE for
instructions
and a sample notice form.
* * *
The following is my statement of principles regarding the practice of estate planning. I first started writing them in 1997, concerned that the desire to minimize taxes was the only concern given attention by estate planning attorneys. You may also want to look at the pages dealing with planning for the elderly and planning for the disabled, which focus more on entitlement benefits, another part of estate planning for those types of clients. Another page, living trusts, sets out the pros and cons of this popular, but sometimes abused device.
What Is Estate Planning?
This is a
particularly good question in light of the
scaling back of a good portion of our estate tax
laws. However, the core human issues remain the same. "What
if something happens to me?"
The need to plan for the care of family members and the distribution of
one's property when we have left this mortal coil is a basic human
instinct. The desire to minimize taxes payable as a result of
death has been and should be only a secondary concern, an aspect of our
desire to control our own property (because we can never control our
own death). Even with the as-yet unexplored tax bill, there will
still be taxes to plan for, but with this much uncertainty estate
planning must emphasize human, not
accounting concerns. Who will care for the vulnerable people we
love and will leave behind? How can -- and should -- our assets protect
and help them? Who do we trust to carry out the chores that are
created by our passing, or to administer the plans we set in
motion? We want our worldly goods to benefit the people we love
and the causes we care about -- how can that be accomplished most
effectively?
For further information on the estate planning process, email your question to davis@sharinglaw.net, or write to me at the address shown. I cannot, however, give specific advice about specific situations without taking you on as a client; writing to me does not create an attorney-client relationship. DO NOT disclose confidential information to me.
List of Related Articles on my website:
- 2011 Tax Alert (NEW disconnect
between federal and state exemptions)
- The Med-Ed Gift Tax Exemption
- How to Administer a Life Insurance Trust
- Second-to-Die Life
Insurance: A Primer
- Keeping the Promise of Section 529 a Reality (on Section 529 college savings plans)
- Pros and Cons of Living Trusts
- Planning with Transfers for the Disabled
- Medicaid for
Married Couples
- "What if I Give it All AWay?" The Medicaid Transfer Rules
THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND CREATES NO ATTORNEY-CLIENT RELATIONSHIP. NO ENDORSEMENT IS INTENDED BY ANY REFERENCES HEREIN. PLEASE CONSULT YOUR OWN LEGAL AND FINANCIAL ADVISORS BEFORE TAKING ANY ACTION. In compliance with regulations issued by the Internal Revenue Service, please be advised that nothing on this webpage was written to be used or may be used by any person to avoid any penalties under the Internal Revenue Code.
Web-site design by: Tintern Productions
Lisa
Nachmias Davis
Davis O'Sullivan & Priest, LLC, Attorneys at Law
129
Church Street, Suite 805
New Haven, CT 06510
Phone:
203-776-4400
Fax:
203-774-1060
Email: davis@sharinglaw.net