Tax Planning

Houston Families Should Take Note of Pending IRS Changes

Published on: August 20, 2015 | By McCulloch & Miller, PLLC

The word is out in the estate planning bar that the IRS is looking at making an announcement this September about a favorite tax benefit gained from the use of family partnerships and LLCs. New regulations would effectively raise the taxable value of assets transferred into these entities, which currently enjoy a generous discount. Wealthy clients are being advised to set up partnerships now to capture what remains of these discounts before the new rules take effect.

According an article in Barron’s titled “IRS Considers New Tax on Wealthy Families,” any changes to tax benefits affection family partnerships and LLCs could have significant consequences.

The article explains that partnerships and LLCs currently let families pass on a minority stake in the family business or in a pool of privately-held investments to their children with little or no tax consequences. This is because minority shares in a private business are illiquid, or unable to be easily sold or exchanged for cash without a substantial loss in value. They are worth less, from a tax perspective, than their stated market value. This is a big help to families who want to lower the taxable value of their assets, and in some cases below the $5.43 million gift-tax exemption. It also works even if the underlying investments getting passed on are liquid. The discount could be as much as 20% to 25%.

Future Trends? Some Savvy Retirement Loopholes May Be Changed

Published on: August 19, 2015 | By McCulloch & Miller, PLLC

Savvy individuals, estate planning lawyers and financial advisors are not averse to finding unintended benefits when Congress makes changes to laws regarding retirement accounts and Social Security payments. Unfortunately, when too many of these techniques are discovered and shared widely, the government sees revenue slipping away. Three of these loopholes have drawn the attention of various government agencies and may be changed in the near future.

A recent Reuters article, titled “3 Retirement Loopholes That Are Likely to Close,” discusses some of the loopholes that can be found, as an unintended result, due to changes in law.

Back-Door Roth IRA Conversions. Congress created this loophole by lifting income restrictions from conversions from a traditional IRA to a Roth IRA, but not placing such restrictions from the contributions to the accounts. As a result, those whose incomes are too high to put after-tax money directly into a Roth IRA so it can grow tax-free, instead are able to fund a traditional IRA with a non-deductible contribution then convert it to a Roth. Taxes are usually expected in a Roth conversion, but this work-around doesn’t cause much liability, the article explains, provided the contributor doesn’t have other money in an IRA.

Estate Planning Isn’t a “Cookie Cutter” Approach for All Millionaires

Published on: August 18, 2015 | By McCulloch & Miller, PLLC

A recent survey from CNBC.com shows that there are differences in how the wealthy perceive the need for estate planning, and not all millionaires behave the same way. There are differences between families at the $1 million – $5 million level and those with $5 million and more. However, a significant number of millionaires do not have an estate plan, and part of that may be due to estate planning fatigue.

According to a poll of 750 millionaires, individuals with $5 million or more (68%) were more likely to seek help with estate planning, compared to individuals with $1 million to $5 million in assets (61%). The survey, conducted by CNBC.com, reports their findings in a recent article: “Wealthy suffer from 'estate-planning fatigue'.”

The political break down was as follows: Republicans (68%) were more likely to use an estate planning expert to create an estate plan than Democrats (61%) or Independents (58%).

Estate Tax Planning Remains Important Step for Some Houstonians

Published on: July 31, 2015 | By McCulloch & Miller, PLLC

Estate taxes are seen by some as instruments of public policy, an attempt to fight economic inequality by diminishing the ability of wealthy families to aggregate vast amounts of wealth. Others see estate taxes as a “death tax” that penalizes those who are financially successful. Whatever your opinion, estate tax rates are still quite high compared to other taxes. This creates an incentive to plan in advance and use sophisticated methods to reduce estates taxes.

Thirteen different brackets might make you think that estate tax planning is all about college basketball! According to a Fox Business article, “2015 Estate Tax Rates: How Much Will You Pay?” the rate structure for the estate tax has remained virtually unchanged since 2013, even with these numerous brackets. See the chart below for a birds-eye-view of the 13 different brackets:

Amount of Taxable Estate	Tax Bracket
$0-$10,000	18%
$10,001-$20,000	20%
$20,001-$40,000	22%
$40,001-$60,000	24%
$60,001-$80,000	26%
$80,001-$100,000	28%
$100,001-$150,000	30%
$150,001-$250,000	32%
$250,001-$500,000	34%
$500,001-$750,000	37%
$750,001-$1 million	39%
Over $1 million	40%

Source: IRS

Before you do any number crunching, remember that the federal government has an estate tax exemption for all estates more than $5.43 million (in 2015). The “lifetime exemption amount” is the cut-off mark for how much wealth each person can pass to their heirs without owing any estate tax.

The article explains that the exemption is different than a standard deduction. What you do is look at all your taxable estate assets and knock out the first $5.43 million. If you have more than that, the estate tax will be at the maximum rate of 40 percent on the portion of the estate that’s above the $5.43 million threshold. For instance, if your estate is $5.44 million, then your estate's tax liability would be $4,000 — which is 40 percent of the $10,000 above the $5.43 million threshold.

An estate planning attorney can help you with some ways to reduce or even eliminate your estate tax liability. This can include gifts during your lifetime to reduce your estate assets at your death. The law says that you can give an individual up to $14,000 annually without having to pay any gift tax. If you give more than that amount, you'll start using up your lifetime exemption. You don’t want that!

There are also many more-complicated methods of giving money to potential heirs during your lifetime that can reduce your eventual estate tax bill. Talk with your estate planning attorney about these more complex strategies and leave more money for your heirs and less for taxes.

For additional information on estate tax planning and elder law topics in Houston, please click here to visit my website.

Reference: Fox Business (July 16, 2015) “2015 Estate Tax Rates: How Much Will You Pay?”

Two Key Documents for Houston Estate Planning

Published on: July 28, 2015 | By McCulloch & Miller, PLLC

When a man who had remarried passed away, his children were less upset about his leaving everything to their stepmother as they were about her decision to liquidate the family home and furnishings. Rather than give them an opportunity to enjoy things that had special meaning to the children, she took the position that they could come to the auction and bid on the items, just like anyone else who attended the auction. The heartbreak and hard feelings that resulted could have been prevented with the use of two documents: a Letter of Instruction and a Personal Property Memorandum.

While it seems that listing out personal assets like jewelry, books, photo albums and home furnishings might be tedious and not really necessary, a recent article in Forbes, “Simple Steps To Prevent Future Family Inheritance Rifts,” points the way to using two documents that can ensure that your personal property goes where you want it to go, and also saves your heirs from losing personal items that may hold a great deal of meaning to them.

A Personal Property Memorandum is a legally binding document. It is to be referred to in the will that is to list all the personal property you want to leave to your heirs and loved ones. A personal property memorandum is recognized in 30 states and must be referred to in the will. But the document doesn’t need to be notarized or witnessed. The article suggests that you clearly describe these items so they aren’t confused with others. For example, “All of the Barry Manilow LPs in my collection are to go to Cousin Buddy.” Make sure your executor or executrix has the correct information, as well. You don’t want the wrong relative to walk off with your disco records!

Is Your Houston Estate Plan Current?

Published on: July 22, 2015 | By McCulloch & Miller, PLLC

Ensuring that your assets are passed on to heirs in a way that you wish is not always easy because of the many options available and the fact that the tax laws are always changing. While certain facts are relatively fixed – i.e., beneficiary designations on life insurance policies and retirement plans avoid having these particular assets subject to probate, others are subject to change. Keep up with these changes by meeting with your estate planning attorney on a timely basis.

The use of trusts to help estates avoid probate is well established in any estate planning law practice, but when laws change, estate planning must change also. An explanation comes from The (Anderson, IN) Herald Bulletin article, "Changes in laws can affect your estate planning," which explains how the revocable grantor trust works and why it was created: to help people avoid probate.

A revocable grantor trust roles include the grantor (the person making the gift), the trustee in charge of the trust (typically the grantor), the income beneficiary (also usually the grantor), and the remainder beneficiary. Taxes that are generated from investments and income are reported on a standard tax return. When assets are placed in a trust, individuals have control and the use of the assets. Ownership is structured so that there is no probate. Individuals should fund the trust with as many assets with which they are comfortable (except IRAs and retirement accounts).

Having THAT Conversation with Your Houston Heirs

Published on: July 21, 2015 | By McCulloch & Miller, PLLC

While some estate planning is better than none, most Americans don't speak with their heirs about basic issues – like where the wills can be found – and most wills are not updated. A recent study from the Center on Wealth and Philanthropy at Boston College, estimates that between 2007 and 2061, as much $59 trillion will be transferred from 93.6 million American estates. The numbers are clear, but little else is. How assets are being distributed, what plans are in place for potential beneficiaries and other critical issues are murky at best, and in most cases, completely undefined.

If you've got heirs, you may want to do something few Americans do – tell them where your will can be found, and discuss your intentions for your estate. These two conversations would put you miles above what happens to most heirs – according to "5 Biggest Estate Planning Mistakes You Can Make," seen in The Street. According to a caring.com survey of adult children more than half (56 percent) of U.S. parents have a will or living trust document in place while nearly one-third of parents (27 percent) don't have estate documents in place; and 16 percent of adult children have no idea about what's in their parents' estate plans. Looks like we are setting up for a generational scavenger hunt – even when parents have an estate plan in place, most adult children don't know where the documents are located (52 percent.) Even worse, 58 percent don't know what the estate planning documents say!

The article cautions that even when you have a will or a trust, there's no absolute guarantee that your assets will be distributed without a hitch. Wills and trusts have kept families in litigation and at odds with each other for years if the estate plan isn't administered properly. To make things easier for your family and make sure your wishes are carried out properly after you pass, try to steer clear of these monstrous errors:

Hard-to-Value Houston Estates Can Be Tax Concern

Published on: July 20, 2015 | By McCulloch & Miller, PLLC

The Internal Revenue Service has won a settlement of $388 million from the estate of Detroit Pistons owner Bill Davidson. According to the IRS, the estate owned more than $2 billion in additional taxes. To gain some perspective: in 2013, the US Treasury took in a total of $12.7 billion in estate tax revenue. Davidson, who made his fortune in glass and auto products, was best known to the public as the team owner of the Pistons, the W.N.B.A.'s Detroit Shock and the N.H.L. Tampa Bay Lightning.

In an article that appeared in Forbes, "IRS Grabs $388 Million From Billionaire Davidson Estate," the case against Davidson's estate is explained in detail. Two years ago, Davidson's estate filed a matter with the U.S. tax court that challenged the agency's assessment of additional taxes. They claimed that the estate owed $187 million in gift taxes, $152 million in estate taxes, and $49 million in generation-skipping taxes, plus a $133,000 gift tax penalty bill.

Two problems factored into to these deficiencies. The IRS claims that the Davidson estate undervalued some corporate stock and improperly valued the self-cancelling installment notes (SCINs). The IRS said that the estate also underestimated the value of privately held stock held in trust for Davidson's children and grandchildren.

Life Estates May Help Protect Houston Homes

Published on: July 3, 2015 | By McCulloch & Miller, PLLC

Let's take a closer look at what a life estate is and how using one could help you save your family home.

Home is where the heart is. The thought of losing your home can be devastating. What options do you have to prevent this from happening?

Motley Fool’s recent article, titled “What a Life Estate Is And How It Could Save Your Home,” tells us about life estates.

Estate Reduction Options for High-Wealth Individuals

Published on: July 2, 2015 | By McCulloch & Miller, PLLC

Some high-net worth families still face the challenge of reducing their estate to minimize or eliminate estate taxes, although the federal estate tax exclusion is currently larger than it has ever been. The portability of unused exclusion amounts are at $5.43 million for individuals and $10.86 million for couples. But a 40 percent top estate tax rate on amounts above the exemption concerns those with large estates.

High-net worth individuals managing their estates are better off working with an experienced estate planning attorney, The Marietta Daily Journal confirms in a recent article, titled “Estate reduction ensuring wealth transfer to heirs.” With the changes in estate and gift tax laws, have an expert on your side to ensure your documentation is drafted properly and work with your financial advisor to plan asset transfers to heirs.

An easy move for wealthy families is gifting. Individuals can gift up to $14,000 per year, per individual without incurring a gift tax. The amount doubles for spouses. There’s an informational gift tax return to be filed, but there’s no tax due if the gift is under the annual exclusion limit.