Joe Goldman Interviewed by NJ1015 Radio

Partner Joe Goldman is interviewed by NJ1015 radio. See link for full article: http://nj1015.com/survey-majority-of-american-parents-have-a-will/

Another Year, Another Chance to Review Your Estate Plan

By Joseph L. Goldman, Esq.
jgoldman@pashmanstein.com

In the words of John Lennon:  “Another year over.  And a new one just begun.”  So this year, among your New Year’s resolutions, why not review your existing estate plan and estate plan documents (Will, Power of Attorney, Health Care Directive)?

For 2015, the top federal estate tax rate remains at 40%.  The federal estate tax exemption amount is up to $5,430,000 per individual.  That amount is $10,860,000 for a married couple, if each owns at least $5,430,000 in his or her own name, or if they take advantage of “portability”.  But remember, there is no “portability” for state estate tax purposes.

The New Jersey estate tax exemption amount remains at only $675,000.  For couples with total assets of over $1,350,000 that means there can be New Jersey estate tax due on the death of the surviving spouse, even if their assets are well below the federal estate tax threshold.

A big change in the New York estate tax exemption amount took place last year.  An increase to the New York exemption is being phased in so that it will conform to the federal exemption amount in 2019.  For decedents who die prior to April 1, 2015, the New York estate tax exemption amount is $2,062,500.  For decedents dying after April 1, 2015, the exemption is $3,125,000.  For couples with total assets of over $6,250,000 there can be New York estate tax due on the death of the surviving spouse after April 1, 2015.

Non-tax considerations, including changes in your family situation, such as marriage or divorce, births or deaths, or a change of residence to another state, may also call for updating your estate plan documents and your estate plan.

Consider also the use of gifting strategies, life insurance planning, and use of lifetime trusts for both tax and non-tax purposes.  Even if you fully used up your federal state and gift tax exemption in 2015 ($5,340,000 for an individual, $10,680,000 for a married couple), the increased 2015 exemption amount ($5,430,000) allows you to make additional gifts of $90,000 ($180,000 for a married couple) in 2015 beyond the $14,000 annual gift tax exclusion gifts per donee.  But be careful what you give away.  A gift of appreciated property can result in a loss of the stepped-up basis the donee would take if he or she inherited the property.  The capital gain on the subsequent sale of that property could exceed any estate tax savings.

Finally, don’t forget to check your beneficiary designations on retirement plans and life insurance to make sure they are up to date.

Here’s hoping you stick to your New Year’s resolutions in 2015!

 

IRS Releases Draft of Streamlined Application for Tax-Exempt Status

By Joseph L. Goldman, Esq.
jgoldman@pashmanstein.com

IRS has released Draft Form 1023-EZ (Streamlined Application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code) and its draft instructions.  The 2-page Form 1023-EZ is a shorter version of the regular Form 1023 that may be used if an organization meets specific criteria (determined by completing the Form 1023-EZ Eligibility Worksheet).

The new form has been created as a method for smaller organizations to apply for exemption under Code Sec. 501(c)(3).  Form 1023-EZ (like Form 1023) provides IRS with information to determine the applicant’s exempt status and private foundation status.  Upon acceptance of the form, IRS will issue a letter that provides written assurance about the organization’s tax-exempt status and its qualification to receive tax-deductible charitable contributions.

Organizations that would normally file Form 1023 will be able to file Form 1023-EZ if they meet the following requirements:  no more than $200,000 of projected annual gross receipts in any of the next three years; annual gross receipts of not more than $200,000 in any of the past two years; total assets not in excess of $500,000.

An organization is a tax-exempt organization under Code Sec. 501(c)(3) if it is organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals.  With limited exceptions, an organization must notify IRS that it is applying for Code Sec. 501(c)(3) status.  To obtain recognition of exemption from federal income tax under Code Sec. 501(c)(3), an organization must generally file the 26-page Form 1023 (Application of Exemption Under Section 501(c)(3) of the Internal Revenue Code).

The Form 1023-EZ Instructions remind taxpayers about key requirements for an organization to be exempt from federal income tax under Code Sec. 501(c)(3).  It must be organized and operated exclusively for one or more exempt purposes.  Further, an organization doesn’t qualify for Code Sec. 501(c)(3) status if a substantial part of its activities is attempting to influence legislation.  In addition, all Code Sect. 501(c)(3) organizations are absolutely prohibited from directly or indirectly participating or intervening in any political campaign on behalf of (or in opposition to) any candidate for elective public office; although non-partisan voter education activities (including public forums and voter education guides) are allowed.

IRA Rollovers to be Limited

A law limits the number of IRA rollovers that can be made in any 1-year period to one.  Recently, the Tax Court held that the limit applies not to each separate IRA an individual may own, but to all of his or her IRAs.  It reached this result even though the  IRS had indicated in proposed regulations and tax publications that the limit applies to each IRA.  Thus, an individual with three IRAs could make three rollovers in a 1-year period under the IRS guidance but only one under the Tax Court decision.

After considering the matter, the IRS has announced that it will adopt the more restrictive view of the Tax Court.  However, the new rule won’t apply to any rollover that involves a distribution occurring before 2015.

The IRS emphasized that an IRA owner will continue to be able to transfer funds from one IRA trustee directly to another as frequently desired.  Such transfers are not rollovers and thus are not subject to the limit.

Major Changes to New York’s Estate and Gift Tax Law

By Joseph L. Goldman, Esq.
jgoldman@pashmanstein.com

Effective April 1, 2014, the 2014-2015 “Executive Budget” makes significant changes to New York’s estate tax and gift tax.  These changes will have a major effect on estate planning for New York residents.  While these changes provide some tax relief for the moderately wealthy, wealthier New Yorkers will see little, if any, change, except under certain circumstances that will cause an increase in estate tax.

The Executive Budget increases New York’s basic exclusion amount ($1 million per decedent prior to April 1, 2014) to $2.0625 million per decedent as of April 1, 2014, with gradual increases annually until January 1, 2019 when the basic exclusion amount will reach $5.25 million.  Thereafter, it will be indexed for inflation, which should link New York’s basic exclusion amount to the federal amount (presently $5.34 million, but also indexed for inflation).  The basic exclusion amount is increased as follows:

chart4

Because of a quirk in the way New York calculates its estate tax, the basic exclusion amount is rapidly phased out once the value of a decedent’s taxable estate exceeds the basic exclusion amount in the year of death, and is totally phased out when the value of a decedent’s taxable estate is greater than 105% of the basic exclusion amount.

The Executive Budget implements the exclusion by allowing a credit of the “Applicable Credit Amount” to be taken against the tax imposed by the statute, as follows:

  • If the New York taxable estate is less than or equal to the basic exclusion amount, the Applicable Credit Amount will be the amount of the tax so computed and, therefore, serves as a wash.
  • If the New York taxable estate is up to 5% greater than the basic exclusion amount, the Applicable Credit Amount will be limited based on a formula, resulting in a rapidly increasing tax for each percent over the basic exclusion amount.
  • If the New York taxable estate is greater than 105% of the basic exclusion amount, no credit is allowed.

The Executive Budget keeps the top bracket at 16%.  Nevertheless, there has been a change in bracket structure.  As a result, estates valued in excess of 105% of the basic exclusion amount will have the same tax they would have had under the old law.

The rates included in the Executive Budget only cover the period for a decedent dying on or after April 1, 2014 and before April 1, 2015.  While this might have been an error that will require a technical correction, there is some question as to whether it is a time-limited compromise, test period or mandate reached during the budget negotiations.

New York has not had a gift tax since 2000 when New York’s gift tax was repealed.  Consequently, a commonly used estate planning technique to reduce the size of a New York resident’s estate tax was to make gifts within the allowable federal exemption.  Not only was the donor able to make a completed gift without incurring gift tax liability in New York, but so long as she had no retained an interest in the gifted property, she was assured that the value of the gift would not come back into her estate for estate tax purposes.  The Executive Budget provides that taxable gifts made within three (3) years of death (if not otherwise includible in the federal gross estate) must be added back to a decedent’s New York estate for estate tax purposes.  The “addback” does not apply to  gifts made (i) when the decedent was not a resident of New York, (ii) before April 1, 2014, and (iii) after December 31, 2018.  In general, “taxable gifts” do not include annual exclusion gifts (currently $14,000 per done) and payments made directly for tuition and medical expenses.  The addback, however, does not appear to exclude gifts of real or tangible personal property outside of New York State, which, if owned at a decedent’s death, would not be subject to New York’s estate tax.

The Executive Budget has repealed New York’s generation-skipping transfer (“GST”) tax, applicable to taxable distributions to “skip persons” and taxable terminations where “skip persons” receive a trust distribution on its termination.

New York residents may need to modify their estate plan and estate plan documents to reflect these changes to the New York State estate and gift tax law.  Pashman Stein tax attorneys are prepared to advise you and assist you in how best to incorporate these changes into your estate plan.

Using Decanting To Modify An Irrevocable Trust

By Jennifer Castranova, Esq.
jcastranova@pashmanstein.com

Many estate planners use irrevocable trusts to facilitate lifetime gifts and remove assets from an estate.  But what can you do when the irrevocable trust contains a provision that you would prefer to amend or when changed circumstances call for changes to the existing trust?  If the trust is “irrevocable”, are you stuck with the existing provisions?

Now, in these situations, planners are able to use a technique called “decanting” to cure substantive and administrative problems in irrevocable trusts.  Decanting allows the trustee of an existing trust to distribute all or part of the trust principal to another irrevocable trust (the “appointed trust”).  A number of states have enacted statutes specifically dealing with decanting.

In New York, EPTL 10-6.6 contains rules governing to which trusts can be decanted, what provisions may be changed and how to decant.  In order to decant in New York, the existing trust agreement must give the trustee the power to invade the trust principal.  The extent of that power determines what types of changes can be made in the appointed trust.

If the Trustee has unlimited power to invade principal then:

(1) The existing trust can be decanted to another trust for the benefit of any one or more beneficiaries of the existing trust;

(2) One or more of existing beneficiaries can be eliminated; and

(3) A beneficiary of the existing trust in whose favor principal can be distributed may be given a power of appointment in the appointed trust.

If the Trustee has limited discretion to invade principal then:

(1) The beneficiaries must be the same in the appointed trust as the existing trust;

(2) The principal invasion standard must remain the same during the term of the existing trust; and

(3) Powers of appointment that are not present in the existing trust cannot be granted in the appointed trust.

The New York statute also provides certain rules for all decanted trusts as follows:

  • The trust cannot be decanted if the trust instrument prohibits decanting or if there is evidence that the grantor opposes decanting;
  • The trustee must consider the tax implications of decanting, including all estate and gift tax consequences;
  • The appointed trust may be an existing or newly appointed trust, but it must be irrevocable;
  • The appointed trust agreement must be drafted and executed before the existing trust can be decanted;
  • The appointed trust can be a supplemental needs trust;
  • The rule against perpetuities cannot be violated;
  • A current right of a beneficiary to receive income or principal cannot be eliminated;
  • A trustee cannot be indemnified from liability;
  • A right to remove or replace a trustee cannot be eliminated; and
  • A trustee’s compensation cannot be changed.

Decanting is accomplished by an instrument in writing, signed, dated and acknowledged by either the grantor or the trustee of the existing trust.  The instrument must state whether all of the existing trust assets or a percentage of them are being decanted.  Then, either (1) a copy of the existing trust agreement, the appointed trust agreement and the executed decanting power must be served on all interested parties (the grantor of the existing trust (if living), the grantor of the appointed trust, the beneficiaries of the existing and appointed trust, anyone who has the power to remove and replace the trustee of the existing trust) either personally or by certified mail; or (2) written consent of all interested parties may be obtained after providing them with copies of all documents.  The exercise of the decanting power becomes effective thirty (30) days after service is complete (unless the parties consent in writing to an earlier date).

An interested party can object in writing to the trustee.  The decanting instrument only needs to be filed with the Court in the case of a testamentary trust or an inter vivos trust that was the subject of a prior court proceeding.

Although the decanting requirements summarized above are lengthy and specific, they offer planners an opportunity to remedy problematic provisions in irrevocable trusts.

Estate Planning Tips for Your Art Collection

By Eleanor Lipsky, Esq. and Joseph L. Goldman, Esq.

Many collectors view art as more than a financial investment and often do not wish to readily part with a piece of sentimental and aesthetic value. Nevertheless, when an art collection is part of a taxpayer’s estate a number of estate, gift and income tax strategies should be considered.

Prior to ATRA 2012 (American Taxpayer Relief Act of 2012), estate tax planning often involved gift and estate tax strategies designed to eliminate appreciating assets from an estate in order to reduce estate and gift taxes.  After ATRA, the federal estate tax exemption has been made permanent at $5,000,000 (indexed for inflation) so fewer taxpayers are subject to federal estate tax.  At the same time, federal income tax rates have increased, so income tax planning has become more relevant.  Accordingly, it may be advantageous for taxpayers not subject to estate tax to leave appreciating assets in their estate to get a “stepped-up” basis at their death. This would reduce potential income tax on the gain when sold by the beneficiary or heir who received the asset.

An art collector should seek regular qualified appraisals of the collection, perhaps even annually, to get a better understanding of how the collection is appreciating.  In the case of a gift or a charitable contribution, such application can help substantiate a work’s value if there is an IRS challenge, protecting a collector from additional taxes and penalties for undervaluation.  Further, if a piece is worth more than $5,000, a taxpayer seeking a charitable income tax deduction will need to include a qualified appraisal with his or her tax return.  Qualified appraisals may also be necessary when artwork is left as a bequest in a Will.  For estate tax purposes, an appraisal must be included with the estate tax return for any piece worth more than $5,000 or for a collection of similar items worth more than $10,000.  For gift tax purposes, a qualified written appraisal is typically the best way to disclose a gift of artwork on a gift tax return.    It is important to check out the appraiser’s credentials to ensure that the appraiser is an expert in the type of item.  A qualified appraiser who makes a false or fraudulent overstatement of value, may be subject to a civil penalty.

A taxpayer transferring an art collection containing at least one item valued at $50,000 or more may request an advance ruling from the IRS to ensure that the IRS will later accept the taxpayer’s valuation.   An advance ruling may be requested only after the property is transferred and must include IRS Form 8283 (“Noncash Charitable Contributions”), along with a qualified appraisal, to make the request.  An advance ruling costs $2,500 for the first three items and $250 for each additional piece.

An art collector who donates artwork to charity can also receive a substantial income or estate tax deduction.  For instance, a taxpayer who donates to a public charity a painting purchased years ago for $1,000 that has a fair market value of $10,000 today and satisfies all tax criteria for deducting the donation will receive a $10,000 charitable deduction for income tax purposes.  Donations may also help avoid capital gains taxes.  This is helpful because while most assets are subject to a 15% capital gains tax rate (in 2013), art is subject to a higher rate of 28%.

A taxpayer donating art work should keep in mind that it is best for the donation to be related to the charitable organization’s charitable purpose.  For example, donating a painting to be displayed at a tax-exempt art museum allows a taxpayer to deduct the painting’s fair market value, for up to 30% of the taxpayer’s adjusted gross income.    If the amount deductible exceeds this limit, it can still be carried forward for up to five years.  On the other hand, if the donated artwork is not related to the organization’s charitable purpose, the deduction is limited to the taxpayer’s cost basis, but up to 50% of the taxpayer’s adjusted gross income.

Another way to donate artwork to charity is to create a charitable remainder trust (CRT).  This allows the trustee of the CRT to sell the art tax-free and reinvest the proceeds in income-producing assets.  The beneficiary receives income from the trust, while the named charity receives what is left at the end of the trust term.  It is important to note that since the donation is not related to the CRT’s tax-exempt purpose, the donor’s current income tax deduction is limited to the donor’s basis in the art, up to 50% of the donor’s adjusted gross income.  Additionally, the donor’s current income tax deduction will be limited to the actuarial value of the charity’s remainder interest in the artwork.

For those art collectors who are not quite ready to part with a piece permanently by a donation of artwork to a museum, consider donating an undivided fractional interest in an artwork to a charitable organization instead.  If a taxpayer donates a one-third (1/3) interest in a sculpture worth $5 million to a museum, the museum will have the right to display the sculpture for four (4) months out of each year.  The benefit of a fractional donation is that the donor can enjoy the sculpture for the rest of the year, while still receiving a sizeable charitable income tax deduction.  This is also a good alternative when an outright donation exceeds the donor’s adjusted gross income percentage limits.  Donating a fractional interest reduces the amount of the income tax deduction, minimizing the need to worry about the five-year carry forward period, discussed above.  A museum will usually be willing to agree to receive a fractional interest during a donor’s lifetime only if the donor agrees to donate the entire interest in the painting to the museum in the donor’s Will (or revocable trust).  The donor’s estate would then be entitled to a charitable estate tax deduction for the donor’s remaining interest in the painting, based on the painting’s value at time of the donor’s death.

Before donating to charity in a Will, a collector should consider the unlimited marital deduction.  The decedent can leave the artwork to his or her surviving spouse and then have the surviving spouse donate the artwork to the charitable organization during the surviving spouses’ lifetime.  This gives the surviving spouse an income tax charitable deduction without a federal estate tax on the artwork in the estate of the deceased spouse because of the unlimited marital deduction.  The advantage to this added step is that the surviving spouse will inherit the artwork at a new cost basis equal to the fair market value on the date of death of the first spouse.  The surviving spouse can also bequeath the artwork in his or her own Will and receive a 100% estate tax charitable deduction.   A taxpayer making a bequest of artwork to a charitable organization, through a Will should describe the artwork with as much specifics as possible.  Additionally, since a charity can renounce a bequest, the Will should include an alternative beneficiary as well.

Finally, a collector may choose to keep the collection in the family and only leave artwork to heirs and other beneficiaries through specific bequests in his or her Will.  Specific bequests can reduce conflict among family members and avoid some of the income tax issues connected with residual gifts.  A taxpayer should discuss his or her plans with family members in order to avoid issues and surprises later on.

No matter how you choose to plan for your art collection’s future, you should consider the tips discussed above to gain the best possible return on your valuable investment.

Goldman’s “Golden Rules” of Estate Planning – Part II

By Joseph L. Goldman, Esq.
jgoldman@pashmanstein.com

Link to Part I

10. “Never look a gift horse in the mouth”

  • Don’t forget gifting as part of your estate plan.
  • Federal unified gift and estate tax exemption amount is $5,340,000 in 2014.
  • Annual exclusion gifts – $14,000 per year, per donee.
  • Gifts for education and medical expenses don’t count toward $14,000 annual exclusion.
  • Discounted gifts – gifts of a limited partner interest or an LLC interest – (a) need to substantiate the discount (e.g., appraisal), (b) the strategy is carefully scrutinized by IRS, (c) watch out for “business purpose” and control tests.
  • After ATRA, 2012, need to weigh benefit of estate tax savings through gifting v. loss of stepped-up basis for donee for income tax purposes.

11. “But the greatest of these is charity”

Charitable bequests can satisfy your charitable inclination and save you money as well.

  •   Outright bequests,
  •   Charitable remainder trusts,
  •   Charitable lead trusts.

12. “It’s time to hang em up”

Pay attention to proper designation of retirement plan and IRA beneficiaries to maximize income tax benefits.

Pay attention to proper designation of retirement plan and IRA beneficiaries to maximize income tax benefits.

  •   Designated beneficiaries,
  •   Don’t name estate,
  •   Spousal rollover,
  •   Stretch IRA,
  •   Use of trusts.

13. “I got the power”

  • Signing a general durable power of attorney allows you to name an agent to make financial decisions for you and can avoid costs and hassles of a guardianship proceeding in the event of a disability.
  • “Springing” power of attorney only becomes effective on the occurrence of a triggering event (e.g., certification of disability by your regular physician (or other licensed physician).

14. “Living well is the best revenge”

  • Make sure to execute a health care document or documents to name an agent to make medical/health care decisions for you if you are unable to do so.
  • NY – Health Care Proxy, Living Will.
  • NJ – Advance Directive for Health Care.
  • You can set forth your wishes regarding use of “heroic measures” if you are in a “terminal” condition – do you want mechanical respiration, artificial nutrition and hydration?
  • Organ donation.
  • Failure to make your wishes known can result in lengthy, painful family disputes.

15. “Nobody’s perfect!”

  • Don’t put off implementation of your estate plan until you develop the “perfect” plan.

16. “It’s never too late”

  • Even if you haven’t done any estate planning yet, do it now.  You could save your family a bundle and avoid headaches after you’re gone.