GENERAL ESTATE PLANNING
A lot of clients start our meetings with “what can I do to protect myself from liability?” While all of them understand that having “liability” may be a bad thing, most do not know what exactly that means. Liability is just another way of saying responsibility. Responsibility may come in many forms: in business, in personal affairs, and through the various relationships we establish in our daily lives. While there are many ways to determine who is liable in any given situation, by far, the strongest determining factor is: who has control?
Where Creditors arise:
A client who has undertaken little, if any, planning may be involved with a number of scenarios in his life: he may run a small business, he may have three or four children with his wife, he may participate in extracurricular activities, and he may travel on a daily basis. All of these activities create relationships, and with these relationships, he creates and establishes creditors. If he has done no planning and established no barriers—his creditors do not recognize his personal affairs from his business affairs. This means that any creditor of his may assert a claim against his interest in assets that he owns in order to satisfy a debt.
Some of you may think, why would I need to plan? I don’t break the rules, I pay my bills, I otherwise conduct myself lawfully; I do not need to be concerned with creditors. While all of that may be good and true for you—that may not be enough to protect you against a creditor’s claim. What if you were in an accident? What if a partner of yours suddenly finds himself in the middle of a divorce? There are many unforeseen scenarios that can turn an otherwise simple estate upside down.
How to plan:
There are a few ways you can plan to provide protections against creditors. One of the first ways is to minimize your exposure and separate your creditors—establish separate business entities to hold your separate business assets. By establishing and using business entities, you can ensure business creditors may only reach business assets; likewise, personal creditors may only reach personal assets. The more separation you have in your affairs, the smaller the “pot” becomes for recovery purposes, as you’ve segregated your former single estate into various little portions, each exposed only to its own specific creditor. Further, business entities are often structured so business creditors may only have the ability to get at monies finally distributed from the entity; creditors then enjoy no ability to control the business’ decision to distribute those monies.
Still need more protection? Another way to plan is through the use of irrevocable trusts in your estate. The only way to truly limit your exposure to liability is not to own anything; after all, who can get blood from a stone? However, clients are often loathe to divest themselves of all their assets and understandably so. While giving all of your assets away may not be practical, there are ways to accomplish ownership and use of assets without control. And if you don’t have control over something, neither do your creditors.
Any liability planning in your own estate should be carefully considered and undertaken with counsel.
This article was written by Jessica B. Moon, Attorney licensed in Ohio and Florida. David Bacon, Jeffrey Roth, and Jessica Moon are members in the law firm of Roth and Bacon Attorneys, LLC. Their Offices are located in Upper Sandusky, Marion, and Port Clinton, Ohio, and Fort Myers, Florida. They have focused their practice to provide estate and business planning concepts to their clients. Nothing in this article is intended for, nor should be relied upon as individual legal advice. The purpose of this article is to help educate the public on concepts of law as they pertain to estate and business planning. Copyright @ Jessica B. Moon 2013.
In Estate planning, QTIPs are not devices used to clean your inner ear; the term “QTIP” refers to qualified terminable interest property. This is further defined and referenced in the Internal Revenue Code 2056(b)(7). http://www.law.cornell.edu/uscode/26/usc_sec_26_00002056----000-.html . How can you tell if you have this type of property in Trust? Put simply, QTIP property is property that operates as life estate interest would: the property is used for the benefit of one person, “A”, during A’s lifetime. However, “A” does not “own” the whole interest; the interest instead has been split. “A” only owns a life interest in the property (a right to use during A’s lifetime to the exclusion of everyone else) and when A dies, so does A’s interest in the property. Who owns it then when A dies? That depends on who set up the QTIP and how he chose to structure it.
Social impact
Why would you want to consider making your trust conform to QTIP rules? Well, there are plenty of reasons. A lot of couples may use this technique when there is a second marriage or children from a prior a relationship. A spouse may want to ensure that his or her children may still inherit property but at the same time be sure that the surviving spouse is left with sufficient assets to care for herself/himself. A QTIP trust allows the surviving spouse to have access to the whole estate (or the whole property in the QTIP Trust) during his/her lifetime—this means that the decedent client does not have to make decisions regarding how property will be split. Unlike leaving everything to the surviving spouse outright, by using a QTIP trust, the client has ensured that the trust property will pass at the surviving spouse’s death to the client’s chosen parties. The property in the QTIP trust passes to the client’s named beneficiaries at the death of the surviving spouse to the exclusion of the surviving spouse’s creditors and heirs.
Tax impact
There are also tax reasons that a QTIP trust may be preferable to some clients. A QTIP trust allows for the use of the unlimited marital deduction while still allowing for ultimate control and disposition of the asset by the decedent. Remember, anything you leave to a spouse is not subject to estate tax; the tax is instead levied on the estate on the surviving spouse when she dies. In the absence of planning, just leaving everything to the surviving spouse does nothing to diminish the estate tax burden—it simply defers it. If the client instead left everything to a trust for the benefit of kids/spouse/charity, etc., that trust would be subject to the estate tax immediately upon the death of that client.
Through the use of the QTIP trust, a trust that would otherwise be completely subject to an estate tax, is instead subject only the portion/percentage of the trust that does not go to a surviving spouse (this is complicated and determined at the first spouse’s death using the life expectancy of the surviving spouse). Even then, the estate tax is levied on the first spouse’s estate only after the death of the surviving spouse. It is better to have cash on hand and defer taxes; after all, you can manage your money better than Uncle Sam and for better rates.
This is also important on the state level because while Florida currently does not collect a State Estate Tax, Ohio continues to collect an Estate Tax until January 2013. This means that, in addition to any Federal Estate tax, all Ohio residents who die before January 2013 and who have estates valued at $338,333.00 or more are subject to the Ohio Estate tax. A client may be able to avoid this eventuality. Where a client’s trust is QTIP-ed and the client leaves a surviving spouse who likely will not pass away until after 2013—the client and estate have deferred a tax that may not be in effect at the time the surviving spouse passes away.
QTIP trusts are complicated but very useful vehicles that you may want to consider for your own estate. As always, you should consult with a professional who can advise you according to your personal needs and planning.
This article was written by Jessica B. Moon, Attorney licensed in Ohio and Florida. David Bacon and Jeffrey Roth are partners in Roth & Bacon Attorneys, LLC; Jessica Moon is an Associate. The Offices are located in Upper Sandusky, Marion, and Port Clinton, Ohio, and Fort Myers, Florida. They have focused their practice to provide estate and business planning concepts to their clients. Nothing in this article is intended for, nor should be relied upon as individual legal advice. The purpose of this article is to help educate the public on concepts of law as they pertain to estate and business planning. Copyright @ Jessica B. Moon 2011.
There’s only the echo
Of his “Ho Ho Ho”
Santa’s gone
And left us snow
It’s cold outside
Weather unforgiving
It’s the dead of winter
It’s the time for giving!!!
My apologies to any poetic purists out there. I have many more of these little rhymes tucked away here and there as a legacy to my children. I’m sure when my day comes at last that there will be a fight over who has to tote the boxes containing these treasures into the back corner of his or her basement for an additional generation of storage. Eventually all great literature of this sort meets its demise when some water heater yet unborn will explode and inundate these boxes with its broiling waters and all those carefully preserved words and snatches of wisdom will find themselves on the curb waiting for the sanitation worker to opine as he tosses my collected lifetime of thoughts into the back of the gaping maw of the truck and utter what will become the eulogy for my life’s work, “Cripes, what’s in here? Did he have a brick collection?” or words to that effect.
Christmas is a time of giving. We give almost anything we can get our hands on to those people we love and to those people to whom we feel compelled to give things to. The marketplace shoulders its way into our daily lives starting before Halloween and constantly reminds us that unless we give something to an entire spectrum of persons that we are cold hearted and apt to meet a grisly and solitary conclusion to our brief time on this planet. Poor Scrooge after the third spirit reveals his bleak end after a lifetime of practiced economy finds almost no one at his funeral except his long suffering nephew who attends only because he is a good person and who would probably attend the funeral of Jack the Ripper if given an opportunity.
Those who would sell us these gifts are daily reminding us in that festive time of year to give to the butcher, baker and candlestick maker, our children’s teachers, out teachers, our public officials, our friends, family, our religious representatives, our betters, our equals, those upon whose actions we frown, those whose actions we approve and all those who appear generally to be generally able to accept a gift of any sort a gift all in an effort to demonstrate that we are decent people possessed of at least minimal social skills which will enable us to appreciate on some base level that it is a demonstration of just plain human decency give a gift. The message is clear- buy what we are selling and give it to someone, to anyone, just do it. I am still looking for the whereabouts of my candlestick maker as I have a very lovely little fruit and nut basket that is going bad in the trunk of my car with his name on it.
I am being disingenuous of course. Giving is a good thing and something that everyone should do. I think the last people who seriously took their best belongings to the tomb with them were the Pharaohs in Egypt and I’m afraid that self motivated thieves and equally motivated museums have succeeded in making sure that the “you can take it with you” approach to estate planning doesn’t actually pan out in the long haul.
Giving is always something that has attracted the attention of taxing authorities. How we ever got ourselves into the mindset that we should be taxed on the act of making a gift is something that I still don’t get. I would like to personally thank the politician or mid level bureaucrat who thought that one up. It was probably a combination of the two with one voting for the other and the other re-appointing the first guy. It usually works like that.
The federal government has just changed its tax laws a little bit. Here’s how it now works. Any gift tax if incurred is a tax paid by the person giving the gift (donor). To start with, all gifts are taxable unless you happen to make a gift that falls into one of the exceptions to the rule. So what are the exceptions? Well, here is the one exception they just changed.
Each person under a recent change to the law can now give to any other person an amount not to exceed $13,000 in any calendar year and that gift is not taxable to the donor. This amount was $12,000 last year and increased to $13,000 this year. The donor is not required to report this type of gift, though for other reasons, he may elect to do so. If you are married you can use your spouse’s exemption amount of $13,000 and increase your gift to $26,000 to one person. Of course if you have used your spouse’s exemption your spouse may not thereafter independently gift any amount to that same beneficiary in the same calendar year and use his or her exemption amount to shield the gift from gift tax. It’s already been used.
The good news is that gifts are not income to the beneficiary and do not have to be included for purposes of calculating the beneficiary’s federal or Ohio income tax. Ohio however does include the value of all gifts made within three years of death in a decedent’s estate for the purpose of calculating Ohio estate tax. Another piece of good news is that Ohio does not sweep back in those annual exclusion gifts up to $10,000 for each beneficiary so at least $10,000 of every annual exclusion gift made to beneficiaries even if made within three years of the decedent’s death passes free of the federal gift and Ohio estate tax. If you have a lot of children and grandchildren or friends in need and more than enough money to keep the lights on it’s possible that gifting can be something that can and does have good estate and gift tax consequences. Also, if you’re giving to help your tax situation, give in January, not December. Making the gift early in the year results in removing not only the gifted asset from your taxable estate, but any additional income accumulation that asset would have earned in your estate had you waited to make the gift in December.
Try and stay warm and remember that you can’t take it with you. Another good tip- any gift to a qualified charity is never subject to the gift tax and can in most cases be used to reduce your income taxes. There’s much good that gifting can do.
This article was written by David F. Bacon, Attorney and Ohio State Bar Association Board Certified Specialist in probate, trust and estate planning. David Bacon and Jeff Roth are partners in Roth and Bacon Attorneys with offices in Upper Sandusky, Marion, and Port Clinton, Ohio. They have focused their practice to provide estate and business planning concepts to their clients. Nothing in this article is intended for, nor should be relied upon as individual legal advice. The purpose of this article is to help educate the public on concepts of law as they pertain to estate and business planning. This is number one hundred fifty one of a series of articles. Additional articles will be published in the future. If you have any questions you would like to have answered, please direct your question to The Daily Chief Union and your question will be considered for use as the topic of subsequent articles. Copyright @ David F. Bacon 2009
The question today is whether or not life insurance is appropriate in an estate plan and the answer is that it certainly can be. As with most questions, it all depends upon what you need the insurance for.
People often equate life insurance with the payment of estate taxes. They figure that if Mom’s or Dad’s estate results in the obligation to pay estate taxes, then life insurance proceeds will be there to pay that tax or to at least to help defray the payment of the tax. This is where things get tricky. Here’s how this all works. First of all, before a person pays any federal estate tax, his estate this year will have to be worth more than three million five hundred thousand dollars ($3,500,000). This is true today and for the rest of this year.
In the year 2010 the Bush tax cuts permitted a year in which there would be no federal estate tax. The incoming administration and newly elected congress has already hinted that it may expire the Bush tax cuts earlier than the end of 2010 so this year of freedom from the federal estate tax is now in question.
After the year 2010 it is anyone’s guess what the federal estate tax will look like. If Congress affirms the repeal of the federal estate tax prior to the close of 2009, there is possibility that there will be no federal estate tax for the years 2011 and thereafter. If Congress fails to affirm the repeal of the estate tax by the end of this year, then in the years 2011 and thereafter the threshold amount will revert to $1,000,000 or perhaps less. Accordingly at this time planning against the estate tax continues to be a moving target because no one really knows where the regulations are going to end up.
It also must be remembered that under the current estate tax structure, all the assets in a decedent’s estate are stepped up to market value prior to being exposed to any estate tax. The one nice thing about this step up in basis for the beneficiaries is that any asset they inherit from a decedent has the decedent’s date of death value of the asset as the asset’s new basis. If the beneficiary ever sells the asset, for purposes of calculating any capital gains income tax liability, the beneficiary will use the decedent’s date of death value of the asset as the beneficiary’s cost basis. Under the current Bush repeal of the federal estate tax, this automatic step up to market value of assets upon a decedent’s estate will cease if there is no longer any federal estate tax in place. There may be no estate tax imposed at death, but any beneficiary inheriting an asset may discover when he subsequently sells the asset that in addition to inheriting the asset the beneficiary also inherited the decedent’s basis in that asset. The net result is that a lot of beneficiaries could pay substantial capital gains income tax upon the sale of their inherited assets.
Now, where does life insurance fit into this maze? Under the federal and State of Ohio models any assets passing to a surviving spouse at death are not generally subject to the imposition of either federal or state estate taxes. Accordingly, anyone may leave any amount or any asset to a surviving spouse and in almost all instances there will never be an estate tax of any kind either due or owing. This is a wonderful thing and of course at the same time, like most alleged tax benefits, it is a potential trap. Most people do not individually have enough assets to get to the threshold amounts such that their estates are exposed to the imposition of the federal estate taxes. But when a spouse leaves everything to a surviving spouse, there is a much greater likelihood that the surviving spouse’s estate upon death will be sufficiently large such that it will be required to pay a federal estate tax. It is the potential imposition of the estate upon the estate of the second spouse to die that often results in life insurance being considered as a helpful solution in paying an estate tax. For this reason, many life insurance contracts sold to married couples have the date to the death of the second spouse to die as the trigger date which results in the payment of the life insurance proceeds. This type of “second to die” life insurance policy may also be less expensive to purchase as the insurance company has two lives upon which to calculate the premium payments.
Accordingly, it should be fairly easy now to calculate whether or not a married couple would need to consider life insurance for payment of potential estate taxes in this circumstance. One could calculate the estimated value of the estate of the second spouse to die and if that person’s estate were to be sufficient in size such that it is likely a federal estate tax would be due and owing, then life insurance could be considered to provide monies sufficient to pay the estimated tax. Here’s where it gets difficult again. Under the federal tax regulations any policies of life insurance owned or controlled by a decedent are usually includable in the decedent’s estate when calculating the potential estate tax liability of the estate. Also it is the death benefit of the life insurance contract that is includable in the estate, not just the cash value of the policy. Accordingly if one figured that his estate would need an additional $500,000 to pay estate taxes of $500,000 then it would seem that the purchase of $500,000 of life insurance would be in order. What must be understood is that the $500,000 life insurance death benefit will be added to the decedent’s existing estate before the estate tax is calculated. This could result in the potential imposition of even more estate taxes.
There are many ways to structure life insurance such that this unintended result does not occur and that the death benefits of the life insurance are not includible in the estate of the decedent for purposes of calculating federal estate tax liability. It is important to understand that life insurance can be and often is an important component in many estate plans. The one example discussed in this article is just one of the many reasons why life insurance might be an important component of your estate plan. As with most matters, a thorough discussion with an estate planning professional is often invaluable in creating the estate plan which is right for you and your family.
This article was written by David F. Bacon, Attorney and Ohio State Bar Association Board Certified Specialist in probate, trust and estate planning. David Bacon and Jeff Roth are partners in Roth and Bacon Attorneys with offices in Upper Sandusky, Marion, and Port Clinton, Ohio. They have focused their practice to provide estate and business planning concepts to their clients. Nothing in this article is intended for, nor should be relied upon as individual legal advice. The purpose of this article is to help educate the public on concepts of law as they pertain to estate and business planning. This is number one hundred fifty of a series of articles. Additional articles will be published in the future. If you have any questions you would like to have answered, please direct your question to The Daily Chief Union and your question will be considered for use as the topic of subsequent articles. Copyright @ David F. Bacon 2009
Those who believed that President Obama was going to govern from the center politically are now waking up to the fact that at least on domestic issues such as the economy, he is governing on the far left of things. In other words the government is now more than ever interested in relieving the citizens of their monies and managing those monies for them as the government sees fit.
The proposed changes to the way we do business are sweeping and are apparently are not going to be endlessly argued before being implemented. Many changes have already been added to our system of governance and it’s not that we don’t know how these changes are going to affect us. It’s more that we’re not even quite sure what these changes are.
How can we then anticipate the effect of these changes and plan our estates against these changes? I think a good term to use would be a sea change. A sea change to an experienced sailor is a total change in a weather pattern. Wind direction shifts. Calm seas become rough or rough seas become calm. In other words whatever had just been the norm is now the opposite. That’s a sea change. Our economy has just experienced a sea change.
On the tax front, the Bush changes to the tax codes will most likely be allowed to expire. When President Bush assumed office the amount of assets a person could leave at death to beneficiaries other than a spouse was $650,000. Anything above that amount passing to anyone other than a spouse or a charity was potentially liable to result in the payment of a federal estate tax. The changes to the tax laws enacted then sought to repeal the federal estate tax. The legislation finally agreed upon incrementally increased the amount which could pass to beneficiaries other than a spouse. The first increase was to one million dollars. This was then increased to one point five million dollars. Last year the sum was two million dollars and this year the amount which a decedent may leave to any person other than a spouse is three point five million dollars. Next year under the existing legislation the federal estate tax will expire and there will be no federal estate tax. However under the Bush legislation, the congress must by the close of business in the year 2009 affirm the repeal of the estate tax. If congress does not so act, then in the year 2011 and thereafter the amount one can leave to a beneficiary other than a spouse upon death reverts to one million dollars.
There is an additional hazy area under the current laws. Under current federal estate tax laws all assets are stepped up to market value upon a decedent’s death. Those persons inheriting from a decedent will have the decedent’s date of death value of said asset inherited for their basis should they ever elect to sell the asset. In the year 2010 of the Bush tax cuts it was always anticipated that since there would no longer be a federal estate tax and an automatic step up of basis in a decedent’s assets that congress would enact legislation to clarify what portion of a decedent’s estate could be stepped up to market value if there were not estate tax. In as much as it is now anticipated that congress in fact won’t affirm the repeal of the estate tax, little or no thought has been given to determine how the question of stepped up basis will be addressed in the year 2010 if indeed there is no estate tax in that one year alone. My best guess is that whatever legislation eventually passes will include provisions to ignore the fact that there was to be no estate tax in the year 2010. It would not surprise me to see legislation which provides for the tax year 2010 to be the first year of the reversion to the million dollar exemption amount. President Obama and congress would like to just allow the Bush tax cuts to expire under their own terms. In doing nothing and allowing the tax cuts to expire congress could succeed in the imposition of a significant tax increase without any additional legislation necessary to accomplish this. There is still that whole problem with what to do with the basis of a decedent’s asset if he dies in the year 2010 and congress has never defined the rules.
In any event, it’s a safe bet that if you die in the year 2011 or thereafter and have an estate of more than one million dollars and leave it to anyone other than a spouse that you will be paying a hefty federal estate tax. Federal estate rates once incurred begin at approximately 45% and head north from there. Even if you leave your assets to a spouse, if the assets you leave your spouse when combined with the assets your spouse already has result in your spouse having more than one million dollars in assets, then your spouse’s estate will pay the tax. In that case it’s not a matter of if, but a matter of when the tax is paid.
The next approach to silently raising taxes is to increase the capital gains income tax rate. If you have an asset that you bought for a thousand dollars and it’s now worth ten thousand dollars and you sell it you have a gain of nine thousand dollars on the sale. Under current capital gains income tax rules in Ohio you would pay approximately 15% federal capital gains income tax on that sale and an additional approximate 7% Ohio capital gains income tax for an approximate total of a 22% capital gains income tax on the sale. If the federal capital gains rate is increased to forty percent or higher, the amount of the tax increases accordingly. When coupled with the Ohio tax any sale of an appreciating asset could result in the imposition of an approximate 50% income tax on the profit. The net result is that no one will sell anything because they can’t afford to pay the tax.
Take a pencil and paper and write down the rough gross value of your assets. See where you fall into this picture. If you’ve got farmland, rental properties, stocks or other appreciating assets, these changes will have a huge impact on your estate plan.
The good news is that there are always planning strategies available to counter these changes in the tax structure. Lots of folks have been lulled into the false notion that they don’t have to pay attention to what’s going on. Of course that’s never been true, but with the ceilings under the Bush tax cuts, it was understandable. The limits had been extended under those regulations such that the federal estate tax touched fewer and fewer people. Well, it looks like Henny Penny was right and that ceiling along with the rest of the sky is falling right on our heads. Suddenly lots of folks who thought that their concerns with the federal estate tax were over are finding out that they’re right back where they were several years ago. It’s a good time to visit with your planning professional and see what you might want to begin to do.
This article was written by David F. Bacon, Attorney and Ohio State Bar Association Board Certified Specialist in probate, trust and estate planning. David Bacon and Jeff Roth are partners in Roth and Bacon Attorneys with offices in Upper Sandusky, Marion, and Port Clinton, Ohio. They have focused their practice to provide estate and business planning concepts to their clients. Nothing in this article is intended for, nor should be relied upon as individual legal advice. The purpose of this article is to help educate the public on concepts of law as they pertain to estate and business planning. This is number one hundred fifty four of a series of articles. Additional articles will be published in the future. If you have any questions you would like to have answered, please direct your question to The Daily Chief Union and your question will be considered for use as the topic of subsequent articles. Copyright @ David F. Bacon 2009
ADVANTAGES AND DISADVANTAGES OF GIFITNG
DO I NEED TO Q-TIP MY TRUST?
GIVING AND GETTING
INSURANCE AND ESTATE PLANS
PRESIDENT OBAMA AND THE ISSUES IN TAX
The purpose of this site is not to provide personal legal advice. This information is general and is not a substitute for individual legal services. Roth and Bacon Attorneys, LLC encourages you to obtain estate planning services and advice from an attorney, CPA, or other qualified individual.