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Trusts, Estates and Succession

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WELLNESS

Written by: Yasmeen S. Khaleel, Esq. and Renee C. Vidal, Esq.

Last month, our faithful friend Punxsutawney Phil saw his shadow which promises six more weeks of winter.  This is a time of year when people often feel dull and depressed.  Therefore, it is a great time of year to remind everyone of the importance of wellness.

A good friend with expertise in helping others achieve wellness recently informed me that wellness is the “the act of practicing healthy habits on a daily basis to attain better physical and mental health outcomes.”  They said the goal is not “surviving” but rather to “thrive.” Take this into consideration for those who are or are caring for the disabled, elderly or infirmed.  The wellness of the care provider is critical to the care of the disabled, elderly or infirmed.

To this end, that same friend gave me four guidelines to live by and I now share them with caregivers out there:            

  1. Know your limits.  Self-care is not selfish.  Say when!
  2. Know how to meditate.  Meditation helps you stop and breathe and allows your mind time to focus.  It helps fosters awareness and attention and helps you find a mentally clear and emotionally calm and stable state.  It also helps relax our typical “knee-jerk” fight or flight response to challenges.  Finally, it helps stimulate your brain to produce melatonin and serotonin without the need of a co-pay or appointment or medication/supplements.  These are the key hormone and chemical to help with sleep and key body functions as mood, sleep, digestion, nausea, wound healing, bone health, blood clotting and sexual desire.
  3. Get physical.  Stand, stretch, walk exercise, clean or dance!  Just move!
  4. Know your experts.  Don’t go it alone.  Instead, assemble your people; whether those are professionals or family/friends who can help with medical issues, physical and nutritional well-being and yes, legal matters.

As “counselors of law,” we pride ourselves in guiding our clients to the best possible results.  A “counselor of law” is generally a professional who provides advice and deals with various issues, particularly those involving legal matters.  This is a more expansive definition than simply “lawyer” which narrowly describes a professional engaged in the practice of law. 

As counselors of law, our goal is to both provide advice on matters of legality and help with the application of that advice for our clients.  That often involves assembling the best team possible for our clients.  This is best illustrated in our files for the disabled, infirmed or elderly.  Our advice in such matters extends beyond the possibly incapacitated person and extends to the caregivers as appropriate and necessary.  Wellness matters; make the effort to give it the time it deserves.

Estate Taxes Across the U.S.

It is human nature to feel that we are overtaxed.  And yes, rates for one tax or another will vary from state to state. 

We have what are commonly referred to as death taxes.  These are usually identified as an inheritance tax or an estate tax and vary by state.  Estate taxes are based on the size of the estate while inheritance taxes are based on the relationship of the decedent to the beneficiary. 

Another death tax is the federal estate tax which is based on the size of the estate.  Currently, the federal estate tax does not come into play unless you have assets in the neighborhood of $12 million.  However, you must keep in mind that, come 2026, that number is expected to drop significantly and more estates are likely to incur a federal estate tax liability.  Federal estate taxes are IN ADDITION to any state death taxes which may be payable. 

Here is a short comparison of estate and gift taxes by state across the nation:

NEW JERSEY – There is no estate tax, however there is an inheritance tax.  The inheritance tax can be up to 15 percent based upon the relationship, but spouses and lineal descendants – children, grandchildren – and charities are exempt from inheritance taxes.  Other beneficiaries are taxed at the rate of 15 percent.

PENNSYLVANIA – There is no estate tax, but there is an inheritance tax for anyone but a spouse or a charity.  Children and grandchildren pay tax of 4.5 percent of their inheritance, siblings to the decedent are taxed at 12 percent and all others are taxed at 15 percent. 

CONNECTICUT – There is an estate tax on par with the federal estate tax.  However, should you be lucky enough to have an estate valued at $129 million or more, there is a cap of $15 million in Connecticut estate taxes.  Further, Connecticut is the only jurisdiction in the U.S. with a gift tax.

IOWA – Here again, there is no estate tax but there is currently an inheritance tax which will be phased out or repealed completely for individuals dying after December 31, 2024. 

NEBRASKA – While there is no estate tax, depending on the relationship and age of the beneficiary, inheritance tax can range up to 15 percent.

WASHINGTON DC – There is an estate tax for estates in excess of $4.3 million.

RHODE ISLAND – No inheritance tax but there is an estate tax that will kick in once an estate reaches $1.648 million.

VERMONT – Interestingly, Vermont has a flat tax rate of 16 percent for estates in excess of $5 million.

WASHINGTON STATE – While there is no inheritance tax, there is a state estate tax for estates over $2.193 million.

NEW YORK – An estate tax is assessed for estates in excess of $6.11 million.  Unsurprisingly, New York has a twist in their estate tax with a built in “cliff.”  For instance, if an estate is between 100% and 105% of the exemption amount, there’s a rapid phase-out of the exemption which estates in excess of 105 percent of the exemption amount will lose the benefit of the exemption amount entirely and be subject to tax from dollar one!  In addition, if the decedent made a taxable gift within three years of death, the taxable gift amount is brought back into the estate for estate tax purposes.

Regardless of where you live, you are subject to taxes.  But, as we know, we all pay taxes in one way or another.  So I leave you with this question – what’s the best state to live in, with regard to taxes?

New Required Minimum Distribution Rules

A few years ago, the Required Minimum Distribution (RMD) rule changed from requiring distributions at the age of 70-1/2 to 72 years.  Life expectancies are increasing (sans Covid) and the Consolidated Appropriations Act of 2023 has extended the starting age for RMDs to the age of 73 for those who turn 72 after December 31, 2022.  If you turn 72 in 2023, you can now delay the withdrawal until the tax year for 2024.

Looking to the future, if someone turns 74 in years 2033 or later, the beginning withdrawal age goes to 75 years. 

But, do not despair and think that you must wait to withdraw from your retirement assets.  Once you reach 59-1/2 years, there is no penalty/surcharge for early withdrawal and these assets are available to you. 

Remember that prior laws have changed the time one has to withdraw from retirement-type assets they receive as a beneficiary to a maximum of ten (10) years, with a few exceptions.  These withdrawal requirements are separate from a retirement asset you own and have access to during your lifetime. 

It is likely that any withdrawals, whether from your own retirement assets or from retirement assets you inherited, will be subject to income tax (except for Roth IRAs) and you will need to provide for the additional income being reported on your income tax returns so that you will not be subject to underpayment penalties and/or interest, which can add up quickly. 

If you need assistance with the decision of when and how to receive your RMDs, speak with your financial advisor or the plan administrator/financial institution.  Don’t think that the distributions will automatically begin when you reach the “magic” age, for there will always be paperwork to be completed!

Your Spouse Has Passed – Now What?

Your spouse has passed – what do you need to do? 

Many times, there may be very little for you, as the surviving spouse, to do after the funeral.  However, everyone is different and what your relative or neighbor may have experienced is not what is true for your situation. 

The list below is but only a few thoughts for you to consider, but remember it is not exclusive and should not be relied upon for being legal advice – only for you to consider.  The best advice is to contact your attorney for definitive actions to be taken. 

  • If you and your spouse owned assets jointly, most likely they were owned as tenants by the entireties – upon the death of one, the surviving spouse owns the entire asset.  What action might be necessary to remove the deceased spouse’s name from the asset? 
  • However, there are other forms of ownership – tenants in common – in which each spouse owned one-half of the asset and upon a spouse’s death, their one-half interest is considered a probate asset and does not necessarily pass to the surviving spouse. 
  • If the deceased spouse owned assets jointly with someone other than the surviving spouse, be aware that the asset most likely passes by operation of law to the surviving owner.  Determination must be made to determine ownership.
  • What assets were owned by your spouse either individually, jointly or with a beneficiary designation?  Some or all of the assets could be subject to estate tax – inheritance or estate tax.
  • Does the deceased spouse’s Will need to be probated?  The best answer comes only after speaking with an attorney.
  • Social Security was most likely notified by the funeral director of the death but the surviving spouse needs to follow up with the SSA for determination of future benefits. 
  • Was the deceased spouse receiving benefits from a retirement-type plan or a former employer? 
  • Do you need to address medical insurance coverage?
  • Is it necessary to prepare and file a state inheritance tax return? 
  • Is it advisable or necessary to prepare and file a federal estate tax return – especially to preserve the unused spousal federal estate tax exemption?
  • What is the impact on your individual income tax returns?
  • Does the surviving spouse need to update their estate planning documents?

Frequently upon the death of a spouse, the surviving spouse will visit a financial institution to notify them of the death.  As the surviving spouse, you want to make certain that someone can help you in the event of your inability to handle your own affairs.  When visiting the financial institution, it may be recommended that you add your child on the account.  BEWARE:  If you add your child as a joint owner, your assets could become subject to your child’s creditors.  Is this your intention?  OR, is it your intention to only grant permission for your child to have signatory permission on the account – but not be an owner?  Has the financial institution recommended that you put a beneficiary designation on the asset(s)?

There is no one answer that fits all circumstances.  Before you do anything with the financial institution, make certain that your wishes are being carried out.  Often times financial institutions advise surviving spouses to put a child’s name on their account.  And, what happens is that the child is made a joint owner and only discovered after the fact.  And, sometimes when it is too late to protect the asset.

Your best bet is to contact an attorney for consulting on what the best direction is for your situation. 

New Year – New To Do List

As we move through the new year, we may have made resolutions, created a To Do list, or just have mentally thought about different things that might need attention.  Regardless of your method, one very important item that you should give priority to is to address your estate planning and to determine if it needs to be updated.  Or in some cases be prepared, as you don’t have any documents in place.

You may think that even if you have done your estate planning in the past that you needn’t think further about it, you are so wrong.  Situations change in your life as well as in the lives of your beneficiaries.  Illness, creditor issues, marital situations, disability, death – just to name a few.   Tax laws change. Any one of these can have an impact on your estate planning. 

            Here are some thought-provoking questions for you to ponder:

  • If your spouse has died since you prepared your estate planning, have you reviewed your documents to make certain that you are covered with fiduciary – executor, power of attorney and living will/health care directive agents – appointments? 
  • Are any of your beneficiaries experiencing creditor issues that you may want to protect any potential inheritance?
  • Are any of your beneficiaries having marital difficulties?  Even if they are in solid marriages, do you have specific feelings as to whether you would want the beneficiary’s spouse to benefit or would you prefer to ensure that the next generation benefit.  For example, if you name your children as your beneficiaries but a child predeceases you, do you wish for your grandchildren to benefit or do you wish for your child-in-law to benefit?
  • If any of your beneficiaries have stepchildren, do you wish for them to be considered a child?  How about adopted children? 
  • If a potential beneficiary is disabled and receiving governmental benefits, special consideration should be given in your estate plan to ensure that the disabled beneficiary would not lose any governmental benefits they may be receiving.
  • If your distributions are to be made to beneficiaries for whom inheritance tax may be assessed, who do you want to pay those inheritance taxes?  Laws differ greatly by state.
  • What is the impact between probate assets and non-probate assets (beneficiary designated assets/jointly owned assets) and your desired distribution?
  • Depending on the size of your estate, might it be beneficial for you to engage in gifting of assets?
  • If you are charitably inclined, based on the makeup of your wealth, are there options regarding charitable donations that could reduce your income taxes while you are living?
  • If you have a child living with you who is providing care services, what are your thoughts about the child receiving compensation of some sort for their services?  Do you need to have a care agreement in place? 

More than anything, I caution you against using free forms found on the internet for estate planning purposes.  Often times there may be discrepancies that you would not know about.  A couple of examples are:  Are they specific to your state of residence?  Do they provide guidance on the necessary signature requirements and witness and notarial requirements?  Have they addressed tax payments?  Do they give you guidance on any specific situations for you or your estate (as mentioned above)?

Even if you think that your estate planning is simple, there is usually one little detail that can necessitate special attention that could have an impact. 

Why not put your estate planning review (or preparation) on the same timing as preparing your income taxes?  Why not get the burden of both off of your shoulders at the same time?

What Is Federal Estate Tax Portability?

For several years now, we have been hearing about “portability.” Do you know what it means? How does the term affect you?

Simply stated, portability of the federal estate tax exemption between married couples means that if the first spouse dies and the value of the estate does not require the use of all of the deceased spouse’s federal exemption from estate taxes, then the amount of the exemption that was not used for the deceased spouse’s estate may be transferred to the surviving spouse’s exemption so that he or she can use the deceased spouse’s unused exemption plus his or her own exemption in effect when the surviving spouse later dies.

Portability is not available for state estate taxes, but only applicable to federal estate taxes.

While the first deceased spouse’s estate may be less than the amount required to file a federal estate tax return, consideration should always be made to preserve the unused portion of the exempt as one does not have a crystal ball to know the circumstances at the time of the second spouse’s passing. There are any number of scenarios which may be present – perhaps the surviving spouse won the lottery, perhaps there was a legal settlement to which the surviving spouse was entitled – just to name a few.

The surviving spouse does not automatically “inherit” the first spouse’s unused exemption, but instead the personal representative of the first spouse’s estate must timely file IRS Form 706, United States Estate (and Generation Skipping Transfer) Tax Return, in order to make an affirmative election. If the surviving spouse is not the personal representative, the spouse should make certain that the personal representative files a Return (Form 706) to preserve the election.

Currently and most likely through 2025, the federal exemption amounts are relatively high – around $12 million at the time of this writing. But, after 2025, the amount is set to be reduced to an amount yet to be determined. Most tax professionals are guessing that the amount will be somewhere in the $5-6 million range, but there is nothing cast in stone.

So, while you may think that you needn’t pay attention to portability while your spouse is living, it is definitely something to keep in mind if your spouse should pass.

Let’s look at a few very simple examples:

  • Xavier and Cleopatra are husband and wife. Xavier has reportable assets of $3.5 million for federal estate taxes. Cleopatra has assets of $4 million.
  • If Xavier dies with a taxable estate of $3.49 million, the estate is not subject to federal estate tax. Rather than lose the unused portion of the available exemption (in 2023 the full exemption is $12,920,000), $9,430,000 would be available for portability use upon Cleopatra’s passing.

  • Now, let’s look at the scenario at the time Cleopatra dies after 2025. Her estate at the time of her death (which includes the assets inherited from Xavier) is $9 million.
    • If portability of Xavier’s unused exemption was not elected, Cleopatra’s estate tax would be based upon the following:
      • $9 million in assets less the federal exemption $5-6 million (exact amount not available at this time) would leave a taxable federal estate of $3-4 million to be taxed at a rate of what could be 40 percent.
      • That would mean that Cleopatra’s estate could pay around $1.5 million in estate taxes.
    • If portability of Xavier’s unused exemption was elected, Cleopatra’s estate tax would be based upon the following:
      • $9 million in assets less the federal exemption of $5-6 million (here again, exact amount not available at this time) less portability of Xavier’s unused exemption of $9,430,000 would eliminate a federally taxable federal estate.

You make the call. Is portability worth filing a return? Perhaps you need to have a discussion with your team – attorney, accountant, financial advisor – before you are faced with a decision. After all, no one has a crystal ball on taxes!

SCAM SEASON, ‘ER, I MEAN TAX SEASON

We are in the first half of January and the scamming has already begun with scammers claiming to be from the IRS.  This is the prime time of the year when thieves posing as the IRS call people and threaten them by saying that taxes are owed. 

Please don’t fall for these scams.  Stay vigilant.  Remember that the IRS will never:

  • Call and demand immediate payment using a specific payment method.  You CANNOT pay any tax obligations using a gift card. 
  • Demand that payment be made without giving taxpayers the opportunity to question or appeal the amount owed.
  • Call you unexpectedly about a refund.

Should you get a call like this, record the number and hang up immediately.  You can report the call by calling the Treasury Inspector General for Tax Administration number – 800-366-4484 or by using the IRS Impersonation Scam form found on the Hotline page of the Treasury Inspector General for Tax Administration. 

Don’t let your guard down and please impress upon any elderly loved ones that should they get such a call, the best thing is to hang up. 

Estimated Income Taxes

Are you required to make estimated income tax payments?  Do you know if you are required to make estimated income tax payments?  Are you aware that the final estimated tax payment toward 2022 income taxes is due January 17, 2023?

For many taxpayers, they are employed and receive a Form W-2 which reflects their earned income and the withholding of various taxes from their regular pay.  However, if you are a contract employee or retired and receiving income from a retirement source, you most likely are required to make estimated tax payments throughout the year to cover your tax liability.  In the event that you are required to make estimated payments and do not do so, you could be subject to underpayment penalties.

So, how do you know if you are required to be making estimated payments? 

Generally, if you as an individual taxpayer expect to owe tax of $1,000 or more, you should be making estimated payments.  The total anticipated tax obligation is divided into four payments due April 15, June 15, September 15 and January 15 using Form 1040-ES.  You can mail your payments or you can make online payments through the IRS.gov website. 

If you did not pay enough tax throughout the year through withholdings or estimated payments, a penalty may be assessed if you owe more than $1,000 in tax after subtracting your withholding or payments, or if you paid less than 90% of the total tax for the year, or if you paid less than 100% of your total tax from the prior year. 

If your income is received sporadically, there is a Form 2210 for you to use to calculate underpayments based upon the actual date of receipt of income.

Don’t subject yourself to a penalty for underpayment – be proactive and do your homework to determine if you should be making estimated payments.  Why incur the cost of penalties? 

Remember, the fourth quarter 2022 payment is due January 17, 2023 – don’t delay, pay today.

2023 Energy Credits

Are you thinking about making some improvements to your home in 2023?  Those improvements may bring you energy credits from the IRS if they meet certain criteria. 

Among the list of improvements that can qualify for credits are solar panels, solar water heaters, heat pumps, air conditioners, water heaters, hot water boilers, exterior doors, exterior windows, exterior skylights and insulation.  Also, if you are building a new home, there are credits available for new construction. 

Each of the improvements has its own credit amount and criteria. 

Prior to 2023, there was a lifetime credit limit.  However, that lifetime credit limit has been lifted and has been broadened to benefit more homeowners. 

If you are considering any of the improvements mentioned above, you can visit irs.gov and search for residential clean energy property credits to find more detailed information.  Some of the credit amounts are substantial and should not be missed.  While you may not see the benefits of the credits or the overall energy savings immediately, you will see them eventually. 

Happy home improving.  And best wishes for the new year.

Everyone Should Know the Facts About How the IRS Communicates With Taxpayers

Knowledge is a taxpayer’s first line of defense against scammers who pretend to be from the IRS with the goal of stealing personal information.

Here are some facts about how the IRS communicates with taxpayers:

  • The IRS doesn’t normally initiate contact with taxpayers by email. Do not reply to an email from someone who claims to be from the IRS because the IRS email address could be spoofed or fake. Emails from IRS employees will end in IRS.gov.
  • The agency does not send text messages or contact people through social media. Fraudsters will impersonate legitimate government agents and agencies on social media and try to initiate contact with taxpayers.
  • When the IRS needs to contact a taxpayer, the first contact is normally by letter delivered by the U.S. Postal Service. Debt relief firms send unsolicited tax debt relief offers through the mail. Fraudsters will often claim they already notified the taxpayer by U.S. Mail.
  • Depending on the situation, IRS employees may first call or visit with a taxpayer. In some instances, the IRS sends a letter or written notice to a taxpayer in advance, but not always. Taxpayers can search IRS notices by visiting Understanding Your IRS Notice or Letter. However, not all IRS notices are searchable on that site and just because someone references an IRS notice in email, phone call, text, or social media, does not mean the request is legitimate.
  • IRS revenue agents or tax compliance officers may call a taxpayer or tax professional after mailing a notice to confirm an appointment or to discuss items for a scheduled audit. The IRS encourages taxpayers to review, How to Know it’s Really the IRS Calling or Knocking on Your Door: Collection.
  • Private debt collectors can call taxpayers for the collection of certain outstanding inactive tax liabilities, but only after the taxpayer and their representative have received written notice. Private debt collection should not be confused with debt relief firms who will call, send lien notices via U.S. Mail, or email taxpayers with debt relief offers. Taxpayers should contact the IRS regarding filing back taxes properly.
  • IRS revenue officers and agents routinely make unannounced visits to a taxpayer’s home or place of business to discuss taxes owed, delinquent tax returns or a business falling behind on payroll tax deposits. IRS revenue officers will request payment of taxes owed by the taxpayer. However, taxpayers should remember that payment will never be requested to a source other than the U.S. Treasury.
  • When visited by someone from the IRS, the taxpayers should always ask for credentials. IRS representatives can always provide two forms of official credentials: a pocket commission and a Personal Identity Verification Credential.

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