Kansas and Missouri Estate Planning

How does the IRS Tax Americans Living in Canada?

Living in another country does not exempt you from U.S. tax laws.

Are you an American citizen?

Do you live in Canada?

Do you think you are exempt from American taxes?

According to a recent The Globe and Mail article titled “Americans living in Canada: Be aware that the IRS is watching you,” you would be wrong.

The IRS still enforces taxes on Americans living abroad.

What are these tax rules?

Principal place of residence.

Did you sell your principal residence in Canada?

You will not be taxed on gains by the Canada Revenue Agency (CRA).

You will be taxed by the IRS on any portion of the gains exceeding $250,000.

Because the CRA does not tax this gain, you will have no foreign tax credits from this transaction available to offset the tax owed to the IRS.

Yikes!

Foreign accounts in the aggregate of $10,000.

Do you have a foreign bank account?

This could be a corporate, trust, or joint account.

If yes, you need to file a Report of Foreign Bank and Financial Accounts (FBAR).

If you do not, you could face severe repercussions.

U.S. gift and estate tax.

Your gift will be subject to gift taxes, above the annual gift exclusion amount of $15,000 per donee.

A "lifetime" amount is exempt up to $11.18 million in 2018.

You should be cautioned.

You could have U.S. estate tax liability in the future should you use this exemption, especially if the exemption is lowered down the road.

Life insurance.

If you are considering getting life insurance, you should understand the tax obligations.

When you die, the policy proceeds from a term policy are included in your gross estate calculations for estate tax purposes in the U.S.

If this brings your gross estate amount the exemption level, your estate may be taxable.

To get around this you could place your term life insurance policy in an irrevocable life insurance trust (and then live at least three years).

What happens if you get a Canadian whole life insurance policy?

Although this may be tax-exempt by the CRA, it may not be by the IRS.

You may owe taxes on the income earned inside the Canadian whole life policy.

Renunciation.

Can you renounce your U.S. citizenship to get out of paying these taxes the rest of your life?

Yes.

It can be a long and expensive process and can have its own complications.

How so?

The renunciation fee is $2,350.

Generally, you must show at least five years of tax-compliance in the U.S. before renunciation.

If not, you risk being deemed a “covered expatriate.”

If you are worth $2 million or more, you may also be considered a “covered expatriate.”

You may be able to avoid this outcome with careful tax planning.

You should talk to an experienced cross-border attorney if you are considering renouncing your United States citizenship.

Reference: Globe and Mail (September 19, 2018) “Americans living in Canada: Be aware that the IRS is watching you”

Retirement Relocation? Watch Out for Death Taxes!

We are very blessed to live smack-dab in the middle of the United States, here in Kansas and Missouri. Sure, cultural fashions arrive here from both coasts with some delay (like colored mohawks and body ink), but that is not necessarily such a bad thing. I mean I can live without any "bling" on the rear end of my jeans. 

On the other hand, if you are moving outside of the heartland for retirement, then you need to beware of how folks elsewhere approach things affecting your wallet (right beneath that bling on your jeans).

This includes death taxes, whether estate, inheritance or both forms of taxes.

First, a little background.

The Brookings Institute has studied federal estate taxes and found that only about one in 700 Americans actually are subject to them. However, each state has its own tax system, too.

This is where you must look before you leap.

While the federal applicable exclusion is $5.43 million in 2015 or $10.86 million for a married couple, many states have much lower thresholds. This casts a much wider net—meaning there is a greater likelihood your estate will be subject to state death taxes. 

To add insult to injury, some of these taxing states do not even index their exemption amounts for inflation, which gradually increases the number of taxpayers affected. 

So, how big is the problem of death taxing states?

Sixteen states and DC have an estate tax, with some taking a bigger chunk of your estate than others. 

And New Jersey is the poster child state.

For confirmation we turn to a "Garden State" newspaper, The Times of Trenton.

In a recent article, titled “N.J. ranks among worst states to die from an estate tax perspective,” The Times asks why more taxpayers are paying estate tax on a state level than the federal? 

 Of all of the states, New Jersey has the distinction of having the lowest exemption level for estate taxes ($675,000).

On estates larger than this exemption amount the New Jersey estate tax rates range from 4.8% to 16% of the total estate. 

And, it gets worse from there.

Not only does the Garden State levy an estate tax, but it is one of only two states to assess an inheritance tax where applicable. This is a tax the "inheritor" pays based on his or her degree of kinship to the decedent.

The state also has a three-year look-back on gifts considered to be in contemplation of death—this could trigger even more inheritance taxes! 

Remember: Spouses are exempted from paying estate or inheritance tax, and in some states, this exemption applies to civil unions. 

Practically speaking, death taxes are first experienced in most families at the death of the surviving spouse. Commonly, that is when assets are passed to other non-spousal beneficiaries.

Unfortunately, too many otherwise responsible taxpayers wait until it is too late to establish a plan addressing death these taxes in all its shape-shifting forms. 

Develop an estate plan to help to reduce future estate taxes wherever you reside ... especially if you are retiring to New Jersey!

An experienced estate planning attorney can help determine the most appropriate approach for you, your loved ones and your hard-earned assets.

Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.

For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri) and to download free tools to help you organize your estate, visit my estate planning website. 

Reference: The Times of Trenton (April 25, 2015) “N.J. ranks among worst states to die from an estate tax perspective”

The House Seeks to Kill Death Tax

That title of today's blog post reads like the pre-release description of a new summer action movie. But we have seen this "movie" played out in the Washington, D.C. before. Every time an attempt is made on its very life ... the villanous death tax just keeps coming back.

It is the tax equivalent of Freddie Krueger.

On the other hand, depending on your political persuasion, the death tax may be rebranded and cast as the "estate tax" hero. 

For those folks it is the IRS version of Robin Hood.

Did I fail to mention that the overarching discussion over taxation is philosophical, political ... and divisive?

In case you missed it, earlier this month the House of Representatives voted to repeal the death tax. The act was largely symbolic, as it came during tax filing week.

Why symbolic?

The White House has vowed to veto.

Dun, dun, dun.

And it appears a run at killing the death tax does not have the magical 60 votes needed to counter a filibuster and get it through the Senate anyway.

A silver bullet it may be not, as Yoda would say (were he to weigh in on this drama).

Under current law, individuals with estates of under $5.43 million in 2015 year (and couples with $10.86 million estates) are exempt from paying the estate tax of 40% on the amount of assets above that threshold.

The last time the House voted to end the death tax was 10 years ago. 

So, why now?

According to a Republican interviewed in a recent article in The Hill titled “House votes to repeal estate tax,” the vast majority of Republicans now in the House have never had the opportunity to stand up for small businesses who are threatened by the death tax every day.

The article in The Hill notes that repealing the death tax would increase the deficit by $269 billion over the next 10 years, and the Joint Committee on Taxation projects that the death tax will impact 5,400 estates in 2015.

This is approximately 0.2% of the 2.6 million deaths expected in the U.S. this year. 

Nevertheless, the original article reports that Republicans think they have a strong argument for repealing what they believe is “an immoral tax that resonates with voters across the economic spectrum.”

The GOP claims that American taxpayers are taxed every step along the way as they work, save and accumulate assets. Consequently, at death their estates should be left to their loved ones without yet another tax.

In addition, the estate tax is more likely to hit family farms and small businesses than the ultra-wealthy who can afford complex estate planning.

But, as one might guess, the Democrats see this differently and view the vote as another way to portray the Republicans as the party of tax cuts for the rich.

Whether you have a little or a lot a lot, true estate planning never has been limited to defeating the "Freddie Krueger" death tax. 

The death tax/estate tax comes and goes, rises and falls with political winds you and I cannot control out here in the heartland of America.

Bottom line: Contact an experienced estate planning attorney who can help you minimize (or eliminate) death taxes/estate taxes, as you seek to protect everyone you love and everything you have.

Can you say personal responsibility?

Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.

For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri) and to download free tools to help you organize your estate, visit my estate planning website. 

Reference: The Hill (April 16, 2015) “House votes to repeal estate tax”

Who's Afraid of ... the Big Bad Death Tax?

While a good number of states have some form of estate or inheritance taxes, only about one percent of Americans are now subject to federal death taxes. So, with estate protection from estate taxes now less of a concern, many Americans are engaging in estate planning to protect their loved ones from the estate they will inherit.

Yes, this is complicated stuff.

So-called “death tax” rates have been the subject of much debate, reform, and repeal over the past 15 years.

However, tax rates of all stripes have been unreliable, so it is hard to use them with confidence when looking at a long-term estate plan.

A recent Forbes article, titled "Estate Planning Fears That Keeps Us Up At Night," explains what this means.

For example, from 2001 to 2010, federal estate tax rates fell until they were eliminated in 2010, but were reinstated the next year and made permanent last year when Congress set a 40% rate on estates in excess of $5 million.

By the way, this $5 million is not static, but is inflation-adjusted. For example, for 2014 it is $5.34 million and will be $5.43 million for all of 2015.

Wow.

In addition, there are now 15 states and the District of Columbia that impose their own estate tax—with six states also imposing an inheritance tax. Some states have raised their exemptions to be more in line with the federal level or have eliminated their inheritances tax altogether.

So what does this mean to you? 

Well, the original article says this is a win for parents who want to leave their children, other heirs, and charities as much as they are able. On the other hand, many people are most concerned whether the wealth they have and pass on to their heirs is going to help those individuals or make matters worse.

T. Boone Pickens, patron saint of Oklahoma State University, has said publicly that he does not intend to leave all his money to his children.

“I’m not a big fan of inherited wealth,” Pickens has said. “It generally does more harm than good.”

This is why it is so important to work with an experienced estate planning attorney.

He or she can custom design an estate plan with the best interests of both you and your loved ones in mind.

As the original article notes, money matters in estate planning. As new tax rates become effective, it is a good time to sit down with your estate planning attorney.

Even more important than taxes, though, your attorney can provide creative solutions so your estate can support your beliefs, philosophies, and charitable intentions—and help prepare your heirs to accept and sustain it.

Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.

For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri) and to download free tools to help you organize your estate, visit my estate planning website.

Reference:  Forbes (October 29, 2014) "Estate Planning Fears That Keeps Us Up At Night"