Kansas and Missouri Estate Planning

What is Estate Tax "Portability"?

Portability helps with estate tax efficiency.

Taxes are a fact of life.

We know we have to pay them.

We hope we do not have to pay a lot.

Tax efficiency is an important part of estate planning.

According to a recent The Monterey Herald article titled “Financial planning: What you need to know about portability,” when it comes to estate tax planning, portability helps simplify this process.

Estate taxes are levied on both the federal and state levels.

The current federal lifetime estate tax exemption is $11.4 million per person.

This means you can leave up to this amount to your family without subjecting the assets to an estate tax.

The estate tax is 40 percent on the assets above this threshold.

A significant cut by any measure.

Portability will apply in situations involving married couples.

Let us say a couple has an $18 million estate.

The husband dies first leaving his estate to his wife.

He did not use any of his exemption.

With portability, his exemption amount is added to the exemption amount of his wife.

This means his $11.4 million plus her $11.4 million equals a $22.8 million exemption.

When she dies and passes her $18 million onto her children, no estate tax will be due to the federal government

Without portability, the combined estate passing to the children would take a "haircut" of 40 percent, or $6.6 million over the exemption amount.

Beware: Portability is not automatically applied to the estate of the surviving spouse.

He or she must claim the unused tax exemption.

To do so, the executor must file IRS a Form 706 tax return within nine months of the date of death for the deceased spouse.

If more time is needed, you can request an automatic six month extension.

Reference: Monterey Herald (February 27, 2019) “Financial planning: What you need to know about portability”

Should I Schedule a "Full Physical Exam" of My Estate Plan?

Reviewing your estate plan is vital to its health, just like a full physical exam is to your own health.

Many of the "responsible" things we do in life are enjoyable.

For example, very few people love going to the dentist.

Even fewer look forward to medical tests or annual physicals.

If you do, you are in the minority.

According to a recent The Kansas City Star article titled “Talk to estate attorney about impacts of Tax Cuts and Jobs Act,” regular checkups are important when it comes to your estate planning as well.

Why?

One of the primary reasons is changing tax laws.

And with the Tax Cuts and Jobs Act of 2017, it is time for a review.

The federal estate tax exemption doubled, limiting the potential for a taxable estate.

If you had a trust with a formula tied to the former federal tax exemption, it could severely impact your estate plan by triggering some unpleasant unintended consequences.

How so?

If you have an estate plan created in 2001 when the exemption was a paltry $675,000, it could have arranged for your children to receive the tax exempt amount and your spouse to receive anything beyond the exemption amount.

If you were to die today, you could unintentionally disinherit your spouse.

Why?

The federal estate tax exemption amount is $11.4 million ... per spouse.

Yikes!

Another issue is portability.

Portability was introduced in 2011.

Without portability, bypass (also known as "credit shelter") trusts were helpful tools.

It allowed income to be paid to a spouse upon your death and then have the principal pass your children after the death of your spouse

The reason?

Folks wanted to maximize the full tax exemption available for the estate of the first spouse.

Now, the "unused exemption" from the estate of the first spouse to die can be added to the estate of the surviving spouse though portability.

Although cost-basis was not addressed in the most recent tax law updates, it is important to consider it in your planning.

A bypass trust could keep your children from benefiting from a second “step-up” in basis.

Why?

Because the "basis"of assets is fixed in such a trust based on their value on the date of death of the first spouse to die.

Consequently, any appreciation in value of those very assets during the lifetime of the surviving spouse will not enjoy as new basis as of the death of that spouse.

This could have significant income tax consequences on your heirs.

If it has been a few years since you have reviewed your estate plan, schedule an appointment with your estate planning attorney.

He or she will be able to get your estate plan back into good health.

Reference: The Kansas City Star (February 7, 2019) “Talk to estate attorney about impacts of Tax Cuts and Jobs Act”

What Recent Estate Tax Law Changes Should I Know About?

New tax laws could impact your estate planning.

Tax laws seem to be constantly changing.

Although constant may not be the most accurate word, tax laws do change frequently.

The tax law signed in December of 2017 made several changes.

Big ones.

According to a recent The Kansas City Star article titled “Talk to estate attorney about impacts of Tax Cuts and Jobs Act,” if you have not looked at your estate plan in more than a year, you should do so now.

What changed with the Tax Cuts and Jobs Act?

The federal estate tax exemption more than doubled from $5.49 million for an individual in 2017 to $11.18 million per person in 2018.

For 2019, the exemption will is $11.4 million for an individual and $22.8 million for a couple.

Oftentimes, wills and trusts will use "formulas" tied to the federal estate tax exemption.

If this was the case for your will or trust, you will want to revisit them with your attorney to ensure you do not trigger unintended tax and non-tax consequences.

Although the most recent law did not change the step-up of basis, the impact this has on estate planning may be more pronounces.

How so?

With a step-up on highly appreciated assets, your loved ones could inherit such assets while minimizing or avoiding income taxes for these gifts.

A step-up in basis will not apply for all inheritances.

Why is that?

For example, assets received through a "bypass" trust (aka a "credit shelter" trust) after the surviving spouse dies will not receive a step-up in basis as this was applied after the death of the first spouse.

If your estate plan originally included a bypass trust, you should contact an experienced estate planning attorney to consider implementing a more tax-efficient tool.

Was the last time you reviewed your trust prior to 2011?

If yes, you will want to have a "full physical exam" of your estate plan.

In 2011 "portability" was introduced allowing the surviving spouse to utilize the estate tax exemption not used in the estate of the first spouse to pass.

Regardless, be mindful of potential non-tax surprises created by a move to portability planning.

This is especially true if yours is a "blended" family.

You could end up disinheriting your own children.

Schedule an appointment with an experienced estate planning attorney to review and updated your estate plan to align with recent tax changes.

Reference: Kansas City Star (February 7, 2019) “Talk to estate attorney about impacts of Tax Cuts and Jobs Act”

What are the Federal Estate & Gift Tax Exemptions for 2019?

Tax law welcomes changes in 2019.

There are few constants in life.

One is change.

Another is death.

This makes changes in estate tax law particularly important.

According to a recent Forbes article titled “IRS Announces Higher 2019 Estate And Gift Tax Limits,” there are new changes in the estate law for the coming year.

What can you expect?

Although the gift exclusion has remained the same at $15,000, the estate exemption has changed.

The federal exemption amount will rise from $11.18 million to $11.4 million per individual.

For couples filing together, it will rise from $22.36 to $22.8 million.

Not surprisingly, the number of taxable estates has decreased as the exemption has increased.

How much?

In 2018, the number of taxable estates was 1,890.

That number was 4,687 in 2013, when the exemption as $5 million.

What about back in 2000, when the exemption was $675,000?

Would you believe the number of taxable estates in 2000 was a whopping 52,000?

Quite a significant decrease from 2000 to present, yes?

The likelihood of your estate being taxed on a federal level is small.

There also is an unlimited marital deduction.

This means your assets can pass to your spouse without estate taxes.

What happens when this surviving spouse dies?

This depends on whether you have elected "portability" in a timely fashion.

For portability to apply, it must be formally elected on the estate tax return of the first spouse.

This must be done even if no tax is due.

Can you avoid estate planning?

No.

Why?

Seventeen states and Washington DC still have their own estate and inheritance taxes.

Their exemption thresholds tend to be far lower.

Another reason?

Estate planning involves far more than taxes.

Do not delay.

Work with an experienced estate planning attorney.

Reference: Forbes (November 15, 2018) “IRS Announces Higher 2019 Estate And Gift Tax Limits”

What is the Latest on the Maryland Estate Tax?

Maryland recently introduced new estate tax legislation.

Do you live in Maryland or have a family member living there?

Perhaps you are planning a move to this state in the near future.

You will want to make yourself aware of the estate tax laws of Maryland either way.

According to a recent LegiScan article titled“MD HB308,” Maryland recently updated its tax law.

The results?

The estate tax exclusion for the state is $5 million per person starting January 1, 2026.

This amount will be indexed for inflation, but it does carry an option for portability.

What does this mean?

The executor of the estate can make an election so any of the exempt amount not used by the deceased spouse with be added to the exemption available to the widow or widower.

Are any other tax laws changed?

The maximum estate tax rate will remain at 16 percent, and the inheritance tax will also remain the same.

The surviving spouse and children are exempt from an inheritance tax.

The maximum Maryland estate tax rate of 16% is not altered with the new legislation.

What if you die in 2018?

The exclusion amount is $4 million, not indexed for inflation.

Portability would also not be an option.

Regardless your state of residence, an experienced estate planning attorney admitted to practice there will be able to explain and plan for the tax laws applicable to your estate.

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), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Reference: LegiScan (April 5, 2018) “MD HB308”

Why Should I Have My Estate Plan Reviewed Now?

The tax laws may change your estate planning strategy.

Taxes impact financial decisions.

When tax laws change, you often need to reevaluate your goals and strategies.

According to a recent Forbes article titled “Trusts In The Age Of Trump: Time To Re-Engineer Your Estate Plan,” this includes your estate planning.

How do the new tax laws influence estate planning?

The federal tax laws now allow for a higher federal estate tax exemption.

What is it?

The exemption is now just north of $11 million per individual when passed to children or non-charitable heirs.

This means the assets will pass without estate or federal gift taxes.

If you are married you could combine your exemptions and transfer just north of $22 million free of federal estate taxes.

By transferring the assets into a dynasty trust, your wealth could grow and pass to unlimited generations in the future without being subject to estate taxes.

If your state has an estate tax or inheritance tax below the federal threshold, you will need to consider this in your planning.

Otherwise, you could owe your state government a sizeable bill.

You will want to avoid leaving a trust with the exemption amount to children and the rest to your spouse.

Why?

This could disinherit your wife and allow your children to receive everything.

The new tax laws now allow for "portability" of the federal estate tax exemption between spouses.

What does this mean?

This means that whatever exemption amount unused by the first spouse to die will pass to the widow or widower.

However, this is not automatic.

The executor must file a tax return electing portability for this to happen.

Are you concerned about capital gains taxes?

If yes, then you may want to skip using a traditional credit shelter trust with assets like collectibles, stocks, mutual funds or real estate.

Why?

When you die, these assets will receive a step-up in basis at your passing to their current value.

This means heirs can sell these inherited assets immediately and would not owe a capital gains tax.

If you leave these assets directly to your spouse, he or she can receive a step-up in basis at your death and the assets will get another step-up when he or she dies.

If you leave them through a shelter trust, the assets will only receive a step-up in basis at your passing.

Trusts are complex estate planning tools.

They have their purposes, but you want to be sure the possible purposes fit your needs.

Work with an experienced estate planning attorney to create or revisit your plan to meet your goals.

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), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Reference: Forbes (February 13, 2018) “Trusts In The Age Of Trump: Time To Re-Engineer Your Estate Plan”

Is there Estate Tax Relief for Widows?

There may be more grace for "portability" elections.

Losing a spouse changes everything.

In the midst of the losing your best friend, you often have other administrative duties to settle his or her affairs.

Especially if you are above the estate tax threshold.

According to a recent Forbes article titled “IRS Offers Estate Tax Relief To Widows And Widowers,” one of the most important actions to take involves the "deceased spousal unused exclusion amount (DSUE)".

What is the DSUE, otherwise known as the "portability" election?

DSUE planning is for those married couples who have estates that may be subject to estate taxes if the federal estate tax exemptions of both spouse's are not used.

Set in 2010, it provided for use of both the unified credit and the unlimited marital deduction.

What are these?

The unified credit protects a certain amount from estate taxes.

In 2017, this amount is $5.49 million for an individual.

The unlimited marital deduction allows for money left to the surviving spouse to be free from the estate tax.

The DSUE was particularly helpful in diminishing the need for certain couples to create trusts to protect their money from the estate tax.

A provision to know is Revenue Procedure 2017-34.

What does this do?

If the decedent died after December 31, 2010 and no estate tax return was filed or required, the executor can file a return with the portability election and take advantage of the estate tax relief.

In this filing the executor must reference the revenue procedure at the top of the first page.

This procedure is available until January 2, 2018.

After this date, the time limit is up to two years after the death of the first spouse to pass on.

Filing forms may seem like a headache, but a small headache may be worth it if you could potentially die with a net worth exceeding the exclusion amount.

Estate planning should not be taken lightly.

Work with an experienced estate planning attorney to determine if this is appropriate for your situation. 

Reference: Forbes (June 12, 2017) “IRS Offers Estate Tax Relief To Widows And Widowers”

Who is Responsible for Filing Portability?

An administrator of the estate must fulfill his or her duties.

Do these duties include filing for portability?

Are you the administrator of an estate?

Did the decedent have a surviving spouse?

According to a recent Justia article titled “In the matter of Estate of Vose,” 390 P.3d 238 (Okla. 2017), you are responsible for filing for portability for the surviving spouse.

This recently came into question in an Oklahoma case.

What happened?

The spouse of a decedent asked for an order from a trial court to make the administrator file for benefits from the portability election.

The court complied and gave an order for the administrator to file a federal estate tax return and elect portability of the Deceased Spousal Unused Exclusion (DSUE) according to federal estate and gift tax laws.

The administrator appealed.

Why?

He claimed the widow had no right to the portability benefit under the terms of a premarital agreement she had signed.

The State Supreme Court upheld the order of the trial court.

The reasoning?

The portability rule allowing a surviving spouse to retain the unused estate and gift tax exemption has been in place since 2010.

The premarital agreement was signed in 2006.

Also, 26 U.S.C.A. § 2010 requires the administrator to make the election to allow portability of the DSUE for a surviving spouse and to act in the interest of the estate.

As a result, the court decided the portability was outside the scope of the premarital agreement.

What happens of the election is not made within the specified time limit?

The portability election is lost.

By the way, the administrator was her stepson and the son of the decedent.

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), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Reference: Justia (January 17, 2017) “In the matter of Estate of Vose”

Can Life Insurance be Inherited Tax-Free?

Taxes on inheritances are affected by how the asset is inherited.

You were named as a life insurance beneficiary.

But you are not quite sure what this means.

Do you have to pay tax?

Or is it exempt?

Good question.

A recent NJ.com post, titled “Is inheritance tax owed on life insurance?,” addressed this very question.

Where do you begin?

First, you need to know the tax rules for your state.

For example, those in New Jersey could potentially face the state estate tax, the state inheritance tax, and the federal estate tax.

Federally, the estate tax exemption is $5.49 million.

With "portability" this would be more.

What is portability?

Portability is when the surviving spouse can add the remaining exemption of his or her last deceased spouse to his or her own federal estate tax exemption.

What does this mean?

A married couple who plans properly could exempt up to $10.98 million at the federal level.

Currently, there is still a $2 million cap on what can pass free of estate tax in New Jersey.

Although it is scheduled to no longer exist after this year, it is in effect for 2017.

Another bummer?

New Jersey does not allow for portability.

How are estate taxes calculated?

The tax is calculated from the gross estate, excluding certain deductions.

What are some of these deductions?

• Estate Administration expenses
• Debts
• Funeral expenses
• Charitable donations
• Bequests to a spouse in the form of a qualified trust
• Bequest made outright to the surviving spouse

What assets are generally included?

All assets controlled or owned by the deceased individual.

Does this include a life insurance policy?

If it is paid to the estate or a third-party beneficiary, yes.

The state inheritance tax is also a factor.

What are these rules?

In New Jersey, the rules are different from the estate tax.

They involve a variety of factors.

Like what?

• Whether the transfer or bequest was made within three years of the death of the individual.
• The relationship of the beneficiary to the decedent.
• The type and value of the asset.

How do these factors affect the inheritance tax?

There is no inheritance tax if an individual is of a certain relationship.

What relationships are included in the exemption?

• Spouse
• Grandparent
• Parent
• Domestic partner
• Descendant
• Charity
• Step-child of the decedent

Does the amount matter?

No.

Not for any of the aforementioned relationships.

What about if the relationship is not one mentioned above?

The nature of the relationship as well as the value and type of asset must be considered together.

Are certain assets completely exempt from inheritance tax?

Yes.

Life insurance is always exempt in New Jersey ... if it is paid to the beneficiary or the trust of the beneficiary.

What if it is paid to the estate?

The tax exemption does not apply.

Does this seem like a lot to consider?

It is.

For the most tax-efficient planning, you must work with an experienced estate planning attorney.

He or she will be able to create a plan to align with the unique estate and inheritance tax laws for your state.

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), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Reference: NJ.com (March 28, 2017) “Is inheritance tax owed on life insurance?”

How does "Portabililty" Impact My Estate Plan?

Lots of things have changed over the years. Yes, again, I am a master of the obvious.

This certainly is true when it comes to estate planning.

This was the theme of a recent article in The (Anderson, IN) Herald Bulletin titled "Changes in laws can affect your estate planning."

The article explains the basics regarding how revocable grantor trusts are created to help folks avoid probate and how they work.

For example, the three parties to every revocable grantor trust are the grantor (the person creating the trust, also known as a trustmaker, settlor or trustor), the trustee who manages the assets held in trust (typically the grantor), the lifetime income/principal beneficiary (also usually the grantor), and the remainder beneficiary (those who inherit after the grantor/trustee/beneficiary dies).

Taxes from investments and income are reported on the standard Form 1040 tax return of the grantor.

When assets are placed in a trust ("funding the trust"), the grantor/trustee/beneficiary has control and the use of the trust assets.

Ownership is structured so that there is no probate required to manage or distribute trust assets should the grantor/trustee/beneficiary become incapacitated or upon his or her death.

As a result, grantors should fund the trust with all of their assets with the exception of IRAs and retirement accounts.

Under previous laws, separate trusts were oftentimes created for a married couple and considerable time would be spent determining how to split the couples' assets between the two trusts.

Why?

Because, under the laws at that time, when the first spouse passed the survivor would be able to only use the unified credit available to the assets of the deceased spouse to avoid death tax liability. 

Again, technically speaking, to avoid probate and minimize estate taxation spouses would have to create two trusts—both revocable—and when one spouse passed, that trust would become irrevocable.

Thereafter, all of the income would be paid to the surviving spouse along with discretionary principal.

Any trust assets remaining at the death of the surviving spouse would pass to remainder beneficiaries.

That, however, was then.

This is now.

A recent tax law change provides for the "portability" of the unified credit of the deceased spouse ... without the creation of a separate trust. 

Oh, by the way, the death tax only impacts estates worth more than $5.34 million for singles and $10.86 million for married couples.

That kind of puts things in perspective, yes?

Consequently, this tax law change makes it imperative that married couples re-examine their separate trusts and perhaps even consider funding a single trust for both of them together.

The original article acknowledges that we all like to compartmentalize decisions.

I mean who really wants to think about estate planning, if given the option to do anything else?

I get that.

Nevertheless, you need not go down that road alone.

Contact an experienced estate planning attorney first to see if your estate plan needs to be updated. 

So, how do you find an "experienced" estate planning attorney?

First, ask around. Friends, family and other professional advisors are trustworthy sources.

Second, conduct an "organic" search on "Google" for "estate planning" near you (e.g., "estate planning Overland Park KS".

Third, either way, verify. Check out the education, experience, ratings and client reviews of any attorney before you contact him or her.

How?

There are two helpful resources just a mouse click away to assist with your due diligence:  Avvo.com and Lawyers.com. 

Check any Avvo ratings, client ratings/testimonials and attorney endorsements on Avvo.com and any "peer ratings" by judges/other attorneys and any client ratings/testimonials on Lawyers.com.

In fact, I use both of these services to thoroughly vett attorneys before referring members of our "client" family for legal help.

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), visit my estate planning website.

Reference: The (Anderson, IN) Herald Bulletin (July 10, 2015) "Changes in laws can affect your estate planning."