Uncategorized – Page 5 – Kling Law Offices

Lessons Learned in a Career of Estate Planning

February 15, 2017/in Uncategorized/by Michael Kling

Through my years of law practice, I have helped clients face and plan for a wide variety of circumstances. Despite this variety, there are some important “lessons learned” that remain important no matter the circumstances.

Planning is always better. The reasons people avoid estate planning are familiar. Some want to avoid lawyers and their fees; others are uncomfortable discussing death. In reality, not planning never leaves you in a better position. Unavoidably, each of us will pass away. Having an estate plan means there will be an orderly transition for your loved ones. Planning also generally saves money by minimizing post-death costs, taxes, and even legal fees when done correctly. Just as importantly, proper planning can avoid litigation and having your personal matters become part of a public record.

A trust is usually better than just a will. While this is not an absolute, I am hard-pressed to think of a client who was worse off for having a trust instead of just a will. A trust allows more flexibility and options than a will, allowing your estate plan to more fully reflect and implement your choices and desires. A trust allows you to dictate the amounts and timing of distributions to children, can have incentives or specific provisions for life’s milestones or achievements, can optimize tax planning strategies, and can simplify the administration of your estate. These advantages make sense for most clients most of the time.

Choosing your estate planning attorney while you are alive is better. Even if you don’t have a particular fondness for attorneys, establishing a relationship with an estate planning attorney while you are alive helps your family tremendously. Your relationship (and a relationship is what it should be) with your attorney means your family has a trusted source of help and information in the time of stress or crisis following your death.

Make a personal property list. Some of the biggest fights will arise over the “stuff” you owned. Your heirs will fight the most over the big-ticket items or things that represent memories. You should write out a tangible personal property list and designate recipients for those items. Incorporating this list into your estate plan takes away the fight and your “stuff” will be distributed according to your wishes.

You get what you pay for. If you want your estate plan to reflect your personal circumstances and choices, you should have a relationship with your estate planning attorney. There should be more than one planning meeting and one document signing session. You should discuss the dispositive and tax provisions for your trust. You should also discuss the people who will be part of your estate plan—who will administer the estate, control your assets, make health care decisions, and be guardians. Instead of paying for a stack of papers, you should pay for advice, experience, expertise, and counsel. If you do, you will get an estate plan that brings you the peace of mind you deserve. And that, as they say, is priceless.

Estate Tax Reform Appears Imminent: What are Your Options?

January 4, 2017/in Uncategorized/by Michael Kling

At the time of writing this article, as 2016 is coming to an end and we contemplate January’s inauguration of Donald Trump as our next President, there is speculation over expected tax law changes. When coupled with the Republican Congressional sweep, Mr. Trump’s election increases the likelihood of significant tax reform, including repealing the estate tax. While this may sound like news you have heard before (remember the 2010 estate tax repeal?), we would suggest anyone who has, or may have, a taxable estate under current law begin reviewing their estate plans and consider implementing changes as details of expected new legislation become known. What should you do? We suggest:

Review your overall plan and determine whether it will meet your goals and desires in the event the estate and generation skip transfer (GST) taxes are repealed. Consider including alternative provisions to take effect in the event these taxes do not apply.

Carefully evaluate formula clauses to make sure they will work as intended if the estate tax and GST are repealed.

Talk to your estate attorney to insure your plan is sufficiently flexible to accommodate future changes in the law.

Consider delaying taxable gifts until Congressional proposals are released so you can understand the gift tax and basis ramifications of these transfers.

Discuss the interplay of income tax and capital gains planning with your estate attorney as these will become significant considerations upon an estate tax repeal.
Make sure you know whether you own assets in states that impose an estate tax since estate tax planning will continue to be helpful in these jurisdictions.

Which estate tax reform measures will pass and when they would become effective is still unknown. Currently, all of the proposed Republican tax policies suggest a repeal of the estate tax, and a repeal could take place immediately upon passage of new laws, or retroactively to January 1, 2017. While a mid-term effective date is always possible, using a first-of-the-year date has emotional appeal.

The GST tax is not directly mentioned in President-Elect Trump’s tax proposal, but Congressman Paul Ryan’s “A Better Way” plan expressly calls for repeal of the GST tax. As well, when the House last voted to repeal the estate tax, repeal of the GST tax was included in the measure. Thus, we fully expect that any tax reform laws will include a GST tax repeal.

It is important to realize that estate tax reform will likely also include repeal of carry-over basis at death for most assets. President-Elect Trump proposes, “capital gains held until death and valued over $10 million will be subject to tax to exempt small businesses and family farms.” This indicates that death would be a “recognition event,” causing tax on capital gains upon death. The application of a $10 million exemption lacks clarity at point, but could be per person, or per married couple.

As always, we welcome you to schedule a free consultation at Kling Law Offices to explore your estate planning options as these new laws and opportunities are unveiled.

The Purchasing Power of Retirement Assets

December 15, 2016/in Uncategorized/by Michael Kling

We recently attended the Southern California Tax and Estate Planning Council Conference and came away with a smart way of looking at retirement assets that we wanted to share. This is the idea of weighing the “purchasing power” of retirement assets when evaluating a traditional IRA and considering a Roth IRA conversion, as well as other Roth investments.

Historically, tax planning has focused on minimizing taxes and deferring any required tax payment for as long as possible. With the arrival of the Roth IRA, another approach was introduced: Consider paying taxes immediately at a known tax rate to allow future tax-free growth and distributions. The “purchasing power” idea can be explained like this (using very simple numbers for the ease of explanation):

Taxpayer 1 has $100,000 in a traditional IRA and $25,000 cash, for a total of $125,000.

Taxpayer 2 has $125,000 in a Roth IRA and no other assets.

This looks like each taxpayer has the same value of assets, $125,000.

However, if you consider purchasing power, all is not equal. Taxpayer 1 will have to pay taxes on any distribution from the traditional IRA in order to use those funds. Applying a 25% tax (again, making the math easy), Taxpayer 1 can withdraw $100,000 from the traditional IRA and use his $25,000 cash to pay the tax bill on that distribution. On the other hand, Taxpayer 2 has already paid taxes on the value of the Roth IRA assets so, upon taking a distribution, Taxpayer 2 still has $125,000 of purchasing power. By using a Roth IRA, or converting to one, the taxpayer can “lock-in” a known tax rate and then allow the retirement asset to grow tax free over time, thus preserving the purchasing power of the invested asset.

Roth IRA rules do not require the taxpayer or a spouse beneficiary to take Minimum Required Distributions (“MRD’s”). Any non-spouse beneficiary is subject to MRD’s but, presently, those distributions can be stretched out over the beneficiary’s lifetime, which maximizes long-term tax-free asset growth. In what has been expected for some time, the “death” of the stretch IRA seems to be looming. This means inherited IRAs will be subject to five-year distribution rules for any non-spouse beneficiary, completely disrupting the long-term growth benefits for future generations. When considering purchasing power, however, the Roth IRA can still be an effective tool for maximizing estate assets and minimizing taxes.

The death of stretch distributions will make conversions to Roth IRAs even more compelling. The spousal beneficiary rules are expected to remain unchanged, and non-spouse beneficiaries will still have a zero tax burden from Roth distributions. By contrast, beneficiaries inheriting a traditional IRA will be paying income taxes on distributions over a compressed, five-year timeline.

If you would like to discuss “purchasing power” concepts as they apply to your retirement assets, please contact Kling Law Offices for a free consultation. We are always happy to work with you in forming an estate plan that meets your unique needs.

A Better Estate Planning Option Is Available Under A New IRS Rule

November 17, 2016/in Uncategorized/by Michael Kling

The 2010 Tax Act introduced us to “portability” of the estate tax exemption, allowing a surviving spouse to add a deceased spouse’s unused exemption amount to his/her own estate tax exemption. This added exemption can be used during the survivor’s lifetime, or at death. To activate portability, the deceased’s estate must file an estate tax return electing the transfer of any unused exemption amount.

Although portability seemed to create a simple solution to estate tax planning for married couples, an earlier revenue procedure rule (Rev. Proc. 2001-38) stood in the way of its easy application and use. Specifically, inconsistencies in the rules meant uncertainty regarding the effectiveness of electing portability when a married couple had established a Qualified Terminable Interest Property Trust, aka “QTIP” trust.

QTIP trusts provide married couples flexibility in an estate plan, allowing the executor to choose the estate tax treatment of the QTIP trust depending on changes in tax laws or asset values. A QTIP trust also allows a couple to take advantage of the marital deduction for transfers made to a spouse in trust while allowing limitations on the power or ownership rights that spouse will have over the trust assets. This is particularly useful in second marriages since many families want to ensure that trust assets will ultimately pass only to certain children or family members. While complex, the QTIP trust is an important component of estate planning where flexibility regarding the timing of estate tax payments and the assurance of assets passing a particular way are primary objectives.

The older revenue rule allowed the IRS to grant relief for a mistaken QTIP election by an estate that did not need the election to reduce estate tax liability. Since 2010, the executor of a nontaxable estate could not file an estate tax return that made both a QTIP and a portability election. In such cases, the IRS would not recognize the QTIP election. Estate planners who recognized the advantages of using both the QTIP and the portability election have been awaiting correction of this inconsistency and the wait is now over. A newly enacted rule, Revenue Procedure 2016-49, clarifies that dual election is available in designing estate plans without compromising a couple’s tax objectives.

Why would this matter to you? A QTIP trust can reduce estate taxes at death, allows for a double step-up in basis when assets pass to the children, and has non-tax benefits regarding the control of assets. A portability election means the surviving spouse can increase his/her estate tax exemption amount to offset gift or estate tax liability. By using both elections, an executor can most effectively balance estate planning objectives regarding minimizing taxes and creating certainty about how assets will pass by using both a QTIP trust and choosing portability.

If you would like to discuss your estate planning options, please contact Kling Law Offices for a free consultation. Our goal is to help you understand and plan your estate to achieve the peace of mind you deserve.

The Disappearing Valuation Discount

October 20, 2016/in Uncategorized/by Michael Kling

Have you heard about the new tax regulations that will eliminate valuation discounts for intra-family transfers? This is important stuff. In fact, for a lot of you, this could be a game-changer. Plus, there is a time-sensitive element to consider: A public hearing on the proposals will take place on December 1, 2016, and new regulations could become effective within 30 days thereafter. Thus, if fully enacted, these regulations will very quickly make sweeping changes to the current estate planning options available to taxpayers.

The use of family limited partnerships (FLPs) and limited liability companies (LLCs) has increased in recent years, with many families creating FLPs and LLCs to hold and transfer family wealth for estate planning purposes. These entities allowed families to maximize the advantage of valuation discounts. The IRS has repeatedly challenged valuation discounts and has issued its proposed regulations in an attempt to eliminate discounts for family controlled entities (both active operating businesses and passive asset holding entities).

Family entities are a significant component of estate planning with many families using them for multiple purposes, including asset management, creditor protection, and legacy planning. Intra-family transfers of interests in these entities are given valuation discounts based on the lack of control (also referred to as minority interest) and lack of marketability of the interests. Under existing rules, discounts of 30% or more have been allowed for transfer tax purposes on gifts and bequests of interests in FLPs and LLCs. The newly proposed regulations, found in Internal Revenue Code Section 2704, will restrict these valuation discounts, effectively limiting these wealth-transfer planning techniques.

Presently, intra-family transfers of interests in FLPs and LLCs that generate valuation discounts for lack of marketability, lack of control, or other voting or liquidation restrictions allow for efficient tax transfers. By disregarding the restrictions associated with a lack of control and marketability, the IRS’s proposals will cause an increase to the interest’s value for gift and estate tax purposes. The proposed regulations may also cause higher taxes on the transfer of the interest to other family members.

Key concepts that will affect your estate plan should be reviewed and discussed with your attorney. The new regulations will apply to all business entities; ownership and control will be key issues for effective transfers; and, most non-family interests will be disregarded. Additionally, there will be a claw-back provision causing transfers within 3 years of death to be included in the estate for tax purposes.

To make intra-family transfers using valuation discounts, you will need to take advantage of the current window for “grandfathering” and complete the transfersbefore the effective date for these new regulations. If you are already engaged in transfer planning, you should complete the process as quickly as possible. If you want to use the existing laws to your advantage for wealth transfer planning, you should begin planning immediately. Please contact us to discuss your personal situation if you have any questions about how these new IRS regulations may affect you and your estate plan.

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