If you are serving as executor or trustee for a loved one’s estate/trust, you have duties, including filing and paying taxes.  This is serious stuff, because if you goof up, you can be held personally liable for the taxes, interest, and penalties.

We are providing an overview of executor and trustee tax duties, but you definitely need to meet with a qualified probate – trust settlement attorney to get good advice, regarding your individual situation.

The 1040

As executor or trustee, you will be responsible for filing the decedent’s final 1040.  If your loved one died anytime in 2011, the final tax return will be for the tax year ending December 31, 2011.  If you loved one dies anytime in 2012, the final tax return will be for the tax year ending December 31, 2012.

As you might expect, the returns are due April 15^th of the year following death and you use the decedent’s social security number.

The 1041

If the trust or estate has any income from that date of death until the trust or estate is closed, a 1041 must be filed.

The 1041 is due April 15^th of the year following death and you use the EIN number assigned to the estate.

The 706

If the estate is large and exceeds any remaining applicable unified credit amount (which was $5 million in 2011, is $5.12 million in 2012, and will be $1 million in 2013) or you want to maintain eligibility for portability, a federal estate tax return (706) must be filed.

The 706 is due 9 months after the date of death (and can be extended for an additional 6 months.)  Use the estate EIN number to file.

As of this writing, California does not have a state inheritance tax or state estate tax, but you would be wise to consult with a qualified probate – trust settlement attorney (estate planning attorney) to determine the current state of the law and how it applies to the trust or estate you’re handling.

Legacy APC, A Trusts & Estates Law Firm is a member of the American Academy of Estate Planning Attorneys.

You may (or may not) have heard about “portability” and the ability for both a husband and wife to use their full federal estate tax credits, without trust planning.  Don’t be so sure.

You absolutely still need trust planning and here’s why.

Why You Need Trust Planning

The trust we’re discussing is usually included in a revocable living trust.  (It can be included in a will, but will-based planning has pitfalls and trusts have virtually no pitfalls.)

This planning is called “credit shelter trust” planning or “AB trust” planning.  It’s a good idea for all married couples, who have revocable living trust planning, to include credit shelter/AB trust planning.

Why?

1. To pay the least federal estate and generation-skipping tax possible.

1. To provide asset protect for trust assets, so they can’t be taken by your spouse’s or children’s creditors (bankruptcy, lawsuit, malpractice, divorce, and the like.)

Why You Can NOT Count on Portability

There are four reasons you cannot count on portability and still need credit shelter/AB trust planning.

1.  Portability ends December 31, 2012.  Unless both you and your spouse are going to die before then, portability won’t work for you.

2.  Portability requires that the executor/trustee (of the first spouse to die) file a federal estate tax return; this isn’t typically done unless there is a taxable estate and if the marriage is a second or third marriage, the executor/trustee may not cooperate.

3.  Portability provides absolutely NO asset protection.

4.  Portability is riddled with pitfalls and, likely, to have fallout litigation.

If you’re married and doing trust-based estate planning, be sure to include a credit shelter/AB trust; despite portability rules, you still need a trust.  A qualified estate planning attorney can help you.

Legacy APC, A Trusts & Estates Law Firm is a member of the American Academy of Estate Planning Attorneys.

A charitable lead trust benefits you, your family, and your favorite charity.  You transfer assets into the trust, the charity receives an income stream for a period of years or your lifetime; then, your family receives a lump sum of the assets that remain in the trust and the trust terminates.

It’s a split interest trust, which simply means that you or your family has an interest and your favorite charity has an interest.  Below, we highlight 5 charitable lead trust benefits for you and your family.

1. You receive an income tax deduction for the present interest of the income stream that goes to the charity.
2. Assets in the trust can be sold without you paying capital gains taxes.
3. You get to benefit the charity of your choice; this can be a public charity such as your library or animal shelter or it can be your own private charity such as a family foundation.  You can get credit for your gift from the charity during your lifetime, even if the income stream to the charity doesn’t begin until your death.
4. Your family gets a lump sum at the end of the trust’s term.  This lump sum is outside your estate for federal estate tax purposes.
5. The lump sum assets can go to your family in an asset protected trust so that they’re protected from bankruptcy, lawsuits, and divorcing spouses.

Ask a qualified estate planning attorney if a charitable lead trust and its benefits may be a good fit in your estate plan.

Legacy APC, A Trusts & Estates Law Firm is a member of the American Academy of Estate Planning Attorneys.

You, likely, wish to pay the minimum amount of taxes possible.  To that end, it’s helpful to understand the annual exclusion versus the lifetime exemption.  After all, while Uncle Sam is often an unintentional heir, not too many folks write him a check intentionally, if they can avoid it.

Annual Gift Tax Exclusion

Each calendar year, you (and everyone else) can give away up to $13,000 to as many people as you would like.  You can write one check on January 1^st (or any other day of the year) or give several gifts throughout the year.

Your gifts fall under the annual exclusion, so long as they don’t exceed $13,000 to any one individual.

In addition, the annual exclusion is doubled, if you’re married.  You and your spouse can, together, give up to $26,000 to as many people as you would like.

Lifetime Gift Tax Exemption

In addition to the annual gift tax exclusion, you also have a lifetime gift tax exemption.  This means, during your lifetime, you can give away assets which are equal or less than the lifetime gift tax exemption.

In 2012, that lifetime gift tax exemption is $5 million; however, the law changes.  In 2012, the lifetime gift tax exemption is set to reduce to $1 million.  If you have significant wealth that you’d like to pass to loved ones, now is the time to do it.

Like the annual exclusion, the gift tax exemption is doubled for married couples.  In 2012, a married couple can give away up to $10 million; in 2013, $2 million.

If you are interested in gifting, consult with a qualified estate planning attorney so you can take advantage of the annual gift tax exclusion and/or the lifetime gift tax exemption and avoid or minimize gift taxes.

Legacy APC, A Trusts & Estates Law Firm is a member of the American Academy of Estate Planning Attorneys.

Marriage has the tax benefit of the unlimited marital deduction, which is a deduction that allows you to give, either during your lifetime or at death, an unlimited amount of assets to your spouse.  A millionaire could give a million dollars to her spouse without being taxed and a zillionaire could give a zillion dollars to her spouse without being taxed.  The marital deduction is, indeed, unlimited.

Why You Should Use the Unlimited Marital Deduction

• Taxes are delayed
• Taxes can be minimized as your spouse can use his or her own unified credit exemption to reduce or eliminate the taxes on the assets you pass to him or her.
• You can pass assets in trust to your spouse and protect them from future creditors

Why You Should NOT Use the Unlimited Marital Deduction

• If portability laws aren’t in effect or the proper steps aren’t followed to take advantage of portability, you could be wasting your unified credit exemption and that means more taxes are paid, overall.
• Instead of using the unlimited marital deduction for all of your assets, this means that your unified credit exemption amount should go either to someone else such as to trusts for your children or to a family trust for your spouse and children.  Then give the excess to your spouse (or a trust for your spouse) to take advantage of the unlimited marital deduction.

Unlimited Marital Deduction Requirements

• Your spouse must have a right to all of the income of the assets.
• Your spouse must be the only beneficiary of the assets during his or her lifetime.
• He or she must have the right to make the assets income producing.
• Your spouse must either be an American citizen or receive the assets in a qualified domestic trust (QDOT.)
• The assets must be taxable in the estate of the surviving spouse (unless that spouse has remarried and passes assets to the new spouse.)

The unlimited marital deduction reduces the estate tax dollar or dollar; it’s an important planning tool.  Consult with a qualified estate planning attorney to determine how to make the unlimited marital deduction work for you and your family.

Legacy APC, A Trusts & Estates Law Firm is a member of the American Academy of Estate Planning Attorneys.

As of November 17, 2011, legislation has been proposed that, if enacted, would change the federal estate tax related laws.  The proposed legislation is called of H.R. 3467, The Sensible Estate Tax Act of 2011.

In a nutshell, the proposed legislation would make the following changes:

• Federal Estate Tax and Gift Tax Exemption and Rates

The federal estate tax and gift tax are unified; they have one exemption that can be used during lifetime or at death.  The exemptions are the same and the tax rates are the same, regardless of whether assets would be transferred during lifetime or at death.

The federal estate tax (and gift tax) exemption, now $5 million in 2011, is indexed for inflation and is set to increase to $5.12 million on January 1, 2012.  The current tax rate is 35%.

The new law would reduce the federal estate tax exemption (and gift tax) to $1 million on January 1, 2012.   Then, beginning January 1, 2013, the exemption would be indexed for inflation (starting from the year 2000.)

The new law provides for the estate tax rate (and gift tax) to be increased to 55% on January 1, 2012.

• Portability of Federal Estate Tax Exemption

For 2011 and 2012, portability is in place.  Portability means that if certain conditions are met, that married couples do not need AB trust planning and don’t need to be concerned about how their assets are owned to qualify for a double exemption.

The new law would continue portability (which would otherwise end January 1, 2013.)

• State Credit for Federal Estate Taxes Paid

Currently, California (and other states) doesn’t have a “pick-up tax.”  A pick-up tax provides a state credit for federal estate taxes paid, allowing California to share in the federal estate tax revenues.

The new law would reinstate the pick-up tax.

Please continue reading at Part 2 of 2, Will there be Changes in the Federal Estate Tax Law??  In part two, we will explore how the proposed law would change valuation discounts, minority interest discounts, grantor annuity trusts, and generation skipping tax planning.

Legacy APC, A Trusts & Estates Law Firm is a member of the American Academy of Estate Planning Attorneys.

Some clients wish to transfer assets to their spouse for asset protection, to make sure the spouse is cared for, or to equalize estates.  These clients ask, “How much can I give my spouse without paying taxes?”  For American citizen spouses, the answer is clear.  You can pass as many assets as you would like (millions, billions, or trillions) during your lifetime or at your death, without paying any transfer taxes.  This is called the “unlimited marital deduction.”

However, if your spouse is not an American citizen, there are restrictions.  There are restrictions on assets transferred to a non-citizen spouse because the U.S. Government wants to be sure they get the taxes on the transfer of the money eventually (i.e. when the non-citizen spouse dies.)  To take advantage of the unlimited marital deduction when you have a non-citizen spouse, the assets must be put in a qualified domestic trust, not given outright to the spouse.  The qualified domestic trust (QDOT) makes sure that the U.S. Government, eventually, gets the tax money.

Although, for citizen spouses you can legally transfer assets directly to your spouse, consider transferring the assets into a trust, for the benefit of your spouse, instead.  A trust can provide guidance, asset protection from future creditors and divorcing spouses, and prevent your children from being unintentionally disinherited.

If you are in a blended family, meaning that you are in a second or third marriage or domestic partnership and you have children from other relationships, seek legal counsel from a qualified estate planning attorney before transferring assets to a spouse.  Any assets transferred to a spouse, who is not the parent of all of your children, will disinherit those children.  This may not be what you’d want.

If you have questions about transferring assets to your spouse and avoiding gift and federal estate taxes, consult with a qualified estate planning attorney to determine the best way to handle your individual situation.

Legacy APC, A Trusts & Estates Law Firm is a member of the American Academy of Estate Planning Attorneys.

There are special opportunities for specialized estate planning techniques in 2011 and 2012.  The unified credit amount is the highest ever, interest rates (AFR) are extremely low, and asset values have been reduced.  Now, is the time to consult with a qualified estate planning attorney to determine whether any of these specialized estate planning techniques are a good fit for you.

• Gifting

If you have wealth and would like to pass your assets to your children or grandchildren, this year and next are the perfect years to do so.  Each individual’s unified credit amount is $5 million; this means that a couple can give away $10 million without incurring any gift tax.

In addition, your estate planning attorney can show you how to compress certain underlying assets, leverage your unified credit and generation skipping tax credit with life insurance, and provide asset protection for your gifts.

• Charitable Lead Trust

This low interest environment and reduction in asset values makes lifetime charitable lead trusts more beneficial than normal.  A charitable lead trust provides an income tax deduction, stream of income for your favorite charity, and a lump sum for your family at the end of the charity’s term (i.e. at your death.)

• Loans to Family Members

Loans to family members are currently free or greatly reduced, depending on the size of the loan.  The current low interest rates allow minute interest payments that can be forgiven either under the unified credit amount ($5 million) or the annual gift tax exclusion ($13,000.)

• Grantor Retained Annuity Trusts (GRATs)

GRATs are simply a method for transferring assets in wealthy families and they work well in a low interest environment.  The government is currently trying to eliminate GRATs, so don’t delay consulting with a qualified estate planning attorney to determine whether GRATs are a good fit for you.

Take advantage of 2011 and 2012 and the unique estate planning opportunities these years provide.  Consult with a qualified estate planning attorney.

Legacy APC, A Trusts & Estates Law Firm is a member of the American Academy of Estate Planning Attorneys.

Funding your revocable living trust is almost, but not quite, as important as establishing your trust in the first place.  If you want your estate plan to work, your trust needs to be funded.  Failure to do so creates a hassle and costs more money.

Consequences of NOT Funding Your Trust

• The trustees you’ve named as disability trustees in your revocable living trust will have no authority to manage assets not funded into your trust.

• A conservatorship proceeding will be required if you become incapacitated and make your own financial decisions.  This means that your loved ones will have to go to court to have someone named to take care of your money and other assets.  The court may not necessarily name the same person you would have chosen.  In fact, in some circumstances, a stranger may be named to handle your money.

A conservatorship is a loss of control, takes time, is a hassle, and can be emotionally traumatic for you and your loved ones.  It’s costs a lot of money too.

• If you own assets in your individual name when you die, probate is guaranteed.  Many people seek to avoid probate because it’s extremely expensive in California.  In addition, it takes a long time to settle and get assets to the beneficiaries; and, it’s a public process, with personal financial and beneficiary information published at the court house.

• If you own assets in your individual name in a state other than the one you resided and died, ancillary probate will be guaranteed.  It’s double the trouble:  2 court systems, 2 lawyers, 2 accountings, and the like.

• You may unintentionally disinherit your children.  If you own assets jointly with your second spouse (i.e. not the parent of all of your children), and you die first, your children will be disinherited.

• You may waste your full federal estate tax exemption and all the good tax planning in your trust.  If you own assets jointly with your spouse, they will pass tax free at your death.  That may sound good, but, in reality, that just means that the taxes were delayed, not eliminated.  The taxes must be paid at your spouse’s death.

Where to Get Help with Trust Funding

Your estate planning attorney, banker, financial advisor, and insurance agent can all assist you with the funding of your revocable living trust.  It’s a lot of paperwork, but it’s worth it to make sure that your estate plan works.

Legacy APC, A Trusts & Estates Law Firm is a member of the American Academy of Estate Planning Attorneys.

The federal estate tax chatter is warming to a buzz once again.  Although the current federal estate law was passed just 6 months ago, change is in the wind.

Current Federal Estate Tax Law

Under current law, each individual may pass up to and including $5,000,000 in the years 2010 and 2011.  The exemption is a lifetime or death exemption, meaning that you can give your assets away during your lifetime or after your death and use the same $5,000,000 exemption.

The exemption is doubled for married couples and $10,000,000 covers most families in America. 

However, the exemption is reduced to “just” $1,000,000 in 2013 which affects many people.  Consider your San Diego area real estate, life insurance proceeds, retirement accounts, investment accounts, bank accounts, jewelry, antiques, and art.  All of these are included for federal estate tax purposes.

What’s to Come?

The future of the federal estate tax law (and all laws pertaining to estate planning) is unclear to everyone.  However, we study the law and keep up with all of the changes.  When you come in for an update or to create a new estate plan, we will incorporate the current law and do our best to anticipate what is yet unrevealed.

You Need to Update

Because the law is dynamic, changing and evolving constantly, it is imperative that you update your estate plan on a regular basis.  The general guidance is that you need to update your estate plan every three to five years.

The every three to five year update catches changes in the law, changes in your life, and changes in your attorney’s experience.

However, if you experience a significant life change, you likely need to update sooner.  Call our office if you have moved to San Diego from another state, gotten married or divorced, have a new child or step-child, start a new business, or if your assets change significantly.

We’re keeping an eye on any new federal estate tax legislation on your behalf.  Call us for an update.

Legacy APC, A Trusts & Estates Law Firm is a member of the American Academy of Estate Planning Attorneys.