Small businesses that reimburse employees for the cost of premiums for individual health insurance policies or pay their health costs directly will be fined up to $36,500 a year per employee under a new Internal Revenue Service regulation that took effect July 1, 2015. According to the new rule, an employer arrangement that reimburses or pays for employee individual health premiums is considered to be a group health plan that is subject to the $100 per-employee per-day penalty. The penalty applies whether the reimbursement is considered a before-tax or after-tax contribution. The new penalty is more than 18 times greater than the $2,000 Affordable Care Act large employer-mandate penalty for not providing health insurance at all. Employers with fewer than 50 workers are not exempt, as they are from the employer-mandate penalty. The rule covers employers with more than one employee. Employers can exclude workers who have been with the company less than three years, are under age 25, or are part-time. S-corporations are exempt through the end of this year.
Rep. Charles Boustany has introduced legislation in the House (HR 2911) and Sen. Charles Grassley introduced legislation in the Senate (S 1697) to attempt to remedy this problem. Both bills are awaiting congressional action.
The gift tax is also a component of the federal transfer tax system and is a tax imposed on transfers (i.e., gifts) of property during life, either given outright or to a trust. Like the estate tax, the gift tax is a transfer tax distinct from the familiar income tax.
Generally, the gift tax is determined by applying the transfer tax rate (the same rate that applies to the estate tax) to the value of property above the exemption amount (the same exemption amount that applies to the estate tax) that is gifted by one person to another during their lifetime, but not including property transferred to a spouse.
Thus, the gift tax covers transfers of property during life, while the estate tax covers transfers of property at death. The two taxes work together, and are said to be unified.
So from a transfer tax perspective, is it better to give away property as a gift during life (subject to the gift tax), or to leave assets to heirs in a will at death (subject to the estate tax)? Generally, if you give assets away while you are still alive, you are also ridding your estate of the future appreciation in the value of that asset. The assets you give away now will trigger a lower gift tax (if any) today than an estate tax years from now because of the assets’ appreciated value at death.
Gift Tax Annual Exclusion
Each year, a person can gift to any one or more other persons up to the annual exclusion amount (currently $14,000 per recipient in 2015) without triggering the gift tax. Married couples can combine their individual annual exclusion amounts and gift $28,000 each year to each person without triggering the gift tax.
Annual exclusion is meant to shield from tax the small common gifts made every year to friends and relatives, such as birthday presents, holiday gifts and small tokens of appreciation.
The Gift Tax is discussed in more detail in my book “Nothing But The Truth About Estate Planning, Probate And Living Trusts”. Download your copy here: Nothing But The Truth About Estate Planning, Probate And Living Trusts by Larry Israeloff CPA & tax attorney.
- Accelerate Deductions and Defer Income – It sometimes makes sense to accelerate deductions and defer income. There are plenty of income items and expenses you may be able to control. Consider deferring bonuses, consulting income or self-employment income. On the deduction side, you may be able to accelerate state and local income taxes, interest payments and real estate taxes.
- Bunch Itemized Deductions – Many expenses can be deducted only if they exceed a certain percentage of your adjusted gross income (AGI). Bunching itemized deductible expenses into one year can help you exceed these AGI floors. Consider scheduling your costly non-urgent medical procedures in a single year to exceed the 10 percent AGI floor for medical expenses (7.5 percent for taxpayers age 65 and older as of the end of 2016). This may mean moving a procedure into this year or postponing it until next year. To exceed the 2 percent AGI floor for miscellaneous expenses, bunch professional fees like legal advice and tax planning, as well as unreimbursed business expenses such as travel and vehicle costs.
- Make Up a Tax Shortfall with Increased Withholding – Don’t forget that taxes are due throughout the year. Check your withholding and estimated tax payments now while you have time to fix a problem. If you’re in danger of an underpayment penalty, try to make up the shortfall by increasing withholding on your salary or bonuses. A bigger estimated tax payment can leave you exposed to penalties for previous quarters, while withholding is considered to have been paid ratably throughout the year.
- Leverage Retirement Account Tax Savings – It’s not too late to increase contributions to a retirement account. Traditional retirement accounts like a 401(k) or individual retirement accounts (IRAs) still offer some of the best tax savings. Contributions reduce taxable income at the time that you make them, and you don’t pay taxes until you take the money out at retirement. The 2016 contribution limits are $18,000 for a 401(k), 12,000 for a SIMPLE IRA and $5,500 for a traditional/Roth IRA (not including catch-up contributions for those 50 years of age and older).
- Reconsider a Roth IRA Rollover – It has become very popular in recent years to convert a traditional IRA into a Roth IRA. This type of rollover allows you to pay tax on the conversion in exchange for no taxes in the future (if withdrawals are made properly). If you converted your account this year, re-examine the rollover. If the value went down, you have until your extended filing deadline to reverse the conversion. That way, you may be able to perform a conversion later and pay less tax.
- Get Your Charitable House in Order – If you plan on giving to charity before the end of the year, remember that a cash contribution must be documented to be deductible. If you claim a charitable deduction of more than $500 in donated property, you must attach Form 8283. If you are claiming a deduction of $250 or more for a car donation, you will need a contemporaneous written acknowledgement from the charity that includes a description of the car. Remember, you cannot deduct donations to individuals, social clubs, political groups or foreign organizations.
- Give Directly from an IRA – Congress finally made permanent a provision that allows taxpayers 70½ and older to make tax-free charitable distributions from IRAs. Using your IRA distributions for charitable giving could save you more than taking a charitable deduction on a normal gift. That’s because these IRA distributions for charitable giving won’t be included in income at all, lowering your AGI. You’ll see the difference in many AGI-based computations where the below-the-line deduction for charitable giving doesn’t have any effect. Even better, the distribution to charity will still count toward the satisfaction of your minimum required distribution for the year.
- Zero out AMT – Some high-income taxpayers must pay the alternative minimum tax (AMT) because the AMT removes key deductions. The silver lining is that the top AMT tax rate is only 28 percent. So you can “zero out” the AMT by accelerating income into the AMT year until the tax you calculate for regular tax and AMT are the same. Although you will have paid tax sooner, you will have paid at an effective tax rate less than the top regular tax rate of 39.6 percent. But be careful, this can backfire if you are in the AMT phase-out range or the additional income affects other tax benefits.
- Use Your Gift Tax Exclusion – You can give up to $14,000 to as many people as you wish in 2016, free of gift or estate tax. You get a new annual gift tax exclusion every year, so don’t let it go to waste. You and your spouse can use your exemptions together to give up to $28,000 per beneficiary.
- Leverage Historically Low Interest Rates – Many estate and gift tax strategies hinge on the ability of assets to appreciate faster than the interest rates prescribed by the IRS. An appreciating market and historically low rates create the perfect atmosphere for estate planning. The past several years presented a historically favorable time, and the low rates won’t last forever.
The estate tax is one component of the federal transfer tax system, which also includes the gift tax and the generation-skipping transfer tax. The estate tax is a tax imposed on the transfer of property at death. It is a transfer tax, which is a different tax than the familiar income tax.
Generally, the estate tax is determined by applying the transfer tax rate to the value of property on the date of death owned by the decedent in excess of a threshold amount (currently $5.43 million per person in 2015). The tax is technically imposed on the transfer of the decedent’s property either outright or in trust to the decedent’s heirs, but not including property transferred to the surviving spouse.
Most people will not be subject to the estate tax because most people will never own property with a total value in excess of the threshold amount. The threshold amount is referred to as the exemption amount, and is $5.43 million if you die in 2015. The exemption amount increases every year at the rate of inflation.
Estate Tax is discussed in more detail in my book “Nothing But The Truth About Estate Planning, Probate And Living Trusts”. Download your copy here: Nothing But The Truth About Estate Planning, Probate And Living Trusts by Larry Israeloff CPA & tax attorney.
Probate assets consist only of assets owned by the decedent at death that do not pass automatically (i.e., by operation of law) to the intended beneficiaries. A person’s will deals only with probate assets – it does not control the transfer of non-probate assets.
Examples of non-probate assets include life insurance policies (because the insurance proceeds are paid to the beneficiaries of the policy according to the terms of the policy contract, not according to a will), retirement accounts (because upon the death of the owner of a retirement account such as an IRA or 401(k), the monies are paid to the person or persons listed on the decedent’s beneficiary designation form) , and jointly owned property (such as a house or apartment owned jointly by a husband and wife). But keep in mind that a person’s taxable estate for estate tax purposes includes both probate and non-probate assets. The estate tax is discussed in more detail later in this book.
Creating A Trust Can Help Avoid Probate
Property that is owned by a trust is non-probate property, because at the creator’s death the terms of the trust agreement determine what happens to the property, not the creator’s will. Unlike a will, a trust does not have to go through probate. Thus, property owned by a trust avoids probate and is managed without the hassles and expense of probate court proceedings.
“Probate?” is discussed in more detail in my book “Nothing But The Truth About Estate Planning, Probate And Living Trusts”.Download your copy here: Nothing But The Truth About Estate Planning, Probate And Living Trusts by Larry Israeloff CPA & tax attorney.
Probate is the legal process that takes place after someone dies of proving the validity of a will or establishing who is entitled to receive the decedent’s property under state intestate succession laws if there is no will. The probate process is handled by the local surrogate’s court and governed by state law. Probate involves paperwork and court appearances by lawyers, which costs money.
As a general rule, a will has no legal effect until it is probated. Probate includes proving in surrogate’s court that a decedent’s will is valid, identifying and collecting the decedent’s property (also referred to as the decedent’s estate), paying debts and taxes of the estate, and distributing the remaining property as the will (or state intestate law, if there is no will) directs. In effect, probate is the process that enables heirs to receive property that is rightfully theirs.
Advantages of Avoiding the Probate Process
Wills and probate proceedings are matters of public record. If you would like to keep your affairs private, and prefer that people don’t know how your estate was distributed, avoiding probate through a trust or other mechanism is the only way to do so.
The probate process can be complicated and time consuming, so it may take several years to completely resolve everything. Typically, assets are frozen and unavailable to beneficiaries (including the surviving spouse) for a period of time without prior court approval. Avoiding probate can speed up the process of settling your estate.
Probate costs, including attorney’s fees, can be expensive. This is especially true if you own real estate in a different state, because probate proceedings would be required in both states. A trust can help to correct this problem.
“What Is Probate?” is discussed in more detail in my book “Nothing But The Truth About Estate Planning, Probate And Living Trusts”. Download your copy here: Nothing But The Truth About Estate Planning, Probate And Living Trusts by Larry Israeloff CPA & tax attorney.
You should always work with a lawyer when setting up a trust. A poorly created trust can be confusing, expensive, and/or ineffective. The trouble with do-it-yourself planning is that even if your situation seems simple, you are not aware of and won’t think of the many unusual things that can go wrong, especially with wills and trusts. These mistakes can end up costing you or your heirs a lot more than you saved in legal fees.
If you have a unique situation, need a special needs trust for a disabled beneficiary, or are overwhelmed by a complex or large estate, hiring a trusts and estates lawyer will help you answer any questions and ensure that a legal and effective trust is created.
As both an attorney and a CPA, I am a “one-stop shop” for legal, accounting, tax and financial planning services. I can help people more effectively manage their wealth and establish an estate plan that is coordinated with and fits neatly among all the pieces of their personal lives – household budget, cash flow, investments, education planning, taxes, and retirement planning.
“Why Retain An Attorney To Establish A Trust?” is discussed in more detail in my book “Nothing But The Truth About Estate Planning, Probate And Living Trusts”. Download your copy here: Nothing But The Truth About Estate Planning, Probate And Living Trusts by Larry Israeloff CPA & tax attorney.
A trust can own almost any kind of asset except for retirement plans. The types of assets that can be retitled in the name of the trust include cash accounts such as checking accounts, savings accounts, money market accounts and CDs; brokerage accounts; non-qualified annuities (and the trust can also be named as the primary or secondary beneficiary); monies owed to you; oil, gas and mineral rights; and royalties, copyrights, trademarks, and patents.
Tangible personal property such as jewelry, clothing, books, household goods, furniture, antiques, collectibles, artwork and pets can also be owned by a trust.
Business interests including shares of stock in a closely held corporation, partnership interests, and membership interests in limited liability companies can also be transferred to a trust, but you should consult any shareholder agreements, partnership agreements, and operating agreements for restrictions on transfers and specific procedures to retitle the shares in the name of the trust.
Finally, real estate can be retitled (or purchased) in the name of the trust, but the transfer requires recording a new deed in the locality where the real property is located.
The Amount of Assets Required To Establish A Trust
There is no minimum amount of money or type of asset required to establish a trust. Although a trust can be funded with a small amount of money, whether or not to create one is a financial decision based on the overall benefits and the estate plan, and not on the amount of the trust itself.
Trusts are discussed in more detail in my book “Nothing But The Truth About Estate Planning, Probate And Living Trusts”. Download your copy here: Nothing But The Truth About Estate Planning, Probate And Living Trusts by Larry Israeloff CPA & tax attorney.
The person who creates a trust is called the creator, the settlor, or the grantor. The trustee is the person or persons who hold title to the trust property in their name. The trustee has a fiduciary duty to protect and manage the trust property for the benefit of the trust beneficiary. The beneficiary is the person or persons for whose benefit the trust is managed and administered. The creator of a trust can also be the trustee, the beneficiary, or both. A trustee who is not the creator can also be the beneficiary. So although the same person can occupy more than one role in a trust, each of the three roles remain separate and distinct.
The Costs Associated With Setting Up A Trust
A trust is created by signing a trust agreement with the trustee and then transferring property into the name of the trust (which is referred to as funding the trust). A trust does not exist until property is actually transferred into it, even if a trust agreement is signed. It does not take a long time to form a trust – only as long as it takes to draft and sign a trust agreement and then complete the necessary steps (usually the completion of paperwork) to transfer the property into the name of the trust. A trust can cost anywhere from a few hundred dollars to thousands of dollars in legal fees, depending on the complexity of the trust agreement’s terms and the type and amount of property to be transferred into the trust. “The Parties Involved In A Trust” is discussed in more detail in my book “Nothing But The Truth About Estate Planning, Probate And Living Trusts”. Download your copy here: Nothing But The Truth About Estate Planning, Probate And Living Trusts by Larry Israeloff CPA & tax attorney.
To the layperson, trusts can appear complicated. People often think trusts are only for the very wealthy. In reality, trusts can be useful for people of all income levels.
A trust is a legal arrangement under state law governed by a written trust agreement by which property or assets are owned in the name of one or more trustees with a fiduciary responsibility to protect and manage the property for the benefit of another person or persons. A trust divides the ownership of property into two parts: the legal title, which is in the name of trustee, and the beneficial ownership interest, which is managed by the trustee for the benefit of the beneficiaries.
A trust is created by the signing of the trust agreement by the creator (also called the grantor or the settler of the trust) and the trustee. The trust agreement specifies the duties and obligations of the trustee and how the income and principal of the trust will be distributed to the named beneficiaries. Trusts provide considerable flexibility in transferring property from one generation to another.
A trust created during the creator’s lifetime is called an “inter vivos” trust or living trust. A living trust can be either a revocable trust or an irrevocable trust. A revocable trust is a trust that can be changed or revoked by the creator. An irrevocable trust cannot be changed or revoked by the creator (although an irrevocable trust can sometimes be changed or terminated by the trustee under certain circumstances).
A trust created in a will when the creator dies is called a testamentary trust. It is a part of the creator’s estate plan. Testamentary trust is always an irrevocable trust, because the creator is not alive to change or revoke the trust.
Common Types of Trusts
Living trusts (revocable and irrevocable) and testamentary trusts can be created for many different purposes and are referred to using many different names depending on their main purpose, such as asset protection trust, charitable trust, special needs trust, credit shelter trust, bypass trust, dynasty trust, grantor trust, Crummey trust, life insurance trust, personal residence trust, and many others. Despite the variety of labels applied to them, all trusts are basically arrangements to hold and control property for the benefit of other people.
Trust As Part Of An Estate Plan is discussed in more detail in my book “Nothing But The Truth About Estate Planning, Probate And Living Trusts”. Download your copy here: Nothing But The Truth About Estate Planning, Probate And Living Trusts by Larry Israeloff CPA & tax attorney.