Paul R. Tierney Law

What About the Gift Tax?

With Congress expected to take up major tax reform soon, there has been a lot of talk about what will happen to the estate tax. Little focus has been given to the gift tax, but it also is important.

The gift tax is often thought of as a check on those who would seek to avoid the estate tax. The two taxes are normally set with about the same exemptions, limits and rates. This leads to the impression that the sole purpose of the gift tax is to make it more difficult for people to avoid the estate tax by gifting all of their assets away.

While that is one of the purposes, it is not the only one.

With Congress set to possibly repeal the estate tax, it is important to understand what that might also mean for the gift tax, which Bloomberg recently discussed in "Gift Tax Tweaks Could Lead to Unsavory Avoidance Tactics."

The gift tax also prevents people from avoiding income taxes.

With no gift tax, property could be gifted tax-free to a child to lower tax burdens. It could then be gifted back when needed. This would suggest that the gift tax should remain, even if the estate tax is eliminated.

However, it is not that simple.

If there is no estate tax, then instead of gifting property to a family member, money could be loaned at very generous terms. The amount of the loan could then be given to the family member in an estate plan, effectively allowing the gift to be tax-free.

It is not clear what Congress will do with the gift tax at this point.

The initial plan for tax reform included repeal of the estate tax, but was silent on the gift tax.

Reference: Bloomberg (April 10, 2017) "What Is Community Property and What Are Community Property Trusts?"

Publicity Rights When a Celebrity Passes Away

Intellectual property rights are mostly determined by federal law and international agreements. When a copyright holder passes away, it makes little difference where he or she lived. However, publicity rights, which govern who can use a person’s image and likeness, are different. They are mostly a matter of state law.

When a famous musician passes away, there is almost always a spike in interest in the musician’s work. This might lead someone to believe that the copyrights to that work are extremely valuable, but the truth is that in most cases they are not.

There is comparatively little money to be made by selling musical works. The musician’s publicity rights are often far more valuable to the estate than any copyrights.

This creates unique estate planning issues as IP Watchdog explains in “How do Estates Monetize Images and Intellectual Property of Dead Celebrities?”

Unlike copyrights which are the subject of federal laws and the same everywhere in the U.S., publicity rights are a matter of state law. Their scope changes from jurisdiction to jurisdiction. A deceased celebrity who lived in Florida may leave an estate with very different publicity rights than a deceased celebrity who resided in New York.

Virtually every jurisdiction in the U.S. does recognize publicity rights, but the details vary. Some foreign jurisdictions, such as the United Kingdom, do not recognize the rights at all.

What this means for anyone with publicity rights to protect is that it is very important to plan for them in an estate plan. It is vital to make sure that the laws in the state in which you reside are fully accounted for in your estate plan.

Reference: IP Watchdog (Aug. 10, 2016) “How do Estates Monetize Images and Intellectual Property of Dead Celebrities?”

Does Wealth Flee High Taxes?

Many state legislators share the common concern that if they increase taxes on their wealthiest residents, those residents will move to lower tax jurisdictions. However, data suggests that there is little basis for that concern.

No one likes paying taxes. Most people given the option to pay fewer taxes would choose to do so. This creates a dilemma for state governments in the U.S. where people can freely move to other states. Legislators often fear that if they raise taxes on their wealthiest residents, those residents have the means and ability to move to other states that have lower taxes.

The possibility of this happening is guaranteed to be mentioned in any legislative debate about the appropriate amount to tax the wealthy.

However, as Private Wealth discusses in "Higher Taxes Don't Scare Millionaires Into Fleeing Their Homes After All" the legislative fears are mostly unfounded.

A new study looked at 13 years of data and concluded that very few wealthy people move to pay lower taxes. The study found that rich people move because of taxes only 2.2% of the time. In fact, millionaires move to different states at a lower annual rate than the general population.

People who only make $10,000 a year are more likely to move to another state than are millionaires. The reason for this is that wealthy people are not normally idle. They are employed or own their own businesses. They cannot simply pick up and move.

This study looked at income tax rates. It will most likely be cited in estate tax debates as well. That could be a mistake as once the wealthy retire it stands to reason that it is easier for them to move.

Reference: Private Wealth (May 26, 2016) "Higher Taxes Don't Scare Millionaires Into Fleeing Their Homes After All"

Splitting a Farm to Keep It in the Family

Farmers who have more than one child have an estate planning dilemma. The most valuable property that they have is almost always the land and the farm equipment. If all of the children are not interested in farming, it can be difficult to give them all an equitable inheritance.

Farmers with multiple children have two seemingly conflicting goals when they plan their estates. They normally want to preserve the family farm in one piece if possible and make sure that all of their children get a roughly equal inheritance.

These goals can be difficult to accomplish because the overwhelming largest portion of the estate is often tied up in farm assets, such as land and equipment.

This can be even more difficult when one child is currently participating in the farm operations and another child is expected to join later.

Recently, Delta Farm Press discussed one possible solution to the problem in "2 separate entities enhance farm succession plan."

The idea is to split the farm into two separate corporate entities. One entity holds title to the land while the other entity owns the farm equipment and operates the farm. The second entity leases the land from the first entity.

Buy/sell agreements are put in place as a way to make sure that the entities remain in the family.

An estate plan then gives the children shares of these corporate entities instead of the physical property. A child who wants to continue farming would then have the option of purchasing the shares of a child who is not interested in being a farmer.

Many other solutions to keep a family farm in the family are also possible.

Estate planning attorneys can offer advice to provide the best solution for your family.

Reference: Delta Farm Press (March 6, 2016) "2 separate entities enhance farm succession plan."

The Real Tax to Worry About

The federal estate tax might get most of the political headlines, but the truth is that it affects a relatively very small number of Americans. Of far more concern for most Americans is how the federal capital gains tax will impact their estates.

If you listen to enough politicians speak, you might come away with the impression that the biggest concern for American estates is the federal estate tax. This might lead you to believe that if your estate is smaller than the $5.45 million individual exemption, then you do not need to worry too much about how taxes will affect your estate.

However, there is a silent estate killer out there.

It is the federal capital gains tax, which can be as high as 33% and can have a devastating impact on estates that do not plan for it.

Recently, Market Watch offered some estate planning tips about the capital gains tax in "5 ways to protect your estate from capital gains taxes."

The tips include:

        • Undo a Trust – Assets put into a trust to keep them out of the estate can have a greater capital gains tax cost when eventually sold.

        • Upstream Gifting – If you give an asset to an older family member, that asset will receive a step-up basis for capital gains when the older person passes away.

        • Joint-Exempt Step-Up Trust – These special trusts allow a surviving spouse to sell an asset after a spouse passes away without having to pay capital gains tax.

        • Home-Sale Tax Exclusion – If you have lived in and owned your home for two out of the last five years, you can sell it without owing capital gains on the first $250,000 of appreciation or $500,000 for married couples.

        • Like Kind Investments – Selling one type of property and using the proceeds to invest in the same type of property can allow you to delay paying capital gains tax.

To learn more about these tips for dealing with the capital gains tax visit with an estate planning attorney.

Reference: Market Watch (Dec. 25, 2015) "5 ways to protect your estate from capital gains taxes."

House Acts on Tax Bills

The U.S. House of Representatives has recently taken up a pair of related bills concerning the Gift and Estate Taxes. Both bills have been brought before the full house for a vote.

Lawmakers have grown increasingly wary about how the gift and estate taxes operate to cause strain on estates of farmers, small business owners and others. This is especially a concern given President Obama's new proposals for an increased capital gains tax and for eliminating the step-up basis for capital gains on death.

Recently, the House of Representatives passed, with broad bipartisan support, the Fair Treatment for All Gifts Act and the Death Tax Repeal Act as reported by The National Law Review in an article titled "Gift Tax Certainty at Last? re: H.R. 1104."

The gift tax act would exempt from the gift tax any gifts to social welfare organizations, trade associations and labor unions. This is an extension of the IRS policy that already exempts gifts to social welfare organizations.

The Death Tax Repeal Act will do just what it says.

Of course, neither act is currently law. They both must still pass the Senate and avoid a Presidential veto. However, this is the first step to making these acts law.

Reference: The National Law Review (April 17, 2015) "Gift Tax Certainty at Last? re: H.R. 1104."

Giving It All Away

A recent trend among the megawealthy is to give all or most of their fortune away to charitable causes either during their lifetimes or in their estate plans. While the intentions are noble, there is a potential drawback that you should be aware of.

Yahoo Finance reports that Apple CEO Tim Cook is the latest wealthy American to announce plans to give his entire fortune to charity. Cook plans to pay for his nephew's college education and give everything else away.

You can read more about this story in the original article titled "Apple's Tim Cook will give away all his money."

This is a trend that started with Warren Buffet, who encourages billionaires to donate at least half of their wealth to charity. The theory is that you can rear your family well enough so they will be able to take care of themselves and not need to inherit the wealth.

However, the big potential drawback to this plan is that family members may not agree that they do not need the inheritance.

In fact, the views of your family members regarding what they need or want might be very different from yours.

It is better to uncover their thinking now before you are gone.

Why?

Because estate litigation can be very expensive and unduly enrich trial attorneys.

Accordingly, if you plan to give all of your wealth to charities, then it is only prudent that you communicate this with your family members sooner rather than later.

It is important that you get your family to buy into the plan while you can.

Reference: Yahoo Finance (March 26, 2015) "Apple's Tim Cook will give away all his money."

Obama to Target Capital Gains Loophole

In the State of the Union address President Obama was once again expected to announce proposals to increase taxes on wealthy Americans. While he is not targeting the estate tax, the proposal could have major implications for some estate plans.

 

President Obama rode into office, in part, by promising to increase taxes on the wealthiest people in the country. So far during his term in office he has done much to follow through on that promise and he has often had success in doing so. Even though he now faces a Republican-controlled House of Representatives and Senate, the President announced proposals for more taxes on wealthy Americans in his State of the Union address as foreshadowed by Forbes in "President Obama Targets The 'Angel Of Death' Capital Gains Tax Loophole."

 

First, the President announced that he wishes to raise the capital gains tax rate from the current 23.8% to 28%. He also announced that he will be seeking to close what some have called the biggest loophole in the tax code, allowing people to inherit appreciated investments without paying capital gains tax on it.

 

For example, currently if someone inherits a stock certificate that was purchased for $100 and is now worth $5000, no capital gains tax is due. The President wants to change that to make it so capital gains tax would be due as part of the deceased's final tax return. He is proposing an exception that no capital gains tax would be due until a surviving spouse dies and an exemption for the first $100,000 for single people, which doubles for married couples.

 

If these proposals were to pass, the implications would be huge. However, it is very unlikely that either proposal will make it through the current Congress.

 

Reference: Forbes (January 18, 2015) "President Obama Targets The 'Angel Of Death' Capital Gains Tax Loophole"

Repealing the Estate Tax

The estate tax is always controversial. Some people believe strongly in it while others see it as unfair. A new bill in Congress seeks to repeal it completely.

 

It is no secret that the Republican controlled congress and President Obama are likely to have several high-profile battles in the next two years. That is inevitable whenever there is a split government in Washington.

 

One issue that might cross the President's desk is repealing the estate tax as Representative Thornberry of Texas has introduced the Death Tax Repeal Act which seeks to repeal the estate, gift and generation-skipping taxes.

 

Everything Lubbockin "Thornberry Introduces The Death Tax Repeal Act" reports that the bill already has 36 co-sponsors.

 

Of course it is too early to predict whether this bill will pass the House of Representatives, let alone make it to President Obama's desk for his signature or a veto. However, it is never too early to let your opinions be known on this bill.

 

Whether you are in favor of it or opposed, now would be a good time to let your congressman or congresswoman known what you think about this important and controversial issue.

 

Reference: Everything Lubbock (January 10, 2015) "Thornberry Introduces The Death Tax Repeal Act"

 

Act Now to Take Advantage of an Estate Tax Break

If your spouse passed away in the last three years, the IRS is offering a potential estate tax break for your estate. However, you need to act quickly if you want to take advantage of it.

One of the newer and better provisions in tax law is that you can take advantage of any portion of the estate tax exemption that a deceased spouse did not use. This provision is known as spousal portability.

The estate tax exemption for an individual is currently $5 million, as indexed for inflation.

If your spouse's estate was worth $3 million, then your estate can have a total exemption of $7 million. Ordinarily, this extra exemption is only available if a timely federal estate tax return was filed for the deceased spouse's estate.

However, as reported by Business Management Daily in an article titled "Don't miss the boat on estate tax break," the IRS is offering a one-time exception to the normal rule.

As a result, if your spouse passed away in 2011, 2012 or 2013, then you have until December 31, 2014 to file the necessary paperwork and take advantage of spousal portability.

For many estates this is a very important exemption, especially as estate planning professionals continue to adapt to this relatively new law.

If you have any inkling that the estate tax might apply to your estate and your spouse passed away in the last three years, you should seek the counsel of an experienced estate planning attorney right away to take advantage of this tax break.

Reference: Business Management Daily (November 30, 2014) "Don't miss the boat on estate tax break"