Hodges Law Blog
The Trustee is a fiduciary put in charge of overseeing the management of cash and property owned by a trust, commonly referred to as a “trust fund.” A Trustee can be an individual, an institution (such as a bank or trust company) or combination of both. Sometimes a Trustee serves as part of the board comprised of multiple Trustees. In that case a vote of the Trustees, or some other form of collaborative process, controls distributions, investments, and any other action of the trust. (more…)
Client’s often ask this question.
Every Last Will and Testament names an Executor, also sometimes referred to as a “personal representative,” to serve on behalf of the will maker, also called the Testator. (more…)
An unfortunate fact, which often comes to light after it is too late, is that many people have outdated wills that no longer reflect their wishes for the disposition of their assets.
Since I announced I was opening my own practice, the two most common questions that I have received are:
(1) Do you do Wills? and
(2) I’m not rich, do I need a Will? (more…)
Late last week Timothy Geithner, the Secretary of the Treasury, provided President Obama’s initial estate tax plan to House Republicans. The President’s proposal included lowering the estate tax exemption from $5.12 million to $3.5 million. It also included an increase in the tax rate from 35% to 45%. See Arthur D. Postal, Obama’s First Offer on Estate Tax, LifeHealthProf, November 30, 2012.
So where will estate tax end up? (more…)
Beginning January 1, 2013, various provisions from President Obama’s Patient Protection and Affordable Care Act will come into effect. From a tax perspective one of the more significant provisions is the 3.8% Medicare Surtax.
The surtax will apply to individuals, trusts, and estates with income exceeding a specific threshold. However, it is important to note that the surtax will be assessed differently for trusts and estates than for individuals.
To begin understanding the 3.8% surtax you must first understand the applicable threshold amounts, which are dependent upon the filing status of the tax payer. Married couples filing jointly will see an applicable threshold of $250,000, whereas married couples filing separately will have an applicable threshold of $125,000. All other individuals will have a $200,000 threshold.
For estates and non-exempt trusts the threshold will be about $12,000 (in 2012 the amount is $11,650 – this amount is indexed for inflation and therefore will increase in 2013). I use the term “threshold” because the effective amount operates in the same manner as the thresholds described for individuals and married couples. However, the law does not actually use the term “threshold” when describing the amount in the context of estates and trusts. Regardless of the label, with such a low amount, the surtax will apply much more easily to trusts and estates.
So how will the surtax be computed?
For individuals, the 3.8% surtax is imposed on the lesser of: (1) net investment income for the tax year or (2) the amount by which the modified adjusted gross income (MAGI) exceeds the threshold amount in that year.
For trusts and estates, the 3.8% surtax will be imposed on the lesser of: (1) the undistributed net investment income (“NII”) for the tax year or (2) the excess of the taxpayer’s adjusted gross income over the dollar amount at which the highest tax bracket begins.
The concept of “undistributed net investment income” makes the application of the surtax to trusts/estates unique.
Trusts and estates are subject to a set of income tax rules whereby if the trusts/estate earns income that is distributed to beneficiaries, then the beneficiaries are taxed on the distributed income. If the trust/estate retains the income, then the trust/estate is taxed. If the trust/estate distributes a portion of the income and retains a portion, each taxpayer (the trust and the beneficiary) pays its portion accordingly. In other words, there is one tax and the trust/estate, the beneficiary, or a combination of the two is responsible for payment of that tax.
This same approach will be applied in the case of the 3.8% surtax. Meaning, to the extent a trust/estate distributes NII to beneficiaries, that amount will become the beneficiaries’ NII for purpose of the surtax. To the extent the trust/estate retains NII, that undistributed NII will be the estate’s/trust’s NII for purpose of the 3.8% surtax.
So what is net investment income? Net investment income is the sum of gross investment income over allocable investment expenses. For purpose of the surtax, investment income includes interest, dividends, capital gains, annuities, rents, royalties and passive activity income.
What can a trust/estate do?
As with many questions involving law and taxes the classic answer must be given: it depends on your specific situation.
Given the very low threshold for trusts/estates, one consideration that ought to be explored is whether NII should be distributed to beneficiaries, rather than retained by the estate/trust. Remember, beneficiaries’ have a significantly higher threshold than estates/trusts. This could lead to a better result for both the trust/estate and the beneficiaries. However, any such distribution must be consistent with the terms of the governing trust document and must fit squarely with the trustee’s fiduciary duty.
Before taking any action you should be certain to consult with your trust/estate attorney, your accountant, or other qualified professional.
In mid-October the IRS issued Rev. Proc. 2012-41, which, among many other actions, will increase the 2013 annual gift tax exclusion to $14,000 per gift to a non-spouse. This exclusion takes effect for gifts made on or after January 1, 2013. Currently the gift tax exemption is $13,000. This marks the first time since 2009 that the annual gift tax exclusion has been increased. The annual gift tax exclusion for gifts made to a spouse who is not a U.S. citizen will also be increased to $143,000 (up from $139,000 for the 2012 tax year). Gifts to a spouse who is a U.S. citizen will remain exempt from gift taxes due to the unlimited marital deduction.
The increase in the gift tax exclusion is great news for individuals and couples who use the gift tax exclusion as an element of their overall estate plan. It will allow individuals to pass more funds on an annual basis without increasing their tax liability. It is and even better deal for couples, who can combine their exclusion. If an individual or couple wants to gift more than the gift exclusion amount to a single individual in a single year they can do so and have it applied towards their lifetime estate exclusion to avoid the gift tax. However, choosing to do that should only be done after full consultation with your tax advisers, as it will reduce the amount of the federal estate tax exemption. There is also a strong likelihood that the lifetime exclusion will change (that is be reduced) based on Congressional actions in the coming weeks.
For additional discussion on the gift tax increase and its practical application to you I suggest you read Deborah L. Jacobs article, IRS Raises Yearly Limit For Tax-Free Gifts, Forbes, October 18, 2012.