• By making a gift of the home, the parents no longer own the property.  The child or children now own this home.  They can decide who lives in the property.  If they no longer want you in what used to be your home, they can kick you out.  That hurts.
• The children will take over the home at the parents cost basis.  This means if the property is sold, the children will use their parents cost basis.  This may be low and could cause the children to pay capital gains tax on the sale.  If the parents sold their home that was their primary residence, a single person could exclude up to $250,000 of gain from tax.  A married couple filing a joint return could exclude up to $500,000 of gain.
• The parents will have to file federal and, perhaps, a state gift tax return.  It’s likely a gift tax won’t be due, but a gift tax return will still need to be filed.

Most parents should keep their home in their name and not give it to their children.  When the parents pass away, the house will be included in their estate.  The value will be at the fair market value at their date of death.  This is a tax advantage over gifting to the children and potentially having them pay capital gains tax.

If for whatever reason you believe you MUST gift your home to your children, be sure to maintain life use.  This means you have the right to live in the home as long as you live.

ACTION ITEM:  Parents need to be cautious when gifting their home to their children.  Instead of an outright gift, consider making the gift but retaining life use.

Thomas F. Scanlon, CPA, CFP®

2010                 2011

Ordinary Income                                   35%                 39.6%
Long Term Capital Gains                       15%                 20%
Qualifying Dividends                             15%                 39.6%
Estate Tax                                              0%                 55%

Unless Congress decides to do something different, we are stuck with these tax rates.  The numbers may need a little explanation.

• For ordinary income, we are stating the maximum tax bracket.  As you can see, this is going up from 35% to 39.6%.  This is quite a jump.
• Qualifying dividends will be taxed at ordinary income tax rates up to 39.6%.
• The estate tax is quite interesting.  There is no estate tax in 2010.  However, it comes back in spades in 2011.  There is only a $1 million exclusion and the federal estate tax rate is 55%. 

What can you do about this?

You MAY want to accelerate income in 2010 based on the income tax increase.  I know this is contrary to what you have been taught your whole life.  You’ll have to run the numbers to see if this is appropriate.

For capital gains, you may want to recognize these in 2010.  However, be cautious of the Alternative Minimum Tax (“AMT”).  This is a nasty backdoor tax that can surprise taxpayers. 

The estate tax is a little more complicated.  Dying this year just to avoid the estate tax does not seem to make a lot of sense to me. That said, the exclusion was $3.5 million in 2009.  In 2011, it will only be $1 million. More people will be subject to the estate tax as a result of this.  Therefore, everyone should make an appointment with their estate planning attorney.  Most married couples should consider a Credit Shelter Trust as part of their estate plan.

Are you concerned about these tax increases?  If so, what are you planning on doing about it?

Thomas F. Scanlon, CPA, CFP®

A Power of Attorney is a legal document that allows one or more individuals to act on someone's behalf.  This power could be broadly based or limited to a particular situation.  An example of a limited Power of Attorney is when someone designates an attorney to represent them at a real estate closing.

Why do you need this document?  When someone turns the age of majority, their information becomes confidential.  For example, my son's grades in college will not come to me, they will go to him.  This can be easily addressed.  We stop paying for college or we just change the locks on the house.  More importantly, any medical provider no longer has to share any information with us.  However, they will share this information if we present the Power of Attorney to them.  Without a Power of Attorney we need to head off to probate court to get appointed as conservator.  This takes time causing delays and has expenses associated with it.

What should you do if you have a child that recently turned the age of majority?

• Have a conversation with them about why you would like them to give you a Power of Attorney.  Explain to them why this is important to both of you.
• Make an appointment with your estate planning attorney.  If you don't have one, ask your family or friends for a referral.
• Have the estate planning attorney prepare a Power of Attorney and Health Care Proxy for your child.  A Health Care Proxy allows the person holding this proxy to make health care decisions for the person who gave it to them if they become incapacitated.
• Keep these with your estate planning documents and other important financial documents. 

How much does this cost?  I paid $100, a very modest amount of money to have this handled.

You can't control the economy.  You can, however, control how you prepare for any future contingencies.  Having this handled should give you some piece of mind.

ACTION ITEM:  If you have children that are age of majority that are not yet independent, ask them to give you a Power of Attorney.

Thomas F. Scanlon, CPA, CFP®

If we had applied the tax rules in effect from 2009, the estate tax would be about $4 billion.  However, in 2010, there is no estate tax.  That's quite a savings.  Nevertheless, there is speculation that Congress will pass an estate tax and make it retroactive.   Hmmm…it's not like they haven't made laws retroactive in the past.  It's just that as time marches on, having the tax become retroactive becomes much more difficult to implement.  And, well, there's a lot of money on the table here!

Just because there is no federal estate tax in 2010, there are still state estate taxes to consider.  State estate taxes are usually based on the fair market value of your assets at the date of death after allowing for some exclusion.  You'll need to know what the exclusion is in your state to plan properly.    

If there is no change to the federal estate tax, beginning in 2011 it will go back to the old rules.  There will be a $1 million exclusion and the highest tax rate will be 55%.

ACTION ITEM:  Contact your estate planning attorney and CPA to make sure all of your estate planning documents are up to date.  Even with no federal estate tax, taxpayers need to be concerned with state estate taxes, having a Will, a Power of Attorney, and a Health Care Proxy.

Thomas F. Scanlon, CPA, CFP®

Why the change?  Two reasons:

    ―The government needs the money.

    ―The "wealthy" can't die without paying their "fair share."

What do you need to do?  Sit tight until this becomes law.  This bill or some close variation of it should become law soon.  Schedule an appointment with your estate planning attorney.  There are numerous reasons to make an appointment now.  The most important reason is to take care of your family and other beneficiaries.  

ACTION ITEM:  Contact your estate planning attorney to make an appointment.  Have your attorney make sure all of your estate planning documents are exaclty what you want now.

It's a shame when someone who has worked hard and saved their whole life dies without a will. Unfortunately, this happens frequently. It's estimated that only one-half of Americans have a will.

Periodically I'll have to remind a new client that everyone has a will. It just might not be the one you want.

So, if you don't have a will, don't worry. It's already taken care of. Most states have intestacy laws, which dictate how assets will be divided when someone dies without a will. Is that what you'd want-the state telling your estate how to divide your assets? Do you want your heirs duking it out at the local probate court? I didn't think so. In one case, I was appointed by a local probate court to prepare probate accountings for a conservatorship. A gentleman in his 80's with a net-worth over two and a half million dollars was unable to manage his affairs. He didn't have a wife or any children, but he did have two sisters. When he died, the estate taxes were eight hundred thousand dollars, almost a third of his estate. He didn't have a will. Over two and a half million dollars of net-worth and no will. Naturally, the sisters couldn't agree on how to distribute the assets and there were lots of lawyers, CPA's, and probate court meetings to decide how to divide the estate. This takes time, costs money, and causes more than hard feelings. One of the sisters called me and claimed she was entitled to all of his assets because "that's what he wanted." She then proceeded to tell me that she found a book, How to Avoid Probate, in his house. Imagine that-he was smart enough to accumulate two and a half million dollars of net-worth, buy a book on how to avoid probate, but didn't leave a will. Apparently he didn't have anyone pack his parachute.

Skip the U-Haul

Ask an estate planning attorney why some people start but don't finish their estate plan, and they'll just shake their head. Some people think they are going to live forever. Then the same attorney that sent their client three letters last year reminding them to make an appointment to finish their estate plan gets a panic call. This client is going on vacation next week and will be flying to a tropical island. Naturally, they need to get their estate planning documents done before they go away. There's nothing like the thought of getting on an airplane to help you focus on your estate plan.

The emotional aspects of estate planning can't be overlooked. What's the big deal? Just about everything. You can hire a great financial advisor, attorney, CPA, insurance agent, trust officer, and any other professional needed to put your plan together. Hopefully, your team works together to accomplish all of your goals and objectives. Passing assets to the next generation and your favorite charities should be the easy part. What's the hard part? It's probably passing down your values to your children and grandchildren. Do your heirs understand the difference between equal and fair? Frequently, they aren't the same. Your son gets a larger portion of the estate than his sister. How does she feel about this? Does she understand why? Do your children know why you are donating to a particular charity? Remember, you can't take it with you. Ain't that the truth? Ever see a hearse pulling a U-Haul?

Money doesn't come with an owner's manual. Having a lot of money can bring with it other issues. Our capitalistic society tends to reward hardworking people and entrepreneurs. However, there can be some costs associated with all of this hard work.
Frequently, your economic success may come at the expense of your family, personal, or community activity time. This can cause a host of other issues. Maybe you feel a need to give your children everything you didn't have when you were a child. Perhaps you want to make it up to your children for not being around so much because you're always working.

You may feel guilty and want to give your children more, more, and more. Be careful – give too much and they may become spoiled.

Hopefully, you've done a great job during the accumulation phase and now are in the distribution phase. For the twenty and thirty-something's, pretend the remote is on fast-forward. Now what? Well, as I've said before, keep things simple. Unfortunately, estate taxes aren't simple. You don't need to become an estate planning expert. You can hire a competent estate planning attorney. You should, however, have an understating of estate taxes and know what strategies are available.

OK, what's simple about estate planning? Start with your money. What can you do with your money? Well, you can spend it. Gosh knows I have plenty of help with this. If spending money is a problem, please give me a call. I can send over a couple of my helpers. Second, you can save your money. Third, you can give it away to relatives, friends, or charity. And last, you can die with your money. This is pretty simple, spend it, save it, give it away, or die with it. So, what do you want to do? Well at some level, whether you have as much help as I do or not, you'll be spending some money. Just don't spend too much – you may not reach some of your goals and have to work "forever."

But, you should spend some money. And you'll need to do it while you're still healthy. Don't wait for next year – do it now. There may not be a next year.

Federal estate taxes may be due if the net taxable estate is greater than the exclusion amount below:

Year Amount
2008 $2,000,000
2009 $3,500,000
2010 Repealed
2011 $1,000,000

If you want to reduce your estate or just help out some family or friends, one simple and easy way is to make gifts. Individuals can make gifts up to $12,000 a year to as many people as they would like without having to file a gift tax return or pay any gift taxes. Married couples can give away $12,000 each or $24,000. This annual exclusion is adjusted for inflation and will increase over time. This exclusion is only available for gifts of so-called present interests. It is not available with gifts of future interests. What's the difference? Present interest gifts go to the recipient immediately, future interest gifts don't. An example of a present interest gift would be cash or securities. The recipient gets the asset immediately. An example of a future interest gift is a gift of real estate, but with the donor retaining life use. This means the donor can continue to occupy this property during their lifetime. The recipient doesn't get the gift until the donor passes away. Keep in mind the donor doesn't get an income tax deduction for these gifts. They do, however, remove these assets from their taxable estate.

In addition to the annual gift tax exclusion of $12,000 per year, you can also pay for certain qualified medical and educational expenses. Qualifying expenses for higher education are defined as payments made directly to the educational organization for tuition. Room and board, books, and fees are not eligible for this exclusion. The key to obtaining this exclusion is to have the donor (parent or grandparent) make the checks payable directly to the educational institution or the medical provider. Only payments that are paid directly will qualify. Payments to your children to "reimburse" them for these expenses do not qualify. These payments are considered gifts and subject to the rules accordingly. This exclusion allows people to reduce their estates beyond the annual exclusion and eliminates filing gift tax returns and paying gift taxes. This is a particularly effective strategy for people with taxable estates that want to help out their children and grandchildren.

If you would like help managing these risks give us a call at (860) 646-2465 or e-mail: TomS@Borgidacpas.com