Avoid Estate Tax

The Double Step Up In Basis: Traditional Planning Makes Kids Pay Extra Capital Gains Tax

This describes how the traditional methods of estate planning for married couples causes children or other heirs and beneficiaries to pay extra capital gains tax due to the failure to take advantage of the double step-up in basis.

In the old days (about a decade ago), the emphasis on estate planning was always avoiding estate tax. Married couples would arrange their wills and trusts so that when the first spouse died, assets were left either in usufruct or to an irrevocable trust so that the assets of the first spouse to die would not be included, for estate tax purposes, in the estate of the surviving spouse. Assets were left to trusts commonly referred to as A/B trusts, credit shelter trusts, survivor's and family trusts, QTIP trusts, or bypass trusts. The goal was to, by leaving assets to an irrevocable trust at the death of the first spouse, those assets would escape estate taxation upon the death of the surviving spouse.

However, this planning method did not have the best capital gains tax result. In community property states, all of the community property would get a step up in basis upon the first spouse's death (to the value at the date of the first spouse's death), but only the assets that the surviving spouse owned would recognize another step up in basis when the surviving spouse died. The family was forfeiting another step up in basis.

Now, for almost all families, the fact that all the assets get lumped into the estate of the surviving spouse is irrelevant for federal estate tax purposes. Each estate can exempt $11.2 (for deaths in 2018) from the estate tax. And since new portability law allows the surviving spouse to use any part of the exemption that went unused by the first spouse to die, married couples can shield $22.4 million) from the estate tax. Simply put, estate tax is not an issue for most families.

So now, married couples should consider doing the opposite. They should consider arranging their affairs to that all marital assets get included in the estate of the surviving spouse. So long as the total is less than the estate tax exemptions, there will be no estate tax but the heirs will benefit from another step-up in basis when the surviving spouse dies. Then, if the heirs sell previously appreciated assets, there will be no tax to pay.

A simple way to include assets in the estate of the surviving spouse is to leave ownership of those assets to the surviving spouse (through a Last Will), Or if a married couple has a living trust to avoid probate, they can provide that the trust does not become irrevocable upon the death of the first spouse. However, if there is a blended family situation, or the couple is worried that the survivor may attempt to leave assets to a second spouse, or if the surviving spouse may need to qualify for Medicaid upon entering a nursing home, that couple may want to reconsider whether or not to put the surviving spouse in complete control of the marital assets.

This post is for informational purposes only and does not provide legal advice. Please do not act or refrain from acting based on anything you read on this site. Using this site or communicating with Rabalais Estate Planning, LLC, through this site does not form an attorney/client relationship.

Paul Rabalais
Louisiana Estate Planning Attorney
www.RabalaisEstatePlanning.com
Phone: (225) 329-2450

2018 Gift and Estate Tax Rules, Limits, & Analysis

There's been a big change to the estate and gift tax rules for 2018. We'll focus on the Louisiana components first, and then the federal components.

The Louisiana aspects to gift and estate tax are pretty simple. Louisiana no longer has either a state gift tax, or a state estate tax. While Louisiana, at one point, assessed a state inheritance tax when Louisiana residents died, that Louisiana inheritance tax no longer exists.

From a federal standpoint, the gift tax present interest annual exclusion increased from $14,000 to $15,000 in 2018. It gets adjusted every few years for inflation, but in $1,000 increments. The confusion comes in when people make gifts that in excess of the $15,000 present interest annual exclusion. Some people mistakenly believe that if a gift is made in excess of this amount, that someone owes tax. This belief is wrong. By making a gift in excess of $15,000 to someone in 2018, the person making the gift will simply be using some of their $11.2 million estate tax exemption - which they can use either during their lifetime or at their death. So, there will be no gift tax due (unless the gifted amounts exceed $11.2 million). 

People refer to the gift in excess of $15,000 as a "taxable gift." But that is a misnomer. I believe the gift in excess of $15,000 should be referred to as a "Reportable Gift," because in almost every instance, no tax is due by anyone.

The federal exemption for 2018 skyrocketed from the 2017 amount of $5.49 million to $11.2 million. However, for your rich folk, the exemption is scheduled to revert back in 2025 to about $6 million (hard to predict because of the inflation adjustment).  

Bottom line: almost no one (except for the uber-wealthy) need to worry about paying either gift or estate tax. The public mistakenly think that taxes are due when a gift exceeds $15,000 (the present interest annual exclusion), but those thoughts are wrong. The gift in excess of $15,000 should be referred to as a "Reportable Gift" instead of a "Taxable Gift," which infers that tax is due as a result of the gift.

This post is for informational purposes only and does not provide legal advice. Please do not act or refrain from acting based on anything you read on this site. Using this site or communicating with Rabalais Estate Planning, LLC, through this site does not form an attorney/client relationship.

Paul Rabalais
Louisiana Estate Planning Attorney
www.RabalaisEstatePlanning.com
Phone: (225) 329-2450

How To Leave a Bequest To Charity

Not everyone wants to leave part of their estate to charity. But some do. And for those who do, there can be a right way and a wrong way to leave assets to charity. The following are two things to consider when leaving assets from your estate to charity.

(1) Designate the Right Organization. There a many charities out there. Some people want to leave part of their estate for cancer research, heart research, or to an organization that helps pets. But each of these causes has numerous organizations. And some of the larger organizations have local, state, and national organizations. Make sure you research your potential charitable bequest and leave it to the right organization.

(2) Restrict Your Bequest? Some people are not aware that they can restrict their charitable organization for a specific purpose. For example, a university alumni who studied engineering may want to restrict his bequest to the university to support scholarship for students pursuing an engineering degree. You do not have to leave your bequest to the general fund of the church, school, or other charitable organization. Know that you can restrict what your bequest will be used for, so long as it is in furtherance of the organization's charitable purpose.

Most serious discussions regarding leaving part of an estate to charity involves making tax-smart decisions. For example, someone with an IRA along with other assets may choose to name a charity as the beneficiary of the traditional IRA since income tax has not been paid on these funds, and if these funds are left to a charity, then no income will need to be paid on the distribution to charity. So some people leave their charitable bequests from their IRA or other pre-tax retirement account.

This post is for informational purposes only and does not provide legal advice. Please do not act or refrain from acting based on anything you read on this site. Using this site or communicating with Rabalais Estate Planning, LLC, through this site does not form an attorney/client relationship.

Churches and Charities Use Estate Planning To Help More People

Next week I'll be delivering a check for more than $100,000 to a church. I just completed the probate of someone who left a percentage of the estate to the church. I know that the church is going to help many people with this bequest.

It reminds me of how, over the years, a number of churches and charities have asked me to speak to groups of members about how  the tax law is set up to give people a big tax break when they leave a portion of their estate to their church or favorite charities.

Churches and charities don't do enough of this education. I find that, when a church or charity educates its members and asks the right way, that people want to help. People would like to see their dollars help their local community more than sending those dollars off to Washington, D.C.

If you are a church or charity leader, make a commitment to education your base about the benefits of making a church or charity part of an overall estate planning program. If you exist in South Louisiana, give me a call and let's have a talk - in the right circumstances I provide that education to groups for free. But you don't have to use me - just start. You'll be helping your organization and your community.

Paul Rabalais
www.RabalaisEstatePlanning.com
Phone: 866-491-3884
Email: paul@RabalaisEstatePlanning.com

Tax Consequences When Living Trust Settlor Dies

Because our government likes to tax people, there are a number of different taxes that come into play when the Settlor of a Revocable Living Trust dies. In general, the "tax at death" landscape has changed from avoiding estate tax, to avoiding capital gains tax and income tax. The following are the types of tax that might affect you if you are a Settlor, heir, beneficiary, legatee, trustee, executor, Agent, or Grantor, Trustor, or other participant in someone's transfer of wealth.

(1) Federal Estate Tax. For most people, you ain't gotta worry about it. If you have less than $11.2 million in assets when you die, you don't even have to file a federal estate tax return. Married? Exempt $22.4 million from the 40% estate tax. Yes, like everyone says, you can call me when you win the Powerball.

(2) Louisiana Inheritance Tax. It went long gone back in 2004. Doesn't exist any more.

(3) Capital Gains Tax. Definitely in play. When someone dies, assets that they own in their name, or assets in their revocable living trust, get a step-up in basis at death. This can permit the Successor Trustee or the beneficiaries to sell appreciated assets and pay little or no tax. Example: Dad bought a share of stock for $10. Before his death, the share is worth $50. If Dad sells it before he dies, he pays capital gains tax on the $40 of capital gain. But if Dad does not sell the share, and he dies, then the heirs or beneficiaries inherit the stock at the "stepped-up" $50 (fair market value on the date Dad died). Note that in community property states like Louisiana, ALL of the community property gets a step up when the first spouse dies. It makes a lot of sense, when a married person dies, to document the value of the assets so that tax can be calculated later when the asset is sold. Remember: no capital gains tax unless an asset is SOLD.

(4) Income Tax. There are all kinds of income tax ramifications to inheriting. Depends on what you inherit and many other factors. However, in general, a distribution of trust principal to a principal beneficiary after a Settlor dies is free of income tax to the recipient. However, income tax consequences exist if you are the beneficiary of a Traditional IRA, 401(k), or other pre-tax retirement account. You may also be required to pay income tax on the "gain" portion of a tax-deferred annuity when you receive it. There are also income tax consequences to inheriting appreciated savings bonds. Note that if you are the beneficiary of a Traditional IRA, and you are not the account owner's spouse, you will likely inherit it as an Inherited IRA and you cannot wait until 70.5 to start taking required distributions.

Many of the decisions you make when establishing your estate planning program, and many of the decisions your Trustee, heirs, or beneficiaries make after you death, can have a significant impact on how much tax the government takes from your estate.

Paul Rabalais
Louisiana Estate Planning Attorney
www.RabalaisEstatePlanning.com
Phone: 866-491-3884

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4 Estate Planning Tips For 2018

2018 brings some changes to the estate planning horizon. The following are four tips that you can take advantage of to protect your estate in 2018.

(1) Taxes. With the new law changes, there will be less emphasis on gift and estate tax avoidance, and more emphasis on capital gains tax and income tax avoidance. Smart married planners will ensure that their estate gets the valuable "double step-up in basis" (doesn't happen automatically), while other smart planners will arrange their affairs so that they and their heirs and beneficiaries minimize the income tax burden of a transfer of retirement accounts and other valuable assets.

(2) You're Living Longer. Because you are living longer, you need to protect your estate if you get sick for a prolonged period, or, if your mind becomes demented. Arranging all of your assets so that your trusted loved ones have access when you can't, and, for some, protecting your estate from nursing home poverty, is critical. To protect your estate from when you are sick, you must take action while you are well.

(3) Simplify Your Estate Settlement. Many Louisiana families want to arrange their estate so that judicially-supervised court proceeding (some call it "Probate;" other Louisianians call it "Succession"). Whether it's utilizing a revocable living trust or other probate avoidance strategies, act in 2018 to make estate settlement simple. In addition, have conversations with participants in your estate settlement - before your estate settlement. This can go a long way toward having an amicable estate settlement.

(4) Get Started. Procrastination is a big obstacle to estate planning. Put it on your "To Do" list, and then get started so you can check it off your "To Do" list. You'll feel great knowing you have all your legal affairs in order for yourself and your family.

Happy New Year! Make 2018 your best ever.

Paul Rabalais
www.RabalaisEstatePlanning.com
Law Office locations: All over south Louisiana
Toll-free phone: 866-491-3884

Is Estate Tax Owed on Living Trust Assets?

Assets that are either in your name or in your Living Trust are going to be included in your estate when you die for federal estate tax purposes. The federal government assesses about a 40% tax on the value of your assets when you die, but only if they exceed a certain amount.

Starting in 2018, as a result of our new tax law, an individual will be able to exempt $11.2 million of assets from the 40% estate tax. To take it a little further, married couples can exempt up to $22.4 million from the federal estate tax.

In fact, for most families, it is more advantageous for assets to be included in your estate for tax purposes than excluded. Assets that are in your estate, for tax purposes, get a step-up in capital gains tax basis when you die. This permits your heirs to sell assets after you die and pay no tax on the appreciation from the time of your initial purchase until the time of your death. This can save a load of tax.

In fact, since Louisiana is a community property state, we get to benefit from the special rule that says that all of the married couple's community property gets a step-up in basis at the first death, not just the deceased spouse's half. And if you set up your estate planning program the right way, the entire estate will get another step-up in basis when the surviving spouse dies. We call this the "Doube Step-Up." But it doesn't happen automatically, you have to actively work with the right estate planning attorney who can guide you through this.

It's worth mentioning at this point that the federal gift and estate tax are unified. Here's what that means. If, in 2018, you donate more than $15,000 to anyone, no one owes tax. By giving more than the annual exclusion amount ($15,000 for 2018), you simply start using up some of your $11.2 million estate tax exemption. That's right - no one owes taxes if a gift is in excess of $15,000 (unless, of course, you give away more than $11.2 million, but that would be one heckuva gift!

And note that based on the new tax law, the estate tax exemption is scheduled to revert back to $5 million (indexed for inflation), in 2026, unless, of course, Congress and the President change it again.

Year-End Gifting Decisions

Here on December 29, it happens every year. We get blitzed with year-end gifting decisions. Yesterday, a gentleman walked into my office wanting to speak with me about whether his parents should engage in year-end gifting. HIs parents have a large estate but the son said the CPA told them not to give because they would lose the step-up in basis.

I asked the son what the parents were intending to gift. He said, "Cash - my parents are going to do a transfer out of their savings account." I then asked if the parents "wanted" to gift. He said the parents were ready and willing to do it - it sounded like the parents were getting some personal satisfaction out of making the gifts.

They decided to gift. Generally, a gift of cash is better than a gift of an appreciated assets (like appreciated stock or real estate). The apppreciated assets that remain in the parents' estate will get a step-up in basis at death. But there is no loss in step up when the gift is cash.

What Estate Related Matters Need To Be Addressed When Wealthier Parent Dies?

I was working with an older, wealthier client yesterday and the husband asked if we could prepare a list of what their survivors would need to address after they pass away. 

Every circumstance is unique but in this matter, the following are a few of the things that will need to be addressed when wealthier Louisiana parents pass away.

If the husband left assets to others through his last will and testament, a Louisiana Succession will be necessary. There may also need to be an Ancillary Probate in other states if he owned real estate in a state outside of Louisiana. If he and his wife had created a Living Trust, then no Succession will be necessary if assets are titled in the name of his trust when he dies.

He will likely have left assets either in ownership, or in usufruct, or in trust, for his wife and kids. Assets will need to be retitled into the proper form (such as into a Usufruct account or in trust). 

There may be a federal estate tax return that must be filed (even if no federal estate tax is due after the first death) within 9 months from the date of death. Both the terms of his estate legal documents, and the moves his family make are likely to have income tax and capital gains tax consequences. Good help here can save a ton.

After the surviving spouse dies, it is likely that one or more of the adult children are named as executors or trustees. If the surviving spouse left assets to the kids through her last will and testament, another Succession (and Ancillary Probates in other states) must happen. If the surviving spouse had assets titled in the name of her trust, the successor trustee (typically one or more of the kids) can disburse assets from the trust to the beneficiaries immediately, skipping the court-supervised Succession.

Estate tax returns may need to be filed, and estate tax may need to be paid. The children should get good help making sure that they inherit IRAs and other assets the right way so that taxes are minimized or avoided on the distribution or subsequent sale of inherited assets.

Don't make the mistake of asking for help after you've made a mistake that you can't undo. If you need help, call our office at 866-491-3884.

Seven Common Uses For Trusts

People often mistakenly believe that trusts are for rich people. But you're about to find out that the trusts are used these days by all classes of people, and in some scenarios, trusts can benefit the middle class more than they can benefit the wealthy.

The following are seven common reasons people in Louisiana use trusts:

(1) Avoid Probate. Probably the most common reason nationwide why people use trusts. When you die with assets in your name, whether you have a last will or not, your assets are frozen. Your executor and your heirs will hire attorneys who will guide the family through the government-supervised probate (also called "Succession") process. Most people believe that this proceeding is too burdensome, costly, time-consuming, and just an overall pain in the behind. In some cases, it tears families apart. You can establish your revocable living trust and name trustees and beneficiaries of your trust, re-title assets into your trust while you are alive, so that when you die, your trustee disburses your trust assets to your beneficiaries, all outside of the government and legal system interference.

(2)  Avoid Nursing Home Poverty. The biggest threat to many people's life savings these days is not taxes or probate, but long term care expenses. With people living longer, if you own assets and need long term skilled care, you will be forced to pay for all of your own care out of your own savings until you have less than $2,000 remaining. If you work with the right people and set things up the right way, at the right time, and you get it right the first time, then you can protect your home and life savings from a forced spend-down in the event you need long term care in the future.

(3) Protect Irresponsible Heirs. Many people we work with want to leave an inheritance to their children or grandchildren, but they fear or they know that leaving a lump sum to certain individuals will enable them to squander the inheritance and spend it on the wrong things. You can establish a trust so that when you die, the inheritance for the financially immature heir can be doled out to him or her over time, or perhaps provide for a monthly stipend, or provide that someone else would have the discretion to determine when the heir is financially responsible enough to handle an inheritance. 

(4) Blended Family Situation. The biggest worry about blended families and estate planning is that when the first spouse dies, the worry is that all of the assets will go the surviving spouse. And then when the surviving spouse dies, all assets will go to the surviving spouse's children. The children of the first spouse to die won't get a penny. If you are a spouse in a blended family situation, you can establish a trust so that when you die, your assets are available for your spouse, but when your surviving spouse later dies, remaining trust assets go back to your children. This helps blended families protect assets for the right people.

(5)  Special Needs Trust. If you leave assets outright to someone who is getting government benefits, then the inheritance you leave them may get them kicked off of their benefits. By leaving the inheritance to what is commonly referred to as a "Special Needs Trust," you can arrange things in a way so that your heir continues to receive the valuable benefits, but also benefits from the inheritance that you left them the right way in a trust.

(6) Minors. Don't ever leave anything outright to a minor. When you leave life insurance or part of an estate to a minor, then that inheritance, while the child is a minor, must be directly supervised by a judge, and a judge must approve every expenditure of the inheritance on behalf of the minor, and then when the child turns 18, the remainder of the inheritance gets dumped in the child's lap. You can set up a trust so that you name a trusted friend or relative, or perhaps a company, to be the "Trustee" of a trust for the benefit of your minor child or grandchild. This will further make sure that what you leave to the minor is used for the right reasons outside of government interference, and is doled out the right way as the minor gradually turns into an adult.

(7) Avoid Taxes. Some people set up trusts to avoid taxes. The wealthy often establish trusts to move money from their "taxable estate" to an arrangement whereby assets are "out of the estate." It is important to note, however, that this estate tax affects only a small number of families. When an individual dies with an estate of less than $5.5 million, the estate is not required to file a federal estate tax return. Married couples can double the amount they can protect.

Two Biggest Louisiana Estate Planning Misconceptions

Everyday I'm faced with Louisiana residents' misconceptions about certain areas of estate planning. If I can use this post to help just a few folks eliminate these misconceptions, it will make my life and the lives of many others much better.

Misconception #1: If you have a Will, you avoid probate. Countless times over the years a spouse has passed away and the surviving spouse has sat with me at the conference room table. The surviving spouse typically says something like this, "I thought that since my spouse had a last will and testament, that the probate (or as we often call it in Louisiana, a "Succession") was avoided. I thought I could just produce the Last Will and Testament and everything would be put in my name."

Sorry folks. No can do. A Will names an executor whose job it is to guide and nurture the family and heirs through the court process, and the Will also tells a judge who to make sure the remaining assets get disbursed to after all of the delays and costs and procedures have been met. But a Will does not avoid probate.

The second biggest misconception that I face on a daily basis is that most people think that if they give more than $14,000 to their kid, then taxes are owed. Wrong again. Everytime I hear someone tell me that taxes are owed if they give more than $14k to someone , I give them this example, which they seem to understand.

I say, "Let's assume you give $114,000 to your kid. You gave $100,000 more than the allowable amount. But no one owes taxes. By making a gift of $114,000 to your kid, you just used up $100,000 of your estate tax exemption. So now, when you die, your estate can only leave $5.35 million free of estate tax, rather than $5.45 million."

To which they respond, "Oh. That's not an issue for me because I don't have an estate that exceeds $5 million."

What other estate planning misconceptions are out there?

Should I Donate Property? Or Let Children Inherit It When I Pass Away

Several people in the last few days have asked me whether they should donate a piece of property to their child, or whether they should let the child inherit the property from the parent. 

There are several factors to consider when determining whether to donate property, or to leave to a child or other heir through your Will or Trust. Here's a few of the factors:

(1) Capital Gains Tax. If you purchased a piece of property for $50,000, and it is now worth $200,000, and you donate the property during your lifetime, the donee (the person you give the property to) will receive a "carry-over" basis. When the donee sells the property, they will pay capital gains tax on what they receive in excess of $50,000. If, however, the child inherits the property from you through your Will or Trust, the inheritor will enjoy the benefits of the "stepped-up" basis. The inheritor's basis will be the value of the property on the date of death. For this reason, many elect to hold on to their appreciated property and let the child(ren) inherit it.

(2) "I Don't Want Them To Sell It. Some people own family property and they do not want it sold after it has been transferred either through gift or inheritance. Perhaps that may be a factor that would warrant you keeping the property for your lifetime, and then allowing the inheritor to own it when you die - perhaps when they are more mature and more likely to abide by your wishes to keep the property in the family.

(3) The Property Generates Income. If the property generates timber or rental or mineral income, this may be a factor as to whether your keep it or donate it. Perhaps you want to continue to receive the income because you want it or need the income, or perhaps your child who may be in a lower income tax bracket may pay less tax if they receive the income.

(4) "I Just Him To Have It." Some people simple want their child or children to own the property - now. If that is really what you want - for whatever reason - then give it to them. Just make sure it is an informed decision in light of all of the other factors that come into play.

(5) Estate and Gift Tax. Because individuals have a $5.49 million gift and estate tax exemption that they can use by making gifts during their lifetime or by leaving assets to others when they die, the estate and gift tax should not be afactor for most people who are contemplating making gifts of property. If a gift is made that is larger than the annual exclusion amount (currently $14,000), no tax is due  - the Donor simply used up some of their $5.49 million estate tax exemption.

(6) Future Medicaid Eligibility. If there is a concern that the parent may need the Louisiana Long Term Care Medicaid benefit if they go into a nursing home in the future, this may be a factor that warrants making the donation now. If the parent holds onto the property and needs nursing home care in the future, the parent would not qualify for Medicaid until after he or she sold the property and used all of the proceeds of the sale on long  term care  nursing home expenses.

As you can see, several factors go into whether you should keep property or donate it before you pass away. Make sure your decision is fully informed - a mistake could cost your family plenty. For more help, call us at 866-491-3884.

"If I Give More Than $14,000 To My Daughter, She Will Have To Pay Tax," Says Everyone - Incorrectly!

I was having a conversation a few days ago with a man who wanted to preserve as much as he could for his family - and as little as he could from the government. It was a difficult conversation to have because - in spite of his confident nature - everything that came out of his mouth was wrong.

While he was on the topic of gifting, he said, "I want to put some things in my daughter's name, but if I give her more than $14,000 in any year, she will have to pay tax on it."

We hear this often. And every time we hear it, it's wrong.

The Technical Side of Gifting

Here's the technical side of gifting. Each year a person can donate $14,000 (or whatever the present interest annual exclusion amount is - it gets adjusted for inflation) to as many people as they want and there are no TAX CONSEQUENCES to that donation. Most people understand this.

But where most lay people misinterpret the law is the following. Any gift, regardless of the value of the gift, is exempt from income tax both to the donor (the person making the gift) and the donee (the person receiving the gift). That's right. If Dad gives $114,000 to Daughter, no one pays any income tax. 

So, what's the catch?

The $114,000 gift described above is a TAXABLE GIFT. But no one pays any income tax. Here's the only tax consequences. You see, Dad has an estate and gift tax exemption of $5.49 million. By making a $114,000 taxable gift, no one owes any tax. Dad must report to the IRS (on a Gift Tax Return - IRS Form 709) that he made a taxable gift. But no one owes any taxes. Dad simply used up $100,000 ($114,000 - $14,000) of his gift and estate tax exemption. Now, when Dad dies, instead of being able to exempt $5.49 million free of the 40% estate tax, Dad can only exempt $5.39 million of assets from the 40% federal estate tax. 

When Dad learns this he exclaims, "I'll never have anywhere near an estate of more than $5 million so making a taxable gift really doesn't matter in my circumstances." Congratulations Dad! You now understand that making gifts in excess of the present interest annual exclusion amount (currently $14,000 for gifts made in 2017, but subject to increase) causes no one to pay any tax.

Gifting can be tricky. If you're gifting, you can make some big mistakes if you don't take into account all of the income tax, capital gains tax, property tax, estate and gift tax, and other nontax considerations that result from making gifts. Some families benefit from giving cash, while others may benefit from giving appreciating assets. Some families lose out when they donate appreciated assets. So get some expert help and have a good estate and tax legal program in place for your family to preserve and protect what you have.

Louisiana Family Avoids Estate Tax and Simplifies Settling Their Estates

Was working with a family recently. Their child had searched online for information about how Louisiana families can establish an estate legal program to avoid estate tax and other government interferences.

Over the years, the family worked hard to establish and maintain a successful business. The parents owned the majority of the stock of the S Corporation, and their child owned a smaller number of shares.

The business had been informally valued recently and it appears it is likely there will be estate tax when the parents die. In short, a married couple can pass along about $11 million to their heirs free from the 40% federal estate tax.

The couple asked me how the tax would get calculated when they die. They asked, "Mr. Rabalais, will the government swoop in and take over all of our business records and business assets immediately after we die so that the estate tax can be calculated by the Internal Revenue Service?"

I said, "No, it doesn't work quite that way. After you die, your child will be responsible for filing a federal estate tax return within nine months of the date of your death. Your son will hire someone like me to help him comply with all of the estate tax reporting rules. Your son will hire an appraiser to appraise the value of your business and your property. All of these appraisals will be attached to the estate tax return. If tax is owed, your child will use your assets to pay the tax. The IRS audits every estate tax return. If they feel your child did an adequate job reporting all of the assets correctly, they will accept the return as filed. If the IRS wants to challenge the valuations or other information, they have the right to do so."

So, we're starting a plan now to help this family arrange their estate so that, with the actions that they take today and in the next several years, they will be reducing the value of their estate that will be subject to the 40% estate tax.

In addition to federal estate tax avoidance, we are also putting an estate legal program in place so that it will be simple for the surviving spouse, and the child, to inherit the assets without having to go through the court-supervised and government-controlled Succession procedure (also called "Probate") when they die.

Lafayette,Louisiana Family Benefits From Dad's Estate and Medicaid Planning

I've been working with a Lafayette area family lately. Dad has his home, his life savings, and a couple of other pieces of property, and he wants to make sure his kids get it when he dies. His biggest threats to his children, as he sees it, are:

  1. Losing the assets due to a long-term care nursing home stay;
  2. Taxes; and
  3. Probate

A large part of his life savings is tucked away in his Individual Retirement Account (IRA). He also has investments held in an account that is not an IRA, and he has some money in bank accounts.

He realized that his IRA is threatened. He knows that any distributions from the IRA during his lifetime or after he dies will be subject to income tax to the recipient of the distribution. He was questioning whether taking required minimum distributions each year was the smartest way to handle his IRA. Here's what he said:

"If I just keep taking my required distributions, then I will pay tax on those distributions and the remainder of my IRA will continue to grow tax-deferred. All of the future growth will be ordinary income to whoever receives a distribution and those distributions in the future could be taxes at a rate as high as 40%, particularly if they go to my kids. Plus, if I go to a nursing home, I will be forced to take large distributions, pay the income tax, and then spend the remaining amounts on my nursing home expenses."

Then he asked:

"Wouldn't it be better if I took larger distributions that the required distributions, pay the tax, and then place the after-tax proceeds in a special trust account where it will be protected from my future nursing home expenses? Oh, and since the trust is a Grantor Trust, any future appreciation of my investments after I take it out of the IRA will passtax-free to my kids due to the step-up in basis that they will enjoy when they sell the assets after my death?"

His analyses appears to make a lot of sense. Most people are encouraged to keep every penny that they can inside their IRA. I'm not saying that's wrong every time, but as long as the investments grow inside the IRA, then a big chunk of each distribution will go the IRS. If the IRA goes ahead and takes distributions faster than required, and pays the tax on those distributions, then future appreciation would escape taxation due to the step-up in basis. Plus, if the IRA owner takes distributions and places those funds into the right kind of trust, then there is the added benefit of being protected from future nursing home costs.

Anyone who has an IRA and is concerned about future taxes and about losing the IRA to nursing home expenses, should have a conversation with an estate planning attorney who understands not only the estate tax, but the income tax and capital gains tax consequences of taking minimum distributions versus taking distributions larger than the minimum required amount.

Give us a call at 866-491-3884 to start a conversation about how to protect your IRA from the government. Don't wait another day. Every day that you wait could be costing you and your family!!!