From the view of December 2011, 2012 brings little change to federal estate tax laws; although, Congressional discussions of change are always on the horizon.

What You Need to Know about Federal Estate Taxes in 2012

1. The federal estate tax exemption has been indexed for inflation and in 2012 is set at $5,120,000.If you die in 2012 and haven’t used any of your exemption during your lifetime, you can pass up to $5,120,000 without paying federal estate tax.
2. If you die in 2012 and haven’t used any of your exemption during your lifetime, you can pass up to $5,120,000 without paying federal estate tax.
3. If you’ve used some of your exemption during your lifetime, your federal estate tax exemption is reduced by that amount.The top rate for federal estate tax is 35%.
4. The 2012 exemption and tax rate will last one year at the most; they are set to expire December 31, 2012.The law now includes a provision called “portability,” which is supposed to mean that married couples don’t need tax planning trusts or asset allocation to take advantage of doubling the federal estate tax exemption.
5. YOU CANNOT COUNT ON PORTABILITY.   The concept of portability makes sense but the actual practice is fraught with problems and is not likely to work.  If you’re married, it may be in your best interest to engage in comprehensive estate planning that includes tax planning (A-B trusts) and fully fund your assets, making sure both you and your spouse use your federal estate tax exemptions.

If you want to understand how the federal estate tax affects you in 2012, consult with a qualified estate planning attorney.

Duffy Law Office is a member of the American Academy of Estate Planning Attorneys.

“Crummey” is actually a man’s last name; his estate planning case made headlines.  Making headlines, for estate planning matters, is rarely a good thing.  However, thanks to Dr. Crummey, we all, estate planning attorneys and clients, alike, benefit.

What’s a Crummey Notice?

A Crummey notice is used to transform what would otherwise be a future gift into a present gift.

Okay, we know that sentence makes no sense to non-lawyers.  We’ll try again; a Crummey notice saves you a lot of money that would otherwise go to pay taxes.

Bottom line:  Crummey notices save you and your family money!!

When are Crummey Notices Used?

Crummey notices are used when money is put into a life insurance trust.  Usually, this is once a year.

Who Gets a Crummey Notice?

The beneficiaries of the life insurance trust receive the Crummey notices.

What does a Crummey Notice Say?

A Crummey notice says, “A gift has been made to a trust of which you are the beneficiary.  You have the right to take out xxx dollars for the next 30 days.”

Do I Take the Money Out? 

No, whoever named you as the beneficiary and his or her attorney will likely explain to you that it is in your best interest to leave the money in the trust.  The money will be used to make life insurance premium payments of which you are a beneficiary.

Life insurance trusts and their Crummey notices are commonly used to save federal estate taxes, generation skipping taxes, and gift taxes.  Consult with a qualified estate planning attorney to learn whether this would work for you.

Duffy Law Office is a member of the American Academy of Estate Planning Attorneys.

Minimizing taxes is a common goal among all of our estate planning clients.  Fortunately, there is much we can do to reduce federal estate taxes.

The first step is to ascertain whether your estate will be over the federal tax exemption at your death.  This isn’t as easy as it sounds because the exemption (i.e. allowable amount without incurring federal estate tax) changes.  For example, in 2011 and 2012, not many families are affected by the tax because the exemption is $5 million.  With good advice, a married couple can pass $10 million.

However, on January 1, 2013, the exemption is automatically reduced to $1 million and many families will be affected.  Congress could change the exemption, but the government desperately needs income and we can’t count on it. We need to plan.

Ignoring federal estate tax issues will cost you about half of everything you have above the applicable exemption.  This means that if you have $1 million over the exemption, your family loses $500,000.  If you’re $5 million over the exemption, your family loses $2.5 million.  It’s worth planning to avoid the tax.

Make a list of all of your estate assets, which is everything you own and all financial assets, monies or contracts owed to you.  Think about your home, vacation home, retirement accounts, investment accounts, bank accounts, life insurance policies, annuities, collections, antiques, jewelry, cars, notes for money owed to you, businesses, and the like.  Add all of these assets up; you’ll likely be surprised at the total.

Consult with a qualified estate planning attorney, who can do the calculations to estimate what your estate value will be at the time of your death.  Regardless of current portability laws, if you’re close to the exemption and you’re married, your attorney will likely recommend an AB tax planning strategy in your revocable living trust.

If that doesn’t cure your federal estate tax problem, a life insurance trust, charitable planning, or a gifting plan may be appropriate.

Duffy Law Office is a member of the American Academy of Estate Planning Attorneys.

Because of the very high unified credit amount ($5,000,000 in 2011 and 2012) and the emergence of portability (the ability of a surviving spouse to utilize the unused unified credit amount without use of a credit shelter trust), credit shelter trust planning has been called into question.

But, there are 7 important reasons why you still need a credit shelter trust.  And, please note that the credit shelter trust is also referred to as a family trust, B trust, or by-pass trust.  You may see these terms in other writings.  They all mean the same thing.  It’s the trust that holds the deceased spouse’s unused unified credit amount.

1.  The unified credit returns to only $1,000,000 in the year 2013 (and beyond)

2.  There is no portability in 2013 and beyond

3.  Although there is portability in 2011 and 2012, the concept is fraught with ambiguities inviting litigation and unhappy, messy consequences.  For example, consider a second marriage situation wherein the executor of the deceased’s estate refuses to file a federal estate tax return to allocate unused unified credit to the surviving spouse.  Messy.

4.  There is no portability for the generation skipping tax and, if it is not allocated to the credit shelter trust, it likely will be lost.

5.  Assets in the credit shelter trust can grow and grow and grow and will not be subject to federal estate tax when the surviving spouse dies.

6.  Assets in the credit shelter trust have asset protection so they can’t be taken in a divorce, bankruptcy, malpractice case, car accident or slip and fall litigation, or any other type of law suit.

7.  Children are unlikely to get disinherited unintentionally if the assets are in the credit shelter trust.  Children are often disinherited when assets go directly to a surviving spouse who later remarries.

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Duffy Law Office is a member of the American Academy of Estate Planning Attorneys.

The statistics on marriage and remarriage in the United States reveal the fact that the typical marriage is almost as likely as not to end in divorce. In addition, about three out of every four people who do get divorced wind up getting remarried, and in the majority of cases one or both of them have children from a previous marriage.

When you are getting remarried and you have children from a previous marriage or marriages you are faced with some estate planning challenges. Traditionally marriage is a total and complete partnership, but second and third marriages can be more complicated, with one or both parties entering into the union with significant assets. So when you have the combination of children from a previous marriage and personal assets that you would like to protect, the solution is to enter into a prenuptial agreement.

Once your personal assets have been legally defined you have the freedom to leave them to your children. But what about your new spouse? Of course you want to provide for your husband or wife in the event of your death, and you can satisfy both of your objectives through the creation of a qualified terminable interest property trust.

With these trusts your spouse receives the trust income for life, and depending on the exact terms of the trust agreement he or she can also tap into the principal under some circumstances. But you name beneficiaries of the trust upon its creation, and these would presumably be your children. Your named beneficiaries inherit the trust assets upon the death of your surviving spouse, so with the QTIP you do provide for your spouse for life but he or she does not decide who gets the remainder.

Duffy Law Office is a member of the American Academy of Estate Planning Attorneys.

In estate planning the estate tax is a very big deal, and the details of the tax are constantly changing so it is something that is an ongoing topic of debate. At the end of last year the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was passed and it included provisions that altered the estate tax parameters. Rather than the $1 million exclusion that would have been in place had this bill not passed it is now $5 million. And instead of the 55% rate of taxation that was scheduled the new measure calls for a 35% rate.

If you look at that last sentence again it states that there is a 35% federal death levy in place, but this is somehow being called “tax relief.” Many would say that the estate tax should not exist at all, and there are a number of good reasons for this. The first and best reason is the fact that it is an instance of double taxation. The assets that comprise your estate were accumulated using funds that you have left over after having paid income taxes, capital gains tax, property tax, sales tax, and a number of additional taxes that go largely unnoticed such as gasoline tax and liquor tax.

In addition it could be argued that it is unfair because only some people have to pay it. And even if you believe in some form of death tax for whatever reason, a tax that lops off somewhere between 35% and 55% of your legacy is extraordinarily excessive.

For these reasons many people are in favor of a repeal of the estate tax, and some of them are holding seats in the United States House of Representatives. There have been five bills introduced to the House that call for the repeal of the estate tax, so this idea is gaining momentum and it is possible that we will in fact see a repeal at some point in the future.

Duffy Law Office is a member of the American Academy of Estate Planning Attorneys.

Countless people make charitable contributions each year. Some people give cash. Some people give their old car, others the very shirts off their backs. Some give shares of stock, and others give their time.

The rules vary as to how and whether each type of gift is deductible.

A gift of your time or services, while laudable, is not deductible. However, you can deduct out-of-pocket expenses incurred in a charitable endeavor, if they are: 1) unreimbursed, 2) directly connected with the services, 3) incurred only because of the services you gave, and 4) not personal, living, or family expenses.

If you make a contribution and receive something in return, you can deduct the value of the contribution to the extent it exceeds the fair market value of what you receive in return. For example, if you pay $80 for tickets to the Red Cross charity screening of Star Wars, the tickets would be deductible to the extent they exceed the normal ticket price for movie tickets.

Generally, the deduction for gifts of tangible personal property, such as cars, furniture, paintings, etc., is limited to the lower of your cost basis or the property’s fair market value at the time of the contribution. For example, if you pay $500 for a rare painting and it appreciates to $5,000 and you contribute it to the Kidney Foundation, it is deductible only to the extent of $500.

However, if the gift is related to the charity’s exempt purpose, you can deduct the full fair market value of the item, including your original cost basis and appreciation that would otherwise have been taxed as long term capital gain. For example, if you contributed the same painting to the National Gallery of Art, you could deduct $5,000 rather than the $500 you were allowed for contributing it to the Kidney Foundation.

It is also necessary to keep adequate records to substantiate your deduction. For non-cash contributions under $250, you must keep a receipt from the charity showing: 1) the name of the charity, 2) the date and location of the contribution, and 3) a reasonably detailed description of the property. For non-cash contributions of at least $250 but less than $500, you must get an acknowledgement from the charity that meets the above requirements and 1) is in writing, 2) contains a statement of whether the charity gave you anything in return for the contribution and, if so, its value, and 3) is obtained before the earlier of when your return is due or when you actually file it. If the contribution is over $500 but not over $5,000, you must meet the above requirements, your records must indicate: 1) how you obtained the property, 2) the approximate date you obtained or created the property, and 3) your cost or other basis of the property and whether you’ve held it more or less than one year. If the deduction is over $5,000 you must meet the same requirements above and you must also obtain a qualified written appraisal of the property.

For further information, you may wish to refer to Internal Revenue Service Publications 526 and 561, which may be obtained on their web site at www.irs.gov. This is a complex area. A gift of the same property to different organizations can result in different tax consequences. Improper documentation can jeopardize the deduction altogether. A qualified estate planning attorney can help you maximize the tax benefit of your charitable gifting.

In planning your estate, the best course of action is to seek the assistance of an attorney whose practice is focused in estate planning

Duffy Law Office is a member of the American Academy of Estate Planning Attorneys.

Although the rate of the tax has been reduced to 35% from the 55% that had been anticipated, few American are anxious to part with over a third of their legacy as they pass it along to their loved ones. If you find that the value of your estate exceeds the $5 million estate tax exclusion you are probably going to look for ways to save tax. One very simple but direct and efficient way of doing so is giving lifetime tax free gifts.

Giving gifts to those who would otherwise be inheriting the money after you pass away while you are still alive is a logical approach to avoid the estate tax. The only snag is the fact that the IRS is thought of this as well, so there is a gift tax in place that carries the same rate as the estate tax. There are, however, exemptions in place that can be used creatively to transfer assets to your loved ones in a tax-free manner while reducing the value of your estate in an effort to ease or eliminate the future estate tax burden.

There is a $5 million lifetime gift tax exemption, but it is unified with the estate tax exclusion so using it does not directly provide you with any estate tax efficiency. However, there is also an annual $13,000 per person (or donee) exemption that can be utilized, and it does not count against your lifetime exclusion.

Each individual can give gifts totaling as much as $13,000 each year to an unlimited number of people. If you are married, you and your spouse can combine your respective annual exemptions and give up to $26,000 as a gift to any number of recipients free of the gift tax. So could use this annual exemption give your loved ones part of their inheritances in advance, free of the gift tax at the same time reduce the future estate tax exposure in the process.

Gifitng is one of the most simple and yet powerful estate planning methods.

Duffy Law Office is a member of the American Academy of Estate Planning Attorneys.

We all heard about the big tax relief legislation that made its way through Congress late last year and was eventually signed into law by the president on the 17th of December. The Bush era tax cuts were extended, unemployment benefits were extended, and the Social Security payroll tax was reduced by about a third, and these were the focal points that got the most attention in the media. However, there were also some components to this measure that had a profound impact on estate planning, and they have really changed the playing field for the next couple of years.

Many people are aware of the fact that the estate tax was repealed for 2010, but it was scheduled to return in 2011. Under the law as it existed before this eleventh hour legislation was enacted the exclusion was going to be $1 million and the maximum rate of taxation was going to be a somewhat incredible 55%. When the tax was last in effect in 2009 the exclusion was $3.5 million and the top rate was 45%, so a lot more estates were going to be vulnerable and the bite was set to increase by 10%.

Fortunately the recently passed Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 changed those numbers considerably. In 2011 and 2012 the estate tax exclusion amount has been raised from the $1 million that was anticipated up to $5 million. This is a per-person exclusion so a married couple may now pool their respective exemptions and have a $10 million estate tax buffer.

In addition to the raise in the exclusion, the maximum rate of the tax has been reduced. Rather than the 55% that had been scheduled, any portion of an estate that exceeds the $5 million exclusion will be taxed a rate of 35%. This is no tax holiday, but at least the government will now be allowing your heirs to receive more than is taken from them should a portion of their inheritances be subject to the estate tax.

Duffy Law Office is a member of the American Academy of Estate Planning Attorneys.

On December 17, 2010, the President signed into law The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. This bill restores the IRA Charitable Rollover for 2010 and permits its use in all of 2011. The act is retroactive to January 1, 2010, so donors who previously made 2010 IRA rollovers will qualify.

The principal rules for direct transfers from an IRA to a qualified public charity are
1. The IRA owner must be 70½ or older

2. The transfer is for no more than $100,000 each year (A 2010 transfer qualifies for the required minimum distribution)

3. It must be to a public charity either outright or for a specific purpose, but may not be to a donor advised fund or supporting organization

4. The transfer is made directly from a custodian or trustee to the charitable organization

A very important potential 2010 benefit exists. Because Congress recognized that it is very late in the year, individuals who choose to make a qualified charitable distribution rollover from their IRA trustee to a charity may make their 2010 charitable gift during 2010 or in January of 2011.

Remember that this distribution is NOT considered a tax deduction.
However, any money transferred to a charity will not be considered taxable income and therefore will not be taxed.

Call us and we can help you with these issues and your IRA and charitable planning.

Duffy Law Office is a member of the American Academy of Estate Planning Attorneys.