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Estate Taxes

Thursday, September 12, 2019

Year End Estate Planning Tip #5 – Make Gifts that Your Family Will Love but the IRS Won’t Tax

Don’t let the chaos of the holiday season prevent you from avoiding federal gift tax by making “annual exclusion” gifts, medical payments gifts, and educational gifts.


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Monday, August 12, 2019

Strategies for Reducing the Income Tax Squeeze on Irrevocable Trusts

Under federal income tax laws, irrevocable, non-grantor trusts (such as Bypass Trusts and Dynasty Trusts) are subject to highly compressed income tax brackets. In 2019, the top 37% tax rate kicks in at only $12,500 of trust income. In addition, trusts in the top tax bracket are subject to the 20% long term capital gains rate, a 9.3% California state tax and a 3.8% surtax on the lesser of undistributed net investment income or adjusted gross income over $12,500.


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Wednesday, December 5, 2018

The Difference Between Equal and Equitable Inheritances

When it comes to estate planning, many individuals believe that dividing assets equally among adult children is the best choice. However, there are situations in which leaving each child the same amount might not be practical. For this reason, it is important to know the difference between an equal inheritance and an equitable inheritance, in which each child receives a fair share based on his or her circumstances.


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Tuesday, September 11, 2018

Common Estate Planning Mistakes Regarding Individual Retirement Accounts (IRAs)

For many people, retirement savings accounts are among the largest assets they have to bequeath to their children and grandchildren in their estate plans.  Sadly, without professional and personally tailored advice about how best to include IRAs in one’s estate plan, there may be a failure to take advantage of techniques that will maximize the amount of assets that will be available for future generations.


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Thursday, August 30, 2018

How to Leave Gifts to Step-Children

Today, blended families have become increasingly common, and many individuals have step-children, that is, children of a spouse or partner. In situations where step-children have not been legally adopted, however, they do not have a legal right to an inheritance from a step-parent. For those who wish to leave step-children part of their estate , it is necessary to include them in an estate plan.


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Wednesday, August 15, 2018

Things to Consider in Establishing a Charitable Giving Plan

For many individuals, leaving a legacy of charity is an important component of estate planning, but there are many factors involved in creating a charitable giving plan.

First, it is important to select causes that you believe in such as environmental, educational, religious or medical, or those dedicated to providing food and shelter to the poor. The number of charities you wish to give to depends on your available resources, as well as other beneficiaries of your estate. Many people opt to limit their selections to a handful of charities that are most important to them.


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Thursday, July 12, 2018

U.S. Supreme Court Rules Inherited IRAs are Not Protected from Creditors

On June 12, 2014, the U.S. Supreme Court—in a unanimous decision—ruled that Individual Retirement Accounts (IRAs) inherited by anyone other than a spouse are not retirement funds and therefore are not protected from the beneficiary’s creditors in bankruptcy.

The reasoning is, because the beneficiary cannot make additional contributions or delay distributions until retirement, it is not a retirement account. There is, in fact, nothing to prevent a beneficiary from withdrawing funds, or even clearing out the account, at any time. As a result, these funds must also be available to satisfy the beneficiary’s creditors during bankruptcy. Following the same logic, an inherited IRA is also subject to divorce proceedings.

This is not great news for parents who have planned to leave large IRA accounts to their children or grandchildren, with the desire to continue the tax-deferred earnings for many more years over their lives.


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Friday, April 1, 2016

Ensuring Income Tax Deferral for Retirement Plan Beneficiaries


Some of the most generous provisions of the tax code are those that permit beneficiaries of IRAs and other qualified retirement plans to defer income tax on the plans until time of withdrawal. This allows the IRA or qualified plan to grow significantly more than if it were subject to tax on gains each year.

Another equally generous provision of the tax code permits beneficiaries to withdraw only a minimum amount from IRAs or qualified plans each year. By taking only these “required minimum distributions” a beneficiary can stretch out distributions over the better part of his or her lifetime, resulting in further deferral of income tax on the amount remaining in the plan.

Unfortunately, most beneficiaries fail to take advantage of this latter provision and withdraw all of the IRA or qualified plan funds immediately, thereby losing the significant tax advantages of tax-deferred growth.
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Monday, March 21, 2016

How to Calculate Estate Tax

In order to predict how much your estate will have to pay in taxes, one must first determine the value of the estate. To determine this, many assets might have to be appraised at fair market value. The estate includes all assets including real estate, cash, securities, stocks, bonds, business interests, loans receivable, furnishings, jewelry, and other valuables.

Once your net worth is established, you can subtract liabilities like mortgages, credit cards, other legitimate debts, funeral expenses, medical bills, and the administrative cost to settle your estate including attorney, accounting and appraisal fees, storage and shipping fees, insurances, and court fees. The administrative expenses will likely total roughly 5% of the total estate. Any assets that is bequeathed to charity through a trust escapes taxation, and the value of those assets must be subtracted from the total. Any assets transferred to a surviving spouse are not subject to taxation as long as your spouse is a US citizen.

If the net worth of an estate is less than the Federal and state exemptions, no taxes must be paid. However, the value of assets over the exemptions will be taxed. The amount over the exemptions is referred to as the taxable estate. A testator’s assets are taxed by the state in which the will is probated. Taxes paid by the estate to the state may be deducted for Federal tax purposes. The Federal exemption was $5.43 million in 2015 and is slated to increase in 2016. The top Federal estate tax rate in 2015 was 40%.

If an estate earns money while it is being administered and distributed, for example, if real estate is rented or businesses continue to operate, it will be necessary for the estate to complete a tax return and pay taxes on the income it receives. The net income of the estate can be added to the taxable portion of the estate if it is over the federal or state exemption. It is important to be aware that the laws surrounding estate taxes change frequently and require seasoned professionals to navigate, and to notify you if changes in the laws will affect your estate plan. 


Monday, February 8, 2016

What is an Estate Tax?

While the terms "estate tax" and "inheritance tax" are often used interchangeably, they are not synonymous. Let's try to clarify the difference.

Estate Tax

Estate tax is based on the net value of the deceased owner's property.  An estate tax is applied to these assets when they are transferred to the beneficiary. It is important to remember that an estate tax doesn't have anything to do with the beneficiary or that person's resources.

Federal estate tax only affects individuals who die with more than $5.45[s1]  million in assets and individuals with such large estates can leave that amount to their beneficiaries without being subjected to a  tax liability. Ninety-nine percent of the population will not owe federal estate tax upon their death.

In most circumstances, no federal estate tax is levied against spouses. As of the Supreme Court's recent ruling, this includes gay married couples as well as heterosexual couples. Federal estate taxes can, however, be charged if the spouse who is the beneficiary is not a citizen of the U.S. In such cases, though, a personal estate tax exemption can be used.  Even where remaining spouses have no liability for federal estate tax, they may be charged with state taxes in some states, taxes which cannot be avoided unless the couple relocates.

Inheritance Tax

Inheritance tax, as distinguished from estate tax, is imposed by state governments and the tax rate depends on the person receiving the property, and, in some locations, on how much that person receives. Inheritance tax can also vary depending upon the relationship between the testator and the benefactor. In Pennsylvania, for example, a spouse is not taxed at all; a lineal descendant (the child of the deceased) is taxed at 4.5 percent; a sibling is taxed at 12 percent, and anyone else must pay 15 percent.

Exemptions

There are exemptions that can reduce the amount of inheritance tax owed by significant amounts, but it is important that there be proper documentation of such exemptions for them to be applicable. Any part of the inheritance that is donated to charity does not require inheritance tax payment on the part of the beneficiary. Because of the inherent complexities of tax law and the variations from state to state, working with a tax attorney who has expertise with state tax laws s the best way to make sure you take advantage of any possible tax exemptions or avoidance.

 

Monday, January 11, 2016

What Your Loved Ones Absolutely Need to Know About Your Estate Plan

What Your Loved Ones Absolutely Need to Know About Your Estate Plan

The conversation about a person’s last wishes can be an awkward one for both the individual who is the topic of conversation and his or her loved ones. The end of someone’s life is not a topic anyone looks forward to discussing. It is, however, an important conversation that must be had so that the family understands  the testator’s final wishes before he or she passes away. If a significant sum is being left to someone or some entity outside of the family, an explanation of this action may go a long way to avoiding a contested will. In a similar vein, if one heir is receiving a larger share of the estate than the others, it is prudent to have this action explained. If funds are being placed in a trust instead of given directly to the heirs, it makes sense for the testator to advise his or her loved ones in advance.

When a loved one dies, people are often in a state of emotional turmoil. Each deals with grief differently and, often, unpredictably. Anger is a common reaction to loss, one of the five stages postulated to apply to everyone dealing with such a tragedy. Simply by talking to loved ones ahead of time, a testator can preempt any anger misdirected at the estate plan and avoid an unnecessary dispute, be it a small family tiff or a prolonged legal battle.

The executor of the estate must be privy to a significant amount of information before a testator passes on. It is helpful for the executor to know that he or she has been chosen for this role  and to have accepted the appointment in advance. The executor should know the location of the original will. Concerns of fraud mean that only the original copy of a will can be entered into probate. The executor should be aware of all bank accounts, assets, and debts in a testator’s name. This will avoid a tedious search for documents after the decedent passes on and will ensure that all assets are included as part of the estate. The executor of an estate should be aware of all memberships, because it will be the executor’s responsibility to cancel them. An up-to-date accounting of all assets and debts will simplify the settlement of the estate for an executor significantly.


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Law Offices Of Michael J. Wittick, A Professional Law Corporation is located in Irvine, CA and serves clients with estate and wealth preservation matters throughout Irvine, Lake Forest, Laguna Woods, Laguna Hills, Foothill Ranch, Tustin, Aliso Viejo and the surrounding areas.



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