Planning Notes

Intentionally Defective Grantor Trusts (IDGT) for Tax, Medicaid, & Asset Protection Planning

Mon, 06 May 2013 19:05:40 -0600

A grantor trust is a trust in which the grantor, sometimes called a settlor or trustor, retains an interest. One particular type of grantor trust, called an intentionally defective grantor trust (IDGT), leverages disparities in the federal income and estate taxes to provide opportunities for tax, Medicaid, and asset protection planning.

Tax Planning

An IDGT can allow a grantor to freeze his/her federal estate and/or gift tax obligations associated with an appreciating asset and allow the IDGT to receive the income from the asset free of federal income tax. An IDGT can also enable a grantor to become eligible for Medicaid coverage while permitting the grantor to claim some federal income tax exclusions and/or deductions.

Estate & Gift Tax

Although the federal estate and gift taxes are distinct taxes, in large part, they are both concerned with the same thing: the taxation of wealth transfers.

The law associated with both taxes effectively creates a lifetime unified credit against which a person can transfer assets without incurring federal estate or gift tax obligations, either while alive or at death. The credit is currently $5.25 million per person or $10.5 million per married couple. Further, this credit is indexed for inflation and has been increasing at a rate of 2.5% per year since such it was so indexed. As such, individuals with assets in excess of $5.25 million, or legally married couples with assets in excess of $10.5 million, may be able to substantially reduce the federal estate and/or gift taxes associated with their assets by transferring appreciating assets to IDGTs.

For example, if a man owns an asset that is appreciating in value, he can effectively "freeze" the value of the asset for federal estate and gift tax purposes by selling the asset to an IDGT for a note payable. When the man dies, only the remaining value of the note payable, if any, will be included in his gross estate and will be subject to any federal estate and/or gift taxes.

In addition to freezing the value of the assets, the grantor may be able to structure the trust so as to discount the value of some types of assets transferred to the trust, e.g. businesses.

Income Tax

The reason an IDGT is often called "intentionally defective" stems from the federal income tax laws that disregard the existence of the trust for federal income tax purposes, thereby imposing the federal income tax obligations associated with the asset upon the grantor as opposed to the trust. Although this may seem undesireable, it can actually enable the asset owner to transfer significant wealth to beneficiaries, tax-free.

For example, if a woman owns an asset that generates income, she can transfer the asset to an IDGT for the benefit of her heirs which will allow the trust to receive the income generated by the asset free of federal income tax because the woman will be required to pay such tax. Not only does this allow the income to be received by the trust free of federal income tax, it also decreases the value of the woman's estate by reducing any federal estate and/or gift tax obligations associated with her estate.

Defects

The interests that cause a trust to be defective are set forth in sections 671 through 677 of the Internal Revenue Code (IRC).

The following is a list of some interests that can cause a trust to be defective, that are often considered significant interests, and that often do not result in a substantial reduction in the value of the interest retained by the grantor outside of minority and/or marketability discounts:

Power to revoke (IRC § 676);
Power to vote or direct the voting of stock or other securities of a corporation in which the holdings of the grantor and the trust are significant from the viewpoint of voting control (IRC § 674); or
Power to control the investment of the trust funds either by directing investments or reinvestments, or by vetoing proposed investments or reinvestments, to the extent that the trust funds consist of stocks or securities of corporations in which the holdings of the grantor and the trust are significant from the viewpoint of voting control (IRC § 675).

The following is a list of some interest that can cause a trust to be defective, that are often considered less significant interests, and that often do result in a substantial reduction in the value of the interest retained by the grantor outside of minority and/or marketability discounts:

Power to alter beneficial enjoyment (IRC § 674);
Power to deal for less than adequate and full consideration (IRC § 675);
Power to borrow without adequate interest or security (IRC § 675); or
Power to reacquire the trust corpus by substituting other property of an equivalent value (IRC § 675).

Medicaid Planning

Individuals can also leverage the same disparities between the federal income and federal estate tax laws during Medicaid planning, i.e. structuring ownership of assets to enable eligibility for coverage through Medicaid.

For example, if a man transfers his house to trust and meets the lookback requirements and other requirements of his state, e.g. not retaining a significant interest in the trust, in addition to the requirements of Section 121 of the IRC, he may be able to claim the capital gain exlcusion on the sale of the residence as set forth in IRC § 121.

Asset Protection Planning

In addition to the federal tax and Mediciad planning opportunities enabled by IDGTs, if structured correctly, an IDGT can also shield a person's assets from liabilities associated with the asset, thereby providing significant asset protection. Principally, this is because IDGTs are irrevocable trusts, and the trust assets generally cannot be attached to satisfy judgments against a grantor if the assets were not illegally transferred to the trust.

For example, if a man transfers his interest in a business to an IDGT in 2013, causes a car accident 2014, and is required to pay a judgment in excess of his automobile insurance policy coverage in 2015, the judgment creditor will not likely be able to attach the interest transferred to the IDGT to satisfy the judgment. However, if the man transferred the business interest to the IDGT after the judgment was entered, the judgement creditor may be able to attach the transferred business interest to satisfy the judgment.

This brief overview of some important considerations associated with intentionally defective grantor trusts (IDGTs), tax planning, mediciad planning, and asset protection is by no means comprehensive. Always seek the advice of a competent professional when making important financial and legal decisions.

Self-Employment Tax: LLC v. S-Corporation

Thu, 11 Apr 2013 11:27:41 -0600

Although many new business owners who will actively participate in their businesses choose to organize limited liability companies (LLCs) as opposed to incorporating S-Corporations because of, among other things, greater flexibility and the lack of state-required reporting formalities, there is at least one potentially compelling reason to incorporate an S-Corporation, or at least elect taxation as an S-Corporation under Subchapter S of the Internal Revenue Code (IRC): potentially lower employment taxes.

The Presumption

If a business owner actively participates in a business, such owner is subject to Federal Self-Employment Tax (SE Tax). In 2013, SE Tax is imposed on the first $113,700 of combined wages, tips, and net earnings which are earned by such a business owner, commonly called earned income.

S-Corporation

While shareholders of S-Corporations are required to pay SE Tax on earned income they receive for the services they provide to the S-Corporation, they are not required to pay SE Tax on distributions of profits.

LLC

By default an LLC is taxed as either a disregarded entity, in the case of a single-member LLC, or a partnership under Subchapter K, in the case of a multi-member LLC. In either case, however, the IRS will chracterize the first $113,700 (as of 2013) of income received by an LLC member as earned income, which is subject to SE Tax.

An LLC may, however, elect taxation as an S-Corporation under Subchapter K, as discussed below.

Why Does This Matter?

As of 2013, the SE Tax rate, which consists of both the employee and employer shares of FICA (Social Security & Medicare) and FUTA (unemployment) taxes, is 15.3%. As such, the potential payroll tax savings on $113,700 (as of 2013), could be substantial.

For example, Business A is a brick and mortar cupcake shop. While the owners of Business A are actively involved in the business, they only spend about 10 hours per week managing the business and employees do the rest. If Business A is an LLC taxed as a partnership under Subchapter K, the distributions of profits, i.e. non-earned income payments, made to the owners, up to $113,700 (as of 2013), will be subject to SE Tax even though such distributions are not attributable to services provided by the owners. However, if Business A is an S-Corporation or an LLC taxed as an S-Corporation under Subchapter S, the distributions of profits made to the shareholders are not subject to payroll taxes by default; rather, only the income earned by the owners, i.e. wages, salary, and compensation for services provided by the owners, is subject to payroll taxes.

Changing the Presumption

An LLC can elect to be taxed as an S-Corporation as opposed to a disregarded entity or partnership in order to eliminate the presumption regarding earned income. However, such an election comes at the cost of flexibility and convenience; among other things, because Subchapter S of the IRC imposes more restrictions than those imposed upon disregarded entities or partnerships. Some of the most notable restrictions are as follows:

S-Corporations may not have more than 100 shareholders;
S-Corporation shareholders must be US citizens/residents;
S-Corporation shareholders cannot be C-Corporations, other S-Corporations, LLCs, partnerships, or certain types of trusts; and
S-Corporations may only have one class of stock.

In order to elect taxation under Subchapter S, an LLC can request a Federal Tax ID (EIN) and file Form 2553 with the IRS (and Form 8832, if necessary).

This brief overview of some important considerations associated with LLCs, S-Corporations, and earned income is by no means comprehensive. Always seek the advice of a competent professional when making important financial and legal decisions.

Computer Software License Agreements

Mon, 18 Mar 2013 13:36:01 -0600

In the United States, it is possible to protect intellectual property associated with computer software via patent, copyright, and/or contract. While patent protection of computer software is not automatic, it requires a person to apply for and receive a patent from the United States Patent and Trademark Office (“USPTO”), copyright protection automatically inures to computer software¹.

In contrast, to patent and copyright protection, which are granted by the U.S. Federal Government pursuant to the authority of the Copyright Clause (Article I, Section 8, Clause 8) of the U.S. Constitution, contractual protection of intellectual property associated with computer software requires that the person using such software agrees to the terms of a contract.

Why Does This Matter?

U.S. Copyright law generally confers, subject to limitations, the following exclusive rights upon copyright holders:

(1) to reproduce the copyrighted work in copies or phonorecords;

(2) to prepare derivative works based upon the copyrighted work;

(3) to distribute copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending;

(4) in the case of literary, musical, dramatic, and choreographic works, pantomimes, and motion pictures and other audiovisual works, to perform the copyrighted work publicly;

(5) in the case of literary, musical, dramatic, and choreographic works, pantomimes, and pictorial, graphic, or sculptural works, including the individual images of a motion picture or other audiovisual work, to display the copyrighted work publicly; and

in the case of sound recordings, to perform the copyrighted work publicly by means of a digital audio transmission.

17 U.S.C. § 106

While what is conventionally thought of as “use” of computer software may not seem to be included in the rights set forth in 17 U.S.C. § 106 above, because of the way that computers function, computer software or its copyrighted output must be duplicated, i.e. reproduced, at least partially, in order for software to function properly. As such, use of computer software is automatically an exclusive right of the software developer or software owner and any person who desires to use computer software must possess a valid license so as not to infringe upon such rights.

Because a valid license is required to use computer software, a copyright holder may impose contractual restrictions in the computer software license agreement, which are not include in the Copyright Act of 1976 and the other associated statutes in Title 17 of the United States Code, to which a person must contractually agree if that person wants to use such computer software.

What Can or What Does a Software License Agreement Contain?

Some licenses are granted for free and provide few, if any, restrictions upon the use, reproduction, distribution, and modification of computer software, e.g. MIT license, while others require payment and impose substantial restrictions of the use, reproduction, distribution, and modification of computer software.

Depending upon the sensitivity of the intellectual property associated with computer software, a copyright holder may include provisions in the license agreement that impose confidentiality restrictions upon the licensee, prohibit reverse engineering of such software, and/or otherwise expand the limitations and protections associated with the software.

Some licenses disclaim liability for improper use of the licensed software and my also disclaim liability for damage to computers or associated networks. While blanket disclaimers of liability as to unrelated parties are sometimes held to be invalid by courts, because a user must agree to any disclaimer in a license agreement in order to use computer software, such disclaimers are more likely to be held as valid and binding by courts.

License agreements can also include a litany of other provisions, including but not limited to provisions about subscriptions, warranties, etc.

¹Although U.S. federal copyright protection is automatic, U.S. federal copyright registration is required if a copyright holder wants to bring suit in U.S. federal court and/or receive statutory damages for infringement.

This brief overview of some important considerations associated with copyright law and computer software licenses is by no means comprehensive. Always seek the advice of a competent professional when making important financial and legal decisions.

Inside / Outside Tax Basis & Partnerships

Fri, 08 Mar 2013 15:47:07 -0700

Tax basis is the amount upon which taxable gain or loss, if any, will be calculated on the occurrence of various events, including but not limited to the disposition of an asset or sale of an interest in an entity.

Although general partnerships created under state law are relatively rare these days, the principles of federal partnership taxation, set forth in Subchapter K of the Internal Revenue Code (“IRC”), are applicable to various types of more common entities by default, e.g. a multiple-member limited liability company (“LLC”).

The contribution of an asset to an entity taxed under Subchapter K of the IRC affects or necessitates at least four distinct calculations: 1) Book Value, 2) Inside Basis, 3) Outside Basis, and 4) Capital Accounts.

Book Value

Upon contribution of an asset, an entity is said to “book” the value of an asset using the current fair market value of the asset.

For example, if Jack contributes an asset to an entity that Jack purchased for $50 but now has a fair market value of $100 and Jane contributes an asset that she purchased for $75 but now has a fair market value of $25, the entity will enter the value of the assets on its books as being $100 and $25, respectively.

Inside Basis

The entity’s tax basis in an asset, called inside basis, is the same as the contributing person’s basis in the asset.

Continuing with the previous example, the entity will have a tax basis, or inside basis, of $50 in the asset that Jack contributed, while the entity will have an inside basis of $75 in the asset that Jane contributed.

Unlike book value and inside basis, outside basis and capital accounts don’t reference an asset; rather, they reference a person’s interest in an entity.

Outside Basis

In return for a person’s contribution to an entity, the person receives an interest, e.g. a partnership interest or an ownership interest, in that entity, which may consist of units, a participation percentage, a capital account, etc., for which interest that person is given a tax basis, called outside basis, equal to the tax basis of the asset contributed. Unlike book value, outside basis is determined at the interest holder, e.g. LLC member, level.

Continuing with the previous example, Jack’s outside basis in his interest in the entity is $50, but Jane’s outside basis is $75.

Capital Accounts

In general, a person’s capital account consists of the book value of any assets contributed by that person minus any distributions to that person from the entity and/or liabilities to the entity.

Continuing with the example above, Jack’s capital account balance is $100, his outside basis is $50, the entity’s inside basis in the asset is $50, and the book value of the asset is $100. Further, Jane’s capital account balance is $25, her outside basis is $75, the entity’s inside basis in the asset is $75, and the book value of the asset is $25.

This brief overview of some important considerations associated with inside basis, outside basis, and partnerships is by no means comprehensive. Always seek the advice of a competent professional when making important financial and legal decisions.

Trademarks, Service Marks & Trade Names

Mon, 11 Feb 2013 14:08:50 -0700

What are the differences between trademarks, service marks and trade names? Generally, a trademark is used to denote the origin or source of a particular good while a service mark is used to denote the origin or source of a particular service; however, a trade name is used to denote the company or entity that is offering the good or service.

Perhaps the best method to clarify the difference between trademarks/service marks and trade names is in terms of grammar: trademarks/service marks are adjectives while trade names are nouns. For example:

This Dell computer was made by Dell Inc.

The former reference to "Dell" is to a trademark, while the later reference is to a trade name.

Federal Trademarks & Service marks: From Fanciful to Generic

The amount of protection conferred upon a federal trademark/service mark is dependent upon how distinctive the mark is from competitors' marks and from everyday speech. Those marks that are the most distinctive receive significant protection that, unlike a patent or copyright, is not of limited duration. The following is a list of categories, in descending order, according the amount of protection with which a mark is provided.

Fanciful Marks

Marks that are very unique and not used in normal speech are called fanciful marks.

A good example of a fanciful mark is that of Verizon as used to denote the communications-related goods and services offered by Verizon Communications Inc. The mark Verizon likely had no meaning before it was used as a mark for Verizon Communications Inc.

Other examples of fanciful marks include Starkbucks, Exxon, and Xerox.

Arbitrary Marks

Marks that are completely abstracted from the goods/services with which they are associated are called arbitrary marks.

A good example of an arbitrary mark is that of Apple as used to denote the technology-related goods and services offered by Apple Inc. The products sold by Apple Inc. under the mark Apple are not associated with the sale of fruit, let alone food, as might be expected for a product or service using such a mark.

Other examples of arbitrary marks include Chevron, Amazon, Adobe, and Sun.

Suggestive Marks

Marks that intimate or allude to a good or service but are still somewhat abstracted from the types of goods and services with which they are associated are called suggestive marks.

A good example of a suggestive mark is that of Mustang as used to denote the car manufactured by Ford Motor Company. Although Mustang does suggest a product or service that may be fast and powerful, the word Mustang alone isn't exclusive to the muscle car; rather, it could also refer to a horse.

Other examples of suggestive marks include Blu-Ray, Liquid Paper, & Caterpillar.

Descriptive Marks

Marks that are descriptive of the particular features, qualities, characteristics, or purposes of the goods and services with which they are associated are called descriptive marks.

Before descriptive marks are afforded trademark/service mark protection, however, they must attain "secondary meaning".

A mark generally attains secondary meaning after a long period of time (although there is no specific minimum required) and extensive advertising so that the mark becomes recognizable as associated with the source or origin of the product or service. In Kellogg Co. v. National Biscuit Co. (305 U.S. 111), the. U.S. Supreme Court articulated the following requirement as to secondary meaning: "It must show that the primary significance of the term in the minds of the consuming public is not the product but the producer."

A good example of a descriptive mark that has attained secondary meaning is the mark Windows as used to denote the operating systems and related software developed by Microsoft Corporation. The mark Windows is descriptive of an attribute of the graphical user interface implemented in the operating system. Further, the mark Windows, in the context of software, is likely synonymous with Microsoft Corporation.

Generic Terms

Terms that are descriptive of a class of goods and services with which they are associated are called generic terms and are afforded no trademark or service mark protection. Such terms identify the actual goods or services as opposed to the source or origin of such goods or services, e.g. car, milk, or water.

Given the substantial variation in terms of protect-ability, based upon distinctiveness, it is likely wise to analyze the distinctiveness of a mark, in addition to the other more common considerations, when to selecting a trademark or service mark.

State Trade Names

Unlike trademarks and service marks, which can be registered at the federal level, there is no federal register of trade names. As such, trade names -- by themselves -- are only protected by state law. While this may seem problematic, it often isn't because the protections granted to a particular trademark/service mark are applicable to a trademark/service mark included in a trade name.

This brief overview of some important considerations associated with federal trademark and service mark law and state trade name law is by no means comprehensive. Always seek the advice of a competent professional when making important financial and legal decisions.

ALTCS Eligibility Requirements, Estate Recovery & Spouses

Fri, 01 Feb 2013 11:37:23 -0700

“Long-term care” describes the group of services that help people with who cannot care for themselves for long periods of time. Long-term care is usually not covered under insurance policies, including Medicare, and costs about $5,500 per month in Arizona, on average. However, the Arizona Long-Term Care System (“ALTCS”) is a “means-tested” program managed by Arizona’s federally funded Medicaid agency, the Arizona Health Care Cost Containment System (“AHCCCS”), and pays for the long-term care of its members. “Means-tested” means eligibility is determined based upon whether (based on certain theoretical standards) the person has sufficient income and assets to pay for long-term care without financial assistance from the government.

Perhaps one of the most important considerations associated with membership ALTCS is how financial eligibility requirements will affect a spouse who is not enrolled in ALTCS, often called a “community spouse” while the ALTCS member is alive and after the ALTCS member’s death.

Financial Eligibility Requirements

ALTCS imposes substantial eligibility restrictions on the resources and income of an ALTCS member; however, such restrictions are often not applicable to ALTCS member’s community spouse.

As of 2013, an ALTCS member may receive a maximum monthly income of $2,130 while maintaining eligibility for ALTCS. Income restrictions, however, are not applicable to a community spouse. AHCCCS Manual 611.03. For example, if a community spouse is employed, the community spouse’s salary is not counted when determining the income eligibility of the ALTCS member.

As of 2013, an ALTCS member may own a maximum of $2,000 of countable resources while maintaining eligibility for ALTCS. However, these same resource restrictions are not applicable to a community spouse who may retain one-half of the couple’s countable resources up to $115,920, called the community spouse Resource Deduction (“CSRD”). Despite the use of the word “community” in the context of resources, ALTCS pools a married couple’s community property and the separate property of each spouse when making resource determinations.

There are several types of non-countable resources that are not included in the calculation of the CSRD, but usually the most important non-countable resource is a couple’s residence with less than, as of 2013, $525,000 of owner’s equity.

“Spend Down”

While the community spouse may continue to own countable resources up to the amount of the CSRD, the ALTCS member must reduce his/her countable resources to $2,000. The process of reducing the assets of the ALTCS member is commonly known as “spend down” or “spending down.”

An alternative strategy to avoid spending down assets, while not violating the transfer restrictions, is converting countable resources into a qualifying annuity, which is treated as income, rather than a resource. Although most transfers of resources made for less than fair value during a 5-year look-back period can result in a period of ineligibility, transfers of resources to a community spouse are exempt from such transfer restrictions. AHCCCS Manual 706.05(C) & AHCCCS Manual 708.02(C). Because a community spouse is not permitted to retain resources in excess of the CSRD, the transferred resources must be converted to income, which is not restricted or limited. However, the process through which a resource converted to income or “annuitized” must conform to both federal and state guidelines. In practical terms, this means that the community spouse can benefit from all of the couple’s resources without affecting the resource eligibility of the ALTCS member.

Estate Recovery

After a member of ALTCS passes, AHCCCS is required to recover funds that it expends to care for an ALTCS member via a process known as “estate recovery.” However, both federal statutes and state regulations prohibit estate recovery, including the placement of a Tax Equity and Fiscal Responsibility Act (“TEFRA”) lien upon an ALTCS member’s residence, when the ALTCS member is survived by either: a spouse, a child under 21, or a child of any age who meets SSA or SSI disability and is blind or disabled. AHCCCS Manual 1902.02(B) & AHCCCS Manual 1903.00(E).

Notwithstanding the foregoing, there may be potential for AHCCCS to pursue in estate recovery upon the death of a community spouse, however, the legislative history of the federal law that mandated estate recovery, the Omnibus Budget Reconciliation Act of 1993, can be interpreted as prohibiting recovery from the estate of a surviving spouse. Further, it appears that AHCCCS interprets the legislative history as requiring AHCCCS to waive recovery from the estate of a surviving spouse.

This brief overview of some important considerations associated with ALTCS and Medicaid eligibility is by no means comprehensive. Always seek the advice of a competent professional when making important financial and legal decisions.

American Taxpayer Relief Act of 2012

Wed, 02 Jan 2013 14:06:48 -0700

Late last night, the U.S. House of Representatives approved the bill, passed by the U.S. Senate on December 31, 2012, that will become the American Taxpayer Relief Act of 2012 ("ATRA"). President Obama is expected to sign the bill into law today.

The bill addresses various tax increases and delays various required spending decreases associated with the so-called fiscal cliff¹. The following is a brief summary of some of the provisions of the American Taxpayer Relief Act of 2012.

Income Tax: The federal income tax rates for individuals with incomes less than $400,000 and joint filers with incomes less than $450,000 will remain as they were under the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”), the Jobs and Growth Tax Relief Reconciliation Act of 2003 (“JGTRRA”), and the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“Tax Relief Act”).

The federal income tax rates, however, for individuals with incomes in excess of $400,000 and joint filers with incomes in excess of than $450,000 will increase from 35% to 39.6%. Further, the tax rate on dividends and long-term capital gains will also increase from 15% to 20% on such taxpayers.

Social Security Payroll Tax: The 2.0% decrease in employees’ portions of the Social Security Payroll Tax expired on January 1, 2013 and was not addressed by the American Taxpayer Relief Act of 2012.

Estate & Gift Tax: The federal estate tax, which was scheduled to apply to estates in excess of $1 million at a rate of 55% beginning in 2013, will be permanently modified so as to apply to estates in excess of $5,000,000 -- indexed for inflation -- at a rate of 40%. The $5,000,000 exemption continues the tax policy created under the Tax Relief Act, however, the 40% rate is an increase from the 35% rate under the Tax Relief Act.

Exemptions & Itemized Deductions: Phase-outs return for exemptions and itemized deductions for individuals with incomes in excess of $250,000 and join filers with incomes in excess of $300,000.

Alternative Minimum Tax: The Alternative Minimum Tax ("AMT") will be permanently indexed for inflation. The AMT is exactly as its name implies, an alternative method of calculating tax, which was created to effectively create a minimum tax for some taxpayers. Prior to the American Taxpayer Relief Act of 2012, the U.S. Congress was required to "parch" the tax every year to reflect changes in inflation.

Section 179 Expensing: The increased Section 179 deduction limits applicable to small businesses will be extended through 2013. Section 179 permits businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during a tax year instead of depreciating such qualifying equipment and/or software over a period of years.

Individual Tax Extenders: Various individual tax cuts will be extended, including deductions for state and local sales taxes, qualified tuition expenses, and mortgage insurance premiums.

Business Tax Extenders: In addition to section 179 expensing, various business tax cuts will be extended, including a one-year extension of 50% bonus depreciation, research credits, and work opportunity credits.

¹ The American Taxpayer Relief Act of 2012 extends many of the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001, the Jobs and Growth Tax Relief Reconciliation Act of 2003, and the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 by effectively removing the sunset provision in that acts, which sunset occurred on December 31, 2012.

This brief overview of some important considerations associated with the the American Taxpayer Relief Act of 2012 is by no means comprehensive. Always seek the advice of a competent professional when making important legal decisions.

Current & Historical Federal Estate Tax Structure, Exemptions & Rates

Mon, 17 Dec 2012 16:24:10 -0700

1/2/2013 - The U.S. Federal Estate Tax exemption and rate were permanently modified by the Taxpayer Relief Act of 2012.

Many people with whom we meet are often quite suprised when we tell them that their estates will not likely be subject to the federal estate tax, which is actually called the federal estate & gift tax. This is due, in large part, to the structure of the federal estate tax and the changes in both the effective federal estate tax exemption over the last 90-plus years.

The federal estate tax only applies to those estates whose value is in excess of a specific amount, often called the federal estate tax exemption. If the estate's value is less than the federal exemption amount, it is not subject to the federal estate tax. However, if the estate's value is above the federal exemption amount, any amount above the exemption is taxed at one or a series of rates.

Current Exemption & Rate

As of today, the federal estate tax exmeption amount is $5,120,000 per person or $10,240,000 per married couple. Any amount in excess of such exemptions is subject to a top rate of 35%.

If, however, the U.S. Congress does not enact legislation, which President Obama also signs into law, the federal estate tax exemption will decrease to $1 million and the top rate will increase to 55% for estates of those who die in 2013.

Historical Exemptions & Rates

Historically, the federal estate tax has applied to a larger percentage of the U.S. population than it does in 2012. To put the changes into perspective, the following table illustrates the historical changes in both the estate exemption and the estate tax rate:

Year	Exemption (dollars)	Top Rate (percent)
1916	50,000	10.0
1917	50,000	25.0
1918-1923	50,000	25.0
1924-1925	50,000	40.0
1926-1931	100,000	20.0
1932-1933	50,000	45.0
1934	50,000	60.0
1935-1939	40,000	70.0
1940	40,000	70.0
1941	40,000	77.0
1942-1976	60,000	77.0
1977	120,000	70.0
1978	134,000	70.0
1979	147,000	70.0
1980	161,000	70.0
1981	175,000	70.0
1982	225,000	65.0
1983	275,000	60.0
1984	325,000	55.0
1985	400,000	55.0
1986	500,000	55.0
1987-1997	600,000	55.0
1998	625,000	55.0
1999	650,000	55.0
2000-2001	675,000	55.0
2002	1,000,000	50.0
2003	1,000,000	49.0
2004	1,500,000	48.0
2005	1,500,000	47.0
2006	2,000,000	46.0
2007	2,000,000	45.0
2008	2,000,000	45.0
2009	3,500,000	45.0
2010	Repealed
2011	5,000,000	35.0
2012	5,120,000	35.0
2013 -	5,000,000 (indexed for inflation)	40.0

SOURCE: http://www.irs.gov/pub/irs-soi/ninetyestate.pdf

While inflation has certainly occured over the last 90-plus years, the rate of such inflation is far less than the rate by which the estate tax exemption has increased, on average, over the same 90-plus year period.

This brief overview of some important considerations associated with the the federal estate and gift tax is by no means comprehensive. Always seek the advice of a competent professional when making important legal decisions.

The Fiscal Cliff: What Should We Do?

Mon, 26 Nov 2012 15:29:41 -0700

The following infographic is a brief, non-comprehensive illustrated description of some potential economic effects associated with policies to ease the so-called "fiscal cliff".

This brief overview of some important considerations associated with the "fiscal cliff" of 2012 is by no means comprehensive. Always seek the advice of a competent professional when making important legal decisions.

USE THIS IMAGE ON YOUR SITE

Gifting in 2012

Tue, 06 Nov 2012 15:27:14 -0700

As the end of 2012 approaches and the bus appears headed off the “fiscal cliff,” one estate planning strategy seems to be taking center stage among more affluent taxpayers.

Expiring Tax Cuts

For two years we have known about the expiration of the temporary reduction in the maximum estate tax rate, the temporary increase in the estate and gift tax exemption from $1,000,000 to $5,000,000 plus, and the reduction in that exemption as of December 31, 2012. Those temporary changes will expire, unless Congress acts, leaving affluent taxpayers questioning whether to use the apparently vanishing opportunity to make gifts of all or a substantial part of the current $5,120,000 exemption before the reduction occurs. It seems unlikely that the estate tax will be addressed even if other aspects of the “fiscal cliff” are avoided through last minute legislation by the lame-duck Congress.

Whether and when the new Congress will deal with the estate tax and gift tax issue next year is uncertain. If on our experience in 2010, when it took nearly the full year to “repeal and repeal” of the estate tax which had taken effect on January 1, 2012, is an indication we could be waiting many months. Furthermore, if and when Congress does act the action could be shaped dramatically by the result of today’s election. After the election we may have a better idea of the likelihood and direction of change, but we will still be guessing as to the magnitude and timing of any change, and we won’t know before the end of 2012.

What Can Be Done?

How can an affluent taxpayer evaluate the advisability of making large gifts in the waning hours of 2012 in order to capture the scheduled disappearance of approximately $4,000,000 of exemption? As with any tax planning the “tax tail” shouldn’t “wag the dog,” meaning that a person should only give what he or she identifies as a clear excess of assets above the donor’s projected needs and wants. This is true whether the exemption is $1,000,000 or $5,120,000. If needs and wants potentially require $5,120,000, then only excess above that amount should be considered to be given away, regardless of the amount of the exemption.

If assets exceed projected needs and wants by more than $1,000,000, a person is potentially a candidate for 2012 gifting. There is no reason to make gifts of less than $1,000,000 under this strategy, because if the exemption is, in fact, reduced to $1,000,000, gifts totaling less than $1,000,000 will merely reduce the remaining $1,000,000 exemption. Note: This statement assumes the taxpayer has used none of the exemption. If part of the exemption has been used, substitute the difference between the amount used and $1,000,000 in the above sentence. None of the potentially disappearing $4,000,000 plus of exemption will be captured unless at least the first $1,000,000 is (or has been) used.

This brief overview of some important considerations associated with the scheduled changes to the estate and gift tax is by no means comprehensive. Always seek the advice of a competent professional when making important legal and financial decisions.