Friday, September 2, 2011

Do I have to file Gift Tax returns for the gifts to my Insurance Trust?

Filing a gift tax return for an ILIT, even if not technically required because all gifts are below the annual exclusion, is a good idea. It starts the statute of limitations for an audit of the gift. It allows you to decide affirmatively whether GST exemption is allocated. The GST Annual Exclusion does not apply to a gift in trust, unless very strict and unlikely criteria are met (only one beneficiary, must be includable in that beneficiary's taxable estate). So to create a GST Exempt Trust, exemption must be allocated. If the ILIT qualifies for automatic allocation of GST exemption, then you are probably OK not filing, but I do not like to rely on automatic allocation.

Tuesday, March 22, 2011

Trust Protectors / Trust Advisors

Yesterday/s Advisor's Forum presentation discussed Trust Protectors and how their use in a trust can help the trust accomplish its goals.  The concept of a Trust Protector is to grant someone who is not a trustee or beneficiary certain powers over the trust.  These powers often include:

  • The power to remove and appoint trustees
  • The power to make modifications to the trust in light of changes in law, particularly tax law
  • The power to correct errors in the drafting
  • The power to settle disputes between cotrustees
Additional common powers are rather technical.  I am in favor of utilizing Trust Protectors as a way to create flexibility in the trust and help keep the trust, its trustee and its beneficiaries out of the court system to savve costs.

Since Trust Protectors are not defined in North Carolina law, their powers are all determined under the language of the trust instrument.  I typically use the designation "Trust Advisor" as I find it sounds more palatable than Trust Protector.

Tuesday, January 25, 2011

Irrevocable Life Insurance Trusts

Today's Advisor Forum call was excellent.  Bill Conway and Louis Shuntich discussed Irrevocable Life Insurance Trusts (ILITs) from a Advisor Team approach.  An ILIT is an irrevocable trust that holds life insurance.  An ILIT is used to make the death benefit escape estate tax.  Life insurance already escapes income tax.  Avoiding both tax systems makes life insurance a very attractive investment for the future of your family.

With the estate tax exemption climbing to $5 million, many taxpayers may believe that estate planning and estate tax planning in particular are no longer needed.  Wise families understand that taxes are just one of the many ways family wealth can be confiscated.  Other major risks, which can be far more devestating that taxes, include lawsuits, divorces, and market risk.  Appropriate life insurance in a well-designed irrevocable trust can address and eliminate these risks.

One rather dramatic planning idea that could be excellent for many families is to utilize the new $5 million gift tax exemption by making a large gift to an ILIT that purchases a single premium life insurance policy.  This could create a huge wealth transfer advantage for a family.  This is particular attractive considering the potential "claw-back" of gifts into the estate tax base at death if the estate tax exemption returns to $1 million in 2013.  This is because the "claw-back" would only bring back in the value of the gift at the time of gift, and not any appreciation on that gift.  If the gift is used to buy Life Insurance, then there is a huge leverage for the after tax wealth transfer.

Again, great seminar Bill & Lou!

Patrick

Tuesday, January 18, 2011

Employee Social Security Tax reduced 2%

As part of the new Tax Relief Act, payroll taxes have been reduced 2% for for the Employee portion.  Starting January 1, 2011, Social Security tax on the first $106,800 of an employee's earned income are reduced from 6.2% to 4.2%.  If you are a wage earner, what will you do with your extra money!??


Self-employment tax is also reduced from 12.4% to 10.4% on 2011 earnings.

Monday, January 3, 2011

Tidbits from the new Tax Laws

Individual tax rates will remain at 2010 levels (10, 15, 28, 33 and 35%) for two more years. If no action had been taken, all of those tax rates would have increased.


Tax on long-term capital gains and qualified dividends remains at 15% for two more years. If no action had been taken, capital gains would have been taxed at 20% and dividends would have been taxed as ordinary income.

Taxpayers will not see their itemized deductions or personal exemptions limited due to income levels in 2011 or 2012.

The deduction for direct charitable donations from an IRA for those 70 1/2 or older was extended for two more years and such contributions made before January 31, 2011, can be attributed to 2010.

The AMT (alternative minimum tax) exemption for a married couple was increased from $45,000 to $72,450.

Investments in new business equipment from September 8, 2010, through the end of 2011 qualify for a deduction of 100% of their cost in the year of acquisition. Acquisitions in 2012 qualify for a deduction of 50% of the cost. There are, of course, restrictions that apply.

Wednesday, November 24, 2010

Why should I want a “Grantor Trust” ?

A Grantor Trust is a Trust that is ignored for tax purposes.  Back when Federal Income Tax Rates were much higher, wealthy individuals would establish many trusts for their descendants to push income in to the lower brackets.  The trusts were designed to give the Grantor lots of power over the various trusts.  Congress decided to maintain the integrity of the Federal Income Tax System by implementing the Grantor Trust Rules.  If a Grantor retains certain powers over a trust, then the trust is ignored for income tax purposes.  This, in effect, keeps all of the income of the various trusts that "violate" the Grantor Trust rules combined back on the Grantor's income tax returns at the Grantor's marginal bracket.

Back when income tax rates were much higher, the Grantor Trust rules limited the usefulness of trusts.  In fact, a trust that violated the Grantor Trust rules was said to be a defective trust.  A trust that did not work.  If designed for income tax planning, that is correct, the trusts would no longer meet those goals.

Today, Income Tax Rates are lower.  Additionally, to further limit the utility of trusts to dilute the income tax base, the tax brackets for trusts are greatly compressed.  That is, a trust hits the highest income tax bracket at only around $11,000 of taxable income.  This compression of the brackets makes using trusts to manipulate income tax rates unattractive.  The Grantor Trust rules are actually no longer needed, but they remain in the law.

The Grantor Trust rules provide a distinct tax advantage from a gift and estate tax point of view.  If a gift is made to a properly drafted trust, that trust will keep the assets of the trust out of the Grantor's taxable estate.  At the same time, the trust will be ignored for income tax purposes. 

This dual tax status trust is essentially a vehicle to allow you to make a gift to your spouse, children or other beneficiaries that can grow income tax free.  Income tax-free compounding is a powerful tool for the transfer of wealth.

Remember the estate tax is scheduled to return on 01/01/11 with a $1 million exemption and a 55% highest rate.  The assets in a properly structured Grantor Trust not only grow income tax free during the grantor's life, but also will not be subject to an estate tax hit.

Grantor trusts is one more tool to help you Disinherit Uncle Sam.

Patrick

Sunday, October 24, 2010

Does my LLC need to have formal meetings?

The law does generally not require meetings of Limited Liability Companies, Trusts, and Limited Partnerships. However, a Limited Partnership or Limited Liability Company (LLC) is a business, and most businesses do have regularly scheduled meetings of the management team and the owners. To help make sure my clients formalize this, the LLC operating agreements I draft do require an annual meeting. There are advantages to having regular meetings. Among the advantages are:

  • An opportunity to discuss the business of the Company.
  • An opportunity to discuss opportunities and problems that arise during the management of the Company.
  • An opportunity to get the family together for a business meeting.
  • The expenses of the business meeting, including travel, food, and lodging, are tax deductible to either the individuals or the Company.
  • In some cases, only part of the travel, food, and lodging are tax deductible. Seek the opinion of your CPA or tax preparer to determine how much is tax deductible in your particular case.
Every Member, Manager or Partner should be notified of the meeting far enough in advance to attend the meeting. Evidence of the notice in writing is not required, but can support the business purposes of the Company, as well as tax deductions for the cost of the meeting.