Archive for Estate Planning Tax

Final Regs On The 3.8% Net Investment Income Tax

The Accounting community was waiting for this eagerly, to see which of their recommendations had been adopted. On November 26th, 2013, the Department of the Treasury issued final regulations governing the Net Investment Income Tax (NIIT).

The 3.8% tax took effect from January 1st, 2013. It applies to individuals, estates & trusts who have Net Investment Income and Modified Adjusted Gross Income above the following threshold amounts:

• Married Filing Jointly and Qualifying Widower with Dependent Child- $250,000

• Single and Head of Household with Qualifying Person – $200,000 Read More

Written by | Posted in Estate Planning Tax • Individual

Income Taxation of Foreign Trusts and Beneficiaries

The income taxation treatment of foreign trusts and beneficiaries takes into account whether the party or entity has entered United States taxing jurisdiction. It is essential to draw a distinction between a foreign trust and a United States, domestic trust. A foreign trust is defined as one that is not a domestic trust. (1) The term trust itself embraces the notion of an inter vivos declaration in which trustees take title to property for the purpose of protecting or conserving it for beneficiaries in accordance with ordinary rules applicable in chancery or probate courts. (2)

The income taxation of a foreign trust requires there be certain contact factors. The factors to be considered, prior to the 1996 Tax Act, (Small Business Job Protection Act of 1996) in this Read More

Written by | Posted in Estate Planning Tax • International

Foreign Nationals – Common US Tax Planning Technique With a Dynasty Trust

TaxConnections Picture - True FalseIntroduction

Many non-US persons have children, grandchildren and succeeding generations who are US citizen or resident individuals. The foreign person often wishes to create a trust for, or implement some other form of estate plan that will benefit these US individuals, whether during the lifetime of the foreign person or upon his or her death. When US individuals are to be the beneficiaries of such planning, extreme care must be taken so as not to run afoul of the numerous US tax rules that can result in harsh taxation to the US beneficiary who receives distributions from a foreign (non-US or “non-domestic”) trust. The creation of a so-called “Dynasty Trust” may be of benefit in some cases and can assist in the saving of significant US tax dollars.

What is a Dynasty Trust? How Does it Work?

In the past, many US States had laws in place that prevented a trust from continuing its existence through multiple levels of generations. This law was known as the “Rule Against Perpetuities.” This Rule was designed to prevent rich families from tying up family assets in trusts that continued through many generations of heirs. The Rule Against Perpetuities has been changed in many States, and as a result, the so-called “Dynasty Trust” appeared. Read More

Written by | Posted in Estate Planning Tax • Expatriate

Estate Planning Part 3 – Old Age

TaxConnections Blog Picture After a lifetime of working, retirement sounds like it would be fun.  When you get to retirement there are lots of changes in your life and one of them should be your estate planning.  At this point your kids are grown and maybe you have grandchildren.  Reworking your will and trusts to include grandchildren and account for other changes in the family can be important.

Gifting can play a major role in your estate planning.  In Minnesota, the estate and gift exemptions are only $1M so annual gifts can be useful in keeping an estate under the $1M threshold.  A couple of kids plus spouses, plus a few grandchildren can make for a big gifting base.  In 2013 you can gift $14,000 to each person without filing a gift tax return.  If you are so inclined, you could gift $14,000 to each person and quickly reduce the assets in your estate.

Another way to change your estate planning is to change the beneficiary designations on your retirement plan accounts.  IRAs and 401ks can be a great way to skip generations in your estate planning.  When a non-spousal beneficiary receives an IRA or 401k from an estate, they are required to make minimum distributions each year.  Those minimum distributions are based on the age of the beneficiary.  A 55 year-old child that inherits an IRA will need to withdraw 3.4% each year, while a 25 year-old grandchild only has to withdraw 1.7% each year.  That can make a huge difference over time as the account grows tax free.  Each family situation is different and the needs of the family and each beneficiary can vary, but it’s important to update your estate planning at each stage of your life.

Written by | Posted in Estate Planning Tax • IRS

Estate Planning Part 2 – Middle Age

TaxConnections Blogger postEstate planning needs to be re-evaluated during your lifetime as your situation changes.  For middle aged taxpayers there can be significant changes to your estate planning needs.  When your kids are minors, your will should include provisions for caring for the children in case something would happen to you and your spouse.

A great way to set aside assets for minor children is to use trusts.  Trusts can have any number of provisions in them, but they commonly set aside assets that provide for the children until they reach age 25.  It’s probably not a good idea for your 15-year old kids to just inherit all the assets free and clear.  Having a trustee to keep an eye on the money until they are a bit older is probably a good idea.

Once your kids are grown and hopefully responsible adults, you might want to look at your will and trusts again.  Changing beneficiary designations is always a part of estate planning.  When the kids were younger, the beneficiary designations might have been to a trust for the benefit of the kids.  When they reach an age of maturity, you can make them the direct beneficiaries and there might be no need to include trusts in the estate planning.

Written by | Posted in Estate Planning Tax • Individual

Estate Planning Part 1 – Charity

TaxConnections Picture - Living Trust Estate PlanningEstate planning is very important, but it’s obviously an uncomfortable topic to discuss with the family. The sooner you address it, the more options you will have and the better off the beneficiaries will be. Let’s break this into three parts with Part 1 focusing on the charitable aspects of estate planning. Part 2 will focus on a middle aged person who maybe has kids and who has parents that might still be living. Part 3 will focus on the classic grandparents getting older and their kids are grownups, with probably some grandkids in the mix.

For taxpayers that are somewhat charitable in nature, estate planning can play an important role in their charitable giving both while they are alive and after they pass. The simplest way to give money to charity is to include them in your will. Either a specific amount or a residual amount of the estate can be given to charity. One common example is to give your beneficiaries the amount that would be tax free, and any excess assets that the estate has would go to charity. That’s simple to do and simple to understand but sometimes that is not the best solution.

For people with substantial assets and a charitable inclination, a CRUT can be a great solution. Basically there is a chunk of assets set aside for the charity and the taxpayer gets a current charity deduction (present value). When the taxpayer dies, the charity gets all the money. While the taxpayer is still alive they receive an income distribution from the CRUT so they haven’t given up the income stream during their lifetime. It’s a bit more complex to understand and there are some costs to setting up and operating a CRUT, but it can be worthwhile for people with larger estates.

Written by | Posted in Estate Planning Tax • Individual

The Unenviable Case of The Seggermans

TaxConnections Picture - Green Question GuyWhat if Someone Dies Owning an Undeclared Financial Account?
What Should The Heirs Do?

Henry Seggerman has first-hand experience with this type of situation. Without hesitation, my guess is that he’ll tell you to get the Estate into the IRS Offshore Voluntary Disclosure Program (“OVDP”). Henry is the son of a prominent New York businessman who passed away. Henry was named executor of his father’s estate, valued in excess of $24 million. Unfortunately, over half of this wealth, however, was maintained in secret and undeclared foreign bank accounts located in Switzerland and other jurisdictions. The father worked with his Swiss lawyer and other parties, arranging for over $12 million in the undeclared accounts to be left to his surviving spouse and five of his children, including Henry.

Henry’s position as executor charged him with various responsibilities, including filing an estate tax return for his deceased father. Henry signed the estate tax return for his father’s estate falsely underreporting its assets by over $12 million. Generally speaking one can say that an executor of an estate steps into the shoes of the deceased. Henry not only did that, he went a step further and perpetuated the fraud of the deceased. While this may possibly have pleased the deceased, it certainly did not please the Internal Revenue Service or the Department of Justice.

In order to access the undisclosed funds, the Swiss lawyer assisted Henry and three of his siblings (Suzanne Seggerman, Yvonne Seggerman, and Edmund Seggerman), in creating undisclosed Swiss bank accounts to hold the hidden money that they had inherited from their father. In order to tap the funds, Henry and his brother worked together, transferring funds from the brother’s Swiss account to a bank account for a foundation controlled by Henry. Henry then transferred the funds into the United States, in the guise of loan repayments. Read More

Written by | Posted in Estate Planning Tax • FBAR • Individual • IRS • North America • Property Tax

Estate Plan For An 18 Year Old?

iStock_000019078679XSmallIt may not initially make sense for an 18 year old to need an estate plan since most do not have assets about which to be concerned. However, in most states, an 18 year old is an adult in the eyes of the law, with legal rights relating to privacy and decision making. As soon as a child turns 18, parents will lose authority to view medical and financial records related to the child, as well as be prevented from making decisions on their child’s behalf.

In order to ease the transition into adulthood, parents and 18 year old children should consider two important estate planning documents. The first is an Advance Health Care Directive (sometimes called a Living Will or Health Care Power of Attorney). This document will allow the adult child to name an agent to make health care decisions for the child in the event the child is unconscious or otherwise unable to communicate. In conjunction with the health care document, the adult child should also execute a HIPAA waiver which will allow the agent to view medical records and discuss current health issues with medical professionals, assisting the young adult with the understanding and management of current health conditions.

The second important document is a Power of Attorney for Finances, which allows the adult child to name the parent to discuss the adult child’s finances Read More

Written by | Posted in Estate Planning Tax • United States

South Africa: Typical Tax Treaty Issues Facing Tax Emigrants

treatyTypical Double Tax Agreement (DTA) or treaty issues we face on a daily basis can be summarised as follow:

United Kingdom / South Africa DTA

1. Tax residency change not timeously reported to either SARS or HMRC
Most client suggest that they need file or report their SA income to the UK tax authority as they were non-domiciled in the UK and as the lump sum was not remitted to the UK, they need to pay UK tax on the lump sum income. No, says HMRC although you are non-domiciled you are subject to UK tax on lump sums received in SA, albeit not remitted to the UK, as lump sums are taxed on the arising basis and not on the remittance basis. In short, you cannot defer UK tax on the lump sum arising in SA, by sending said lump sum to Channel Islands, USA or EU nor can you escape the UK tax exposure by keeping the lump sum in your blocked account in South Africa.

2. The treaty dictates that lump sum received from South African fund managers on retirement annuity fund (RA) lump sums or pension/preservation funds, are tax exempt in SA and UK taxed only
This argument is most often presented to us by clients having called the HMRC call centre. We do not know how the client explained the situation to the HMRC call centre but suffice to say the answer is incorrect. The fact that HMRC refers you to Article 17 of the treaty is not adequate as the said article does not deal with lump sums. Article 17 specifically states that for purposes of the agreement an annuity taxable in the new home country only, is a fixed amount paid on a regular basis. You need not be tax lawyer to understand why the lump sum will never fall into this category of treaty exempt (in SA) annuity payments. Read More

Written by | Posted in Africa • Australia/Oceania • Estate Planning Tax • Expatriate • FATCA • FBAR • Individual • International • VAT

Why You Need An Estate Plan, Even If You Think You Don’t Have An Estate

TaxConnections Picture - Living Trust Estate PlanningPeople often assume that an estate plan is only necessary for those with a certain level of net worth. The reality, however, is always everyone needs an estate plan, regardless of the value of the assets. There are so many reasons to establish an estate plan, none of which have any relevance to the value of your estate. Below are four good reasons:

1. To name guardians for minor children. Admittedly, there is no one better to raise your children than you. But if the unthinkable happens and you are not around to do the job, the next best thing is for you to choose who will take on the responsibility of raising your children. And if you know that there is someone you do not want raising your children, then it becomes even more important for you to express your choice of guardian. If you haven’t committed your choice of guardian in a legally valid document, then a judge in the county probate court will decide who is best to raise your children without your input.

2. To avoid the cost, time, and public nature of a probate action in the county court. If you do not decide now how you would like to transfer your assets, then the probate court will be involved in distributing your assets. Almost everything that takes place in probate court is a matter of public record and anyone can see who will receive what. Additionally, the fees due to the lawyer and the representative of your estate are established by statute and are calculated on a percentage of the GROSS value of your estate (regardless of the amount of any debt).

3. To direct the disposition of your assets to your beneficiaries upon your death. With careful estate planning, you can direct your beneficiaries’ use of your assets long after your death. You can include conditions relating to the completion of education, require a certain level responsibility, or simply hold assets until a time you decide is best for distribution. If you Read More

Written by | Posted in Estate Planning Tax • United States

Estate Planning You Should Do Right Now

TaxConnections Blogger Betty Williams posts estate planningThere is one simple estate planning tool you can accomplish immediately and without having to call a lawyer-updating your beneficiary designations.

Many assets, including bank, retirement, brokerage, company benefit plan, life insurance, and 529 college accounts are passed at death via a beneficiary designation. It is easy to name the beneficiary by completing the proper form provided by the financial institution. It’s also easy to forget to turn the form in or to make sure the beneficiary you designated when the asset was acquired is still your intended beneficiary. In most cases, the beneficiary form will overrule your will, trust, and even state law so it is important to make a periodic review of your designated beneficiaries.

The Supreme Court has faced this issue on at least two occasions. In 2001, the court ruled that a decedent’s ex-wife was the legal beneficiary of his pension benefits and life insurance proceeds because the decedent failed to update the beneficiary designations after their divorce. The Court ruled that the beneficiary designations overruled the state law that would have automatically disinherited the ex-wife and so the decedent’s children from a prior marriage received nothing. Egelhoff v. Egelhoff, 532 US 141 (2001). In another matter, the Court determined that the beneficiary Read More

Written by | Posted in Estate Planning Tax • Individual • United States

Risky Business – Using an Offshore Trust

TaxConnections Blogger Virginia La Torre Jeker writes about offshre trustsThe Use of Offshore Trusts

This is an area requiring great care and planning if there is a United States grantor or any possible US beneficiaries. Prior to certain US tax law changes, a US person was able to establish a trust in a foreign, tax-neutral jurisdiction that could generally accumulate income and capital gains without paying tax at the trust level. These would ultimately be taxed only at the time of distribution to US persons. The value of tax deferral and the time value of money was very significant. Imagine no tax being paid for twenty or thirty years while the assets in the trust continued to grow and grow. Comparable tax deferral was not available with the use of US trusts, since a US trust is itself, a separate taxpaying entity. The law was thus changed to make the use of foreign trusts created by US grantors with a US beneficiary (or even the possibility of a US beneficiary) highly inadvisable.

A US grantor who establishes a foreign trust with a US beneficiary will himself generally be taxed directly on the trust’s income (including capital gains) even if the trust makes no distributions to anyone! It is very important to note that when a foreign trust is funded by a US person, the trust will automatically be treated as having a US beneficiary unless the trust document specifically prohibits all US persons, including the US grantor, from benefiting from the trust at any point in time. Without this critical language in the trust instrument, a foreign trust created by a US person will be taxed as discussed, that is, the US grantor will pay tax each year on all the income earned by the trust regardless of whether or to whom, trust distributions were made. Read More

Written by | Posted in Estate Planning Tax • Europe, Middle East • North America
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