Estate Tax Exemption Raised in 2014

Beginning next year, donors who have maxed out on their tax-free transfers to their families can give a bit more.  As of January 1st, 2014, it is estimated and calculated that the estate tax exemption amount will increase by $90,000 (per person or $180,000 per couple).  So for those dying in 2014, the total exclusion amount will be $5,340,000 per person (up from $5.25M in 2013).  That means a husand and wife will have a combined exemption amount of $10.68M.  The increase is due to the fact that the exemption amounts are now pegged to infation. 

Unfortunately though, the annual gift tax exclusion amount will remain at $14,000. 

Happy Mother's Day! Son Tries to Deduct Over $1MM in Legal Fees to Parents

So how much would you pay to have your child take care of you when you’re old and infirm?

According to one tax attorney, $1.2 million. At least that is the take away from Estate of Olivo v. Commissioner.

"The court considered whether mom’s estate could deduct $1,240,000 for son’s services before mom died. Tax lawyer Anthony Olivo worked in law firms from 1976 to 1988, then opened his own practice.

Yet by 1994, he was devoting so much time to his parents and their health problems that it was hard to maintain his practice. He lived with his parents and gave them round-the-clock care. That left little time to practice law, so from 1994 through 2003, he earned almost nothing from his practice.
So when they died he figured the estate should pay him all those lost wages. Hey, it’s deductible, he said. The court had to decide whether the estate could deduct the $1,240,000. On top of that was the $44,200 administrator’s commission Anthony received, not to mention $55,000 in accountant’s and attorney’s fees.
The court was careful to say that Anthony rendered extraordinary care. Hey, this was a doting son. His efforts were commendable. However, mom’s estate couldn’t prove that Anthony was entitled to any pay or how much his services were worth.
There was no contract, no invoice, and no evidence the family agreed to pay him anything. Sure, Anthony gave round-the-clock care. The family would have hired round-the-clock nurses if he hadn’t been there.
But he was, and the fact that a nurse would have been paid didn’t mean pay to Anthony was deductible. Anthony even considered billing the estate for his legal services.
After all, apart from his personal care and for administering the estate, he performed legal work too. He filed the estate tax return, handled an IRS audit and the estate’s Tax Court petition.
But here again, Anthony was out of luck. He didn’t keep time records, prepare invoices, or establish the value of what he did. He merely estimated his hours at a $150 hourly rate. That kind of loosey-goosey estimate wasn’t enough for a deduction.
The biggest lesson? Contracts, invoices, and good record-keeping are as important with family or related parties as anywhere else. In fact, perhaps there’s a bigger reason for being scrupulous with family and related parties: to save yourself headaches with the IRS. Happy Mother’s Day, Mom."

(Hat Tip:  Attorney Robert Wood of Forbes)

2012 Tax Relief Act Hammers Certain Trusts

Like many of the provisions of the 2012 Tax Relief Act that flew under the media radar, one aspect is particularly troubling.

To the casual observer, they were aware that for those with incomes above$450K they would be in the top tax bracket of 39.6% and subject to an increased capital gains rate of 20%--and that those making above $250K would be subject to the Obamacare 3.8% tax on investment income. 

What most didn't realize is that these taxes hit non-grantor trusts on any income that it does not distribute over just $11,950.  In other words, trusts that retain small amounts of income will get hit much hard and at an accelerated rate, even though its beneficiaries will be in a lower bracket.

While there are ways to navigate through these issues, careful consideration should be made as to how much should be distributed and when it should be distributed from the trust as there is always a tension between the current income beneficiaries and the remainder beneficiaries who stand to inherit what is left.

The biggest complication arises when you have a trust established for a spendthrift child or special-needs child who, under the terms of the trust, really isn't supposed to gain access to 100% of the trust's income.

WSJ: How to Control Your Heirs From the Grave

WSJ: How to Control Your Heirs From the Grave

Wall Street Journal Tax Report:   How to Control Your Heirs From the Grave, by Laura Saunders:
Can you force a grandchild to take a drug test in order to receive an inheritance? Insist your heirs use trust funds only for tuition at your alma mater? Make sure your wife's future husbands can't run through money you worked hard to earn?
In many cases, the answer is yes—you can, in effect, control your heirs from the grave.
The issue of what you can give away and how is especially relevant now because unusually favorable estate- and gift-tax rules are set to expire. The "exemption" for both—which is the amount of assets a taxpayer can transfer to others, tax-free, either at death or through gifts while alive—is now $5.12 million per individual, and twice that for a couple. The top tax rate on amounts above that is 35%.
But not for long. In January the exemption is slated to drop to $1 million per person, and the top tax rate will jump to 55%. Although many experts don't think those changes will stick because they are so unfavorable, a new regime might well be less generous. President Barack Obama favors a $3.5 million exemption and a 45% top rate.
With the law in flux, experts are recommending that wealthier taxpayers who can afford to part with assets make gifts of them this year. The rationale: if the law becomes less favorable, this year's gifts either will be grandfathered in or, at worst, won't be "clawed back" until death. ...
As with many good tax deals, there is a hitch: Taxpayers taking advantage of the exemption by making gifts have to give up control of assets today. Typically that means putting them into "irrevocable trusts" that require upfront decisions about who will get what, when and for how many years thereafter.

Gift Tax Appraisers--The Potential Bottleneck For Year End Gifts

Currently, federal law provides a lifetime gift tax exemption of $5.12 million, per person.  If Congress takes no action, beginning 2013, the exemption will drop to just $1 million.

Because of this impending change in the gift tax exemption, alot of estate planners are recommending that their clients make significant gifts of assets, real property and business interests to their children and grandchildren. 

However, appraisers, in particular those that specialize in valuation discounts for gifts of business interests, are getting swamped with requests.  Often the turn around time of one to two months is being doubled.  While a gift tax return for a 2012 gift won't be due until April of 2013, it is preferred to know that exact value of the gifted interest to maximize planning opportunities.

What's the FMV of artwork that cannot be sold? IRS says $65 million

From the NY Times:

The object under discussion is "Canyon," a masterwork of 20th-century art created by Robert Rauschenberg that Mrs. Sonnabend’s children inherited when she died in 2007.
Because the work, a sculptural combine, includes a stuffed bald eagle, a bird under federal protection, the heirs would be committing a felony if they ever tried to sell it. So their appraisers have valued the work at zero.  But the Internal Revenue Service takes a different view. It has appraised “Canyon” at $65 million and is demanding that the owners pay $29.2 million in taxes.
At the moment, tax experts note that the I.R.S.’s stance puts the heirs in a bind: If they don’t pay, they would be guilty of violating federal tax laws, but if they try to sell “Canyon” to zero-out their bill, they could go to jail for violating eagle protection laws.
Mr. Lerner said that since the children assert the Rauschenberg has no dollar value for estate purposes, they could not claim a charitable deduction by donating “Canyon” to a museum. If the I.R.S. were to prevail in its $65 million valuation, he said the heirs would still have to pay the $40.9 million in taxes and penalties regardless of a donation.
Then, given their income and the limits on deductions, he said, they would be able to deduct only a small part of the work’s value each year. Mr. Lerner estimated that it would take about 75 years for them to absorb the deduction.
“So my clients would have to live to 140 or so,” he said.

Formula Value Gifts--How to Make a Gift That is Essentially Audit Proof

"I hereby make a gift of a portion of my LLC interests worth $X to my son, BUT, if the IRS audits me and says that this gift is worth much more than $X, than I really gave much less of my LLC interests so that this gift will not incur gift tax."

While the above headline and gifting statement is an oversimplification, a recent Tax Court case, families using FLPs or FLLCs to make gifts to their children.