San Fernando Valley Los Angeles Attorneys
Navigation Two
Phone Number

Entries in capital gains (3)

Wednesday
Jun192013

Designated Beneficiary Assets: Consider Your Income, Capital Gains & Estate Taxes

Trusts & Estate Planning Attorney

by Kira S. Masteller
818.907.3244

 

In the third segment of our series regarding Gift Tax & Estate Planning, we'll examine assets that require designated beneficiaries, specifically: IRA accounts, retirement accounts, life insurance, accidental death insurance, annuities and payable on death accounts, which pass outside of a probate or a living trust.

Designated beneficiary assets must be looked at individually because different types of assets require different designations depending on their income tax consequences.

For example, a life insurance policy does not suffer any negative income tax consequences when being distributed upon the death of the insured – although it is exposed to estate tax consequences. Because of this, your revocable living trust can be named as the primary beneficiary of a life insurance policy.

There are important advantages to naming the trust as the primary beneficiary: 

1. If you are married and have a trust that splits into two or more trusts upon the first spouse’s death for death tax planning purposes, the insurance proceeds can be utilized in the allocation of assets between the two trusts so that none of the decedent’s estate tax exemption is wasted.

If a surviving spouse is named as the primary beneficiary of the life insurance, the proceeds of the policy are not in the trust for allocation purposes and some or all of the decedent’s estate tax credit could be wasted.

2. If you have minor children and you name them as the direct beneficiaries of the life insurance policy, the proceeds will be subject to a Guardianship proceeding (court supervised) and held in an FDIC insured account (ensuring the account is held in an insured banking institution), which will be distributed to a child upon attaining age 18. This limits the asset’s growth possibilities, the ability for an adult to use those assets for that child during that child’s lifetime, and it gives a windfall to a child at age 18 when they may not be mature enough to manage money or get assistance managing money.

Remember: If minor children are direct beneficiaries of any asset, there will be a Court Guardianship proceeding which is expensive and time consuming. 

It is better to name your trust as the beneficiary of life insurance for children so that the problems discussed here, do not occur. You may consider using a life insurance trust for the same reasons mentioned above, as well as for estate tax planning purposes – the life insurance trust will keep the proceeds of the death benefit out of your taxable estate upon your death.

If you have any questions about who to designate as a beneficiary for your assets, please contact me for help.

In my next blog, we'll look into Retirement Assets, some of their potential problems and solutions to those problems. If you'd like to catch up on previous posts in this Gift Tax and Estate Planning series, click on the embedded links above to read about Living Trusts and Life Insurance.

Kira S. Masteller is a Gift Tax and Estate Planning Attorney and a Shareholder at our Firm. Contact her via email: kmasteller@lewitthackman.com for more information.

 

Disclaimer:
This Blog/Web Site is made available by the lawyer or law firm publisher for educational purposes only, to provide general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand there is no attorney client relationship between you and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for obtaining legal advice from a licensed professional attorney in your state.

Wednesday
Dec052012

The Tax Increases Have Begun

by Lewitt Hackman's Trusts & Estate Planning Practice Group 
December 4, 2012

Tax Attorney EncinoMichael Hackman - Certified Tax Law Specialist Kira S. Masteller - Gift Tax, Trusts & Estate Planning

With the “fiscal cliff” discussions front and center, many people do not realize that certain tax increases are already being implemented, both at the federal and at the state level. 

 

Federal Taxes

 

Earlier this week, the IRS released 159 pages of new tax rules related to the implementation of the 2010 healthcare reform law, sometimes known as “Obamacare”. 

First, there is a 3.8 percent surtax on “investment income” for individuals earning more than $200,000 in modified adjusted gross income, and married couples filing jointly with more than $250,000 of such income (notwithstanding the 159 pages, there are still numerous uncertainties as to what constitutes “investment income”). 

This surtax will be applied to capital gains and dividend income and is the first of its kind applying to capital gains and dividend income.  The IRS offered the example of a single taxpayer who makes $180,000 in wages plus $90,000 in investment income (a modified adjusted gross income of $270,000).  The 3.8 percent tax would apply to $70,000, resulting in a $2,660 surtax. 

In addition, there is a 0.9 percent healthcare tax on wages (i.e., the employee portion of the payroll tax) for such “high-income” individuals.  These rules are effective for the tax year starting January 1, 2013, though the IRS will take public comments and hold hearings in April before making the rules final in the fall.  It is estimated that these tax increases will raise $317.7 billion over 10 years.  We believe that employers must start to withhold once an employee’s wages pass $200,000 each year. 

There are numerous other changes as part of the healthcare law, including several changes in the deductibility of medical expenses.

 

California State Taxes

 

California voters recently passed Proposition 30 by a margin of 55.3 percent to 44.7 percent.  This proposition increases California sales tax to 7.5 percent from 7.25 percent.   

In addition, it will result in increases in state income taxes for “high-income” tax brackets.  These California income tax increases will apply retroactively to January 1, 2012, as follows:

  • 10.3 percent tax rate on taxable income for individuals between $250,000 and $300,000, and for married couples filing jointly between $500,000 and $600,000 (formerly 9.3 percent);

  • 11.3 percent tax rate on taxable income for individuals between $300,000 and $500,000, and for married couples filing jointly between $600,000 and $1,000,000 (formerly 9.3 percent); and

  • 12.3 percent tax rate on taxable income for individuals over $500,000, and for married couples filing jointly over $1,000,000 (in addition, though not part of Proposition 30, there continues to be an additional 1 percent tax assessed for an individual’s taxable income in excess of $1,000,0000, pursuant to the Mental Health Services Act). 

The Proposition 30 tax increases are temporary – the increased sales tax applies for four years and the increased income taxes apply for seven years. It is estimated that these taxes will bring in additional revenues to the state of approximately $6 billion annually (less after 2016-17 as a result of the sunset of the four year sales tax increase period). 

On the bright side, certain proposed deep cuts to education and other government services should not occur as the result of the passage of Proposition 30.

 

Michael Hackman is the Chair of our Trusts and Estate Planning Practice Group, and is a Certified Specialist in Tax Law, designated by the State Bar of California Board of Legal Specialization. Kira S. Masteller is a Gift Tax, Trusts and Estate Planning Attorney. 

Disclaimer:
This Blog/Web Site is made available by the lawyer or law firm publisher for educational purposes only, to provide general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand there is no attorney client relationship between you and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for obtaining legal advice from a licensed professional attorney in your state.
Tuesday
Dec062011

Steve Jobs Estate Taxes – Which Way is “Up” for the Jobs Family and for You?

 

by Robert A. Hull

As the world mourns the loss of innovative tech giant Steve Jobs, we learn he may have left his wife, Laurene, and family up to $6.78 billion dollars in Disney and Apple stock.

He also left his family in a quandary not of his own making, namely, how to negotiate financial pitfalls while traveling on uncertain terrain.

Unfortunately, with the recent failure of the so-called congressional Super Committee to address tax and spending reform, the “Bush tax cuts” are set to expire in 2013.

Capital Gains Tax Legislation: As it Stands Now

 

If there are no further changes in the law:

▪ The current 15 percent capital gains tax rate is set to rise to 20 percent,
▪ Income tax rates are due to increase,
▪ The current $5 million gift/estate tax exemption will return to a $1 million exemption.

The key takeaway is “absent further legislation”, i.e., no one knows what the law will be in 2013.

At least as far as the Jobs family is concerned, if they sell the stock before 2013, and (here’s the kicker) if indeed the Bush tax cuts lapse, the Jobs family may avoid almost hundreds of millions in capital gains tax they would have to pay at the higher 20 percent rate if they sold after 2013.

The great news is that the beneficiaries of Steve Jobs’ stock will receive an automatic step-up in basis of the stock to the value of such stock on Jobs’ date of death (including a step-up on Laurene’s ½ community property interest in such stock) – i.e., they will receive the benefit of the increase in the stock’s value since acquisition, tax free. However, any further increases (after Jobs’ death) in the value of the stock interest Jobs’ passed to his heirs will be subject to capital gains when the stock is sold.

So, there’s a capital gains tax of 15 percent or ‘possibly’ 20 percent, which prompt some questions:

1. How are individuals and businesses supposed to make certain financial decisions in the face of such uncertainty?

2. And, how are financial and estate planning professionals supposed to give sage advice and counsel when none of them know what the law will be in 14 months?

Steve Jobs’ Estate Taxes: Looking Up

 

The answer to both questions above is that effective planning in such uncertain times is a challenge. Obviously, if considerations other than tax consequences are paramount, then those business decisions may take care of themselves.

If the Jobs family wishes to retain Steve Jobs’ control of Apple, for example, they might hold on to the stock, risking a higher tax in the future if Congress does nothing or increases capital gains.

But, if the tax consequences are the most important consideration (hey, who really wants to give the government $876 million?) they may wish to sell the stock. But, the Jobs family will be divesting themselves of Steve Jobs’ legacy.

Tax and Estate Planning for Your Family

 

Many of you may be facing similar questions, though not on the scale of the Jobs family: To sell or not to sell? To gift or not to gift? For example, do you as parents and owners of a family business utilize the current $5 million gift tax exemption to gift portions of the family business to your children, even though you may prefer to do so in a few years?

If you do so before 2013, you can pass along $5 million of business value tax-free. If not, you risk having to pay gift tax on the portion of the business you pass which is worth over $1 million. . . unless Congress takes some other action, of course.

Given our government’s penchant for last minute deal-making, short-term fixes, and for striking bargains that are difficult to predict (like a “default” return to a $1 million exemption in 2013 absent further action), it may not be prudent to wait till the last minute to make these financial decisions.

Some decisions take time and fit into a family’s overall strategy (e.g., making gifts of minority interests in a family business or property, over time) and you may not have the necessary time to effectuate such a strategy or sell the stock before the new law goes into effect.

So, which way is up? And, where does this leave us all?

It leaves us in the same boat we’ve been in longer than any of us care to imagine – making life-altering financial decisions based on less information than we wish we had. However, it is nonetheless helpful to have a first mate on this trip, a professional who can help you best negotiate the rocks and reefs which may be lying just below the surface.

 

Disclaimer:
This Blog/Web Site is made available by the lawyer or law firm publisher for educational purposes only, to provide general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand there is no attorney client relationship between you and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for obtaining legal advice from a licensed professional attorney in your state.

 

 

LEWITT HACKMAN | 16633 Ventura Boulevard, Eleventh Floor, Encino, California 91436-1865 | 818.990.2120