No one likes taxes… well except maybe the government and accountants. For this reason, we wanted to put together a quick article that highlights some of the key points our clients and friends should know about estates, trusts, and taxes in 2019. To help us out, we invited our friend Stacy Cavin to answer a few tax related questions.
Introduction to Stacy Cavin
Stacy Cavin is a Certified Public Accountant (“CPA”), and associate at Botz, Deal & Co. Where she helps families and businesses with their accounting needs. Stacy primarily focuses on helping families understand and file probate and trust tax records.
Q&A with Stacy
Stacy, what are three important tax issues families should be aware of when administering the estate (probate) of a deceased loved one?
Honestly, there are so many things I would like families to know. The top three that instantly come to mind are:
- Understanding who pays the tax. Is it the trust/estate that pays, or is it the beneficiary of the estate that will pay the taxes. The answer to this question helps us understand which tax rate will apply. As well as how that will impact the tax returns of the estate and/or the beneficiaries.
- The next is understanding what assets are taxable. Which may create options for distributing those assets to avoid or minimize taxable events.
- The final item is determining the full value of the estate. The value of the estate will help us determine whether an estate return (Form 706) is required or perhaps favorable. By favorable, I mean whether a surviving spouse would want to elect portability. Portability is a tax savings clause that must be elected by a certain time after a spouse passes away.
Are there any major tax changes for the 2018 tax year that have impacted Trusts and Estates? If so, what are two or three of the most common changes you encounter?
There are some tax changes that have made an impact on estate, trusts, and taxes. Qualified Business Income deduction, limits on state/local income taxes, removal of deduction subject to the 2% floor (such as investment fees), and adjusted tax rates. The changes having a large impact on my clients are the limitations on the state/local income taxes and the loss of the deduction on the investment fees.
We create a lot of Revocable Living Trusts for families here at Welch Law. Once the grantor(s) pass away, those trusts become Irrevocable. How are irrevocable trusts taxed and are there ways to limit the tax burden on the trust estate and/or beneficiaries?
When a trust becomes Irrevocable, it obtains a new Tax ID and file its own income tax return (Form 1041). If income is received by a trust and not distributed out to the beneficiaries, the trust will pay the tax. Trust tax brackets are graduated like personal tax brackets, but highly compressed.
A trust will pay the maximum rate of 37% on income over $12,500. Where an individual wouldn’t pay 37% until their income was over $500,000 if single or $600,000 if married filing jointly. The tax burden can be minimized with proper planning.
Distributing income and timing of distributions are two ways we help minimize the tax burden on the trust. In some cases, we may also look at working with the trustee (and attorney) to distribute assets without triggering a taxable event.
The new tax law has doubled the estate tax exemption, from $5.6 million to $11.2 million ($22.4 million for a married couple) until 2025. This new exemption amount makes estate taxes a non-issue for many families. Are there other tax burdens to be aware of?
Depending on size of the estate and life expectancy, there are other planning opportunities. For some of our wealthier families, it may make sense for individuals to gift at higher values before the exemption sunsets in 2025. Especially gifts in cash.
The reason cash gifts make more sense right now is because some assets get a step up in basis when they are inherited. This means that when the assets are sold you pay tax on the difference of the sales price and the FMV at date of death (an example of this would be real property). On the other hand, if you are gifted an asset prior to death, the beneficiary pays tax on the difference of the sales price and the original purchase price. The step up in basis needs to be considered for items that have or will appreciate in value. I highly encourage clients to talk with their attorneys and tax professional before making any gifts over $15,000.00 in a year.
One last thing we are seeing right now, is families should be aware that they may still need to file tax returns simply to elect portability for a surviving spouse.
The term portability comes up a lot when discussing trust planning with married couples, and during our discussion. Could you please briefly describe what portability is and how a surviving spouse makes that election?
Each individual is allotted an exemption of $11.2 million (until 2025 ). This means that your assets can total up to this amount without being subject to federal estate tax. Assets over this amount are subject to a federal estate tax of 40%. If one spouse passes away and their half of their estate is say $10 million, then the surviving spouse can elect to port the remaining $1.2 million of the exemption to their estate.
So essentially, the surviving spouse would keep their $11.2 million and add the additional $1.2 million for a grand total exemption of $12.4 million on their estate. The surviving spouse must timely file IRS Form 706 to claim portability. Taxpayers should consider that assets appreciate, so while the surviving spouse’s half of an estate may be $10 million when the first passes, they may live for several more years and the assets fair market value may rise over their exemption. Or, they may live to see the exemption go back down, perhaps to $5.6million or less.
We are not certain at this time how the IRS will handle a portability situation if one spouse passes away before 2025 and the other passes away after that time.
What is your number one piece of advice to readers worried about how taxes may impact their estate and/or trust plan?
Everyone should have a team of advisors, regardless of how large or small their estate is currently. Attorneys, tax professionals, and financial advisors can work together to show you the full picture. Knowing the legal, tax and financial implications of your estate/trust plan can help you make the best decisions for you and your family. A plan of action often saves a tremendous amount of time and expense after a loved one passes.
Stacy, thank you for your time and this awesome information. If someone would like to learn more about estates, trusts, and taxes, how could they reach you?
They can contact me at the office, (636) 946-2800 most days, or they can email me at [email protected]. I’m always happy to see how I can help. Even during this busy time of the year try to return calls and emails within a day or two.
An old adage often comes to mind when we are helping families with their estate plan. “The only things certain in life are death and taxes”. We greatly appreciate Stacy’s help in preparing this primer on Estates, Trusts, and Taxes and hope you found it useful.
Contact Welch Law here if there is anything we can do to help.
Remember, this article is for informational purposes only. Every situation is unique and you should contact your attorney or tax professional if you have specific questions.