What is Portability and How Can It Benefit You and Your Family?

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TaxBill-91024The legal concept of “portability” is still relatively new in estate planning, having become available only after 2011. Since then, it’s been both a blessing (for its tax saving benefit) and a curse (because of rules that seem to be constantly shifting). Fortunately, the IRS has recently clarified some important details about portability.

So how can a portability election benefit you and your family? It could help save hundreds of thousands of dollars of estate and gift taxes for your family if you lost your husband or wife within the last few years. Although the exact mechanics of the tax remain complicated, portability makes it much easier for estate planners and tax professionals to save taxes for you and your family. But be aware, portability is not automatic (even under the new regulations), so you must take action to claim it.

Why should I care?
Portability allows a surviving spouse to inherit and use the estate tax exemption from a deceased spouse. If you’re planning isn’t as good as it could have otherwise been, portability can save hundreds of thousands of dollars of estate and gift taxes. And for those who are proactively planning, it also makes crafting your trust or will much more flexible so we can tailor the plan more towards you and your family’s needs, and less to the needs of the IRS.

What’s new with portability?
Under a new IRS revenue procedure, you now have additional time to take advantage of portability. In the past, you had only 15 months after the death of a loved one to file for portability. Now, you now have two years after the passing of a spouse to file for portability, making this option much easier to use than before.

The IRS is also allowing a unique opportunity to file a late portability estate tax return, as long as you meet certain requirements and have it submitted by January 2, 2018.

On the other hand, if you have a substantial estate (over $5.49 million) or are not a US citizen or resident alien then the traditional 15-month rule will continue to apply to you. Also, like any legal or tax issue, it’s always a good idea to obtain qualified assistance as early as possible so you can have the widest possible set of options and the best likely outcome.

What do I need to do now?
If you lost your spouse after 2011 and haven’t yet spoken with an estate planning attorney about your options, now is the time. As the stock market and housing markets have recovered in the last few years, it might be worth a second look to see if a portability election is right for you and your family, even if you previously decided against one. But whatever you decide to do, do it sooner rather than later. January 2, 2018, will be here before you know it.

Dedicated to empowering your family, building your wealth and securing your legacy,

Marc Garlett 91024

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Holiday Bonuses & Tax Refunds: Where to Put Them For Max Return

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Income TaxesDid you get a holiday bonus from your employer? Or maybe you have a tax refund coming. If so, do you have any of it left, have you already got it spent in your mind, or are you thoughtfully considering how you can best utilize this surprise resource? Annual bonus payments and tax refunds are nice windfalls, which can be used to create more stability in your life. While it is fun to treat such income as “mad money” to be spent on frivolous endeavors, it may be more effective to use it to create more for your long run.

The Best Uses

Paying down a home mortgage is one of the best uses of extra cash. The less principal on which interest is calculated, the more money you will keep for yourself in the long run. Another benefit to making a principal payment is that if it brings the remaining principal to less than 80% of the appraised value of your home, then private mortgage insurance can be dropped, saving you even more money.

Contributing to a retirement account is another excellent use of extra money, if your employer matches your contribution.

If not, consider the possibility of investing your bonus or tax refund into starting your own side business. Here’s a great article about the Side Hustle and how it could help you.

Other Good Uses

Home improvement needs are common for most home owners. Keeping up the condition and value of your home are important long term goals. Letting things go too long typically increases the ultimate cost of repairs. Dealing with them early can pay dividends.

Another good use of bonus funds is to invest in an estate plan if you don’t have one already. Over 50% of Americans between ages 55 and 64 don’t have a will. And 69% of parents have never named legal guardians for their kids. Of the 31% who have, most have made one of 6 common mistakes that means their kids are at risk. Are you part of this group?

Dying without a will, let alone a comprehensive estate plan (and a Kids Protection Plan® if you have minor children), creates complications for your heirs and can leave your family in Court and/or conflict. While you may not relish the idea of investing your bonus or tax refund in an estate plan, the cost to you now would be much less than the cost to your loved one’s later.

If you are thinking about using your tax refund or holiday bonus to protect your family, contact us and ask for the tax refund/holiday bonus special that includes a Family Estate Planning Session + analysis of the best use of the funds for your current situation, as our gift to you, if you are one of the next 5 to call and request it.

Dedicated to your family’s wealth, health, and happiness,
Marc Garlett 91024

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Watch Out for Predatory Tax Liens on Your Family Home

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real estate 91024As our parents and other loved ones age, they may need a little more attention from us. Parents, grandparents, aunts and uncles, or and even neighbors who are aging may want to be seen as strong and independent. Often, however, their abilities to take care of household and financial affairs begin to erode as they get older.

What’s at Risk?

One such example which can have catastrophic consequences is the failure to pay property taxes. A lot of retired people are struggle to make ends meet and may not be able to pay their taxes as they come due. This puts their home at risk because unfortunately, governments have processes in place to collect back taxes by placing liens against the property.

Worst Case Scenario

Different locales have different approaches to filing liens against property, but one of the worst is Washington, D.C. There, the city made a policy change in 2001 that has had devastating effects on homeowners. Prior to that time, the city would sell a lien at auction to individuals who could then charge interest on the amount due until it was paid. If it was not paid, the city could move to foreclose on the property.

The change in 2001 allowed the purchasers of the liens to go directly to court to foreclose on the property they purchased. This attracted predatory lenders from other states that became very aggressive in pursuing the foreclosures. In many cases, people who owned their homes free and clear lost them over unpaid taxes of less than $500. Once investors buy the liens, they can begin charging interest and legal costs, which makes it more expensive for the homeowner to pay off the lien.

While it is true that homeowners have ample time and notice to pay the taxes, even after the liens are sold, Washington’s story is replete with cases of owners with dementia or other serious illnesses. Because of these types of conditions, many owners were not aware of or did not understand what was happening. And without family or friends looking out for them, the predators can have a field day.

What Can be Done?

Thankfully, Washington is in the minority of governments that allow this predatory approach to tax collection. But it points out the need for those of us with elderly family members and friends to pay attention. Respect their pride, but make sure they get the help they need so they are not taken advantage of.

One of the main objectives of our law practice is to keep families out of court and out of conflict. Our lawyers can help you protect those you love by starting with a Family Estate Planning Session. Call our office today, mention this article, and we’ll waive the fee for your session.

Dedicated to your family’s wealth, health, and happiness,
Marc Garlett 91024

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Debunking 4 Common Myths About Gift Taxes

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Income TaxesApril 15 is upon us! It is not only the deadline for filing your state and federal income tax returns, but also the deadline for filing gift tax returns via IRS Form 709.

Many people are confused about the subject of gift taxes. While only two states — Connecticut and Minnesota — have a state gift tax, there is a federal gift tax you may need to be concerned about. Here are some common myths and the actual truths about gift taxes:

Myth 1: The recipient must pay taxes on gifts.

Reality: While the gift giver may face taxes on certain gifts, the recipient usually doesn’t. There are some circumstances, however, when that will not be the case. For example, if you receive a bonus from an employer or tips, these may be subject to income tax. If you are gifted property that has appreciated in value since the giver bought it, you receive the cost basis as part of that gift. But if you sell the property, you will be liable for taxes on the difference between the sale price and the cost basis (what the giver paid for it).

Myth 2: A giver must pay tax on gifts of over $10,000 per year.

Reality: The annual gift tax exclusion rate is currently $14,000 (it increases periodically), and you can give gifts of that amount to an unlimited number of individuals each year without having to pay gift tax. If you give to a charity or your spouse, you can give an unlimited amount without incurring taxes. The lifetime gift tax exemption for 2015 is $5.43 million per person and your annual gifts (so long as they are under $14,000 per person) don’t count towards that number.

Myth 3: Gift taxes can be avoided by loaning money at no interest and forgiving the loan.

Reality: The IRS requires that you treat a loan like a loan, not a gift. You will have to charge a fair market interest rate and put the terms of the loan in writing.

Myth 4: You can always deduct charitable contributions from your taxable income.

Reality: Charitable contributions must be made to a qualified tax-exempt charity, and must be itemized. You can check the status of your charity on the IRS website with its Exempt Organizations Select Check Tool.

If you have questions about gifting strategies or anything else related to protecting and providing for your family, please let us know. We’re here to help.

To your family’s health, wealth, and happiness,
Marc Garlett 91024

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How to Protect Life Insurance Proceeds from Taxation

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InsuranceIf you have been responsible enough to purchase a life insurance policy as added protection for your loved ones, then you will want to carry that responsible action a little further by protecting that important asset from taxation.

If you are married and have named your spouse as the beneficiary of your life insurance policy, those proceeds will pass free of both income taxes and estate taxes. However, if your children are named as beneficiaries, the proceeds are free of income tax, but they do become part of your taxable estate. Estate taxes have ranged from 35% up to 55% in recent years, so that’s a big bite.

An Irrevocable Life Insurance Trust (ILIT) is a great asset protection tool that shields your life insurance from estate taxes, and when drafted properly, can also be used to protect proceeds from creditors, bankruptcy and divorce.

The best way to use an ILIT is to have the Trustee of the life insurance trust purchase the life insurance directly and pay all premiums. If you already own the life insurance, your ILIT Trustee can either buy the policy for you, or you can transfer it in, by following certain rules we can help you with.

So why is this a good idea? The proceeds from the life insurance are not part of your estate if the ILIT owns the life insurance. Therefore, they are not subject to estate tax upon your death.

If you have not yet purchased life insurance, you should create your ILIT first. Have your ILIT purchase the life insurance. This will circumvent the transfer of life insurance from you to
another party, thus avoiding any difficulties if you do unexpectedly pass away since the proceeds of your life insurance policy would revert to your estate if you died within three years of the transfer.

The ILIT is a phenomenal tool for protecting your life insurance from taxation, leaving behind more for your loved ones.

To put the proper legal and financial protections in place for your family, contact our office to schedule a time for us to sit down and talk. We normally charge $750 for an Estate Planning Session, but because this planning is so important, I’ve made space for the next two people who mention this article to have a complete planning session at no charge. Call today and mention this article.

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6 Tax Questions to Ask Before the End of the Year

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Your holiday season “to-do” lists is already incredibly long, I know, but you really owe it to yourself to answer these six tax questions before year-end:

Should I defer or accelerate income? Will you be in a higher tax bracket next year? If so, you may want to pull more income into this year. Conversely, if it looks like you will be in a lower tax bracket in 2014, you should consider deferring income until January. In addition, it may be beneficial to accelerate deductions by immediately paying any income or property taxes not due until 2014.

Should I take any gains or losses this year? If you are in a lower tax bracket than you expect to be in next year and have gains on your investments in 2013, you may want to consider selling some of your investments to benefit from lower tax rates on those gains.

Should I do a Roth conversion? If you have a traditional IRA, you may want to convert all or some of those assets to a Roth IRA, especially if you are still years away from retirement. You will pay taxes on the converted assets now, but your earnings will grow tax-free in the Roth IRA.

Should I make any changes to my FSA or HSA for 2014? If you have a flexible spending account (FSA) or health savings account (HAS) through your employer and anticipate bigger medical expenses next year, you may want to increase the funds in those accounts which allow you to use pretax money for out-of-pocket medical costs.

Should I be making charitable contributions? If your income increased this year, you may want to think about reducing your taxable income with charitable contributions. You may also consider gifting appreciated securities, which allows you to avoid capital gains taxes while still deducting the full amount of the donation.

Should I be making gifts to family? In 2013, you can gift up to $14,000 (or $28,000 if you are married and your spouse participates) to as many individuals as you choose. This allows you to assist family members while removing taxable assets from your estate. It’s important that if you are giving large gifts, you set it up so those gifts are protected from bankruptcy, divorce and creditors forever. We can help you with that.

If you would like more information about year-end tax-saving strategies, call our office today to schedule a time for us to sit down and talk. We normally charge $750 for a Family Wealth Planning Session, but because this planning is so important, I’ve made space for the next two people who mention this article to have a complete planning session at no charge. Call today and mention this article.

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