Posts Tagged ‘estate tax’

 

The Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA) has swiftly expanded across the country, and has already been enacted in 32 states including Minnesota in August 2016. The RUFADAA places the responsibilities of properly planning for digital property on estate professionals. A common misconception is that this law automatically allows fiduciaries access to review accounts. This simply is not true, and blanket digital executor language in the estate documents will not be recognized by site owners.

Personal accounts: Many recent changes.  In 1995, the average American had 10 traditional accounts (savings, checking, credit cards, merchant accounts, etc.).  Today, that same population has 130 different digital and traditional accounts.

Estate administration is undergoing a sea change. Digital assets are creating new challenges. I see more and more estate planning clients coming to me with an increasing number of personal accounts and they’re unclear what to do with them. Clients have everything from financial accounts to travel rewards programs to social and professional networks online with no method of managing them. There’s risk of any number of these accounts becoming hidden or forgotten during estate administration, leaving loved ones to deal with finding and closing them. I see personal representatives left with the task of re-opening and finalizing an estate they thought was settled.

Loved ones are left confused. Navigating the complex requirements of tracking down and notifying the myriad of personal accounts can be overwhelming and complicated. The multitude of accounts, lack of awareness of their existence and not knowing where to turn result in procrastination and avoidance. This can potentially become a breeding ground for identification theft and fraud. It’s an emotional and logistical nightmare leading to incomplete estate administration as well as potential liability.

The needs of our estate planning clients are changing. The proliferation of digital technology (and its adoption by all generations) is changing the role of the estate planning attorney. Legislation and regulation in this area are being introduced to guide estate planning attorneys. Our clients count on us for effective estate planning and administration. We are remiss in our responsibilities if we fail to be proactive in ensuring the proper handling of all types of accounts. Effective planning and peace of mind are critical but now must also include digital assets to complete their portfolio of off-line assets. My clients and my reputation demand more.

We need solutions. Clients aren’t aware of the impact hidden accounts may have on their estate nor do they have the resources available to properly plan for them. DCS provides me the opportunity to offer an efficient, cost effective way to keep track of and ultimately close or resolve accounts in the manner my clients wish.

Facts:

  • Non-account holders using passwords can be in violation of state and federal regulations.
  • Sharing passwords can encourage the breach of account holder agreement and is unsecure.
  • The custodian’s terms of agreement may prevail over a court order. Custodians determine approval for access to accounts. Once an account is closed, all account contents may no longer available. To ensure disclosure, consent must be clear & express by the living account holder.
  • Cash-value assets can be hidden almost anywhere, including online storage, email, e-commerce or even in a gaming account.
  • Americans 65 and older spend an average of 4+ hours daily online.

Fictions:

  • The estate is authorized to use the account holder’s password to access their digital account.
  • Recommending that clients provide passwords to friends and family is a best practices.
  • A court order will always give access to digital account contents.
  • Closing an account and account content requests are the same.
  • Digital assets can wait to be dealt with until the time of death. Only financial institutions hold cash-value
  • Digital estate management is just for younger

 

Fiduciaries that may be granted rights:

  • Personal Representatives;
  • Conservators;
  • Agents acting pursuant to a power of attorney;

Each of the above categories of fiduciaries is subject to different opt-in and default rules based on the presumed intent of the account holder and the applicability of other state and federal laws.

Under the Act, a personal representative is presumed to have access to all of the decedent’s digital assets unless that is contrary to the decedent’s will or to other applicable law. A conservator may access the assets pursuant to a court order. An agent acting pursuant to a power of attorney is presumed to have access to all of a principal’s digital assets not subject to the protections of other applicable law; if another law protects the asset, then the power of attorney must explicitly grant access. And a trustee may access any digital asset held by the trust unless that is contrary to the terms of the trust or to other applicable law.

 

Additional/Optional POA Clause:

_____   (N)           digital property management and transactions as defined in Minnesota Statutes, Section 523.24, or applicable Fiduciary Access to Digital Assets Act.

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Proposed IRS Regulations May Eliminate Valuation Discounts for Gifts of Family Ownership

Sunday, September 18, 2016 @ 10:09 AM
Author: Peter Brehm

On August 4, 2016, the IRS published in the Federal Register a set of proposed new regulations under Chapter 14, Section 2704 of the Internal Revenue Code. These proposed regulations would have a significant impact on the valuation of private business entity interests for transfer tax (estate, gift, and generation-skipping) purposes.  Currently, business appraisers will examine real world restrictions on ownership interests (such as limitations of voting rights, control, etc.), and will often apply significant discounts to stock that is gifted to family members.  The discounts are intended to reflect the reality that potential buyers will pay less for stock that is restricted than it will for stock that is not restricted.
Under the proposed regulations, appraisers would be required to conduct valuations assuming hypothetical circumstances that often do not coincide with market conditions.  In other words, appraisers would be expected to assume that restrictions of the stock being transferred do not exist. This would cause them to determine a fair market value that ignores otherwise applicable valuation discounts, resulting in a value determination that may not match what the market would actually pay.
If these regulations are enacted in December 2017 as planned, valuation discounts for transfer interests will essentially be eliminated.  This will redefine how these interests are valued and most likely limit the financial benefits of these transfers.  The proposed changes would affect anyone who plans to transfer equity interests to family members. It is essential to approach this process in the company of a seasoned business valuation expert who is adept at navigating the complex authorities in action during these transfers.

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New Minnesota Estate and Gift Tax Laws

Thursday, June 6, 2013 @ 10:06 AM
Author: Steven Ness

At the end of May the Minnesota Governor signed a bill into law that will impact people who reside in Minnesota and those who claim their residence in another state but own property in Minnesota.  Minnesota is now the second state (after Connecticut) to impose a gift tax. The new law also imposes a Minnesota estate tax for all property located in Minnesota held in pass-through entities (an LLC, Sub S Corp or partnership). Some key provisions provide:

  1. A Minnesota gift tax of 10 percent will be imposed on certain taxable gifts made by Minnesota residents and non-residents owning property located in Minnesota.

·         Beginning on June 30, 2013, Minnesota residents and non-residents will be subject to Minnesota gift tax on all transfers of real property located within Minnesota and transfers of tangible personal property that is customarily kept in Minnesota at the time the gift is executed. In addition, Minnesota residents will also be subject to Minnesota gift tax on transfers of intangible assets (e.g., cash, securities, business interests).

 ·         Each person has a lifetime exemption of $1,000,000 from the Minnesota gift tax. The Minnesota gift tax only applies to transfers that are treated as taxable gifts for federal gift tax purposes. As a result, certain gifts that are not subject to the federal gift tax – including transfers falling under the annual exclusion cap ($14,000 in 2013), gifts to spouses, charitable gifts and certain transfers for educational or medical purposes – will not be subject to the Minnesota gift tax.

 ·         This may be particularly important for people who have not yet taken advantage of their $5,000,000 federal gift, estate and generation-skipping transfer tax exemptions (indexed for inflation to $5,250,000 in 2013)

 

  1. Unlike many other states, Minnesota still has an estate tax on taxable estates that exceed $1,000,000 (with a top tax rate of 16%). Beginning in 2013, individuals who die resident in Minnesota or those who own property located in Minnesota will be required to include in their Minnesota taxable estate taxable gifts made within 3 years of death.

 

  1. For people dying after December 31, 2012, who own a pass-through entity (such as an LLC, S Corp or partnership) the location of real or tangible personal property held in the entity will be determined as though the entity does not exist. This means that property located in Minnesota held in pass-through entities will be subject to estate tax.

 ·      Under prior law, a non-resident owner of an interest in a pass-through entity that owned real estate, inventory or equipment in Minnesota was not subject to Minnesota estate tax on that property. The new law will subject such property to Minnesota estate tax, even if the business owner or investor has no other connection to Minnesota and even if the business entity is organized and operated in another state.

·         Non-Minnesota residents who may have previously transferred Minnesota situated property to a pass-through entity, in order to avoid the Minnesota estate tax, should to review these transfers. This is no longer an effective way to reduce or avoid Minnesota estate taxes.

·         Since the new law does not apply to Minnesota-situated property owned by C Corporations people owning pass through entities will want to consider whether a conversion to a C Corporation is appropriate.

At this point in time, the new law does not include a similar provision for Minnesota gift tax. After June 30, non-residents may be able to continue making gifts of interests in pass-through entities owning Minnesota property, without triggering a Minnesota gift tax. It must be remembered that any such gifts made within 3 years of death will be included in the gifting individual’s Minnesota taxable estate. People who desire to complete gifts of Minnesota situated assets should consider doing so as soon as possible.  It is anticipated by many that the Minnesota gift tax provisions will be modified to align with the new Minnesota estate tax provisions in one of the next legislative sessions.

 

 

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It May Be Time to Review Your Estate Plan

Wednesday, March 6, 2013 @ 09:03 AM
Author: Steven Ness

For more than a decade the estate planning landscape has been foggy at best.  During that entire period, existing laws created “automatic” changes that many tax and legal professionals found difficult to predict.  The passing of the American Taxpayer Relief Act of 2012 (the “2012 Act”) at the close of 2012, finally makes the estate and gift tax laws “permanent,” meaning that they are not scheduled to expire, be repealed or rolled back. This is a significant change because since 2001 taxpayers and their advisers have had to plan based on an uncertain statutory framework.

The 2012 Act sets the estate tax exemption amount at $5 million. This is the amount of money that can pass estate tax free to any individual without triggering federal estate tax.  Since this exemption amount will be adjusted for inflation, the exemption amount in 2012 was actually $5.12 million and it is predicted to rise to $5.25 million this year.

The 2012 Act unifies the estate tax with the gift tax, making the lifetime gift tax exemption amount also equal to $5 million (adjusted for inflation). The generation-skipping tax (“GST”) exemption amount is also set at $5 million (adjusted for inflation). As a result, a person can gift over $5 million during life ($10 million between spouses) and not trigger any transfer tax.

The maximum estate and gift tax rate was increased from 35% to 40%.

The “portability” of exemptions between spouses has been permanently extended so that a surviving spouse will be able to utilize his or her last deceased spouse’s unused exemption amount. This does require the filing of a federal estate tax return, but with proper elections built into a carefully prepared estate plan, a surviving spouse can protect up to $10 million (adjusted for inflation) if his or her deceased spouse did not utilize any of his or her exclusion amounts.

While the exemption amounts are high and portability enables a surviving spouse to use both spouses’ exemptions, there are still many reasons why planning during life is very important, including:

  1. All appreciation on gifted assets escapes federal and state estate taxes. For this reason, it still may make sense to make lifetime gifts if you anticipate that assets may appreciate and/or grow to a level that exceeds the exemption amounts.
  2. While the federal exemption amount is $5 million, the Minnesota estate tax exemption amount is still $1 million. A $10 million estate may not be subject to federal estate tax but will be subject to approximately $1 million in Minnesota estate tax.  Proper planning can reduce or eliminate this $1 million state estate tax exposure.
  3. While the estate tax exemption is portable, the state level estate tax exemption and the federal GST exemption are not portable. If not properly planned for, these valuable exemptions can be wasted, costing significant tax dollars.

Steven E. Ness is an estate planning attorney for Business Law Center, PLC in Bloomington, Minnesota.

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Tax Savings for Companies Selling in Foreign Countries

Friday, February 1, 2013 @ 01:02 PM
Author: Steven Ness

An Interest Charge Domestic International Sales Corporation (commonly called an “IC-DISC”) is a unique tax savings entity, available to U.S. companies that have substantial sales to foreign countries, which includes sales to Canada and Mexico. An IC-DISC reduces tax liability by converting a portion of export income, which is taxable at ordinary income rates as high as 35% into qualified dividends generally taxed at 15%.

In short, an IC-DISC is a tax-exempt, domestic “paper” C corporation set up to receive commissions on the company’s export sales. The IC-DISC must have its own bank account, keep separate accounting records and file U.S. tax returns. But this separate entity need not have an office, employees or tangible assets nor is it required to perform any services.

To qualify as and IC-DISC a U.S. corporation must:

1. Be incorporated in one of the 50 states or District of Columbia;
2. File an election with the IRS to be treated as an IC-DISC for federal tax purposes (the application can be found at http://www.irs.gov/pub/irs-pdf/i1120icd.pdf);
3. Maintain a minimum capitalization of $2,500;
4. Have a single class of stock;
5. Meet a qualified export receipts test and a qualified export assets test;

Meeting a qualified export receipts test and a qualified export assets test indicates that at least 95% of an IC-DISC’s gross receipts and assets must be related to the export of property whose value is at least 50% attributable to U.S. produced content. Some services, such as engineering and architectural services related to construction projects outside the U.S. may also generate qualified export receipts.

The internal processes followed by an IC-DISC can be summarized as follows:

1. An owner-managed exporting company organizes a new C corporation and applies for qualification as a tax-exempt IC-DISC;
2. The exporting company pays IC-DISC a commission;
3. The exporting company deducts commission from ordinary income taxed at 35%;
4. The IC-DISC pays no tax on the commission;
5. The shareholders of the IC-DISC must pay income tax on dividends at a qualified rate of 15%;
6. The result is 20 percent tax savings on commissions.

Steven E. Ness is a busienss attorney with Business Law Center in Minneapolis Minnesota

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Gifting Stock: Use a Formula, Not a Savings Clause

Thursday, August 9, 2012 @ 02:08 PM
Author: Peter Brehm

Small business owners often struggle finding ways to transfer the value of what they have built to their children and grandchildren.  The current tax law permits a parent to gift $13,000 to each child without paying gift tax.  So, for example, a husband and wife with 4 children could gift $26,000 in stock every year to each child ($104,000 per year) without paying tax.   As most small business owners know, however, establishing the value of small business stock is not easy to do, and if the IRS decides that the amount of stock you gave exceeds the annual exclusion amount, there is the potential for a rather punitive gift tax.

Many practitioners have tried to remedy this situation by adding a ‘savings clause’ to the gift that says: we are gifting X number of shares to each child with the expectation that the value of the shares does not exceed the gift tax exclusion amount, and if the IRS finds that  X number of shares exceeds the gift tax exclusion amount, we take back enough of the gift so that no tax is owed.  The IRS, and most court have rejected this approach.

However, the Tax Court has held that a gift of stock based upon a formula, where the gift is for a set dollar amount (not a specific number of shares) the taxpayer can effectively create a gift that will never exceed the exclusion amount.  In Wandry v. Commissioner, the court held that “[a] savings clause is void because it creates a donor that tries ‘to take property back’.  On the other hand, a ‘formula clause’ is valid because it merely transfers a ‘fixed set of rights with uncertain value’.  The difference depends on an understanding of just what the donor is trying to give away.”

For the small business owner the solution is clear: when planning around the gift tax exclusion, you should use a formula based gift, not a savings clause.

Peter Brehm is a small business and estate lawyer practicing in Minneapolis, Minnesota and Scottsdale, Arizona.

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Will Minnesota Tax Your Estate?

Tuesday, July 10, 2012 @ 08:07 AM
Author: Steven Ness

The State of Minnesota imposes a tax on the estates of individuals who are residents of the state when they die or who own tangible property in MN when they die. The taxable estate is generally the fair market value of the estate on the day the decedent died, less deductions (e.g., transfers to a surviving spouse and charitable bequests) and an exemption mount, which is $1 million for unmarried individuals. The tax is imposed under a graduated rate schedule on the taxable estate.  The tax rates range from 0.8% to 16%. For the 16 years ending December 31, 2001, the MN estate tax was directly linked to the federal tax as a “pickup” or “soak-up” tax equal to the credit allowed under federal estate tax for state death taxes. As a pickup tax, the MN tax imposed no additional tax burden on estates. For each dollar of state tax paid, federal tax was reduced by an equal amount.

However, U.S. Congress repealed this credit in 2001, the MN legislature chose to continue imposing the estate tax under the rules in effect before Congress repealed the credit. As a result, the MN estate tax now is a stand-alone tax.  Many people, including some estate planning practitioners, drafted their estate plan around the federal estate tax and ignored the impact of Minnesota’s estate tax rules.  All estate plans, especially estate plans created prior to 2002, should be reviewed, and may need to be modified to recognize Minnesota’s lower taxable estate threshold.

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