Source: http://www.wealthpreservationist.com/2018/
Timestamp: 2020-03-31 16:09:50
Document Index: 709765499

Matched Legal Cases: ['§199', '§199', '§199', '§199', '§199', '§199', '§199', '§199', '§199', '§199']

Wealth Preservationist: 2018
Charitable Giving after the Tax Cut and Jobs Act of 2017
Under the new tax act, the standard deduction has been raised to $24,000 for a married couple. As such, many taxpayers will not reach this deduction threshold thereby losing the tax benefits of charitable giving. Experts estimate that the raise in the standard deduction will lower charitable giving by more than 13$ billion per year.
Although this change may affect standard charitable giving, charitable gifting has shifted to other methods that still provide advantageous tax benefits. One popular way to donate post Act is the gifting of the required minimum distribution (RMD) from an IRA. Donating this RMD can allow one to gift an appreciable asset and avoid the tax on the appreciation. Another method of charitable giving that has gained popularity is the Donor Advised Fund. Donor advised funds (DAF) allow one to reduce tax burdens after a windfall situation by taking the immediate tax deduction when you make a donation to your DAF. Also, contributions of appreciable assets to a DAF can eliminate capital gains under certain guidelines.
If you wish to make a charitable donation, the attorneys of Morris Law Group can help you structure an effective charitable plan.
Gift Away- IRS proposed regulations removes concerns for clawback
Proposed regulations issued by the IRS on November 23rd of this year cleared up one of the main concerns to gift givers after the Trump Tax cuts of 2017. The doubled estate tax and gift tax exemption will face no claw-back when these rules expire at the end of 2025. This proposed regulation eliminates some of the unease that individuals may felt at the possibility of later having to pay taxes on past giving. This is of significant importance due to the huge jump in the estate tax exemption for $5.49 Million in 2017 to $11.18 in 2018, which could have created massive back payments.
This ruling also applies to the generation skipping transfer exemption as well as the estate tax exemption. While estate planning attorneys may have had language advising of the possibility of a claw-back, this regulation eliminates any doubt that gifting your full current exemption will cause a headache in 2026. If you are interested in learning more about the new proposed regulations, please feel free to reach out to the experienced attorneys of Morris Law Group.
Irrevocable Life Insurance Trusts (ILITs) in the Current Environment
Irrevocable Life Insurance Trusts (ILITs) have always been a strong planning technique for the inevitable estate tax. However, due to periodic increases in the federal estate tax exemption over the last two decades, the estate tax is no longer a concern for most United States residents.
The current federal exemption is $11.18 Million per person ($22.36 Million for a married couple) leaving almost 99.9% of US individuals without the worry of a federal estate tax upon death. Thus, very few individuals feel the need to form an ILIT to own their life insurance for estate tax purposes.
Although ILITs may no longer be deemed necessary by many individuals for estate tax purposes, we still strongly believe that ILITs be utilized for asset protection purposes, as life insurance policies are not always protected from creditors. Rather, the creditor protection of a life insurance policy is state specific and determined by the state statute in which the insured resides. Life insurance policies are protected from creditors in Florida, however, there are many states in which they are not. Thus, if you reside in a state where life insurance policies are not statutorily protected, an ILIT may be essential in order to protect the policy from creditors.
Additionally, an ILIT provides enhanced asset protection to the beneficiary of a life insurance policy, as the death benefit will pass to the beneficiary in a trust rather than outright. While the assets remain in the irrevocable trust (assuming the terms are sufficient), they will be protected from creditors. Alternatively, if the death benefit is distributed outright to a beneficiary, such amount may be obtainable by that beneficiary’s creditors.
Please do not hesitate to contact Morris Law Group should you have any questions about establishing an ILIT.
§199A Update
As discussed in previous posts, one of the most complicated yet compelling provisions of the recently enacted tax reform is the addition of §199A to the Internal Revenue Code.
As a brief background, §199A provides a deduction for business owners of pass-through entities (non-corporations). Subject to certain thresholds and exceptions, §199A permits such pass-through business owners to deduct up to 20% of their qualified business income.
Naturally, many taxpayers (through their advisors) have begun utilizing extra deductions by transferring interest in their businesses to non-grantor trusts. Since each non-grantor trust is a separate tax-paying entity, it may (subject to limitations) qualify for its own deduction under §199A.
As expected, the IRS has responded to such planning by issuing proposed regulations. Some of the proposed limitations are as follows:
The IRS will aggregate trusts if i) they have the same grantor; ii) they have substantially the same beneficiaries; and iii) the principal purpose of the trust is to avoid income tax.
Trusts formed with a significant purpose of receiving a §199A deduction, will not be respected under §199A.
When calculating taxable income of a trust for §199A purposes, it will include amounts that the trust has already distributed to beneficiaries.
Please stay tuned for updates regarding the proposed regulations. However, in the interim, please do not hesitate to contact Morris Law Group should you have any questions about the new §199A.
As has been discussed previously on this blog, multi-member LLC’s offer a strong form of asset protection since the underlying assets cannot be attached by an individual member’s personal creditors. Specifically, the sole remedy available to such a creditor would be to obtain a charging order against the member’s LLC interest and only be paid if the LLC distributes assets to that member.
A charging order is essentially the right to receive a distribution when (and if) a distribution is ever made. Thus, a creditor will only receive assets if a distribution is made to the member. The charging order does not provide the creditor access to the LLC’s underlying assets, nor does it provide any voting rights in the LLC. The ultimate purpose of the charging order (and the purpose of keeping assets in multi-member LLC’s) is to force a creditor into a reduced settlement.
Please do not hesitate to contact Morris Law Group should you have any questions about charging orders and the protection they offer.
183 Day Residency Test
The United States is a country that taxes all citizens and residents on their worldwide income. However, in order to be deemed a US resident for tax purposes (notwithstanding an income tax treaty), one must either have a green card or satisfy the “substantial presence test.”
The substantial presence test is a cause of confusion for many, since most people mistakenly believe that as long as they remain in the US for less than “six months and a day,” (183 days), they will not be treated as a US resident for tax purposes. Unfortunately, they are mistaken because the 183 day test calculates residency status by utilizing a weighted formula outlined below:
1) 100% of the days in which you were present in the US during the current year; plus
2) 1/3 of the days in which you were present in the US during the preceding year; plus
3) 1/6 of the days in which you were present in the US during the second preceding year.
Thus, if you are a non-citizen who spends exactly 183 days in the US for three consecutive years, you will eventually be taxed in the US on your worldwide income. Pursuant to the weighted calculation, the highest number of days you can spend in the US for three consecutive years without being deemed a resident for tax purposes is 122. For example:
2017: 122 days * 1 = 122 days; plus
2016: 122 days * 1/3 = 40.67 days; plus
2015: 122 days * 1/6 = 20.33 days.
In this example, the total weighted days for 2017 is 183 (122 + 40.67 + 20.33), and would not lead one to be deemed a US resident for tax purposes.
Please do not hesitate to contact Morris Law Group should you have any questions about the confusing 183 day residency test.
A common estate planning technique for high net worth individuals is a Sale to a Defective Trust.
In general, a “defective grantor trust,” (now more simply known as a “grantor trust”) is a trust that is disregarded for income tax purposes. Thus, all of the trusts income, deductions, etc. are treated as though they are received by (or paid by) the grantor. Furthermore, although the trust is disregarded for income tax purposes, it is respected for estate and gift tax purposes, thereby enabling a grantor to transfer assets outside of his or her estate without any income tax consequences.
The sale/transaction works as follows:
Step 1: Grantor establishes an irrevocable trust with his or her spouse and/or other family members as beneficiaries.
Step 2: Grantor gifts and sells assets to the trust established under step 1 in exchange for a promissory note with the required minimum interest payments set out by the IRS.
The result at the end of the transaction is twofold. First, for estate tax purposes, all future appreciation of the assets gifted and sold to the trust will grow outside of the grantor’s estate. Second, for income tax purposes, the grantor does not need to recognize any income tax on the sale, since the sale to a grantor trust for income tax purposes, is deemed to be a sale to the grantor himself. Furthermore, all income from the trust will be taxed at the grantor’s individual tax rate rather than the rate for trusts. This is important since the highest income tax rate for individuals (37%) kicks in at income over $500,000, whereas the highest income tax rate for trusts (also 37%) kicks in at only $12,500.
The end result is that all assets transferred to the trust will be successfully removed from the grantor’s estate. Additionally, since the grantor’s spouse is a Trustee and beneficiary of the Trust, such spouse may access the trust’s assets should the need arise.
As discussed in previous Wealth Preservationist posts, one of the most significant forms of asset protection offered in Florida is the Homestead protection.
As a matter of background, your homestead is defined as your primary place of residence (assuming you are a permanent resident of Florida). Furthermore, homestead is limited to up to one-half acre within a municipality and up to 160 contiguous acres outside a municipality. If you have more than 1 home in Florida, you can only declare one of the properties as your Homestead property.
Although this seems like a very strong protection tool, there are three scenarios in which the Homestead Protection will not prevail, IRS tax liens, mechanic’s liens associated with maintenance or construction of the specific homestead property, and liens related to mortgages and Home Owners Association dues. These classes of creditors can attack your Homestead property and force a sale to satisfy a judgement.
In a recent case (Dejesus v. A.M.J.R.K. Corp.) the Florida District Court of Appeals provided some clarity on the issue of ownership of a homestead. The main issue of the case was whether the beneficial homeowner could receive Homestead protection of a residence owned in a corporation. The court concluded that in order for a property to receive Florida’s homestead protection, it must be owned by a natural person. Furthermore, the court came to this conclusion even though the beneficial homeowner was the sole shareholder of the corporation.
This decision in Dejesus further clarifies the understanding that a business entity cannot qualify for homestead protection. In order to receive such protection, a property must be owned by an individual or a land trust.
Please do not hesitate to contact Morris Law Group should you have any questions about Florida’s Homestead protection.
Recent Updates for DAPT Planning
As referenced in previous posts, Domestic Asset Protection Trusts (“DAPTs”) are an extremely efficient estate planning and asset protection technique. To recap, a DAPT provides protection from creditors who exist after the creation and funding of the trust, and such creditors cannot attach the assets of the trust so long as the trust terms are consistent with a state’s DAPT Act.
Since only a limited number of states have passed laws which make DAPTs effective, it is common for individuals from other states to establish DAPTs in such jurisdictions. Further, the Grantor of a DAPT need not be a resident of the state in which the DAPT is situated as long as the Trustee is within the jurisdiction. However, there has been much debate as to how/why a DAPT can protect a Grantor who is not a resident of the state in which the DAPT is situated. This question is relevant for Floridians as Florida does not currently have a DAPT statute and therefore residents must seek such trusts in other states.
We don’t believe that this case poses a threat to Floridians who wish to establish a DAPT in another state. Specifically, in this case, the defendant clearly engaged in a fraudulent transfer and the sole purpose was to set up a DAPT to hide assets from an existing creditor. Furthermore, this case is consistent with our opinion and understanding that a DAPT will provide the necessary protection from creditors who exist after the creation and funding of the trust.
The New §199A
Standard Deductions Under the New Tax Plan
For many years, the standard deduction was a tax benefit rarely utilized by moderate to high net worth taxpayers, simply because their itemized deductions outweighed the standard deduction.
This will change significantly under the new tax plan, since the new plan has doubled the standard deduction to the following figures:
For married couple filing jointly: $24,000;
For heads of household: $18,000; and
For Single Individuals: $12,000.
In addition to the doubled standard deduction, the new tax bill has eliminated many of the popular itemized deductions, leaving only the following:
Deduction for payment of state and local taxes (limited to $10,000);
Home mortgage interest expense deduction (up to $750,000);
Deduction for medical expenses not covered by insurance (capped at 7.5% of AGI);
Deduction for interest expense incurred in connection with investment income; and
Deduction for casualty losses in a federally declared disaster area.
Now that tax overhaul is nearly a month old, it is important for taxpayers to understand the new plan. The new tax bill has a significant effect on most Americans at its most basic level, the individual income tax. It is extremely important for all taxpayers to be aware of their tax bracket, which may have changed this year. Please see the charts below for a list of the new tax rates and brackets.
Below is a list of the tax rates associated with specific income brackets resulting from the newly enacted tax reform:
10% $0-$9,525 0$-$19,050
22% $38,701-$82,500 $77,401-$165,001
35% $200,001-$500,000 $401,000-$600,000
In comparison, below is a list of the tax rates associated with specific income brackets prior to the 2018 tax reform:
15% $9,526-$38,700 $19,051-$77,400
25% $38,701-$93,700 $77,401-$156,150
28% $93,701-$195,450 $156,151-$237,950
33% $195,451-$424,950 $237,951-$424,950
35% $424,951-$426,700 $424,951-$480,050
39.60% Over $426,700 Over $480,000
Please do not hesitate to contact Morris Law Group should you have any questions about the new tax brackets or the new plan in general.
For most high net worth individuals, the main estate planning vehicle for an efficient transfer of wealth upon death is through use of a revocable trust. However, although efficient from a wealth transfer and disability planning perspective, a revocable trust does not afford any asset protection to the grantor.
Once executed, all assets can be assigned to the DAPT, including financial accounts, real property, interests in closely held businesses, etc. Additionally, all future accounts should be titled in the name of the trust. However, it is important to note that the Trustee of the trust must be a resident (individual or corporation), of the trust’s jurisdiction.
Please do not hesitate to contact Morris Law Group if you believe that a DAPT will better accomplish your combined estate planning and asset protection goals.
Gift Away- IRS proposed regulations removes concer...
Irrevocable Life Insurance Trusts (ILITs) in the C...