IRS Announcement: Estate Tax Closing Letters Will Now Only Be Issued Upon Request

Due to the increased volume of federal estate tax return filings in order to make the “portability election,” the IRS has announced that estate tax closing letters will only be issued upon request by the taxpayer. This change in IRS policy started on June 1, 2015.

What is the “Portability Election” and How is the Election Made?

The “portability election” refers to the right of a surviving spouse to claim the unused portion of the federal estate tax exemption of their deceased spouse and add it to the balance of their own exemption. The portability election went into effect for deaths occurring on or after January 1, 2011. 

To properly make the election, a surviving spouse must file a federal estate tax return within nine months of the date of a spouse’s death, although a six-month extension of time to file the return can be requested. Filing an estate tax return is required to make the election even if the value of the deceased spouse’s estate does not exceed the federal estate tax exemption.

A Portability Example

The easiest way to understand how portability works is through an example.  Let’s say Carol and Bob are married, all of their assets are jointly titled with rights of survivorship, their total estate is valued at $4 million, and neither spouse made any taxable gifts during their lifetimes.  If Bob dies in 2015, none of his $5.43 million federal estate tax exemption will be needed since Carol will automatically inherit the entire estate through rights of survivorship.  In addition, a federal estate tax return will not otherwise be required for Bob’s estate since it is valued under $5.43 million.

Nonetheless, if Carol wants to pick up Bob’s unused $5.43 million exemption and add it to her own exemption so that she can pass on up to $10.86 million when she dies, she can timely file an estate tax return for Bob’s estate and make the portability election with regard to Bob’s unused exemption.

What is an Estate Tax Closing Letter?

An estate tax closing letter is a document issued by the IRS after it determines that an estate tax return has been accepted as filed or that all required adjustments have been completed.  In other words, the closing letter provides written proof from the IRS that all federal estate tax liabilities have been satisfied. An estate tax closing letter is often necessary to sell or distribute property.

New Rules for Issuance of Estate Tax Closing Letters

Prior to June 1, 2015, the IRS automatically issued estate tax closing letters.  However, the IRS recently announced the following on its website in response to the increased number of federal estate tax return filings for the sole purpose of making the portability election: 

“For all estate tax returns filed on or after June 1, 2015, estate tax closing letters will be issued only upon request by the taxpayer.  Please wait at least four months after filing the return to make the closing letter request to allow time for processing.  For questions about estate tax closing letter requests, call (866) 699-4083.”

The portability election provides another strategy that estate planning attorneys can use to lessen the burden of death taxes on your family. Like any other tax or legal strategy, you should seek competent advice to select the strategies that will work in your situation. If you have any questions about federal estate tax returns, the portability election, or the new rules regarding the issuance of estate tax closing letters, please contact our office.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in  this newsletter  was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax  penalties that may  be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer’s  particular circumstances.

5 Most Expensive States for Retirees in 2015

While there are many factors to consider when choosing the place where you will retire, the ones that will impact your wallet may be the most important. Why?  Because having a low crime rate and beautiful weather will be irrelevant if high costs deplete your retirement nest egg faster than anticipated. 

Recently Investopedia.com compared cost-of-living and tax-rate data from Bankrate.com’s list of “Best and Worst States to Retire” and Kiplinger’s list of “10 Worst States for Retirement” to come up with their list of “The Most Expensive States to Retire In.”  We’ve added Genworth’s “2015 Cost of Care Survey” to the mix to come up with our five most expensive states for retirees when comparing cost of living, tax rate, and long-term care expenses (as listed in alphabetical order):

·         Connecticut ranks #3 in tax rate and cost of living and #2 in long-term care expenses.  Along with a state estate tax, Connecticut is also one of only two states that collect a state gift tax (New York is the other).

·         New Jersey ranks #2 in tax rate, #6 in cost of living, and #4 in long-term care expenses.  Along with a state estate tax, New Jersey is also one of six states that collect a state inheritance tax.

·         New York ranks #1 in tax rate, #4 in cost of living, and #5 in long-term care expenses.  Along with a state estate tax, New York is also one of two states that collect a state gift tax (Connecticut is the other).

·        Rhode Island ranks #8 in tax rate, #9 in cost of living, and #10 in long-term care expenses.  Rhode Island also collects a state estate tax.

·         Vermont ranks #9 in tax rate, #10 in cost of living, and barely fell out of the top 10 by coming in at #11 in long-term care expenses.  Vermont also collects a state estate tax.

Final Thoughts on Where to Retire

Each year the statistics on tax rates, cost of living, crime rates, health care expenses, and weather are sliced and diced to come up with various lists for those approaching retirement to consider.  But in the end the choice of where to retire is personal.  While the financial data may point you away from or to a particular location, staying close to your support system of kids, grandkids, other family members, and friends may be priceless.

No matter where you end up deciding to retire, you should obtain qualified estate planning counsel to make sure your plan will work when it’s needed. If you plan on relocating upon retirement, living part-time in another state, or traveling extensively, we encourage you to contact us, so that we can assist you with your estate planning needs.

Additional Resources:

http://www.thinkadvisor.com/2015/04/27/top-15-most-expensive-states-for-long-term-care-20

https://www.genworth.com/dam/Americas/US/PDFs/Consumer/corporate/131168_040115_gnw.pdf

http://www.investopedia.com/articles/personal-finance/060215/most-expensive-states-retire.asp

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in  this newsletter  was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax  penalties that may  be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer’s  particular circumstances.

Federal and State Death Tax Updates

Death taxes are back in the news at the federal level as well as in Delaware and Minnesota.

What Happened to the Death Tax Repeal Act of 2015?

Back in February and March of 2015, identical bills calling for repeal of the federal estate tax and generation-skipping transfer tax were introduced in the U.S. House and Senate.  In April 2015 the U.S. House passed the “Death Tax Repeal Act of 2015” by a margin of 240 to 179.  While the votes were largely along party lines (233 Republicans voted for the bill, while 176 Democrats voted against it), seven Democrats ended up supporting the bill. 

In spite of the Republicans’ majority in the U.S. Senate – there are currently 54 Republicans, 44 Democrats, and two Independents – the bill has stalled there.  Why?  Because Democrats have signaled that they will filibuster the bill, which means that at least 60 senators need to be in favor of repeal in order to overcome the filibuster.  Since the two independents – Sen. Angus King (ME) and Sen. Bernie Sanders (VT), who is actually running for U.S. President as a Democrat – caucus with the Democrats, Republicans will need six Democrats to change their minds and vote for repeal.  That’s a lot.  And even on the slim chance that this would happen, President Obama has repeatedly expressed his support of the estate tax and would undoubtedly veto the repeal bill if it ever came across his desk.

What’s Going On With Death Taxes in Delaware and Minnesota?

Delaware enacted an estate tax in 2009 with a $3,500,000 exemption.  Since then Delaware’s estate tax exemption has been indexed for inflation so that each year it matches the federal exemption.  Thus, in 2014 Delaware’s exemption was $5,340,000, and with a small population and such a high exemption, the state only brought in an insignificant $1,300,000 in estate tax revenues.  This has prompted the introduction of legislation to eliminate Delaware’s estate tax effective July 1.

Meanwhile, just last year Minnesota legislators tweaked their state’s estate tax laws by increasing the exemption from $1,000,000 to $1,200,000 and then increasing it in $200,000 increments on an annual basis so that it reaches $2,000,000 by 2018.  But apparently this was not enough because in May 2015 a bill was introduced that will increase Minnesota’s exemption to $5,000,000 by 2018, after which it will be indexed for inflation so that it matches the federal exemption.

Where Do We Go From Here?

Will any of these estate tax bills become law?  Only time will tell.  One thing is certain though - legislative changes can affect your estate plan and your estate tax bill. Please stay tuned as our firm continues to monitor both federal and state legislation that may affect your estate plan and your estate tax bill.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in  this newsletter  was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax  penalties that may  be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer’s  particular circumstances.

The Shocking Truth About Asset Protection Planning

Some view asset protection planning with a skeptical eye.  They believe there is a moral obligation to pay one’s debts.  They think that asset protection planning is immoral because it prevents a creditor from collecting on a judgment entered by a court.

The truth is the U.S. justice system is unpredictable.  Defendants are faced with ever-expanding theories of liability, being sued just because they appear to have “deep pockets,” and judgments entered against them based on desired outcomes instead of the law.

                                                  

What, then, can you do that will ethically and legally protect your hard-earned assets from creditors, predators, and lawsuits?

What Asset Protection Planning Is, and What it Is Not
The first step in protecting your assets is to understand that planning to preserve and secure your property in advance of a claim, or the threat of a claim, is a legitimate form of wealth planning.  The goals of asset protection planning are to:

·         Provide your creditor with an incentive for settling a claim;

·         Improve your bargaining position;

·         Offer you options when a claim is asserted; and

·         Ultimately, deter your creditor from filing that lawsuit.

On the other hand, asset protection planning is not about avoiding taxes, keeping secrets, hiding assets, or defrauding creditors.  In addition, it will not be effective to shield your property from an existing claim, and it must be done long before there is even the hint of a claim. 

When Done Right, Asset Protection Planning is Completely Legal and Ethical
Using all legal tools available to help clients protect their hard-earned assets from future claims is consistent with the rules of professional conduct that govern the actions of attorneys.  In fact, these rules require attorneys to pursue representation of their clients with diligence and advocacy.  What these rules do not allow, however, is assisting or counseling a client in fraudulent or criminal conduct.  Therefore, you must be wary of an attorney who offers to assist you in protecting your property after a lawsuit has already been threatened or filed.  This type of conduct is not ethical or legal.

The Final Truth About Asset Protection Planning

While you may drive carefully and steer clear of barroom brawls, unfortunately you cannot avoid all activities that create liability.  Putting together a plan to preserve and protect your assets in advance of a claim is a completely acceptable and, more importantly, legal form of wealth planning.

We are experienced at helping clients design and implement asset protection plans that are custom-tailored to each client’s family situation and financial status.  Please call us if you have any questions about this type of planning and to get started on protecting your assets from future creditors, predators, and lawsuits.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in  this newsletter  was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax  penalties that may  be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer’s  particular circumstances.

What Documents Do You Need to Find After a Loved One Dies?

After a loved one dies, you need to gather the important documents that are necessary to settle their final affairs.  While the documents required will vary depending on what your loved one owned and owed, below is a list of common documents you will need to find:

·         Account statements – These may include bank statements and investment account statements (including brokerage accounts, IRAs, 401(k)s, 403(b)s, annuities, pensions, and health savings accounts).  The closer to the date of death that the statement is dated, the better.

·         Life insurance policies – If you are not sure if your loved one owned any life insurance, check their bank account ledger for checks written to a life insurance company.  Because some people choose to pay life insurance premiums on an annual basis, rather than a monthly basis, you might need to look back some time in the check register. If your loved one was employed at the time of death or worked for a large corporation, a local or state government, or the federal government prior to retiring, check with their employer or former employer to determine if your loved one had any employer-provided or government-provided life insurance benefits.  If your loved one served in the U.S. military, check with the U.S. Department of Veterans Affairs to find out if your loved one had any military-based life insurance benefits.

·         Beneficiary designations – These may include beneficiary designations for life insurance, retirement accounts (IRAs, 401(k)s, 403(b)s, annuities), payable on death accounts, transfer on death accounts, and health savings accounts.

·         Deeds for real estate – If you are unable to locate the original deed, many states now allow you to view and print deeds online.  Note that you will not need the original deed to sell the property. 

·         Automobile and boat titles – If you are unable to locate the original title, a duplicate original can be ordered from the department of motor vehicles.  Alternatively, some states will allow the transfer of a vehicle title without the original for an additional fee.

·         Stock and bond certificates – This may include corporate certificates, local and state bonds, and U.S. savings bonds.  If you are unable to locate an original certificate, a lost certificate affidavit can be filed by the deceased person’s legal representative.

·         Business documents – If your loved one owned a small business, then you will need to locate all of their business-related documents, including bank and investment statements, corporate records, income tax returns, business licenses, deeds for real estate, loan documents, contracts, utility bills, and employee records

·         Bills – This will include utilities (electric, gas, water, sewer, garbage), cell phones, credit cards, personal loans, property taxes, insurance (real estate, automobile, boat), storage units, medical bills, and the funeral bill.  Check their checkbook for bills that were paid during the past year.

·         Estate planning documents – This may include a Last Will and Testament, any Codicil(s) to the will, a Revocable Living Trust, and any Amendment(s) to the trust.

·         Other legal documents – This may include a Prenuptial Agreement and any Amendment(s), a Postnuptial Agreement and any Amendment(s), leases (real estate, automobile), and loan documents (personal loans, mortgages, lines of credit).

·         Tax returns – This should include gift tax returns and the past three years of state and federal income tax returns.

·         Death certificate – It is a good idea to order at least ten (10) original death certificates so that you do not have to keep ordering more.

As you can see, a significant amount of paperwork is involved. For even a small estate, you should set up a filing system for the deceased loved one’s affairs. This can help ensure that nothing gets missed and that administration costs can be minimized.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in  this newsletter  was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax  penalties that may  be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer’s  particular circumstances.