Rowley Law

Congress Looking at Program to Ease Estate Taxes for Business Succession

“The Maryland lawmaker said the tax certainty the bill creates, would make it easier for family business owners to transfer their operations to subsequent generations.”

A story originally reported in Bloomberg reports that a House Republican is planning to reintroduce a bill that would allow taxpayers to make annual payments, rather than face the estate tax at death in the event that estate tax repeal isn’t part of a tax reform plan.

Representative Andy Harris (R-Md.) has again proposed the American Solution for Simplifying the Estate Tax (ASSET) Act. Introduced in previous Congresses, the act would enable taxpayers to pay a percentage of their modified adjusted gross income annually for a certain number of years to avoid estate taxes at death. Harris introduced versions of the ASSET Act in 2014 and 2015.

Bloomberg’s article, “Maryland Rep Has Backup Estate Plan, If Tax Reform Fizzles,” says that if enough Republicans want the tax reform to be revenue-neutral, they’ll need to find significant revenue increases to offset President Trump’s proposed tax cuts.

Trump proposed a repeal of the estate tax during his campaign. It is also included in his tax plan. In addition, it’s in the House GOP’s tax reform framework.

In the 2015 version of Harris’ bill, taxpayers could elect to make annual payments of 1% of their modified adjusted gross income for a minimum seven-year period, in lieu of existing estate and generation-skipping transfer taxes. However, the Joint Committee on Taxation said that the 2015 bill would cost the government money. Thus, the new legislation will include changes to make it revenue-neutral. Harris commented that he’s considering increasing either the annual payment amount or the seven-year payment window.

The American Farm Bureau Federation has yet to express a position on the ASSET Act, but it supports the full repeal of the estate tax. The Federation said it supports increasing the exemption and indexing it for inflation, until a repeal is passed. The 2015 ASSET Act had no increase in the exemption amount. In addition, the group wants to see “basis step-up” in all scenarios. This allows a person who holds onto his or her assets until death, to get a step-up in the basis of those assets to fair market value. This reduces the amount of capital gains tax that heirs are required to pay on the inherited property, if it’s sold.

Reference: Bloomberg (May 8, 2017) “Maryland Rep Has Backup Estate Plan If Tax Reform Fizzles”

Are You Really Prepared for Retirement?

“When it comes to preparing for retirement, the devil is in the details. Just one slip-up can derail your plans.”

Kiplinger’s recent article, “5 Common Roadblocks That Can Shut Down Retirement Success,” reports that numerous studies say most people aren’t properly preparing for retirement. According to the Economic Policy Institute, “nearly half of families have no retirement account savings at all.” Many who do save, don’t have what they’ll need to maintain a comfortable lifestyle for what could be a decades-long retirement.

Here are five of the most common obstacles to a successful retirement:

Not defining how you want to live during your retirement years. You may believe that your expenses will decrease when you retire. However, many folks find out this isn’t true with travel, hobbies, and other pursuits that fill their free time. Calculate the costs of the things you want to do and factor in inflation. Before retiring, you should also figure out how you’ll want to spend your retirement years. By setting some specific personal goals, you can be more exact with financial planning.

Not committing to financial success. Create a budget and track your monthly expenses.  This is a critical part of planning for what your retirement income needs will be. You have to take this step for yourself. It’s not something that anyone else can do for you.

Failing to plan for the unexpected. Everyone needs a Plan B—a contingency plan. Life happens, like disability, divorce, and unexpected death, any of which could throw a wrench into your savings and retirement plans. Consider insurance (life, disability, and long-term care) as a good base of your financial plan.

Ignoring employer-sponsored plans. Some believe that they can’t afford to participate in their employer’s 401(k) plan or fail to review other benefits the company offers, like disability or life insurance. These employer-sponsored programs can be a very cost-effective way to help protect yourself and your family against the unexpected.

Having no comprehensive financial plan. Retirement means no paycheck, and everyone has concerns about saving enough money to be comfortable for the rest of their life.  This even includes leaving something behind for their loved ones and favorite causes. A comprehensive plan can help you to make certain that you have addressed all of your issues. This plan should include asset allocation, income sources and budgets.

Reference: Kiplinger (March 2017) “5 Common Roadblocks That Can Shut Down Retirement Success”

Don’t Delay Your Estate Planning

“If you’ve been putting it off because it's sad or uncomfortable, don't. Estate planning can be a loving tribute and source of comfort. Here’s what to consider.”

No one likes death or thinking about their own mortality. OK, maybe the undertaker, but for the rest of us, it’s creepy. Estate planning can make people uneasy because it deals with death. But it can give loved ones peace of mind.

Some of the elements of final planning are described below.

In the article, “A Will Can Be a Beautiful Thing,” Kiplinger’s advises that the initial step in estate planning is creating a will. A recent survey found that 64% percent of American adults don't have a will. They either decided they didn't need one or they have just kept putting it off. A will instructs who you want to inherit your assets. It’s also used to let parents name a guardian to care for their minor children. Without a will, all of your estate may wind up in probate court. One option of an estate plan is a living trust. A trust transfers assets from the trust to beneficiaries without having to go through the probate process.

Here are a few other reminders about estate plans:

Spell Out Your Decisions on End-of-Life Care. Tell loved ones your wishes in the event that you are unable to make medical decisions for yourself. This includes life support, sustenance and pain treatment,  as well as organ donation. A living will also contains a health care declaration with a power of attorney designating the agent you name to ensure that your medical instructions are executed.

Check Your Beneficiaries. Fill out each of the beneficiary designations for your bank accounts, brokerage accounts and life insurance policies. You should specify both your primary and contingent beneficiaries.

Document Your Funeral Wishes.  Specify whether you want to be buried or cremated. You can also list favorite music or scriptures for your end-of-life celebration or funeral. You should also note if you’re a veteran and whether you have funds put aside for funeral expenses.

Other Thoughts. Keep real estate and car deeds, wills, trusts, insurance policies, retirement benefits, 401(k), and IRA documents in a safe location. But make sure to tell the executor of your estate where these items are kept.

If you are married, don’t draft a joint will. This is because it is unlikely that you’ll pass away at the same time. Separate wills for each spouse can address other personal circumstances, like previous marriages, other children and charitable causes.

Don’t think of estate planning as creepy. Think of how it protects your family.

Reference: Kiplinger’s (April 2017) “A Will Can Be a Beautiful Thing”

Avoid Nannygate and Make Sure Your In-Home Caregivers Taxes are Correct

“The nanny tax isn't just for Mary Poppins. It covers any household employee, including housekeepers, gardeners and caregivers.”

With this latest presidential transition, there’s another Nannygate controversy. You may remember the 1993 case of Zoë Baird—the person nominated to be the first female U.S. attorney general—only to be stopped short, when it was made public that she didn’t pay the required “nanny taxes” for her household employee.

Kiplinger’s recent article, “Paying Taxes for a Hired Caregiver,” says that now we have Congressman Mick Mulvaney, who was President Donald Trump’s choice to run the Office of Management and Budget (OMB). Congressman Mulvaney admitted that he failed to pay five years’ worth of taxes for the woman he and his wife hired in 2000 to help take care of their triplets.

 There was also Andrew Puzder. Once he was nominated as Labor Secretary, he disclosed that he hadn’t paid the required taxes due for a household employee who was illegally in the U.S. Both men stated in their confirmation hearings that they’d paid the back taxes they owed the government.

Remember that the nanny tax isn’t just for Mary Poppins, a whimsical movie role played by Julie Andrews who had charge of a banker’s kids. The so-called nanny tax covers any household employee, like a housekeeper, landscaper, or—of particular interest to us here—the caregiver for your spouse or elderly parent. If the caregiver is provided through an agency or is self-employed, you don’t have to be concerned. However, if you hired the individual yourself and control the type of work that is done, you’re most likely considered to be an employer in the eyes of the IRS.

If you hired the caregiver and control his or her work and if you paid more than $2,000 last year, the nanny tax will apply. When you file your tax return, you are required to include a Schedule H and pay the 15.3% Social Security and Medicare tax on the wages you paid. The tax is supposed to be split evenly between you and your employee, but whether you withheld the tax from your employee’s wages during the year or not, you’re responsible to pay the full amount when you file your return.

In addition, if you paid more than $1,000 to employees in any calendar quarter of 2016 or 2015, you also owe the federal unemployment tax. You may also owe a state unemployment tax.

If you haven’t done so, you should give your employee a W-2 showing wages paid and any withholding (due at the end of January) and send a copy to the Social Security Administration.

Reference: Kiplinger’s (March 2017) “Paying Taxes for a Hired Caregiver”

Does My Kid Need a Trust?

“If your children are under age the age of eighteen, you should have trusts for them in your wills, in the event that you and your spouse should die before all of your children reach age 18.”

Trust Advisor explains in its recent article “Should You Create Trusts for Your Children?” that if minors receive assets before age 18, a guardian of the property must be appointed to oversee those assets for the child.

Guardians typically need to be bonded and must file a formal accounting with the court each year with a petition for approval. All of the costs are paid from the child’s funds.

Another option is to instruct that a trust be created for each minor child in your will at the death of both parents. In the will, you can state that the trustee doesn’t need to post a bond or to file an accounting with the court every year.

 Setting up a trust for a minor child is usually easier and less expensive than leaving the assets outright to a minor child and having a guardian appointed. Many estate planning attorneys recommend that even if you think your children will be over 18 when both spouses die, consider keeping the assets in a trust for the children to protect them from themselves.  It is recommended to wait until they reach a specific age, when they would be best ready to handle the assets. For some, this might be age 30 or 35, or older. Other parents set up the trust to continue for their entire lives to protect the assets in the trust from future claims of the child’s creditors, or in the event that he or she goes through a divorce. Assets that continue to be held in the trust, can’t be touched by a child’s current or future creditors.

Trusts can have considerable flexibility. For instance, the trustee can be given the authority to make liberal distributions to the child for any reason the trust creator wants or for no reason at all.  At a certain specific age, the child can also become a co-trustee of his or her own trust and be given the power to remove and replace the co-trustee making the distribution decisions. That can give the child significant control over his or her own trust.

There are many reasons to create trusts and every family situation is different. It’s important to work with a qualified estate planning attorney on these issues in order to create a plan that works best for your family.

Reference: Trust Advisor (March 28, 2017) “Should You Create Trusts for Your Children?”