Header graphic for print

Tax, Trusts & Estates Law Monitor

Updates and Commentary on Business and Individual Tax and Estate Planning

Paradox of Mental Incapacity in State Estate Tax: How Moving Your Elderly Parent from Florida May Generate an Unexpected Estate Tax

Posted in Estate Planning, Estate Tax

It is difficult enough for families to come to grips with having to care for an elderly parent that may no longer be able to live on their own.  After coming to terms with this unfortunate reality, the next steps often involve moving that parent into their home, an assisted living facility or a nursing home nearby.  With all of this turmoil, it should be no surprise that most people would not consider whether such a move may create a significant estate tax liability should that parent die, even if it is shortly after such a move.  Your parent could live their entire post-retirement life in a state such as Florida where there is no estate tax and when they are no longer able to live on their own, you bring them to your home state.  If you pack your parent up, sell his or her home and get them established in new living quarters in New Jersey, should they die even a few months later, their entire estate could be subject to an expensive New Jersey estate tax.  How could this be?  Because New Jersey will take the position that your parent had either voluntarily changed his or her domicile, or if incompetent to do so, he or she has taken the domicile of their guardian.  What does this mean?

A change of domicile occurs when there is both a physical presence in the new locality (with an intention to permanently relocate) and an intention to abandon the old domicile.  In other words, once you permanently move to a new home and abandon your old home, you avail yourself to your new home’s tax laws. What about the adult who lacks (or who may soon lack) the capacity to change his / her domicile voluntarily and by his or her own act?   In New Jersey, domicile may be acquired in one of three ways: (1) through birth or place of origin; (2) through choice by a person capable of choosing a domicile; and (3) through operation of law in the case of a person who lacks capacity to acquire a new domicile by choice.  Importantly, even after an adjudication of mental incompetence, a person may nevertheless possess sufficient mental capacity to elect a new domicile, and it is generally recognized that his or her actual capacity to do so is a question of fact.  However, once incompetency has been shown, there is a presumption that the incompetent lacks the mental capacity to make such a choice and the burden of showing that he or she in fact possessed the necessary mentality shifts to the party claiming that his domicile had been changed.  How does the NJ Division of Taxation view it?

The 1969 Appellate Division case Estate of Gillmore is the authority for the above and very much remains good law today.  In Gillmore, the executors of the decedent’s estate appealed from an assessment of the New Jersey Inheritance Tax Bureau against the estate. Two years before Gillmore’s death, having become hopelessly senile, the decedent was moved from her New York apartment by her brother, who was named her guardian, into his New Jersey home for several weeks, and thereafter placed in a New Jersey nursing home. The executors claimed that the decedent had never been a New Jersey domiciliary, a prerequisite to assess tax.  The Court affirmed a judgment for the Tax Bureau on the grounds that the decedent, though incapable of acquiring a domicile other than New York by choice, acquired one in New Jersey by operation of law through the guardian.  This decision is reinforced by New Jersey law that provides that a guardian of the person has the authority to “establish the incapacitated person’s place of abode within or without this state.” N.J.S.A. 3B:12-57(a).  The New Jersey Division of Taxation continues to take the position that if your parent dies in New Jersey after having moved here, even if only for a short period of time, in most instances, they are expecting a check based on the value of their entire estate.

New York Courts have taken the opposite position in holding that an adjudication of incompetency and the appointment of a guardian for the incompetent is as a matter of law conclusive as to the incompetent’s legal incapacity to change domicile by his or her own act until he or she has been judicially recognized as competent or has been restored to sanity by a court of competent jurisdiction. This rule is apparently based on the following considerations: (1) that a person adjudged incompetent by a court is presumed to be incapable of choosing a new domicile; and (2) that only the court, which adjudged him or her incompetent retains control and only that court can determine a whether the incompetent’s domicile changed. This holding was originally set forth in the case In re Meyer’s Estate, 59 Misc. 2d 507, 299 N.Y.S.2d 731, 734 (Sur. Ct. 1969), which has also continues to be cited in current cases and remains good law today.

Believe it or not, New York is now a much more friendly estate tax home than New Jersey.  New York has no inheritance tax and its estate tax exemption is scheduled to be in line with the federal exemption in 2019.  New York’s currently exempts $4,187,500 where New Jersey exempts only $675,000.  Although there is pending legislation that may raise New Jersey’s estate tax exemption, it is unclear if that law will pass.

There is no suggestion by the authors to turn away an elderly parent in need of new living quarters in favor of potential New Jersey estate tax savings.  However, there are many steps that you can take as their advocate to avoid a New Jersey estate tax trap for your elderly parent who may be living in a no estate tax jurisdiction such as Florida.  If your parent lacks (or who may soon lack) capacity, but has lucid moments and is not completely incapacitated, you may be able to take effective steps to preserve their old domicile and avoid an unnecessary New Jersey estate tax upon their death.  These steps may include: (i) not establishing a new domicile in New Jersey; or (ii) not abandoning your parents’ former domicile in Florida.  There are several specific steps that you and your elderly parent can do to bolster the positon that they are not subject to New Jersey estate tax notwithstanding that they may have been living in New Jersey before he or she passed.  Managing your elderly parents’ affairs is never easy.  Adult children who care for their parents, however, must be mindful of this potential tax trap. Once you get your parent set up in their new living quarters, it is imperative that you consult with an experienced state and local tax professional for tax planning advice.

Moved to Florida, but Still Can’t Let Go of New York – Will Your Estate Be Subject to New York Estate Tax?

Posted in Estate Tax

Many New Yorkers who want to move to Florida still desire to retain a home, an apartment, or some other type of property in the place where they grew up.  What many of the newly minted Florida residents may not consider are the estate tax consequences of continuing to own property located in New York.  In light of the changes to New York’s estate tax laws in the past two years, we set forth some important rules that the old New Yorker / new Floridian should keep in mind.

A primer on New York estate tax law is helpful before considering the issues associated with being a Florida resident who owns property located in New York.  New York imposes an estate tax at rates ranging from 4% to 16% on its residents (and also nonresidents, as will be explained below).  However, New York law also provides that anyone owning less than $4,187,500 in assets is exempt from New York estate tax.  This exemption increases to $5,250,000 on April 1, 2017 and finally increases again on January 1, 2019 to equal the federal exemption (which is currently $5,450,000 as adjusted for inflation).

Therefore, if an individual’s total estate is less than the New York exemption amount, that individual need not be concerned with New York estate tax.  In addition, if the total value of a Florida resident’s New York assets is under the New York exemption, that individual also need not be concerned with New York estate tax.  But, what if a Florida resident’s New York assets are valued over the New York exemption?

New York’s estate tax applies to nonresidents owning real or tangible personal property located in New York.  It does not apply to intangible property owned by Florida residents.  Tangible personal property is defined in the negative, meaning New York law sets forth assets that are considered intangible, and therefore not subject to New York estate tax, including bank deposits, shares of stock, bonds, mortgages, debts and receivables.  Tangible personal property includes assets that (i) are movable,  (ii) have physical characteristics, and (iii) are capable of being possessed – boats, cars, artwork, jewelry, antiques and other collectibles.

New York’s estate tax also applies to any gifts made within three years of an individual’s death.  For the individual who has recently moved to Florida, this means that the value of any gifts by that individual while he or she was a New York resident of real or tangible property located in New York or intangible personal property relating to an active business, trade or profession in New York will be considered for determining whether the Florida resident is subject to New York estate tax.  This three year add-back only applies to gifts made after April 1, 2014.  The rule will not apply to estates of individuals who die after January 1, 2019.

To illustrate how New York estate tax law operates, take for example a Florida resident who owns a vacation home in the Hamptons valued at $6,000,000. That individual would be subject to New York estate tax because the value of the home ($6,000,000) is greater than the current New York exemption ($4,187,500).  Also note that, unlike federal estate tax law, once an individual’s estate exceeds the New York exemption, the value of the individual’s entire estate is subject to New York estate tax, not just the amount over and above the New York exemption. Therefore, in our example, the entire $6,000,000 would be subject to New York estate tax (not just $1,812,500).

What if that same Florida resident instead owns a cooperative apartment in New York City and does not own the Hamptons home? That Florida resident would not be subject to New York estate tax because that individual owns shares in the cooperative apartment, which is considered an intangible asset.

Now assume that the Hamptons home is valued at $1 million and the rest of the Florida resident’s assets, which are all located in Florida, are valued at $5 million.  Then the Florida resident would not be subject to New York estate tax because the $1 million Hamptons home is less than the current New York exemption of $4,187,500.  It is irrelevant that his or her total estate is greater than the New York exemption.

So how does the Florida resident avoid New York estate taxation on his or her $6,000,000 Hamptons vacation home?  One option is forming a special residence trust and then gifting the property to that trust.  This removes the property from the individual’s taxable estate.  There are advantages and disadvantages to this option, which are not discussed in this blog post.

Another option is to place the home in a Limited Liability Company.  By placing the home in a LLC, the interest in the home converts to an intangible asset, which is not subject to New York estate tax (so long as the LLC is not carrying on an active NY business).  The potential savings from transferring the $6 million Hamptons home to the LLC? A few hundred thousand dollars ($510,800 to be exact).  One caveat to transferring the home to a LLC is that the LLC should be a multi-member LLC, as New York takes the position that if a LLC is disregarded for federal tax purposes (i.e., it only has one member), then it will be disregarded for New York estate tax purposes in determining whether the property is intangible or not.  This is based on a decision made by the NYS Department of Taxation and Finance in May 2015.

If there is valuable artwork or other collectibles in that home, then the Florida resident may want to consider moving that property to Florida, gifting that property, or transferring those assets to the LLC.  He or she could also lend that art to a museum or public gallery in New York for exhibition.  All of these options would remove the property from the New York taxable estate.

Also important in determining whether a Florida resident will be subject to New York estate tax are the deductions allowable for New York estate tax purposes.  In determining what expenses are deductible in order to determine the value of a Florida resident’s New York estate, any deductions directly related to (i) real and tangible property located outside New York and (ii) intangible property are disallowed.  For example, property taxes on a New York home would be deductible, but property taxes on a Florida home would not be deductible.  Funeral expenses, Executor’s commissions, and other federal deductions that are not directly related to real or tangible property located outside New York or to intangible property would be partially deductible based on a percentage equal to the value of property outside of New York compared to the total value of the estate.

After moving to Florida, make sure you know the value and quality of the assets you are leaving behind in New York. If it is determined that those assets are real or tangible assets and their value exceeds the New York exemption amount, then plan accordingly to move those assets outside of New York, gift those assets, or convert the assets to intangible assets.  The savings could amount to hundreds of thousands of dollars for your family.

Estate Planning and Administration – Be Prepared for the Year That Follows the Death of a Loved One

Posted in Estate Planning

The loss of a loved one is a traumatic event and it can be among the most challenging of times to make important financial decisions.  Proactive planning with an attorney and financial planner can significantly lessen the burden.  Here are a few things to consider.

Be Prepared for the Immediate.  Even if you have prepared, following a death, there are several steps that generally require immediate attention.  These include (1) funeral arrangements, (2) guardianship of minors (3) liquidity needs for the surviving spouse or other family members, (4) ensuring that cash and tangible personal property like jewelry and valuables are safe and secure, (5) addressing the needs of an operating business, (6) locating and filing the original Will, and (7) obtaining death certificates.

Estate Administration is a Process.  The estate administration process generally takes one to three years to complete and is supervised by attorneys.  There are numerous steps in the estate administration process, including the following:  (1) get the executor appointed by the Surrogate’s Court, (2) open an estate checking account, (3) gather assets, consolidate and retitle them in the name of the estate, (4) address claims and expenses, (5) obtain date of death values for all assets, including appraisals for hard to value assets, (6) prepare estate tax returns (federal and state), (7) prepare income tax returns (including decedent’s final life income tax return and the estate’s income tax return, (8) obtain a closing letter and appropriate tax waivers from the IRS and state tax authorities, (9) distribution of the estate and funding of trusts, including allocation of assets among various beneficiaries, and (10) prepare accounting (formal or informal) and obtain receipt and releases from the estate beneficiaries.

Your financial planner plays an important role in many of these steps, such as providing account statements, retitling accounts, updating basis information, communicating with the entire team of advisors, and of course providing investment advice for the estate assets.

Tax planning.  There are various tax issues to consider during the estate administration process, including:  (1) selecting a taxable year for the estate, (2) considering alternate valuation date for asset values, (3) making a QTIP election for a surviving spouse’s trust (or a QDOT election for a non-citizen surviving spouse), (4) making an election to treat a revocable trust as part of the estate, (5) making a portability election for the decedent’s unused federal estate tax exemption, (6) making generation-skipping tax allocations on the federal estate tax return, (7) determining which deductions to take on the estate tax return or on the estate’s income tax return, and (8) deciding whether to make annual distributions from the estate or related trusts for income tax planning purposes (as the trust’s income tax rates are often higher than the income tax rates of the trust beneficiaries).

When Conflict Arises.  If there are conflicts in an estate, or any aspect of the estate will be contested, the financial advisor is often one of the first to learn of the situation, and importantly can consult with an attorney to objectively evaluate and resolve the issues.

Uncertainty Remains Surrounding the Nonprofit Hospital Tax Exemption

Posted in Tax Appeals, Tax Exemptions

In a recent ground-breaking decision, the New Jersey Tax Court in AHS Hospital Corp., d/b/a Morristown Memorial Hospital v. Town of Morristown shattered the previous near incontestability of the tax exemption that has shielded nonprofit hospitals from local property tax obligations for over 100 years. In response, the New Jersey Legislature, in conjunction with the New Jersey Hospital Association, quickly joined forces in an attempt to formulate a “fix” and alleviate the resulting great uncertainty that has left municipalities and nonprofit hospitals clamoring for answers.

The resulting bi-partisan supported fix, embodied by Bill No. 3299 (approved early this year) was sent to the Governor’s desk for signing with just days left in the recently completed legislative session. Unfortunately, due to the fast track of this legislation, the late submission of the bill for consideration to the Governor’s office, claims of constitutional infirmity swirling, the Governor, not having been afforded adequate time for fair comment, instead allowed the time to lapse for taking action on the bill. As a result, the bill was killed by virtue of the Governor’s pocket veto.

The import of this failed bill is that while it worked to attempt to reaffirm the longstanding exemption applicable to nonprofit hospital property, it also, in a controversial twist, declared that even those portions of the hospital that were being utilized for, or supporting, for-profit medical activities, should be exempted from taxation. By attempting to continue the exemption, even for components deemed unquestionably “for-profit” by the tax court in the AHS Hospital case, this bill worked to effectively strip away the host municipality’s ability to effectively contest the applicability of the exemption. In return, however, the Legislature attempted to create a special “Community Service Contribution” obligation that was to be borne by the hospital in lieu of paying taxes. This contemplated Community Service Contribution was championed by the sponsors as being readily calculable and serving to remove the need for costly litigation to determine what, if any, portions of the hospital should remain exempt. The funds received by the municipality through this “contribution” obligation in turn would have been earmarked to offset local expenses and financial hardships created by the presence of these typically large facilities that introduce thousands of patients, employees, professionals and associated vehicular activity into the community. The failed bill therefore, although controversial, appeared to strike a reasonable balance between stakeholders, affording both hospitals and municipalities benefits that were left to chance in the unstable environment created in the aftermath of the recent tax court decision.

The killed bill would have required non-profit acute care hospitals to pay a Community Service Contribution equal to $2.50 a day for each licensed hospital bed at the exempt acute care facility.  In addition, satellite emergency care facilities of acute care hospitals would have been required to contribute $250 a day for each such facility.  These mandatory contributions were to have been made in equal quarterly installments and, as in the case of tax payments, payable on February 1, May 1, August 1 and November 1 of each year. These new obligations were to also have been treated the same as other local tax obligations from an enforcement perspective (i.e., the same penalties for late payments and exposure to municipal lien foreclosure actions would apply in the event defaults).

The proposed legislation also dictated that 5% of these contribution payments were to be paid to the County. Such fund sharing would not otherwise have been required in the traditional payments made in lieu of taxes (so-called “PILOT” payment) setting. As a result, the failed bill also afforded county officials some measure of comfort and pre-empted any claims that counties were being unfairly ignored.

This failed legislation further afforded the subject hospitals and satellite emergency care facilities an opportunity to seek relief from these Community Service Contributions obligations where the facility was able to demonstrate that it: 1) had a negative operating margin in the prior tax year; 2) was not in full compliance with the financial terms of any bond covenants, 3) was in financial distress, or 4) was at risk of being in financial distress.

The present impasse however occasioned by the pocket veto continues an environment of uncertainty that will undoubtedly foster a spike in tax court actions to determine the scope and applicability of the hospital tax exemption. Consequently, the question that remains is not if, but when, some refashioning of this proposed legislation will find its way back to the desk of the Governor for adoption.

Receiving a Deduction for Your Charitable Contribution on Giving Tuesday

Posted in Charity, Income Tax

Today is Giving Tuesday, so today’s blog post focuses on ensuring that you are doing everything necessary to receive your charitable deduction, especially in light of a recent court decision. In a case that was decided just two weeks ago, the Tax Court found that a taxpayer could not take a deduction for contributions of more than $250 made to a charity either because the taxpayer did not receive a written acknowledgement from the charity or because the taxpayer did not have a contemporaneous acknowledgement.

We frequently advise charities on preparing written acknowledgements to be sent to donors. There are many charities that ensure that their donors are receiving these acknowledgements as soon as the donations are received. However, there are many smaller charities that may not be aware of this requirement or may fail to send the acknowledgement unless a donor requests it. Therefore, the donor must be informed and be sure to ask for an acknowledgement at the time of his or her donation.

When making a donation of more than $250, the donor should request a written acknowledgement from the organization that is on the organization’s letterhead and contains (1) the name of the organization, (2) the amount of the cash contribution, (3) a description of any non-cash contribution, (4) a statement that no goods or services were provided by the organization (if that was the case), and (5) a description and good-faith estimate of any services or goods received in return for a contribution.

The acknowledgment will be considered “contemporaneous” if received by the earlier of the date on which the donor actually files his or her federal income tax return for the year of the contribution or the due date of the return.

IRS Proposed Regs Redefine the Terms “Husband” and “Wife”

Posted in Articles, Estate Planning, Estate Tax, Gift Tax, Income Tax, International Tax, Legislation

The Supreme Court has recently struck down state bans on same-sex marriage as unconstitutional in Obergefell v. Hodges, 576 US ___ (2015), after previously striking down the federal exclusion of same-sex couples from marriage-related laws in US v. Windsor, 570 US ___ (2013).  The Internal Revenue Service (IRS) has now followed suit to recognize same-sex marriage for all federal tax purposes, including income, estate, gift, generation-skipping, and employment tax.

On October 23, proposed regulations were published in the Federal Register, which redefine the terms “husband” and “wife” under Section 7701(17).  Both terms will now mean an individual lawfully married to another individual, and the term “husband and wife” will mean two individuals lawfully married to each other. These definitions would apply regardless of sex.  Prop Reg § 301.7701-18(a).  The IRS is accepting comments for a limited time.

However, the proposed regulations redefining marriage will not apply to domestic partnerships, civil unions or other relationships. Prop Reg § 301.7701-18(c).  The couples’ choice to remain unmarried is respected by the IRS as deliberate, for example, for purposes of preserving eligibility for government benefits or avoiding the tax marriage penalty.  Preamble to Prop Reg 10/21/2015.  In addition, a marriage conducted in a foreign jurisdiction will be recognized for federal tax purposes only if the marriage would be recognized in at least one state, possession, or territory of the United States.  Preamble to Prop Reg 10/21/2015.

Adults with Special Needs May Soon Be Able to Streamline the Process to Establish First Party Special Needs Trusts on Their Own: A Review of the Special Needs Trust Fairness Act

Posted in Estate Planning, Guardians/Guardianship, Legislation, Medicaid, Special Needs Assistance, Special Needs Trusts

In 1993, Congress enacted Section 1917(d)(4)(A) of the Social Security Act, authorizing the establishment of special needs trusts (also called first-party trusts and self-settled trusts). First-party special needs trusts enable disabled individuals to set aside their funds to pay for supplemental care while enabling those individuals to remain eligible for government benefits. See 42 U.S.C. § 1396p(d)(4)(A). Following suit, the New Jersey Supreme Court has long recognized special needs trusts as effective asset protection tools which can be used “to plan for the future of a disabled minor or adult . . .” See Saccone v. Board of Trustees of Police and Firemen’s Retirement System, 219 N.J. 369, 383 (2014). First-party special needs trusts are used when individuals with disabilities have assets in their own name, (e.g., due to a lawsuit settlement, direct inheritance, savings or gift), yet want to be eligible to receive government benefits such as Supplemental Security Income (SSI) and Medicaid.

Unfortunately, under the current law, individuals with special needs are not authorized to establish their own special needs trusts even if they have the requisite mental capacity and despite the fact that the trust will be funded by assets belonging to them. Rather, a First-party special needs trust can only “be established by a parent, grandparent, legal guardian of the individual, or a court.” See 42 U.S.C. § 1396p(d)(4)(A). Accordingly, if an individual with special needs does not have a parent, grandparent or legal guardian, that individual must petition the Court to establish the first-party special needs trust, even if that individual is competent. This process can be costly and time consuming. A parent, grandparent, or legal guardian, however, can establish a first-party special needs trust for the disabled individual in a relatively short amount of time and is not beholden to the Court’s schedule. While likely a drafting oversight, requiring disabled individuals to have a parent, grandparent, legal guardian or a court to establish their first-party special needs trusts implies that all individuals with disabilities lack the requisite mental capacity to enter into a contract and handle their own affairs. This presumption, however, is unwarranted and offensive.

The Special Needs Trust Fairness Act of 2015 (H.R. 670) introduced in February 2015 by Congressmen Glenn Thompson (R-Pa) and Frank Pallone, Jr. (D-NJ), corrects this problem by adding the individual with special needs to the list of people who can create a first party trust on his or her behalf, giving those individuals the same right to create a trust as a parent, grandparent, guardian, or court. The Special Needs Trust Fairness Act of 2015 proposes to add the words “the individual” to Section 1917(d)(4)(A) of the Social Security Act, permitting disabled individuals to establish their own special needs trusts without a parent, grandparent, legal guardian, or a court. If enacted, persons with disabilities who have no close family would no longer be forced to petition a court and undergo unnecessary legal fees and delays.

On September 9, 2015, the United States Senate passed a companion version of the Special Needs Trust Fairness Act of 2015 by unanimous consent. Hopefully, there will also be swift passage in the House of Representatives.

New Jersey Court Holds Financial Institutions are Not Required to Report Suspected Elder Fraud

Posted in Estate Planning

In a case of first impression, the Superior Court of New Jersey held that financial institutions do not have an affirmative duty to report suspected fraud upon senior citizens or vulnerable individuals. See Lucca v. Wells Fargo Bank, N.A., 441 N.J. Super. 301, 315 (Law Div. 2015). In Lucca, an 82-year old woman received a phone call from a man (who identified himself as a lawyer) inviting her to “participate in an enterprise where she could win some money.” Over the course of six months, he instructed her to make twenty-seven wire transfers totaling $330,000 to individuals in Alabama and Costa Rica. Bank employees at Wells Fargo reported these transfers to their internal elder fraud unit as a potential scam, but never received a response from that unit and did not pursue the matter any further.

N.J.S.A. 17:16T-1 to 4 is a statute that authorizes financial institutions to release customer financial records to law enforcement and adult protective agencies. Relying upon the statute, the woman sued Wells Fargo and asserted that the statute requires financial institutions to report a suspected scam to either adult protective services or the police. N.J.S.A. 17:16T-3 provides that “a financial institution may release” a customer’s financial records to a law enforcement or county adult protective services agency, if the “senior customer” or “vulnerable customer,” as those terms are defined by the statute, has an interest in the account and “the financial institution suspects that illegal activity is, or will be, taking place which involves the account including, but not limited to, defrauding any vulnerable or senior customer . . .” Additionally, N.J.S.A. 17:16T-4(b) provides that a financial institution “which decides in good faith not to disclose information which it is permitted to disclose . . . shall not be liable under any law or regulation or common law of this State for that decision.”

In analyzing whether Wells Fargo had an affirmative duty to report the suspected scam to either the police or adult protective services, the Court looked to both the plain language and the legislative history of the statute and concluded that disclosure is not required. The Court instead found that the statute immunizes the institution from liability whether or not it releases the customer’s information to the authorities. Id. at 311. The use of the word “may” in both the legislative committee statement and the statute itself concerning the decision to release information confirms that interpretation. Id. at 311-312. Accordingly, the Court concluded that plaintiff had no cause of action against Wells Fargo. Id. at 315-316.

The Court’s decision in Lucca is instructive for anyone with family members who may be vulnerable to predatory financial scams, undue influence or deception. It highlights the importance of ensuring that trusted individuals are appointed to protect the assets of such family members through the use of durable powers of attorney or by instituting guardianship proceedings when necessary.

2015/2016 Estate and Gift Tax Update

Posted in Estate Tax, Gift Tax

Experts have started to calculate the inflation adjustments to key estate and gift exemption amounts for 2016. Note that these are not the official figures to be released by the IRS, but should be used as a guide. The IRS will officially release the numbers later this year.

For an estate of any decedent dying during calendar year 2016, the applicable exclusion is increased from $5.43 million to $5.45 million. This change increases not only the applicable exclusion amount available at death, but also a taxpayer’s lifetime gift applicable exclusion amount and generation skipping transfer exclusion amount. This means a husband and wife with proper planning could transfer $10.90 million estate, gift and GST tax free to their children and grandchildren in 2016.

The estate, gift and GST tax rate remains the same at 40% and the gift tax annual exclusion remains at $14,000.

While the New Jersey state exclusion amount remains unchanged at $675,000, the New York exclusion amount was changed as of April 1, 2014. Beginning April 1, 2014, the exclusion is as follows:

• $2.0625 million for decedents dying between April 1, 2014 through March 31, 2015;
• $3.125 million for decedents dying between April 1, 2015 through March 31, 2016;
• $4.1875 million for decedents dying between April 1, 2016 through March 31, 2017;
• $5.25 million for decedents dying between April 1, 2017 through December 31, 2018. Beginning in 2019, the exclusion would be indexed for inflation, and equal to the Federal exclusion.

The gift tax annual exclusion to a non-citizen spouse has been increased from $147,000 to $148,000. While gifts between spouses are unlimited if the donee spouse is a United States citizen, there are restrictions when the donee spouse is not a United States citizen.

Family Limited Partnerships: Are Discounts Disappearing?

Posted in Estate Planning, Estate Tax, Gift Tax, Legislation

“Family limited partnerships” – that is, family investment entities usually structured as LLCs or limited partnerships – have been a popular estate planning technique for years. Generally speaking, a client can transfer non-voting, non-marketable interests in these types of entities to children or a trust, and claim a valuation discount due to the restrictions that apply to the interest transferred. It appears, however, that the IRS will soon release proposed regulations under Code §2704 that are expected to limit the use of valuation discounts in these situations.

Code §2704 governs certain “applicable restrictions” that may apply to ownership interests in family entities. The law provides that certain restrictions are disregarded for valuation purposes. The law also permits the IRS to issue regulations providing for other restrictions (as determined by the IRS) to be disregarded in determining the value of a transfer to a family member, if a restriction has the effect of reducing the value of the transferred interest but does not ultimately reduce the value of such interest to the transferee.

After including new Code §2704 regulations on its list of priority guidance for the past 11 years, it appears (based on comments made by an IRS spokesperson to the ABA Tax Section) that the IRS will soon issue these regulations. While the scope and specifics of the regulations are unknown, it is expected that the proposed regulations will restrict the use of discounting by defining new restrictions that are to be disregarded when valuing a transfer of an interest in a family entity. The effective date of the proposed regulations and possible “grandfathering” opportunities are also currently unknown.

Accordingly, if you have been considering this type of estate planning transaction, it would be prudent to contact us and discuss with one of the attorneys in our group.