Simmons & Schiavo Blog

he new tax law that resolved the “fiscal cliff” issue in January allows employees with a 401(k) plan at work to roll over any or all of the assets in their current plan into a Roth 401(k) plan. This is a big change, and should at least be considered by anyone who is eligible.

In a traditional IRA or 401(k) plan, employees contribute pre-tax earnings to the plan. The assets grow tax-free until retirement age, at which point the employee can withdraw them and pay ordinary income tax on the withdrawals.

With the new law, it’s likely that many more employers will begin to offer Roth 401(k)s as a result of employee demand.

With a Roth IRA, though, employees contribute post-tax earnings to the account, but when they withdraw the assets years later, the withdrawals are tax-free.

The new Roth 401(k) plans follow the same idea – earnings are contributed post-tax, but withdrawals are tax-free. [Read more...]

A federal estate tax return doesn’t have to be filed every time someone dies. In fact, most estates never have to file one. However, a provision in the new “fiscal cliff” tax law may make it very advantageous to file an estate tax return if the deceased person is survived by a spouse – even if a return is not legally required.

Here’s why: Generally, when a person dies, his or her estate can give an unlimited amount to a surviving spouse. After that, if the person’s bequests (plus large lifetime gifts) total more than a certain “exemption amount,” then an estate tax is due. For 2013, the exemption amount is $5.25 million.

It’s almost always a good idea to file an estate tax return for anyone who dies and is survived by a spouse.

Traditionally, the exemption amount applied separately to each spouse. So if a husband died first, his estate could use his exemption amount, and when his wife died later, she would get her own exemption amount.

But under a change in the law starting in 2011, if the first spouse to die doesn’t use all of his or her exemption amount, the difference can be passed along to the other spouse. (The 2011 law was temporary, but the new “fiscal cliff” law makes it permanent.)

So suppose a husband dies and doesn’t use any of his $5.25 million amount (because he leaves everything to his wife). When the wife dies, her exemption amount will be her own $5.25 million plus the $5.25 million that the husband didn’t use. So instead of being able to leave $5.25 million tax-free to her heirs, she can leave $10.5 million tax-free – a potential savings of millions of dollars.

However, this only works if the husband’s estate filed an estate tax return and elected to pass the exemption amount on to his wife. If the husband’s estate didn’t file a return (because it wasn’t legally required), then all the potential tax savings are lost.

This means that it’s almost always a good idea to file an estate tax return for anyone who dies and is survived by a spouse.

Even if it seems highly unlikely that a surviving spouse will be worth more than $5.25 million when he or she dies, it’s still a good idea to file a return, because Congress could always change the exemption amount. In fact, if not for the “fiscal cliff” law, the exemption amount this year would be only $1 million.

The annual gift tax exemption has been increased to $14,000 in 2013, up from $13,000 last year. That’s due to an adjustment for inflation.

This means that you can give any person $14,000 this year without any gift tax liability at all. Making annual gifts of the exemption amount is one of the best and easiest forms of estate planning, because it transfers assets from one generation to the next without any tax liability whatsoever.

If you have multiple heirs, the amount you can give away tax-free multiplies quickly. For instance, if you have two children, and each child is married and has two children, you can give $14,000 to each child, spouse and grandchild. That’s eight recipients at $14,000 each, or a potential maximum gift of $112,000 a year.

Keep in mind that a spouse can also make gifts. If your spouse gave an additional $14,000 to each recipient, that would be $224,000.

If you’re thinking about making regular annual gifts, you might want to consider setting up trusts for the beneficiaries and making gifts to the trusts – especially if your grandchildren are young. [Read more...]

In a big surprise to many people, when Congress passed a law to resolve the “fiscal cliff” in January, it retained the large ($5 million-plus) estate, gift, and generation-skipping transfer tax exemptions that had been available in 2011 and 2012. These taxes will now be 40% of amounts over this exemption.

Without this new law, the exemptions would have dropped to only $1 million at the start of 2013, with a tax rate of 55%.

The exemptions will now be $5 million in 2011 dollars, with adjustments for inflation each year. For 2013, they will be $5.25 million.

This is great news for people who want to transfer wealth to the next generation while avoiding taxes. It means that anyone who didn’t use the “window” in 2011 and 2012 to make large gifts without incurring gift tax has a reprieve, and can make those gifts this year.

That makes 2013 a great time to review your estate plan. While it’s possible to make large tax-deferred gifts right now, we don’t know how long this opportunity will continue, and it’s possible that Congress could change the rules again. Also, the Obama Administration has indicated that it wants to restrict some other popular estate planning techniques, including grantor retained annuity trusts, valuation discounts, family limited partnerships, and dynasty trusts. So it might be wise to investigate these options now before they disappear. [Read more...]

Many wills provide that the executor will pay the estate’s expenses out of the estate’s assets, and what’s left over will be divvied up among the heirs. But it’s good to give some thought to this, because an estate’s expenses can be, well, expensive.

“Expenses” can include estate taxes (and even if federal estate taxes aren’t an issue, many states have their own estate taxes, often with a lower threshold than the federal tax.) Expenses can also include professional fees for accountants, lawyers, and appraisers; medical and funeral expenses; probate fees; fees for transferring title to assets; local taxes on a decedent’s personal property; and certain debts of the decedent.

Here’s why this is important: The estate’s expenses are paid only by the heirs who receive property under the will. But sometimes, other heirs receive property outside the will – they’re beneficiaries of an IRA, a co-owner of a bank account, the payee on a transfer-on-death brokerage account, etc. Unless you specify otherwise in your estate plan, the beneficiaries of these “non-probate” assets won’t have to contribute at all to the estate’s expenses.

So if you think your expenses could become significant, or you’ve recently arranged for substantial assets to pass to your heirs outside of probate, you might want to review your will. Otherwise, some heirs might be unevenly saddled with large expenses – which might not be what you intended.

Often, older people will add the name of one or more of their children to their checking accounts or brokerage accounts. They might do this to make it easier for the children to help them with their financial affairs. Or they might think that it’s a clever way to avoid probate.

Joint ownership can be good in some cases, but there are a number of dangers in setting things up this way.

To illustrate, imagine that Anna has three children – Barry, Louise, and Todd – and she adds their names to some of her various accounts so they can help her with her finances. What could go wrong?

A child’s debts. Suppose Barry loses his job, and runs up large debts. Since Barry is a joint owner of one of Anna’s accounts, his creditors could potentially come after Anna for repayment. Or suppose Barry owns a business, and personally guarantees a business loan. If the business goes under, Anna could be on the hook.

A lawsuit. Suppose Louise causes an auto accident, and the injured driver sues her. The driver might be able to empty Anna’s bank account as well as Louise’s.
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If you haven’t updated your power of attorney documents in many years, it might be worth having them reviewed to see if you can take advantage of some recent changes in the tax laws.

If you’re ever near death and unable to manage your affairs, your agent may be able to make some smart financial moves that will dramatically reduce taxes for your heirs. But your agent can do this only if your power of attorney documents allow him or her to – so you might want to consider whether to give your agent this authority.

For instance, your agent could:

• Convert your IRA to a Roth IRA. This would trigger an income tax bill, which would reduce the value of your estate for estate tax purposes. If you recover, you or your agent could undo the conversion, so you wouldn’t be socked with the tax. This could be particularly important if you have losses or carryforwards that otherwise couldn’t be used.
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Many people have an instinctively negative reaction when they hear the term “prenuptial agreement.” That’s because, when prenups first became popular, they were often seen as weapons by which rich spouses took advantage of less wealthy, less sophisticated partners. A person who got engaged and said, “I want a prenup” was often seen as unromantic at best and scheming at worst.

But the truth is, prenups often provide important advantages for both partners. They’re not always just about protecting yourself in the event of divorce. They’re often about planning your future affairs so as to arrange things legally and tax-wise in ways that are mutually beneficial.

If you approach a prenup in this spirit, it’s often a win-win for everyone.
[Read more...]