CURRENT ISSUES IN THE AREAS OF ESTATE, TAX
AND PERSONAL AND BUSINESS PLANNING
The information that follows summarizes some of the current issues in the areas of estate, tax and personal and business planning which may be of interest to you. Although this information is accurate and authoritative, it is general in nature and not intended to constitute specific professional advice. For professional advice or more specific information, please contact my office.
Gift Exclusion Raised. The annual gift tax exclusion (more correctly the exclusion for gifts to one or more donees) has been increased to $14,000 beginning in 2013. One of many myths is that a gift in excess of the annual donee exclusion (which many years ago was $10,000 per donee) will result in gift tax or income tax to the donee. That is not the case. Rather, all gifts in a calendar year made by a particular donor are aggregated, and an exclusion applies equal to $14,000 per donee in each calendar year. If an individual donor makes ten $14,000 gifts to ten donees, all of those gifts are excluded from the calculation of the gift tax. Both a husband and wife can make gifts to the same donee and each will qualify for the $14,000 annual donee exclusion, or a married donor can elect to “split” his or her gifts with the spouse, thus also allowing two separate $14,000 exclusions for each donee. Aggregate gifts in excess of the donee exclusions will constitute “taxable gifts,” unless other deductions apply, such as the deduction for qualified gifts to charities, and the total remaining amount is the total of the “taxable gifts.” However, each donor is entitled to a credit against the gift tax which applies over a person’s lifetime so that, in effect, currently up to $5.25 million can be gifted in taxable gifts by the individual donor without paying any gift tax, and any remaining amount of the exemption equivalent which remains at death can be offset against the federal estate tax. The purpose of this commentary is not to provide a detailed explanation of the federal gift and estate tax scheme, but rather to advise readers that annual exclusion gifts have been increased beginning in 2013 to $14,000, that substantial gifts can be made without invoking the federal gift tax against the donor, and that no gift tax or income tax is paid by the donee who receives gifts from one or more donors. The gift tax, if it is imposed at all, is imposed at the donor level, not against the donees who receive the gifts.
Social Security Strategies. When to apply for social security benefits has become an increasingly complex determination. Consultation with a qualified financial planner, in particular a Certified Financial Planner (“CFP”), may be advantageous. Since social security benefits to recipients age 65 and older are no longer reduced by excess earnings, there is no longer a major disadvantage to applying for benefits even though a person intends to continue to work. However, delaying the application until age 70 will result in a significant increased monthly payment for an individual with a normal retirement age of 66. To be offset against that will be the fact that benefits would have been paid for four more years if the person had applied for benefits at age 62. Calculations must also be made of the recipient’s income tax circumstances and the ability to invest the benefits at an earlier age. There are numerous planning strategies available for married couples. One strategy is the “claim and suspend” strategy. One spouse who has reached normal retirement age might want to delay the receipt of benefits, but his or her spouse can claim an immediate spousal benefit if the higher earning spouse applies for benefits and then requests that they be suspended. The lower earning spouse can then claim immediate benefits on the earnings record of the higher earning spouse, and the higher earning spouse can delay the receipt of benefits and earn additional retirement credits. There are other strategies as well, such as the “claim now, claim more later” strategy pursuant to which a married individual who has reached normal retirement age will apply for benefits using the earnings record of the other spouse and then apply based on his or her own benefits later after building up delayed retirement credits. Another strategy, called the “free loan” strategy, allows the applicant to apply early and then at a later date withdraw the application, repay the amount of benefits received, and then reapply and receive benefits based on the later attained age. This in effect constitutes a free loan of the initial benefits paid. However, this can only be done by an individual one time and only within 12 months of the initial determination. Consult your personal financial planner for additional assistance in making such social security retirement determinations.
Life Insurance Tax Surprises. Life insurance proceeds are received tax free, except for the possible imposition of the federal estate tax if the decedent who owned or controlled the policy has a taxable estate of more than $5.25 million in 2013. However, there can be tax surprises attached to life insurance policies. For example, if a beneficiary of life insurance leaves the proceeds on deposit, the interest and additional payments on the proceeds retained by the insurance company will be taxable under rules similar to those applicable to annuity payments. It should be noted that insurance companies are increasingly marketing the retention by the company of insurance payments, and in many cases even keeping the proceeds and sending the beneficiary a checkbook rather than a check for the proceeds. The beneficiary should weigh his or her ability to handle and benefit from his or her own investments against the advantage, if any, of allowing the funds to remain with an insurance company. Although life insurance proceeds are generally received tax free, it should be noted that certain products which are more in the nature of a typical investment may subject the proceeds to taxability unless the policy satisfies certain complex tests pertaining to required premium levels and cash value ratios. Such policies include certain universal life policies with adjustable or flexible premiums. Further, if insurance policies are surrendered or sold prior to the death of the insured, gross income will be realized if the proceeds exceed the policyholder’s investment in the contract. A viatical settlement (the sale or surrender of the policy by a terminally or chronically ill insured), may avoid the taxability of the sale proceeds. Similar rules apply in the case of a policy with an accelerated death benefit rider pursuant to which the company makes a payment directly to the insured if the insured is terminally or chronically ill. Viatical settlements involve a third party purchaser and are subject to specific rules in order to avoid taxability in respect of the proceeds.
Another Retirement Plan Suggestion. A participant in a qualified retirement plan (“QRP”) may contemplate marriage, or may in fact be married to a second or subsequent spouse, and does not want the spouse to possess the survivor annuity rights required by ERISA. All QRPs are required to include surviving beneficiary rights. It should be noted that an IRA is not subject to this requirement. Either before or after the marriage, the QRP participant could roll the QRP funds into an IRA. If this occurs after the marriage, however, the spouse must consent. If it occurs prior to the marriage, the rollover can be made without consent. Of course, the spouse might then acquire certain rights in regard to the IRA in the event of divorce, but the spouse would not generally have a right of inheritance. In any case, it is advisable for spouses who plan to marry in the context of a second or late life marriage to have a prenuptial agreement which addresses the issues of retirement benefits. It should be noted, however, that it is not sufficient to include a provision in the prenuptial agreement that says that the spouse agrees to release his or her rights in the other spouse’s QRP. It will be necessary under ERISA for the spouse actually to sign the appropriate form provided by the QRP to result in the actual waiver of those rights. It is also possible for married spouses to enter Into a post-marital agreement addressing such issues.