The Petrosewicz Law Firm Estate Planning Blog

Microsoft’s Co-Founder Paul Allen’s Billions Estate

It’s been a little more than a year since billionaire Paul Allen’s passing, but the course he charted to give away his fortune remains a private secret, described as a complicated work in progress by the Seattle Times in the article that asks and answers the question “What’s happening to Paul Allen’s billions? A year after his death, it’s complicated.”

There’s been some recent chatter that Jeff Bezos, founder of Amazon, was interested in buying an NFL team, and possibly the Seattle Seahawks. This has sparked renewed curiosity about what has happened to the Allen empire.

Paul Allen was a philanthropist and interested in many different endeavors, from sports to fine art, pop culture and nonprofits, real estate investing and science. What will be kept within the family, what will be sold and what shape will the promised philanthropy take?

The answer to the question of when all of this might happen, is perhaps the only clear answer: not yet, and maybe not for a while. Experts say that it can take years for such a vast empire to be unwound. His estate includes businesses, investments, properties, world-class fine art and other valuable assets.  Giving away what might be as much as $10 billion or more, is not something to be done quickly.

As to who is in charge, that is Jody Allen, trustee, sister, and along with her family, the sole heir. A biography on the website of Vulcan, the business that Paul and his sister Jody co-founded, says that she has the responsibility for preserving and implementing his vision for generations to come. Jody’s intentions are unknown, outside of a tight and protective inner circle.

A Vulcan spokesperson said that the company is committed to tackling the world’s toughest problems, but nothing more.

The expectations are great, based in part on the long and varied record of philanthropy from Jody and Paul Allen. He gave away $2 billion during this lifetime to business, scientific, and cultural entities.

One of the main channels for philanthropy is the Paul G. Allen Family Foundation, which has given away at least $575 million. At the end of 2018, the foundation had assets worth more than $931 million and made more than $48 million in contributions.

Vulcan, the company, and the family foundation will continue to exist for many years, putting their stamp on science, the arts, environmental causes and educational programs.

Reference: Seattle Times (November 26, 2019) “What’s happening to Paul Allen’s billions? A year after his death, it’s complicated”

Giving With Warm Hands Gives a Happy Feeling

Traditionally, giving assets away while still living was done in an effort to minimize tax liability at death. However, with the federal tax exemption amount at $11.4 million and growing each year with inflation indexing, federal estate taxes apply to very few people, reports Kiplinger in the article “To Gift or Not to Gift.” The federal exemption is scheduled to fall to about $6 million per person in 2026, unless Congress makes changes to the law. However, even then, only about 0.2% of Americans will pay federal estate taxes.

Therefore, taking action to avoid federal estate taxes is not a top priority for most of us. However, you still need an estate plan to address asset distribution, state taxes and long-term care planning.

Twelve states and the District of Columbia currently have a state estate tax. Their exemptions are not as generous as the federal exemptions. Gifting can help reduce the state estate tax liability. For example, in Massachusetts, lifetime gifts are not subject to the Massachusetts estate tax. Making gifts reduces the value of the estate and lowers the state estate tax.

Before giving away assets to reduce state estate taxes, you’ll need to bear in mind the issue of unrealized capital gains and the step-up in basis. At death, the fair market value of most assets becomes the tax basis of those assets. Because many assets appreciate, the basis of assets is said to “step-up” to the fair market value, which can wipe away all potential capital gains taxes.

Giving can protect assets from having to be spent down to qualify for Medicaid to pay for nursing home care. If there is no long-term care insurance policy in place, there are two other options to pay for nursing home care. You can pay for it yourself, or, if you qualify, you can apply for federal Medicaid. However, to qualify, you’d have to have very little countable assets.  $2,000 is the resource limit for a single individual in a nursing home. For a married couple with a healthy spouse living at home, the resource limit is based on a complicated calculation and is different for every couple. There is also a five- year look back period, where Medicaid looks at five years of financial records to be sure you haven’t given away assets that could have been used to pay for nursing home care. Assets given away more than five years before an application is made are not penalized. These gifts, including the family home, can be saved for loved ones.

What about the simple joy of giving? Many want to help loved ones, while they are alive, to witness what their loved ones can do with their generosity. A down payment on a first home, paying down a student loan, or helping with challenging expenses is a welcome way to help family members. Do give thought to your gift: does the use align with your intentions, could it be waylaid by a divorce or will creditors pounce on it?

There are requirements for gifts.  In particular gifts in excess of $15,000 per year to the same recipient usually require that a gift tax return be filed, even if there are no taxes due. As long as your total gifts during your life are less than $11.4 million, you will not owe a gift tax. However, you will need to file a gift tax return when you file your income tax return to report the use of the exemption during your lifetime.

Speak with your estate planning attorney before making significant gifts, to be sure that there are no unintended consequences for you or for the recipient.

The Petrosewicz Law Firm can assist you with your estate planning needs.  Contact us today at (281) 344-9455 or [email protected].  

Reference: Kiplinger (September 10, 2019) “To Gift or Not to Gift”

Good News About Gifts

It’s worthwhile to understand the rules about taxes that might be triggered by your generosity, says Forbes in the article “How To Avoid Taxes When Giving Big-Dollar Gifts.” Did you know that you can give any one person as much as $15,000 every year, without having to pay any gift taxes? You can give any number of people up to $15,000 and they don’t even need to be relatives.

Note that if and when any gift taxes are due, it’s the giver who pays any gift taxes, and not the recipient.

Therefore, if you think the world of your next-door neighbor and give him a gift of $20,000, you only owe taxes on the $5,000 above the $15,000 limit, but that’s only if your previous gifts have exceeded your lifetime exclusion. You don’t have to be generous with cash only. Gifts can come in the form of stock, a boat or jewelry. Just remember to keep it under $15,000, so as not to incur any gift taxes.

The $15,000 limit is per person, not per couple, so if you want to give someone $15,000 and your spouse also wants to give them a $15,000 gift, that works. You can double the gift, while still staying under the annual limit.

If your gift is going to a charitable organization—a registered 501(c)(3), you won’t owe anything in gift taxes.

In addition to this $15,000 annual cap, wealthy gift givers should just keep in mind an $11.4 million maximum that is known as the lifetime exclusion. That’s the limit in 2019, and it will rise next year. This governs all the gifting you do during your lifetime, above the annual exclusion of $15,000.

Anything more than that in the way of gifts, and you or your estate will have to pay estate tax. The top rate for the overage is high-40%. However, you’ll have to be mighty generous to get near that limit.

Here’s what’s nice: you won’t have to pay gift taxes every single time you go over that $15,000 limit. Let’s say you give your son $50,000 in 2019. Your gift is $35,000 above the ceiling, which is taxable.  However, rather than write a check for taxes to the IRS now, you count it against the $11.4 million lifetime exclusion. You now have $11.365 remaining.

The best way to go about gifting, is to make sure that your desired gifts are working in concert with your estate plan. One reason for gifting “with warm hands” is to reduce the taxable size of the estate, but there are many other ways to do this. There are also instances when gifts need to be reported to the IRS, even if no taxes are owed on them.

Speak with an experienced estate planning attorney about your gifting strategy, how it works with your estate plan and what gift tax forms you do, or do not, need to file.

The Petrosewicz Law Firm can assist you with your estate planning needs.  Contact us today at (281) 344-9455 or [email protected]. 

Reference: Forbes (October 14, 2019) “How To Avoid Taxes When Giving Big-Dollar Gifts”

Having a Generous Spirit is a Good Thing for Many Reasons

Many people give generously throughout the year, for birthdays, to help children or grandchildren with college costs or just because they want to help family or friends. However, according to the New Hampshire Union Leader’s article “Lifetime (noncharitable) giving has many advantages—and not just for tax purposes.”

Lifetime giving means that you are more involved with giving, than if your giving occurs after you have died. Perhaps the best part of gifting with warm hands, is that you are able to enjoy seeing the recipient (donee) benefit from your gift. It’s a good feeling to see a person have his life enriched by your generosity.

It should also be noted that sometimes, giving away something can be a way of liberating yourself. With less property, there’s less for you to manage, insure or provide upkeep.

If you die with no will, the intestacy laws of your state will determine who gets what. With a will, you have the opportunity to make your intentions known clearly. However, since you will not be alive, you won’t be able to see the actual transfer of property. A beneficiary might decide that they don’t want an asset. It is also possible that someone who always told you that he loved the painting in the foyer of your home, may decide to sell it, instead of keeping it.

Lifetime giving lets you react to changing circumstances and provides some control over how your assets are distributed.

After your death, your property and your estate may go through probate, which in some states can be a lengthy process. Lifetime giving also reduces the costs associated with probate and estate administration, because they won’t be included in your estate at the time of death. Assets that come out of the probate estate, reduce the likelihood of estate creditors or dissatisfied heirs. Lifetime gifts are private, while probate is public.

However, there are also tax advantages. If your gifting program is structured correctly by an experienced estate planning attorney, income and estate taxes can be decreased. Generally, a gift is not taxable income to the donee. However, any income earned by the gift property or capital gain subsequent to the gift, is usually taxable. The donor holds the responsibility of paying state or federal transfer taxes imposed on the gift. There are four taxes to be aware of: the state gift tax, the state generation-skipping transfer tax, federal gift and estate taxes and the federal generation-skipping transfer tax.

Many people give, because they want to support charitable causes or help friends and family enjoy a higher quality of life. The need to reduce the size of an estate to lower estate taxes is now less prominent, since the federal estate tax exemption is so high. It should be kept in mind that the new tax laws regarding federal estate taxes end in 2025. That may seem far away, but it will be here soon enough.

Another way to give, is to help with college expenses. Any gift must be made directly to a qualified institution. Similarly, if you’d like to help a friend or family member with medical expenses, a gift needs to be made directly to the healthcare provider. Not only are these types of transfers exempt from federal gift and estate taxes, but they are outside of the $15,000 annual gift exclusion gift you can make to an individual in any given calendar year.

This is a simple overview of gifting. An estate planning attorney should be consulted to create a plan for giving, that aligns with your overall estate plan and tax management plan.

The Petrosewicz Law Firm can assist you with your estate planning needs.  Contact us today at (281) 344-9455 or [email protected].  

Reference: New Hampshire Union Leader (April 7, 2019) “Lifetime (noncharitable) giving has many advantages—and not just for tax purposes”

What’s the Best Way to Pass the Family Vacation Home to the Next Generation?

The generous exclusion that allows wealthy individuals to gift up to $11.4 million and not get hit with federal estate taxes, came from the Tax Cut and Jobs Act of 2017. However, it’s not expected to last forever, according to the article “What to Know When Gifting the Family Vacation Home” from Barron’s Penta. Those who can, may want to take advantage of this window to be extra-magnanimous before the exemption sunsets to about $5 million (adjusted for inflation) in 2025.

At issue for potentially giving, is that when someone transfers property, the recipients must account for it, according to the original price paid for the property. This is known as the basis. For example, shares of stock valued at $5 million today that were originally purchased for $1 million 10 years ago, would be subject to income taxes only on $4 million, if the recipient were to sell the stock.

Advice given to wealthy individuals is to make use of that higher estate tax exclusion while it’s still in place, and that may include property that they expect to gift to beneficiaries. The most likely asset would be the family vacation home, whether it’s a ski chalet or a beach house.

First, make sure your children want the property. There’s no sense going through all the processes, unless they plan on enjoying the vacation home. Next, figure out the best way to gift the home, while making the most of the high exclusion.

If you don’t want to give up the use or control of the house during this process, experts advise not making an outright gift. This can lead to less control or the loss of a share to a child’s spouse, in the event of a marital split.

Another option: transfer the property into a trust. There are several kinds that would work for this purpose. Another is to consider a Limited Liability Company, which also serves to protect the family’s assets against any claims, if someone were to be injured on the property. The parents would transfer the property into the LLC and give children interests in the company.

A fairly common structure for vacation home ownership is called a Qualified Personal Residence Trust (QPRT). These are used by families who want to retain the right to continue using the home, usually for the rest of their lives. The property is transferred to the designated beneficiaries at death. If it is set up properly, a QPRT avoids any income or estate taxes.

A trust also lets an individual or a couple be very specific in how the property will be used, who can use it and any rules about how they want the home maintained. Making sure that a beloved family vacation home is well-cared for and not rented out for college parties, for instance, can provide a lot of comfort for a couple who have poured their hearts into creating a lovely vacation home.

Speak with an experienced estate planning attorney to learn how you can take advantage of the current federal estate tax exemption to pass your family’s vacation home on to the next generation.

Contact Benecia Flores at the Petrosewicz Law Firm at (281) 344-9455 or [email protected] to discuss preserving your inheritance.   

Reference: Barron’s Penta (March 31, 2019) “What to Know When Gifting the Family Vacation Home”

Estate Taxes, Death and a Other Certainties

As the old saying goes, “Nothing is certain but death and taxes.” Many people don’t have the faintest idea of just how extensive those taxes can be, says Pittsburgh Post-Gazette in the article “Death and taxes—and taxes and taxes.” For all the headlines and noise about federal estate taxes, those are the last ones most of us have to think about.

The federal estate tax is a non-event, unless you belong to the upper one percent of wealthy Americans. The federal tax is paid, based on the value of the assets owned by the decedent at the time of death. It also includes any assets that are controlled by the decedent at the time of death. The first $11.4 million is now excluded from any taxes due for an individual, and $22.8 million for a couple.

Before the Tax Cuts and Jobs Act of 2017, this exemption was roughly $5 million, so many more people had to pay it. The levels are expected to go back to the pre-2018 amount at the end of 2025, unless the law changes before that time.

This is an important point to remember: the tax laws change, and anytime tax laws change, your estate plan should be reviewed to ensure that it is still going to work the way you intend.

In some states, like Pennsylvania, there are still inheritance taxes. Only six states have inheritance taxes, and only 12 states still have an estate tax. Your estate planning attorney will know what your state’s inheritance and estate taxes are and can help you plan, so that your family is not overly burdened when it comes time to pay these taxes.

Inheritance taxes are generally based on the value of the assets owned or controlled by the decedent. It is independent of the obligation to file an income tax return for the estate.

The decedent’s representative, usually the executor, is responsible for filling all state, local and federal income tax returns for the portion of the year, in which the decedent was still living.

When a person passes and their last will and testament is admitted to probate, the executor receives an employer identification number (EIN) from the IRS. If the decedent died owning a trust, the trustee must obtain an EIN. Once the EIN is obtained, the IRS sends a letter notifying you of the due date for the income tax return for the estate or the trust. These are known as “fiduciary income tax returns.” They must be filed every year for the year that the estate or trust exists.

Note that the tax returns involve federal capital gains tax and how assets purchased before death will be treated for tax purposes, when they are sold after death. Usually these are real estate and investments. There are a LOT of taxes to consider, each has a unique due date and there may be ways to pay some taxes that will have an impact on other taxes, depending upon the situation.

The key, and an estate planning attorney can help with this, is to create a plan that takes all the taxes into consideration and plans out a strategy to minimize taxes, ensure that everything is paid on time, and prepare for the taxes to be paid.

Ideally, all this planning takes place before someone dies, as part of their estate plan, so that their loved ones are not left figuring out all of the different tax liabilities and how to pay them.

The Petrosewicz Law Firm can assist you with your estate planning needs.  Contact us today at (281) 344-9455 or [email protected].  

Reference: Pittsburgh Post-Gazette (March 25, 2019) “Death and taxes—and taxes and taxes”

New Year’s Resolutions Can Still Include Your Estate Plan

‘Tis the season—to make decisions about year-end giving to friends and family and charitable organizations. And then, just as quickly, it’s time for New Year’s resolutions. Instead of making resolutions about getting more fit, or sleeping better, asks the Grand Rapids Business Journal, in the article “Incorporate estate planning into New Year’s resolutions,” why not make a resolution about your estate plan this year?

Resolving to address your estate plan and wealth administration in the coming year, will be a big help to you and your family. It’s easy to become overwhelmed—how many accounts do I have? Who is the named beneficiary? Who will administer my estate? To make it easier, use this checklist:

Revisit your estate plan. Have you looked at your estate plan in light of the 2018 tax law changes? Have you updated your beneficiary names on any accounts? Do you have contingent beneficiaries named?

Develop or update your will and don’t forget to sign it. If you pass without a will, the laws of your state will determine how your property is distributed, and the court will assign a guardian to your minor children. Better—have your will created or update it. Not having a will may increase your family’s tax liabilities, not to mention the legal disputes or challenges that result when there is no will. Don’t forget to finalize the document with your signature, according to the formalities required by your state. Yes, that really does happen, and it leads to unnecessary problems.

Revise your charitable giving. Instead of annual charitable giving that may no longer be deductible under the new tax laws, consider donating a larger sum to a donor-advised fund. This lets you receive an immediate charitable deduction and distribute funds to carefully vetted charities over time. This also lets your money grow tax-free before it is donated.

Check on your insurance coverage: Just as your life changes and your estate plan changes, your insurance needs change also. Make sure there are no gaps in your coverage and that there’s enough liquidity to pay estate taxes, satisfy any buy/sell agreements and provide enough money to support any survivors. If you have young children, have you included their college educations in your insurance portfolio?

Business succession plan review. Business owners who pour their heart and soul into their businesses hate to think about succession planning, and as a result many do nothing, leaving partners, family members, and clients in a bad position. What would happen to the business, if something unexpected happened to you? Does your retirement plan center on the sale of your business? It usually takes a long time to create a business plan, and then it needs to be reviewed on a regular basis to ensure that it still works for all involved.

Make an appointment with your estate planning attorney. Make an appointment now, and you’ll be sure to go over these steps before too much of the new year passes by.

The Petrosewicz Law Firm can assist you with your estate planning needs.  Contact us today at (281) 344-9455 or [email protected].  

Reference: Grand Rapids Business Journal (Dec. 7, 2018) “Incorporate estate planning into New Year’s resolutions”

2018 Estate Tax Exemption Projections

The IRS has not yet announced what the 2018 estate tax exemption will be. However, expert analysts think there will be some slightly good news for wealthy people.

They predict that the exemption should increase to $5.6 million for a single person and more than $11 million for married couples.

At the same time, they predict that the annual gift tax exemption should also increase to about $15,000, as Forbes reported in "Estate Tax Exemption To Top $11 Million Per Couple in 2018."

This should give wealthy people and their estate planning attorneys a little bit more flexibility, as they attempt to shrink estates to below the threshold.

While most people who might be affected by this exemption increase would prefer to see the estate tax repealed entirely, that is increasingly looking like it will not happen this year.

Congress has turned its attention to tax reform, but getting anything passed could be a long process and will likely continue into next year.

Repealing the estate tax is also controversial. If Democratic votes are needed to pass tax reform legislation, that might take the estate tax off the table.

If you have questions about your estate and how it might have an impact on the estate tax, then you should see an experienced estate planning attorney in your area.

The Petrosewicz Law Firm can assist you with your estate planning needs.  Contact us today at (281) 344-9455 or [email protected].  

Reference: Forbes (Sep. 15, 2017) "Estate Tax Exemption To Top $11 Million Per Couple in 2018."

Purposeful Gifting

As long as the estate tax is with us, people will look for ways to avoid it. There are all kinds of different ways to accomplish this.

Some of these ways work better than others, depending on the size of the estate and other potential issues.

One common strategy is to give your assets away before you pass away. If they are not in the estate, then assets cannot be subject to any estate taxes.

This is known as gifting.

Many wealthy people decide to implement gifting plans to get around the estate tax. Others do not out of fear that giving assets to younger family members could lead to problems, such as younger people wasting the money or becoming disincentivized to make their own money.

There are ways around those problems, as Private Wealth discussed in "Purposeful Family Gifting."

The idea is a fairly simple one.

You can give gifts as a way to incentivize younger people to do good things. For example, a gift of cash could be conditioned on someone needing to graduate from college or hold a job for a certain period of time, before they will receive the cash.

The options are nearly limitless.

If you tell someone they can get a gift of cash if they do something, then within reason you can incentivize your family to do many good things.

If you are interested in a gifting strategy, talk to an estate planning attorney.

There are limits and tax implications to be aware of, before starting to give gifts.

The Petrosewicz Law Firm can assist you with your estate planning needs.  Contact us today at (281) 344-9455 or [email protected]. 

Reference: Private Wealth (July 19, 2017) "Purposeful Family Gifting."