Vacek & Thain, PLLC

Your Gift May Have Strings Attached: IRS Form 709

Technically speaking, whenever you give a gift to someone, you have to follow the gift-tax rules. You don't have to file a gift tax return every time you give someone a birthday present or a bouquet of roses, but it's useful to know when the gift tax – embodied in IRS' Form 709 – needs to be dealt with. It's better to know the rules and follow them than to have to deal with the IRS with an unexpected tax.

The purpose of IRS Form 709 is to report gifts that are subject to gift and generation-skipping transfer taxes, as explained in The Motley Fool's article, "Form 709: Do You Need to File a Gift Tax Return?" While this sounds like another unpleasant task to add to your to-do list, in actuality the IRS has some favorable rules that make many gifts exempt from these reporting requirements.

The annual exclusion lets you give up to $14,000 in cash or property to another without having a taxable gift, which prevents most of the regular holiday or birthday gifts from being taxable. Unlimited gifts to spouses are also typically permitted without having to file Form 709. This annual exclusion applies to each person receiving a gift—so if your child is married, you can give $14,000 to your child and another $14,000 to her spouse without any gift tax. The same thing works for your spouse: he can make $14,000 gifts to as many people as he wants, regardless of the gifts that you've made.

A special rule allows a spouse in a married couple to make double-sized gifts and have them viewed as made equally by both spouses. This might keep you from paying a tax, but you'll still have to file a gift tax return in order to claim it. There are other exclusions that will keep you from having to file Form 709, such as the educational exclusion and the medical exclusion. These aren't considered taxable gifts, so no gift tax return is necessary. However, you must make the "gifts" directly to the institution, not the beneficiary, to qualify for this valuable exclusion.

Even if you made a taxable gift, the tax code gives you some help. The federal gift and estate tax provides for gifts made during your lifetime to be treated the same as gifts made from your estate after your death. Each person has a lifetime exemption from gift and estate tax which stands at $5.43 million in 2015. So even after you use up your $14,000 annual exclusion, any remaining gift amount applies towards your lifetime exemption amount.

Gift tax returns are frequently needed for more complex estate planning strategies, so talk with a qualified estate planning attorney about future interests and generation-skipping issues. He or she can create a wise strategy for your situation and will take care of preparing the Form 709 so that you meet all the requirements.

Reference: The Motley Fool (October 3, 2015)"Form 709: Do You Need to File a Gift Tax Return?"

Please visit our website for more information on gift tax.

A Checklist for the Executor

Naming the right person as the executor of your estate is one of the hardest and most important decisions. Knowing what to do if you’ve been named an executor can feel overwhelming. Being named an executor is an honor – it means that someone trusted your judgment and your ability to handle complex tasks on their behalf. But it is also a complex responsibility, requiring a fair amount of time and energy. Some estates take years, even decades, to settle depending on the size and complexity of the estate.

If you are appointed executor of an estate, your first task, according to a recent Forbes article, “What an Executor of an Estate Needs to Do,” is to identify an experienced estate planning attorney who can guide you through the complex process of settling an estate.

When settling an estate, an executor is in charge of these basic functions:

• Locating, collecting, and being responsible      for the estate’s assets until they are distributed to the beneficiaries.
• Paying the decedent’s debts and estate      administration expenses.
• Handling tax matters, including filing      the decedent’s and the estate’s income tax returns and paying the income      taxes, if any.
• Distributing the remaining assets in      accordance with the terms of the will.

The financial responsibilities of an executor mean that he or she must make an investment analysis of all assets in the estate to determine which to sell and how the estate’s cash needs will be met. The majority of the administrative work in handling an estate is recordkeeping.

The executor must first arrange for his or her court appointment in probate court to obtain “Letters Testamentary,” which permits the executor to represent the estate to third parties such as banks and financial companies to collect, liquidate and distribute assets and other tasks. The executor must compile information about the decedent’s finances and then sell or divide certain assets among those named to receive them in the will or to pay taxes.

In addition, the executor must cancel the decedent’s credit cards, have utilities turned off and pay expenses such as rent, taxes and insurance premiums. Home repairs or maintenance may also be needed. The executor will also need to open an estate bank account to hold the collected assets. These funds are used to pay the bills.

An estate planning attorney can be a huge help with this process to ensure that everything is done right and that the decedent’s estate is settled in an efficient manner.

Reference: Forbes (August 26, 2015) “What an Executor of an Estate Needs To Do”

For more information on how to administer an estate plan, please visit our website.

Retirement Savings Options for Self-Employed

Unlike people who work for an employer and can set automatic deductions for their IRA accounts, self-employed people need to set up and contribute to retirement accounts. Two of the most frequently used accounts are the Simplified Employee Pension (SEP-IRA) and the Solo 401(k). Contributions to both are tax-deductible, allowing the entrepreneur to obtain tax-deferred growth and cut taxes.

Figuring out which retirement account is best for your circumstances will be easier after reviewing this article in Physician’s Money Digest, “Self-Employed Can Still Cut 2014 Taxes with a Retirement Plan.”It lists the pros and cons of each of these two accounts, along with a general description of each.

An SEP-IRAis similar to a traditional IRA in that the investment earnings grow taxed-deferred until they are withdrawn. However, a self-employed individual can save and deduct much more than the $5,500 ($6,500 if 50 and over) for contributions to a traditional IRA. SEP-IRA contribution limits are calculated as the lesser of 20% of net business income or $52,000 for 2014, $53,000 for 2015.

A Solo 401(k) is for self-employed individuals with no employees. Your spouse is not included in the employee count and is permitted to contribute to the plan if he or she is employed by the business. This 401k can be structured as a traditional 401(k) or as a Solo Roth. The maximum 2015 contribution is $53,000 or $59,000 for those 50 and older. The contribution includes (i) an annual employee deferral up to 100% of compensation or earned income for a self-employed individual (to a maximum of $18,000 and $24,000 if 50 or older), which allows some to contribute more to a Solo 401(k) than to a SEP-IRA; and (ii) an employer discretionary contribution of up to 25% of compensation as defined by the plan or 20% of earned income for a self-employed individual.

One advantage a 401(k) offers over an IRA is that you can borrow from a 401(k). If you opt for Solo Roth 401(k), there’s no deduction, but withdrawals are tax-free if you wait until you’re 59½. The plan lets you save much more than a Roth IRA. Another advantage for the Solo Roth 401(k) is that contributions aren’t subject to income limits (unlike the Roth IRA).

Which is better… a Roth or traditional IRA?It depends on many factors. If you expect to be in a higher tax bracket in the future, the Roth version may make more sense, but if your current tax rate is low, it might be better to forgo a deduction now in order to withdraw money tax-free when you’re in a higher bracket in the future. What’s nice is that it doesn’t have to be an “either-or” proposition: you can have both traditional and Roth 401(k) plans and divide contributions between them.

For most self-employed individuals, the SEP-IRA may be a better choice than a traditional IRA because the contribution limits are much higher. Also, deductions for traditional IRA contributions are limited by income for participants who are covered or whose spouse is covered by a retirement plan at work.

Talk to a qualified estate planning attorney to see how these IRA options may fit into your strategy.       

Reference: Physician’s Money Digest (August 27, 2015) “Self-Employed Can Still Cut 2014 Taxes with a Retirement Plan”

Please visit our website for more information on how to protect your retirement.

If You Have No Will, There’s No Way Your Heirs Will Know Your Wishes

Consider your will as one last chance to let your heirs know how much you love them – because you thought enough of them to plan for your eventual demise. Any adult with minor children or assets of any kind needs to have an estate plan. And if you have a complicated life – second or subsequent marriages, business ownership, etc. – your estate planning becomes even more important.

Despite the obvious need, a CBS Boston post, “Where There’s A Will There’s A Way!” reports that less than 35% of Americans have wills in place. No one wants to think about why they need a will, but if you have minor children, failing to have a will can lead to disastrous consequences for them. You may be one of those dedicated parents who won’t allow anything that’s not organic, GMO free or petroleum product free into your home – but if you’ve procrastinated about your will, your children are completely unprotected if something tragic happens to you and your spouse.

You need a will that names guardians for your children, so that the decision is not made by the court. If you have life insurance and no will naming a guardian, expect a lot of distant relatives to show up who profess to care about your children.

One solution is to create a trust for the children when they are minors so something is in place for their financial support in the event you pass away. You would need to designate a person or persons in the will to serve as trustee.  This may also be accomplished using a revocable living trust.  However, many parents delay this because they can’t figure out who to designate as guardian for their children. This decision can be complicated with blended families. So many just postpone thinking about this important decision.

The wisest selection may be an adult sibling, cousin or a friend who lives close by. You should discuss this with family members and friends. Talk about who you would like to raise your kids.

Estate planning makes things easier for those you leave behind if something should happen to you. Visit an experienced estate planning attorney and get this done now.

Reference: CBS Boston (August 27, 2015) “Where There’s A Will There’s A Way!”

Please visit our website for more information on estate planning.

Estate Planning For Adult Children with Mental Illness or Addictions

When their daughter had a breakdown while attending college, there was nothing that Keisha Sacher’s parents could do when she refused to come home. At age 19, she was an adult. They had no legal control over her. When she finally did return to their home, the family endured a nightmare of her drug addition, homelessness, hospitalizations and worse. The Sacher’s were aging, and they needed to plan for their daughter’s care in the future.

For parents watching helplessly while adult children struggle with mental illness and addition, there is another layer of worry. What will happen when the parents are no longer alive? In“For Parents With Troubled Adult Children, Financial Hurdles Abound,” The New York Times examine the financial challenges of helping loved ones stricken with mental illness. The solution must provide for care without placing assets in the ill person’s control, must not jeopardize their government benefits and must not worsen their condition. One solution is the special purpose trust.

A special-purpose trust is different from a special-needs trust, which is frequently implemented to pay for additional needs of those receiving government benefits where the government has strict restrictions on the recipient’s assets. A special-purpose trust can be used to provide children more of the life they might have enjoyed without mental illness or addiction, and it allows the parents the flexibility to make changes with the distributions.

Special-purpose trusts are more complicated to establish than regular trusts because of the powers they give to the trustees and the restrictions they place on distributions. However, the toughest part of creating a special-purpose trust is getting parents to accept them as necessary: parents must first acknowledge that their children will never fully recover.

Parents are advised to set out some very specific criteria for distributions into trust documents, for example, staying on medication or staying sober for a certain period of time. In addition, those with a family history of mental illness and addiction issues should get a power of attorney and health care proxy for children over 18 who are away at college. In the event that something happens to their child, the parents will have access to medical records and will be able to help.

Work through these issues with an experienced estate planning attorney to make sure that you are doing your best to help your child.

Reference: New York Times (August 28, 2015) “For Parents With Troubled Adult Children, Financial Hurdles Abound”

Please visit our website for more information on estate planning for difficult family issues.

Family Limited Partnerships and Family LLCs About to Get Overhauled

The details are still unknown, but family limited partnerships and family limited liability companies are being scrutinized by the IRS and the US Treasury and changes are coming. The IRS is looking to close a loophole that has worked very well for many years for wealthy families.

The IRS is about to get tough on the use of family limited partnerships and family limited liability corporations, used by wealthy families to avoid paying millions in taxes, according to The New York Times in “Navigating Tougher I.R.S. Rules for Family Partnerships.” There are no specific details available at this time, but anyone who is in the process of setting up one of these entities needs to get them completed as soon as possible. There’s no way to know when this will happen, but it's coming.

The White House estimated in 2012 that closing this loophole could net at least $18 billion in tax revenue over 10 years. Assets in family partnerships, like securities and cash, still have a value that does not support a discount of 30%. Some advisers argue that the partnership, not the individuals, controls when securities are bought and sold and distributions are made. However, tax experts expect that entities set up to hold businesses or assets that require consolidated management, like rental properties, will still see some discount.

If a family has significant real estate, typically they use discounts to transfer interest in the entity. If you’re already setting up a partnership or making gifts to one to accelerate what they were doing, get it in under the deadline. The IRS won’t make the date retroactive, so get going.

Talk to your estate planning attorney about how this change may affect your estate planning.

Reference: The New York Times (August 17, 2015) “Navigating Tougher I.R.S. Rules for Family Partnerships”

Please visit our website for more information on estate planning.

Wealth Needs a Deep Bench of Talent

Managing and growing wealth requires a deep bench of skilled and trusted advisors. Among millionaire investors, a third are comfortable with having two advisors, while 36 percent prefer to work with three advisors. Interesting that those prefer two advisors are mostly Baby Boomers, while half of those who prefer the trusted trio are Gen X-ers, ages 36- 44. When asked, members of the Ultra High Net Worth households ($5 million to $25 million) prefer three advisors.

Whether you are a millionaire or an aspiring millionaire, a recent Millionaire Corner article, “Financial Planning--Who's On Your Money Team?,” describes the professionals that should be on your financial team.

CERTIFIED FINANCIAL PLANNER™ Practitioner. Along with your estate planning attorney, this player is responsible for helping you paint the “big picture.” This perspective allows you to identify your financial goals and prepare for a financially secure retirement. This will include money management, investing advice, estate planning, insurance planning, business planning, and other strategies to help you get ready for retirement and the ability to enjoy your senior years in comfort.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNER™ in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

Accountant. An accountant or an attorney experienced with tax matters is also an essential player on your team. It’s good to have an accountant or lawyer who will prepare your taxes and offer appropriate tax shelter recommendations.

Insurance Broker. This person will help navigate the wide range of available products and determine which best suits the needs of you and your family. If they team with your estate planning attorney, you can be sure that all of your objectives are met and that everything works towards the common goal of placing you in the best position when you retire.

Estate Planning Attorney. This is the “pivotal” money team member. This is your clean-up batter or your quarterback. The attorney is crucial and will assist you with the creation of your estate plan. He or she will help you draft essential estate planning documents like a will, living trust, a health care directive and a power of attorney. Your quarterback will make sure that your assets are protected and your estate is settled according to your wishes.

Huddle up with your quarterback and make sure you have a winning game plan for your estate planning. Don’t get blind-sided by not preparing!

Reference: Millionaire Corner (August 18, 2015) “Financial Planning--Who's On Your Money Team?”

For more information on how to protect your wealth, please visit our website.

Why Your Estate Plan Needs to Be Reviewed and When

Life is about changes, both good and bad. Children grow up and marry and have children of their own. Families experience the pain of divorce. New families are created when divorced parents remarry. Many of these changes require revisiting and making changes to your estate plan. Even when your family life is stable, laws change and can impact the best of estate plans. An estate plan needs to be reviewed and changed as family situations, laws or other factors change. Here are some common points when estate plans need to be reviewed.

There are certain life events that call for your estate plan to be reviewed, detailed in“9 Life Changes That Require An Estate Plan Review.” from the Huffington Post. Some of the events are happy times, like the birth of a grandchild. But whether they are happy or sad, they all require that you take the time to review your estate plan to ensure that your loved ones are protected and that your wishes are carried out in the event of your death or if you become incapacitated.

Marriage. Did you know that your spouse may not be the sole beneficiary or heir of your estate?Depending on where you live at the time of your death, this may be unknown without a solid estate plan. To ensure your spouse, or anyone else gets certain belongings from your estate, you need to detail this in your plan. When you wed, you should review your estate plan and make any necessary adjustments.

Remarriage. A marriage license typically doesn’t set up your new spouse to receive your entire estate after your pass away. The laws of most states say that your new spouse will share in your estate assets along with your children from your first (or previous) marriage unless you change this in your will, living trust, or other estate planning document. If you get remarried, it's critical that you update your estate plan to add your new spouse and any of his or her stepchildren should you want them to inherit from you.

Divorce. Typically when a divorce decree is entered, the laws automatically disinherit a former spouse. Nonetheless, if you included provisions in your estate plan that give specific property to your former spouse by name, make sure to change this to disinherit him or her.

Birth of a Child. This big change definitely qualifies for an update of your estate plan to protect your child or children. You need to nominate guardians to care for your children in case something happens to you. If not, your children will be cared for by guardians appointed by the court. That could be anyone. The same thing applies if you adopted a child.

Death of a Beneficiary. Updating your estate plan may be the furthest thing from your mind if this should occur. However, it's important. If your beneficiary dies, you will need to ensure your estate plan still does what you want, such as if the beneficiary had children and you want his or her portion to go to them. You’ll typically need to talk to your estate planning attorney to make sure that happens.

Illness or Disability. One often overlooked aspect of estate planning is illness or disability. There are lots of things to consider regarding your care, and you need to articulate your desires before you become ill, disabled, or incapacitated. This can save your loved ones heartache. In addition, you need to think about the situation if you passed away and one of your beneficiaries became incapacitated. Money from your estate could actually harm them by causing him or her to be ineligible for needs-based government care programs. You need to look at a special needs trust. Plan for both of these scenarios by updating your estate plan before anything happens.

A Substantial Increase in Assets or Income. If you have more money or assets now than when you first created your estate plan, then that is a good thing up to a point. That point is when you and your beneficiaries are subject to federal or state estate taxes. Your estate planning attorney can structure your estate to minimize these taxes and keep more money for your estate.

Moving to Another State. Every state has its own unique set of estate laws, so you should talk to your estate planning attorney.

Changes in the Law. State and federal tax and estate laws are always changing. When this occurs, your estate plan may be at risk.

Review your plan with your attorney to make sure everything is OK.

Reference: The Huffington Post (August 17, 2015) “9 Life Changes That Require An Estate Plan Review”

Please visit our website for more information on how to keep your estate plan current.

Plan to Protect Your Pet As Part of Estate Planning

If you are a pet owner, chances are you love your pets and consider them family members. We love them, we buy them toys, and it is not usual for people to bury their beloved pets in pet cemeteries. However, we often do not make plans for what will happen to our pets if we should die before them. Ask at any animal shelter – many of the animals arrive at the shelters when children or relatives do not want to or cannot care for the pets of deceased family members. In 1990, changes to the Uniform Probate Code recognized the creation of Pet Trusts, and states began to enact pet trust laws that govern in the event of an owner’s death or disability.

The state of Florida enacted laws to authorize the establishment of pet trusts in 2003, allowing petowners to plan for the care and maintenance for their pet’s lifetime. An article in The Naples Daily News, “Pet Trusts Gaining Popularity.” explains the fundamental issues involved.

Now almost every state recognizes these trusts (which vary in each state). A named trustee will typically be responsible for the investment, management and distribution of the trust assets. Another individual is named to avoid conflict of interest as the pet’s caregiver. The trust will include details for caregivers, medical needs, and the final arrangements for the pet’s death.

However, Internal Revenue Code typically doesn’t recognize pet trusts, as an animal isn’t a “person” by definition. The trust wouldn’t work because it doesn’t have a legal "beneficiary.” Nonetheless, the IRS does recognize pet trusts for tax purposes.

If the trust is validly established under state law, the assets passed to a pet trust are included in the decedent’s gross taxable estate. But no part of the assets qualifies for a charitable deduction—even if the remainder beneficiary after the passing of the pet is a qualifying charity.

You should speak with a qualified estate planning attorney because estate taxes and other expenses attributable to the trust will need to be considered when drafting a pet trust. Planning for your pets can be an important part of your estate planning process. Make sure that all members of your family—including your pets—are cared for in your estate plan.

Reference: Naples Daily News (August 17, 2015) “Pet Trusts Gaining Popularity”

For more information on pet trusts, please visit our website.

The Best Estate Sales from the Most Eccentric People!

No stranger to unusual estate issues -- like a pet eel with no named caretaker and a security detail for a ring worth half a million dollars -- the Orange County Public Administrator’s Office is now preparing for an estate sale of Gerald Willits, who left behind 69 cars in his yard, several real estate properties and no heir.

Gerald Willits was an eccentric plumber who liked to collect cars and didn’t seem to mind having wills executed according to The Orange County Register. “A Buena Park plumber's death left behind 69 cars and one big mystery.” Willits had 69 cars neatly parked in rows on his property. He also had three wills, all of which disinherited his only child.

The most recent will designates a California charity as the beneficiary. However, this one isn’t considered valid because it’s a copy, which leaves the 1996 will in play. That one has the estate going to his parents, who were already deceased. As a result, the county is trying to settle an estate that is basically “up for grabs.” Several people are making claims.

Gerald Willits was a plumber and, in addition to all of the vehicles, he also owned four homes that together are worth at least $1.2 million. Willits was a pack rat who was cited for trash, overgrown trees, peeling paint, a lack of running water, and housing inoperative vehicles on his property. He was eccentric and a very private person.

The auto auction is scheduled for September 1 and is expected to net $60,000 to $150,000 from 110 “lots.” This sale includes a 1930 Ford Model A Roadster and a 1965 Volkswagen van. There will be dozens of Fords, Chevys, rusted flathead V8s, as well as an experimental aircraft.

Many people believe that the Public Administrator is trying to get the estate, but that never happens. That office is entitled to a maximum of 4% of the estate’s value under California law.

Don’t have your loved ones fighting over your massive collection of cars or other assets of your estate. Talk to an experienced estate planning attorney. He or she can help you draft a legal will and other estate planning documents to ensure that your wishes are carried out properly.

Reference: The Orange County Register (August 17, 2015) “A Buena Park plumber's death left behind 69 cars and one big mystery”

Please visit our website for more information on how to create a sound estate plan.