How will proposed tax reform affect your estate plan?

Posted January 30, 2015 in Business Law, Estate Planning, Probate by Michael Lonich.


January 30, 2015
How will proposed tax reform affect your estate plan?
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On January 20th, 2015, President Obama stood before a joint session of Congress and delivered the annual State of the Union address. Some of the topics discussed were the current State of the Union, College Savings Plan reform, his legislative agenda as well as several White House proposed tax reforms for the upcoming fiscal year.

While many of his new policies will affect all Americans in some way, several of his proposed tax increases will particularly affect upper-income persons and financial corporations. One in particular is a proposed change to the tax on appreciated estate property, otherwise referred to as the “trust-fund loophole.”

Taxation on Appreciated Estate Property

The term Capital Gain stands for the profit realized on the sale of a non-inventory asset that was purchased at a cost amount that was lower than the amount realized on the sale.  In the United States, individuals and corporations pay U.S. federal income tax on the net total of all their capital gains just as they do on other sorts of income. “Long term” capital gains are generally taxed at a preferential rate in comparison to ordinary income.

Currently, the law states that property which has appreciated in value that is owned by an estate is generally not subject to tax at death. Under this tax scheme, children and other heirs typically receive and sell property with little or no capital gains tax since most property receives an increase in basis to fair market value. For example, a parent who dies can pass along a valuable asset to their child or heir with no capital gains tax being due. When the child or heir eventually sells the asset, the current law limits the eventual tax bill by figuring the taxable gain only since the parent’s death. While this is a feature commonly known as a stepped-up basis the administration refers to this as the “trust fund loophole” and is looking to change it.

The White House proposal is to tax this appreciated estate property. The proposal states that the tax will be at 28% if the difference between the cost of the property and the fair market value at death exceeds $100,000 per person. There would be a separate exclusion for a personal residence of $250,000 per person. The proposal would not include clothes, furniture and most other personal items.

In arguing its case for revising this aspect of the tax code, the White House claims that all of the gain on valuable property or assets that occur prior to the death of a parent unfairly escapes tax. The White House claims it is in good company. Critics of the current tax code say that it is outdated. They claim that while the current policy reduces disputes over prices paid for assets long ago, they acknowledge that revision to the tax code would unlock capital by removing an incentive for holding valuable assets for generations.

Many experts, such as USC tax expert Edward Kleinbard, agree. Mr. Kleinbard notes that the capital gains tax is our only truly voluntary tax. Taxpayers can defer it for a considerable amount of time simply by withholding on the sale of their taxable assets. He argues that if you’re rich enough to hang onto your stocks and bonds, or can utilize financial strategies to enable you to exploit their value without selling them, you can defer paying capital gains tax your entire life.

Whether the White House prevails in passing this legislation remains to be seen. It seems clear, however, that negotiations on tax policy will continue in attempts by the current administration to eliminate tax loop-holes. Eliminating the lock-in effect, where holders of appreciated assets avoid selling because of the taxes imposed on the sale, could have a major impact on estate planning strategies and should prompt concerned individuals to look more closely at their estate plans, which should be revised periodically to ensure the best treatment of ones assets.

These are issues that make estate planning a complex field. Whether you are concerned with devising a plan for either a family estate or that of a business, it is important to get good advice. The attorneys at Lonich & Patton have decades of experience handling complex estate planning matters including business succession plans, wills, and living trusts. If you are interested in developing an estate plan or reviewing your current estate plan, contact the experienced estate planning attorneys at Lonich & Patton for further information as we are happy to offer you a free consultation.

Please remember that each individual situation is unique and results discussed in this post are not a guarantee of future results.  While this post may detail general legal issues, it is not legal advice.  Use of this site does not create an attorney-client relationship.


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Divorce Month is Half Over

Posted January 16, 2015 in Family Law by Lonich and Patton.

This coming Monday, January 19, 2015, has been marked as “blue Monday” or the unhappiest day of the year. Experts predict the following factors contribute to blue Monday: weather conditions, debt level, time since the holidays, time since failing our new year’s resolutions, low motivational levels, and the feeling of a need to take action. On a similar note, every January also experiences a noticeable increase in the number of individuals seeking divorce advice and ultimately filing for divorce. The president of the American Academy of Matrimonial Lawyers says the number of divorce filings is one-third more than normal, starting in January and continuing until early March. Like blue Monday, this trend is rather melancholy but makes sense for a couple of reasons.

First, an unhappy spouse may want to wait until the new year to file for divorce in order to avoid the associated social stigma. Most spouses probably do not want to explain why their spouse was served with divorce papers right before the holidays, a time traditionally for family. Additionally, waiting until January avoids “ruining” Christmas for the children and keeps the status quo until the children return to school.

Further, a new year comes with new year’s resolutions, most of which are aimed at achieving personal happiness. If a spouse is in an unhappy marriage, then a divorce may be an appealing option.

Lastly, it may be logistically easier to wait to file until the holidays are over. This may streamline the divorce process, making it more likely that the divorce will be finalized before the end of the year. Courts often experience backlog during the holiday season, as spouses rush to finalize their divorce before January for tax purposes (they want to file as single for the new year).

Whatever the reason, if you are in an unhappy marriage right now, you are probably not alone. On a positive note, many spouses have completely different and new lives in front of them after divorce. Hence, January is also the busiest time of the year for online dating websites, which experience a similar 38% increase in registrations from December through February. According to a study published in the National Academy of Sciences, around one-third of American marriages now begin online and are less likely to end in divorce than those who did not meet online.

If you are considering filing for divorce at any time of the year, the Certified Family Law Specialists at Lonich & Patton have decades of experience handling complex family law matters.  Please contact the Certified Family Law Specialists at Lonich & Patton for further information.  Please remember that each individual situation is unique and results discussed in this post are not a guarantee of future results.  While this post may include legal issues, it is not legal advice.  Use of this site does not create an attorney-client relationship.

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