Important Dates to Be Aware of in 2023

The new year brings with it important dates that may impact your clients’ financial situations and tax deadlines they may need to meet. By providing them with the following information, you can help them plan ahead to avoid financial trouble and avoid penalties for nonpayment or late payment of taxes.

March 6, 2023, is the deadline under the sixty-five-day rule for trust distributions. Under Internal Revenue Code (I.R.C.) § 663(b), distributions made to beneficiaries of nongrantor trusts (and estates) made within sixty-five days of the end of 2022 may be counted as distributions made during 2022. This could be an important tax savings opportunity for your clients, as a nongrantor trust must pay income tax at the trust level on any taxable income it retains. For 2022, a trust is taxed at the maximum rate of 39.6 percent when its taxable income exceeds $13,451, in contrast to individuals, who reach the top tax rate of 37 percent when their income exceeds $539,900. In some cases, the Medicare surtax (net investment income tax) may also apply, meaning that the trust will have an even higher marginal tax rate. As a result, the overall tax savings may be significant when distributions of trust income are made to a beneficiary in a lower tax bracket. An election to treat the distribution as being made in 2022 must be made by the trustee on a timely filed income tax return for the trust.

April 18, 2023, is the deadline for 2022 individual retirement account (IRA) contributions. Encourage clients who are still working to review their 2022 IRA contributions so they can take full advantage of tax-free or tax-deferred growth, as they are permitted to make contributions for 2022 until April 18, 2023. Due to the high rate of inflation, the limits on contributions to traditional and Roth IRAs will increase from $6,000 in 2022 to $6,500 in 2023. Individuals who are fifty years old or over are permitted to contribute an additional catch-up contribution of $1,000 (unchanged from 2022). In addition, remind older clients to take their required minimum distributions: under the SECURE Act, those who reached age seventy and a half in 2020 or later must take their first required minimum distribution by April 1 of the year after they reach age seventy-two.

April 18, 2023, is tax day. Now that a new year has started, remind your clients to gather the paperwork they need to prepare for filing their income tax returns: W-2s, Forms 1099, records of income from other sources, records of IRA contributions, health savings account contributions, and other items that can reduce their taxable income, as well as documentation that will allow them to take advantage of tax deductions or credits, such as charitable contributions and mortgage interest.

Student loan repayments resume sometime in 2023. To provide relief to students holding eligible federal student loans during the COVID-19 pandemic, the 2020 CARES Act required the US Department of Education to pause loan payments, implement a zero percent interest rate, and stop collection on defaulted loans starting March 13, 2020. The relief was extended by subsequent legislation and administrative forbearance, and in November 2022, the Department of Education instituted another extension of the pause on repayments while Biden’s student loan forgiveness plan is being litigated in the courts. However, in the absence of another extension, the pause on repayments is currently set to end sixty days after the litigation is resolved or sixty days after June 30, 2023, whichever happens first, amid a period of record high inflation. If your clients are among the millions who owe a substantial amount on their student loans, help them create a plan that will enable them to resume payments by helping them determine how much they owe, the size of their payments, how it will affect their budget, and if debt consolidation could be helpful. 

Although the Biden Administration’s plan to forgive up to $10,000 in eligible federal student loan debt for non-Pell Grant recipients and up to $20,000 for Pell Grant recipients was recently struck down by several courts as unconstitutional, if the plan is eventually implemented, be sure to advise your clients that the amount forgiven may be taxable. Although the Internal Revenue Service has indicated that the amount forgiven will not be taxable income at the federal level, it will be taxable in some states.

Your role in helping your clients assess their financial and tax situation and advising them appropriately is critical. If we can help your clients further secure their financial future by creating or updating their estate plan, please give us a call.

New Business Succession Strategy: The Purpose Trust

The beginning of a new year is when many of us reflect on where we have been and what we would like to accomplish in the future. However, business owners are often tempted to succumb to the tyranny of the urgent and fail to take time to consider the future of their businesses. You can provide a great service to your business-owning clients by encouraging them to think about what they would like their life’s work to accomplish in the future. Those who would like to help make the world a better place for future generations should consider a relatively new and perhaps unfamiliar planning tool: the purpose trust.

What Is a Purpose Trust?

A typical trust is an agreement involving several parties: the grantor, the trustee, and the beneficiary. After the trust is created, the grantor funds it with money or property, and the trustee is responsible for managing those assets as specified in the trust for the benefit of specific named beneficiaries. One exception recognized under the law is a charitable trust that is created for a charitable purpose but has no specific beneficiaries. In recent years, however, some states have enacted statutes that allow the establishment of noncharitable purpose trusts (generally known as purpose trusts). In some states, they can be established only to care for pets or maintain a grave site. However, other states (for example, Delaware, New Hampshire, South Dakota, Utah, and Wyoming) allow purpose trusts for most lawful purposes, as long as they are reasonable, attainable, and do not violate public policy. Because there are no beneficiaries to ensure that the trustee is carrying out the purpose of the trust, the grantor must designate an independent trust “enforcer” who can petition the court if the trustee fails to perform its duties under the trust. The same or a different party could also be appointed as a trust protector who can modify the trust if necessary, for example, to add beneficiaries if the purpose of the trust has ended, change the situs of the trust, or even terminate it. The goal of a purpose trust is different from that of more common estate planning tools in that it is not aimed primarily at minimizing taxes or transferring wealth efficiently (although it may achieve those goals) but instead at ensuring that the grantor’s stated purpose is carried out.

The Patagonia Purpose Trust

In September 2022, Yvon Chouinard, the founder of Patagonia, a $3 billion clothing company, transferred the voting stock of the company to a purpose trust designed to further his lifelong goal of fighting the environmental crisis. In a message from Chouinard on Patagonia’s website, he explained that his desire was for the company to continue to pursue its stated purpose: “We’re in business to save our home planet.” After learning that his children were not interested in running the business, he considered his options. Although he could have sold the company and donated the proceeds to other organizations that would continue to pursue the company’s goals, he worried that a new owner of Patagonia would have different values and that his employees would not have job security. The voting stock of the company was transferred to the Patagonia Purpose Trust, which, guided by the family and their advisors, will ensure that the company’s values are pursued and that its profits further their goals. All of the nonvoting stock was contributed to a 501(c)(4) nonprofit organization that will be funded by Patagonia’s dividends, worth an estimated $100 million a year, which it will use in its efforts to protect the environment. Because the business interests were not donated to a charity, the gift will be subject to an estimated $17.5 million in gift tax, and no charitable deduction will be available to Chouinard. However, he will avoid $700 million in capital gains taxes, and when he dies, Chouinard’s estate will avoid substantial estate tax liability.

Why Would a Client Want to Transfer Their Business to a Purpose Trust?

There are a number of reasons why clients who own profitable companies may be interested in a purpose trust as they consider business succession planning. Like the Chouinard family, they can ensure that in addition to providing job security for their employees, the values underlying their business continue to be pursued for many decades into the future. If they do not have children who are interested in running the business, or if their children do not share their values, they can use a purpose trust to require future management to adhere to the purposes set forth in the terms of the trust. Transferring the business to a purpose trust will also ensure that it remains a private company and that the pursuit of profits will never replace the owner’s cherished values as its main goal.

As your client’s financial advisor, you know them well and are aware of their goals for the future of their business and whether they have a desire to use the wealth they have acquired for the benefit of others. You can do a great service for civic-minded clients by informing them about the planning opportunity presented by a purpose trust. Give us a call if we can help you and your clients determine if this opportunity is one they would like to explore.

————————————————–

1 Yvon Chouinard, Earth Is Now Our Only Shareholder, Patagonia, https://www.patagonia.com/ownership/ (last visited Dec. 12, 2022).

2 David Gelles, Billionaire No More: Patagonia Founder Gives Away the Company, N.Y. Times (Sept. 14, 2022), https://www.nytimes.com/2022/09/14/climate/patagonia-climate-philanthropy-chouinard.html.

3 Patagonia Billionaire Ducks $700 Million Tax Hit by Giving It Up, Bloomberg L. (Sept. 16, 2022), https://news.bloombergtax.com/daily-tax-report/patagonia-billionaire-ducks-700-million-tax-hit-by-giving-it-up.

Will 2023 Be a Good Year for Your Clients?

Inflation Has Hit the Estate Planning World

The rate of inflation has reached a historic high, but it has also created estate planning opportunities that some of your clients may not have anticipated. Both the annual gift tax exclusion and the lifetime gift and estate tax exclusion amounts are adjusted for inflation each year, so when the rate of inflation is higher, the increases in these amounts are also greater. Now is a great time to remind your clients of the opportunity to take advantage of these tax-saving opportunities.

Annual Gift Tax Exclusion

Clients who are interested in making an outright gift to a loved one can take advantage of the annual gift tax exclusion, which was increased to $17,000 for 2023 (up from $16,000 in 2022), to make tax-free gifts of money or property up to the exclusion amount directly to as many loved ones (including nonfamily members) as they wish. Married couples can each give $17,000 per recipient; for example, they can provide tax-free gifts of $34,000 to each of their children. Annual exclusion gifts do not count against your clients’ lifetime estate and gift tax exemption amount, and the recipients will not owe any income or gift taxes on the amount they receive. Remind your clients that their gifts of money or property must be of a present interest, that is, they must transfer full title with no limitations to avoid disqualifying the gift from eligibility for the annual exclusion. Annual exclusion gifts are a use-it-or-lose-it opportunity each year and do not accumulate from year to year, so the gifts must be made by the end of 2023, or the chance to use the 2023 annual exclusion will be lost.

Lifetime Gift and Estate Tax Exclusion Amount

The basic exclusion amount for decedents dying in 2023 and the generation-skipping transfer tax exemption amount for 2023 is $12.92 million (up from $12.06 in 2022). The increase in the basic exclusion amount means that an individual will be able to transfer an additional $860,000 ($1.72 million for married couples) free of transfer tax liability in 2023. Gifts exceeding the annual exclusion amount will be counted against their lifetime exemption amount. These gifts are considered taxable gifts, but your clients can simply file a gift tax return and use part of their exemption amount as a credit, so they will not owe any gift tax unless the total value of all gifts made exceeds their remaining basic exclusion amount. The lifetime estate and gift tax exemption amount is set to be cut in half in 2026 in the absence of a change in the current law, so time is of the essence for clients who are interested in taking advantage of the current high exemption amount.

Remember the Anti-clawback Regulations

Under 2019 regulations issued by the Internal Revenue Service (IRS), a special rule was adopted allowing an estate to compute its estate tax credit using the greater of the basic exclusion amount (BEA) applicable during a taxpayer’s lifetime and the BEA applicable on the taxpayer’s date of death, ensuring that taxpayers will not be adversely impacted if they take advantage of the increased BEA by making lifetime gifts and then die in a year with a reduced BEA. The final regulations also clarified that the increased BEA is a use-or-lose benefit, available only to the extent that a taxpayer actually uses it by making gifts during the period in which the increased BEA amount is available. 

Proposed regulations released in April 2022 deny the benefit of the special anti-clawback rule to completed gifts that are treated as testamentary transfers for estate tax purposes and are included in the donor’s gross estate (includible gifts). The exception to the special rule, which requires the estate tax credit to be calculated using the BEA applicable on the taxpayer’s date of death (and thus a lower exemption amount after 2025), is likely to apply to grantor retained annuity trusts, qualified personal residence trusts, promissory note transactions, and possibly preferred partnership techniques. However, the anti-clawback rule would continue to apply to transfers includible in the donor’s gross estate where the taxable amount is 5 percent or less of the total amount of the transfer valued on the date of the transfer. The proposed regulations would also claw back gifts into a decedent’s estate made by the decedent less than eighteen months prior to the death of the decedent. 

We Can Help

No one is happy about the high rate of inflation, but you can help your clients turn lemons into lemonade by strategic gifting. Please contact us if we can help your clients determine if they should take advantage of the estate planning opportunities provided by the historic increases in the exclusion amounts, especially in light of the sunset of the doubled gift and estate tax exemption amount at the end of 2025. 

Tax Season Is Just around the Corner

For everything there is a season, and it will soon be the season for taxes. Although it always seems to arrive too quickly, you will start to receive important tax documents by January 31. Whether you are filing as an individual or administering an estate or trust, you should start to prepare for tax day, April 18, 2023.

Filing as an Individual

Individuals (and married couples) use Form 1040 to file their annual income tax return. Starting in January, watch for the arrival of forms stating the amount of income you earned during 2022. Here are several of the most common forms you may need to complete your Form 1040:

Form W-2, Wage and Tax Statement. If you are a full-time employee or work part-time but are classified as an employee, your employer is required to send you a Form W-2 by January 31, 2023, showing the amount you were paid in wages, tips, and other compensation; the amount withheld by your employer for taxes; and the amount withheld for Social Security and Medicare. This form is not sent to independent contractors or self-employed workers.

Form 1099-NEC, Nonemployee Compensation. If you earned at least $600 in income as an independent contractor, the party or business who hired you must provide you with a Form 1099-NEC (in the past, Form 1099-MISC was used) by January 31, 2023. Form 1099-MISC is still used for prizes, awards, and other income payments, and the business must also provide this to you by January 31, 2023.

Form 1099-INT, Interest Income. Any entity that has paid you interest income of at least $10 must send you a Form 1099-INT by January 31, 2023. This could include banks or other financial institutions. For example, it will be issued for interest paid on savings bonds or savings and checking accounts. You should use this form to report all interest income you have received during the tax year to the Internal Revenue Service.

Form 1099-DIV, Dividends and Distributions. Financial institutions such as banks, credit unions, and mutual funds that have issued you at least $10 in dividends or other distributions must send you a Form 1099-DIV by January 31, 2023. This form supplies you the information you will need to report the income you receive from investments in the form of dividends. 

It is also important to gather and maintain records of IRA contributions, health savings account contributions, and other items that can reduce your taxable income, as well as documentation that will allow you to take advantage of tax deductions or credits, such as charitable contributions and mortgage interest.

Filing as an Executor or Trustee

If you are the executor of an estate or a trustee for a trust, you must report income of more than $600 earned by the estate or trust on Form 1041. If there is a beneficiary who is a nonresident alien, it must be filed regardless of the amount of income earned. However, if the beneficiaries of the estate or trust are entitled to receive the income, they are responsible for actually paying the income tax rather than the estate or trust. A few examples of assets held by an estate or trust that may earn income include mutual funds, rental property, savings accounts, stocks, or bonds. 

The date the return is due depends on whether the estate or trust follows a calendar year or a fiscal year. Calendar year estates and trusts must file the return by April 18, 2023, but fiscal year estates and trusts must file the return by the fifteenth day of the fourth month following the close of the tax year. The executor or trustee can choose whether to use a calendar or fiscal year. Many executors and trustees file a form electing a fiscal year, which begins on the date of the individual’s death and ends on the last day of the month before the anniversary of the date of death, because it allows more time for tax planning. In contrast, if the executor or trustee chooses to use a calendar year, the tax year begins on the date of death and ends on December 31 of the same year.

Executors and trustees must report all distributions of income made to beneficiaries on a Schedule K-1 (1041). In addition, you must send a copy of their respective Schedules K-1 to each beneficiary who has received a distribution of income, and the beneficiaries must report the amount of the distributions on their personal income tax returns. The deadlines for Schedule K-1 are the same as those for Form 1041 and depend on whether a calendar year or fiscal year is being used. Because the beneficiaries need to report this income on their own income tax returns, it is important to send the Schedule K-1 to them as early as possible.

As the executor or trustee, you should gather and maintain records of your fees, fees paid to professionals such as lawyers or accountants, administrative expenses, and distributions to beneficiaries so you can report them on Form 1041 to support tax deductions you claim for the estate or trust.

We Can Help

It is crucial to consider the implications of income taxes for estate planning and administration, whether you are an individual who needs to create or update your own estate plan or if you are administering an estate or trust. Please give us a call if you have any questions about how income taxes should affect your planning or administration decisions.

New Business Succession Strategy: The Purpose Trust

The beginning of a new year is when many of us reflect on where we have been and what we would like to accomplish in the future. If you are a business owner, you may be tempted to succumb to the tyranny of the urgent and fail to take the time to consider the future of your business. However, it is important to think about what you would like your life’s work to accomplish in the future. If you would like to help make the world a better place for future generations, you should consider a relatively new and perhaps unfamiliar planning tool: the purpose trust.

What Is a Purpose Trust?

A typical trust is an agreement involving several parties: the grantor, the trustee, and the beneficiary. After the trust is created, the grantor funds it with money or property, and the trustee is responsible for managing the money and property as specified in the trust for the benefit of specific named beneficiaries. One exception recognized under the law is a charitable trust that is created for a charitable purpose but has no specific beneficiaries. In recent years, however, some states have enacted statutes that allow the establishment of noncharitable purpose trusts (generally known as purpose trusts). In some states, they can be established only to care for pets or maintain a grave site. However, other states (for example, Delaware, New Hampshire, South Dakota, Utah, and Wyoming) allow purpose trusts for most lawful purposes, as long as they are reasonable, attainable, and do not violate public policy. Because there are no beneficiaries to ensure that the trustee is carrying out the purpose of the trust, the grantor must designate an independent trust “enforcer” who can petition the court if the trustee fails to perform its duties under the trust. The same or a different party could also be appointed as a trust protector who can modify the trust if necessary, for example, to add beneficiaries if the purpose of the trust has ended, change the situs of the trust, or even terminate it. The goal of a purpose trust is different from that of more common estate planning tools in that it is not aimed primarily at minimizing taxes or transferring wealth efficiently (although it may achieve those goals) but instead at ensuring that the grantor’s stated purpose is carried out.

The Patagonia Purpose Trust

In September 2022, Yvon Chouinard, the founder of Patagonia, a $3 billion clothing company, transferred the voting stock of the company to a purpose trust designed to further his lifelong goal of fighting the environmental crisis. In a message from Chouinard on Patagonia’s website, he explained that his desire was for the company to continue to pursue its stated purpose: “We’re in business to save our home planet.” After learning that his children were not interested in running the business, he considered his options. Although he could have sold the company and donated the proceeds to other organizations that would continue to pursue the company’s goals, he worried that a new owner of Patagonia would have different values and that his employees would not have job security. The voting stock of the company was transferred to the Patagonia Purpose Trust, which, guided by the family and their advisors, will ensure that the company’s values are pursued and that its profits further their goals. All of the nonvoting stock was contributed to a 501(c)(4) nonprofit organization that will be funded by Patagonia’s dividends, worth an estimated $100 million a year, which it will use in its efforts to protect the environment. Because the business interests were not donated to a charity, the gift will be subject to an estimated $17.5 million in gift tax, and no charitable deduction will be available to Chouinard. However, he will avoid $700 million in capital gains taxes, and when he dies, Chouinard’s estate will avoid substantial estate tax liability.

Why Would You Want to Transfer Your Business to a Purpose Trust?

If you own a profitable company, there are a number of reasons why you may be interested in a purpose trust as you consider business succession planning. Like the Chouinard family, you can ensure that in addition to providing job security for your employees, the values underlying your business continue to be pursued for many decades into the future. Especially if you do not have children who are interested in running the business, or if your children do not share your values, the terms of a purpose trust can require future management to adhere to the purpose of the trust. Transferring the business to a purpose trust will also ensure that it remains a private company and that the pursuit of profits will never replace your cherished values as its main goal.

What are your goals for the future of your business? If you have a desire to use the wealth you have acquired for the benefit of others, you may be interested in learning more about a purpose trust. Give us a call if we can help you determine if you would like to explore this planning opportunity.

——————————————————

1  Yvon Chouinard, Earth Is Now Our Only Shareholder, Patagonia, https://www.patagonia.com/ownership/ (last visited Dec. 22, 2022).

2 David Gelles, Billionaire No More: Patagonia Founder Gives Away the Company, N.Y. Times (Sept. 14, 2022), https://www.nytimes.com/2022/09/14/climate/patagonia-climate-philanthropy-chouinard.html.

3 Patagonia Billionaire Ducks $700 Million Tax Hit by Giving It Up, Bloomberg Law (Sept. 16, 2022), https://news.bloombergtax.com/daily-tax-report/patagonia-billionaire-ducks-700-million-tax-hit-by-giving-it-up.

Important Things to Do As You Begin 2023

January Is National Mentoring Month: Three Creative Ways to Use the Estate Planning Process to Be a Mentor

Celebrate National Mentoring Month this January by becoming a mentor to the people in your life who have less life experience, whether they are your children or other loved ones. Mentors can have a huge positive impact on a young person’s life by sharing the wisdom, knowledge, and experience they have gained to help their mentee develop skills and goals that will enable them to succeed in life. 

What does mentoring have to do with estate planning? You may think that estate planning is only relevant when a person dies or is preparing to pass on their money and property upon their death. However, estate planning can also involve strategies you implement during your lifetime and provides a great mentoring opportunity. Here are three ways you can use estate planning to guide your younger loved ones toward a more successful life: 

(1) Give small gifts during your life to help your mentee reach a goal. First, help your mentee learn why setting goals is important and how to set goals for their own life. For example, if your mentee would like to start a business or pay for college, you could assist them in creating a bank or investment account to save money for that purpose. You could use gifts to create an incentive for them to deposit money regularly in that account by contributing a certain amount, perhaps fifty cents, for every dollar they deposit. Or, if they would like to contribute to a charitable organization that is important to them, you could encourage them by providing a matching gift for every contribution they make. By helping them reach these goals themselves instead of merely giving them all of the money needed to achieve them, they will learn valuable lessons. You can further facilitate their success by sharing life lessons you learned when you tried to achieve similar goals.

(2) Educate your mentee about a particular item that you plan for them to inherit one day. For example, if you have a family cabin that you plan to pass on to your son and daughter, document all of the steps needed to maintain it and create a schedule for who will fulfill those chores on a regular basis. If you and your sibling have been in charge of taking care of the cabin, you can share the knowledge and experience you have gained over the years about the best ways to work together to care for the property. In addition to providing information about the nuts and bolts of maintaining the cabin, you can share stories and memories about your own experiences there to communicate why it means so much to you and why you want them to have those same positive experiences in their lives.

(3) Teach your mentee about a skill you have developed and believe is important. Perhaps your mother or father taught you important lessons about how to save money or contribute to good causes. You can pass these same lessons on to the next generation as well. If you learned money management skills that have enabled you to build a sizable estate and allowed you to benefit your family and others, invest time in teaching those skills to your younger loved ones. Similarly, if you have discovered methods for determining whether a charity is being run responsibly and is a worthy organization for a donation, share that knowledge with your mentee so they can make good decisions when they make their own charitable contributions. Communicate to your mentee how these skills have had a positive impact on your own life and the lives of others to reinforce their importance and why it is important for them to gain the same skills.

Creative mentoring can provide a great opportunity for you to share more than just your money and property with those you love: you can share your important values and the skills and experiences gained as you have put them into practice. If you want to leave a lasting legacy for your family and loved ones and need assistance creating or updating your estate plan, please give us a call.

Are Your Clients Ready for 2023?

Set them up for success.

Advantageous Gift Ideas for Your Clients

Many Americans associate December with holiday gift-giving, so it is a great time for you to remind your clients of a valuable planning opportunity: year-end gifts. In making lifetime gifts, your clients will experience the pleasure of immediately benefitting their loved ones while helping to shape their legacies, for example, by funding a loved one’s education or continuing a family tradition of charitable giving. A much larger proportion of your clients can benefit from year-end giving, as the doubled gift and estate tax exemption amount will sunset at the end of 2025, returning to $5 million adjusted for inflation in the absence of legislative action. The following are several advantageous ways for your clients to make year-end gifts.

1. Direct payment of medical expenses. Your clients can make an unlimited number of tax-free gifts by paying their loved ones’ medical expenses. These gifts should be made directly to the medical providers rather than to your clients’ family members or friends. In addition, it is important to verify that the payments are for expenses that would qualify as deductible itemized medical expenses on the tax return of the individual receiving the healthcare. 

2. Direct payment of tuition. Similar to paying medical expenses, your clients can pay for their loved ones’ tuition. There is no limit on the amount of tax-free gifts or restrictions on who can benefit from them, but payments must be made directly to the educational institution, not to the parents or students themselves. The payments must fall within the Internal Revenue Code’s definition of “tuition,” which is not limited to college or graduate school tuition, but also includes private school tuition for younger students. It does not include payments for living expenses, books, or other fees, however. 

3. Charitable gifts on behalf of or in honor of a loved one. For clients who are charitably inclined or who want to honor a loved one by donating to their favorite charity, a year-end contribution to a qualified organization will also enable clients to claim a charitable deduction. Remind clients that they must keep records of any contributions, and they may need to obtain written acknowledgment from the charity to deduct a cash or noncash contribution. There are additional requirements for larger noncash gifts. Your clients can claim their charitable deductions during their lifetime or at death, depending on the strategy they use.

Your Help Is Crucial

As your clients’ trusted advisor, you can provide essential guidance by helping them determine when is the best time for them to make a gift, how large the gift should be, and what type of gift they should make. It may be more advantageous for your clients to give certain property or accounts over others, and you can help them evaluate what type of gift will work best for them and their recipients. You can also inform clients about the tax consequences of their gifts and assist them in making sure the relevant tax forms or other paperwork are completed and submitted to the Internal Revenue Service (IRS). Please contact us if your clients would like to integrate their lifetime gifts into a comprehensive estate plan.

Are You Ready for 2023?

End-of-Year Considerations

Unique Gift Ideas that Benefit You Too

You may associate the month of December with giving holiday gifts, but it is also a great time for you to think about the valuable estate planning opportunity presented by year-end gift giving. In making lifetime gifts, you can experience the pleasure of providing immediate benefits to your loved ones while shaping your legacy, for example, by funding a loved one’s education or starting a family tradition of charitable giving. There are several advantageous ways for you to make year-end gifts.

1. Direct payment of medical expenses. You can make an unlimited number of tax-free gifts by paying your loved ones’ medical expenses. These gifts should be made directly to the medical providers rather than to your family members or friends. In addition, it is important to verify that the payments are for expenses that would qualify as deductible itemized medical expenses on the tax return of the individual receiving the healthcare. 

2. Direct payment of tuition. Similar to paying medical expenses, you can also pay for your loved ones’ tuition. There is no limit on the amount of tax-free gifts or restrictions on who can benefit from them, but payments must be made directly to the educational institution, not to the parents or students themselves. The payments must fall within the Internal Revenue Code’s definition of “tuition,” which is not limited to college or graduate school tuition, but also includes private school tuition for younger students. It does not include payments for living expenses, books, or other fees, however. 

3. Charitable gifts on behalf of or in honor of a loved one. If you are charitably inclined or want to honor a loved one by donating to their favorite charity, a year-end contribution to a qualified organization will also enable you to claim a charitable deduction. You must keep records of any contribution, and you may need to obtain written acknowledgment from the charity to deduct a contribution of cash or property. There are additional requirements for larger gifts of property. You can claim charitable deductions during your lifetime or your estate can claim it when you pass away, depending upon the strategy you use. We can help you determine the best strategy for your unique circumstances.

Your Best Gift

The best gift you can provide for your loved ones is to have all of your affairs in order. Please contact us if we can help you create or update a comprehensive estate plan that will help provide for your loved ones through thoughtful lifetime gifts and after you pass away.

Have You Made New Year’s Resolutions?

A new year is a great time to start fresh and implement positive changes that will enhance our lives. Many of us want to lose weight, spend more time with friends and family, eat healthier, learn a new skill, or save money. Although we can implement these goals anytime, the beginning of the new year is often a good starting point to help us measure our progress.

There are pros and cons to setting New Year’s resolutions, and people have varying opinions about their helpfulness. People who have a favorable attitude towards New Year’s resolutions often point out the following benefits: 

  • Having goals provides people with a sense of purpose and a positive, forward-looking perspective. 
  • If you do not set goals, it is axiomatic that you will not achieve them!
  • Accomplishing a goal—or at least making significant progress—provides a sense of satisfaction.

Others point out the following cons of New Year’s resolutions:

  • The initial motivation generally wanes over time, making failure likely.
  • Not keeping them could lead to a feeling of failure or shame.
  • They reflect dissatisfaction with oneself or one’s life circumstances.

If you have decided that New Year’s resolutions are helpful to you, think about goals that can provide significant security for yourself and your family. Although they may not be the first New Year’s resolutions that come to mind, there are several steps that you can take that will benefit your family.

1. Choose a guardian. If you are a parent, create a plan to ensure that your children are cared for if you or the other legal parent are unable to care for them by naming a person you trust to be their guardian. If you do not choose someone to serve as a guardian, a court will appoint someone for you—and it may not be the person you would have chosen. Designate the person you choose in your will or in a separate document, if your state allows for it. 

2. Create medical and financial powers of attorney. If you are unable to communicate or make your own medical or financial decisions, your agent under a power of attorney can step in and make decisions on your behalf. Even if you are married, it is still prudent to appoint an agent to act for you because your spouse may not be able to step in for you depending on the situation. If you want your spouse to be your agent, you must have medical and financial powers of attorney prepared. This will help your spouse or other loved one avoid the stress of having to go to court to be appointed as your guardian.

3. Have enough life insurance. If you pass away, will the proceeds of your current life insurance policy provide adequate funds for your loved ones? It is important to regularly evaluate whether your coverage is sufficient, particularly if you have had another child. If you do not have life insurance, one of your New Year’s resolutions should be to ensure that this gap in your planning is filled.

4. Establish a plan for your money and property. Have you decided who you would like to inherit your money and property when you pass away? If you do not have a written estate plan, your money and property will go to individuals specified in your state’s statute instead of to the beneficiaries you choose. You should create a will, which is a document that states how you would like your money and property to be distributed at your death and the individuals (or organizations if you would like to give to a charity) who you would like to receive it. Alternatively, many people create trusts to hold their money and property on their behalf and on behalf of their beneficiaries and which specifies when and to whom the money and property should be distributed. Trusts provide privacy because, unlike wills, the trust documents do not become public record during probate proceedings. In addition, a trust can protect your beneficiaries from unwise spending and creditors.

Let Us Help You Keep Your Resolutions

We can help you create a comprehensive estate plan that will fulfill all of your goals and provide you and your loved ones with substantial peace of mind. Please give us a call to discuss how we can assist you in creating the best plan for you as you enter the new year.

Different Types of Charitable Giving

The end of the year is a great time for you to think about donating to charity. Donations not only aptly express the generosity associated with the holiday season, but they help worthy organizations and allow you to save on taxes by claiming a charitable deduction. While most people think of donating cash or financial accounts, donating property can be advantageous as well. 

Cars

Many organizations accept donations of cars, even if they do not currently run, and some will also take donations of other types of vehicles such as recreational vehicles, trucks, or motorcycles. You should transfer the title of the car to the charity and remove the license plate and registration. For the donation to be tax deductible, the charity receiving the donation must be a 501(c)(3) organization. You should obtain a written acknowledgement of the donation from the charity. If the charity sells the vehicle, the deduction should generally be for the charity’s gross proceeds from the sale, but under some circumstances, a deduction can be claimed for the car’s fair market value (i.e., the amount it could be sold for in the open market by a willing seller to a willing buyer) on the date that it is donated. However, if the written acknowledgment indicates that the donated vehicle sold for $500 or less, you can claim a deduction for the lesser of the vehicle’s fair market value on the date it was donated or $500.

Household Items

Donations of household items such as furniture, appliances, books, and clothing to a 501(c)(3) organization are eligible for a charitable deduction of their fair market value on the date of the donation. Donated household goods and clothing must be in good used condition to be eligible for a deduction based on its fair market value. If they are not in good condition, you must attach a qualified appraisal and Internal Revenue Service (IRS) Form 8283, Section B to your tax return to claim a deduction of $500 or more. 

Building Materials

If you have materials left over after building a new house or old cabinets or fixtures after a remodeling project, you can donate them to a 501(c)(3) organization that helps families build affordable homes or sells donated materials to raise money for a charitable cause. Like household items, the amount of the deduction is the fair market value of the building materials on the date they are donated. 

We Can Help

Charitable organizations often operate tight budgets and count on year-end donations to continue their missions. You can benefit a charity and possibly lower your tax bill by donating your old car or leftover building materials before the end of the year. However, keep in mind that you can deduct charitable donations only if you itemize deductions on Schedule A of your IRS Form 1040. Even if you do not itemize your deductions, making a charitable contribution is worthwhile because it is an opportunity to benefit those in need. If you would like to discuss how to make gifts that both fulfill your charitable goals and benefit your family by lowering your taxes, please contact us.

How the 2022 Midterm Election Will Impact You

On Tuesday, November 8, United States elections for the year 2022 were held. During this important midterm election, more than one-third of the seats in the Senate and all 435 seats in the House of Representative were contested. Now that the results are in, we know that Republicans will control the House and Democrats will retain control of the Senate come January. What does this mean for you?

With a Republican-controlled House and a Democratic-controlled Senate, it seems likely that any legislative action, outside of must-pass legislation such as funding the government, will come to a screeching halt. And negotiations on even the must-pass legislation will likely be factious, with each party seeing it as their only opportunity to pass policy.

GOP power in the House means Republicans will likely bring congressional investigations of certain people, policies, and corporations. For example, congressional hearings for the Justice Department’s handling of the Trump Mar-a-Lago investigations and telecommunications companies that cooperated with the January 6 committee seem likely. Republican members of the House have also signaled support for probes into Hunter Biden, the White House’s handling of the southern border, and President Biden’s withdrawal from Afghanistan. Some far-right members have also said they would try to launch impeachment proceedings against President Biden, although this effort would likely not get far because the Senate, which has sole power to conduct impeachment trials, is controlled by Democrats.

The Republicans’ agenda will likely include putting an end to Build Back Better, and they may also attempt to get spending cuts as concessions from the White House when the time comes to raise the cap on government spending in 2023.

On the other hand, Democrats will focus on what they can do with the Senate’s power: confirming federal judges and executive branch appointments. Since only a simple majority in the Senate is required to confirm judicial nominees for district courts, circuit courts, and even the Supreme Court, a Democratic Senate will be able to confirm more of President Biden’s choices.

The Democrats’ retention of a majority in the Senate also means that they can determine legislative priorities—Senate Democrats can set their own floor agenda and reject bills approved by the Republican-controlled House. They can also ensure that hearings and committee time are not used on investigations of President Biden and other members of his administration.

In reality, at this point all we can do is speculate until the new congressional session begins. We will continue to keep you updated, particularly with regard to how any proposed or new laws might impact your estate planning. In the meantime, do not wait to start or revise your estate plan if changes are needed. Life events such as marriage, divorce, birth, and death have a major impact not only on your life but on your estate plan as well. If you or your loved ones have had any of these changes, it is crucial that you review your estate plan (on your own or with us) to ensure that your wishes are carried out. Remember: estate planning is not a one-and-done event.IRS Extends Late Portability Election

The IRS recently issued a new procedure (Revenue Procedure 2022-32) which extends the time an estate has to elect portability to five years after the decedent’s date of death. Since portability is probably not top of mind for you, let us take a minute to review what portability is and why this news could be very useful information.

What is the portability election?

In its simplest terms, portability is a procedure that allows spouses to combine their estate and gift tax exemptions by allowing a surviving spouse to use their deceased spouse’s unused exclusion (DSUE) amount. The surviving spouse then has their own exemption from estate and gift tax plus the unused exemption of their deceased spouse.

Example: Spouse 1 dies in 2022 when the exemption amount is $12.06 million. Spouse 1 used $2 million of their exemption amount to make gifts during their lifetime, leaving a DSUE amount of $10.06 million. Spouse 2 can elect portability to combine Spouse 1’s $10.06 million unused exemption amount with their own exemption amount.

What was the prior deadline, and why did the IRS issue a new deadline?

Prior to Revenue Procedure 2022-32, for estates not required to file an estate tax return, the deadline to elect portability was two years after the decedent’s death. (For estates required to file an estate tax return, the due date for the return is nine months after the decedent’s death, or if an extension has been obtained, the last day of the extension period, regardless of whether the estate elects portability.) However, the IRS was receiving a significant number of requests for private letter rulings from estates that did not meet the two-year deadline, placing a considerable burden on the IRS’s resources. The IRS observed that many of these requests were from estates where the decedent had died within five years of the request, thus prompting issuance of Revenue Procedure 2022-32, which extends the election period to five years after the decedent’s death.

Why might you be filing late?

Because many couples own property jointly, when the first spouse passes away, the surviving spouse becomes the sole owner of their deceased spouse’s property by operation of law; thus, they often do not consult with any advisors at the first spouse’s death. If the value of the surviving spouse’s money and property is greater than their individual exemption amount, or if the value of their money and property increases after the death of the first spouse, then the surviving spouse’s individual exemption amount alone may not be enough to avoid the payment of estate taxes.

Example: Spouse 1 and Spouse 2 own property worth $10 million. Spouse 1 dies in 2022 when the estate tax exemption amount is $12.06 million. Because everything was owned jointly, all property automatically passes to Spouse 2 as the sole owner. Spouse 2 does not file an estate tax return to elect portability at Spouse 1’s death and does not have to because Spouse 1’s assets were worth less than Spouse 1’s remaining estate tax exemption amount. When Spouse 2 passes away in 2026, the exemption is approximately $6 million, and Spouse 2’s property is now worth $14.06 million, meaning that estate taxes will be owed on the $8.6 million not covered by Spouse 2’s exemption amount. If Spouse 2 had used the extended five-year period for electing portability to claim Spouse 1’s unused $12.06 million exemption amount, the entire estate could have been shielded from estate taxes (($14.06 million – $12.06 million) – $6 million = no estate tax due).

If you need more information about portability and how it might apply to you, please contact us and your tax preparer for help in analyzing your financial and tax situation. We are here to assist you in that analysis and direct you in taking next steps.

How the 2022 Midterm Election Will Impact You and Your Clients

On Tuesday, November 8, United States elections for the year 2022 were held. During this important midterm election, more than one-third of the seats in the Senate and all 435 seats in the House of Representative were contested. Now that the results are in, we know that Republicans will control the House and Democrats will retain control of the Senate come January. What does this mean for you and your clients?

With a Republican-controlled House and a Democratic-controlled Senate, it seems likely that any legislative action, outside of must-pass legislation such as funding the government, will come to a screeching halt. And negotiations on even the must-pass legislation will likely be factious, with each party seeing it as their only opportunity to pass policy.

GOP power in the House means Republicans will likely bring congressional investigations of certain people, policies, and corporations. For example, congressional hearings for the Justice Department’s handling of the Trump Mar-a-Lago investigations and telecommunications companies that cooperated with the January 6 committee seem likely. Republican members of the House have also signaled support for probes into Hunter Biden, the White House’s handling of the southern border, and President Biden’s withdrawal from Afghanistan. Some far-right members have also said they would try to launch impeachment proceedings against President Biden, although this effort would likely not get far because the Senate, which has sole power to conduct impeachment trials, is controlled by Democrats.

The Republicans’ agenda will likely include putting an end to Build Back Better, and they may also attempt to get spending cuts as concessions from the White House when the time comes to raise the cap on government spending in 2023.

On the other hand, Democrats will focus on what they can do with the Senate’s power: confirming federal judges and executive branch appointments. Since only a simple majority in the Senate is required to confirm judicial nominees for district courts, circuit courts, and even the Supreme Court, a Democratic Senate will be able to confirm more of President Biden’s choices.

The Democrats’ retention of a majority in the Senate also means that they can determine legislative priorities—Senate Democrats can set their own floor agenda and reject bills approved by the Republican-controlled House. They can also ensure that hearings and committee time are not used on investigations of President Biden and other members of his administration.

In reality, at this point all we can do is speculate until the new congressional session begins. With such uncertainty, it is important to make sure we are meeting with clients and keeping them up to date. Life events such as marriage, divorce, birth, and death can have a major impact on our clients’ lives and necessitate a review of their estate plan. It is up to us to remind our clients that comprehensive planning is not a one-and-done event. Although it appears that there are no substantial legal changes impacting our clients’ financial and estate plans today, we pride ourselves on being your source for relevant estate planning information and look forward to working with you into the next year.IRS Extends Late Portability Election

The IRS recently issued a new procedure (Revenue Procedure 2022-32) that extends the time an estate has to elect portability to five years after the decedent’s date of death. Since portability is probably not top of mind for you or your clients, let us take a minute to review what portability is and why this news could be very useful information.

What is the portability election?

In its simplest terms, portability is a procedure that allows spouses to combine their estate and gift tax exemptions by allowing a surviving spouse to use their deceased spouse’s unused exclusion (DSUE) amount. The surviving spouse then has their own exemption from estate and gift tax plus the unused exemption of their deceased spouse.

Example: Spouse 1 dies in 2022 when the exemption amount is $12.06 million. Spouse 1 used $2 million of their exemption amount to make gifts during their lifetime, leaving a DSUE amount of $10.06 million. Spouse 2 can elect portability to combine Spouse 1’s $10.06 million unused exemption amount with their own exemption amount.

What was the prior deadline, and why did the IRS issue a new deadline?

Prior to Revenue Procedure 2022-32, for estates not required to file an estate tax return, the deadline to elect portability was two years after the decedent’s death. (For estates required to file an estate tax return, the due date for the return is nine months after the decedent’s death, or if an extension has been obtained, the last day of the extension period, regardless of whether the estate elects portability.) However, the IRS was receiving a significant number of requests for private letter rulings from estates that did not meet the two-year deadline, placing a considerable burden on the IRS’s resources. The IRS observed that many of these requests were from estates where the decedent had died within five years of the request, thus prompting issuance of Revenue Procedure 2022-32, which extends the election period to five years after the decedent’s death.

Why might your client be filing late?

Because many couples own property jointly, when the first spouse passes away, the surviving spouse becomes the sole owner of their deceased spouse’s property by operation of law; thus, they often do not consult with any advisors at the first spouse’s death. If the value of the surviving spouse’s money and property is greater than their individual exemption amount, or if the value of their money and property increases after the death of the first spouse, then the surviving spouse’s individual exemption amount alone may not be enough to avoid the payment of estate taxes.

Example: Spouse 1 and Spouse 2 own property worth $10 million. Spouse 1 dies in 2022 when the estate tax exemption amount is $12.06 million. Because everything was owned jointly, all property automatically passes to Spouse 2 as the sole owner. Spouse 2 does not file an estate tax return to elect portability at Spouse 1’s death and does not have to because Spouse 1’s assets were worth less than Spouse 1’s remaining estate tax exemption amount. When Spouse 2 passes away in 2026, the exemption is approximately $6 million, and Spouse 2’s property is now worth $14.06 million, meaning that estate taxes will be owed on the $8.6 million not covered by Spouse 2’s exemption amount. If Spouse 2 had used the extended five-year period for electing portability to claim Spouse 1’s unused $12.06 million exemption amount, the entire estate could have been shielded from estate taxes (($14.06 million – $12.06 million) – $6 million = no estate tax due).

As an advisor, you have the critical role of analyzing the financial and tax situation of your surviving spouse clients to see if it would be beneficial for them to file a Form 706 to elect portability. We are here to assist you in that analysis should you have any questions.