Adventures in 199A for Real Estate Investors


Farhad Aghdami and I presented “Getting Your Hands Dirty with Real Estate Investors” at the 52nd annual Heckerling Institute on Estate Planning last Thursday, January 25, 2018.  I caused a bit of a stir in my summary of new Internal Revenue Code Section 199A as it applies to real estate, and the accountants in the room corrected me afterwards.  This was just one of many examples of how all tax professionals need to come together to understand the most expansive tax legislation we’ve had in decades.

At issue is the language in Section 199A(b)(2)(B)(ii) that gives pass-through entities that pay no W-2 wages the ability to deduct the lesser of 20% of their qualified business income or “2.5 percent of the unadjusted basis immediately after acquisition of all qualified property”.  Section 199A(b)(6) defines the term “qualified property” to mean, “with respect to any qualified trade or business for a taxable year, tangible property of a character subject to the allowance for depreciation under Section 167” (emphasis added).

In our presentation, I emphasized that the 2.5% calculation only applies to tangible property depreciable under Section 167, and implied that this did not include real estate holdings.  But, thankfully for our real estate investor clients, this was only approximately 20% true and 80% false.

Real estate consists of both land and improvements.  Estate planners are accustomed to the word “tangible” as it applies to tangible personal property – meaning, items that can be picked up and moved around.  As accountants know, however, improvements such as buildings, parking lots, docks, swimming pools and the like are also tangible, and they are subject to wear, tear and decay, which means that these improvements are depreciable under Section 167.  Because land is not a wasting asset (although people living on the coastline may disagree), it is not depreciable under Code Section 167.

Treasury Regulation 1.167(a)-2 clarifies that the depreciation allowance “in the case of tangible property applies only to that part of the property which is subject to wear and tear, to decay or decline from natural causes, to exhaustion, and to obsolescence.  The allowance does not apply to … land apart from the improvements or physical development added to it.”

The end result is good news for real estate owners, who often hire management companies to manage the real estate assets and, as a result, can pay very little in W-2 wages to employees.  Consider the following example:

Bob Sponsor owns a 50% interest in a commercial real estate property through an LLC.  Bob’s share of the rental income of the LLC is $2,000,000.  The LLC pays no W-2 wages, rather, it pays a management fee to an S corporation that Bob controls.  The management company pays W-2 wages, but it breaks even, passing out no net income to Bob.  Bob’s share of the total unadjusted basis of the buildings and improvements immediately after acquisition of the commercial property is $15,000,000.  Bob is entitled to a deduction of $375,000, which is the lesser of: (a) 20% of qualified business income of $2,000,000 (or, $400,000), or (b) 2.5% of the unadjusted basis of $15,000,000 (or, $375,000).

There is a rule of thumb in the real estate world that 80% of the purchase price of an improved property is attributable to the building, and only 20% to the land.  Hence, the reason for the statement above that I was only 20% correct that the 2.5% calculation does not include real estate.  However, this rule of thumb should not be relied upon for purposes of the 2.5% calculation or for depreciation, especially in populous areas where the value of the land may be higher than the building that sits on it.

In a 2017 Tax Court case called Nielsen v. Comm’r, T.C. Summary Opinion 2017-31, the IRS challenged a taxpayer’s allocation of the purchase price to land versus buildings, and the Tax Court sided with the IRS, finding the Los Angeles County tax assessor’s value of the land to be more reliable and persuasive than the taxpayer’s own estimate.

If the purchaser of real estate does not want to pay for the commission of a separate appraisal of the land being purchased, separate and apart from the structures on it, then the real estate owner should at least rely on the county tax assessor’s allocation, applying to the purchase price the same land-to-total-value ratio arrived at by the assessor.

The purchase price or “acquisition cost” of buildings and other improvements will be critical to the calculation of a real estate pass-through entity’s Section 199A deduction.  As a result, it will be more important than ever for accountants and business owners to more accurately allocate a purchase price to land versus buildings and other improvements.

Congress Passes Tax Reform

The legislation formerly known as the “Tax Cuts and Jobs Act” (the “Act”) has passed the House and Senate and is headed to the President for signature.[1]  Here are some of the ways the Act will impact estate planning.

Increased Exemptions
The Act will increase the estate, gift and generation-skipping transfer (“GST”) tax exemptions to $10 million per person, adjusted for inflation.  Beginning January 1, 2018, the exemptions will be $11.2 million per person and $22.4 million for a married couple.  The tax rate remains unchanged at 40%, and the GST tax exemption is still not “portable” between spouses.  These exemptions will expire at the end of 2025 and will return to current levels (adjusted for inflation) unless Congress acts to make the change permanent.
Here is our planning advice:

  • Do not rely on these exemptions remaining permanent.  If you have a taxable estate even at the increased exemption levels, consider making gifts in 2018 of your increased exemption amount.
  • If you have an existing trust that is not fully GST exempt, consider making a late allocation of your increased GST tax exemption to such trust in 2018.
  • If you are married and your estate plan utilizes your GST tax exemptions by creating “Descendants Trusts”, “Dynasty Trusts” or other trusts for the lifetimes of your children, grandchildren and more remote descendants, we should examine how your assets are titled to ensure that both spouses have assets up to the new exemption amounts in their own names.
  • Although rare, some of our clients have estate plans that distribute the estate tax or GST tax exemption amount directly to children and/or grandchildren, thus skipping the spouse or in some cases, skipping children.  If your plan includes this element, you should consider putting a cap on the amount passing pursuant to this provision, as you may not have intended for the full $11.2 million to skip your spouse or children.

Annual Exclusion from Gift Tax
The Act makes no changes to the annual exclusion from gift tax, but we note that it has increased for inflation to $15,000 for 2018.  You can give any one person $15,000 without having to use any of your new $11.2 million gift tax exemption, and without having to file a gift tax return.  If you are married, your spouse and you can give $30,000 to any one person in 2018, but a gift tax return will be required to report gift-splitting if the gift is made by only one spouse.

Charitable Contributions
Under the Act, you can donate cash to public charities and operating foundations and receive a charitable contribution deduction for up to 60% of your adjusted gross income (“AGI”).  The current limit is 50%.  The limit for contributions of appreciated property such as stocks and real estate remains unchanged at 30% of AGI, and the limit for contributions to private foundations of 30% of AGI for cash and 20% of AGI for appreciated property also remain unchanged.
Because your income tax rate will likely be reduced in 2018, your charitable contributions may have more overall impact in 2017.

529 Plans May be Used for Elementary and Secondary Education
The Act amends Section 529 of the Code to allow certain amounts from 529 plans to be used for elementary and secondary education. Owners of 529 plans will be able to distribute up to $10,000 per child per year for enrollment or attendance at an elementary or secondary public, private or religious school.  If a child has multiple 529 accounts created by parents and grandparents, the amount distributed to the child from all accounts in a calendar year cannot exceed this $10,000 threshold, so coordination among family members will be required.

Planning opportunity:  Some clients hold back on funding 529 accounts to the maximum amount permitted under state law because of the prior limitations on what was considered a qualified educational expense.  Now that the use of 529 accounts has been broadened by the Act, clients should consider making increased gifts to 529 accounts.  If you make the election to use 5 years’ worth of annual exclusions, you can fund a 529 account in January 2018 with $75,000 per recipient (or $150,000 per recipient if you are married).  This 5-year election must be made on a timely-filed gift tax return.

Pay Estimated State Income Taxes for 2017 before Year End and Pre-Pay Property Taxes
The Act limits the amount of property taxes and state and local income taxes you can deduct to $10,000 per year.  As a result, you should pay all of your estimated state income tax for tax year 2017 before year-end.  If you have a property tax bill due and payable, or if you can pre-pay any of your 2018 property taxes, you should also make these payments before year-end.  Note, however, that if you are subject to the alternative minimum tax (“AMT”), these deductions may not be helpful to you.

Congress anticipated that some of us may try to prepay our 2018 state and local taxes, and it closed that loophole by disallowing deductions on your 2017 income tax returns for prepaid 2018 state and local taxes; however, property taxes are not mentioned and should be able to be pre-paid if the local jurisdiction allows it.

Retirement Accounts
It is worth noting that the Act makes no changes to retirement accounts.

Please Contact Us
We hope to meet with you in 2018 to discuss ways to take advantage of the increased gift and GST tax exemptions.  Please contact us to schedule an appointment.

Thank You
Thank you to those of you who responded to our charity poll.  Here are the results:

  • 47% to Washington Area Women’s Foundation
  • 28% to Tahirih Justice Center
  • 25% to Lucky Dog Animal Rescue

Each organization will receive a meaningful check from us in the coming days.

Happy holidays, and best wishes for a prosperous, peaceful and happy New Year!

Your team at Birchstone Moore

[1] The official name of the new law will be: “To Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018”.

Assisted Suicide in D.C., Maryland and Virginia

The topic of assisted suicide re-entered the news during Judge Neil Gorsuch’s Supreme Court’s confirmation hearings.  In his 2006 book “The Future of Assisted Suicide and Euthanasia,” Gorsuch discussed the legal and ethical issues raised by assisted suicide and euthanasia and presented a moral and legal argument against their legalization.  More recently, Gorsuch discussed his beliefs on this issue during the third day of his confirmation hearings.  As part of an exchange with Sen. Dianne Feinstein (D-Calif.), Gorsuch noted that he agreed with the Supreme Court’s 1990 decision in Cruzan v. Director, Department of Health, under which the Court recognized the ability to refuse medical treatment as a constitutionally protected right.  Additionally, Gorsuch stated that “anything necessary to alleviate pain would be appropriate and acceptable, even if it caused death, not intentionally, but knowingly.”  The distinction drawn by Gorsuch (and most current state laws) between permissible and illegal assistance to a terminal patient is one of intent.  If medication is administered with the intent to alleviate pain and allow death to occur due to an underlying physical illness, such care is considered palliative.  However, if medication is administered with the intent of causing death, such action constitutes assisted suicide and, in most states, is a crime.

While the nation waits to see how Judge Gorsuch’s beliefs regarding assisted suicide and euthanasia may shape future Supreme Court decisions, the robust discussion of this issue in the news has led many individuals to consider their rights when it comes to their end-of-life treatment.  Below is a description of the rights of those living in the “DMV” area.

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Federal Law

To date, there have been three Supreme Court decisions pertaining to assisted suicide.

  • Washington v. Glucksberg – In this 1997 decision, the Court held that the State of Washington’s ban on assisted suicide did not violate the Fourteenth Amendment’s Due Process Clause. In distinguishing the right to die from the right to refuse treatment, the Court noted that the right to refuse treatment was supported by a long held common law rule against forced medication as a form of battery.  The right to die had no such historical basis and, in fact, conflicted with a consistent and universal tradition of criminalizing suicide.  As such, the Court held that the right to die was not a fundamental liberty protected by the Constitution.
  • Vacco v. Quill – In this 1997 decision, the Court held that New York’s ban on assisted suicide and its statutes permitting patients to refuse medical treatment did not violate the Equal Protection Clause as “everyone, regardless of physical condition, is entitled, if competent, to refuse unwanted lifesaving medical treatment; no one is permitted to assist a suicide.”
  • Gonazales v. Oregon – In this 2006 decision, the Court held that the U.S. attorney general could not rely on his powers under the Controlled Substances Act (the “CSA”) to prohibit a physician from prescribing a controlled substance under Oregon’s Death with Dignity Act. In reaching this decision, the Court found that Congress intended for the states to determine the meaning of a “legitimate medical purpose” under the CSA as part of their traditional regulation of the medical profession.  Thus, it was within the authority of Oregon lawmakers, not the attorney general, to determine whether assisted suicide qualified as a legitimate medical purpose.

As a result of these prior decisions, it is clear that the right to engage in assisted suicide is not protected under the Constitution.  However, it appears that a state may regulate the process by which a physician may assist a terminally ill patient with his or her death as part of the states’ traditional role in regulating the medical profession.


Local Law

D.C. – While the D.C. Death with Dignity Act of 2015 became effective on February 18, 2017, it has not yet been funded and, thus, may not be relied upon by D.C. residents.  This Act permits the prescription of medication for the purpose of ending a person’s life in a “humane and peaceful manner.”

In order to request such medication, a patient must make two oral requests, separated by at least 15 days, to an attending physician and submit a signed and dated written request to the attending physician at least 48 hours before the medication may be prescribed or dispensed.  Such written request must be witnessed by at least 2 individuals who attest to the patient’s state of mind in signing the request and must be in the form provided under D.C. Code Section 7-661.02.

Upon receipt of a written request, the attending physician must determine that the requesting patient (i) has a terminal disease that will result in death within 6 months, (ii) is capable and has made the request voluntarily, and (iii) is a D.C. resident.  The attending physician then must inform the patient of his or her medical diagnosis and prognosis, the potential risks and probable result of the medication and the availability of feasible alternatives.  A second “consulting physician” must examine the patient to confirm the diagnosis and verify, in writing, that the patient is capable, acting voluntarily and has made an informed decision.  A health care provider must notify the Department of Health of a dispensation of a covered medication and a patient’s death due to such medication.

A qualified patient’s ingestion of a covered medication will not have any effect on an insurance or annuity policy or employee benefits, however, the District of Columbia may make a claim against a patient’s estate for any costs incurred in connection with such patient’s ingestion of a covered medication in a public place.

Maryland – The Richard E. Israel and Roger “Pip” Moyer End-of-Life Option Act was introduced to the Maryland House of Delegates on January 25, 2017. The sponsors of the bill withdrew it from consideration on March 3rd, citing a lack of support.  This is the third consecutive year that similar legislation has failed to advance from committee.  Advocates have indicated that they will introduce the bill again in 2018.

  • With the failure of the proposed bill, assisting another individual with his or her suicide remains a felony under Maryland law. Maryland Criminal Law Section 3-101, et. seq., criminalizes the act of (i) knowingly providing the physical means by which another person commits or attempts to commit suicide with the knowledge of such person’s intent or (ii) knowingly participating in a physical act by which another person commits or attempts to commit suicide. An exception is provided for palliative care that may hasten death, provided that such care is not administered to cause death, and the withdrawal or withholding of care in accordance with a patient’s advance directive or reasonable medical practice.  A conviction is punishable by up to 1 year in prison and/or a fine of up to $10,000.

Virginia – Virginia prohibits assisted suicide through civil penalties.  Virginia Code Section 8.01-622.1 provides that the spouse, parent, child or sibling of a person who commits or attempts to commit suicide may recover damages in a civil action against any person who knowingly and intentionally provided the physical means for such suicide or attempted suicide or participated in a physical act resulting in such suicide or attempted suicide.  Additionally, an action for injunctive relief may be maintained against a person who is reasonably expected to assist or attempt to assist in another person’s suicide.  An exception is provided for palliative care that is not administered with an intent to cause death or the withholding or withdrawal of life-prolonging procedures.


What Does This Mean for You?

For now, individual states may determine the availability of certain medications to terminally ill patient seeking to end their lives.  Currently, only six states have adopted such “death with dignity” laws, including D.C.

If you live in D.C., your ability to utilize the Death with Dignity Act of 2015 relies on the District’s ability to fund the components of such legislation, which in turn relies on Congress’s approval of D.C.’s proposed budget.  In Maryland and Virginia, any legislation on assisted suicide is at least a year away, if not more.

In the meantime, residents of the DMV area who are concerned about their ability to control the circumstances of their deaths would be well-advised to execute an advance directive that provides end-of-life treatment instructions to his or her health care agent and attending physicians.  Such documents provide guidance and, as mentioned above, may even provide certain protections against criminal and civil penalties for caregivers.  Additionally, one might consider relocating to a state that permits assisted suicide.  Keep in mind, however, that all such states require that a patient seeking assistance be a resident of such state and capable of making and communicating health care decisions for himself or herself.  Thus, a patient must relocate while he or she has the mental capacity to meet the applicable residency and competency requirements.

Ethical Wills-Antidote to the Rich Fool

Parable of the Rich Fool

In the Bible, Jesus tells the parable of the “rich fool” after one of his followers requests help convincing his brother to share an inheritance.  The rich fool was a man who had such an abundant farm, he decided to tear down his existing barns and build bigger ones to store all the grain he had harvested.  The rich fool went to bed happy with this decision, thinking he had ample goods built up to allow him to eat, drink and be merry for many years.  But, alas, that was the man’s last night on earth.  He was a fool for treasuring his things, and not his blessings.Blog 2- Image.jpg

In the Jewish tradition, the “Zava’ah” is a document used by Rabbis and laypersons to pass ethical values from one generation to the next.  President Barack Obama famously wrote this legacy letter to his daughters on the eve of his first inauguration, January 18, 2009.  These are examples of Ethical Wills – the dissemination of knowledge, rather than money and things.

As estate planners, we focus our attention almost exclusively on our client’s material possessions, rather than their values.  But we are uniquely positioned to set our clients on a path to creating their true family legacy – a set of core, shared beliefs that are passed along the generations.  We can and should introduce our clients to the concept of an Ethical Will.

An Ethical Will is not a legal document.  In fact, it should be written by the you, the client, not your attorney.  An Ethical Will can take many shapes – a spiral-bound notebook, a Word document, a scrapbook, a voice recording or a professionally-produced video.  The purpose of an Ethical Will is to communicate with your children, grandchildren and other loved ones your beliefs, lessons learned, family history, expressions of love and gratitude.  An Ethical Will can even end a long-held grudge by expressing forgiveness.

Getting Started

Without a doubt, the most difficult thing about an Ethical Will is starting.  The second hardest thing may be knowing when to stop.  If you allow yourself a quiet space and time to think about an Ethical Will, your thoughts are likely to spin off in a thousand different directions.  In your lifetime, hundreds upon hundreds of events have shaped you.  The tapestry of your family history is complex and not easily unraveled.  A blank canvas is daunting.

My former colleague, David Rutstein, has written and spoken extensively on the topic of Ethical Wills.  When clients are interested in embarking on this noble mission, I give them Dave’s materials as a starting point.  Here are the potential subjects he suggests for an Ethical Will:

  1. Introduction. Briefly state why you are creating the Ethical Will.  What is your objective?
  2. Statements of Value. What ideals are most important to you?
  3. Lessons Learned. What significant experiences or relationships have shaped you and how?
  4. Major Influences. What people and events have been meaningful to you and why?
  5. Thoughts about Religion.
  6. Family Lore. What family stories need to be memorialized for posterity?
  7. Advice. What do you wish you had been told when you were young?
  8. Personal. Specific expressions of love, gratitude, appreciation and forgiveness.
  9. Blessings and Hopes. Your hopes and wishes for the future.

Expanding on any one of these topics is better than nothing.  So is an unfinished draft.  Many people who have successfully written Ethical Wills have done so bit by bit rather than in one sitting.  They might carry around a notebook and jot down ideas or stories as they think of them.  After some time, they might have enough recorded thoughts to identify common themes that can help them write a beginning, middle and end.  Others may block off a whole day and force themselves to start and finish by the end of the day because that is how they work best.  Know yourself, and set a goal that is realistic for you.

Use Examples and Stories

As with performance evaluations at work, the use of examples is more impactful than making broad generalizations.  If you are trying to impart the values that have best served you during life, you might tell stories revealing the traits you admire most in others – the time your friend stuck by you, the day your spouse used humor to diffuse a tense situation, the nanny who went out of her way to treat your siblings and you fairly.  Just like religious parables, stories will help make the lessons memorable.

Be Yourself

Don’t use an Ethical Will to try to remake your image into the saint you always wanted to be.  If you are known to have a flaw, admit it and explain how that flaw has impacted you.  Use humor if that comes naturally to you.  The Ethical Will is also an opportunity to explain yourself.  If you are famous for always wearing pearls or a bowtie, explain why you have done so all these years.  If you have a family motto (ours is “Southern hospitality meets Western adventure”) explain it – even if you think everyone already knows why it is the family motto.  Like the game of telephone, things get lost in translation.

Be Nice

While you may use an Ethical Will to discuss your own flaws, take care not to point out those of others.  If you hurt someone’s feelings, there is no opportunity to reconcile after you are gone.  Generally, it is best not to single out any one family member in the Ethical Will, unless they are part of a family story (see above).  If you talk about how proud you are of grandson Johnny for his artistic talents, your granddaughter who secretly believes she is a better artist than Johnny may never forgive you.  If you think you might devote a paragraph to each child or grandchild, you invite scrutiny over things you could never imagine – “she used more words in my paragraph” or, “he was funny in Jane’s paragraph but serious in mine, so he must like Jane/me better”.  An Ethical Will should serve up inspiration, not criticism.

Now or Later?

Once you have finished your Ethical Will, do you read it or discuss it with your family, or do you give it to your lawyer to be revealed after you’ve passed away?  That is a personal choice, but most experts agree that the closest families are those that communicate.  By sharing the Ethical Will while you are living, you will start a family dialogue, perhaps be asked for more details about your stories, and hopefully receive hugs and thanks.  If your family or friends plan a “roast” or retirement party for you, that is a good time to share your Ethical Will, when everyone is gathered and focused on you.  This can be the gift you give them in return.  The process of making an Ethical Will can also be a gift to yourself  – inspiring you to live in a manner that matches your own expectations for others, and providing an opportunity to focus on your blessings instead of material things.

Estate Planning in 2017 -What to Do in Uncertain Times

Déjà vu– As was the case sixteen years ago in January 2001, we ring in the new year with a Republican president and a Republican-controlled Congress threatening to repeal the federal estate tax.  What’s a taxpayer to do?  President Trump has proposed a repeal of the federal estate tax and a $10 million exemption for capital gains at death (without any additional specificity).  The House Republicans have proposed a repeal of both the estate and generation-skipping transfer (“GST”) tax.  Ultimately, we don’t really know what legislation will pass, or when.  Will the gift tax remain?  Will there be a capital gain tax on inherited assets (which effectively reduces death taxes but does not eliminate them)?  Will the Republicans be able to pass a true repeal of the federal estate tax or will a repeal be temporary, with a sunset back to today’s rates after ten years?  In such uncertain times, estate planning is more important than ever!

Planning with no estate tax.

  • Review of current plan. If Congress were to pass a permanent estate tax repeal (which we believe would be very difficult), it will be important for clients to review their current estate plan with their estate planner to determine if modifications are needed.  Flexibility will continue to be important so that your estate plan covers the different potential scenarios with or without an estate tax.
    • Federal estate tax provisions. Many times planning is tied to the available federal estate or GST tax exemption.  In 2017, the federal estate tax exemption is $5,490,000 per person, and $10,980,000 for a married couple.  If the federal estate tax were repealed, many clients’ estate plans would need to be updated.  In the event of a repeal, there are some plans that would cause the entire estate to pass to a client’s descendants, while the spouse would be disinherited.
    • State estate tax provisions. Despite a repeal of the federal estate tax, state estate tax planning may still be necessary.  As of January 1, 2017, Maryland has an exemption from its estate tax of $3,000,000 per taxpayer, which will increase to $4,000,000 in 2018 and will match the federal exemption in 2019. Beginning in 2017, the District of Columbia estate tax exemption is $2,000,000 per person.  If the District hits certain revenue targets, its exemption could rise to match the federal exemption in future years.  If the federal estate tax law changes, it is uncertain whether Maryland and/or D.C. will revise their estate tax laws to ensure the continued existence of a state-level estate tax.
    • Charitable bequests. Clients may have large charitable bequests under their plans that were included to reduce federal estate taxes.  Such clients may want to reduce or remove these charitable bequests if assets can be transferred to family members free of Federal estate taxes.
  • Review of life insurance. Often clients purchase individual or joint and survivor life insurance policies for the purpose of providing an illiquid estate with cash to pay estate taxes.  If the federal estate tax is repealed,  clients will need to weigh the costs and benefits of maintaining such insurance policies.  Do you hedge and keep some insurance in case the estate tax is reintroduced?  Do you still have a state estate tax or a new capital gains tax for inherited assets to mitigate with insurance?
  • Gift planning. If the federal estate tax is repealed, it will be more advantageous than ever to move assets into an irrevocable trust for family members to protect such assets from estate taxes should the tax be reinstated in the future.  To avoid giving too much to descendants too soon, a spouse could be included as a potential trust beneficiary.
  • Trust protection. Although trusts have been included in estate plans for estate tax planning for many years, there are numerous nontax reasons to incorporate trusts in your estate plan, irrespective of an estate tax repeal:
    • Creditor protection (including a former spouse in a divorce);
    • Planning for spouses with children from prior marriages;
    • Spendthrift or minor beneficiaries;
    • Special needs beneficiaries; and
    • Creation of a common family investment fund.

Planning with an estate tax.  Because of the uncertainty of the estate tax laws in the near future and the distant future, we will continue to plan for our clients as usual (other than to avoid making taxable gifts where possible).  Certain decisions may be postponed until we have a better idea of the future tax landscape.  We will continue to provide flexibility in our documents and recommend that our clients do the following:

  • Review of current estate plan. Again, if your plan incorporates distributions that are linked to the federal estate or GST exemption, you should update your plan to ensure that your assets will pass to your heirs as intended, regardless of changes to federal tax law.
  • Continue with certain gifting. Although it may make sense to defer any gifts that would require the payment of a gift tax, if your goal is to benefit family members currently, there is no reason to defer certain tax-free gifting.
    • Annual exclusion and excluded gifts. In 2017, the gift tax annual exclusion amount remains at $14,000.  This is the amount you can gift to any number of persons and it is not considered a taxable, reportable gift.  If no additional reportable gifts are made in 2017, a gift tax return does not need to be filed.  Subject to certain restrictions, you can also pay a person’s tuition and medical expenses without it being counted as a gift, so long as the payment is made directly to the educational institution or medical provider.  There is no cap on the amount of tuition or medical expenses that can be paid on a person’s behalf in any given year.
    • 2017 Gift Tax Exclusions/Exemptions: As of January 1, 2017, the federal GST and gift tax exemptions are $5,459,000 per person, allowing you to gift up to this amount during your lifetime to any one or more persons without having to pay gift or GST taxes.  Please note, however, that, even though no gift or GST tax would be owed, gifts in excess of $14,000 per recipient must be reported on a timely-filed gift tax return.

 Income tax planning for irrevocable trusts

Trust income is taxed at the highest personal income tax level (39.6%) for income exceeding $12,500.  There is an additional surcharge of 3.8% for certain types of income.  This surcharge was enacted as part of the “Obamacare” legislation.  Republicans have indicated that repealing President Obama’s Patient Protection and Affordable Care Act is a top priority, but for now, the surcharge remains a concern for trustees.  Clients should discuss with their advisors whether or not it would be more advantageous to distribute trust income to the trust beneficiaries in order to have such income taxed at the beneficiary’s income tax rate, especially if the beneficiary’s rate is lower than the trust’s rate.  Such distributions can be made for the first 65 days of the tax year (or by March 5, 2017) and still qualify as a 2016 income distribution.


Tips & Tricks for National Estate Planning Awareness Week!

October 20-26 is National Estate Planning Awareness Week.  With this in mind, Birchstone Moore has partnered with the YMCA of Metropolitan DC to promote the following tips for a healthy estate plan:

  • Could my life insurance proceeds be subject to estate tax at my death?

Yes! If you are the owner of a life insurance policy at the time of your death, the value of the insurance proceeds will be included in your estate for estate tax purposes. If you live in Maryland or DC and have a life insurance policy with a death benefit of $1M or more, you currently have a taxable estate simply because of your life insurance policy.

  • True or False: My Will controls the distribution of my entire estate at my death.

False! The portion of your estate that passes under your Will is called your “probate estate.” Retirement benefits, life insurance proceeds and property owned jointly with your spouse, as a general rule, are not part of your probate estate and will not pass under your Will. Retirement benefits and life insurance proceeds pass in accordance with beneficiary designations that you complete for those items. Property that you own as tenants by the entirety or as joint tenants with rights of survivorship will pass to the surviving joint owner by operation of law.

  • True or False: If I pass away without a Will, my spouse will inherit my entire estate under all circumstances.

False! If you are a Maryland or DC resident and you pass away without a Will, your spouse will receive only part of your probate estate if one or more of your descendants or your parents survives you. Your parents and/or children will also be beneficiaries of your probate estate. For Virginia residents dying without a Will, your spouse will receive your entire probate estate unless you are survived by one or more children from a prior marriage who are not also children of your surviving spouse.

  • I want to leave a portion of my estate to charity. Is it best to make a bequest under my Will or designate the charity as a beneficiary of my retirement account?

It is generally preferred to leave your retirement assets to charity, and let your other assets pass to your family. If you leave a tax-deferred retirement account to an individual beneficiary, the individual must pay ordinary income tax on any withdrawal from the account, just as you would have if you had taken withdrawals from the account in retirement. Charities pay no income tax on a bequest of tax-deferred retirement assets because charities are tax-exempt. By sending the taxable retirement account to charity, and other assets to your family, you free up the more income tax-advantaged assets for your family, at no cost to the charity.

  • Do I need to address my digital assets (my email account, my Facebook page, etc.) as part of my estate plan?

Absolutely! As part of your estate plan, you will want to ensure that your fiduciaries are able to access your digital assets. You should create a list of such assets and their corresponding usernames and passwords. You should then store such list in a secure place (e.g., with an online storage service, on a home computer with a password that you provide to your fiduciaries, etc.). You should also include in your estate planning documents language authorizing your fiduciaries to access your digital assets. This will give your fiduciaries not only the means, but also the right, to manage your online accounts.