Perhaps you are wondering, “What are the differences in the estate tax proposals for Donald Trump and Hillary Clinton?”
In its current pre-election form, an estate must pay federal estate tax if the estate has a net fair market value in excess of $5.45 million as of the date of death. The estate tax rate is 40%. Married couples can use certain estate tax planning legal strategies (such as the unlimited marital deduction and portability) to protect $10.9 million from the estate tax.
The Donald Trump Estate Tax Proposal
Well, it’s pretty simple. Donald Trump proposes eliminating the estate tax.
There are many benefits that both the government and the people recognize from a tax system that does not tax fair market value of assets as of date of death:
- It’s Complicated. The federal estate tax is one of the most complicated taxes in our American system. Simply preparing an estate tax return after the death of someone who had a “taxable estate” is one of the most difficult exercises any person or tax preparer can go through. And this tax return (with the corresponding tax) is due to the IRS within nine months from the date of death. Government will be bigger with an estate tax due to the complexity required to monitor and enforce the estate tax.
- It’s Burdensome on Families. So, with our current estate tax system, you’re often forcing surviving family to rush to sell real estate, farms, and businesses at less than fair market value in order to pay a 40% tax that is based on the value of the assets as of the date of death.
- It’s a Small Portion of the Budget. The federal estate tax that the IRS collects represents a miniscule portion of the overall taxes that the government collects. Face it – the IRS gets its money from the income tax. So, why have a complicated and burdensome estate tax when it doesn’t provide significant revenue that the government would re-purpose.
- America Doesn’t Understand It. Most people don’t understand that the estate and gift tax are unified. For example, most of America thinks that somebody owes taxes on gifts in excess of $14,000 (the present interest annual exclusion). People don’t realize that no one owes taxes on gifts in excess of $14,000. When an individual makes a gift in excess of $14,000, they merely being using some of their $5.45 million estate tax exemption – which most people will never use!
- Eliminating Estate Tax Will Motivate Business Owners. Business owners who face the fact that the government will get as much as 40% of the value of their business and their estate when they die, will be less inclined to work hard, hire and pay top employees, and grow their business. A business owner who knows they can pass their business – intact – to their family will be motivated to increase the value of that business which will, in effect, create more income for themselves and thus, paying more income tax due to their successful business.
- It’s What America Wants. As an estate planning attorney, the biggest concerns that people who plan their estates have is first, they want to avoid taxes on their estate, and second, they want to avoid leaving their estate to the government – they want their family to get what they worked hard for.
- The Super Wealthy Are Charitable (And Avoiding Estate Tax Anyway). It’s been stated that the super wealthy should face an estate tax because the rich are “getting off the hook.” Well, the two richest people that I know of are not going to pay estate tax under our current system anyway. Both Bill Gates and Warren Buffett have pledged to leave their vast estates to the Bill and Melinda Gates Foundation. They will take advantage of the estate tax charitable deduction, which allows estates to avoid estate tax when the estate is left to charity. I suppose Bill and Warren feel that their Foundation can spend the money more wisely than the federal government. And I know that many other of our nation’s wealthiest taxpayers have pledged to leave their estate to charity, thus eliminating any chance that the government will collect estate tax from these folks. So, a complicated estate tax system on the super wealthy doesn’t do any good when the super wealthy are using their wealth and their smarts to avoid the federal estate tax and leave their estates to charity.
The Hillary Clinton Estate Tax Proposal
Hillary Clinton’s estate tax proposal is to increase the tax. The tax will be increased through her proposal to lower the estate tax exemption and increase the estate tax rates. She is proposing to reduce the estate tax exemption from $5.45 million to $3.5 million. And she is proposing to increase the estate tax rate from 40% to 45%.
Today, someone who dies with a $6 million estate will pay $220,000 in estate tax. Under Donald Trump’s proposed estate tax plan, that same estate would pay $0 in federal estate tax. Under Hillary Clinton’s proposed estate tax plan, that same estate would pay $1,125,000 in estate tax, and they may have to sell their business to pay the tax, perhaps eliminating jobs of those who helped the business owner who built the business.
Feel free to Comment and share your analyses of the different estate tax proposals. The estate tax has been largely kept out of the limelight in the political debate between Hillary Clinton and Donald Trump.
It’s common for individuals who own real estate to procrastinate estate planning. Too frequently, individuals procrastinate too long and end up passing away with no plan in place for their real estate. The result: legal confusion.
One family comes to mind. The wife had real estate that was only in her name. When she passed away, her husband desired to continue living on the property, but he ran into issues with his step-children who wanted to sell the property and collect a nice check for their share. The dispute escalated, lawyers were hired, and filings were made with the probate court. This was going to turn into an expensive, time-consuming, and messing legal fight.
Yet, there was an alternative to probate that none of the heirs knew about called an Affidavit of Heirship. A Missouri Affidavit of Heirship can be used to transfer property from a deceased individual to that individual’s heirs (as defined by Missouri law), without going to probate court. In order to use a Missouri Affidavit of Heirship, all of the heirs will need to agree on how to divide the property. Missouri law is clear on intestate succession so typically the parties will agree to follow the letter of the law.
If you have questions about how to handle real estate that is still titled into a deceased person’s name, after their own death, follow this checklist to see if an Affidavit or Heirship is right for you. Missouri Affidavit of Heirships can be powerful tools to avoid having property stuck in the name of a deceased loved one.
- 1. Was the real estate only in the name of the deceased individual?
- 2. Has the deceased individual been dead more than 1 year?
- 3. No will has been admitted to probate?
- 4. Did the deceased individual leave a last will and testament?
- 5. All of the legal heirs are in agreement and willing to cooperate?
A Missouri Affidavit of Heirship needs to be properly drafted, signed, notarized and filed with the county recorder’s office. Once complete, the heirs can receive clear title on the land. This is important so if the heirs decide to sell the land, they can get full fair market value since the potential buyer can obtain title insurance.
If you have property title in a deceased individuals name and need help getting it transferred to living heirs or getting it sold, contact Mark McMullin, a Missouri attorney with experience you can trust.
Probate is the process of transferring property from a deceased individual to living individuals. Sounds simple, right? Yet, it can quickly become complicated and expensive.
In Missouri, each county has a probate court that handles these transfers. However, probate takes time. The Missouri Bar advises that “the earliest that an estate may be closed and distribution made to the heirs or beneficiaries is approximately six months and 10 days after the date of first publication. However, it often takes a year or more to finish the administration.”
What happens during that time?
- 1. Hire an attorney to represent you. Make sure it is someone familiar with Missouri probate.
- 2. Apply for Letters (if there is a Will, the Letters are called “Letters Testamentary”; if there is no will, the Letters are called “Letters of Administration”)
- 3. Publish notice to creditors. This notice is important because it alerts creditors that an estate has been open and gives them information on how to submit any claims they may have.
- 4. Inventory and appraise assets.
- 5. Maintain estate property. Pay taxes, electric bills, insurance, etc.
- 6. Pay debts.
- 7. Keep careful records. You’ll need to prepare a “Settlement” showing where every dollar has gone.
- 8. Obtain court approval to distribute the reminder of the estate.
- 9. Close the estate.
If you are looking for a Missouri attorney to help you sort through probate, from opening an estate to getting funds distributed to the intended parties, we would be happy to help.
Recently I had a small-business owner contact me regarding changing the name of his business. We were able to amend the Articles of Organization with the Missouri Secretary of State’s office. That is a routine matter and can be done in one day
This was a healthcare business and it also needed to update its federal tax ID number or EIN (Employer Identification Number). The IRS has a webpage that addresses this topic that can be accessed here: https://www.irs.gov/individuals/business-name-change
Let me share with you 3 tips on notifying the IRS of a Business Name Change:
- You can call the IRS. Their phone number is 1-800-829-4933. While there are many negative connotations associated with the IRS, I have found the operators on the phone to be surprising pleasant and helpful.
- You can mail the notice to an address that does not show up on their website. The address I use is:
Internal Revenue Service
Internal Revenue Service Center
Mail Stop 6273
Ogden, UT 84201-0027
Make sure to include the “mail stop” number for faster service.
- You can fax the notice to the IRS. That’s right, the IRS accepts fax notifications of a business name change. And while the fax number is nowhere to be found on the webpage above, I’m happy to share it with you here. It’s FAX: 801-620-7116.
My experience has been that the IRS will not issue a new CP 575, however it will issue a verification of EIN with the new business name on it. Though, it is important to do this well ahead of any deadlines. It can take 2-4 weeks to get the EIN updated.
Recently I hosted an estate planning workshop for the community. In introducing myself I said that I focus my practice on estate planning and elder law. An attendee wanted to know what those terms meant: what does “estate planning” mean? What is “elder law”?
My simple definition for estate planning is this: planning so your property goes to who you want, when you want, and the way you want. The common denominator is doing what you want. Estate Planning is important because if you don’t plan, the state has a plan for you – and you may not like its plan. The common tools we use in estate planning are: wills, trusts (revocable living trusts and irrevocable trusts), powers of attorney, and beneficiary deeds.
Elder law is concerned with helping you stay in control as you age – our focus is on intended consequences. That means we have a plan for how you handle everything from how you stay in control of your healthcare decisions to how you pay for a nursing home. Elder law encompasses all aspects of planning for aging, illness, and incapacity.
A survey by Martindale-Hubbell reports that 55% of all American adults don’t have a will. In fact, most people spend more time shopping for a car, than planning their estate. The result is that as they age they face unintended consequences, or when they pass away, their spouse or children face unintended consequences.
Staying in control is better. Planning is better. Intended consequences are better. Estate Planning and Elder Law attorneys help make your life better.
Recently a past client of mine called. She had inherited several pieces of farm land that had been owned by her great-grandparents. The result, is that while the great-grandparents owned 100% of the land, at their death it was divided up equally among their children. The children then divided it among their children and so on until it got to my client who owned about 3% of a large farm. The great-grandchildren had finally come to a point where they no longer wanted to own the farm together. My client was calling because she wanted to know what her options were? What could she do with her 3%?
The answer is she could have the property “partitioned”.
When two or more people own land together we say that they are co-owners or that they own the property jointly. When any owner of the land no longer wishes to own the property together, that owner has the right to have the land “partitioned”. Partitioning the land means dividing the property.
Often “partitioning” the land happens voluntarily. If it was between two siblings, they can usually work out a way to divide the land equally. This is called a “partition in kind” where the land is physically divided to carve out a separate piece for each owner.
Keeping it simple: “partition in kind” means the land is physically divided with each owner retaining some portion of the land.
Sometimes, the land cannot be “partitioned in kind” or the parties are opposed to the land being “partitioned in kind”. The result is that the land has to be “partitioned by sale” with the proceeds divided proportional to the ownership of the land. Again, this often occurs voluntarily where siblings will decide to sell the family land. Yet, sometimes family members cannot agree or there is a need for judicial oversight. In these instances, a court-of-law supervises the process.
Keeping it simple: “partition by sale” is accomplished by selling the entire property and dividing the proceeds among the owners.
Proper estate planning can reduce the likelihood or need for partitioning in the future. Especially when it comes to farm land, it’s important to think ahead so that the farmland you have worked so hard to acquire or maintain, can stay in your family, rather than be sold on the courthouse steps.
Missouri Supreme Court Rule number 96 addresses “Partition of Real and Personal Property” and can be found here: http://www.courts.mo.gov/page.jsp?id=1019.
I’m a note-taker. Usually you will find me with a blue ink pen and legal pad in hand, ready to take notes on whatever is being discussed. Recently, I came across one of my legal pads that had the following notes: Top 10 Reasons for Creating an Estate Plan from “The Everything Wills & Estate Planning Book” by Deborah S. Layton. I like the list because she outlines some of the major benefits of estate planning in layman’s terms.
- A sound estate plan can save your family thousands of dollars in taxes and legal fees.
- If you don’t have a plan, the government will decide who will receive your property.
- If you don’t have a plan, your spouse or partner may not receive the property you intended to provide.
- Most people can avoid or reduce estate taxes with the right plan.
- Naming a legal guardian in your will is the way to choose who will raise your minor children if you are gone.
- Creating a durable power of attorney ensures that someone can pay your bills and sign legal documents if you become disabled.
- Have a medical directive will provide guidance about your health care wishes in the even you become incapacitated.
- You can avoid the unexpected results of owning property in joint name when you understand the rules.
- You can make gifts to your favorite charity to reduce estate taxes but still provide for your family.
- A good estate plan can preserve your assets for your children’s use and prevent them from wasting those assets.
In just a few weeks, we will elect a new president. Recent polls have Hillary in the lead. Regardless of whether you agree with Bill and Hillary’s politics, we can learn a few things from them about smart estate planning strategies. A recent Time.com article reveals that Bill and Hillary have set up a variety of trusts.
First, the Clintons have a “qualified personal residence trust” for their home in Chappaqua, New York. The purpose of the “qualified personal residence trust” is lock-in a low value for a piece of real estate before it appreciates. In most cases, the result is that while the value of property transferred to the trust is subject to estate tax, any appreciation on the property is not. With the estate tax at 40%, the resulting savings can be huge.
Second, the Clintons set up Irrevocable Life Insurance Trusts (ILIT). It is reported that Bill and Hillary have 5 different life insurance policies, 3 of which are in ILITs. The benefit of the Irrevocable Life Insurance Trusts is that you can minimize or completely avoid tax. By using ILITS, Bill and Hillary will likely allow the death benefits of their large life insurance policies to pass to their daughter, Chelsea, outside of their estate, which means it will not count towards their estate tax exemption ($5.45 million per person in 2016).
If Bill and Hillary Clinton take advantage of the tax laws, so should you! ILITs are a common estate planning tool we use for high net worth individuals including small business owners and farmers. It’s only fair that you have the opportunity to use the same estate planning tools that the Clintons are using.
Missouri is a common sense state and most of our laws reflect that. Missouri has a whole chapter of laws dedicated to non-probate transfers. These are ways that individuals can name or designate a beneficiary and thereby avoiding probate. One of the areas I see this most often relates to vehicles owned by a deceased individual.
This week I had a gentleman call. His father had passed away and had left an old boat and trailer. The total value of the boat and trailer were approximately $500. Yet, because the father had not designated a beneficiary, the boat and trailer were still in his name. The son was calling to find out how much it would cost to have a small estate opened in probate court so he could get the boat and trailer retitled in his name.
At $500, the question became whether the son thought it was worth the cost to do the small estate. The son decided it was and we were able to help him file a small estate. Yet, this headache could have been prevented with a little planning. The father could have simply added a Transfer on Death (TOD) to the title of both the boat and the trailer.
What is a TOD?
TOD stands for Transfer on Death. It is a simple way to transfer ownership of your vehicle, trailer, or equipment to another at the death of the owner. It is a very easy and cost effective way to avoid probate.
How do I add a TOD?
Fill out a Fill out Application for Missouri Title and License (Form 108). In most instances, you can simply go to the license bureau and they will fill out this form for you, you will complete the “TOD Beneficiaries, If Applicable” box, sign, have it notarized, pay the fee ($11.00 total – $8.50 title fee; $2.50 processing fee) and you are done.
What to do after Death?
Return to the license bureau. Again, usually they are very helpful. They will help you obtain a title in the beneficiary’s name. The new title will cost $11.00.
The simple answer has 2 parts.
Each individual has an “annual exclusion” that allows them to give $14,000 per year to any number of individuals, without paying any gift tax. That means a wealth grandmother can give her 3 kids $14,000 each and each of her 7 grandchildren $14,000 each. The grandmother could give $140,000 (or more), each year, with no IRS reporting requirements.
Keeping it simple: Annual Exclusion = $14,000 (2016)
The issue becomes for gifts above $14,000. Gifts above $14,000 begin to apply to your “lifetime exclusion”. In 2016 the lifetime exclusion is $5,450,000. That is a large amount of money and does not apply to most people. However, if you make a gift above $14,000, you must report to the IRS using a gift tax return when you made the gift and the amount of the gift so it can be deducted from your lifetime exclusion. I have yet to meet anyone who enjoys reporting additional information to the IRS. By keeping gifts to $14,000 or less and giving to multiple individuals, you avoid those reporting requirements.
Keeping it simple: Lifetime Exclusion = $5,450,000 (2016)