Author Archives: Robert Mondo

The estate tax exclusion is currently at an all-time high of $11.7 million. This consists of the permanent exclusion of $5 million, adjusted for inflation from the 2011 base year, and then doubled by the Tax Cuts and Jobs Act. However, the Tax Cuts and Jobs Act, which doubled the exclusion, only doubled it temporarily. The exclusion will revert to $5 million (adjusted for inflation) after 2025. So, it’s expected the exclusion on January 1, 2026 will be around $6 million. (In 2021, if you remove the doubling currently in effect, it would be $5.85 million.)

As we know, there are several proposals out there which would reduce the exclusion. The “For the 99.5% Act” would reduce it to $3.5 million, effective January 1, 2022. These proposals may not pass due to the razor-thin majorities in the House and Senate. But the exclusion will go down in 2026, even if no legislation passes.

If you were to utilize their current exclusion of $11.7 million, there’d be no tax due even when the estate tax exclusion drops. In other words, there is no “clawback.” It would be best for you to utilize the full exclusion. Let’s say you only uses $6 million. Come 2026, they would have used all of their exclusion available at that time and they would have no exclusion remaining due to the prior gift. So, it’s really only to the extent they give in excess of $6 million that you’re capturing some of the historically high exclusion.

What assets are the best to gift? Those with an income tax basis near their current fair market value, but which are expected to increase in value. Why is that? If the client gifts loss assets, the loss could not be harvested by the donee typically. If you gift assets which have significant appreciation, you’d lose the step-up in basis at your death. Let’s say you have $1 million of XYZ stock with a basis of $50,000. If you were to sell the XYZ stock today, you’d pay capital gains on $950,000, the difference between their basis in the XYZ stock and the sales price. If you gift the XYZ stock, it’d have a carryover basis in the hands of the donee. However, if you were to hold the asset until your death and it were included in your taxable estate, there’d be a step-up in basis to fair market value. In other words, the capital gains would be wiped out.

So, to the extent you can gift cash or other assets with income tax basis near fair market value, that would be the best use of the exclusion. And, if you utilize your full $11.7 million exclusion, you would have captured the full doubled exclusion whereas if they only gift a lesser amount, you’d be leaving exclusion on the table. You really aren’t dipping into the doubled portion of the exclusion until and to the extent your usage of the exclusion exceeds what the exclusion will be in 2026.

Currently, federal law taxes capital gains at a maximum rate of 20%, plus a 3.8% surcharge on net investment income, for a total of 23.8%. However, under proposals, to the extent a taxpayer’s income is above $1 million, their capital gains would be taxed at the highest rate for ordinary income. That cap for ordinary income would revert to the law prior to 2017, i.e., 39.6%. The surcharge on net investment income of 3.8% would be on top of that for a total of 43.4%. This assumes no state or local taxes.

Thus, for someone who could keep their income below $1 million, their capital gains would be 23.8% or lower. However, to the extent that income is above $1 million, it would be taxed at a marginal rate of 43.4%. That’s nearly double the rate of taxation. So, if they can spread out taxation of the gain over multiple years, they may be able to reduce their taxable income so it fits under that $1 million threshold and gets taxed at the lower level.

A Charitable Remainder Trust (“CRT”) is just such a tool. With a CRT, the donor gets an upfront deduction for the actuarial value of the remainder interest expected to go to charity. This must be a minimum of 10% of the value of the contribution. The value of the income interest could be as much as 90%. So, if a donor contributes $1 million to a CRT and the actuarial value of the interest going to charity is $100,000, the donor can take a $100,000 charitable deduction in the year of the donation to the CRT (subject to typical AGI percentage limitations).

Perhaps the best attribute of a CRT is that it is a tax-exempt entity. So, if the donor contributes appreciated assets and the CRT sells them (without a prior commitment to do so), the CRT doesn’t pay tax on the gain. However, when distributions go out to the donor or other income beneficiary, those distributions are flavored by the income the CRT has earned.

The impact of this is to defer gains so the donor might pay tax on them at a much lower rate of taxation. The impact of this deferral can be even greater in some circumstances. For example, let’s say your client, Tom Taxpayer, is approaching retirement. Tom has accumulated a great deal of stock at a very low basis. In his final year of employment, Tom contributes $1 million of stock to a CRT. He gets an income tax deduction in his final year of employment when his income is high and the deduction is more valuable. The CRT sells the stock but doesn’t pay tax on the gain because it’s tax-exempt. When Tom receives payments from the CRT in his retirement, he’s in a lower income tax bracket and pays tax at lower rates.

The current estate tax exemption is $11.7 million. This is a record high. The “permanent” exclusion is $5 million and is adjusted for inflation from a 2011 base year. Then the Tax Cuts and Jobs Act temporarily doubled it. At the end of 2025, the doubling goes away. So, in 2026, the exemption will be back to only $5 million, and with inflation adjustment it’s expected to be around $6 million at that time. Transfers above the exemption are currently taxed at a rate of 40%. However, those who use their exemption before it drops won’t be penalized. So, if they use the larger exemption before it drops, they won’t lose it.

There’s legislation pending in Congress which would lower the exemption even faster and even lower than current law provides. The “For the 99.5% Act” introduced in the Senate by Sens. Bernie Sanders (I-VT) and Sheldon Whitehouse (D-RI) would reduce the exemption effective January 1, 2022. For transfers at death, the exemption would go down to $3.5 million and wouldn’t be inflation-adjusted. Only $1 million of the exemption would be able to be used during life. Under the legislation, transfers above the exemption would incur a tax at rates beginning at 45% and going to as much as 65%, for those with over $1 billion. This proposed legislation increases the taxes on the less wealthy than it does on the wealthy. We get what we vote for. Thanks boys!!

However, clients could use the exemption this year and avoid the reduction in the exemption. For example, let’s say a person has $15 million. They could give away $11.7 million this year and retain $3.3 million. At their death, they’d only owe tax on the $3.3 million in their estate. If married, they could take advantage of a Spouse And Family Exclusion (SAFE) Trust, (sometimes called a Spousal Lifetime Access Trust (SLAT)). Such a trust is set up by one spouse for the benefit of the other spouse and their children. If there are sufficient differences in the trusts, each spouse could even set up such a trust for the other spouse. By doing this, a couple could utilize their exemptions but still have access to the assets.

For example, Bill and Mary had $30 million, $15 million each, and wanted to take advantage of the current exemption. Bill gifted $11.7 million into a trust for the benefit of Mary and his children. Likewise, Mary gifted $11.7 million into a trust for the benefit of Bill and her children. Each spouse now only has $3.3 million left in their estate.

If the trusts are designed to avoid the “reciprocal trust doctrine,” neither trust would be included in either of their estates at death. So, the terms of the trusts should vary somewhat. While the trusts avoid inclusion and estate taxation, this is a double-edged sword. While gifting to an irrevocable trust such as a SAFE trust avoids estate taxation, it’s only inclusion in the taxable estate that provides a step-up in basis at death. Thus, you can have your cake, but you cannot eat it, too.

Under current law, estate taxation starts at 40%, whereas long-term capital gains rates generally cap out at 23.8% for federal purposes. Thus, if the assets gifted would have been subject to federal estate taxation, the taxpayer usually would be better off to have them removed from the estate, even if it means losing a step-up in basis.

Also, if Bill sets up the trust for Mary, in the above example, there’s a risk Mary might not set up a trust for Bill since the trusts aren’t set up contemporaneously due to the reciprocal trust doctrine. Of course, each situation is different, and you’d want to explain the tradeoffs to your clients.

Whether you choose to use a SAFE trust or some other method, utilizing the current exemption can make a great deal of sense.

Every year there are numerous tax proposals. These proposals run the gamut. We start paying attention when there’s a change in power in Washington, D.C., especially when there’s not divided government.

Right now, Democrats control the House by a narrow margin and the Senate is evenly divided, with Vice President Harris able to cast a deciding vote if the chamber is split. So, while a tax change is certainly possible, it’s not at all certain.

A recent proposal by Senators Sanders (I-VT) and Whitehouse (D-RI), “For the 99.5% Act,” would dramatically alter the Estate Planning landscape. Here’s a summary of the Act from Senator Sanders. Here are some of the changes the Act would make:

• Lower the amount that can be passed to $3.5 million at death, with only $1 million available during life. These amounts would not be inflation-adjusted. Today’s amount is $11.7 million and is inflation-adjusted. (However, even under current law, the exemption drops in half after 2025.)
• Amounts in excess of the exemption are taxed at rates from 45% to 65%. The current rate is 40%. Amounts from $3.5 million to $10 million would be taxed at 45%, from $10 million to $50 million would be taxed at 50%, from $50 million to $1 billion would be taxed at 55%, and amounts in excess of $1 billion would be taxed at 65%.
• Change the rules for Generation-Skipping Tax exemption so that assets cannot be left in a trust which avoids estate taxes for more than 50 years.
• Change the rules for Grantor Retained Annuity Trusts so that they aren’t nearly as attractive as a way of transferring value to others.
• Limit valuation discounts, such as minority discounts. Such discounts are often used to pass as much as possible with the least possible use of exemption or the least possible tax.

The Act might change considerably or might not pass at all. But, if it passes in its current form, it would dramatically alter Estate Planning. So, what can you do? I encourage you to plan under the current rules. For example, you could use the current, historically high exemption while it is available. You could use strategies to take advantage of discounting while they’re available.

What’s the role of an Estate Planning attorney? Is it merely to document a client’s wishes? Or is it to counsel the client regarding those wishes and then craft a plan that best fits their situation? Clearly, it’s the latter.

For example, if a client walks into my office and says they want to leave everything outright to their three children, is it appropriate to draw up a plan to do so? The proper course would be to find out more information about the three children. What are their situations?

Perhaps the first child, Betty, is 30 years old and in a rocky marriage. Perhaps the second child, John, is 25 years old and has creditor issues. Perhaps the third child, Ben, is 20 years old and has Special Needs. In each of these situations, it would be best to advise the client about the possible advantages of leaving the assets to the children in a continuing trust. This could provide divorce protection for Betty, creditor protection for John, and preservation of public benefits for Ben.

An Estate Planning attorney should explain the different relevant options available and the range of consequences with each option. Explaining to the client the benefits of leaving the assets in trusts with various attributes for the various beneficiaries. Explaining the advantages and the disadvantages of the different alternatives. For example, in order to provide creditor protection in John’s situation, I’d use a trust with a third-party trustee and a completely discretionary standard. This would also require a tax return for the trust each year.

If, after a thorough explanation of the pros and cons, the client still chooses their original course, then what?

As long as the course chosen by the client is not illegal or unethical, a Trusts & Estates lawyer should carry out the client’s wishes and prepare the desired documents. An Estate Planning attorney is not a mere scrivener. Our most important product is not the documents we produce, rather our counsel which is based on a wealth of professional experience based on years of technical training.

Congress has tried in many ways to help employers through the COVID-19 pandemic. The headline news was the Payroll Protection Program, passed as part of the CARES Act last year. But, the Taxpayer Certainty and Disaster Relief Act of 2020, enacted on December 27, 2020, made some changes to the employee retention tax credits previously available under the CARES Act, including extending the Employee Retention Credit (ERC) through June 30, 2021.

With the new changes, employers, including Estate Planning attorneys, may be able to claim a refundable credit against the employer’s share of the Social Security tax. That credit could be up to a maximum of $7,000 per employee per calendar quarter, for a total of $14,000 in 2021. Under current legislation, the credit is only applicable through June 30, 2021. The credit is 70% of qualifying wages up to $10,000 per employee per quarter. The credit is refundable. In other words, even if you don’t owe that much in taxes, you’d still get a refund of that amount.

Employers are eligible if they operated a business between January 1 through June 30, 2021, and experienced either:

1. A full or partial suspension of the operation of their trade or business during this period because of governmental orders limiting commerce, travel, or group meetings due to COVID-19, or
2. A decline in gross receipts in a calendar quarter in 2021 where the gross receipts of that calendar quarter are less than 80% of the gross receipts in the same calendar quarter in 2019 (to be eligible based on a decline in gross receipts in 2020 the gross receipts were required to be less than 50%).

If your business didn’t exist in 2019, you’d use the corresponding quarter in 2020 for the comparison.

According to the IRS, “for an employer that averaged 500 or fewer full-time employees in 2019, qualified wages are generally those wages paid to all employees during a period that operations were fully or partially suspended or during the quarter that the employer had a decline in gross receipts regardless of whether the employees are providing services.”

Further, the law now allows employers who received Paycheck Protection Program (PPP) loans to claim the ERC for qualified wages that are not treated as payroll costs in obtaining forgiveness of the PPP loan. In other words, you can count them as long as you’re not double-dipping.

You can obtain the credit before filing your employment tax return by reducing employment tax deposits. Small employers (those under 500 full-time employees in 2019) may request advance payment of the credit (subject to certain limits) on Form 7200, Advance of Employer Credits Due to Covid-19, after reducing deposits. Larger employers don’t qualify for this advancement.

If you’d like more information, see this announcement from the IRS (https://www.irs.gov/newsroom/new-law-extends-covid-tax-credit-for-employers-who-keep-workers-on-payroll).

Further, the IRS has extended the deadline for the filing of individual income taxes to May 17, 2021.

It’s difficult to even think that someone might not want to accept inherited assets. But sometimes clients don’t need any more assets and a newfound inheritance simply may compound their estate tax issues.

A “qualified disclaimer” is a creature of statute. It’s found in Section 2518 of the Code. If you meet the requirements, then the disclaimant is treated as having predeceased the decedent and it’s not considered to be a gift by them and won’t use any of the erstwhile recipient’s gift/estate tax exclusion.

Section 2518 has several requirements:

1. The refusal must be in writing,
2. The refusal must be received by the transferor of the interest (or the representative or legal title holder) within 9 months of the date of death or when the instrument creating the transfer became irrevocable (or the date the recipient achieves age 21),
3. They must not have accepted any of the benefits of the property, and
4. The interest must pass without direction to the decedent’s spouse or someone other than the disclaimant.

Let’s look at a quick example:

Granny leaves a Will leaving Blackacre to John. The terms of the Will provide that if John predeceases Granny, the bequest goes to John’s daughter, Betty. Blackacre is worth $3 million. John already has used all of his exclusion. He’d like to see Blackacre go to his daughter, Betty. If John accepts Blackacre and makes a gift of it to Betty, he’d be making a taxable gift of $3 million, which would incur a $1.2 million gift tax. If John does a timely qualified disclaimer, Blackacre would pass as though John predeceased Granny. Since Granny’s Will provides that the property would go to Betty if he predeceased her, this would accomplish John’s wishes without needing to direct where it goes. This saves John $1.2 million in these circumstances.

If you’re contemplating a disclaimer, it’s vital to map out where the disclaimed property would go after the disclaimer. Sometimes this can be very complicated. But it’s absolutely essential since the disclaimant has no control over it. It’s somewhat like releasing water from a dam. You need to know what the course of the river is before you release the water. Sometimes it may be possible to change the course of the river by doing a double disclaimer or some other mechanism.

After you’re confident the disclaimed property would go where intended, it’s imperative you follow the requirements of Section 2518 to the letter. For example, it’s impossible to get an extension on the 9-month deadline for a disclaimer. It doesn’t matter if the disclaimant were sick or had extenuating circumstances. The deadline cannot be changed.

Even wealthy clients are often most concerned about the possessions which they have around them. They may have financial accounts with lots of zeros, yet they are most concerned about the things which they have collected or been given over the years. At first glance, this may not make much sense because the items may not be of great financial value. But people may have developed great emotional attachment to these items. In fact, there is a psychology of stuff and the attachment people have to their stuff. (In the extreme, it manifests as hoarding.)

Perhaps it’s the baseball card collection which he started when he was six years old. Perhaps it’s the stamp collection her father started when he was a boy. Perhaps it’s the coin collection she started when she was little when her grandmother gave her a silver dollar for Christmas. Perhaps it’s the drawings she did while recovering from a stroke. Some of these items might have financial value while others might have only emotional value.

What’s the best way to dispose of this stuff? People could give the items away during their lifetime. That has many advantages, including the client watching the joy on the recipient’s face when receiving it. But often the client won’t want to part with the items during life.

If a person wants to wait until death, sometimes they may want to include a specific bequest for each item in their will or trust (if assigned to the trust). But there are several reasons that’s not the best solution. First, the person might change their mind from time to time. While they may want to give the stamp collection to Johnny today, next year they may decide to give the stamp collection to Becky who reveals herself a philatelist. If the stamp collection had been given as a specific bequest in the Trust, the Trust would need to be revised by visiting the attorney again. Next, the person might decide to make bequests of additional items that they didn’t have before or which they hadn’t thought to bequeath when they signed their estate planning documents.

For the foregoing reasons, it’s far better to handle these sorts of specific bequests through a “Bequeath of Special Gifts” which is inherent in every estate plan that I prepare. Such a document is a valid way to bequeath property and is flexible so that the person can, unilaterally change the document without having to amend the Trust or come to me. With the Bequeath of Special Gifts, the person would then list the items, indicating a description of the items and to whom the client is bequeathing the items.

Again, if the person changes their mind, they could simply change the list. If they thought of an additional bequest, again, they could simply add it to the list. Each time they made a change, they would initial and date each entry.

The use of the Bequeath of Special Gifts has many benefits, including its simplicity. Perhaps most of all, this method gives the person a sense of more direct control over their personal property and the items which might have the greatest emotional value to them.

Have you ever wondered why the dispositive instrument in which you express your wishes is called a “Last Will and Testament?” Few people, including Estate Planning attorneys, know the reason. In fact, the history is a little muddy. Occasionally, clients will ask this question. Now you’ll know the answer!

It’s thought that the “Last Will” part comes from English common in which the testator was expressing what they “willed” to have happen to their realty. It appears that, originally, this was intended for those without heirs. The laws at the time devised real property according to the bloodline. So, it was only when there was no bloodline a Last Will became relevant. The “testament” was the portion intended to transfer personal property.

The term became combined with “and Testament” after the Norman invasion of England by the French Duke of Normandy, who became known as William the Conqueror after the battle of Hastings (and his later coronation) in 1066. The old English common law and the French civil law became somewhat blended and the terms were combined for clarity.

In a recent episode of Jeopardy, the clue was “After the Norman Conquest, lawyers made sure they were clear with ‘Last Will (an Anglo-Saxon word) &’ this French-derived term?” The contestant correctly replied “Testament.”

The term dates back a millennium. But the document type is still in use to this day, as we know. Often it is combined with a Trust, to avoid the process of probate, among other reasons. A Will which sends the assets to a Trust is called a “Pour-Over Will.”

Next time one of estate planning comes up asks why a “Will” is called a “Last Will and Testament” you’ll have a story to tell, dating back nearly 1,000 years. And you can weave into the story the fact that people have been doing Estate Planning long before that. The Code of Justinian recognized Wills in ancient Rome. It’s likely dispositive instruments have existed long before that.

Many items within a household can affect the overall value of the estate. These items include art, jewelry, collectibles, antiques, musical instruments, and the house itself.

Appraisals provide a snapshot in time of each item’s value. This helps to accurately structure equitable distribution of assets as dictated by the client.

Appraising Art

There are many forms of art: paintings made with watercolors, oil, acrylic, and mixed media; prints made by lithograph, screen printing, and other techniques; photography, ceramics, and sculptures constructed of many different materials. You may have never heard of the artist, but their work might be selling for big bucks. How can you tell if what you’ve collected, inherited or are preparing to sell is worth a fortune or a pittance?

Turn to the experts at an established, reputable appraisal organization. They require members to adhere to a code of ethics, as well as the Uniform Standards of Professional Appraisal Practice. They charge an hourly rate, which can vary widely (i.e. $25 to more than $300/hour) depending on their experience and expertise.

It’s important to obtain current art appraisals for several reasons: to know the fair market value or replacement value for full insurance protection against loss or damage; for estate or divorce settlements; for charitable donation valuations; and for sellers who wish to know how to equitably price the artwork.

Appraising Jewelry

You may believe the jewelry you’ve inherited or plan to sell or insure is very expensive. Until you have a qualified jeweler examine and appraise each piece, you won’t know for sure. Make sure the appraiser is a professional qualified to appraise jewelry. They should be a graduate gemologist and affiliated with a national personal property appraisal organization.

Are the pearls natural or cultured? What’s the setting made of? How does the clarity, color and cut affect the price of gemstones? Is the gold 24K? Valuations can affect estate taxes if the jewelry is worth many thousands of dollars. Have the jeweler report on the cash value at today’s market rate. Then you’ll have an idea of an equitable selling price, or a starting point to insure the jewelry.

Appraising Musical Instruments

Musical instruments can be quite valuable, yet many people sell them for pennies on the dollar, often unknowingly. Consider the person who bought an $8,000 player piano for $250 at a yard sale. Guitars, brass horns, violins, banjos (yes, even the much-mocked banjo), and other instruments may be worth a lot more than you’d think. Or, you may over-value a mass-produced instrument.

The only way to know the value of a musical instrument, either for legal purposes such as insurance, divorce settlements or probate, or to establish a valid sale price, is to hire an informed appraiser. They will charge a fee to provide a written appraisal.

Appraising Collectibles

Collectibles can have monetary value, or perhaps just sentimental value. For those who collect images and items depicting their favorite animals, such as owls, frogs, turtles, elephants, etc., chances are, the value is sentimental.

Modern day collectibles such as vinyl record albums, Hummel ceramics, baseball cards, Pocket Dragons, and other items may have monetary value, or maybe not. With antique collections, such as clocks, irons, toys, prints, furniture, advertisements, glass, pottery, etc., you can start getting into real money.

How can you tell for sure? Take it to an expert who can verify its authenticity and establish value. But don’t rely solely on an expert who wants to buy your items, as they may offer a lowball price.

Appraising the House

Home appraisals provide an educated guess as to the actual value of your house. Banks and lenders need to know this figure to establish collateral value for a mortgage loan. If you’re selling the house, an appraisal provides a solid asking price. Appraisals also provide a starting point for obtaining a reverse mortgage, if you plan to stay in your house.

Appraisers will look at the conditions of a house’s exterior structure, interior materials and quality, amenities and upgrades, and the front and back yards. They can also do sales comparisons, also known as comps, to get prices on similar homes in your neighborhood and recent market trends in the area.