The Rabalais Law Firm's La. Estates Blog

Leaving IRA to Grandchildren - Required Distribution Rules

Met with a very nice couple last week that wanted to leave their investments to a trust for their grandchildren. One of the issues that we had to deal with was that the bulk of their investments were held in their IRA account.

I spent some time educating them about what their grandchildren would be facing from an income tax standpoint. The couple expressed that they did not want the grandchildren to get any of it until they were well into their adulthood.

I explained that since they were leaving an IRA to their grandchildren - even though it is going to a trust for the grandchildren, the grandchildren will be required to take distributions starting the year after the surviving spouse dies. I explained that the best we could do would be to set things up so that after the couple died, the grandchildren would be forced to follow the rules of an "Inherited IRA" and they would be required to take immediate distributions based on their life expectancy.

Nonetheless, we are still able to accomplish their objectives of providing an income to their grandchildren for many years, and then have the remainder turned over to the grandchildren when the grandchildren are nearing retirement age.

Anytime you name someone other than your spouse as the beneficiary of your IRA, be aware of the Inherited IRA rules that they will have to follow regarding their schedule for required minimum distributions. Their schedule will likely be very different than your schedule or your spouse's required minimum distribution schedule.

Paul Rabalais

Lousiana Estate Planning and Avoiding Capital Gains Tax

 

Very little emphasis has been put on avoiding capital gains tax. When people have talked in the past about estate planning and avoiding tax, the emphasis has always been on avoiding federal estate tax. With a current estate tax exemption of $5 million ($10 million for married couples), the emphasis is shifting from avoiding estate tax (easy - maybe) to avoiding capital gains tax.

When you die, your estate gets a "step-up" in basis on what you OWN when you die. This can be a great thing when your heirs sell assets that have appreciated in value during your lifetime. But if your predeceased spouse did not leave his or her estate to you the RIGHT WAY, there won't be another step-up on basis when you die.

Leaving your spouse the "usufruct" of your estate may protect your children and it may avoid estate tax when the surviving spouse dies, but it may not be the way to go to avoid CAPITAL GAINS tax.

Because there is so much uncertainty about future tax law, we have to write Wills and Trusts to cover various contingencies that MIGHT occur - but we won't know until somebody dies. So, lots of flexibility must be written into your estate planning documents.

Your Will might read, "IF THIS, THEN THAT."  Or it might read, "IF THAT, THEN THIS." Or "I LEAVE IT TO MY SPOUSE THIS WAY BUT IF MY SPOUSE REFUSES THIS WAY THEN I LEAVE IT TO MY SPOUSE THAT WAY."

Don't wait until it's too late. Procrastinating can destroy your family and the legacy you leave behind. Get informed and take action.

Good News for Many Looking to Avoid Estate Tax

As I am sure most of you have heard, today President Obama proposed the extension of the Bush Tax Cuts leaving with the goal of extending the current income tax rates for another two years. What a lot of people have not heard about are the proposed changes to the Estate Tax.

This year there is no Estate Tax, and there was widespread speculation on where the estate tax rates and exemption levels would be set for 2011 and the years to follow. Most analysts pegged the tax exemption at anywhere from $1 Million per individual to $3.5 million per individual with tax rates ranging from 35% to 55%.  

In a bit of a surprise, today's proposal would set the exemption level at $5 Million per individual with a flat rate of 35%. This means that, at death, only estates worth greater than $5 Million would be subject to Estate Tax and this tax would be 35% no matter how much your estate's value exceeds $5 Million. 

If these rates stick, then the majority of the population will not need to worry about their estate being subject to estate tax at death. However, professional estate planning would still be beneficial to you to ensure that your property is left to your heirs according to your wishes and that your heirs will be able to easily access the property in your estate.

If you would like to discuss your estate and how this law change could affect you, give me a call in the New Orleans/Metairie Area at (504) 247-1980 or send an email to chris@rabalaislaw.com. On the Northshore, contact Brent Durham at (985) 246-3020 or brent@rabalaislaw.com. In Baton Rouge, contact Paul Rabalais at 225-329-2450 or paul@rabalaislaw.com.

Chris Kane, Attorney

Director, New Orleans Office

      

Estate Tax Planning: How to Gift Down Your Estate Without Liquidity

With the coming changes in Federal Estate Tax Laws, many clients have expressed a growing concern about making sure the value of their estate falls below the new Estate Tax exemption levels, whatever that may level may be.

The most common strategy to lower the value of your estate without affecting your exemption involves giving away your property $13,000 at a time. Under existing law, A husband and wife can each give up to $13,00 to any number of people every year. For example, lets say husband and wife have 3 children and a niece who they want to leave an inheritance. They can start giving this inheritance to the children before they die to lower the value of their Estate. Each spouse can give $13,000 to all 4 heirs every year. This lowers the husband and wife's estate by $104,000 every year they chose to make these gifts. They can even make these gifts into an irrevocable trust if the kids are not yet ready to handle the money.

Gifting is easy when there is a lot of liquid cash lying around, but this is not always the case. Often times the bulk of the value in a persons estate is tied up in pieces of immovable property such as homes, rental properties, and land. It is difficult to give away portions of ownership in this property because of recording requirements in Louisiana. Essentially every time you donate an interest in the property regardless of the size that donation must be recorded in the parish records.

The best wat to gift such property is through the formation of a Limited Liability Company or LLC. By transferring the property into the name of an LLC which we set up, you can donate ownership interests in the LLC without any recordation and without giving up any control over the property. You would donate ownership interests in the LLC equivalent to $13,000 based on the value of all the property held by the LLC. This is a great way to gift without liquidity.

If you would like to discuss your options when it  comes to Gifting down your estate to Avoid Estate taxes feel free to contact me or one of my partners. You can reach me by phone or email me in the New Orleans/Metairie Area at (504) 247-1980 or chris@rabalaislaw.com. On the Northshore, contact Brent Durham at (985) 246-3020 or brent@rabalaislaw.com. In Baton Rouge, contact Paul Rabalais at 225-329-2450 or paul@rabalaislaw.com.

Chris Kane, Attorney

Director, New Orleans Office

QTIPs; Not Just for Cleaning Your Ears

The other day a client came in asking about what is known as a QTIP trust. A QTIP trust has nothing to do with those small cotton swabs made by the fine folks at Johnson & Johnson. A QTIP trust is a trust that is often used by married couples as an estate tax avoidance mechanism. The trust is usually incorporated into the wills of each spouse and allows for special tax treatment upon the death of the first spouse.

QTIP stands for qualified terminable interest property, but this terminology is not helpful or telling of the ultimate benefits provided by a QTIP trust. Essentially a QTIP trust places restrictions on your spouses rights to inherit from you that prevents the value of your estate from being lumped into the estate of your spouse, but still allows for your spouse to take use your estate tax exemption in addition to their own exemption by deferring payment of any tax at the death of the first spouse. This ultimately lowers any potential estate tax liability.

In addition, the limited control over funds left in a QTIP trust ensures that your assets will not ultimately go to your surviving spouse's new squeeze upon remarriage.

While this bare bones explanation may be somewhat helpful, I'd be happy to discuss your trust and estate tax options in further detail. You can reach me by phone or email me in the New Orleans/Metairie Area at (504) 247-1980 or chris@rabalaislaw.com. On the Northshore, contact Brent Durham at (985) 246-3020 or brent@rabalaislaw.com. In Baton Rouge, contact Paul Rabalais at 225-329-2450 or paul@rabalaislaw.com.

Chris Kane, Attorney

Director, New Orleans Office

Taxes and the Revocable Living Trust

We've been getting tremendous interest in our office recently about the use of a revocable living trust ("RLT") and avoiding probate in Louisiana. When an individual or couple comes in to address this important matter, taxes typically are part of what gets addressed. Here is a brief overview, in general, on taxes and the revocable living trust in Louisiana:

• Income Tax. The RLT does not provide any income tax savings nor income tax cost. It is considered for income tax purposes as a "Grantor Trust." All income and loss is reported on the individual income tax return of the individual or couple that set up the trust (known in Louisiana as the Settlor or Settlors, but known in other states as Grantors or Trustors).
• Tax Identification Number. The RLT does not need a tax identification number ("TIN"). The trust uses the Settlor's personal social security number ("SSN"), as its TIN. Treas. Reg. 1.671-4(b)(8) provides that a trust owned by husband and wife who file a joint income tax return is treated as a trust owned by one person for income tax reporting purposes.
• RLT Becomes Irrevocable. Typically, upon the death of a Settlor, the trust (or perhaps the deceased's portion of the trust if there are two Settlors) becomes irrevocable. Once irrevocable, it is no longer a Grantor Trust and it must apply for a TIN. It is the responsibility of the trustee to apply for the TIN.
• Federal Estate Tax. RLT assets are subject to the estate tax. Married couples may structure their RLT so that there will be no federal estate tax upon the death of the first spouse, and the married couple will be permitted - upon the death of the surviving spouse - to exempt double the estate tax exemption. You have to do this JUST RIGHT so contact us to get it done right - it's not as simple as you might think - particularly if you have non-probate assets that have designated beneficiaries.

Hope this helps. If you have questions, comments, or experiences with RLTs in Louisiana (or elsewhere) that you would like to share, please post them as a comment for all our readers to benefit. If you would like to discuss using our customized estate planning legal services to prepare a RLT based plan for you and your loved ones, give us a call at 225-329-2450, or send me an email at paul@rabalaislaw.com. Thanks, Paul

Be Careful Not To "Lump"

With the federal estate tax scheduled to blast back onto the scene in January 1, 2011 with a $1 million exemption, it is likely that we'll be dealing with a number of estates whereby a spouse unknowingly lumps his or her estate into the estate of the surviving spouse.

Here's the deal: John and Mary have a combined estate of $2 million. They have Wills in which they leave their estate to each other. Some people call these, "I Love You" Wills. I call them, "I'm going to make you pay tax" Wills.

Let's say John dies on January 2, 2011. No federal tax is due because:

1. His estate of $1 million does not exceed the exemption; and
2. Even if it did exceed $1 million, there would be no tax due to the unlimited marital deduction which provides, generally, that John's estate gets a deduction for anything he leaves to his surviving spouse.

Here's the problem: Mary now has an estate of $2 million because John lumped his estate into Mary's estate. Mary "owns" $2 million. When she later dies, Mary's estate owes about $500,000 to Uncle Sam. Could this have been avoided? Yes!

Here are a few options for John and Mary's estate plan:

• If they live in Louisiana, they can set up their Wills to leave each other the lifetime usufruct of their estates. Federal estate tax laws provide that if you leave your spouse the lifetime usufruct, then no tax is due after the first death, and the exemption amount does not get lumped into the surviving spouse's estate for federal estate tax purposes.
• Establish a certain type of testamentary trust in their Wills which provides, among other things, that the surviving spouse is entitled to the lifetime income from the deceased spouse's estate. Similar tax treatment as the Louisiana usufruct.
• Set up a revocable living trust with similar provisions as described above.

As an emergency measure, if John dies with a Will leaving his estate to his wife, Mary, the Mary can - if she wants to - disclaim some or all of the inheritance she was to inherit from her husband, John. The disclaimed assets will likely go to John's children and will not be lumped into Mary's estate for estate tax purposes when Mary dies. There are very particular formalities which must be met when disclaiming.

We've handled a number of Louisiana successions lately that have involved this issue of the first spouse "lumping" or "stacking" the assets into the surviving spouse's estate. This will happen more frequently as the estate tax slams more families starting in 2011. This was not an issue for many families this year or in years past when the exemption amount was $3 million+

Let us know if we can help with an issue like this.

Paul Rabalais

225-329-2450

paul@rabalaislaw.com

Free Upcoming Webinar: Revocable Living Trusts in Louisiana

Most people in Louisiana use their Last Will and Testament ("Will") to provide for the disposition of their estate. However, even if you have a Will, there will be a court-supervised succession procedure which must take place after you die (other states refer to this procedure as "Probate"). Your assets cannot be transferred to your heirs any other way. The following will occur when a succession takes place after you die:

1. A randomly appointed civil court judge will confirm your executor. This first step often takes weeks if not months to process through our judicial system. Your estate will be frozen from the moment you die until your executor is confirmed. After being confirmed, your executor will be required to open estate accounts at various financial institutions and transfer all of your funds to your estate accounts while your succession is pending. The failure of your executor to do this may cause your executor to be assessed with a 20% penalty by the judge.
2. Your executor will be required to work with a law firm to have prepared a formal, customized detailed listing of all of your assets (and their exact date of death values) and debts as they existed on the date of your death, including investment account numbers, bank account numbers, mortgage and credit card account information.
3. Your entire Louisiana succession record, including your Will, your list of assets and liabilities, any claims filed against your estate, and all of your heirs, will be public record and posted on the internet for anyone in the world to view.
4. If you are married and your Will does not take advantage of estate tax laws f or 2011 and beyond, your family may pay additional estate tax at the rate of 55% of the value of your estate.
5. If you are married, two successions will be necessary: one immediately after the death of the first spouse and one after the death of the surviving spouse.
6. If you own real estate in more than one state, there will a court-supervised probate required after you die in each state that you own real estate.
7. Your estate will be required to pay thousands (if not tens of thousands or more) in rising court costs and attorney costs. Your executor will be paid a fee of 2.5% of your gross estate which is subject to income tax. 

Attend a Free Webinar: "How To Avoid Probate, Estate Tax, and Delays by Using a Revocable Living Trust in Louisiana"

Click here to register for this Friday's free webinar

 

On Friday, July 30, 2010, starting at 1:00pm and ending at 2:00pn CST, I'll teach you everything you need to know about avoiding probate and estate taxes for Louisiana residents. You will discover:

1. The differences between a Last Will and Testament and a Revocable Living Trust;
2. The differences between a revocable and irrevocable trust;
3. What happens in a Louisiana Succession from start to finish - how long it takes and how much it costs;
4. The benefits and pitfalls of using a revocable living trust in Louisiana;
5. How you can keep your IRAs, annuities, life insurance, vehicles, and bank accounts in your name and avoid the Louisiana Probate;
6. How you can save $1,300 when you form and fund your revocable living trust;
7. Who is the ideal candidate and who can benefit the most from a revocable living trust; and
8. What are the estate tax consequences of using a revocable living trust in 2010 and beyond.

Click here to register for this Friday's free webinar

 

P.S. Register now. Space is limited. This webinar will not be recorded. It is a live event. See you on the webinar! Forward this webinar email invitation to your family and friends that are also interested in protecting their estates.

Shifting Interest in Trust Principal

This is one of the most confusing components of many Louisiana trusts. People who set up trusts often get thoroughly confused even though the provision may never affect them or their family.

Let's say Mom sets up a Louisiana trust for her three children. She names the three children as the principal beneficiaries of the trust. She may have done this to move assets out of her estate for federal estate tax purposes, or she may have done this to move Countable Resources out of her name for Louisiana Long Term Care Medicaid eligibility purposes.

Mom is concerned about what will happen to these assets if one or more of her children die before Mom.

Here's the deal with Louisiana trusts:

• If a child dies during the term of the trust AND THE CHILD HAS DESCENDANTS, then the trust principal will be in the child's estate and will go to the child's heirs or legatees. If the child dies without a Last Will and the child has children, then this separate property of the child will stay in trust for the benefit of the child's children, unless there exists a provision in the trust allowing the child's children to receive it sooner or later. There's nothing Mom can do to change this since the child died with descandants.
• If a child dies during the term of the trust AND THE CHILD DOES NOT HAVE DESCANDANTS, then Mom, in the trust, can provide who the substiture beneficiaries of the trust are. Perhaps Mom wants the child's interest to go back to her other children. Or perhaps Mom wants the child's interest to go to the child's spouse. As long as the child died without descendants, then Mom can designate who the substitute principal beneficiaries are if the child dies prior to the termination of the trust.

Hope I explained it in a way you can understand. There are a few minor exceptions to this rule but you should be able to get the gist of it.

Befriend us and find out more at www.facebook/RabalaisLawFirm

Seeing More Usufruct Than Ownership As Estate Tax Creeps Into Picture

Was meeting with a super-nice couple today. She had attended my webinar last week and they were ready and overdue on getting their estate plan in order.

They had no children under 24 so there were no forced heirship issues. I was walking them through the usual estate planning decisions, such as:

• what happens if both of them die;
• what happens if they become incapacitated;
• who will be in charge;
• who will inherit from them;
• how can they protect their children's inheritance from a future divorce; and
• how will their future medical decisions be made.

I got to the point of the conversation where they needed to decide whether they would leave ownership or usufruct to their surviving spouse. Until recently, it didn't really matter which they chose. Some couples want to leave things simple and leave ownership to surviving spouse. Some couples want to protect the children from the surviving spouse changing things - so they will lifetime usufruct to their surviving spouse.

NOW IT MATTERS.  The couple I worked with today has total assets of about $1 million. If the first spouse to die leaves ownership to the surviving spouse, all the assets will be lumped into the surviving spouse's estate. And with the federal estate tax exemption schedule to be $1 million in 2011 and beyond, we don't want that.

So, as the husband stated, it was a "no-brainer." They decided to leave each other the lifetime usufruct so that the assets of the first spouse to die will not be lumped into the surviving spouse's estate for federal estate tax purposes.

With the estate tax exemption dropping to a mill next year, better revisit those estate plans to make sure there is on unnecessary lumping going on after the first spouse dies. Until next time...

Paul Rabalais