Estate Planning Law Firm of Louisiana

Understand Tax Laws Before You Sell or Donate Appreciated Property

I was visiting with a wonderful married couple today. They had seen me speak to a big church group a while back and they attended my Barnes & Noble book signing and mini-seminar. They were telling me how fantastic their children and grandchildren were.

They have owned some acreage for many years. It has appreciated significantly in value, but they are not at risk for paying federal estate tax (at least not unless there are some major changes in estate tax laws - which might happen). They were considering selling this property to one of their grandchildren. I pointed out that if they sell this property to their grandchild, they will pay approximately $100,000 of capital gains tax because there has been so much appreciation since their original acquisition.

However, if the grandchild inherits this property, then the grandchild will inherit it at a stepped-up basis. All of that appreciation that would be taxed if they sold or gave away would no longer be taxed.

Here's my rule: If you are certain there will be no federal estate tax, DON'T GIVE AWAY APPRECIATED ASSETS. If you give them away, your donees will receive your basis (called a "carry-over" basis). Let your heirs inherit the asset and let them enjoy the stepped-up basis.

Of course every circumstance is different and other factors may affect your decision, but make sure you know the rules before you take action.

Force Beneficiaries of IRA to Take Required Minimum Distributions By Naming Trust as Beneficiary

Have been asked a couple of times in the last couple of weeks to help people set up their IRAs so that when they die, the beneficiaries could only receive the required minimum distribution (RMD) from the IRA.

The reason people typically want to do this is twofold:

1. You virtually can guarantee that your beneficiary will receive annual income for the rest of the beneficiary's lifetime. The rules say that a non-spouse beneficiary must take RMDs over the beneficiary's life expectancy.
2. You can prevent your beneficiary from taking a lump sum distribution - requiring a hefty income tax bill - and then blowing the inherited funds.

Here's how it works:

• Determine who you want your beneficiaries of your IRA to be. It might be your children, your grandchildren, or other loved ones.
• Determine who will be the trustee of your "Stretch IRA Trust." This should be a responsible person or a trust company that will manage your IRA after your death and distribute to your beneficiaries their RMD amount.
• Work with an attorney like me to establish your Stretch IRA Trust.
• Give a copy of your Trust to your IRA custodian and make sure they will comply with the terms of your trust after your death.
• Name your trust as primary or contingent beneficiary of your IRA. Perhaps - if you are married - you want your spouse to be your primary beneficiary, and you want your trust to be the contingent beneficiary.

Paul Rabalais

Annual Gift Tax Exclusion Increases To $13,000 In 2009

During the calendar year 2008, individuals can make gifts of up to $12,000 to as many people as they'd like withou gift tax consequences.

Starting January 1, 2009, individuals will be permitted to gift $13,000 annually to individuals.

Note that this is NOT an income tax rule. Generally, gifts, regardless of the amount, do not have income tax consequences. 2009 gifts exceeding $13,000 per donee will require the donor to file a federal gift tax return and report the gift.

Note also that the State of Louisiana no longer has a state gift tax or a state inheritance tax. If you have questions about a Louisiana estate, feel free to send me an email at paul@rabalaislaw.com. I enjoy reading and responding to emails on a daily basis. Thanks.

Paul Rabalais

WSJ Reports on Portable Estate Tax Exemption

I recently read an October 15, 2008 article in the Wall Street Journal which discussed the presidential candidates' views on the federal estate tax - my dad showed me the article. It appears that both candidates favor making the estate tax exemption "portable," which means that the exemption would be transferable from one spouse to the other.

This would be a major change to the estate tax law. Currently, if the first spouse to die leaves all of his or her assets to the surviving spouse, the couple wastes one of the estate tax exemptions that is available to each of them. Currently, if a Louisiana couple wants to make certain that each spouse uses the maximum amount of their exemptions, they must either leave each other the lifetime usufruct, or they must set up trusts (either revocable living trusts or testamentary trusts), so that the first spouse to die's assets do not go directly to the surviving spouse.

Making the exemption portable would especially help couples that have the vast majority of their wealth in a company retirement account or an individual retirement account (IRA). The surviving spouse is often named the beneficiary of these accounts, which under our current system, overuses the marital deduction and unnecessarily lumps assets into the surviving spouse's taxable estate. Making the estate tax exemption portable may solve this problem since the surviving spouse will be able to protect "double" the estate tax exemption.

If you have questions about minimizing federal estate tax - particularly if you are a Louisiana resident - feel free to send me an email at paul@rabalaislaw.com

Paul Rabalais

What's the Best Way to Loan/Give Money To Your Child?

A friend of mine called me the other day. He said he wanted to help his son out by giving him $350,000 toward the purchase of a home. He wanted to know the best way to structure it.

We talked about it for a few minutes. These kinds of arrangements frighten me because if the help is in the form of a loan, the child rarely ever pays it back, it creates friction among all family members, and it could cause the parent(s) to have adverse income tax consequences.

If the help is in the form of a gift, then the parent(s) use some of their gift and estate tax exemption, but at least there will be no 3% Louisiana gift tax because that tax was eliminated from the law earlier this year.

After weighing the factors involved, he decided to make an outright gift to his son. He acknowledged that he and his wife would have to file a federal gift tax return due April 15, 2009, but no gift tax would be due, and the gift would have no income tax effect to himself or his son. But he felt that this would not penalize him since their estates were under estate tax exemption (although who knows what will happen with the estate tax in the future).

There are a number of factors to weigh when transferring assets to your children during your lifetime, such as, income tax, capital gains tax, gift tax, estate tax, liability concerns, ability to repay loans, in-law problems, children's divorces, and much more. If you want some help in figuring the best way to transfer assets to your child, send me an email at paul@rabalaislaw.com

Paul Rabalais

Make gifts to your child - save $3.625 million in tax

Was working with a family this week. The parents want to do whatever they can legally do to avoid federal estate tax. We don't know what Congress will do with the estate tax in the future, but let's assume they keep it. Let's look at how much estate tax savings would result from making annual exclusion gifts to your child.

Let's say the parents are 50 years old. They start now by giving $24,000 annually to their child - or to an irrevocable trust for the child's benefit. Let's further assume that the child (or the trustee) invests the gifted funds and earns a 10% investment return. If the parents continue the annual gifting at $24,000 per year and die at the age of 85, and assuming the child or trustee continues investing the gifts, then when the parents die, the child (or the trust) will have assets totalling $7,251,508. If those assets would have remained in the parents estate - and if the estate tax rate was 50% - then the family saved over $3,625,000 in federal estate tax.

We work with people in our office who like avoiding tax. If you want to know how you can legally and ethically plan ahead and provide for your children and grandchildren, then give me a call at (225) 329-2450, or send me an e-mail at paul@rabalaislaw.com

Paul Rabalais

Warning: Be Careful With IRA's and Revocable Living Trusts

Here's an example I dealt with recently: An individual moves to Louisiana from another state. Prior to moving to Louisiana, she created and funded a Revocable Living Trust in that other state. Her goal was to avoid probate. While in that other state, she named her Revocable Living Trust as the beneficiary of her large IRA.

When she died, the custodian of the IRA said that since the Revocable Living Trust provisions required that the trust be terminated at her death, the entire IRA must be taxed to the decedent in the year of her death. Had she named her children as the beneficiaries of the IRA (instead of the trust), they could have been able to take minimum taxable distributions over their lifetime.

Moral of the story: If probate avoidance is your primary goal, name individuals as beneficiaries of IRAs and 401(k)s. They avoid probate and there won't be any question about your beneficiaries' distribution options.

Paul Rabalais

For Families With More Than $2 million of Assets: Bad Wills Can Cost You $1,000,000

I met with an awesome family yesterday. The couple and their two grown children drove in from about an hour and a half away. We had done their son's estate planning a couple years ago.

We had a good time and we talked about lots of things. For me, the biggest issue was helping them avoid estate tax. Their current Wills (prepared more than 20 years ago) left their assets to each other. I told them this would "lump" all of the assets into the surviving spouse's estate and could require significant estate tax at the surviving spouse's death.

The solution was to arrange their estates so that when the first spouse dies, none of the "first spouse's assets" get included in the estate of the surviving spouse, but arrange it in a way so that the surviving spouse has contol and access to the assets. There's a few different ways to do this:

1. Set things up so when the first spouse dies, that spouse's assets go in trust for the benefit of the surviving spouse and then the children. This can be done in a revocable living trust format, or it can be done through "testamentary" trusts established in their last will and "testament."
2. You can give your spouse the lifetime usufruct of your estate in your Will. This should only be done for Louisiana residents since "usufruct" is a Louisiana term, and no one outside Louisiana knows what it means (or much less - how to pronounce it!)

Have questions or comments? Bring 'em on!

"Usufruct Account" May Not Be A Good Idea

Got a call today from a colleague. We had prepared his parents' estate plan and handled his father's estate administration when he died. He said his financial advisor was recommending his mother have two accounts - her own account and a usufruct account. Whoa!!!

If Mom sells stock over which she has a usufruct, she will have converted a nonconsumable (stock) to a consumable (cash). She then becomes the owner of ALL the cash but her estate will have a debt to the naked owners of this cash. If that cash is then used to purchase stock or mutual funds, those assets will be owned 100% by the surviving spouse - as far as the IRS is concerned for federal estate tax purposes.

Example. When Dad died, they owned 200 shares of ExxonMobil stock. Mom now owns 100 shares and has the usufruct of 100 shares. Mom later sells all 200 shares for $20,000. NO MATTER WHAT MOM DOES WITH THAT CASH, HER ESTATE OWES THE NAKED OWNERS $10,000 AT HER DEATH. If Mom buys Wal-Mart stock with that $20,000 and it grows to $50,000 (or decreases in value to $5,000), then all of the Wal-mart stock will be included in Mom's estate, but her estate will be entitled to a $10,000 deduction on the usufructuary accounting filed with the federal estate tax return within nine months of her death.

If Mom sells and buys and sells in a usufruct account, it can become an accounting nightmare. Sound confusing? It is.