Vandrew Law | NJ Estate Planning, Wills, Trusts, Asset Protection

Generation Skipping Tax: Don't Blow Off That Gift Tax Return

Towards the end of 2012, there was a mad dash to set up trusts to reduce both federal and New Jersey estate tax. When the dust cleared, a log of people had been spurred on to do a lot of planning that was often long overdue. A lot of former procrastinators are feeling very content.

However, if you transferred assets to a trust during 2012, chances are that you're not done yet. Most transfers to trust made in 2012 will require a gift tax return to be filed in 2013. Even if no gift tax is owing due to your $5.25M lifetime gift tax exemption, a return must still be filed.

Many readers may ask why a gift tax return is so necessary if no gift tax is owing. First and foremost, it's a legal requirement to notify the IRS of any reduction in your lifetime gift tax exemption. Second, and perhaps more importantly, it is necessary to property allocate your Generation Skipping Tax (GST) exemption.

GST is a tax assessed whenever a transfer is made to anyone more than a generation beneath you. The classic example is a transfer to grandchildren. When you make a transfer into a trust, GST is assessed whenever that trust makes a transfer to a grandchild or other "skip person".

Each person has a lifetime $5.25M GST exemption which they can allocate to trusts. For example, if you make a $1M gift to a trust and properly allocate $1M of your lifetime gift tax exemption to that trust, any and all future distributions from that trust will be GST-free, no matter how much the trust appreciates. The exception would be if you make later transfers to trust which are not allocated any of your GST exemption.

Failure to property allocate your GST exemption to your trusts on a gift tax return is passing up a huge opportunity and may result in additional GST owing. Even if you gifted assets to a trust where only your children are beneficiaries, GST may apply if your exemption isn't properly allocated. For instance, if one of your children were to pass away before termination of the trust, without a proper GST allocation, more than likely GST would be owing upon passage of that child's assets to your grandchildren.

Gift tax returns were due on April 15, but even if you missed the deadline most negative consequences can be avoided by filing ASAP. A gift tax return is one of the most difficult tax returns to file, and you shouldn't trust its completion to just any CPA or attorney, as this link from the Wall Street Journal explains: http://bit.ly/ZyBodW. If you need a gift tax return completed, feel free to contact me.

TAX ADVICE DISCLAIMER: Any tax advice contained in this communication (including attachments) was not intended or written to be used, and it cannot be used, by you for the purpose of (1) avoiding any penalty that may be imposed by the Internal Revenue Service or (2) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

NOT LEGAL ADVICE. Everything posted here is for educational purposes only, and is not to be construed as legal advice. Do not take any action, postpone any action, or decline to take any proposed action based on this information without first engaging the representation of me or another qualified attorney. Nothing posted on Twitter or on any website shall be construed in any way as legal advice.

DISCLAIMER: I am an attorney and a CPA, however I am neither your attorney nor your CPA, and therefore no communications between us are covered by attorney-client or accountant-client privilege unless you possess a signed document which states that I currently represent you as an attorney or a CPA. In the case that such a document exists, the existence or waiver of attorney-client privilege or accountant-client privilege shall be controlled by the signed fee agreement or engagement letter.

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The Future of State Estate Tax Planning

I'm proud to announce that I was published in New Jersey Law Journal again this past week, this time on the topic of the "fiscal cliff" tax changes have altered planning for the New Jersey Estate Tax.

A copy of the article can be accessed here.

The article is written for attorneys rather than clients, so it's a little technical. The main takeaway is that the fiscal cliff tax changes have changed the way we plan for the New Jersey Estate Tax, and as a result wills may need updating. This change potentially affects anyone with more than $675,000 in assets.

If you would like me to take a look at your current wills to see if they need updating, feel free to contact me.

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Why is It Important to Choose an Estate Planning Law Specialist?

The Estate Law Specialist Board, Inc. is the only American Bar Association accredited program for certification of an attorney as in the Estate Planning Law Specialist (“EPLS”).

Attorneys who become Board-Certified under this program demonstrate a high level of professionalism and commitment to the concept of specialization. I believe that as attorney specialization increases, it will benefit not only lawyers but also the public.

This program was accredited by the American Bar Association in 1996.

I believe choosing a Board-Certified Estate Planning Law Specialist is important, as it requires rigorous testing and continuing education standards to demonstrate excellence in the field. To obtain Board-Certified status, an attorney must meet the following requirements:

Five (5) or more years as an Estate Planning attorney during which at least one-third (1/3) of the attorney’s practice is devoted to Estate Planning.
Passage of a rigorous proctored examination on estate planning law.
Twelve (12) or more hours of continuing legal education in Estate Planning topics per year for the last three (3) years.
Verification of professional liability insurance coverage.
Recommendations from at least five (5) colleagues that are not related to or within the same firm as the attorney.

I am proud to have earned this designation, and prouder to use the knowledge it demonstrates to help protect you and your family for generations.

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Taxes, Mortgage, and Title Insurance: Side Effects of a Home Held in Trust

When clients transfer the deed to their home or other real estate into a revocable living trust, or into an irrevocable trust, they often question how it will affect the property's title insurance, mortgage, and taxes. Because I receive so many questions on this topic, I thought I'd do a post addressing each area.

Title Insurance. If you transfer your home out of your personal name into a trust and your title insurance policy was issued before 2006, it is likely that the transfer voids your title insurance. This is obviously an undesired result, as if there were ever a problem with your title years down the road you wouldn't be covered. The solution to this problem is to contact your title insurance company before making the transfer to inquire about an endorsement to the policy to cover the trust. Title insurance companies generally issue such endorsements without a problem; usually they only require a copy of the trust, a copy of the deed, and a fee for the endorsement. The fee varies between title insurers. I've had some title insurance companies charge as little as $75 and others charge as much as $400 depending on the amount of the policy. Whatever the fee, it is generally small compared to the cost of a new title policy and is worth the investment for piece of mind.

If your title insurance was issued after 2006, the situation is even better as the transfer into trust is likely covered without any endorsement necessary. To find out whether your title insurance covers such a transfer without endorsement, you'll need to read the policy itself. You'll need to read the actual policy (sometimes called the "jacket"), not the title work. If a transfer to trust is covered without endorsement, the "Conditions" section of the policy will generally state such in Section 1(d)(i)(D)(4). If you find this confusing, we can review the policy for you to make sure you're covered.

Mortgage. Your mortgage almost certainly states that if title to your property is transferred out of your name, the entire mortgage balance becomes due and payable immediately. This is called a "Due on Sale" clause. At first blush, this would seem to prevent any transfers into trust unless a home was owned free and clear. In this scenario, however, a federal statute known as the Garn-St Germain Act comes to the rescue. Under the Garn-St Germain Act, a mortgage company is prohibited from enforcing any Due on Sale clause upon a transfer in trust if the borrower is a beneficiary of the trust and is permitted under the trust document to occupy the property. This generally permits transfers into revocable living trusts without any problem. Most irrevocable trusts, on the other hand, may pose a problem unless written approval is first obtained from the mortgage company. Note that Garn-St Germain only applies to residential properties of less than five units.

Taxes. So long as the trust to which your property is transferred is a "grantor trust", your ability to deduct your property taxes each year on your tax return is unaffected. Likewise, your ability to exclude the gain on sale of your principal residence under IRC 121 is also unaffected. All revocable living trusts are "grantor trusts", as are many irrevocable trusts.

New Jersey has three major property tax benefits for principal residences: the Homestead Rebate, the Property Tax Reimbursement ("Senior Freeze"), and the Veterans Deduction. All three benefits are likewise unaffected if the principal residence is held in trust for the person who resides there and is claiming the benefit.

I hope this rundown was beneficial, and if you have any questions, don't hesitate to contact me.

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When Does Joint Ownership Begin and End?

Married clients often ask me whether all of their combined assets are considered "joint". The answer to this question in New Jersey (to the surprise of many clients) is no.

New Jersey is a separate property state. This means that if an asset is owned by one spouse, absent a written statement or account title that joint ownership was intended, it is owned solely by that spouse. That spouse may do whatever he or she wants with the asset without input from the other spouse (with a few exceptions).

For those curious, all of the above rules change when a divorce is filed. At that point, all of the property owned by the spouses potentially goes into a pot for "equitable distribution". During "equitable distribution" the judge sitting in the divorce action may reallocate ownership of the assets. This is one reason that premarital planning can be so important.

This presumption of separate property (at least until a divorce happens), is very strong. In a recent case, a husband withdrew funds from a bank account and used them to purchase some jewelry. After his death, there was family infighting about whether this jewelry was jointly owned with his wife, or was his separate property. The court ruled that as soon as the funds were withdrawn from the joint bank account, they lost their joint character and belonged solely to the husband. The jewelry he purchased with those funds, therefore, was not jointly owned with his wife, and she had no right to it. See Connell v. Connell, 93 So. 1140 (Fl.App. 2012).

Joint ownership has many consequences for inheritance and also taxation. If you have any questions about it, feel free to contact me.

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A Season for Giving

In this post, I wanted to paste a copy of my firm's newsletter that went out this past week because I think it was particularly relevant to this season. [If you aren't signed up to our firm's newsletter, it's weekly and covers estate planning, personal finance, and tax tips. Contact us and I'll get you on the list.] Anyway, here we go:

All of this "fiscal cliff" talk is just about ready to make me a little crazy. Every year, there's some new crisis which Congress has to avert.

That means more uncertainty, and in my opinion, tax rates will go up. This means that many people are looking at accelerating their income into this year as much as they can (though this is a pretty good analysis of why that maybe shouldn't be the case for everyone: http://www.forbes.com/sites/peterjreilly/2012/12/02/who-should-be-accelerating-income-into-2012/ ).

The nonprofit industry is suffering as a result of the "cliff". From churches to the United Way, many are reporting decreased giving, with many donors forgoing their "end of year" giving in order to carry as many deductions into 2013 as possible. While that may make sense from a tax perspective, I have another thought.

Five Reasons To Give, No Matter The Tax Rates

When we set up mechanisms for clients to deliver their philanthropy, there's much discussion about the benefits of the gift.

But what about for the giver?

Here are some strong words about why you should be giving, no matter how effectively your money is spent.

1. Your heart changes. Studies show (http://www.livescience.com/health/080320-happiness-money.html) that when individuals spend money on gifts for friends or charitable organizations, their happiness increases -- while those who spend on themselves get no such boost. Even Scrooge can agree that everyone wins.

2. You can double your money without doing any work. Instead of simply sending off your money, why not find out if anyone is offering to match? Sites like www.DonationDoubler.org have lists of companies that will match your charitable contribution. Find one you like and suddenly your contribution goes twice as far!

3. You're just going to blow it on something dumb anyway. As pious as you are, there's still extra money in your budget somewhere. Create a budget for charity donations, then take some of your extra money (each month or each year) and donate it to charity. Use your spending money to make a difference instead of spending it on Brookstone junk you'll use once.

4. Face it: If you don't help now, you never will. Don't pretend that instead of giving money you're going to donate time. When was the last time you volunteered at a soup kitchen? Don't let your mind fall for this trick. Send the money now or you'll end up giving nothing.

5. Be a leader, not a follower. This is the big one in my opinion. There's just something that happens in your psyche when you cut a big (or relatively big) check to someone in need or to a charity organization. You feel more powerful--more dynamic. You signal to your own unconscious: "Money doesn't rule me. I have more than enough, so much more than enough that I'm giving it away." Of course, something special often happens: more money seems to find itself in your hands.

I'm not advocating a mystical pay-it-forward scheme; I'm simply making the observation over years of being a student of how money "works". It just seems to find itself in the hands of those who give it away.

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Unreported Offshore Accounts: You're Going to Get Caught

The following is a guest post from Brian Mahany, an attorney and principal in Mahany & Ertl, LLC, a boutique law firm concentrating in fraud litigation, asset recovery and tax matters. I'm happy to post it here both because it provides a cautionary tale about what can happen when when you try to hide assets. At any rate, Brian's post follows:

I would be a rich man if I had a nickel for every time a potential client with unreported foreign bank accounts asked me if I thought they would be caught. Back in 2008, my answer might have been different. Not today. While not everyone may get caught - a few people always slip between the cracks - the odds now greatly favor the IRS and not taxpayers.

Yesterday I had the chance to attend a presentation by Seton Hall University School of Law Professor Tracy Kaye. Like me, she also believes that odds favor the government. With penalties that include prison and $100,000 (or much more) per year for each year an account is unreported, smart taxpayers are coming forward and making peace with the IRS.

After the event, we had a chance to discuss some of the ways folks get caught. Here is my list (and in no specific order).

First, the government pays snitches. A lot. Former UBS and Credit Suisse banker Bradley Birkenfeld was recently paid $104 million for providing information about former UBS clients with Swiss accounts. Even though Birkenfeld is a convicted felon and served time for helping Americans evade taxes, the government still paid him.

He is not the only one and the U.S. is not alone in such tactics. Previously we reported on how Germany paid a Swiss banker for account documentation stolen from Swiss private bank Julius Baer. Reportedly the German tax authorities also provided witness protection for the banker. (Stealing is still a crime.) There is not much difference between paying whistleblowers and knowingly purchasing stolen data. Actually, there is no difference as Germany and the U.S. share tax intelligence.

If paying for information doesn't work, there is always indicting foreign bankers. The U.S. Department of Justice does that routinely. If a foreign banker knowingly assisted a U.S. taxpayer in concealing a foreign account or evading taxes, the banker can be charged with conspiracy to defraud the United States Treasury. Given the choice between prison or cooperation, most bankers will always choose the latter.

Earlier we talked about whistleblowers who are paid for their information like Bradley Birkenfeld. Not all whistleblowers are motivated by money. Many are business folks who were harmed by unscrupulous fraudsters. Others are competitors, jilted spouses, jealous boyfriends, pissed off employees, the recently laid off and an entire list of others who feel disenfranchised or who hold a grudge. Chances are that someone knows about your foreign account. How sure can you be of their loyalty?

The 4th risk is the Foreign Account Tax Compliance Act. FATCA is the 800 pound gorilla in the room. Passed by Congress several years ago, FATCA will soon require foreign banks to review their accounts and report to the United States anyone who is a U.S. citizen or has indicia of ties to the U.S.

If you think that you can quickly close your account or move the money, don't count on that. The IRS plans on asking for retroactive account data. How far back they will go remains to be seen.

Already, the U.S. has tax exchange agreements with many countries. Even the Swiss are negotiating with the IRS. Sooner or later every bank will be forced to cooperate or risk being shunned worldwide.

There is always someone who believes they are smarter than the feds. We have seen people open accounts in the name of a foreign trust or nominee. Do that and get caught and expect a relatively quick indictment. Intentionally hiding assets through phony names or entities is an affirmative act of evasion. That could earn you two felonies instead of one.

Lawyers and accountants are now bound by IRS Circular 230. Although your conversation with a lawyer may be protected by the attorney - client privilege, lawyers and accountants are prohibited from assisting others in evading taxes. We lose our license if we help you commit a crime. We can confidentially advise you of your options but can't help you hide money from the feds.

Some folks still try to open up accounts in the name of Panamanian corporations, Belize IBC's, etc. It may work for awhile but how do you get your money back into the U.S.? The Treasury folks are already looking at wire transfers, check clearinghouses, credit card records and the like. You may have a credit card from a foreign bank but it clears through Visa or Mastercard and those entities are subject to U.S. law enforcement subpoena power. Ditto for ATM networks like PULSE and NYCE that process debit card cash advances.

The world is getting smaller by the day. Each week we learn of new methods used by the feds to track down unreported offshore accounts. About the only method left is filling a suitcase with cash and hiding it in a coffee can in some other country. Not the wisest of strategies.

Not all people with unreported accounts are felons. In fact, most of our clients are dual nationals, foreign born Americans, green card holders or Americans who live or retired overseas. Many of these folks simply don't understand the reporting laws and requirement to file annual FBARs (Report of Foreign Bank and Financial Accounts).

Whether your failure to report was intentional or accidental, time is quickly running out. As noted above, the penalties for unreported accounts are huge. Often they exceed the value of the account.

The IRS is currently running an amnesty program called the Offshore Voluntary Disclosure Program or "OVDI." For those who knew what they were doing when not reporting their account, its a great deal. Come into compliance, avoid an audit, pay reduced penalties and even get the proverbial "Get Out Of Jail Free" card. As with most IRS programs, there is a catch. You need to get to the IRS before they find you. Once your name has been turned over to them or they send you an audit notice, all bets are off and amnesty is no longer an option.

For those who truly didn't know of the foreign account reporting requirements a traditional disclosure or "opt out" may be better. The penalties for negligent violations are $10,000 per year and often are waived entirely.

There are special programs for those with small accounts (aggregate balance less than $75,000), the so-called "accidental Americans", those who inherited accounts but didn't access the money and those who live overseas but are still required to file US returns. With so many options, it is best to speak to a knowledgeable tax attorney.

The IRS can look back 8 years and reportable accounts include brokerage accounts, certain foreign mutual funds, offshore hedge funds, foreign CDs and even some foreign insurance products and property owned through an entity. Again, seek competent legal help if you have questions.

If you received bad legal or accounting advice and find yourself in a problem because of that advice, seek help too.

If you walk away from this article with anything, it should be this- Don't wait! Chances are you will get caught.

Brian Mahany is a tax attorney based in Milwaukee, Wisconsin. He represents taxpayers in a wide variety of offshore and foreign tax reporting issues. Brian works with other lawyers and CPAs and has been named by CPAmerica as their exclusive legal services provider for offshore and international tax issues. He welcomes questions and can be reached through his law firm, Mahany & Ertl at brian@mahanyertl.com or by telephone at (414) 704-6731.

Blog of the Law Offices of Jeff Vandrew Jr, Attorney-CPA

Generation Skipping Tax: Don't Blow Off That Gift Tax Return

The Future of State Estate Tax Planning

Why is It Important to Choose an Estate Planning Law Specialist?

Taxes, Mortgage, and Title Insurance: Side Effects of a Home Held in Trust

When Does Joint Ownership Begin and End?

A Season for Giving

Unreported Offshore Accounts: You're Going to Get Caught