2020 has been a year to remember for so many reasons: a global pandemic, the race to a vaccine, and an election with record-breaking voter turnout.

President-elect Joe Biden and his running mate Vice President-elect Kamala Harris campaigned on a platform of detailed proposals, including changes to certain areas of tax law. Here are some

You may have heard by now that the Gift and Estate Tax exemption amount was increased by the Tax Cuts and Jobs Act of 2017, which became effective on January 1, 2018. This article is to highlight some of the key estate planning issues under the new tax law.

In 2019, the Gift and Estate Tax exemption as adjusted for inflation is $11.4 million, and in 2020, the exemption amount will be increased to $11,580,000. Historically, this is the highest the exemption has ever been. The exemption will continue to increase incrementally due to a built-in inflation adjustment until January 1, 2026, when, absent an act of Congress, the exemption will be decreased to about $6 million. The value of a decedent’s estate in excess of the available exemption upon death will be subject to a 40% estate tax.

This dramatic increase (and future expected decrease) in exemption poses a range of estate planning issues which affect all clients, regardless of the amount of your wealth. There are also some opportunities for tax savings.
Continue Reading With New Tax Law, Your Estate Planning May Need Some Revisions

Last Thursday, the United States Supreme Court ruled in Clark v. Rameker that funds held in inherited individual retirement accounts (IRAs) are not “retirement funds” for bankruptcy purposes.

In October 2010, the Clarks filed for bankruptcy and claimed that Heidi Clark’s $300,000 inherited IRA was exempt from their bankruptcy estate under Section 522 of the Bankruptcy Code (which provides that tax-exempt retirement funds are exempt from a bankruptcy estate). The bankruptcy trustee and creditors objected to this, taking the position that the funds were not “retirement funds” within the meaning of Section 522. The Bankruptcy Court agreed with the trustee and creditors.

The district court ruled that inherited IRAs are exempt because they retain their character as retirement funds, but the US Court of Appeals for the Seventh Circuit reversed that ruling. The Supreme Court agreed with the Seventh Circuit, holding that the funds in an inherited IRA are not set aside for the debtor’s retirement and, thus, are not “retirement funds” under the exemption in Section 522.


Continue Reading U.S. Supreme Court Ruling Regarding Inherited IRAs Highlights the Benefits of IRA Trusts

HilaryLThere has been a lot of talk lately about repealing parts of Proposition 13.   Passed in 1978, under this initiative, property tax increases are severely limited. The resulting loss of tax revenues was devastating to the public school system and other infrastructure in California.  Democrats who now have a supermajority in the state legislature are looking at their supermajority as an opportunity to turn that around.   In addition, recent polls show that a majority of Californians are in favor of a repeal of Proposition 13 as it relates to commercial (non-personal residence) properties.  For an extended read about the recent polls of Californians who are in favor of a repeal of Proposition 13 see the following SFGate: Poll Finds Support for Prop. 13 Change .

In addition, Proposition 13 has recently even come under attack by its usually staunch supporters due to a perceived abuse of loopholes (See LA Times Article).   In response to this perceived abuse, Assemblyman Tom Ammiano has introduced a bill to plug the “loophole.”

The basic rule of Proposition 13 is that increases to the property tax are limited to not more than 2% each year until sold or otherwise transferred, for example by gift or inheritance;  such sales or transfers are referred to as a “change of ownership.”  It is not quite that simple, however.  Property passed to children under the parent/child exemption is exempt from reassessment for a home regardless of value, and for other property up to $1 million in assessed value. Assessed value is the amount for which property is assessed on the property tax bill, not the fair market value of the property.  Since property tax increases are so severely limited under Proposition 13, that $1 million exemption can cover a lot of property if the property has been held for a long time.

In addition, if property is held in an entity,  such as a corporation, partnership or LLC, then until more than 50% of the property changes hands, or one person gains control (obtains more than 50%), transfers of interests within the entity are not deemed to be a “change of ownership.”  The parent/child exemption does not apply to these transfers; so once more than 50% of the entity is transferred to the children, or one person obtains control, there will be a “change of ownership” and a reassessment even if the interests do pass to children.


Continue Reading Uncertainty Surrounding the Repeal of Proposition 13 May be a Reason to do Tax Planning Now to Avoid Increases in Property Taxes Later

This is a question that has arisen in my practice numerous times this year since “Portability” became permanent when the American Taxpayer Relief Act (ATRA) was signed in January 2013. And I’m sorry, but–the answer is “Maybe”.

The Way It Was

The majority of my clients want the surviving spouse to continue to be able to use all of the couple’s assets after the first spouse dies. In the not so distant past, when the Estate Tax Exemption (Exemption) was $600,000 (increasing to $1 million over a period of years), and estate tax rates were up to  55%, this was a real problem.  If clients with $2 million in assets provided for all assets to pass outright to the survivor, then when the survivor died owning the whole $2 million, there could be $500,000 of estate taxes to pay.  As a result, the vast majority of my clients who are married couples have an estate plan that creates a “Bypass Trust” when the first spouse dies, to bypass estate taxes.  The Bypass Trust will hold the deceased spouse’s assets, and use the deceased spouse’s Exemption.  The survivor is the beneficiary of the Bypass Trust but the assets in the Bypass Trust are not taxed when the survivor dies.  This allows the survivor to use all the assets during his or her lifetime, and to use the Exemption of both spouses; this approach essentially doubles the amount that can pass free of Estate Tax.

There has always been a potential downside to the use of the Bypass Trust, and that is: while the assets in the Bypass Trust escape Estate Tax at the death of the survivor, they also do not receive a new ”stepped up”  income tax basis at that time.  Because the Estate Tax was taxed at up to 55% versus capital gains at 20% (plus California capital gain taxes around 9+%), it was almost always better to avoid the Estate Tax and forgo the “stepped up” basis at the death of the survivor.  With the current Estate Tax rate of 40%, and California capital gain tax rates bumped up to 13.3%, this is not such an easy choice now.


Continue Reading Now that there is “Portability” of the Estate Tax Unified Credit, Do I Need a Bypass Trust?