529 Plans – Tools for Financing a College Education

Posted in Internal Revenue Code, Tuition

Take it from a former student: college is expensive! Student loan debt in the United States is presently in excess of $1.3 trillion and growing, as college tuition increases continue to outpace the rate of inflation. Parents and family members who wish to help pay for their loved ones to attend an accredited post-secondary institution may want to consider 529 plans – named by reference to the Internal Revenue Code section sanctioning qualified tuition plans – as a financing technique.

529 plans are particularly attractive because the earnings on 529 plans, which are sponsored by all 50 states and the District of Columbia or educational institutions, are not subject to federal income tax and may not be subject to state income tax. Also, properly structured contributions to 529 plans are not subject to federal gift tax.

529 plans comprise both pre-paid tuition and savings plans. Pre-paid tuition plans generally only cover tuition and mandatory fees and allow the purchaser or custodian to purchase credits or units for the current or future student at participating colleges and universities at a locked-in price. Some plans also provide for room and board option and may require residency in the sponsoring jurisdiction. Educational institution can only offer prepaid tuition plans.

Savings plans, also known as savings accounts, cover not only tuition and mandatory fees, but also room and board and the cost of computer technology and related equipment and/or related services, such as internet access, but prices are not locked-in. The donor chooses the investment options for the plan, which may include stock mutual funds, bond mutual funds, and money market funds. Some investments are not federally insured and do not always guarantee growth or return on investment. Unlike some pre-paid tuition plans, savings plans do not contain residency requirements, but aggregate contributions may be limited to a specified amount.

Annual contributions of up to the annual exclusion amount per beneficiary ($14,000 in 2017 and $15,000 in 2018) are not subject to federal gift tax (provided no other gifts are made to the beneficiary during that year) and married couples may effectively double their contributions. Contributions also may be front loaded for up to five years, which requires that the donor file a federal gift tax return to make the five-year election. In order to take advantage of front loading annual exclusion amounts, the donor must survive for the entirety of the five-year period. If the donor passes away during the five-year election period, contributions allocated to the remaining years after death will be included in the taxable estate of the donor.

For additional information, please visit SEC website or the IRS website.

*Not admitted to the practice of law.

Tis the Season: Holiday Gifting Without Gift-Tax Pains

Posted in Estate Tax, Gifts

Many individuals give gifts to family, friends, and charities during the holiday season. Knowing the tax rules applicable to gifts will ease the process and enhance the joy of gifting.

Gifts Come in Many Shapes. For individual U.S. citizens or residents, the federal gift tax applies generally to all gifts of property – of whatever kind and wherever situated — to the extent that their value exceeds available exclusions, deductions, and exemptions. Special valuation rules apply to gifts other than cash and an appraisal may be required to substantiate the value of certain gifts.

Who Pays the Gift Tax? The individual who gives (i.e., the donor) pays the gift tax.

Not All Gifts Will Result in the Outright Payment of Gift Tax.

  • Annual Exclusion Gifts. The first $14,000 of gifts made to any individual recipient (i.e., the donee) is excluded in determining the total amount of gifts for 2017. The annual exclusion amount is indexed for inflation and will increase to $15,000 for gifts made in 2018. Married couples can either make separate annual exclusion gifts to the same individuals or elect to have the gifts made by each spouse to other individuals in any calendar year deemed to have made one-half by each spouse (i.e., the election to split gifts), but a federal gift tax return (IRS Form 709) must be filed to make the election. In the case of a gift in trust, the beneficiary of the trust is the donee. Generally, gifts in trust do not qualify for this exclusion.
  • Medical Expenses and Tuition Exclusion. Amounts paid on behalf of an individual as tuition directly to a qualifying educational organization for the education or training of that individual are not treated as gifts for purposes of the federal gift tax, regardless of amount. The same applies for amounts paid on behalf of an individual directly to a medical provider with respect to that individual as payment for the qualifying medical expenses arising from such medical care. Additionally, payments for room and board, books, and supplies do not qualify for the exclusion.
  • Deduction for Gifts to Spouse. Gifts to a U.S. citizen spouse are generally not subject to gift tax, regardless of amount.
  • Deduction for Charitable Gifts. Gifts to qualified organizations – including nonprofit groups that are religious, charitable, educational, scientific, or literary in purpose, or that work to prevent cruelty to children or animals – may be deducted for gift-tax purposes (and for income-tax purposes by individuals who itemize deductions on their federal income tax return (IRS Form 709, Schedule A, Itemized Deductions), subject to certain limitations and substantiation and reporting requirements).
  • Lifetime Gift Tax Exemption. Because federal gift tax is not paid until an individual has made lifetime taxable gifts (i.e., gifts in excess of applicable exclusions and deductions) in excess of the $5.49 million exemption (for 2017), the tax is inapplicable to most individuals, although a federal gift tax return must be filed. The exemption amount is indexed for inflation and will increase to $5.6 million in 2018.

Get Competent Advice Before Gifting. For holiday gifting without regret, get competent advice before gifting. See IRS Publication 950: Introduction to Estate and Gift Taxes.

*Not admitted to the practice of law.

IRS Announces December 2017 Applicable Federal Rates and 7520 Rates

Posted in Applicable Federal Rates (AFRs), IRS

The Internal Revenue Service (IRS) publishes a monthly update to the applicable federal rates (AFRs) and 7520 rates.

Planning professionals and their clients should take note of fluctuations in these rates and be mindful of planning opportunities that come with rate changes.

The AFR is calculated by the IRS under Section 1274(d) of the Internal Revenue Code (the Code) and is used for many purposes.  One of its most common applications is to establish the minimum interest rate that can be charged on an intra-family loan without income or gift tax consequences.  These “safe harbor rates” are dependent upon two factors: (i) the term of the loan and (ii) the frequency of compounding of interest.

For these purposes:

  • Demand notes and notes with a term of three years or less are considered short-term obligations,
  • Notes with a term of more than three years but less than nine years are considered mid-term obligations, and
  • Notes with a term of more than nine years are considered long-term obligations.

The 2017 AFR rates are as follows:

The 7520 rates are used to calculate the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest.  They are calculated by the IRS under Code Section 7520 (hence, the name 7520 rates) and are always 120% of the AFR for mid-term obligations with semi-annual compounding.  The 7520 rates for 2017 are as follows:

Rates are typically published by the 20th day of each month and provide planning opportunities for certain estate planning vehicles which are interest rate sensitive.  For example:

  • Lower rates are generally preferable for intra-family loans, grantor retained annuity trusts (GRATs), installment sales to grantor trusts and charitable lead annuity trusts (CLATs).
  • Higher rates are generally preferable for qualified personal residence trusts (QPRTs) and charitable remainder annuity trusts (CRATs).

As rates continue to change, advisors and clients should maintain an open dialogue so that clients can take advantage of any planning opportunities tied to increasing or decreasing rates.

Tax Reform: The Impact on Tax-Exempt Bonds and Low-Income Housing Finance

Posted in Government, Tax Planning

The Senate Proposal – Some Good News.

The Senate Finance Committee released its proposed tax bill (the “2017 Senate Tax Bill”) late on November 9, 2017. Unlike the 2017 House Tax Bill (defined below), the 2017 Senate Tax Bill would maintain current private activity bond provisions without modification (although, like the 2017 House Tax Bill, it would eliminate advance refunding bonds for 501(c)(3) organizations and governmental bonds).

Like the 2017 House Tax Bill, the 2017 Senate Tax Bill preserves the “9%” low income housing tax credit. Unlike the 2017 House Tax Bill, the 2017 Senate Tax Bill, by preserving the ability to issue Section 142(d) housing bonds, also preserves the use of the “4 %” low income housing tax credit.

However, the 2017 House Tax Bill remains alive and its potential ramifications with respect to affordable housing finance are addressed below. How the differences between the two proposals will be resolved remains to be determined.

To read the full GT Alert, click here.

Tax Credits for Wind and Solar Facilities Under the Republican Tax Plan

Posted in Tax Planning

On Thursday, Nov. 2, 2017, the House Republicans unveiled their long-awaited tax plan, which was introduced as a Bill (H.R. 1) entitled the “Tax Cuts and Jobs Act” (the “Act”). While the Act has yet to be passed by the House, and it is likely to change in the legislative process, it contains proposals affecting the solar and wind industries which deserve to be carefully monitored. In addition to lowering income tax rates, which would, in general, make the tax benefits from investments in solar and wind facilities less valuable, as discussed in detail below, the Act would also make changes to the primary tax incentives relative to solar and wind facilities; namely, the investment tax credit and the production tax credit. While these changes may present planning opportunities, they also create issues and uncertainties, which hopefully will be clarified as the legislation progresses.

To read the full GT Alert, click here.

Greenberg Traurig’s Todd Steinberg Quoted in Forbes

Posted in Estate, Estate Planning, Estate Tax

Greenberg Traurig Shareholder, Todd Steinberg, was recently quoted in Forbes where he discusses, in particular, the estate tax repeal. The article is in response to recently issued bill, H.R.1, the Tax Cuts and Jobs Acts, and addresses the potential legislative tax law changes on the horizon.  Steinberg reminds readers this is proposed legislation and there may be changes before it is passed and signed into law.  To read the full article, click here.

 

Making Final Arrangements for Funerals and Dispositions of Remains

Posted in Death and Disability Planning, Estate Planning

Unlike Halloween, funeral arrangements shouldn’t be a spooky mysterious process. If your wishes are not specified in writing, how will your family and friends know your ideal ultimate resting place? To avoid confusion and added stress in a time of grief and mourning, as much of the desired funeral and burial/cremation arrangements should be made in advance, while you are also planning for other dispositions in your estate plan.

Most states specifically allow individuals to make pre-death arrangements for funerals and disposition of bodily remains. In this form of written direction, individuals may choose a person or persons who will be responsible for carrying out their last wishes. In Virginia, for example, any person may designate, in a signed and notarized written document, an individual to be responsible for his funeral and disposition of remains, including cremation, internment, entombment, or memorialization upon death. In Virginia, and in many other places, this gives the named person priority over all others potentially legally entitled to make such arrangements, and allows them to decide the best course of action based on an individual’s written wishes. This step is of particular importance for those final arrangements that are unique and have not been previously discussed with, or agreed to by, family and friends.

Prepaid funeral contracts may also be drafted with local funeral homes and other providers. Many funeral homes will allow individuals to exactly specify their preference for religious ceremonies, viewings, and compliance with applicable or desirable cultural traditions. These directions may also include burial and headstone placements, as well as preference pertaining to public and private funerals. Implementing any one or more of these available pre-death planning strategies, especially a combination of them, can take the guess work out of your funeral and burial/cremation arrangements. Most importantly, such planning can allow your loved ones to mourn with less stress and anxiety, and allow you to rest in peace.

*Not admitted to the practice of law.

Federal Estate Tax Exemption Increases to $11.2 Million in 2018 (For a Married Couple)

Posted in Estate, Gifts, IRS

The federal estate (and gift) tax exemption amount (exemption amount) is the total amount that an individual may transfer during life, or at death, without incurring gift, estate, or generation-skipping transfer tax on the value of the transferred assets.  This amount is adjusted annually for inflation, meaning that even if you exhaust your exemption amount by making substantial gifts in the current year, on Jan. 1, 2018, the inflation adjustment on the base $5 million exemption amount will become available for future gifting.

In 2018, the exemption amount will increase from $5,490,000 to $5,600,000 per individual (or $11,200,000 for a married couple) and individuals who have already used their entire exemption amount for lifetime gifting will have an additional $110,000 of exemption available as of Jan. 1, 2018.

The federal gift tax annual exclusion amount also will increase in 2018 from its current amount of $14,000 to $15,000 per donee.  Gifts to any recipient may be doubled if gifts are split with a spouse.  Unlike the exemption amount, the gift tax annual exclusion amount is a “use it or lose it” tax benefit.  You may make annual exclusion gifts to as many recipients in a year as you wish, but you may not carry the annual exclusion amount forward to the next year.

For further detail on 2018 tax benefits please see IRS Revenue Procedure 2017-58.

For more information on estate and gift tax, click here.

IRS Announces November 2017 Applicable Federal Rates and 7520 Rates

Posted in Internal Revenue Code, IRS

The Internal Revenue Service (IRS) publishes a monthly update to the applicable federal rates (AFRs) and 7520 rates.

Planning professionals and their clients should take note of fluctuations in these rates and be mindful of planning opportunities that come with rate changes.

The AFR is calculated by the IRS under Section 1274(d) of the Internal Revenue Code (the Code) and is used for many purposes.  One of its most common applications is to establish the minimum interest rate that can be charged on an intra-family loan without income or gift tax consequences.  These “safe harbor rates” are dependent upon two factors: (i) the term of the loan and (ii) the frequency of compounding of interest.

For these purposes:

  • Demand notes and notes with a term of three years or less are considered short-term obligations,
  • Notes with a term of more than three years but less than nine years are considered mid-term obligations, and
  • Notes with a term of more than nine years are considered long-term obligations.

The 2017 AFR rates are as follows:

The 7520 rates are used to calculate the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest.  They are calculated by the IRS under Code Section 7520 (hence, the name 7520 rates) and are always 120% of the AFR for mid-term obligations with semi-annual compounding.  The 7520 rates for 2017 are as follows:

Rates are typically published by the 20th day of each month and provide planning opportunities for certain estate planning vehicles which are interest rate sensitive.  For example:

  • Lower rates are generally preferable for intra-family loans, grantor retained annuity trusts (GRATs), installment sales to grantor trusts and charitable lead annuity trusts (CLATs).
  • Higher rates are generally preferable for qualified personal residence trusts (QPRTs) and charitable remainder annuity trusts (CRATs).

As rates continue to change, advisors and clients should maintain an open dialogue so that clients can take advantage of any planning opportunities tied to increasing or decreasing rates.

IRS Provides Tax Relief for Victims of Hurricanes Harvey, Irma, and Maria

Posted in Insurance, IRS

The IRS has announced that “affected taxpayers” in areas of Florida, Georgia, Puerto Rico, Texas, and the U.S. Virgin Islands designated as “covered disaster areas” are eligible for the postponement of time to file returns, pay taxes, and perform other time-sensitive acts.

Taxpayers in the categories below constitute “affected taxpayers”:

  • Individuals who live, and businesses (including tax-exempt organizations) whose principal place of business is located, in the covered disaster area;
  • Taxpayers not in the covered disaster area, but whose records necessary to meet a deadline listed are in the covered disaster area; and
  • All relief workers affiliated with a recognized government or philanthropic organization assisting in the relief activities in the covered disaster area and any individual visiting the covered disaster area who was killed or injured as a result of the disaster are entitled to relief.

Affected taxpayers will be given until Jan. 31, 2018 to file most tax returns (including individual, corporate, and estate and trust income tax returns; partnership returns, S corporation returns, and trust returns; estate, gift, and generation-skipping transfer tax returns; and employment and certain excise tax returns.) that have either an original or extended due date occurring on or after Aug. 23, 2017, and before Jan. 31, 2018. Certain fees, penalties, and other administrative costs associated with these filings may be waived so long as the time-sensitive actions are completed on or before Jan. 31, 2018.

Of particular note is information released from the IRS relating to retirement benefits and pension plans. The IRS announced 401(k)s and similar employer-sponsored retirement plans will allow taxpayers the opportunity to make loans and hardship distributions to affected victims and their family members. The IRS is relaxing many of its procedural and administrative rules to allow taxpayers to support those affected by the storms; however, certain employer-sponsored retirement plans will not be waiving the 10 percent early withdrawal penalty.

Lastly, there is additional relief for affected taxpayers who have sustained losses on certain property where insurance or other means of reimbursement are not provided to cover the damage. These losses, better known as casualty losses, include certain loss arising from fire, shipwreck, or in this case storm, in a federally declared disaster area. Taxpayers have the option to claim a casualty loss for this year or the immediate prior year, on their federal income tax return. In order to determine the amount of loss that is deductible under these provisions, taxpayers should look to the fair market value of their property before and after the storm damage. The cost of repairs to property damaged, and not covered by insurance or other means, is acceptable as evidence of the loss of value by the IRS if the taxpayer can show the repairs are necessary to restore the property to its condition immediately prior to the storm, and the amount spent is not excessive or for more than the damage done. Those taxpayers claiming losses should specify the related Hurricane when filing, so as to simplify and expedite the processing of these returns and any potential refunds. Publication 547 provides information on how to determine the amount of the casualty loss.

See IRS webpage “Help for Victims of Hurricanes Irma and Maria” for more information. See also:

https://www.irs.gov/newsroom/tax-relief-for-victims-of-hurricane-irma-in-florida

https://www.irs.gov/newsroom/tax-relief-for-victims-of-hurricane-maria-in-puerto-rico

https://www.irs.gov/newsroom/tax-relief-for-victims-of-hurricane-harvey-in-texas

https://www.irs.gov/newsroom/tax-relief-for-victims-of-hurricane-maria-in-us-virgin-islands

 

*Not admitted to the practice of law.

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