Planning for the Inevitable

Planning for the Inevitable

(including 2014 New York State changes) By Marisa J. Punzone, CPA


Estate planning, like retirement planning, remains an essential facet in the lives of those that like to maintain some sort of control over their future. The estate tax is a tax on your right to transfer property at your death. It is an accounting of all of your assets, with certain allowable deductions applied against them. The constant changes made to estate tax laws requires you to be on the lookout for the most beneficial and cost effective way to transfer your assets to your loved ones. The good news is that the federal estate exclusion amount continues to climb. The exclusion amount has risen to $5,340,000 (up from $5,250,000 in 2013) for estates of decedents dying in 2014. However, the estate tax rate linked to estates of this size has also increased from 35% in 2012 to 40% in 2013 and future years.

Although the federal government allows for generous estate tax exclusions, attention must be given to the state domicile of the decedent. Effective April 1, 2014, New York State enacted significant changes to its estate tax laws. For example, for those that died between January 1, 2014 and March 31, 2014 in New York State only secure a state exemption of $1,000,000. As of April 1, 2014, the New York State basic exemption amount has been increased to $2,062,500 and is scheduled to rise every year until it matches the federal exemption amount. The increase in the New York estate tax exclusion only benefits those estates equal to or below the new exclusion amount. On the other hand, if the New York taxable estate exceeds the new basic exclusion amount by more than 5%, the entire taxable estate will be subject to New York State estate tax as opposed to the amount in excess of the basic exclusion amount.  In addition, New York taxable estates that are over the exclusion amount, yet under 105% of the exclusion, will quickly lose the benefit of the exclusion due to a phase-out computation. Consider the following hypothetical examples:

Example:                                                      Case 1                                                  Case 2

  1. Date of Death:                             April 15, 2014                                     April 15, 2014
  2. NYS Basic Exclusion Amount:   $2,062,500                                          $2,062,500
  3. NYS Taxable Estate:                    $2,062,500                                          $2,165,625 (105%)
  4. NYS Estate Tax:                            $0                                                          $112,050
  5. Marginal Tax Rate:                        0%                                                         108.65%

As illustrated, the new law provides significant tax savings to estates that are in excess of the old threshold of $1 million but below the new exclusion amount. However, it provides no tax relief for those estates that exceed the basic exclusion amount by more than 5%.

In regard to gift tax, two elements must be considered: the lifetime exemption amount and the annual exclusion amount. The lifetime exemption amount equals the federal estate tax exemption ($5,340,000 in 2014). This represents the maximum amount a person can give away during their lifetime without paying gift tax. The annual gift exclusion is the maximum amount a person may gift to another person in any given year without encountering federal gift tax ($14,000 in 2014). Married couples may combine their annual exclusions and gift up to $28,000 to an unlimited amount of people per year, free of gift tax. Another important fact surrounding gift tax is that there are certain gifts which are entirely exempt and free from gift tax: gifts from one spouse to the other (unless the receiving spouse is not a U.S. citizen), gifts that qualify for either the medical or educational exclusion and gifts to charities. New York State repealed its gift tax in 2000 and has not reinstated it under the new legislation. However, there was one temporary change made. Gifts made by New York residents between April 1, 2014 and December 31, 2018, which were made within three years of death, will be included in their New York gross estate. This translates to New York State estate tax being imposed on gifted property located both inside and outside of New York State that otherwise would not have been subject to New York State estate tax. In addition, it appears that gifts that are added back may not be eligible for the state death tax deduction allowed against the federal estate tax.

Planning for the inevitable is not a pleasant task, however, we all want to offer protection to our loved ones when we are no longer able to do so. Therefore, consider the following:

  • Be sure to introduce your spouse, or loved ones, to your financial advisor. They are often the ones involved with brokerage account investments, life insurance and individual retirement accounts.
  • Inform your heir(s) of the location of all of your accounts and how to access them. This includes a password list for online accounts, a list of your estate planning documents and their locations, a list of your lawyer(s), financial planners, accountants and any other professionals that you may have utilized in constructing an estate plan.
  • Update your will and beneficiary information.
  • Never assume that having a will is enough. Certain assets are not covered by your will. Ensure that your beneficiary designations are correct on retirement accounts, such as 401(k) and IRAs, life insurance, annuities and any TOD (Transfer on Death) accounts that you may hold.
  • Although the federal government allows for portability, New York does not. Therefore, New Yorkers should consider taking advantage of a Credit Shelter Trust, due to the lack of portability within the state.
  • Review your estate plan with your attorney and accountant to minimize estate taxes and probate fees.

We hope this information answers some of your questions surrounding estate taxes. There are many aspects to consider when forming a solid estate plan. Please contact our office if you would like to further discuss the above material.

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Retirement Plans for the Self-Employed

When contemplating retirement plans for their business, the self-employed have two popular options; the Simplified Employee Pension Plan (the “SEP”) and a Keogh Plan.  The Keogh Plan may be set-up as a profit-sharing plan or a money-purchase plan.  Depending upon the circumstances of the business owner, each of the Plans has significant benefits over the other.  I will try to highlight what I feel are some of the key difference for each of the Plans.

Plan Set-up:  A SEP is generally one of the easiest retirement plans to set-up.  It can be done as simply as through your bank or brokerage house, with separate accounts for each participant.  A model SEP can be established by using IRS Form 5305-SEP.  Setting up and administering a Keogh Plan is a little more complicated than a SEP and in most cases returns may have to be filed periodically (generally through a third-party administer).

An advantage of the SEP is it can be set up and funded by the tax return due date. If a business owner determines in January, for example, that a contribution to a SEP would benefit them on their prior year tax return, they may still set up and fund one before the filing of their return.  Contributions can be made after year-end to a Keogh plan only if the plan was actually set up by the end of the previous tax year.

Contribution and Deduction Limitations: With either plan, contributions may not be based on earnings in excess of $245,000 (for 2011, indexed for inflation) per year.  For the self-employed, the money purchase Keogh will generally allow for the largest deductible contributions possible.  Under this type of Keogh the owner may contribute 100% of their earnings, up to $49,000 (for 2011, indexed for inflation).  The profit-sharing Keogh and SEP Plan allow for employer contributions at a lower percentage.  A major disadvantage of the money-purchase plan is that the employer contributions are at a set amount for each of the years of the Plan.  The other Plans discussed, however, allow contributions to vary from one year to the next, depending upon how the business is doing.  The profit-sharing Keogh is a very popular option for high earners looking to maximize their employer contribution.

Employees Covered: If your employees are age 21 or older, they are generally accepted under most plans.  With a Keogh however, employees who have not completed one year of service (two years in some cases) do not have to be covered under the Plan.  Part-timers may not be covered at all based upon how a year of service is defined within the Plan documents.  The SEP rules differ from the Keogh in that covered employees include those who have worked for the company during three of the past five years.

Vesting Benefits: An employer may set up a Keogh so that the participants of the Plan are not entitled to their accrued benefits until they have been Plan members for a certain period of years (generally 3-5 years).  Alternatively, they may be entitled to their benefits gradually over a set period of time.  If the employee leaves the company, he or she is only entitled to their “vested” benefits.  SEP participants on the other hand are immediately vested in their benefits as no such waiting period is allowed.

As you can see, there are many differences to each of the Plans.  It is important for self-employed individuals to consult with their advisors before selecting a Plan to determine which Plan will give them the most benefit.  The business owner should work closely with their tax advisor to be certain they are in compliance with the Plan documents and have met required contribution deadlines.

Please feel free to contact us with any questions regarding the above, or if you would like further information regarding retirement plans or other business and tax related matters.

IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (a) avoiding penalties under any taxing jurisidiction or (b) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

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Lawmakers consider changing tax breaks on retirement savings – The Washington Post

As speculation continues about the direction that legislatures will pursue to reduce the nation’s deficit, the Washington Post published this article indicating that the tax breaks on retirement savings may be at risk: Lawmakers consider changing tax breaks on retirement savings – The Washington Post.  Taxpayers and there advisers need to keep a close eye on changes to the tax code over the upcoming year as consideration is made over a possible limitation on the mortgage interest and real estate deduction, in addition to other aspects of the Code such as increased capital gains rates, all  of which could impact a large portion of Americans.

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