The Goralka Law Firm (of Sacramento, CA) writes about Revocable Living Trusts, Wills, Powers of Attorney, Living Wills, Healthcare Power of Attorney, Life Insurance Trusts, Family Limited Partnerships, Limited Liability Companies, Corporations, Charitable Trusts, Medi-Cal Planning, and Other Estate Planning and Tax Planning Strategies.
Many estate planners believe that their job is done when the beneficiaries avoid probate and receive the inheritance. However, when beneficiaries receive their inheritance in their name outright that needlessly exposes the legacy you leave to the claims of creditors, lawsuits, divorce, the loss of governmental benefits they might otherwise receive and even a second estate tax when they die. "Outright" distributions from the trust to the beneficiary in his or her name should rarely occur.
A better approach is for each beneficiary's inheritance to go into his or her own Beneficiary Controlled Trust. If properly drafted and funded, the beneficiary can control, use and enjoy the inheritance without the risks of outright ownership.
A Beneficiary Controlled Trust refers to a trust where the beneficiary is also the controlling trustee. The beneficiary can be provided virtually the same control as he or she would have with outright ownership. For example, the beneficiary, as the controlling trustee, could make all investment decisions. Investments such as a home or brokerage account would be held in the name of the trust and would be better protected from lawsuits, divorce, creditors or predators.
The primary beneficiary could alter the level of control or protection if greater risks arose. A co-trustee could be appointed to control distributions or even investments. If the risk is very high, the primary beneficiary could even resign as trustee and appoint their best friend, trusted family member or professional to act as Trustee.
If the primary beneficiary wants to act as the sole trustee with control over investments and administration, distributions can be limited to the beneficiary's health, education, maintenance and support ("HEMS") to avoid estate tax (the "HEMS Trust"). However, some states permit certain creditors such as a divorcing spouse or health care providers to pierce through the trust and access assets up to the HEMS standard. If they obtain judgement against the beneficiary, the price to be paid for the beneficiary's additional control is potentially weaker creditor protection.
If the primary beneficiary seeks even greater asset protection, then the primary beneficiary can act as the investment trustee and control or make all investment decisions. This primary beneficiary can appoint an independent trustee who acts as the distribution trustee and is authorized to make distributions to the beneficiary in such amounts and at such times as may be determined in the sole discretion of that Independent Distribution Trustee (the "Discretionary Trust"). The Discretionary Trust generally provides greater asset protection irrespective of the beneficiary's state of residence.
The beneficiary may be concerned about giving such discretion to the Independent Distribution Trustee. This issue can be minimized by providing the primary beneficiary with the right to remove and replace the Independent Distribution Trustee. While the beneficiary does not have direct control over distributions, the beneficiary can select who does have the power so long as the person selected is not a related party or subordinate person.
Careful consideration must also be given to the trust income tax rules. The highest marginal federal income tax rate for ordinary investment income is now 44.588% (39.6% plus the 3.8% NIIT and 1.188% for the phase out of deductions). The highest tax rates are triggered with income for a single individual of $413,000 or more. The highest marginal tax rates for a trust are triggered with income of only $12,300. The difference in tax liability can be substantial.
The beneficiary controlled trust can be drafted in some cases to be a "Grantor Trust." A Grantor Trust is a trust that is "disregarded" for income tax purposes. Income is taxed to the beneficiary without regard to whether the income is distributed to the beneficiary. A Grantor Trust will avoid the higher tax rates applicable to a trust.
Alternatively, the Beneficiary Controlled Trust can be drafted as a "Complex Trust" for income tax purposes. The Complex Trust files a separate tax return. Income actually distributed to the beneficiary is taxed at the beneficiary's lower individual tax rates. Only income not distributed by the Trust will be taxed at the higher trust income tax rates.
There is no single best approach and careful analysis of the client's goals, concerns and situation should always be analyzed. The Trust may, in some circumstances, have an ability to toggle or switch between a Grantor Trust and a Complex Trust.
As a general rule, a client with a substantial estate should always consider the protective features of a beneficiary controlled trust. If you have any questions about this topic. Please contact the Goralka Law Firm.
On the first of each month, our firm votes for Team Member of the Month for the previous month. Each member of the team casts their vote based upon three categories: 1) Contribution to the Team, 2) First Rate Attitude, and 3) Professional Appearance. We are very proud of our team and love to reward them for their hard work and dedication!
Melissa (Missy) is our winner for Team Member of The Month for the month of June.
Melissa (we all know her as Missy) is John's Executive Assistant. Missy recently moved to Sacramento in May of 2015 and enjoys boating, fishing and camping.
Here is what the team had to say about Missy:
Melissa is the go-to person to handle a variety of wide-ranging tasks and handles them all with aplomb. Melissa presents a polished appearance to clients and co-workers both in person and over the telephone. She is a positive face for the firm.
Missy truly embodies grace under fire as she expertly handles a myriad of essential and time-sensitive tasks for everyone at the office. Plus, her "can-do" attitude and smile are contagious!
Missy is truly an asset to our firm. There is nothing she cannot tackle. She enjoys using her creativity to accomplish huge projects from start to finish without blinking an eye. She has a true sense of work ethic that everyone can learn from daily.
Congrats to Melissa as our Team Member of the Month!
On December 18, 2015, President Obama signed the Protecting Americans from Tax Hikes Act of 2015. The bill makes permanent a number of business and individual tax incentives that expired at the end of 2014, extends some provisions for five years, and extends a few other provisions through 2016.
The bill is welcome news for taxpayers because it will reduce much of the uncertainty that taxpayers have faced when doing year-end tax planning over the last few years by providing a permanent extension of the enhanced section 179 limitations and a five-year extension of bonus depreciation. The bill is expected to save taxpayers $622 billion over ten years. Below are some of the highlights of the provisions extended as part of the bill.
Provisions that were Permanently Extended:
• Section 179 annual expensing limitation of $500,000, gradually phasing out for taxpayers with more than $2 million in asset acquisitions
• Research and experimentation tax credit
• Five-year recognition period for S corporation recognized built-in gains (rather than ten years)
• Exclusion of all of the gain from the sale of qualified small business stock acquired after December 31, 2014
• Tax-free treatment of distributions from retirement plans by individuals age 70-1/2 and older for charitable purposes
• 15-year depreciable life for qualified leasehold improvements
• Itemized deduction for sales taxes in lieu of state income taxes
Provisions Extended for Five Years
• Bonus depreciation (the bonus depreciation percentage is 50% in 2015, 2016, and 2017; 40% in 2018; and 30% in 2019, with bonus depreciation completely phased out beginning in 2020)
• Work opportunity tax credit (expanded to be available with respect to long-term unemployed individuals)
Other Provisions Extended
• Section 179D deduction for the cost of energy efficiency improvements to commercial buildings has been extended through 2016
• Solar tax credit has been extended through 2022 with a phase out beginning in 2020
• Credits with respect to facilities producing energy from certain renewable sources have been extended through 2016
If you would like to learn more about the new rules, you can read the complete text of the billHERE or the Ways and Means Committee's summary of the bill HERE. Please contact the Goralka Law Firm at (916) 440-8036 if you would like to discuss the new rules and the impact that they will have on your year-end tax planning.
John Goralka Talks with ThinkAdvisor on Protecting Inherited Retirement Assets
When planning for retirement, an individual may face the dilemma of deciding what to do if they have leftover retirement assets when they die. Many designate a beneficiary, like a child or a grandchild, to inherit the retirement account. During the beneficiary's lifetime, the assets are able to grow significantly; but sometimes, young beneficiaries withdraw funds at an early age, which can be a crippling decision.
In the article "How to Protect Inherited Retirement Assets" published by ThinkAdvisor, Founder John Goralka of the Goralka Law Firm, explains the consequences of withdrawing funds too early. "Once it comes out, instead of a stretch-out, it's kind of like a blowout; it's like a flat tire that you can't fix because once the funds are pulled out of that qualified account, you really can't put it back," he says. By naming a retirement trust as a designated beneficiary, assets are protected from beneficiaries until they are old enough to properly decide when to withdraw from the fund.
However, early withdrawal is not the only concern regarding retirement accounts. In fact, there are many other factors that jeopardize these assets, such as bankruptcy and divorce. One section of the Bankruptcy Code stipulates that inherited assets are not considered retirement funds. Moreover, retirement assets are highly desired in divorce settlements because a spouse can take them tax-free. In order to protect retirement assets, Mr. Goralka encourages communication between estate planning attorneys and clients, and making sure that beneficiary designations are properly made. He adds, "It sounds silly, but often these beneficiary designations, because they're so simple, they're overlooked."