Paul Ryan’s New Tax Plan

Paul Ryan and the Republican party cite coming debt crises as necessity for major tax changes.  Democrats react with charges that the Republican budget proposal hurts seniors without focus on revising or eliminating the tax breaks for the wealthy.

Ryan’s plan sets discretionary spending at $1.028 trillion for FY 2013.  This budget is approximately $19 billion less than the spending cap agreed to by President O’Bama and the Republican party on the deal to raise the national debt ceiling.

The Ryan budget: converts the current tax brackets from six to two: 10% & 25%; cuts the corporate rate from 35% to 25%; eliminates the Alternative Minimum Tax; overhauls Medicare for those under the age of 55; cuts the deficit by $3.3 trillion in ten years; cuts taxes on corporations with oversees operations.

Congressional Budget Office says that 15% of US revenues goes only to service the National Debt.

No mention in current proposal on the Federal Estate Tax, Gift Tax or the Generation Skipping Transfer Tax.

No Comments by on March 23, 2012
filed in Estates & Taxes
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Upcoming Seminars on New Obama Tax Law

President Obama signed the “Middle Class Tax Relief Act of 2010” yesterday December 17, 2010.

Key points of the New Tax Law:

  • $5 Million Dollar Exemption for Estates
  • $5 Million Dollar Exemption for Lifetime Gifts
  • $5 Million Dollar Exemption for Generation Skipping Transfers
  • Portability of the Estate Tax Exemption for married couples

The New Tax Law provides a window of opportunity for wealthy families to transfer wealth to subsequent generations, but the planning must be done carefully.  For example, in many instances depending upon the “Portability” of the estate tax exemption could be disastrous!

Many taxpayers should consider making substantial gifts to a Dynasty Trust in 2011 (don’t wait, tax laws change and opportunities can be lost)!  By acting quickly some families may enjoy transfers over several generations without any dissipation from the imposition of transfer taxes.

Check The Duffey Law Firm Home Page for a list of upcoming seminars on How to Take Advantage of the New Tax Law, and Preserving Family Wealth over the Generations.  Click on the link to The Duffey Law Firm to see dates and venues of 2011 Seminar Series.  Be sure to RSVP 561-862-4176 as seating is limited.

No Comments by on December 18, 2010
filed in Advice of Florida Counsel, Estates & Taxes
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Upcoming Seminar Series for New Florida Residents

Check The Duffey Law Firm Home Page for updated list of seminars starting in January 2011 on various topics of interest for New Florida Residents.

Learn:

  • The most important question to ask for new Florida residents (hint – don’t listen to the neighbors)
  • Five steps every new Floridian needs to take to escape the taxing jurisdiction of your former residence
  • Homestead - its more complicated than you think!
  • How Florida law impacts trusts created by Non-Florida lawyers (caveat emptor)

Plus, information everyone needs today:

  • How to take advantage of the New Obama Tax Law
  • How to protect your family’s wealth in these uncertain times
  • New estate planning techniques for Floridians in 2011

The Duffey Law Firm is joining forces with major banks, insurance companies, local CPA’s and other professionals in order to provide timely information to our clients and the general public.  Seminars will be held at various venues throughout Palm Beach County, from Palm Beach to Coconut Creek!

Go to The Duffey Law Firm Home Page and click on the Upcoming Seminar Schedule link for the most current list of venues and dates.  Please be sure to RSVP at 561-862-4176 as seating is limited.

No Comments by on December 18, 2010
filed in New Florida Residents
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Opportunities Under New Estate Tax Law

Initial reports out of Capital Hill indicate that the new Estate Tax Law contained in the “Framework” agreed to by Obama and the Republicans could be a real opportunity for wealthy Americans.

According to sources on the Hill, not only will the Estate Tax Exemption Amount be $5 Million Dollars, but the Gift Tax Lifetime Exclusion Amount and the Generation Skipping Transfer Tax may also be set at $5 Million Dollars!

That would potentially provide wealthy Americans with an opportunity to transfer significant assets to second and third (and more remote) generations without the penalty of transfer taxes.

Some taxpayers may consider utilizing their lifetime gift exemptions to transfer up to $5 Million Dollars to children and grandchildren in trusts known as “Dynasty Trusts” or “Generation Skipping Transfer Tax Exempt Trusts.”

Properly structured strategies could result in beneficiaries receiving the benefits of significant wealth over many generations without any imposition of transfer taxes at each generational level.

Stay tuned for more details as the bill makes its way to the President’s desk!

No Comments by on December 14, 2010
filed in Advice of Florida Counsel, Uncategorized
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States to Lose Revenue Under Obama – Republican Tax Deal

One aspect of the Estate Tax Deal which passed its first legislative hurdle in the Senate last night is the loss of potential revenue to the States.

California could lose as much as $2.7 Billion due to the change in the Estate Tax Law according to a Bloomberg.com report dated 12/14/10.

Under the current law, the Estate Tax would allow for a $1 Million Dollar Exclusion in 2011, and any amount over that would be taxed at 55%.

An important element of that taxing regime (current law) is that it would allow States to participate in the revenue stream created by that tax.   This is the so called “Soak Up Tax” which was part of the Estate Tax prior to the final years of the Bush Tax Cuts.

The “Soak Up Tax” was a feature of the prior taxing regime.  The Soak Up Tax is reportedly not part of the Obama – Republican Tax Deal.  The Soak Up Tax allowed states like Florida (that has no estate tax of its own) to benefit when a resident of that state owed estate taxes to the Federal government without in any way increasing the taxpayer’s estate tax liability.

The bottom line – some states like California and perhaps Florida may have been counting on those revenues to help them balance revenue starved budgets!

No Comments by on December 14, 2010
filed in Advice of Florida Counsel
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Obama Cuts Tax Deal with Republicans!

ESTATE OF CONFUSION

Obama held a press conference on 12/6/10 to announce new Tax Deal with Republicans!  Here is what we know so far:

  • 1) two year extension of the Bush Tax Cuts (no restriction on taxpayer income);
  • 2) one year 2% reduction on Social Security withholding tax;
  • 3) Capital Gains and Dividend income will be taxed at 35% (for two more years) but perhaps the most contentious item of all -
  • THE ESTATE TAX EXEMPTION AMOUNT – $5,000,000.

This means that the first $5 million dollars of a decedent’s assets can be passed to their family or friends without any tax!

Which also means, for a married couple, the total amount of assets that can be passed to family or friends WITHOUT ANY ESTATE TAX will be $10 MILLION DOLLARS!

However, before you pop the champagne, you need to know that there is a lot of work remaining!  Many Democrats in the House and Senate are not yet ready to sign on to the Obama Tax Deal!

The Seattle Times reported on 12/7/10 that Obama’s Estate Tax proposal could lead to a revolt among Democrats in the House!

MSNBC aired an interview with Leo Gerard, President of the United Steel Workers Union on Tueseday, Dec. 7, 2010 in which he stated that “The Rich will make out like Bandits for two years!”

Forbes website’s headline following the White House’s announcement: “OBAMA’s CHRISTMAS PRESENT FOR THE WEALTHIEST AMERICANS!”

MOVEON.ORG a strong ally of President Obama released an TV commercial which aired on cable networks Wednesday, December 8, 2010 chiding President Obama to “fight for them” and to fulfill his promise of “Change!” Finally, the ad concludes with a plea to change the deal and not allow a “windfall” for the Wealthy Americans who don’t need it!

No one knows for sure what the final compromise will look like, but for now we do know one thing, the Democrats and their allies in the Unions and other liberal organizations are not ready to sign on to this Tax Deal quite yet!

No Comments by on December 8, 2010
filed in Advice of Florida Counsel
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No Estate Tax in 2010 Could Mean Major Problem for Surviving Spouse

When the law was passed in 2001, almost no one believed that Congress would actually allow the Estate Tax to end in 2010, even for just one year.  When the Senate failed to act this past December, the unthinkable happened – the Estate Tax was repealed!  There is no Estate Tax for individuals dying in 2010!  You might think that is good news but you might be wrong!  The repeal of the Estate Tax may be a major problem for the surviving spouse and it could cost the beneficiaries of the estate significant tax dollars as well!  Here’s why.

Most affluent tax payers utilize some form of a trust in their estate plans to accomplish a multitude of important goals.  With the Estate Tax in the 45% range, avoiding the imposition of the Estate Tax has been one of the most significant goals for many taxpayers.  For the past several years, Congress allowed some amount of a decedant’s estate to pass to beneficiaries without the imposition of the Estate Tax.  Last year the amount that could pass free of Estate Tax was $3,500,000.  Now that there is no estate tax, why is that a problem?

Many taxpayers took advantage of an aspect of the former Estate Tax law by using what is called a “Bypass Trust”.  The way the Bypass Trust works is simple -  the decedant’s trust provides that upon death of the first to die (either the husband or the wife), a certain amount of the decedant’s assets pass to the Bypass Trust, usually to benefit the family of the decedent (children & grandchildren) with the balance of the decedant’s assets passing to the Marital Trust.  And THAT is the problem.  Can you see why?  Read on, this is where things get interesting!

The problem is that when the most recent version of the Estate Tax was passed (back in 2001 by President Bush) the amount of assets that a decedant could pass free of Estate Tax was changing each year (at first we were working with $675,000, then $1,000,000, eventually it got up to $3,500,000).  The way most estate planning attorneys dealt with that moving target was to utilize “formula language” to set the amount of assets that would flow to the Bypass and the Marital trusts.  And that is where the problem starts – “formula language.”

Most estate planning documents call for something along the lines of the following; “Take the maximum amount that can pass free of estate tax and use that to fund the Bypass Trust, then take the balance to fund the Marital Trust.”  Did you see it?  Did you see the problem?  If there is no Estate Tax, the decedant’s entire estate will go into the Bypass Trust and NOTHING will go into the Marital Trust.  If you are a spouse of someone with wealth, I’m sure you understand where this is going.  It gets better (or worse, depending on your perspective) read on.

Here is a simple example: suppose Husband & Wife have a combined net worth of $6,000,000.  Suppose they have the typical estate plan that utilizes a Bypass and a Marital trust.  Husband has $3,000,000 in his trust and Wife has $3,000,000 in her trust.  Suppose Husband predeceases Wife and in the unlucky year of 2010.  Wife may have just lost $3,000,000!  Here’s why.

Husband’s trust has $3,000,000 in assets.  Husband’s trust directs the Trustee to fund “…the maximum amount that can pass free of estate tax into the Bypass Trust…”  Since there is no estate tax, that’s ALL the trust assets.  Just about every trust agreement is different from the next, but it is safe to say that many trusts provide that the surviving spouse has little or no interest in the Bypass Trust.  Why?  Because back when there was an Estate Tax, the assets that flowed to the Bypass escaped Estate Tax.  In order to take maximum advantage of that fact, the estate plan tried to keep those assets from being taxed in the surviving spouse’s estate.  How do you accomplish that?  One way is to give the surviving spouse little or no interest in the Bypass Trust.  In 2010, that could mean DISASTER!

Now, just for fun, consider families with second marriage situations.  Can you imagine the surviving spouse asking the children of her husband from the first marriage to “share” some of the windfall they received due to the end of the Estate Tax.  Good luck with that!  But wait, it gets better (or worse)!  No more automatic stepped-up basis adjustment!

Under current law, there is no more “Stepped-up Basis”.  What is Stepped-up Basis, simply explained, prior to 2010, when a decedant left property to a beneficiary, the beneficiary received a basis in the inherited property equal to the value of the property at the time of the decedant’s death (I’m simplifying this concept – but essentially this is the rule).  So if you inherited $100,000 worth of IBM stock from your dad, then you sold it for $100,000 you didn’t have to pay any tax.  Under the current law, if you inherit that same $100,000 in IBM stock from your dad, and if your dad bought it 30 years ago for $10,000, you now have to pay a tax on the difference between your dad’s basis ($10,000) and the Fair Market Value at death ($100,000).  Therefore you have a $90,000 capital gain!  So much for “repeal of the taxes on assets passing from a decedant to a beneficiary.  What could be worse than that?  Keep reading.

Congress must have known that this would create huge taxes even on smaller or medium sized estates, so they put a provision in the 2010 Estate Tax Law that allows the executor of the estate to “adjust” the basis upwards to a full amount of $3,000,000.  So even if a beneficary inherited $4,000,000 with a basis of only $1,000,000, there would be no capital gain tax due.  Wow, that’s pretty generous of Congress!  Here’s the bad news, the $3,000,000 exemption amount is ONLY available to property passing to the Surviving Spouse of the decedant!  Again, problem is, under most “formula language” trusts, all the decedant’s assets are going to fund the Bypass Trust and assets in that trust DO NOT QUALIFY for the $3,000,000 stepped-up basis under the 2010 Estate Tax Law.

It is true that there is another way for the Executor to increase basis in property passing even under the Bypass Trust but that amount is limited to $1,300,000.  So any way you slice it, if your documents are not “fixed” you could end up with money being taken away from the spouse(despite the intention of the decedant prior to his death) and you will also end up giving away a $3,000,000 adjustment in basis.  Now for the only GOOD NEWS – these problems can be fixed!

But they can only be fixed if you have your estate planning documents reviewed by an attorney.  The documents can be amended under most circumstances, but TIME IS OF THE ESSENCE!!!  Call your estate planning attorney, set up a meeting and review your documents.  Otherwise, 2010 may be the worst year of all for clients with medium to large estates!

In accordance with Internal Revenue Service Circular 230, we advise you that unless otherwise expressly stated, any discussion of a federal tax issue in this communication or in any attachment is not intended to be used, and it cannot be used, for the purpose of avoiding federal tax penalties.

9 Comments by on January 13, 2010
filed in Advice of Florida Counsel, Estates & Taxes
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New Florida Residents

Residency & Domicile

Perhaps you recently moved to Florida, perhaps you’ve had a residence in Florida for years, but recently have decided to change your domicile from your former Northern state (New York, Pennsylvania, Massachusetts, New Jersey, etc) to Florida  – what do you need to do in order to change your domicile so that you can avoid your “former” Northern state’s taxing regime?

Many new Florida residents get advice from their new Florida friends, bridge partners and golf buddies, that the only issue they need to be concerned about is the “Day Count.”  This can be an example of where a little bit of knowledge can be a dangerous thing.  It is true that many Northern jurisdictions utilize a “Day Count” however it is critically important for those that are trying to escape the taxing regime of their “former” Northern jurisdictions to understand that the “Day Count” is only one test, and even at that, if you do not have a clear understanding of exactly how the Day Count works you could easily fail the Day Count test.  But even if you pass the Day Count test, you may fail the lesser known but equally important Domicile Test, failing either test could cost you thousands (in many cases millions) of dollars in taxes!

Properly establishing domicile in Florida is not a difficult thing to do when you understand the rules.  However, it can be a disaster if you either don’t know or don’t understand exactly how the Domicile rules work.  The mistake most new Florida residents make is not having a clear understanding of  exactly what they have to do in order to properly extract themselves from the taxing jurisdiction of their former Northern state.

At the Duffey Law Firm we have had the good fortune to work with many clients who have relocated to Florida from other states.   Most share a few common goals – to escape the cold dreary winters and to enjoy the beautiful weather and lifestyle of living in Florida.  But for many, there is a very important additional benefit to becoming a Floridian – when done properly, establishing your domicile in Florida means that in many cases in addition to escaping from the bad weather, you may escape the taxing regimes of your former state.

In most cases it is easier to escape the cold than it is to escape the cold hearted Tax Man.  New Florida residents must understand that there are two completely different sets of rules that operate in this area of the law.  First, you need to understand and follow the Florida rules of establishing domicile in Florida.  Second, you need to understand and follow the rules of your former state in order to ensure that you will no longer be considered a resident of your former state.  Clients often are shocked when they learn this.  Often, we will get the question; “Does that mean that I could be considered to be a resident of both, New York and Florida – at the same time?”  And the answer to that question is YES!  A U. S. Supreme court ruling holds that a citizen can be considered a resident of several different states by those several states all at the same time (under certain facts & circumstances).

Therefore, the key to properly establishing your domicile in Florida requires that you also make certain that you have satisfied the rules of your former state with regard to terminating your domicile in that state.  This is a two step transaction and it is important for you to know what is required under both steps in order for you to successfully accomplish your goal.

Most Northern jurisdictions follow similar rules with respect to residency, however each client’s situation must be reviewed on a case by case bases as these matters are not only State specific but often very fact specific as well.  Most states will consider a Statutory Resident Test as well as a Domiciliary Test.  The Statutory Resident Rule is the one that most people in Florida refer to when they talk about the Day Count Test; thus this is the so called “183 Day Count Test”.  What some people don’t realize is that when NY (or just about any other Northern taxing jurisdiction) counts a day, they count any part of a day.  Which means, if your flight into JFK, lands at 11:55 PM on Thursday, and you get into a cab at 12:05 Friday, before you pay for the cab ride, you’ve spent two (2) days in New York for purposes of the 183 Day Count Test.

Another trap we see people get caught in is in the area of burden of proof.  When you claim to have spent X number of days outside the state of your former domicile, you are the one that must prove that as a fact.  Your former state of domicile doesn’t have to prove you were physically in the state.  This may seem like a subtle issue to some, but it can be enormously significant.  Some clients wonder how their former states can challenge any assertion regarding what days they were or were not physically in the state.  Some are surprised to learn that the Northern jurisdictions have subpoena powers in these matters and they routinely use them.  Clients have seen their credit card records pulled, their Easy Pass records, cell and home telephone records, etc.

While the Statutory Residency Test focuses on only two areas; (1) residence and (2) the day count, the Domiciliary Test focuses on five; 1) residence,(2) days spent physically within the state note this is very different than the Statutory Residence Test day count), (3) place of business, (4) “near & dear” and (5) family.  Both of these tests have many different elements and when the rules are applied to different facts and circumstances, it can get quite complex.

Establishing domicile in Florida and leaving the state of your former residence requires a knowledge of the rules and experience in this area of the law.  This is not a matter that should be left to the advice of friends and neighbors (unless those friends and neighbors are lawyers that understand these laws and are experienced in this area).

by on June 30, 2009
filed in New Florida Residents

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