Header Right

ESTATE, TRUST, GUARDIANSHIP

March 5, 2024 Deadline to Reduce 2023 Estate & Trust Income Taxes

by

 

If you are the executor of an estate or the trustee of a trust, you should know that egregiously high income tax rates apply to estates and trusts at very low levels of income.  In 2023, for estates and trusts, a 37% income tax rate as well as the 3.8% Net Investment Income (NII) tax kicks in at $14,451 of income. That’s not very high.   For example, let’s say an estate has income of $214,451. The tax on the $200,000 (income in excess of the $14,451 threshold), at 40% equals a tax of $80,000. Ouch!

Suggestions?

There is hope!  Estates and trusts only pays tax on what’s not distributed. Distributions lower the income tax for the trust and at the same time increase the recipient’s personal income tax. However, individuals do not pay the highest rates unless they are wealthy. In our example, if there are four beneficiaries and each receives $50,000 (one-fourth of the $200,000) many individuals will only pay 10% – 24% on that $50,000 instead of 40%.  Potential tax saving could range from $32,000 to $60,000 depending on the individual tax bracket of each beneficiary.

What Can I Do Now?

It’s not too late. There’s a rule allowing distributions made in the first 65 days of the next year to be treated as if made in the preceding year. A special election must be made on the Fiduciary Income Tax Return.  This year’s deadline is          March 5, 2024. 

Estates don’t need to have a calendar year end.  For example, if a decedent died in June, the year end for the Estate can be May 31, in which case the 65-day rule would allow distributions until August 4th.    Executors should keep this in mind when planning distributions. 

Are there Other Factors to Consider?

Yes.  In addition to financial considerations, there are other factors to keep in mind.  If a beneficiary is not financially knowledgeable and cannot manage money, or has a drug habit or is mentally unstable, you may not want to distribute the funds. These factors may outweigh the potential tax savings of larger distributions from a Trust or Estate.

Please contact us for assistance with making distributions or any other tax related questions about managing a trust or estate.

Need to take an RMD in 2023…Perplexed?

by

When is your Required Beginning Date (RBD) to take the first RMD?  Your first RMD (required minimum distribution) must have been taken by April 1 of the year following the year in which you reached 72 for those who reached age 72 by Dec. 31, 2022. The first RMD for those turning 72 after Dec. 31, 2022 must be taken by April 1 of the year following the year you turn 73. After that, your RMDs must be taken by Dec. 31 of each year.

Beneficiary of an IRA account? (Rules below apply to IRA owners who passed away after Jan. 1, 2020)

An individual non-spouse beneficiary must distribute the entire account balance by the 10th calendar year after the account owner’s death. If the IRA owner reached his required beginning date, the beneficiary must take annual RMDs based generally on his own life expectancy. These RMDs must begin by December 31 of the year after the owner’s death. Although the beneficiary must take annual RMDs, you will need to fully distribute the account within ten years from the owner’s date of death.

If the IRA owner passed away before the RBD, the RMDS are not required. However, the entire account balance must be distributed within ten years from the owner’s date of death.

The IRS is providing relief to heirs of inherited IRAs who are subject to the 10-year rule, allowing them to skip required minimum distributions in 2023. However, there are reasons why one should take an RMD in 2023, although not required:

  • If he has high medical expenses, the medical expenses will offset the RMD income eliminating the income tax on the RMD
  • By taking an RMD in 2023, he will have a smaller balance to distribute in year ten, avoiding a bunched higher RMD at higher tax rates

If an estate is the beneficiary of an IRA, and the account owner reached his RBD, the estate must make distributions based on the remaining life expectancy of the IRA owner. If the IRA owner passed away before his RBD, the assets must be completely distributed within five years of the owner’s passing, but no annual RMD is required.

IRA owner passed away in 2023? If the IRA owner passed away in 2023 prior to taking this year’s RMD, the beneficiary, whether an individual or an estate must distribute the RMD by the end of 2023.

Want to save income taxes on the RMD? – Use a Qualified Charitable Distribution (QCD) in 2023 For IRA owners with charitable intentions, there is a substantial tax benefit using a QCD. The owner contributes all or part of his RMD to charity. The portion contributed to charity will not be taxed. QCDs can be made as early as age 70.5, even though minimum distributions are not required until age 73. A QCD may only be made by an original account owner, not by a beneficiary.

What happens if I don’t take the RMD in 2023? If an account owner fails to withdraw an RMD, the amount not withdrawn is taxed at 25% (reduced from 50% for missed RMDs prior to Dec. 31, 2022).

Still confused? Everyone’s situation is different. Please consult with a tax advisor at Urbach & Avraham, CPAs, to analyze the impact on your personal situation.

 

March 5, 2023 Deadline to Reduce 2022 Estate & Trust Income Taxes

by

If you are the executor of an estate or the trustee of a trust, you should know that egregious high income tax rates apply to estates and trusts at very low levels of income.  In 2022, for estates and trusts, a 37% income tax rate as well as the 3.8% Net Investment Income (NII) tax kicks in at $13,451 of income. That’s not very high.   For example, let’s say an estate has income of $213,451. The tax on the $200,000 (income in excess of the $13,451 threshold), at 40% equals a tax of $80,000. Ouch!

Suggestions?

There is hope!  Estates and trusts only pay tax on what’s not distributed. Distributions lower the income tax for the trust and at the same time increase the recipient’s personal income tax. However, individuals do not pay the highest rates unless they are wealthy. In our example, if there are four beneficiaries and each receives $50,000 (one-fourth of the $200,000) many individuals will only pay 10% – 24% on that $50,000 instead of 40%.  Potential tax saving could range from $32,000 to $60,000 depending on the individual tax bracket of each beneficiary.

What Can I Do Now?

It’s not too late. There’s a rule allowing distributions made in the first 65 days of the next year to be treated as if made in the preceding year. A special election must be made on the Fiduciary Income Tax Return.  This year’s deadline is March 5, 2023. 

Are there Other Factors to Consider?

Yes.  Frequently, the main purpose for a trust is not to save taxes, but rather control. If a beneficiary can’t manage money, is a spendthrift, gambler, drug addict or is mentally unstable, you may not want to distribute the funds. These Factors may outweigh the tax savings of distributions from a Trust or Estate.

Please contact us for assistance with making distributions or any other tax related questions about managing a trust or estate.

Guardian? Moving Mom?

by

A Financial Guardian has a myriad of responsibilities to handle. If the ward’s living situation isn’t safe or suitable, the Guardian should pursue moving the individual to a home or facility which provides supervision, medical care and socialization.

The Guardian/POA must coordinate the relocation:

  • Moving  parent’s possessions to the new location
  • Inventory contents of home
  • Engage relocators to select furniture & possessions suitable for new smaller home
  • Monitor relocators who distribute remaining home contents to relatives or charity
  • Engaging certified real estate appraisers to determine value of home
  • Working with real estate agent to sell the home
  • Working with elder law attorneys to file Court motion for approval to sell home

The Guardian has additional responsibilities:

  • Locating assets of ward
  • Budgeting for the ward’s personal & health needs
  • Investing liquid assets
  • Maintaining real estate of ward
  • Review terms of traditional or reverse mortgages
  • Review and update of all insurance policies
  • Preparing court accountings
  • Handle tax matters

Our CPA firm assists Financial Guardians with the administrative, relocation and accounting requirements. Several members of our firm have taken care of their elderly parents. We have experienced the many trials and tribulations of providing for their medical needs and handling their financial affairs.

 

 

Guardian Accountings 101

by

Does your parent need a Guardian?

If Dad becomes mentally incapacitated to the point where he should not be handling his own financial affairs, he may need a Guardian.  We work with many attorneys who specialize in Guardianships. They can apply to the Court to have a Financial Guardian appointed and a Personal Guardian also if necessary.

Guardian vs. Power of Attorney- What’s the Difference?

A Financial Guardian has a myriad of responsibilities to handle. In contrast to a Power of Attorney who has the right to handle many of these functions, the Guardian is Court-appointed and has the obligation to perform all these jobs.

Accounting Obligations of Guardian:

  • Locating assets of ward
  • Handling all tax matters
  • Preparing court accountings
  • Establishing budget for the ward’s personal and health needs
  • Investing liquid assets
  • Review and update of all insurance policies
  • Review of terms of any traditional or reverse mortgages
  • Maintaining real estate of ward

NJ Guardianship Accounting Requirements

In all States, the Guardian must file an annual report of the financial affairs of the incapacitated person. In NJ, many counties now require that the Guardian of the Estate report using Judiciary forms as to the financial affairs. There are two different periodic reporting forms:  the Periodic EZ Accounting form and the Periodic Comprehensive Accounting form.  The Comprehensive Form requires numerous attachments to substantiate the figures reported. The Judgement of Incapacity should specify which form you are required to file, as well as the deadline for filing.

Instead of filing a Judiciary form, it is possible that a Judgement may direct periodic filing of a formal court accounting. All of these types of accountings are complex. Urbach & Avraham can relieve you of this burden and prepare these accountings for you.

An accounting? No problem! After all, you kept all the bank statements and receipts for every expense. However, unfortunately, a formal accounting must be in a specific format strictly mandated by NJ Statutes in the Uniform Principal and Income Act. The following do not constitute a formal accounting:

• A stack of all the bank and brokerage statements
• Boxes, envelopes and binders of all receipts for all expenses paid
• The check register for the estate checking account
• The fiduciary income tax returns for the trust or estate (Form 1041) or the individual income tax returns (Form 1040)
• An Excel summary of all expenses paid
• A profit and loss summary from Quickbooks
• Mom’s medical records

Preparing a formal account can be an overwhelming process for a fiduciary. The starting point is a list of all assets for the first day of the account period. All receipts, disbursements, gains and losses from disposition of assets, transfers and distributions are detailed.
We can relieve your burden, take your crates of documents and convert them into a formal accounting. If there is a dispute about a specific asset or disbursement, we will add additional documentation to clarify, strengthen and justify our client’s position.

Working with Urbach & Avraham, CPAs is unique because we truly know what you’re going through. Several members of our firm have taken care of their elderly parents. We have experienced the many trials and tribulations of providing for their medical needs and handling their financial affairs. Please contact us to see how our CPA firm can assist you.

 

 

 

 

Preserve Family Wealth with Portability

by

 

Extension of Time to Elect Portability of the DSUE

and Preserve Family Wealth

In 2011, the IRS introduced the concept of portability of the estate tax exemption from a deceased spouse to a surviving spouse. Currently, with the federal estate tax exemption at $12 million, a married couple can transfer up to $24 million to heirs without a federal estate tax. One of the tools enabling this large tax-free transfer is electing the DSUE, the “Deceased Spouse Unused Exclusion.”

What is Portability and How to Obtain it?

Portability occurs when a surviving spouse files a US Form 706, Gross Estate Tax Return, for the sole purpose of calculating and capturing any unused estate tax exemption from the estate of the first spouse. Completing a Form 706 to make the DSUE election is no easy task.

Why should one elect Portability/DSUE?

If the surviving spouse has an estate worth much lower than the current $12 million estate exemption, why file for the DSUE?

  1. Congress may reduce the estate tax exemption to 5 or 3.5 million
  2. The estate of the surviving spouse may appreciate substantially if there are businesses and/or real estate
  3. A young healthy spouse has many years to accumulate more wealth and have a potential taxable estate
  4. The surviving spouse may inherit from other relatives

When must one file to elect Portability/DSUE?

Good news! This year the IRS extended the time to file for the DSUE election to on or before the fifth anniversary of the decedent’s death.

Conclusion

With the current federal tax exemption so high, spouses should take advantage and claim any unused estate tax exemption after the death of the first spouse. Given the factors mentioned above, even smaller estates should consider filing for portability.