Five Things to Consider Now

The end of the year approaches, and pretty soon we’ll all be busy with entertaining, shopping, and other holiday pursuits. So now’s the time to think about things that you might want to set in motion to provide a little fiscal relief for the rest of 2012 and 2013.

1. Look at your income for 2012. Is this a slow year? If so, think about things that you might have been putting off or avoiding because of their negative tax consequences. If your income is low this year, or you have a lot of deductions, maybe now is the time to take the tax hit from converting some IRA funds to Roth-IRA status, or withdrawing them entirely (if  you would be needing those funds in the near future anyway). If your income is looking low for 2012, consider shifting some deductions into 2013, by putting off expenditures until after the first of the year. Conversely, if it’s looking high for the year, think about additional deductions you might be able to squeeze into 2012, by purchasing items or pre-paying for rent or services in November or December.

2. Consider using the huge estate and gift unified tax exemption that is going to expire at the end of this year. If your estate is over $5 million, or likely to be that large when you die, then now is the time to shift some of those funds out of your estate to your children or other beneficiaries. You don’t have to give them a big check – you can place the funds into irrevocable trusts, that will protect the assets and allow them to be prudently managed, with not only their current value but all future appreciation out of your estate permanently.

3. Update your estate plan, if it hasn’t been done lately. With the extreme uncertainty over what the estate and gift tax laws will look like for 2013, you want to be sure that your planning is flexible enough to adapt to changing laws and rules, and still provide the best results for you and your family.

4. Plan to have a ‘heart-to-heart’ with your family. Why not take time over the holidays, when everyone is together and in a relaxed frame of mind, to discuss your estate planning with family members? It can be a difficult subject to broach, but a pleasant family gathering can be the perfect time to spend a little time explaining to your children the steps you’ve taken to ensure that things go smoothly if something should happen to you. Everyone’s catching up, so make sure they’re caught up on this aspect of your life too. (One way to bring up the subject is to tell your adult children that you’ve made plans for them, and ask if they’ve done the same for their families. Children can use this approach with their parents as well.)

5. Read up on the new 3.8% ‘surtax’ on certain kinds of investment income, and determine the effect it will have on your overall tax bill. Consider whether shifting some of your assets to a different investment vehicle, or converting some assets to a Roth IRA, might eliminate or reduce the ‘bite’ of that extra tax. Here’s one article that provides some ideas, to get you started.

Published in: on October 23, 2012 at 8:48 pm  Leave a Comment  

Zombie Tax – Update

Good news on the “Zombie Tax” front. This summer, the Legislature passed a new law changing the Hawaii death tax laws. Honestly, I haven’t read the law in its entirety (watch this space for a more in-depth update), but basically it changed the amount that can be passed free of Hawaii state estate tax from a fixed, $3.5 million, to a figure that tracks the Federal exemption (which is now $5.12 million, set to return to $1 million on January 1, 2013). So while the Zombie Tax is still (un)dead, at least it is a little easier to figure out, and plan for – you will either have a taxable estate (under both Federal and State law) or you won’t.

Unless you are in a civil union, of course – in which case you can’t claim the unlimited Federal marital deduction, but can claim an unlimited marital deduction for the purpose of calculating the Hawaii estate tax. Hopefully they’ll fix that soon, too – I heard that DOMA was just declared unconstitutional by the Second Circuit, looks like it’s headed to SCOTUS.

Published in: on October 22, 2012 at 4:45 am  Leave a Comment  

The Best of Both Worlds

When setting up a trust-based estate plan, married couples* in Hawaii have always had to decide what to do about their real property that was held in the special tenancy known as “Tenancy by the Entirety,” or “T-by-E” for short. That was because T-by-E property enjoys special protections, including protection from either spouse’s individual creditors. So if a couple owns property in this manner, and just one of them gets sued or incurs a debt, the creditor cannot place a lien on the T-by-E property, or force it to be sold to pay the debt. There are other special properties of T-by-E ownership as well, and together these properties generally make T-by-E the preferred form of property ownership for most married (or civil union) couples. In fact, in Hawaii, ALL kinds of property – even personal property – can be held as a Tenancy by the Entirety.

But in order to put such property into a trust, and gain all of the benefits that trust planning provides (avoidance of probate, privacy, planning to use both spouse’s tax exemptions fully, providing a smooth transition in the event of death or incapacity), the owners had to give up the benefits conferred by the “T-by-E” tenancy. So couples owning T-by-E property have always had to choose between keeping their property in T-by-E (and risking a probate if they should die at the same time, or if the survivor should die before transferring the property into his or her trust, or creating a ‘Transfer on Death Deed’), and putting it into their trust(s) and losing the special benefits of T-by-E ownership.

But now they no longer have to make such a choice. And if you are in this situation, and previously set up a trust but elected not to put your home or other T-by-E property into your trust (or separate trusts), it’s time to reconsider that choice.

Why the change? Because this summer, our State Legislature passed a new law, which allows T-by-E property to be placed into the owners’ joint revocable trust (or, if they have separate trusts, 50% into each spouse’s or parther’s trust), and KEEP all of the protections afforded by the T-by-E form of ownership. To get the benefit of this new law, certain formalities must be complied with. If you put your property into a trust before July 2012, then you will have to transfer it BACK to your names as a “Tenancy by the Entirety,” and then put it back into the trust, to regain the protections of T-by-E. (But that’s not difficult; both deeds can  be prepared at the same time.) It may be necessary to change the name of your trust, and there is certain language that must be included in the deed in order for the new law to apply.

So, if you have a trust, or have been thinking about getting one, and also own real property here in Hawaii (or in one of the other states that recognizes the T-by-E form of ownership), it is definitely worth looking into this new law that allows you to now have “the best of both worlds.”

*This article also applies to civil union partners (who enjoy all of the legal rights of married couples in Hawaii), and those in “reciprocal beneficiary” relationships.

Published in: on October 22, 2012 at 4:21 am  Leave a Comment  
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