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September 2024
To Use It, You Must Lose It
As we have highlighted in prior newsletters, the gift/estate tax exemption for all US taxpayers was doubled under the Tax Cuts and Jobs Act of 2017. As a result, the exemption is currently $13.61M per person, with cost-of-living adjustments (COLA) to be added each year going forward. However, the doubling of the exemption is a “bonus” that is scheduled to expire at the end of 2025, at which time it will be reduced by half. With projected COLA adjustments, it is anticipated this will result in a gift/estate tax exemption in 2026 of some $7+ million, assuming Congress does not change the law before then.
This era of the bonus exemption has been an ideal time for high net worth families to explore and implement estate tax planning strategies. While a taxpayer can transfer $13.61M free of gift/estate tax now, he or she will only be able to transfer approximately $7M in 2026. Think of it as a “use it, or lose it” proposition as to the $6.61M difference. Bear in mind the clock is ticking, and many wealth transfer techniques can take several months to implement.
The Case For Giving An Early Inheritance
After years of building your savings and investing wisely, you can now enjoy the fruits of your labor and then some. You might ask yourself, what comes next?
Opting to give an early inheritance to your family allows you to see the impact of your generosity and opens the door to advanced estate planning strategies that can benefit both you and your family. There is also a practical side. By giving early, you can ensure your money is used when it is most needed. Whether that manifests itself as helping with medical bills, paying off debt, or providing financial stability during a job loss—an early inheritance can be life changing for those you love. Open communication will play a key role because giving an early inheritance may help them dramatically in the short term, but it could also create challenges like dependency or poor financial choices. By discussing your intentions with your family, you ensure they understand the purpose of the gift and your expectations for the gift. Assuming giving now is the best decision for you and your family, consider which strategy aligns with your objectives:
Mark Twain Was Right
Mark Twain famously said, “Those that respect the law and love sausage should watch neither being made.”
It could be said that goes doubly for Federal Regulations. It was in 2002 that final Treasury Regulations were first issued to govern IRA/401(k) distributions under the Internal Revenue Code of 1986, then The Secure Act was passed in 2020, followed by proposed regulations in early 2022, and Secure Act 2.0 later that same year.
At long last, to consolidate and update all of the above, final Treasury Regulations (along with a few more proposed regulations) were issued in July 2024. These regulations extend for over 250 pages, and our Firm has been immersed in their study so as to advise our clients of their best options going forward.
Keeping Current Matters
Although there are no significant 2024 legislative updates to report, there are several noteworthy happenings of which to be aware:
• Annual inflation adjustments to the gift/estate exclusions will be announced shortly for 2025. The Federal gift tax annual exclusion is anticipated to be $19,000 (per donor, per donee); and the Federal estate, gift, and generation-skipping tax exemptions are anticipated to be $13.99 million per taxpayer.
• The FDIC’s simpler rules governing insured bank accounts for trusts became effective on April 1, 2024, making it easier for you to evaluate your coverage. For a detailed summary of the changes, see our 2022 newsletter article here, along with the FDIC’s Fact Sheet here.
• Alert! If you created an LLC, limited partnership or corporation prior to January 1, 2024, you must file your Beneficial Ownership Information (BOI) report with the Federal Crimes Enforcement Network (FinCEN) before January 1, 2025. And if you created your entity during 2024, your deadline was or is within 90 days of its creation. Earlier this year we provided a summary of these requirements, established under the new Corporate Transparency Act here. Also, FinCEN maintains a comprehensive and dynamic FAQ page, most recently updated on September 10, 2024, which can be found here.
• Beginning in 2024, the Texas franchise tax is only imposed on those entities with total revenue greater than $2.47 million. If your entity falls below this revenue threshold, you are no longer required to file what was called a “No Tax Due Report.” But keep in mind that you must still file your Public Information Report. The Texas Comptroller offers a helpful summary of this change here.
• In June of 2024, the U.S. Supreme Court issued an opinion that may impact how your business utilizes life insurance. In Connelly v. United States, the IRS successfully argued that life insurance proceeds payable to the family corporation increased the value of the deceased brother’s shares of its stock. More importantly, the corporation’s obligation to redeem those shares, using the life insurance proceeds, did not offset the shares’ value for purposes of calculating the estate tax. In light of this decision, consider whether you should avoid such “redemption” arrangements. Instead, perhaps a cross-purchase agreement with life insurance payable directly to the surviving shareholder(s) accomplishes your objectives, without increasing your estate tax bill.
Be assured the attorneys at Farner & Perrin, LLP, are available to advise you in connection with the above requirements and opportunities, and more generally on how each may fit into your estate plan.
January 2024
This is an important alert for those who own or control business entities.
The new Corporate Transparency Act (“CTA”) went into effect January 1, 2024, and requires certain business entities to file an information report with the Financial Crimes Enforcement Network (“FinCEN”). The CTA imposes these reporting requirements on legal entities that are formed by a filing with the Secretary of State. The reporting entities include corporations, limited liability companies, and limited partnerships.
- Entities formed in 2024 must file their initial BOI Reports within 90 calendar days of formation.
- Entities formed before January 1, 2024 must submit their initial BOI Report by December 31, 2024.
- Entities formed after 2024 must file their initial BOI Reports within 30 calendar days of formation.
There are some notable exceptions. Entities formed without a Secretary of State filing, such as Texas general partnerships, are exempt, as are Texas trusts and tax-exempt entities. Legal entities with at least 20 full-time employees in the US and at least $5 million in gross receipts are generally exempt as well.
Failure to file by the deadline may result in civil penalties of $500 for each day past the due date. In some cases, criminal prosecution could result in a fine of up to $10,000 and/or imprisonment of up to 2 years.
Here are some helpful links for more information and for assistance in getting your BOI Report filed:
You can file your BOI Report directly with the Financial Crimes Enforcement Network here:
If you prefer the assistance of a commercial service to file for you, consider the following:
While Farner & Perrin, L.L.P., will not be undertaking to file the BOI Reports for clients, our attorneys are available for any further guidance you may request. We encourage you to stay in compliance and file your BOI Report sooner rather than later.
October 2023
Sunrise, Sunset, Swiftly Fly the Years
As of sunrise on January 1, 2024, certain tax thresholds change. As of sunset on December 31, 2025, there is an important tax exemption reduction of which you should be aware.
The cost-of-living adjustments (“COLA”) to the Federal gift and estate tax thresholds have been announced for 2024. The annual gift tax exclusion amount will increase from $17,000 to $18,000 per donor, per donee. Although seemingly modest, it has been said that the single most powerful tool in moving wealth tax efficiently is the regular, annual use of this exclusion. Of course, it should be judiciously applied, ideally through a trust rather than directly to the individual donee. Over ten years at this rate, a married couple with three children could transfer $1,080,000 with no transfer tax effects. That is a savings of over $400,000 in estate tax, using the current (40%) tax rate.
It’s One Thing to Shoot Yourself In The Foot, Just Don’t Reload the Gun
Most people undertake estate planning somewhat reluctantly, akin to getting a root canal. So it is no wonder that some people are not “all in” on the process. Sure, they sign their Wills and Powers of Attorney, but those follow-up tasks? Not so much. Despite instructions from the attorney on how to coordinate their various assets with the Will (or trust), they instead end up heeding the advice of a well-meaning albeit misguided clerk at a financial institution. They end up shooting themselves – and their estate plan – in the foot.
Executing your Will is only part of completing your estate plan. More and more in contemporary America, personal wealth is held in accounts/assets that do not pass directly under the terms of your Will.
A Special Note From Diane Perrin:
Friends and clients:
I am writing to share some Firm news with you. I will be taking a reduced role at Farner & Perrin in the new year. I will serve as Of Counsel to the Firm, with special emphasis on client transitions.
Wendy Farner and I have practiced law together for 35 years, with the very capable assistance of our long-time paralegal Anita Thompson and our helpful legal assistant Wil Maestretti. The Firm has prospered and expanded to include another partner, Lance McLain, and our new associate, Connor Beique.
I am very proud of the superior team we have assembled over the years, and the depth and breadth our Firm brings to address your legal needs. Be assured that we stand ready to meet your estate planning and probate needs for years to come.
Our mission always has been and continues to be to serve you with EASE: Excellence, Attentiveness, Sensitivity and Earnestness. We hope that you will continue to think of us as your estate planning and probate needs arise in the future.
Best regards,
Diane
May 2022
Only Inflation Adjustments in Tax News
Our Firm’s last newsletter chronicled pending tax legislation in the Fall of 2021, none of which has passed to date. Most commentators believe it unlikely that any 2022 tax legislation will change the Federal estate and gift tax laws, especially given the specter of the upcoming midterm elections.
However, annual inflation adjustments were applied as of January 1, 2022. This year’s Federal gift tax exclusion is $16,000 (per donor, per donee). And the Federal estate, gift and generation-skipping tax exemptions are now $12.06 million per taxpayer; these exemptions will be adjusted annually going forward until, under current law, they will be reduced by half as of 1/1/26.
As a result, many taxpayers are adopting a “wait and see” posture with respect to making large gifts at this time. Some, however, are still motivated by the “time value of money” concept, meaning the sooner a gift is made the more opportunity for its growth to escape estate tax exposure. It is also said that the single most powerful estate planning tool is to use the [now increased] $16,000 per donor/per donee gift tax exclusion every year.
Our Firm is vigilantly watching developments, and stands ready to counsel you in these uncertain times.
“The difference between death and taxes is death doesn’t get worse every time Congress meets.” ― Will Rogers
What We Leave Behind
Under the name Farner & Perrin, LLP, in our Firm logo, we include the byline “leaving a lasting legacy.” Obviously the idea of legacy is one which resonates with us, often overlaying all that we do. But what exactly is a legacy, and how does one leave a legacy that lasts?
Webster’s dictionary states that a legacy is “something transmitted by or received from an ancestor or predecessor from the past.” Often a legacy is expressed as a cash bequest in a Last Will, sometimes including the gift of a business, stocks or real estate as well. Assets can also be left in a trust that will benefit several generations of descendants, thereby extending the reach and impact of the person who established the trust. But does one’s legacy end with the transfer of financial assets and economic security? Having observed families now for decades, our Firm’s answer is that a “legacy” is actually much more profound.
You Are Not Alone, by Lance McLain
In one sense, you began your life incapacitated. To be sure, your mother did not see you as such. She gladly provided all the care you needed. Your mother did not get anyone’s permission to decide what you would eat or what time you would go to bed, though you probably voiced your preferences. Unable to provide your own food, clothing, or shelter you are alive because someone was there for you.
And the day finally came. On your 18th birthday you officially became an adult (at least in Texas). You decided that you were quite smart, and in fact, that you may have known everything. Upon entering adulthood, you eagerly deployed your wisdom on the myriad decisions you faced. More and more each day, you became increasingly independent.
Consider for a moment the possibility you may enter another season of life, one where you are becoming increasingly dependent with each passing day.
Bitcoin Basics, by Christian Ryholt
Bitcoin has been in the news a lot lately. It has been praised by Elon Musk and Jack Dorsey and derided by Paul Krugman and Warren Buffett. For those of you who are unaware, bitcoin is what is known as a “cryptocurrency” or, under Texas law, a “virtual currency.” Bitcoin does not have a physical item associated with it; it lives wholly in the digital world. In light of the unique characteristics of bitcoin, its ownership and transfer have unique aspects as well, which are explored here.
In Other News…
▸ Earlier this year, the Treasury released proposed regulations associated with the Secure Act of 2020. These regulations are 275 pages long and cover a broad array of issues relating to IRA (and Roth) rules following a death. Under the Secure Act, many beneficiaries must liquidate an IRA within 10 years of the death. The proposed regulations contain a very big surprise in interpreting this. That is, Treasury has taken the position that beneficiaries must withdraw minimum distributions during the 10-year period, not just at the end. On the positive side, these regulations liberalize the provisions for a trust to qualify for the 10-year period. We encourage all clients with IRAs (including Roths) to consult with us, since updating your trusts may be prudent to align with these regulations. The Treasury is offering a comment period until 6/15/22 before finalizing these regulations.
▸ In the past, the FDIC has insured trust bank accounts, with a distinct category for revocable trusts and a distinct category for irrevocable trusts. The rules for irrevocable trusts are more complex and have generated many questions over the last decade. In response, the FDIC has just unveiled simpler rules for trusts, collapsing revocable and irrevocable trusts into a single category. Check out the latest FAQ to learn more: http://farnerandperrin.com/faqs/.
Accolades and Announcements:
★ Wendy Farner and Diane Perrin have been named as Texas Super Lawyers for the 13th consecutive year, as well as being named in the publication, The Best Lawyers in America.
★ She’s a Keeper: This summer we are celebrating our paralegal, Anita Thompson, as we recognize her 15th anniversary at the Firm. Almost all of you will remember Anita as the effervescent face of Farner & Perrin, although more recently you will find her handling our probate matters and entity formations. Hard-working, knowledgeable and always helpful, Anita deserves every heartfelt compliment she has received from our clients and friends through the years. We certainly appreciate her many talents.
And finally, to quote Yogi Berra:
“Always go to other people’s funerals; otherwise they won’t go to yours.”
October 2021
Tax Winds Blowing, Storm in the Offing
Gulf coast residents are always relieved when hurricane season passes at the end of summer. The political winds, however, are another story. Those are often just heating up as fall emerges, when Congress looks to pass new legislation and corresponding tax increases to “pay for it.”
In mid-September this year, the tax storm came within view, as the House Ways & Means Committee offered its proposed tax bill. A multitude of far-reaching income tax changes is getting most of the press. But the bill would also make sweeping changes to the estate and gift tax landscape if it becomes law
Grantor Trusts: High Tide Approaching, Move Your Sandcastles
The proposed legislation is pushing a high tide toward shore. This could sweep away many gift and estate planning strategies, impacting grantor trusts first.
If it passes into law, the new legislation will effectively eliminate future grantor trust planning, as of the date of enactment.
Early forecasts suggest this could occur in the coming month or two (before year-end), though the winds of change are always gusty and unpredictable.
Life Insurance Trusts: In the Eye of the Storm
Holding life insurance through an irrevocable life insurance trust (“ILIT”) has been a common estate planning strategy for decades. ILITs are commonly designed to ensure that the life insurance death benefit is not included as a part of the insured’s estate, and therefore is not subject to estate tax. At the insured’s death, the life insurance proceeds pay to the ILIT, and from there the funds can be loaned to the insured’s estate to pay estate taxes if necessary.
Family Limited Partnerships: Time to Batten Down the Hatches
Our final point of discussion regarding the newly proposed tax bill relates to limited partnerships. Limited partnerships are a common tool for estate planners and are usually called family limited partnerships (or FLPs) in the estate planning context. FLPs allow the senior generation to transfer wealth downstream while often retaining some control over the transferred wealth. Under current law, they also allow for valuation discounts on the assets held in the FLP, which helps move more wealth down the generations in a tax-advantaged way.
In Other News…
Rule Against Perpetuities
As an aside from tax law developments, the Texas legislature just extended the allowable duration of Texas trusts.
A new Texas trust that becomes irrevocable on or after 9/1/21 can last up to three hundred years.
And finally, on a much brighter note:
Farner & Perrin is delighted to announce the recent addition of two associate attorneys, Lance McLain and Christian Ryholt, infusing strong new talent into our Firm.
Lance has been practicing in the area of trusts and estates law for 16 years, is Board Certified in Estate Planning and Probate Law by the Texas Board of Legal Specialization, and has a degree in accounting and an LLM in Taxation.
Christian is a 2019 graduate of The University of Texas law school with honors, with background in the tax field at a major national law firm, and a natural aptitude for entity and other tax-related planning.
Partners, Wendy Farner and Diane Perrin, have both once again been named Texas Super Lawyers and among the Best Lawyers in America, and Farner & Perrin, LLP has been named among the Best Law Firms in America.
Washington Status Update, March 2021
On March 25, 2021, Senator Bernie Sanders (I-VT) and Senator Sheldon Whitehouse (D-RI) introducted the For the 99.5 Percent Act (the “Act”). If the Act, or anything like it, becomes law, there is now only a small window of opportunity to implement estate planning strategies that have been utilized for years. Additionally, estate planning will become materially relevant to taxpayers whose taxable estates are less than $10 million.
We now have the shot across the bow we all knew was coming. Some shots across the bow are intended as warnings. This one is a sighting shot – zeroing in on the target. The planning window is open now but closing fast.
So, what is in the Act?
1. Effective for decedents dying, and generation-skipping transfers and gifts made, after December 31, 2021:
a. $3,500,000 per taxpayer basic exclusion amount, with continued indexing for inflation;
b. $1,000,000 per taxpayer gift tax exclusion, with no indexing for inflation.
2. Effective for deaths, gifts, and generation-skipping transfers occurring after December 31, 2021, maximum rates of:
a. 45% for estates greater than $3,500,000 but not over $10,000,000;
b. 50% for estates greater than $10,000,000 but not over $50,000,000;
c. 55% for estates greater than $50,000,000 but not over $1,000,000,000; and
d. 65% for estates over $1,000,000,000.
3. Effective for transfers after, and trusts created on or after, the date of enactment:
a. Clarification that assets in an “Intentionally Defective Grantor Trust” (IDGT) receive no step-up in basis upon death unless the assets are includible in the gross estate of the transfer;
b. Elimination of valuation discounts for transfers of non-business assets held by family entities;
c. Effective elimination of zeroed-out and rolling GRAT transfers by requiring a minimum GRAT term of 10 years and a maximum GRAT term of the annuitant’s life expectancy plus 10 years, as well as caps on remainder interests; and
d. Unless grandfathered:
i. Assets in an IDGT would be includible in the estate of the deemed owner;
ii. Distributions from an IDGT to beneficiaries during the life of the deemed owner would be treated as a transfer by gift;
iii. The assets of an IDGT would be treated as a transfer by gift made by the deemed owner in the event the grantor status is turned off during the life of the deemed owner; and
iv. Any transfers on or after the date of enactment to IDGTs created prior enactment would be includible in the grantor’s estate.
4. Effective on the date of enactment, there will be no GST exempt status for any trust which has a date of termination greater than 50 years after the date on which it was created. Any trust created prior to enactment shall be deemed to be a qualifying trust for a period of 50 years after the date of enactment.
5. Effective for any calendar year beginning after the date of enactment, certain annual gifts by a transferor in trust would be limited to 2x the annual exclusion per donor.
In addition to the For the 99.5 Percent Act, bills imposing capital gains tax upon death and imposing a tax on any increase in value of assets from year-to-year (i.e., wealth tax) have also been introduced separately.
The bullets are flying. The aim is getting better. If you have been putting off planning, call your advisor today.
June 2020 Newsletter
The Farner & Perrin law firm is transitioning to reopening our offices. We have limited staff on site daily, with most of us working remotely. Be assured we continue to be operational and ready to serve your trusts and estates needs. However, in the interests of everyone’s health and safety we are not conducting in-person meetings at this time.
AND THE WINNERS ARE….
TOP TEN MOST COMMON ESTATE PLANNING MISTAKES
People work a lifetime to save and accumulate wealth, and usually intend to pass it on to their children (or other heirs) at death. Unfortunately, too many people neglect how their wealth will ultimately be transferred, and their lack of planning can wreak havoc with their good intentions. Reminiscent of the David Letterman show, here are the “top 10” estate planning mistakes that we commonly see, in reverse order:
ADDING INSULT TO INJURY
DEATH FOLLOWING DIVORCE
Spend some time searching on the internet, and you will find no shortage of studies, statistics and facts about divorce. You will find everything from its major causes (money, infidelity) to its demographics (highest rate in Russia, lowest in India) to its incidences among occupations (highest among bartenders, lowest optometrists). As the rate of marriage trends downward in American society, the rate of divorce is not surprisingly somewhat slowing. Yet, the rate of divorce in second marriages is higher than in first marriages. And another noteworthy trend is the divorce rate among people age 50 and older has doubled in the last twenty years.
If not fascinating, these factoids at least focus us on the reality of divorce in our families, now or in the future.
IN CASE YOU MISSED IT:
2019 LAW CHANGES AFFECTING ESTATES AND TRUSTS
Texas
The Texas legislature meets only in the odd years, so it is currently out of session. While 2019 was not a banner year for probate and trust law, allow us to share select highlights:
Access to Digital Assets. An executor now has specific authority to seek a court order to access the decedent’s digital assets. Digital assets are broadly defined. A good way to think about them is as electronic substitutes for items that used to be physically maintained, e.g., records, correspondence, books, CDs, and videos. Digital assets may also include email accounts and social media accounts, such as Facebook. An executor’s authority may be limited by the terms of certain accounts.
January 2020 Newsletter
Congress passed the Secure Act in the final days of 2019, effective as of January 1, 2020. This is a transformational tax law in terms of post-death income tax on inherited IRAs.
To provide context, the Investment Company Institute estimates there is almost $6 trillion in 401(k) assets and almost $10 trillion in IRA assets, as of 2019. So it is not really a surprise that Congress would seize on an opportunity to tax these assets sooner rather than later, as the aging of the population continues and the impending generational transfer of this wealth looms large.
And that is the main thrust of the Secure Act. Seniors will enjoy somewhat greater income tax deferral, but their heirs will encounter quite a compressed time frame for recognition of the income tax on what they inherit from an IRA or 401(k).
Channeling Clint Eastwood, allow us to share The Good, Bad and the Ugly.
The Good
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