Spring 2018 Newsletter

Federal Estate and Gift Tax Alert

On December 23, 2017, President Donald Trump signed the Republican Tax Cut Bill into effect. As part of our continuing service to our clients informing them of significant changes in the law having an impact on estate planning, we are providing this Tax Alert to you.

The provisions of the new tax act make it imperative that you review your estate planning documents with us. The federal estate, gift and generation skipping transfer tax exemptions have now been doubled. Whereas the exemptions were scheduled to rise to $5,600,000 per person in 2018, they will now be $11,200,000 per person, or $22,400,000 for a married couple. These new exemptions are scheduled to rise annually with the rate of inflation.

The annual gifting exclusion is rising from $14,000 to $15,000 per person and the annual exclusion for gifts to non-citizen spouses is rising to $152,000 from $149,000. Funding of 529 Savings Plans has now been extended to allow for $10,000 of private elementary and high school tuition per pupil, annually.

These new, dramatically increased exemptions provide additional planning opportunities. For example:

  • Whereas additional gifting may have been precluded in the past because gift and/or generation skipping transfer tax exemptions were fully utilized, you now have the ability to make additional, significant lifetime gifts.
  • Planning techniques such as Family Limited Partnerships (FLPs) and Grantor Retained Interest Trusts (GRATs) continue to remain viable and to offer the ability to gift substantial assets to family members while retaining both control and a continuing income stream.
  • Since many estate planning documents were drafted with the much lower exemptions in mind, the language of your documents may need to be modified.
  • Finally, the New York State estate tax exemption will remain at $5,250,000 for 2018. Whether New York’s estate tax laws will mirror the new federal exemptions remains uncertain.

The increased federal exemptions are scheduled to expire after 2025, so there is a possibility that the exemptions will revert back to present levels. Please make an appointment with our office for a complimentary and no-obligation review of your existing estate plan. This is the time to determine whether your prior planning may conflict with the new tax act.

New Opportunities for Owners of Pass Through Entities

The Tax Cuts and Jobs Act created an important new deduction for owners of “pass through entities.” These are businesses such as S corporations, partnerships and limited liability companies which do not pay taxes of their own, but rather have their income “pass through” to their owners.

The deduction is for 20% of what is referred to as “qualified business income.” This is income derived from a trade or business. It does not apply to passive investments. Businesses performing services in the fields of medicine, law, accounting, consulting and financial services, and a few other fields, do not qualify for this deduction.

Individuals with taxable income less than $157,500 and married taxpayers with income less than $315,000 qualify fully. The deduction applies regardless of whether a taxpayer itemizes deductions or not. (With the new, higher standard deductions, much fewer individuals will itemize.) There are other, more complicated, formulas for taxpayers with higher levels of income. This deduction also applies to estates and trusts.

This new and important change in the tax law highlights how important it is to plan properly for pass through entities. It also adds to the many other reasons, including protection against liability and estate planning, why individuals should operate businesses as pass through entities.

All owners of real estate should consider retitling their real estate into individual limited liability companies. Not only will you obtain the benefit of the new qualified business income deduction and all other tax benefits that come with the ownership of real estate, but you will be able to limit the ability of creditors to attach your other assets as well. Further, privacy is maintained because the individual owners’ names will not be on the public record, except for professionals.

Please make an appointment with our offices to review your business planning with pass through entities and be sure you meet with your CPA to review the income tax planning issues as well.

How to Be Charitable with Benefits: The Charitable Remainder Trust

If you are charitably inclined, then there are some very attractive Estate Planning options that you should consider. Besides being benevolent, there are income tax and estate tax benefits that can be enjoyed by structuring a charitable plan. A ‘Charitable Remainder Trust’ can be created during your lifetime or upon your death. This type of trust must be carefully designed so that it qualifies to take advantage of the exclusion from the taxable estate and also the available income tax deduction.

A Testamentary Charitable Remainder Trust (funded upon death) results in a charitable estate tax deduction for the present value of the remainder interest earmarked for the charities (a great benefit for your heirs). A lifetime Charitable Remainder Trust (created and funded during your life) results in an income tax deduction and a flow of income during your lifetime as well as a charitable deduction against the Estate Tax. Note that the income tax benefit may only be offered Federally. Many States, including New Jersey, do not enjoy a deduction. New York, however, does.

A lifetime Charitable Remainder Trust (CRT) offers several distinct advantages to you during your lifetime, as well as benefiting the charity or charities that you designate at the time of your death. The primary requirement is that the assets of the CRT must eventually wind up in the hands of a public charity or charities (all of which you select and can change at any time while you are alive and competent). Prior to that time, you retain the right to receive a reasonable rate of income from the assets of the CRT.

You receive a charitable income tax deduction for establishing the lifetime CRT. The deduction depends upon the amount of assets contributed, the type of assets (60% for cash or 30% for appreciated property), your age, and a rate of interest (the Applicable Federal Rate or ‘AFR’) that the Internal Revenue Service dictates. The older you are and the larger the contribution to the CRT, the larger the deduction will be. At the time of your death, the entire remaining balance will be excluded from the value of your Estate for Estate Tax purposes.

The CRT works particularly well with the contribution of appreciated assets. Being a tax exempt Trust, the CRT can sell the appreciated assets without the imposition of capital gains taxes and then invest the proceeds of sale without the proceeds being eroded by taxation. This has become an even more important benefit as a result of the increased capital gains tax rates under the recent tax act.

For example (and based on the current AFR), assume that you purchased a stock in 1990 for $100,000 and that it is worth $300,000 today. Assume also that you are 70 years old and are subject to the 20% capital gains tax rate. You transfer the stock to a CRT and designate that it gives you a 6% return.

Had you merely sold that stock on your own, you would have had $240,000 after taxes to invest to provide whatever rate of return the market will generate. With the CRT, however, you have the full $300,000 to invest. You also have a 6% return, or $18,000 per year, for the remainder of your lifetime. In addition, you receive a charitable income tax deduction of $103,500.

To the extent that you cannot use the deduction fully in one year, there is a five year carry forward. This charitable income tax deduction can then be used to offset your remaining income tax liability. And, at your death, the assets of the lifetime CRT are not part of your taxable Estate. This is truly a ‘win-win’ situation for those who are charitably inclined. Planning with a CRT is smart from a tax perspective, fulfilling from a charitable perspective, and strategic from an Estate Planning perspective.

Cyber-Protection Protocol at Schanker & Hochberg P.C.

Due to the ever evolving level of cyber-technology, there is a recent significant increase in cyber-crimes against both small and large companies. Schanker and Hochberg P.C. has been at the forefront of protecting our business and our clients from these threats. We have the following defenses in place:

  • FortiGate 30E Router with Firewall, Gateway Filter, Content Filter and Antivirus: This is a business-class router with all the security necessary to protect against hacking.
  • Norton Endpoint Antivirus on Server: Our router has its own dedicated antivirus, as well as the server and workstations. We therefore have three (3) layers of protection.
  • Avast antivirus on all the workstations: This is each workstation’s own dedicated Antivirus program.
  • Dynamic Internet address which changes by the Internet provider Optimum randomly: Dynamic means that we do not have a permanent internet address. It changes from time to time. It is therefore that much harder for hackers to breach us because our internet address is constantly changing. Alternatively, if we had a “static” internet address, it would give hackers endless time to try and gain access into our system.
  • Multi-level Password protections: Each individual workstation is password protected as is our access, remotely, into our server. Only our office manager and Attorneys at Schanker and Hochberg P.C. have ‘remote access’ into our server from an outside location. He/she is required to know a very specific protocol with passwords for entry. Our passwords are regularly changed for added security.
  • Cyber-Insurance: Furthermore, Schanker and Hochberg P.C. has also taken the initiative to secure enhanced protection for our clients’ data. In addition to the digital security measures our firm already employs (as described above), we have also secured cyber-insurance protection should a breach occur. This insurance will financially assure our clients through notifications, credit monitoring, and indemnification should our digital systems be compromised and impact our clients. Schanker and Hochberg P.C. is dedicated to proactive protection to further your peace of mind.

Long Term Care Insurance: Knowledge Is Power

If you or your parents or someone you may be responsible for the future care of has Long Term Care Insurance, it is critical that you have the information you need in order to effectively take advantage of this care-benefit. The following will briefly provide some tips in order to ensure you are ‘in the know’:

  • Understand what the policy actually covers. Does it only cover home health-care or only Nursing Home care, or does it cover both?
  • What does your policy say about actual eligibility for commencement of coverage? Review your policy if you do not know.
  • Contact your provider and specifically authorize your Health Care Agent, Power of Attorney, or loved one to be an authorized contact so that if someone has to call on your behalf, said person is approved on their records.
  • If you are about to commence coverage under your policy, this is an ideal time to meet with your Estate Planning Attorney and determine that your Estate Planning is current and up-to-date and to evaluate any pre-planning that you may need to consider for potential future Medicaid coverage in case this coverage is eventually exhausted.

Planning ahead is essential. It saves time, money, and prevents terrible frustration.

Highlighted S&H Attorney: Steven Schanker, Esq.

Steven Schanker, Esq. — Partner, received a Bachelor of Arts degree from the University of Rochester and his Juris Doctorate from St. John’s University School of Law. He is admitted to practice before the Courts of the State of New York, the Eastern and Southern Districts of the U.S. District Courts, and the Supreme Court of the United States of America.

His knowledge and competence have earned him widespread respect amongst his peers and colleagues. A very relaxed and personable manner has enabled him to build long, gratifying and rewarding relationships with his clients.

Mr. Schanker is an accomplished public speaker and has lectured in front of both lay and professional audiences on a national basis. He has been retained and continues to be retained by several large financial institutions, including life insurance companies and stock brokerage firms. He is an active member of the Society of Chartered Life Underwriters Speakers Bureau, the Estate Tax Planning Council of Long Island, a speaker at “Top of the Table,” a former adjunct professor at Adelphi University on Long Island, and a quoted author, including articles in Forbes and Fortune magazines.

Mr. Schanker resides in Huntington, with his wife, Carol, who is an accomplished artist.

General Disclaimer: While we hope this newsletter provides useful information, please know that this newsletter does not predict or guarantee the outcome or result in any particular situation and no attorney-client relationship exists or is established as a result of this newsletter or its receipt.