Thursday, March 15, 2018

President Trump and the Estate Tax

The Tax Cuts and Jobs Act of 2017 was signed into law by President Trump on December 22, 2017. Among many of the changes in the tax code which will have an impact on income and other taxes for individuals and businesses, the federal estate tax is also impacted. Many thought the federal estate tax was repealed as a result. While the federal estate tax remains in place, the exemption amount was greatly increased. Other benefits that were in place prior to the passing of the Act remain in place.

Beneficiaries of a decedent's estate continue to enjoy a step-up in basis on assets that pass to them upon death. Spouses also continue to enjoy a right of election of portability. In the case of a married decedent, an election is available under which any exemption amount that was not used by the decedent may be used by the decedent’s surviving spouse during the surviving spouses's life or at his or her death.

Prior to the Act, the federal estate tax exemption amount would have been $5.6m per individual for the year 2018. This amount is now doubled to $11.2m per individual. The exemption remains indexed for inflation for the forthcoming years. On January 1, 2026, the exemption will revert to the pre-Act amount indexed for inflation. The tax rate on taxable gifts and estates remain the same.

For New York State, the estate tax exclusion amount remains at $5.25m.

Tuesday, July 12, 2016

Estate Planning for Non-US Citizen Spouses

A surviving spouse is entitled to to the unlimited marital deduction. In other words, assets left to a surviving spouse are not subject to federal estate tax. There is no limit to the amount inherited by the surviving spouse. However, the caveat is that this only applies for a surviving spouse who is a US citizen.

If a surviving spouse is NOT a US citizen, including a person who is a legal permanent resident, he or she does not get the benefit of the unlimited marital deduction when inheriting property from a deceased spouse. Therefore, providing for a non-US citizen spouse requires special planning. If it is the non-US citizen spouse that dies first, then property left to a surviving spouse who is a US citizen is entitled to the unlimited marital deduction.

A surviving spouse who is not a US citizen can qualify for the unlimited marital deduction when inheriting property from his or her deceased spouse if the property is held in a qualified domestic trust ("QDOT") for the benefit of the non-US citizen spouse. 26 U.S. Code § 2056A. Instead of passing property directly in the name of the surviving non-US citizen spouse, the property is placed in trust of which the surviving non-US citizen spouse is the sole beneficiary.

In a QDOT, the non-US citizen spouse cannot be the sole trustee. A US citizen or a US bank must act as co-trustee or may be the sole trustee. If the QDOT assets exceed $2 million, the US trustee must be a bank, or the individual must obtain a bond or an irrevocable US letter of credit for 65% of the assets in the QDOT.

Distributions of income to the beneficiary from the QDOT are not subject to estate tax. However, distributions of principal are subject to federal estate taxes calculated at the marginal estate tax rate of the deceased spouse. There is an exception, however, when distributions of principal are made because the beneficiary has an urgent, immediate need and no other resources. When the beneficiary dies, the QDOT assets are included in his or her estate for estate tax purposes.

It is best to plan in advance prior to the death of the first spouse to ensure that the estate is handled in in accordance to the wishes of the deceased spouse and so that the non-US citizen spouse is sufficiently provided for. However, it is possible to establish a QDOT after the death of the first spouse under limited circumstances. The executor or the surviving spouse may elect to establish a QDOT and transfer property to the trust before the estate tax return is due, which is nine months after the date of death of the deceased spouse. Property which passes to the surviving spouse outside of probate by way of joint tenancy or payable-on-death designation may be transferred to a QDOT without being subject to estate tax if the property is transferred prior to the due date of the estate tax return.

Gifts During Lifetime
Similarly, gifts made to a spouse during lifetime is free of gift tax, except if the donee is not a US citizen spouse. If the donee is a non-US citizen spouse, tax-free gifts are limited to $148,000 per year for 2016, indexed for inflation.

Wednesday, December 2, 2015

US Supreme Court Defers to Board of Immigration Appeals in Aging Out of Derivatives

On June 2014, the highest court of the land has ruled that the interpretation of the Board of Immigration Appeals ("BIA") was correct with respect to the scope of protection afforded by the Child Status Protection Act for the purpose of protecting the aging out of minor children as derivative beneficiaries in the family preference categories of immigration.

US citizens and lawful permanent residents ("LPRs") are able to petition for certain family members to obtain immigrant visas. The principal beneficiary who is being sponsored by his or her US relative can in turn bring his or her spouse and minor children as accompanying derivative beneficiaries. The ruling by the US Supreme Court, in essence and for all practical purposes, limits the protection of the aging out of minor children to those minor derivative beneficiaries under the F2A preference category (spouses and children of lawful permanent residents) that age out and then, as a result, fall into the F2B preference category (unmarried sons and daughters 21 years of age and older of lawful permanent residents).

Much of the issue lies in the interpretation of which immigration petitions can be automatically converted under 8 USC § 1153(h)(3) for the protection of the aging out of minor derivative beneficiaries. The BIA determined that only those petitions that can be seamlessly converted from one family preference category to another without the need for a new sponsor are entitled to conversion and protection under the Child Status Protection Act. Under this determination, derivative beneficiary children under the F2A category who age out into the F2B category are able to enjoy the benefit of retaining the original priority date of when the F2A immigration petition was filed. This is because the petition of the derivative beneficiary child, who was then a minor and later becomes an adult, relates back to the same sponsoring US person, the child's parent.

On the other hand, F3 and F4 family category petitions cannot be seamlessly converted from one family preference category to another. When the derivative beneficiary child ages out, there is no other family preference category which the derivative beneficiary can fit into that can relate back to the same sponsoring US person in order to retain the original priority date.

Those principal beneficiaries under the F3 (married sons and daughters of US citizens) and F4 (brothers and sisters of US citizens) preference categories who wish to bring their spouse and children will not have the assurance that their children will be able to accompany them to the United States when their visa becomes available. The bureaucratic immigration process often takes years and even decades to complete. Currently, F3 and F4 categories take more than ten years from when an immigration petition is filed to when an immigration visa  number becomes available. Therefore, it would not be unusual for a minor derivative beneficiary to reach the age of 21 by the time an immigration visa number becomes available to the parent, the principal beneficiary.

Therefore, in the case of F3 and F4 petitions in which the principal beneficiary wishes to bring his or her minor child along to the US, if and when the the derivative minor child ages out, the principal beneficiary would have to immigrate to the US first, then file a new petition as a sponsoring LPR for his or her aged out child under the F2B category. A copy of the decision of the US Supreme Court can be found here, Scialabba v. Cuellar De Osorio, 134 S.Ct. 2191, 189 L.Ed.2d 98, 82 U.S.L.W. 4455 (2014).

Wednesday, December 31, 2014

Mortgage Forgiveness Debt Relief Act is Extended

Thousands of Americans have a reason to celebrate this year end of 2014. On December 16, 2014, President Obama signed a bill passed by Congress at the 11th hour that extended the Mortgage Forgiveness Debt Relief Act ("Relief Act") to cover any mortgage debt of a homeowner's primary residence that was cancelled or forgiven after the residence went through a foreclosure sale or a short sale. However, the bill only extends the Relief Act retroactively and is set to expire on December 31, 2014.

The Mortgage Forgiveness Debt Relief Act was last updated on January 2, 2013 and expired by the end of 2013. Therefore, any homeowner who went through a short sale or foreclosure sale during the year 2014 originally expected that any mortgage debt forgiven by the lender would be a taxable event. Homeowners who still owed $100,000.00 in mortgage debt after a short sale or foreclosure sale in 2014 would be liable for income tax of about $28,000.00.

This is welcome relief especially for many homeowners in New York City where mortgage debt easily exceeds $500,000.00 stemming from the period of easy credit to purchase real property with little to no money down. It is unknown whether Congress will grant an extension of the Relief Act through the end of 2015 or even on a more permanent basis.

Wednesday, June 11, 2014

New York State Estate Tax Has Changed

Effective April 1, 2014, exemption from New York State estate tax will be revised gradually upward over the next few years until the exemption is equal to the federal estate tax exemption. Prior to April 1, 2014, exemption from New York State tax was applicable only for estates equal or less than $1,000,000.00. This was the rule since 1997.

For decedents dying on April 1, 2014 through March 31, 2015, the excluded amount from New York State estate tax will be $2,062,5000.00.
For decedents dying on April 1, 2015 through March 31, 2016, the excluded amount from New York State estate tax will be $3,125,000.00.
For decedents dying on April 1, 2016 through March 31, 2017, the excluded amount from New York State estate tax will be $4,187,500.00.
For decedents dying on April 1, 2017 through December 31, 2018, the excluded amount from New York State estate tax will be $5,250,000.00.
For decedents dying on January 1, 2018 and thereafter, the excluded amount will be equal to the federal estate tax exemption.

For estates that are between 100% and 105% of the above exclusion amount, exemption of estate taxation will be phased out based upon a formula. Estates that exceed 105% of the above exclusion amount will not benefit from any estate taxation exemption. The entire estate will be subject to taxation.

The new law effective April 1, 2014 also repeals the New York State generation-skipping transfer tax.

Three-Year Look Back on Gifts
For gifts made between April 1, 2014 through December 31, 2018, such gifts will be clawed back and deemed part of the estate for the purpose of calculation of estate taxes if the donor dies within three years of making the gift at issue. The three-year look back rule does not apply if (1) the gift was made when the decedent was not New York State resident, (2) the gift was made before April 1, 2014, or (3) the gift was made on or after January 1, 2019.

Wednesday, March 26, 2014

Offer of Renewal of Rent Stabilized Lease Is Not Deemed Automatically Renewed

The Rent Stabilization Code sets forth that "Where the tenant fails to timely renew an expiring lease or rental agreement offered [by the landlord] pursuant to this section, and remains in occupancy after expiration of the lease, such lease or rental agreement may be deemed to have been renewed upon the same terms and conditions, at the legal regulated rent. . . had the offer of a renewal lease been timely accepted." Rent Stabilization Code § 2523.5(c)(2). Therefore, a landlord in a rent stabilized apartment would expect that if he timely delivered a notice of renewal to the tenant prior to the expiration of the lease term and the tenant remains in possession without signing the renewal, the landlord would be entitled to hold that the renewal lease to be deemed renewed for the year under the law, especially if the tenant remains in possession and pays the newly increased monthly rent.

Thursday, June 27, 2013

Increased Taxes Are Here

In addition to the change in estate and gift tax provisions made as a result of the passing of the American Taxpayer Relief Act of 2012 by Congress as mentioned in this post, the Act also increased taxes on certain income tax provisions, including but not limited to federal income tax rates, capital gains tax rates, and dividend tax rates.

Individuals with taxable income of $400,000.00 per year or $450,000.00 per year for a married couple on a joint tax return will experience higher income taxes in several areas:
  1. The top marginal tax rate on income will increase to 39.6% up from 35%.
  2. The top marginal tax rate on long term capital gains will increase to 20% up from 15%.
  3. The top marginal tax rate on on dividends will increase to 20% up from 15%.
Most people reading this will think after looking at these income levels, that this does not concern them and will never affect them. They think the above applies only to the "1%" and they are just one of the regular folks. However, many people come to find it a surprise that the above tax rules, in fact, does affect them without ever realizing it before when they plan to sell their investment property. This is especially true with real estate being as expensive as it is in New York City.