A Grudge, A Nudge and a Trudge

Post Fiscal Cliff Edition 2016

A Grudge, A Nudge and a Trudge

A Grudge (or a few)

The IRS has a GRUDGE against Congress.  The Estate Tax Exemption is now “PERMANENT” (until the next change) and is unified with the Gift Tax Exemption (you can give it away during life or at death) at a whopping $5 million.  The exemption is indexed to the inflation rate so this year (2016) it stands at $5.45 million.  And yes, the exemption can be claimed by both spouses and the exemption applies to transfers to the grandkids- a married couple can give away up to $10.9 million during their lifetimes or at death.  Moreover, the exemption is ‘portable’ meaning the surviving spouse can apply the unused portion of the decedent spouse’s exemption to his or her own exemption.  An estate tax return must be timely filed at the death of the first spouse to utilize the portability feature and portability does not provide for tax free transfers to the grandkids.  Also know that the annual exclusion amount remains at $14,000.  The annual exclusion amount is the maximum amount you can give to another person(s) during a calendar year without filing a gift tax return.  Couples may double the annual exclusion amount to $28,000.

If you are a high earner, you have a GRUDGE against Congress.  Tax rate increases for single individuals earning more than $400,000 and couples earning more than $450,000 remain in place for 2016.  And those high earners face Federal Capital Gains rates of up to 20%.  The good news is California has no Capital Gains Tax – the bad news is that Capital Gains are taxed at ordinary income rates and that rate can now be in excess of 13%.  This translates to 33% or so, total, on Capital Gains for high earners and an increase in the California tax rate for mid-level earners.  And don’t forget that pesky Affordable Healthcare Tax add-on of 3.8% tax on investment income for couples with over $250,000 and singles with over $200,000 in taxable income.

A Nudge to keep your estate plan relevant and join our Maintenance Plan

Remember, the increase in the Estate Tax Exemption does not eliminate the need to implement and/or update your estate plan.  Whether or not your estate will pay a death tax, the fact is that incapacity, death and the vagaries of life provide ample reasons for planning.  Privacy and dignity in the event of incapacity, probate avoidance in the event of death and removing ambiguities to avoid family battles are a few good reasons why your estate plan remains a valuable tool.  If your estate plan is in place, becoming a member of our Maintenance Plan is an excellent way to keep your estate plan up to date and in line with your goals and life circumstances.  Contact us for more information if you are not already a member.

Another little Nudge – Thinking of heading out of the family home – think about this

If you are considering moving from the family home to a retirement community, think about this.  Place 50% of your home in a Charitable Remainder Trust (CRT) first.  When you sell your home, you will have 50% of the sales price to buy into the retirement community.  Capital Gains on the sale of the home will be sheltered by the fact that only 50% of the property is subject to the tax and, as a couple, the $500,000 Primary Residence Tax Exclusion applies to the proceeds of sale of the 50%.  If there is still a Capital Gains Tax, the 50% of the house in the CRT will generate a charitable deduction that can shelter some or all of that remaining gain.  Any charitable deduction remaining can be used to shelter a portion of income for 5 years.  The 50% sales proceeds in the CRT will provide an annuity to help cover the monthly fees imposed by the retirement community.  At the death of the surviving spouse, whatever remains in the CRT goes to the charity of your choice.  You win, charity wins and the IRS has a grudge.

If you want to downsize out of your current home remember, you can take your current PROPERTY TAX payment with you if you are over 55 and buy a property of lesser value in the same county or in one of 8 different California counties participating in the program.

You can transfer your principal residence and up to $1 million of ASSESSED value of other California real property to your kids without reassessment.  The transfer does not have to be a gift; it can be a sale or part gift/part sale.  Interest rates are at an all time low making this a great time for family loans with the sale of property or businesses.  See us if you are interested in exploring any of these options.

A Trudge

Take a walk as you consider all the information falling from the Fiscal Cliff or come visit our office for one of our workshops or social events.  Click here to see our event calendar.

If you want to learn more on fiscal cliff contact us at:

2070 Pioneer Court
San Mateo, CA 94403
Tel 650-572-7933
Fax 650-572-0834

McDowall Cotter provides comprehensive legal services in three areas of practice: civil litigation; business; and wealth preservation. To learn more visit us at http://www.mcdlawyers.net. We are a San Mateo based law firm and for more than 50 years, McDowall Cotter’s chief objective has been to deliver exemplary legal services that are personalized, effective and efficient.