QTIPs 101

What’s a QTIP? No, it’s not the fuzzy thing people used to clean out ear wax. QTIP stands for “qualified terminable interest property” and is a tax law term of art. A QTIP works to allow a person to transfer property in trust while enjoying some tax benefits and reducing tension between a spouse and children from another marriage, while minimizing the tax consequences.

My law firmJohnson Law KC LLC, can guide you and your family through the QTIP process. If we can serve you or your family on your QTIP needs, please call (913.707.9220) or email us (steve@johnsonlawkc.com) to schedule a free, convenient consultation.

(c) 2015, Stephen M. Johnson, Esq.

QPRTs 101

What’s a QPRTs? QPRT stands for “qualified personal residence trust.”A QPRT enjoys some tax benefits and allows a person to transfer the family home or personal residence (not a vacation home) to their family, while minimizing the usual tax consequences.

My law firmJohnson Law KC LLC, can guide you and your family through the QPRT process. If we can serve you or your family on your QPRT needs, please call (913.707.9220) or email us (steve@johnsonlawkc.com) to schedule a free, convenient consultation.

(c) 2015, Stephen M. Johnson, Esq.

Taxes 101

Death and Taxes: Form 1040 and Form 1041

Benjamin Franklin once said nothing was certain in life but death and taxes. Federal income tax is charged on a person, their estate, and/or their trust. Kansas and Missouri have individual and fiduciary income taxes, but no state estate, gift, or generation skipping transfer (GST) taxes.

Form 1040

When a person dies, two tax returns are usually filed for the tax year: (1) a final Form 1040 for the deceased person and (2) a Form 1041 for the deceased person’s estate and/or trust. Form 1040 is the familiar individual income tax return, while Form 1041 is the (often less familiar) fiduciary income tax return. Just like Form 1040 captures an individual’s or married couple’s income and deductions for the year, so Form 1041 captures the estate and/or trust’s taxable income, expenses, or deductions. Often both tax returns are “short year” returns, covering less than 1 year each (since the person lived less than a full year). The final Form 1040 covers the decedent’s income from January 1 through the decedent’s date of death, while the Form 1041 captures income from the decedent’s date of death through December 31. A final Form 1041 may be filed jointly with the surviving spouse.

Form 1041

An estate files Form 1041 if the estate had: (1) gross income of at least $600 for the tax year or (2) a nonresident alien beneficiary. A trust files Form 1041 if the trust had: (1) any taxable income for the tax year, (2) gross income of at least $600 for the tax year, or (3) a nonresident alien beneficiary. Schedule K-1 (of Form 1041) reports an estate and/or trust beneficiary’s share of income, deductions, credits, or other items. An estate can claim a $600 annual personal exemption. Most trusts only get a $100 exemption, but trusts that must distribute all accounting income get a $300 personal exemption.

Trust Income Taxes: Mind the Gap

A trust has three roles – (1) grantor, (2) trustee, and (3) beneficiary – and a trust can be taxed three ways: a trust’s income taxes could be paid by the trust’s (a) grantor, (b) trustee, or (c) beneficiary. Most trusts are designed so the trustee pays income taxes. But many trusts are designed so the grantor or the beneficiary picks up the tax bill.

Grantor Pays the Tax Bill: the Intentionally Defective Grantor Trust (IDGT)

The grantor could start an intentionally defective grantor trust, where the trust income is taxable to the grantor and the trust money is not included in the grantor’s estate, since the trust is irrevocable and outside the grantor’s control, while the grantor pays the trust’s income tax bills.

Trustee Pays the Tax Bill

Usually the trustee pays the trust’s income taxes from the trust’s assets. But trusts can be designed so the beneficiary or the grantor pays the trust’s income taxes, while the trust assets are not included in the beneficiary or grantor’s estate. Some irrevocable trusts need a third party trustee (like a bank or trust company) to avoid income tax issues when making distributions to a beneficiary, but a beneficiary can guide the trust’s investment strategy (even as “investment trustee”). Control is key – if the IRS allows a person to exclude assets from their estate, the person cannot control those assets.

Beneficiary Pays the Tax Bill: the Beneficiary Defective Inheritor’s Trust (BDIT)

A beneficiary could have a beneficiary defective trust, where the trust income is taxable to the beneficiary/recipient, but the trust money is not included in the beneficiary’s estate, since the trust is irrevocable and outside the beneficiary’s control, while the beneficiary pays the trust’s income tax bills.

Tax ideas are often once in a lifetime deals, like withering leaves of grass or falling flower petals, leaving only memories as the seasons change. Seize great opportunities, since as acclaimed poet Rudyard Kipling wrote, these moments of possibility “vanish at the morning’s breath!” For more tax ideas, see this article.

My law firmJohnson Law KC LLC, is experienced counseling clients from all stages and walks of life with various aspects of estate planning and taxes. We can help you answer your estate planning and tax questions with confidence and friendly expertise. If we can serve you or your family, please call (913.707.9220) or email us (steve@johnsonlawkc.com) to schedule a free, convenient consultation.

(c) 2015, Stephen M. Johnson, Esq.

Revocable vs irrevocable trusts

What’s the difference between a living or revocable trust and an irrevocable trust? Change.

Living/Revocable Trusts

A living or revocable trust is a stand alone estate planning document, often executed with a pour-over will. A revocable trust can be changed or amended over time as circumstances and needs change (K.S.A. 58a-601, 602) – e.g. someone gets married, divorced, has children, receives an inheritance, retires, or dies. A revocable trust becomes irrevocable when the settlor or grantor (the person who set up the trust) dies (K.S.A. 58a-813(b)(3)).

Irrevocable Trusts

By contrast, an irrevocable trust usually cannot be changed or amended, although some exceptions, including “decanting” exist. Since 2011, Missouri has allowed decanting by statute (V.A.M.S. 456.4-419); Kansas allows decanting under common law with court approval. The administrative terms of an irrevocable trust can often be changed (e.g. a new trustee appointed, the trustee changing locations, the trust moving from Kansas to Missouri or vice versa). But the substantive or dispositive provisions of an irrevocable trust often cannot be changed – who gets what, how long the trust lasts, and other issues. An irrevocable trust must also file a federal fiduciary income tax return (Form 1041) if income exceeds $600 for a fiscal year, and pay a higher income tax rate than an individual on a compressed tax schedule. Learn more at Taxes 101.

My law firmJohnson Law KC LLC, is experienced counseling clients from all stages and walks of life on every aspect of estate planning and the probate process. We can help you answer all your estate planning and asset protection questions with confidence and friendly expertise. If we can serve you or your family with your trust or estate planning questions, please call (913.707.9220) or email us (steve@johnsonlawkc.com) to schedule a free, convenient consultation.

(c) 2015, Stephen M. Johnson, Esq.

Estate planning musings

Steve Akers (Bessemer Trust, of Dallas, Texas) has these ACTEC musings, along with discussions of a recent case, and some good ideas on IRS Code Sec. 2704 regulations. Today I will be presenting on taxes and probate/legal ethics for a continuing legal education seminar, as part of a Kansas probate seminar in Kansas City, courtesy of Foxmoore Continuing Education. More soon on the seminar’s highlights and presentation materials …

My law firmJohnson Law KC LLC, is experienced counseling clients from all stages and walks of life on every aspect of estate planning and the probate process. We can help you answer all your estate planning and asset protection questions with confidence and friendly expertise. If we can serve you or your family with your trust or estate planning questions, please call (913.707.9220) or email us (steve@johnsonlawkc.com) to schedule a free, convenient consultation.

(c) 2015, Stephen M. Johnson, Esq.

2015 Heckerling Musings

Steve Akers (Bessemer Trust, of Dallas, Texas) has these illuminating 2015 Heckering Musings on current estate planning trends.

My law firmJohnson Law KC LLC, is experienced counseling clients from all stages and walks of life on every aspect of estate planning. We can help you answer all your estate planning and asset protection questions with confidence and friendly expertise. If we can serve you or your family with your trust or estate planning questions, please call (913.707.9220) or email us (steve@johnsonlawkc.com) to schedule a free, convenient consultation.

(c) 2015, Stephen M. Johnson, Esq.

 

Private Museums?

Happy New Year from The KC Estate Planner! The NYT has this interesting article about a growing trend of private museums (legally structured as tax exempt organisations or nonprofits), so the art donors get tax write-offs for donating art, but with very limited hours (or by appointment only), so these museums can be effectively private museums for the benefit and enjoyment of the art donors, their family, and friends (but not the general public or the community). What do you think? Are private art museums a good idea or bad idea? Does this tactic abuse the IRS Code’s design? Should this tactic be curtailed or encouraged? Should a nonprofit or tax exempt organisation be allowed to do this? Should an art donor who does this get a tax deduction?

My law firmJohnson Law KC LLC, is experienced counseling clients from all stages and walks of life on every aspect of estate planning. We can help you answer all your estate planning and charitable donation questions with confidence and friendly expertise. If we can serve you or your family with your trust or estate planning questions, please call (913.707.9220) or email us (steve@johnsonlawkc.com) to schedule a free, convenient consultation.

(c) 2015, Stephen M. Johnson, Esq.

 

 

Save Like a Millionaire

Happy holidays from our office to yours! The WSJ has this interesting article about a recent study of how many wealthy, upper middle class, and middle class Americans respective portfolios are structure and the implications for their financial security and independence.

  • The wealthiest 1% have less than 10% of their net worth invested in their home. Most of them hold large amounts of wealth in businesses (they’re often the owners, partners, or an entrepreneur) and real estate investments. Still more money is held in stock portfolios, mutual funds, or trusts (which could in turn hold assets in a  variety of forms). Depending on the investment structure, some or most of these folks’ assets will be highly illiquid.
  • The upper middle class have substantial assets in IRAs and retirement plans, which are good from a saving and tax perspective, but often highly illiquid.
  • The middle class have most of their money in the family home, usually a mortgage (or two), some retirement savings, and more modest cash reserves or stock portfolios.

My law firmJohnson Law KC LLC, is experienced counseling clients from all stages and walks of life on every aspect of estate planning. We can help you answer these questions with confidence and friendly expertise. If we can serve you or your family with your trust or estate planning questions, please call (913-707-9220) or email us (steve@johnsonlawkc.com) to schedule a free, convenient consultation.

(c) 2014, Stephen M. Johnson, Esq.

Switching Trustees

Barrons has this interesting article with helpful insights about switching trustees, an increasingly common occurrence given the rise of dynasty trusts (lasting for generations) and shifting relationships among family members (for individual trustees) and banks and trust company (for corporate trustees).

My law firmJohnson Law KC LLC, is experienced counseling clients from all stages and walks of life on every aspect of estate planning, including switching trustees  and trustee selection. We can help you answer these questions with confidence and friendly expertise. If we can serve you or your family with your trust or estate planning questions, please call (913-707-9220) or email us (steve@johnsonlawkc.com) to schedule a free, convenient consultation.

(c) 2014, Stephen M. Johnson, Esq.

 

 

Estate Planning for College Students and Young Professionals

Forbes’ Deborah Jacobs has this interesting article about the basic estate planning documents every adult needs – even college students and young professionals. The Forbes article recommends every adult should have medical and financial durable powers of attorney signed and in force. As an attorney, I agree and would add that you also need a will and a living will. If you’re married, you and your spouse should each have these documents. If you’re a wealthy person or have complex financial holdings, you may need a trust or more sophisticated documents. If you travel domestically or abroad, you also need estate planning documents in place – even if you’re not wealthy or don’t have extensive business interests. (I often insist clients execute basic estate planning documents before traveling internationally or for long periods of time for business. Otherwise, you’re risking the financial and medical well being or yourself, your family, and/or your business.) Not having estate planning documents in place is gambling with you and your family’s future. If you’re a more seasoned person, it would be “criminally negligent” (in C.S. Lewis’ words) not to have a will or other estate planning documents in place (The World’s Last Night). My firm crafts tailored estate planning documents for you that are affordable, reliable, include cutting-edge provisions standard (like asset protection, probate avoidance, elder law, and digital estate planning), and work smoothly whether you’re in the U.S. or abroad.

My law firmJohnson Law KC LLC, is experienced counseling clients from all stages and walks of life on every aspect of estate planning. We can help you answer these questions with confidence and friendly expertise. If we can serve you or your family with your charitable giving questions, please call (913-707-9220) or email us (steve@johnsonlawkc.com) to schedule a free, convenient consultation.

(c) 2014, Stephen M. Johnson, Esq.