Taxes and legal ethics

I recently enjoyed meeting seminar attendees and presenting on taxes and legal ethics as part of a Kansas probate seminar in Kansas City, hosted by Foxmoore Continuing Education. Courtesy of Foxmoore, I’m pleased to offer complimentary copies of my published articles and Power Point slide decks on taxes and ethics. (Attorneys are required to attend about 12 hours of continuing education (CLEs) seminars each year – including 2 hours of legal ethics training – to maintain state bar licenses. I’ve attended many CLEs, but it was a good learning and growth experience to teach at a CLE seminar.)

The CLE’s tax portion explored final individual and fiduciary income tax returns for decedents, estate taxes, gift taxes, and generation skipping taxes (IRS Forms 1040, 1041, 706, and 709) and the individual and fiduciary Kansas and Missouri counterparts. To make the tax part more useful (and interesting) for folks, we walked through preparing and filing the various tax returns as a group, since serving each client’s legal and tax needs is our top priority. The CLE’s legal ethics portion reviewed the familiar ethics canons, with a focus on probate and estate planning issues and recommended some best practices for attorneys and accountants. We also discussed the IRS’ recent Circular 230 revisions, which makes those (annoying and) ubiquitous accounting and law firm email/blog/website footers optional.

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 your estate planning and asset protection questions and solve your legal issues 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.

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

Trusts 101

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.