Estate Planning Interview with Tax Attorney, Gary Michel.
The only good news about taxes is that the estate tax is gone for lots of Americans. Anyone who is worth less than $5,430,000 at the time of death will be exempt from estate taxes, as of 2015. However, as you ponder what to do with your own tax refund, or how to pay less next year, now is a great time to make sure that your dough will get to your kids without them paying half (or more) to Uncle Sam in income taxes. As Tax Attorney Gary Michel advises, setting things up right early makes all the difference!
Below are 9 Common Tax Problems, along with Gary's advice on how to keep more of the dough in the family, and out of the hands of financial predators, debt collectors and Uncle Sam.
Solutions for 9 Common Tax Problems
1.My husband lost all of our money. I want to divorce him... financially.
2.The debt collector has backed me against a wall. Should I withdraw money from my retirement plan to pay them off?
3.I have a second home (a rental) that is seriously underwater. Can I give it back without losing the home I live in?
4.Roth IRA or traditional IRA in today's world?
5.My life insurance payments are killing me!
6.How do you keep your artist kid, who has no interest in your business or in learning about money, from losing everything you worked so hard to gain?
7.What Warren Buffett did for his kids...
8.Should someone who is inheriting money consult a tax attorney before getting married?
9.How affordable is it to set up a revocable trust?
1. My husband lost all of our money and the debt collectors are trying to take everything. I still love him, but I want to divorce him... financially.
Gary Michel: If you're squirreling away your own money, out of a separate business identity and LLC, qualified retirement plans are bankruptcy proof. You can't get them. So, that would be a good thing. Almost anything else, if the investments have any recourse on them, I'd be worried that you will still have some lingering liability to the lenders.
2.The debt collector has backed me against a wall. Should I withdraw money from my retirement plan to pay them off?
GM: Qualified retirement plans, including 401Ks, are bankruptcy exempt. If I were in that situation, or had someone I cared about in that situation, I'd have them fight it. I'd make them show me the proof that I owe the money. Oftentimes, the person trying to collect the money from you doesn't have the paperwork to support that you owe the money because all they are getting is your name and identifying information on a spreadsheet account -- without all of the supporting documentation. Your debt obligation gets sold many, many times for pennies on the dollar to official debt collectors.
3.I have a second home (a rental) that is seriously underwater. Can I give it back without losing the home I live in?
GM: You have to look at the loan document to make sure that the only collateral for that loan is that one house, and not your home. If this one bad loan is secured by that one bad investment, and your loan is non-recourse, you're in the driver's seat. You just have to give them back the keys and say, "Good-bye." If it's a recourse loan, you can't do that. They can come after you personally.
4.Roth IRA or traditional IRA in today's world? Does it depend upon your age?
GM: It's more of a matrix than a simple yes or no. There's something to be said in this higher tax environment that we're in to take that current deduction, and worry about the taxes later on, when you are probably in a lower tax bracket and earning less money.
5.My life insurance payments are killing me!
One couple was paying $40,000 a year for a life insurance policy that was intended to pay the taxes on any asset sales their kids would do after their death. The problem is that the premiums were depleting their estate and they were borrowing through home equity to pay it! Another elderly woman lost her insurance outright, at the age of 88, because she could no longer afford it. So, all of those years, she was just making the insurance company rich, and actually depleting the estate that she wanted to will to her kids.
GM: The whole calculation changed starting in 2013 because the estate tax exemption was increased dramatically. Right now, it is $5,430,000 per person. For a married couple, you can double that. If the value of your estate is more than that, then you can start looking at placing assets into limited liability companies, and giving minority interests in the LLCs to the younger generation, either outright or in trusts for them, under the gift tax level of $14,000 per person, per year. Don't give away so much that you can't live yourself! You're here to enjoy it. You earned it, not Generation 2 or 3.
6.How do you keep your artist kid, who has no interest in your business or in learning about money, from losing everything you worked so hard to gain?
One single professional mom has a home in Pacific Palisades that is worth $3 million, a job that pays $250,000 a year and $2 million in her 401K.
GM: Building up substantial wealth in a retirement plan is wonderful. It allows you to have a very comfortable retirement life. What's left in that plan when it passes down to the next generation is taxed almost prohibitively high. It's included in your estate, which may generate an estate tax. When your child starts taking money out of it, they pay income tax on it, so it's not tax free to the child. If it's taxable in your estate and he pays income tax, you put the two together, the tax could be well north of 70%. It's not the most tax-efficient gift. It's a high-class problem to have to have that much money in your retirement account. Live off of it and save the rest of this stuff, which is a more efficient way of passing over wealth.
7. What Warren Buffett Did For His Kids...
Each of Warren Buffett's kids has a foundation. What are the advantages, and disadvantages, of this?
GM: It's a good vehicle to teach them money and management of money. The board can be populated with people to educate them, so that it is almost like a private university. When you set up these private foundations, the first thing that happens is that you get inundated with grant requests. It teaches you how to go out and meet people and discern from your conversation with them who is real and who is not, who has performed and who has not. These are lessons that you don't get in school. Foundations can also provide income. You can get reasonable compensation for the work you do.
Are there any downsides to this approach?
GM: The foundation has to give 5% of the value of its assets out each year as grants to its charitable purpose. If not, the penalties and excise taxes are very high. You can't be fast and loose with it like it's your money because you're under the jurisdiction of the charitable trust division of the attorney general of the state, and you can get into a lot of hot water by not playing by the rules. And, you're not able to grow the assets for your own benefit.
8.Should someone who is inheriting money consult a tax attorney before getting married?
GM: They should, and that doesn't have to be an expensive proposition. When you get married, what you inherit and what you had before you got married remains separate property. The problem is that there are certain things that can happen while you are married that can move some of the things that you have separately, in whole or in part, into the community. You need to know what the rules of the game are. What we advise clients to do is to make your child the trustee of his own trust, with discretionary powers of distribution. The difference between that and actual ownership is really small. What it allows you to do is to protect that child against creditors, including a bad spouse. It's a trust that you, as the parent, have established, not the child. It is not a self-settled trust for bankruptcy purposes. Creditors cannot attack it. It would take a great deal of effort by the child to want to move some of this property into community property. Hopefully they would have enough sense not to do that.
9.How affordable is it to set up a trust?
GM: The biggest cost is the face-to-face encounters between the client and the lawyer to find out what the person wants to do and to make final decisions. So, if we can have a conversation in an hour and decisions are made and they are not changed and they don't get goofy on me, with too many ideas in their head, like a Rubik's cube figuring out who the trustees are going to be, that's something that can be done between $2500 and $5000.
About Gary Michel:
Gary Q. Michel is a Partner in and Head of Ervin, Cohen & Jessup's Tax Department. With more than 30 years of tax and business law experience, Gary serves as business advisor and tax specialist to his clients who cover a wide spectrum of industries. Gary's clients are generally privately-owned businesses with a strong entrepreneurial spirit demanding effective and creative legal judgment over a wide area of legal terrain.
