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Articles Tagged with “estate tax”

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stock-photo-6126140-bank-sign-on-building.jpgIt is a fairly common practice for people to open joint bank accounts. Often joint accounts are held by spouses, and the funds do actually belong to both individuals. However, sometimes these accounts are opened for the convenience of allowing a child or to access funds and write checks to pay bills, or as a way to have ownership of the funds pass to the surviving joint account holder upon death. While this is an effective and simple way to give someone else control of your assets of have the funds pass to another upon death, there are problems associated with joint accounts which should be considered before opening a joint account.

1) The joint account holder has unfettered access to the funds in the account. There is no oversight over the way the funds are used. Both joint account holders can utilize the funds for any reason; there is no need for permission – either account holder can withdraw of any portion or all of the money in the account for any purpose.

2) A joint bank account is at risk from legal actions by the creditors of either account holder. If the joint account holder has a judgment entered against her, all the funds in the joint bank account can be attached and used to pay the judgment. For example, a one account holder gets divorced and his spouse claims a right to some of the funds in the account, then the account holder who deposited the funds in the joint account would need to go to court to prove that the money does not belong to the divorcing account holder. Another example is if the other joint account holder is sued, loses and does not pay the resulting judgment.

3) Upon the death of either account holder, the money would indeed pass to the surviving joint account holder. However, the money remains subject to estate and inheritance taxes. If the individual who passes is not the individual who contributed the funds to the account, the account would nonetheless be taxed as part of the deceased account holder’s estate. In other words, the survivor would have to pay inheritance tax even if she deposited the funds in the first place. Depending on the amount of assets in the account, the relationship between the two joint account holders, and the value of the decedent’s total estate, this can result in a significant death tax burden which could have been avoided.
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B&O_RR_common_stock.jpgA self-cancelling installment note (“SCIN”) can be used to sell a business interest, stocks, real estate or other types of assets, usually to a family member of the current owner. This is a variation of an installment sale where the remaining payments are cancelled upon the death of the note holder.

When using a SCIN, the person selling assets essentially serves as a bank. They transfer title to the asset to the buyer in exchange for installment payments, including interest, (at regular intervals, i.e. monthly, quarterly or annually) over a specified time period. The SCIN will contain a provision that the unpaid balance of the note is cancelled upon the seller’s death. If the seller lives beyond the term of the note, the cancellation provision has no meaning and is just ignored, because the entire balance will have been paid. However, if the seller dies before the term has expired, the buyer’s obligation to make the installment payment ends at the seller’s death.

The main purposes of utilizing a SCIN to transfer assets are: 1) minimizing estate taxes – the unpaid balance is not includable in the seller’s gross estate; 2) avoiding gift taxes; and 3) prorating capital gains on the increase in value.

Estate taxes are saved because the title to the asset was transferred to the purchaser for value before the seller’s death. This includes all appreciation which accumulated since the seller took possession of the asset. Additionally, any appreciation in value after the sale will be excluded from the seller’s taxable estate.
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A qualified personal residence trust (QPRT) offers an opportunity for homeowners to minimize or avoid federal and New Jersey estate taxes. A QPRT allows a homeowner to transfer ownership of a primary or vacation home to a “grantor trust,” while keeping the right to live there for a specified period of time. When that specified time ends, ownership passes outright to the homeowner’s children or whoever is named as the remainder beneficiaries.

When you transfer your home into a QPRT, you make a gift to the beneficiaries which is subject to gift tax. The value of that taxable gift is not the full fair market value of the home, as it would be with an outright transfer. The value is discounted. In the current real estate market values are quite low, adding to the benefit of the QPRT. The gift is also discounted to reflect that you have retained an interest (the right to live in the home for the specified term). Internal Revenue Service tables and current interest rates are used to determine the amount of the discount. The federal gift tax exemption is currently $5,120,000.00 and you can utilize a portion of that exemption and pay no gift tax. As New Jersey does not have a gift tax, you can transfer the home without incurring any New Jersey gift tax.
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