Tax Moves to Consider, From Trusts to Estate-Tax Exemption

Your mind still might be summering in the Hamptons, but based on the experiences of John Anzivino, estate and trust principal with Kaufman Rossin, Miami, you should start thinking taxes now.

You don’t want to run into the experience suffered by one of his clients. That client didn’t realize until he so generously gave $500,000 to charity last year that the gift netted him zero tax benefit.

Reason: The newly reinstated “Pease amendment” caused him to lose his first $750,000 in tax deductions. The amendment reduces itemized deductions by an amount equal to 3 percent of income over $300,000 annually. The client, between a salary, bonus and the release of a large amount of restricted stock, showed an income of more than $25 million.

A charitable lead trust might have provided one way to eliminate this problem. “Any time you make gifts, ask a tax preparer to determine what the tax benefit is,” warns Anzivino, whose company has an office in Palm Beach Gardens.

There are other tax issues worth considering now.

You’d think the highest tax rates hit only those with the highest income. But if you have a trust, you may need a review. Trusts have the highest income tax rates, Anzivino says. A married couple filing jointly can be zapped with a 39.6 percent federal income tax rate if the trust’s income is only $12,150 annually, he says. Plus, the new 3.8 percent investment tax also applies to a trust at that income threshold. Thus, rather than holding income in the trust, it could pay to distribute it to beneficiaries who might be in a lower tax bracket.

Exemption change

You also want to examine your trust to make sure it provides flexibility in case laws change. Trusts that were drawn up years ago may be based on old estate tax exemptions — as little as $600,000. Typically, amounts over that exemption would go into a credit shelter trust to protect assets from estate taxes for beneficiaries when the surviving spouse dies.

Now that today’s estate tax exemption is $5.34 million per person, you may not want to be putting so much in a trust so quickly. Meanwhile, once a person dies, it’s difficult to change the trust. Fortunately, trusts drawn up more recently generally let the surviving spouse decide whether to put inherited assets into a credit shelter trust.

Consider that you can give away $14,000 annually per person per year without paying gift tax. However, Anzivino says too many clients fail to take advantage of the unlimited gift tax exemptions they could get for paying educational or medical expenses. Warning: To qualify for the unlimited exemption, you can’t make this gift directly to Junior. It must go to the educational or medical institution.

 Portability

If you lose a spouse, be fully aware of IRS requirements to take advantage of the estate-tax exemption portability. New portability rules can double your $5.34 million estate tax exemption for a married couple. To qualify, however, a surviving spouse must file IRS Form 706 nine months from the exact date of a spouse’s death, or file for a six-month extension. It’s so easy to forget this in a time of despair.

And Anzivino reminds that a new IRS rule restricts IRA retirement account rollovers to one per year. Want to change your money manager more than once annually, and you easily could run afoul of this new rule.

Easy way around this: Do a “trustee to trustee” transfer from institution to institution. However, note that some institutions or their funds may charge for this.