4 Tips for Avoiding a Will or Trust Contest

A will or trust contest can derail your final wishes, rapidly deplete your estate, and tear your loved ones apart. But with proper planning, you can help your family avoid a potentially disastrous will or trust contest.

If you are concerned about challenges to your estate plan, consider the following:

1. Do not attempt “do it yourself” solutions. If you are concerned about an heir contesting your estate plan, the last thing you want to do is attempt to write or update your will or trust on your own. Only an experienced estate planning attorney can help you put together and maintain an estate plan that will discourage lawsuits.

2. Let family members know about your estate plan. When it comes to estate planning, secrecy breeds contempt. While it is not necessary to let your family members know all of the intimate details of your estate plan, you should let them know that you have taken the time to create a plan that spells out your final wishes and who they should contact if you become incapacitated or die.

3. Use discretionary trusts for problem beneficiaries. You may feel that you have to completely disinherit a beneficiary because of concerns that a potential beneficiary will squander their inheritance or use it in a manner that is against your beliefs. However, there are other options than completely disinheriting someone. For example, you can require that the problem beneficiary’s share be held in a lifetime discretionary trust and name a third party, such as a bank or trust company, as trustee. This will insure that the beneficiary will only be entitled to receive trust distributions under terms and conditions you have dictated. You will also be able to control who will inherit the balance of the trust if the beneficiary dies before the funds are completely distributed.

4. Keep your estate plan up to date. Estate planning is not a one-time transaction – it is an ongoing process. Therefore, as your circumstances change, you should update your estate plan. An up to date estate plan shows that you have taken the time to review and revise your plan as your family and financial situations change. This, in turn, will discourage challenges since your plan will encompass your current estate planning goals.

By following these four tips, your heirs will be less likely to challenge your estate planning decisions and will be more inclined to fulfill your final wishes. If you are concerned about heirs contesting your will or trust, you should seek the professional advice now.

The Clock is Ticking on Maxing Out Your 2014 Retirement Plan Contributions

With the end of 2014 fast approaching, now is the time to take a look at your year-to-date retirement plan contributions to see where yours stand when compared with the 2014 contribution limits.

Summary of 2014 Retirement Plan Contributions Limits

Depending on how much you’ve already contributed, you may be able to contribute more to your retirement plan for 2014.

To help you determine whether you need to make some additional contributions, here is a summary of the 2014 retirement plan contributions limits. Please remember that some types of accounts require contributions before December 31, whereas other types of accounts allow contributions up to the April deadline for filing your tax return. Contact us now so we can offer you specific guidance about your account.

• The contribution limit for employees under age 50 who participate in a deferred contribution plan (401(k), 403(b), most 457 plans, or the federal government’s Thrift Savings Plan) is $17,500. These plans generally require contributions to be made on or before December 31.

• The contribution limit for employees age 50 and over who participate in a deferred contribution plan (401(k), 403(b), most 457 plans, or the federal government’s Thrift Savings Plan) is $23,000. These plans generally require contributions to be made on or before December 31.

• The contribution limit for employees under age 50 who participate in a Savings Incentive Match Plan for Employees of Small Employers (known as a SIMPLE plan) is $12,000. These plans generally require “employee” contributions to be made on or before December 31 and permit “employer” contributions to be made up to the filing deadline of your tax return on April 15.

• The contribution limit for employees age 50 and over who participate in a Savings Incentive Match Plan for Employees of Small Employers (known as a SIMPLE plan) is $14,500. These plans generally require “employee” contributions to be made before December 31 and permit “employer” contributions to be made up to the filing deadline of your tax return on April 15.

• The contribution limit for a Simplified Employee Pension Individual Retirement Account (i.e., SEP IRA) or Solo 401(k) is the lesser of (a) $52,000, or (b) 25% of the employee’s salary, and the compensation limit used in the savings calculation is $260,000. These plans generally permit contributions up to the filing deadline of your tax return on April 15.

• The contribution limit for individuals under age 50 to a traditional or Roth Individual Retirement Account (IRA) is $5,500. These plans generally permit contributions up to the filing deadline of your tax return on April 15.

• The contribution limit for individuals age 50 and over to a traditional or Roth Individual Retirement Account (IRA) is $6,500. These plans generally permit contributions up to the filing deadline of your tax return on April 15.

• While contributions to IRAs that apply to the 2014 tax year can be made up until April 15, 2015, the time is now to make contributions so that you can maximize your earnings inside the account.

• Before you make any contributions to a Roth IRA, make sure you’re not subject to the adjusted gross income (AGI) phase-out. If your income is greater than AGI phase-out amount for your filing status, then you’re not eligible to make contributions to a Roth IRA. The AGI phase-out amounts for taxpayers making contributions to a Roth IRA is $181,000 to $191,000 for married taxpayers filing jointly; $114,000 to $129,000 for single taxpayers and head of household taxpayers; and for a married taxpayer filing a separate return, the phase-out is not subject to an annual cost-of-living adjustment and is therefore $0 to $10,000. We can help you determine which phase-out, if any, applies to your situation.

What the 2015 Inflation Adjustments for the Estate Tax Exemption and Trust Income Tax Brackets Mean for You

The Internal Revenue Service has released the official inflation adjustments that will affect 2015 federal reporting for estate taxes, gift taxes, generation-skipping transfer taxes, and estate and trust income taxes.

2015 Federal Estate Tax Exemption

In 2015 the estate tax exemption will be $5,430,000. This is an increase of $90,000 above the 2014 exemption.

What this means is that when the value of the gross estate of a person who dies in 2015 exceeds $5,430,000, the estate will be required to file a federal estate tax return (IRS Form 706). Form 706 is due within nine months of the deceased person’s date of death.

The maximum federal estate tax rate remains unchanged at 40%.

2015 Federal Lifetime Gift Tax Exemption

In 2015 the lifetime gift tax exemption will also be $5,430,000. This is an increase of $90,000 above the 2014 exemption.

What this means is that if a person makes any taxable gifts in 2015 (in general a taxable gift is one that exceeds the annual gift tax exclusion – see more on that below), then they will need to file a federal gift tax return (IRS Form 709). For taxable gifts made in 2015, Form 709 is due on or before April 15, 2016.

The maximum federal gift tax rate remains unchanged at 40%.

2015 Federal Generation-Skipping Transfer Tax Exemption

In 2015 the exemption from generation-skipping transfer taxes (GSTT) will also be $5,430,000. This is an increase of $90,000 above the 2014 exemption.

What this means is that if a person makes any transfers that are subject to the GSTT in 2015, then they will need to file a federal gift tax return (Form 709). For generation-skipping transfers made during 2015, Form 709 is due on or before April 15, 2016.

Note that if the generation-skipping transfer does not exceed $5,430,000, then no GSTT will be due; instead, the transferor’s GSTT exemption will be reduced by the amount of the transfer.

For example, if Bob has not made any prior generation-skipping transfers and makes one of $500,000 in 2015, then his GSTT exemption will be reduced to $4,930,000 ($5,430,000 GSTT exemption – $500,000 generation-skipping transfer made in 2015 = $4,930,000 GSTT exemption remaining).

The maximum federal GSTT rate remains unchanged at 40%.

2015 Annual Gift Tax Exclusion

In 2015 the annual gift tax exclusion will be $14,000. This is the same as the 2014 exclusion.

What this means is that if a person makes any gifts to the same person that exceed $14,000 in 2015, then they will need to file a federal gift tax return (Form 709). For taxable gifts made in 2015, Form 709 is due on or before April 15, 2016.

Note that if the taxable gift does not exceed $5,430,000, then no gift tax will be due; instead, the lifetime gift tax exemption of the person who made the gift will be reduced by the amount of the taxable gift.

For example, if Bob has not made any taxable gifts in prior years and makes a gift of $500,000 to his daughter in 2015, then Bob’s lifetime gift tax exemption will be reduced to $4,944,000 ($500,000 gift – $14,000 annual exclusion = $486,000 taxable gift; $5,430,000 lifetime gift tax exemption – $486,000 taxable gift made in 2015 = $4,944,000 lifetime gift tax exemption remaining).

As mentioned above, the maximum federal gift tax rate remains unchanged at 40%.

2015 Estate and Trust Income Tax Brackets

Finally, estates and trusts will be subject to the following income tax brackets in 2015:

If Taxable Income Is:                                The Tax Is:

Not over $2,500                                         15% of the taxable income

Over $2,500 but                                        $375 plus 25% of
not over $5,900                                          the excess over $2,500

Over $5,900 but                                         $1,225 plus 28% of
not over $9,050                                          the excess over $5,900

Over $9,050 but                                         $2,107 plus 33% of
not over $12,300                                        the excess over $9,050

Over $12,300                                               $3,179.50 plus 39.6% of
the excess over $12,300

As you can see, an income of only $12,300 inside a trust could be taxed at a marginal rate of 39.6%. In addition, many trusts paying at the top bracket are also subject to the 3.8% net investment income tax, making the top marginal rate 43.4%. Many states also impose an income tax on trusts. So, depending on which state the trust pays income taxes, the marginal income tax rate could be over 50% for trusts earning just $12,300.

What this means is that Trustees should give careful consideration to the timing of income and deductions and whether distributions of income to beneficiaries should be made to avoid paying excessive trust income taxes. Any income tax planning, of course, has to be balanced against a Trustee’s fiduciary duties to the trust.