Celebrity Estates – Michael Jackson’s Estate Liable For $200M in Taxes Due to Unfunded Trust

Michael Jackson, the “King of Pop,” had always been a controversial superstar. Over the years, he became the father of three children, Prince Michael Jackson II, Paris-Michael Katherine Jackson, and Michael Joseph Jackson, Jr.

While Jackson created a trust to care for his children and other family and friends, he never actually funded it. The result? $200 million in estate taxes and years of court battles.

4 Essential Purposes of a Trust

A trust is a fiduciary arrangement which allows a third party (known as a trustee) to hold assets on behalf of beneficiaries. There are basically four essential purposes of a trust:

  • Avoiding probate. Unlike wills, funded trusts are not subject to probate as ownership is transferred outside of the grantor’s will. However, unfunded, or underfunded, trusts will go through probate.

 

  • Maintaining privacy. Probate is a matter of public record. However, since trusts aren’t subject to probate, privacy is maintained.

 

  • Mitigating the chance of litigation. Since trusts are not subject to the probate process, they are not a matter of public record. Therefore, fewer people know estate plan details – mitigating the chance of litigation.

 

  • Providing asset protection. Assets passed to loved ones in trust can be drafted to legal protection so assets cannot be seized by predators and creditors.

While these are arguably the most essential purposes, trusts can also affect what you pay in estate taxes as well.

Sadly, Jackson could not take advantage of any of these benefits. Although he created a “pour-over” will, which was intended to put his assets into a trust after his death, the estate still had to be probated.

The probate, along with naming his attorney and a music executive as his executers (instead of family members), fueled a fire that could have been avoided.  With nearly $600 million at stake, it’s no surprise that everyone wanted a piece of the pie.

Don’t Burden Your Family!

Losing a loved one is difficult enough without having to endure legal battles afterward.  In Jackson’s situation, a proper estate plan could have reduced litigation, legal fees, and estate taxes.  His situation, although it deals with hundreds of millions of dollars, applies to anyone who has assets worth protecting.  In other words, it likely applies to everyone!

There are many types of trusts and estate planning vehicles available to ensure that you don’t burden your family after your death.  We’ll show you how to best provide for and protect your loved ones by creating the type of estate plan which is tailored to fit your needs.

Celebrity Estates – James Brown’s “Vague” Estate Plan Forced Family into Years of Litigation

James Brown, the legendary singer, songwriter, record producer, dancer, and bandleader was known to many as the “Godfather of Soul.” Although he intended his estimated $100 million estate to provide for all of his children and grandchildren, his intentions were somewhat vague.  This forced his family into years of litigation which ended up in the South Carolina Supreme Court.

Everything Seemed In Order…

Brown signed his last will and testament in front of Strom Thurmond, Jr. in 2000. Along with the will that bequeathed personal assets such as clothing, cars, and jewelry, Brown created a separate, irrevocable trust which bequeathed music rights, business assets, and his South Carolina home.

At first glance, it seems as though everything in Brown’s estate plan was in order. In fact, he was very specific about most of his intentions, including:

  • Donating the majority of his music empire to an educational charity

 

  • Providing for each of his six adult living children (Terry Brown, Larry Brown, Daryl Brown, Yamma Brown Lumar, Deanna Brown Thomas and Venisha Brown)

 

  • Creating a family education fund for his grandchildren

However, only days after his death in 2006 from congestive heart failure, chaos erupted.

Heirs Not Happy With Charitable Donation

Apparently, Brown’s substantial charitable donations didn’t sit well with his heirs. Both his children and wife contested the estate.

  • His children filed a lawsuit against the personal representatives of Brown’s estate alleging impropriety and alleged mismanagement of Brown’s assets. (This was likely a protest of the charitable donation.)

 

  • Brown’s wife at the time, Tomi Rae Hynie, and the son they had together, received nothing as Brown never updated his will to reflect the marriage or birth. In her lawsuit, Hynie asked the court to recognize her as Brown’s widow and their son as an heir.

In the end, the South Carolina Supreme Court upheld Brown’s plans to benefit charities and recognized Hynie and their son as an heir.

Should You Anticipate Litigation?

Brown’s estate was substantial and somewhat controversial – and he failed to update or communicate his intentions to his family.  His heirs were taken by surprise.  And experienced attorney could have avoided much of the family upset.  Call our office today to protect your goals.

How to Make Your Inheritance Last

A 2012 study by Ohio State researcher Jay Zagorsky found that about one-third of Americans who receive an inheritance have negative savings within two years of getting their money, and of those who receive $100,000 or more, nearly one in five spend, donate or simply lose it all.  If you are about to receive an inheritance, there are several steps you can take to insure your funds will last longer than a few years.

Don’t Make Any Hasty Decisions.  Once you receive your money, don’t make any hasty decisions about what to do with it.  Instead, park the funds in a safe place such as a savings account, money market, or CD until you have had enough time to put together a long term financial plan.  If you don’t already have one, set up an emergency fund that will cover six months of expenses.  If you already have an emergency fund, consider adding to it to cover one year of expenses.  If you are married, you will need to decide early on if you want to keep your inheritance in your separate name or place the funds in joint names with your spouse.  If you are considering giving some of your inheritance to your children, you could invoke a gift tax or negative income tax consequences and should only proceed with gifting once you understand all of the consequences.

Still Working?  Put Away More Towards Your Retirement.  If you are working and are not contributing the maximum to your 401(k), bump up your withholding, particularly if you are not meeting your employer’s match.  If your employer does not offer a 401(k), start funding an IRA.  Note that if you have inherited a traditional IRA, any withdrawals you make will be included in your taxable income.  You can minimize the income tax consequences by only taking required distributions and leaving the balance invested inside of the inherited IRA.

Hire a Team of Professional Advisors.  You will need a team of professionals to help you develop long term plans for your inheritance.  A financial advisor will help analyze your current finances and build a solid financial foundation to include investment advice, insurance (life, long term care, and liability), credit and debt management, college savings, and retirement planning.  Your advisor can also help you look into the future and plan for long term financial goals, such as purchasing a first or second home or starting a charitable foundation.  An accountant will help you determine cash flow and minimize capital gains and other income taxes.  An estate planning attorney will help you create or update your estate plan (everyone needs a will, revocable trust, advance medical directive and durable power of attorney), decrease or eliminate estate taxes (federal and/or state), set up a gifting strategy, meet your charitable goals, create a family legacy, and protect your inheritance from creditors, predators, and lawsuits.

If your inheritance is large enough, it has the potential to last your lifetime.  Don’t go it alone.  We are here to answer any questions you have about receiving, growing, donating, protecting and ultimately passing on your inheritance to your loved ones.

Surprise! You Can’t Easily Disinherit Your Spouse in the U.S.

Believe it or not, in the U.S. it isn’t easy to disinherit your spouse.  But the same is not true for other family members – generally, you can use your estate plan to disinherit your brothers and sisters, your nieces and nephews, or even your very own children and grandchildren.

However, in the majority of states and the District of Columbia, you can’t intentionally disinherit your spouse unless your spouse actually agrees to receive nothing from your estate in a Prenuptial or Postnuptial Agreement.

Beware:  Spousal Disinheritance Laws Vary Widely From State to State

Unfortunately there isn’t one set of rules that govern what a surviving spouse is entitled to inherit.  Instead, the laws governing spousal inheritance rights, referred to as “community property laws” or “elective share laws” depending on the state where you live or own property. These laws vary widely:

  • In some states the surviving spouse’s right to inherit is based on how long the couple was married.
  • In some states the surviving spouse’s right to inherit is based on whether or not children were born of the marriage.
  • In some states the surviving spouse’s right to inherit is based on the value of assets included in the deceased spouse’s probate estate.
  • In some states the surviving spouse’s right to inherit is based on an “augmented estate” which includes the deceased spouse’s probate estate and non-probate assets.

For example, in Florida a surviving spouse has the option to receive a portion of their deceased spouse’s estate called the “elective share.”   This share is equal to 30% of the deceased spouse’s “elective estate,” which includes the value of the deceased spouse’s probate estate and certain non-probate assets such as payable on death and transfer on death accounts, joint accounts, the net cash surrender value of life insurance, property held in a revocable living trust, and annuities and other types of retirement accounts, reduced by the deceased spouse’s debts (this is an example of the last category described above).

Aside from this, state laws also vary widely regarding the time limit a surviving spouse has to seek their inheritance rights, which can range anywhere from a few months to a few years.

Disinherited Spouses Need to Act Quickly!

If your spouse has attempted to disinherit you, you must seek legal advice as soon as possible before state law bars you from enforcing your rights.  Only an experienced estate planning attorney can help you weigh all of your options and protect your interests as a surviving spouse.

 

Halloween Special – Even Vampires Need Estate Planning

Yes, even the undead need an estate plan.  After you stop laughing you need to hear me out.  As we’ve learned from the likes of The Vampire Chronicles, the Twilight saga, and HBO’s True Blood, vampires aren’t immortal.  They do die, and it’s usually unexpected and messy.

While vampires aren’t good candidates for life insurance and probably don’t need an Advance Healthcare Directive (after all, their wounds seem to heal quickly and they never end up in the hospital), they should have a Power of Attorney to allow Mrs. Dracula or Dracula Jr. to manage finances just in case they need to take an extended trip.

And what happens if Dracula is sued?  A good asset protection plan will insure that his hard earned assets aren’t wasted away defending an expensive lawsuit and snatched up by a judgment holder.

And of course Dracula could cross paths with Buffy the Vampire Slayer or run out of gas in the middle of the desert at dawn.  While not likely, these things are nonetheless possible and will lead to that messy and unexpected death.  That’s where a will and trust come in handy – directing who will be in charge of settling Dracula’s final affairs and who will inherit his worldly possessions.  And what about Dracula Jr., what if he’s still a toddler or an adult who isn’t financially savvy?  A trust can be used to protect Jr. in either situation.  And then there’s always the concern that Mrs. Dracula will remarry.  A trust can be used to provide for Mrs. Dracula during her lifetime but insure that what’s left when she bursts into flames goes to Dracula Jr. and his children.  Oh, and these trusts can include creditor protection and tax planning that’s designed to minimize taxes for years to come.

If it’s clear that even the undead need an estate plan, what about you?  What are you, a mere mortal, waiting for?  Without an estate plan your final wishes will remain a mystery.  Worse yet, your state’s laws will provide your estate with a default plan that your loves ones will be stuck with and probably isn’t the plan you would have wanted.  Now is the time to create your estate plan on your own terms.  Please call our office now to arrange for your estate planning consultation.

How Will the 2015 Supreme Court Decisions Affect You and Your Family?

While approximately 10,000 cases are appealed to the U.S. Supreme Court each year, only 75 to 80 make it to oral argument. Of those cases, only a handful grab the media’s attention. Below is a summary of three landmark decisions handed down in 2015 that could affect how you are taxed, pay for healthcare, and plan your estate.

Comptroller v. Wynne – A State Can’t Double Tax Income Earned Outside of the State

Legal Issue: Does Maryland’s state income tax scheme violate the U.S. Constitution by “double taxing” a resident’s income earned from economic activity in another state that also taxes the same income?

Decision, 5 – 4: In a taxpayer-friendly ruling, the Supreme Court ruled that, yes, Maryland’s “double taxation” scheme violates the dormant Commerce Clause.

The Wynne case involved a Maryland couple who owned stock in a Maryland S corporation that did business in 39 states. Since income generated by an S corporation is passed through to its shareholders, the Wynnes paid income taxes in Maryland as well as their pro-rata share of taxes on the income the corporation earned in the other states.

In Maryland, residents are subject to a state income tax as well as a “local tax” based on the city or county in which they live. Prior to the Wynne case, the state allowed residents to take a credit against the Maryland state tax to offset a similar tax paid to another state, but it did not allow a credit to be taken against the local tax. Thus, income of a Maryland resident earned outside of the state was “double-taxed” by being subject to (1) out-of-state taxes, and (2) the local city or county tax. The Court struck down this “double taxation” scheme, holding that because the dormant Commerce Clause gives Congress power over interstate commerce, Maryland could not hinder interstate commerce by offering a credit against state income taxes but not against local income taxes.

Planning Tip: The Wynne decision will potentially affect hundreds of cities, counties and states other than Maryland, including Indiana, New York, and Pennsylvania. If you pay income taxes in your home state and other states, you should seek qualified tax advice regarding filing protective claims (such as amended returns or requests for refunds) for tax years in which the statute of limitations has not run.

King v. Burrell – Obamacare Subsidies Are Available to All

Legal Issue: Can the IRS provide tax-credit subsidies to healthcare coverage purchased through the federal healthcare exchange under the Patient Protection and Affordable Care Act (the “ACA,” commonly referred to as “Obamacare”)?

Decision, 6 – 3: Yes, Obamacare subsidies are available to individuals who obtain their healthcare coverage through a federal exchange.

Buried in the 2,700-page ACA is a provision which states that tax-credit subsidies are available to individuals who sign up for healthcare coverage “through an exchange established by the state.” After the ACA was passed, 34 states did not establish exchanges, leaving their residents to use the federal exchange to obtain their coverage. The King case challenged the validity of federal subsidies given to these residents since the ACA appeared to limit subsidies only to individuals who relied on a state-established exchange. Writing for the majority, Chief Justice John Roberts stated, “We doubt that is what Congress meant to do.” Thus, the validity of subsidies claimed by residents of the 34 states that use the federal healthcare exchange was upheld.

Planning Tip: Despite the King decision, the Obamacare debate will continue to be hashed out in the political arena as the 2016 presidential election fast approaches.

Obergefell v. Hodges – Same Sex Marriage is Legal Everywhere in the United States

Legal Issue: Does the Fourteenth Amendment of the U.S. Constitution require a state to license same sex marriages and recognize same sex marriages that are legally licensed and performed in another state?

Decision, 5 – 4: Yes, same sex marriages are legal and must be recognized everywhere in the United States.

The Obergefell case consolidated four cases that challenged state-banned same sex marriages in Kentucky, Michigan, Ohio and Tennessee. Relying on the Due Process and Equal Protection Clauses of the Fourteenth Amendment, the Court held that marriage is a fundamental liberty and denying the right of same sex couples to wed would deny them equal protection under the law.

Planning Tip: Same sex couples who are considering marriage need to decide if commitments regarding how to handle money, debt, and related matters should be formalized in a prenuptial agreement. Same sex couples who are already married need to determine if their prenuptial agreement should be fine-tuned and if their estate planning documents need to be amended in view of the King decision.

The Bottom Line on the Wynne, King and Obergefell Decisions

There are constant changes in the law from judicial, legislative, or regulatory action. These selections from the recent Supreme Court session are just a small example of the numerous changes that occur every year. How the Wynne, King and Obergefell decisions will affect your planning options has yet to be fully determined. Our firm is available to answer your questions about these landmark cases and how they may affect you and your family.

What Documents Do You Need to Find After a Loved One Dies?

After a loved one dies, you need to gather the important documents that are necessary to settle their final affairs. While the documents required will vary depending on what your loved one owned and owed, below is a list of common documents you will need to find:

  • Account statements – These may include bank statements and investment account statements (including brokerage accounts, IRAs, 401(k)s, 403(b)s, annuities, pensions, and health savings accounts). The closer to the date of death that the statement is dated, the better.
  • Life insurance policies – If you are not sure if your loved one owned any life insurance, check their bank account ledger for checks written to a life insurance company. Because some people choose to pay life insurance premiums on an annual basis, rather than a monthly basis, you might need to look back some time in the check register. If your loved one was employed at the time of death or worked for a large corporation, a local or state government, or the federal government prior to retiring, check with their employer or former employer to determine if your loved one had any employer-provided or government-provided life insurance benefits. If your loved one served in the U.S. military, check with the U.S. Department of Veterans Affairs to find out if your loved one had any military-based life insurance benefits.
  • Beneficiary designations – These may include beneficiary designations for life insurance, retirement accounts (IRAs, 401(k)s, 403(b)s, annuities), payable on death accounts, transfer on death accounts, and health savings accounts.
  • Deeds for real estate – If you are unable to locate the original deed, many states now allow you to view and print deeds online. Note that you will not need the original deed to sell the property.
  • Automobile and boat titles – If you are unable to locate the original title, a duplicate original can be ordered from the department of motor vehicles. Alternatively, some states will allow the transfer of a vehicle title without the original for an additional fee.
  • Stock and bond certificates – This may include corporate certificates, local and state bonds, and U.S. savings bonds. If you are unable to locate an original certificate, a lost certificate affidavit can be filed by the deceased person’s legal representative.
  • Business documents – If your loved one owned a small business, then you will need to locate all of their business-related documents, including bank and investment statements, corporate records, income tax returns, business licenses, deeds for real estate, loan documents, contracts, utility bills, and employee records.
  • Bills – This will include utilities (electric, gas, water, sewer, garbage), cell phones, credit cards, personal loans, property taxes, insurance (real estate, automobile, boat), storage units, medical bills, and the funeral bill. Check their checkbook for bills that were paid during the past year.
  • Estate planning documents – This may include a Last Will and Testament, any Codicil(s) to the will, a Revocable Living Trust, and any Amendment(s) to the trust.
  • Other legal documents – This may include a Prenuptial Agreement and any Amendment(s), a Postnuptial Agreement and any Amendment(s), leases (real estate, automobile), and loan documents (personal loans, mortgages, lines of credit).
  • Tax returns – This should include gift tax returns and the past three years of state and federal income tax returns.
  • Death certificate – It is a good idea to order at least ten (10) original death certificates so that you do not have to keep ordering more.

As you can see, a significant amount of paperwork is involved. For even a small estate, you should set up a filing system for the deceased loved one’s affairs. This can help ensure that nothing gets missed and that administration costs can be minimized.

An Estate Planning Checklist to Facilitate Wealth Transfer

Studies have shown that 70% of family wealth is lost by the end of the second generation and 90% by the end of the third.

Help your loved ones avoid becoming one of these statistics. You need to educate and update your heirs about your wealth transfer goals and the plan you have put in place to achieve these goals.

What Must You Communicate to Future Generations to Facilitate Transfer of Your Wealth?

You must communicate the following information to your family to ensure that they will have the information they need during a difficult time:

• Net worth statement, or at the very minimum a broad overview of your wealth

• Final wishes – burial or cremation, memorial services

• Estate planning documents that have been created and what purpose they serve:

o Durable Power of Attorney, Health Care Directive, Living Will – property management; avoiding guardianship; clarifying wishes regarding life-sustaining procedures

o Revocable Living Trust – avoiding guardianship; keeping final wishes private; avoiding probate; minimizing delays, costs and bureaucracy

o Last Will and Testament – a catch-all for assets not transferred into your Revocable Living Trust prior to death, or the primary means to transfer your wealth if you are not using a Revocable Living Trust

o Irrevocable Life Insurance Trust – removing life insurance from your taxable estate; providing immediate access to cash

o Advanced Estate Planning – protecting assets from creditors, predators, outside influences, and ex-spouses; charitable giving; minimizing taxes; creating dynasty trusts

• Who will be in charge if you become incapacitated or die – agent named in your Durable Power of Attorney and Health Care Directive; successor trustee of your Revocable Living Trust and other trusts you’ve created; personal representative named in your will

• Benefits of lifetime discretionary trusts created for your heirs:

o Fosters educational opportunities
o Provides asset, divorce, and remarriage protection
o Protects special needs beneficiaries (if properly drafted)
o Allows for professional asset management
o Minimizes estate taxes at each generation
o Creates a lasting legacy for future generations

• Overall goals and intentions for inheritance – what the money is, and is not, to be used for (in other words, education vs. charitable work vs. vacations vs. Ferraris vs. business opportunities vs. retirement), and who will be trustee of lifetime discretionary trusts created for your heirs and why you’ve selected them

• Where important documents are located – this should include how to access your “digital” assets

• Who your key advisors are and how to contact them

How Can Your Professional Advisors Help You Communicate Your Wealth Transfer Goals?

Your professional advisors are well-positioned to help you discover your wealth priorities, goals, and objectives and then communicate this information to your heirs. This, in turn, will prepare your heirs to receive your wealth instead of being left to figure it out on their own and, as statistics have shown, lose it all.

We are available to assist you with figuring out your wealth transfer goals, putting a plan in place to achieve these goals, and effectively communicating this information to your loved ones.

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.

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.