You Paid More Estate and Income Taxes than You Had to. Legal Ways to Reduce or Eliminate your Taxes. Estate Planning Mistake #8.

We all know we are supposed to brush and floss our teeth at least once a day and preferably after each meal. Brushing and flossing is usually not fun. It always seems to take too long when you are trying to race out the door to an appointment.

dental1We know when we go to the dentist they will check for bacteria living in our mouths and tooth decay and tell us if we need to replace teeth with implants. There is the horror of root canals, surgery and tooth loss.

Planning to avoid paying too much taxes can be equally annoying. But failure to plan can result in a loss of 30 to 50% of your estate. We put it off, knowing we should go to the professional to get the problem fixed and have regular checkups.

There is one big difference between taking care of your teeth and tax planning. Teeth cleaning makes sense and tax planning often does not.

mother-daughter-grandmother-black-and-white1Martha wants to make sure her daughter Helen inherits her house without any cost or fuss. So, Martha deeds her house to Helen while Martha is still alive. Martha continues to live in her house as if nothing changed. No will or trust was necessary or no need to mess with some confusing and expensive attorney or CPA.

Martha soon has tax problems. Martha cannot deduct the real estate property tax payment of $5,000 she made on her home because Martha is not the owner of the house. Helen tax-return-formcannot deduct the $5,000 because Helen did not pay it. When Martha goes to her tax preparer to complain about this, he tells her that she could owe gift taxes of about $150,000 unless she pays him $1500 to prepare and file a gift tax return and $400 for an appraisal of the house.

Martha cannot refinance the house or get permits in her name for improvements.

Martha then dies. Helen goes to sell Martha’s house. Martha paid $100,000 for the house and Helen sells it for $500,000, after paying all selling costs. Helen has a taxable gain of $400,000 or taxes of about $100,000 to $150,000 on the sale of the house depending upon state and local taxes and Helen’s tax bracket.

Why? Because Martha gave the house to Helen while Martha was alive. If Martha had given the house to Helen when Martha died, Helen would probably pay no federal or state taxes on the sale of Martha’s house.

morpheusA key concept in avoiding income taxes on inherited property is the “step up in basis on death”. What this means is that the tax code says: Helen: You are starting over with your ownership of the house when you inherited it and we are going to use the appraised current value of the property as your “cost” basis in the house. Basis is what the tax code says is the value at which you are deemed to have “paid” when you acquired the property.

But Helen says: “Mom lived in the house after she signed the deed and I didn’t get the house until she died.” But, this is an example where the tax code does not seem to make any sense; because of this, many people make this mistake. Martha thought she was doing sensible planning that would allow Helen to avoid probate and easily sell the house.

Martha’s basis was $100,000 when Martha bought her house. So, because Martha gave her house to Helen while Martha was alive, Helen took over the basis of Martha and that is why Helen got stuck with more than $100,000 in taxes, completely legally avoidable.

Nancy sets up a revocable living trust and transfers her house to her trust, with Nancy as the Trustee. Even though it is in trust, Nancy can sell the house at any time, use her $250,000$T2eC16V,!yME9s5qGr9GBRZ!hymRUw--_35 offset against capital gains in the sale of her residence, and deduct her payment of real estate taxes. The trust provides that in the event of the death of Nancy, Nancy’s daughter Betty will receive 100% ownership of the house and will be able to sell it without going through any court process. Because of the language of the trust, the tax law says that Nancy owns it at the time of her death and Betty will be able to sell the house without any taxes, except to the extent the house sells for more than it was appraised for in Nancy’s estate.

With the house in trust, as Nancy gets older and less able to get around, she can add Betty in as trustee. Nancy can stay in her home with Betty arranging for home care of Nancy. As Trustee, daughter Betty will have ability to manage and sell the house as needed by Nancy without falling into any tax trap. The house is still available for Medicaid planning where desirable or to fund the retirement needs of Nancy. When Nancy dies, Betty will not have to probate the house.

In contrast, where a parent deeds part or all of their home to a child, if the child has an auto accident or a financial reversal, then the parent could lose their home to legal actions against the child.

female-senior-calculating-her-money-older-woman-42613948Does this “inherit without any capital gain tax” work for other assets? Yes! The step up in basis rule also applies to stocks, businesses, art and even your beanie baby or gun collection.

The big area where most people dump their unpaid tax liability on their children is in the area of retirement funds such as 401(k) s or IRAs. Your heirs will pay the taxes you did not pay on most qualified retirement funds.

Martha had $400,000 in Martha’s IRA when Martha died. Her daughter Helen is the sole beneficiary as her IRA. Helen cashes in Martha’s IRA shortly after Martha dies. Come tax time, Helen is shocked to find that Helen has to pay $180,000 in taxes on the IRA she inherited.

This is because unless it is a Roth IRA where the taxes have been paid or other similar arrangement, when you put money into an IRA, the IRS gives you a “break” by allowing you to not pay tax on deposits into the IRA. You deposit $100,000 over time and it grows to $500,000 when you retire. Is the tax on the $100,000 (your seed corn) or $500,000 (the crop of downloadcorn)? The sucker break you got turns into a big time win for the tax man. You have to pay the highest applicable tax rate for ordinary income and other taxes on the $500,000 and to the extent you do not, your heirs have to pay the tax on everything in your retirement account. To make sure you or your heirs pay up on the entire $500,000, the tax law requires you or your heirs to take out minimum amounts every year or suffer huge penalties.

Nancy sets up a standalone special IRA trust for her granddaughter Bess. Bess is five years old when Nancy dies. Because of the way the trust for Bess is setup, Bess will only have to take out 1/90th of the funds each year from the IRA Bess inherited from Nancy and is able to grow the $500,000 in this IRA to several millions of dollars during Bess’s lifetime. Bess, at age five, has a life changing almost guaranteed generous retirement when she will be in her sixties. Bess’s mother Betty controls the money until Betty is satisfied that Bess will manage the funds wisely and can then allow Bess to take over the management of the IRA.

There are advanced techniques to lower taxes on inherited IRAs. Contact us if this interests you.

The new federal estate tax exemption started at $5,000,000 per person and increases each year by the increase in the Consumer Price Index. In 2016, it is $5,450,000. Estimates are that less than 1% of Americans will be subject to a federal estate tax. If you will not have estate tax, you need to focus your tax planning on lessening income taxes.

happy man talking on the phone, forgetting about his wife

Norm has a second marriage and a daughter and a son from his prior marriage, In Norm’s estate plan, he leaves everything to his son and daughter. Because he owns a successful Dental practice, real estate and life insurance, his total estate is $9,000,000. His unused exemption after some gifts is $5,000,000. With his current plan, he is subject to a federal tax rate of 40% of $4,000,000 or about $1,600,000 because he is not taking advantage of his new wife’s exemption. If Norm changes his plan by including his second wife in the plan and uses other techniques, then he could completely eliminate these taxes and his children will inherit a million or more than with his old plan.

There are so many legal tools and techniques to reduce or eliminate estate taxes, you should not end of paying estate taxes unless you have a mega estate. Even taxes (1)with a mega estate, the estate taxes can be greatly reduced. I recently participated in a national broadcast for continuing education for attorneys and CPAs going over most of these techniques and this information is available through our office. We have successfully planned estates where we have saved client families millions in estate taxes.

Please note that some states and jurisdictions such as the District of Columbia have much lower exemptions (only $1,000,000 in DC) than the federal tax exemption and additional planning is necessary for people with property in such places.

Just like having a habit of brushing your teeth, if you have a habit of proper tax planning, you will avoid the mistake of paying more than you are required to pay for income and estate taxes.

Want a tax plan for your estate? Contact us at or call 571-633-0330.

You Forgot to Protect Yourself and Your Spouse; Asset Protection Trusts; Tenants by the Entireties, Retirement Plans and Life Insurance; Estate Planning Mistake Number 7

You were so careful to swerve your car to avoid hitting the mother duck and her seven small furry cutest-ever ducklings crossing the road that you smashed into the SUV coming from the opposite

You put the oxygen mask on your son first, but you passed out before you could put on your own mask.

You worried so much about protecting your children in your estate plan against divorces, creditors, and taxes that you forgot to protect yourself and your spouse.

It’s a classic “Can’t see the forest for the trees” problem. You focus so intently on one issue, that you miss the bigger problem.

The biggest problem of not having an estate plan is not dying without one —but living without one. You have failed to protect yourself, your spouse or partner from the many landmines of getting older.

Clare goes to the hospital. She was hit by a drunk driver, severely injured, and arrived unconscious. Her husband passed away two years ago and her loving daughter Susie takes care of her. When Susie arrives at the hospital, she asks how her mother is doing and the hospital staff goes ballistic legal, demanding to see documents waiving her mother’s privacy rights HIPAA-compliantunder the federal HIPAA law and granting Susie access to Clare’s healthcare information. The legal wrangling continues for days and Susie can’t get critical information. Susie has no documents giving her the power to make healthcare decisions for Clare. Clare dies and Susie blames herself for not being able to make sure that Clare got the best care.

Mary loses control over everything. Mary has a simple Will. But, the nosy neighbors think she is losing it when she leaves her trash cans out all day. Mary is getting forgetful, loses her keys often, and is exploited by shysters that prey on the elderly with phony private lottery schemes and home-repair rip offs. Sadly, i-m-from-the-government-and-i-m-here-to-help-3Mary has not set up a team of people to take care of her as her mind fades. The County, tipped off by the neighbor, sues and is able to impose a guardianship on her. The County appoints a stranger—an attorney who knows how to run up big bills–who decides to move Mary out of her well-kept house into a smelly, second-class institution. He also takes over all of Mary’s healthcare decisions and financial investments, which will now be handled by one of his buddies. Mary loses her financial adviser who had successfully grown her estate and her friends have to go through the attorney to even visit Mary.

Bill and Betty get wiped out. Bill is a partner in a growing architectural firm. The firm decides to build an office building to have space for future growth. Along with his business partners, Bill has to personally guarantee the loan. The bank makes Betty cosign the loan, too, because Bill and Betty own everything 090408atogether. The market goes south and the firm cannot pay the mortgage on the building. The bank forecloses then comes after Bill and Betty for the difference between the loan balance and what the building sold for in foreclosure. Bill and Betty lose their home and life savings. Bill is 65, having a hard time finding a job, and Betty is trying to get a part time job at Walmart. They have to move in with their daughter and live in her basement.

Nancy has a home and modest savings totaling $400,000, but she has no long-term care insurance. Nancy has to go into a nursing home, but can’t qualify for Medicaid because she has too much money. She exhausts her $400,000 to pay for her care and her children inherit nothing.

Could Clare, Mary, Bill, Betty and Nancy have protected themselves with good estate plans? Yes, but only if they took action to focus on their needs, not just the needs of their children and heirs.

Sarah goes to the hospital. Sarah is severely injured by a drunk driver and arrives at the hospital in a coma. Her daughter Roberta appears with a HIPPA and health care power of Docubank-Portal-1 (1)attorney in hand that Roberta was able to download quickly from a website that stores these documents for Sarah. Roberta takes charge of the care of Sarah, making sure that Sarah gets the best doctors, nurses, treatments, and medicines. Sarah survives, and after her convalescence, returns to an almost normal life.

Harry and Harriet survive. Harry is a partner in an engineering firm whose practice is growing. Harry and his partners decide to build an office building to house the growing firm and be a good investment. Harry and Harriet have separate living trusts. Harriet’s trust owns 100% of their home and all investments that are not in Harry’s protected retirement accounts. Together with his partners, Harry has to guarantee the bank loan to build the building. Because their No-Foreclosuresassets are separate, the bank does not require Harriet to sign the loan. The office building goes bust and the bank is left with a big deficit on the loan. The bank calls Harry in and finds out that it cannot get Harry’s home, his investments or his 401(K). The bank lets Harry off after he pays them $50,000. Harry and Harriet have saved their home and most of their life savings.

Denise is protected. Denise is in her eighties and getting forgetful. She loses her keys, does not keep up her yard like she used to and does not balance her checking account. Nosy neighbors who never liked her politics, the purple wall on one side of her house or her bright red polka dot dresses, call the County to have a guardianship imposed on her. The County gets one of their employees to opine that Denise no longer can take care of herself and files a guardianship proceeding to take away all of her liberties. However, Denise has a team already in place to step in where necessary to manage her house, assets, healthcare, and daily life as her mind melts away. Denise’s team is able to defeat the County’s lawsuit and allow Denise to stay in her well-kept house with the purple wall.

Eleanor qualifies. Eleanor has $400,000 and may need nursing home care in the future. She works with an elder care team to allow her to receive care in her home and if she has to go to a nursing home, she will qualify for Medicaid to pay most of her expenses.

While there is no absolutely foolproof way to predict what you will need in the future, there are many ways you can protect yourself, depending upon your anticipated circumstances and geographic location.

An American road sign and no symbol and word Elder Abuse with sky background and copy space for your message, Stop Elder Abuse Sign

Some states allow state asset protection trusts. You may can get even more protection with a trust you can move offshore in the event of trouble.

Check your retirement accounts to see what protections you have there as many retirement plans do offer certain protections under federal law.

Many people think that the cash value of their life insurance is protected. But, state law varies on the protection of cash value and although the death benefit may be protected, state law may allow your creditors to seize the cash value of your life insurance policy.

Many states have strong laws that protect marital property owned as tenants by the entireties from the debts of just one spouse. But be aware that the federal tax man can seize assets owned as tenants by the entirety because federal law can trump state law protections.

Does your estate plan protect you as well as it should? Contact us for a review of your plan to make sure you take care of yourself while you are alive as well as your beneficiaries later.


Most Americans pass up one of the top benefits of US law for their children or other heirs. They do not leave their property to be inherited in a trust that protects against financial reversals, divorce, legally avoidable taxes and even against the mistakes of their children.
Fred & Frita Fail to Protect. Fred and Frita go to their estate planner. Their estate planning lawyer asks:
Lawyer: “How do you want to leave your inheritance to your three children?”
Fred: “I don’t want to control from the grave. We could leave some of when they get say 30 years old and then the rest when they are older.”
Lawyer: “How about at 25 they get one third, 30 one third and 35 one third? This is what everyone else is doing.”
Fred: “Sounds good to me.”
Frita: “What if one of them gets in trouble or gets divorced?”divorce-money-fight
Lawyer: “Some of the money will be protected up to age 35.”
Frita: “Well, if that is what everyone else does, I guess it is okay.”
Fred and Frita sign a trust that says that one third goes to each child when the child is 25, another one third when the child is thirty and the remaining one third when they are 35. They have three children: George, Gary and Nancy.
When Fred and Frita both die, George, Gary and Nancy are all over 35 years of age and they get their inheritance directly and not in trust. Each of them puts their inheritance of $1,000,000 into their personal bank and investment accounts.

Scheming Dana Gets Half. Dana, George’s wife, cajoles George to put his $1,000,000 into a joint account with his wife Dana. Dana says: “We are in this together, aren’t we?” Two years later, Dana divorces George to be with her lover of the last five years. Because the $1,000,000 is in a joint bank account with Dana, in the divorce case, Dana gets one half ($500,000) because usually marital assets are split 50/50. Dana’s divorce attorney makes a winning argument to the court that the $1,000,000 became a marital asset when George put the money into a joint marital account with Dana.


Broke businessman showing his empty wallet against a white background

Gary loses everything-including his inheritance. Gary starts a high tech company and borrows $2,000,000 to pay employees, rent and other business expenses. Mega Company copies his technology but in a way that Gary would have a hard time winning an infringement lawsuit against the larger company. Also, Gary does not have the estimated $400,000 to fight the legions of lawyers of Mega Company. At age 55, without a job, Gary loses everything, including his $1,000,000 inheritance because the $1,000,000 is in his bank account and the bank lender takes Gary’s inheritance to pay back the loan. Gary files bankruptcy and has a hard time finding a job because of his bad credit and age. He lost his home, his wife leaves him and he can’t pay for the college education of his children.


Nancy pays estate taxes that could have been avoided. Nancy founds an advertising agency and marries into a wealthy family. Due to the size of their estate, Nancy and her husband Andrew will pay estate taxes when they both die. Nancy grows her $1,000,000 inheritance to $4,000,000 ESTATE-GIFT-TAXESduring her lifetime. When Nancy dies, because of her inheritances and the value of her business, Nancy’s estate pays nearly $3,000,000 in federal and state estate taxes.
Her tax advisor had told her that if Nancy had inherited the $1,000,000 in a lifetime trust from her parents, she would not have had to pay any estate taxes on the value of the assets left to her by her parents and could have passed on the $4,000,000 to her children tax free. But, when Nancy got the money outright, it was too late to use that planning tool.
Patty, one of Nancy’s children has disabilities and Nancy had planned to leave the $4,000,000 to Patty for her care for life in a trust for Patty. But, because Nancy living trust creates the trust for Patty, instead of under the trusts of Fred and Frita, the money was part of the taxable estate of Nancy. Most of the money never makes it to the Patty trust because it has to go to pay estate taxes. If Fred and Frita had set up a lifetime trust for Nancy, the $4,000,000 could have been available for Patty’s care, free of estate taxes in Nancy’s estate.

Harry protects his only daughter–from herself. I first met Harry in the conference room of a nice assisted living facility where he was living. In his late 80s, Harry had been a careful steward of his earnings and money and had a very capable financial advisor who produced good returns over the years. The advisor had managed to grow $500,000 to about $2,000,000. Harry spending-money-clipart-spending-money-cliparthow-to-zfk0qntesaved his entire lifetime, even when he was news paperboy. His wife and oldest daughter had already died. His remaining family was his daughter and her daughter.
“My daughter is really terrible with money”, said Harry, sadness in his voice. “I pay the rent for her apartment with her boyfriend and daughter. If I send the money directly to her, she will spend it and get evicted. I have to send the money directly to the landlord.”
I had reviewed his trust that was prepared by another lawyer.
I said: “Harry, I have read your trust and if you pass, your daughter immediately gets all of your money. Your daughter could spend all of your savings in three months”.
Harry: “No, she would spend it three weeks.”
Harry instructed me to change his trust so that his daughter’s inheritance would last the joint lifetimes of his daughter and his only grandchild, with the investments to be done by his trusted financial adviser. Now that Harry has passed, his money continues to be carefully invested and his daughter will receive a significant monthly check for the rest of her life. She can’t blow her inheritance.

Mary is protected against a bad marriage. Oscar and Harriet have two children, Mary and Mike. Oscar and Harriet set up life time discretionary trusts for their two children. Mary’s divorce-property-issues_505_022413072138marriage seems to be going well. However, after Oscar and Harriet die, Mary’s husband Felix becomes a drug addict and after multiple attempts to dry him out, Mary concludes Felix is a hopeless case and divorces him. In the divorce court, Felix attempts to get part of the $1,500,000 in the trust Mary’s parents set up for her. However, the court does not award anything from Mary’s trust, but divides the joint property of Mary and Felix 50/50. With the $1,500,000 trust, Mary has enough for a fresh start and a good retirement.

Alex survives bankruptcy. Alex is a go getter and founds a successful high tech business. Within three years, he has 20 employees and annual sales of $8,000,000. He bankruptcy2-620x613takes out a $4,000,000 bank loan secured by his business assets to rapidly expand his business. His technology is overtaken by the latest high tech gadget and Alex’s business collapses. Alex owns $6,000,000 with assets of $800,000 (outside his trust). Alex files bankruptcy. The major asset of Alex is the $2,000,000 in a lifetime trust he inherited from his parents. The bankruptcy court liquidates all of the assets of Alex outside of trust Alex inherited from his parents. Alex has lost everything-except the $2,000,000 in trust from his parents. Alex can start over and live well due to the far sighted planning of his parents.


Is your plan like so many that it fails to protect your children or heirs from creditors, bad marriages or themselves? Contact us to see if you have maximized the protections for the next generations.