How Changes to Portability of the Estate Tax Exemption May Impact You

Pen lying upon an estate tax return.On July 8, 2022, the Internal Revenue Service issued new guidance that allows a deceased person’s estate to elect “portability” of their unused gift and estate tax exemption for up to five years after their death. So, if your spouse passed away less than five years ago, you may be able to file an estate tax return to transfer their unused estate tax exclusion to yourself.

What Is Portability, and How Does One Get It?

Portability is a way of transferring the amount of the gift and estate tax exemption that a deceased spouse did not use to the surviving spouse. It is only available to married couples.

To get the benefit of portability, the executor of an estate must file a federal estate tax return. Previously, this return had to be filed within two years of a person’s date of death, assuming an estate tax return was not required sooner. Because so many estates kept missing this window, the IRS decided to extend it to five years.

Let’s say your spouse has passed away, and you are the executor of their estate. If the total value of your spouse’s assets in their estate is below the threshold for federal estate taxation, you may assume that no estate tax return needs to be filed. While this is technically correct, if you do not file an estate tax return, there is no way to transfer over your spouse’s unused estate tax exclusion for your benefit.

The federal gift and estate tax exclusion as of 2022 is $12.06 million per person ($24.12 million for married couples). A person can give away — either during their lifetime or at death — up to this amount, tax-free.

In the above example, if your spouse’s estate were worth $2 million, that would leave an unused exemption of $10.06 million, which you could add to your own $12.06 million exemption, should you ever need it. But you must file an estate tax return for your spouse and complete the section of Form 706 currently entitled “portability of deceased spousal unused exclusion.”

Now Is a Good Time to Consider If You Could Benefit From Portability

The current federal gift and estate tax exemption will be reduced by half in 2026. So, if you have a spouse who died in the past five years, you should consider as soon as possible whether electing portability makes sense.

To be eligible, the deceased spouse must have been a U.S. citizen or permanent resident on the date of their death, and the executor must not have been otherwise required to file an estate tax return based on the value of the total estate and any taxable gifts. If an estate tax return was filed within nine months after the spouse’s death or an extended filing deadline, the portability option may also not be available.

For families with some wealth, this option could result in hundreds of thousands of dollars or more in tax savings. Many families might not have an estate tax problem now, under the gift and estate tax exclusion of 2022. However, if the second spouse dies after 2026, that spouse’s estate could owe hefty taxes. Portability allows you to plan ahead to avoid this problem.  To learn more, reach out to the MSW team: contact Amy Stratton or Kristen Prull Moonan.

What You Should Consider Before Scattering a Loved One’s Ashes

Man in monk robe scattering ashes and flower petals into water at funeral ceremony.Saying goodbye to a loved one is heartbreaking. Making final arrangements can be overwhelming, and knowing what you are allowed to do to fulfill your loved one’s wishes is important, but it can also be confusing. If the person you lost wanted to be cremated and have their ashes spread, you should know where you can scatter their ashes to make sure that putting your loved one to rest is done appropriately.

Where Do You Want to Scatter the Ashes?  

The place you choose to spread your loved one’s ashes is very important. The rules for spreading someone’s ashes are different depending on the type of location.

Is the Area Private or Public Property?

The biggest question about location is whether the property is public or private. If the location is public, you may be able to scatter your loved one’s ashes freely so long as you do not spread their remains in a place where others would use the space. For example, do not scatter your family member’s ashes in the sandbox at the park. Always be considerate of others in public places.

Also make sure you have the appropriate permission. During the 2022 NHL Playoffs, a hockey fan who lost his best friend, another big fan of the sport, spread some of his friend’s ashes on the ice rink. He quickly learned that he could not pay tribute to his friend that way after being banned from attending games for the rest of the season. If you get the property owner’s permission, you can scatter the ashes on their property. However, it is unlikely that you will get your favorite amusement park or stadium’s permission to spread your loved one’s ashes.

Note that if you are allowed to spread ashes on a piece private property, the specific location may have certain requirements you must follow.

Scattering Ashes at the Beach

You will need permission to spread your loved one’s ashes on the beach. Many states do not allow you to spread ashes along the shoreline, but in states like California, you can scatter ashes 500 yards or more from shore.

Scattering Ashes at Sea

It may have been your loved one’s last wish to have their ashes scattered at sea. The Environmental Protection Agency regulates how surviving loved ones can scatter the ashes of the person they lost. Usually, the EPA requires that anything you put into the ocean decomposes easily. So, flowers are OK, but you probably can’t place the urn into the sea.

Knowing what’s allowed as you lay your loved one to rest will make a hard situation just a little easier. Any way that you choose to honor your loved one is valuable. Spreading their ashes will help you heal and keep their memory alive. To learn more, reach out to the MSW team: contact Amy Stratton or Kristen Prull Moonan.

Is a Grantor Retained Annuity Trust Right For You?

100-dollar bills moving from one place to another.What is a GRAT?

Grantor Retained Annuity Trusts (GRATs) ­are a mechanism by which wealthier individuals and couples can transfer appreciating assets to their heirs and minimize gift or estate taxes. High-net-worth individuals and couples can use GRATs to freeze the value of their estates and transfer any increase in the value of their assets to their heirs, with minimal tax consequences.

Understanding the Basics

GRATs are irrevocable trusts permitted by the Internal Revenue Code. A client (grantor) transfers an asset or assets to the trust. The grantor (and only the grantor) retains a right to receive an annuity income from the GRAT over a certain period of time. The GRAT is required to pay this annuity stream no less than annually, and it must be a dollar amount or percentage of the value of the asset put into the trust. Any annuity income received is not subject to income tax due to special tax rules.

The asset that is transferred is considered a gift equal to its value reduced by how much of an annuity the grantor receives, along with any interest, as set forth in IRS guidance. Once the trust terminates, the assets transfer to beneficiaries such as a client’s children or a trust for their children.

A GRAT can be designed to result in no taxable gift and, therefore, no gift tax. However, if a GRAT cannot be set up this way, then the grantor can use any of his or her lifetime gifting exclusion to offset any gift tax.

If the grantor does not pass away during the GRAT’s term, then any assets or appreciation that pass to beneficiaries are not subject to gift tax or estate tax upon the grantor’s death. If the grantor dies during the term, then the value of the assets needed to pay the remaining annuity payments to the grantor would be included in his or her estate for tax purposes. The rest of the assets would pass without being included in the grantor’s estate.

Let’s Look at An Example

Let us say you have a stock account worth $1 million and transfer it to a GRAT. The terms of the GRAT provide that you receive 10 annual payments of $100,000, plus interest, at a rate set by the IRS from the income of the trust. If designed to be a zeroed-out GRAT, the total payments should equal the asset’s present value at the date of transfer. If the stock account is appreciating, this works out very well. The trust can pay you the annuity without invading the principal, and any appreciation in value transfers to the beneficiaries of the trust, with no gift or estate tax consequences, once its term ends.

Why Consider a GRAT?

A GRAT may be especially prudent for clients that gift money regularly and may use up their federal estate and gift tax exemption. The total lifetime exclusion as of 2022 is $12.06 million ($24.12 million for married couples). A GRAT is also a helpful planning device for clients with high-value estates who may suffer serious tax consequences when the federal exemption reduces by half in 2026.

Furthermore, many states have less favorable estate tax exclusion amounts and gifting rules. New York, for example, has an exclusion of $6.11 million as of 2022. In New York, the consequences of exceeding this threshold can be harsh. If an estate is more than 5% over the exemption, the estate loses the exemption entirely, and the total value of the estate’s assets is subject to estate tax. New York also has a three-year clawback rule for gifts. So, when a person passes away, the state includes the last three years of gifts that person made in calculating the total value of their estate for tax purposes.

GRATs can help avoid many of these issues. So why not plan ahead now? Contact your attorney to determine whether a GRAT is a good fit for you. To learn more, reach out to the MSW team: contact Amy Stratton or Kristen Prull Moonan.

The Ins and Outs of Estate Sales

Jewelry at an estate sale.Following the death of a family member, you may find yourself needing to sort through many possessions accumulated over the deceased’s lifetime. An estate sale is one way to distribute those items that you do not want or need quickly and efficiently.

While selling someone’s furniture, jewelry, artwork, antiques, and other belongings yourself can mean a great deal of time and effort on your part, there are companies that help families sell items. An estate sale company will do all the work in exchange for a percentage of the proceeds — typically anywhere between 25 percent and 50 percent. The company usually handles organizing the inventory, staging the house, appraising the value of items and setting prices, promoting the sale to the public, and hiring workers to run the sale. You may need to pay a separate fee to the liquidator for cleaning up following the sale, including donating or disposing of any goods that do not sell.

Keep the following in mind when getting ready for an estate sale:

  • First ensure that you have the legal right to sell the property. There cannot be any unresolved estate issues. Companies may request legal documentation showing that you have the right to dispose of the property.
  • Remove from the house anything you want to keep before calling in the liquidators, but avoid throwing too much away – one person’s idea of trash might be another person’s treasure.
  • There is no regulatory body that oversees the estimated 15,000 estate sale companies in the United States, so before hiring one of them, rely on a referral from a trusted friend or family member and do some research. You can search the website of the American Society of Estate Liquidators, a trade association that requires its members to meet certain requirements and abide by an ethics code.
  • Check your local Better Business Bureau and Yelp for complaints about companies you are considering, or attend a sale run by the company.
  • Make sure your liquidator carries insurance in case there are any accidents while buyers are at the estate sale.
  • Ensure the company offers a written contract.
  • Ask any prospective liquidating company how it handles security, what happens to goods that do not sell, and what type of clean-up is included.
  • Note that many companies discourage families from being present during the actual sale.

To learn more, reach out to the MSW team: contact Amy Stratton or Kristen Prull Moonan.

Keeping Your Emergency Contacts and Medical Information Updated for First Responders

Paramedic in ambulance holding smartphone.If medical personnel are able to access your medical history during an emergency, it could mean the difference between life and death. But if, for example, you are injured, in shock, suffering from dementia, or are otherwise incapacitated, you may not be able to provide that information yourself.

There are several systems readily available to help make crucial contact and medical history information available to first responders. Consider taking the time to update your details with the following free tools:

  • On Your Smartphone: Even when your smartphone is locked, you have options for inputting your emergency contacts as well as other vital information that could help save your life.
    • Medical ID for iPhones. If you are an iPhone user, take advantage of the preinstalled Health app to input details about your medical needs so that first responders will have the information they need in an emergency. To do this, open the Health app, choose Review Medical ID, and enter your information.You can include not only your designated emergency contacts, but also such details as your birthdate, any medical conditions or allergies, your blood type, and your organ donor status. You can then choose to make your Medical ID available on your iPhone’s lock screen for first responders.

      In addition, there is an option to share your Medical ID information automatically with a dispatcher, should you ever need to make an emergency call.

    • Emergency Information on Androids devices. Depending on your device, you may be able to find “Emergency Information” or “My Info” in your Settings, where you can enter your medical details and emergency contacts. Be sure to add anyone you wish to designate as an emergency contact into your Contacts app as well.In your Android Settings, you can also add your emergency contact information to your lock screen as a custom message.
    • In Case of Emergency (ICE) Contact. This program, which was originally established in 2004, encouraged people to list in their cell phone their “in case of emergency” contacts under the heading “ICE,” allowing paramedics or other medical personnel to know whom to contact in the event of an emergency. Today, there is also a free ICE app for smartphones, which allows you to send an instant message, including your GPS location, directly to your ICE contacts with the tap of a button if you are in an emergency situation. Learn more about ICE.
  • The National Next of Kin Registry (NOKR). The NOKR is a free service that allows you to register yourself and your next of kin in the event of such situations as daily emergencies or natural disasters. The information you enter is not available to the public, but it is available to emergency service agencies registered with the NOKR. If you are in an accident, emergency services personnel would be able to search the website to find your next of kin and notify them about your condition. The NOKR stores emergency contact information for those across the U.S. as well as 87 other countries. You can register online, through U.S. mail, or via fax. Learn more about registering for the NOKR.

To get the most out of an emergency contact, you should make sure the person you choose as your emergency contact has agreed to act in this capacity, knows about any allergies or other factors that could affect your treatment, and knows whom to contact on your behalf. To learn more, reach out to the MSW team: contact Amy Stratton or Kristen Prull Moonan.

Dynasty Trusts: A Tax-Efficient Way to Pass Wealth Down Through the Generations

If you want to pass money to future generations without having it subject to gift and estate taxes, then a dynasty trust may be right for you. A dynasty trust allows trust assets to be used for the benefit of multiple generations while keeping the assets out of the grantor’s and the beneficiaries’ taxable estates.

The main benefit of a dynasty trust is the avoidance of estate and gift taxes over many generations. In 2022, federal estate tax exemption is $12.06 million ($24.12 million for couples). Estates valued at more than the exemption amount will pay federal estate taxes, at a rate of between 18 percent and 40 percent. The lifetime gift tax exclusion – the amount you can give away without incurring a tax – is also $12.06 million in 2022. Note that you can give any number of people up to $16,000 each per year (in 2022) without the gifts counting against the lifetime limit. In addition, the generation skipping transfer (GST) tax affects assets passed to grandchildren. The tax is imposed even when property is left in trust for a grandchild. The GST exemption is the same as the estate and gift tax exemptions. If you transfer more than the GST exemption, the tax rate is 40 percent.

Assets transferred to a dynasty trust are subject to estate, gift ,and GST taxes only when initially transferred and only if they exceed federal exemption thresholds. While estate and gift tax exemptions are currently very high, in 2026 the exemption is set to drop to the previous exemption amount of $5.49 million (adjusted for inflation).

Another benefit of a dynasty trust is that the assets in the trust are protected from the beneficiaries’ creditors or in the event a beneficiary divorces. If the trust is properly structured, creditors cannot go after trust assets to pay the beneficiaries’ debts.

How a dynasty trust works
A dynasty trust is an irrevocable trust, which means once it is created it cannot be changed. Funds transferred into the trust will be taxed if they exceed the lifetime gift tax exclusion. However, once funds are transferred to the trust, beneficiaries of the trust can pass assets to the next generation without those assets being subject to estate, GST, or gift taxes. In addition, the assets placed in the trust are removed from your estate and can grow outside of it.

The trustee of the trust can be a beneficiary, but because the trust is designed to last for generations, it may make sense to have a professional fiduciary, such as a bank or other financial institution, serve as trustee. The trustee manages and distributes the assets in the way you set forth in the trust agreement. Usually, the trust provides for the beneficiaries’ support during their lifetimes. For example, it could direct the trustee to pay out income regularly, make periodic principal distributions, or make distributions contingent on the beneficiary’s need.

The length of time the dynasty trust can continue to exist depends on state law. Some states allow trusts to run for hundreds of years or indefinitely, while others place limits on how long the trust can operate. Traditionally, the rule against perpetuities states that a trust can last 21 years past the death of the last beneficiary. However, many states have opted out of the rule, allowing trusts to continue for many generations.

The downside of dynasty trusts is that they are inflexible. Once the trust is created, you lose access to the assets. Because dynasty trusts last for generations, they require guesswork about what will be best for your descendants.

Dynasty trusts are complicated instruments that must be designed correctly in order to provide benefits.  To determine if a dynasty trust is right for you, reach out to the MSW team: contact Amy Stratton or Kristen Prull Moonan.

How to Deal with an Estranged Child in Your Estate Plan

Unfortunately, not all families get along. If you are having problems with one of your children, you may not want them to benefit from your estate. There are several strategies for dealing with an estranged child in your estate plan.

Depending on the level of estrangement and the reasons for the estrangement, the following are the main approaches for treating a child differently in your estate plan:

  • Outright disinheritance. If you really do not want your child to receive anything from you, you can fully disinherit the child. To be safe, even if you are leaving a child nothing, you should specifically mention the child in the will and state that you are disinheriting him or her; failing to do so could make it easier for him or her to challenge the will. (You also need to specify whether you are disinheriting that child’s children, too.)

Disinheriting a child comes with a risk: He or she may contest the will in court, which can cost your estate time and money. There are steps you can take to try preventing a will contest, including making sure your will is properly executed, writing a letter to the estranged child to explain your reasoning, and removing any appearance of undue influence. Keep in mind, however, that nothing is foolproof.

  • Smaller inheritance. If you don’t want to disinherit your child entirely or wish to make it less likely the estranged child will contest the will, you may want to leave them an inheritance that is smaller than the amount you leave to other beneficiaries. Leaving a child a reduced inheritance may prevent him or her from contesting the will, especially if you include a no-contest clause (also called an “in terrorem clause”) in the will. A no-contest clause provides that if an heir challenges the will and loses, then he or she will get nothing. You must leave the heir enough so that a challenge is not worth the risk of losing the inheritance.
  • Put the inheritance in a trust. If the reason you do not want to leave your child an inheritance is because you are worried about how they will use the money, you can leave the child’s inheritance in a testamentary trust. You can provide instructions to the trustee on when and how the trustee should disburse the funds in the trust. For example, you can instruct the trustee to disburse the money in small increments or only if the child meets certain conditions, like staying drug- or alcohol-free or working a full-time job.

Figuring out how to treat an estranged child in your estate plan is complicated and emotional. As Leo Tolstoy wrote in Anna Karenina, “Happy families are all alike; every unhappy family is unhappy in its own way.” To determine the best strategy for you, reach out to the MSW team: contact Amy Stratton or Kristen Prull Moonan.

Three Estate Planning Options for Your Art Collection

Collecting art or other valuable items can be a passion for many people. Often such a pastime is more about enjoying the art or the medium itself than about ensuring financial gain. However, once you have accumulated a sizable collection, what do you want to happen to it after you pass away?

It is important that your estate plan address your art separately from your other assets.

The first step in estate planning for your collection is to document it. You should not only have the collection appraised, but also take photographs of each item and assemble any paperwork relating to the authenticity and origin of the pieces in your collection, including artist notes, bills of sale, or insurance policies.

When considering what to do with an art collection, you have three main options:

  • Sell the collection. If your family is not interested in maintaining your collection after you are gone, then you may want to sell it.

If you sell the collection while you are alive, you will have to pay capital gains taxes on the collection’s increase in value since you purchased it. The capital gains tax rate on artwork is 28 percent, compared with the top rate of 20 percent for other assets.

If the collection is sold after you die, it will be included in your estate, possibly increasing the value of your estate for estate tax purposes, but it will be “stepped up” in value. This means that if your heirs sell the collection, they will have to pay capital gains tax only on the amount by which the pieces have increased in value since your death.

  • Leave the collection to your heirs. You can give your artwork to individual family members, but a better approach may be to put the artwork in a trust or a Limited Liability Company (LLC).  The trustee of the trust or manager of the LLC whom you appoint will be responsible for sustaining the collection, including maintaining insurance on the artwork, arranging storage, and making decisions about selling and buying pieces. You can leave instructions for care and handling of the collection. Any profits from the sale of items would be split among the beneficiaries of the trust or members of the LLC.
  • Donate the collection. You can donate your artwork while you are still alive and receive an income tax deduction based on the value of the items. This can be a good way to pass on your collection while avoiding capital gains taxes. Should you choose to donate through your estate plan, your estate will receive a tax deduction based on the collection’s value.

Deciding which option to take will depend on your circumstances and your family’s interest in the collection. To figure out the best option for you, reach out to the MSW team: contact Amy Stratton or Kristen Prull Moonan.

Supreme Court Rules State Medicaid Programs Can Recoup a Larger Share of Injury Settlements

If you are injured due to another person’s negligence and receive Medicaid benefits to pay for care, the state has a legal right to recover the funds it spends on your care from a personal injury settlement or award. Yet in a legal case involving a Floridian teen who was catastrophically injured more than a decade ago, the U.S. Supreme Court has ruled that state Medicaid programs may be repaid from settlement funds reserved for future medical expenses as well.

The decision affects anyone who receives medical care through Medicaid after suffering a disabling injury that results in a lawsuit.

In 2008, a truck struck 13-year-old Gianinna Gallardo, leaving her in a vegetative state. The state’s Medicaid agency provided $862,688.77 in medical payments on Gallardo’s behalf. Her parents sued the parties responsible, and the case eventually settled for $800,000, of which about $35,000 represented payment for past medical expenses. The settlement also included funds for Gallardo’s future medical expenses, lost wages, and other damages.

The state Medicaid agency claimed it was entitled to more than $300,000 in medical payments from this settlement, including money that had been specifically allocated for Gianinna’s future medical expenses.

Gianinna’s parents then sued the agency in federal court, arguing that the state of Florida should be able to recover monies only from that portion of the settlement allocated for past medical expenses.

When a U.S. district court ruled in favor of Gianinna, the Medicaid agency appealed. A court of appeals reversed the lower court’s decision. Ultimately, the U.S. Supreme Court agreed to hear the case in order to resolve the conflict.

In a 7-2 decision, the Supreme Court agreed that the state is allowed to recover benefits for Gianinna’s past — as well as future — medical care. Justice Clarence Thomas, who wrote the majority opinion, noted that Medicaid law “distinguishes only between medical and nonmedical care, not between past (paid) medical care payments and future (un-paid) medical care payments.”

Justices Sonia Sotomayor and Stephen Breyer dissented. They argued that accepting Medicaid shouldn’t leave a beneficiary indebted to the state for future care that may or may not be needed.

To read the full decision, click here. To learn more, reach out to the MSW team: contact Amy Stratton or Kristen Prull Moonan.

Some Social Security Beneficiaries Can Get Retroactive Payments — But at a Cost

If you need a lot of cash on hand upon retirement, Social Security offers a lump-sum payment option that’s worth six months of benefits. However, it comes at a cost. It is important to understand the details before agreeing to the payment.

If you have waited beyond your full retirement age (66 for those born between 1943 and 1954) to begin collecting Social Security benefits, you have the option of asking for back payments. The maximum that Social Security offers is six months’ worth of retroactive payments in a lump sum. The downside is that by taking the lump sum, your retirement date and the amount of your monthly benefit are rolled back six months.

When you delay taking retirement beyond your full retirement age, you amass “delayed retirement credits” that increase your benefits by 8 percent for every year that you wait, over and above annual inflation adjustments. By taking the lump-sum payment, you lose the delayed credits that you had accumulated over the previous six months, so your monthly benefit will be lower than if you did not take the lump sum — forever.  So, for example, if by taking the six months of retroactive benefits your regular monthly benefit is reduced by $150 and you live another 25 years, you’re foregoing $45,000 over that span.

Whether you should take the lump sum payment depends on a number of factors, including your life expectancy, your spouse’s needs, and what you will do with the new money. Taking the lump-sum payment makes more sense if your life expectancy is shorter. In this case, the immediate cash infusion will be more beneficial than bigger monthly payments. However, if you are married and are the higher earner, you will want to consider your spouse’s needs. If you die, your spouse will receive spousal benefits equal to the monthly amount of your benefits. The higher your benefit, the more your spouse will receive.

You also need to consider what you will do with the lump-sum payment. If you are paying off high-interest debt or investing in something with a good rate of return, the lump sum might be better than having the higher monthly payment.  To learn more, reach out to the MSW team: contact Amy Stratton or Kristen Prull Moonan.