Pamela Avraham

March 5, 2023 Deadline to Reduce 2022 Estate & Trust Income Taxes

January 16, 2023 by Pamela Avraham

If you are the executor of an estate or the trustee of a trust, you should know that egregious high income tax rates apply to estates and trusts at very low levels of income. In 2022, for estates and trusts, a 37% income tax rate as well as the 3.8% Net Investment Income (NII) tax kicks in at $14,451 of income. That’s not very high. For example, let’s say an estate has income of $214,451. The tax on the $200,000 (income in excess of the $14,451 threshold), at 40% equals a tax of $80,000. Ouch!

Suggestions?

There is hope! Estates and trusts only pay tax on what’s not distributed. Distributions lower the income tax for the trust and at the same time increase the recipient’s personal income tax. However, individuals do not pay the highest rates unless they are wealthy. In our example, if there are four beneficiaries and each receives $50,000 (one-fourth of the $200,000) many individuals will only pay 10% – 24% on that $50,000 instead of 40%. Potential tax saving could range from $32,000 to $60,000 depending on the individual tax bracket of each beneficiary.

What Can I Do Now?

It’s not too late. There’s a rule allowing distributions made in the first 65 days of the next year to be treated as if made in the preceding year. A special election must be made on the Fiduciary Income Tax Return. This year’s deadline is March 5, 2023.

Are there Other Factors to Consider?

Yes. Frequently, the main purpose for a trust is not to save taxes, but rather control. If a beneficiary can’t manage money, is a spendthrift, gambler, drug addict or is mentally unstable, you may not want to distribute the funds. These factors may outweigh the tax savings of distributions from a Trust or Estate.

Please contact us for assistance with making distributions or any other tax related questions about managing a trust or estate.

ABCs of 2022 RMDs

December 11, 2022 by Pamela Avraham

Perplexed? Need to take an RMD in 2022?

Over age 72? – The age for withdrawing from retirement accounts was increased in 2020 from 70.5 to 72. Your first RMD (required minimum distribution) must be taken by April 1 of the year following the year in which you turn 72. After that, your RMDs must be taken by Dec. 31 of each year. However, if you became 72 in 2022, you may want to withdraw the first RMD in 2022. This will avoid having two RMDs in 2023 and bunching income into higher tax brackets.

Beneficiary of an IRA account?– An individual non-spouse beneficiary must begin taking RMDs on the basis of his or her own life expectancy by December 31 of the year after the owner’s death. If the original retirement account owner passed away in 2022 prior to taking this year’s RMD, it still must be withdrawn. The responsibility for taking the year-of -death RMD falls to the beneficiary.

Although the RMDs are calculated based on the beneficiary’s life expectancy, if the original account owner passed away after Jan. 1, 2020, you will need to fully distribute the account within ten years from the owner’s date of death. In the tenth year, the balance of the account will need to be distributed.

If an estate is the beneficiary of an IRA, and the account owner reached age 72, the distributions would be based on the remaining single life expectancy of the IRA owner. If the original account owner passed away in 2022 prior to taking this year’s RMD, the estate must withdraw it by the end of the year. If the owner was younger than 72, the assets must be completely distributed within five years of the owner’s passing, but no annual RMD is required.

Want to save income taxes on the RMD? – Use a Qualified Charitable Distribution (QCD) in 2022 For IRA owners with charitable intentions, there is a substantial tax benefit using a QCD. The owner contributes all or part of his RMD to charity. The portion contributed to charity will not be taxed. QCDs can be made as early as age 70.5, even though minimum distributions are not required until age 72. A QCD may only be made by an original account owner, not by a beneficiary.

What happens if I don’t take the RMD in 2022? If an account owner fails to withdraw a RMD, the amount not withdrawn is taxed at 50%.

Still perplexed? Everyone’s situation is different. Please consult with a tax advisor at Urbach & Avraham, CPAs, to analyze the impact on your personal situation.

Avoiding Pitfalls of Guardians

December 1, 2022 by Pamela Avraham

A Guardian may bear personal liability for his actions or inactions. There are many pitfalls to avoid while managing the ward’s assets.

Insurance– Guardian must keep insurance on the ward’s home , even if the ward no longer lives there. The homeowner’s insurance company must be informed that the home is vacant. Guardian should inventory all valuables in the home such as jewelry, musical instruments, paintings, etc. and ascertain that these are all properly insured.

Winterize the house, even if the heat is supposedly being kept on. Turn off the master water valve and open the faucets to let the water drain.

Guardian must keep insurance on any automobiles, even if the vehicle is not being driven.

Health Aides -If the ward is still at home and cared for by health aides, the insurance policy must have coverage for domestic servants. If the aides are not covered for workers’ compensation, the Guardian may be liable for the aide’s medical expenses if injured on the job.

If the ward moves to a facility, the private health aide isn’t covered by the homeowner’s insurance policy. Therefore, in this scenario, a private aide must be engaged by a health care agency to be properly insured.

Income Taxes– In addition to handling the preparation of all current tax returns, the Guardian must ascertain if the ward has any unfiled tax returns for prior years or any outstanding tax obligations. The IRS and the state tax authorities should be contacted to verify and resolve these issues.

Mortgages– Review the terms of all mortgages. Determine if mortgage should be refinanced. If the ward moves to a facility, a reverse mortgage may have to be paid-off within a few months.

Real Estate– If the ward moves to a facility or to a family member’s home, his prior residence should be sold or rented. Guardian should evaluate the options given many factors: the ward’s cash flow needs, expenses to maintain, potential appreciation and the real estate market.

Investing Liquid Assets– Guardian should review all bank and brokerage accounts and make sure that all assets are invested properly. A qualified investment advisor should be engaged to invest according to the ward’s needs and according to the Prudent Investment Act.

Accounting- Guardian must file an annual accounting with the Court. Good records and a journal of all cash receipts and disbursements must be maintained in order to prepare an accounting.

A Power of Attorney has the right to handle many of these functions, however, the Guardian is court-appointed and has the obligation to perform all these jobs.

Navigating through the guardianship maze is overwhelming. We can assist you with this difficult process. Working with Urbach & Avraham, CPAs is unique because we know what you’re going through. Several of our firm members have taken care of their elderly parents or special needs relatives. Please contact us to see how our CPA firm can assist you.

Guardian? Moving Mom?

November 25, 2022 by Pamela Avraham

A Financial Guardian has a myriad of responsibilities to handle. If the ward’s living situation isn’t safe or suitable, the Guardian should pursue moving the individual to a home or facility which provides supervision, medical care and socialization.

The Guardian/Power of Attorney must coordinate all aspects of the relocation:
• Moving parent’s possessions to the new location
• Inventory contents of home
• Engage relocators to select furniture & possessions suitable for new smaller home
• Monitor relocators who distribute remaining home contents to relatives or charity
• Engaging certified real estate appraisers to determine value of home
• Working with real estate agent to sell the home
• Working with elder law attorneys to file Court motion for approval to sell home

The Financial Guardian has additional responsibilities:
• Locating assets of ward
• Budgeting for the ward’s personal & health needs
• Investing liquid assets
• Maintaining real estate of ward
• Review terms of traditional or reverse mortgages
• Review and update of all insurance policies
• Preparing court accountings
• Handle tax matters

Our CPA firm assists Financial Guardians with the administrative, relocation and accounting requirements. Several members of our firm have taken care of their elderly parents. We have experienced the many trials and tribulations of providing for their medical needs and handling their financial affairs.

Fiduciary Accountings 101

November 21, 2022 by Pamela Avraham

Does your parent need a Guardian?

If Dad becomes mentally incapacitated to the point where he should not be handling his own financial affairs, he may need a Guardian. We work with many attorneys who specialize in Guardianships. They can apply to the Court to have a Financial Guardian appointed and a Personal Guardian also if necessary.

Guardian vs. Power of Attorney- What’s the Difference?
A Financial Guardian has a myriad of responsibilities to handle. In contrast to a Power of Attorney who has the right to handle many of these functions, the Guardian is Court-appointed and has the obligation to perform all these jobs.
Accounting Obligations of Guardian:

Locating assets of ward
Handling all tax matters
Preparing court accountings
Establishing budget for the ward’s personal and health needs
Investing liquid assets
Review and update of all insurance policies
Review of terms of any traditional or reverse mortgages
Maintaining real estate of ward

NJ Guardian Accounting Requirements
In all States, the Guardian must file an annual report of the financial affairs of the incapacitated person. In NJ, many counties now require that the Guardian of the Estate report using Judiciary forms as to the financial affairs. There are two different periodic reporting forms: the Periodic EZ Accounting form and the Periodic Comprehensive Accounting form. The Comprehensive Form requires numerous attachments to substantiate the figures reported. The Judgement of Incapacity should specify which form you are required to file, as well as the deadline for filing.
Instead of filing a Judiciary form, it is possible that a Judgement may direct periodic filing of a formal court accounting. All of these types of accountings are complex. Urbach & Avraham can relieve you of this burden and prepare the accountings for you.

Do Executors and Trustees also need Accountings?

Estates and trusts need court accountings in two instances. If a beneficiary requests an accounting, usually in a litigated matter, the Court will demand a formal accounting. If any of the beneficiaries is a charitable organization, than a formal accounting must be submitted to the state Attorney General.

An accounting? No problem! After all, you kept all the bank statements and receipts for every expense. However, unfortunately, a formal accounting must be in a specific format strictly mandated by NJ Statutes in the Uniform Principal and Income Act. The following do not constitute a formal accounting:

• A stack of all the bank and brokerage statements
• Boxes, envelopes and binders of all receipts for all expenses paid
• The check register for the estate checking account
• The fiduciary income tax returns for the trust or estate (Form 1041) or the individual income tax returns (Form 1040)
• An Excel summary of all expenses paid
• A profit and loss summary from Quickbooks
• Mom’s medical records

Preparing a formal account can be an overwhelming process for a fiduciary. The starting point is a list of all assets for the first day of the account period. All receipts, disbursements, gains and losses from disposition of assets, transfers and distributions are detailed.
We can relieve your burden, take your crates of documents and convert them into a formal accounting. If there is a dispute about a specific asset or disbursement, we will add additional documentation to clarify, strengthen and justify our client’s position.

Working with Urbach & Avraham, CPAs is unique because we truly know what you’re going through. Several members of our firm have taken care of their elderly parents. We have experienced the many trials and tribulations of providing for their medical needs and handling their financial affairs. Please contact us to see how our CPA firm can assist you.

Preserve Family Wealth with Portability

November 21, 2022 by Pamela Avraham

Extension of Time to Elect Portability of the DSUE

and Preserve Family Wealth

In 2011, the IRS introduced the concept of portability of the estate tax exemption from a deceased spouse to a surviving spouse. Currently, with the federal estate tax exemption at $12 million, a married couple can transfer up to $24 million to heirs without a federal estate tax. One of the tools enabling this large tax-free transfer is electing the DSUE, the “Deceased Spouse Unused Exclusion.”

What is Portability and How to Obtain it?

Portability occurs when a surviving spouse files a US Form 706, Gross Estate Tax Return, for the sole purpose of calculating and capturing any unused estate tax exemption from the estate of the first spouse. Completing a Form 706 to make the DSUE election is no easy task.

Why should one elect Portability/DSUE?

If the surviving spouse has an estate worth much lower than the current $12 million estate exemption, why file for the DSUE?

Congress may reduce the estate tax exemption to 5 or 3.5 million
The estate of the surviving spouse may appreciate substantially if there are businesses and/or real estate
A young healthy spouse has many years to accumulate more wealth and have a potential taxable estate
The surviving spouse may inherit from other relatives

When must one file to elect Portability/DSUE?

Good news! This year the IRS extended the time to file for the DSUE election to on or before the fifth anniversary of the decedent’s death.

Conclusion

With the current federal tax exemption so high, spouses should take advantage and claim any unused estate tax exemption after the death of the first spouse. Given the factors mentioned above, even smaller estates should consider filing for portability.