How the New Tax Law Affects Your Estate Planning
July 22, 2011

For much of 2010 there was no federal estate tax in place, and there was considerable uncertainty as to what Congress would do about the issue. In the post-election session of Congress in December, Congress included a new structure for the federal estate tax that will be effective for the next two years, and potentially longer if Congress finds it easier to extend the current law rather than re-visit the issue. While the federal exemptions have increased significantly, the Minnesota estate tax exemption remains $1,000,000. As described below, the difference between the federal and state exemptions will have an unexpected and undesirable impact on many estates in Minnesota.

Following are the most important provisions of the new federal estate tax law:

1. The estate tax exemption amount has been increased to $5 million per person, which means that with proper planning, a married couple can pass assets up to $10 million without incurring federal estate tax;
2. The new federal estate tax rate for amounts over the exemption amount is 35%;
3. For the first time, any exemption amount that goes unused at the death of the first spouse to die can be transferred to the surviving spouse. This could potentially allow the surviving spouse to transfer more than $5 million free of federal tax at his or her death. In order to make use of this new allowance, an estate tax return must be filed at the first spouse’s death, even if that return would not otherwise be required (this new concept is referred to as “portability” of the exemption).
4. The new lifetime gift tax exemption is also $5,000,000 per individual (although a gift tax return should be filed for any gifts exceeding $13,000 in any year in order to claim this exemption). This new larger gift tax exemption provides a good, and possibly temporary, opportunity for individuals to move large amounts of assets out of their estate during their lifetime without incurring tax. There are also techniques available to allow a person to leverage this exemption to move even more assets out of his or her estate.

While the new federal estate tax legislation will lower the federal tax burden for individuals with estates over the prior exemption amount ($3.5 million), in Minnesota, it will result in some individuals paying more Minnesota estate tax when their spouse passes away than would have been the case under the former law. Prior to the middle of the last decade, a common estate tax plan would place assets up to the federal exemption amount into a trust at the first spouse’s death. This planning technique would allow the assets placed into the trust to pass free of tax. However, now, because the federal exemption has increased so dramatically while the Minnesota exemption has remained at $1,000,000, that type of plan can result in an unexpected Minnesota estate tax burden for the surviving spouse. The reason is that Minnesota will tax any assets placed in that trust that exceed $1,000,000. The rate at which these assets are taxed varies, but is approximately 8.5%. If the full $5,000,000 federal exemption amount is placed into this trust, it would mean a Minnesota tax of approximately $390,000 to be paid by the surviving spouse.

As a general rule, we recommend that you review your estate plan approximately every five years, not only for changes in the law, but also to determine if the personal situations of either the person making the plan or the beneficiaries have changed. However, regardless of when you last reviewed your plan, because of the recent changes in the federal tax law, we recommend that you review your estate plan now.

We would be happy to discuss any issues you may have regarding your estate planning documents.

Generally, taxpayers who filed their returns online by April 15 should have received their refund check within the last week and taxpayers who mailed in their returns should expect to see their refund check within six weeks of the date their return was received by the Internal Revenue Service (IRS).

If you have not yet received your refund check, you might be wondering where it is. There is an easy search you can perform yourself.

You can check the status of your refund online at www.irs.gov. Once your are on the site, you can click on “Where’s My Refund” and enter your Social Security Number and the exact whole dollar amount of your refund to see if your check was returned to the IRS as undeliverable, update your mailing address, see when your refund is supposed to be sent out, and/or request a replacement check if you haven’t not received it within 28 days of the date the IRS mailed it. If you receive your check more than 45 days after the date on which you filed your return, you will also receive interest on the amount from the IRS. The interest rate changes quarterly, but the current rate is 4%.

But please note that you can only check the status of your refund online after 72 hours if you e-filed your return or after three-to-four weeks if you mailed your return. Also note that you cannot check the status of you refund online if you filed an amended tax return. If you filed an amended tax return and have not received your refund within eight weeks of your filing date, you can check your status by calling 1-800-829-104.

December is here again.  There is no better time to do a little tax planning.

We have prepared the following tax-related tips to assist you in managing your year end income tax planning activities.  Our office is available to assist you in any way we can in preparing your 2009 income taxes and/or estate planning documents.  In addition to Norm’s direct dial office number, which is 612-879-1804, you may also contact him on his cell phone at 612-720-2716, at home, 952-926-3583, or send him an email at nbjornnes@mulliganbjornnes.com.  Our partner, Michael Ostrem, is also available to help you.  His direct dial office number is 612-879-1818 and his email address is mostrem@mulliganbjornnes.com.  There is still time to complete meaningful tax planning activities before 2009 is just a memory.

Congress was busy tinkering with the tax laws and spending your money again this year.  We have summarized some of the major changes below for your reference in preparing for your 2009 tax return.

Individual Taxation.  The “kiddie tax” for 2009 taxes a child’s income at his or her parents’ highest marginal tax rate on income greater than $1,900 (2009 indexed amount) until age 19. The unearned investment income (e.g. dividends and interest) of a full-time student between the ages of 19 and 24, and whose earned income does not exceed one-half the amount of his or her support, will be exposed to taxation at his or her parents’ highest tax rate.  The kiddie tax does not apply to earned income.

The above-the-line (above the adjusted gross income line on your Form 1040 income tax return) deduction of $4,000 for tuition and related expenses was reinstated by Congress for 2009.  This deduction is most beneficial for taxpayers with children in college and whose adjusted gross income is below $80,000 (or $160,000 for joint filers).

The  ”first-time” home buyer credit is in place for 2009 and has been extended into 2010.

The educators’ deduction, a deduction for up to $250 of classroom supplies purchased by educators is still available in  2009.

Finally, IRA contribution limits for 2009 remain at $5,000 per taxpayer (plus an additional $1,000 for taxpayers turning age 50 or over during the year as a “catch up” contribution).  You may also direct the IRS to deposit all or a part of your tax refund directly into your IRA account.

Required Minimum Distributions. There are no required minimum distributions from IRAs in 2009.

State Sales Tax Deduction. The law allowing taxpayers the option of deducting either state and local sales taxes or state and local income taxes on their federal return was extended through 2009.  For our clients in states with low or no income tax (such as Florida, Nevada, Texas and South Dakota), this is a helpful development.  Unfortunately, the alternative minimum tax may eliminate any benefit provided by this state sales tax deduction.

Charitable Contributions. Any donations of clothing or household goods that you make to a charity will not be deductible unless the donated items are in “good” or better condition.

Just as in 2008, you cannot deduct any 2009 charitable contributions made in cash or by check (or other monetary gifts, by credit card, for example) unless you can produce a bank record or a receipt, letter, or other written communication from the charitable organization confirming that the gift was made.  This strict requirement applies regardless of the amount of the donation.  The written proof must be provided at the time of the donation and must include: 1) the name of the charitable organization; 2) the date the contribution was made; and 3) the amount of the contribution.

Congress extended the law that allows owners of IRAs who are 70 1/2 or older to give as much as $100,000 from their IRA or Roth IRA to charitable organizations in 2009 without recognizing any income from the distribution.  Such a distribution must be made as a direct rollover from the IRA trustee to the charity.

Review Your Investment Portfolio. Qualifying dividends continue to be taxed at a maximum rate of 15%.  The implication of this is clear: dividend income is finally on a level playing field with long term capital gains for most investors.  Our advice to all clients is to buy more dividend paying stocks.  There are timing conditions on the 15% tax rate on dividend income which must be considered – the stock must have been owned for more than 60 of a 120-day qualifying period to be affected by the new rates (the qualifying period begins 60 days before the ex-dividend date).  This lower taxation of dividend income has huge implications for your retirement and investment planning.  Consulting with your investment professional will help you maximize your benefit from these changes.  One final caveat — dividend income from real estate investment trusts (“REITs”) will not qualify for the 15% tax rate.  All this said, the favorable tax treatment of qualified dividends is a likely tax increase target.

Also, it is always good tax planning to take advantage of any capital losses you may have before the end of the year.  You may deduct up to $3,000 ($1,500 for married taxpayers filing separately) of capital losses on your federal and state income tax returns.  Should you have investment securities with a loss this year, now is a good time to sell them as the losses can be used to offset your capital gains.  However, please be aware that you are not allowed to repurchase any investment you sell until the 31st day after the sale.  This is a very good opportunity to review your portfolio with your investment advisor.

At the same time, if it is at all possible, it is a good idea to delay taking capital gains until January or later.  Similarly, you should delay exercising nonqualified stock options or stock appreciation rights.  Of course, be mindful of expiration dates and other factors which may be unique to your own situation.

Finally, note that gold and silver are subject to special treatment under the Internal Revenue Code.  Since they are considered collectibles, not capital assets, gains on the sale of gold and silver are taxed at a maximum of 28% when held for more than one year, and at ordinary income tax rates when held for less than one year.

Alternative Minimum Tax. The Alternative Minimum Tax (“AMT”) is a “parallel” taxing system.  In short, your income tax is calculated according to the regular method and also according to the AMT method.  You will pay the higher of the two tax calculations.  While the AMT was developed to be an “easy” way to prevent high-income individuals from dodging their tax liabilities, because the threshold amounts have not been updated consistently, every year more taxpayers pay the AMT.  If you are in danger of being subjected to the AMT, you probably already know what it is; however, if you have questions in this regard, please consult with us.  Congress continues to discuss changes to the AMT exemptions and we will, of course, make any such changes a part of your 2009 tax return.  The AMT individual exemption amounts were increased slightly in 2009.

Saving for College. As we have advised in the past, it is greatly beneficial to begin saving for your children’s education as early as possible.  In the past, the so-called “529 accounts” were a preferred method of accomplishing this goal because of the beneficial tax consequences; however, the 2003 tax law leveled the playing field for Uniform Transfer to Minors Act (“UTMA”) accounts.  Essentially, what happens is that because of the capital gains rate decreases which are discussed above, children, who generally fall into the lowest tax bracket, can sell stocks that have been given to them and retain more of the money.  Because 529 accounts cannot hold stock and UTMA accounts can, this makes the UTMA accounts more attractive to many taxpayers for gifting purposes.  However, 529 accounts may still have other benefits that outweigh how the current laws benefit UTMA accounts, so all families should consider their own needs before deciding how to proceed.  For example, there is a provision that allows a gift to a 529 account of as much as $55,000 without it being subject to gift tax, so long as no other gifts are made in the following five (5) years.  Further, under Minnesota law, a transfer to an UTMA account is an irrevocable gift, and the recipient is entitled to the funds at age 21.  If you may need the money later, do not make such a transfer.  The downside to UTMA accounts is the expansion of the kiddie tax.  We can help you navigate these choices with the participation of your investment advisor.

Estate Tax Exemption Amount. For decedents dying in 2009, the estate tax exemption amount is $3,500,000.  Stay tuned as the scheduled sunset of this exemption amount is being addressed in congress with no final resolution as we write this.  Also, please be advised that, for clients domiciled in Minnesota and a variety of other states, the state estate and inheritance tax schemes start at levels below the federal exemption amounts.  For example, the Minnesota exemption amount is $1,000,000, which means that if an estate falls between $1,000,000 and $3,500,000 in Minnesota, there will be no federal estate tax, but there will be some state estate tax owed. We can assist you if you have any questions regarding state estate tax issues.

Pay Your State Income Tax Estimate by December 31. If you do any tax planning at all this month, please pay your state income tax estimate by December 31^st.  Doing so will ensure deductibility of that state tax on your 2009 federal income tax return if you itemize deductions.

Maximize Your Charitable Contributions. Pay with check, credit card, or appreciated stock by December 31^st.  Donating stock is a very efficient way to contribute because the deduction is based on the fair market value and you do not pay any capital gains taxes on the appreciation.  Remember, the IRS requires documentation of every charitable contribution. For donations of less than $250, a canceled check, credit card statement or receipt from the charitable organization can be used to document the gift. For gifts of $250 or more, you must have a receipt or letter from the charity documenting the gift in order to deduct the contribution on your return.  This receipt requirement is an absolute.  We must receive your documentation (or copies) to enter your contributions on your 2009 income tax returns.

Postpone Income. Easy to say, not always easy to do: postpone any bonuses if you can.  This strategy will not work for bonuses paid by a personal services corporation to an employee-owner or by a Subchapter S corporation to an employee-shareholder.  And if income tax rates rise next year, it may be better to “take the money” now.

Pay Deductible Expenses/Bunch Miscellaneous Itemized Deductions. Consider paying any real estate taxes due in 2010 this month.  I generally do not recommend paying your January 2010 mortgage payment in December 2009, as this one-time extra interest payment is just that, one time.  Also, your mortgage interest statement from your lender will probably be incorrect as a result, and remain incorrect for years to come.  Some mortgage lenders have a policy in place to allow you to pay your January payment for the following year up to a cut-off date in December.  Contact your mortgage lender for more information about its individual policy.  Because miscellaneous itemized deductions are only deductible to the extent that the total exceeds 2% of your adjusted gross income, it may be worthwhile to bunch such expenses.  For example, you could pay your 2010 professional dues in December, or prepay subscriptions, union dues or tuition related to job training.

Annual Gifting. You may want to consider taking advantage of the annual gift tax exclusion by December 31.  The first $13,000 per person gift each year ($26,000 per donee if your spouse joins in the gift) is excluded from gift tax.  Making such gifts may reduce your estate tax obligation.

Capital Investments-Small Business. The Section 179 expense deduction of up to $125,000 for purchases of qualifying property has been extended through 2011.  To be eligible for this expense deduction in 2009, the property must be placed in service by December 31^st.

Roth Conversions in 2010. Starting in 2010, there will be no income cap barring certain taxpayers from converting their traditional IRAs to Roth IRAs: taxpayers with modified adjusted gross income of more than $100,000 will be allowed to convert a traditional IRA to a Roth IRA.  This change applies to all years beyond 2010 – and the income taxes due on the 2010 conversion can be spread over two years.  So the 2010 conversion amount may be included as taxable income in 2011 and 2012 – helping to spread out the tax bite.  Conversions in subsequent years are included in income during the tax year in which the conversion is completed. Because of this change, you may want to hold off on any conversions planned for December of this year. If you would like to discuss a possible conversion of your Roth in 2010, please contact us.

An Identity Theft Reminder. The IRS does not send unsolicited e-mails about your taxes. If you get an e-mail that appears to be from the IRS, it may be an attempt to steal your private information. Don’t click on any links in the message. Rather, forward the e-mail to phishing@irs.gov using the instructions at www.irs.gov.

Enjoy the holiday season!

Ryan Langsev     rlangsev@mulliganbjornnes.com

I have practiced law locally for nearly twenty years.   During these years I have represented numerous property owners in the context of appealing the real property taxes assessed against their property interests for significant tax reductions and refund check amounts to my clients.  The following Questions and Answers address some of the basic issues or concerns that have been raised in my discussions with clients in regard to this unique type of litigation.

Q:  How is my real property valued for taxes as assessed on my property tax statement?

A:  County assessors are required to value your property on an annual basis.  Property taxes are due to be paid on a semi-annual basis; first half by May 15^th, and the second half by October 15^th.  However, the property taxes due to be paid this year are based upon your property’s assessed value as of January 2^nd of the previous year. 

The market value of a property is the price a willing and able buyer will pay a seller for the property in an arm’s length transaction.  However, in the absence of a recent sale of your property, assessors typically implement three valuation approaches: market, cost, or income. 

The market approach, arguably the most common method applied to value real property, involves the use of sales data and information from recently sold comparable properties to determine market value.  It is critical in this approach to have accurate information regarding the size, age, condition and location of your property to determine which comparable sales figures best reflect the current market value for your property.  The cost approach is often implemented for recently constructed properties.  And the income approach, available only for income-producing properties, considers at what price an investor is willing to purchase your property for the related income stream through its operation.  This approach considers the overall market including, but not limited to, rental and vacancy rates and implements a capitalization rate.

Determining whether your property is over-valued can be based upon determining which approach is more accurate considering overall market factors and other information.  Attorneys use these valuation methods and information germane to the subject property to negotiate with assessors to explain why the value of their client’s property should be reconsidered.  Frequently expert appraisers are retained to demonstrate to an assessor an opposing value for your property in an effort to reach resolution and a resulting property tax reduction or refund check.

Q:  Who can appeal the real property taxes assessed against a property?

A:  Any person with an interest in property may file a petition to contest or determine the validity or amount of property taxes assessed against their property.  Landowners typically bring such a petition.  However, tenants of commercial properties may hold this right especially when the lease obligates the tenant to be responsible to pay part or all of the property taxes. 

Q:  How do I appeal the real property taxes assessed against my property?

A:  Real property tax petitions are filed in the district court of the county where the taxes are levied.  Petitions may claim the property has been assessed a value that is unfair or not uniform to other similarly classified nearby properties, assessed at a value greater than its actual value, improperly classified, or that the tax levied is not proper or the property is exempt from taxation. 

Section 278.01 of the Minnesota Statutes sets forth the procedure by which the petition must be properly filed with the court and served upon certain governmental offices.  The deadline to complete such filing and service is on or before April 30^th of the year in which the tax is payable.  Petitions that are not timely served and filed are subject to automatic dismissal.  Property owners or petitioners must also timely pay the property taxes owed on their property that is subject to their petition or it will be automatically dismissed, as well. 

Q:  What is the litigation process after I timely file and serve my real property tax petition?

A: Section 278.05 of the Minnesota Statutes requires petitioners of income-producing property to disclose certain information to the assessor within two months after the petition filing deadline.  The so-called “60 Day Rule” mandates that income and expense information including, but not limited to, two (2) years of year-end financial statements, rent rolls, and proposed budgets must be provided to the county assessor by June 30^th after the filing of the petition.  Petitioners who fail to comply with this provision may have their petition subject to automatic dismissal. 

Months after filing your petition, the Minnesota Tax Court assigns a trial date or what is commonly referred to as a “first setting” trial date to your case.  Attorneys generally endeavor to provide the necessary information on an informal basis with the assigned assessor and communicate the proposed valuation reduction in negotiation prior to the first setting date to determine whether an agreement can be reached.  Sometimes the assessor will request an inspection of the subject property which should be arranged to allow all parties and counsel to view and discuss the current condition of the property.  Inspections raise another opportunity for parties to exchange information and attempt to reach agreement on the value of the property.

If the parties are unable to reach an agreement prior to the first setting trial date, petitioner must either reach agreement with the county to request a second setting trial date or be prepared to exchange appraisals with the county no later than five days before the trial date.  Assuming the parties are unable to reach agreement after setting a second trial date, the petitioner and county must obtain court approval before a third, and date certain, trial is scheduled.  Typically tax court judges will want to understand the status of the litigation and issues in dispute before determining whether to grant a date certain trial date.  In complex cases, judges may order a pre-trial in lieu of anther trial date to assist the petitioner and county to have sufficient time to consider a particular issue or issues that is precluding the parties from reaching an agreement. 

Absent agreement or dismissal, a petition is tried before a judge who issues a subsequent order with findings that determines the value of the property and other issues in dispute.  The Tax Court’s decision can be subsequently appealed to the Minnesota Supreme Court.