Like any mischievous Leprechaun, we all want to hang onto our hard-earned pots of gold. Here at Donohue, O'Connell & Riley, we treat the tax season with just as much vigilance. As our names suggest, the Irish blood runs deep, and we're not about to let anyone whisk away your wealth — especially not some pesky little green man or the old guy with long white hair and whiskers!
So, to celebrate St. Patrick's Day, here are three tax traps that a properly structured trust can help you avoid:
- State Income Tax
Forty-three states impose some form of income tax. In the Northeast, the top state income tax rates range from 3.07% in Pennsylvania to 12.7% in New York City. But certain jurisdictions exempt trusts from state-level income tax. New Hampshire trusts are exempt from all state-level income tax: capital gains, interest and dividends are not taxed while assets remain in the trust.
- State-Level Estate, Inheritance and Gift Tax
The majority of Northeast states impose a state-level estate tax on assets that exceed a certain threshold. Also, Connecticut has a gift tax and in New Jersey and Pennsylvania estates may be subject to inheritance taxes. New Hampshire is the only state in the Northeast without a state-level estate, gift or inheritance tax, meaning that your wealth will not face state-level penalties as it transfers to the next generation.
- Federal Estate Tax
The 2017 Tax Cuts and Jobs Act doubled the federal estate and gift tax exemption, and further adjustments for inflation mean that in 2020 a married couple will not pay federal estate taxes on assets less than $23.16 million (the exemption threshold is $11.58 million for individuals). You can leverage this opportunity to fund a New Hampshire-based trust. In addition, assets held in New Hampshire "dynasty" trusts minimize taxes paid on amounts transferred to the next generation. This allows trusts to continue in perpetuity, saving families significant expenses as well as time in court. With this provision "sunsetting" in 2026, now is the time to leverage this law's ability to fund a New Hampshire-based trust.
“Lá Fhéile Pádraig sona duit!” ("Happy St. Patrick's Day!")
March 17, 2020
If you own a residence in another state and you are under the impression that all you need to move your domicile to a “Sunshine State” is to get a Driver’s License with your new mailing address or register to vote, think again.
High-tax states, such as New York, New Jersey, Connecticut and Massachusetts, make it quite complicated and consider a long list of both hard and soft factors that govern domicile and residency.
It is important to realize that domicile controls for estate tax purposes, whereas residency controls for income tax purposes.
Most people are concerned about both to some degree, but particularly for New York residents, the estate tax issue is a big one. In New York, if you have an estate just slightly north of the $5.7M threshold, known as the “cliff”, New York will tax your estate from dollar zero forward.
In line with our focused on foresight theme for 2020, consider this real life story as a lesson to understand the myriad of domicile requirements.
We have a client who passed away recently. We will refer to him as Lou Patterson for illustration purposes.
Lou Patterson thought he had done everything he needed to do to claim Florida as both his residency and domicile, but he didn’t satisfy all of the requirements and New York still considered Lou a New York domiciliary for estate tax purposes.
Lou traveled a lot for work and stayed out of New York adequately to claim Florida residency, over 183 days, the bright-line test for residency. As a Florida resident, he filed as a Florida resident for years, so he assumed he would be a Florida resident for estate tax purposes as well. Turns out, even though his residency transfer was successful for income tax purposes, he failed to cut ties sufficiently with New York for estate tax purposes.
He was found to be a New York domiciliary, based on keeping his house in New York, and maintaining his role as a partner at a New York City investment bank. This decision led to a whole series of tax filings and tax payments that would not have been necessary if he had done just a few things differently.
How does someone learn from this and avoid this financial surprise and headache for themselves? Unfortunately, high-tax states such as NY, NJ, CT and MA do not have a bright line test. Instead, they keep people guessing and have busy auditing departments who use a long list of circumstances to build their cases.
Short of selling everything and leaving the state forever, they do not want anyone to have 100% certainty that they will not have to pay estate taxes, and have been known to find creative ways to enforce domicile such as cell phone geo location records, EZ-pass transactions and credit card transactions.
For those who call two or more states “home”, consider scheduling an appointment with one of our attorneys to discuss how to mitigate your risk based on our experience with many of these cases.
You can also refer to our Residency vs. Domicile Checklist, and our more in depth articles; Snowbirds: Establishing Residency for Income Tax Purposes and Evaluating New York and Florida’s Domicile Laws for Spouses .
February 19, 2020
Having only recently gained 20/20 vision after being born severely nearsighted, Joe Donohue, managing member of Donohue, O'Connell and Riley, understands the value of clarity. For him, it's a gift. The ability to see clearly is something he's been working toward his entire life, both personally and professionally.
The ability to foresee what lies ahead as a person grows old gives him or her peace of mind. When it comes to preparing for the late-in-life trials and tribulations, having a clear plan is truly a gift to everyone involved. Statistically, most people will not die from a tragic, unexpected death, but instead the slow, degenerative nature of aging. Many of their lives will end in an institution with someone taking care of them.
Will You Be Prepared?
The sad truth is that many people are not prepared. They do not take the time to think ahead earlier in life when it matters most. Far too many people have not established who, if anyone, will be supporting them throughout the aging process, leaving them isolated and vulnerable.
Donohue remembers a striking example of an elderly husband and wife who died within a short time of each other. They were a symbiotic couple. She was hard of hearing, and his vision was weak; when he would drive, she would tell him when to turn. They did everything together but had nobody around to support them as they got older – and they had no plan in place. One day, the husband tripped and fell on the wife as they ascended the stairs. They both suffered head trauma, ended up in a nursing home, and died within six months of each other. What was supposed to be a simple outing turned tragic because they lacked a support network. They had nobody around to help them with simple chores and had made no arrangements for themselves as they aged.
Many older people need a lot of assistance to stay independent. They need someone to help keep up with the various bills that will continue to come no matter their ability to manage them. Too often, a medical emergency happens at night, and the elderly patient has to leave the house unexpectedly. Without a plan in place, the house is left unoccupied, which can lead to all kinds of added woes down the road. It's upsetting enough to deal with the trauma of a hospital visit but to have to deal with the further stresses of a burst pipe or a break-in only adds insult to injury.
Our estate, tax and elder law practice ensures that our clients have the appropriate documents in place, so there's always someone advocating for them. Our "Support Circle" strategy makes sure there will always be someone else who's aware of the "big picture." With over 100 combined years in practice, we have seen almost every scenario; our value to you is the foresight we've acquired. We'll help you gather all the necessary information, allowing us to provide you with a clear and bright path forward.
Visit our website or call Donohue, O'Connell & Riley at 844-50-TRUST (844-508-7878).
January 23, 2020
Donohue, O’Connell & Riley, PLLC is proud to be sponsoring the Exeter Riptide 12U Girls Softball Team as they celebrate their incredible 2019 season, culminating with winning the District Championship for the first time ever at the 12U age group, as well as winning the Litchfield invitational tournament. Joe Donohue’s daughter plays 1st base for the team.
Their dream season has become even more exciting as the girls were one of two teams invited to represent New Hampshire at the Babe Ruth World Series in Florida July 27-August 2! Our firm is contributing to their fundraising efforts to cover travel expenses for the trip to Florida. If you would like to donate, please click below:
July 23, 2019
Donohue, O’Connell & Riley PLLC is pleased to announce the acquisition of Mann, Mann & Lewis, P.C., welcoming their Nyack-area clients into our estate, tax and elder law practice in Pearl River, New York and growing our Rockland County presence.
Partners Joseph M. Donohue and Kristin A. Canty met attorneys Orville H. Mann, Jr. & Robert P. Lewis, Jr. through colleagues and found common ground in our longstanding Rockland County legacies and a deep commitment to helping families in the community with quality estate planning, tax and elder law services. Together, we are ensuring a smooth transition of cases and files.
Our team has advised thousands of clients on how to structure their affairs and businesses in order to minimize taxes and assure the smooth transfer of wealth between generations. This merger gives Mann, Mann & Lewis clients the opportunity to benefit from both our local presence and regional scope. With attorneys admitted in New York, New Jersey, Connecticut, Massachusetts & New Hampshire, clients can access New Hampshire’s favorable tax laws (New Hampshire trusts pay no state-level income, estate or sales taxes).
Since life is constantly evolving and keeping your estate plan up to date is of paramount importance, clients are encouraged to call the Pearl River Team of Donohue, O’Connell & Riley at (845) 735-5050 to schedule an appointment. Our legal team can review your documents to make sure everything is current and accurately reflects your wishes. You may also benefit from the latest tax legislation and Medicaid rules.
Our practice takes pride in our personalized approach to client service, so we look forward to a conversation to understand your unique circumstances and tailor our advice to best meet your current and long-term needs. As you know, planning early is critical to staying in control and protecting the maximum amount of assets possible. Your loved ones and your legacy depend on taking a proactive approach to protecting and passing on your life savings.
July 22, 2019