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
In 1969, Patrick and Ann Murphy became the proud owners of a lovely cottage on the easterly shore of Pleasant Pond in Bethel, Maine. They spent summers enjoying the peace of being surrounded by nature and dreamed of future generations making memories during their summer vacations and holidays.
Eleven years later, Patrick and Ann followed through on their vision and gave the Murphy cottage in equal 1/7 shares to their seven children with gift deed. That is when the trouble began.
The Murphy family is now celebrating 50 wonderful years of family gatherings and adventures and their great-grandchildren are truly blessed by their legacy. Though, as the current owners make plans to pass their shares to the next generation, they are taking responsible Estate Planning steps and would like other families to learn from their valuable experience.
For starters, had Patrick and Ann had consulted an attorney in 1969, they may have decided to transfer the property through a trust, instead of with a simple gift deed, which would have allowed their children to benefit from a step-up in basis.
Next, as these seven children made their marks on the world, many of them followed opportunities that led them away from home. Their children ended up living in states outside of Maine including New Hampshire, Massachusetts, Maryland and Arizona. This geography led to challenges since there was no formal management agreement in place. The owners relatively close-by in Massachusetts and New Hampshire were able to enjoy the cottage more, but were also disproportionately responsible for the labor-intensive responsibilities of maintaining a seasonal cottage. The more distant owners in Maryland and Arizona questioned why they need to make equal financial contributions to upkeep and maintenance since they weren’t able to spend as much time enjoying the cottage.
Then, in the mid-1990’s one of the siblings passed away suddenly and had not done any estate planning. Along with mourning the tragic loss of their brother emotionally, the extended family had to deal with complex, time-consuming, expensive intestacy proceedings in two states.
To complicate matters further, when four of the children decided to sell off their 1/7 shares, one of the children’s spouses volunteered as an attorney to handle the legal paperwork as a cost-savings favor to the siblings. Unfortunately, down the road minor issues such as missing spousal consent waivers required in Maine jurisdiction had major ramifications, so the family would have been better off doing everything by the book instead accepting the good faith effort of a family member.
When Molly, one of the two remaining owners with a 75% share, arrived at our firm to do her Estate Planning, she wanted to make sure the Murphy cottage would be saved as an important part of her legacy and passed on smoothly to her children and grandchildren. Our firm facilitated conversations with Molly and her brother Matthew, the other 25% owner, to bring their wishes to fruition.
Our firm coordinated with local Maine counsel and family members to run a full title search, execute corrective deeds, and transfer the property into the Murphy Cottage LLC with a clear governance structure.
The Murphy Cottage LLC established terms including:
- Schedule for contributions to the annual budget and a replenishment of the capital fund based on ownership share;
- Decision making guidelines for improvement projects;
- Cottage use rules of conduct to make sure everyone shows respect for the property and its natural setting;
- Fair labor compensation rates for members that have the time, skills and geographic ability to contribute to tasks such as opening and closing, moving docks and boats, and doing major projects such as building a deck, fixing the structural issues and repairing the rotted screen porch;
- Allocation and reservation process for prime weeks and procedure for owners offering their weeks to other family members for an agreed reimbursement fee;
- Succession plan for current owners to designate their direct descendant children as the family branch’s new owner in their individual Trusts;
- Buy-out clause for any owners that are delinquent and are not able to stay in good standing;
- Process for selling shares and option for sale of the entire property in the event that 2/3 owners are in agreement.
Thanks to Molly and Matthew’s efforts, future Murphy generations will be swimming in the pristine fresh water, playing with tadpoles and frogs, fishing for trout off the edge of the canoe, reading books on an Adirondack chair, hiking to the top of Mt. Baker for breathtaking views and drifting off to sleep to the eerie, beautiful calls of the loons.
If you have a summer home that you want to preserve as your legacy, contact us today.
March 15, 2019
There are a host of complicated terms associated with the legal practice of estate planning, but the Donohue, O’Connell & Riley team prides itself on making the process as simple for our clients as we can. Download our free comparison chart to learn if a Will, Revocable Trust or an Irrevocable Trust is best for you here.
February 26, 2019
The start of a New Year is a great time to plan ahead to save yourself and your loved ones time, money and stress. This easy-to-use checklist serves as a comprehensive guide for seniors, their families and caregivers as they consider all the legal, financial, personal and practical steps to proper advanced planning. We invite you to download and share this worksheet with anyone looking for an opportunity to live life to the fullest in the retirement years and prepare for the road ahead.
January 29, 2019
HAPPY NEW YEAR!
As you set goals and resolutions for 2019, organizing your affairs for peace of mind should be at the top of the priority list. Many clients and their families feel overwhelmed when they try to navigate the financial and emotional complexities of aging. We hope this Document Checklist gives you a solid foundation of helpful documents you’ll need to get your affairs in order, in the event of an unexpected health crisis. Please feel free to download and share with your family, friends and trusted advisors.
January 3, 2019