News, Tax Savings, Tax Exemption, Estate taxes

Retirement Landscape: Estate Taxes


The quality of your retirement can be impacted by state-level taxes, such as income, sales and property taxes. Taxes tend to lead to inflation, meaning the cost of living trends higher in high tax states. Your spending power will thus be greater in states with low state taxes. Retiring in a state with high taxes, such as California where income taxes alone range up to 13%, means paying a large chunk of your retirement income to the state, diminishing your spending power. Consider how you plan to spend during retirement; do you prefer to make your home a vacation destination for others, or do you want to be the one travelling? If the latter, putting down roots in a small home in a state with low taxes may give you the financial freedom you want to see the country or the world. 

Still another factor to consider is the taxes payable upon death, commonly called estate taxes or inheritance taxes. An estate tax is based on the value of the decedent’s gross estate (all the real and personal property the decedent owned); whereas an inheritance tax is based on the relationship between the decedent and the beneficiary. The chart on the right identifies the states with a state-level death tax. Estate taxes are highest in Washington, which currently has a 20% estate tax on estates over $11.2 million. Other tough tax jurisdictions include Vermont, New York, Massachusetts, Rhode Island, Maryland, Oregon and Hawaii. Retirees who have family in these states may benefit from maintaining a primary residence in a low tax state, with a second home in the higher tax state.

Six states have an inheritance tax: New Jersey, Pennsylvania, Maryland, Kentucky, Nebraska and Iowa. Although bequests to spouses are exempt from inheritance tax, bequests to children, siblings, nieces and nephews, cousins, or close friends may bear a high tax. Crossing the border to a state without an inheritance tax can save your loved ones hundreds of thousands of dollars. For example, a niece who inherits from an aunt who passes away in New Jersey with a $5 million estate will pay approximately $750,000 to the State of New Jersey; however, if the same aunt died a New York resident, there would be no inheritance tax liability. 

Another way to take advantage of tax-friendly jurisdictions is by establishing a trust in that state. In New Hampshire, trusts are exempt from state-level income, sales and estate taxes. Consider again a woman living in New York or New Jersey with a $7 million estate. If she were to transfer her investments to a New Hampshire trust, her niece could inherit from the trust without having to pay estate or inheritance tax. Often people find that the tax savings they enjoy by establishing a New Hampshire trust more than pay for the costs and fees associated with setting up and maintaining the trust. Each individual’s circumstances are different. Working with your investment advisor and accountant, our attorneys can create a custom estate plan that will maximize your spending power in retirement and help you navigate your own retirement map.




January 18, 2021

News, Tax Savings, Tax Exemption



Strategies to Reduce Gift/Estate Tax Uncertainty

Many of our clients have had their eyes on the election and may be rightly thinking about the need to update their gift and estate planning. There is already an open discussion about a rollback of the 2018 Trump tax cuts in the Biden camp. If Biden’s win is confirmed, and if those sympathetic to Biden’s policy proposals gain control of both houses of Congress, the current generous gift tax of exemption $11.58M, or $23.16M for a married couple, could easily be reduced by 50% or more. Currently, the balance of power will be decided by a run-off election for Georgia’s two senate seats, which won’t be decided until January 5th, potentially too late to make a decisive move.


To counter this uncertainty, consider a strategy that allows you to “freeze” the current generous gift estate exemption: the gift of a promissory note. An individual can promise to make gifts to donees in the future through such a gift. This promise to make the transfer in the future allows the donor/promisor to take advantage of the current $11.58M estate tax exemption, while still having possession and control of the funds or property.

Normally, a promise must be supported by some consideration and show mutual assent by the parties to be enforceable. Nevertheless, for gift tax purposes, a transfer may constitute a gift even if the property is transferred for less than adequate and full consideration in money or money’s worth. 26 U.S. Code §2512. Additionally, a gratuitous transfer of a legally binding promissory note is considered a completed gift even though the donor is solely making a promise to gift property in the future. Rev. Rul. 84-25. These gifts should be timely reported on a Form 709: “United States Gift (and Generation-Skipping Transfer) Tax Return.”

Whether this gift strategy will ultimately reduce the estate tax burden will depend in part on whether the taxpayer dies within 3 years of making the gift. If so, the IRS can successfully “add back” the tax burden to the decedent’s gross estate. Gifts made shortly prior to a person’s death are normally considered “gifts in contemplation of death”; in other words, a gift of property made by a person expecting to die soon. If the gift is considered to be made in contemplation of death, the gift will be included in the value of the decedent’s estate for federal tax purposes, which could result in taxation if the estate tax threshold is lowered significantly.

A potential solution to this issue may be a self-cancelling note. This instrument works similarly to a typical installment note, in that payments are made to a person or a trust periodically over a specified period of years. But, unlike a classic installment note, a self-cancelling note includes one or more provisions for automatic cancellation of the unpaid balance at the death of the seller/donor. Therefore, if the donor dies before the specified period, the property is transferred, and the value is removed from the decedent’s estate. If the donor lives beyond the period over which payments may be made, the “cancel at death” provision(s) are not triggered.

Some states have similar provisions to the federal 3-year-period explained above. One example is the State of New York, where there is no gift tax. Here, New York Tax Law § 954 (a) (3) includes in a New York resident’s taxable estate the amount of any gift made during the three year period before the decedent’s death, but not including any gift made: (a) by a non-resident of New York state; or (b) before April 1st, 2014; or (c) between January 1st, 2019 and January 15th, 2019; or (d) that is real or tangible personal property having an actual situs outside NY state at the time the gift was made. This provision is set to expire on January 1st, 2026, in line with current Federal law.

Another strategy is to make the promissory note payable to an irrevocable trust for the benefit of the donees. In this case, the donor could promise to pay or give property to a trust for the donee’s benefit. The note would then be delivered to and enforceable by the trustee of the trust. Even though the beneficiaries of the trust are the ultimate recipients, they should not be considered to have received an indirect gift to the trust for gift tax purposes. If the note is payable to a trust created by the donor, the trust could be structured as a grantor trust for income tax purposes. 26 CFR §1.671-2 (e) (2). Consequently, neither the donor nor the trust should be taxed on the interest on the note. Rev. Rul. 85-13.

Carefully implemented, this gift tax strategy can allow you to benefit from the current gift tax exemption, without losing control of assets, and may allow you to reduce your estate tax burden significantly. Contact us to see if this simple but effective strategy could be right for you.

November 16, 2020

News, 529 College Savings Plan, Home Equity, higher education

Strategies to Pay for Higher Education


The cost of higher education can be daunting. Whether your children plan to attend trade schools, community college, four-year bachelor’s degree programs or even graduate or professional schools, finding ways to make higher education costs fit your family’s budget can be challenging. Many parents know about the basic approaches to paying higher education – scholarships, grants, loans, work study etc. – but few find additional options. Luckily the strategic solutions here can help you fund your children’s education expenses while continuing to prioritize retirement savings.


529 College Savings Plan

A 529 College Savings Plan is a commonly used tax-advantaged financial tool that helps many parents and students save and pay for education programs. The most common tax advantage associated with 529 plans is the ability to make tax-free withdrawals from the account for any qualified education costs, including costs for primary and secondary education and books, fees, room and board at the college and graduate school level. In addition, a 529 plan can be a useful tool in estate planning, since assets in 529 accounts do not count toward your taxable estate but are still under your control. Some states also offer limited tax deductions for setting up these accounts, and contribution limits vary from state to state.


Home Equity

Using home equity is a popular way of paying for college. Refinancing your home or taking out a home equity line of credit can give you enough liquidity to cover education expenses. It is important to note, however, that this strategy can be risky. If you are counting on using your home equity to supplement retirement income, using it to pay for a child’s college could put those retirement plans in jeopardy. It is useful to remember that borrowing to finance education is much easier than borrowing to finance your retirement.


Life Insurance

One way of saving for education expenses is paying for them through withdrawals from an existing life insurance policy. Holding a whole or universal life insurance policy is an excellent, low-risk way to protect your family in the event of your death, but it can also be used as a tax-free savings account. Whole life policies accumulate a cash value over time, against which you can borrow money. The cash value stored in your life insurance policy is usually not considered in financial aid calculations, so it is possible to tap into that cash value without reducing your student’s financial aid award.


Employment at a Parent’s Business

If you happen to own a business, employing your child can be a smart way of transferring them money tax-free for their college education. The annual individual income tax exemption as of 2020 is $12,400. This means that if you employ your child starting at age 14, you can pay them nearly $50,000 tax free to go toward college before they step on campus. You can also keep them on the payroll throughout their time at college and even graduate school for additional tax savings. If you are a business owner in a relatively high tax bracket, redirecting some of your salary to your children can save you thousands in taxes and effectively make higher education costs nearly 100% tax deductible. Of course, the child should perform meaningful work for the business, and must be compensated fairly.


If these any methods apply to your situation, they could dramatically reduce the cost of higher education for your child. For more details about how these strategies could help you, we recommend scheduling an appointment with an attorney at Donohue, O’Connell & Riley, and be sure to take a look at our upcoming higher education puzzle booklet at


By Carla Vercellone and Peter O’Keefe (Legal Interns at Donohue, O'Connell & Riley)

September 3, 2020

News, covid19, lifetime giving, asset relocation, charitable contributions, roth conversions, harvesting losses

When the Skies are Grey, Look for Silver Linings


The Coronavirus has formed a dark cloud over the economy but may offer a silver lining for savvy clients. The downturn has created an opportunity for you to use proven strategies to reduce your tax burden and preserve your wealth.

Lifetime Gifting

During a downturn in the market, you can reduce or eliminate estate taxes by gifting to loved ones (or trusts) assets which are likely to appreciate in value. For example, now is an excellent time for anyone who owns a business to do succession planning. Transferring fractional shares of the business to the next generation is a timely strategy. You can transfer minority shares at a discount thereby using less of your lifetime gift exclusion than you would if you transferred the same assets at their full value. This is an easy way to reduce the size of your taxable estate while still maintaining control of key assets.

Relocate Assets

Asset location is often more important than asset allocation. Moving assets to a trust in a tax-friendly state, such as New Hampshire, might allow you to avoid state-level taxes, which can be severe. In New York, for example, estate taxes can be as high as 16%, and income taxes can be as high as 8.79% (throughout the state) or 12.7% (in NYC). The right asset location can significantly reduce your tax burdens and help you to build and secure your families’ wealth.  

Charitable Contributions

You can assist your favorite charitable organizations by creating a charitable lead trust or a charitable remainder trust. If you have investments that are generating interest and dividends that you do not need, a charitable lead trust may be right for you. With a charitable lead trust, the charity receives a payment from the trust during the term of the trust, calculated as a percentage of assets. At the end of the term, the assets in the trust transfer to non-charitable beneficiaries, such as family members. The benefits are threefold – your favorite charity receives a stream of donations, you reduce your income tax, gift tax and estate tax liability, and the underlying assets are ultimately preserved for your family members.

On the other hand, if you wish to receive a steady stream of income, a charitable remainder trust may be the better option. With a charitable remainder trust, you receive a fixed payment during the term of the trust, and at the end of the term the assets transfer to a charity. This is a preferable option where you have assets that have highly appreciated, but are not generating significant dividends, such as concentrated appreciated stock holdings. If you were to sell those stocks, you would pay significant capital gains tax. Assets sold while in a charitable remainder trust, however, are not subject to capital gains taxation, and therefore you can “swap” appreciated stock for a more diversified portfolio, creating an income stream for yourself while minimizing capital gains tax. Ultimately the assets transfer to a charity, which helps to reduce your estate tax liability as well.

Harvest Losses and Rebalance Portfolio

You can take advantage of the market downturn by harvesting losses in positions that have declined in non-retirement accounts. Capital losses can offset other income, up to $3,000 a year. Capital losses can also be used to offset capital gains to an unlimited extent. They can be carried forward if not used in a given calendar year. When rebalancing and diversifying a portfolio, having these losses in store to offset future gains can be a wise move. Talk to your investment advisor about prudently implementing this strategy.

Roth Conversions

In a traditional IRA, your contributions are taxed on the way in, but not the way out. In a Roth IRA, it is the opposite. You pay taxes on your contributions, but not on what you withdraw. For many people, due to the current circumstances, it might be better to pay the taxes now and avoid them later. This move might make sense for you for a number of reasons. The first is that markets are temporarily depressed at the moment. That means that when you convert your assets from a traditional IRA to a Roth IRA, you will pay taxes on that depressed value, meaning less taxes overall. Additionally, those assets are expected to bounce back, so after you convert to a Roth IRA, you will avoid paying taxes on the value your assets gain. Another reason to convert is if your income is lower this year due to the crisis. You will have to pay income taxes when converting, but if you convert during a year when your other income is lower, your overall tax burden will be less. It may seem counterintuitive to intentionally pay more taxes this year of all years, but in the long run, converting to a Roth IRA might be the best option for you and your family if you have at least ten years to go before retirement.

We Are Here To Help You

If you and your loved ones are looking for opportunities to minimize your tax burden and preserve your wealth, consider reaching out to Donohue, O’Connell & Riley. We are here to help you get through these challenging times together.

June 25, 2020

News, covid19, CARES Act, SECURE Act

How the 'SECURE' and 'CARES' Acts Have Changed IRA Withdrawal Rules


At the end of 2019 and now in the midst of the COVID-19 pandemic, Congress passed two laws that may affect the way our clients enjoy their retirement. These laws were the Setting Every Community Up for Retirement Enhancement (‘SECURE’) Act and the Coronavirus Aid, Relief and Economic Security (‘CARES’) Act.


Congress presented the SECURE Act as a way to encourage small employers to offer retirement plans; but the law may also affect you and your loved ones’ retirement account particularly regarding required minimum distributions and inherited IRAs.

The SECURE Act has changed regulations for those born after June 30, 1949, allowing such seniors to delay taking their required minimum distributions until April 1st of the year they reach 72.

If you fall under that age group, you can allow your assets to grow for an additional year and a half without taking withdrawals. Additionally, SECURE allows you to continue to contribute to your IRA after the age of 72, even while you are required to withdraw.  You can still, if necessary, withdraw at any time after age 59 ½ without a penalty, other than paying taxes on the amount withdrawn.

Additionally, another change brought by the SECURE Act is for inherited IRAs. These must now be entirely withdrawn within 10 years of the death of the initial owner, as opposed to allowing withdrawals based on the beneficiaries’ own life expectancy under the previous regulations.

This restriction only applies to those retirement plans inherited after 2019 and there are certain exceptions. This new inherited IRA rule doesn’t apply to spouses of the deceased owner who can continue to convert inherited IRAs to their own ownership. Additionally, minor children, individuals with disabilities and chronic illnesses, and those who are up to 10 years younger than the original owner can continue to stretch withdrawals based on their own life expectancies.

The SECURE could also affect your trust, especially if you have a Conduit trust. In Conduit trusts with at least one non-eligible designated beneficiary, SECURE’S 10-year limit for distributions applies. On the other hand, if the beneficiary falls under one of the exceptions mentioned earlier (spouse, minor children, etc.), the withdrawals can be based on the beneficiary’s life expectancy. We recommend you look at this website and this website for more details.


Dealing with the COVID-19 pandemic, the CARES Act made it so there is no required minimum distributions for 2020, and loosened withdrawal regulations for those under the age of 59 ½ who have been effected by COVID-19.

Though these changes will only be applicable for this year, they might make life easier for those whose incomes are down during the crisis.

If you, your spouse, or a dependent has been diagnosed with COVID-19 or suffered adverse financial consequences due to the coronavirus, you can withdraw up to $100,000 before the age of 59 ½ and not be subject to the usual 10% tax. You can also report withdrawals of up to $100,000 as income over three years or treat such withdrawals as a loan to be repaid within three years with no taxes paid.

Even if you’ve already taken a distribution for 2020, you may be able to rollover the distribution to an IRA or eligible retirement plan under certain circumstances. These circumstances include, the rollover has to be within 60 days of the distribution (the IRS extended this until July 15, 2020 for distributions taken within Feb 1 and May 15, 2020), the distribution can’t be from an inherited IRA, and you can only do one 60-day rollover per 12-month period.

We Are Here To Help You

If you and your loved ones are looking for ways to supplement lost income during this very unusual year, or use these new regulations in a smart way, consider reaching out to Donohue, O’Connell & Riley to see how you might be able to take advantage of these new opportunities.

June 18, 2020