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Lawrence Scherer, Esq., CPA, LL.M. Taxation
The Generation Skipping Transfers Tax Trust – Multiple Generations… One Exemption
When asked about the greatest force in the universe, Albert Einstein, the world’s most preeminent physicist/mathematician, never thought for one second about the atomic bomb. Instead, he replied, “Compound Interest, of course.” That clarity in response makes great sense in the taxation area, as well. The concept of compounded interest relies on “Time.” Given a long enough period of time, any exemption from tax that applies today could grow to enormous sizes over time.
By way of background, it should be noted that there are, in fact, two estate taxes that the federal government has created. The first we are familiar with is called the estate tax. The second, which many people are not as familiar with, is called the generation-skipping transfers tax.
Both taxes use the same basic exemption amount, currently $13,610,000 per person. Almost all of us have heard that if they had taken the $40 worth of blankets and trinkets and invested that amount for the Indian tribe that gave up Manhattan Island, and if that investment earned only 7%, the Indian tribe could re-acquire today all of Manhattan with money left over. That is the power of time and compound interest.
As estate planners, it is often incumbent upon us to maximize the benefit for a client’s immediate family. However, for those of significant wealth, we may wish to multiply the accumulation of inter-generational wealth through applying an individual’s generation-skipping transfer tax exclusion.
While saving tax dollars is always a good thing, there is an immediate impetus for changing your estate planning documents in order to utilize the current $13.61 million, as both the sun-setting of the 2017 Tax Act and the promise of significantly curtailing generation-skipping transfers by one of the candidates for president may significantly reduce the benefits that are currently available.
The general rule for a generation-skipping tax exclusion is that a taxpayer can gift directly or through a trust a certain amount to or for the benefit of grandchildren or more remote descendants. In order to get the best benefit for a generation-skipping transfer, taxpayers should be looking to establish a trust that will benefit multiple generations, all as allowed by each individual state’s laws (the so-called “Rule Against Perpetuity”). Those rules define how long a trust can hold property before distributing the property to the grantor’s descendants. The laws in New York only allow a trust to delay vesting for a life in being +21 years. Each state sets its own Rule Against Perpetuities (the time when a trust must distribute its property to a human). Very often, the choice of law will give you the ability to defer the vesting for much longer than New York State. Some states have absurdly long periods of time, such as 350 or 1,000 years, or as applies in South Dakota and Tennessee, a trust can last forever.
Through the use of GST trusts, an estate plan can have tax savings as well as dynastic benefit.
House of Representatives Passes Medicaid Integrity Act
A bill introduced by U.S. Congressman Anthony D’Esposito (R-Garden City) that he says would protect Medicaid recipients recently passed the House of Representatives and is now on its way to the U.S. Senate.
The Medicaid Integrity Act would amend Title XIX of the Social Security Act to further require certain additional provider screenings under the Medicaid program. As part of the provider enrollment and re-enrollment process, state Medicaid programs would be required to check whether certain providers have stopped participating in the federal or state Medicare program or the Children’s Health Insurance Program (CHIP). This would be accomplished by using certain databases such as the Data Exchange system. Lastly, the bill would also require states to continue to check these databases at least once a month after providers have been enrolled.
Elder Law – Changes to Regulations Regarding In-Kind Support and Maintenance (ISM) Calculations Become Effective September 30, 2024
The Social Security Administration has revised the rules on In-Kind Support and Maintenance (ISM) calculations for Supplemental Security Income (SSI) recipients. The administration has updated the SSI regulations to remove food from the calculations of In-Kind Support and Maintenance (ISM). The new policy removes a critical barrier for SSI eligibility due to an applicant or recipient receiving informal food assistance from family, friends, and community support networks.
Trump May Seek to Use Impoundment Powers to Block or Reduce Funds Earmarked for New IRS Personnel
Part of the Trump impeachment trial was related to the apparent pressure he exerted on the Ukrainian President to investigate criminal activity by then-Democratic presidential candidate Joe Biden and his family. Trump threatened to withhold $400 million in military aid to Ukraine (which had been approved by Congress) if they did not investigate. The GAO (Government Accountability Office) found that the Trump administration, which eventually released the funds, violated the Congressional Budget and Impoundment Act of 1974, which bars presidents from withholding funds appropriated by Congress. Trump claims the Impoundment Act is unconstitutional and vowed to test the law if he wins a second term. Trump said, “I will use the president’s long-recognized impoundment power to squeeze the bloated federal bureaucracy for massive savings. This will be in the form of tax reductions for you. This will help quickly to stop inflation and slash the deficit.”
We could see a challenge to the money appropriated by Congress for additional IRS personnel. We will have to see how this plays out in the months following the election if Trump wins a second term.
High Income Earners May Face Two Additional Taxes
Higher-income folks may be subject to a couple of extra taxes, in addition to their federal income tax. The two taxes are the 3.8% net investment income tax (NIIT) and a 0.9% additional Medicare tax. Having a high income may mean you owe one or both of these two extra taxes.
The NIIT – In addition to income tax, this tax applies to your net investment income. The NIIT only affects taxpayers with adjusted gross incomes (AGIs) exceeding $250,000 for joint filers, $200,000 for single taxpayers and heads of household, and $125,000 for married individuals filing separately. If your AGI is above the threshold that applies ($250,000, $200,000, or $125,000), the NIIT applies to the lesser of (1) your net investment income for the tax year, or (2) the excess of your AGI for the tax year over your threshold amount.
The “net investment income” that’s subject to the NIIT consists of interest, dividends, annuities, royalties, rents, and net gains from property sales. Wage income and income from an active trade or business aren’t included. Tax-exempt income (such as tax-exempt bond interest), is likewise exempt from the NIIT.
For our members and their families, please note that the NIIT applies to home sales. If you sell your principal residence, you may be able to exclude up to $250,000 or $500,000 for joint filers when figuring your income tax. This excluded gain isn’t subject to the NIIT. Any gain that exceeds the exclusion limit is still subject to NIIT tax. Additionally, distributions from retirement plans are not subject to NIIT.
The Additional Medicare Tax – In addition to the 1.45% Medicare tax that all wage earners pay, some high-wage earners pay an extra 0.9% Medicare tax on part of their wage income. The additional 0.9% tax applies to wages in excess of $250,000 for joint filers, $125,000 for married individuals filing separately, and $200,000 for all others. It applies only to employees, not to employers. The extra 0.9% Medicare tax also applies to self-employment income in excess of the same amounts for high-wage earners. This is in addition to the regular 2.9% Medicare tax on all self-employment income. The $250,000, $125,000, and $200,000 thresholds are reduced by the taxpayer’s wage income.
In addition to being a co-founder of the LIAFPN, Larry Scherer has a strong background in Trust & Estates and Elder Law and serves as Managing Member of Scherer & Pudell, PLLC, a transactional law firm in Garden City, NY. He can be reached at (516) 747-7007.
