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    Year End Estate and Gift Tax Planning Considerations

    As the New Year approaches, there are a number of planning techniques that individuals should consider implementing before December 31, and after the first of the year, to take advantage of estate and gift tax savings opportunities. 


    Gifts to Individuals

    Individuals may limit the growth of their taxable estates by making annual lifetime gifts. The 2017 limit on such gifts is $14,000 per donee per year.  In addition, in 2017, married couples can gift up to $28,000 to each donee in 2017, if each spouse gave the limit individually or if the donors agree to split joint gifts for tax purposes.  In 2018, this limit increases to $15,000 per done per year ($30,000 for married couples who agree to gift split).  It is important to remember that a donor is not limited to a certain number of annual exclusion gifts every year.  By making annual gifts to multiple beneficiaries, individuals may transfer significant wealth over time.  The gift is considered to be made on the date the donee receives the gift.  However, in the case of checks, the donee must cash the check before the end of the year.  Since the gift tax annual exclusion is based on a calendar year, individuals also may wish to make 2018 gifts in early January 

    Individuals interested in creating or adding to 529 Plan accounts for children or grandchildren should make the contributions before year-end and consider front-loading the accounts with five years’ worth of annual exclusion gifts. 

    Individuals wishing to pay a beneficiary’s medical or educational expenses should make payments directly to the institution, not to the individual.  If the payments are made this way, they will not be counted against the donor’s annual or lifetime gifting limits, so the donor can do both. 

    The federal estate, gift and generation-skipping transfer (GST) tax exemptions are each $5 million per individual ($10 million per married couple), increased for inflation. After adjusting for inflation, the exclusion amount for deaths in 2017 is $5.49 million and for deaths in 2018, the tax-free amount will be $5.6 million per person. Utilization of the $5 million exclusion provides significant opportunities for lifetime gifting beyond the annual exclusion, educational and medical care gifts outlined above.  Lifetime gifting is an effective strategy for the tax-efficient transfer of wealth because gifts remove future appreciation on transferred assets from an individual’s taxable estate.  In states like Massachusetts where there is an estate tax, but not a gift tax, individuals can reduce their state-level estate taxes if they transfer assets through gifts instead of relying on testamentary transfers.

    Although the current federal estate and gift tax laws were enacted with the goal of providing permanence to the federal transfer tax laws, it is possible that changes could be on the horizon. President Trump’s plan for tax reform includes the repeal of the federal estate and generation-skipping transfer (“GST”) tax.  At present however, Trump’s plan for reform does not include a repeal of the gift tax.  And it is unclear on whether Trump intends to reduce the “step-up in basis” that dramatically reduces the capital gains tax that heirs would otherwise pay when selling certain inherited assets.  The likelihood of these changes being enacted is uncertain; however, they are worth keeping in mind for the coming year.

    Gifts to Charities

    Gifts made to charities enjoy the dual benefits of reducing estate tax exposure and yielding current income tax deductions.  Such transfers must be effectuated on or before December 31 in order for donors to reap the tax benefit in 2018, when 2017 tax returns are filed and income tax is due to be paid.  It is important that donations be delivered to the charity before December 31, as the deduction is recognized on the date the charity receives the gift, not the date the check was written.  The tax benefits of charitable gifting can be enhanced by gifting appreciated assets.  By donating appreciated assets, the donor avoids capital gains tax that would have been realized upon a sale of the property.  The charity can sell the property and benefit from its value without paying this tax. However, if a donor sells the asset and then donates the proceeds to charity, the donor would be subject to the capital gains tax on the sale. 

    There are certain charitable giving techniques by which individuals can make charitable donations and obtain a charitable deduction, but retain an interest in the property for life or a certain term.  Depending on the individual’s goals, these can be structured in many different ways.

    Review of Estate Planning Documents

    It is advisable for individuals to review Wills, Trusts and other estate planning documents periodically. The end or beginning of each year is a good time for this.  When reviewing estate plans, individuals should consider these questions:  

    1.      Do the provisions still accomplish your goals?

    2.      Have your documents been updated to take advantage of changes to tax laws?

    3.      Do your documents contain provisions that provide asset protection to your children, grandchildren and other loved ones? 

    4.      Are the fiduciaries named (Personal Representative/Executor, Trustee, Power of Attorney/Agent-in-Fact, Health Care Agent) still appropriate? 

    5.      Are your Durable Power of Attorney and Living Will on file with family members and health care providers?

    6.      Have estate planning concepts, funeral arrangements and decisions on anatomical gifts been discussed with family? 

    7.      Are your life insurance policy and retirement plan beneficiary designations still appropriate and in line with your overall estate plan? 

    8.      Are bank accounts and other assets titled in line with your overall estate plan?

    9.      For business owners, are buy-sell agreements and the related valuations and life insurance policies up to date? 

    Please contact us if you would like to discuss any of these matters. 


    Year End Legal Issues

    We are now well into November and approaching the holiday season.  Before your social calendar kicks into high gear, we recommend that you schedule time to conduct an annual corporate review to make sure you are ready to roll into 2018.  The review should address the following topics: 

    1.           Annual Reports and Filings – Make sure that you maintain good standing in the jurisdiction in which you incorporated and any other jurisdictions in which you are registered to do business by filing all required annual reports.  Failure to keep up with these reports will cause you to incur additional costs and may result in the administrative dissolution of your entity.

    2.           Minutes – Prepare and file shareholder and director minutes for all transactions that were not undertaken in the ordinary course of business – new long term contracts (leases), executive salary increases, bonus plans or distributions, benefit plans, and shareholder or commercial loans.

    3.           Contracts – Are any of your contracts, including leases, up for renewal?  Do you need to give notice of termination or renewal?  It is wise to diary these dates in advance so you do not inadvertently miss a critical deadline.

    4.           Employment Policies – Update your employment manual to reflect any changes in the law.  A hot topic in Massachusetts are changes related to the new sick leave law. 

    5.           Loans – Review loan covenants for compliance as well as financial reporting compliance to prepare for Q1 2018. 

    6.           Tax Planning - Review tax planning and related issues with your accountants and legal advisors to ensure that any actions that you can take any necessary actions before the end of the year.

    Please feel free to reach out to us with any questions or if you wish to schedule time for a year-end review.  


    MassHealth: Potential Changes to Pooled Trusts

    The Massachusetts Medicaid program – MassHealth – has strict financial eligibility criteria.  For a single individual his or her assets cannot exceed $2,000.  In assessing financial eligibility, MassHealth also looks to the means by which the person spent-down his or her assets – penalizing gifts by imposing a one month disqualification period for every $10,000 gifted in the last five years.  Funding a pooled charitable trust, however, is not considered a gift for MassHealth eligibility purposes.  For this reason, pooled charitable trusts are a common means of preserving assets so they remain available to improve the quality of life of a MassHealth recipient.  In Massachusetts, there are several pooled trusts managed by non-profit organizations.

    The assets in the pooled trust must be used exclusively for the benefit of the beneficiary.  The funds are typically used for supplemental needs not covered by MassHealth.  Commonly this includes transportation to and from the nursing home, companionship services, recreational activities, occupational and physical therapies not otherwise covered, uninsured dental costs, additional nursing home expenses such as cable and personal and household items.  Pooled Trust funds enable the disabled elder to age in place by supporting home maintenance, real estate taxes and other expenses that public benefits do not cover.  After the person dies a percentage of the assets remaining in the trust go to the non-profit organization managing the trust.  The balance of the trust is paid to MassHealth to reimburse their payments for care.  If there are remaining funds, they can be distributed to the family, however there are rarely funds remaining.  Funding a pooled trust allows an individual to immediately qualify for MassHealth, while ensuring he or she has funds available to meet needs not covered by public assistance programs.

    Unfortunately, MassHealth proposed new regulations that would prevent disabled seniors over age 65 from funding pooled trusts.  The regulatory change would end the twenty-year policy of allowing disabled elders to use special needs pooled trusts to maintain their quality of life.  The regulatory change will affect seniors who already live with a wide range of physical, mental, cognitive and neurological conditions.  The proposed regulations will also harm MassHealth – which is reimbursed for payment care from the funds placed in the pooled trust.  This recovery even extends to MassHealth benefits provided prior to the establishment of the pooled trust.  Annually this amounts to millions of dollars for the Estate Recovery Unit of MassHealth.

    In response to this proposed regulation, the Massachusetts chapter of the National Academy of Elder Law Attorneys, along with other pooled trust organizations, have encouraged state senators and representatives to file legislation to ensure that disabled seniors 65 and older would continue to be able to utilize these trusts.  The legislation is in the Health Care Finance Committee and had a public hearing on May 2, 2017.  House Bill H2074 and Senate Bill S629 propose to stop these damaging regulations.  To support this legislation, and in turn prevent the proposed regulations from being implemented, call your State legislator and ask them to contact the Health Care Finance Chairmen to move the bill out of Committee and continue the policy that has been benefiting disabled seniors in the Commonwealth for many years.


    Health Care Proxies: Create the Document, Have the Conversation

    In Massachusetts, communicating and enforcing our health care wishes is a two-step process. First, we must have the document. Under our state laws, a health care proxy must be in writing and executed properly. In cases where you want a group of people to have input, or where there is no family to step into this role, a "caring committee" is a good option to consider.

    A Massachusetts health care proxy becomes effective when a doctor determines that you are no longer competent or can no longer communicate your wishes. At that point, your health care agent can make any decision that you could have made when you were competent. While many people have a written living will, indicating their wishes for end of life and emergency medical care, it is important to remember that, in Massachusetts, this document is not enforceable.

    Once your health care proxy has been executed, it is important to move on to the second step - have the conversation. In preparing to talk with family members about your end of life and emergency health care wishes, spend some time considering just what your wishes are. Our clients have found the following sites to be helpful resources during this process:

    Couples should spend some time making sure that they understand each other's wishes. Each of us should gather those likely to be most impacted by our future illness for an honest conversation - significant others, adult children, parents, siblings, successor health care agents. While the conversation can be in person, by Skype or Facetime, or on a conference call, it is helpful to share with everyone at once. This gives those we love important information about what we would and would not want, but also gives them a group of people who have also had the conversation with us, and who can help support the health care agent as he or she is making challenging decisions.

    Ideally, each of us will revisit this conversation with our families regularly - many families plan to discuss it annually, when they are together during the holiday season.

    If you are interested in talking further about health care proxies or other aspects of your estate plan, please call us at (781) 864-9977.


    Why Everyone Needs an Estate Plan

    The surprising truth that many of us don't realize is that we all have an estate plan in place, even if we haven't created one ourselves. Every state has a set of laws that dictates what happens if a person is incapacitated or dies without estate planning documents. That means that the choice each of us faces is not whether or not to have an estate plan, but whether we can do better than the one the state provides.

    The "intestacy laws" of Massachusetts provide that when a person dies without a will, assets are distributed among a surviving spouse, children, and sometimes parents, siblings or other relatives. The assets are distributed right away unless someone who gets assets is under age 18. If a minor is entitled to assets, the probate court keeps control over the assets until he or she turns 18 - at that point, they are given to the 18 year old outright.

    Where there are no estate planning documents, the probate court makes an effort to determine, often based only upon blood relationships, who should be in charge. This may be as a guardian or conservator of the person during their lifetime, as a Personal Representative after death, or as guardian of minor children after the death of the children's parents.

    The probate court will oversee all of this to make sure that the assets are distributed in accordance with the law and by the people it deems appropriate to be in charge. The records related to this administration will be available to the public to review. After about a year, the person in charge of the estate can ask the probate court to formally end the estate and end that person's obligation to the estate and the beneficiaries.

    There are times when this "ready-made" estate plan is not right for you:

    • If you want assets used for a person after your death, but not given to them outright.
    • If you want assets divided in a way other than the laws provide.
    • If you want assets that are left to your family to be protected from creditors.
    • If you want to name specific people to fill specific roles in your estate plan.
    • If you want to pay Massachusetts as little estate taxes as possible - ideally, none.
    • If you want the distribution of your assets to be private.
    • If you want to eliminate the need to deal with the courts entirely.
    • If you have a family member with special needs, an addiction or mental illness, or who receives public benefits.

    If any of these apply, you should have a customized estate plan for you and your family. If you are interested in talking further about your estate plan, please contact us at 781-864-9977.