The Annual Exclusion and Special Needs Trusts

Posted on April 21, 2009 by Mary W. Browning

Beginning in 2009, the annual exclusion amount increased to $13,000 per person. The annual exclusion is the amount that each person can gift to anyone each year without any gift tax or use of the $1 million gift tax exclusion.

In order to qualify for the annual exclusion, the recipient must have a present interest in the gift. A present interest means that the recipient receives the gift today and not in the future. Trusts can be drafted in such a way to qualify for the annual exclusion by giving the trust beneficiaries the right to withdrawal up to the annual exclusion amount each year. Any amounts not withdrawn will stay in the trust. This right of withdrawal is often referred to as a "Crummey" power, named after a court case of the same name.

Special needs beneficiaries cannot have Crummey powers because having the right to withdraw this money could disqualify them from governmental benefits they may be entitled to. Therefore, generally, gifts to special needs trust will not qualify for the annual exclusion amount and instead, will use part of the donor's $1 million gift tax exemption.

One way to use annual exclusions with special needs trusts is to add additional beneficiaries to the special needs trust. The grantor’s spouse or siblings of the special needs beneficiary can be added to the trust, and thus, given Crummey powers, so that annual exclusion gifts can be made to the trust using annual exclusion amounts available to these additional beneficiaries.

For example, if a father creates a special needs trust for his son, the father can include the mother as a discretionary beneficiary under the trust. The mother would also have Crummey powers, thus allowing donors to give up to $13,000 per year to the trust using their annual exclusion amounts towards the mother.

If tax planning is important to you, make sure you are maximizing tax planning opportunities by creating and funding a trust for your children with special needs using available annual exclusions.
 

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The Basics: New Jersey and Federal Estate, Inheritance and Gift Taxes

Posted on March 24, 2009 by Mary W. Browning

The federal estate tax is based on the value of one’s assets less liabilities at the person’s date of death. There are three important exceptions that are critical to understanding how the federal estate tax works. 

First, there is the unlimited marital deduction, which means that all of the assets one leaves to his or her surviving spouse are exempt from federal estate taxes.

The second important exception involves the estate and gift tax applicable exclusion. Under current law, the estate tax applicable exclusion permits you to transfer up to $3,500,000 at your death to anyone without incurring an estate tax. In 2010, the Federal estate tax is scheduled to be repealed, but only for one year. Starting in 2011, estates will once again be subject to estate tax at 2001 rates (top rate of 55%) with only a $1 million exemption available.

The federal gift tax applicable exclusion is fixed at $1 million and permits you to transfer that amount to anyone during your lifetime without incurring a gift tax. If you use any portion of the gift tax exemption during your lifetime, it is essentially subtracted from the $3.5 million exemption allowed at your death.

The tax law also allows you to gift up to $13,000 per year to anyone without using any part of your $1 million exemption. This is called the annual exclusion.

The third exception applies to certain qualified charitable organizations. In general, assets passing to charity are exempt from estate tax.

Currently, the federal estate tax rate is 45%. In 2010, the estate tax will be repealed. In 2011, the estate tax will return with a maximum estate tax rate of 55%. It is anticipated that Congress will consider new estate tax legislation in 2009.

Under New Jersey law, there is a state estate tax imposed on assets in excess of $675,000 passing to someone other than a spouse. The rates are range from 4.8%-16% (with the first $52,174 taxed at 37%).

In addition, there is a New Jersey inheritance tax for assets passing to someone other than a parent, child or grandchild. Any assets left to siblings or spouses of children would be subject to this tax at a rate of 11-16%, and any assets left to anyone else, as well as any amounts left in trust, would be subject to this tax at a rate of 15-16%. Estates subject to inheritance tax will receive a credit for the amount of inheritance tax paid against the New Jersey estate.

New Jersey does not impose a separate gift tax.

Although each spouse is allowed both the federal and New Jersey estate tax exemptions, Wills must be drafted in a particular way in order for each spouse to take advantage of his or her exemptions. If you do not have a Will, or if your Will is not drafted properly, the first spouse could be wasting his or her exemptions, which could result in more tax owed at the second spouse’s death and less assets being available to care for your child with special needs.

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