The Applicable Federal Rate (AFR) is a rate published monthly by the IRS for federal income tax purposes.
The IRS will treat any “loan” with a below market interest rate (below the AFR) as a gift of the foregone interest from the lender to the borrower. The amount of the foregone interest will be treated as though it was transferred from the lender to the borrower as a gift and retransferred from the borrower to lender as income on the last day of the calendar year.
Do you own a family business in Humboldt County? Be it in Eureka, Arcata or Southern Humboldt, succession planning for a family business raises a number of issues.
You should plan for the succession to your business over a long period. Primary concerns include determining your children’s interest in the business and their ability to run a business.
The California Legislature has proposed several Bills which if passed by both houses of the Legislature will have an impact on your estate planning.
1. Revocable Transfer on Death Deed (TOD). In Assembly Bill 699, the Assembly made another attempt to allow for the transfer of real property at death by the pre-death executing and recording of a deed. This is at least the fourth attempt by the Legislature to provide this opportunity for owners to transfer their property at death by way of a deed recorded prior to death. This estate planning tool could be very effective for persons whose primary asset is their family residence. This could eliminate the need for these persons to incur the expense of a revocable trust in order to avoid a probate upon death. Concerns that that this type of deed would be procured by fraud or undue influence have apparently kept the Legislature from providing this type of estate planning tool in its previous attempts.
Please remember if you are the successor trustee of a decedent’s estate you will have the responsibility of filing the decedent’s final federal income tax return for the tax year ended on the date of the decedent’s death. If the decedent was married at the time of death, the successor trustee may file a joint return with the surviving spouse for the decedent and the surviving spouse. If the surviving spouse remarries before the end of the year of the decedent’s death, a joint final return may not be filed.
In late May, the Internal Revenue Service adopted a new position regarding taxation of registered domestic partners in its Private Letter Ruling 201021048 (the “PLR”). See Pender, Kathleen, “IRS adopts state domestic-partner property law,” San Francisco Chronicle (June 3, 2010) available at SFGate.com. Previously, the IRS did not apply California community property principles to registered domestic partnerships in terms of federal tax law since “[t]he relationship between registered domestic partners under the California Act is not marriage under California law.” See IRS Chief Counsel Advice 200608038.
However, now the IRS will treat the income earned by California registered domestic partners as community property income for federal income tax purposes. This means that each partner must report to the IRS one half of the total income earned between the two partners, not just his or her separate income. While this does not change the format in which the domestic partners must file their California state taxes, it may have significant federal tax benefits for partners with very disparate incomes.
While Humboldt County residents should always periodically review their retirement plans and accounts as a part of their estate planning and business planning, now is a particularly good time to consider whether you should convert your traditional IRA into a Roth IRA.
As of January 1, 2010, a significant change occurred in the conversion rules for Roth Individual Retirement Accounts. The $100,000 adjusted gross income limit that has prevented many individuals from converting a traditional IRA to a Roth IRA has been lifted enabling all individuals to take advantage of conversion without any income or filing status limits.
For years estate planners have been extolling the virtues of a revocable trust primarily to avoid the need for a probate of a decedent’s estate. Now we have another reason to recommend a revocable trust to our client: the number of probate filing fees have significantly increased.
A provision of 2008’s Filing Fees legislation has significantly increased the number of probate filing fees for many probate proceedings.
WHAT WILL THE FEDERAL ESTATE TAX EXEMPTION END UP BEING?
Estate planners (and their clients) would like to know what Congress is going to do with the Federal estate tax exemption. For 2009, the estate tax applicable exclusion is $3.5 million ($7 million per married couple). The estate tax rate is 45%.
As we near the end of a 10-year piece of legislation, if Congress does not act, there will be no estate tax in 2010 and the Federal estate tax exemption will be $1 million ($2 million per married couple) in 2011.
A recent budget proposal of President Obama and the House of Representatives would extend the current $3.5 million exemption and 45% estate tax rate. In a narrow vote, the Senate passed an amendment to its version of the budget resolution that would increase the estate tax applicable exclusion amount to $5 million ($10 million per married couple). It’s believed the Senate version of the budget resolution is not likely to be successful because it is not supported by the Democratic leadership. Also, it is estimated that it would increase deficits by $91 billion in the first 10 years when compared with the cost of the President’s proposal. Tax Policy Center Table.
If you have questions regarding planning your estate to minimize the effect of estate taxes, please contact our estate planning department.