By Gregg Greenberg
Farewell to crypto winter and all its discontent. But what does crypto fall hold for retirement savers? Should they expect a comedy or another tragedy in the coming months? Discover here.
Where Will Crypto Head This Fall?
Your Crypto and NFTs Could Outlive You: Here’s How to Plan
By Leslie Quander Wooldridge, @lesliequander
Featuring Asher Rubinstein
Partner, Gallet Dreyer & Berkey, LLP
That piece of paper with your private keys isn’t going to cut it. So I talked with New York attorney and law firm partner Asher Rubinstein about estate planning steps to consider.
Do you know what will happen to your crypto, NFTS, or other digital assets when you die? And how you’ll pass along these assets to your heirs?
Or, if your loved one dies, and you’re the beneficiary, do you know how you’ll access your inherited holdings?
While estate planning may not be something we ponder on a daily basis, these are very real questions that we should be able to ask ourselves…
Read the Full Article on GDBLaw.com
2021 Year End Notes
By Asher Rubenstein – Partner at Gallet, Dreyer & Berkey LLP
As another unprecedented year comes to a close, we offer some planning tips to our clients, colleagues and friends of the firm regarding their assets, tax and estate concerns. Foremost, there are some time-sensitive ways to save taxes that could result in much more money for your family…
Alternatives to Naming a Child as Your Life Insurance Beneficiary
By Rebecca Shoenthal & Amanda Shih
Featuring Asher Rubinstein, Partner at Gallet Dreyer & Berkey, LLP
When you get life insurance, you name beneficiaries, the people who get the policy’s death benefit when you die. Most people name their spouse or partner as the primary beneficiary, but many want to name their children too.
That instinct makes sense: life insurance is meant to replace the financial support you give your family, including childcare costs. But, legal restrictions mean minors can’t actually be paid the death benefit, so it’s better to stick with an adult beneficiary. If you can’t name your spouse, naming an irrevocable trust ensures that the payout goes toward your child’s care….
Will Working From Home During COVID-19 Affect Your Taxes? For New Yorkers, Unlikely; For Other States, a Tax Battle Begins
Normally, working in New York City means that income tax will be due to New York State. This is true irrespective of whether the worker travels to the NYC job from the worker’s home within New York State or from home in New Jersey or Connecticut. New York State income tax is based on working at the job inside New York, even if one commutes to that job from one’s home outside New York State. If you live in NYC, you also incur NYC income tax.
But, what if you haven’t commuted to your job in NYC for many months because of the COVID-19 pandemic? What if your NYC office or employer has been closed and you’ve been working from home? What if you haven’t even set foot in NY State during the pandemic? What if your employer remains in NYC, but you’ve moved to Florida and work from home? Will you still have to pay income tax to NYS?
The answer is: Yes. You will still pay NYS tax if your employer is in NYS and you’ve been working from home, whether home is in New York or New Jersey or another state.
New York’s “Convenience of the Employer” Rule
The position of the New York State Department of Taxation is that for nonresidents whose primary office is in New York State, any days “telecommuting” during the pandemic are treated as days worked in the state unless the taxpayer’s employer has established a “bona fide employer office” at the telecommuting location. New York State has thus refused to adjust its state tax liability rules to account for the changing dynamic of working from home or “telecommuting” due to the COVID-19 pandemic.
In October 2020, the Department addressed the issue of nonresident withholding requirements for COVID-19 telecommuting. The guidance, posted on the Frequently Asked Question page of the Department’s website, provided that the same test established in 2006, the “Convenience of the Employer Test,” will apply in determining whether a taxpayer is subject to New York State income taxes when he or she is “telecommuting” due to COVID-19.
Because the Department’s recent guidance offers no special rules or exceptions relating to the COVID-19 pandemic, employees working from home because of COVID-19 will generally still be required to pay New York State taxes on income earned from a New York State employer, even if working from home outside of New York State. (Note, it is possible for the “bona fide employer office” requirement to be established. For example, if the employee’s duties require the use of special facilities that cannot be made available at the employer’s place of business, but those facilities are available at or near the employee’s home).
It is important to note that for purposes of New York State income tax, an employee’s home office is not the same as a “bona fide employer office.” Therefore, New York employers should continue to withhold New York State income taxes for their nonresident employees working from home, and such employees should expect to be subject to New York state income taxes.
NYC Income Tax is Based on NYC Residence
With regard to local income taxes, telecommuting has no effect on whether or not a taxpayer is subject to New York City Personal Income Tax (NYCPIT). This is because NYCPIT focuses strictly on residency, rather than the city or state in which the income was earned. Only NYC residents are subject to the New York City Personal Income Tax; nonresidents of NYC are not liable for NYCPIT (with one exception: employees of New York City Government agencies are subject to the NYCPIT regardless of their residency). Therefore, working from home due to the pandemic will not change a taxpayer’s NYC tax liability for purposes of the NYCPIT.
What if a taxpayer is a New York City resident but has lived and worked in her house in the Hamptons since the pandemic began? The answer depends on whether or not the taxpayer intended to change her residence, and there are different indicia of intent that will be examined in an audit. For instance, if the taxpayer kept her NYC apartment while living and working in the Hamptons, NYC income tax would likely still be due.
The following chart explains the tax implications for working from home:
The Tax Battles Between States Over Working From Home During Covid
The State of New Hampshire recently filed a lawsuit against its neighboring state of Massachusetts over a tax issue that has arisen from working from home during the COVID-19 pandemic.
Prior to the pandemic, residents of New Hampshire who worked for Massachusetts employers paid income tax to Massachusetts based on the number of days the New Hampshire residents worked within Massachusetts. If the New Hampshire residents worked from home, then Massachusetts would not tax income earned when working from home. If the New Hampshire resident worked from home one day each week, that would be a 20% reduction to the tax owed to Massachusetts.
But what if, as a result of the pandemic, the New Hampshire resident now works from home five days a week? Early into the pandemic, Massachusetts enacted a rule that froze the classification of income as sourced in Massachusetts, without regard to the new pandemic realities of working from home. As a result of the rule, the New Hampshire resident would only be allowed to deduct the same 20% as before the pandemic. Similar to New Jersey residents working from home and not setting foot in New York, New Hampshire residents are paying tax to Massachusetts when they no longer commute to work in Massachusetts.
New Hampshire has now sued Massachusetts over this issue, and the case will be heard by the United States Supreme Court. In one interesting argument, Massachusetts argues that the state of New Hampshire itself should not be allowed to sue as plaintiff, because any alleged harm is not to the state itself, but rather to the citizens of New Hampshire. Massachusetts also argues that it has always taxed non-residents on their Massachusetts-sourced income, and continues to do so, just as other states tax Massachusetts residents on income derived in those other states. This is the same reason why New York State taxes New Jersey and Connecticut residents on their income earned in New York State.
It is also interesting to note that New Hampshire, like Florida, Texas, and Nevada, does not have a personal income tax (but New Hampshire does tax investment income), which means that if New Hampshire wins the lawsuit, it would appear that its residents would not be taxed by either Massachusetts or New Hampshire on their “work from home” income.
The lawsuit between New Hampshire and Massachusetts is now before the United States Supreme Court. New Jersey and Connecticut, among other states, have filed briefs in support of New Hampshire’s position. The ultimate decision in this case will also affect whether New York can continue to reach beyond its borders to tax residents of other states who are working from home.
The COVID-19 pandemic has transformed the working world, as legions of people have been working from home and will continue to do so. In addition, multitudes of people have left New York City but remain tied to their NYC employers — meaning that they will continue to be taxed by New York State despite their relocation. Our tax and employment lawyers at Gallet Dreyer & Berkey, LLP continue to monitor the changing working dynamics and the resulting tax consequences and would be pleased to advise you.
How to Use Current Law to Save Significant Taxes and Get More Money to Your Family, Less to the IRS. The Law May Change as a Result of the Election.
The current exemption from federal gift and estate tax is at an all-time high ($11.6 million per person), which you should utilize now, before the favorable opportunity is lost. This is a way to get more to your heirs, less to the IRS, relatively easily.
- This exemption is scheduled to “sunset” in 2025, although Joe Biden campaigned to reduce the estate exemption to $3.5 million, and the gift tax exemption to $1 million, as soon as 2021. In addition, the gift and estate tax rate could increase to 45%. Any changes to the law could be retroactive to January 1, 2021.
- The IRS has stated that it will not “claw back” gifts made today, if the exemption is reduced in the future.
- This is a “use it or lose opportunity”. The exemptions have never been higher. Once the law changes, you will be limited to a much lower exemption from gift and estate tax.
- Example: You own a family business worth $10 million. You gift it to your daughter in 2020. No gift tax is due. Instead, you gift it in 2021. Assuming a $1 million exemption and a gift tax rate of 45%, you would owe $4,050,000 in gift tax: $10 million gift – $1 million exemption = $9 million x 45% tax = $4,050,000 in tax due. Same business, same gift, new year, $4 million to the IRS.
- If you’ve already gifted assets up to $5 million, you can now gift $6 million more, tax-free.
- Consider making such gifts in trust, which could provide tax benefits, family governance and asset protection from creditors.
- If you own a family limited partnership (FLP) or LLC, you can use discounted gifting to leverage even more than $11.6 million out of your taxable estate. Like calls to lower the gift and estate tax exemptions, politicians looking for revenue have also called for repealing the discounts on closely held entities like LLCs and FLPs. The strategy is currently available, legal and effective.
- We have additional strategies to get assets to the next generation with fewer taxes: Grantor Retained Annuity Trusts (GRATs), Qualified Personal Residence Trusts (QPRTs), Charitable Remainder Trusts (CRUTs), Dynasty Trusts and others. These trusts can be used for estate tax minimization, capital gains tax minimization, family management and asset protection. Please see our article, here.
Please contact us for more information.
Tax Increases After Election Day? Here’s What to Do Now
When the tax law changed in 2017, the benefits to taxpayers were expected to last through 2025. The favorable tax changes included an increase in the amount exempt from estate tax, from $5 million to $11 million per person, and a maximum capital gains tax rate of 20%. With the upcoming presidential and congressional elections, and calls by politicians to undo these favorable tax laws, our clients wonder what they should do now, before the tax law changes again.
Fortunately, there are many strategies that allow us to benefit from the current tax law, and to lower our taxes through already-proven techniques, before the law changes again. There is no new “magic button” tax remedy for Election Year 2020. Instead, tax lawyers can rely on “tried and true” tax strategies that have already proven to be effective and are available now. An added bonus: the IRS has stated that it will not challenge taxpayers who implement these tax strategies now, before the law changes.
On a basic level, one can simply gift up to $11.58 million worth of assets in order to remove the assets from one’s taxable estate at death. However, most people are hesitant to part with such a high amount, and they may not want their relatives to be enriched with such a windfall, simply to lower a tax at death. Instead, the following strategies contemplate lowering tax, while still controlling or benefiting from the asset during one’s lifetime.
How to Lower Your Estate Tax;
More to Your Beneficiaries, Less to the IRS
The goal here is to remove assets from the reach of the estate tax, utilizing up to the full current $11.58 million exemption (before it may be reduced to $5 million or perhaps $3.5 million after the election), while still controlling or benefiting from the use of those assets. This generous exemption is per person; a married couple may remove $23 million combined from estate tax. Here are some techniques to keep the assets in the family, and still remove them from estate tax at your death. Some have acronyms that lawyers, but probably few others, find to be cute.
Leveraged Gifting
This method to reduce estate taxes utilizes discounted transfers of interests in closely held entities (Family Limited Partnerships, LLCs, family corporations) to family members. Such “leveraged gifting” has been an extremely important, effective and common method used to reduce or eliminate estate taxes. As long as you retain your controlling interest (e.g., LLC Manager, General Partner), you will continue to control all assets within the entity, while still escaping the estate tax.
If you own a Family Limited Partnership (FLP), you can gift Limited Partnership (LP) interests (or membership interests in an LLC) to your heirs, and take advantage of discounting, to get even more out of your estate, tax-free. In some cases, as much as $46,000,000 worth of FLP interests can be conveyed to your heirs and escape the estate tax. FLPs also provide the additional bonus of excellent asset protection. It should also be noted that in the past, politicians have called for the elimination of such discounting benefits. Once again in this election year, discounting is in jeopardy of legislative repeal. However, until the tax law changes once again, leveraged gifting utilizing favorable discounting is a legal, available and very worthwhile strategy.
GRAT (Grantor Retained Annuity Trust)
GRATs are particularly effective for assets that you think will appreciate over time. The IRS sets a very low “hurdle rate” which in today’s COVID economy is at 0.4%, a historic low. (The rate was 2.2% in September 2019.) So long as the assets in the GRAT perform better than the IRS’s hurdle rate, they escape taxation.
If you contribute assets into a GRAT, you can receive a regular payment akin to an annuity over many years. When the trust term ends (from two to ten years), the appreciated assets pass to your heirs, are not considered part of your estate and will not be subject to estate or gift tax.
There are calls to eliminate GRATs, like discounting, after the election. However, GRATs are an effective and completely legal strategy, currently available for tax savings.
SLAT (Spousal Lifetime Access Trusts)
Spouses who are uncomfortable gifting significant monies to their heirs may instead set up trusts for each other and utilize the current $23 million joint exemption while still benefiting from the assets. The trust would provide distributions to your spouse (which would also benefit you) and would distribute the remaining assets to your heirs after your spouse’s death.
QPRT (Qualified Personal Residence Trust)
If you contribute your personal residence into a QPRT, you may still live in the residence for a term of years, and when the trust term ends, the home is removed from your estate while passing to your heirs, free of estate taxes.
ILIT (Irrevocable Life Insurance Trust)
If you own or control life insurance policies, the IRS deems the death benefit to be in your estate and subject to estate tax, even though you will never receive the death benefit during your life. If you contribute these life insurance policies to an Irrevocable Life Insurance Trust, you may remove the insurance policies from your estate. Your family members may receive the death benefit from the trust, free of any estate tax.
Dynasty Trust
A Dynasty Trust allows for the preservation of assets for one’s immediate and remote descendants, along with offering asset protection from creditors, as well as delay of the estate tax bite for many generations. The trust can distribute income to beneficiaries, but principal is preserved, asset-protected and grows tax-free.
CRUT (Charitable Remainder Trust)
In addition to the loss of an $11.58 million exemption from estate tax, politicians are also calling for an increase in the income tax on capital gains from the current 20% to 39.6% (plus the 4.3% investment tax). This will affect taxpayers who own appreciated assets; if the law changes, they will pay double when they sell those assets. In addition, politicians are also calling for the repeal of the basis “step up” at death. (Under current law, assets passing at death are entitled to a “step up” to their current value, rather than their original value. This means, for example, that when the heir inherits and sells the inherited asset, the heir pays no tax. Such a “step up” in basis may be eliminated after the election.) To avoid this, taxpayers should consider a Charitable Remainder Trust. CRUTs are effective for both income tax and estate tax savings.
By contributing appreciated assets to a CRUT, the sale of these assets by the CRUT is exempt from all taxes; you are entitled to a charitable deduction; the trust makes regular payments back to you during the trust term; and at the end of the term, 10% of the assets pass to the charity, are not subject to income tax and are removed from your estate.
When?
Some clients are availing themselves of the above strategies currently. Some clients are waiting until after the election on November 3 to see who wins, and which way the tax winds will blow. Even if final legislation may not be enacted until well into 2021, there are concerns that such legislation would be retroactive to January 1, 2021. The window from November 3 to December 31, 2020 is not wide.
Who?
These strategies are not only for the mega-wealthy. We have successfully utilized these strategies for clients of means at various levels who are concerned with leaving as much of their hard-earned assets for their heirs with as little as possible going to the IRS and state tax authorities. These are equally attainable goals with a $5 million estate as they are at $50 million. Moreover, these strategies are affordable, especially considering the amount of tax savings they offer.
Please contact us for more information.
Tax Abatements for Landlords Who Offer COVID “Recovery Leases” to Small-Business Tenants
New York State has assisted businesses suffering economic hardship from the COVID-19 crises by enacting legislation over the past few months granting eviction moratoria and relief to individual guarantors of commercial leases. A new bill is being considered by the legislature which may offer long-term property tax abatements to commercial landlords who agree to limit rent increases and settle arrears owed by commercial tenants who have been impacted financially by the pandemic.
Even as some businesses in New York City have reopened, many are still struggling with decreased revenues and an inability to keep up with expenses. Senate Bill 8904 would offer relief to small businesses (100 or fewer employees) by allowing New York City to adopt or amend legislation to provide an as-yet-undetermined abatement of real estate taxes to property owners who enter into “recovery leases” with their commercial tenants. A “recovery lease” is defined in the statute as one meeting the following five criteria:
- The recovery lease is entered into by an eligible commercial tenant and a property owner, where either the eligible commercial tenant or the property owner has suffered a financial hardship during the COVID-19 covered period, or both have suffered such a hardship;
- The recovery lease has a term of ten years or more;
- The recovery lease provides for annual rent increases that do not exceed the amounts permitted pursuant to a local law to be enacted for the purpose of setting such maximum increases;
- The recovery lease settles any rent arrears owed by the tenant pursuant to any previous lease agreement for the leased property; and
- The recovery lease includes any additional provisions that may be required pursuant to local law.
In essence, the legislation seeks to settle past rent arrears and limit rent increases over a long-term lease, while providing tax incentives to landlords who enter into such leases.
Commercial landlords remain limited in their ability to recover rent from commercial tenants who are suffering economically from the pandemic. These landlords, who are suffering economically due to their inability to collect rent, may soon have a tax incentive to negotiate payment terms with their tenants in a recovery lease.
Landlords considering entering into recovery leases should be mindful that they may not be entitled to tax abatements if the recovery lease is signed before the legislation is enacted. In addition, participating landlords should note that they could be subjecting themselves to a commercial rent regulation system with unknown consequences going forward.
The bill is currently in committee and has not yet been passed by either the New York State Senate or Assembly. The benefits to both commercial landlords and commercial tenants are apparent, but it will be critically important to review the details of any local law enacted by New York City to implement the property tax incentives should S8904 pass.
Please follow our blog for further developments. For additional information, please contact us.
UPDATE: Protections for Personal Guarantors of Commercial Leases Extended to March 31, 2021
On September 28, 2020, the New York City Council amended NYC Admin. Code Section 22-1005, which made personal guaranty provisions in some commercial leases unenforceable. The protection afforded to some business owners is now in effect until March 31, 2021.
In addition to extending the end date of the default period to March 31, 2021, the City Council clarified that the protections cover personal guaranty provisions that “relate to” to commercial leases or other rental agreements. The prior version of the law was unclear as to whether the guaranty provision had to be written into the lease document or could be in a separate document.
Now, the guaranty provision can be in the lease itself or in a separate document; both are covered.
In addition, even after the amendment, the law remains unclear whether the personal guaranty provisions are permanently unenforceable or merely suspended until March 31, 2021.
The legislation renders unenforceable (at least for now) only those guaranty provisions for tenants that were affected by Executive Orders 202.3 (restaurants), 202.6 (non-essential retail establishments), and 202.7 (barbershops, salons, tattoo parlors, etc.).
Please follow our blog for further developments.
For additional information, please contact us.