Inheriting stock or other assets? You’ll receive a favorable “stepped-up basis” | estate planning cpa in elkton md | Weyrich, Cronin & Sorra

Inheriting stock or other assets? You’ll receive a favorable “stepped-up basis”

If you’re planning your estate, or you’ve recently inherited assets, you may be unsure of the “cost” (or “basis”) for tax purposes.

How do the rules work?

Under the current fair market value basis rules (also known as the “step-up and step-down” rules), an heir receives a basis in inherited property equal to its date-of-death value. So, for example, if your grandfather bought stock in 1940 for $600 and it’s worth $1 million at his death, the basis is stepped up to $1 million in the hands of your grandfather’s heirs — and all of that gain escapes federal income tax.

The fair market value basis rules apply to inherited property that’s includible in the deceased’s gross estate, and those rules also apply to property inherited from foreign persons who aren’t subject to U.S. estate tax. It doesn’t matter if a federal estate tax return is filed. The rules apply to the inherited portion of property owned by the inheriting taxpayer jointly with the deceased, but not the portion of jointly held property that the inheriting taxpayer owned before his or her inheritance. The fair market value basis rules also don’t apply to reinvestments of estate assets by fiduciaries.

What if assets are given before death?

It’s crucial to understand the current fair market value basis rules so that you don’t pay more tax than you’re legally required to.

For example, in the above example, if your grandfather decides to make a gift of the stock during his lifetime (rather than passing it on when he dies), the “step-up” in basis (from $600 to $1 million) would be lost. Property that has gone up in value acquired by gift is subject to the “carryover” basis rules. That means the person receiving the gift takes the same basis the donor had in it ($600 in this example), plus a portion of any gift tax the donor pays on the gift.

A “step-down” occurs if someone dies owning property that has declined in value. In that case, the basis is lowered to the date-of-death value. Proper planning calls for seeking to avoid this loss of basis. Giving the property away before death won’t preserve the basis. That’s because when property that has gone down in value is the subject of a gift, the person receiving the gift must take the date of gift value as his basis (for purposes of determining his or her loss on a later sale). Therefore, a good strategy for property that has declined in value is for the owner to sell it before death so he or she can enjoy the tax benefits of the loss.

Need help with estate planning and taxes?

These are the basic rules. Other rules and limits may apply. For example, in some cases, a deceased person’s executor may be able to make an alternate valuation election. Contact us for tax assistance when estate planning and taxes as they relate to inheritances.

© 2023


When can seniors deduct Medicare premiums on their tax returns? | estate planning cpa in baltimore md | Weyrich, Cronin & Sorra

When can seniors deduct Medicare premiums on their tax returns?

If you’re age 65 and older and have basic Medicare insurance, you may need to pay additional premiums to get the level of coverage you want. The premiums can be costly, especially for married couples with both spouses paying them. But there may be an advantage: You may qualify for a tax break for paying the premiums.

Premiums count as medical expenses

For purposes of claiming an itemized deduction for medical expenses on your tax return, you can combine premiums for Medicare health insurance with other qualifying medical expenses. These includes amounts for “Medigap” insurance and Medicare Advantage plans. Some people buy Medigap policies because Medicare Parts A and B don’t cover all their health care expenses. Coverage gaps include co-payments, coinsurance, deductibles and other costs. Medigap is private supplemental insurance that’s intended to cover some or all gaps.

You must itemize

Qualifying for a medical expense deduction is difficult for many people for a couple of reasons. For 2023, you can deduct medical expenses only if you itemize deductions and only to the extent that total qualifying expenses exceed 7.5% of adjusted gross income.

The Tax Cuts and Jobs Act nearly doubled the standard deduction amounts for 2018 through 2025. For 2023, the standard deduction amounts are $13,850 for single filers, $27,700 for married couples filing jointly and $20,800 for heads of household. (For 2022, these amounts were $12,950, $25,900 and $19,400, respectively.)

So, many people claim the standard deduction because their itemized deductions are less than their standard deduction amount.

Note: Self-employed people and shareholder-employees of S corporations can generally claim an above-the-line deduction for their health insurance premiums, including Medicare premiums. So, they don’t need to itemize to get the tax savings from their premiums.

Other expenses that qualify

In addition to Medicare premiums, you can deduct various medical expenses, including those for dental treatments, ambulance services, dentures, eyeglasses and contacts, hospital services, lab tests, qualified long-term care services, prescription medicines and others.

There are also many other items that Medicare doesn’t cover that can be deducted for tax purposes, if you qualify. You can also deduct transportation expenses to get to and from medical appointments. If you go by car, you can deduct a flat 22-cents-per-mile rate for 2023 or you can keep track of your actual out-of-pocket expenses for gas, oil, maintenance and repairs.

Evaluate the options

We can answer any questions you have about whether you should claim the standard deduction or whether you’re able to claim medical expense deductions on your tax return.

© 2023


If your family owns a vacation home, address it carefully in your estate plan | estate planning cpa in baltimore county md | Weyrich, Cronin & Sorra

If your family owns a vacation home, address it carefully in your estate plan

For many people, the disposition of a family home is an emotionally charged estate planning issue. And emotions may run even higher with vacation homes, which often evoke even fonder memories. So, it’s important to address your vacation home carefully in your estate plan.

Keeping the peace

Before you do anything, talk with your loved ones about the vacation home. Simply dividing the home equally among your children or other family members may be an invitation to conflict and hurt feelings. Some may care more about keeping the home in the family than about any financial benefits it might provide. Others may prefer to sell the home and use the proceeds for other needs.

One solution is to leave the vacation home to the family members who want it and leave other assets to those who don’t. Alternatively, you can develop a buyout plan that establishes the terms under which family members who want to keep the home can buy the interests of those who want to sell. The plan should establish a reasonable price and payment terms, which might include payment in installments over several years.

You also may want to create a usage schedule for nonowners whom you wish to continue enjoying the vacation home. And to help alleviate the costs of keeping the vacation home in the family, consider setting aside assets that will generate income to pay for maintenance, repairs, property taxes and other expenses.

Transferring the home

After determining who will receive your vacation home, there are several traditional estate planning tools you can use to transfer it in a tax-efficient manner. It may make sense to transfer interests in the home to your children or other family members now, using tax-free gifts.

But if you’re not yet ready to give up ownership, consider a qualified personal residence trust (QPRT). With a QPRT, you transfer a qualifying vacation home to an irrevocable trust, retaining the right to occupy the home during the trust term. At the end of the term, the home is transferred to your beneficiaries, though it’s possible to continue occupying the home by paying them fair market rent. The transfer is a taxable gift of your beneficiaries’ remainder interest, which is only a fraction of the home’s current fair market value.

You must survive the trust term, and the vacation home must qualify as a “personal residence,” which means, among other things, that you use it for the greater of 14 days per year or more than 10% of the total number of days it’s rented out.

Discussing your intentions

These are only a few of the issues that may be involved in passing on a vacation home. Estate planning for a vacation home may be complicated but it doesn’t have to be. The key is to sit down with your family to discuss the options. Only then can you put together a plan that meets everyone’s needs. Contact us with questions about the most tax-efficient way to proceed.

© 2023


Don’t overlook these two essential estate planning strategies | estate planning cpa in baltimore county md | Weyrich, Cronin & Sorra

Don’t overlook these two essential estate planning strategies

When it comes to estate planning, there’s no shortage of techniques and strategies available to reduce your taxable estate and ensure your wishes are carried out after your death. Indeed, the two specific strategies discussed below should be used in many estate plans.

1. Take advantage of the annual gift tax exclusion

Don’t underestimate the tax-saving power of making annual exclusion gifts. For 2023, the exclusion increased by $1,000 to $17,000 per recipient ($34,000 if you split gifts with your spouse).

For example, let’s say Jim and Joan combine their $17,000 annual exclusions for 2023 so that their three children and their children’s spouses, along with their six grandchildren, each receive $34,000. The result is that $408,000 is removed tax-free from the couple’s estates this year ($34,000 x 12).

What if the same amounts were transferred to the recipients upon Jim’s or Joan’s death instead? Their estate would be taxed on the excess over the current federal gift and estate tax exemption ($12.92 million in 2023). If no gift and estate tax exemption or generation skipping transfer (GST) tax exemption was available, the tax hit would be at the current 40% rate. So making annual exclusion gifts could potentially save the family a significant amount in taxes.

2. Use an ILIT to hold life insurance

If you own an insurance policy on your life, be aware that a substantial portion of the proceeds could be lost to estate tax if your estate is over a certain size. The exact amount will depend on the gift and estate tax exemption amount available at your death as well as the applicable estate tax rate.

However, if you don’t own the policy, the proceeds won’t be included in your taxable estate. An effective strategy for keeping life insurance out of your estate is to set up an irrevocable life insurance trust (ILIT).

An ILIT owns one or more policies on your life, and it manages and distributes policy proceeds according to your wishes. You aren’t allowed to retain any powers over the policy, such as the right to change the beneficiary. The trust can be designed so that it can make a loan to your estate for liquidity needs, such as paying estate tax.

The right strategies for you?

Bear in mind that these two popular strategies might not be right for your specific estate plan. We can provide you additional details on each and help you determine if they’re right for you.

© 2023


Have you planned for long-term health care expenses? | cpa in alexandria va | Weyrich, Cronin & Sorra

Have you planned for long-term health care expenses?

No matter how diligently you prepare, your estate plan can quickly be derailed if you or a loved one requires long-term home health care or an extended stay at an assisted living facility or nursing home. Long-term care (LTC) expenses aren’t covered by traditional health insurance policies or Medicare. So it’s important to have a plan to finance these costs, either by setting aside some of your savings or purchasing insurance. Let’s take a closer look at three options.

1) LTC insurance

An LTC insurance policy supplements your traditional health insurance by covering services that assist you or a loved one with one or more activities of daily living (ADLs). Generally, ADLs include eating, bathing, dressing, toileting, transferring (getting in and out of a bed or chair) and maintaining continence.

LTC coverage is relatively expensive, but it may be possible to reduce the cost by purchasing a tax-qualified policy. Generally, benefits paid in accordance with an LTC policy are tax-free. To qualify, a policy must:

  • Be guaranteed renewable and noncancelable regardless of health,
  • Not delay coverage of pre-existing conditions more than six months,
  • Not condition eligibility on prior hospitalization,
  • Not exclude coverage based on a diagnosis of Alzheimer’s disease, dementia, or similar conditions or illnesses, and
  • Require a physician’s certification that you’re either unable to perform at least two of six ADLs or you have a severe cognitive impairment and that this condition has lasted or is expected to last at least 90 days.

It’s important to weigh the pros and cons of tax-qualified policies. The primary advantage is the premium tax deduction. But keep in mind that medical expenses are deductible only if you itemize and only to the extent they exceed 7.5% of your adjusted gross income (AGI), so some people may not have enough medical expenses to benefit from this advantage. It’s also important to weigh any potential tax benefits against the advantages of nonqualified policies, which may have less stringent eligibility requirements.

2) Hybrid insurance

Also known as “asset-based” policies, hybrid policies combine LTC benefits with whole life insurance or annuity benefits. These policies have advantages over standalone LTC policies.

For example, their health-based underwriting requirements typically are less stringent and their premiums are usually guaranteed — that is, they won’t increase over time. Most important, LTC benefits, which are tax-free, are funded from the death benefit or annuity value. So, if you never need to use the LTC benefits, those amounts are preserved for your beneficiaries.

3) Employer-provided plans

Employer-provided group LTC insurance plans offer significant advantages over individual policies, including discounted premiums and “guaranteed issue” coverage, which covers eligible employees (and, in some cases, their spouse and dependents) regardless of their health status. Group plans aren’t subject to nondiscrimination rules, so a business can offer employer-paid coverage to a select group of employees.

Employer plans also offer tax advantages. Generally, C corporations that pay LTC premiums for employees can deduct the entire amount as a business expense, even if it exceeds the deduction limit for individuals. And premium payments are excluded from employees’ wages for income and payroll tax purposes.

Think long term

Given the potential magnitude of LTC expenses, the earlier you begin planning, the better. We can help you review your options and analyze the relative benefits and risks.

© 2023


Avoiding challenges to your estate plan | tax accountant in alexandria va | Weyrich, Cronin & Sorra

Avoiding challenges to your estate plan

A primary goal of estate planning is to ensure that your wishes are carried out after you’re gone. So, it’s important to design your estate plan to withstand potential will contests or other challenges down the road.

The most common grounds for contesting a will are undue influence or lack of testamentary capacity. Other grounds include fraud and invalid execution.

There are no guarantees that your plan will be implemented without challenge, but you can minimize the possibility by taking these actions:

Dot every “i” and cross every “t.” The last thing you want is for someone to contest your will on grounds that it wasn’t executed properly. So be sure to follow applicable state law to the letter. Typically, that means signing your will in front of two witnesses and having your signature notarized. Be aware that the law varies from state to state, and an increasing number of states are permitting electronic wills.

Treat your heirs fairly. One of the most effective ways to avoid a challenge is to ensure that no one has anything to complain about. But satisfying all your family members is easier said than done.

For one thing, treating people equally won’t necessarily be perceived as fair. Suppose, for example, that you have a financially independent 30-year-old child from a previous marriage and a 20-year-old child from your current marriage. If you divide your wealth between them equally, the 20-year-old — who likely needs more financial help — may view your plan as unfair.

Demonstrate your competence if you’re concerned about a challenge. There are many techniques you can use to demonstrate your testamentary capacity and lack of undue influence. Examples include:

  • Have a medical practitioner conduct a mental examination or attest to your competence at or near the time you execute your will.
  • Choose witnesses you expect to be available and willing to attest to your testamentary capacity and freedom from undue influence years or even decades down the road.
  • Videotape the execution of your will. This provides an opportunity to explain the reasoning for any atypical aspects of your estate plan and will help refute claims of undue influence or lack of testamentary capacity.

Consider a no contest clause. Most, but not all, states permit the use of no contest clauses. In a nutshell, it will essentially disinherit any beneficiary who challenges your will or trust.

For this strategy to be effective, you must leave heirs an inheritance that’s large enough that forfeiting it would be a disincentive to bringing a challenge. An heir who receives nothing has nothing to lose by challenging your plan.

Use a living trust. By avoiding probate, a revocable living trust can discourage heirs from challenging your estate plan. That’s because without the court hearing afforded by probate, they’d have to file a lawsuit to challenge your plan.

If your estate plan does anything unusual, it’s critical to communicate the reasons to your family. Indeed, explaining your motives can go a long way toward avoiding misunderstandings or disputes. They may not like it, but it’ll be more difficult for them to contest your will on grounds of undue influence or lack of testamentary capacity if your reasoning is well documented. Contact us for additional details.

© 2023


Enacting a spendthrift trust can be beneficial to your loved ones | estate planning cpa in baltimore md | Weyrich, Cronin & Sorra

Enacting a spendthrift trust can be beneficial to your loved ones

Are you concerned that some of your beneficiaries might squander their inheritances or simply aren’t equipped to handle the financial responsibilities that come with large sums of money? You don’t have to hold on to your assets until the day you die with the hope that your heirs will change their ways by that time. Instead, consider using a spendthrift trust that can provide protection, regardless of how long you live.

As with other trusts, a spendthrift trust may incorporate various tax benefits, but that’s not its primary focus. Indeed, this trust type can help you provide for an heir while protecting assets from his or her potentially imprudent actions.

Spendthrift trust in action

Generally, a spendthrift trust’s assets will consist of securities such as stocks, bonds and mutual funds, and possibly real estate and cash. The appointed trustee manages the assets.

The terms of the trust restrict the beneficiary’s ability to access funds in the account. Therefore, the beneficiary can’t invade the trust to indulge in a wild spending spree or sink money into a foolhardy business venture. Similarly, the trust assets can’t be reached by any of the beneficiary’s creditors.

Instead of having direct access to funds, the beneficiary usually receives payments from the trust on a regular basis or “as needed” based on the determination of the trustee. The trustee is guided by the terms of the trust and must adhere to fiduciary standards.

Be aware that the protection isn’t absolute. Once the beneficiary receives a cash payment, he or she has full control over that amount. The money can be spent without restriction.

Role of the trustee

Depending on the trust terms, the trustee may be responsible for making scheduled payments or have wide discretion as to whether funds should be paid, and how much and when. Designating the trustee is an important consideration, especially in situations where he or she will have broad control.

Although it’s not illegal to name yourself as trustee, this is generally not recommended. More often than not, the trustee will be an attorney, financial planner, investment advisor or someone else with the requisite experience and financial acumen. You should also name a successor trustee in the event the designated trustee dies before the end of the term or otherwise becomes incapable of handling the duties.

Other key considerations

There are several other critical aspects relating to crafting a spendthrift trust. For example, will the trustee be compensated and if so, how much? You must also establish how and when the trust should terminate. The trust could be set up for a term of years or termination may occur upon a specific event (such as a child reaching the age of majority).

Finally, try to anticipate other possibilities, such as enactment of tax law changes, that could affect a spendthrift trust. A word to the wise: This isn’t a do-it-yourself proposition. We’d be pleased to assist you when considering a spendthrift trust.

© 2023


Joint ownership isn’t right for all estate plans | estate planning cpa in elkton md | Weyrich, Cronin & Sorra

Joint ownership isn’t right for all estate plans

Generally speaking, owning property jointly benefits an estate plan. Indeed, joint ownership offers several advantages for surviving family members. However, there are exceptions and it’s not the solution for all estate planning problems.

2 types of joint ownership for spouses

As the name implies, joint ownership requires interests in property by more than one party. The type of joint ownership depends on the wording of the title to the property.

From a legal standpoint, there may be two main options for married couples:

  1. Joint tenants with rights of survivorship (JTWROS). This is the most common form and often is used for a personal residence or other real estate. With JTWROS, one spouse’s share of the property can be sold without the other spouse’s consent. The property is subject to the reach of creditors of all owners.
  2. Tenancy by the entirety (TBE). In this case, one spouse’s share of the property in some states can’t be sold without the other spouse joining in.  But TBE offers more protection from creditors in noncommunity property states if only one spouse is liable for the debt. Currently, a TBE is available in slightly more than half the states.

Property may also be owned as a “tenancy in common.” With this form of ownership, each party has a separate transferable right to the property. Generally, this would apply to co-owners who aren’t married to each other, though in certain situations married couples may opt to be tenants in common.

Joint ownership plusses and minuses

The main estate planning attraction of joint ownership is that the property avoids probate. Probate is the process, based on prevailing state law, whereby a deceased person’s assets are legally transferred to the beneficiaries. Depending on the state, it may be time-consuming or costly — or both — as well as being intrusive. Jointly owned property, however, simply passes to the surviving owner.

Joint ownership is a convenient and inexpensive way to establish ownership rights. But the long-standing legal concept has its drawbacks, too. Some disadvantages of joint ownership relate to potential liability for federal gift and estate tax. Comparable rules may also apply on the state level.

For starters, if parties other than a married couple create joint ownership, it generally triggers a taxable gift, unless each one contributed property to obtain a share of the title. However, for a property interest in securities or a financial account, there’s no taxable gift until the other person actually makes a withdrawal.

Lessons to be learned

Joint ownership can be a valuable estate planning tool, especially because it avoids probate. However, this technique shouldn’t be considered a replacement for a will. We can help you coordinate joint ownership with other aspects of your estate plan.

© 2023


Deciding whether to make lifetime gifts or bequests at death can be a deceptively complex question | estate planning cpa in washington dc | Weyrich, Cronin & Sorra

Deciding whether to make lifetime gifts or bequests at death can be a deceptively complex question

One of your primary estate planning goals may be to pass as much of your wealth to your family as possible. That means sheltering your estate from gift and estate taxes. One way to do so is to make gifts during your lifetime.

Current tax law may make that an enticing proposition, given the inflation-adjusted $12.92 million gift and estate tax exemption. However, making lifetime gifts isn’t right for everyone. Depending on your circumstances, there may be tax advantages to keeping assets in your estate and making bequests at death.

Tax consequences of gifts vs. bequests

The primary advantage of making lifetime gifts is that by removing assets from your estate, you shield future appreciation from estate tax. But there’s a tradeoff: The recipient receives a “carryover” tax basis — that is, he or she assumes your basis in the asset. If a gifted asset has a low basis relative to its fair market value (FMV), then a sale will trigger capital gains taxes on the difference.

An asset transferred at death, however, currently receives a “stepped-up basis” equal to its date-of-death FMV. That means the recipient can sell it with little or no capital gains tax liability. So, the question becomes, which strategy has the lower tax cost: transferring an asset by gift (now) or by bequest (later)? The answer depends on several factors, including the asset’s basis-to-FMV ratio, the likelihood that its value will continue appreciating, your current or potential future exposure to gift and estate taxes, and the recipient’s time horizon — that is, how long you expect the recipient to hold the asset after receiving it.

Estate tax law changes ahead

Determining the right time to transfer wealth can be difficult, because so much depends on what happens to the gift and estate tax regime in the future. (Indeed, without further legislation from Congress, the base gift and estate tax exemption amount will return to an inflation-adjusted $5 million in 2026.) The good news is that it may be possible to reduce the impact of this uncertainty with carefully designed trusts.

Let’s say you believe the gift and estate tax exemption will be reduced dramatically in the near future. To take advantage of the current exemption, you transfer appreciated assets to an irrevocable trust, avoiding gift tax and shielding future appreciation from estate tax. Your beneficiaries receive a carryover basis in the assets, and they’ll be subject to capital gains taxes when they sell them.

Now suppose that, when you die, the exemption amount hasn’t dropped, but instead has stayed the same or increased. To hedge against this possibility, the trust gives the trustee certain powers that, if exercised, cause the assets to be included in your estate. Your beneficiaries will then enjoy a stepped-up basis and the higher exemption shields all or most of the assets’ appreciation from estate taxes.

Work with us to monitor legislative developments and adjust your estate plan accordingly. We can suggest strategies for building flexibility into your plan to soften the blow of future tax changes.

© 2023


What’s the difference between a springing and a nonspringing power of attorney? | estate planning cpa in alexandria va | Weyrich, Cronin & Sorra

What’s the difference between a springing and a nonspringing power of attorney?

Estate planning typically focuses on what happens to your children and your assets when you die. But it’s equally important (some might say even more important) to have a plan for making critical financial and medical decisions if you’re unable to make those decisions yourself.

A crucial component of this plan is the power of attorney (POA). A POA appoints a trusted representative to make medical or financial decisions on your behalf in the event an accident or illness renders you unconscious or mentally incapacitated. Without it, your loved ones would have to petition a court for guardianship or conservatorship, a costly process that can delay urgent decisions.

A question that people often struggle with is whether a POA should be springing, that is, effective when certain conditions are met or nonspringing, that is, effective immediately.

A POA defined

A POA is a document under which you, as “principal,” authorize a representative to be your “agent” or “attorney-in-fact,” to act on your behalf. Typically, separate POAs are executed for health care and property.

A POA for health care authorizes your agent — often, a spouse, an adult child or other family member — to make medical decisions on your behalf or consent to or discontinue medical treatment if you’re unable to do so. Depending on the state you live in, the document may also be known as a medical power of attorney or health care proxy.

A POA for property appoints an agent to manage your investments, pay your bills, file tax returns, continue making any annual charitable and family gifts, and otherwise handle your finances, subject to limitations you establish.

To spring or not to spring

Typically, springing powers take effect when the principal becomes mentally incapacitated, comatose, or otherwise unable to act for himself or herself.

Nonspringing POAs offer a few advantages over springing POAs:

  • Because they’re effective immediately, nonspringing POAs allow your agent to act on your behalf for your convenience, not just when you’re incapacitated.
  • They avoid the need for a determination that you’ve become incapacitated, which can result in delays, disputes or even litigation. This allows your agent to act quickly in an emergency, making critical medical decisions or handling urgent financial matters without having to wait, for example, for one or more treating physicians to examine you and certify that you’re incapacitated.

A potential disadvantage to a nonspringing POA — and the main reason some people opt for a springing POA — is the concern that your agent may be tempted to abuse his or her authority or commit fraud. But consider this: If you don’t trust your agent enough to give him or her a POA that takes effect immediately, how does delaying its effect until you’re deemed incapacitated solve the problem?

Given the advantages of a nonspringing POA, and the potential delays associated with a springing POA, it’s usually preferable to use a nonspringing POA and to make sure the person you name as agent is someone you trust unconditionally. If you’re still uncomfortable handing over a POA that takes effect immediately, consider signing a nonspringing POA but have your attorney or other trusted advisor hold it and deliver it to your agent when needed.

Contact us if you have additional questions regarding a springing or nonspringing POA.

© 2022