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By: Stephen R. Elville, J.D., LL.M., Principal and Lead Attorney -- Elville and Associates, P.C. In today’s Time to Think blog, we ask this question: is your estate planning optimized for income taxes? If not, this is an important consideration since income tax is now arguably the “new estate tax”. How does one go about doing this – optimizing an estate plan for income tax purposes? The process is straight-forward and involves a review of your existing estate planning documents and financial assets, including titling, beneficiary designations, and corporate-related documents. Begin gathering these documents today for a comprehensive review by your estate planning attorney. You’ll be glad you did. Are you taking the time to think about this issue? Stephen R. Elville is the principal and lead attorney of Elville & Associates, P.C., a leading estate planning, elder law, and special needs planning law firm in Maryland. Elville and Associates engages clients in a multi-step educational process to ensure that estate, elder law, and special needs planning works from inception, throughout lifetime, and at death. Clients are encouraged to take advantage of the Planning Team Concept for leading-edge, customized planning. The education of clients and their families through counseling and superior legal-technical knowledge is the practical mission of Elville and Associates. If you would like to set an appointment with Mr. Elville to discuss estate or elder law planning issues, you may contact him at 443-393-7696, or via email at steve@elvilleassociates.com. #elvilleeducation

By: Matthew F. Penater, J.D., LL.M. — matt@elvilleassociates.com For those of us who have established a trust, are a beneficiary of a trust, or are considering implementing a trust into our estate plan, the recent changes in trust income tax rates warrants our attention. If a trust is in existence, a review of the trust terms is recommended for the reasons outlined in this article. For trust accounting purposes, a trust consist of two components: Principal and Income. Simply put, Principal consists of the assets used to fund the trust, and Income consists of earnings on those assets (dividends, interest, etc.). However, an important deviation from this concept is the treatment of capital gain on the sale of assets – this is considered Principal, even though under the Internal Revenue Code, it is taxable income. So, we have taxable income in the form of capital gain, which is Principal, and taxable income in the form of dividends/interest, which is Income. These are the conceptual inconsistencies that send a non-professional trustee into a tail-spin. The vast majority of trusts in existence are drafted in a way that results in the following: • If Income (dividends/interest) is distributed to a beneficiary during any given year, that beneficiary must report that Income on the beneficiary’s individual income tax return in that year and then personally pay the income tax thereon; and • If Principal (which could include capital gain) is distributed to a beneficiary during any given year, that beneficiary DOES NOT report that capital gain on his or her individual income tax return – instead, the trust reports the capital gain on the trust’s income tax return and pays the income tax thereon from the assets of the trust. The foregoing result is due to several factors, including the language of the trust and the Internal Revenue Code. This result worked fine as generally speaking, there was no more income tax being paid by the trust than would have been paid by the beneficiary. However, the changes to the tax treatment of trusts resulting from the American Taxpayer Relief Act of 2012 has caused trusts to start paying much higher rates of tax in most cases. I promised myself I would keep this article simple and generally non-technical. So, without getting into the nitty-gritty, I can summarize the tax effect as follows: a married individual will pay the highest capital gain rate of 23.8% capital gains (which includes net investment income tax) once that married couple’s combined income reaches $457,600 for 2015; a trust will pay that same 23.8% capital gains rate once the trust has taxable income of only $12,300 for 2015. This means in general, capital gain taxed within a trust will be subject to substantially more income tax than if that same capital gain were passed out to a beneficiary and taxed to that beneficiary. The problem is that most trusts today are not drafted to allow for the trustee to pass out the capital gain to the beneficiary, in the trustee’s discretion. There are Income Tax Regulations which provide for mechanisms on how to pass the capital gain out to a beneficiary if the terms of the trust do not address it, but those Regulations are complex and can be difficult to satisfy. The best solution is to give a trustee the discretion to allocate capital gain to a beneficiary within the trust document. The tax savings can be significant. A review of existing trust documents is the first place to start. For more information, please call 443-393-7696 or complete the form below.