The Importance of Wills



JANUARY 10, 2014


When you go see a layer to prepare your Will, he or she will ask a series of important questions.  Your Will is the place to answer those questions.  If you don’t have a Will, there are no answers.  Let’s see what those questions are.


First, and most important, who will raise your children if you and your spouse die before they are grown?  If you don’t have a Will, you have no input.  You cannot ask your family to make sure your children stay in their home town or home school district.  You cannot emphasize the importance of giving them a religious education or making it possible for them to develop their athletic or artistic talents. 


If you don’t pick someone to raise your children, your families will surely find a volunteer.  But what if both spouses’ families want the children to be raised by their side?  That could lead to a court fight, and that is the last thing your orphaned children need.  Your families could also pick your warm and loving sibling.  The one who doesn’t discipline his or her own children because it “stifles their creativity”.  Would you be okay with that?


Second, who will handle your affairs after you are gone?  That person is called an executor, administrator or personal representative.  Some families have lots of worthy candidates.  Some have none.  You want someone who will get the job done fairly and efficiently and without ruffling any unnecessary feathers.  If you don’t have a Will and don’t delegate that job, the first person to the courthouse will probably get the job, whether or not that person is the one best suited to do it.


Third, if you have no Will, your children will get their inheritance as long as they are at least 18.  If you have raised children who are responsible adults at age 18, congratulations on a job well done.  If your children are more typical, their inheritance will be gone by the time they are 19 or 20.  That could leave them in a financial bind, as well as causing you to roll over in your grave.


With a Will, you can pick the ages and conditions under which your children get their inheritance.  Your wealth will still be available to send them to college, help them to buy a farm or a first home or to pursue any other worthy projects.  However, there will be someone with grown up judgment between the children and their money.  Someone to say that “yes, the child can have a car,” but “no, the car cannot be a Corvette.”


Fourth, how does your wealth get spent on your children?  Does it stay in one pot to pay tuition for one child atIowaStateand tuition for another child at Harvard?  Does it pay for graduate school and post- graduate school for any child who chooses to go? Or does each child have an equal share regardless of the needs and desires the other children?


Are you helping to support your parents or making charitable gifts that you want to continue after your death?  If you have no spouse and no children (and no Will), your wealth will go to your parents.  If you have a spouse or children, your help for your parents may stop at your death.  You can continue that help, but, again, it takes a Will to do that.


What if you have a farm or a vacation home or something else that everyone wants?  Without a Will, all assets get divided among your heirs, without regard to your wishes on the matter.  If your assets are liquid, that is not a problem.  Anyone can do the math and dole the assets out.  But any asset (even ones without significant monetary value) can ignite a family feud.  A Will is the best chance of avoiding that scenario.


How about grandchildren?  If you are lucky enough to have them, you might want to leave them something as a remembrance of you.  You cannot do that without a Will.


Are your children happily married to good people who are good to their children? Maybe one of your children has had an unhappy marriage and has an ex-spouse who thrives on drama.  If that child should somehow predecease you, that ex-spouse will probably end up raising the grandchildren.



If the deceased child’s share then goes to those grandchildren, and if the ex-spouse is the person who gets to dole out the grandchildren’s money, how much of that money do you think the grandchildren will see?  If that scenario troubles you, you can change it by Will.


Finally, what if you are alone in the world?  No spouse, no descendants, no living parents and no siblings.  Maybe you don’t care where your wealth goes then, but if you do care, you need a Will to say so.  Otherwise, your wealth will go to extended relatives.  It could even go to people you barely know.  That is not the best result, but again, it takes a Will to change it.


Now let’s say you do have siblings.  They will inherit automatically if you have no Will, no living parents, no spouse and no descendants.  Do you want all of your siblings to inherit equally from you?  Be honest; in large families, there is sometimes one sibling no one really likes. Or some who has done so well that they don’t need your money.  Again, you can pick and choose among your siblings, nieces and nephews, but you need to lay out your choices in a Will.


Those are the questions a lawyer will ask if you decide to get a Will. If you have minor children, a Will is a necessity, because it is the only way you can provide for their future.  If your children are grown, you can decide if any of these questions are important enough to answer in a Will.  If they are, you need to see an attorney. In most cases, you will be glad you did.


The 3.8% Medicare Tax: Applicability to Trusts and Estates.

Breanna Young, Nelson Young & Braland


January 10, 2014




The Medicare tax on net investment income is imposed under section 1411 of the Internal Revenue Code. Section 1411 was adopted on March 30, 2010 as part of the Health Care and Education Reconciliation Act of 2010. The section comprises the newly enacted Chapter 2A of the Code, entitled “Unearned Income Medicare Contribution.” For this reason, the tax is frequently called the “Medicare tax.” The tax is also referred to as the “Net Investment Income Tax” or the “NIIT.”


The Medicare tax imposes an additional 3.8% surtax on certain individuals, trusts, and estates. Although section 1411 was adopted in 2010, the Medicare tax did not become effective until 2013. The tax is to be reported on Form 8960 for tax years beginning after December 31, 2012.


The IRS and Treasury Department have issued proposed regulations for the Medicare tax, and final regulations are expected to be released by the end of 2013. The IRS has stated that taxpayers may rely on the proposed regulations until the effective date of the final regulations. Any election made in reliance on the proposed regulations will be in effect for the year of the election, and will remain in effect for subsequent taxable years.


For individuals, the 3.8% tax is imposed on the lesser of (a) net investment income, or (b) the excess of modified adjusted gross income over a certain threshold amount (in 2013, the threshold amounts are $250,000 for married filing jointly and $200,000 for single filers).


For trusts and estates, the 3.8% tax is imposed on the lesser of (a) undistributed net investment income, or (b) the excess of adjusted gross income over the top income-tax-bracket threshold (in 2013, $11,950). Consequently, the exposure is greater for trusts and estates than for individual taxpayers.


Factor 1: “Undistributed Net Investment Income.”


Undistributed net investment income, or “UNII,” is the first of two factors in calculating the Medicare tax for trusts and estates. The term “undistributed net investment income” is not defined, but presumably means net investment income, less distributions to beneficiaries.


UNII includes interest, dividends, royalties, annuities, and rents (other than rents from the ordinary course of a trade or business). Also included are trade or business income from a “passive activity” under I.R.C. §469, and net gain from disposition of property less deductible losses under I.R.C. §61(a)(3).

UNII is reduced by properly allocable deductions, including investment interest, advisory fees, and brokerage fees; expenses related to rental and royalty income; and state and local income taxes allocable to net-investment-income items.


A Note about Material Participation.


Trade or business income from a passive activity is included in net investment income, or “NII.” Conversely, income from a trade or business in which the taxpayer materially participates does not count toward NII.


I.R.C. §1411 defers to I.R.C. §469 to define a passive activity. Under section 469, an activity is not passive if the taxpayer’s involvement in the trade or business operations is regular, continuous, and substantial. Regulations promulgated under section 469 provide a seven-part test to determine whether an individual taxpayer’s actions constitute material participation. No such test exists, however, where the taxpayer is a trust or an estate.


The IRS position is that only the activities of the trustee should be considered in determining material participation. See PLR 201029014, TAM 201317010, and TAM 200733023. But the federal district court in Mattie K. Carter Trust v. U.S., 256 F.Supp.2d 536 (N.D. Tex. 2003), determined that material participation should be determined by considering the activities of all persons acting on behalf of the trust.


A Note about Expense Allocations.


Direct expenses must be allocated to the income that generated the expenses. Some amount of indirect expense must be allocated to tax-exempt income, but the remainder may be allocated to reduce NII. If indirect expenses are allocated to income not included in NII, these deductions are wasted for purposes of the Medicare tax. Thus, the trustee may consider allocating as many indirect expenses as possible to NII.


Factor 2: “Excess of Adjusted Gross Income over Threshold Amount.”


The excess of adjusted gross income, or “AGI,” over the over the top income-tax-bracket threshold is the second of two factors in calculating the Medicare tax. In 2013, the applicable threshold amount is $11,950.


AGI is calculated under I.R.C. §§62 and 67(e). AGI includes gross income, less certain deductions, including rental and trade or business deductions. Excluded from AGI are the personal deduction, costs relating to administering the trust or estate, charitable contributions, and distributions to beneficiaries.


Typically, the excess of AGI over the threshold amount will be the lesser of the two measuring factors. As a result, in most cases the 3.8% tax will be assessed on the excess of AGI over the threshold.


Applicability to Certain Trusts and Estates.


The general rule in I.R.C. §1411 is that the Medicare tax applies to all estates and trusts that are “subject to the provisions of part I of subchapter J of chapter 1 of subtitle A of the Code.” Accordingly, ordinary trusts, pooled-income funds, and funeral trusts all are subject to the Medicare tax. Exempt from the tax are trusts not subject to income taxes (e.g., charitable trusts); trusts in which all of the unexpired interests are devoted to one or more of the purposes described in I.R.C. §170(c)(2)(B) (e.g., religious or educational purposes); trusts classified as grantor trusts under I.R.C. §§671-679; and trusts that are not classified as “trusts” for federal-income-tax purposes (e.g., REIT’s).


Planning Considerations.


State law, fiduciary duties, and the language of the will or trust govern a fiduciary’s investment and distributions of trust or estate property. Where permitted, a fiduciary may consider taking certain actions to mitigate the impact of the Medicaid tax on the trust or estate. These actions may include:


Choosing Investments Carefully. Certain investments may reduce includable interest income (e.g., municipal bonds) and capital gains (e.g., low-turnover funds).
Allocating Expenses Wisely. Deductions may be used to reduce NII. A fiduciary should consider allocating as many indirect expenses as possible to NII.
Making Charitable Contributions. Charitable gifts can reduce AGI.
Distributing Income to Beneficiaries. Distributions to beneficiaries reduce both UNII and AGI. Each beneficiary’s modified AGI will be considered separately for determining the Medicare tax. Distributions to lower-income trust beneficiaries may eliminate the tax entirely. However, distributions to higher-income trust beneficiaries may only serve to transfer the Medicare-tax liability to the beneficiaries.


Planning Example.


A hypothetical example of how the Medicare tax can be reduced or eliminated with the use of distributions is as follows:


During the 2013 tax year, the Smith Family Trust had $100,000 of NII and $19,700 of deductible expenses. Each beneficiary is in the 28% income-tax bracket. Each beneficiary’s MAGI is below the threshold amount.



If Trustee Distributes $0:

If Trustee

Distributes $80,000:

Gross income



(Less deductible expenses)



Adjusted total income



(Less personal exemption)



(Less distributions to beneficiaries)



Taxable income



Income tax at trust level



Income tax at beneficiary level



Total Income Tax



Medicare tax  at trust level



Medicare tax at beneficiary level



Total Medicare Tax



Total Tax



















Tax Savings with Proper Planning: $21,021



Due to the relatively low threshold amount at which the Medicare tax applies, fiduciaries should be cognizant of the tax’s impact on trusts and estates. In certain cases, the impact of the tax can be reduced or eliminated with proper planning. While final regulations for the Medicare tax have not been released, fiduciaries may rely on the proposed regulations until the effective date of the final regulations.


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