North Carolina Estate Planning Blog

Senator Baucus Proposes Big Changes to IRAs

Greg Herman-Giddens — Thu, 09 Feb 2012 06:55:13 -0500

I've been a big proponent of planning to preserve the ability to "stretch" inherited IRAs over the life expectancy of the beneficiary, which allows for tremendous tax-deferred growth. In what came as a big surprise, to me anyway, Senator Max Baucus recently proposed requiring that most inherited IRAs be paid out within five years. Now, however, it appears that Baucus is backing off his revenue raising proposal. This brings a collective sigh of relief from IRA owners, financial advisors, custodians, and tax professionals.

Sen Baucus Eyes Inherited IRAs for $4.6 Billion.

Tax Related Duties of an Executor

Greg Herman-Giddens — Wed, 01 Feb 2012 08:36:29 -0500

I just came across this article, Closing Down the Estate, on SmartMoney.com. It gives a good overview of what an executor is responsible for from a tax perspective, but is by no means exhaustive. Since Executors can be personally liable for certain tax penalties, they should make sure to engage an experienced tax attorney or CPA to ensure that everything is done timely and correctly.

S Corporation Service Firm Owners Beware

Greg Herman-Giddens — Mon, 30 Jan 2012 13:48:05 -0500

S Corporation owners who are service providers often take a low salary so that they can receive most of the firm's profits as a dividend, avoiding payroll taxes. When the salary is unreasonably low, or there are no other fee generating employees of the firm, doing so is particularly questionable. In the December 2010 Watson case, a CPA, whom you think would know better, was busted by the IRS for this practice. Mr. Watson took a salary of just $24,000 in a year in which his share of the profits was over $200,000. The U.S. District Court for the Southern District of Iowa ruled for the IRS and held that the compensation was unreasonably low and the dividends were properly reclassified as salary and subjected to payroll taxes.

To be safe, make sure you set a salary comparable to what someone in a comparable position would get, and if you you have no employees who are also bringing in fees, take virtually all of your net income as a salary. This will help keep in the IRS away, and let you contribute more to your retirement account, as your earned income will be much higher.

Drafting an IRA Trust - What You Need to Know

Greg Herman-Giddens — Fri, 27 Jan 2012 16:22:25 -0500

I have previously blogged about IRA Trusts, which are one of my favorite estate planning tools. This afternoon I presented a 90 minute national continuing legal education teleconference and webinar on the topic. It was my fourth presentation this week! I'm thinking about becoming a professional speaker and giving up actually practicing law. (That's not really true, but I have really come to enjoy helping to educate others).

For those who want an analysis of why and when IRA trusts make sense, an overview of the IRA Required Minimum Distribution rules, and an explanation of the tax issues involved, I offer the manuscript here for the benefit of my readers.

Why Lawyers vs. the Internet - a Baker's Dozen

Greg Herman-Giddens — Fri, 13 Jan 2012 11:32:45 -0500

It's Friday the 13th, and I've been at the University of Miami School of Law's Heckerling Institute on Estate Planning all week. This morning there was some discussion on the future for estate planning attorneys. While online documents may have some limited utility, some feel that online software can take care of all their estate planning related legal needs. I beg to differ. Here are 13 reasons why a flesh and blood lawyer beats a computer program any day - a lawyer can:

Listen to your goals and desires and incorporate them into your plan.
Offer advice, not just words on paper.
Help with referrals to other trusted professionals.
Make sure that the documents are properly executed.
Make sure that any trusts are properly funded.
Make sure that beneficiary designations are properly completed.
Make sure that accounts and real estate are properly titled.
Help with managing assets of incapacitated family members.
Help with probate and trust administration.
Help with income, gift and estate tax matters.
Help ensure governmental benefits for disabled or incapacitated family members.
Serve as an advocate in dealing with financial institution and governmental bodies.
Care about you and your family!

New NC Estates Court Costs in 2012

Greg Herman-Giddens — Tue, 03 Jan 2012 16:35:08 -0500

Effective January 1, 2012, North Carolina has added a couple of new court costs in estate matters:

Will Caveats (will contests) - a $200 filing fee.
Reopened Estates - a filing fee of 40 cents per $100 of property in the reopened estate. The maximum cumulative fee for estates is $6,000.

These are on top of increased filing fees for estates that took effect last year. As fees to continue to rise, avoiding probate with living trusts and other planning will save even more money.

Tax Provisions Expiring December 31, 2011

Greg Herman-Giddens — Fri, 30 Dec 2011 11:38:43 -0500

There a few federal income tax deductions and other provisions that expire this year:

Tax-free distributions from IRAs for charitable purposes - Taxpayers who were at least age 70½ could make tax-free charitable distributions from an IRA up to $100,000.
Contributions of capital gain real property made for conservation purposes - The expanded deduction (50% for individuals, 100% for qualified farmers and ranchers) of the value of a qualified conservation easement donated to a qualifying charitable organization. In 2012 and later, the deduction will be limited to 30% for all taxpayers.
Deduction for certain expenses of elementary and secondary school teachers - The above-the-line deduction of up to $250 for unreimbursed classroom expenses.
Deduction of state and local sales taxes - Taxpayers could choose to deduct, as an itemized deduction on Schedule A, state and local general sales taxes, in lieu of deducting state and local income taxes.
Qualified tuition and related expenses - Certain taxpayers were allowed an above-the-line deduction (up to a maximum of $4,000) for qualified tuition and related expenses for higher education.
Individual AMT exemption amounts - Individual AMT exemption amounts for 2011 are $74,450 (married filing jointly), $37,225 (married filing separately), and $48,450 (single and head of household). In 2012 the exemption amounts will decrease to $45,000 (MFJ), $22,500 (MFS), and $33,750 (Single/HoH).

It's possible that tax legislation in 2012 could retroactively extend these benefits. A host of other tax cuts will also expire on December 31, 2012, and I'm sure that Congress will at least attempt to address the issue next year. Stay tuned for more fun and games from Washington!

Are You Required to Support Your Parents?

Greg Herman-Giddens — Tue, 27 Dec 2011 16:24:38 -0500

Much to my surprise, I recently became aware of the following North Carolina law:

§ 14‑326.1. Parents; failure to support.

If any person being of full age, and having sufficient income after reasonably providing for his or her own immediate family shall, without reasonable cause, neglect to maintain and support his or her parent or parents, if such parent or parents be sick or not able to work and have not sufficient means or ability to maintain or support themselves, such person shall be deemed guilty of a Class 2 misdemeanor; upon conviction of a second or subsequent offense such person shall be guilty of a Class 1 misdemeanor. If there be more than one person bound under the provisions of the next preceding paragraph to support the same parent or parents, they shall share equitably in the discharge of such duty.

On its face, this law makes it a crime not to support one's parents if they are unable to support themselves. What about all those elderly persons receiving assistance from the state because they can't pay for nursing home costs themselves? It might make one think twice about assisting your parents in divesting themselves of assets in order to qualify for Medicaid. Also, it could make considering long-term care insurance that much more important - who wants their kids to get arrested, even if just for a misdemeanor?

However, on the North Carolina Bar Association's Elder Law Section list serve, there was a recent discussion of the statute and the fact that no one is aware of anyone being prosecuted for violation of the the law.

That's not surprising - even as a estate planning attorney (as opposed to a criminal attorney), I see many problems with the law. It is so vague that I do not see how it could ever stand up to challenge before a judge. How does one determine what "sufficient income" is or "reasonable providing." What about saving for one's own retirement to avoid the same problem with the next generation? What about college expenses for kids? The statute also makes no mention of assets, so apparently one could have a couple of million dollars socked away, and the statute would not apply if one's income was all used for reasonable support of one's immediate family.

Bottom line - you probably don't need to worry about N.C.G.S. Section 14-326.1. In the unlikely event you are busted for a violation, hire a good attorney. You'll probably make law by having the statute declared unconsitutional.

How to Draft IRA Trusts - Teleconference

Greg Herman-Giddens — Thu, 22 Dec 2011 16:57:18 -0500

Attorneys interested in learning more about IRA Trusts may wish to sign up for my 90 minute teleconference, How to Draft IRA Trusts, to be held on January 27, 2011 at 2:00 p.m. Eastern. The program may also be of interest to CPAs, financial planners and trust officers.

IRA Trusts are great tool for protecting large IRAs for the benefit of younger generations. Anyone with an IRA or retirement account over $250,000 or so should consider implementing one.

IRS Requests Comments on Trust Decanting

Greg Herman-Giddens — Tue, 20 Dec 2011 15:52:57 -0500

The IRS is requesting comments on the tax implications of trust "decanting," which refers to transfers by a trustee of all or a portion of the principal of an irrevocable trust to another irrevocable trust. Specifically, would like to hear from practitioners regarding when and under what circumstances such transfers that result in a change in the beneficial interests in the trust are not subject to income, gift, estate, and/or generation-skipping transfer (GST) taxes. See Notice 2011-101 for details.

North Carolina and many other states have statutes that expressly allow for trust decanting. In addition, in order to add flexibility and protection for beneficiaries, irrevocable trusts such as life insurance trusts often contain provisions allowing the trustees to transfer some or all of the principal to another trust. Court approval is not required, but certain limitations are imposed to so that the rights of the beneficiaries are not substantially modified.

Duke's OLLI Program to Offer Retirement Course in 2012

Greg Herman-Giddens — Tue, 13 Dec 2011 12:42:51 -0500

Local Financial Planner Janet Ramsey, MBA, CFP will be offering a course entitled To the Health of Your Wealth as part of Duke University's OLLI program. The course will run from January 11 to March 28, 2012. Greg Herman-Giddens will speak on non-tax reasons to do estate planning.

For more information click here.

Tax Information for U.S. Citizens Living Abroad

Greg Herman-Giddens — Fri, 09 Dec 2011 12:10:53 -0500

U.S. citizens must report and pay taxes on their world-wide income, even if living in another country. U.S. taxpayers are also required to disclose foreign bank and financial accounts (FBARs). It's important to know and follow the rules in order to avoid civil and criminal penalties.

The IRS has published a guide on income tax filing and FBARs for U.S. Citizens or Dual Citizens Residing Outside of the U.S.

IRS May Allow Late Filing Relief for 706 for Portability

Greg Herman-Giddens — Mon, 05 Dec 2011 14:22:37 -0500

According to Robert Keebler, CPA, the IRS may allow a late filed Federal Estate Tax Return, Form 706, if the only reason for filing the return is for the surviving spouse to claim the deceased spouse's unused estate tax exemption. The current exemption is $5 million, but it is scheduled to reduce to $1 million in 2013.

Form 706 is due nine months after death, with an automatic six month extension available.

Estate Planning and Probate Seminar for Paralegals

Greg Herman-Giddens — Mon, 05 Dec 2011 14:08:28 -0500

North Carolina legal assistants working with estate lawyers may be interested in a day-long seminar, Estate Planning and Probate Practice for Paralegals, to be held in Chapel Hill on January 25, 2012. I will be presenting the portion on Assisting with Guardianships.

Four Common Estate Planning Mistakes

Greg Herman-Giddens — Wed, 30 Nov 2011 07:48:43 -0500

The American Institute of Certified Public Accountants (AICPA) recently published an informative article entitled Four Estate Planning Mistakes (and How to Avoid Them). Although the article is geared toward CPAs for counseling their clients, I recommend it as reading for all, as I see these problems everyday. The four mistakes featured are:

Outdated or Unsigned Estate Planning Documents (i.e., if they have a plan at all, most people's plans are either outdated or inadequate).
Lack of Coordination between the Estate Planning Documents, Titling of Assets and Apportionment of Estate Taxes.
Lack of Understanding That a Transfer of $1 Is a Gift (i.e., that transfers (typically of real property) for less than adequate consideration constitute a gift).
Life Is a Movie, Not a Snapshot (i.e., that estate planning should be viewed as a process rather than a one-time transaction).

The conclusion provides a good summary of the article: “For most of us, the crystal ball of planning does not go more than five years. Families change, health changes, tax law changes and the law changes. The goal is to get the client on the path and to keep him or her there through all of the phases of life. Helping the client through each phase and encouraging the planning as part of the ongoing relationship between the CPA and the client is a very valuable service to the client and their family.”

Thanks to Jonathan Mintz of WealthCounsel, LLC for sharing the article and his comments.

Estate and Gift Tax Bill Introduced in House

Greg Herman-Giddens — Wed, 23 Nov 2011 08:05:02 -0500

On November 17, 2011, Congressman Jim McDermott (D-WA), a senior member of the House Ways and Means Committee, introduced HR 3467, the “Sensible Estate Tax Act of 2011”. Along with changes to the estate tax, the bill includes many of Obama's 2012 Fiscal Year Proposals with regard to gift and GST taxes. The bill includes the following:

Estate Tax Exclusion Amount of $1,000,000 with Top Rate of 55%:

Reduction of the estate tax exclusion amount to $1 million for decedents dying after December 31, 2011, and indexing for inflation from the year 2000 for decedents dying after 2012. The top tax rate is 55%, and the graduated amounts subject to the rate schedule would also be indexed for inflation.

Provisions designed to coordinate with the gift tax to reflect the decrease in the applicable exclusion amount.

Permanent Spousal Portability of the Estate Tax Exclusion Amount:

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the "2010 Act") created portability of the estate tax exemption between spouses, but the law expires on December 31, 2012. The Bill makes portability permanent.

Also included is a technical correction in the definition of “deceased spousal unused exclusion amount (“DSUEA”)” of a surviving spouse. The reference to the basic exclusion amount of the last deceased spouse of the surviving spouse would be replaced with a reference to the applicable exclusion amount of the last deceased spouse, so that the statute would reflect the calculation of the DSUEA as described by the Joint Committee on Taxation.

Credit for State Death Taxes Restored:

The credit was phased out from 2002 to 2005. Before, many states had estate tax laws that permitted them to "pick up" the amounts allowable as a federal estate tax credit. Thus states could share in the estate tax collections without increasing the overall estate tax burden. The bill would restore the revenue sharing mechanism with the states.

Valuation Discounts and Minority Interest Discounts Limited:

Valuation discount limitations for certain transfers of nonbusiness assets (defined as an asset which is not used in the active conduct of one or more trades or businesses), including:

For the transfer of an interest in an entity which is not actively traded, no valuation discount would be allowed with respect to “nonbusiness assets”;
For the transfer of an interest in an entity which is not actively traded, no discount would be allowed by reason of the fact that the transferee does not have control of the entity if the transferee and the transferee’s family members have control of the entity.
Effective with regard to transfers after the date of enactment.

Consistency in Value For Transfer and Income Tax Purposes Would be Required :

Imposition of a consistency and a reporting requirement, with penalties for inconsistent basis reporting. The basis of property acquired from a decedent pursuant to Internal Revenue Code ("IRC") Section 1014 must equal the value of that property for estate tax purposes, and the basis of property received by gift must equal the donor's basis determined under IRC Section 1015.

Effective for transfers for which returns are filed after the date of enactment.

Restrictions on Grantor Retained Annuity Trusts :

Minimum 10 year term;
Annuity payment cannot be reduced from one year to the next during the first 10 years of the GRAT term; and
The remainder interest at the time of the transfer must have “a value greater than zero.’’
The bill contains no guidance regarding the parameters of the "greater than zero" requirement.
Effective for transfers made after the date of enactment.

Duration of Generation-Skipping Transfer Tax Exemption Limited:

Expiration of the GST exemption 90 years after the establishment of a trust. This is done by increasing to one the inclusion ratio with respect to property transferred after that date.

Applies to trusts created after enactment, and to transfers made from pre-existing trusts if the transfer is made out of principal added to the trust after the date of enactment (subject to grandfathering exceptions).

My view is the that Bill has no chance of passage in its current form, the main sticking point being the drastic reduction of the current estate tax exemption and increase of the rate.

Death Taxes - Worst States to Die In

Greg Herman-Giddens — Thu, 17 Nov 2011 20:37:04 -0500

Here are the states with an estate and or inheritance tax, ranked from approximate highest to lowest tax burden (North Carolina has the distinction of being the best of the worst):

New Jersey - $675,000 exemption, 16% top rate (estate tax); $500 exemption/16% top rate (inheritance tax)
Maryland -$1M/16% (estate tax); $50,000/10% (inheritance tax)
Pennsylvania - 0/15% (inheritance tax)
Iowa - $0/15% (inheritance tax)
Indiana - $100/20% (inheritance tax)
Kentucky - $500/16% (inheritance tax)
Nebraska - $10,000/18% (inheritance tax)
Ohio - $338,338/7% (repealed effective 1/1/2013)
Rhode Island - $850,000/16%
Minnesota - $1M/16.7%
Maine - $1M/16%
Oregon - $1M/16%
District of Columbia - $1M/16%
Massachusetts - $1M/16%
Washington - $2M/19%
Illinois - $2M/16.7%
Connecticut -$2M/12%
Vermont - $2.75M/16%
North Carolina - $5M - 16%

State death taxes are deductible against the federal estate tax, which currently has a $5 million exemption and 35% rate.

Democrats to Introduce Bill to Lower Estate Tax Exemption to $1 Million

Greg Herman-Giddens — Thu, 17 Nov 2011 13:18:28 -0500

This news courtesy of Financial Advisor Nat Harris (emphasis added):

House Democrats plan to introduce a bill today to extend and overhaul the estate tax beyond 2012 in the opening salvo of what is likely to be a long and politically-charged debate next year.

A favored target of Republicans, the tax on inherited wealth already promises to be one of the most controversial elements of the tax code up for renewal at the end of next year. Six Republican presidential candidates, including all of the front-runners, have said they would repeal the tax.

But the legislation by Rep. Jim McDermott (D., Wash.), a veteran member of the House Ways and Means Committee, proposes to extend the current reach of the estate tax by reducing the amount of the estate exempted from the tax to $1 million from $5 million and raising the tax rate to 55% from 35%, bringing it back to pre-Bush era levels.

"I'm not against people making money in this country, but I do think they have a responsibility to give some of it back," especially at a time of a deep federal budget deficit, McDermott said in an interview this week.

While Democrats acknowledge they will face stiff resistance from Republicans, McDermott said taxpayers need to know Congress is not ignoring the issue until the last minute. In a deal brokered with President Barack Obama last December, Congress reinstated the estate tax for this year and next, after letting it lapse for one year in 2010. While the estate tax is slated to revert back to 2001 levels after next year, Republicans in Congress have already introduced legislation to repeal it again.

"It really is a question of clarity," for both families and planners, McDermott said. "The question is how to bring fairness into it."

Under McDermott's proposal, co-sponsored by Rep. Charles Rangel (D., N.Y.), the exemption for married couples would drop to $2 million from $10 million.

Spouses could still claim the remainder of their partner's exemption if some remains unused after death, as they can now. The rate and $1 million exemption would be adjusted for inflation, beginning at the 2000 level.

The bill, slated to be introduced today, would also unify the estate and gift taxes. That means a taxpayer would only have a single exemption of $1 million for their estate and most gifts. The legislation also includes several provisions from Obama's last budget proposal to end targeted estate tax breaks.

Republicans, often led by Sen. Jon Kyl (R., Ariz.) have pushed hard in previous years to repeal the tax, whose rates and exemption levels have varied wildly over the last decade.

2011 NC Senior Fraud Booklet

Greg Herman-Giddens — Tue, 15 Nov 2011 09:30:42 -0500

The 2011 Consumer Scams and Fraud booklet issued by the North Carolina Attorney General is now available. It is geared to increase awareness of and prevent fraud against seniors.

Annual SSA Earnings/Benefit Statements Ceased

Greg Herman-Giddens — Mon, 14 Nov 2011 12:37:44 -0500

In the past, each year the Social Security Administration (SSA) mailed a statement to all workers age 25 and older who were not receiving Social Security or Medicare benefits. The statement listed a worker's earnings record along with estimated benefit amounts at various retirement ages.

For budgetary reasons, the SSA will no longer send out these annual statements. It is not known when, or if, the automatic mailings will resume.

The SSA also will no longer accept Form SSA-7004, "Request for Social Security Statement."

Since Social Security benefits are based on one's lifetime earnings history, it is important to determine that all earnings are correctly listed on (SSA) records.

Those who need to verify earnings information can call the SSA directly at (800) 772-1213; TTY – (800) 325-0778, Monday through Friday, 7:00AM to 7:00PM.

Social Security benefits can also be estimated using the calculators on the SSA website.