Estate Planning

Here We Go Again....Proposed New Rules for IRA's.

2012-02-08T12:59:00.000-08:00

On Tuesday, Senate Finance Committee Chairman Max Baucus announced he will release a modified Chairman's Mark of The Highway Investment, Job Creation and Economic Growth Act of 2012 ahead of the Committee's consideration of the bill. Under the proposal, the five-year rule is the general rule for all distributions after death for plans and IRA's (regardless of whether the owner dies before or after the required beginning date) unless the beneficiary is an eligible beneficiary as defined in the proposal. This would apply to deaths occurring after 2012. Eligible beneficiaries include any beneficiary who, as of the date of death, is the surviving spouse of the employee or IRA owner, is disabled, is a chronically ill individual, is an individual who is not more than 10 years younger than the employee or IRA owner, or is a child who has not reached the age of majority. For these beneficiaries, the exception to the five-year rule (for death before the required beginning date) applies whether or not the IRA owner or employee dies before or after the required beginning date. In addition, the five year rule would apply after the death of the beneficiary.

While this is only proposed legislation, it does show how some in Congress want to find new ways to increase our income taxes in the years to come. Leaving money in an IRA (or any type of qualified plan, i.e. 401(k), 403(b), etc.) at death is the worst place to leave one's wealth for heirs to inherit anything. That is why these vehicles are called "Retirement Plans". One is to "use" these monies while one is alive during your retirement years to live on. So many people make the mistake of only taking minimum distributions late in their retirement years allowing wealth to compound tax free. But, never forget that this is only "tax deferral" and not "tax avoidance". Every IRA guarantees that there will be at least two kind of taxes at death. First, (i) an income tax; and (ii) secondly, an estate tax if one exceeds his or her basic exclusion amount. People would be better leaving these assets to qualified charities when they see the tax brackets of what the IRS will take when people die. And, it is only continues to look worse with these kind of proposals. Stay tuned.

Missouri Taxes

2011-12-26T11:28:00.000-08:00

For those of us who live in Missouri the article here might be of interest. Especially for those who take yoga classes and for those who smoke! On a serious note, I do not think the state tourism commission has caught on to my idea for increasing population growth in our state. Missouri is one of the few states that has NO INHERITANCE tax of any kind. So, if you want to pick a tax jurisdiction to die in, we are one of the best states in which to expire!

IRS Offers Year End Tax Planning Advice

2011-12-17T14:41:00.000-08:00

It is nice that our government actually does something to help out taxpayers at the end of the year. Go to the link here for the IRS web page for free year end tax advice. This is otherwise known as IR-2011-18. Happy Holidays from all of us! If you need futher help, feel free to give us a call at (314) 241-3963.

Prenuptial Agreements

2011-06-20T05:20:00.000-07:00

When one marries a second time it is critically important to protect one's wealth through a Prenuptial Agreement. This is a contract between two parties entered into upon the advice of counsel that sets forth the rights a spouse will have after one is legally married. A typical Prenuptial Agreement will set forth what is considered "Separate Property" and what property will be deemed to be "Marital Property". Separate Property is wealth that the future spouse waives his or her rights to upon death or divorce. When someone says "I do" a spouse gains legally enforceable rights to take against a will or a living trust by virtue of the marriage contract. The only way to protect against a second spouse upsetting the apple cart for the heirs is to have the spouse waive those rights before the marriage. This has to be done upon advice of counsel and full disclosure. A Prenuptial Agreement needs to be signed long before the date of the marriage ceremony so as to avoid any undue influence that might give someone the right to void the agreement at a later time. Married couples need to promise their current spouses that they will enter into Prenuptial Agreements if they decide to remarry after one becomes a widow or widower.

Estate Planning for One's Social Media

2011-06-17T06:47:00.000-07:00

While traditional estate planning deals with one's physical assets such as bank accounts, stocks and bonds, brokerage accounts, real and personal property, etc. the mark of a good estate plan goes beyond these matters to reflect a client's goals, legacy and history for future generations. Today one's social media may record more about a person's hopes, dreams and goals than ever before. So what happens to your Twitter, Facebook or Linked-In accounts when someone dies?

Facebook has a page here whereby one's Facebook page can be memorialized for friends of the deceased Facebook owner. Comments can be left on the wall for the family. The same link can also be used to close the account.

Twitter has a policy that sets forth the requirements for saving a deceased's public tweets or deleting them. They require the following information:

Your full name, contact information (including e-mail address), and your relationship to the deceased user;

The username for the Twitter account, or a link to the profile page of the Twitter account.

A link to a public obituary or news article.

One can either contact them at privacy@twitter.com or mail or fax at:

Twitter, Inc.
c/o: Trust & Safety
795 Folsom Street, Suite 600
San Francisco, CA 94107

Fax: 415-222-9958

Linked-In has a very simple "Verification of Death Form" here. One can opt to submit the form on-line or via Fax.

As with a person's other property, one's estate planning may include instructions on how one wishes their intangible property to be used even after one's death. Social media may do more to preserve one's photos, videos and conversations for future generations than ever before possible.

When you make a Charitable Gift - Get a Receipt at that time!

2011-05-25T14:05:00.000-07:00

The IRS recently issued an e-mail advice that when a taxpayer fails to obtain a contemporaneous written acknowledgment from the charity to whom the taxpayer has made a gift, the taxpayer cannot later claim an income tax deduction even if the charity files an amended Form 990 for the year of contribution for purposes of identifying the gift. See more here.

A Window of Opportunity

2011-05-21T13:15:00.001-07:00

The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 which was passed and signed into law in December of 2010 gives affluent individuals a gift, estate and generation-skipping tax exemption of $5M for the tax years 2011 and 2012. On December 31, 2012, these exemptions are scheduled to expire. The new amounts going forward could be as low as $1M. At the same time, the present estate tax rate of 35% is scheduled to increase to a whopping 55%!

Savvy planners are telling clients that there is currently an 18 month "Window of Opportunity" to shift wealth to the next generation on an extremely tax advantaged basis.

What happens if someone gives away $5M in 2011 and dies in 2013 when the estate tax is only $1M?

The answer is "We don't know?" The way the Tax Act was written in 2010 there is a possibility that Congress could attempt to "claw back" into the taxable estate gifts made in 2011 and 2012 that were in excess of the estate tax basic exclusion amount then in effect (i.e. $1M). Other commentators are convinced that this will not happen. The way we look at it, even if the claw back were to occur, the appreciated earnings of the gifted amounts would escape estate tax taxation at a potential 55% and the taxpayer would be no worse off if he or she had done nothing.

2. If I give my money away have I lost all control over the assets of the gift?

There are two basic ways one can make a gift: (1) outright; or, (2) in trust. Outright gifts are just that....a donor writes a check to a child and proceeds become the child's outright as soon as the check clears. The child can do whatever he or she wishes with the proceeds. Outright gifts are cheap and easy. But, they offer no asset protection or oversight of the gifted funds. A gift into a trust is a gift with strings attached to it. The donor can condition how the proceeds are to be used by placing the proceeds with a Trustee for the benefit of the child who is known as a beneficiary, i.e the one who "benefits" from the trust. A trust can be crafted to be as "liberal" or "restrictive" as the donor wishes. The main advantage to a gift in trust is that the proceeds can be protected from a beneficiary's predators, creditors and spouses. This asset protection of the gift is a huge benefit. It is even possible with proper drafting to make the donor one of a class of beneficiaries (the donor, the donor's spouse, the donor's children and grandchildren) of an Irrevocable Trust.

3. If I make a gift of appreciated securities doesn't the donee get the donor's income tax basis in the assets that are transferred?

If one's estate is less than $1M dollars there is no need to make gifts for estate tax purposes as the heirs will receive a "step-up" in the basis of the inherited property to the full fair market value as of the taxpayer's death. When one makes a gift of appreciated securities or real estate, the donee of the gift does get the donor's lifetime income tax basis along with the gift. That is why it is always better to gift cash than highly appreciated securities that would get the step-up at the time of the owner's death. Another option is to make a transfer of appreciated securities to what is known as an "intentionally defective grantor trust" a/k/a as an "IDGT". Why would anyone want a defective trust? It is a quirk in the tax code that one can make a gift for gift tax purposes of property transfered to an IDGT; but, for income tax purposes the donor continues to pay the income taxes on the property inside the IDGT. Why would a donor want to to do this? Because, every time the donor pays the tax on the IDGT it is the same as making a transfer for value to the grantor trust; but, the payment of the income taxes is NOT deemed to be a gift for gift tax purposes. In essence, the proceeds inside the IDGT can appreciate on a "tax free basis" because the IDGT is not paying the income tax on the growth inside the IDGT with its assets. If the Trustee of the IDGT sells stock, the capital gains tax on the sale is paid by the donor of the securities and reported on the donor's income tax return. Often the amount of wealth transferred in this manner will more than offset the capital gains taxes paid by the donor even if the children did not receive a "step-up" tax basis.

4. What is the effect of gifting to a "Dynasty Trust"?

When a donor gifts assets into a "Dynasty Trust" for the benefit of children, grandchildren and future children yet to be born by allocating their Generation Skipping Tax Exemption to such a gift, the benefit of avoiding taxes as each generational level is leveraged. If a taxpayer does not use one's Generations Skipping Tax ("GST") exemptions, the exemptions are generally wasted. The government gives these exemptions to everyone. It truly is a case of use it or lose it.

Let's say Taxpayer X does NOT use his GST exemption when he dies with a $5M estate in 2011. There will be no estate tax on the transfer of his wealth to his son Y at the time of his death . But, let us say son Y dies in 2013 when the estate tax rate is 55% over everything over $1M. The tax on the son's estate is 55% of $4M = $2,200,000; which in turn passes to Y's daughter Z. Z dies the following the year with a taxable estate of $2,800,00 [$5M - federal estate taxes of $2,200,000] at which time her estate owes $990,000 in Federal Estate Taxes on her taxable estate which passes to her children. So to pass Taxpayer's X original $5M estate down to two generations, his heirs will have paid a whopping $3, 190,00 in Federal Esate Taxes.

Use the same fact pattern with Taxpayer X as above. However, this time Taxpayer A creates a $5M dynasty trust with his estate at the time of his death and allocates his GST exemption to the dynasty trust so that there is no tax. When his son B dies in 2013 there is NO estate tax on the dynasty trust because the son B does not own the Dynasty Trust! Instead, the entire proceeds of the Dynasty Trust are held for the lifetime of Son B's daughter, C. If daughter C dies a year later, again the entire $5M (plus earnings) of the Dynasty Trust will pass estate tax free to C's children inside the Dynasty Trust. The tax savings over three generations can be as high as 65%. While it is true that Taxpayer A will have to pay some professional fees to create the Dynasty Trust, the tax savings pale in contrast to any expenses of administration of such Dynasty Trusts. Dynasty Trusts can be great "rainy day" fund to protect future beneficiaries from the effect of predators, creditors and spouses.

Sharing the Estate Plan with Family Members

2011-04-25T06:54:00.000-07:00

Parents are often reluctant to share financial and estate planning information with the children as they become adults. Generally, many parents are concerned that if the next generation becomes to fixated on what they will inherit some day that this may prove detrimental to their own independence and self sufficiency. A recent study confirmed that wealthy parents were afraid to share to much information with their children.

While no two families are the same, when each generation can do their estate planning with knowledge of what is going to happen in the future, there are opportunities to do things that otherwise go unnoticed. For example, if a child knows that there is will be a substantial inheritance someday, that knowledge could free up the child to consider gifting and multi-generational planning to take advantage of things such as the utilization of generation skipping transfer taxes. Through the use of dynasty trusts one can transfer wealth down to future generations on a tax free basis that can bless many future generations of one's heirs.

With proper drafting a trust can reflect the goals and desires of parents to foster independence and business entrepreneurship without, at the same time, creating a sense of entitlement that could impair a beneficiary's future development. We have seen success stories where families plan together and achieve a much improved estate plan that benefits a far greater number of members that when each generation plans in secret.

Current Planning to Avoid the Future Health Care 3.8% "Surtax"

2011-01-17T07:25:00.000-08:00

A new 3.8% surtax on certain investment income of taxpayers becomes effective January 1, 2013 as part of the health care reform act. While that is nearly two years away, it is not too early to start planning for it now because there are certain things one can do to help reduce or eliminate this new income tax.

Understanding the Tax

The 3.8% investment income surtax, also known as the health care surtax or "Medicare tax", applies to tax year ending after December 31, 2012. The surtax is:

For individuals, 3.8% of the lessor of:

net investment income for such taxable year; or,
the excess, if any of:

a. the modified adjusted gross income for the year, over

b. the threshold amount.

For trusts and estates, 3.8% of the lesser of:

the undistributed net investment income for the year; or,
the excess, if any of:

a. the adjusted gross income (as defined in Code Section 67 (e) for the year, over

b. the dollar amount at which the highest tax bracket in Section 1(e) begins for the year ($11,200 in 2010).

Three Key Numbers

There are three numbers that determine how this surtax will affect a client:

Net Investment Income. This is the sum of gross investment income over allocable investment expenses. For purposes of this surtax, investment income includes interest, dividends, capital gains, annuities, rents, royalties and passive income. Investment income does not include active trade and/or business income; any of the income sources listed above (e.g., interest , dividends, capital gains, etc.) to the extent it is derived in an active trade and/or business; distributions from IRA's and other qualified retirement plans; or any income taken into account for self-employment tax purposes. For the sale of active interest in a partnership or S corporation, gain is included as investment income only to the extent net gain would be recognized if all of the partnership/ S corporation interests were at fair market value.
Modified Adjusted Gross Income ("MAGI"). Here, MAGI is the sum of adjusted gross income (the number from the last line on page 1 of Form 1040) plus the net foreign income exclusion amount.
Threshold Amount.

Married taxpayers filing jointly............................$250,000
Married taxpayers filing separately....................$125,000
All other individual taxpayers..............................$200,000
Trusts and Estates......................(Beginning of the top bracket ($11,200 for 2010).

Who will pay the new Surtax?

Here is a quick formula to determine if the the 3.8% surtax will apply:

MAGI less than or equal to the threshold amount = no tax
MAGI greater than the threshold amount = Tax is 3.8% of the lesser of investment income; or MAGI threshold amount

Note that the surtax liability is determined on income BEFORE any tax deductions (page 2 of Form 1040) are considered. As a consequence, a client with lots of deductions could be in the lowest tax bracket and yet have investment income that is subject to the surtax! Also, because the capital gains rate has increased to 20% in 2011, with the 3.8% surtax in 2013 the effective capital gains rate will become 23.8%.

Planning Tip: Start adjusting trust and estate investments now to reduce income in 2013 and beyond.

Planning Considerations: For taxpayers who could be hit by the surtax, look for ways to invest income and MAGI:

The 3.8% surtax does NOT apply to distributions from IRAs and other qualified retirement plans, and contributions to these plans provide tax-deferred growth. Therefore, taxpayers may wish to increase contributions to IRAs, 401(k) plans, 403(b) plans and 457 plans. However, be aware that required minimum distributions for those over 70 and 1/2 will increase MAGI as those distributions are considered ordinary income.
The 3.8% surtax does not apply to distributions from Roth IRAs. However, Roth conversion income will count toward MAGI. Thus, 2011 and 2012 Roth conversions can help to avoid the surtax by reducing post 2012 MAGI from required minimum and other plan distributions in 2013 and beyond.
Because income from tax-exempt and tax-deferred vehicles like municipal bonds, tax deferred non-qualified annuities, life insurance and non qualified deferred compensation are not included in investment income, investments in these vehicles should be more favorable.
Charitable Remainder trusts should be more appealing because they permit taxpayers to defer income over a period of time, enabling them to stay under the threshold amount.
Charitable lead trusts will become more popular to shift investment income to a CLT which in turn will be offset by the "above the line" charitable deduction.
Installment sales will be popular to smooth income.
Oil and gas (with 95% initial investment deduction, 15% depletion allowance and IDC deduction on passive oil and gas) will continue to be attractive investments.
For eligible estates and electing trusts, select the proper year to reduce the surtax. For example, Frieda dies in January 2012. Her estate elects a November 30, 2012 year end. Result: The surtax will not apply to her estate until the year beginning December 1, 2013, providing 11 additional months without the surtax.

Roth IRA Conversions today reduce future MAGI

As stated earlier, required minimum distributions from a traditional IRA are exempt from the surtax; but, they increase MAGI. This can effectively create a 43.4% effective tax rate on IRA distributions in later years (39.6% income tax plus 3.8% surtax on investment income made surtaxable by the IRA distribution).

Planning Tip: Converting to a Roth prior to 2013 can reduce MAGI in 2013 and beyond and thereby reduce or eliminate surtax exposure.

2011-2012: The Time to Plan

2011-01-03T06:31:00.000-08:00

Congress has given those who plan estates a wonderful 2 year window before the possible return of the estate tax in 2013. The 2010 Tax Act kicked the can of Bush tax cuts down the road for two years. In addition, Congress increased the size of the exemptions from tax. The new limits are set to expire on December 31, 2012. But, in the meantime, here are the current limits:

Gift Tax Exemption: Individuals can now make lifetime gifts up to a $5M and exclude the transfer from tax by filing a Federal Gift Tax return allocating one's lifetime gift tax exemption.
Generation Skipping Transfer ("GST") Tax Exemption: Individuals can now set up trusts for younger beneficiaries and use a $5M GST lifetime exemption. This is a "use it" or "lose it" exclusion. Once a person dies, this exemption disappears.
Annual Exclusion Gifts: In addition to the use of one's lifetime exemptions, an individual can also make annual exclusion gifts of up to $13,000 per year per donee without any adverse tax consequences.
Estate Tax Exemptions: An individual can die in the next 2 years and not pay any Federal tax on estates of less than $5M. In addition, for spouses dying in 2011 and 2012 it will now be important for the personal representative of a deceased person's estate to file a gift tax return passing along a deceased spouse's Unused Spousal Exclusion Amount to one's spouse. Effectively, the surviving spouse could then have up to $10M worth of estate tax exemption. However, the GST tax exemption cannot be transferred in this manner.

This means that families with wealth who wish to plan ahead can do some extraordinary things to benefit future generations. The use of an Irrevocable Life Insurance Trust ("ILIT") which can be funded with life insurance creates opportunities for tremendous tax leverage for future generations. Clients who have illiquid assets, such as a family business or a farm, can use an ILIT to balance out distributions between multiple beneficiaries.

Another strategy that received a reprieve was the use of the Grantor Retained Annuity Trust ("GRAT"). This strategy coupled with an ILIT can make intergenerational wealth transfers a significant part of giving what one has, to whom one wishes, the way one wishes, at the lowest possible tax impact. Those who choose to plan in the next two years will benefit their families significantly over those who do nothing.

The time to do this planning is now! Every day one waits you run the risk of losing these opportunities.

The Charitable IRA Rollover Gift

2010-12-29T13:42:00.000-08:00

For clients over age 70 and 1/2 Congress snuck in a bit of charitable opportunity in the new 2010 Tax bill that allows one to make gifts directly from one's IRA to your favorite qualified public charity on a tax free basis. The ability to do this ends on January 31, 2011. The gift cannot exceed $100,000.

The Charitable IRA Rollover gift is made directly from the IRA custodian to the charitable organization. The gift is completely tax-free from the IRA to the charity. The gift is not included in the donor's income and the donor receives no income tax charitable contribution deduction for the gift. The completely tax-free transfer provides the equivalent of a 100% income tax charitable deduction for the gift. More importantly, the Charitable IRA Rollover gift does not reduce the donor's ability to make other charitable gifts that are subject to the income tax charitable contribution deduction rules.

Anyone needing more information should contact their tax advisor to take advantage of this opportunity before January 31, 2011.

Year End Fire Sale on Generation Skipping Transfers for 2010

2010-12-27T14:48:00.000-08:00

Grandparents wishing to make gifts to grandchildren have been handed an opportunity by the new 2010 Tax Act to make gifts, directly or in trust, without incurring any Generation Skipping Transfer ("GST") tax in this calendar year. However, a grandparent would still pay 35% gift tax on a grandchild's gifts in excess of the $1 million gift tax exemption. In 2011 and 2012, the tax rate on GST transfers will be 35% with a $5 million exemption.

The decision to pull the trigger on this opportunity is effectively over by Thursday as most financial institutions will be closed on Friday for the New Year Holiday. Anyone who wishes to consider this should contact their tax advisors ASAP.

It is now up to the President

2010-12-17T06:55:00.000-08:00

Last night while most of us were sleeping, the U.S. House of Representatives passed the "The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010" [hereinafter the "2010 Act"] and sent it off to the President to sign on December 17, 2010. This band aid of legislation is only effective for two years. Yes, we will be right back where we are today looking at $1M dollar estate tax exemptions and a 55% estate tax rate all over again in December 2012! What a way to run a railroad? Assuming that President Obama signs this new law, there are a variety of new provisions which we will have to incorporate into our estate planning practice. Here are a few of the highlights:

1. Estate Tax for 2010: Exclusion Amount $5M with a maximum tax rate of 35% and the option to elect carryover tax basis instead of estate tax treatment. The Gift Tax exclusion amount will remain at $1,000,000 (no change) and at a 35% gift tax rate (no change).

2. Estate Tax for 2011-2012: Exclusion Amount $5M with a maximum estate tax rate of 35%. The Gift Tax exclusion amount will increase to $5M and maintain a rate of 35% (no change).

3. One of the new features is the use of a deceased spouse's exemption amount ("portability") for spouses who die in 2011 and 2012. In essence, married couples will get the use of a $10M exemption under certain circumstances.

There is much to be studied and absorbed from this legislation. We will bring you more details ahead in the coming days.

Year End Tax Reform Controversy Contines

2010-12-09T08:01:00.000-08:00

On Monday, December 6, President Obama announced that he had reached a compromise with the Republican Senators for a two year extension of the Bush-era tax cuts. The projected estate tax exemption would be $5 million per citizen with an effective tax rate of 35% over and above $5 million ( down from the scheduled $1 million exemption and a 55% tax rate scheduled to take effect on January 1, 2011). In exchange the unemployment insurance benefits (including a 2% reduction in payroll tax, from 6.2% to 4.2%), would become effective in 2011.

Almost immediately this compromise drew fire from both sides of the aisle. For example, Republicans were uneasy awaiting details of the plan. At the same time some Democrats have announced their opposition to the passage of this legislation. This is not a done deal.

All we can suggest is that clients stay tuned for the latest developments. No doubt a $5 million dollar exemption would be welcome news to 99% of all Americans who would not be bothered with Federal Estate Taxes. But, if Congress fails to act, those Americans with estates over 1 million dollars may wish to avail themselves of some gift giving opportunities in 2010. The shopping days in December are rapidly coming to a close.

Year End Estate Planning

2010-11-22T07:27:00.000-08:00

Congress is back in session and the big question is whether this lame duck Congress is going to do anything on the tax front before the end of the year? Whether they do or do not, there are still some things that folks should consider:

Making taxable gifts in 2010. This year there is a "blue light special" on taxable gifts of 35% made in 2010. Next year the rate goes to 45%. And, if one does die next year or thereafter the death tax rates will be 55%. If there was ever a time to consider this option it is now.
Use of Rolling Grantor Retained Annuity Trusts ("GRATs"). While Congress has debated sticking a knife in this technique by requiring a minimum 10 year lifetime term (i.e. if a donor sets up a GRAT and dies within 10 years it gets sucked back into one's taxable estate) right now short term GRATs are still possible. This is a win-win situation that may not be with us much longer.
The Section 7520 rate dropped to 1.8% in December. This is a historic all time low rate of interest that makes some techniques like Charitable Lead Annuity Trusts very attractive for people looking to avoid the payment of Federal Estate taxes on estates over $1M in 2011.
Irrevocable Gift Trusts for children and grandchildren are still favorites to provide asset protection planning for future generations.
IRA Roth conversions from traditional Individual Retirement Accounts ("IRAs") in this month may be an appropriate move for many people with with the right mix of investment assets that can be used to pay the income taxes on the conversion. Coupled with a Retirement Benefits Trust as a Qualified designated beneficiary, one can get "stretch" IRA tax treatment for the beneficiary and asset protection planning under the right circumstances.

Our calendar is filling rapidly for planning in December. If you need help or assistance, please call soon.

November AFR Rates continue lower

2010-10-20T09:26:00.000-07:00

The November Applicable Federal Rates continued their downward spiral for next month. The new annual short term rate is down to .35%. Mid-term rates on notes between 3 years and 9 years are now at 1.59% and the new annual long term rate is down to 3.35%. The Section 7520 rate is now a historic 2.0%. Loans to younger generation beneficiaries, Grantor Retained Annuity Trusts ("GRATS") and Charitable Lead Trusts are wonderful tools to lock in some these lower rates.

October Applicable Federal Rates ("AFR")

2010-09-18T14:59:00.000-07:00

Every month the government establishes what is known as the Applicable Federal Rate for the charging of interest rates in related party transactions. The Section 7420 rate is now down to 2%. This is a historic all time low water mark for interest rates.

If one wanted to make a loan to a child over $10,000.00 the IRS requires that the loan bear interest at certain minimum rates. For loans repayable within three (3) years [the "short-term" rate] the minimum interest rate in October is .41%. The "mid-term rate" for loans over 3 years but less than nine (9) years to maturity is 1.71% for monthly payments. The "long-term rate" for loans over nine years to maturity is now 3.27%. The use of intra-family loans is a wealth shifting device that can be used to enable a younger generation's accumulation of wealth.

10 Things the IRS wants you to know about Charitable Giving

2010-08-26T14:27:00.000-07:00

Did you make a donation to a charity this year? If so, you may be able to take a deduction for it on your 2010 tax return.

Here are the top 10 things the IRS wants every taxpayer to know before deducting charitable donations.

1. Charitable contributions must be made to qualified organizations to be deductible. You can ask any organization whether it is a qualified organization and most will be able to tell you. You can also check IRS Publication 78, Cumulative List of Organizations, which lists most qualified organizations. IRS Publication 78 is available at IRS.gov.

2. Charitable contributions are deductible only if you itemize deductions using Form 1040, Schedule A.

3. You generally can deduct your cash contributions and the fair market value of most property you donate to a qualified organization. Special rules apply to several types of donated property, including clothing or household items, cars and boats.

4. If your contribution entitles you to receive merchandise, goods, or services in return – such as admission to a charity banquet or sporting event – you can deduct only the amount that exceeds the fair market value of the benefit received.

5. Be sure to keep good records of any contribution you make, regardless of the amount. For any contribution made in cash, you must maintain a record of the contribution such as a bank record – including a cancelled check or a bank or credit card statement – a written record from the charity containing the date and amount of the contribution and the name of the organization, or a payroll deduction record.

6. Only contributions actually made during the tax year are deductible. For example, if you pledged $500 in September but paid the charity only $200 by Dec. 31, your deduction would be $200.

7. Include credit card charges and payments by check in the year they are given to the charity, even though you may not pay the credit card bill or have your bank account debited until the next year.

8. For any contribution of $250 or more, you must have written acknowledgment from the organization to substantiate your donation. This written proof must include the amount of cash and a description and good faith estimate of value of any property you contributed, and whether the organization provided any goods or services in exchange for the gift.

9. To deduct charitable contributions of items valued at $500 or more you must complete a Form 8283, Noncash Charitable Contributions, and attached the form to your return.

10. An appraisal generally must be obtained if you claim a deduction for a contribution of noncash property worth more than $5,000. In that case, you must also fill out Section B of Form 8283 and attach the form to your return.

For more information see IRS Publication 526, Charitable Contributions, and for information on determining value, refer to Publication 561, Determining the Value of Donated Property. These publications are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Links:

Publication 78, Cumulative List of Organizations

Publication 526, Charitable Contributions ( PDF)

Publication 561, Determining the Value of Donated Property ( PDF)

What to do with Inherited Property in 2010?

2010-08-24T08:59:00.000-07:00

With the repeal of the Estate Tax and Generation Skipping Transfer Tax in 2010, those who inherit assets from someone who dies in 2010 may be forced to deal with some very difficult income tax basis rule changes. If someone dies and their entire estate is less than $1.3M the inherited assets will receive a "step-up" in basis to the fair market value of the asset as of the decedent's date of death. But, if the person who dies in 2010 owned more than $1.3M in assets, then a tax return must be filed with the decedent's final income tax return which would be due April 15, 2011 or such later date as the IRS might prescribe by regulation not yet issued [see IRC Section 6075(a)].

If an heir sells property in 2010 where the asset is included in an estate of a deceased person with more than $1.3 M in property, that individual will need to wait until he or she receives the information required by Internal Revenue Code Section 6018. So far, the IRS has not even published the necessary tax forms to file this report.

Heirs who inherit property from someone who dies in 2010 in excess of $1.3M would do best to NOT sell that asset in 2010. There is an argument that with the sunset of the current tax laws at the end of this year (Section 901 of the EGTRRA) that the basis of assets sold after 2010 from decedents dying in 2010 will be entitled to a step-up in basis under the resurrected Section 1014 of the Internal Revenue Code. No one can say for sure what Congress might do before the end of the year? Stay tuned.

Generation Skipping Issues in 2010

2010-07-28T13:18:00.000-07:00

Like the federal Estate tax, the federal Generation-Skipping Transfer ("GST") tax is currently repealed for 2010. If Congress continues on its "do nothing" approach to tax reform, the GST tax will reappear on January 1, 2011 at a top rate of 55%.

Unlike the estate tax where one has to die in 2010 to benefit from the repeal, there are some options this year for those who are planning on living until 2011. By way of background, the GST tax was implemented by Congress in 1976 as a way to stop rich people from passing wealth down to future generations tax free. It was designed to tax distributions that did not get passed down from one generation to the next (i.e. parent to child) by taxing distributions that "skipped" a generation. Thus, in addition to income tax, estate tax, and gift taxes Congress leveled a new tax (the GST tax) for transfers that are classified as "generation skipping transfers" to or for the benefit of a "skip person". This system was so complicated that Congress decided in 1976 to give every taxpayer a $1M dollar exemption from GST taxes. In 1976 $1M was a lot of money. From 1976 to 2001 the GST exemption was increased to $1, 060,000. Suddenly, people who had never heard of the GST tax [Chapter 13 of the Internal Revenue Code] were paying more in taxes. Congress ratcheted the exemption up to $3,500,000 by 2009. We are now poised for the return of the GST tax on January 1, 2011 at the base rate of $1M with perhaps some minor inflation adjusted amount.

A skip person is generally a person more than one generation removed (think grandchild and beyond) from the transferor. A skip person can also include a trust for the benefit of beneficiary or beneficiaries of a skip person(s). A generation skipping transfer can be either:

a "Direct Skip" which is an outright transfer to a skip person or a trust for a skip person;
a "Taxable Distribution" from a trust to a skip person; or
a "Taxable Termination" of a trust or non-skip person's interest in a trust that vests property in a skip person, which could include the termination of all non-skip persons' interests in the trust, leaving only skip persons as beneficiaries.

Certain trusts may be "GST Exempt" trusts because they were set up before the date of the enactment of the GST tax (i.e. they are "grandfathered") or the maker of the trust allocated his or her GST exemption on a validly filed GST tax return to allow the GST Exempt trust to have an inclusion ratio of "0".

Several planning opportunities present themselves in 2010. For example, a donor can make direct gifts to grandchildren without any GST tax in 2010. However, the federal Gift tax still remains in effect. The highest federal Gift Tax rate for 2010 is 35%. Gifts that are less than $13,000 per donee per calendar year are exempt from gift tax. In addition, a person may allocate any part of their $1M dollar lifetime gift tax exemption to such gifts. Note that the gift tax rate is down 10% from last year (45%) and will be 20% less than the projected current gift tax rate of 55% for next year.

If a grandparent who has exhausted all of one's annual exclusions and gift tax exemption were to gift $1,000,000 to a grandchild this year, the transfer tax would be $350,000. That same gift if made in 2011 would incur a combined gift tax and GST tax liability of $1,100,000! That is a tax rate of 110%! If a grandparent were to make gifts to great-grandchildren, such gifts would skip two generational levels.

Many grandparents have established gift trusts for grandchildren. Each calender year the grandparent would gift $13,000 into such a trust for the benefit of the grandchild. Normally Section 2611 (b)(2) of the Code would protect future distributions from such trusts from GST tax in the future since the original transfer to the trust was subject to GST. A transfer to such a trust in 2010,however, would NOT be subject to GST. There fore, the protection of Section 2611 (b)(2) may not apply. Accordingly, grandparents should not make annual exclusion gifts to gift trusts in 2010. Instead, one may wish to consider either direct transfers to skip persons or to a Uniform Transfer to Minors Account for such a grandchild in 2010. Consideration needs to be given to the appropriateness of such gifts to a grandchild outright.

Grantor Retained Annuity Trust ("GRAT")

2010-07-05T16:01:00.000-07:00

The Grantor Retained Annuity Trust (often referred to as a "GRAT") is a long favored technique for those with substantial estates who find themselves staring at a 55% estate tax rate starting January 1, 2011. By setting up a GRAT one can legally pass wealth down to the next generation on a tax favored basis. In essence, a donor sets up an Irrevocable Trust and retains the right to receive an annuity paid to the donor over a specified term of years. At the end of the annuity term, if there is anything left over for the beneficiaries, known as "remaindermen", the amount of increase in the trust's investments that exceeds a specified rate set by the IRS, passes tax free to the remaindermen.

The IRS hates this technique even though it is sanctioned by the current tax Code. Clients often set up revolving GRATS that rollover at the end of the term as a way to leverage their transfers to younger beneficiaries. Typically, we use GRATS that have a term of two, three or sometimes five years.

On July 1, 2010 the House of Representatives voted 215 to 210 to pass an amendment to H.R. 4899 ( a supplemental spending bill) that would now require all GRATS to have a minimum ten year term. If the donor who sets up a GRAT dies during the term, the bulk of the GRAT is includable in the estate of the donor for Federal Estate Tax purposes. Thus, for older donors this may well be the death knell of the use of the GRATS. The Senate is expected to take the measure up in the next few days.

For anyone interested in setting up GRATS, now is the time to do so! The effective date of the legislation will be the date the Act is enacted. Due to the very low interest rates now in play, if anyone has ever considered this technique, they should rush to get this accomplished post haste to avoid the application of the ten year minimum term rule. It looks like the clock will be ticking down soon.

The Closely Held Business - What to do?

2010-07-03T15:21:00.000-07:00

Estate planning attorneys are always talking with clients about how to best plan for their retirement and estate planning. For those clients who own a business, planning for the transfer of that business upon death or disability must be built into the process. The challenge of how to treat both the family and the employees of the business fairly is a difficult challenge.

Current Climate for Business Transfers

With the aging of the baby boomers, there are more and more closely held businesses coming onto the market every month. There may be a myriad of more sellers than qualified buyers. Coupled with the current stock market losses, these factors affect the value of one's closely held business. Coupling that with increased governmental regulation in all areas of the law dealing with commerce, labor, anti-discriminatory employment practices, new tax laws and the like, the small closely held business is under assault. Trying to get a bank to make a loan to buy a closely held business is almost impossible given the increased standards of the banking and finance industries. And, to top it off, for the first time in years individual income tax rates are increasing to exceed corporate income tax rates. Income taxes next year could be as high as 39.6% for an individual ( federal rate), plus 6% for Missouri state income tax, with any a new 3.8% healthcare tax on higher incomes. We are now looking at a first-time Medicare tax on passive income. Long-term capital gains tax rates will be increasing from 15% to 20 - 28%. And, if Congress fails to act, estates of more than $1M dollars starting on January 1, 2011 will be taxed at 55%.

Public corporations can pass along their increased costs to the consumers. But, a privately owned company must absorb these increased costs out of what goes to the owners of the business. If a private business wants to borrow money to keep a business afloat, the owners will have to sign a personal guaranty with the bank pledging their personal assets for the business loan. If the business fails, often the fortunes of the family go with the business.

The analysis has to start with "What does the client want?" Here it is often difficult for clients to resolve inherent conflicts. How does a business owner treat children who work in the business with those who work outside the business? Is the goal to pass the business down to the next generation? Who will provide the management of the transferred business? Are the children of the owners the best "qualified" people to lead the company? Sometimes bringing in an outside consulting firm to give the owners an unbiased opinion is a good start to the succession planning process. Retaining employees who feel that they have merited consideration can be extremely difficult in a business succession plan. Protecting the business's good will through contracts with key employees that restrict competition, or soliciting customers or vendors and employees are critical components in maximizing the valuation of the business.

The very best time to sell a business to maximize it's value is when things are going well. Unfortunately, this is the very last thing a successful closely-held business owner is thinking about until some disastrous event occurs. The transfer of a company has to be incorporated in the client's retirement, estate and income tax planning.

Leaving a Legacy

2010-06-26T21:17:00.000-07:00

I like to define estate planning as giving what you want, to whom you want, the way you want, how you want, and at the lowest possible cost. That definition has always made a lot of sense to me. But, that definition is really focused on estate planning as a process. What makes even more sense is to think of how one's estate plan can add value to others. The joy of giving is difficult for many to grasp. But, when one gives something of value that reflects a donor's hopes, dreams and goals there is demonstrable benefit to the donor. It is, I believe, an universal law of nature. When you gives some thing away of value, there is a benefit that comes back to the donor. It may not be economic; but, there is joy in helping others to achieve a goal. That joy is brought about by leaving a legacy. A legacy is a benefit that survives the donor. It comes from the realization that we enter this world with nothing and when we die, we can't take it with us. So what does one do with the accumulation of wealth? This has nothing to do with the quantity of wealth; but, everything to do with the quality of one's estate plan.

If someone fails to do any planning at all, the State determines who will benefit. This is called the law of Intestate Succession. For example, in Missouri if someone dies while they are married with children, the spouse will receive the first $20,000 of assets. The balance is then divided between the spouse and the children. If a single person dies without descendants, the estate passes in equal shares between the mother, father, brothers and sisters. Many times when people discover this, they will say, "That is not what I want!" This is why it is important for every person, regardless of the size of one's estate, to create an estate plan long before the need arises.

New Wyoming Single Member Limited Liability Company

2010-06-22T07:44:00.000-07:00

I remember back in 1977 when the State of Wyoming passed the first Limited Liability Company Act. Many thought that a hybrid company that could be treated as a partnership or proprietorship for tax purposes and yet have limited liability like a corporation would never work. Fast forward to today and all fifty states now have Limited Liability Company statutes and the Limited Liability Company ("LLC") has become the entity of choice for all of new business organizations.

Well, the state of Wyoming is at it again. Beginning July 1, 2010 , an individual can set up a single person LLC in Wyoming and have creditor protection in a way that is not available in Missouri or in very few states. The new provision of the Wyoming statute regarding creditor's rights (W.S 17-15-503) now creates an "exclusive remedy" for creditors of an LLC. A creditor is limited to what is known as a "charging order". The charging order "is the exclusive remedy by which a person seeking to enforce a judgment against a judgment debtor, including any judgment debtor who may be the sole member, disassociated member or transferee, may, in the capacity of the judgment creditor, satisfy the judgment from the judgment debtor's transferable interest or from the assets of the limited liability." This means the individual member of the LLC (think "owner") cannot be sued for the liabilities of the LLC. The Wyoming statute even goes on to say that there are "no other rights, legal or equitable, other than the charging order". Thus, there is no judicial foreclosure available to a creditor of a member's LLC ownership interest.

Anyone who is interested in creating an extra layer of security in a business enterprise might consider setting up a single member Wyoming LLC and then registering the Wyoming LLC as a foreign business in the state in which the member resides or does business. We can partner with attorneys who are licensed in Wyoming to assist clients with this new tool of asset protection planning.

2010 Estate Planning

2010-06-08T07:59:00.001-07:00

As of June 8, 2010 Congress has still failed to act to advise us as to what the exact tax implications will actually be for people who die in 2010. With the repeal of the Estate Tax and Generation Skipping Transfer ("GST") tax in 2010, anyone who contemplates that they could meet their demise in 2010 would be well advised to seek legal counsel immediately to update one's estate planning documents. In particular, anyone who utilizes a "formula clause" in one's will or trust to create sub-trusts after the first spouse's death for the benefit of a surviving spouse and/or family members (i.e. a "Marital Trust" and a "Family Trust") would be well advised to update his or her documents.

For larger estates the gift tax rate this year is at an all time low of 35%. Next year, the rates revert to 55%. Should one consider making taxable gifts this year to pick up a 20% savings for the benefit of one's heirs? Anyone who has to write a check to the "U.S. Treasury" next year for 55% rates would have thought that this would have been a wonderful idea!

Clients who face end of life issues may wish to update their Health Care Powers of Attorney and Living Wills in light of the year end tax issues for 2010. The time to make these decisions is well in advance of the events that cause the need for them.

Our best guess at this time is that we are not going to see any tax legislation before the November elections. Given the current circumstances of gridlock in Washington D.C. at this time, the thought of comprehensive tax legislation getting done before year end is looking more and more unlikely. We very well may be facing a situation starting on January 1, 2011 where every unmarried citizen who dies in 2011 will be paying 55% estate taxes on one's estate in excess of $1M dollars.