Monday, August 24, 2009

Planning for Disability

All of us are swamped with busy schedules. No one ever thinks that he or she will ever be the person who is incapacitated or disabled. Yet, statistically, a person is seven time more likely to experience incapacity rather than sudden death. It is reported that less than a third of Americans adults, and less than half of nursing-home patients, have ever created any advanced directives setting forth one's wishes and medical desires.

An advance medical directive typically has two parts: a health care power of attorney and a living will. The health care power of attorney for health care, designates a person, such as a spouse or trusted friend, who can legally act as your agent, making medical decisions for you if you are incapacitated. Meanwhile, the living-will portion describes the type of care you would want if you are critically ill. The Missouri Bar offers a free down loadable form here. However, I would strongly urge anyone to seek a competent estate planning attorney to fine tune and develop legal documents that reflect one's hopes, goals and objective in this area. These forms are state specific.

An advanced directive is for the benefit of the living as well as the person who creates them for himself or herself. Anyone who has ever had to make these kind of medical decisions for a loved one knows how emotionally difficult it can be for the decision maker. Leaving instructions that tell someone you trust what you want and how you wish to be treated is a loving act for the benefit of those who are left behind.

Every estate plan should address these issues and create instructions that reflect the client's hopes, dreams and goals.

Saturday, August 8, 2009

Estate and Gift Tax Update

What is Congress doing about the current situation whereby the Estate Tax will be repealed in 2010. President Obama has asked for legislation that would extend the current 2009 $3.5M exempt amount for another 3 years. But, so far nothing has happened. With the focus in Congress on health reform and cash for clunkers the "fixing" of the Estate Tax Code has seemed to have dropped off the radar screen.

Now this is my pure speculation. However, if the country becomes even more polarized over legislative agendas this Fall, I could see a scenario whereby the White House takes a pure party line approach. If no comprises are reached the Estate Tax will be repealed for one year in 2010. This means that if Warren Buffet died in 2010 his entire estate could pass estate tax free to his heirs. There would be no need for charitable planning from an estate tax avoidance point of view. I can actually picture people jumping off bridges on December 31, 2010 so that they can die to pass their estate to their heirs tax free. I can also picture junior who might wish to accelerate mom or dad's demise in 2010? One may wish to take a long cruise to stay away from anxious expectant heirs late in the year.

But, here is the kicker! Starting January 1, 2011 everyone who dies who has gross taxable estate in excess of $1,000,000 dollars would pay an estate tax of 55% on the excess over and above that amount. If you want to pick a on a constituency that does not vote, dead people fit the bill. And, if Congress is looking for an easy fix to ring in the tax dollars to pay for prior exorbitant spending, what better way than to say "we did not do anything. We just let the tax breaks expire." I hear a large sucking sound beginning to resonate in Washington, D.C. that will impact us all.

In light of all the uncertainty, the one thing that everyone who has an estate of over $1M should do is to update their estate plan to take all these scenarios into account. Many people will be lulled into a false sense of security thinking that this will not apply to them. What they do not realize is that the estate tax is like a giant sponge. It soaks up everything that one owns at death. This includes not only a person's so called "liquid assets" like cash, bank accounts, stocks, bonds, etc. but it also includes equity in real estate, all of an individual's retirement plans such as IRA's , 401(k) plans, annuities and the face amount of all life insurance owned by a decedent. When people add up all of this they are shocked to discover that on paper their estates are a lot larger than they think. The first dollar over $1M could be at risk of a possible 55% haircut.

Stay tuned as the script is not even been written on this yet!

Monday, August 3, 2009

Planning for College

As kids get ready to go off to college it is that time of year when parents swallow hard to pay for tuition, fees and expenses of a child's college education. For a child in Missouri the cost of a public education is approximately $17,000 per year. For a private school costs can exceed $50,000 per year. Few people can afford to pay for this out of their regular income. It takes a lifetime of savings and planning for this expenses.

What are the options for saving?

1. Parents can try to save money in their name. The plus of this is that the investment is in the parent's name and there is no loss of control. The downside is that the return on the investment is currently taxable at the parent's rate.

2. Specialized savings accounts in the child's name, i.e. Uniform Transfer to Minor's Account ("UTMA") and Uniform Gift to Minor's Account ("UGMA") are popular accounts at banks, savings institutions and investment firms. The advantage of these type of accounts are that they cheap and easy to set up. The investments in these accounts are taxed to the minor (subject to kiddie tax). The downside to these accounts is that when the child turns 21 in Missouri (in some states it is 18) the investment belongs to the child. For example, if your child wants to buy a motorcycle on his or her 21st birthday and take their significant other to Alaska you will not be able to do anything about it. For this reason, I do not recommend these accounts unless they are for very small amounts.

3. Section 529 College Savings Plans. Almost every state offers these accounts which are similar to an IRA. The main attraction is that the investment grows tax free inside the 529 Plan. If used for "Qualified Educational Expenses" the amounts expended for college are not taxable income. The parent (or better yet the parent's living trust) can be the owner of the 529 plan so that there is no loss of control. If the child does not go to college, the owner of the 529 plan can name a new beneficiary. Contributions are limited to $13,000 per year. A five year gift of $65,000 can be made up front; but, no other contributions can be made for a five year period.

4. An Irrevocable Trust. Another way to create a fund for future use is to set up an Irrevocable Trust. Let's say a Grandparent sets up an Irrevocable Trust naming the Parent as the Trustee for the benefit of a Grandchild (the "beneficiary") The Trustee can invest in anything that is fiduciallary appropriate. Grandparent can contribute up to $13,000 per year (the "annual exclusion gift"). If Grandparents want to make a joint contribution to such an Irrevocable Trust the maxiumum amount of the gift could be as much as $26,000 per year ($13,000 x 2 = $26,000) . In addition, a Grandparent could choose to make a lifetime gift up to $1M as part of their lifetime gift tax exemption amount to "supercharge" such a trust in addition to annual exclusion gifting. If Grandparent wishes to do so the trust can be made "defective". This means that for estate and gift tax purposes the Irrevocable Trust is outside of the estate of the Grandparent. But, for income tax purposes the earnings of the Irrevocable Trust can be picked up by the Grandparent and put on the Grandparent's income tax return. Why would a Grandparent might want to do this? Because, so far paying the income tax for someone else is not deemed to be a gift. In essence, the Grandparent's payment of the Irrevocable Trust's income tax is another way to transfer more wealth to the next generation. Meanwhile the Irrevocable Trust grows "tax free" so to speak. The earnings are compounded and re-invested in the trust each year. If the Irrevocable Trust could earn 7% a year for 10 years it would double in value. This is a wonderful way to create a supercharged savings plan for a grandchild. The trust can offer asset protection planning from the grandchild's creditors, predators and spouses for their lifetime if so desired.

Fictitious Business Names in Missouri

Many of our business clients utilize a Fictitious business name for their corporations, partnerships, proprietorships and limited liability companies. The Missouri legislature has passed a new law effective August 28, 2009 that requires all former Fictitious Name Registrations filed before August 28, 2004 to be renewed. See here for a copy of the new law. Filings are now good for five years and may be renewed.

If you have need to renew an existing registration or have questions regarding how to file, please feel fee to give us a call.