Wednesday, December 29, 2010

The Charitable IRA Rollover Gift

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.

Monday, December 27, 2010

Year End Fire Sale on Generation Skipping Transfers for 2010

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.

Friday, December 17, 2010

It is now up to the President

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.

Thursday, December 9, 2010

Year End Tax Reform Controversy Contines

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.

Monday, November 22, 2010

Year End Estate Planning

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:
  1. 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.
  2. 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.
  3. 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.
  4. Irrevocable Gift Trusts for children and grandchildren are still favorites to provide asset protection planning for future generations.
  5. 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.

Wednesday, October 20, 2010

November AFR Rates continue lower

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.

Saturday, September 18, 2010

October Applicable Federal Rates ("AFR")

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.

Thursday, August 26, 2010

10 Things the IRS wants you to know about Charitable Giving

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

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 or by calling 800-TAX-FORM (800-829-3676).


Publication 78, Cumulative List of Organizations

Publication 526, Charitable Contributions (

Publication 561, Determining the Value of Donated Property (

Tuesday, August 24, 2010

What to do with Inherited Property in 2010?

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.

Wednesday, July 28, 2010

Generation Skipping Issues in 2010

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:
  1. a "Direct Skip" which is an outright transfer to a skip person or a trust for a skip person;
  2. a "Taxable Distribution" from a trust to a skip person; or
  3. 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.

Monday, July 5, 2010

Grantor Retained Annuity Trust ("GRAT")

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.

Saturday, July 3, 2010

The Closely Held Business - What to do?

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.

Saturday, June 26, 2010

Leaving a Legacy

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.

Tuesday, June 22, 2010

New Wyoming Single Member Limited Liability Company

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.

Tuesday, June 8, 2010

2010 Estate Planning

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.

Wednesday, May 5, 2010

The Increased Need for Special Needs Trust Planning

There is no doubt that the need for special needs planning is increasing. Just look at these statistics:

  • In 1992, there were 15,580 children ages 6-22 who were diagnosed as having what is now called an Autism spectrum disorder. In 2006, the number was 224,594.
  • In 2006, there were an estimated 24.9 million adults in the United States with serious psychological distress.
  • Approximately 4.4 % of U.S. adults may have some form of bipolar disorder during some point in their lifetime.
  • In 2006, an estimated 22.6 million people in the U.S. (9.2% of the population age 12 or older) were substance dependent or abusive in the previous year.

Almost every family has at least one member (child, grandchild, nephew, niece, parent, grandparent) who will always need help managing personal care and/or finances. And since most of these conditions do not decrease life expectancy, many families are seeking answers on how to provide the best quality of life for their loved ones for the rest of their lives . . . which could, for a young child, be 70 years or longer.

Fewer Programs Are Available
At the same time that the need for support services is increasing, government and non-government programs are being reduced and even eliminated due to the strain on state budgets, competition among entitlement programs, and pressures to reduce deficit spending. Once a program is cut, it may be difficult if not impossible to restore it in the future.

Families Are Motivated
Even families who are using them now do not trust that the programs that are benefitting their special loved one will be there to provide the needed benefits in the future. They are wisely (and fearfully) looking at alternatives to provide those services. Common concerns are:

  • Who will care for my loved one when I am gone?
  • Who will be my loved one's advocate?
  • Where will my loved one live?
  • How much independence can be maintained?
  • Will the money last for my loved one's lifetime?
Preserving Government Benefit Entitlement
Are government benefits for a special needs person worth preserving? For families of lesser means, the answer is almost always, "Yes, absolutely!" For more affluent families, however, maybe not.

It may be better to privatize the special needs person's care instead of spending thousands of dollars to protect a few hundreds in benefits that may not be available in the future. In the past, many practitioners focused exclusively on preserving public benefits at all costs. Today, special needs planning is not necessarily "poverty planning." The proper focus today is, on a case-by-case basis, how to provide the best quality of life throughout the life of the loved one.

Saturday, May 1, 2010

Estate Planning Update - No News

It is now May and so far it looks like the Senate is to busy to deal with Estate Tax Reform before November. It is looking more and more like 2010 will be the year when one can die without the imposition of any Estate taxes regardless of the size of one's estate. However, starting January 1, 2011 taxpayers will be limited to an exemption of only $1M dollars. Everything else above that number will be taxed at 55%.

I never dreamed that we would see the actual repeal of the Estate Tax. Nor did I imagine we would ever go back to exemptions and rates that were in effect in 2002. The Federal Estate Tax is like a sponge. It soaks up everything that one owns: cash, bank accounts, CD's, stocks, bonds, investment accounts, retirement plans, real estate and life insurance owned by the person who dies. When one totals up everything on this kind of basis, there are many more "millionaires" today than there were in 10 years ago. Your next door neigbbor might be a millionaire?

Married people get a special break called the "Unlimited Marital Deduction". Any property that passes at death to one's spouse, whether outright, as a designated beneficairy or as the beneficiary of a Marital trust, will qualify for deduction. Often this means there will be no tax at the first spouse's death! But, the IRS is not being that generous. They will just wait until the second spouse dies, subtract the $1M exemption, and then tax the excess at 55%. We often refer to the Federal Estate Tax as the "Tax on the 2nd spouse's life".

It is imperative that when the first spouse dies, that he or she use whatever exemptions are available to the deceased spouse in the year of death. Jointly held property will not get one there. The first spouse needs to set up a Family Trust(sometimes referred to also as a "By-Pass" trust, or a "Residuary Trust" or a "B-Trust"....lawyers just love to call the same thing by different names to confuse people!) at the death of the first spouse. That trust can be for the surviving spouse's benefit during his or her life. But, when the surviving spouse dies, this Family Trust can pass tax free to the heirs as it is not deemed to be "owned" by the 2nd spouse during his or her lifetime. This savings is huge! It could be as much as 55% of $1M dollars =$550,000 starting next year. Jointly held property in this set of circumstances actually increases one's taxes and becomes a trap. Planning before one becomes disabled or dies is essential.

It is entirely possible that we will get a new Tax bill after November's elections. A lot will depend on who is elected. Stay tuned. This is going to be a wild ride for millions of Americans.

Thursday, April 22, 2010

Congress to Increase Taxes on Individuals

With the passage of the new Patient Protection and Affordable Care Act, starting in 2013 the new law provides for 3.8% tax on “Net Investment Income” to help pay for nearly $1 Trillion in spending under the health care legislation. This has now been labeled the“Medicare Tax”.

For individuals, this 3.8% additional tax is imposed on the lesser of:
(i) Net Investment Income; or,
(ii) Modified adjusted gross income exceeding $250,000 for married couples filing jointly or $200,000 for single tax payers.

This 3.8% tax increase also implies to Net Investment Income of trusts.

Net Investment Income encompasses interest, dividends, capital gains (other than income from an active trader business not primarily engaged in investment trading activity), rent and royalties as reduced for applicable specific deductions.

It appears that tax exempt interest from municipal bonds and similar investments will not be subject to this tax. Also exempt are distributions from IRAs and qualified retirements plans such as 401(k) and profit sharing plans.

With the ending of the Bush tax cuts which are scheduled to expire at the end of 2010 long term capital gains rates will increase next year from 15% to 20% and dividend rates will again be taxed as ordinary income starting next year. With the corresponding expiration of the cuts in ordinary income tax rates, the top rate on dividends will be 39.6% (federal). This will be a resumption of the Clinton-era top income tax rate.

In addition, starting in 2013 the new law increases the 1.45% Medicare portion of FICA taxes by .9% on wages exceeding $250,000 for married couples jointly or $200,000 for single taxpayers. Also, starting in 2013 (and in 2017 for individuals and their spouses age 65 or older) the floor for deducting medical expenses will increase from 7.5% to 10% of adjusted gross income.

However, twenty (20) states have now filed suit to overturn the new law on constitutional grounds. Where this will end up is anyone’s guess at this point? Very few such constitutional challenges are successful. What is apparent is that the trend of current tax law will create significant increases in many individual’s personal income taxes at almost all levels. The need for efficient tax planning is now even more necessary for the preservation of one’s wealth.

Tuesday, April 20, 2010

Community Spouse Owned Annuities are no longer available resources for Medicaid Purposes

In a decision on April 20, 2010 out of the Western District of the Missouri Court of Appeals, the appellate court reversed the trial court and barred the Missouri State Family Support Division from counting a community spouse's ownership of a commercial annuity as an "available resource" to disqualify an institutionalized spouse from Medicaid assistance. The court found that treating a community spouse's income stream from a commercial annuity as an available resource which denied coverage for the institutionalized spouse for Medicaid assistance was a violation of federal Medicaid law.

Monday, April 5, 2010

Creditor Protection Benefit of the Stand Alone IRA Beneficiary Trust

In a recent bankruptcy court decision out of the Eastern District of Texas (In re: Chilton) the court found that an inherited IRA is not the equivalent to an IRA for purposes of determining whether the account contains “retirement funds” that may be exempted from the bankruptcy estate under U.S.C. §522(d)(12).

Courts have listed several reasons for distinguishing an inherited IRA from an IRA which allows the creditors to reach the inherited IRA assets:

  • The state exemption was for retirement benefits to be available to the retired person, not a child who was still earning a living;
  • The beneficiary of an inherited IRA has an unrestricted right to withdrawal of the IRA at any time without any penalties;
  • And, the IRA is significantly different than an inherited IRA under the Internal Revenue Code.

The Chilton case highlights the dangers of relying on the bankruptcy code to provide protection for an inherited retirement accounts. To obtain solid asset protection we recommend that retirement plans be payable to a Stand Alone IRA Beneficiary Trust that is drafted to qualify as a designated beneficiary under Internal Revenue Code Section 401(a)(9) and that contains spendthrift language. The incremental cost of creating a Stand Alone IRA beneficiary trust is more than offset by the benefit of protecting the inherited IRA assets during the lifetime of the beneficiary from creditors, predators and spouses.

Tuesday, March 23, 2010

Patient Protection and Affordable Care Act (H.R. 3590)

On March 23, 210 President Obama signed into law sweeping and historical health care reform legislation, H.R. 3590, the Patient Protection and Affordable Care Act. Lawmakers are debating H.R. 4872, the Health Care and Education Reconciliation Act of 2010, a reconciliation bill that would amend H.R. 3590. The House passed H.R. 4872 on March 21, 2010 and the Senate must take up the measure.

H.R. 3590 as a stand alone measure provides the following:
  • For group health plans and individual health insurance coverage: prohibition from establishing unreasonable annual limits or lifetime limits; restricts rescissions; requires minimum coverage for preventive health services; continues dependent coverage until age 26.
  • Creates exchanges for purchasing health insurance coverage.
    Establishes a refundable tax credit to provide premium assistance for coverage under a qualified health plan.
  • Provides businesses with a tax credit for the premium cost of health insurance coverage.
  • Requires individuals to maintain minimum essential coverage or be subject to a penalty.
  • Requires automatic enrollment for employees of large employers.
  • Imposes a 40% excise tax on health coverage above certain dollar amounts.
  • Raises the HI tax on wages and self-employment income in excess of $200,000 ($250,000 for joint filers) by 0.9%.
  • Imposes annual fees on manufacturers and importers of branded drugs, manufacturers and importers of certain medical devices, and health insurance providers.
  • Raises the Adjusted Gross Income ("AGI") floor for deducting medical expenses from 7.5% to 10% (7.5% remains in effect for individuals over 65 and their spouses through 2016).
  • Implements a $500,000 deduction limitation on taxable year remuneration to officers, employees, directors, and service providers of covered health insurance providers.
  • Requires employer W-2 reporting of the value of health benefits.
  • Increases the penalty for nonqualified health savings account distributions from 10% to 20%.
  • Limits health flexible spending arrangements in cafeteria plans to $2,500 (indexed for inflation after 2011).
  • Requires information reporting on payments to corporations.
  • Imposes additional requirements for Sec. 501(c)(3) hospitals.
  • Conforms the definition of medical expenses for HSAs, Archer MSAs, health FSAs, and HRAs to the definition of the itemized deduction for medical expenses (excludes over-the-counter medications, except if prescribed by a physician).
  • Imposes a 10% excise tax on indoor tanning services.
  • Makes the adoption credit refundable; increases the qualifying expense threshold; and extends the credit through 2011.

Meanwhile 13 state attorneys general have filed a lawsuit challenging the constitutionality of the Act. A copy of the complaint is here. It appears the judicial branch will get a chance to weigh in on this legislation.

Thursday, March 18, 2010

Estate Planning is a Loving Act

There is no question that estate planning understandably takes an emotional toll on clients. In addition to facing the emotionally charged issues associated with handling money, clients must face their own mortality. Clients may also have to come to grips with strained family relationships, and address how best to provide for the future well being of children or other loved ones. Often, clients "gag and choke" with the gut-wrenching choices that surround the estate planning process. Fear of planning often leads to the paralysis of analysis.

A Loving Act

We believe that estate planning can be a proactive, positive influence. Planning for loved ones is a loving act. It really boils down to "Do you want to determine where your money goes; or, do you want the government (in its infinite wisdom) to do that for you?" We handled an estate of a woman who wrote a will and left everything to her two brothers and sister. Unfortunately, all of her siblings predeceased her without leaving any surviving descendants. When she passed away, she left a sizable estate to unknown cousins who lived in eastern Europe with whom she had very little, if any, contact. These sorts of scenarios do not have to happen. However, statistics tell us that 7 out of 10 Americans will never get around to making an estate plan before they die.

Our Approach

We strive to make your estate planning a life affirming experience. We believe that when a client shares his or her hopes, dreams and goals with us, we can create a plan that will design a legacy which reflects the client's values for years to come. When clients capture the vision of creating something that will survive them, it can actually be "fun"!

A number of years ago a married couple with no children came to me to plan their estate. They were in a serious quandary as to what to do with their wealth. We discussed the idea of establishing a plan that would reflect the values that they supported. They ended up leaving their estate to a series of charitable institutions. One of those institutions was the Ronald McDonald House. I suggested that they allow me to initially contact the various charities on an anonymous basis to let them know that they had been named as a beneficiary. At first, the couple was reluctant. However, after considering our advice , they allowed me to put them in touch with the various charitable entities. The staff at the Ronald McDonald House invited our clients to spend a day touring their facility and visiting with families staying at the house. Not long thereafter the wife passed away. Her husband contacted me after her death to thank me. He told me that the one of the best days of their life together was the day they spent touring the Ronald McDonald House. He was so appreciative that we had helped them to create an enduring legacy for them with their estate plan. The husband has since passed away and now a number of charities have substantially benefited from this couple's estate plan.

An Alternative Approach

We do not profess to have all the answers and solutions. Sometimes bringing in other professionals can help families dealing with some of the emotional problems. We can work with licensed marriage and family therapists who can provide additional family services to assist in dealing with family issues in a legacy context. Often, coming up with a family financial philosophy, something akin to a Family Mission Statement, can create a guide for the making of estate planning suggestions.

Sunday, February 28, 2010


The problem for most Americans when it comes to doing an estate plan is the "P" word. The "P" word does not stand for "Probate"; but,for "Procrastination". Most people think that Estate Planning is always something that one will get around to tomorrow. It is never urgent....until something happens.

According to a recent survey by, the number of Americans with some type of estate planning document has dropped from 64% in 2007 to 51% in 2009. I have heard of other surveys that suggest that fewer than 30% of Americans have properly drafted and funded estate plans in place. I suspect that in these rough economic times, people are simply testing fate to put off the expense of creating their estate plan. What people do not understand is that a good estate plan helps one avoid probate and saves significant wealth for the benefit of one's family. A good estate should have the ability to benefit the beneficiaries many times over the cost of the initial plan. For example, while the cost of a will is rather inexpensive up front, the cost of administering a will through the Probate process [all wills go through probate] can be as much as 6-8% of the value of the entire estate. While one is alive, a will is meaningless. A will only speaks at the date of death. If one becomes incapacitated and a guardian or conservator has to be appointed while one is still living, the annual cost of such probate administration can be literally thousands of dollars. A simple living trust can avoid both the cost of disability probate and death probate.

We often get calls like "Mom is in the intensive care unit having just suffered a stroke. Can you do her estate plan now?" The answer is: NO. The time to do one's planning is long before the crisis of disability or death. If you are loved one has not effectuated an estate plan, do something about it today. Do not procrastinate! It is not a question of "if" you will need this. The only question is "when" you will need it.

Tuesday, February 16, 2010

A Suggestion for Congress

There is a lot of talk these days about "bipartisanship" in Congress. Perhaps Congress needs to find some baby steps for the concept of putting the American taxpayer ahead of politics. Here is a suggestion for our legislators. Since we are waiting on a new Tax bill to straighten out the debacle of the repeal of the Estate Tax and Generation Skipping Transfer Tax, fix the imposition of the new "Modified Carryover Basis" tax regime that became effective on January 1, 2010. These new income tax rules dealing with basis are a nightmare for the heirs of those who have lost loved ones after January 1 of this year. Assuming the new tax bill will take a while to work out, at least spare those who were unlucky enough to die in this calendar year from the headache of trying to figure out all the new modified carryover basis rules. Surely both sides of the aisle can agree that the imposition of these taxes at this time are patently unfair. A simple bill to repeal the modified Carryover basis rules should be a slam dunk to sail through the House and Senate.

Saturday, February 6, 2010

Estate Tax Battle Resumes

Secretary of the Treasury, Timothy Geithner, and the Senate Finance Charmian, Max Baucus agree on one thing. Both want to extend the 2009 estate tax rate and exemption amount to 2010 and make it retroactive to January 1, 2010. In the 2011 budget released Feb. 1 by President Obama, the administration is backing the legislation passed by the House last December to repeal the repeal of the Estate Tax in 2010. Too bad nobody has explained to them the due process clause of the Constitution has been interpreted such that the tax code in effect as of the date of a person's death is the law that is to be imposed. Anyone who has a relative who has died in 2010 and who inherited amounts in excess of the proposed $3.5M exemption may wish to contest such retroactive application of any new estate tax law.

Some insiders suggest that the estate tax bill could be linked to the proposed jobs bill being submitted to boost the economy. All we can say is "stay tuned". The final chapter in this area has not yet been written.

Monday, January 25, 2010

New Haiti Tax Deduction Legislation

On January 20, 2010, the House passed H.R. 4462. This bill permits Haiti relief gifts from January 12 to February 28 of 2010 to be deducted on 2009 tax returns. Following the House passage on the unanimous voice vote, the Senate acted quickly on January 21, 2010 to pass the bill. President Obama is expected to sign the bill within the next week.

Senate Finance Chair Max Baucus (D-MT) stated, "Today, Congress unanimously agreed to extend the tax deadline for charitable giving so Americans can continue to help the relief efforts in Haiti." The Ranking Republican on the Senate Finance Committee, Charles Grassley (R-IA), continued, "Americans give generously to disaster relief and I hope this extension encourages them to give even more. I also hope Americans will make sure the charities they choose are above board. People should be careful to give only to groups they recognize and trust.

"The bill permits cash gifts (not property gifts) from January 12 to February 28 of 2010 to be deducted on the 2009 tax returns. The gifts must be "for the relief of victims in areas affected by the earthquake in Haiti on January 12, 2010." All qualified charities may receive the gifts, so long as they use the funds appropriately for Haiti relief. Because many individuals have made gifts using their telephone, a deduction is also permitted for cash gifts by phone during the above dates. For a telephone gift, donors should retain the telephone bill with the name of the charity, the date of the gift and the amount of the contribution.

Wednesday, January 6, 2010

Welcome to 2010!

The start of a new year brings with it some very interesting tax developments. Congress adjourned and promised to come back and fix the estate and generation skipping tax this year. So right now if anyone wants to die and pass thier estate along without the impositon of any estate tax at the federal level, the opportunity is yours! Tough advice to give to a client!

However, the generation skipping tax ("GST") is also no more. Anyone contemplating gifts in excess of the current $1,000,000 lifetime gift tax exemption will not have to pay GST tax of 45% to gifts to grandchildren. The gift tax rate was reduced from 45% to 35%. While Congress has talked about making any new taxes retroactive to January 1, 2010, there is some thought that that may be unable to do so based on prior case law. So there exists a window of opportunity for those willing to play the game.

The bad news is that Congress had to come up with some way to make up the revenue loss. So they invented something for this year called "modified carryover basis". This means that the executor of a decedent's estate can elect to "step up" the first $1.3 million of assets to the fair market value of a deceased person's estate as of the date of death. But anything else will be subject to "carryover basis", i.e. the basis in the hands of the heirs will be the same as the lifetime basis of the person who died owning the asset....unless, the decedent was married! A spouse is entitled to an additional $3M dollars of step up in basis election. The result is to increase the income tax on the sale of inherited assets at the time of a subsequent sale. The accounting profession will love this new computation. Congress tried this back in 1976. After two years when they admitted that it was so complicated that nobody could compy with it, Congress repealed it. Now this new system is back again in 2010. I wonder how long it will take Congress to remember that this was a mistake the first time and it is not any better the 2nd time around.

Conclusion: This is the year that everyone should review their estate planning documents to see what the current repeal of the Estate tax does to one's estate planning. There are still so many unknowns that are difficult to predict; but, high net worth estates may be able to do some things right now that will not be available later.