Washington Wealth Counsellors' B-LAW-G

Aunty Mae and Inflation: Gifting to Avoid Estate Taxes; Purchasing Power and Inflation

2011-11-29T09:44:00.014-05:00

Aunty Mae. Aunty Mae consults an estate planner to update her estate plans. She is 80, in good health, a widow, with $2,000,000 in assets, $400,000 of which is her home, which has with no mortgage. She has $80,000 a year of pension income from her deceased husband and social security; most of this income is not indexed for inflation. She spends $60,000 a year, believes that she has all she needs and saves what she does not spend each year. She is thinking of making some gifts to her grandchild. This is December of 2011 and she is a US citizen. She has a ten year life expectancy.

$1,000,000 Exemption. In December of 2011, the estate, gift and generation skipping tax exemptions for Aunty Mae are $5,000,000. However, the current law is that the estate tax exemption will be $1,000,000 starting January 1, 2013 unless Congress and the President are able to agree on a new tax law by then. If she dies after 2012 and there is no change in the law, then Aunty Mae’s estate could pay up to $550,000 in estate taxes plus any additional estate taxes due to the state in which she lives. This assumes that her assets will not increase in value during the next ten years (her life expectancy); but, her assets are likely to substantially increase in value due to her savings rate, the likely appreciation of her assets and the compounding of her rate of savings. Assuming an average increase of seven percent per year (inflation and return on her money combined) in the value of her assets, her $2,000,000 could be worth $4,000,000 in ten years, causing an estate tax of over $2.6 million. If she placed $1,000,000 in trusts for her four grandchildren in 2011 she would pay no taxes on the $1,000,000 transfer. Over the lifetimes of her grandchildren, this money, carefully invested, could provide several millions of dollars for each of the grandchildren’s retirement. This would allow the grandchild to take risks and pursue their dreams, knowing that their retirement was taken care of. Currently, it does not appear that Aunty Mae should need the $1,000,000 for her future needs.

$5,000,000. If the current $5,000,000 exemption is retained, Aunty Mae would probably not have to worry about an estate tax and could make the gifts to her grandchildren as part of her living trust at the time of her death. But, this is a gamble and potential waste of the limited opportunity to make tax free gifts in 2011 and 2012.

Inflation. Aunty Mae remembers paying $0.19 for a loaf of bread that now costs $2. Some commentators are concerned that the federal government’s level of high debt will motivate the federal government to increase inflation so that the federal government will be able to pay down its debt with future cheaper dollars. With all of the financial turmoil in Europe, there are concerns about hyper inflation. Other commentators are concerned about deflation.

Should Aunty Mae Make the Gifts? If there is hyperinflation, Aunty Mae’s $80,000 may only buy her $20,000 of the same goods and services she now receives for $60,000 and she may need all of her $2,000,000 to live on. Given her concern about the present financial turmoil in the world, she decides not to make the gifts to her grandchildren. Her advisors tell her that her financial security has to be the priority and not potential future taxes of $2.6 million and not the hopes and dreams of her grandchildren.

Tough Love. Aunty Mae’s daughter Karen asks Aunty Mae to pay off the $400,000 mortgage on Karen’s house because the lender is foreclosing and the house is now only worth $300,000. Her son Kevin wants to borrow $400,000 for an investment opportunity. Her son Larry needs $2,500 immediately to pay his back rent on the apartment he shares; Larry has spent the last three months at Occupy Wall Street, prefers to stay at home and write poetry and keeps losing his jobs over fights with his employers because they all fail to understand his personal needs. Also, he needs $1000 to replace his stolen laptop. Often Aunty Mae sends $20,000 a year to Larry to keep him afloat.

No Gifts. The advisors of Aunty Mae all advise her against making any gifts to Karen, Kevin or Larry. They adviser her that there is no certainty in this world of financial uncertainty and that she needs to keep her funds for her own future.

Common Dilemma. Aunty Mae is a fictional person and does not refer to any real person, alive or dead. But, her situation illustrates a common dilemma for people trying to plan their futures today, reduce taxes and provide a brighter future for their children and grandchildren.

Protect Your Cash, Stocks, and Bonds with the Right LLC

2011-10-18T15:36:00.017-04:00

Age of Uncertainty. In an age of uncertainty, where the global market is changing so fast and is so complex and intertwined that even a super computer or a financial genius will get it wrong a lot of the time, you need to have a strong defense of your financial assets.

Corporations for Businesses. Business people are used to using corporations and LLCs to protect themselves when operating a business. What is less common is to use an LLC to protect their cash, stocks, bonds, precious metals and other liquid assets.

Fred Loses His Nest Egg. Fred bought a two million dollar home when business was booming and put a million down. Now the lender says that the property is only worth $800,000 and has started foreclosure. The house sells at the foreclosure auction for $500,000 and now Fred still owes the bank $590,000 as the balance on the loan which now includes $90,000 of attorney fees, advertising costs and a trustee commission incurred as a result of the foreclosure. Fred has $800,000 in stocks and bonds and the bank gets a court order to get paid $650,000, up from $590,000 due to $60,000 of bank attorney collection fees, out of the stock and bond accounts of Fred. Fred consults his attorney to ask if there is a way to protect his life savings and the attorney advises him that it is too late because Fred already knew about the pending foreclosure and anything Fred did now may be a fraudulent transfer.

What Should Have Fred Done? Fred could have set up a Virginia or Delaware LLC prior to his financial troubles to own just his cash, stocks, bonds, precious metals and other liquid assets. He would not put his home or business into this LLC. Once the Bank comes after him after the foreclosure, the bank lawyer will ask the Judge to issue an order to take the assets owned by Fred’s LLC to pay the balance owned to the Bank. Fred’s lawyer answers that the Bank can’t take the assets owned by the LLC because the LLC, not Fred, owns the assets and the Bank does not have a judgment against the LLC.

Take Over of LLC. The Bank’s lawyer then says, well, if we can’t get the cash directly in the LLC, we will get it indirectly. Since Fred owns 80% of the membership interests in the LLC, the Bank’s lawyer requests that the Judge order a sale of Fred’s 80% membership interests in the LLC. The Bank plans to buy the 80% membership interests at the court ordered auction of the membership interests at a very reduced price, vote a Bank officer in as the Manager of the LLC and then have the bank appointed Manager dissolve the LLC and distribute all of the LLC assets to the members, 80% of which go to the Bank. Result: the Bank gets paid in full, including the $150,000 of attorney’s fees and costs.

Fred’s Counter Offense. Fred’s lawyer counters that the LLC is a Virginia LLC and that under Virginia law, a charging order is the sole remedy of a creditor of a member of a Virginia LLC. In other words, the Judge is prohibited by Virginia statutory law from exercising the normal powers of a Judge to order the sale of the LLC membership interests to satisfy a judgment against a member. The Bank obtains a charging order that says if the LLC distributes, say $10,000 to Fred, the Bank and not Fred gets the $10,000. The Judge enters the charging order and denies the Bank’s request to sell the membership interests in the LLC of Fred. Fred is the Manager of the LLC and the LLC agreement gives Fred the discretion not to make distributions of assets out of the LLC. Fred tells the Bank there will not be any distributions out of the LLC anytime soon and the Bank cannot force distributions out of the LLC.

Settlement. With this stalemate, the lawyers for Fred and the Bank enter into settlement discussions. They settle on Fred paying $95,000 to the Bank in final settlement of all of Fred’s debt to the Bank. Fred makes a distribution out of the LLC to Fred to settle the debt by paying $95,000. Fred saved himself $500,000 or more and retains most of his nest egg.

Not Corporation or Trust. Could Fred have used a corporation or a trust to provide this protection? No, for the corporation, because corporate shares are the same as any other asset and can be seized and sold by court order. See prior blogs for protection of corporate shares. For trusts, unless it is a special asset protection trust set up under special offshore or certain state statutes providing for a special asset protection trust, a trust set up by Fred does not provide Fred this protection under the self settled trust doctrine. In addition, an LLC set up in a state without specific language that the charging order is the sole remedy may not provide any protection for Fred. See our article on Shaun Olmstead v. Federal Trade Commission in our 2010 blog entitled Asset Protection denied with LLC. Also, Fred has to set up the LLC prior to a creditor coming after him under the fraudulent transfer doctrine. More on these doctrines in subsequent blogs.

Act Now. Don’t wait for financial disaster to strike you before it is too late. Call us for your options for asset protection of your stock and bond portfolio.

If You Are in Your Eighties, It is Time to Get Married; Portability of Your Spouse’s Exemption from Estate Taxes.

2011-02-10T15:17:00.016-05:00

New Estate Tax Law. For two years, 2011 and 2012, there is yet another new estate tax with another set of new rules. For two years, the amount that is exempt from estate gift and generation skipping taxes is $5,000,000. One new rule is the portability of your deceased spouse's estate tax exemption.

Portability. The new law allows the surviving spouse to use the exemption from estate taxes that was not used by the first spouse. This was not true under the prior law. Example: John dies in 2011 with a taxable estate of $1 million. In 2011, John had a $5 million exemption from estate taxes and therefore did not use $4 million of his exemption. Mary, his surviving spouse, dies in 2012 with an estate of $8 million. Because Mary gets to use the $4 million unused exemption of John, Mary's estate exemption is her $5 million exemption plus John's $4 million exemption for a total exemption of $9 million and with a $8 million estate, Mary pays no estate taxes.

Qualifying for Portability. You do not have to set up a living trust or make elaborate plans to qualify for portability other than getting legally married (under federal law). To qualify, when the first spouse dies, the deceased spouse's estate must file on time an estate tax return even for estates where no estate tax return is due because there is no estate tax. On that estate tax return, the deceased spouse's estate must make an election to use the "deceased spouse's unused election amount" (DSUEA). Once you make the DSUEA election, you can't change your mind. A downside is that this gives the IRS the right to audit the deceased spouse's return, regardless of the normal time limits on IRS audits. Also, all of this only applies where both spouses die in 2011 and 2012, although many commentators expect Congress to make portability a permanent feature of the estate tax law.

No Serial Marriages. For the enthusiastic tax savers or Zsa Zsa Gabor (married nine times), you cannot accumulate DSUEA by marrying one spouse after the other who dies before you. You only get to use the DSUEA of the last spouse. You may not want to marry someone with a large estate if you plan to use his DSUEA! The charming elderly retired professor living in gentile poverty is now a tax advantage.

Time to Get Married. Fran is 85, has a $10 million taxable estate and is in bad health. She has cohabited with her long time boyfriend Jim of 20 years, but they have not married because Jim would lose his survivorship pension from his prior marriage if they married. Jim has only $200,000 to his name which he plans to leave to his children from a prior marriage. Fran marries Jim. Jim dies in 2011 and Fran gets his remaining exemption of $4.8 million. Fran gives $200,000 to charity before she dies in 2012 with an estate of $9.8 million with her $5 million exemption and $4.8 million exemption of Jim. Her heirs save over $1.7 million in taxes and the cost may only be for Fran to replace the pension of Jim from her own resources. Or, if Fran dies first, through the use of family and marital trusts, she can still use Jim's $5 million exemption and achieve the same result: no estate tax.

Time to Change your Plans. In the past, when there was no portability, we had to move assets from one spouse to another to make sure we captured the exemption from estate taxes. Example: In a plan made in 2008 when the estate tax exemption was $2 million, if one spouse only had $1 million in her estate and the other had $3 million, to eliminate estate taxes by fully using both $2 million exemptions, we had to move $1 million to the spouse with the $1 million in order to even out the two estates in case the spouse with the $1 million estate died first. This could be uncomfortable in second marriages. With portability, this is no longer necessary.

More Flexibility. With the ability to exempt $10 million from estate taxes for a married couple without using exemption planning, we now can have estate plans that do not have to fit into the straight jacket of tax requirements. All of the money can be left to children or a surviving spouse or someone else.

Cautions. By law, unless changed, the estate tax exemption will be $1 million in 2013, with no portability and a rate up to 55%. This means you have to have two sets of plans, one for the current law and another for the future law. Also, for people who provide protective trusts for children and want some of their inheritance to go to grandchildren, there is no portability for the generation skipping tax exemption.

Time to Act. Call us to review your plans to see how you can take advantage of these new sets of rules.

Estate Tax Returns from the Grave

2010-12-15T12:04:00.016-05:00

Estate Tax is Coming Back. President Obama has signed a compromise agreement on a temporary extension of the Bush income tax cuts for a two year period. Part of the bill includes a return of the estate tax with a $5,000,000 exemption and a 35% rate for two years only. Prior to this new law, there was no estate tax in 2010. In 2009, there was an estate tax with an exemption of $3,500,000 at a maximum rate of 45%. Without this new legislation, then the exemption was on autopilot to be $1,000,000 per person with a maximum rate of 55% on January 1, 2011. The autopilot date has been postponed to January 1, 2013.

Opposition of Compromise. There was opposition in the House and Senate, but a tax compromise of a two year extension was able to pass and be signed by the President. However, the return of estate tax and whether the exemption should be less than $5,000,000 will be an issue in the 2012 elections for President and Congress. Since this is only a two year extension, this means that the estate tax exemption will be $1,000,000 on January 1, 2013 with a 55% rate unless there is another compromise. In order to stop this from happening, there must be 60 votes in the Senate for another compromise. In 2010, there was the pressure of raising taxes in a recession. If the past is an indication, there will not be a compromise next time and the estate tax exemption will revert to $1,000,000 on January 1, 2013.

Tax Increases Are Coming. We have written before that the estate tax would return because of the growing federal deficit. This tax proposal and unemployment extension may add more than $900 billion to the deficit for the next two years according to estimates. Part of the opposition to this two year extension of the Bush tax cuts was due to the large and growing federal deficit. Eventually, Medicare, Medicaid and Social Security and the interest on the debt are on autopilot to consume all federal revenues. There will have to be painful tax hikes in the future unless the costs of these and other programs are reduced more than what is now considered politically acceptable.

$5,000,000 Exemption. The impact on planning between a $5,000,000 per person exemption and a $1,000,000 exemption is very large. With home equity, a life insurance policy and retirement savings over a lifetime, it is common for a family who worked for the government or had a mid level position to have over a $1,000,000 estate. However, over $5,000,000 estates are not common and require that the person had an unusually successful business or had a $300,000 or higher annual salary over a long period of time. The $5,000,000 exemption removes the estate tax as a concern for only a small percentage of Americans. In addition, with the new portability provisions (more on this later), married people will more easily use their combined $10,000,000 exemption.

What to Do Now. If you will have an estate over $5,000,000, or if you are concerned that the $1,000,000 exemption and 55% rate will return January 1, 2013, what should you do now:

1. Make large gifts before the end of the year. Since there is no estate tax or estate tax exemption in 2010, it is a reasonable position to make large gifts in 2010 and not use up any of your future exemption from estate taxes. There is a large dispute over how this will be decided by the courts due to ambiguous language in the statute which provides for the expiration of the Bush tax cuts. Even if there eventually is a ruling that the rules for 2011 should apply to 2010, even thought the tax year and law was different during those two years, you are likely to come out ahead because you made a gift when dollar prices were depressed in 2010. If you give away something worth $800,000 in 2010, it may have a price tag of $5,000,000 in 2020 simply as a result of high inflation rates. Gifts in excess of your $1,000,000 gift tax exemption in 2010 would incur a 35% tax rate on gifts.

2. Make gifts to grandchildren or to trusts for grandchildren. Not only is there no estate tax in 2010, there is no generation skipping tax paid on gifts to grandchildren in 2010, even if to a properly designed trust for a grandchild. With the return of the estate tax in 2011 at a 35% rate, there will be a 35% tax on gifts to grandchildren under the generation skipping transfer tax (GSTT) over the $5,000,000 exemption for 2011 and 2012. The new law clarifies that you can make a gift to a trust for grandchildren in 2010 and pay no GST tax this year or in the future. This is done by reimposing the GST tax in 2010, but with a zero percent rate. You make gift to a trust just for grandchildren, you do not use any exemption from GST tax and therefore it is a taxable transfer in 2010, but since the tax rate is zero, you can make gifts to trust for grandchildren and not use up any of your $5,000,000 GSTT exemption. You only have until the end of 2010 to do this. You will be able to make GSTT gifts up to $5,000,000 in 2011 and 2012.

3. Discounting and GRATs not modified yet. There was concern that the use of discounts for family limited partnerships or through a grantor retained annuity trust would be curbed by the new legislation. They were not. However, when taxes will need to be raised in the future, these restrictions could be reconsidered.

4. Roth Conversion. You can convert your retirement plans to a Roth IRA in 2010. This can be an important tool of estate planning. If your financial projections are that you will not need to use the funds in your regular IRA during your lifetime, then if you convert it to a Roth IRA, you will not be required to take out any distributions during your lifetime and the funds in the Roth IRA will continue to accumulate tax free. If you retain the funds in a regular IRA or retirement fund, you will be required to take minimum distributions calculated to exhaust everything in your retirement account during your lifetime. Instead, if you leave your Roth IRA to your five year old granddaughter with a life expectancy of 105 years, then the granddaughter could take distributions over her remaining 100 year life expectancy and have one of the few accounts that are not subject to any of the high tax rates that are coming in the future. The downside is that you have to come up with separate funds to pay the taxes caused by the Roth conversion now.

Taxes Are Going Up. The debt commission recommends tax increases and drastic cuts so as to balance the budget by 2035. The 2010 tax rates and the two year compromise will probably be the lowest taxes you will see during your lifetime. Eventually, taxes will go up to pay for everything. Our future may look like what is happening is Ireland now where they have to have large broad based tax increases and large cuts in entitlement and spending.

It is Not Too Late. There still is time to take advantage of these end of the year planning opportunities. There are only a few days left to take advantage of the zero percent rate for gifts to grandchildren in trust in 2010.

Pursuant to U.S. Treasury Department Regulations, we are required to advise you that, unless otherwise expressly indicated, any federal tax advice contained in this document, including attachments and enclosures, is not intended or written to be used, and may not be used, for the purposes of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed in this document.

A Purchaser of a Foreclosed Property May Be a Victim of A Botched Foreclosure; Protect Yourself Against Defective Foreclosures

2010-11-16T11:29:00.020-05:00

Bungled Foreclosures. There are many headlines and news reports about bungled foreclosures, major lender nationwide suspensions of foreclosures and governmental investigations of foreclosure fraud. You need to make sure that you are not a victim of this legal morass.

Profits from Foreclosures. Buy low and sell high - is also a formula for making money in real estate. One way many people have bought low is to buy a property which has been foreclosed against. Often, a bank may be eager to get rid of a property that is costing it money that it cannot sell for top dollar because it needs a lot of work after it was trashed by the former owner or vandals. The investor buys the house, fixes it up and resells it for a profit or adds the house to their rental portfolio. Because of substantial fix up costs, cash requirements and holding periods costs, the investor usually needs to buy the property 40% or more under the market value.

Bob and Betty. Bob and Betty have been working for 20 years, but are nowhere near their dream of retiring with a large financial cushion. They went to a real estate seminar about how to make millions by buying foreclosure property and paid hundreds of dollars for books and tapes sold by the speakers. They follow the guidelines they learned, buy a foreclosure property, fix it up and are ready to put the house back on the market for a profit of over $50,000. After listing the property for sale with a realtor, they are served with legal papers from the former owner demanding that Bob and Betty turn over the house back to the former owner due to a defect in the foreclosure process. Bob and Betty lose the case, have to pay an attorney $50,000 to defend themselves and lose all of their investment and their savings of $100,000, sweat equity and lost weekends they put into the house. Their foreclosure dream has become a nightmare.

Foreclosure Legal Process. The buyer of a foreclosed property can have title problems if the legal procedure followed by the attorney overseeing the foreclosure was defective. There are many stories in the press now about defective foreclosures. In general, the law says you can’t take someone’s house unless you provide them the mandated notice, advertise the sale in the paper, have a proper auction and follow any required court filing procedures. Everyone can understand the heartbreak of someone who loses their home to a foreclosure and the law provides some protection to home owners against arbitrary foreclosures. Typically, after notice and advertisement, an auctioneer sells the property at a public auction and this process results in a legal transfer of title under state law to the new owner who made the highest bid at auction, all against the will of the foreclosed owner. Given the volume of foreclosures and bank loses, the lenders may have put the foreclosure legal work out to the lowest bidder and achieved defective results. Where a foreclosure does not properly transfer title to the auction imagesCAPEILPP.jpg" type="#_x0000_t75" o:spid="_x0000_s1026">buyer, the person who bought the property at the auction may never receive good title; the property may still be legally owned by the person against whom the foreclosure took place. This all depends upon a complex set of state rules. Each state has its own esoteric legal steps that have to be followed to legally transfer title through the foreclosure process. If the process was not followed correctly, the title of the buyer at auction could be defective and the auction buyer may be unable to pass good title onto the purchaser.

How Can This Happen? You as a buyer of a property which has been foreclosed, could have a loss of investment in the following cases:

1. You Didn't Buy Title Insurance. You got a loan to buy the foreclosed property and the lender received title insurance but you did not buy title insurance for yourself. Title insurance is where a capital rich insurance company enters into a contract to guarantee that the title to the property is good. There are lender policies and buyer policies. For the buyer to be protected, the buyer has to buy their own policy. The buyer may not understand this or try to save money by only paying for a lender policy, mistakenly thinking they are protected by the lender insurance policy. A lender title policy protects the lender from loss, but not the buyer.

2. You Got a Quit Claim Deed. In the deed, there is generally a guarantee, called a "warranty" of title from the seller. If there is a title defect and you have a warranty deed, you have legal recourse against the seller if the seller had a title defect in their foreclosure. If there is no guarantee in the deed, you may have no recourse against the seller of a property with a defective title.

3. The Bank Went Bankrupt. The bank or large federally regulated institution went bankrupt and even though you had a warranty deed, you are now an unsecured creditor in a huge nationwide bankruptcy case headquartered in Delaware and you have to hire a Delaware attorney for a large fee to collect three cents of every dollar you invested.

4. Your Title Insurance Does Not Protect You. You go to settlement and pay for title insurance. You ask to read the title insurance policy to make sure that you are protected against a defective foreclosure on the property prior to signing the settlement papers. If you have a title insurance contract that says you own the property with no exceptions for the prior foreclosure and you lose the property due to a defective foreclosure, then the title company is supposed to pay you for the loses up to the dollar limit of the title policy. The settlement company says they will get around to writing up the policy a couple of weeks after settlement. The settlement company gives you a letter saying they will commit to issuing you a title policy with certain exceptions. The exceptions listed concern anything to do with the foreclosure. Unless the exceptions for the foreclosure are later removed, the title insurance contract will not protect you from defects in the foreclosure process. The problem is that you may have to go to settlement before the title company has even looked at the foreclosure paperwork to determine if there is a problem. All you get is a promise that they will issue a policy later and you have nothing in writing that they will guarantee there are no problems with the prior foreclosure. You may have only bought yourself a lawsuit if later the title company finds a problem with the foreclosure.

5. You Lost Your Fix Up Costs and Profit. Larry and Louise bought a title policy with no exceptions for the foreclosure with a limit of $150,000, the price they paid for the house. They put $50,000 of fix up and carrying costs into the house and are ready to sell it for $250,000. But, they lost the property due to a defect in the foreclosure process. The title company makes good on the insurance policy and pays Larry and Louise the policy limit of $150,000 and Larry and Louise are out $100,000.

How To Protect Yourself. In general, this has not been a likely problem in the past and in many cases will not be a problem today for many reasons even if there is a defect in the foreclosure. But, press reports indicate that the number of messed up foreclosures have dramatically increased. To protect yourself, obtain a copy of the title policy with insurance against foreclosure defects prior to the settlement. If you have this option, select a title company to do the settlement that you know and trust to thoroughly review the foreclosure record. If you expect a large profit, have a clause in your purchase contract that provides that your own lawyer must approve the foreclosure paperwork as a condition of going to settlement. This will focuses everyone's attention on getting this taken care of prior to settlement.

Real Estate Problems. We have decades of experience working with investors in residential and commercial real estate and look forward to working with you.

Estate Plans that Fail to Protect Your Family; When Wills, Trusts, Powers of Attorney and Asset Transfers Are Not Enough

2010-10-15T14:25:00.009-04:00

What is Estate Planning? Insurance companies, banks, financial planners and attorneys all advertise that they will help you with your estate plan. When we talk about estate planning, people are often confused as whether we provide financial or legal advice. Our name, Washington Wealth Counsellors, lends to this confusion. The answer: an effective estate plan is one that protects and provides for you and your loved ones now and in the future and distributes your property the way you want, when you want and how you want with the minimum of taxes and expenses. This requires the skills of lawyers, accountants, financial planners, insurance professionals and trust officers.

Sam and Sally. Sam and Sally come to us for an estate plan. During the interview we discover that Sam has several old life insurance policies which would provide $300,000 to Sally if Sam died and the total cash value of the policies are $280,000. The cash value is what the insurance company would pay Sam today if Sam turned in (surrendered) the insurance policies while Sam is alive. After Sam dies, his wife receives only half of his pension and then Sally will have less income than she needs without selling the house. Sally has spent thousands of hours in her flower beds and decorating her kitchen to make her home a very pleasing and comfortable place and has many wonderful memories of family gatherings there. As lawyers, we can do the wills, trusts, powers of attorney and property transfers to make their estate plan perform as they desire. But, the documents do not save Sally's house.

What is the Central Problem? The central problem in Sam and Sally's estate is not the legal documents, although the proper legal documents will make sure that their property goes to whom they want, when they want and how they want with the minimum of taxes and expenses. Instead, the central problem is that Sally, who statistically is likely to survive Sam, will not have enough income to stay in her beloved home after Sam dies. The children of Sam and Sally have their own families, are well established and do not need Sam and Sally's money to live on. Sally does not have the stamina or skills to go back to work.

Providing for the Surviving Spouse. The solution to this central problem is for Sam to exchange his insurance policies for a new insurance policy that will provide enough money for Sally to live on after Sam dies. The tax code under Section 1035 allows Sam to exchange his old policies for a new policy with a higher death benefit and lower cash value without paying any taxes at the time of the exchange even though he is using his untaxed earnings in his insurance policy to buy something of greater value to him. When not being used as an investment and tax saving vehicle, the purpose of life insurance is usually to replace the income of the breadwinner when the breadwinner dies and to shift the risk of a premature death of the breadwinner from the policy holder to the insurance company. Here, with $280,000 of cash value and a death benefit of $300,000, Sam has nearly all of the risk of his death on his shoulders and his insurance is providing him virtually no leverage. We brought this up to Sam and Sally during a review of their estate plan because we ask questions about how much will Sally have to live on after Sam dies, how much insurance they have and what is the cash value of their insurance.

Solving the Central Problem. We referred Sam and Sally to a qualified trustworthy insurance professional. The insurance professional shopped the insurance companies and came up with a policy that will provide a death benefit of $1,000,000 up to age 97 for Sam in exchange for the cash value in the policies. Sam and Sally pay for this by using the cash value in the insurance policies, do not write a new check, do not pay taxes when they trade the cash value for a new policy and have no future insurance payments because they used the cash value to pay for this new policy. If Sam dies before age 97, Sally receives $1,000,000 and this, with their other assets, will be enough for Sally to stay in her beloved home. Of course, Sam had the alternative of taking the $280,000 out of the policy and investing it in hopes that next year or any year thereafter he would have grown the $280,000 to $1,000,000. With many experts stating that the stock market will be flat for the next 6-9 years, how will Sam invest these funds to make sure the $1,000,000 would be there for Sally? The insurance company invests these funds, takes over the risk that Sam will die soon, and guarantees to pay the $1,000,000 under the terms of the contact and makes a profit.

How Can This Happen? I do no know why Sam's prior insurance agent never talked to Sam about this problem. If Sam had consulted any of the financial planners we work with, the financial planner would have brought up this solution. This happens too often because in this era of specialization, the specialist attorney or other advisors put their blinders on and only look at what concerns their narrow specialty rather than solving the problems of their clients. We spotted the problem and bought in an insurance professional with the license, credentials, honesty and experience to solve the problem. What is a necessity for an estate plan that meets all of your goals is that you must have a team of professionals looking out for you - your accountant, your lawyer, your insruance professional, your financial planner and your personal banker. All of them have a contribution to maqke to protect you and your family.

Plan Now. If you want a comprehensive estate plan, call us for an appointment for a review by our team.

How to Eliminate Estate Taxes on Your Residence

2010-09-14T13:15:00.012-04:00

Make Gifts Before 2011. Unless Congress is able to agree on what the estate tax ought to be after the November election, the estate tax will automatically be reinstated January 1, 2011 with an exemption of only $1,000,000 and a maximum tax rate of 55%. This is because the Bush phase out of the estate tax expires by its own terms at the end of 2010. In 2010, there is no estate tax and this presents a last minute opportunity to reduce estate taxes. According to our informal, unscientific survey of advisors, most tax advisors are convinced that a reported gift in 2010 will not be deducted in the future from the $1,000,000 estate tax deduction after 2010; a minority of advisors believe the government will be able to subject gifts completed in 2010 to a future estate tax. If our majority is correct, a way to save on future estate taxes is to make gifts in 2010 because in 2010, gifts do not reduce the future $1,000,000 estate tax exemption, but the same gifts made only months later in January 2011 will reduce the $1,000,000 estate tax exemption. Gifts made in 2010 greater than the $13,000 exemption per person do reduce each person's $1,000,000 exemption from gift taxes. If you had a chance to get a 55% reduction, would you take advantage of this 55% discount?

Story of Sam and Sally. Sam is a retired government employee and he and his wife Sally own their home in the wealthy Washington suburbs worth $1.5 million; they bought it years ago for $100,000. They paid off their mortgage. Sam invested in the stock market, has a retirement account from the federal government, life insurance and some rental property totaling about $1,000,000. Sally also has her investments, retirement funds and savings which total $1,000,000. Sam and Sally have set up revocable living trusts which will maximize use of each of their individual estate tax exemptions in 2011. If Sam and Sally die after 2010 when there is $1,000,000 per person exemption, their total combined estate tax exemption would be $2,000,000. Because Sam and Sally's taxable estate totals $3,500,000 less their combined exemptions of $2,000,000, they would pay estate taxes on $1,500,000 for a tax of about $750,000 in 2011.

Property Settlement Agreement. Sam and Sally change the title to their house so that each of them owns 50% of their residence as tenants in common. Sam and Sally enter into a property settlement agreement which specifically prohibits either of them going to court and asking the court to order a sale of the property. This is called an action for partition, which will be prohibited by their property settlement agreement.

Appraisal Provides 35% Discount. They obtain an appraisal of the value of their 50% interest in the residence and the appraiser issues a well documented opinion that a 50% interest in the residence is worth not $750,000 (one half of the $1,500,000 market value), but is worth $500,000, a discount of about 35%. This is because a 50% interest is a divided interest and people are not willing to pay full price for a property in which they will only own 50%. Also, due to the prohibition of a partition action, if a person bought a 50% interest, the buyer could not get out of the investment until the other owner agreed to sell the property, which is a restriction on transfer. In the past, the combined discounts resulting from a restriction on transfer and a divided interest were as high as 50% on such arrangements.

Establish Qualified Personal Residence Trusts. Sam and Sally each then execute their own qualified personal residence trust (QPRT). A QPRT is allowed under IRS regulations and must comply with those regulations. The terms of the QPRT say that each will own and have the right to reside in the property during a certain number of years and after that time period, they no longer own the property. After the selected time period, the children will own the property through the trusts. Each of Sam and Sally select different time periods that is less than their individual life expectancy. They then transfer their interest to their QPRTs and the QPRTs are also bound by their property settlement agreement which prohibits a partial action. After the time period in the QPRT, they rent the residence from their children or move to a retirement community, based upon what Sam and Sally want to do at that time.

QPRT Reduction in Value of Gift. Because Sam and Sally have given a future interest to their children in their residence, Sam and Sally have to file a gift tax return reporting the amount of the gifts made to their children. The accountant must calculate the value of the gifts. First, the house is reduced in value from $1,500,000 to $1,000,000 due to the property settlement agreement. Because the children will not received the gift of the residence for several years (the time periods set forth in the QPRTs), the value of the gifts is further reduced as a result of the use of the QPRT. If someone agrees to pay you $100 ten years from now, you would not give them $100 today. You may give them $50 because for you, the present value of $100 ten years from now is $50. The IRS has tables to calculate this. As a result of these calculations, the value of the QPRT gifts to the children of the entire residence total $500,000, a combined reduction of $1,000,000. Because Same and Sally each made a gift worth $250,000, if our majority is correct, they each reduce their er person $1,000,000 gift tax exemption by $250,000 each, but none of their future tax exemption.

Magic of 2010. According to our majority, the opportunity of 2010 is that any gift in 2010 under current law does not reduce the future $1,000,000 estate tax exemption. Thus, if Sam and Sally complete these gifts in 2010, they still will each have a $1,000,000 estate tax exemption in 2011. But, if they were to make this gift in January of 2011, their joint gift of $500,000 less in total combined exemptions from estate taxes. Of course, this process provides even more tax reductions for residences worth more than $1,500,000.

Estate Tax Eliminated. Sam and Sally both live their life expectancies and so now the trusts for their children own their personal residence. When Sam and Sally die, then their personal residence is completely out of their taxable estate and Sam and Sally's children own the residence which is what Sam and Sally wanted from the beginning. Their children can keep or sell the residence as determined by the children. The children could have higher capital gains taxes as a result of the QPRT, unless they use available exemptions or deferrals from capital gains taxes. Therefore, rather than having a taxable estate of $3,500,000, now that Sam and Sally's $1,500,000 residence is out of their taxable estate, their taxable estate is $2,000,000 or more before they both died. Because they made their QPRT gifts in 2010, they still each have their $1,000,000 estate tax exemptions under the majority view and they no longer have a taxable estate ($2,000,000 estate less $2,000,000 in exemptions). Their estate saves $750,000 in estate taxes.

Must Survive the Time Period. If Sam or Sally do not live to their life expectancy and do not survive the time period of the QPRT, then the discounted value of their share of the residence is still part of their taxable estate. They may not have benefited from the planning fees and costs for the QPRTs, but their tax liability is the same as if they did not use the QPRTs and their taxes are less because of the property settlement agreement. If they do survive the time period, then they may rent the house from the trusts for their children and this rent will enable them to transfer more wealth to their children without any estate taxes on this transfer. Such rent payments will not be subject to a gift tax or reduction of their exemptions from gift taxes.

Must Start Now. You must immediately get started on this. It takes about 90 days to obtain such appraisals and the transfer must be done before January 1, 2011 to take advantage of this window of opportunity. We will still use these strategies in 2011, but they will not give you the same extraordinary level of benefits as they do in 2010. Even if the minority is correct, you have removed a valuable asset when real estate prices are low and have removed all of the appreciation in the real estate over a several year period from your estate. Call us to get this underway.

Avoiding the Bag-Lady Syndrome; Living on the Street, Old, Female and Broke; Put Your Protections in Place

2010-08-23T16:10:00.014-04:00

Bag Lady Syndrome. A woman can be independently wealthy and suffer from the "bag lady syndrome". This is the fear that they will lose all of their money and have to live on the streets, with bags full of old ratty clothes as their only possessions. According the Olivia Mellan, author of the Advisor's Guide to Money Psychology and a Washington DC therapist, the bag lady syndrome can plague and sometimes paralyze women who want to better plan their finances, as reported in MSN Money. We find that women doing estate and financial planning often fear that they will be penniless, homeless and abandoned on the streets. In our experience, the bag lady syndrome is based upon some real life defects in the plans of many people.

What Will She Live On? In planning for married couples, we often ask: If John your husband dies, what will Mary (his wife) live on? We find that usually the couple does not have a good answer to this question. This is something that each married couple should plan for with a financial planner. It may mean insurance, savings and a retirement account. Often when the husband dies, his income stops or the retirement pay from the husband is cut in half. This means that there needs to be concrete dollars in place for the surviving spouse, whether the surviving spouse is the husband or the wife. The same is true for couples who live together but who are not married, a growing segment of the population.

Are Diamonds A Girl's Best Friend? In the past, women were financially dependent on men; this is still true in many countries even today. With the entry of women into the workforce, the professions, corporate leadership and with women forming most new small businesses, this is no longer true for many modern women. With a fifty percent or higher divorce rate, women need to make sure they have their money set aside in their own retirement accounts or other means of financial security. A woman's best friend is her own bank account, investment and retirement funds.

Do You Have Your Trusted Ones Ready and Able? The primary legal planning issue for a single male or female is not estate taxes, but who will have the legal power to take care of them when they become disabled. We meet with widows, widowers, singles and divorced people frequently, who if they become disabled, have no legal papers in place that will allow their trusted loved ones to take care of them. With the increasing level of rules and regulations regarding bank accounts and finances, the sister or brother can not walk into the bank of their disabled sister and start writing checks to pay the disabled sister's bills. It is common for financial institutions not to honor powers of attorney for a variety of reasons - its not their form, they don't know the person presenting the power of attorney, federal know your customer regulations, or the power of attorney is too old. For the person who needs to immediately pay some bills, it doesn't matter that the reasons may be bogus. The net effect is that they can not take care of their sister, mother, or best friend. The most effective solution is the setting up of a living trust with a Disability Panel and the transfer of all of the non retirement assets of the single person to their living trust. We have never had a call that the trustee of a single person's trust was not able to use the funds in the trust to take care of the person who set up the trust. From the thousands of attorneys in our national association, our anecdotal evidence is that throughout the US living trust planning puts in place the legal powers and the people to take care of disabled single persons.

Are You Comfortable with Gifts? If you have the bag lady syndrome, you will be too afriad to make gifts that will help the next generations, your favorite charity and greatly reduce your estate taxe. There are time tested formulas to determine how much is safe to give away even if the economy is depressed. Such financial calculating tools are availbale to most sophisticated financial planners.

Stay off the Street. Make sure you know waht money you will have if your spouse dies, have your own nest egg and have your living trust in place to take care of you, and you will not be a bag lady. Call our planning team to implement these protections for you.

Raise Taxes

2010-08-05T14:36:00.006-04:00

Tax Increases. The big debate in Washington is now over whether to let the Bush era tax cuts expire at the end of this December for some or all taxpayers. If these tax cuts expire, then the income tax rates and capital gain rates will increase, maximum dividend rates will go from 15% to the highest individual rate of 39.6%, the estate tax exemption goes to $1,000,000 with a 55% rate, the child tax credit reduces from $1,000 to $500 and there will be limits on the tuition and earned income tax credits. The Obama Administration has proposed retaining the Bush tax cuts for income earners below $250,000 married and $200,000 single. Tax cut proponents want to extend all of the Bush tax cuts and government proponents want all of them to expire. This is like a debate about how to arrange the deck chairs on the Titanic as it sinks.

You Can’t Handle the Truth. Politicians in both parties believe you can’t handle the truth. The truth is that the growing budget deficit largely comes from the rapid growth in Social Security, Medicare and Medicaid costs and interest expenses. The Obama administration estimated in January that the expiration of the Bush tax cuts for the poor, middle class and wealthy would bring in an additional $5 trillion over ten years. But, the estimates are that the deficit will be $8 to $10 trillion or even $15 trillion in the next 10 years. US public debt is expected to reach 62% of the economy in 2010 according to a recent Congressional Budget Office (CBO) estimate, nearly double the historic average. By 2030, CBO estimates that debt will be 146% of the Gross National Product. Unfunded age-related spending for pension and health care obligations are the fundamental drivers for this and the US will have the second highest increase in age related expenditures of the twenty largest world economies. Congress fails to report the unfunded obligations for entitlements in its annual budgets. These entitlement obligations are on autopilot and have first call on federal dollars.

What this Means for You. Our goal is to help you plan for your future and not get bogged down in political disputes. What does this mean for you:
*Your Income and Capital Gain Taxes Are Going up. Taxes are going up on everyone, regardless of your income bracket.
*You are much more likely to pay estate taxes.
*Your government benefits will be cut.
*The cuts in governmental benefits will get even bigger in the next two decades.
*The government is likely to print money to pay its bills.
*The US government will face a debt crisis similar to those of many countries.

What to Do:
*Take advantage of the lower income and capital gain rates this year.
* Make non taxable gifts this year to reduce your future estate taxes.
*Protect your assets from people who want to take them away from you now and in the future. Expert Rob Slee is projecting that 25% of Americans will be making money and will have to carry the load for the 75% who will have a hard time earning a living wage in this world economy. Through lawsuits, crime and taxes, the 75% will take money from the 25%.
*Decide on your approach to investments. We are not qualified to advise you on how to invest your funds. The only thing we seem to know for sure is that we are in a period of rapid change in technology, the world economy and lifestyles. This leads me to believe that you need to be covered for anything that can happen-deflation, inflation, drop in the dollar, rise in the dollar, recession or a new boom in the world economy. You need not just diversify your investment portfolio, but also diversify among the philosophies of your financial advisors.

Take Action Now. There are less than 150 days left of the lowest tax rates you will experience for a decade. Call us now to take advantage of this disappearing opportunity.

Do Not Make A Will; For A Married Man, Making a Will is a Dangerous Illusion; No Problems Solved Without Changing Names on Your Accounts and House

2010-07-27T09:28:00.008-04:00

The Will Illusion. We have all heard the TV and radio ads that you need to make a will and should hire a computer, not an expensive lawyer, to make the will. I have advised married men that only making a will is just an illusion that lulls them into a dangerous complacency. It is worse when the husband wants to make a will without his wife’s participation.

Why Do a Will: Most married men who sign a will want to accomplish the following objectives: Make sure their property goes to their spouse and children; designate who will be the guardian of their children; make sure things go smoothly when they die; and protect the inheritance of their children. For the typical married man, none of these objectives are likely to be accomplished.

Ensure Property Goes to Spouse. Seventy percent of married men own their house, bank and brokerage accounts and household goods jointly with their wives. The number is higher for first time married men. These men also usually designate their wives as the sole beneficiary of their retirement accounts and life insurance policies. They then sign a will, thinking they have protected their wives and children. Most men die before their wives. When the man dies, survived by the wife, everything goes to their wives due to the fact that all of their property is owned jointly with their wives and the will has no affect on the beneficiary designations on their insurance or retirement accounts. There is no protection of his wife of against her creditors or her disability and estate taxes will be higher. This is because the title to property overrides any provision of the will. If the man named his parents as the beneficiaries on his insurance or retirement accounts and did not change the beneficiary designations when he got married, then these accounts go to his parents if they survive him or to a probate estate if they do not, and not directly to his wife. Beneficiary designations override the provisions of a will.

Protect His Children. Often, the married men I advise want to make sure that after taking care of their wives, their property goes to their children, and they want their will to say that. But, if the wife survives the husband, everything goes directly to her either by title or because the will says so. If the wife remarries, there is no protection for his children and all of man’s share of the property will go to the next husband and his children if the next husband survives his wife or one half to the next husband if there is a divorce. I have talked to many children who were unintentionally disinherited this way.

Guardians for His Children. Husband dies first, survived by wife. Wife is now the guardian of the children and wife now decides who will be the guardian of his children if she then dies. The husband’s will is irrelevant at this point. Also, if the children are minors or disabled and if the wife does not have a will, in most states, the court will appoint the guardian and supervise the finances of the children until they are 18, depending upon the legal age for children in their state.

Things Go Smoothly. Many people I have advised think that a will avoids probate. Not so; the will’s purpose is to direct the probate process. Instead, any property passing under a will must be probated. Probate is the state law process requiring that the will and a detailed list of assets are filed on the public record. Someday soon, your neighbor may be able to go on line and see to whom you left your property. There are notice and accounting requirements, which vary from state to state and in some states are quite onerous and expensive to comply with. Probating a will is like filing a lawsuit against yourself, with a notice for everyone who has a claim to join in the lawsuit without the need to hire an attorney or file their own case.

Solutions That Do Not Work. The solution is not to make sure the wife dies first. Even if husband and wife make identical wills, and the husband dies first, none of the above is really changed much because the wife has a will. Non married couples come out ahead if they do not own their property jointly because the non married man’s will determines who inherits his separately owned property. Some married couples go so far as to get rid of jointly owned property, thereby requiring a probate when the husband dies and then again when the wife dies. This makes the probate lawyers a lot of fees.

Solutions that Work. To accomplish the goals of the married man, he needs to set up a living trust and put the name of the trust on his accounts and real estate and name his trust as the death beneficiary of his insurance and retirement accounts. To have an estate plan which accomplishes your goals, call us for an appointment.

Losing Your Business to Estate Taxes: George Steinbrenner & Jack Kent Cooke

2010-07-21T12:12:00.008-04:00

Steinbrenner Dies With No Federal Estate Taxes in 2010. Owner George Steinbrenner built the New York Yankees from a team worth $10 million to a team worth $1.3 to $1.6 billion, one of the most valuable sport franchises in the world. Because Steinbrenner died in 2010 when there is no federal estate tax, his heirs can inherit the team without losing it to crushing federal estate taxes. Also, as a Florida resident, he may have avoided state estate taxes. In contrast, when John Kent Cooke died as the former owner of the Washington Redskins, half or more of his estate could have gone to federal and state estate taxes. A factor in the loss of the team by Cooke’s son was the structure of Cooke’s estate plan, which had the effect of dramatically cutting Cooke’s estate taxes.

Charitable Deduction. Cooke used charitable planning to avoid a huge estate tax bill in his $825 million estate. Cooke died in 1997 when more than half of his estate could have gone to pay estate taxes. By leaving the Redskins and most of the other assets of his estate to a Family Foundation which he qualified as a charity, his estate was able to deduct from his estate taxes the gift to the charity and thereby avoid most of the estate taxes. He left the Redskins to the Foundation with instructions to sell the team. The Foundation put the Redskins up for sale to the highest bidder. Cooke’s son lost the team because he was outbid by an investment team headed by Daniel Snyder, the current owner. Cooke did not buy a large enough life insurance policy to provide the tax free funds his son needed to be able to pay the top price for the team.

Cooke Saves Team in 2010. If Cooke had had the fortune to die in 2010 when there was no estate tax, he could have eliminated the Foundation and left the team to his son. He would not have had to use the John Kent Cooke Foundation to avoid estate taxes. Of course, the John Kent Cooke Foundation does provide many millions of dollars in scholarships to talented low income students and that is a general benefit to our country.

Estate Tax Free. The Steinbrenner heirs can inherit the New York Yankees and other assets if allotted to them by Steinbrenner’s estate plan without a federal estate tax. However, if Steinbrenner had not updated his estate plan to take advantage of the one year window of no federal estate taxes in 2010, then he too may have left the bulk of his estate to a foundation and his heirs could lose the Yankees due to such estate tax avoidance techniques.

No Action Yet From Congress. At the beginning of 2010, there was talk that Congress would pass a law bringing back the estate tax for 2010. A bill passed the House, but the latest reports are that the Senate cannot come to an agreement on a new estate tax. With each passing day, there is less likelihood of an attempt by Congress to retroactively impose a federal estate tax in 2010.

Lesson Learned: Update and Revise Now. Make sure your plan includes the best options for the rules in 2010. Call us for a review and update of your plan today.

Asset Protection Denied with LLC: Single member LLC subject to court sale of interests; Charging Order Not Sole Remedy

2010-07-07T10:05:00.010-04:00

No Surprise to US. Everyone is talking about the decision of the Supreme Court of Florida in Shaun Olmstead v. Federal Trade Commission as if this were starling new law undermining the basics of LLC planning. In our view, it was an expected result which we have been taking into account in our planning in recent years. See our blog from last year: You Choose the Wrong State: LLC Mistake Number Two.

Two Types of Protection. With an LLC, there are two potential ways an LLC can protect you. First, if your LLC owns a rental property and the tenant files suit for an injury which occurred on the property and wins the suit, then there is a judgment entered against the LLC. Unless you personally caused the injury, then the judgment is against the LLC and not you and your assets outside the LLC should not be at risk. This general rule applies to both LLCs and Corporations. Second, if you have a car accident and you are sued and lose the case and a judgment is entered against you for $3,000,000 and your insurance only covers $1,000,000, then the judgment creditor will come after all of your assets for the remaining $2,000,000, including your ownership in an LLC. If the applicable state law does not limit the creditor to a charging order as the exclusive remedy, there was always a concern that the creditor could obtain the assets in the LLC through a court ordered sale and seizure of your LLC interests to pay the $2,000,000. A court can order a sale of your corporate shares because most state statutes for Corporations do not limit the creditor to a charging order as the exclusive remedy.

Charging Order. A charging order is where the judgment creditor gets an order from a judge that says that, for example, if Frank owns an interest in an LLC, anytime the LLC makes a distribution of profits, then the creditor gets Fred’s share of the profits and not Fred. If the charging order is the exclusive remedy, then the creditor is not supposed to be able to get a court order for the sale of Fred’s interest in the LLC.

Courts Want to Preserve Their Power. As the Court in Olmstead points out, courts for centuries have had the power to order the sheriff to seize any of your real estate, bank accounts and furniture and sell it at auction to pay a judgment against you. Courts hate to give up this power. A court will only give it up where the legislature has said in no uncertain terms that the court power to order a sale is prohibited for a particular asset.

Exclusive remedy. The Olmstead opinion is 45 pages long and two Florida Supreme Court Judges disagreed with the votes of the majority. To boil down all of the esoteric legal discussion, the Florida legislature failed to use the words “exclusive remedy” in the reference to a charging order in the LLC statute. Florida had amended its partnership acts to provide that charging orders were an exclusive remedy for partnerships but not the LLC statute. In the Olmstead opinion, there were strong and well reasoned opinions on both sides and it was not a foregone conclusion that the majority would require the exclusive remedy language. We expected it because our experience and view of the world is that people generally do not give up their power unless they are forced to do so.

Fears Confirmed. This is a major decision in that if confirms the fears of those that you have to have the words exclusive remedy in the LLC statute to set aside the age old power of the courts to sell everything you have.

Back to the Basics. This does not change the basics of increasing your asset protection by using LLCs, asset protection trusts, corporations, and offshore planning:

1. Take Action Now Before Disaster Strikes. Any asset protection can be set aside if you do it when you are in trouble. You have to be proactive and do asset protection before disaster strikes. With local, state and federal laws compounding in complexity and world change happening at a dizzy pace, you have to build your defenses now because the future is not predictable.

2. Do Good, not Bad. The federal courts found that Olmstead had operated an advance-fee credit card scam and was ordered to pay more than $10 million in restitution. If the courts find that you did something really bad, they will find any way they can to get you.

3. Choose the Right State. Establish your LLC in a state where the state statute clearly says that a charging order is the exclusive or sole remedy of a creditor and do everything you can to make that law apply in your state.

4. Avoid Single Member LLCs. In Olmstead, all of the LLCs were single member LLCs and the court said there was no block to a creditor taking over a single member LLC. There may be a block if there were two or more members. For an LLC with serious assets, use multiple member LLCs and restrictions on transfers of interests in your documents.

5. Make Distributions Discretionary. If there is a charging order entered, your manager should be able to deny making distributions so as to encourage a settlement.

6. Optional Buy Out. If a charging order is entered, provide in your operating agreement a way for other members to buy out the person who has a charging order entered against them for a discounted value.

7. Manager LLCs. Set up the manager position to retain control in case of bankruptcy.

8. Layers of Protection. An LLC is only the first layer of protection. For more protection, use partnerships or LLCs to own the interests in the operating LLC and an offshore or onshore asset protection trust to own the partnership interests.

Take Action Now. Call us to review your asset protection. We will review your entire situation and recommend changes. The above list is only some of the basics and not all of the steps you need to take now. We have a national network of advisors in every state and can work with you in any state. With the dangers of this economy, many who hung on until now are going under. Asset protection only works when it is done before disaster strikes. With all of the turmoil and change, you must take care of this now.

Private Social Service Safety Net, Finding the Immortal Trustee for the Special Needs Mentally Disabled Person

2010-04-27T12:17:00.007-04:00

Private Social Service Safety Net. In our last blog, we discussed how the need for care for those loved ones with physical or mental disabilities is increasing while the federal and state programs for them are being cut or unable to keep up with growing demand and expenses. No one wants a loved one to be forced to live in an unsanitary and abusive institution. There remain many excellent governmental programs that are only available to those who do not have money. You can’t buy your way into many of the better programs. Instead, parents and planners for those with special needs should realize they will have to set up their own social service safety net for their loved ones. The first step is to recognize these dynamics and to establish a plan to take care of the disabled person using government benefits where available as a floor and their inheritance as a way to elevate their children’s quality of life.

A Special Needs Trust That Works. This type of special needs trust will be crafted to provide the specific treatment and the economic security for the special needs child or loved one. The focus is not on qualifying for government welfare benefits, but on designing a plan which will provide a safe and secure future for the special needs person. Where possible, there may be an attempt to qualify for governmental benefits, but whether governmental benefits are there or not, the special needs trust will provide for the disabled loved one.

People, Not Documents Are the Answer. Stephen Dale is a national expert on designing and drafting special needs trusts. Before becoming a lawyer, Dale had seventeen years of hands on experience as a psychiatric nurse taking care of persons with mental disabilities. He drafted the special needs language used by Wealth Counsel, the largest national organization of estate planners in the country with thousands of members and representation in every state. You should have the best documents. But, even though Dale is the guru of special needs trust documents, Dale’s experience is that even with the best documents, the documents will not come to life, jump off the table and protect your disabled child from abuse, neglect and lack of adequate care. In decades of hands on experience, Dale knows that the key is to find the right care giver advocate for your disabled child or loved one when you are no longer able to be the advocate of your child.

A Professional Care Manager. Most families assign the task of taking care of the disabled loved one to a spouse, sister or brother of the disabled person. In Dale’s experience, this is a usually a huge mistake. The family member is not an expert in this field, doesn’t know what resources are available, does not know which practices will improve or help the condition of the disabled person, does not have the time to spare from their own family and career and often will face care giver burn out. Ask yourself: Is this a fair and wise thing to impose on your child? Dale has seen people with disabilities have their conditions improve when their care is supervised by a professional care manager. Dale says a great source to find a care manager is http://www.caremanager.org/.

Role of the Family, Trustee and Care Manager. Dale recommends that the family serve as the Trust Advisory Committee which can supervise and replace the Trustee and Care Manager, direct distributions and amend the Trust to conform to changing laws where necessary. The Trustee will be a professional Trust Company which will use discretion in making distributions, understand and keep up with public benefit requirements, wisely invest the funds, conform to statutory fiduciary requirements, file taxes, do tax planning, keep perfect books, provide advocacy and be immortal, that is, stay in business longer than the lifetime of the disabled person. There are several national trust companies which have specialized divisions for disabled persons or extensive experience in this field. The Care Manager can supervise the distributions by the Trustee and the care of the disabled person. For additional information, go to http://www.achievingindependence.com/.

Separate Stand Alone Trust. Dale recommends in nearly all cases the creation of a special needs trust as a stand alone trust separate and apart from the estate planning living trust document of the parents. With a stand alone trust, grandparents, siblings and others have the opportunity to contribute funds to this trust. In our experience, stand alone trusts are much more readily accepted by banks, title companies and financial institutions. This facilitates the reduction of future estate taxes of the parents. Properly structured, the funds in the stand alone trust will be very hard to reach by a creditor of the parent or of the special needs child. In the separate trust document, the parent can decide who will receive the funds not used by the special needs child. A down side is that you have to determine whether the fully funded stand alone trust would restrict or deny present governmental benefits.

Change Your Special Needs Plan. If your plan for your special needs person is not set up in the way discussed in this blog or if you want your current plan revised or reviewed, contact us for a review and adoption of a better plan for your special needs child or person.

Will There Be A Need for Speical Needs? Special Needs Trusts, Budget Deficit and Declining Government Services

2010-04-16T12:31:00.011-04:00

Losing Valuable Government Benefits. For families and parents with children with mental or physical conditions which limit the ability of children or loved ones to earn a living, their greatest fear is what happens to their child when the parent dies and is no longer able to care for the special needs child. Often such children receive important government benefits for medicine, care or housing. If the parents leave an inheritance outright or in trust, the existence of such funds may cause the special needs child to lose their government benefits. Parents look to Special Needs Trusts to solve this problem.

Government Program Requirements. Each county, state or federal governmental program can have different eligibility requirements for governmental programs for disabled persons. For social security disability where the person has contributed a long time into the social security system, at the present time, there may be no limits on the assets or income a person may have to qualify for benefits. In contrast, for Medicaid, which has a combination of federal and state eligibility requirements, the single person usually may not have more than $2,000 of countable assets (called “resources”) and nearly all of their income they have will first have to go to pay for the costs of their care. If a person has more than $2,000 in resources, the Medicaid program may require that person to exhaust all of their money for their care in a nursing home until they only have $2,000 left. Or worse, if there were any gifts during the five years prior to applying for Medicaid, they may be disqualified from Medicaid for a time period equal to what the gifts would have paid for their care. Each state and federal program can have complex eligibility rules which rival the US tax code in complexity and difficulty to understand.

Special Needs Trusts. The concept of the Special Needs Trust is to have a trust which can supply limited needs of the special child without losing their governmental benefits. The traditional “Special Needs” often only provides for limited items such as vacation travel which the government would not pay for and often prohibit use of the funds in the trust for the food and housing of the special child. In contrast to this focus on government welfare benefits, a properly drafted Special Needs Trust can be a very flexible document that can give the trustee the ability to pay for almost any need the beneficiary might have. The specific rules vary from state to state. Parents want to help their special child and still have the child qualify for a government program and these may be conflicting goals for many programs.

Preventing Abuse. I recently participated in an eye opening presentation by Stephen W. Dale, a California attorney who specializes in working with families with children who have disabilities and who will require support from others for their entire lives. Stephen Dale was a psychiatric nurse for seventeen years and personally treated persons with psychiatric problems in institutions and elsewhere before becoming a lawyer. Many consider Dale a national expert. His passion is to serve as an advocate in the prevention of abuse and mistreatment of persons with mental health problems.

Growing Needs. Dale points to the increase in needs for services and the decrease in the funding available for those needs. In 2006, there were nearly 225,000 cases of US children with autism ages 6-22. In 2006, there were an estimated 25 million adults aged older in the US with serious psychological distress. About 4.4% of US adults may have some form of bipolar disorder. In 2006, about 9.2% of the US population 12 or older had substance abuse problems.

Declining Funding. State and county budgets are pressed. When I was in the Virginia legislature, there was never enough funding to meet the needs of persons with mental health issues. According to Dale, California counties have nearly eliminated their mental health programs and the state is dismantling its social service systems. Other states are or will follow the lead of California.

Federal Budget Deficits. This year, there was a time when social security payments were less than the program’s income. Entitlement spending (social security, Medicaid and Medicare) will consume the entire federal budget by 2052, with no money available for defense, highways or parks. In 2010, the Heritage Foundation estimates that Medicare, Medicaid and all other health costs will consume 17.2% of the US economy, up from 4.7% 50 years ago. The total national debt is $12.4 trillion, but the unfunded obligations for social security and Medicare are $45.6 trillion, almost four times the national debt. In short, due to budget problems, the federal government will have to eliminate eligibility for government assistance for any person with a disability where that disabled person has any kind of Special Needs or other trust or money set aside for their benefit.

The Grim Future. Our Prediction: A Special Needs Trust that qualifies a child today for continuing government benefits will not qualify for government benefits in the future. This is but one of the fundamental flaws in conventional planning for special needs children. A properly drafted and administered Special Needs Trust in reality is a private social system that should serve as the parent’s alter ego to provide quality of life and life long advocacy. In our next blog, we will provide the solutions that are working.

When Not Having A Tax Creates A Problem for Taxpayers: Insurance Trusts and Generation Skipping Taxes in 2010

2010-04-07T11:43:00.006-04:00

No GST Tax. Since January and through the end of December of 2010, there is no Generation Skipping Transfer (GST) Tax, unless Congress changes the law in the meantime. The GST tax was part of the temporary repeal for one year of the estate tax, which automatically expires at the end of 2010. Starting January 1, 2011, the estate tax and the GST tax come back in full fury with up to a 55% rate of tax. Your estate can suffer both an estate tax and a GST tax at 55% each.

Insurance Trusts. Trusts which own life insurance are one of the most efficient ways to avoid estate and GST taxes. Over the lifetime of the life insurance policy, the taxpayer may pay $300,000 in premiums, but the taxpayer’s heirs receive $1,000,000 of the death benefit of the life insurance tax free if the insurance is owned by an Irrevocable Life Insurance Trust. If the taxpayer still owns or controls the life insurance (not owned by an independent trust), then the taxpayer may have to pay estate and GST taxes at rates up to 55% on the $1,000,000 in 2011 and thereafter. People are often confused by this because there is no capital gain tax on the difference between the $300,000 paid for the policy and the $1,000,000 death benefit to the heirs. But, there is an estate tax on life insurance proceeds you own which is not in a trust even though there is no capital gains tax on the “profit”.

Creating the Insurance Trust. Fred creates a life insurance trust, transfers the initial premium payments to the trustee of the trust (his CPA) and the CPA as trustee purchases the life insurance policy on behalf of the trust. The result is that when Fred dies, the $1,000,000 death benefit is available to Fred’s heirs with no estate taxes. If the life insurance trust creates lifetime trusts for Fred’s two children, Ellen and Paul, then Ellen and Paul split the $1,000,000 in their lifetime trusts and Ellen and Paul pay no estate taxes in their estates on the life insurance proceeds. Fred loves his grandchildren and sets up this life insurance trust to say that when Ellen and Paul die, then the grandchildren can also receive the remaining money in the insurance trust without any estate taxes. This can go on for generations and create a “Dynasty Trust”.

Annual Gifts of Premiums. Each year Fred sends the annual premium of $20,000 to Fred’s CPA and the CPA pays the $20,000 for the annual premium payments for the insurance owned by the trust. Each year, the CPA sends a notice to Ellen of her right to take out $10,000 each year for 30 days and sends the same notice to Paul for his $10,000. Each year, Ellen and Paul do not ask for their respective $10,000. As a result, if proper procedures are followed, the $20,000 paid each year is exempt from gift taxes (which could be due from Fred) and if Fred’s total gifts per year are less than the annual exemption per person, $13,000 this year, then there is no gift tax paid on the $20,000 and no decrease in the $1,000,000 gift tax exemption of Fred.

GST Gifts. If Ellen has the ability to unilaterally decide when she dies who gets her accumulated annual $10,000 gifts to the insurance trust, then all of the $10,000 gifts are part of her taxable estate as well as her $500,000, her 50% share of the $1,000,000 life insurance death benefit. We want the benefit of excluding this $500,000 from the estate of Fred and also from the estate of Ellen. So, we do not give Ellen the right unilaterally to decide who may get her accumulated $10,000 annual premium payments. When we do this, two things occur: (1) It is not part of Ellen’s taxable estate and (2) the $10,000 annual gift for the benefit of Ellen to the insurance trust does not qualify as a gift exempt from GST taxes. Unless we do something, the $1,000,000 death benefit could be subject to the 55% GST tax. What normally is done is that the CPA files a gift tax return each year using $20,000 of Fred’s exemption from the GST tax. This is a highly leveraged beneficial use of the GST tax exemption. Many insurance trusts are set up this way.

No Tax, No Exemption. In 2010, there is no GST tax and therefore no exemption from GST tax. In 2010, the CPA can not file a paper with the IRS claiming a $20,000 exemption from GST tax. Does this mean that part or all of the death benefits are in the taxable estate of Ellen or Paul or is subject to GST tax in the estate of Fred? For all of those who have such insurance trusts, it is necessary that you take action quickly to solve this problem.

Loan the Premium. The solution that many advisors are recommending is that instead of gifting the $20,000 in 2010, Fred should loan the $20,000 to the CPA in 2010 to avoid this problem. The insurance trust, not the CPA, is the borrower. In future years, the loan can be paid back to Fred either from additional gifts by Fred to the trust or a loan from the insurance policy.

Action Necessary if You Have an Insurance Trust. If you have an insurance trust, call us to analyze whether your trust has this problem in 2010 and we will work out a solution for you.

RISKY BUSINESS: DON’T LOSE YOUR LIFE’S WORK BECAUSE YOU DO NOT HAVE A BUY SELL AND PROPER INSURANCE; ROB SLEE OF THE MIDAS NATION

2010-02-24T12:16:00.005-05:00

Rob Slee and MidasNation. Many of you know that we are great fans of Rob Slee and the Midas Nation, a nationwide group of private business owners dedicated to promoting the American dream for private businesses. Privately owned businesses provide most of the growth in employment, represent a larger portion of the economy than the companies on the stock markets and are the key to our economic prosperity. But, most of the discussion of business in the media is about publicly owned companies and it is very difficult to obtain reliable and usable information about what to do in a privately owned business. Rob Slee is the number one expert on what is happening in privately owned businesses in the U.S. Rob Slee is a private business owner himself who has successfully operated, bought and sold many businesses over the years; his expertise is founded on actual experience and research meeting the highest standards. If you want help with your small business you should sign up to be a member of the Midas Nation. Go to http://www.midasnation.com/. His MidasNotes of this week are so timely and to the point, we needed to share them with you. This week’s MidasNotes was written in cooperation with an expert in the field of business succession planning.

Slee MidasNation Notes for February 22, 2010:
As a Member of MidasNation™, you are cordially invited to read MidasNotes – the written voice of MidasNation, updated weekly at MidasNation.com. MidasNation Founder Rob Slee is widely recognized as the country's foremost authority on the capitalization and financial management of privately owned companies. And that is just the beginning. Read Rob and other Midas Managers' views on marketing, operations, skill leverage and the legal and economic environments affecting private business.
Following is the 21st Note from MidasNation, written by Rob Slee:

February 22, 2010: Risky Business
I’ve been yapping a lot lately about risk. I’ve always believed that most business owners are a single phone call away from oblivion. Let’s spend some time today on what we can do to minimize risk of ownership.

What’s next? What other risks can possibly blindside business owners today? Beyond the economic threats, competitive pressures and increasing taxes business owners face, there are other contingencies equally out of our control, but can be planned for and, thereby, mitigated. Risk management is more important than ever. As we lay in our foxholes and wait for the private capital markets to follow their 10 year transfer cycle, there are important steps to take immediately to protect business value and make the business ready when the timing is right.

Risk Management
What would happen to your business if your partner or co-shareholder met an untimely death? Do you have a Shareholders Agreement (aka Buy/Sell)? Is it up to date? Does the price reflect today’s valuation? Unless your agreement has been reviewed in the last 12 to 18 months, it may pose a serious threat to you, your business and your family. Is the agreement funded with life insurance to give it teeth and make it operative? Without proper funding, the burden of additional debt assumed by you, your partner(s) or the business could be crushing. A properly structured and funded buy/sell agreement protects the business, the family of the deceased shareholder and the surviving shareholders and investors from losing value.

Cost of Insurance
Business Owners have found that the cost of insurance (COI) has come down substantially over the years and that a review of all corporate and personal life insurance policies is essential. Policyholders have saved thousands of dollars (in some case hundreds of thousands of dollars) over the life of their policies by consolidating and restructuring their existing insurance and making sure that critical gaps do not exist.

Loss of Key People
Another potential risk is the loss of a key employee. Without the talent, loyalty and ongoing contribution of business executives, CFOs and high level operations people, the business cannot run. By insuring the lives of these key people for their replacement value, it will ensure that the business will continue to run smoothly and maintain value.

Similarly, what will happen if the banks call in loans and mortgages that owners have signed for and guaranteed personally? An infusion of cash at a critical point in time (such as the death of the borrower or guarantor) can make the difference between business survival and failure.

Non-Equity Performance Package
How do you attract, retain and reward key employees? Everyone offers the typical package of 401(k), medical, dental, etc. An employer can make a difference by offering special incentive programs to reward long-term retention. This can be an excellent alternative to giving up equity or cash now. These non-equity performance packages can also be designed creatively to align with corporate growth goals and increased revenues and profitability. The better the employee performs, the bigger the payoff in the end. These programs can also serve as a sort of “golden handcuffs” in that if the employee leaves before an agreed upon timeframe, benefits will be reduced or forfeited.

Policy Reviews
Last but not least, any personal or trust-owned life insurance should be reviewed for cost effectiveness. In a decreasing interest rate environment, many of these policies are not performing as originally expected. Even the finest insurers invest their reserves in fixed income investments that have experienced the same declining interest and dividend rates we all have.

An experienced financial professional can help you understand your options. Should you skip a premium, borrow or withdraw against cash value? Reduce the amount of coverage? Utilize a tax-free exchange? Surrender the policy? Sell the policy? A qualified insurance professional can help answer these questions and potentially save you money while protecting your family and your business.

Value enhancement is also about avoiding risk. Loss of life is, arguably, the biggest risk out there. Don’t let it cause you to miss your window of opportunity to maximize sales price during the next transfer cycle. Plan ahead and address these contingencies. If you have addressed them in the past, now is the time to review and get a second opinion to make sure your dollars are spent effectively and business value is protected.

-Rob

Visit MidasNotes weekly to read the latest from MidasNation Founder Rob Slee and discover other Midas Managers' views on various issues affecting private business.

Pay Lower Taxes Now, Higher Taxes Later: President Obama’s Tax Proposals and Expiration of the Bush Tax Cuts

2010-02-12T12:21:00.008-05:00

Obama’s Tax Proposals. Many will pay lower taxes now and higher taxes later whether or not President Obama’s Fiscal Year 2011 Revenue Proposals (translated: tax changes) becomes law. Outlined in generalities in more than 150 pages, President Obama proposes tax increases and tax decreases for businesses and individuals and many complex provisions whose precise impact and details will not be known for years.

Increases for Higher Income Tax Payers. Overall, the revenue changes produce a net increase in tax revenue to the federal government from 2011 to 2020 of $1,103,250,000,000 dollars. Of this, $969,467,000,000 or almost 88% of the new tax revenue comes from upper income individuals. This is done by exempting high income tax payers from the Bush tax cuts set to expire at the end of this year. The President proposes to reinstate the maximum rate of 39.6% on earned income from the Clinton administration as opposed to the 35% rate under the Bush tax cuts. This maximum rate would apply to taxable incomes over $373,650 for married persons filing jointly and single fliers. This 39.6% rate is projected to produce about a third of the new revenue to come from the increase of taxes on upper income people. There will be a top 36% rate, up from 33%, which will apply to married filed jointly with $250,000 of annual income (less the standard deduction and two personal deductions) and $200,000 for single filers, less the standard deduction and one personal exemption. In addition, for the $250,000/$200,000 income and above group, there will limitations on itemized deductions, phase out of the personal exemption, a 20% capital gains rate and limitation of the value of a deduction to a maximum of 28%. These items raise $642 billion over the next ten years, the other two thirds of the new $970 billion of revenue from upper income tax payers. Many people who think that they will not be in the $250,000/$200,000 brackets will be shocked when they find that when they sell real estate or stocks at a profit that this could move them into these brackets in the year they make these sales.

Extension of the Bush Tax Cuts. In a short paragraph on page 147 of the Revenue Proposals, President Obama proposes an extension of the Bush tax cuts for those below the $250,000/$200,000 and above brackets. As promised by him during his campaign, he said he would not raise taxes on the middle and lower classes. This extension of the Bush tax cuts, together with indexing of the Alternative Minimum Tax, will cost about $3.8 trillion of lost revenue over 2011-2020, or a loss of nearly four times the revenue increase from all of the other provisions in the 146 pages before the one page on the AMT and the Bush tax cuts. The largest item is a revenue loss of about $1.6 trillion resulting from the Bush tax cuts for middle and lower income tax payers. The Bush tax cuts took millions off of the tax roles and provided large tax rate reductions for lower and middle income earners; President Obama plans to continue these tax breaks. This results basically in an income transfer of about $970 billion from upper income taxpayers and $2.8 trillion from government deficits to middle and lower income taxpayers of about $3.8 trillion over ten years.

Will it Pass. Congress will have their own ideas about tax changes and there is a lot of talk about an omnibus tax bill. Such a bill will have tax increases, tax loopholes, closing of tax loopholes and hundreds of pages of nearly indecipherable tax talk. Republicans will probably vote as a block against the bill as a “tax increase” and the Republicans who vote for it will fear a tea party challenger in their Republican primary. Many Democrats will worry about reelection if they vote for a large tax increase. Of course, the fear of voting for a tax increase ignores that the President’s proposal is really the continuation of the Bush tax cuts for most people and these large tax cuts contribute substantially to the increasing deficit.

Best Guess. The bigger the tax bill, the more likely it will fail. From the standpoint of the budget deficit, if Congress is not able to agree on a tax bill in 2010, then the Bush tax cuts will expire at the end of 2010 and in 2011 and thereafter, there will be a huge increase in projected federal revenue. Unless there is a substantial decrease in the rate of increase in federal spending and a boom in the economy, the Bush tax cuts can not be sustained. Members of Congress can point out that they voted against the proposed tax increase bill. My best guess, based upon years in politics, is that no major tax bill will pass this year and the Bush tax cuts will expire at the end of the year.

Action Item. Whether the President’s proposals pass or the Bush tax cuts expire, you will be paying a lot more taxes in the future. If you have capital gains or income over which you have the option to be taxed in 2010, it may be a good bet to pay taxes now, rather than later. This is completely different from the usual advice that it is best to postpone paying taxes. Contact us and we will assemble your team of advisors to implement a tax strategy designed around your needs.

One Time Estate, Gift, Generation Skipping Tax Planning Window for 2010 for US Citizens and Non Residents May Close Soon; Time to Act is Now

2010-01-28T12:49:00.007-05:00

Once in a Life Time Opportunity. Federal tax planners estimate that the total savings to the government in keeping the estate and gift tax regime in place for the next ten years is $1 Trillion. This is a down payment on the $10 trillion plus estimated budget deficit over the next ten years. This budget reality and the gridlock in Congress will mean that the estate tax is coming back in 2011, if not sooner. Since there is no estate tax in 2010 at the present time, this presents a once in a lifetime planning opportunity. We list them by bullet point, but each of them has a complex set of rules which could hurt you if done incorrectly. You should not do any of these except with your tax planning team.

*Make substantial gifts in 2010. You do not use up any estate tax exemptions for gifts in 2010. Check with your financial planner to make sure your do not need the money. Make sure the gift is not bad for the person who receives it. If gifts total over $1,000,000 per taxpayer, there would be a gift tax.
*Gift Tax Lowest. Gift tax in 2010 is 35% on any amount over $1,000.000 and may be as high as 55% in 2011.
*Make outright gifts to financially savvy grandchildren. There is no generation skipping tax on gifts to grandchildren in 2010. Again, there could be a gift tax.
*Make gifts in certain trusts to grandchildren. There are opportunities with carefully crafted trusts to transfer large amounts to grandchildren.
*Plan Basis Allocations. Redo your estate plan to take advantage of the basis increases we discussed in prior blogs.
*Who Gets What. Make sure your existing plan does not disinherit a spouse or child in 2010 because your plan assumes an estate tax as the way to allocate assets between spouse and children.
*Existing Trusts for Grandchildren. For existing trusts where grandchildren are beneficiaries, next year a distribution to them could be subject to a grandchild tax (generation skipping tax (GST)) at a 55% rate. Solution: carefully plan and make distributions this year out of these existing trusts when the distribution will not be subject to a GST tax.
*Basis over Value. If you have property with basis over value, consider passing on that higher basis now to your heirs. Example: Real estate or business interest has gone down in market value to $2,000,000, but your basis is $5,000,000. If you and your spouse gift the asset now, your heirs will have the $5,000,000 basis compared to a $2,000,000 basis if your heirs inherit the property in 2010. The basis on which heirs inherit property when someone passes in 2010 is the lesser of market value and basis.
*Use Tools That May Go Away. There is talk about prohibiting further use of tools to discount value, facilitate use of insurance trusts and other commonly used methods to reduce estate taxes. Use them now before they go away.
*Overseas to US Resident. A non US citizen and non resident may be able to transfer substantial wealth to relatives in the US with no US taxes. Beware of taxes imposed by the country of the non US resident.

What If? What if you make a large estate tax free gift in February, 2010 and in June, 2010, the Congress reinstitutes the estate tax and makes it retroactively effective back to January 1, 2010? From our survey:

1. No one knows what Congress will do. A $3.5 million estate tax exemption bill passed the House in December with no Republican voting for it and has not been acted upon by a Senate Committee. Since 2002, Congress has been unable to pass a new estate tax law. Best Guess: Congress will not be able to agree on what the estate tax should be, will allow the automatic repeal of the Bush tax cuts to take place and the estate tax will automatically go back to a $1,000,000 exemption phased out for the larger estates and a maximum 55% rate.
2. Could Be Retroactive. Congress may pass a bill in 2010 and make it retroactive.
3. Courts May Prohibit Retroactive Law. Most legal commentators are not predicting whether the courts will allow Congress to make the law retroactive. Past cases permitting such retroactive laws may not apply.
4. More Delay, Less Likely To Be Retroactive. The longer Congress waits, the less likely Congress will make it retroactive.
5. Short Window of Opportunity. If the bill is not retroactive, then those who act now will take advantage of a window of opportunity that may last only two to six months.
6. Gifts Can be Undone. There are planning techniques to deal with a retroactive imposition of the estate tax in 2010. These could include formula clauses, disclaimers, powers of appointment, decanting, and Trust Protectors.
7. Plans Have to Be Changed Anyway. Many plans need to be revised due to changes in the family and also changes in the law.
8. Risk and Reward. You have to decide whether the rewards of lower taxes on the transfer of your wealth are worth potential risks.

Act Now While the Law is Favorable Before it Changes. Review your plan now to see if you should take advantage of these short term opportunities.

No New Death Tax for Real Estate: Tax Deferred Exchanges and Home Occupancy Deduction

2010-01-22T09:18:00.006-05:00

New Death Taxes. In our recent blogs we have shown how for many families, the new death tax in 2010 will cause families to pay more taxes when someone dies in 2010 that they would have paid in 2009. This is because in 2010, there is no step up in basis for property received from a decedent, except for the $1.3 million and marital exemptions.

Home Occupancy Exemption. In the past, a person could exclude up to $250,000 from the profit on the sale of their principal residence if they lived there two of the last five years from the date of sale. What is new in 2010, is that the heirs of the decedent can use this $250,000 exemption even though they did not live there.

Dr. Sam’s $250,000. Dr. Sam bought his house in 1981 and paid $100,000. Over the years, Dr. Sam made $100,000 of improvements. If Dr. Sam had sold his house for $950,000, his taxable gain would have been calculated this way: Determine what Dr. Sam paid for the house ($100,000) plus his documented improvements ($100,000), giving him a basis of $200,000. You deduct from his $950,000 sales price his $50,000 of sales expenses (real estate commission, settlement expenses and seller concessions) to determine net sales proceeds of $900,000, giving him a taxable profit of $700,000. You multiply the $700,000 profit times his estimated combined federal capital gain and state taxes of 20% times $700,000, for a total tax of $140,000 ($700,000 times .20 equals $140,000). But since Dr. Sam lived there two of the last five years, Dr. Sam gets a $250,000 exemption from this tax on the sale of his principal residence so that his taxable gain is $450,000 for a combined estimated tax of $90,000, giving him a tax savings of $50,000.

Sally Inherits the $250,000. If Dr. Sam had died in 2009, his house would have received a “step-up” in basis to $950,000, the value at the date of his death in 2009 and his daughter Sally could have sold his residence for $950,000 and paid no federal or state capital gain (assuming state law is the same as federal law). But, with step up in basis gone in 2010, Sally receives the property at its basis of $200,000 and would have to pay the full $140,000 of taxes if she sold it, unless she uses part of the $1,300,000 exemption. But, there is a special exemption in the new 2010 law that allows Sally to use Sam’s $250,000 exemption even though Sally never lived in the property. If Sally does live there for a while, Sally’s time of residence gets tacked on to Dr. Sam’s time of residence.

Tax Deferred Exchange Beats Death Tax. In addition, real estate has another tax break that is not available for stocks and bonds and has only a narrow application for gold. Under Section 1031 of the US tax code, owners of real estate can complete a qualified tax deferred exchange (trade) of their old rental or business real estate for a new (to them) piece or pieces of rental or business real estate and defer indefinitely any gains. The reason 1031 provides for a deferral of gain is that when doing a 100% exchange, the seller of the property never has the right to receive any cash and therefore has not taken any money out of the investment and has only continued her investment in real estate. However, when the investor cashes out, then the investor has to pay the deferred gain from all of the predecessor properties which were exchanges.

Dr. Sam’s Rental Property. Dr. Sam had bought a modest home in 1972 on Main Street for $40,000. When he bought his new residence, he didn’t sell his Main Street home, but kept it over the years as a rental property. Dr. Sam deducted his depreciation on the Main Street rental property so that his basis was reduced to $10,000 when he died in 2010. With the Main Street property now being worth $500,000, Sally could pay nearly $100,000 in taxes if she sold Main Street after inheriting it from Dr. Sam with a basis of $10,000 ($490,000 times .20 equals $98,000 of taxes). Since Main Street is rental property, there is no $250,000 exemption for it, but it is eligible for a 1031 exchange. Sally believes that she could make more money by exchanging Main Street for other real estate. She completes a qualified tax deferred exchange of Main Street and defers all of the gain on Main Street, thereby having almost $100,000 more available to provide her income from the new properties. Under 1031, Sally can continue to do this for the rest of her life and pass these properties on to her children. She could eventually exchange into a very nice house which she later uses (after a period of rental use) as her home. She could exchange into properties where she has virtually no management headaches and a solid income guaranteed by a large national corporation.

Post Mortem Planning. As can be seen from our blogs, there are lots of ways heirs can reduce the impact of the new Death Tax. Since federal capital gain rates are going up, you have to investigate whether a tax deferred exchange makes sense. If you are an heir of property in 2010, make certain that you consult well informed tax, legal, accounting and financial planning professionals to avoid costly mistakes.

Immediately Redo Your Estate Plan to Capture the New Exemptions from Death Taxes; Obtaining Step Up in Basis in 2010

2010-01-12T14:21:00.009-05:00

New Set of Death Taxes. For one year, 2010, there is a new death tax. In 2010, there is no estate tax or generation skipping tax that is paid by your estate. Instead, there is the abolition of step up in basis for one year. For most single widows and widowers with money, this change means that there will be higher taxes imposed on their heirs than was true in 2009 when there was an estate tax (click here for last weeks blog). And, the exemptions for the step up in basis tax require different estate plans than the ones that worked prior to 2010. Since most estate planners thought this would never happen, our informal survey shows that the estate plans of most people have to be changed and changed immediately to comply with the new law.

The New Death Tax. For 2010 only, when someone dies who is a US citizen or resident, the heirs of the decedent take the same “basis” in the property as the person who died or the value at the time of death, whichever is lower. Example: Dr. Sam bought 1000 shares of Google stock when it was $100 and when Dr. Sam died in 2010, Google shares were selling for $600 a share, for a gain of $500,000. If Sally, Dr. Sam’s daughter and heir, sells those 1000 shares she will have to pay the capital gain on those shares, which would be $500,000 times an estimated combined federal and state tax of 20% or about $100,000. If Sally waits to sell the shares in 2011, when the combined federal and state capital gain rate may be 35% or higher, Sally would pay $175,000 or more in taxes on just the Google stock.

First Step: Gather Those Receipts. Your first step in 2010 estate planning is to gather in a folder and have someone scan and put in computer storage, everything that proves what you paid for your assets and all improvements you have made on your residence. For estates over $1.3 million, the executor has to report data to the IRS so that the IRS can check up on the taxes the heirs report when they sell the assets they inherited.

Step Two: Capture the $1.3 Million Exemption. For everyone dying in 2010, there is a $1.3 million exemption that your heirs get to add to the tax basis of the property you owned at your death. This means for most Americans, they do not have to worry about this step up in basis problem because they have less than $1.3 million in their estate. This $1.3 million applies to property in revocable trusts or passed by will or without a will. But, it will not apply to assets you gave away or are in irrevocable trusts you do not own.

Step Three: The Big Prize: $3,000,000 Exemption. If you are married, your spouse can have $3,000,000 worth of property exempt from the no step up in basis rule. In 2009, five years after his wife died, Dr. Sam went to a high school reunion, saw Daisy, his high school sweetheart for the first time in 40 years, and they married three months later. Dr. Sam’s estate is worth $5 million, with a basis of $1 million and therefore potentially $4,000,000 is subject to taxes when inherited and sold by Sally. Dr. Sam updates his estate plan and sets up a trust so that when Dr. Sam passes away, $2.3 million goes to Sally in an asset protected trust and $2.7 million goes to Daisy in a trust that pays Daisy only the income for her lifetime. After Daisy passes away (she is 84), the balance goes to Sally. No estate tax because there is none in 2010. Sally has Dr. Sam’s receipts to show the $1,000,000 in basis and Sally receives the $1.3 step up in basis for the $2.3 million she receives in trust. The $2.7 million in trust for Daisy gets a full step up because it uses the $3,000,000 spousal exemption of Dr. Sam. The executor assigns assets that have no basis or have declined in value to the Daisy trust. Dr. Sam’s assets can be liquidated into cash after his passing and there is no federal or state income taxes (assuming the state follows the federal rules and no retirement accounts which generate taxes).

Dr. Sam Remarries but Does Not Update his Estate Plan. Alternatively, Dr. Sam does not know the law has changed or chooses not to update his estate plan. He left everything in his plan to Sally and nothing to Daisy. Sally is only able to find documentation of the basis of Dr. Sam of $500,000. Sally’s basis in the Dr. Sam’s property is $500,000 plus the $1,300,000 exemption for a total of $1,800,000, leaving $3,200,000 of Dr. Sam’s estate subject to capital gains taxes to be paid by Sally of about $640,000 or higher in later years.

Dr. Sam Does Re Do His Plan but they Live Together. As a third example, if Dr. Sam and Daisy lived together and did not get married, even if Dr. Sam left $2.7 million in trust for Daisy, the trust for Daisy would not qualify for the $3,000,000 exemption because they were not married. Daisy or Sally has a large tax bill when they sell assets. There has been a national trend of more unmarried households. The 2010 tax rules may result in more marriages; there is now a $3,000,000 penalty for not being married.

Plan Now. It is time to redo your plan to make sure it reflects what you want and your plan is current with the current law. Many estate advisors thought this day would never come and they now say that Congress will change the law retroactively and wipe out the step up in basis problem in 2010. But, Congress has not solved this problem since 2002 and you should not depend on Congress to do your planning for you.

Circular 230 Disclosure Notice
Pursuant to recently enacted U.S. Treasury Department Regulations, we are now required to advise you that, unless otherwise expressly Indicated, any federal tax advice contained in this document, including attachments and enclosures, is not intended or written to be used, and may not be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed in this document.

For Many with Money, the Temporary Repeal of the Estate Tax Will Increase their Death Taxes

2010-01-07T10:14:00.003-05:00

Beware of TV Commentators. A TV financial commentator made the morbid comment this weekend that 2010 is the year to die because there is no federal estate tax in 2010. What he ignored is that the arcane tax law provides that for many with money in 2010, they will actually pay more taxes with the repeal of the estate tax if they die in 2010. So, if you are single or in a second marriage, have between $1.3 and $3.5 million, don’t use dying in 2010 as a tax planning strategy.

Temporary Repeal. Under current law, effective January 1, 2010, the federal estate tax is repealed until January 1, 2011, when the federal estate tax returns with a vengeance with a tax on everything above $1,000,000 and up to a 55% rate. There is legislation pending which would bring back the estate tax in 2010 with an exclusion of $3.5 million for 2010 and the next several years. Congress will probably try to reinstate the estate tax retroactively to January 1, 2010, making the pull the plug strategy for 2010 even a worse idea. More on that in a future blog. The federal estate tax is a tax on the estate of everything above the exclusion amount, except that bequests to your spouse and to qualified charities are federal estate tax free. Also, many states still have an estate tax and some have an inheritance tax.

Step Up in Basis Is a Big Deal. Before 2010, if someone died, their heirs received their property at the market value of the property as of the date of death of the decedent, or an alternate date. In tax talk, this means their “basis” in the property increased and was “stepped up” to current market value.

Dr. Sam Dies in 2009: No Death Taxes. Dr. Sam (a widower) bought a house in the suburbs for $100,000 which is now worth $900,000. The basis of Dr. Sam in his house is $100,000 (what he paid of it in 1981), plus another $100,000 in improvements, for a total basis of $200,000. If Dr. Sam sold his house for $900,000 and assuming it is eligible for the $250,000 homeowner exemption from capital gain taxes, his taxable gain is $900,000 less his basis of $200,000 less homeowner exemption of $250,000 or $450,000 in total ($900,000-$200,000-$250,000 =$450,000). Dr. Sam’s capital gain tax is a combined federal and state rate of about twenty percent (20%) times $450,000 or $90,000. If Dr. Sam had died in 2009, his daughter and sole heir Sally Sue would have received an increase in Sally Sue’s basis to $900,000, the market value of the house as appraised in the estate of Dr. Sam. Therefore, Sally Sue sells the house for $900,000 after expenses and because her basis was “stepped up” to the value in Dr. Sam’s estate, Sally Sue pays no capital gains because Sally’s stepped up basis is the same as what she sold it for. If Dr. Sam’s estate was less than $3.5 million, his estate pays no estate taxes.

Dr. Sam dies in 2010: $160,000 in Capital Gains Taxes. As a way of raising tax money to replace the revenue “lost” from the repeal of estate taxes, Congress also repealed step up in basis for property received from a decedent. So, if Dr. Sam died in 2010, when there is no step up in basis, Sally Sue receives the basis for Dr. Sam’s house of $100,000, assuming Sally Sue found proof of the $100,000. Sally Sue is very unlikely to find the receipts of Dr. Sam to prove that Dr. Sam made $100,000 of improvements. Sally Sue has not lived in the house and the five year period to qualify for the homeowner residence deduction of $250,000 has expired. Sally Sue’s capital gain in 2010 is $900,000 less $100,000 which is $800,000 ($900,000-$100,000=$800,000). With an estimated 20% combined federal and state rate, Sally Sue pays $160,000 in taxes on the sale of Dr. Sam’s house in 2010 if the house is not covered by the $1.3 million exemption. Sally Sue may experience a $160,000 tax increase due to the one year repeal of the estate tax.

Paper Chase Harassment. Sally Sue has the paper chase harassment of trying to find proof of what Dr. Sam paid for his house in 1981, what he paid for his Microsoft stock in 1982 and what grandmother paid for the family cabin in 1932 before she gave it to Dr. Sam. Finding proof of the basis in assets of a decedent will be very difficult. Sally Sue will have to document her claims of her basis to the IRS. The title companies, the stock brokerage companies, and most of the public will go crazy trying to figure out what parents, aunts, and uncles paid for things during their lifetime. But the anal record keeper gets to finally say with glee: “See, I told you never to throw out those papers from the thirties”.

Exceptions & Exemptions. Of course, it would not be the American tax law unless there were exemptions and exclusions. There is a $1.3 million allowance for a step up in basis and an additional $3,000,000 spousal exemption. For people who are not US citizens or US residents with investments in the US, the exclusion is only $60,000. The net effect of this is that if you are single or married with an estate plan that does not capture the spousal exemption, you still have a death tax in the form of future capital gains for your heirs and your exemption is no longer $3.5 million as it was in 2009, but only $1.3 million plus proof of your basis in assets not covered by the $1.3 million. Since many people are widowed when older and most don’t have estates greater than $3.5 million, 2010 is the year when the taxes to be paid by their heirs on their inheritance increased up to $440,000.

Update your Plan. Will your estate plan survive 2010? In the estate plans we have been doing in the last several years, the 2010 temporary repeal is covered. But, many other plans do not cover this. There are new planning opportunities to take advantage of this one year repeal of the estate tax. Call us to go over whether your plan is up to date, uses all of the new exemptions and how you can take advantage of current rules.

Best Last Minute Tax Deduction at the End of the Year: Charitable Remainder Trust

2009-12-30T13:24:00.006-05:00

Have Taxable Income or Gain. If you had substantial income or have a large taxable gain in 2009 or will in future years, the best end of year tax savings technique is often the Charitable Remainder Trust (CRT). This is because with a CRT, you can obtain a large tax deduction even if you wait until the end of the year. Many of the other techniques that taxpayers used in the past for end of year tax deductions have been severely limited. With the CRT, you retain some control over the asset, receive income from it, get an immediate tax deduction and postpone or avoid capital gains on the sale of the asset.

What is a CRT? A CRT is a trust which you create and to which you contribute assets such as stocks or free and clear real estate. The CRT then sells the asset and because the CRT is similar to a charity which pays no income taxes for charitable activities, the CRT does not pay any capital gains at the time of the sale of the property. Depending on how you set up the CRT, you may never pay any capital gain taxes on the sale of the asset.

Major features of the CRT:

*Planning A Must. The first step is to plan the CRT, which involves integrating your CRT into your financial, business and estate plan:
*Not Too Big and Not Too Small Deduction. You generally want to maximize the deductions you will receive in the year of the gift. The deduction is calculated based upon IRS tables which predict how much the charity will receive. If you contribute $100,000 in 2009 to the CRT and the IRS tables say the charity is predicted to receive $30,000, you receive a $30,000 deduction from your taxes in 2009. If you exceed the maximum deductable level for charitable deductions in year 2009, you can carry forward the deduction to use in future years, with certain limitations. You do not want to give too much or too little.
*Charity Minimum Ten Percent. The charity has to receive at least 10% of the total gift. If you are below 50 years of age, you may not be able to use your lifetime as the time for the payments back to you from the CRT and may have to use a maximum of 20 years before the assets go to the charity. As part of the planning, we run computer calculations of the results of different options.
*Payout Rate. You have to decide the annual rate at which the CRT will pay you. It has to be at least 5% and not more than 50% and it can be fixed or dependent upon earnings or the value of the property. The pay out rate is the rate at which you will receive income for your life or the set period of the CRT.
*Distributions Taxed. You pay taxes on the distributions if they are ordinary income or capital gains, but not return of principal or tax exempt income.
*Postpone Income Taxes. If you will have high income for the next several years, high taxes and do not want to receive any payments which would be subject to taxes, you can set the CRT up so that the CRT does not make payments to you during the high income years through the use of financial instruments such as an annuity or family limited partnerships. You can turn the cash flow spigot on or off depending upon your future cash needs. The IRS is watching for abuses.
*Appraisals. If you contribute to the CRT real estate or a hard to value asset such as an interest in a closely held business, you must have an independent appraisal and a special independent trustee involved in the process.
*You are the Trustee. You can be the trustee of the trust, but there are self dealing limitations.
*Option to Change Charity Designated. You initially name the charity, but you can retain the right to change the charity. Properly planned, your family foundation may become a beneficiary.
*Exempt from Estate Taxes. The assets in the CRT will not be part of your taxable estate and you do not use up any of your exemptions from estate taxes by use of the CRT.
*Replace the Inheritance. Since the assets go to the charity upon your passing and not to your heirs, you can decide to replace those assets with life insurance. If is possible to so design a CRT in many cases where the net tax and other financial advantages provide enough additional cash to pay for the insurance.
*Money is in the CRT. Once established, you can not change the rules of the CRT and take back the asset. You have to be able financially to not have this as an asset that you must liquidate to pay bills. However, with the deferred income CRT, you can sell assets in the CRT when you need money so that you receive all of the distributions you did not receive over the prior years.

Your Team of Advisors. There are exceptions and many details to this planning not discussed above which you do not need to know in order to accomplish your goals. The key point is that there is a way to obtain large last minute tax deductions at the end of the year. The CRT will be used more in the future as capital gains rates, income tax rates and estate tax rates increase in the coming years. If you want to plan for the coming higher taxes, we will assemble your team of advisors to use the tools permitted under the law to lessen the blow of these higher taxes on you.

How to Protect Yourself: US Goes Bankrupt: Taxes Going Up, Services Going Down; President Obama Tells the Truth

2009-12-18T16:38:00.007-05:00

You Can’t Handle the Truth: When I was in politics for ten years as a member of the Virginia legislature, most politicians believed that the “people” couldn’t handle the truth. My experience was that people didn’t like to hear about the harsh realities that government often faces.

Obama Tells the Truth. President Obama did a public service for the country when he said the US is going bankrupt unless we raise taxes and cut spending. Now, the President didn’t say it exactly that way, but the pending health plan in the Senate recommended by the President relies upon decreasing expenditures for Medicare and Medicaid and raising taxes. New Hampshire Republican Senator Gregg claims current and proposed spending will lead to bankruptcy for the United States.

Unsustainable Budget. In our private client letter mailed in December 2008, I quoted: “Under any plausible scenario, the federal budget is on an unsustainable path”-Peter Orszag, Director, Congressional Budget Office, December, 2007. This was before the historic spending of 2009. In our Prepare for the Return of the Estate Tax, we provided the numbers which show how the government is going broke. The Obama Administration is projecting a $9 Trillion deficit in the next ten years. This is more debt than America accumulated from 1789 to 2008 combined. The Heritage Foundation says the correct number is $13 Trillion over ten years with the national debt being equal to the entire production of the country (GDP) by 2019. At some point, the federal government will no longer be able to borrow money at acceptable rates to finance spending. The projected rates of spending will force punishingly high taxes on individuals, businesses and the economy. So, what do you do if the US government goes bankrupt?

Capital Gains. The 15% federal capital gain rate expires by law at the end of 2010. Rates will go higher. Strategies include selling of stock now with capital losses to store up loses against future taxes, use of charitable trusts to postpone or avoid gains and use of tax deferred exchanges for real estate.

Income Taxes. The maximum 35% personal rate expires at the end of 2010. Rates will probably go to $39.5%. With increases in state taxes, phase out of deductions and the raising of the ceiling on withholding taxes, the effective rate could be near 60%. Business owners will increase corporate perks and take another look at deferred compensation planning. Tax payers will seek charitable planning, annuities, life insurance and tax shelters.

Estate Taxes. We predicted the $1,000,000 exemption and 55% tax rate is coming back in Prepare for the Return of the Estate Tax. There are time tested techniques to legally reduce your estate taxes to zero even if you have a large estate.

Decline of the Dollar. If the US government goes bankrupt, the value of the dollar will decline greatly and the prices you pay will increase greatly. If all of your assets are in dollars denominations, you will have to work to able to pay your bills, if you can find a job that pays enough to live on. Talk with your financial advisor about whether you should diversify a substantial amount of your portfolio into assets in currencies other than dollars, assets that will retain their buying power or other defensive moves. There is a historically wide variation of opinion among economists as to whether we will have inflation or deflation.

Health Care. It is well known and documented that the path to saving on personal health care expenses is to control your weight, exercise, get a good nights sleep, avoid fast foods, eat a Mediterranean diet, avoid harmful medicines, have a warm and loving family, avoid narcotics and excess alcohol consumption, reduce stress and feel you are making a worthwhile contribution to your community. Sounds simple enough-for the perfect person. A large number of people I know think that their health care is in their hands and that they will not be able to depend upon a government provided health care system. My personal recommendation is for you to read a book such as “Ultraprevention: The 6-week Plan that Will Make you Health for Life” by the two medical doctors who run the Canyon Ranch health spas. We will give away copies of this book to the first ten people who call Silvio at 571-633-0330 and to anyone who comes in for an appointment to plan their taxes, estate or business.

Be Ready. Call us to have a balanced plan for the coming years of more financial turmoil.

Is the Tiger Woods’ Pre Nuptial Agreement Protected Against Multiple Mistresses?

2009-12-09T11:50:00.007-05:00

Tiger Woods. We are reading press reports that Tiger Woods may pay an additional $5 million and up to $80 million to his wife, Elin Nordegren, the mother of their two children, to stay with him after revelations of multiple mistresses. Under the reported original pre nuptial agreement, Tiger Woods agreed to pay Elin $20 million if she agreed to stay with him for ten years. The additional sums are payments to her to be the dutiful wife even though he has reportedly had multiple affairs.

A PreNup. A pre nuptial agreement is a legal agreement entered into prior to marriage waiving the normal legal rights of a spouse. In general, in the event of a divorce, each spouse often receives one half of all of the property acquired during the marriage. This could include any increase in the value of a business owned by a spouse, or real estate or a stock portfolio even though the business, real estate and stock portfolio was owned by the spouse prior to the marriage. If the wife is a stay at home mom, she may receive part of the pension fund of her husband, child support and alimony for a time period until she is able to re enter the work force.

Celebrities. You often hear about celebrities such as Tiger Woods, Paul McCartney, or Michael Jackson entering into pre nuptial agreements to protect against losing half of their multi millions in the event of a later divorce.

Business Owners Too. We have done pre nuptial agreements for stock brokers, owners of contracting companies, professionals and real estate developers who have wealth to protect, but are not celebrities. Usually, the man requests the pre nuptial agreement because he believes he “was taken to the cleaners”-i.e. lost half of his wealth in his last divorce. Sometimes the successful business woman or heiress of a substantial estate also is motivated to obtain a prenuptial agreement. We have represented the less wealthy spouse as well in many cases.

What it Says. Usually, both sides agree to give up their rights to take half of the property bought into the marriage and any growth in value of that property. They also agree not to make any claims against the retirement funds or separate investments of the other spouse made during the marriage. They waive any rights to alimony or to receive an inheritance from the spouse. For the spouse who is not as well off, often there is a promise of a minimum income or a life insurance policy in the event of the death of the wealthier spouse during the marriage. A pre nuptial agreement can be combined with an estate plan so that if there is divorce during the marriage, there is no inheritance, but if the wealthier spouse dies during the marriage, the surviving spouse will have enough funds to continue their life style and raise their children.

What it Should Say: To be enforceable, the pre nuptial should have the following:
*Full disclosure of all of the assets and income of each person.
*Separate legal representation by both spouse.
*Full understanding of what each spouse is giving up.
*How the ownership of the residence will be handled.
*Equal division of marital property upon divorce.
*Financial support for the stay at home mom who removes herself from the workforce and the ability save for retirement while taking care of the children.

What Not to Do: Preparing for a marriage and a prenup causes enormous stress, but in the long run the marriage will be stronger if you are fair and sensitive to the other person:
*Do not hide any assets from the other spouse. This will be strong grounds to set aside the agreement.
*Do not have one attorney draw up the agreement with no review by an independent attorney representing the less wealthy spouse.
*Failure to determine how money will be handled in the marriage.
*Failure to understand that the less wealthy spouse will feel that she is not being trusted by her new husband; she has to understand it is not about her, but about the emotional scars of her husband.
*Finalizing the prenup two days before the wedding after the family is in town and no one knows whether the wedding will take place. I have seen this happen a couple times and when I am one of the lawyers, it reminds me why I am not a divorce lawyer.
*Failure to integrate the prenup into the financial and business plans of the new family.

After the marriage. If you don’t follow your marriage vows, don’t expect the prenup to have much meaning or legal effectiveness. The courts often do not favor prenuptial agreements and will look for loopholes not to enforce them. But, a faithful spouse with an effective pre nuptial agreement will be protected in the event his spouse runs off with the pool boy or an errant husband with a cocktail waitress.

Get Five Times the FDIC Insurance Against Bank Collapse by Use of Your Living Trust

2009-12-02T12:33:00.008-05:00

Bank Failures. There have been over 100 bank failures this year and many more are expected next year. If you have deposits in a bank, what happens to your money when the bank fails? [click here for a list of bank failures throughout United States] Because of the run on banks in the Great Depression of the 1930s, the Congress established the Federal Deposit Insurance Corporation (FDIC) to provide insurance when a bank fails. If another bank does not take over the failing bank and guarantee all of the deposits of the failed bank, then the FDIC steps in and pays the consumers who had deposits in the failed bank up to the maximum insurance limit then in effect. Until January 1, 2014, when the maximum insurance reverts to $100,000, the present maximum insurance is $250,000 per person.

Auntie Mae. Auntie Mae is worried that she may live longer than her money. She keeps nearly everything in cash and money market accounts. Her life savings, everything she inherited from her sisters and deceased husband totals about $800,000 which she has in her checking, savings, money market and other accounts. She put $100,000 in eight separate branch offices of a local bank, thinking that would protect her. She didn’t want to have to deal with several banks which she did not know and trust. She was afraid to put her daughter’s name on the accounts because her daughter is a pediatrician and although her doctor daughter has not been sued, pediatricians are often targets of lawsuits. When her bank failed and closed its doors, the FDIC paid her $250,000, the maximum insurance under this federal guarantee system, and she lost $550,000, most of her life savings. Auntie Mae will have to get a job at Wal Mart because she does not now have enough money to live on.

The Living Trust Solution. For years, there was confusion and uncertainty as to how FDIC insurance worked for accounts held in living trusts. This was clarified last year by the FDIC and there is now a “five-times” rule. Under the five times rule, if you have five or more beneficiaries of your estate in your trust, then you receive at a minimum five times the current maximum level of insurance on all of your accounts at the bank. With the five times rule, you will have a minimum of $1,250,000 of FDIC insurance for accounts held in your living trust at a single bank. You can have more than $1,250,000 in FDIC insurance with a living trust, but if there are over five beneficiaries, the FDIC will look at the actual amounts left to all of the beneficiaries and limit the amount by the lesser of $250,000 per beneficiary or the actual amount given. There is no extra charge to you for this additional FDIC insurance. The $1,250,000 of insurance will take care of most accounts. After 2013, this is scheduled to reduce to $500,000.

How it works. Auntie Mae puts all of her checking, savings and bank money market accounts into the name of her living trust. She does this by going to her bank and having the ownership of the account changed to the name of her living trust. Auntie Mae has left 50% of her estate to her daughter Ellen, 20% to her nephew, $10,000 to the aide who helps her each week, $10,000 to the Salvation Army and $10,000 to a friend. This means she has five beneficiaries; the old requirement of family members as the only qualifying beneficiaries is gone. As a result, the bank and FDIC now provide her accounts up to $1,250,000 in FDIC insurance even though all of her accounts are in one bank. She does not have to spread her money into different accounts at different banks, which could lead to great confusion and complexity. If her bank went under, all of her $800,000 will be protected by FDIC insurance.

Transfer Your Bank Accounts to Your Trust Now. Many people put off putting their personal savings and checking accounts into the name of their living trust. Now, you have a very strong reason for doing this-getting five times the FDIC insurance.

Dad Died and the Bank Took Everything

2009-11-13T15:15:00.007-05:00

Successful Contracting Company. Jimmy Jones had a successful contracting company which was worth several million dollars. Over his lifetime, he had seen the business go up and down with the economy. To put away some funds for the future, he bought an apartment building and a small shopping center. Jimmy worked until his seventies and never found the right person to take over his company. His daughter Jane is a successful CPA with her own practice but his son Jimmy Jr. drifts from job to job. Jimmy gave his children everything when they were growing up because he didn’t want his children to remember being poor as a child.

Great Banking Relationship. Jimmy has had a great relationship with his local community bank where he had his business accounts over the years. He had a line of credit and commercial loans on his apartment building and shopping center all with the same bank. He thought he saved on legal fees when he obtained or renewed his loans by not having a lawyer review the documents.

MegaBank Takes Over. On Friday the 13th of November, Jimmy had a heart attack and died. All of the loan documents for his business and his real estate have a clause in the loan documents which say that if Jimmy died, the bank could demand full payment immediately on all of his loans. Recently, his local community bank had been acquired by MegaBank which now has all of Jimmy’s loans. MegaBank has been kept out of bankruptcy by billions of dollars from the federal government. The federal regulators want MegaBank to have higher cash reserves in case of loan defaults and to get rid of all risky loans, which the regulators classify as including all commercial loans on local real estate to individual owners. Jimmy had always paid all of his loans on time and the business and real estate generated enough cash flow most months to pay all of the loans; Jimmy was an excellent credit risk. Now, because Jimmy has no successor in place to take over his construction business and manage his real estate, MegaBank feels itself insecure, is being pressured by the regulators and therefore declares due and immediately payable all of the loans that Jimmy had with the bank based upon the clause in the loan documents that the bank can demand immediate full payment if the borrower dies.

MegaBank Wins in Court. Jimmy’s daughter Jane hires an attorney to try to stop the foreclosures on the business and the real estate. Jane loses in court because the loan documents clearly allowed MegaBank to foreclose if Jimmy died. Jane pays $120,000 in legal fees out of her savings and MegaBank adds its legal fees of $150,000 to the balance due on the loans owed by Jimmy’s estate. Due to the depressed construction industry during the recession and the decrease in values for the real estate and the shortage of loan money, Jane can not get loans to stop the foreclosures. After MegaBank foreclosed, Jimmy’s construction company closed its doors and 32 people lost their jobs. The real estate was sold at fire sale prices for less than the balances on the loans. MegaBank came after Jimmy’s savings and wiped out any other money he had that did not go by right of survivorship to Gerry, Jimmy’s widow. Jimmy’s widow sells her house to have money to live on and moves in with her sister and her sister’s crude and rude husband. Jimmy’s children, who could have each inherited millions, will get no significant inheritance from their parents.

Prevention. This could have all been prevented. “Death is a default” is a standard term in commercial loan documents that can be removed through negotiations. If Jimmy had hired our firm to represent him with his commercial loans, we would have insisted that the loan commitment letter state that the loan could not be called by the bank if Jimmy died. We would have worked with Jimmy to have a business succession plan in place that we would show to the bank to convince them that they would still be paid if Jimmy died. We have always been able to obtain bank agreement that the loan could not be called in the event of the death of the principal borrower. MegaBank would not have had the right to foreclose and the Jimmy Jones family assets would have been saved and Gerry would not have had to move in with her sister and her rude husband. Many entrepreneurs do not use competent legal counsel to review the commercial loan commitment letter before their sign it. This story shows what can happen to a lifetime of work and a family if you do not obtain the proper loan terms.

Don't Put Children on Title to Your House

2009-11-06T13:47:00.011-05:00

Add Ellen to the Deed. When I did a weekly talk radio show for WRC in Washington in the 90s on real estate, every week a little old lady would call me about putting her daughter (Ellen) on the title to her home. The mother wanted to do this as a cheap and easy way to plan her estate. If she died with the house in the joint name of her and her daughter with right of survivorship, the house would automatically go to the daughter. No probate, no will and no need for a living trust or to talk to a lawyer. I always spoke against this idea.

Joint Liability. When the mother puts her daughter Ellen on title, the daughter becomes a joint owner. As a joint tenant, most states treat this as tenants in common for the purposes of liability. Ellen has a car accident and a judgment for $2,000,000 is entered against her. Ellen’s insurance limit is $500,000. The trial lawyer who got the judgment comes after all of Ellen’s property. Now that Ellen is a co owner of the home, the trial lawyer can get a court order requiring the sale of Ellen’s interest in mom’s home and mom gets evicted from her home, or has to buy off the trial lawyer. If Ellen gets divorced, a half of mom’s house may be part of the divorce property settlement with the ex son in law.

Medicaid Denial. Under current Medicaid rules, a transfer to a child would be a gift and would disqualify the mother from Medicaid for up to five years, depending upon the appraised value of the house at the time of the gift and other factors.

Can’t Sell. Mom can’t sell the property to a legitimate buyer without Ellen’s signature. When the house is sold, Ellen is under no legal obligation to give any of the house proceeds to mom. What happens if mom needs the money for a nursing home and Ellen needs the money for a life threatening illness of one of her children? If mom has Alzheimer’s, has a stroke or becomes incompetent, no one can sell the house until Ellen engages in an expensive and time consuming guardianship court procedure. When parents put children on title to their homes and later take them off to get a loan or sell the property, we have often found that there are title problems that prevent a later sale.

Vulture Takes Mom’s Home. A vulture investor may be willing to buy out Ellen at bargain prices for a payment of quick cash to Ellen. Mom can’t legally stop the vulture investor from then obtaining a court order for the sale of mom’s home.

Gift Tax. Mom has made a gift to Ellen which will probably be subject to a gift tax. If mom’s house is worth $500,000 and she owns it without debt, the gift to the daughter is $250,000, $237,000 more than the annual exemption of $13,000 from gift taxes in 2009. Should mom file a gift tax return? If mom intended a gift, then she is required by the tax law to file a gift tax return and use $237,000 of her $1,000,000 exemption from gift taxes. If mom sells the house and Ellen agrees that all of her share, worth $250,000, should go to mom, then Ellen has given $237,000 to mom and should file a gift tax return.

Pay Capital Gains Tax Unnecessarily. If mom filed a gift tax return or if Ellen can’t prove to the IRS that mom didn’t really give her anything in the house, then Ellen received one half of mom’s house based upon her mother’s basis in the property. Mom and dad (now dead) had paid $50,000 for the house and Ellen can’t find the receipts for improvements made during the lifetime of her parents. Therefore, mom’s basis in the property is $50,000. Ellen receives a basis of $25,000 in Ellen’s one half interest in mom’s house; one half of the mother’s basis of $50,000 is $25,000. When Ellen sells the house for a net of $600,000 after mom dies, Ellen unnecessarily pays a capital gain tax on one half of the house of about $55,000 at current rates and more with higher rates in the future.

Loans. How it happens, I don’t know. But, there are cases where a child goes out and gets a loan on the house without telling mom, the child pockets the money and later is unable to pay the loan. Mom loses her house in her old age to foreclosure. Or, mom wants to get a reverse mortgage and can not because the daughter is on title to the house.

Family Destruction. Mom had two daughters and son and mom’s will says everything goes in an equal split one third to each child. But, mom’s house passes outside mom’s will so her daughter Ellen receives not one third of the house, but 100% of the house. The will usually does not equal this out. Ellen must now decide whether to take money from Ellen’s family and give two thirds to her siblings and use up part of Ellen’s gift and estate tax exemptions for her gift to her siblings. If Ellen doesn’t do that, her sibling will believe that Ellen plotted this from the beginning so that Ellen could steal mom’s house from her brother and sister.

Living Trust. If mom had instead set up a living trust and named herself and Ellen as the trustees of the trust, she could have avoided all of these problems. We will cover the issues later that arise from putting a home in a living trust. After mom got off the radio talking to me, did she follow my advice? Probably not.

Funding Avoids Probate

2009-10-29T15:28:00.007-04:00

Probate. In Living Trusts Do Not Avoid Probate, we discussed probate and living trusts. Probate is the court supervised process of transferring property after a person passes away and the property is in the name of the person at the time of death. The majority of people who die with assets have estates that have to go through probate; even though most people while they were alive did not want their loved ones to suffer through the costs, stress, delay and lack of financial privacy that is probate.

Living Trusts. A living trust is a legal entity you create when you sign a trust agreement with the required language and in some cases, when your transfer assets to the trust. Trusts are the first step to avoiding probate, but are not enough. To avoid probate, you have to take the second step to “fund” the trust.

Funding. Funding is the word that lawyers use to describe the transfer of assets to a living trust and the making the trust a beneficiary of qualified retirement plans and certain insurance contracts. My experience is that most non lawyers are not familiar with this use of this word. An example is where Ellen Smith signs a living trust agreement on Monday. On Wednesday, she goes to her bank, meets with an employee at one of the desks in the lobby and requests that the bank transfer the name of her account from her name individually to the name of her living trust. On the bank records, the name of her bank account was in the name of “Ellen Smith”. After the bank account is “funded” into the living trust, the name on the account will probably be “Ellen Smith, Tee (Trustee) utd (under a trust dated) 11/2/2009 (the date she signed the trust). Or, it may be “Ellen Smith Living Trust”.

Titling. The name of the owner of each asset of Ellen must be changed to the name of the trust for it to be in the trust. The title to her house, brokerage account, furniture, jewelry, vacation home, stocks, business and in some cases, insurance, must be changed to her trust. Each one of these assets has special rules as to how to complete funding. You do not transfer your pensions, IRAs or qualified annuities to your trust while you are alive, but do change the beneficiary designations of each of these accounts.

Bank Accounts. As an example, due to concerns about terrorists setting up bank accounts to finance terrorist attacks in the US, to change the name on your bank account to your trust, you have to physically go to the bank with your identification and all of the people who will be immediate trustees to sign the bank forms. An attorney can not do this for you. Some banks will make you open a new account in the name of the trust. Other banks will not make you open a new account, but will require that you obtain new checks with the name of your trust on your checking account. You would prefer not to have the name of your trust on your checks that go through all sorts of hands and businesses. Some stores are reluctant to accept checks from a trust because they think they may be business checks. You will prefer to work with a bank that does not require a new account or requires that you put the name of your trust on your checks. If one of your children or sister or brother is helping you with your banking now and is a co signer on your account, you will probably want to name that person a Cotrustee and they will have to go with you to the bank. Under IRS rules, because you have the legal power to revoke your trust at any time, you continue to use your social security number when your bank account is in the name of the trust.

Five Times the Insurance. There are many advantages to having a bank account in the name of your trust, rather than in your own name and the name of your cosigner. For example, in these times of failing banks, you can get five times the federal insurance against losing your money if you have your bank account in the name of your trust at no extra charge from the bank. More on this later.

Living Trusts Do Not Avoid Probate

2009-10-26T10:22:00.005-04:00

Most, Not All. One of the primary purposes of setting up a living trust is to avoid probate. But, according to our informal survey of the experiences of thousands of estate planners nationally, most living trusts do not avoid probate.

Probate. When someone dies with property only in their name, then generally there is a legal process called probate. The designated person, often called the executor, if the person dying had a will, files the will with the court where the deceased lived. Then, typically, the executor or executrix must file an initial list of the assets in the estate, often called the inventory, and pay any court fees and applicable inheritance taxes. There may be annual reports and a later court approval of how the money is distributed to the heirs. The procedures are basically the same even if there was no will.

Dacey: Avoid Probate. Norman Dacey, who died on October 21, 2009, created a huge controversy when he wrote “How to Avoid Probate” in 1965. Dacey criticized the probate system and advocated that people use living trusts to avoid the costs, delays and publicity of the probate process. According to the New York Times, Dacey sold over two million copies of his book and was subject to lawsuits that claimed, because he was not a lawyer, he was practicing law without a license to do so. Dacey lost a case over this in Connecticut, but won one in New York. Many non lawyers saw this as an attempt by the Bar to protect the lucrative probate business of lawyers.

Living Trusts. What was new in 1965 for most Americans, the living trust, is now relatively commonplace today. This is part due to Dacey and the many attorneys advertising the advantages of living trusts. A living trust is a legal entity under US and English law which provides instructions for taking care of your property and you during your lifetime and after death. The way the trust avoids probate is that you change the title to your assets so that the trust is now the owner of your assets. When the person dies, the trust continues in existence and the designated trustees (usually children) take over all of the assets owned by the trust and split them up outside of probate.

Most Do Not Work. Many lawyers who write living trusts only provide the document and related will and powers of attorney. But to avoid probate, there must be an actual change of the title to the house, bank accounts, brokerage accounts and where appropriate, life insurance, to the name of the trust. If you have $100,000 in a bank account in your name only and you pass, then, in many states, probate has to be initiated before any of the $100,000 can go to your heirs. Of course, if the account was owned with someone else with right of survivorship, then the money would go to the survivor and not yet be subject to probate. The reason why most living trusts do not avoid probate is because the client or the lawyer does not take this crucial second step of transferring the assets to the living trust. More on this process called “funding” in future articles. The minority of living trusts – those that do own all of the deceased person’s property – do avoid probate.

Protect Your S Corporation with an LLC

2009-10-16T15:31:00.008-04:00

Protect Your Shares. In our last blog, we showed how to Protect your Corporation with an LLC if you operate your business as a regular C corporation. One of these methods is to have an LLC own all of your shares in your C Corporation; such LLCs can have more than one member. You benefit from this because there is no real protection against a creditor getting a court order to seize your shares in a Corporation. In contrast, your membership interest in certain LLCs in Virginia, Delaware and some other states and countries should be protected against court seizure and sale.

S Corporation. The S Corporation is designed for the small business where the owners want to avoid the double tax of the C Corporation. Under normal circumstances, an S Corporation pays no tax. Instead, all of the income and most of the deductions usually flow though to the owners of the S Corporation. This means an annual savings of 15% or more of federal taxes on each dollar earned.

Real People Are Owners. The S Corporation comes with a lot of restrictions. The government does not want large corporations to use S Corporations to avoid paying corporate taxes. This means that the shares in S Corporations can only be owned by a human being or certain trusts for human beings. Shares in S Corporations can not be owned by C Corporations or partnerships or by many LLCs. So how can we use an LLC to protect your S Corporation stock?

Vanishing LLCs. Current tax regulations allow you to “check the box” as to whether you want your new business to be taxed under the partnership or the corporate rules. A partnership means there are two or more partners. You can not have a partnership with only one owner. You can have a Corporation and also an LLC with only one owner. IRS regulations say that where you have only one owner, called a single member LLC, the “LLC” is a “disregarded entity” for tax purposes. This means that as far as the tax man is concerned, the single member LLC does not exist for tax purposes even though it exists as a legal entity under state law.

Single Member LLC. Well then, could you have a single member LLC own the shares in an S Corporation, have the LLC disregarded, and treat the human being who owns 100% of the LLC shares as a human being that owns the S shares? The IRS has said yes in several private letter rulings. A private letter ruling is where someone writes to the IRS for a ruling on their situation. The ruling protects the persons who got the IRS blessing, but no one else. However, this has been a consistent position in several of these rulings and the logic of this is very sound. So check with your tax advisor, but one way you could increase the protections of your shares in your S Corporation is to have them owned by a single member LLC. One letter ruling even approved of a limited partnership owning S shares where the general partner was a single member LLC owned by X and X was the only limited partner. For tax purposes, the limited partnership was ignored, but should be treated as a limited partnership under state law.

Cautions. Single member LLCs may offer less protection than multimember LLCs. Also, if you forget and bring in another person (who is not a spouse) as a member of the LLC, you will immediately blow your S election because now a real partnership owns the S Corporation.

IRS Circular 230 Disclosure.

IRS rules impose requirements concerning any written federal tax advice from attorneys. To ensure compliance with those rules, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under federal tax laws, specifically including the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Protect Your C Corporation with An LLC

2009-10-08T10:02:00.010-04:00

C Corporation. If you own shares in your own business, you should consider owning your shares in an LLC. This week we discuss regular C Corporations and not the special restrictions on S Corporations. A “regular” corporation is a corporation that is subject to paying corporate income taxes and is taxed under Subchapter C of Chapter 1 of the US Internal Revenue Code, hence the reference to “C” Corporations.

Transfer to LLC. If you own shares in any corporation and there is a personal judgment against you, then a court usually has the power to order a sale of those shares to pay off the personal judgment against you. This applies equally to your ownership in Google or Sam’s Deli, Inc. For an example, see Don’t Own Your Corporation. In contrast, with a LLC formed in Virginia, Delaware and certain other states, the court should not have the power to sell your membership interest in an LLC to satisfy a personal judgment against you.

Solution: Use an LLC to own your C Corporation shares. You do this by transferring your shares to the ownership of the LLC as long as you do not have the problems listed below.

Advantages:
1. Deter Lien Holders. It will be difficult to be able to take over your corporation if your shares are owned by your LLC.
2. Tax Neutral. If you select your LLC as a flow through entity, the ownership of the shares should not increase your taxes.
3. Spread Ownership. You can spread the ownership of your shares to family members without giving family members any rights to direct what happens with your corporation.
4. Income Tax Reduction. If some members of your LLC are in a lower tax bracket than you, this will reduce income taxes. This will be more important when dividend tax rates increase. Beware of the kiddy tax.
5. Estate Planning. The LLC can assist in the smooth transfer of shares in the event of death or disability and reduce estate taxes and avoid probate.

Cautions:
1. Make Sure Tax Neutral. Although such a transfer should be tax neutral, do not make this contribution until your tax advisors have reviewed it.
2. Buy Sell Agreements. If you have a buy sell agreement or other arrangement on share ownership with others, get their approval of the change. The LLC can be required to sell under the conditions of the buy sell agreement.
3. Corporations Owning Corporations. In many cases, there are tax advantages for one corporation to own its subsidiaries. You would probably use this LLC technique for the upper tier corporation. What we are talking about here is a closely held company without complex tiers of ownership.
4. Lender Restrictions. You may have to get permission of your lenders to do this.

Don't Own Your Corporation

2009-09-29T14:26:00.011-04:00

Small Business Corporations. Many small businesses are run through corporations. You have heard the radio ads that you must protect your home and banking accounts from business liabilities by running your business though a corporation.

Stock Not Protected. But what protects your shares in your corporation that owns your business? In contrast to a Virginia or Delaware LLC, a court may order the seizure and sale of your corporate shares to pay judgments against you.

Peter Plumber. Peter Plumber has a successful plumbing company (Peter Plumber, Inc.) with 20 employees, ten trucks and $3,000,000 a year in sales. One night he has a terrible auto accident while he was driving home from work. He ends up losing the lawsuit over the accident and a judgment for $5,000,000 is entered against him personally. His auto insurance only pays $500,000 of the judgment. The trial lawyer for the accident victim comes after Peter for the remaining $4,500,000. The trial lawyer obtains a court order for the sale of all the stock Peter owns in Peter Plumber, Inc., in addition to losing most of his assets.

Just Another Asset. Whether in Microsoft® or shares in Peter Plumber, Inc., corporate stock is treated as an asset just like a bank account or real estate and can be sold on the courthouse steps. In my experience, most business owners do not know this.

What to do. To protect your shares in your corporation, here are some of the techniques. Each of them has advantages and disadvantages:
1. Buy Sell. Have a buy sell agreement that mandates the sale of your stock in the event it is taken as a result of a court judgment.
2. Use an LLC. Consider setting up your business as a Limited Liability Company (LLC) in a state where LLC interests are protected. Consider making a corporate tax election for the LLC. More on this later.
3. Convert. If you have a corporation, review with your advisors the feasibility of converting to an LLC. Be aware that the IRS considers such conversions a sale and do not do this if you have to pay a lot of taxes.
4. Segregate Assets. Have all of the assets that you use in the business owned by separate LLCs and rent those assets from these LLCs. For example, Peter Plumbing, Inc. does not own the vehicles or its warehouse. The vehicles are owned by a separate LLC as is the warehouse.
5. Have LLCs own your Shares. If you have a C Corporation that pays corporate taxes, have your shares owned by an LLC that is protected. If you have an S Corporation that pays no corporate taxes, there is a special type of LLC to use. More on this later.

You Used Your Name: LLC Mistake Number Three

2009-09-16T11:39:00.010-04:00

Dr. Fred F. Funkel LLC. Fred F. Funkel sets up his own LLC to own his money market funds, stocks, bonds and savings accounts. Fred does this because he wants to protect these assets from a future creditor. Fred is a medical doctor who delivers babies and therefore is at high risk for medical malpractice claims. Fred proudly names his LLC the Dr. Fred F. Funkel LLC. Fred sets it up in a state where the state law is not clear as to whether a creditor is able to obtain a court order requiring that Fred’s LLC membership interest be sold on the courthouse steps. (See “You Choose the Wrong State: LLC Mistake Number Two” blog)

Investigator Finds Funkel LLC. A couple lost their baby while Dr. Fred F. Funkel was the attending physician. There is no clear medical reason as to cause of death and Fred does not think he is at fault. The grieving couple consults Tom Triallawyer to see if they should sue Fred. Tom does an asset search and does not find that Fred personally has much liquid assets. (Fred’s liquid assets are held by Fred’s LLC). Tom also does an internet and name search and finds that Fred owns the Dr. Fred F. Funkel LLC. Tom retains an investigator who finds out that the Dr. Fred F. Funkel LLC has about $2,000,000 of liquid assets. Tom looks at recent judgments in his state and finds that a botched baby delivery is getting an average of $5,000,000 in jury awards. Tom decides to take the case of the couple on a contingency fee basis-that is the couple pays the expenses of the lawsuit, but no legal fees unless Tom gets a settlement or wins the case.

Tom Files Against Fred. Tom Triallawyer files the medical malpractice case against Fred. Fred consults Susan Sharp, his own personal lawyer, separate from the lawyer appointed by Fred’s malpractice insurance carrier.

My LLC Was Supposed to PROTECT ME! “I thought my LLC would stop people from suing me”, Fred painfully complains to Susan. Susan sees Fred is in pain and doesn’t say “I told you that I should set up your LLC because of all of the mistakes you could make”. Instead, Susan says in a soft voice: “The investigator’s job was a lot easier finding you because you used your own name as the name of the LLC. I recommend that we change the name of the LLC in the future to make it harder to find your assets.”

My LLC is Secret. Fred replies: “Well, I will just won’t tell them what my LLC owns.” Susan: “At a point in the litigation, the other side will require a statement of all of your assets and at that point, the court can force you to list the value of all of your assets in your LLC. This can happen in any lawsuit, whether or not they know that you have an LLC.”

My Assets Are Safe in My LLC. Fred: “At least I have the LLC. My assets in my LLC should be safe even if I lose the lawsuit”. Susan: “Unfortunately, the law of Maryland is not clear on this point. In general, a state court judge has the power to enforce judgments and this may include the authority to reach the assts in your LLC. For example, if Tom Triallawyer obtains a judgment for $5,000,000 against you in the existing litigation and your insurance carrier pays $3,000,000 of the judgment, the remaining $2,000,000 could be collected against you. After entry of the judgment, Tom Triallawyer will schedule a deposition of you to force you under oath to disclose everything you own, including the assets of your LLC. If you have a bank account in your name, then Tom Triallawyer will request that the Judge place a lien on your bank account, remove the funds from your bank account and deliver the resulting funds to Tom Triallawyer. The general power of a judge may authorize the court to order that your membership interests in your LLC be sold to the highest bidder in a court supervised auction sale. Tom Triallawyer buys your membership interests at a low price at the sale, takes over your LLC, liquidates the LLC, retains a third of the proceeds and disperses the remainder to his clients.

Fix My LLC Now! Fred: “What can I do to fix this? Could I move the LLC to another state?”

Too Late for Now. Susan: "If you had formed the LLC in Virginia, Delaware and several other states, we would have a strong argument that the judge does not have the power under those laws to have your LLC sold. However, since you have been sued, we can not now change the state of your LLC because this could be held by the court to be an action that hinders or delays an existing creditor. This is called a fraudulent conveyance and may be grounds to set aside the move of the LLC from Maryland to Virginia.” (Susan says to herself that when Fred consulted her about setting up an LLC she told Fred about this and Fred decided to save some legal fees and set up the LLC himself.) Susan gently adds: “We need to examine a strategy for the future after this awful time is past you.”

Fred Loses $1,000,000 from his LLC. In the settlement of the case, Fred is forced to pay $1,000,000 out of his LLC because of the possibility that Triallawyer could penetrate the LLC. If Triallawyer didn’t know that Fred had an LLC with $2,000,000, Triallawyer may not have taken the case. If the LLC had been stronger, Triallawyer probably would have settled for just a payment from the insurance company without a significant contribution from Fred.

Don’t Use Your Name. Fred let his pride make the mistake of using his own name in his LLC that was intended, but failed, to provide protection of his cash and securities assets. Fred could have named it the FFF LLC, or Chesapeake Three LLC or some other name, not used or trademarked by someone else, which does not so quickly lead the asset investigator directly to Fred’s doorstep.

When to Use Your Name. This is different if Fred conducts his medical practice in an LLC. In that case, if Fred is promoting his name “Fred Funkel” as a preeminent obstetrician, the name of Fred’s medical practice would be the Dr. Fred Funkel MD LLC. Or, if Fred’s practice uses medically sound natural childbirth techniques, the practice could be the Natural Child Birth Center LLC. You should have a conversation with your advisors as to the best name for your LLC.

Insider Secrets to Maxing Your IRA

2009-09-11T10:44:00.020-04:00

Little Used Powerful Tool. This is about a little known planning tool, the Retirement Benefits Trust, which can provide dramatic benefits for generations of your family.

Great Wealth Accumulation. There is a way to create great wealth using IRA (Individual Retirement Account) and other retirement benefit planning. This is basically done by using the tax deferral available from IRAs for multiple generations. It will become much more important because taxes on your earnings and the earnings of your children and grandchildren are going up dramatically in the coming decades. For many, income taxes will take away 50% of your income. Because you can roll over your company retirement plan to an IRA when you retire, your IRA can have millions of dollars. Without proper planning, most of your retirement savings could go to taxes.

Tax Deferral. People use IRAs for postponing paying taxes during their lifetime. What is not well understood is how your IRA can continue to save on taxes even after you’re gone from this Earth (I am not talking about space travel).

Traditional IRA. There are two types of IRAs: Traditional and Roth IRAs. Under the traditional IRA, you are able to deduct the contributions you make to the IRA, there is no tax on gains inside the IRA for qualified contributions and when someone takes the money out of the IRA, the tax must be paid on all distributions at the then current ordinary income tax rate. The owner of the traditional IRA must start taking required minimum distributions from the owner’s IRA April 1 of the year after the owner turns 70 1/2. You must take out each year the required minimum distributions based upon the applicable IRS tables that project how long you will live. If you live as long as the IRS thinks you will live or longer, you may have taken everything out of the IRA.

Roth IRA. For the Roth IRA, you do not get a tax deduction when you make the contribution, you do not pay taxes on the earnings inside the Roth IRA and when someone takes funds out there is no tax on the money put in or on the earnings. The owner does not have to take out minimum distributions during the owner’s lifetime. But after the owner dies, the person inheriting the Roth IRA must take out distributions over their life expectancy under the IRS tables.

Tax Free Growth Does It. The trick is to legally postpone taking distributions as long as possible. That is because you get wealthy by consistently making money over time, reinvesting the earnings, getting a healthy rate of return and not paying taxes on the earnings.

Stretch it Out. The goal, then, is to have the IRA go to the youngest person possible after the owner dies. This does not happen in most cases because people leave the money to their surviving spouse who is usually about the same age (Anna Nicole Smith being the exception) or to children, nieces or nephews who take out the money and spend it. Only a few advisors understand Retirement Benefit Trusts (RBT).

Willy Wise and his Retirement Benefits Trust. Willy Wise wants to provide a legacy for his children, grandchildren and a favorite niece. He can see for that for the next 50 years or so, federal and state governments will be imposing higher and higher tax rates on income. He sets aside a life insurance trust and other assets that provide for all the needs for his wife. He has eight children and grandchildren and his niece. He sets up a “Retirement Benefits Trust” for his eight children, grandchildren and niece during his lifetime. Willy can amend this Retirement Benefits Trust during his lifetime so if Willy Wise III turns into a bum, Willy can cut Willy Wise III out of his RBT. Willy leaves the largest percentages in his RBT to his grandchildren, thereby maximizing the tax deferral and the growth of the assets. Willy does this for both his traditional and Roth IRAs. Willy’s advisors prepare beneficiary designation forms for Willy using the same percentages for his IRAs as is set forth in his RBT. Willy’s IRAs provide for the future education, capital for investments and a sound retirement for his eight descendants and his niece. When Willy dies, his spouse, children and advisors take all the necessary steps for each of the nine subtrusts of the Willy RBT to qualify to be an IRA beneficiary.

Multiple Benefits:

1. Maximum Tax Savings. Each child, grandchild and niece can use their life expectancy to determine minimum distributions. So for ten year old Wonda, with a 100 year life expectancy, Wonda’s trustee would only have to take out 1/100 each year and the remaining amount accumulates tax free.
2. Asset Protection. The assets inside the IRA are protected from the creditors, predators, spouses and relatives of the child, grandchild or niece.
3. Heirs Can’t Blow the Money. The heirs do not have to have the power to take out all of the money and blow it.
4. The Other Guy’s Kids Don’t Get Willy’s Money. Willy’s heirs get the money rather than a second spouse of the surviving spouse or someone else’s children.

Watch for Announcements. There are downsides, details and technicalities that need to be discussed with your advisor. Look for announcements on valuable workshops we will be having on this topic.

The Big IRA Book. This discussion is based upon the Big IRA Book from experts Robert S. Keebler, Cecil D. Smith and Carol H. Gonnella, but none of these individuals are responsible for any of the content of this article.

Circular 230 Disclosure Notice
Pursuant to recently enacted U.S. Treasury Department Regulations, we are now required to advise you that, unless otherwise expressly Indicated, any federal tax advice contained in this document, including attachments and enclosures, is not intended or written to be used, and may not be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed in this document.

Going to Jail for Having A Bank Account

2009-08-27T15:20:00.008-04:00

Go to Jail. If you have a bank account with more than $10,000 outside the country and have not reported it to the US government every year, you could go to jail for five to ten years and pay fines from $100,000 to $500,000.

End of Swiss Bank Privacy? The IRS recently announced that the US government has worked out an arrangement where the IRS will receive the names of US citizens who have not reported their Swiss bank accounts to the IRS. There were media reports that the IRS sought information on 52,000 accounts, however, a recent settlement calls for UBS to give the IRS between 4,500 and 5,000 names. Once the IRS has these names, the IRS can then initiate criminal prosecutions for tax evasion. Several US citizens with UBS accounts have recently pleaded guilty of not reporting foreign bank accounts, with their information being posted on the IRS website.

Grandmother Lee. Grandmother Lee fled Vietnam when the North Vietnamese Communist government took over South Vietnam and she settled in France. In 2006, she died and left her money equally to her three children in her bank account in France. Dr. Lee, one of her daughters, is a US citizen living in Virginia and is a medical doctor. In 2006, Dr. Mae Lee found out that she had inherited $80,000 in a savings account in a French bank from her mother. Dr. Lee left the money in France, thinking that when she had time from her busy medical practice, her family would have a great vacation in France. The first time Dr. Lee received a statement of the interest income from this French Bank account was in 2008. Dr. Lee filed a personal tax return for 2008 reporting the interest income from the French Bank account. The IRS examines the return and started a criminal investigation of Dr. Lee for failing to timely file Form TD F 90-22.1, Report of Foreign Bank and Financial Account, commonly known as a FBAR, for three years.

Who Has to FBAR: 1.) Any US citizen or a US resident or certain persons doing business in the US or domestic trusts, corporations or partnerships AND
2.) This person had signature authority over a foreign account with a bank or foreign financial institution AND
3.) The foreign financial account had a combined value of more than $10,000. Of course, as with all tax regulations, there are many broad definitions and a lack of clarity on many points. If you want more detail, contact us for a confidential consultation. This short B-LAW-G can not be relied upond for legal or tax advise.

How to FBAR: File an annual TD F 90-22.1 by June 30, 2009 to a designated address in Detroit. You report the maximum value of the account during the year, the type of account, the name of the financial institution and its address and the account number. This form is not filed with your tax return. As a US citizen, you have to report your worldwide income on your regular 1040 personal tax return. Use Schedule B to inform the IRS of the existence of a foreign bank account. Even if you reported the income on your personal 1040 return, you would still be in trouble if you did not file the separate TD F 90-22.1 (FBAR form).

Penalties. If you fail to file the FBAR form, you can be subject to severe civil or criminal penalties or both. A non willful violation is subject to a $10,000 fine. The civil penalty is limited to the greater of $25,000 or the balance in the account up to $100,000. So for Dr. Lee, her penalty could be $80,000 and she forfeits the entire $80,000 she inherited. The IRS has six years to assess the FBAR penalty. Criminal violations can result in a fine of up to $250,000 and 5 years in jail. Where the failure to file the FBAR is part of tax evasion, the fine may go as high as $500,000 and up to ten years in prison.

Collapsing Offshore Tax Shelters. In the past, prosecutions have been rare. But with the step up in enforcement against offshore tax evasion, prosecutions may increase. For people who are not part of a tax evasion scheme and only recently realized they need to file FBAR reports, the IRS has a temporary voluntary disclosure program.

Saving Dr. Lee. Dr. Lee had no idea that she was committing a crime because she inherited money in 2006 in the form of an account in France from her departed mother. She could be subject to a civil fine of $80,000 and a possible criminal tax prosecution. She retains an attorney, not a CPA, because there is an attorney client privilege against disclosure of past crimes with an attorney, but not with a CPA. The attorney may retain an experienced CPA to do most of the work. Though her attorney, Dr. Lee participates in the IRS voluntary disclosure program. If there is unreported income from these accounts, she will have to file amended returns and pay the tax and penalties on the unreported income. The IRS warns that if Dr. Lee just filed amended returns and did not participate in the voluntary disclosure program, Dr. Lee could be subject to criminal prosecution. If Dr. Lee does participate in the voluntary disclosure program, then Dr. Lee would not pay $80,000, the entire inheritance as a penalty, but 20% of the account or $16,000. Once the IRS has started a criminal investigation, Dr. Lee is no longer eligible for the voluntary disclosure program.

Six Months Window. The voluntary disclosure program ends September 23, 2009; it was started March 23, 2009. “There are no plans to extend the deadline past September 23, 2009”, said Neil Shulman, head of a FBAR Task Force of AICPA, a national association of CPAs.

Get Out of Jail Card. In the board game of Monopoly, you can roll the dice and end up on the square “Go to Jail”. If you should have filed your FBARs and didn’t, your Get Out of Jail Card is about to expire.

Prepare for the Return of the Estate Tax

2009-08-20T15:52:00.007-04:00

It’s Coming Back! The Estate Tax is coming back. That is the growing consensus of observers of what is happening on Capital Hill.

$3,500,000 exemption for 2009. This year, 2009, each person has an exemption from federal estate taxes of $3,500,000. This means that unless you have life insurance, real estate, savings and retirements funds in excess of $3,500,000, you do not pay any federal estate tax. If you live in Virginia, you don’t have any Virginia estate tax. But, if you live in DC or Maryland, you have estate taxes if you have more than $1,000,000.

Easy to be a millionaire. For many people, it is surprisingly easy to have an estate over $1,000,000, but difficult to exceed $3,500,000. Let us say you bought a house for $50,000 and it is now worth $500,000. You have a retirement fund of $150,000 and other savings of $75,000. We are talking about someone who considers themselves as middle class and not rich. They also have a small term life insurance policy with a death benefit of $250,000 and another $150,000 life insurance from their work. The death benefit of the life insurance is part of their taxable estate if they die while the insurance is in effect. Under the estate tax calculations with a $1,000,000 exemption, you have a taxable estate of $1,150,000.

Wealthy Escape at $3.5 million. Compare this to Mr. And Mrs. Wealthy. They have $1,000,000 in real estate, $1,000,000 in investments, another $2,000,000 in a family owned business, and insurance of $2,000,000. Their total taxable estate is $6,000,000, but they pay no estate tax when the estate tax exemption is $3,500,000 per person and their living trusts both use their $3,500,000 exemption (Two times $3,500,000=$7,000,000 which is greater than $6,000,000).

Bush Taxes Cuts Expire. The $3,500,000 exemption is part of the phase out of the estate tax under the Bush tax cuts. Next year, there is a complete elimination of federal estate taxes. But at the end of 2010, the Bush tax cuts expire. Rumors are that at the end of 2009, Congress will extend the $3.5 million exemption for only one year, through 2010. Without further legislation, the exemption automatically goes back to the $1,000,000 exemption in 2011 with rates as high as 55%.

$3,500,000 Was Here to Stay. President Obama’s election platform included a promise to keep the exemption at $3,500,000 and he implements his promise in his budget assumptions for future years by use of a $3,500,000 exemption. Earlier this year, I and many people who follow developments in Congress predicted that Congress would extend the $3,500,000 exemption for years to come. Most estate tax commentators saw the $3,500,000 exemption as the logical answer.

Impact of New Spending. What has changed so soon? Look at some numbers from the Heritage Foundation report of July 2009:

*Spending Surging. Spending and deficits are surging at a pace not seen since World War II.
*$33,932 per household. Washington will spend $33,932 per household in 2009 which is an increase of $8,000 from 2008.
*2008 Deficit $466 B. Federal spending was $3,031 billion in 2008 with a deficit of $466 billion.
*2009 Deficit $1,845 B. Federal spending in 2009 will be $4,004 billion with a deficit of $1,845 billion.
*Large Deficits Through 2019. Federal Spending is projected to continue to exceed revenue by a large gap through 2019.
*32.1% Jump in 2009. Federal spending grew by 4.9% in 2008 and by 32.1% in 2009.
*Spending Will Stay High for 10 years. President Obama’s budget proposal has per household spending at $33,392 in 2009 and ten years later in 2019 at $33,312, indicating a continuing high level of spending.
*Annual Increase is 8%. Since 2001, spending has increase at an average annual rate of 8%. If this rate continues for the next ten years, there will be massive requirements for new revenue.
*Social Spending To Consume All Taxes. By 2050, spending just for Social Security, Medicare and Medicaid will consume all of the federal taxes that the federal government usually collects as a percentage of the economy.
*Massive Tax Increases Needed. To just pay for Social Security, Medicare and Medicaid, taxes will have to increase from less than $1000 per household in 2010 to $3,000 by 2020 and over $12,000 per household by 2050.
*Spending Increases without 2009 Problems. This spending is not temporary and will continue to increase even without the global war on terror, the 2009 financial bailouts and the 2009 stimulus bill.
*Popular Programs Rapid Increase. Spending on popular programs is growing rapidly.
*Education up 169%. K-12 spending has surged 169% since 2001.
*Veteran Spending Doubled. Veteran spending has doubled since 2001.
*Medicare up 68%. Medicare Spending has jumped 68% since 2001.
*Interest Will Consume 2/3s of Deficit. By 2019, net interest costs will be two thirds the size of the entire budget deficit.

Looking for Found Money. Congress is considering cap and trade and health care legislation which involve large tax increases. There is a major search by Congress through the tax code for ways to pay for desired projects and plans. Most plans target the “wealthy” for increased taxes.

Do Nothing and Get an Automatic Tax Increase on the Rich. An obvious target: Do nothing, and by law, the exemption for estate taxes will be $1,000,000 with rates as high as 55% in 2011. The estate taxes do not generate much revenue, but given what is happening, even a few measly $100 billion extra here or there might help pay for parts of a few programs.

Did Julia Childs Change America?

2009-08-12T12:02:00.018-04:00

Julia Childs changed my America.

Growing up in Columbus, Ohio in the 1960s, I lived a peaceful, unexciting and efficient life. For dinner we ate meat and potatoes, heavily cooked vegetables and the all American apple pie. Once, my father cooked a can of El Paso enchiladas, I considered that exotic. When my father served lasagna to his Ohio music camp high school students, he found that they had never eaten this before. If you went to a local coffee shop for breakfast it would consist of over easy eggs, white buttered toast and regular American coffee. Fish was mainly fried; if it was fresh it came from Lake Eire which contained unhealthy levels of mercury. There were a few expensive French restaurants; nobody I knew went to them. The height of spending and elegance was a shrimp cocktail at a nice restaurant.

When I traveled to Europe for the first time at age 19, I had fish and chips in London; as a Midwesterner, this was entirely new to me. I ate onion soup and snails at small cafes in Paris and ate my first quiche. In Florence I ordered the mysterious cappuccino in Italian cafes. I had an exotic tomato and cucumber Greek salad at the Plaka in Athens and paella in Madrid. When I came home I was thrown back into the world of plain, ordinary foods. At the time, these foods were not available in Columbus, unless you made them yourself.

Fast forward to today in America. Cappuccino is found in 7-11’s and there’s a Starbucks on every corner, and even in supermarkets. In the Washington DC area, every national cuisine has its own restaurant: Afghani, Brazilian, Iranian, Lebanese, Ecuadorian, Cuban, Ethiopian, Peruvian, Mongolian, Serbian, and Thai. Even learning to cook is easier than ever with a whole cable channel devoted to cooking, The Foodnetwork channel, and many competitive cooking shows. For quick guides of “how to” you can simply turn your computer on and YouTube has cooking lessons and recipes from around the world available at your fingertips. America has pioneered “fusion” cuisine blending French and Vietnamese and many other world cuisines.

On my more recent trips to Italy, I discovered that you could get a truly awful meal in some Italian hotels. Many restaurants had similar menus with mediocre performances. I yearned to be back in the Washington area where I could get a better meal and for less than half the price because I knew where to go. You can now eat as well or better in America as you can anywhere in the world.

Why this enormous change in a generation?

When lanky, frumpy and nearly nerdy Julia Childs hit the TV screen with her 60s debut on how to cook French food, it changed cooks all over the country. French cooking was thought to be nearly impossible for uncouth Americans, until she came along. If this somewhat silly and sometimes pompous woman could make boeuf bourguignon or onion soup, well I could to. I remembered the delectable food in France and wanted a little taste of France in my own home.

Grocery stores started to carry real French bread, something that is so common place now that we have forgotten that in most parts of the country in the 60s you could not get hard crusted French bread. Now the local supermarket has expanded even further to “Artisan Breads” of great variety, heavy crusts and robust flavors.

We didn’t notice that Julia Childs worked for the OSS, the predecessor of the CIA, for years in the US and abroad. She attended the famous Le Cordon Bleu cooking school in Paris learning and teaching cooking while her diplomat husband worked for the US Information Agency.

Childs was no “info babe” and may not have made it in today’s glamorous world of TV. She did not have a band or an audience and if humorous, it may not have been intentional. She was often the subject of parodies. She reinvented herself in her fifties and became a national celebrity over something as frivolous as the taste of food.

She treated good food and wine as an important part of life in a country where we did not want to waste three hours to prepare one dish. She made the mysterious ways of French cooking fun and something that could be mastered by the “average Joe”. She freed the fifty five year old house wife to join the 60s revolution and smell the flowers – or at least the ragout. Since the 60s, this country has had a cultural revolution in fashion, family structure, and more. Thanks in part to Julia Childs, we now have the greatest variety and quality of food experiences in the world.

Guardian vs. Executors

2009-08-05T09:52:00.012-04:00

Agonizing decision. The most difficult decision for most parents is who will take care of their children in the event that the parents have a horrible accident and die before their children are grown. Once made, this decision is set forth in their will as the choice for guardians of their children.

Blended families. This choice has become more difficult now that many families are raising children from a prior affair, from a prior marriage or from their own children. The ex-lover is gone and may have little to do with the children of the blended family. But, if both spouses die, the surviving birth parent will have a priority claim for custody of the children. We discussed the planning options in a recent blog as to how to deter an irresponsible birth parent from obtaining legal custody in: “Who Will Take Care of Your Children If You Can Not?”

Guardian Does Not Control the Money. A touchy problem is who will control the money for the children. There is no legal requirement that the person in charge of your money (trustee or executor) be the same person who has custody of your children. The guardian may be a wonderful care giver – an ideal stay at home mom with a helpful and supportive husband – but they may be lousy money managers, or just unsophisticated. You may have someone else, family member or friend, in whom you trust to judiciously invest the funds and to spend it wisely.

Trustee Controls the Money. You have created a living trust to hold property so as to avoid court process in the event of death or disability, to save on taxes and to provide lifetime asset protection for your children. You have named Susan Surefoot, a CPA and financial wizard, as the successor trustee of your trust after you are gone. Surefoot will administer, invest and distribute the funds for your children if you and your spouse die while they are minors. Your sister Ellen will be the guardian. How does Ellen receive money from Surefoot to take care of your children?

Jackson Mother vs. Jackson Attorney. This issue is currently in contention in the Michael Jackson case. The court has given custody of Michael Jackson’s three children to his mother, Katherine Jackson. Reports are that Katherine Jackson is financially stressed, was financially dependant on Michael Jackson and has been living on her social security since his death. She requested the court to provide her a family allowance and copies of Jackson’s proposed concert tour contracts and challenged the appointment of a Jackson business advisor and an attorney as the executors of Jackson’s estate. The court grated a temporary allowance to Katherine but left the executors appointed by the will in charge of the estate until further hearings. This is an example of how the guardian may challenge the authority of the executors over the administration of the estate.

A Soap Opera. Allen had an affair with Angelina, a rock band groupie. Angelina, deciding Allen was too dull, left him and followed her favorite alternative band, the Dead Toads, around the world. Later, Angelina said she was pregnant with Allen’s child, to be named Toadie Patty. Angelina became a drug addict and abandoned Toadie at birth. Allen picked up Toadie at a hospital in Kathmandu, Nepal and raised him as his son. Later, Allen met Rachel, they fell in love, got married and had two children of their own, Erica and Eric. They became a loving and blended family, with Erica, Eric and Toadie all behaving as part of the same family.

Guardian vs. Trustee. Allen and Rachel designated Mary, Allen’s sister, who is successfully raising her own three children with her husband, a leader of a Mega Church in McLean, Virginia. But, reports are that Angelina has gone through drug rehabilitation twice and became a convert to a new age religion. Allen and Rachel may never be able to defeat a claim for custody by Angelina, the birth mother, but want to make sure that Allen’s brother, Aaron, a successfully financial planner, will handle the administration and investment of the funds of the estate of Allen and Rachel in case Angelina wins custody of Toadie.

How will Allen and Rachel navigate these stormy waters?

1. Put responsible people in charge of the money. Aaron will be the successor trustee of the Allen and Rachel trust and therefore have control of the money. Without pursuing a difficult and expensive law suit, the court will not have automatic jurisdiction over Aaron, as the court does with a will, and substantial proof of mismanagement will have to be clearly established for the court to remove Aaron or interfere with Aaron’s management of the trust assets.

2. Have the Trustee pay the bills. The trust gives the power of Aaron to pay the bills directly for the care, education, health needs, clothes and other expenses of Toadie. Angelina can not siphon off the funds to buy drugs.

3. Establish an allowance. Set forth in the trust how much is to go to Angelina directly to spend on Toadie.

4. Have the trust own the house. The trust can buy a house for Toadie and Angelina to live in and it is owned by the trust and not Angelina.

5. Fund monitoring of care. Authorize the trustee to use trust funds to find out how well Angelina is taking care of Toadie and to take court action to remove her as guardian if she is abusive to Toadie.

6. Allow discretion. Angelina may become a great mother, having learned from her mistakes. Give discretion to Aaron to help Angelina with her expenses of bringing up Toadie.

7. Alternative Rules. Provide an alternative set of rules if Angelina is not awarded custody of Toadie and Toadie stays with Erica and Eric and is raised by Mary and her husband.

8. Trust Protectors. Provide a committee of family members who are “Trust Protectors”, with the sole power to remove the trustee and appoint a replacement. You never know: Aaron may abandon his job as a financial planner to follow his passion for cooking after he wins the contest as the Next Food Network Star.

You Choose the Wrong State: LLC Mistake Number Two

2009-07-29T10:31:00.011-04:00

Asset Protection. Most people set up a limited liability company for asset protection, that is protection against the consequences of losing lawsuits. But, since LLCs have become so common and there are many non lawyers who are glad to put them together for you. Many people set them up without expert advice and make many mistakes.

Choice of Law. When you set up an LLC, you have to file “Articles of Organization” with a state government. The laws of the state in which your file the initial Articles then becomes the law that applies to the LLC. You do not have to choose the state in which you live or in which the property is located. Just as with Delaware Corporations, you can shop around and choose the best state in which to form your LLC. Many people who form their own LLCs incorrectly assume they have to set up the LLC in the state in which they live.

Enterprise Liability. LLC protections against lawsuits have two completely different aspects. These two are not usually understood by most people. The first one is protection against enterprise liability. That is, if you own a rental house in your own name, and the tenant has a big party and someone slips and falls on a broken beer bottle, the injured party goer may sue you for their damages. If the party person gets a judgment for $2,000,0000 against you and your insurance pays up to its top limit of $500,000, then the party person can come after your home, bank accounts, stocks, bonds, shares in your business corporation and maybe your IRA until they get the rest of $1,500,000.

Limited to the LLC Assets. If you own the house in an LLC, then in most states, the maximum that the party goer will get from their judgment is the liability insurance on the house and the equity in the house. Your liability is “limited” to what is owned by the LLC. The judgment creditor gets a judgment against the LLC and not you, unless they can prove you were at the party and threw the beer bottle at the injured party goer. LLCs and Corporations, if properly maintained, provide this “enterprise liability” protection.

Creditor Protection. There is a second type of liability protection that refers to “creditor protection”. In Virginia and Delaware, an LLC provides you greater protection than a Corporation formed in any state or LLCs formed in many other states.

Personal Judgment. You are in auto accident. At trial, the jury doesn’t like you, finds you at fault and renders a $2,000,000 judgment against you personally. You were driving so you are personally at fault and the judgment is against you and all of your assets. Your limit on your insurance pays $500,000 to the creditor and the creditor comes after you for the $1,500,000 balance. When entered in a court of record, that $1,500,000 judgment automatically becomes a lien against any real estate you own in your name in the county of that court and quickly goes on your credit report.

Personal Judgment Protection? You put your rental house into an LLC to protect against liabilities coming out of that enterprise. Will your LLC also protect you against the auto accident liability?

Collection Process. When a judgment is entered against you by a court, that is the beginning of the collection process. First, the judgment creditor can have the court issue a subpoena for you to appear in court to list all of your assets. Next, the creditor takes this information and starts to levy on your assets. For certain assets, the creditor may request that the judge order a court sale of the asset.

Sale on the Court House Steps. Prior to the change of the law in Virginia, a creditor could get a court order requiring the sale of your membership interests in your LLC to pay for a personal judgment. Today, this could happen still with an LLC formed in the District of Columbia, Maryland and many other states.

Charging Order Sole Remedy. When looking for a state in which to form an LLC, you look for the phrase in the state’s LLC law: “… the entry of a charging order is the exclusive remedy of the creditor” or similar language. This means that the creditor can only get a court order requiring you to pay over any money you take out of the LLC, but can not require a sale or seizure of your membership interest by court order as they are able to for your bank account or stock portfolio.

Encourages Favorable Settlements. Where state law of your LLC says that the charging order is the exclusive remedy, the creditor has to wait for distributions to come out of the LLC for the creditor to get paid. If the LLC distributes nothing, the creditor gets nothing. This is “creditor protection” and encourages settlements of the creditor’s claims and large reductions in the amount you will have to pay the creditor. Careful people will own most of their cash and brokerage accounts in an LLC for this reason.

Choose the Right State. If you choose the wrong state to form your LLC, you will not have this creditor protection. If you choose Virginia, Delaware and certain other states, you will. Can you live in Maryland and have the advantages of a Virginia LLC? Most state LLC statutes state that the law of the state in which you set up the LLC determines the rules applicable to that LLC. You should choose the state with the best law for what you are trying to do.

Counterattacks. It is possible that a local Judge may try to get around the state law and order a sale of the LLC interest. But, there appear to be very few cases on this issue at this time, probably because there is enough uncertainty to the creditor that these cases get settled. The results in a federal bankruptcy court may be different. There are additional costs for multistate registrations, but, with the right state, you have built a high hurdle for the aggressive creditor to jump over. We will cover how to keep the hurdles high in later blogs.

Choose Wisely. Choose the right state law for your LLC.

Delaware: Still A Great State, Just Don't Live There

2009-07-23T09:36:00.008-04:00

Taking More of Your Money. When you and I have less income coming in, we cut our expenses and maybe use some savings. But, when government has less income, they take more of our income by raising taxes.

Reinstated Estate Tax. The Delaware legislature effective July 1, 2009 raised taxes by reinstituting an estate tax on its residents. There was a trend of some states, such as Virginia, in eliminating state estate taxes. This means that Delaware may no longer be a safe haven for retirees fleeing high tax Maryland and the District of Columbia.

Have they lost their minds? Does this mean Delaware is no longer a good place to set up a corporation, limited liability company or a trust? Most know that Delaware is where many major US corporations are “Delaware Corporations” to take advantage of Delaware corporate laws and a specialty court system well trained in commercial law. Delaware is also a top state for forming limited liability companies; we will discuss the advantages of Delaware LLCs in future blogs. We rely on Delaware politicians to provide us better law than we can get from our own politicians where we live. Delaware government receives substantial revenue from out of state business registrations and the selling of Delaware law employs thousands of people in Delaware. There is hot competition between Delaware and Alaska, Nevada and South Dakota for this business. It does raise suspicions about the ability of politicians in Delaware to keep from ruining the status of Delaware as one of the top tier states for planning.

Advantages. Delaware has many advantages for setting up your trust in Delaware:

*Keep the Family Business. The ability to use an Administrative Trustee which enables family to retain control of a real estate portfolio or a family business after the death of founder of the business or of a mini real estate empire.

*Avoid State Taxes. In Virginia, New York and certain other states, with a properly structured Delaware non grantor trust, you are able to avoid state capital gain taxes on sales of stocks held in a Delaware Trust by non residents.

*No Frontier Justice. The Delaware Court of Chancery has judges that enforce the law (not make it up as they go), understand complex structures, do not pander to local prejudices, and do not have their own agenda to “share the wealth”.

*Protect Your Assets. The ability to set up a trust and obtain certain asset protection and a limited ability to benefit from the income from the trust, available in only a hand full of other states.

*Build Generations of Accomplishment. The ability to have a trust that will last for several generations, something that can be done in Virginia and Maryland, and a minority of other states.

*Stop the Greedy Son in Law. The ability to set up a trust for a child and to avoid claims of the spouse of the child against the Delaware trust assets.

*A Century of Performance. Delaware has been a leader in trust law for over a century, unlike its competitors in Alaska and Nevada.

*Protect Bank Accounts. Establishment of bank accounts that may not be subject to the claims of creditors.

*Motivate New Wife and Kids of Former Wife to Cooperate. The opportunity to use total return trusts to reconcile the interests of a spouse of a second marriage and children of a prior marriage.

Residents Pay an Estate Tax. Is this all ruined by the new Delaware tax on estates? The Delaware tax applies to residents of Delaware. As a resident, you will be exempt from estate taxes on the first $3.5 million of assets in 2009, certainly better than the $1,000,000 limits of DC and Maryland. But, if the federal government allows the federal tax exemption go to $1,000,000 in 2011, then residents of Delaware will pay taxes on their estates greater than $1,000,000. The tax will range from 9.6% to 16%, should be deductable from federal tax, and results in an effective rate of 8.8% for the estates paying at the 45% federal rate.

Beware of the Non Resident Tax. It only applies to a non resident to the extent that the non resident has real estate or “tangible” property in Delaware and the non resident has an estate greater than the federal exemption. Tangible property are things you can touch such as an antique pool table, a mint condition yellow Edsel, a record cover autographed by Elvis, a 3rd century hand decorated Turkish bible, 12th century Japanese Samurai armor, first addition movie posters, platinum necklaces and your gun collection. Because of this new Delaware estate tax, you may want to avoid having a beach house in Delaware and will want to keep your collectables in Florida, where there is no estate tax, if you are subject to a federal estate tax. As a non resident, your stocks, bonds, checking accounts, insurance policies inside your Delaware Trust are not subject to this new estate tax.

Delaware is still a great state for planning, just don’t live there.

Who Will take Care of Your Children if You Can Not? The Michael Jackson Case

2009-07-14T15:10:00.004-04:00

Choosing A Guardian. The hardest part of estate planning for parents with minor children is choosing who will take care of their children if both parents die before the children are adults. Because this is such a difficult decision, it often is never made, with tragic consequences. But, even where a parent has made a choice, the courts are not bound by the parent’s will, and may appoint an ill suited ex spouse, the worst nightmare of a caring parent. This is front page news in the Michael Jackson case.

Jackson’s Will. Michael Jackson’s will designates his mother, Katherine Jackson, as the person to receive custody and to be the guardian of his three children, 12-year old Prince Michael, 11-year old Paris Michael and 7-year old Prince “Blanket” Michael II. But, Jackson’s ex-wife, Debbie Rowe is negotiating over custody with Katherine Jackson. The Los Angeles Court had delayed until July 20 a ruling on who will receive permanent custody of the children by a joint request of Katherine Jackson and Debbie Rowe. See Michael Jackson's Will Here.

Is Debbie the Mother? Debbie Rowe claims to be the mother of Prince Michael and Paris Michael. The mother of Blanket was an unknown surrogate. Michael Jackson and Debbie Rowe were married in 1996 and divorced in 1999, with Rowe giving full custody rights to Jackson in the divorce. Reports are that Michael Jackson paid Rowe $8 million and gave her a house in Beverly Hills to get her out of

the life of his children. An agreement giving up her parental rights was later set aside by a court in 2004, but Rowe and Jackson entered into another agreement in 2006 for allegedly an additional large payment. TMZ reports that Rowe was not the biological mother, but actually a surrogate mother. This is denied by Rowe and is probably irrelevant because previous court decisions have treated her as their mother. Reports are that Jackson and Rowe reportedly had little of a real marriage, no contact since the divorce and that there is no relationship between Rowe and the children, Prince and Paris.

Primacy of a Parent. If there is a big court battle between Katherine Jackson and Rowe, many legal experts think Rowe would likely be given custody of the children even though Jackson’s will chooses Katherine, someone who has a strong relationship with the children. First and foremost, a sole surviving parent has often a decisive legal right to the custody of their children. Rowe’s attorney might make a case that Katherine, nearing 80, is too old, and that her husband, Joseph Jackson, was abusive to his children, making their home not a healthy and safe place for Michael’s children. Katherine’s advocates would fire back that Debbie has no regular contact with the children and gave up her custody rights for money.

What to Do. What does all of this tragic soap opera mean for us? In estate planning, one of the most wrenching problems is making sure that the children of a responsible parent do not end up with an ex spouse who is irresponsible. The basics are that your designation of a friend, new spouse, or your parent as the guardian for your children in your will is not legally binding on the court. What can you do?

1. Name the Guardian and Alternatives in your will. If you do not have a will, the court will appoint a guardian for you. Name a primary and at least one back up guardian.

2. Give the reasons for your choice. Put in your will, your cogent and persuasive reasons for your choice of guardians. I am not talking about: “my ex husband is a bum and a drunk”. But if the ex husband beat the children, is an alcoholic and you have proof, then include that.

3. Fund the Fight. In your living trust, emphasize the importance of your choice of guardians and require the trustee to spend funds from the trust assets to buy the best legal talent to fight for custody.

4. Reference any court orders, doctor’s findings or other evidence that shows the ex spouse would be a bad choice for guardianship. Even siblings and close friends will not be able to find old court cases or testimony determining custody in a divorce or even know that they exist. In one case, we put in the will the report of the examining psychologist that the mother was an alcoholic and suffered from acute mental disorders and was an unfit mother and should receive no custody of the children in the divorce proceeding. But, with this likely testimony, the ex wife gave up custody before the hearing so there were no formal court findings in the record. If we did not have the information in the will, no one may know about it. You might be concerned that the will is a public document and you might prefer a private statement. However, the will is likely to be admitted as evidence before a court and a separate statement may be excluded from consideration by the rules of evidence.

5. Have the Guardians involved with your children. When possible, have the prospective guardians be a part of family gatherings and even do some babysitting. An important factor is the relationship between the guardians and the children.

6. Choose Your Guardians Well. Choose responsible people who do not have a criminal record or a history of child abuse and who have experience as good parents.

You might say, well, I will just buy off the ex spouse in exchange for their parental rights. Michael Jackson appears to have tried that, but the Court set it aside. A contract to sell your children is probably not enforceable and in many cases is a crime in California and other states.

Will Taxes Destroy the Michael Jackson Estate?

2009-06-30T15:30:00.016-04:00

Death and Taxes. Will the headlines next year say that estate taxes have destroyed the finances and estate of Michael Jackson? There is not sufficient information available to the public to know now for certain, but from what we have heard, it appears that the late star’s estate will run into big problems with the Internal Revenue Service.

At the time of Michael Jackson’s death, the amount exempt from federal estate taxes is $3,500,000. To determine the taxes due from his estate, you must add up everything he had control over, had an ownership interest in or was part of his taxable estate under a complex series of rules. Figuring this out may take years.

Calculating Your Taxable Estate. For most people, your taxable estate means your total equity in your real estate, your retirement accounts, your savings and checking accounts, your stock and bond investments, your business interests, your life insurance death benefit, your cars and everything in your home. In counselling with people, I generally find that people are shocked as to how much is subject to estate taxation. Recently, a husband and wife consulted me about planning their estate. They are both practicing CPAs preparing income tax returns for other people. They said they didn’t have an estate tax problem, but when I totaled it up and looked at how they owned their assets, they had a significant estate tax problem.

Jackson’s Assets. According to press reports, the largest asset of Michael Jackson was half of Sony/ATV Music Publishing, a 750,000 song catalogue that includes music by the Beatles, Bob Dylan, Neil Diamond and others. The speculation is that the Jackson share is worth somewhere between $500 million and $1.25 billion. Reports indicate that although Jackson owned this in a protective trust, he had used this catalogue to secure loans and that his creditors could force a fire sale of this asset. Jackson also had interests in his own songs and recordings, which are skyrocketing in value after his death.

Billion Dollar Estate. So, let us assume all of the assets of the Jackson estate are worth $1,000,000,000 (one billion), a figure often mentioned in press reports. He has a lot of debt which does not go away because he died. Reports are that his debt is from $400,000,000 to $500,000,000. Let us assume the middle with $450,000,000 of debt.

Net Estate over ½ Million. This means that his gross taxable estate is about $550,000,000 (one billion minus $450,000,000 of debt). From this you will subtract legal, accounting and other fees of the estate that could range from $5,000,000 to $50,000,000, depending upon the costs and commissions to sell his assets. So, Jackson’s net taxable estate, after subtracting $26.5 million in fees and expenses and his $3.5 million exemption from estate taxes (if still fully available), would be about $520,000,000.

Pay $230,000,000 by March. The federal rate is 45% so the Jackson estate would owe about $230,000,000 in estate taxes to the federal government. When? Nine months after his death, in March of 2010. In cash.

Creditors Sued Him. Jackson had been fighting his creditors in court for the last several years. He successfully fought an attempt to auction many of his personal possessions earlier this year. He had been sued by his former publicist, video director, attorneys and financial advisors. A financial backer bought Jackson’s Neverland Ranch just before the property was to be sold at auction to cover back debts.

World’s Most Powerful Collection Agency. If you do not pay the IRS the estate taxes due in nine months, the IRS can lien and sell your property at a distress sale. You can ask the IRS for more time to pay, but this is often in the discretion of the IRS. Given Jackson’s debt problems before his death and the public exposure of this case, do you think the government will give the Jackson estate a break that they may not give to the average person?

Forced Sale of Assets. If Jackson couldn’t pay his bills during his lifetime, where will his estate get the $230,000,000 by next March? Will the IRS force a sale of his assets at fire sale prices? This has happened in other estates where the family ended up with pennies on the dollar compared to the millions the family thought they would get.

Was there Tax Planning? Jackson could have hired tax planners who could have eliminated most of these federal and any state estate taxes. You may be shocked to know that someone can die worth half a billion and not pay significant estate taxes through clever planning. Alternatively, if you don’t plan, the tax system can wipe out most of the value of your estate. Yes, that is the system we have now and it is going to continue this way for years to come.

The world is mourning the passing of this music legend. His legacy is not just money and will live on regardless of what happens to the finances and taxes of his estate. But, his estate is heading for a show down with the most powerful collection agency in the world.

First LLC Mistake: You Signed the Articles!

2009-06-24T11:18:00.001-04:00

Why do you set up a limited liability company (LLC)? Because you want to have at risk only the money and property you choose to put into your LLC; you do not want to risk all of your other assets if there is a failure of the LLC business. You want to limit your liability from business activities.

Example: Susan owns five rental houses, A, B, C, D and E. Susan is sued on house A which she owns in her name. She loses the lawsuit and suffers a judgment against her for $500,000. As a result, all of Susan’s assets are at risk to pay the $500,000. The person who gets the judgment against Susan (judgment creditor) uses the judgment to sell house A through a court sale or foreclosure. The net proceeds of the distress sale of house A are $50,000 and all of this goes to the judgment creditor. She still owes $450,000 to the judgment creditor. The judgment creditor has houses B, C, D and E sold at distress sale prices for total net proceeds of $200,000. Susan still owes $250,000. The judgment creditor then goes and takes the money out of the savings, brokerage accounts, home, stamp collection and other assets of Susan until she has paid the entire $500,000, plus interest, legal fees and costs.

Is the LLC the solution? Susan does not like this. She does not want her savings and other assets put at risk as a result of her investments in rental houses. Susan hears that a limited liability company (LLC) can limit her liability.

LLCs became popular in America in the last 20 years. Basically, an LLC is a legal entity you set up under state law. Once you have the LLC and you keep it in force and if there is a judgment against the LLC, the judgment creditor is only supposed to get the assets in the LLC. The judgment creditor can not come after the assets of the owners of the LLC, unless the owners contributed personally to the reasons for the judgment. Thus, if it works and all of Susan’s houses are titled in the name of Susan’s LLC, then the $500,000 judgment creditor gets all of the five houses owned by her LLC, but can not come after Susan’s savings accounts and other assets.

Personal Judgments: If Susan had an auto accident where she was found at fault and the person she injured obtained a judgment $1,000,000 against her above the insurance limits that Susan had, then Susan is personally responsible to pay the $1,000,000 that her insurance company will not pay. In some states, if Susan’s houses are owned by her LLC, then the $1,000,000 judgment creditor can not use the judgment to sell her houses.

Pre Lawsuit Asset Search. Trial lawyers make their money by suing people and insurance companies who can pay money. The wealthy trial lawyers pick cases very carefully and will often order an asset search before deciding to sue someone. Go to the internet and search for “asset search” and you will find many companies who are ready to find out what you own for a fee. One private investigator says that he can find out what most people own in a couple of hours!

First Mistake: Susan decides to save on legal fees and files the papers for the LLC herself. This means that Susan’s name is in the public record as owning the LLC. When the trial lawyer is deciding whether to sue Susan, the trial lawyer finds through these state and local records that Susan is the owner of her LLC which owns multiple properties, making Susan a desirable target for a lawsuit. Using the internet, this may take fifteen minutes or less. The trial lawyer may be able to force a sale of the houses owned by Susan’s LLC to pay a future judgment. Susan has greatly decreased the asset protection available from the use of an LLC.

Do Not Sign the Articles. Instead, if Susan retained a well informed lawyer to file the Articles of Organization with the state, then in many states, Susan’s name would not be in the public records either for the LLC or as the owner of her houses. The asset investigator may not find out that Susan owns five houses. If an investigator calls the attorney’s office, we treat this as a private matter and subject to the attorney client privilege. We don’t tell the investigator who owns her LLC unless Susan instructs us to tell the investigator. Normally, there is no legal right for a private investigator to force us to say who owns the LLC or LLC property before the filing of a lawsuit.

Top Ten Mistakes. Certainly, when Susan is sued, she will probably have to tell the trial lawyer what she owns, including the LLC, through the litigation process. But, if Susan does not make the First Mistake, she may not be sued in the first place. But, if Susan is sued and she has not made the top ten mistakes in setting up the LLC, there is a good chance of a reduced quick settlement paid entirely by insurance.

This is the First Mistake. We will take about the other Nine Mistakes in future blawgs.

When is a Tax Cut a Tax Increase?

2009-06-19T15:14:00.000-04:00

When is a tax cut a tax increase? Or a tax increase a tax cut? In the case of estate taxes, it is both a tax cut and a tax increase.

President Obama is proposing that the federal exemption for estate taxes stay at its current 2009 level of $3.5 million for the next several years. An exemption of $3.5 million means that you have to have over $3.5 million in your taxable estate to pay any federal estate taxes. But, under the Bush tax cuts, there will be no estate taxes in 2010 and if you have an estate over $3.5 million in 2010, you pay no federal estate taxes under current law. Thus, with Obama's continuation of the estate tax in 2010, with an exemption of $3.5 million, there will be a tax increase in 2010 for you if have an estate in 2010 over $3.5 million. So, for you dedicated tax avoiders who will do anything to save taxes, forget going to your reward in 2010.

In this crazy world of taxes, the Bush tax cuts expire starting 2011 and then the federal tax exemption will go back to $1,000,000. Thus, an exemption of $3.5 million will be larger than the $1 million exemption in 2011 and therefore a change to $3.5 in 2011 will be a tax cut. And this is a tax cut for the wealthy between $1 and $3.5 million, or for a couple, for a total of $7 million.

How do we know it is going to be $3.5 million? The Bush tax cuts are still the law. There is no bill ready for the signature of Obama for the $3.5 million. Any bills bouncing around Congress now are unlikely to be the one that puts it at $3.5 million.

But, Obama’s budget figures assume there will be a $3.5 million exemption next year and for several years later. The top lobbyists following this expect the Congress will pass and the President will sign a $3.5 million exemption in the fall. If they do not change the law to the $3.5 million, then with no estate tax in 2010, this will be a tax cut that the Obama budget can not afford, particularly when there are large deficits. If they dropped the exemption to $1 million, this would sweep in large numbers of those who live around the DC beltway and might foment angry mobs of wealthy people in suits, or at least, lots of campaign contributions to their opponent in the next election. A $5 million exemption or higher would let too many of the “rich” not “pay their fair share”. So, $3.5 is not too high and not too low, but just right. Most planners are betting on a $3.5 exemption for the coming years.

Who's In Charge of Your Funeral?

2009-06-10T13:54:00.015-04:00

Most people do not put someone in charge of their funeral. Most people don’t sign a document that designates the person who will make funeral arrangements.

You say: Isn’t this covered by my will? No, because it takes weeks to get an appointment to be appointed the executor of your will and no one is going to wait weeks to deal with the body. They don’t put you on ice wanting for a decision. It is not common to cover this in your will.

But, I gave a general power of attorney to my trusted daughter/spouse/son/buddy. No, because powers of attorney expire when you do.

Well, I have this lengthy living trust with all sorts of things in it. No-the living trust deals with property not your physical body.

Remember the week long trial in 2007 on CNN with the Weeping Judge in Florida as to who had the right to bury Anne Nicole Smith?

Today, families are dispersed and according to recent statistics, most Americans do not live with a legally married spouse. Widows, widowers, live ins, divorced, living in nursing homes, never married, sisters, same sex couples, and singles now out numbered the number of people living with spouses. This means most Americans today do not have the automatic comfort of a caring spouse who will make these arrangements.

Fred died and wanted the love of his life, Ellen, his live in of 20 years to execute his funeral instructions that he had told her in detail. But, his estranged son, Edward, insisted that father’s body be cremated even though his dad’s religious beliefs forbade cremation. Dad was a veteran and wanted a Marine Corps honor guard and taps at his funeral, but the son disliked the military and failed to contact the Marine Corps to make such arrangements. Ed had quickly made arrangements with the funeral home as the oldest son and Ellen had no legal power to stop Ed. Ed didn’t even invite Ellen to the funeral because Ed resented Ellen as the cause of the divorce of his Dad and mother.

This is an emotional minefield when it comes to same sex couples where the partner has no legal rights under most state laws.

Contrast this Ted who planned his church service and funeral. He had two children and had an emotional divorce and shared a house with Mary, the later love of his life, whom he never married. One daughter, Judy, was estranged and Ted and Judy had not talked for years. But, Ted scripted the music, readings and remembrances for his church service and funeral and included Judy, his son, Mary, his ex wife and his closest friends as readers and participants in the service. When Ted died, he was a healthy 60 year old ridding his bike to the store and had a sudden and unexpected stroke. At the service, everything went smoothly and the family was brought back together with a warmth that I will never forget. No one expected Ted to die so suddenly, but Ted was a detail person and made sure he covered this detail.

You don’t have to devote yourself to the details that Ted did. You can simply sign a document indicating your wishes and have your lawyer do what is necessary to make it work. In Virginia, we have a very good set of statutes which allow people to designate who will handle their funeral, burial and autopsy. You have the choice to designate a spouse, child, friend, partner or anyone you trust. This trusted person must sign a notarized statement that they accept these duties. Also, you direct your trustee or executor to pay the expenses of the funeral out of your trust or estate.

The laws of the states vary a lot on this subject. Some states have virtually no law and leave it up to the funeral homes to choose the person who will make the arrangements.

Make sure you cover this important point in your estate planning with an attorney who has experience with this. Don’t have your final memory be the debacle at your funeral.