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

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

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

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

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

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

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

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.