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.

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

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

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

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

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

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

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.