The debate is raging in Washington over how to solve the deficit problem. Lots of our representatives believe that a tax increase is inevitable. From a philosophical perspective, it’s hard to argue that there’s a tax more clearly associated with “the rich ” than estate taxes.

The federal estate tax exemption—the amount that can be passed to kids without having to worry about estate taxes—for calendar years 2011 and 2012 is scheduled to be $5 million for a single person. For a married couple the exemption can be $10 million. The tax rate on the estate in excess of those amounts is a flat 35 percent.

If Congress and the President do nothing prior to the end of 2012, at the beginning of 2013 the exemption amount is scheduled to drop to $1 million, and the top estate tax rate will be 55 percent.

The IRS published statistics a few months ago about federal estate tax returns filed for those who passed away in 2007. What do the statistics tell us about estate taxes then and now?

• Whether the exemption amount ends up being $1 million, $3.5 million, or $5 million, it shouldn’t make a difference of more than about 25 percent in the amount of estate taxes collected for a given year.

• Annual estate tax collections are not a big revenue number, relatively speaking, for the federal government. They represent about 2 percent of the budget deficit, and .2 percent of the national debt.

• A smaller estate tax exemption will probably disproportionately affect the survival of family farms unless special protections are built in.

• A smaller estate tax exemption will probably not disproportionately hurt closely held businesses.

Do these observations provide any assurance about what will happen with federal estate taxes? Unfortunately, no. Feel welcome to keep in touch with me so you can stay in touch with the latest federal estate tax developments.

If you feel your estate plan is not up-to-date or needs a review, please contact us.

AS ALWAYS, PLEASE FEEL FREE TO CALL TO DISCUSS THESE OR OTHER FINANCIAL SECURITY ISSUES OF CONCERN.

THINGS TO CONSIDER

Imagine that a family member has only months to live. 

When a loved one’s family is struggling with the emotional issues associated with end-of-life, it’s easy for them to overlook the important things that can be taken care of prior to death.  

What kinds of issues should be addressed in the final days?

• Get financial details in order.
  • Gather specific information about life insurance, annuities, government benefits, pensions, investments and real estate.
  • Make sure beneficiary designations and titling are correct.
  • Make plans for creating needed liquidity to pay for final expenses and to take care of those left behind.
• Get estate distribution details together.
  • Make sure all will and trust documents are up-to-date and legally adequate.
  • Consider gifts to family members during lifetime to remove uncertainty later.
  • Make sure proper plans are in place for the transfer of closely held business interests.
• Make final arrangements.
  • Pre-pay or pre-arrange funeral.
  • Make the arrangements about disposition of remains known.
  • Consider a memorial fund.
• Seek to resolve unresolved family issues.
  • Create a “forgive” and “seek forgiveness” checklist.
  • Write or record messages for family members.
• Handle the details for health and end-of-life care.
  • Monitor health insurance and government benefits.
  • Make wishes about end-of-life sedation, life support and feeding/hydration known.
  • Create needed power of attorney documents.
• Address spiritual issues.
  • Identify the clergy the person wishes to see during the end-of-life process.
  • Discuss potential spiritual activities the person wants to engage in.

The tasks and action steps are not a complete list of all the things that must be done when dealing with end-of-life.  The checklist is meant as a general guide to which each should make his or her own order of priorities, and add or omit tasks that are more or less relevant to the dying person’s particular circumstances. 

If you ever find yourself involved in helping a family member face the final days, please let me know how I can help.

AS ALWAYS, PLEASE FEEL FREE TO CALL TO DISCUSS THESE OR OTHER FINANCIAL SECURITY ISSUES OF CONCERN.

It is almost impossible to avoid a tax examination by the IRS.  However, there’s plenty of good news:

1. According to the IRS itself, only about one percent of returns are selected for examination. 
2. Even if the IRS examines a taxpayer’s return, the IRS itself says that they usually work the issue out. 
3. If the discussion between the IRS and the taxpayer escalates into a disagreement, the Service has established administrative procedures to allow a taxpayer to appeal the IRS’s position. 
4. At the end of the day, if the taxpayer and IRS still disagree on a tax issue, the courts can resolve the problem. 

 How can you minimize the chances of being audited?  Here are two simple steps to take: 

1. File all required income tax returns by the prescribed deadlines. 
2. Make sure your tax return information agrees with reports generated by third parties (e.g. – W-2 forms, 1099 Forms). 

What if the IRS challenges the information on your return, and tells you that more taxes are owed?  Don’t panic.  There are procedures that are designed to protect you and give you the chance to make your case with the IRS: 

1. Get a paid professional involved.  We can represent you in an IRS audit, even for tax years when we didn’t prepare the tax returns.
2. Read everything you receive from the IRS and respect any deadlines.  When the IRS believes a taxpayer owes additional tax, the Service is likely to send letters that create deadlines for action.  If you fail to meet a deadline, you may be precluded from relief to which you are otherwise entitled.
3. In most cases, exhaust administrative procedures first.  If a taxpayer is in a disagreement with the IRS, there is usually a choice between going through internal administrative processes, or heading directly to court.  If you choose to use the administrative process and don’t get a good result, you can choose to go to court later. 
4. If all else fails, consider going to court.  If a taxpayer and the IRS disagree on a tax issue, the taxpayer may ask a judge or jury to sort it out.  If the IRS is being unreasonable with regard to its tax position, in some cases the court may even allow the taxpayer to recover part of the cost of the fight. 

I hope that you never find yourself in a position where you have a disagreement with the IRS.  However, if it happens, please let me know how I can help.

AS ALWAYS, PLEASE FEEL FREE TO CALL TO DISCUSS THESE OR OTHER FINANCIAL SECURITY ISSUES OF CONCERN.

 Here are some questions that can lead to tax savings opportunities:

• Have you made the maximum deductible IRA contribution for yourself and for your spouse?
• Is it possible to bunch deductible expenses in 2010 to minimize this year’s taxable income?
• Does a Roth conversion make long-term tax sense?
• Should personal investments be re-allocated to take more advantage of tax-free or tax-deferred opportunities?
• If you have young children who expect to attend college, are you taking full advantage of the tax-favored programs to save or pay for school?
• If you are the owner of a closely held business:
  • Have you implemented a pension plan and taken full advantage of the rules to save for your retirement? 
  • Can you employ family members in your business to achieve wealth distribution objectives and save taxes? 
  • Does your business pay for disability income, health insurance and long term care coverage for you and your family?

Would you like to see what you can do to improve your tax situation?  Please let me help.  We can review your 2010 tax situation together and discuss tax planning opportunities you might be missing.

AS ALWAYS, PLEASE FEEL FREE TO CALL TO DISCUSS THESE OR OTHER FINANCIAL SECURITY ISSUES OF CONCERN.

Plenty of famous people have made estate planning mistakes.  Their stories are reminders of the importance of planning.

1.  Peter the Great of Russia waited to make plans until it was too late.  Peter was preparing to name his successor as tsar when he died.  His wishes were never known.  Howard Hughes and Sonny Bono also died without leaving clear written instructions for their family members.
2. Doris Duke failed to put together a professional team to manage her estate.  Doris died a billionaire heiress, but named her butler as the executor of her estate.  Those who stood in line to benefit from Doris’s fortune spent years trying to get him removed from that position of responsibility.
3. Joe Robbie forgot to make sensible plans for the family business and to pay unexpected estate taxes.  During Joe’s lifetime, he was controlling owner of the Miami Dolphins football franchise, as well as the stadium at which they played.  After his death, family squabbles helped to fracture the business, and estate tax issues forced the sale of the franchise and stadium.
4. Anna Nicole Smith let her will document get out of date.  Smith had prepared a will naming her son the sole beneficiary of her estate, and specifically excluded all others.  At the time of Anna’s death, her son had tragically predeceased her, and Smith had made no new plans for her young daughter.  Likewise, Heath Ledger’s will left his estate to his parents and siblings, but had no provision for his young daughter.
5. Kurt Cobain failed to make proper plans for his baby daughter.  At Kurt’s death, he left no will.  His daughter Frances’ inheritance came under the control of Courtney Love and another trustee.  The family and trustees are still squabbling over control of that trust.
6. Bettie Page forgot to plan for the possibility of incapacity.  Bettie was a classic American pinup model from the 1950’s.  Fifty years later, she was being treated in California state hospitals for a debilitating illness.  Her attorney received permission to act as conservator of Page’s estate.  A judge later ruled that the attorney had failed to use the money under his control for Page’s benefit, and ordered him to pay back $145,000.

All of these situations could have been helped with proper estate planning.  Estate planning involves creating needed legal documents, such as wills, trusts and powers of attorney.  It also involves making sure asset titling and beneficiary designations are consistent with the overall distribution strategy.

 Are you worried about your own estate plan?  I’d be glad to review it with you.

AS ALWAYS, PLEASE FEEL FREE TO CALL TO DISCUSS THESE OR OTHER FINANCIAL SECURITY ISSUES OF CONCERN.

1. The maximum contribution that can be made to a defined contribution plan in 2010 under Section 415 is the lesser of $49,000 or 100 percent of compensation—the same limit as in 2009.
2. The limit on employee elective deferrals to Section 401K and Section 403b plans has remained at $16,500 in 2010.  The limit for Section 457 plan salary reductions has likewise kept steady at $16,500.
3. The maximum elective deferral for a SIMPLE or 401 K SIMPLE plan is $11,500 in 2010.
4. The limit on IRA contributions remains at $5,000 for 2010.  Those 50 and older can still contribute an extra $1,000 under the special catch-up provision.

Here are a few of the income tax changes:

1. The standard deduction for joint filers and surviving spouses who do not itemize in 2010 is $11,400, the same as 2009.  For heads of household, the deduction is $8,400, and for unmarried individuals it’s $5,700.  The aged and the blind get an additional $1,100 or $1,400 added to their standard deductions, depending on their filing status.
2. The personal exemption has remained steady at $3,650 for 2010.  The exemption started to be phased out at $250,200 of adjusted gross income for married filers, $208,500 for heads of household, $166,800 for unmarried individuals and $125,100 for married individuals filing separate returns in 2009.  The phase-out has been eliminated in 2010
3. The phase-out of itemized deductions began at $83,400 of adjusted gross for married individuals filing separate returns, and $166,800 for all other taxpayers.  The phase-out has been eliminated in 2010.

And here are some other items that may be important to you.

1. The social security tax rate for individuals stays at 7.65% in 2010.  The rate for self-employed individuals also remains constant at 15.3%.  The taxable wage base for the OASDI portion is $106,800 in 2010—and that gets hit with the full 7.65% tax for individuals.  Any additional compensation over that limit is subject to only the Medicare portion of 1.45%.
2. In 2010, the federal annual gift tax exclusion amount has remained at $13,000.  The lifetime gift tax exemption has stayed at $1 million.
3. The federal estate tax exemption was $3.5 million in 2009, and as of right now is scheduled to be unlimited in 2010.  Watch for probable action on federal estate taxes by the Congress and President.  Most experts expect the federal estate tax exemption for 2010 to be reinstated at $3.5 million.

These changes may affect your own retirement or tax plans.

As always, please feel free to call to discuss these or other financial security issues of concern.

Pension plans create income tax deductions for the business, and allow employees to exclude contributions from their taxable income.  However, the employer must include all eligible employees in the plan, and retirement benefits are generally taxable to the participants.

Certain nonqualified benefit arrangements can generally be more selective in terms of participation, but the income tax results are generally not as favorable—especially for the business owners.

Disability income insurance coverage provided by the business can also be selective, and the premium can be deductible.  However, the owner-employee with disability income coverage must generally choose between excluding the premium from income or getting a tax-free benefit in the event of a claim.

Could the best employee benefit be a long-term care insurance (LTCi) plan?

C corporation employers have the greatest number of potential advantages for implementing LTCi plans for their employees.

1. The premium is deductible by the corporation.
2. There is no practical limit to the amount of premium that can be paid by the employer for an employee’s policy.
3. The company can pick the employees to be covered by the plan.
4. The premium paid by the corporation is not included in the employee’s taxable income.
5. The benefits paid to the insured are tax free.
6. Spouse and dependent family members of participating employees may also be included under the plan.

Most of the advantages described are also available to the owners and employees of S corporations, LLCs, partnerships or proprietorships.

For entrepreneurs who have employees nearing retirement, or whose key employees have aging parents, long-term care insurance may be perceived to have high value.  LTCi helps pay for costs associated with chronic illness that, in most cases, Medicare or Medicaid won’t.

The federal government has strongly encouraged business owners to provide LTCi plans to employees, even in some cases if those covered are only the group of owner-employees.  LTCi plans are worth considering by closely-held business owners.

As always, please feel free to call to discuss these or other financial security issues of concern.

Others with IRA balances may be interested in making a tax-free transfer to a new IRA custodian, or in splitting the current IRA account for various reasons.

Tax-free transfers may be made by trustee-to-trustee transfer, direct rollover or 60-day rollover.

We have found that in thinking about transfers, clients want to know:

• Does the account they’re starting with qualify for a tax-free transfer to another qualified account?
• Is the vehicle into which they intend to transfer a qualified plan balance one that can accept a tax-free transfer?
• What administrative procedures need to be followed to accomplish the transfer?
• What special considerations need to be evaluated to help determine whether the proposed transfer makes economic and tax sense?

Rollover distributions from the following plans are eligible for tax-free transfers:

• IRAs
• Qualified pension plans
• Tax-sheltered annuities (403(b) plans)
• Governmental 457(b) plans
• A 403(a) annuity

Rollover distributions can generally be transferred to a traditional IRA or pension plan on a tax-free basis if the pension plan will accept them.

Distributions that might otherwise qualify for a tax-free rollover might be defeated by one or more of the following complications:

• The 20% mandatory withholding on distributions from pension plans may make it difficult for the participant to accomplish a complete rollover of a taxable distribution.
• The prerequisite within a pension plan of a triggering event prior to the distribution of a pension balance may mean that a distribution is not allowed at all.
• The fact that the source of funds intended for rollover is from a beneficiary account rather than the participant’s own IRA may mean rollover is not allowed.
• Multiple IRA rollovers in the same 12-month period may be disallowed by IRS rules.

When done properly, rollovers offer the opportunity to continue tax-deferred growth on  retirement assets.  If done improperly, an attempted rollover may result in a large unexpected income tax result, and cause you to be liable for an extra 10% penalty tax, plus any state penalties.

As always, please feel free to call to discuss these or other financial security issues of concern.

Those considering starting the estate planning process-perhaps by visiting an attorney about a will or trust-usually have one or more questions:

1. Why do I need to prepare a will or trust at all?
2. Do I need a living trust?
3. How can I protect my young children?
4. How can I protect my special needs relative?
5. How do we arrange our affairs to adequately protect all sides of our blended family?
6. How can I keep peace in the family after I’m gone?

What are the answers?

1. Wills or trusts are used to make death-time distribution intentions clear. They are also used to express wishes about guardianship of minor children. A person who dies without a will is said to be intestate. Those who die intestate have an estate plan imposed on them by the state in which they lived at the time of their death.
2. The main reason people choose to do living trusts is to avoid probate. If a person creates a living trust prior to death, and if all the person’s assets are transferred to the trust, probate will likely be avoided at the person’s death.
3. Those who are creating an estate plan are usually interested in making contingency plans for their young children. The contingency plan should cover the logistics and financial aspects of caring for the children. The logistical part of the plan hinges on making the decision regarding who will raise the children—that is, act as guardian—in the event no parent is available to do the job. The financial part of the plan may be to create a trust for children at the time of the death of one or both parents.
4. A special needs trust is designed to ensure that a disabled child or other beneficiary can enjoy the use of trust property, which is intended to be held for their benefit. The trustee of the trust provides management of the trust assets, which the beneficiary may be incapable of. The special needs trust is also usually intended to help the beneficiary avoid losing access to needs-based government benefits.
5. When thinking about estate planning issues in blended families, the partners must consider and answer a variety of questions:
   • Should the surviving spouse get access to both spouses’ assets at first death?
     • If yes, should that spouse’s access be restricted or unrestricted?
     • When and to whom should the ultimate distribution be made?
   • How should family considerations be matched with estate tax considerations?
   • Which of the children should be taken care of? When should the children receive an inheritance? How should distributions for the benefit of children ultimately be made?
6. Estate planning professionals have plenty of ideas for dealing with the possibility of family strife.  Creating a written estate plan and keeping it current is the best way to plan to avoid issues after death.You may have estate planning questions of your own.  I’d be glad to visit with you to help sort them out.As always, please feel free to call to discuss these or other financial security issues of concern.

Traditionally, the owner of a permanent life insurance policy had one choice when he or she wanted to cash in a policy—surrender the policy and receive the cash value.

Beginning about twenty years ago, some third party companies began to offer the owners of policies on terminally ill insureds the ability to viaticate the policy. In such cases, the viatical settlement company would make an offer to the owner to purchase the policy for a substantial percentage of the policy’s death benefit.

Since that time, the market has expanded to situations involving more healthy insureds. The focus is less on viatical settlements and more on life settlements.

From the life insurance policyowner’s perspective, when should a life settlement be pursued? In general, if the insured is older than age 60, and the insurance is no longer needed, then life settlement should be considered. From an economic perspective, life settlements tend to be more attractive if one or more of the following factors are present:

• The insured is in worse shape health-wise than when the policy was originally purchased.
• The policy has been in force for ten years or more.
• The policy has a substantial death benefit.

From the consumer’s perspective, a life settlement only makes sense when the amount received is greater than any surrender value from the contract. However, that’s not the end of the analysis. The policyowner must also consider the following:

• Keeping the policy in force, particularly where life expectancy is very short, may be a more efficient economic decision than settlement for the consumer.
• Privacy is lost as the settlement company investigates the insured’s health status.
• When the settlement company buys the policy, it will generally keep the face amount in force. The insured will lose some life insurance capacity that might be otherwise available.
• The insured will likely lose the ability to know who owns the life policy after the contract is settled.
• Taxes have an impact on how much of the settlement the policyowner can actually keep.

Earlier this year, the IRS published its stance on the tax results when a policyowner settles a life policy. In the ruling, the Service answered many of the questions that experts had been unsure about. The IRS’s answers have a significant impact on those who are—or will be—considering life settlements.

Some of our clients may have reason to consider a life settlement, and are likely to need help in evaluating whether a life settlement makes sense. We can provide professional help to shop for the best deal, weigh the risks and calculate the costs of pursuing a life settlement.

As always, please feel free to call to discuss these or other financial security issues of concern.