The Wealth Advisor

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New Law Creates Exciting Planning Opportunities - Volume 1, Issue 1

The purpose of this newsletter is to inform you of changes in the law and to provide planning information and general financial news. These newsletters also give me a chance to share new techniques to enhance your planning, as well as to help you to stay current with tactics designed to maximize the effectiveness of your plan. I hope you will read each newsletter carefully to keep up to date on these important topics. Please feel free to contact me if you have any questions about this or any matters relating to your planning.

The new Pension Protection Act of 2006 (signed into law last Fall) creates significant planning opportunities for those who understand it. This newsletter focuses on two key provisions: (1) non-spousal rollovers from a qualified plan to an inherited IRA and (2) charitable contributions of IRAs during lifetime.

Non-Spousal Rollovers from Qualified Plans
In the past, only a surviving spouse could roll over a qualified plan (for example, a 401(k)) to an IRA after a plan participant / owner’s death. Once rolled over, it is as if the surviving spouse created the IRA. He or she can defer required minimum distributions from the IRA until reaching age 70 1/2 and can withdraw these required minimum distributions over his or her lifetime.

Planning Tip: The new law does not impact spousal rollovers. A spouse can still rollover a qualified plan to his or her own IRA after the death of the owner.

Alternatively, a beneficiary other than a surviving spouse (for example, a child, a grandchild or an unmarried partner) has been forced to withdraw the qualified plan in full – and pay income tax on this full amount – over the period set forth in the plan agreement, typically within one to five years of the plan participant’s death. Thus, a non-spouse beneficiary could not defer income tax by “stretching out” distributions over his or her life expectancy.

Effective January 1, 2007, a non-spouse beneficiary can roll over a qualified plan to an “Inherited IRA” after the plan participant’s death if the plan is amended to permit such a rollover. If the plan participant names a trust as beneficiary of the qualified plan, the trustee of that trust can roll over the qualified plan to an inherited IRA for the benefit of the trust beneficiary.

Planning Tip: Naming a trust as designated beneficiary can protect the assets from creditors (including former spouses of the beneficiary) and spendthrift beneficiaries, who often withdraw far more than the required minimum distributions.

With an Inherited IRA, a non-spouse beneficiary can use his or her own life expectancy to determine required minimum distributions. This significantly reduces the amount that the beneficiary must withdraw each year, thereby deferring income tax and allowing the account balance to continue to grow, income tax free, over the beneficiary’s lifetime.

Planning Tip: It is critical that your beneficiaries work with an advisor who understands these new rules. Any distribution directly to a non-spouse beneficiary (or to an existing IRA in his or her own name) will subject the entire account to ordinary income tax.

Are You Impacted by This Change?
Anyone with qualified plans, or those named as the beneficiary of a qualified plan, will potentially benefit from this new provision.

Charitable Contribution of IRA During Lifetime
For tax years 2006 and 2007 only, a taxpayer who is at least 70 1/2 years old can contribute to charity up to $100,000 per year from one or more Individual Retirement Accounts (IRAs).

Planning Tip: Distributions from a qualified plan do not qualify because they are not distributions from an IRA. If you have one of these accounts and would like to take advantage of this new law, contact us to discuss whether it makes sense to roll out the qualified plan assets into an IRA. With contributions made by direct transfer from the IRA custodian to a “public” charity, the IRA owner need not report the distribution as taxable income.

Planning Tip: Unlike a typical IRA distribution, the distribution will not appear as taxable income on your income tax return. Because the distribution does not appear as income, however, you do not receive an offsetting charitable income tax deduction to reduce the income created by the IRA distribution.

Planning Tip: Public charities include religious organization, schools, etc. Unfortunately, Donor Advised Funds, Supporting Organizations and Charitable Remainder Trusts are not public charities, and therefore distributions to these types of charities do not qualify.

These are just a few traps in the new law. Therefore, it is critical that you work with an advisor or team of advisors that understand the new law.

Significantly, charitable contributions that meet these requirements satisfy required minimum distributions for the year of distribution; in other words, the distributions the government makes you take from your IRAs once you reach 70 1/2.

Planning Tip: Consider life insurance to replace the wealth contributed to charity. If owned by and payable to a wealth replacement trust, the death proceeds will be income and estate tax free, as well as protected from creditors, divorce and spendthrift beneficiaries.

Are You Impacted by This Change?
There are two critical questions: (1)Do you have IRAs from which you can make direct contributions to charity, or, alternatively, can you roll out of a qualified plan into an IRA?; and (2)Are you currently making or contemplating charitable gifts? If so, you may benefit from this new law, particularly if one or more of the following applies to you.

  1. You Claim the Standard Federal Income Tax Deduction
    For those who do not itemize, this new law provides the equivalent of an unlimited federal charitable income tax deduction for up to $100,000 of the charitable gifts that they make from an IRA.
  2. You Would Otherwise Lose Phased-Out Deductions with Increased Income
    Under the new law, a direct contribution of an IRA up to $100,000 does not increase the taxpayer’s Adjustable Gross Income (AGI). Correspondingly, it does not impact other deductions.
  3. You Are Subject to the 50% Limitation on AGI
    A direct contribution to charity of up to $100,000 is not subject to the typical 50% of AGI cap for cash contributions to a public charity.
  4. Your State of Residency Does Not Permit State Income Tax Charitable Deductions
    For clients in Indiana, Michigan, New Jersey, Ohio and Massachusetts, direct contributions from IRAs will result in the highest possible net state tax savings.

This new law creates significant opportunities for those clients who take advantage of its provisions. I encourage you to schedule an appointment to see how this law impacts you and your planning.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.

Planning for Disability - Volume 1, Issue 2

No one likes to think about the possibility of their own disability or the disability of a loved one. However, as we’ll see below, the statistics are clear that we should all plan for at least a temporary disability. This issue of The Wealth Advisor examines the eye-opening statistics surrounding disability and some of the common disability planning options.

Most Americans Will Face At Least a Temporary Disability
Study after study confirms that nearly everyone will face at least a temporary disability sometime during their lifetime. More specifically, one in three Americans will face at least a 90-day disability before reaching age 65 and, as the following graph depicts, depending upon their ages, up to 44% of Americans will face a disability of 2.4 to 4.7 years. On the whole, Americans are up to 3.5 times more likely to become disabled than die in any given year.


Many Americans Will Face a Long-Term Disability
Unfortunately, for many of us the disability will not be short-lived. According to the 2000 National Home and Hospice Care Survey, conducted by the Centers for Disease Control?s National Center for Health Statistics, over 1.3 million Americans received long-term home health care services during 2000 (the most recent year this information is available). Three-fourths of these patients received skilled care, the highest level of in-home care, and 51% percent needed help with at least one “activity of daily living” (such as eating, bathing, getting dressed, or the kind of care needed for a severe cognitive impairment like Alzheimer’s disease).

The average length of service was 312 days, and 70% of in-home patients were 65 years of age or older. Patient age is particularly important as more Americans live past age 65. The U.S. Department of Health and Human Services Administration on Aging tells us that Americans over 65 are increasing at an impressive rate:


Nursing home statistics are equally alarming. According to the 1999 National Nursing Home Survey, the national average length of stay for nursing home residents is 892 days, with over 50% of nursing home residents staying at least one year. Significantly, only 18% are discharged in less than three months.

While a relatively small number (1.56 million) and percentage (4.5%) of the 65+ population lived in nursing homes in 2000, the percentage increased dramatically with age, ranging from 1.1% for persons 65-74 years to 4.7% for persons 75-84 years and 18.2% for persons 85+.

Planning Tip: Many Americans will require significant in-home care lasting, on average, close to a year. For those requiring nursing home care, that care lasts, on average, nearly 2 1/2 years! Not surprisingly, the older we get, the more likely we will need long-term care – which is significant given that Americans are living much longer.

Long-Term Care Costs Can be Staggering
Not only will many of us face prolonged long-term care, in-home care and nursing home costs continue to rise. According to the 2006 Study of the MetLife Mature Market Institute, national averages for long-term care costs are as follows:

  • Hourly rate for home health aides is $19, higher than in 2004.
  • Hourly rate for homemakers/companions is $17, higher than in 2004.
  • Daily rate for a private room in a nursing home is $206, or $75,190 annually, a 1.5% increase over the 2005 rate.
  • Daily rate for a semi-private room in a nursing home is $183, or $66,795 annually, a 3.9% increase over the 2005 rate.

These costs vary significantly by region, and thus it is critical that we know the costs where the patient will receive care. For example, the average cost for a private room in a nursing home is much higher in the Northeast ($346 per day, or $126,290 annually, in New York City) than in the Midwest (only $143 per day, or $52,195 annually, in Chicago) or the West ($199 per day, or $72,635 annually, in Los Angeles).

Planning Tip: Nursing home costs will consume many Americans’ assets. A recent Harvard University study indicates that 69% of single people and 34% of married couples would exhaust their assets after 13 weeks (i.e., 91 days) in a nursing home!

Consider Long-Term Care Insurance to Cover these Costs
As the Harvard University study demonstrates, if you or a family member needs long-term care, the cost could easily deplete and/or extinguish your family’s hard-earned assets. Alternatively, you (or your family) can pay for long-term care completely or in part through long-term care insurance.

Most long-term care insurance plans let you choose the amount of the coverage you want, as well as how and where you can use your benefits. A comprehensive plan includes benefits for all levels of care, custodial to skilled, and you can receive care in a variety of settings, including your home, assisted living facilities, adult day care centers or hospice facilities.

Planning Tip: Absent financial insolvency, government benefits for long-term costs are extremely limited – typically only for skilled care and only for a short duration. Given the costs of long-term care, discuss with your financial advisor how a long-term care insurance policy can meet your unique planning objectives.

Planning Tip: While long-term care insurance will cover in-home or nursing home costs, it will not replace the income lost due to the inability to work. Therefore, income earners should also discuss with their financial advisor how a disability insurance policy can replace lost income if you become disabled.

Your Estate Planning Should Thoroughly Address Disability
When a person becomes disabled, he or she is often unable to make personal and/or financial decisions. If you cannot make these decisions, someone must have the legal authority to do so for you. Otherwise, your family must apply to the court for appointment of a guardian for either your person or your property, or both. If you remember the public guardianship proceedings for Groucho Marx, you likely recognize the need to avoid a guardianship proceeding if at all possible.

At a minimum, you need broad powers of attorney that will allow agents to handle all of your property if you become disabled, as well as the appointment of a decision-maker for health care decisions. Alternatively, a fully funded revocable trust can ensure that you and your property will be cared for as you desire, pursuant to the highest duty under the law – that of a trustee.

Planning Tip: Your estate planning should include properly drafted and well thought-out estate planning documents that address both your property and your person in the event you become disabled. Be sure to discuss this aspect of your planning with your estate planning attorney.

Planning Tip: An estate plan that utilizes a revocable trust as its foundation not only helps ensure that you will be cared for as you desire, but it can ensure consistent asset management through the continued use of your existing financial advisors.

Consider Adding HIPAA Language and Authorizations
Under the Health Insurance Portability and Accountability Act of 1996 (HIPAA), absent a written authorization from the patient, a health care provider or health care clearinghouse cannot disclose medical information to anyone other than the patient or the person appointed under state law to make health care decisions for the patient. The penalty for failure to comply with these rules is severe: civil penalties plus a criminal fine of $50,000 and up to one year of imprisonment per occurrence, and worse if the disclosure involves the intent to use the information for commercial advantage, personal gain, or malicious harm.

These HIPAA rules became effective only recently. As a result, doctors, hospitals and other health care providers now refuse to release any information absent a release from the patient. For example, hospital staff will go so far as to refuse to disclose whether one’s spouse or parent has been admitted to the hospital. The inability to receive information about a loved one could become very troubling when the information concerns treatment as part of long-term care.

Planning Tip: Your “personal representative” for health care decisions has the same rights to receive information as you do. While it is arguably unnecessary, the safest approach to ensure release of information to a personal representative is to modify the document appointing him or her so that it expressly authorizes the release of HIPAA-protected information on your behalf.

The Regulations promulgated under HIPAA specifically authorize a HIPAA Authorization for release of this information to persons other than you or your personal representative. Thus, you should consider creating such an Authorization so that loved ones and others can access this information in addition to your personal representative.

Planning Tip: Consider preparing a HIPAA Authorization for loved ones and others who potentially need access to your medical information if you become disabled. Your estate planning attorney can create such a HIPAA Authorization for you.

The above discussion outlines the minimum planning you should consider in preparation for a possible disability. As the Planning Tips demonstrate, it is imperative that work with your team of professional advisors to ensure that, in light of your unique goals and objectives, your planning fully addresses all aspects of a potential disability.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.

Understanding the Significance of Trusts - Volume 1, Issue 3

This issue of The Wealth Advisor addresses a topic that is important to many Americans yet is sometimes misunderstood – trusts. In the right circumstances, trusts can provide significant advantages to those who utilize them, particularly in protecting trust assets from the creditors of beneficiaries.

Admittedly this can be a complex topic, but you see its implications in the headlines every day. This newsletter attempts to simplify the subject and explain the general protection trusts provide for their creator (the “trust maker”) as well as the trust beneficiaries. Given the numerous types of trusts, this newsletter explores only the most common varieties. We encourage you to seek the counsel of your wealth planning team if you have questions about the application of these concepts to your specific situation, or if you have questions about specific types of trusts.

Revocable vs. Irrevocable Trusts
There are two basic types of trusts: revocable trusts and irrevocable trusts. Perhaps the most common type of trust is revocable trusts (aka revocable living trusts, inter vivos trusts or living trusts). As their name implies, revocable trusts are fully revocable at the request of the trust maker. Thus, assets transferred (or “funded”) to a revocable trust remain within the control of the trust maker; the trust maker (or trust makers if it is a joint revocable trust) can simply revoke the trust and have the assets returned. Alternatively, irrevocable trusts, as their name implies, are not revocable by the trust maker(s).

Revocable Living Trusts
As is discussed more below, revocable trusts do not provide asset protection for the trust maker(s). However, revocable trusts can be advantageous to the extent the trust maker(s) transfer property to the trust during lifetime.

Planning Tip: Revocable trusts can be excellent vehicles for disability planning, privacy, and probate avoidance. However, a revocable trust controls only that property affirmatively transferred to the trust. Absent such transfer, a revocable trust may not control disposition of property as the trust maker intends. Also, with revocable trusts and wills, it is important to coordinate property passing pursuant to contract (for example, by beneficiary designation for retirement plans and life insurance).

Asset Protection for the Trust Maker
The goal of asset protection planning is to insulate assets that would otherwise be subject to the claims of creditors. Typically, a creditor can reach any assets owned by a debtor. Conversely, a creditor cannot reach assets not owned by the debtor. This is where trusts come into play.

Planning Tip: The right types of trusts can insulate assets from creditors because the trust owns the assets, not the debtor.

As a general rule, if a trust maker creates an irrevocable trust and is a beneficiary of the trust, assets transferred to the trust are not protected from the trust maker’s creditors. This general rule applies whether or not the transfer was done to defraud an existing creditor or creditors.

Until fairly recently, the only way to remain a beneficiary of a trust and get protection against creditors for the trust assets was to establish the trust outside the United States in a favorable jurisdiction. This can be an expensive proposition.

However, the laws of a handful of states (including Alaska, Delaware, Nevada, Rhode Island, South Dakota, and Utah) now permit what are commonly known as domestic asset protection trusts. Under the laws of these few states, a trust maker can transfer assets to an irrevocable trust and the trust maker can be a trust beneficiary, yet trust assets can be protected from the trust maker’s creditors to the extent distributions can only be made within the discretion of an independent trustee. Note that this will not work when the transfer was done to defraud or hinder a creditor or creditors. In that case, the trust will not protect the assets from those creditors.

Planning Tip: A handful of states permit what are commonly known as domestic asset protection trusts.

Given this insulation, asset protection planning often involves transferring assets to one or more types of irrevocable trusts. As long as the transfer is not done to defraud creditors, the courts will typically respect the transfers and the trust assets can be protected from creditors.

Planning Tip: If you are concerned about personal asset protection but are unwilling to give up a beneficial interest to protect your assets from creditors, consider a domestic asset protection trust or even a trust established under the laws of a foreign country.

Asset Protection for Trust Beneficiaries
A revocable trust provides no asset protection for the trust maker during his or her life. Upon the death of the trust maker, however, or upon the death of the first spouse to die if it is a joint trust, the trust becomes irrevocable as to the deceased trust maker’s property and can provide asset protection for the beneficiaries, with two important caveats.

First, the assets must remain in the trust to provide ongoing asset protection. In other words, once the trustee distributes the assets to a beneficiary, those assets are no longer protected and can be attached by that beneficiary’s creditors. If the beneficiary is married, the distributed assets may also be subject to the spouse’s creditor(s), or they may be available to the former spouse upon divorce.

Planning Tip: Trusts for the lifetime of the beneficiaries provide prolonged asset protection for the trust assets. Lifetime trusts also permit your financial advisor to continue to invest the trust assets as you instruct, which can help ensure that trust returns are sufficient to meet your planning objectives.

The second caveat follows logically from the first: the more rights the beneficiary has with respect to compelling trust distributions, the less asset protection the trust provides. Generally, a creditor “steps into the shoes” of the debtor and can exercise any rights of the debtor. Thus, if a beneficiary has the right to compel a distribution from a trust, so too can a creditor compel a distribution from that trust.

Planning Tip: The more rights a beneficiary has to compel distributions from a trust, the less protection that trust provides for that beneficiary.

Therefore, where asset protection is a significant concern, it is important that the trust maker not give the beneficiary the right to automatic distributions. A creditor will simply salivate in anticipation of each distribution. Instead, consider discretionary distributions by an independent trustee.

Planning Tip: Consider a professional fiduciary to make distributions from an asset protection trust. Trusts that give beneficiaries no rights to compel a distribution, but rather give complete discretion to an independent trustee, provide the highest degree of asset protection.

Lastly, with divorce rates at or exceeding 50% nationally, the likelihood of divorce is quite high. By keeping assets in trust, the trust maker can ensure that the trust assets do not go to a former son-in-law or daughter-in-law, or their bloodline.

Irrevocable Life Insurance Trusts
With the exception of domestic asset protection trusts discussed above, a transfer to an irrevocable trust can protect the assets from creditors only if the trust maker is not a beneficiary of the trust. One of the most common types of irrevocable trust is the irrevocable life insurance trust, also known as a wealth replacement trust.

Under the laws of many states, creditors can access the cash value of life insurance. But even if state law protects the cash value from creditors, at death, the death proceeds of life insurance owned by you are includible in your gross estate for estate tax purposes. Insureds can avoid both of these adverse results by having an irrevocable life insurance trust own the insurance policy and also be its beneficiary. The dispositive provisions of this trust typically mirror the provisions of the trust maker’s revocable living trust or will. And while this trust is irrevocable, as with any irrevocable trust, the trust terms can grant an independent trust protector significant flexibility to modify the terms of the trust to account for unanticipated future developments.

Planning Tip: In addition to providing asset protection for the insurance or other assets held in trust, irrevocable life insurance trusts can eliminate estate tax and protect beneficiaries in the event of divorce.

If the trust maker is concerned about accessing the cash value of the insurance during lifetime, the trust can give the trustee the power to make loans to the trust maker during lifetime or the power to make distributions to the trust maker’s spouse during the spouse’s lifetime. Even with these provisions, the life insurance proceeds will not be included in the trust maker’s estate for estate tax purposes.

Planning Tip: With a properly drafted trust, the trust maker can access cash value through policy loans.

Irrevocable life insurance trusts can be individual trusts (which typically own an individual policy on the trust maker’s life) or they can be joint trusts created by a husband and wife (which typically own a survivorship policy on both lives).

Planning Tip: Since federal estate tax is typically not due until the death of the second spouse to die, trust makers often use a joint trust owning a survivorship policy for estate tax liquidity purposes. However, a joint trust limits the trust makers’ access to the cash value during lifetime. In these circumstances, consider an individual trust with the non-maker spouse as beneficiary.

You can protect your assets from creditors by placing them in a well-drafted trust, and you can protect your beneficiaries from claims of creditors and predators by keeping those assets in trust over the beneficiary’s lifetime. By working together with your other wealth planning professionals, we can ensure that your planning meets your unique goals and objectives.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.

Planning for Pets - Volume 2, Issue 1

For many pet owners, pets are members of the family. These individuals often say that if something happens to them, they are more concerned with what will happen to their pets than to their children or spouse.

This issue of The Wealth Advisor examines the issues surrounding caring for pets after the disability or death of the pet’s owner. Given the feelings of many individuals towards their pets, and the costs of care and longevity of some types of pets, planning in this area can be of critical importance. This is particularly true given our mobile society and that the laws of a different county or state may impact you and your pets or the pets of parents and other loved ones.

What Will Happen to the Pets When the Owner Becomes Disabled or Passes Away?
Most pet owners do not want their pets killed if something should happen to them. However, without proper planning, the death of the pet is almost certain in some areas. For example, in some Nevada counties, if the owner does not provide for a pet by way of a trust, when the owner dies Animal Control must take the pet to the local kill shelter if there is not a family member present who is willing to care for the pet. Some kill shelters euthanize animals 72 hours after they arrive at the facility, making it virtually impossible for anyone to adopt the pet. Thus, it is critically important that pet owners know how their state and county laws may impact their pets.

Planning Tip: Pet owners should discuss with their advisor team how state and county laws affect pets after the owner dies or cannot care for the pet.

Planning Tip: A good resource for pet owners is Providing for Your Pet’s Future Without You by the Humane Society of the United States (order a free kit by calling 202-452-1100 or e-mailing It includes a door/window sign for emergency workers, an emergency contacts sticker for inside of the door, emergency pet care instruction forms for neighbors/friends/family, wallet alert cards, and a detailed instruction sheet for caregivers.

Providing for Pets Upon the Owner’s Death

Outright Gifts
The law treats pets as property, and thus an individual cannot leave money outright to a pet, as property cannot own other property. An individual may leave an outright gift of money to a caretaker with the request that the caretaker care for the individual’s pet for the rest of the pet’s life. However, because the caretaker received the gift outright, and not in trust, no one is responsible for ascertaining whether the pet is receiving the care requested by the pet owner.

Once the caretaker receives the gift and the pet’s owner is gone or incompetent, there is nothing to stop the caretaker from having the pet euthanized, throwing it out on the street, taking it to a local kill shelter, or using the assets in ways unrelated to the care of the pet. In addition, once in the caregiver’s hands, the assets are exposed to the caregiver’s creditors and they may be transferred to a former spouse on the caregiver’s divorce.

Statutory Pet Trusts
As of late 2007, thirty-eight states and the District of Columbia have enacted statutes pertaining to pet trusts, and others have legislation pending. These statutes allow virtually any third party designated by the terms of the trust to use the trust funds for the benefit of pets.

Some state statutes specifically limit the terms of a pet trust. For example, some states limit the amount of money an individual can leave in trust for his or her pet to the amount required to care for the animal over the term of the trust. The trust must distribute any excess funds to the beneficiary(ies) who would have taken them had the pet trust terminated.

The pet’s current standard of care determines the endowment amount required to provide care for the pet. Factors include: the cost of daily care (food, treats, and daycare), veterinary care (yearly teeth cleaning, shots, nail trimming, and emergency care), grooming, boarding, travel expenses, and pet insurance. Additional factors may apply in particular cases. For example, horses are expensive to maintain and require exercise, training, and a large tract of land; some birds and reptiles have very long life expectancies; and care of some pets will require construction of a special habitat on the caregiver’s property.

Traditional Trusts
Even if your state does not have a specific pet trust statute, a pet owner can name a human caregiver as the beneficiary of a trust, require that the distributions to the beneficiary are dependent on the beneficiary caring appropriately for the pet, and require the trustee to ensure that the beneficiary is properly caring for the pet using trust assets. This type of trust may be used without regard to whether the state has a specific pet trust statute.

Planning Tip: Both statutory pet trusts and traditional trusts allow the pet owner to provide detailed requirements as to how the caregiver must care for the pets upon the pet owner’s disability or death.

Planning Tip: Will planning is inadequate for pets because Wills do not address disability and because of the time lapse between the pet owner’s death and the Will being admitted to probate.

Funding Pet Care
Many pet owners do not have sufficient funds to properly care for their pets after their disability or death. Life insurance is one way to increase funds available to care for pets after the pet owner’s death.

Planning Tip: Pet owners should consider life insurance that names a pet trust or traditional trust as beneficiary to fund a pet’s care. If the pet owner is concerned that funding of a pet or traditional trust will reduce the inheritance of children or other beneficiaries, he or she should consider life insurance that names both (1) the pet or traditional trust and (2) other beneficiaries (or a trust for their benefit). These assets can be invested like any other assets during the owner’s lifetime, and those who currently manage the assets can continue to do so for the pet’s lifetime.

Trust Terms
Here are several issues for pet owners’ consideration:

  • Creating a pet panel to offer guidance to the trustee and caregiver/beneficiary, and to remove and replace the trustee and caregiver/beneficiary if necessary. Consider including a veterinarian to make the final decision regarding euthanization for medical reasons, to ensure that the pet is not euthanized prematurely by the caregiver/beneficiary.
  • Paying the caregiver/beneficiary a monthly fee for caring for the pet or allowing the caregiver/beneficiary to live in the pet owner’s home, rent free.
  • Awarding a bonus to the caregiver/beneficiary at the end of the pet’s life as a “thank you” for taking care of the pet.
  • Determining how the trustee is to distribute the remaining trust funds after the last pet dies.

If the pet owner decides against creation of a pet panel to determine who will be a successor caregiver/beneficiary, the trust should name multiple successor caregivers/beneficiaries (three or more) in case a caregiver/beneficiary is unwilling or unable to serve. As a final back-up, the pet owner should consider requiring the trustee to give the pet to a no-kill animal sanctuary if there are no caregivers/beneficiaries available.

An alternative to naming individual caregivers is for the pet owner to name a local charitable organization that will ensure care in exchange for a contribution upon the owner’s disability or death. A listing of such organizations nationally is available online at

Pet Identification
To prevent the caregiver/beneficiary from replacing a pet that dies in order to continue receiving trust benefits, the pet owner should specify how the trustee can identify the pet. Micro-chipping the pet or having DNA samples preserved are two methods commonly used for verification.

Some pet owners want their healthy pets euthanized when they pass away because “no one can care for my pets as well as I do.” However, many courts have invalidated euthanasia provisions on the basis that destruction of estate property is against public policy. Instead, pet owners should consider no-kill organizations that have the pet’s best interest in mind and will find the next best home for the pets.

Many individuals are unaware of the issues surrounding the care of their pets after their disability or death. By discussing these issues with their advisor team, pet owners can ensure that all of their loved ones are cared for, even when the owner is unable to care for them directly.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.

Planning for the New 'Zero Percent' Tax Bracket | The Need for Life Insurance - Volume 2, Issue 2

Planning for the New “Zero Percent” Tax Bracket

There was a recent change in the tax law that you might not be familiar with – yet it may entitle you to significant tax savings. Beginning January 1, 2008 and continuing through December 31, 2010 (unless extended by Congress), a zero tax rate may apply to long-term capital gain and dividend income that would otherwise be subject to the lowest federal income tax rates, 10% and 15%.

The new zero tax rate creates the opportunity for eligible individuals to sell certain appreciated assets at no tax cost. By working with you to ensure that you take advantage of this new opportunity, if available, we can help you pay less tax and preserve more of your wealth.

The Zero Tax Rate
There are two questions we must ask to determine whether a taxpayer is eligible for the new zero tax rate.

  1. Is the taxpayer an individual who has “adjusted net capital gain.”
  2. If yes, is the individual eligible for the zero tax rate?

Adjusted net capital gain is, in essence, long-term capital gain minus short-term capital losses, if any, plus dividend income.

Planning Tip: There are exceptions when calculating adjusted net capital gain. Therefore, it is important that a knowledgeable tax advisor assist you with this calculation.

Who Gets the Zero Tax Rate?
Not surprisingly, determining whether someone is eligible for the zero tax rate is a complex calculation. We have tried to simplify it as follows:

  1. Add all of your income to determine your Adjusted Gross Income (AGI).
  2. Subtract exemptions and deductions from your AGI to determine your taxable income.
  3. Subtract adjusted net capital gain from your taxable income to determine your “other taxable income.”
  4. Is your other taxable income less than the threshold of your 25% income tax bracket? If yes, subtract other taxable income from your 25% tax rate threshold.
  5. The remainder is eligible for the zero tax rate.

Planning Tip: Your income does not have to be below the 25% tax rate threshold for you to be eligible for the zero tax rate. Even if your taxable income is significantly higher than your 25% rate threshold, some of your adjusted net capital gain may still be eligible for the zero tax rate.

For 2008, the 25% tax rate threshold is:

  • $32,550 for single taxpayers and married taxpayers filing separate returns;
  • $65,100 for married taxpayers filing joint returns and surviving spouses; and
  • $43,650 for heads of household.

Suppose in 2008 Mr. and Mrs. Taxpayer have $105,000 of wages plus $120,000 long-term capital gain from the sale of stock. Thus, their 2008 adjusted gross income (AGI) is $225,000. If they have $65,000 in personal exemptions and itemized deductions, their 2008 taxable income is $160,000 ($225,000 minus $65,000).

From the formula above, the Taxpayers’ other income, after exemptions and deductions, is $40,000 ($160,000 minus $120,000 adjusted net capital gain). Subtracting this amount from their 25% threshold of $65,100, the zero rate applies to $25,100 of their adjusted net capital gain ($65,100 minus $40,000). Thus, the zero rate would save them $3,765 ($25,100 x .15) of federal income tax. The balance of their adjusted net capital gain ($120,000 minus $25,100) would be subject to the 15% rate.

Planning Tip: If your taxable income is less than your respective 25% rate threshold, all of your adjusted net capital gain will be subject to the zero tax rate.

Planning Tip: Conversely, if your taxable income – other than adjusted net capital gain – is equal to or greater than your 25% rate threshold, you will not be eligible for the zero tax rate.

Planning Tip: You and your tax advisors should pay careful attention to year-end income and deduction timing. Careful planning may create eligibility for the zero tax rate.

Application of the “Kiddie Tax”
In establishing the zero tax rate, Congress was concerned that taxpayers would transfer appreciated assets to their young children to avoid tax on the sale of those assets. Absent some limitation, the children could then sell the assets at the zero tax rate and avoid paying tax on the capital gain. A limitation comes from Congress in the form of the so-called “kiddie tax.”

With the kiddie tax, a child must pay federal income tax at his or her parents’ highest rate on the child’s unearned income over $1,800. For tax years before 2008, the kiddie tax applied only to children under 14. However, while the zero tax rate is in effect, the kiddie tax is extended to all children under 18. In addition, while the child is a full-time student, the kiddie tax now applies until the child is 23 years old if the child’s earned income does not provide more than one-half of his or her support.

Planning Tip: The opportunity remains to transfer appreciated assets to children, grandchildren or other family members 24 or older to take advantage of the zero tax rate. The opportunity also remains with younger children, but is limited. We can help clarify your planning opportunities.

The zero tax rate presents a significant opportunity for those individuals whose income, other than adjusted net capital gain, is less than their 25% income tax rate threshold – no matter how high their total taxable income (including adjusted net capital gain). The zero tax rate may also be available through transfers to young adults and other low-income taxpayers. Like with so many other areas, your planning team should work together to ensure that you take full advantage of the zero tax rate without compromising your other planning goals and objectives.


The Need for Life Insurance

Chances are great that you should have life insurance. Whether you can afford to buy it and what kind you need are just two of the many issues that confront us when we consider life insurance.

There are few experiences more traumatic than trying to figure out one’s life insurance needs. Many of us have a genuine fear of being underinsured, especially in the days of lengthening life expectancies and rising costs of living. How will my family pay the mortgage, pay for college, etc., and maintain the same standard of living should something happen to me? Insurance isn’t a gambling proposition. But, alternatively, the insurance consumer frequently feels pressure to buy more than he or she needs.

“How much life insurance do I really need?”
Perhaps the soundest approach to purchasing life insurance is to consider personal “needs.” There are three basic uses for life insurance.

Income Replacement (“How will my family pay the bills if I die?”)
Life insurance can replace lost income for those of us who die unexpectedly. For example, what funds will be available to pay everyday bills? In determining the amount of life insurance necessary for income replacement, consider the following needs:

  • A “transition” fund to pay at least six months’ bills during the grieving period;
  • An “emergency find” for a catastrophic illness or injury, sudden and unexpected accident or casualty, financial collapse or the like;
  • Funds to pay off mortgages and other debts; and
  • Funds to supplement or replace Social Security.

If you have young children, also consider an amount sufficient for child-rearing, college and post-graduate expenses, career help and even the cost of marriages.

Planning Tip: Consider life insurance to replace income from the premature death of a breadwinner spouse or parent. The amount of insurance necessary should take into consideration not only monthly living expenses, but also transition and emergency funds, plus child-related expenses.

Wealth Replacement (“How can my family receive the full value of my assets?”)
The traditional wealth replacement use for life insurance was to replace wealth lost to the federal estate tax. However, in 2008 the exemption to the federal estate tax has increased to $2 million per individual, $4 million per married couple. As a result, fewer individuals are subject to federal estate tax, and thus few individuals need life insurance solely for the traditional wealth replacement need.

But life insurance also satisfies other wealth replacement needs. For example, many of our most significant assets are tax-qualified plans (such as IRAs, 401(k)s and pension plans). Because these are a special class of assets, they are subject to ordinary income tax when distributed to our beneficiaries. Given the statistics that beneficiaries often deplete these assets quickly, they will incur significant income tax in withdrawing these assets. Therefore, a million dollar IRA may be worth only $650,000 after federal income tax, less after state income tax. Realizing this, many of us would benefit from life insurance designed to replace this lost wealth.

Other wealth replacement needs for life insurance include:

  • Funeral and other last expenses; and
  • Estate administration expenses, including medical bills, hospital costs, decedent’s debts and bills, taxes, fiduciary’s commissions, attorney’s fees and probate costs;

Wealth Creation (“What if I die before I build an estate for my family?”)
The third basic need for life insurance is the creation of wealth. Examples of this need are families who wish to add to their wealth for future generations or to fund their philanthropic objectives. Wealthy families often use life insurance for the creation of additional wealth.

Other Uses for Life Insurance (“I didn’t know there were so many other situations where only life insurance will assure me my goals will be reached even if I die!”)
Many individuals use life insurance as a funding mechanism in other situations, including:

  • buy-sell planning for business owners;
  • key employee coverage;
  • nonqualified deferred compensation;
  • liquidity for state death taxes; and
  • inheritance equalization (for example, where only one child works in the family business).

Planning Tip: Life insurance is often the only vehicle that ensures that you will have the necessary liquidity when needed.

Irrevocable Life Insurance Trusts (“A little planning can provide enormous tax savings.”)
Life insurance proceeds are not subject to income tax. However, if the insured owns the insurance policy, these proceeds will be included in the insured’s gross estate and, therefore, be subject to federal and/or state estate tax. One simple way to avoid this result is to use a properly drafted and maintained Irrevocable Life Insurance Trust (ILIT). An ILIT that owns the life insurance can avoid federal and estate tax on the life insurance proceeds. Such a trust can also ensure that the life insurance proceeds are available as you intended.

Planning Tip: Use an Irrevocable Life Insurance Trust to purchase, own and be the beneficiary of life insurance. This will ensure that the life insurance proceeds are not subject to estate tax.

Life Insurance is a unique asset that can provide the highest degree of flexibility for changes in the law or changes in your circumstances. Therefore the quality of the life insurance agent and the life insurance company you select are among the most important choices you can make. We recommend that this professional be part of your planning team to help ensure that your life insurance is an integral part of a comprehensive financial and estate plan.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.

'Portability' of the Federal Estate Tax Exemption - What does it Mean? - Volume 2, Issue 3

With the political and economic climate as it is in the summer of 2008, we are not likely to see total repeal of the federal estate tax in the foreseeable future. However, both Republican and Democratic Presidential candidates support estate tax reform. Realistically, such reform is at least one year away, but the outlines are already clear. And while the top estate tax rate and the exemption amount are not yet established, both candidates support making the exemption “portable” for spouses.

On its face, exemption portability is a good thing. However, like many “good” things from Congress, this one may not be all that it is cracked up to be.

What is “Portability”?
Under current law, if a spouse dies without having planned for his or her exemption, that exemption will be lost. In other words, in 2008 a married couple can transfer a combined $4 million of assets ($2 million each) free of federal estate tax, but only if they set up what is commonly referred to as a credit shelter trust (aka “bypass” or family trust) for the $2 million of the first spouse to die. This trust “shelters” or preserves the federal estate tax exemption of that spouse so that it is not lost at death. Without such a trust in place, the first spouse to die wastes his or her exemption and the surviving spouse can only transfer $2 million free from federal estate tax. (Note that the state estate tax exemption may be less than $2 million, as discussed below).

Under the portability proposals of both Presidential candidates, when the first spouse dies, the unused exemption would simply transfer to the survivor and be available for use when that spouse dies. In other words, the surviving spouse will have both spouses’ federal exemptions. In some respects, such a change would simplify estate planning for surviving spouses by eliminating the need for credit shelter trusts (either in their wills or as part of a revocable living trust) set up solely to save estate taxes. Also, with portability, couples would not need to retitle assets to equalize their respective estates.

Thus, with portability, Barack Obama’s proposal would effectively allow for a $7 million federal estate tax exemption for couples. John McCain’s proposal would allow for a $10 million federal estate tax exemption for married couples. Does this mean that if a married couple has less than $7 million they no longer need to plan or update their existing planning? Absolutely not.

Shortcomings of Exemption Portability
The biggest shortcoming of federal estate tax exemption portability is the loss of asset protection by not utilizing a credit shelter trust in a revocable living trust or Will. While you may not believe that you are at risk for claims against these assets, consider this: a single car accident can result in a judgment that far exceeds your insurance limits, even where you believe that you are not at fault.

Planning Tip: Through the use of a properly drafted credit shelter trust, the assets in the credit shelter trust will never be subject to creditors of the surviving spouse or future beneficiaries, often children and grandchildren.

Additionally, these assets are not subject to federal estate tax no matter how much they grow during the surviving spouse’s lifetime and beyond. Therefore, these assets can grow well past $2 million and never be subject to federal estate tax.

Planning Tip: Your investment advisor can continue to invest these assets and grow them significantly over time without imposition of federal estate tax.

Furthermore, more and more states have state estate tax exemptions that are less than the federal estate tax exemption. Thus, while your surviving spouse might not be subject to federal estate tax upon your passing, your surviving spouse may have to pay significant state estate tax if you rely solely on the federal exemption portability. This is true even if you live in a state that does not currently have a state estate tax as it might institute one, or you might someday move to such a state or own property there.

Last, but not least, there is nothing to prevent Congress from changing the rules in the future. This is our country’s fourth version of the estate tax, all instituted in time of war when the government needed money – which is arguably where we are today. Moreover, Congress continuously tinkers with the estate tax, and has done so nearly 20 times since 1976. What is to prevent Congress from doing so again, especially if we need to raise revenue? And if one spouse has already passed it will be too late.

Planning Tip: Congress has continuously tinkered with the federal estate exemption amounts and rates. There is no reason to believe that Congress will not continue to tinker with these in the future.

Portability of the federal estate tax is an improvement of the “default” Congressional estate plan, but it is not a substitute for proper planning or continuous updating of existing planning. As your planning goals or assets change, so too should your estate planning change. By working together, your planning team can ensure that your planning stays current and will accomplish your unique goals and objectives.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.

New FDIC Rules: Are You Protected? - Volume 2, Issue 4

With the rash of bank failures, you may wonder whether – and to what extent – the FDIC (Federal Deposit Insurance Corporation) will protect your bank accounts. Fortunately, new rules from the FDIC clarify how you can ensure maximum FDIC insurance coverage. You may need to modify your planning slightly to take advantage of these new rules.

The FDIC is an independent federal agency that ensures the availability of deposited funds after a bank failure. Created in 1933 after a run on banks left many account owners penniless, the FDIC promotes public confidence and stability in the nation’s banking system by insuring your deposits at any FDIC-insured institution.

Planning Tip: FDIC-insured institutions include most banks and savings associations located in the United States. It does not include brokerage firms.

Until very recently, the FDIC insured up to $100,000 for each account beneficiary. Beginning October 3, 2008, the FDIC temporarily increased coverage to $250,000 per beneficiary.

Planning Tip: FDIC insurance covers checking accounts, savings accounts, money market deposit accounts (but not money market mutual funds), certificates of deposit, and certain retirement accounts.

Planning Tip: FDIC insurance does not cover investments in stocks, bonds, mutual funds, life insurance policies, annuities, or municipal securities, even if you bought these from an insured bank. The FDIC also does not insure U.S. Treasury bills, bonds, or notes, although the U.S. government backs these investments.

Planning Tip: FDIC insurance also does not cover money market mutual funds. However, the United States Treasury Department recently created a temporary guarantee program for money market mutual funds that is effective for one year beginning September 19, 2008.

New Rules for Non-Interest-Bearing Accounts
Beginning October 14, 2008, FDIC insurance temporarily covers all non-interest-bearing deposit accounts for the entire amount of the account. This includes personal and business checking accounts that do not earn interest.

New Rules for Revocable Trusts
The FDIC recently issued rules that clarify the insurance limits when the account is in the name of a revocable trust. This clarification confirms that you can protect up to $250,000 for each revocable trust beneficiary under certain circumstances.

As you may know, a revocable living trust (also known as a living trust or inter vivos trust) is a trust that you create during your lifetime to control your property during any disability and at death. As a result, revocable living trusts typically name as beneficiaries the maker of the trust, plus a spouse, children and grandchildren, if any. Revocable trusts also often name siblings, parents, and other relatives and friends as beneficiaries, as well as charities.

Under the new FDIC rules, a trust account owner with up to five different beneficiaries named in all of his or her revocable trust accounts at one FDIC-insured institution will have FDIC insurance up to $250,000 per beneficiary. In other words, if your revocable trust(s) names five beneficiaries, the FDIC will insure up to $1,250,000 at any one FDIC-insured bank.

What Beneficiaries Count for Revocable Trust Coverage?
If you create your own individual revocable trust (other than a joint revocable trust), the FDIC rules tell us that you are not a beneficiary of this trust for FDIC purposes. What if your trust names a primary beneficiary (one who takes before the contingent or alternative trust beneficiaries)? The FDIC rules also tell us that the contingent beneficiaries generally do not have an interest in a revocable trust for FDIC purposes while the primary beneficiary is living.

However, there is an exception to this general rule if the primary beneficiary has the right to receive income, or some or all of the trust principal during the primary beneficiary’s lifetime; the FDIC rules define this as a “life estate.” With this type of trust, the FDIC counts both your primary and contingent beneficiaries for purposes of determining FDIC coverage.

Husband has a living trust that gives wife a life estate interest in the trust, with the remainder going to their two children equally upon wife’s death. In this example, the FDIC’s insurance rules recognize wife and the two children as beneficiaries. Since there is one trust owner who has three beneficiaries, husband’s revocable trust account at an FDIC-insured bank is protected up to $750,000.

Revocable Trusts with More Than $1.25 million or 5 Beneficiaries
What if your revocable trust account has more than $1,250,000 or more than five different beneficiaries? Under these circumstances, the FDIC will insure the greater of either: $1,250,000 or the aggregate amount of all the beneficiaries’ interests in the trust(s), limited to $250,000 per beneficiary. For example, suppose your revocable living trust names eight beneficiaries equally. If your FDIC-insured bank fails when you have $2,500,000 in this trust account, the FDIC will insure $2,000,000. What if instead you had $1,500,000 in your revocable trust account and three named beneficiaries in equal shares, plus one beneficiary in the amount of $25,000? In this instance, the FDIC will insure only $775,000 – three beneficiaries insured at $250,000 each, plus one at $25,000.

Joint Revocable Living Trusts
If you have an account for a joint revocable trust, you and your spouse both have $250,000 FDIC insurance per qualifying beneficiary. In other words, a joint trust with three named beneficiaries will have $1,500,000 of FDIC coverage (both spouses have $750,000 of FDIC insurance–$250,000 each for three beneficiaries).

Planning Tip: If the owners of a joint revocable trust account are themselves the sole beneficiaries of the trust, both spouses are eligible for up to $250,000 of FDIC insurance. The FDIC treats this arrangement as a joint account (discussed below).

Multiple Account Types at One FDIC-Insured Institution
In addition to the FDIC-coverage for revocable trusts outlined above, you may also be eligible for up to $250,000 of deposit insurance coverage for each of the following types of accounts at any one FDIC-insured institution:

Single accounts. This includes accounts in an individual’s name alone and accounts in the name of a sole proprietor business (for example, “DBA accounts”);

“Certain retirement accounts.” This includes all types of IRAs, self-directed 401(k)s, and self-directed Keogh plan accounts (or H.R. 10 plan accounts) designed for self-employed individuals.

Planning Tip: The FDIC adds all qualifying retirement accounts owned by the same person in the same FDIC-insured bank and insures the total up to $250,000.

Joint accounts. These are deposits owned by two or more people (businesses and other legal entities do not count for this purpose).

Planning Tip: With joint accounts, the FDIC will add together each of the co-owner’s share of every account that is jointly held at the same insured bank with the co-owner’s other shares, and insure up to $250,000.

Irrevocable Trust Accounts. The interests of a beneficiary in all irrevocable trust accounts established by you and held at the same insured bank are added together and insured up to $250,000.

Alternatively, if you as the trust maker retain any interest in the trust, the FDIC will add the amount of your retained interest to any single accounts you own at the same bank and insure the total up to $250,000.

Planning Tip: The rules for revocable trusts apply to trusts that were revocable but that have become irrevocable because of the death of the trust maker.

Employee benefit plan accounts. The FDIC insures up to $250,000 for each participant’s non-contingent interest in an employee benefit plan account.

Corporation/Partnership/Unincorporated Association Accounts. The FDIC insures accounts owned by a corporation, partnership, or unincorporated association up to $250,000 at a single bank. This includes for-profit and not-for-profit organizations under the same ownership category. This FDIC insurance is separate from your personal accounts if you are one of the entity’s stockholders, partners, or members.

Worst-Case Scenario
Bank failures at a rate similar to the Great Depression is unlikely. However, if there are significant bank failures, the FDIC may not have the liquidity to immediately pay out all FDIC-insured claims. According to the FDIC website (at, the FDIC directly supervises about 5,250 banks and thrifts, more than half of the institutions in the U.S. banking system. The FDIC insurance fund totals approximately $49 billion, which insures more than $3 trillion of deposits in insured U.S. banks and thrifts.

Planning Tip: Since the FDIC insures deposits with each FDIC-insured bank separately from deposits at a different insured bank, consider holding different accounts at separate FDIC-insured institutions to ensure the availability of FDIC insurance for all of your bank accounts.

If your FDIC-insured bank accounts have significant value they may be covered up to $250,000 per beneficiary, per account type, at each FDIC-insured institution. By discussing your situation with your planning team, you can ensure that you have maximum coverage for all your accounts, including your revocable trust account, in the event any of your banks fail.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.

Planning You Should Consider Now - Volume 3, Issue 1

These are difficult times. The “experts” now acknowledge that we are in a recession – and that we have been so for some time. Consumer confidence is low. As a result many of us are concerned, wondering what planning we should do now, if any.

For the vast majority of Americans, planning is not discretionary. These individuals continue to have – or perhaps for the first time have – personal concerns that they need to address now because these concerns are unrelated to the economy. In fact, some of these concerns may even be made worse by our current economic situation.

In addition, for anyone who may be subject to federal or state estate tax in the future, unusual circumstances have created a “perfect planning storm” that will not last long. This newsletter addresses some of the planning needs unrelated to the economy and discusses strategies that create the biggest planning opportunities today.

Planning Needs Unrelated to the Economy
Many planning needs are unrelated to the economy. They include:

  • Disability and retirement planning;
  • Special needs planning;
  • Beneficiary protection planning (for example, protection from divorce, creditors and/or perhaps the beneficiaries themselves); and
  • Second marriage and “blended family” protection.

These planning needs are often more critical for those with fewer assets than for those with more wealth.

Disability Planning
According to the Family Caregiver Alliance and recent MetLife Mature Market Study, of those Americans currently age 65 and older:

  • 43% will need nursing home care;
  • 25% will spend more than a year in a nursing home;
  • 9% will spend more than 5 years in a nursing home; and
  • The average stay in a nursing home is more than 2.5 years.

Nursing home costs are increasing much faster than the inflation rate would imply. Thus, many of us quite appropriately are very worried about how we will pay for that kind of care if we need it.

Planning Tip: Careful consideration of how to pay for long-term care is critical for most individuals.

Also of concern to many people is who will provide long-term care and whether those caregivers will care for us in the way we desire. For many, there is a strong desire to stay at home as long as possible. For others, the companionship found in an assisted living facility makes that choice preferable. Still others need care that cannot be provided at home or only at a prohibitive cost. And, not surprisingly, these goals often change over time and with changing circumstances.

Planning Tip: A trust that sets forth your current, carefully thought-out disability objectives is the best way to ensure that your planning meets your personal goals and objectives.

Special Needs Planning
Special needs planning is another area unrelated to the economy. According to the 2002 U.S. census:

  • 51.2 million people reported having a disability;
  • 13-16% of families have a child with special needs;
  • Autism occurs every 1 in 150 births and between 1 and 1.5 million Americans have an Autism spectrum disorder.

Failure to properly plan for a person with special needs can have disastrous consequences, especially if the person is receiving government benefits.

Planning Tip: A Special Needs Trust that incorporates specific care provisions is a critical component of the planning necessary for a special needs person who needs ongoing support.

Planning Tip: Insurance on the lives of the parents or grandparents of a special needs person frequently funds the ongoing care of that special needs beneficiary.

Beneficiary Protection Planning
Protecting an inheritance from being lost in a divorce or to a beneficiary’s creditors is a serious concern of many individuals. Many from the older generation fear that their children and grandchildren lack strong financial decision-making skills – and the potential for creditor attack or for beneficiary dissipation of an inheritance is greater during difficult economic times.

Also, divorce rates exceed 50% nationally. Many individuals express concern over their children and grandchildren divorcing – they don’t want the assets they worked so hard to accumulate winding up in the hands of a former daughter-in-law, son-in law, etc. Since divorce rates increase in difficult economic times, this planning is even more important now than in better economic times.

Blended Family Planning
A higher divorce rate also leads to more second and subsequent marriages – each with a higher statistical probability of ending in another divorce. With blended families (in other words with potentially his, her, and their kids), it is critical that each parent’s planning protect his or her children in the event that parent predeceases the subsequent spouse. Failure of blended-family parents to do this type of planning practically guarantees that somebody’s kids will be disinherited or a messy probate will result.

Planning Tip: Carefully drafted estate plans protect beneficiaries from divorce, creditors and themselves. Such plans can also provide for children from prior marriages, which is often the only way to ensure that these beneficiaries actually receive any inheritance.

The “Perfect Storm” for Taxable Estate Tax Planning

Certainty as to the Federal Estate Tax
The prospect for a repeal of the federal estate tax in the foreseeable future is essentially zero and, in half the U.S. jurisdictions, there is also a state estate tax (which can apply if you own property in that state or move there). Nobody knows whether the Congress and President will agree to a new federal estate tax exemption amount (the amount an individual, with planning, can pass free of federal estate tax). Despite rumors from Capitol Hill, we also do not know what that new amount might be – especially in light of the federal spending developments of the past few months. If that spending leads to greatly increased inflation, many more individuals may face being subject to the federal estate tax. Because of the virtual certainty that we will continue to have an estate tax, many individuals must plan if they wish to avoid paying it.

As the U.S. Supreme Court said:

“Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes. Therefore, if what was done here was what was intended by [the statute], it is of no consequence that it was all an elaborate scheme to get rid of [estate] taxes, as it certainly was.”

For those who may be subject to federal or state estate tax, we are in a “perfect storm” that creates exceptional planning opportunities not likely to be seen again for many years. The factors that have come together to create this “perfect storm” are (a) reduced asset values; and (b) historically low interest rates.

Reduced Asset Values
Reduced values for stocks, real estate, businesses, etc., mean that individuals can transfer these assets for less today than they could have just a few months ago.

For example, if a particular stock you own declined from $100 per share to $80, now you can transfer 162.5 shares with a $13,000 annual gift tax exclusion (it went up from $12,000 on January 1, 2009) instead of 130 shares had it remained at $100. Married couples can give twice that amount, or $26,000 per person, per year. Typically, clients transfer this amount to children, grandchildren and other close family members.

In addition, reduced real estate and business values mean that you can transfer a larger percentage of these assets free of federal gift tax by taking advantage of your $1 million lifetime exemption from federal gift tax.

Planning Tip: At a minimum, if you are subject to federal or state estate tax, you should take advantage of the annual gift tax exclusion ($13,000 per person as of January 1, 2009) to transfer assets with reduced values to children, grandchildren and others. Ideally, you should make these gifts in trust to provide the beneficiaries protection from divorce, creditors, predators, and themselves.

Historically Low Interest Rates
The other piece to the “perfect storm” is today’s historically low interest rates. The January 2009 Applicable Federal Rates (AFRs) – the “safe harbor” interest rates provided by the government for, among other things, loans among family members – are as follows:

  • Short-term (not over 3 years): 0.81%
  • Mid-term (over 3 but not over 9 years): 2.06%
  • Long-term (over 9 years): 3.57%

Due to a number of reasons, these low interest rates make many estate planning strategies even more attractive, including:

  • Strategies that involve the use of loans at current interest rates; and
  • Strategies that assume (as required by the IRS) that the assets you transfer will grow at current interest rates. For transfers you make in January 2009, this rate is 2.4%.

We encourage you to contact your advisors to determine if one or more of these strategies is appropriate for you under the circumstances.

Despite these difficult economic times, there are many reasons why you should plan or update your planning now rather than wait until we have more economic certainty. Furthermore, in the current economic and political climate it is impossible to know which of us will be subject to federal (or state) estate tax in the future. We do know, however, that the federal estate tax is not going away. If you may be subject to estate tax, the current “perfect storm” creates a unique opportunity for the planning team to help you meet your goals and objectives.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.

Understanding the New Economic Stimulus Law: How Does It Impact You? - Volume 3, Issue 2

On February 17, 2009, President Obama signed into law the $787 Billion American Recovery and Reinvestment Act of 2009 (ARRA). This new law, designed to stimulate the economy, contains numerous tax provisions that affect individuals and small businesses. This includes some provisions that may not apply to you personally, but may affect your parents, children, and/or grandchildren. The following is a summary of the key provisions for individuals and married couples.

“Making Work Pay” Credit
ARRA provides for an individual tax credit in the amount of 6.2% of earned income, not to exceed $400 for single returns and $800 for joint returns in 2009 and 2010. This credit phases out at adjusted gross income (AGI) in excess of $75,000 ($150,000 for married couples filing jointly). Eligible taxpayers can claim the credit as a reduction in the amount of income tax that is withheld from a paycheck, or through a credit on a tax return. Under the paycheck withholding option, workers can expect to see approximately $13.00 per week less withheld from their paychecks starting around June. Next year, the extra take-home pay will be approximately $7.70 per week.

Economic Recovery Payment
ARRA provides for a one-time payment of $250 to retirees, disabled individuals, Social Security beneficiaries, and SSI recipients receiving benefits from the Social Security Administration and Railroad Retirement Board; and to veterans receiving disability compensation and pension benefits from the U.S. Department of Veterans’ Affairs. There is no AGI phase-out, and this one-time payment reduces the taxpayer’s “Making Work Pay” credit.

Refundable Credit for Certain Federal and State Pensioners
ARRA provides for a one-time refundable tax credit of $250 ($500 for spouses filing jointly where both spouses are eligible) in 2009 to certain government retirees who are not eligible for Social Security benefits. This one-time credit also reduces any allowable “Making Work Pay” credit.

Unemployment Compensation Exclusion
A provision in ARRA temporarily suspends federal income tax on the first $2,400 of unemployment benefits received by a recipient in 2009.

Expanded Tax-Free Expenses and Credits for Students
For college and graduate school students, as well as their parents and grandparents, ARRA makes two important changes.

First, in 2009 and 2010 only, ARRA authorizes you to make distributions from a 529 plan, free of income tax, for the purchase of computer technology or equipment. This includes computers, educational software, internet access, and related services. Prior to ARRA, only distributions for “qualified higher education expenses” were free of income tax. Qualified higher education expenses include tuition, fees, books, supplies, and a limited amount of room and board.

Second, ARRA creates the “American Opportunity Credit,” a tax credit for up to four years of college or higher education expenses. Applicable for 2009 and 2010 only, the maximum annual credit is $2,500 per student and includes expenses for required course materials.

Planning Tip: The new American Opportunity credit is available for each college or higher-level student in the household. It is not limited to one credit per household.

Expanded and Increased “First-Time Homebuyer” Credit
Designed to stimulate the real estate market, ARRA provides for a refundable “first-time homebuyer” credit of up to $8,000 ($4,000 for unmarried or married filing separately). “First-time homebuyers” are those who have not owned a principal residence during the three-year period prior to the purchase. For married taxpayers, the law tests the homeownership history of both the homebuyer and his/her spouse.

Example: If you have not owned a home in the past three years but your spouse has owned a principal residence, neither you nor your spouse qualifies for the first-time homebuyer tax credit. However, unmarried joint purchasers may allocate the credit amount to any buyer who qualifies as a first-time buyer, such as may occur if a parent jointly purchases a home with a son or daughter. Ownership of a vacation home or rental property not used as a principal residence does not disqualify a buyer as a first-time homebuyer.

To apply, the home purchase must occur before December 1, 2009. If the homebuyer uses the home as his or her (or their) principal residence for 36 months, the homebuyer will not be subject to repayment of any of the credit. This is significant in that prior credits for first-time homebuyers were subject to repayment (for example, over a 15-year period).

Planning Tip: On February 25, 2009, the IRS announced that first-time homebuyers who purchase in 2009 can claim the credit on their 2008 federal tax return. If the home purchase closes after filing of the buyer’s 2008 return, the buyer can file an amended 2008 return to claim this credit. Alternatively, first-time homebuyers may claim this credit on their 2009 return.

COBRA Assistance
Under COBRA, a former employee can pay to continue the former employer’s health insurance benefits for up to 18 months after separation of service. Typically, the former employee pays 100% of this benefit, unless the employer pays some or all as part of a severance agreement.

Under ARRA, the employer must pay 65% of the cost of COBRA for former employees who:

  1. involuntarily separated from service between September 1, 2008 and December 31, 2009; and
  2. participated in their employer’s health plan at the time they lost their jobs.

Qualifying employees must pay only 35% of the cost of COBRA coverage. Significantly, the employer-borne 65% of the COBRA cost will not be included in the former employee’s gross income. This COBRA subsidy phases out beginning at $125,000 modified AGI for individuals, $250,000 for married taxpayers filing jointly.

Planning Tip: If you or a loved one lost a job between September 1, 2008, and February 17, 2009, even if COBRA coverage was not initially elected, an additional 60 days to elect COBRA coverage and receive the subsidy must now be provided by the previous employer.

Planning Tip: Employers can claim a credit for their 65% of the cost of COBRA coverage on their payroll tax return.

Sales Tax Deduction for Vehicle Purchases
For eligible taxpayers who buy a new car, light truck, motor home or motorcycle in 2009 and pay state and local sales and excise taxes, ARRA permits a deduction for some or all of this tax. This deduction applies regardless of whether the taxpayer itemizes deductions on their tax return.

ARRA limits this deduction to the tax on up to $49,500 of the purchase price of an eligible motor vehicle. The deduction phases out beginning at $250,000 AGI for joint filers, $125,000 for other taxpayers. Purchases before February 17, 2009, are not eligible for this deduction.

Energy Efficiency and Conservation Incentives
Designed to encourage energy efficiency, ARRA provides for a 30% credit (up from 10%) for 2009 and 2010 for the cost of replacing windows and doors with energy efficient ones, installing insulation and installing energy efficient heating and cooling equipment. It also increases the aggregate credit available from $500 to $1,500. There is no maximum credit on:

  • Electric and solar water property
  • Fuel cells (but the eligible expenditure is limited to $500 [$1,667 for property occupied by more than one person] for each half kilowatt of capacity installed)
  • Small wind and geothermal heat pump property

Planning Tip: It appears that taxpayers who had used up their $500 lifetime credit can now take an additional $1,000 credit for qualifying expenditures made during 2009 and 2010.

ARRA also provides for a credit equal to $7,500 (no weight limit) for plug-in electric vehicles and a 10% credit (up to $4,000) for converted plug-in vehicles. Low-speed vehicles receive a 10% credit (up to $2,500).

Planning Tip: The energy efficiency, conservation and plug-in vehicle credits are not subject to AGI phase-outs. Therefore, all taxpayers are eligible for these credits.

Enhanced Child Tax Credits
ARRA increases eligibility for the child tax credit for many taxpayers by lowering the annual threshold to $3,000 from $8,300. This change to the child tax credit applies to 2009 and 2010 only.

Alternative Minimum Tax (AMT) Patch
ARRA provides for a relatively small, one-year “patch” or extension of the exemption from the Alternative Minimum Tax, but this patch will keep millions of taxpayers out of AMT. As a result of this patch, individuals earning approximately $85,000-100,000 and married couples filing jointly earning approximately $150,000-200,000 will be exempt from the AMT in 2009.

The recent economic stimulus law includes numerous credits and incentives for individual taxpayers and small businesses. These provisions primarily impact tax years 2009 and 2010, but some provisions affect 2008 and earlier tax years. By working with your planning team to understand these new provisions and the opportunities they create, you may be able to save significant tax dollars, for yourself and possibly parents, children and grandchildren. Please do not hesitate to contact us if you have any questions.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.

When Is It Time to 'Service' Your Estate Plan? - Volume 3, Issue 3

If you own a car, then you know it requires regular servicing in order to perform well and be reliable. More than likely, your car came with a recommended schedule for service, based on how many miles it has been driven. After a certain number of miles, you need to change the oil, replace the brake pads, rotate the tires, and so on.

If you have a newer car, you probably have an irritating dash light that comes on when it’s time for service and stays on until the mechanic resets it. Either way, whether you pay attention to the odometer or rely on that dash light, it’s pretty easy to know when it’s time to service your car. And if you keep driving it without servicing it, it’s a sure bet your car will let you down.

Like your car, your estate plan needs “servicing” if it is going to perform the way you want when you need it. Your estate plan is a snapshot of you, your family, your assets and the tax laws in effect at the time it was created. All of these change over time, and so should your plan. It is unreasonable to expect the simple will written when you were a newlywed to be effective now that you have a growing family, or now that you are divorced from your spouse, or now that you are retired and have an ever-increasing swarm of grandchildren! Over the course of your lifetime, your estate plan will need check-ups, maintenance, tweaking, maybe even replacing.

So, how do you know when it’s time to give your estate plan a check-up? Well, instead of having mileage checkpoints, your estate plan has event checkpoints. Generally, any change in your personal, family, financial or health situation, or a change in the tax laws, could prompt a change in your estate plan. Use the list at the end of this newsletter to guide you.

It’s a good idea to review your estate plan every year. Set aside a specific time every year (your birthday, anniversary, family gathering) to review it. Keep these events in mind each time you read through your documents. If you think a change may be in order, don’t write on your actual document; contact your attorney. Most changes can be handled by a simple amendment that is attached to your current will or trust.

Planning Tip: Like your car, your estate plan needs regular “servicing.” Set aside a specific time every year (your birthday, anniversary, family gathering) to review it. Become familiar with it. Keep it current so it will perform the way you want when you need it.

What Do You Do with Your Estate Plan?
Think for a few moments about what would happen if you became incapacitated or died today. Would your spouse, family and successor trustees know what to do?

Would they know where to find your estate planning and health care documents? Do they know whom should be notified? Do they know what insurance you have and the benefits they can apply for? Do they know what assets you own and where they are located? Do they know who your attorney and accountant are? If you own a business, do they know what to do to keep it operating? Do they know whom to call if they need help?

You don’t have to tell your family everything about your assets right now. But it is very important that they know where to find this information when they need it. So, organize it and let someone know where to find it. The point is to try and make things as easy as you can for your loved ones.

Give copies of your signed health care documents to your physician and designated agent. Keep the originals (titles, estate plan, health care documents) in one safe place like a fireproof safe or safe deposit box. (Be sure to add your successor trustee to your safe deposit box so he or she will have easy access.) You may also want to give a copy to your successor trustee; at the least, go over the main provisions with him or her.

Gifting…An Easy and Satisfying Way to Reduce Estate Taxes
If you have a sizeable estate, you may want to consider giving some of your assets now to the people or organizations who will receive them after you die.

Why? First, it can be very satisfying to see the results of your gifts – something you can’t do if you hold onto everything until you die. Second, gifting is an excellent way to reduce estate taxes because you are reducing the size of your taxable estate. (Just make sure you don’t give away any assets you may need later.) And third, it costs you less in the long run.

One of the easiest ways to gift is through annual tax-free gifts. Each year, you can give up to $13,000 to as many people as you wish. If you are married, you and your spouse together can give $26,000 per recipient per year. (This amount is now tied to inflation and may increase every few years.)

So if, for example, you have two children and five grandchildren, you could give each of them $13,000 and reduce your estate by $91,000 each year – $182,000 if your spouse joins you.

You can also give an unlimited amount for tuition and medical expenses if you make the gifts directly to the educational organization or health care provider. Charitable gifts are also unlimited.

You do not have to give cash. In fact, appreciating assets are usually the best to give, because any future appreciation will also then be out of your estate. For example, if you want to give your son some land worth $52,000, you can give him a $13,000 “interest” in the property each year for four years.

As long as the gift is within these limits, you don’t have to report it to Uncle Sam. Just the same, it’s a good idea to get appraisals (especially for real estate) and document these gifts in case the IRS later tries to challenge the values. You should do this under the watchful eye of your attorney or tax advisor.

What if you want to give someone more than $13,000? You can, it just starts using up your $1 million federal gift tax exemption. If your gift exceeds the annual tax-free limit, you’ll need to let Uncle Sam know by filing an informational gift tax return (Form 709) for the year in which the gift is made. After you have used up your exemption, you’ll have to pay a gift tax on any gifts over $13,000 (or whatever the annual tax-free amount is at that time). The gift tax rate is equal to the highest estate tax rate in effect at the time the gift is made. In 2009, it is 45%.

Even though the gift and estate tax rates are the same, it costs you less to make the gift and pay the tax while you are living than it does to wait until after you die and have your estate pay the estate tax. That’s because the amount you pay in gift tax is no longer in your taxable estate.

Event Checkpoints for Your Estate Plan

You and Your Spouse

  • You marry, divorce or separate
  • Your or your spouse’s health declines
  • Your spouse dies
  • Value of assets changes dramatically
  • Change in business interests
  • You buy real estate in another state

Your Family

  • Birth or adoption
  • Marriage or divorce
  • Finances change
  • Parent/relative becomes dependent on you
  • Minor becomes adult
  • Attitude toward you changes
  • Health declines
  • Family member dies


  • Federal or state tax laws change
  • You plan to move to a different state
  • Your successor trustee, guardian or administrator moves, becomes ill or changes mind
  • You change your mind

Planning Tip: Many people have set up revocable living trusts to avoid the costs, delays and publicity of probate after they die. But all too often they do not change titles of their assets to the name of their trusts. This process is called “funding” the trust. If you have not funded your living trust, you have simply wasted your money. Any assets still titled in your name will have to go through probate – just what you were trying to avoid. Talk to your financial advisor team about funding your living trust right away. And be sure to title new assets in the name of your trust as you acquire them.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.

Legal Notice and Disclaimer. The materials within this website are for informational purposes only. This information does not constitute legal advice and should not be relied upon by any individual. Communication of this information is not intended to create, and receipt does not constitute, the establishment of an attorney-client relationship. Internet users and readers should not act upon this information without first seeking professional legal counsel for your particular circumstances. The information on this website is provided only as general information which may or may not reflect the most current legal information.

The hiring of a lawyer is an important decision and should not be based on advertising alone. Before hiring us, please request that we provide you with additional information about our qualifications.

Copyright 2019. All Rights Reserved. The Coleman Law Firm, PLLC

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