CPAs

In May 2013, The Ultimate Estate Planner, Inc., released its premier issue of its free monthly estate planning newsletter.  This is a newsletter unlike any others out there for estate planning professionals.  Not only is it intended for estate planning professionals of all designations - - including estate planning attorneys, CPAs, financial advisors, life insurance agents, and even administrative staff - - but it is intended to be practical, timely and provide useful technical, legal and practice-management strategies that professionals can actually use in their practice.

IN JUNE'S ISSUE:

• "Green Book" Proposals and Income Tax Planning by Robert S. Keebler, CPA, MST, AEP (Distinguished)
• Fight Back Against "Commoditization" and Low-Priced Competition by Philip J. Kavesh, J.D., LL.M. (Taxation), CFP®, ChFC, California State Bar Certified Specialist in Estate Planning, Trust & Probate Law
• Advise Clients to "Shift" Opportunities Rather than Grab Opportunities Themselves by Jeremy Spackman, Esq.
• "Contextualizing" Life Insurance by Jason Oshins, Financial Advisor, MBA
• Five Simple Tips for Being a More Organized Assistant by Kristina Schneider & Megan DeLaGarza, Executive Assistants
• Announcement: Client-Friendly Laminated Charts and Handouts

CLICK HERE to read June's newsletter

Click the "Subscribe Now" icon below and make sure that you're signed up to receive our free monthly newsletter so you don't miss out!

Thanks to the assistance of Michelle Ward of Keebler & Associates, LLP for bringing to our attention a recent case regarding bankruptcy exemption for inherited IRAs.

The 7th Circuit Court of Appeals has reversed a district court's ruling extending bankruptcy exemption to an inherited IRA (Download Case). In Clark, the Wisconsin district court had previously reversed the bankruptcy court's decision and allowed an inherited IRA to be exempt from the bankruptcy estate. The debtors, Mr. and Mrs. Clark, filed for chapter 7 bankruptcy in 2010. Mrs. Clark had inherited an IRA from her mother in 2001. Neither Mr. nor Mrs. Clark was retired. The debtors claimed the inherited IRA was exempt under Wisconsin law and 11 U.S.C. Sec. 522(b)(3)(C). The Court of Appeals (cases Nos. 12-1241 & 12-1255) stated that by the time the Clarks filed for bankruptcy, the money in the inherited IRA did not represent anyone's retirement funds and that to treat this account as exempt would be to shelter from creditors assets that can be freely used for current consumption. The Court further stated that an inherited IRA does not have the economic attributes of a retirement vehicle, because the money cannot be held in the account until the current owner's retirement.

Given this recent decision and the diversity of decisions on this topic, caution suggests having an IRA payable to a trust rather than to a beneficiary outright to strengthen creditor protection.

Keebler & Associates, LLP assisted the Law Firm of Kavesh, Minor & Otis in obtaining PLR 200537044, approving the IRA Inheritance Trust®, the use of a standalone trust as beneficiary of IRA assets for the purpose of ensuring the stretchout of RMDs and providing added protection of IRA assets.  For more information about the IRA Inheritance Trust®, click here.

This post has been brought to you by The Ultimate Estate Planner, Inc., providing practical, tested and proven technical and marketing products to help estate planning professionals throughout the country build their practices.  Connect with us on Facebook, Twitter or LinkedIn.

Thanks to generosity of Robert Keebler, CPA, MST, AEP (Distinguished) of Keebler & Associates, LLP, AICPA and Leimberg Information Services, we are pleased to provide to you two free podcasts to download on the subject of President Obama's 2014 Proposed Budget.

Obama's proposed budget will have a negative impact on the following planning:

1. The estate tax rate would increase to 45% from today’s 40% rate.
2. The gift tax exemption would be reduced to $1,000,000
3. The estate tax and GST exemptions would be reduced to $3,500,000
4. The GST period would be limited to 90 years from today’s unlimited period
   1. Current dynasty trust transactions would be grandfathered
5. The IDGT trust transactions will be eliminated on a prospective basis
   1. Current dynasty trust transactions would be grandfathered
   2. Additional sales would not be protected
6. The GRAT transaction will be eliminated on a prospective basis
   1. Ten year rule
   2. No zeroing out GRATs
7. A Buffet rule would impact income greater than $1,000,000
8. Itemized deductions would be reduced to a credit for those with income greater than $250,000
9. Carried Interests capital gain treatment would be eliminated
10. A special provision would eliminate the ability to retain more than approximately $3,400,000 in an IRA or pension plan.

The 90-year GST rule may require some thought and attention.  Recall that for pre-1986 GST trusts any contribution after the effective date eliminates grandfather status.  It may be prudent  to sever/decant/reform insurance and other trusts before the end of 2013 if this provision becomes law.

AICPA Podcast
"Robert Keebler on President Obama's 2014 Proposed Budget"
DOWNLOAD

LISI's 60-Second Planner Podcast
"Key Elements of the President's 2014 Budget"
DOWNLOAD

The podcasts above are the copyrighted materials of Robert S. Keebler, CPA, MST, AEP (Distinguished), AICPA and Leimberg Information Services, Inc. These are provided to you as a courtesy from the permission granted to The Ultimate Estate Planner, Inc.  Reproduction in any form or forwarding to any person prohibited without the express permission of AICPA and Leimberg Information Services, Inc.

This post has been brought to you by The Ultimate Estate Planner, Inc., providing practical, tested and proven technical and marketing products to help estate planning professionals throughout the country build their practices.  Connect with us on Facebook, Twitter or LinkedIn.

Leading tax and estate planning experts, Martin Shenkman, J.D., CPA, MBA, Jonathan Blattmachr, J.D. and Robert S. Keebler, CPA, MST, AEP (Distinguished) have come together for the very first time to co-author the single most authoritative practical guide to crucial, last-minute planning for 2012.

This unique book is written technical enough to assist professionals like you to understand the key planning choices and how to avoid the traps involved with each - - and written in plain-English enough for the sophisticated client who wants to better understand complex planning or needs some motivation to move ahead and do something!

This one book covers all of the following:

• Irrevocable Life Insurance Trusts
• Grantor Retained Annuity Trusts
• Valuation Discounts
• Defined value Clauses
• Sales to Intentionally Defective Grantor Trusts
• Qualified Personal Residence Trusts
• Beneficiary Defective Inheritor's Trusts
• Split Dollar Loans
• Domestic Asset Protection Trusts
• Last Minute Income Tax Planning
• How to Overcome the Biggest Client Objections
  • Complexity
  • Cost
  • Law Uncertainty
  • Clawback
  • Fear of Giving Up Assets
  • Fear of Giving Up Income
• And much, much more!

Click here to review the complete Table of Contents.

You can receive this this one-of-a-kind, extremely timely book immediately when you purchase it in downloadable PDF format, so you can use it now before the window of opportunity closes.  Plus, since it’s in a PDF format, you can readily print out and give certain sections of the book to clients, as needed.  The best part is that you can get all of this for just $39.95.

In addition, you will get 4 special bonuses for purchasing the book by this Friday, September 21st!

BONUS #1: Access to a special website where you can immediately customize, address and mail out the provided marketing postcard, so you can get clients and prospects to start calling you for appointments!*

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BONUS #3: A 50% discount toward estate tax and asset protection expert, Steve Oshins’ “Advanced Estate Tax Planning Sales Tools” - - extremely helpful sales tools to help you get clients and prospects to engage you!

BONUS #4: A sample client marketing letter used by Phil Kavesh for his law firm clients to get them to move before it’s too late!

*Does not include discounted printing fee and postage.

For more information and to get your 4 special bonuses, order your book today!

This post has been brought to you by The Ultimate Estate Planner, Inc., providing practical, tested and proven technical and marketing products to help estate planning professionals throughout the country build their practices.  If you are interested in a personal consultation for your office regarding how to make your office more efficient and how to improve the productivity of your attorneys, staff and advisors, contact us today at 1-866-754-6477 to find out how you can receive a free 30 minutes consultation.  Connect with us on Facebook, Twitter or LinkedIn.

At The Ultimate Estate Planner, Inc. it's important to us to keep our customers and the rest of the estate planning community informed about very important and exciting updates as it happens.  A special thank you to Joseph C. Mahon featured on WealthManagement.com.

On Aug. 16, the Internal Revenue Service released a draft version of a revised Form 706 (the 706), “United States Estate (and Generation Skipping Transfer Tax) Return.”  www.irs.gov/pub/irs-dft/f706--dft.pdf.  It didn’t release instructions.  The revisions implement two major changes in the law. First is the allocation of a decedent’s unused estate tax exemption to his surviving spouse under Internal Revenue Code Section 2010(c)(4) beginning in 2011, the portability of the deceased spouse unused exemption (DSUE) under Treasury Regulations Section 20.2010-2T.  Second is the filing of protective refund claims for unresolved claims for debts and administration expenses to take into account post-death events under the revisions to Treas. Regs. Section 20.2053-1 that apply to the estates of decedents dying after Oct. 19, 2009.

Portability
Conceptually, the DSUE revisions are the most remarkable.  They allow the filing of the return when it’s not required.  The executor makes the portability election simply by filing the 706; the executor isn’t required to make a specific election.  Rather, a check-the-box option is provided for opting out of portability.  The draft form permits other elections to be made, including the qualified terminable interest property (QTIP) election for marital deduction purposes and the election to apply the decedent’s generation-skipping transfer tax exemption to the QTIP property.  The election to take administration expense deductions for either estate or income tax purposes will also be required.  The revisions may force consistent positions to be taken for state tax purposes for decedents in states imposing estate taxes.  And, the revisions introduce the concept of estimated valuation for estate tax purposes in limited circumstances when property qualifies for the marital or charitable deductions.

Part 6 of the 706 addresses portability, on a new p. 4.  The option to elect out is at Part A.  The actual computation of DSUE being ported to the surviving spouse is at Part C.  And the calculation of DSUE available to claim by the estate of the surviving spouse is set forth at Part D, taking into account the DSUE received from the most recent deceased spouse and the DSUE received from one or more other deceased spouses and used by the current decedent.  The result is then carried to line 9b of the tax computation on p. 1.

The DSUE arising when property passes to a qualified domestic trust (QDOT) for the decedent’s surviving spouse who’s a non-citizen of the United States becomes tentative, subject to re-computation after the application of the tax due under IRC Section 2056A in the subsequent administration of the QDOT.   (See Section B of Part 6.)

The estimated valuation provision, referenced on almost every schedule and at Parts 1 and 5 of the 706, is likely to be of limited use.  While the regulations refer to a range of estimated values being provided in the instructions to the 706, Treas. Regs. Section20.2010-2T(7)(ii)(B), the instructions aren’t yet available.  Estimated valuation only applies to property qualifying for either a marital deduction or a charitable deduction when the value doesn’t affect the value passing to any other beneficiary or any elections to be made.  (Treas. Regs. Section 20.2010-2T(7)(ii)(A).)  For bank and brokerage accounts, the actual valuation of the property is likely to be readily available.  For other assets, valuation may be required for other reasons, including establishing basis for income tax purposes or for the application of state death taxes.  An alternative tax planning strategy for charitable bequests is to give the asset to the surviving spouse, so that he may then make the donation and claim a deduction for income tax purposes. 

Unresolved Claims
Schedule PC, “Protective Claim for Refund,” provides a permissive method to preserve a claim for deduction under Treas. Regs. Section 20.2053-1(a)(5) for “unresolved claims” against the estate for either administration expenses or for debts.  Schedule PC is required: (1) to be completed separately for each unresolved claim or expense that may not become deductible under IRC Section 2053 until the limitations period has expired; and (2) to be filed in duplicate. 

Schedule PC has three parts.  Part 1 requests general information concerning the estate, including the number of protective claims being filed with the 706.  Part 2 requests information about the specific claim being reported, including the amount in controversy, the parties, the basis for and a description of the claim, its status and copies of relevant pleadings or other documents.  Given the information requested and the space provided on Schedule PC, attachments to substantiate the claim will likely be needed.  No provision is made for a computation of the amount of tax reduction or refund due, consistent with the regulatory provision that the protective claim doesn’t need to state a particular dollar amount or demand an immediate refund. 

Schedule PC appears designed to be filed with the 706 and as a separate, stand-alone filing.  It anticipates multiple filings with respect to specific claims, with subsequent filings reporting either partial payment or complete resolution of the claim.  (See Part 2, lines b and c.)  Once a claim is resolved, the regulations indicate that the resolution is to be reported within a reasonable time.  At Part 3, Schedule PC provides for a listing of any Schedules PC or Forms 843, Claim for Refund, previously filed with respect to the unresolved claim.  A necessary step in the estate administration process will be filing refund claims to follow up on the estate’s payment of contingent expenses and liabilities as they get resolved.  Since Form 843 does provide for the computation of the refund amount due, in contrast to Schedule PC, it may be the preferred form to file.  Hopefully, the instructions will provide guidance on the coordination of filing these different forms.

This post has been brought to you by The Ultimate Estate Planner, Inc., providing practical, tested and proven technical and marketing products to help estate planning professionals throughout the country build their practices.  If you are interested in a personal consultation for your office regarding how to make your office more efficient and how to improve the productivity of your attorneys, staff and advisors, contact us today at 1-866-754-6477 to find out how you can receive a free 30 minutes consultation.  Connect with us on Facebook, Twitter or LinkedIn.

Photo Credit: paelderestatefiduciary.blogspot.com
Source: WealthManagement.com

At The Ultimate Estate Planner, Inc. it's important to us to keep our customers and the rest of the estate planning community informed about very important and exciting updates as it happens.  A special thank you to Michelle Ward and Robert Keebler for this wonderful article featured on WealthManagement.com.

Roth IRA Conversion Recharacterization Permitted by Michelle L. Ward
Taxpayer relied on financial advisor’s advice

In Private Letter Ruling 201235030 (June 6, 2012), received by Keebler & Associates, the Internal Revenue Service granted the taxpayer an extension to recharacterize his 2009 Roth individual retirement account conversions.

Facts
In 2009, the taxpayer read articles and heard discussions describing the end of the $100,000 income limitation (which actually occurred in 2010) for converting to a Roth IRA and highlighting the benefits of performing such a conversion.  He came under the mistaken impression that the income limitation was eliminated in 2009, rather than in 2010.  Because the articles, generally, indicated that it was a good time to perform a conversion, due to the decline in the stock market, he decided to go forward with performing the Roth IRA conversions.

Also in 2009, before he performed the Roth conversions, the taxpayer consulted with his financial advisor, who was also his uncle, and discussed that he was considering performing a Roth IRA conversion.  The financial advisor submitted an affidavit along with the PLR request, in which he represented that he has been advising the taxpayer and the taxpayer’s wife since 1998, that in 2009 the taxpayer discussed with him the idea of a Roth conversion, that he never informed the taxpayer the $100,000 limitation still applied in 2009, that his failure to inform the taxpayer was an oversight on his part and that the taxpayer relied on the financial advisor to inform them if a Roth conversion was either inadvisable or not allowable.

The taxpayer prepares his and his wife’s tax return annually without the assistance of a paid preparer.  In 2009, he used software to prepare their income tax return, but due to a keystroke or entry error when completing the 2009 Form 1040, the Roth IRA conversion amounts he placed on line 15a didn’t carry over to line 15b.  He didn’t realize this error had occurred when he filed their tax return.  Because of this error, the taxpayer and his wife received an IRS Notice of Deficiency, increasing their income by the amount of the conversion.  Upon receipt of this Notice, the taxpayer contacted an attorney for assistance, and it was during these conversations with that the taxpayer first discovered that he had been ineligible to make the 2009 Roth conversions, because his 2009 income exceeded $100,000.

IRS Ruling
For tax years beginning before 2010, a taxpayer is eligible to rollover funds from a traditional IRA to a Roth IRA provided that his: (1) adjusted gross income (AGI) was no more than $100,000, and (2) filing status wasn’t “married filing separately”.

To the extent that a taxpayer converted his traditional IRA to a Roth IRA and later found out that his AGI exceeded $100,000, the taxpayer could elect to recharacterize (that is, undo) the conversion.  However, the recharacterization must have been completed on or before the due date of the federal income tax return (including extensions) for the year of conversion (that is, no later than October 15th would be constrained to the original conversion amount.

Notwithstanding the Oct. 15th deadline, under Treasury Regulations Section 301.9100-1(c), the IRS may grant a reasonable extension of time fixed by regulation, a revenue ruling, a revenue procedure, a notice or an announcement for making an election, which includes a Roth IRA recharacterization.

Treas. Regs. Section 301.9100-3 provides that applications for relief will be granted when the taxpayer provides sufficient evidence to establish that: (1) the taxpayer acted reasonably and in good faith; and (2) granting relief wouldn’t prejudice the interests of the government.  The regulations provide that a taxpayer will be deemed to have acted reasonably and in good faith if, among other factors, the taxpayer reasonably relied on a qualified tax professional, and the tax professional failed to make, or advise the taxpayer to make, the election.

In this case, the IRS found that the information presented and documentation submitted by the taxpayer was consistent with his assertion that his failure to elect to recharacterize the Roth IRA on or before the due date was caused by his lack of awareness of the necessity of making an election, as a result of his reliance on his financial advisor.

Lessons Learned
Although one should never depend upon Treas. Regs. Section 301.9100-3 relief, this PLR provides some insight as to when such relief can be granted.  It’s also a good reminder of the power of the recharacterization provisions.  Although, in this instance, the recharacterization provisions applied when the taxpayer's modified AGI exceeded $100,000, there’s nothing to prevent a recharacterization if the Roth IRA falls in value after the conversion or if the taxpayer's financial circumstances change significantly. 

The primary benefit of recharacterizations is that the taxpayer can assess the post-conversion returns and determine if the conversion was worthwhile in the first place.  For example, let’s assume a taxpayer converts $100,000 to a Roth IRA in 2012.  Now let’s assume that the value of the Roth IRA is $80,000 in March 2013.  In this case, the taxpayer would simply recharacterize the conversion by moving the entire $80,000 Roth IRA back to a traditional IRA on or before the time he files his 2012 individual income tax return.  The effect of the recharacterization is that the taxpayer won’t be taxed on any of the $100,000 original conversion, because he recharacterized the entire amount back to a traditional IRA.

The 2012 tax year is the perfect time to take advantage of converting to a Roth IRA before income tax rates go up in 2013.  In many cases, taxpayers can easily achieve a “heads I win, tails I tie” situation, especially those who have sufficient wherewithal outside of their IRAs to pay the income tax liability on a Roth IRA conversion.  In most cases, all post-conversion income and growth can be sheltered from future income tax, while any post-conversion losses can be made less painful by recharacterizing the prior conversion.

This post has been brought to you by The Ultimate Estate Planner, Inc., providing practical, tested and proven technical and marketing products to help estate planning professionals throughout the country build their practices.  If you are interested in a personal consultation for your office regarding how to make your office more efficient and how to improve the productivity of your attorneys, staff and advisors, contact us today at 1-866-754-6477 to find out how you can receive a free 30 minutes consultation.  Connect with us on Facebook, Twitter or LinkedIn.

Photo Credit: under30ceo.com
Source: WealthManagement.com

Join us next Thursday, September 6th for a special 60-minute teleconference with nationally renowned CPA, Robert S. Keebler, on the topic of Portability and the New Form 706.  For more information and to register, click here.

Last Friday, the Internal Revenue Service released a draft of the new Form 706.  For the first time, the form addresses the issue of portability of a deceased spouse's unused estate and gift tax exclusion amount by providing an option for the executor to opt out of electing portability of the unused portion.

Under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, a surviving spouse can increase his or her applicable exclusion amount by the amount of the unused exclusion amount of the deceased spouse, provided that the deceased spouse died after 2010. This provision is currently scheduled to expire after on December 31st of this year.  This election is made by the executor of the deceased spouse’s estate. Form 706 must be filed to make the election, and even estates that would not otherwise be required to file Form 706 must file in order to make the election.
 
Because filing Form 706, by default, causes the election to be made, the draft Form 706 provides a mechanism for estates that are required to file because the value of the gross estate exceeds the applicable exclusion amount or for another reason to opt out of the election.

Again, we will be covering the new Portability Rules and this new Form 706 on our teleconference next Thursday, so be sure to register right away!

This post has been brought to you by The Ultimate Estate Planner, Inc., providing practical, tested and proven technical and marketing products to help estate planning professionals throughout the country build their practices.  If you are interested in a personal consultation for your office regarding how to make your office more efficient and how to improve the productivity of your attorneys, staff and advisors, contact us today at 1-866-754-6477 to find out how you can receive a free 30 minutes consultation.  Connect with us on Facebook, Twitter or LinkedIn.

Photo Credit: blog.aicpa.org
Source: Journal of Accountancy

With the Hollywood star’s $250-million-plus fortune already locked up, high-profile lawyers stress sensitivity to residency and religion as key differentiators for celebrity clients looking for discreet resolutions.

While Katie Holmes and Tom Cruise raised plenty of eyebrows during their five-year marriage,  their divorce is practically a model for advisors who want to shield their clients’ feelings while protecting their wealth.

It only took 11 days for the lawyers to reach a settlement, saving both stars the expense, trauma and risk of career blowback of an extended or messy public custody fight.

And thanks to the smart decision to file in New York instead of Hollywood, Katie’s people managed to keep the details of how she’ll raise Suri almost entirely out of the public eye.

“Unlike California, divorce filings are not open to the public,” notes Manhattan family attorney Daniel Clement. “I suspect the main reason that Holmes filed in New York rather than California is privacy.”

Getting that privacy evidently mattered to Katie and her advisors made sure she got it.

To get a divorce in New York, she needed to establish at least two years legal residence on the East Coast, so she’s been working toward this — and documenting her visits — since at least 2010.

The minute she ran out the clock, she filed the papers, found another apartment and enrolled Suri in an elite local school.

Location is everything

Other than confidentiality and the right to petition New York courts if something goes wrong with custody of Suri, shifting venues didn’t really buy Katie much.

Despite speculation elsewhere, New York has finally joined the rest of the country as a no-fault state, lawyer Daniel Clement says, so it didn’t really matter who the aggrieved party was.

Both states also divide marital property equitably, which would leave Katie with the same split of the couple’s — mostly Tom’s — wealth either way.

But it’s not hard to imagine scenarios where a change of residency makes a huge difference for a client who may benefit from a different spousal division of the assets.

Smart premarital planning means smoother divorces

For Katie, marital property would be moot even if she didn’t have the luxury of picking an address from which to file the papers.

From all reports, Tom’s people got her to sign a prenuptial agreement that renounced her right to seek half of the roughly $250 million he amassed as the world’s top-paid movie star.

Simply having that deal in place puts them miles ahead of plenty of messy celebrity splits right there.

Furthermore, while the gossip columnists have speculated about the agreement awarding Katie $40 million to $50 million, her people insist that she walked away without taking a dime from Tom.

Why so magnanimous? Granted, Katie was a TV star in the ‘90s and has appeared in some movies, but at a measly-for-Hollywood $30,000 an episode, she’s not exactly a billionaire in her own right.

Unless she made some extremely good investments, estimates of her personal net worth being around $25 million are probably inflated as a matter of pure career earnings.

However, the $15 million Tom’s lawyers reportedly put in a trust for her and Suri before the wedding probably have something to do with it.

Remember, a substantial transfer of assets from the rich partner traditionally makes the contract go down a lot easier — and Katie’s father just happens to be a divorce lawyer, so he knows the drill.

Handing his fiancee $15 million five years ago likely saved Tom $120 million or more, not to mention the airing of whatever secrets he might have in court.

That works out for both parties, says Daniel Clement.

Otherwise, “as part of the divorce and the custody fight, Holmes and Cruise would have to expose not only details about their finances, but intimate details of their lives,” he says.

On the other hand, Tom has reportedly agreed to pay $10 million in annual child support for the next 12 years — a lot more than the normal New York cap of $23,000 a year — so it all comes out in the end.

She’s set up for the rest of her life even if she never works again. And she has no motive to complain.

Religion and other intangibles

With the money questions sewn up in advance, the lawyers got to spend those 11 days ironing out how Suri will be raised and how the stars would characterize the break-up to their fans.

“It’s clear that the spiritual upbringing of the couple’s only child Suri played a central role in the pair’s split,” says New Jersey divorce lawyer Bari Weinberger.

Katie has gone back to Catholicism and has signed Suri up for a church school. That’s controversial for Tom’s friends in the Church of Scientology, to say the least, but the religious terms of the settlement are under wraps.

Weinberger sees a lot of these “intangibles” play a huge role in divorce proceedings, so she’s sure to raise emotional and spiritual concerns with clients.

After all, couples may fight over money but it rarely makes them break up.

She’s even worked with clients to get them back together with their spouses when the emotional problems weren’t really as insurmountable as they thought.

That probably wouldn’t have worked for Tom and Katie, but your clients might have better luck.

This post has been brought to you by The Ultimate Estate Planner, Inc., providing practical, tested and proven technical and marketing products to help estate planning professionals throughout the country build their practices.  If you are interested in a personal consultation for your office regarding how to make your office more efficient and how to improve the productivity of your attorneys, staff and advisors, contact us today at 1-866-754-6477 to find out how you can receive a free 30 minutes consultation.  Connect with us on Facebook, Twitter or LinkedIn.

Source & Photo Credit: Scott Martin / TheTrustAdvisor.com

The Supreme Court’s decision upholding the Affordable Care Act confirmed that taxpayers whose income exceeds a threshold amount will be subject to a 3.8% Medicare surtax on net investment income, effectively raising their marginal income tax rate. However, whether the Bush era tax cuts will be extended and, if so, for whom, remains an open question. In light of this uncertainty, CPAs may want to start planning for possible 2013 tax increases now, particularly for clients who will benefit from transferring assets to family members, decisions that can take time to make. Download a free Medicare surtax chart from Robert Keebler, CPA, and listen to his recent podcast on how to plan for the Medicare surtax below.

Robert S. Keebler, CPA, MST, DEP, Partner, Keebler & Associates, LLP. Bob is a 2007 recipient of the prestigious Distinguished Estate Planners award from the National Association of Estate Planning counsels. From 2003 to 2006, Bob was named by CPA Magazine as one of the top 100 most influential practitioners in the United States. He is the past Editor-in-Chief of CCH's magazine, Journal of Retirement Planning and a member of CCH's Financial and Estate Planning Advisory Board. His practice includes family wealth transfer and preservation planning, charitable giving, retirement distribution planning, and estate administration.  

This audio webcast was originally recorded June 29, 2012.

Transcript:

On behalf of the PFP Division of the AICPA, this is Bob Keebler, bringing you planning strategies in the wake of the Supreme Court's decision on health care.

Earlier today the Supreme Court ruled that the health care bill was constitutional.  This holding means that beginning January 1st, 2013, a Medicare payroll tax of 0.9% will be imposed on individuals with income exceeding $200,000 and married couples with income exceeding $250,000.  Also beginning in January is a 3.8% surtax which applies to the lesser of net investment income or the amount by which AGI exceeds $200,000 for individuals and $250,000 for married couples.  To reiterate, the surtax applies to all investment income if the taxpayer's AGI is above the threshold.

The mandate or penalty is scheduled to take effect January 1st, 2014.  It will impose an additional tax on those who cannot secure insurance.  Beginning in 2014, the annual penalty will be $95 or 1% of income, whichever is greater.  This will eventually rise to $695 or 2.5% of income by 2016.  Families will have a maximum flat penalty of $2,085, but will still owe 2.5% of income if that is greater.

In 2012, all W-2s will include the value of health insurance provided to employees.  Effective in 2011, the penalty on non-qualified distributions from HSAs will be doubled to 20%.  For 2013, the itemized deduction floor on medical expenses will increase to 10% of AGI.  Beginning in 2018, the Cadillac tax will be implemented.  This will be a 40% excise tax on the portion of health care plans that exceed $10,200 for individuals or $27,500 for families.

Beginning in 2014, a refundable health tax credit will be available to help individuals with low income to purchase coverage.  Also beginning in 2014, a nondeductible fee of $2,000 per employee will be imposed on business which do not provide adequate coverage.  The first 50 employees are not counted under this threshold.

Also, recognizing there's a lot to learn, Speaker of the House John Boehner has promised to repeal what's left of Obamacare so that all these new rules we're learning will never be implemented.

Perhaps the most important part of the Court's decision is that the 3.8% Medicare surtax will stand.  This means beginning on January 1st, 2013, a new 3.8% Medicare surtax will apply to all taxpayers whose income exceeds a threshold amount.  This new surtax will, in essence, raise the marginal income tax rate for affected taxpayers.  For example, beginning in 2013, a person in the 39.6% bracket -- i.e., the highest marginal tax rate that could be in effect in 2013 -- would increase to 43.4%.  So what we're looking at basically across the board is an increase on investment income of 3.8%.

Now, there's a little bit of a calculation that goes into this.  The new Medicare surtax is equal to 3.8% times the lesser of the following: net investment income or the excess of modified adjusted gross income for such a taxable year over a threshold amount.  Now, let's talk about what those threshold amounts are.  Threshold amount is going to be $250,000 for married couples and $200,000 for individuals.  But for estates and trusts, the threshold amount will be right around $12,000.  So for estates and trusts, immediate steps are needed to plan for this.

So the new Medicare surtax is equal to 3.8% times the lesser of, in the context of an estate or trust, undistributed net investment income for such taxable year or the excess of adjusted gross income for such taxable year over the dollar amount of which the highest bracket begins.  So basically, once you hit $12,000 of income in a trust, give or take a little bit there, you're going to be subject to a 3.8% surtax.  So especially for trusts that are accumulating prince -- principal and income, and they're not making distributions, those trusts are going to be hit with the 3.8% surtax.

One very critical thing for most of us to pay attention to is the year-end we choose for individuals that died in 2011 or 2012.  By selecting the right year end we may be able to stretch out the rule so that the 3.8% surtax doesn't apply until December 1st, 2013.  You would do that by picking a November 30th, 2012, year end, and then the next year starts on January 1st, 2012, and this tax only applies to years that begin on or after January 1st, 2013.  So we can stretch that out a little bit.

Now, there's three critical terms we need to understand when we're working with the 3.8% Medicare surtax: net investment income, the threshold amount and modified adjusted gross income.  So those are the keys.  Now, net investment income is defined as interest, dividends, annuities, rents, royalties, income derived from a passive activity and net capital gains.  It doesn't include wages.  It doesn't include distributions from IRAs and qualified plans.  It doesn't include self-employment income or the gain on an active sale of a trade or business.  There'll be a lot more to learn, but this is a quick overview.

Now, I want to come back to these threshold amounts.  Basically, in 2013, the threshold amount for single taxpayers will be $200,000, married 250, estates and trusts $11,650.  The key is modified adjusted gross income.  Basically, the front page of the return is going to give us our modified adjusted gross income.  Modified adjusted gross income means adjusted gross income, basically line 37 plus that foreign earned income that's been excluded from income, and that's going to be our adjustment.

Okay, now, there's a number of examples.  I've provided to everyone a chart which is called Understanding the Health Care Surtax.  From the front, we go through the law, but on the back we have 23 separate examples to help you get your arms around how this works.  I would encourage all of you to study that chart.  It's a quick read.  Within an hour, I think you'll have a real good feel for how this is going to apply in your practice.  Let me give you a couple of quick examples, just so you can start to think like this.

John, a single taxpayer, has $100,000 of salary and $50,000 of net investment income for the year.  A 3.8% surtax would not apply, because his modified adjusted gross income is less than $200,000.  Now, Linda, a single taxpayer, has $225,000 of net investment income, no other sources of income.  The 3.8% surtax will only apply to $25,000, so $200,000 of threshold, $225,000 of net investment income minus the $200,000 threshold means that $25,000 will be exposed to the 3.8% tax.

Terry and Tina, married filing jointly, have $300,000 of salaries and absolutely no investment income.  The 3.8% surtax will not apply to them because they have no investment income.  Now, same case, except Peter and Paula have $400,000 of salaries and $50,000 of net investment income.  They're going to pay the 3.8% surtax on $50,000.  So basically, because they're over the threshold amount, they have to pay the 3.8% surtax on their investment income.

So this is going to affect a lot of taxpayers.  It's also going to affect many estates and trusts, okay?  So that's something we have to understand.  Now, the strategies planning around the surtax, municipal bonds, tax-deferred annuities for people that are still working, life insurance, rental real estate, where you have depreciation.  Life insurance is going to work because life insurance is tax-free when you die, obviously.  Very effective for bypass trusts.  Life insurance also works because I can borrow my principal and not have to pay tax.  Oil and gas investments will continue to work because of the large IDC deductions you receive up front and because you have depletion allowances along the way.  Basically, it's our tried and true tax shelters that are going to continue to work.

But we also want to focus on the choice of accounting years for estates and trusts, and very much we're going to be focused on the timing of estate and trust distributions and how that will play into the surtax.  So when you work through this, there is a lot to know.  And basically we're all -- every time a client asks you a question on a going-forward basis, you're going to have to measure that question not only from an income tax perspective, but looking at the AMT results, and then finally looking at what's going to happen under this new surtax.  So again, a lot to cover.  And let's jump back in, though, and let's look at some strategies.

Okay, so one of my biggest strategies is going to be life insurance.  Another big strategy will be what we call the leapfrog annuity.  Using annuities to shelter income -- say, for a surgeon that's 55 years old, he's still working, but he has a lot of conservative investments, he might use an annuity to leapfrog until he retires.  Transfer that income out over his wages so that all that ex-passive income subject to a surtax does not hit his tax return until he's fully retired and no longer has those wages.

When we're planning around to reduce modified adjusted gross income, not just investment income.  Our Roth conversions will continue to be very popular.  Charitable remainder trusts will -- there will be a renaissance in charitable remainder trusts as people sell positions and securities because they're not going to want to sell all in one year, or they might drop it into a charitable remainder trust and then take distributions out over a 15- or 20-year period of time.

I think non-grantor charitable remainder trusts will also have some efficacy, and installment sales will come back more than we've seen in the past, because instead of selling a building, an apartment building in one year and having a $2 million gain, I might spread that gain out over ten or 15 years through an installment note.

One of the things on the Roth IRA we have to consider is Roth IRAs will probably be looked at as a way around the surtax, because they will reduce modified adjusted gross income.  So they're going to put a dent in modified adjusted gross income.  I think there's a lot to cover here, but we really want to take a look at how Roth IRAs play into your wealthier clients that are going to have major-league surtax problems.

Okay, now again, charitable remainder trusts, why would we do that?  We would to the charitable remainder trusts because we will avoid recognizing the income of one year, but maybe spread it over a ten- or 15-year term for the whole entire charitable remainder trust.  When you run the math, typically it's hard to make a charitable remainder trust work without a charitable intention.  This may bring that much closer together as a decision.  When you're designing your charitable trusts, remember, you can do these annuity trusts or charitable remainder unit trusts.

So there's truly a lot to cover, okay?  There's truly a lot to cover.  I think we're just starting here, and I'm hoping that my chart will help all of you get your arms around this.  Talk to your clients about this.  You -- We are at a tremendous place in our history, where really in the next six months you can probably make more impact than you ever could in your career.

On behalf of the PFP Division of the AICPA, this has been Bob Keebler, and thank you for joining us.

This post has been brought to you by The Ultimate Estate Planner, Inc., providing practical, tested and proven technical and marketing products to help estate planning professionals throughout the country build their practices.  If you are interested in a personal consultation for your office regarding how to make your office more efficient and how to improve the productivity of your attorneys, staff and advisors, contact us today at 1-866-754-6477 to find out how you can receive a free 30 minutes consultation.  Connect with us on Facebook, Twitter or LinkedIn.

Source: Keebler & Associates, LLP, Robert S. Keebler, CPA, MST, AEP (Distinguished)

For those of you in the southwestern region of the U.S., we thought you may be interested in attending this upcoming event held by SCI (Southern California Institute).

California Forum for Independent Collaborative Advisors

This California educational event concentrates on the new topics that have materialized in California’s laws, and new wealth planning strategies and techniques developed over the previous year. This condensed two-day program presents a variety of topics for Advisors, and provides tools to help them protect their clients and recognize possible liabilities.

Click Here to View Agenda 

Monday, July 23rd

12:00 Registration

12:30 - 5:10 General Sessions; Topics to Include:

• A New Way to Attract Business Owners
• America's New Gold Rush: Working with Affluent Foreign Nationals
• Your Client Will Run Out of Money Without Proper Distribution Planning
• Understanding the Liabilities for Business Owners as Fiduciaries
• Today’s Real Estate Market – The Values of Plans for My Home, My Residential Investment Property, and those “Other Investment Classes”

6:00 – 9:00 Poolside BBQ

Tuesday, July 24th

7:30 - 8:00  Breakfast and registration

8:00 - 4:00  General Sessions; Topics to include: 

• Captive Insurance Companies – Opportunities and Hazards
• Is Life Insurance Really Only About the Illustration of a Bucket, Two Graphs, and Five Needs?
• Secrets from the Boardroom? Trusts & Public Mutual Funds
• Realities and Benefits of Using Alaska Trusts
• Social Media - Creating Your Online Presence and Keeping Compliant?
• Afternoon of Marketing with Mark Merenda

Cost: $200

This post has been brought to you by The Ultimate Estate Planner, Inc., providing practical, tested and proven technical and marketing products to help estate planning professionals throughout the country build their practices.  If you are interested in a personal consultation for your office regarding how to make your office more efficient and how to improve the productivity of your attorneys, staff and advisors, contact us today at 1-866-754-6477 to find out how you can receive a free 30 minutes consultation.  Connect with us on Facebook, Twitter or LinkedIn.