Income Tax Planning

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.

Review Your Will, Living Trust and Plan in 2013. Congress has just concluded tax legislation as part of its effort to avert the fiscal cliff. While the Senate called it the “American Taxpayer Relief Act of 2012,’’ likely it will have a 2013 moniker. While the 157 pages have not been analyzed yet, a number of key points may be made about the impact on estate planning, bearing in mind that final legislation, interpretations, and more are to follow. For those who think estate planning no longer is relevant because they are safely under the $5 million inflation adjusted exemption amount, think again. Estate planning never was only about federal estate taxes. Asset protection, succession planning, insurance and retirement planning, and much more, remain relevant. For those taxpayers, the good news is that the focus of planning can now more securely be on those issues. For wealthier taxpayers thinking they’ve finished planning in 2012, think again. There are three more “fiscal cliffs” coming up and Congress will have to deal with other aspects of deficit reduction, which may further impact estate planning for the ultra-wealthy. True, you’ve been given a bit of breathing room on planning, but don’t squander it. The bottom line for everyone is that now is the time to act, but how you should do so has be decisively and perhaps permanently affected but the recent tax legislation.

All Taxpayers. Many taxpayers’ initial reaction to the 2013 tax law is that nothing needs to be done. Moderately wealthy taxpayers may believe, since the federal estate tax will not apply to them, that no planning is necessary. Wealthy taxpayers may think they completed all of their planning in 2012. But, just like those late night TV infomercials, “There’s more!”

• FLPs and LLCs. Family LLCs or partnerships (“FLPs”) will continue to be vital to control assets, protect assets from creditors and irresponsible heirs. Even if the federal estate tax benefits wane, these entities should remain the cornerstone of many plans. But given the restrictions on itemized deductions, and that it is pegged at a lower income level then the maximum income tax rates, many high income taxpayers will find deductions disappearing. For these taxpayers, creative and careful use of LLCs and FLPs to shift income (subject to the family partnership rules) and shift qualifying deductions to their LLC or FLP, may provide valuable income tax benefits. Thus, LLCs and FLPs that had been intended for estate tax discounts may morph into income tax planning tools. The asset protection and control benefits will continue to be useful regardless of the tax changes. This will continue to make FLPs and LLCs, when properly planned for in the new tax environment, great tools for a broad cross-section of taxpayers.

• Itemized Deductions, Residency and Domicile. The restrictions on itemized deductions will push wealthy taxpayers who can shift their domicile and residency to a no or low tax state to do so with greater vigor. This will not only save state estate taxes and property taxes for which deductions may be fare more limited, but it will have a significant impact on where you should revise and sign new estate planning documents.

• Roth Conversions. Under prior law there are only a limited number times that you can roll a 401(k) or certain defined contribution plans into a Roth IRA. Specifically, unless you changed jobs, retired or reached age 59 ½, rolling into a Roth was not allowed. Now, however, conversion will be permitted for anyone. This will require you to pay current income taxes on the value of the plan rolled over, but perhaps that was the point. It may generate income tax to help the deficit. Why would any taxpayer undertake this type of planning? Simply because in the right circumstances it can be quite valuable. If you fear greater tax rates in the future (not so likely at this point) it would be advisable. If you do convert likely you will want income tax projections to try to minimize rate bracket creep from the additional income. A meaningful advantage for some taxpayers will be that a Roth has no required minimum distributions so that the money might stay protected from creditors and claimants. If your state law (check first) protects Roth funds this may prove an advantageous asset protection benefit from some. For ultra-high net worth clients rolling into a Roth and paying income tax may reduce your taxable estate.

Moderate Wealth Taxpayers. For those who are wealthy, but not super-wealthy, what might appear to be a permanent $5 million exemption makes the confiscatory estate tax possibly a worry of the past. The combination of the $5 million estate tax exemption, inflation indexing, and the ability of spouses to use their deceased spouse’s exemption under the portability rules, makes federal estate tax worries academic for the vast majority of Americans. Even more so, it appears that there is some permanence and confidence to the new $5 million exemption level so the worries that should have had moderate wealth taxpayers planning until now (but really had most stuck in the mud and not planning) are changed. But plenty of other worries remain. Estate planning is just as important for you, only it will be different.

• Review and Revise. The prudent step to take is to re-evaluate your estate plan and documents. Since the estate tax exemption remains at $5 million, to be indexed for inflation, most wealthy Americans will remain below the federal tax threshold. For most taxpayers who have deferred planning waiting for more estate tax certainty, wait no more. Review, revise and update your plan. However, don’t forget the lessons of the estate tax roller coaster ride of the past few years: draft and plan flexibly.

• Will Update. With the estate tax exemption fixed at $5 million, it may significantly affect how your assets are distributed under old wills and revocable trusts. Too many people have deferred updating their documents for years because of the uncertainty in the law. If you were one of those that ignored estate planning since the 2010 Tax Act first raised the exemption to $5 million thinking that estate planning didn’t apply to you, now that there seems to be some permanency, move forward on updating your planning. With the uncertainty apparently resolved, stop delaying. Protect your goals and loved ones. If a new estate tax law is passed, which is what most tax professionals anticipate, your will, living trust and overall plan will certainly need to be reviewed and possibly updated. Most wills and revocable trusts had plans that are formula based. Make sure the formulas work in the new tax environment. Many states still have estate taxes so you need to be sure that the formulas not only work in the current $5 million federal environment, but in the context of any state estate tax you might face.

• 2012 Remorse. If you’re having buyer’s remorse because the exemption will remain high, be mindful that the return of inflation, increasing longevity and other factors could all work to make your planning prove invaluable. So don’t unwind your plan. Further, no one knows which way the fickle political tax winds will blow in the future. It may not have been coincidence that on New Year’s Eve CNN coverage bounced from interviews of Honey Boo Boo to updates on Congressional fiscal cliff matters. It is also important to recognize that most sophisticated trust plans provide a range of valuable benefits, which are in addition to federal estate tax benefits. The odds are that your plan, even if the exemption stayed the same, is well worthwhile. See “Reconsidering Irrevocable 2012 Gifts,” below.

• Life Insurance. If you have owned life insurance for the purpose of paying an estate tax you will never face, don’t cancel the policy before having it evaluated. A good policy might make sense to retain as a ballast against other investments you hold, or to secure other purposes. If that policy is held in an irrevocable life insurance trust, after you have your insurance consultant review the policy, have your estate planner review the trust. Often there is tremendous flexibility in an insurance plan (both the policy and trust) that might facilitate your remaking a plan that was intended to pay estate tax into a new and more useful tool. If you held life insurance inside a pension plan, your advisers may have cautioned you to remove it because of adverse estate tax consequences. If your estate is safely below the new estate exemption, it may no longer matter. If you have an old insurance trust it undoubtedly has annual demand (so called “Crummey” powers) that make the gifts you make to the trust qualify for the annual gift tax exclusion. If your estate, inclusive of insurance and likely future appreciation, will remain below the threshold, you might not want to bother issuing these annual notices. Don’t simply ignore them. Your insurance trust provides valuable asset protection benefits as well and ignoring its terms may undermine that protection. See “Irrevocable Trusts,” below.

• Irrevocable Trusts. You should evaluate any existing irrevocable trusts. If you had a trust, for example for children or grandchildren to hold annual gifts, with the possible permanency of the $5 million exemption these may no longer be needed for estate tax purposes. However, before you simply cancel and distribute the funds, consider the impact of an outright distribution on divorce of your heirs/beneficiaries. The bottom line is that all irrevocable trusts, just like the insurance trusts discussed in the preceding section, should be reviewed in light of the new estate tax paradigm, and determine how they can be modified, or even eliminated, to provide you the best result in the current environment. Some irrevocable trusts may permit an independent trustee to distribute “so much or all of the principal….” This type of clause may suffice to distribute the trust to current beneficiaries and terminate the trust. Caution, however, is in order. What of contingent or other beneficiaries? Will terminating a trust that is no longer needed to address estate tax issues simply put those assets in harm’s way in the event of a recipient beneficiaries divorce? There may be other options to clean up an old trust and revitalize it. See “Reconsidering Irrevocable 2012 Gifts,” below.

Ultra-High Net Worth Taxpayers. The $5 million exemption is positive news, but relative to the size of your estate the $3.5 million exemption initially proposed by President Obama compared to the $5 million compromise is not significant to you. The 40% maximum tax rate is higher than 2012, but much lower than it could have been. That is great news, but a 40% rate can still decimate a closely held business, or undermine wealth accumulation goals.

• It Ain’t Over. With Congress having more bites at the tax apple in coming rounds of deficit reduction negotiations, those with ultra-high net worth that think they can breathe a sigh of relief, think again. Restrictions on grantor retained annuity trusts (“GRATs”), valuation discounts, and perhaps even on excluding grantor trusts from your estates, may all be up for grabs in future legislation. The fact that these matters appear not to have been addressed in the current legislation may only be due to time constraints. These could all show revenue additions to the federal budget part of future deficit reduction activities. Given that the estate tax exemption is now an inflation indexed $5 million, doubled for married couples because of portability, there may be little resistance to these changes as they will only affect a tiny fraction of the wealthiest Americans.

• Finish a Good Thing. Consider “topping” off gifts to GST exempt grantor trusts that you started in 2012. Many of these trust plans fell short of the $5 million gift goal because time was too limited to complete all desired transfers. Use the recent legislation as a reprieve to complete the transfers of as much as you can to your trusts.

• Plan Before the Next Adverse Tax Change. Take advantage of this current window of opportunity to consummate note sale transactions and other steps to shift greater future values into protective trusts, and freeze the value of your remaining estate while you can. The bad news is that a 40% tax rate is very high, and if your estate is, or will be, well in excess of the $5 million inflation adjusted exemption, you should take maximum advantage of sophisticated estate freeze techniques before Washington deficit cutters attack them. If you completed sophisticated 2012 trust planning you may have the estate planning infrastructure in place to complete more planning with modest cost and effort. If your irrevocable trusts were created as grantor trusts in states with favorable trust laws, they may be just what is needed to complete a sale transaction (or perhaps an additional sales transaction) now. If you had costly appraisals done in 2012 if you make additional transfers of the same assets (e.g., selling interests in a business that you made a $5 million gift of in 2012) you may be able to use the same appraisal report.

Asset Protection Planning. Whatever happens in Washington, it will have no impact on the litigious nature of our society. Use the $5 million exemption to implement (or if you started in 2012, to continue to implement) asset protection planning. Don’t dismantle existing family partnerships or LLCs, use them as asset protection tools, even if the discounts no longer affect your planning. Use the newly liberalized rules on Roth conversions to convert retirement assets into Roth IRAs. Roth IRAs, in contrast to regular IRAs, have no required minimum distributions, so assets can remain in the protective Roth envelope for as long as you wish. So long as your state law provides creditor protection for Roth IRAs, this can be a simple asset protection homerun.

Divorce Protection Planning. Whatever changes affect the tax law, the reality of a high divorce rate will not change. Too many moderate wealth taxpayers will fall into the “gee I can get a simple will,” attitude because “I won’t face an estate tax.” But the 50% purported oft quoted divorce rate can decimate an estate to a more significant degree than a 40% estate tax rate. And, unlike the estate tax, the divorce courts won’t give your heir the first $5 million free of claims. All assets might be at risk. So, regardless of whether estate taxes will ever be a concern, you should almost assuredly use similar trust planning for heirs to protect their assets from the ravages of divorce.

Income Tax Planning for Most Income Taxpayers. For most Americans the new tax law effectively eliminates the worries most Americans will ever have about becoming ensnared by the Alternative Minimum Tax (“AMT”). It also makes permanent the tax cuts enacted as part of the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (“JGTRRA”). This means, for most Americans, the prior tax rate brackets of 10%, 15%, 25%, 28%, 33% and 35% remain.

Income Tax Planning for High Income Taxpayers. Income tax planning will become the new estate planning for many moderate wealth taxpayers. For those who had previously been more worried about estate tax, income tax worries may become paramount. While most Americans are breathing a sigh of relief that the Bush era tax cuts did not end for them (although they are struggling with a not insignificant payroll tax increase), for high income taxpayers a combination of higher rates and phase out of itemized exemptions will create significantly more tax cost. When this is combined with the 3.8% tax on passive investment income, the overall income tax costs are pretty substantial.

• Higher Income Tax Rate. A new 39.6% tax bracket has been added. This higher rate will apply to those earning over $400,000 for single taxpayers, $425,000 for head of household taxpayers, and $450,000 for married taxpayers.

• Capital Gains. A new higher 20% capital gains rate will apply to capital gains and dividends at the same threshold the higher 39.6% rate above will apply. For middle income taxpayers the 15% rate is retained and for taxpayers in the lowest 10% and 15% brackets a 0% rate will apply. See the discussion about using FLPs and LLCs to shift income.

• Medicare Tax. Starting January 1, 2013 a 3.8% Medicare tax will apply to net investment income. Wages are subject to a 2.9% Medicare payroll tax. Workers and employers each pay half, or 1.45%. The Medicare tax is assessed on all earnings or wages without a cap. Starting in 2013, a 0.9% Medicare tax will be imposed on wages and self-employment income over $200,000 for singles and $250,000 for married couples. IRC Sec. 3101(b)(2). That will make the marginal tax rate 2.35%. Under 2012 law only wages/earnings were subject to the Medicare tax. Starting January 1, 2013 a 3.8% Medicare tax will apply to net investment income if adjusted gross income ("AGI") is over $200,000 for single taxpayers or $250,000 on a joint tax return. IRC Sec. 1411. The lesser of net investment income or the excess of modified adjusted gross income (“MAGI”) over the threshold, will be subject to this new tax. Investment income derived as part of a trade or business is not subject to the new Medicare tax on investment income unless it results from investment of working capital.

• Itemized Deductions. Personal exemptions and itemized deductions will be phased out at new thresholds: $250,000 for single taxpayers, $275,000 for heads of household and $300,000 for married taxpayers filing jointly. Note that every tax rule has different income thresholds. This was certainly intentional in that the Republicans can claim partial victory by having kept “tax increases” to taxpayers making over $400,000 single and $450,000 married, when the reality is that, as the itemized deduction phase out proves, the tax increases occur at lower levels. From a planning perspective, having different thresholds for almost every tax benefit/reduction makes planning very complicated. Having rules of thumb as to what level of income triggers tax implications won’t be practical.

• Medical Expenses. Deductions for certain medical expenses will be reduced, and for many eliminated. Under prior law you could only deduct medical expenses to the extent exceed 7.5% of adjusted gross income (AGI). This restriction is in addition to the others that limit the tax benefits of itemized deductions, above. Starting with 2013 you’ll only be able to deduct medical expenses as an itemized deduction if they exceed 10% of your AGI. IRC Sec. 213.

• FLPs and LLCs. The use of family partnerships and LLCs to shift income will take on new importance for some families.

• Minimizing Higher Capital Gains Taxes. Charitable remainder trusts (“CRTs”) had fallen into disuse because of the low capital gains rates. The new tax rate structure should increase the use of CRTs to minimize or defer capital gains taxes for those selling businesses or valuable assets, such as a large concentrated stock position. Better coordinating the harvesting of gains and losses to minimize the now higher income tax rates will have increased importance. Since many wealthy taxpayers created one or more complex grantor trusts (trusts on which they remain liable for the income even though the earnings remain in the trust) the “pots” over which the harvesting will have to be coordinated will be broader.

Trust Income Tax Planning. Planning for trusts and estates to address the higher rates and compressed brackets, and timing distributions to beneficiaries to minimize overall trust/beneficiary tax burdens, will take on new importance and complexity. It may even change historical distribution patterns for some trusts.

Understanding Your 2012 Planning. Given the incredible sophistication and highly technical nature of much of the better 2012 planning, it is advisable to review the planning and documentation you implemented in 2012 and be certain you and the various individuals named in your plan (trust protector, individual trustee, loan director, investment trustee, etc.) all understand their respective roles. Ideally, a meeting with all these people present to review the trust document terms that relate to operations should take place.

2012 Follow Up. 2012 planning will require follow up and review of critical steps if it is to succeed. Consider the following:

• Loose Ends. No plan completed under the pressure of 2012 deadlines and the veritable tidal wave of work every adviser is facing will be free of loose ends, typographical errors or the need for other “housekeeping.” The way to address these potential loose ends is to review all the documents, calculations and organize them for future follow up.

• Additional Legal Documents. Most plans will require additional legal work that was deferred until after the 2012 crush as not being essential to complete by year end. For example, it was common when interests in an entity, such as a corporation or limited liability company were given or sold to a trust that the legal work completed in 2012 was limited to the assignment of the interest involved. The shareholders’ agreement or operating agreement and other ancillary documents may remain to be completed. Stock certificates may not have been issued. Since the focus for many transactions was completing the essentials of a gift or sale before year end, in many cases most other documents and steps were left for follow up after year end. You should, with your advisers, endeavor to identify any such missing documents or incomplete steps and set up meetings or milestone dates to assure that they will be addressed and not overlooked.

• Gift Tax Returns. Importantly, for any significant 2012 planning a gift tax return will have to be filed in 2013 reporting the 2012 gifts. There are disclosures and steps which must be taken on gift tax returns that are critical to the success of your plan. Generation skipping transfer (“GST”) tax exemption, perhaps, should be affirmatively allocated to protect your 2012 gifts. In order to run the period of time during which the IRS can audit a gift tax return (“toll the statute of limitations”) your gift tax return will have to fully disclose all relevant information concerning a gift. This is referred to as “adequate disclosure.” This will require that your CPA will have to be provided with copies of legal documents your attorney created (or as discussed above, will still have to create), financial documentation corroborating values and transfers from your wealth manager, and complete appraisal reports (see below). Given the massive number of gift tax returns and the complexity involved your CPA might well advise that you extend the date of filing your 2012 gift tax return so decisions can be made once the law is known (e.g., late allocation of GST exemption). If you sold assets to a trust, even thought it was not intended to be a gift, such “non-gift” transactions are commonly reported on gift tax returns to run the period of time during which the IRS can audit the transaction. There are also a number of technical issues that your CPA may have to address when filing your gift tax return. If you are married can your spouse elect to “split-gifts” with you by treating your gifts as if ½ were made by him or her? Will this be advantageous if it is permitted? Etc.

• Income Tax Returns. Income tax returns will have to be filed in a manner that reflects the planning that was done. For example, if on November 1 you transferred 50% of your interests in what had been a single member (you were the only owner/member) limited liability company (“LLC”) to an irrevocable trust, the LLC would no longer be a single member disregarded entity but rather, in most instances, a partnership for income tax purposes. If you gave 25% of your 45% interest in a family S corporation to your trust on November 1, the income from the S corporation for the 2012 year will have to be allocated between you and the trust for the portion of the year you each owned that 25% transferred interest. There are a host of other steps your CPA may have to consider in light of 2012 planning.

• Grantor Trust Status. Many, perhaps most, trusts set up in 2012 were “grantor trusts.” The income of such trusts is reported on your return even though the earnings may be held in the trust. You should endeavor to have your CPA and wealth manager project the tax consequences in advance so that you can appropriately plan for the tax payments and future impact.

• 2013 Sale Transactions. Many people who started planning later in 2012 would have benefited from selling assets to their grantor trust, however, due to time constraints, many of these transactions were not completed. When evaluating possibly completing such transactions in 2013, watch the dates on appraisals. If too much time elapses the appraisals will be stale and new or updated ones will be required. Also, carefully monitor with your tax advisers how new law changes may affect the planning for such a sale.

• Reconsidering Irrevocable 2012 Gifts. If you have second thoughts or new concerns about the planning you finished in 2012, perhaps as a result of the contents of any new tax law, the flexibility of many trusts, the use of disclaimers (refusing to accept interests in a gift), some of the options on gift tax return decisions, decanting (pouring one trust into a new and typically better crafted trust), may all afford opportunities to adjust planning that you are not as comfortable with as you initially thought. This should be addressed with your advisers as early as possible in 2013. Make appointments now to meet with your CPA, estate planner, wealth manager, trust officer, insurance consultant and other critical advisers so you can address these points quickly. For example, if you accept the benefit of an asset, you may no longer be able to disclaim your interests in it.

• Appraisals. If you had an appraisal started in 2012 for your 2012 gifts or sales to trusts, be certain to follow up and obtain a final complete appraisal. Many appraisals were issued only as numbers with the full reports to be completed after year end. Your CPA will require a complete appraisal to file a gift tax return and you certainly want the detailed report for your records as well.

• Approvals. Third party contractual approvals were essential for many transactions. If you have not received them, you need to make a judgment call. Should you follow up now and get the approvals you should have had risking opening up a proverbial Pandora’s Box? You should also bear in mind that if approvals were required and not received, the IRS might argue that the lack of required approvals made the transfer incomplete.

• Defined Value Clauses. Many gifts and sales completed in 2012 were planned using a mechanism to reduce the risk of a tax being triggered if the IRS increases the value of the assets given (e.g., stock in a hard to value closely held business). Review with all of your advisers how these mechanisms should be handled post-transfer. For example, what should be reported on a Form K-1 for an S corporation if the actual percentage (number of shares) of stock cannot be known until an audit is finalized? Who votes the equity interests during the period before an audit occurs? Reasonably addressing these practical implications may be important to the ultimate success of the mechanism used.

• Distributions. Distributions from entities have to reflect the new ownership interests. Distributions from trusts must reflect the intent of the trusts. If a goal of a trust is to assure that the assets are removed from your estate, regular distributions might be used by the IRS to argue that you had an understanding with the trustee to receive distributions and serve as a basis of including the trust assets in your estate.

• Developing Case Law. It is not only major tax bills that are important to consider. Other laws can change that affect your planning. For example, some of the recent developments that affect self-settled asset protection trusts (trust you give assets to but remain a beneficiary of) might have you reconsider how certain aspects of such a trust might be handled. It might be feasible to disclaim certain interests in such a trust to enhance the likelihood of the trust being respected.

More Information. We have emailed to our data base a regular stream of planning materials. We have mailed numerous articles in hard copy to all clients that we can identify that engaged in 2012 planning. Our newsletter has for several issues addressed specific planning steps. In 2013, articles will address post-2012 planning and new developments in the estate tax laws. If you have not, or do not, receive these materials, or would like materials on a particular issue please email me shenkman@shenkmanlaw.com and I’ll send whatever materials we have that might help you.

Contact Us if We Can Help. We are here to help during throughout the uncertainty and changing estate planning environment. Let us know how we can assist you and your other advisers with reviewing or revising your will and planning, and in follow up on completing and implementing your 2012 planning. Please call or email at your convenience.

Also, you may be interested in our special 60-minute teleconference entitled, "Fiscal Cliff Legislation and What It Means for Your Clients" on January 4th or January 9th with Robert S. Keebler, CPA, MST, AEP (Distinguished).

ABOUT THE AUTHOR
Martin M. Shenkman, J.D., CPA, MBA

Martin “Marty” Shenkman, Esq., CPA, MBA is an estate planning attorney and Certified Public Accountant from Paramus, New Jersey. He received his Bachelor of Science degree from Wharton School, University of Pennsylvania 1977 with a concentration in accounting and economics. He received a Masters degree in Business Administration from the University of Michigan 1981, with a concentration in tax and finance.
Mr. Shenkman is a widely quoted expert on tax matters and is a regular source for numerous financial and business publications, including The Wall Street Journal, Fortune, Money, The New York Times, and others. He has appeared as a tax expert on numerous television and cable television shows including The Today Show, CNN, NBC Evening News, CNBC, MSNBC, CNN-FN and others. He is a frequent guest on radio talk shows throughout the country and has a regular weekly radio show on Money Matters Financial Network.

Mr. Shenkman is a prolific author, having published thirty-four books and more than seven hundred articles. Mr. Shenkman has served as contributing editor to a host of publications, including: New Jersey Lawyer, The Journal of Real Estate Finance, Real Estate Insight, Commercial Leasing Law & Strategy, The Journal of Accountancy, Real Estate Accounting and Taxation, Shopping Centers Today, and others.

Mr Shenkman is active in numerous charitable organizations, sitting on many boards and planned giving committees and lectures regularly for these and other organizations.

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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

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

In an effort to help fellow advisors better understand the 3.8% HealthCare Surtax, nationally renowned CPA, Robert S. Keebler, has issued the examples below to help you. 

• John, single, has $100,000 of salary and $50,000 of net investment income.
  • The 3.8% surtax would not apply (MAGI <$200,000).
• Mary, single has $225,000 of net investment income and no other income.
  • The 3.8% surtax would apply to $25,000 of income (excess of $225,000 MAGI over $200,000 “threshold amount”).
• Terry and Tina, married filing jointly, have $300,000 of salaries and no other income.
  • The 3.8% surtax would not apply (no net investment income).
• Peter and Paula, married filing jointly, have $400,000 of salaries and $50,000 of net investment income.
  • The 3.8% surtax would apply to $50,000 of net investment income (lesser of rule).
• Scott and Sarah, married filing jointly, have $200,000 of salaries and $150,000 of net investment income.
  • The 3.8% surtax would apply to $100,000 of income (lesser of rule excess of $350,000 MAGI over $250,000 “threshold amount”).
• Randy, a single taxpayer, age 69, has investment income of $200,000 and is not subject to the surtax. In the following year, Randy has an RMD from his IRA of $125,000.  In this case, $325,000 of MAGI exceeds the $200,000 threshold and $125,000 is subject to the 3.8% surtax.                
• The John Smith Trust has investment income of $51,000 and no distributions.
  • $39,800 of income ($51,000 - $11,200 top bracket amount) will be subject to the 3.8% surtax.
• David and Veronica, age 75, have pension and IRA income of $750,000, $25,000 of tax-exempt income and no taxable investment income.  The 3.8% surtax does not apply regardless of income because they have no net investment income. 
  • A Roth conversion will be surtax neutral. 
• Jill, age 60, has wages and pensions of $200,000 and 2012 interest income from CDs of $300,000. She moves half of her investments into an annuity and purchases a life insurance policy with the remaining CDs.
  • In 2013 all of her interest is sheltered in either the annuity or the life insurance policy and she is not subject to the 3.8% surtax.
• Eliot, a widower, earns wages of $175,000 and owns an interest in a publicly traded real estate partnership which generates taxable income of $50,000.
  • $25,000 (excess of $225,000 MAGI over $200,000 “threshold amount”) will be subject to 3.8% surtax.
• Larry, a widower, earns wages of $175,000 and owns an interest in a closely-held real estate partnership which generates taxable income of $75,000.
  • His MAGI is $250,000 and $50,000 will be subject to the surtax (lesser of rule).
• Bruno, a single person, earns wages of $200,000 and receives royalties of $60,000 from an oil and gas limited partnership. 
  • $60,000 will be subject to the surtax (excess of $260,000 MAGI over $200,000 “threshold amount”).
• Mary and David earn wages of $260,000 and receive a trust distribution of $90,000 (100% dividends).
  • $90,000 (net investment income) will be subject to the 3.8% surtax.
• The estate of Jane Smith earned $111,200 of dividends and made no distributions. 
  • Assuming a threshold exemption of $11,200, $100,000 will be subject to the 3.8% surtax.
• The estate of Jane Smith earned $111,200 of interest and made a distribution of 100% of income.   
  • The income will be reported by the heirs and the estate will not be subject to the 3.8% surtax.
• Bob and Bonnie have interest income of $248,000 and no other income.  They convert Bob’s $300,000 IRA to a Roth IRA which increases AGI to $548,000.
  • Under the lesser of rule, $248,000 will be subject to the 3.8% surtax; this is the lesser of $298,000 of excess MAGI ($548,000 -$250,000) or $248,000 of investment income.
• In 2011, Randy converts a $1,000,000 IRA to a Roth IRA incurring $450,000 of state and federal income tax.   Randy pays the income taxes from his outside/taxable investment funds.  
  • Future investment income from the outside funds will no longer exist and avoid the 3.8% surtax.  
• Daniel and Donna have wages of $250,000 and investment income of $45,000.  Their employer creates a new deferred compensation plan allowing a contribution of up to 20% of income (i.e. $50,000).
• Gary and Barb, age 69, have pension income of $130,000 and investment income of $115,000 for a total MAGI of $245,000, just below the threshold amount.  In 2013, their Roth IRA withdrawal will be $50,000. 
  • No 3.8% surtax will apply because the $50,000 Roth IRA distribution does not count towards MAGI.
• Thor and Kristen, age 69, have pension income of $100,000 and net investment income of $75,000 for a total MAGI of $175,000, well below the $250,000 threshold amount. 
  • In 2013, their RMDs will be $50,000 bringing MAGI to $225,000, which is still below the threshold amount.
• Art and Patricia, age 69, have pension income of $130,000 and net investment income of $115,000 for a total MAGI of $245,000, just below the threshold amount.  In 2013, their RMDs from their IRAs will be $50,000, which brings their MAGI to $295,000. 
  • MAGI is $45,000 above the threshold amount ($295,000 less $250,000). 
  • The surtax will be imposed on the lesser of $45,000 or their net investment income of $115,000. (i.e., $45,000). 
  • A 2011 or 2012 Roth conversion would eliminate the RMDs and the surtax would not apply.  
• Same facts, except they convert in 2013 and the pension is $30,000.  The conversion would be added to MAGI of $195,000 and their entire net investment income of $115,000 will be subject to the surtax.
• Brian and Betty, age 69, have annual pension income of $260,000 and net investment income of $115,000 for a total gross income and MAGI of $375,000.   In 2013, their RMDs from IRAs will be $50,000 bringing MAGI to $425,000. 
  • Because their “fixed” non-investment income of $260,000 (e.g. pensions) is over the $250,000 threshold amount, their surtax reduction planning must focus on reducing net investment income, not on reducing MAGI. 
  • A Roth conversion will be surtax neutral; however, such a conversion may still be beneficial.

In particular, the application of the 3.8% surtax to estate and trusts needs your immediate attention.  The problem with trusts and estates is that the 3.8% surtax will apply to income in excess of approximately $12,000.

The key issues are:

• Timing of distributions to reduce the impact of the surtax
• The choice of year end to avoid the surtax for the first 11 months of 2013.
• Ensuring that trusts are funded in 2012 to avoid gains upon funding
• Making a proper and timely Section 645 election
• Reviewing the proper investments during the estate/trust administration.

You can also download Bob's updated 3.8% HealthCare Surtax Chart on our Free Resources Page.

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)

Reposted from Forbes.com | By Robert W. Wood

What a week! First an unprecedented IPO, then marriage. Yes, Facebook’s Zuckerberg Marries His Longtime Girlfriend Priscilla Chan. And California marriages are, well different, as California divorce lawyers–aka “family lawyers”–will tell you.

The water cooler debates about taxing Mark Zuckerberg have been vitriolic for weeks now–not to mention the endless likes and dislikes over the expatriation of one-time co-founder Eduardo Saverin. It’s only natural that we’ll all worry over this one too. After all, what does this latest one-two development mean for the Zuckerberg family tax return?

Joint v. Separate? Mr. Zuckerberg and his new wife could file married filing separate or married filing joint for this year, even though they married part-way through the year. While 95% of married couples file joint tax returns, you might be surprised to find that the tax savings by filing jointly are often small. If Mr. Zuckerberg hopes to keep assets separate–more about that below–he’s better off filing separately.

Separate v. Community? One of the big issues in California and the handful of other community property states is separate v. community. What each person acquires prior to marriage is separate property. That means all the billions Mr. Zuckerberg had before tying the knot remain his separate property.

But you might be surprised how that can get confused over time. If there’s a prenup–and I presume there is–it might say that no matter what, it stays separate. But separate property can be transmuted into community property not only by agreement but by actions too. Seemingly innocuous acts–like one person making a mortgage payment on their spouse’s separate residence–can have an impact.

Business and Investment Management? One of the biggest risks is where a couple works together or even undertakes joint management of assets or business interests. What is considered a contribution to the community can become murkier still. Even if Mr. Zuckerberg’s Facebook stock and cash are all separate up until he marries, earnings from his work at the company during marriage are generally considered community. That is likely to include more options in the future.

Gifts During Marriage? One thing that’s not a tax problem during marriage is the gift tax. Married taxpayers can give as much property as they want to their spouse during marriage free of gift tax. So if Mr. Zuckerberg wants to give his bride a billion dollar wedding gift of Facebook stock, there’s no gift tax.

There’s no income tax either, unless she sells it. Then, because her tax basis in the shares would be the same as the stock’s basis was in her husband’s hands before the gift, she would pay tax on the gain on sale.

Divorce Rules. Sorry to be a killjoy, and I truly wish the newlyweds well. But the biggest and most important tax rules about marriage apply to its unwinding. Since these tax rules only work on unwinding a legal marriage and not on any form of cohabitation, they remain a gross tax inequity the gay marriage debate has never thoroughly addressed.

Like gifts during marriage, property transfers incident to divorce don’t trigger gift or income taxes. Alimony or spousal maintenance if structured properly is income to the recipient spouse and deductible by the payor spouse. Child support is neither deductible to the payor nor income to the child or the recipient spouse with custody.

All these rules may sound simple and they are simple to state. But the tax cases in which they are misapplied and audited are legion.

Robert W. Wood practices law with Wood LLP, in San Francisco.  The author of more than 30 books, including Taxation of Damage Awards & Settlement Payments (4th Ed. 2009 with 2012 Supplement, Tax Institute), he can be reached at Wood@WoodLLP.com.  This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.

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.

Source & Photo Credit: Forbes.com

Reproduced with Permission by and Courtesy of Leimberg Information Services, Inc. (LISI).  For information about how to subscribe to LISI, click here.

“After approximately 15 years since the first DAPT legislation passed, not a single DAPT has been tested all the way through the court system.  Most likely this is because such a large supermajority believes that if tested the DAPT will work to protect its assets from a creditor of the settlor.  However, despite the very high likelihood of protection, if there is a way to increase the odds of success even more, then such a strategy should be utilized whenever possible.

The Hybrid Domestic Asset Protection Trust (“Hybrid DAPT”) is such a strategy, and it is very simple.  The Hybrid DAPT is like a regular DAPT except that the settlor isn’t an initial discretionary beneficiary of the trust, but can be added later.”

We close this week Steve Oshins’ commentary on a strategy he refers to as the “Hybrid Domestic Asset Protection Trust.”  According to Steve, the Hybrid DAPT puts the client in a significantly stronger position than with a traditional Domestic Asset Protection Trust.  As he explains below, this strategy can be used with both an incomplete gift version and a completed gift version of the Domestic Asset Protection Trust. 

Steven J. Oshins, Esq., AEP (Distinguished) is a member of the Law Offices of Oshins & Associates, LLC in Las Vegas, Nevada.  Steve is a nationally known attorney who is listed in The Best Lawyers in America® and has been named one of the Top 100 Attorneys in Worth magazine.  He was inducted into the NAEPC Estate Planning Hall of Fame® in 2011.  He has written some of Nevada's most important estate planning and creditor protection laws, including the law making the charging order the exclusive remedy of a judgment creditor of a Nevada LLC and LP (in 2001, 2003 and 2011), the law changing the Nevada rule against perpetuities to 365 years (in 2005) and the law making Nevada the first and only state to allow a Restricted LLC and a Restricted LP creating larger valuation discounts than any other state allows (in 2009).  He is also the author of the Annual Domestic Asset Protection Rankings which you can download from our Free Resources page.  Steve can be reached at 702-341-6000, x2 or at soshins@oshins.com.  His law firm's web site is http://www.oshins.com. 

Before we get to Steve’s commentary, members should take note of the fact that a new 60 Second Planner by Bob Keebler was just posted to the LISI homepage. In his commentary, Bob reviews the May 4th opinion by the Ninth Circuit in Estate of Morgans, where the issue presented was whether Section 2035(b)’s gross-up rule applies in the case of a surviving spouse's deemed gift of a QTIP remainder. You don't need any special equipment to listen- just click on this link.

Now, here is Steve Oshins’ commentary:

EXECUTIVE SUMMARY:

Asset protection has become one of the hottest areas of law and has become the ideal complement to estate planning.  Consequently, the Domestic Asset Protection Trust (“DAPT”) has become one of the most popular asset protection tools in the planner’s toolbox.  As more states have enacted DAPT legislation, practitioners have started doing more DAPTs for their clients.

FACTS: After approximately 15 years since the first DAPT legislation passed, not a single DAPT has been tested all the way through the court system.  Most likely this is because such a large supermajority believes that if tested the DAPT will work to protect its assets from a creditor of the settlor.  However, despite the very high likelihood of protection, if there is a way to increase the odds of success even more, then such a strategy should be utilized whenever possible.

The Hybrid Domestic Asset Protection Trust

The Hybrid Domestic Asset Protection Trust (“Hybrid DAPT”) is a strategy that should increase the probability that the trust assets will be protected.  And it is very simple.  The Hybrid DAPT is just like a regular DAPT except that the settlor isn’t an initial discretionary beneficiary of the trust, but can be added later.  Thus, the trust is initially set up for the benefit of the settlor’s spouse and descendants, for example, but not for the settlor.  By not including the settlor as a beneficiary of the trust, the Hybrid DAPT is by definition a third-party trust and therefore almost certainly avoids the potential risk of uncertainty of a regular DAPT.

Especially where the settlor is married and has a strong, trusting relationship with his or her spouse, is there any good reason that the settler must have his or her name in the trust agreement as a beneficiary?  It is very simple to indirectly access the trust assets through the spouse.  And the trust agreement should define the “spouse” using a “floating spouse provision” that defines the spouse as the person the settlor is married to and living with from time to time.  This gives the settlor the ability to access the trust assets through a subsequent spouse in the event of a divorce or the death of the settlor’s spouse.

If the settlor has no spouse, then it becomes more difficult to access the assets.  However, since a good asset protection planner will be sure to leave sufficient wealth outside of the client’s asset protection trust, in most cases the settlor won’t have to work through this issue anytime soon.

If the Settlor Is Added as a Beneficiary

In case the settlor needs to be a discretionary beneficiary of the Hybrid DAPT sometime in the future (i.e., if the settlor has no spouse or child that will “share” a distribution with the settlor and the settlor now needs a distribution), the trust agreement provides that the trust protector or independent trustee can add additional beneficiaries, including the settlor.  However, if the settlor is added, then the Hybrid DAPT becomes a regular DAPT and thus risks that the law is still unsettled on DAPTs (even though most people believe that they work).

What happens if the settlor suspects that a creditor attack may be forthcoming?  Or what if the settlor is considering filing bankruptcy?  In either case, very far in advance of the problem occurring, the settlor would ask the trust protector or independent trustee to remove him or her as a discretionary beneficiary. 

§548(e) of the 2005 Bankruptcy Act

It is extremely unlikely that a DAPT settlor will file for bankruptcy, especially if the settlor has an “old and cold” DAPT that is past the applicable state’s statute of limitations period.  In fact, of the hundreds of DAPTs created by the author, not one of those clients has gone through bankruptcy. 

However, in maintaining the philosophy of this commentarythat it is important to build into the structure every safeguard available, it is interesting to note that the Hybrid DAPT most likely does not fit the definition required by §548(e) of the 2005 Bankruptcy Act that would otherwise potentially claw back the assets of a traditional DAPT.  The requirements of §548(e) are as follows:

(1) In addition to any transfer that the trustee may otherwise avoid, the trustee may avoid any transfer of an interest of the debtor in property that was made on or within 10 years before the date of the filing of the petition, if—

(A) such transfer was made to a self-settled trust or similar device;

(B) such transfer was by the debtor;

(C) the debtor is a beneficiary of such trust or similar device [emphasis added]; and

(D) the debtor made such transfer with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made, indebted.

Unless the settlor is added as a discretionary beneficiary of the Hybrid DAPT, Subsection (C) doesn’t apply.  Also, arguably Subsection (A) doesn’t apply either since the Hybrid DAPT isn’t a “self-settled trust or similar device” at the time the provisions are applied.

The Completed Gift Hybrid DAPT

Most DAPTs are designed as Incomplete Gift DAPTs where the sole objective is asset protection.  However, many DAPTs are designed as Completed Gift DAPTs where the settlor is a discretionary beneficiary of a trust designed with the following attributes: 

(i)                It’s a completed gift for gift tax purposes,

(ii)             The settlor is a discretionary beneficiary,

(iii)           The trust assets are protected from the settlor’s beneficiaries, and

(iv)           The trust assets are outside of the settlor’s estate for estate tax purposes at the settlor’s death.

The Completed Gift DAPT strategy was approved by the Service in PLR 200944002 where a resident of a DAPT jurisdiction established the DAPT using the laws of that DAPT jurisdiction. 

However, with respect to a resident of a non-DAPT jurisdiction, although most practitioners are comfortable that this strategy works, whether the trust assets are open to creditors of the settlor is still uncertain, since it is unclear which state law will apply for creditor purposes.  The DAPT will be includible in the settlor’s estate at death if the trust assets are open to the settlor’s creditors.  If this were the case, this would occur under IRC §2036(a)(1) since the settlor would be treated as retaining the ability to run up creditor debts which can be paid out of the trust at the settlor’s death. 

IRC § 2036(a)(1) provides that the value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in the case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise, under which the decedent has retained for life or for any period not ascertainable without reference to the decedent's death or for any period that does not in fact end before death the possession or enjoyment of, or the right to the income from, the property.

The Completed Gift DAPT reduces this risk significantly since the settlor isn’t a discretionary beneficiary of the trust and, thus, it isn’t a self-settled trust.  In an ideal scenario, the settlor will never need to be added as a discretionary beneficiary by the trust protector or independent trustee.  However, if the settlor does need to be added at a later date, since the Completed Gift Hybrid DAPT also gives the trust protector or independent trustee the power to remove beneficiaries, as long as the settlor is removed as a discretionary beneficiary more than three years prior to death, there is no estate tax inclusion since IRC §2035 (the three-year contemplation of death rule) won’t apply.

Down and Dirty

To this date, there is still no case law saying that a DAPT does or does not work to shield the assets from the creditors of a settlor who is a resident of a non-DAPT jurisdiction.  Although all the cases have settled, or the creditors have decided not to sue, the estate or asset protection planner must still consider how to plan if the law does go the wrong way.  Unfortunately, although there will ultimately be case law, whether good or bad, unless the case law goes through the appeal process and is ultimately decided by the highest court, we still won’t have any certainty.  So it is prudent to plan for this uncertainty.

If the settlor has set up a Hybrid DAPT, whether as an Incomplete Gift Hybrid DAPT or as a Completed Gift Hybrid DAPT, if the settlor wants to be sure to preserve a portion of the Hybrid DAPT’s assets if the settlor is being added in as a discretionary beneficiary, the trustee can split the Hybrid DAPT into two separate trusts and the trust protector or independent trustee can add the settlor as a discretionary beneficiary of only one of the two trusts so as not to taint the other trust.

For example, if there are $10 million of assets in the Hybrid DAPT, the trustee might divide the trust into two trusts – the “Clean Hybrid DAPT” which doesn’t include the settlor as a discretionary beneficiary and has $8 million of assets, and the “Dirty Hybrid DAPT” which includes the settlor as a discretionary beneficiary and has $2 million of assets.  Thus, the risk has been transferred away from the Clean Hybrid DAPT to the Dirty Hybrid DAPT (which, again, should be protected, but is potentially being sacrificed in the interests of not tainting the assets in the Clean Hybrid DAPT).  This is nothing more than a risk management decision.

COMMENT:

It is imperative that the asset protection planner create a plan with the highest probability of success.  In most cases, it is possible to significantly increase the protection by simply using a Hybrid DAPT rather than a traditional DAPT.  This commentary describes this structure, and also creates a further structure where the Hybrid DAPT can be divided into a Clean Hybrid DAPT and a Dirty Hybrid DAPT, so that even if the Dirty Hybrid DAPT is unsuccessful, it doesn’t taint the Clean Hybrid DAPT. 

HOPE THIS HELPS YOU HELP OTHERS MAKE A POSITIVE DIFFERENCE!

Steve Oshins

TECHNICAL EDITOR: DUNCAN OSBORNE

CITE AS: LISI Asset Protection Planning Newsletter #200 (May 10, 2012) at http://www.leimbergservices.com  Copyright 2012 Leimberg Information Services, Inc. (LISI). Reproduction in Any Form or Forwarding to Any Person Prohibited – Without Express Permission.

CITES: PLR 200944002; Oshins & Keebler on Mortensen:  “No, the Sky Isn’t Falling for DAPTs!”, Asset Protection Newsletter #186 (Oct. 31, 2011); Battley v. Mortensen, Adv. D.Alaska, No. A09-90036-DMD, May 26, 2011 (Original Memorandum) and July 18, 2011 (Memorandum Denying Motion For Reconsideration).

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.

Sources: Leimberg Information Services & Steven J. Oshins, Esq.

If you or a client has just gotten married or divorced, the last thing you want is for something to further complicate tax returns–or throw a snag into the processing of a refund.

Name changes can do just that, whether it’s a matter of taking a new name or resuming an old one. Connubial bliss can suffer if the refund doesn’t arrive in time to pay some of those hefty wedding bills–and freedom might not seem so free if finances are impaired when a long-anticipated refund check fails to show up.

Thanks to the folks at AdvisorOne.com, here are five suggestions from the IRS that can help you stay out of trouble, whether you’re once again flying solo or have just tied the knot.

1. Calling a Spouse a Spouse
So you’ve taken the plunge and jumped the broom. The IRS’ computers won’t know, or care, unless you let the Social Security Administration know too–after all, a computer will look at your Social Security number and the name on your joint return and scream “Reject!”–even if you kept your old name and hyphenated it with that of your new spouse.

2. Back to the Future
Divorced? Same problem. If you went back to your old name, don’t forget to let SSA know so that the IRS computers don’t have a nervous breakdown trying to figure out where they know you from.

3. A Rose by Any Other Name
When you’re ready to notify Social Security, you will need to provide them with proof that you are (now) who you say you are. Make sure you have a recently issued document that identifies you as you wish to be known.

4. Gotta Do the Paperwork
Provide the Social Security Administration with that recently issued document, as well as a completed Form SS-5, Application for a Social Security Card, either by mail or in person at your local SSA office. The form is available online at http://www.socialsecurity.gov/, by phone–call 800-772-1213 to request it—or at those handy local offices. Your new card will arrive with your old number and your new name.

5. But What About the Kids?
Suppose you (or your spouse) adopted the kids, and their names changed too. Social Security needs to know about them as well, even if they don’t have SSNs yet. For adopted children without SSNs, the parents can apply for an Adoption Taxpayer Identification Number–or ATIN–by filing Form W-7A, Application for Taxpayer Identification Number for Pending U.S. Adoptions, with the IRS. The ATIN is a temporary number used in place of an SSN on the tax return. Form W-7A is available on the IRS.gov website or by calling 800-TAX-FORM (800-829-3676).

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.

Source & Photo Credit: AdvisorOne.com

For decades many of us, as wealth strategies planners, have wondered not only how but if we should attract, engage and work with affluent families and those with complex taxable estates.  Their advisors are more protective.  The solutions are more complicated and create larger liability.  Though the fees may be greater, are they enough to cover the time and effort – especially if we only do it occasionally?

The Laureate Center for Wealth Advisors has the training and education needed to attract, engage, and implement work in the taxable estate arena.  You owe it to yourself and your clients to learn more about The Laureate Program, especially if you desire to:

• Quarterback a team of advisors or be called in as a team member;
• Find your quiet confidence as a leader and resource to clients and their advisors;
• Identify, explain, and implement complex tax, wealth, legal, and other technical strategies in an understandable client language;
• Price for your intellectual property and the value you create;
• Improve closing techniques while practice with energy, freedom, and passion;
• Have an effective, process-oriented, and profitable business, not a job

This program should seriously be considered by wealth strategies practitioners and advisors interested in the Families with Taxable Estates market and having the quiet confidence to quote six digit fees.

Below is a summary of The Three Pillars of the Laureate Curriculum: Counseling, Practice Management, and Case Studies. These pillars seem to separate the successful cases from the wildly successful and have helped to truly address the clients’ concerns, increase advisor compensation, and provide an established process through review, design, and implementation.

Counseling – Interpersonal Labs

The training and counseling labs provided through the Laureate Program helps each member decide and recognize which type of client you would like to work with.  We believe that expanding from a “client engagement” to “client partnering” deepens the relationship and leads to more productive plans and results.

Client Partnering achieves the client’s specific goals through the process of Review, Design, and Implementation through authority on and clarity of:

• Problem and what’s behind it;
• Possible Solutions often resulting in former goals as less or not important; and
• Implementation and commitment to solution, timeline, and responsibilities for new goals.

In Client Partnering we facilitate a safe environment to explore the client’s and advisor’s true drivers.  The common characteristics of facilitating a safe environment are:

• Rapport – a continued feeling of connection
• Relevance – current personal perspective related to the subject
• Expanding engagement
• Encouraging “new and clearer thought about the situation and what’s behind it”
• Understanding and committing to “We Can Help”
• Proactive commitment to process
• Expectations – setting, continuously reaffirming, achieving, and “whole plus one”

Practice Management - Processes & Protocols

Processes that worked before may not support a practice serving wealthy clients.  Practitioners need to review and fine tune their processes and systems to support themselves and their team’s implementation, considering changes in technology.  It is even more critical to continue to include the other collaborative advisors in communications, being sensitive and respectful to each professional and his or her role.

In short, continue to enhance your protocols on how you and your team interact with clients and advisors.  Remember to work on, not in, your practice.

Case Studies – Review, Design, and Implementation

It is important to stay abreast of changes caused by new laws, economic conditions, financial products, and the impact of the media.  Even though counseling and practice management are stronger players in attracting and engaging families with taxable estates, financial, tax and legal competency is required to design and implement successful client strategies.  Through the technical and strategic training provided by The Laureate Program, we not only teach the “ins” and “outs” of stand-alone strategies but the more integrated strategies that should, or should not, be used together in the more hands on world of wealth strategies planning.

The art of working with affluent families is in the combining and layering of strategies that we have learned in order to accomplish our client’s deeper goals – identified through counseling. Laureate Program Members, through the Three Pillars of study and its members’ various professional experiences, continue to learn and practice to not only the variations of combining and layering complex strategies through case studies, but also ways to present these strategies to clients in an understandable fashion.

Enjoy Practicing Law – Join The Laureate Program today!

The Laureate Program facilitates discussions and provides process on how to counsel at a deeper level, manage our practices with more process, and to practice case studies that challenge ourselves, make more money, and appreciate what we do.  Collaboration is king! Join The Laureate Program to learn more about how working with affluent families can be profitable and pleasurable with the right team of advisors at the table.

The Laureate Center for Wealth Advisors provides cutting edge training from industry leaders in advanced wealth, business, estate, and income tax planning. This year’s three 3-day session starts May 10-12, 2012. Visit www.laureatecenter.com or call (858) 200-1919 for more information.

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.