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Wednesday, May 16, 2012

TAXES—The Tax Magazine®: The Mathematics of Harvesting Losses and Gains

The Ultimate Estate Planner, Inc. is pleased to share with you a copy the article, "The Mathematics of Harvesting Losses and Gains" by Robert S. Keebler, CPA, MST, AEP (Distinguished) found in the Family Tax Planning Forum that appeared in TAXES - The Tax Magazine®'s April 2012 edition. This article presents a model for deciding when it makes sense to harvest losses and explore its planning implications and quantify the power of gain harvesting in 2012. Click here to read the full article.

This article is reprinted and redistributed with the publisher's permission from TAXES - The Tax Magazine®, a journal published by CCH, a Wolters Kluwer business. Copying or distribution of this article without the publisher's permission is prohibited. To subscribe to TAXES - The Tax Magazine® or other CCH Journals please call 800-449-8114 or visit cchgroup.com.

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Friday, May 11, 2012

Steve Oshins & the Hybrid Domestic Asset Protection Trust

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;

(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).

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

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Monday, April 30, 2012

LISI.com - Practice Pointers on the Core Concern of Blended Family Estate Planning: Joint or Separate Representation

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

“Statistics show that approximately 60% of second marriages end in divorce, and almost 75% of third marriages do as well. These figures loom large in the minds of couples with the “yours, mine and/or ours” scenarios in their step and blended families.

There are pluses and minuses to couples sharing everything regarding their estate planning together, and when it comes to couples with blended families, the minuses can outweigh the pluses substantially. While there is great value in working together in approaching estate planning, it is important to be aware of the cautions against representing both partners in estate planning, especially when it is the second or third marriage or partnership for one of the members of the couple.

When couples who have children from prior relationships contact you about possibly representing them, the first question that should go through your mind is: “Should I represent this couple together or should I only represent one of the partners in the couple?”

The pros and cons of joint representation of blended family couples is the subject of L. Paul Hood, Jr. and Emily Bouchard’s commentary. Paul and Emily have written a book on the subject titled Estate Planning for the Blended Family, (Self-Counsel Press 2012) that will be released at the end of April. Their book will be available on all of the major online bookstore, and order information can be obtained through the following link: http://blended-families.com/estateplanning/

LISI members should also look for their three-part series on blended family estate planning that they are presenting on May 8, 15 and 22 for Phil Kavesh’s The Ultimate Estate Planner, Inc. The information on how to register for their upcoming teleconference series can be obtained either by clicking the following link: Estate Planning for the Blended Family 3-Part Teleconference Series.

L. Paul Hood, Jr. received his J.D. from Louisiana State University Law Center in 1986 and Master of Laws in Taxation from Georgetown University Law Center in 1988. Paul is a frequent speaker, is widely quoted and his articles have appeared in a number of publications, including BNA Tax Management Memorandum, CCH Journal of Practical Estate Planning, Estate Planning, Valuation Strategies, Digest of Federal Tax Articles, Loyola Law Review, Louisiana Bar Journal, Tax Ideas and Charitable Gift Planning News. Presently, He has spoken at programs sponsored by a number of law schools, including Duke, Georgetown, NYU, Tulane, Loyola (N.O.) and LSU, as well as many other professional organizations, including AICPA and NACVA. From 1996-2004, Paul served on the Louisiana Board of Tax Appeals, a three member board that has jurisdiction over all Louisiana state tax matters. Paul Hood can be reached directly at paul@paulhoodservices.com

Emily Bouchard is a family, wealth, and money coach, and the managing partner of Wealth Legacy Group (WLG), specializing in the emotional impact of wealth in people’s lives. She has been working with inheritors in high net worth families since 2004 with a specialty in step and blended family issues. She is also the director of www.Blended-Families.com and has appeared on the Today Show and NPR, and has been featured in publications such as New York Times and Newsweek. Along with coaching individuals, couples, and families, she consults with advisors in responding effectively to their client’s emotional needs related to estate planning. Her book, co-authored with Paul Hood, from Self Counsel Press on Estate Planning for the Blended Family is due out later this month. Emily can be reached at 360.991.9558 or by e-mail to emily@wealthlegacygroup.net.

Here is their commentary:

EXECUTIVE SUMMARY:

Statistics show that approximately 60% of second marriages end in divorce, and almost 75% of third marriages do as well. These figures loom large in the minds of couples with the “yours, mine and/or ours” scenarios in their step and blended families.

COMMENT:

Advantages of One Strategy versus the Other

Obviously, most professionals want what is in the client’s best interest. And there are advantages to both separate and joint representation.

Some advantages of joint representation for couples on blended families include:

It is a way to build greater trust and more open communication between the two of them, and possibly with all of the children in their lives.
It is more cost-effective, since they only have to pay one set of estate planners.
It can be more efficient for them, as they can work together and divvy up tasks as they prepare to meet with you.

Some pro’s of having separate representation for clients with blended families include:

Each may have more freedom to speak up about their specific concerns and desires without having to necessarily compromise with their partner.
The best interests of the individual you represent are the only interests guiding you, and this is an important consideration since there can often be competing agendas, and potential conflicts of interest, often between a step parent and their step children.
How suited the couple is for joint representation can be discovered in an introductory session with you, which we see also is advantageous for you, even if it is complimentary. No one wants a problem client, as they are more likely to sue you and less likely to pay you. Even in these uncertain economic times, sometimes the best decision that an estate planner can make is to not take on certain people as clients. Taking the time to determine the best route to go up front makes a lot of sense, even if you give a bit of your time away for free.

Without healthy communication between the couple, joint representation could be disastrous. Paul witnessed this first hand with a couple, he in his early sixties, and she in her early fifties. Outwardly, they looked like a routine couple coming in for estate planning, and Paul agreed to represent the couple together, despite lingering concerns about how much was left unsaid at their introductory session, particularly about the abilities of each of their children, who should serve as their successor trustees, and how much to leave to all the children in their lives. However, shortly after the meeting, things quickly disintegrated between the partners, so much so that the couple ultimately divorced, in part over the significant differences in their estate planning goals and plans.

To make sure that he complied with the legal rules of ethics, Paul withdrew from representing both of them, and so they had to start over with two new attorneys. There were so many differences between the partners that they would have been better served by each having a separate set of estate planners from the start. The husband wanted their oldest son to serve as executor, while the wife was adamant that her younger daughter was the most capable. He felt strongly that her “baby” wasn’t ready or capable enough to handle her step-brothers and she wouldn’t command the boys’ respect or cooperation; his wife was just as adamant that his “baby” was neither incompetent nor unable to handle the enormity of the responsibilities. This couldn’t have been the reason for the divorce, but it was apparently just the straw that broke the camel’s back on a life-long tortured marriage, and it all came tumbling down.

Emily got to witness the other side of the equation, where joint representation created an opening for results beyond what anyone could have imagined. The advisory team at a well-known bank referred a client couple to Emily after then went two years without signing their estate planning documents. Their stand-off was a result of a blended family situation, where the husband had two children from a prior marriage and his second wife had two children with him. He wanted the estate equalized at the time of his death and to be assured that all four of his children received the same amounts.

She saw things very differently, since his children were not the same as theirs together, being able to benefit (or not as the case may be) from their bio-mother’s estate. As a result, she wanted her two children to receive the bulk of her estate, including that which she would be the beneficiary of if she were to outlive her husband (which was very likely since she was significantly younger than him). After four months of family dynamics coaching, they learned some communication strategies that allowed them to address over 30 years of long standing hurts and resentments. As a result of some in-depth, facilitated conversations, they not only came up with an innovative approach to their estate planning that honored both of their concerns, they also expressed feeling closer as a couple. They then worked effectively with their team at the bank and found an estate planning attorney who specialized in blended family issues who was able to easily incorporate their wishes into their documents.

Signposts for Joint or Separate Representation
In order to make the decision of joint or separate representation a bit more straightforward, there are some signposts that strongly indicate the need for considering separate representation:

If one partner is childless but the other has children. These people are not in similar circumstances if only one of them has descendants. Most people want to leave their estates to their children; it’s only natural. However, childless people don’t have such a tie. The risk here is where the stated goal of the parent partner is to leave everything to his or her children may be changed if the parent partner is the first to die.
There is a significant disparity in wealth or income in the couple. While not always definitive, an income or wealth disparity between the partners can signal an economic imbalance in the couple that could adversely affect the estate planning of the partner who has less.
One of them is economically dependent on the other. This signpost alone is usually not necessarily of the need to have separate representation. However, it together with the presence of other signposts discussed in this recording can be a strong signal of the need for separate representation.
One of them does all of the talking or appears to exert strong influence over the other. As an estate planner, you should take note of this sort of situation and take steps to delve into what appears to be a problem in communication between the two of them. The one who is being strongly influenced (or oppressed) will certainly know but may lack the self-will or the perceived freedom to point it out.
Length of the relationship. Generally speaking, the shorter the relationship, the stronger the suggestion of separate representation.
The number of past relationships one, or both of them, have had. Generally speaking, the greater the number of past relationships, the stronger the suggestion of separate representation.
The two of them were separately represented in a pre-nuptial agreement or property agreement. If it was important enough to have been separately represented in an earlier agreement, it is probably still important enough to maintain separate representation with respect to estate planning.
There is a significant age disparity between the couple. Generally speaking, the greater the age disparity between the couple, the greater is the need to consider separate representation.
If one of them has a significant secret from the other partner like another child, other assets or another lover. Secrets can have an insidious impact on relationships and can really put your estate planners in a difficult spot when the secret comes to light. Obviously, clients who are inclined to hold on to secrets aren’t going to be forthcoming, so you’ll have to ascertain this indirectly by reading between the lines and finding points of aggravation where you have violated the boundaries that the secret holding client has set around that secret information.

Ways to Address These Concerns with Potential Couple Clients
These are not easy points to consider and, the more uncomfortable they make the couple as you bring them forward, the stronger the indication that you all should slow things down. Give them sound legal reasons for why you think they need to seriously consider separate representation, if that’s what their particular circumstances call for at the time of your initial meeting. You can assure them that there are ways that they can stay in communication and connection around their planning even as they are represented separately.

Once they are clear about why you are recommending separate estate planners, you can then breakdown the different details to be determined together, such as medical/durable powers of attorney, and show them that they can still share with each other their thinking, and explore the pros and cons of their pending decisions. You can also note that when conflicts of interest arise, couples who can find places to align with each other, instead of needing 100% agreement, are able to feel more connected as they make their individual decisions.

With regards to alignment, in Emily’s earlier story about the couple with “yours and ours”, the husband was able to let go of needing 100% equality. They were able to come up with a strategy that honored the wife’s contribution to their marriage in a monetary fashion. They both agreed that her earning potential was about one sixth of his, and they calculated a percentage that seemed to fairly represent both of their views. This percentage was then taken into consideration in the difference that their two children together would receive over and above what his two would get. They were in alignment around the new approach and were able to get there by both letting go of their attachment to having their original views seen as right. In his estate, should he outlive his wife, all four children received the same amounts. She was able to be in alignment with that decision, even though it wasn’t her first choice.

Conclusion
If you determine that separate representation is the best option for a couple, communicate how you see it professionally and with a sense of truly taking care of both of their needs and concerns. Frame your assessment in ways that show them why this in their best interest and that it is not personal but is based on sound advice.

HOPE THIS HELPS YOU HELP OTHERS MAKE A POSITIVE DIFFERENCE!

CONTRIBUTORS: L. Paul Hood, Jr., J.D., & Emily Bouchard

CITE AS: LISI Estate Planning Newsletter #1954, (April 26, 2012) at http://www.leimbergservices.com/

Sources: Leimberg Information Services, Inc. & Robert S. Keebler, CPA, MST, AEP

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Friday, April 27, 2012

Autism Awareness Month: Special Planning for the Future with Autistic Children

April is Autism Awareness Month and The Ultimate Estate Planner, Inc. has teamed up our fellow colleague, Thomas D. Begley, Jr. and the Begley Law Group, P.C., based out of New Jersey, to help spread awareness for this very special cause.

A recent report released by the Centers for Disease Control shows a drastic increase in autism diagnoses. One in every 88 children in the United States is diagnosed with a form of autism spectrum disorder, an increase of 78% since 2002. Boys with autism continue to outnumber girls at a rate of 5 to 1.

Since this is such a prevalent disorder that touches so much of the population, it is necessary to ensure that safeguards are in place for your loved one affected by autism.

GUARDIANSHIPS

If, upon reaching age 18, an autistic individual has sufficient capacity, he or she can, and ought to, execute documents, including a will, living will, and powers of attorney. These documents will name a loved one to act as an agent, if necessary, regarding emergency medical decisions as well as routine financial and personal decisions.

For an individual with insufficient capacity, a guardianship will be necessary. Once a child turns 18, the parents no longer retain the legal right to make the decisions that they have been making up to that point. In many cases, the guardianship process can be simple for parents of children on the autism spectrum, but it is still essential in order to ensure that safeguards are in place for the child.

It is also important for parents of children with autism to make sure that their own wills name choices for a successor guardian for their child.

SPECIAL NEEDS TRUSTS

Most parents worry about the well-being of their children once both spouses have passed away. A parent's or grandparent's concern about their loved ones is especially well-founded for special needs children. Leaving an inheritance outright to a child with special needs will jeopardize his or her eligibility for governmental benefits. For example, in order to receive Medicaid benefits, an individual cannot have more than $2,000 of countable assets in his or her name.

In order to rectify this issue, parents and loved ones often establish a third party special needs trust, which is a mechanism through which funds can be made available in order to enhance quality of life while still allowing the child to remain on government benefits. A special needs trust supplements public benefits, such as Medicaid and SSI, without jeopardizing eligibility. The trustee has absolute discretion to expend funds from the trust to purchase things for your child that are not otherwise covered by Medicaid.

It is extremely important to inform relatives about the existence of this special needs trust. Grandparents and other relatives can make lifetime gifts or leave inheritances directly to the child's trust in order to make sure that benefits are preserved.

Even if you are not personally affected by autism, please join us at The Ultimate Estate Planner, Inc. and the Begley Law Group, P.C., along with millions of other advocates, to continue to spread awareness about autism spectrum disorders and the importance of looking at the special planning needed for these individuals.

Source & Photo Credit: Begley Law Group, P.C., Susan M. Green, Esq.

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Wednesday, April 18, 2012

Keebler & Ward on Taproot v. Commissioner: Roth IRA Not Eligible Shareholder of S Corporation

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

Traditional IRAs are not eligible S corporation shareholders under Rev. Rul 92-73 on the theory that the beneficiary of a traditional IRA is not taxed currently on the IRA's share of the S corporation's income. But what about Roth IRAs?

In Employee Benefits and Retirement Planning Newsletter #506 Bob Keebler provided LISI members with his analysis of the initial Tax Court decision in Taproot, that at the time supplied the answer to the fascinating question set out above. Now, Bob returns with Michelle Ward, and together they comment on the 9th Circuit’s affirmation of the Tax Court’s decision.

EXECUTIVE SUMMARY
In Taproot, the Ninth Circuit Court of Appeals upheld the U.S. Tax Court’s finding that a Roth IRA is not an eligible S-corporation shareholder.

FACTS
Paul Di Mundo incorporated Taproot Administrative Services, Inc. in the state of Nevada in 2002. Taproot elected S corporation status effective as of the date of incorporation and filed its 2003 tax return on a U.S. Income Tax Return for an S Corporation.

In early 2003, Taproot issued all outstanding shares of its stock to a custodial Roth IRA account held at the First Trust Co. for the benefit of Di Mundo. The custodial Roth IRA account remained Taproot’s sole shareholder during the 2003 tax year.

In 2007, the Commissioner of the Internal Revenue Service issued a notice of deficiency to Taproot for the 2003 tax year. Among other findings, the Commissioner determined that a Roth IRA did not qualify as an eligible shareholder of an S corporation. Consequently, Taproot was deemed taxable as a C corporation for the 2003 tax year.

DISCUSSION
Taproot argued that the individual beneficiary of a custodial account also qualifying as a Roth IRA should be considered the shareholder for purposes of the S corporation statute.

Treas. Reg. Sec. 1.1361-1(e)(1) provides that “[t]he person for whom stock of a corporation is held by a nominee, guardian, custodian, or an agent is considered to be the shareholder of the corporation for purposes of [the S corporation statute].” Taproot contended that as the sole beneficiary of the DiMundo Roth IRA, DiMundo should be considered the shareholder and, thus a qualifying individual for the purposes of the statute.

IRC Sec. 1361(c)(2)(A)(i) also extends shareholder eligibility to any grantor trust “all of which is treated...as owned by an individual who is a citizen or resident of the United States.” Taproot therefore also argued that a Roth IRA should be classified as a grantor trust.

In Rev. Rul. 92-73, the IRS ruled that an IRA is not a permitted shareholder of an S corporation under section 1361. The IRS reached similar conclusions regarding an IRA’s eligibility as an S corporation shareholder in a least 42 PLRs (see, e.g., PLRs 200915020, 200931039 and 200940013). While the Court acknowledged that such rulings were not binding precedent, it also noted that they can be used as evidence of an administrative practice of the IRS.

The Tax Court, along with noting the functional differences between IRAs and grantor trusts, found Rev. Rul. 92-73 to “sensibly distinguish[ ] IRAs from grantor trusts.” In making that determination, the Tax Court relied in part on the rationale of Revenue Ruling 92-73, stating that:

[T]raditional IRAs are not eligible S corporation shareholders because the beneficiary of a traditional IRA is not taxed currently on the IRA’s share of the S corporation’s income whereas the beneficiaries of the permissible S corporation shareholder trusts listed in section 1361(c)(2)(A) are taxed currently on the trust’s share of such income.

On appeal, Taproot maintained that the Di Mundo Roth IRA functioned merely as the form of Di Mundo’s individual investment account and that the plain language of Treas. Reg. Sec. 1.1361-1(e)(1) explicitly authorizes those IRAs and Roth IRAs created as custodial accounts to be shareholders of S corporations.

Taproot first claimed that both forms of IRAs and Roth IRAs—trusts and custodial accounts—lack the essential characteristics of a separate taxpayer and should therefore be treated as indistinguishable from the individual owners. The Court, however, found that Taproot did not provide persuasive reasoning or convincing authority for this conclusion and found the reasoning in Rev. Rul. 92-73 to support the opposite result. The Court found that the distinguishing feature is the deferred income tax treatment, which differentiates IRAs from beneficiaries listed in IRC Sec. 1361(c)(2)(A) who are taxed currently on the trust’s share of income.

The Tax Court also discussed the legislative intent behind the S corporation statute, finding the only available evidence suggested that Congress did not intend to allow IRAs to own S corporation stock. Although at the time Congress initially drafted the S corporations statute, both traditional and Roth IRAs had yet to be created, the Tax Court reasoned that “had Congress intended to render IRAs eligible S corporation shareholders, it could have done so explicitly,” as it did with the 2004 amendment allowing banks with IRA shareholders to elect S status in specific circumstances.

This was especially true in light of Congress’s 1999 directive to “the Comptroller General of the United States to conduct a study of possible revisions to the rules governing S corporations including “permitting shares of such corporations to be held in individual retirement accounts.” For these reasons, the Tax Court concluded that traditional and Roth IRAs were not eligible shareholders. On appeal, the Court found the legislative history of the S corporation statute favored limited eligibility and that if at any point Congress had intended IRA eligibility, it could have amended the statute. The Court pointed out that if IRAs and Roth IRAs qualified as eligible shareholders in 2003, then the subsequent 2004 amendment would have been completely unnecessary.

CONCLUSION
It is interesting to note that the Tax Court was also mindful that under Taproot’s theory of statutory construction, DiMundo would avoid virtually all taxation on his S corporation profits. This would enable S corporations to achieve an overwhelming benefit over C corporation competitors which are subject to two levels of taxation —one at the corporate level and another at the shareholder level.

In a lengthy dissent, however, Judge Halpern notes that “this underestimates the strengths of the Code's other defenses against such shenanigans.” He noted that there are numerous limitations on what can go in and out of an IRA—income-contribution limits, deadlines for contributions, penalties on prohibited transactions, and penalties on excess contributions. Judge Halpern further noted that while custodial retirement accounts are generally exempt from tax on undistributed IRA income, they are still subject to the taxes imposed on Unrelated Business Income Tax. In general, the Unrelated Business Income Tax subjects the business earnings of tax-exempt organizations to taxation.

The majority of the Tax Court, however, expressed its skepticism that the Unrelated Business Income Tax could adequately mitigate this tax advantage. Although Taproot contended that the Unrelated Business Income Tax negates the Tax Court’s policy concerns, the Appeals Court agreed with the IRS that I.R.C. Sec. 512 generally excludes passive investment income, such as interest income, from application of the UBIT and thus, in this case, the interest income at issue would not be subject to the UBIT.

HOPE THIS HELPS YOU HELP OTHERS MAKE A POSITIVE DIFFERENCE!

TECHNICAL EDITOR: Barry Picker

CITE AS: LISI Employee Benefits and Retirement Planning Newsletter #603 (April 17, 2012) at http://www.leimbergservices.com/ Leimberg Information Services, Inc. (LISI). Reproduction in Any Form or Forwarding to Any Person Prohibited – Without Express Permission.

CITES: Taproot Administrative Services v. Commissioner, Case No. 10-70892; Revenue Ruling 66-266, 1966-2 C.B. 356; Revenue Ruling 92-73, 1992-2 C.B. 224

Sources: Leimberg Information Services, Inc. & Robert S. Keebler, CPA, MST, AEP

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Tuesday, April 10, 2012

Attract, Engage & Work with Families with Taxable Estates and Their Advisors

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.

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Friday, April 06, 2012

TrustAdvisor.com: Does Hartford’s Annuities Exit Signal the End for Others?

Reposted from The Trust Advisor | By Scott Martin

Dumping $1.4 billion business underlines the extreme pressure some insurance carriers have been facing, but retirement income experts say the variable annuity market is simply shaking out a lot of second- and third-tier competitors.

Annuities now account for the bulk of the Hartford Financial Services Group’s earnings, so the wealth management industry was stunned when the company unceremoniously pulled the plug on future sales and started winding down the business. Hartford, of course, isn’t alone. Big names like ING, Sun Life and John Hancock have peppered the headlines over the last few months with similar announcements.

With all these names dropping out of the annuity business, advisors may be wondering what will be left on their retirement income shelf this time next year.

Turns out there will still be plenty of vendors happy to write this business — and there’s currently $240 billion of this business to write, according to the industry watchdogs at LIMRA, formerly known as the Life Insurance Marketing and Research Association.

Hartford was just a bit player anyway

Although Hartford’s decades of marketing have created huge brand recognition for its home and auto insurance lines, the company hadn’t been more than a niche player in the annuity business in a long time.

With “only” $1.4 billion in annuity sales, the company didn’t even make the Top 20 list of annuity vendors last year.

And given the infamously concentrated nature of the industry, you have to either go big or go home.

The ten biggest annuity carriers already write 61% of the total business. The next bracket is hanging onto another 18% share, leaving everyone else — including Hartford — to fight over the scraps.

So instead of Hartford being the canary singing about trouble brewing in the annuity coal mine, the real question is what that songbird was doing down there at all.

Analysts who follow the company are actually pretty pleased that this is happening.

“We think that this is the right decision for the company,” says John Nadel, who follows Hartford for Sterne Agee & Leach. “We applaud the actions.”

Not a bad business

The other annuity vendors departing the business were only marginally bigger players than Hartford, with only Sun Life even managing to capture a 1% share of the overall market.

If Sun Life couldn’t generate enough scale to keep selling new annuity contracts, everyone smaller — accounting for maybe $55 billion in annual sales — should definitely be thinking about their future.

Giants like MetLife, Prudential and Jackson National Life, on the other hand, are feeling no pain. Sales of variable annuities in particular soared 13% last year to a post-recession high, and these carriers have consolidated close to half of that high-margin business just between the three of them.

If anything, they’re even more eager to sell annuities than ever, given the way demand for these products spikes when the stock market looks rocky.

Jackson National, for example, was getting grief from its corporate parents last spring because its variable annuity business was so successful that it was crowding everything else off the map.

A year later, Jackson is still generating a staggering 64% profit margin on these products — sending a record $511 million back to corporate — and the executives have stopped complaining.

Scale is evidently the key here. Compare those huge margins to the money-losing proposition that a much smaller vendor like John Hancock was facing with its annuity business.

Between “volatile equity markets and the historically low interest rate environment,” Hancock restructured its annuity sales back in November.

Vendors like Hartford, crowded to the edges of the annuity industry, never quite recovered their balance after the 2008 market crash, when aggressive portfolio management imploded on carriers and sucked billions of dollars in capital off their books to pay promised benefits.

The leaders printed heavy losses too, but were big enough to survive. Smaller players are now acknowledging that they’ll never hit that scale.

Winding down contracts, not desperate for buyers

But since Hartford was earning relatively fat margins on its annuity sales, why dump that business?

Nadel thinks the big win for Hartford here is not so much in abandoning a profit center but in freeing up billions of dollars in capital currently tied up in the company’s life insurance contracts.

That money is better spent paying down debt and meeting the demands of activist shareholders like hedge fund king John Paulson, who owns 8.5% of the company.

Since the annuities ride alongside life insurance and Hartford’s retirement product sales, it doesn’t make much sense to keep them if those non-core businesses go on the chopping block, he says.

As it is, Hartford is perfectly happy to let its existing annuity contracts run down over the next decade or so — and the legacy book value there is worth about $10 billion.

Ironically, Paulson isn’t so cheerful, since he sees the company’s property insurance unit as the main problem.

And down on the street, annuity-focused advisors are actually booking strong sales and charging big commissions.

Just about all Americans are worried about protecting their retirement savings through volatile markets, and as LIMRA data points out, they’re as eager as ever to buy annuities and lock in at least part of their retirement income.

Annuities are even moving into retirement plan menus. For the victors, the spoils are going to get mighty sweet indeed.

Source: trustadvisor.com

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Friday, March 30, 2012

WSJ.com - Death Tax Defying: Estate Tax Repeal Gains Momentum in the States

While Washington continues to debate what to do with the federal death tax—the top rate is now 35% and is scheduled to rise to 55% next year—states are starting to recognize that their high estate taxes are a good way to chase away wealth producers.

Last year Ohio abolished its estate tax, joining the 28 other states that do not impose such a tax at death. Indiana's legislature recently passed by big margins a bill to phase out its death tax by 2021, and Governor Mitch Daniels signed it this week. Heated debates are going on in Tennessee and Nebraska over the issue. Even in Oregon taxpayer groups are attempting to put an initiative on the November ballot to abolish the death tax, and polls show it could win.

The left has long been flummoxed by polls showing that roughly two of three Americans want this tax abolished. Why would Americans oppose a tax that politicians say is aimed at the top 1%?

The answer is that Americans instinctively understand that the tax is unfair. It punishes a lifetime of thrift and investment solely due to the accident of death. And it does so in a way that imposes another tax on income that in most cases has already been taxed once, or sometimes twice.

A majority still believes that anyone can get rich in America, and that someday that could happen to them or to their children. They reject the idea that the government could then help itself to half their hard-earned fortune. All of this is to say that Americans generally view the death tax debate not in soak-the-rich terms, as the left does, but as a moral issue: Thou shalt not steal.

But even on purely economic grounds, death taxes are spectacular failures as revenue raisers or a tool of income redistribution. This is because the people who are subject to these taxes often move across state borders to avoid paying. They do this so they can pass businesses and property to their children and grandchildren.

People generally don't build up assets to leave them to the IRS. Certainly Warren Buffett doesn't, though he favors a punitive death-tax rate. He can afford to be generous with everyone else's money because he's created a charitable foundation that will let him avoid the tax.

A November 2011 study of tax return data by economists Arthur Laffer and Wayne Winegarden shows how people avoid state death taxes. The study compared Florida and Tennessee high-income returns. Both states have no income tax, but Tennessee is one of only two states that imposes an estate and a gift tax. (Connecticut is the other.)

The authors point out that this year there is a $5 million exemption on the federal estate tax and gift tax (a once-in-a-lifetime wealth transfer for the living), but in Tennessee the exemption is a meager $13,000 for estates and gifts. With a gift and death-tax rate that reaches 9.5%, a Tennessean with a $5 million estate would pay $462,000 more estate tax than someone living in the 29 states with no such tax, such as Florida. Tennessee is a very expensive state to die in.

The Tennessee tax really does cause the rich to flee. The authors found that in 2010 Florida had nearly twice as many federal tax returns with taxable estates (per 100,000 population) as did Tennessee. The average estate is also larger in Florida—$7.4 million versus $4.4 million in Tennessee.

Here's the kicker: Because wealthy people avoiding the estate tax take their businesses and spending with them, the study concludes that "had Tennessee eliminated its gift and estate tax 10 years ago, Tennessee's economy would have been over 14% larger in 2010." They also find the estate tax cost Tennessee state and local governments over $7 billion in tax collections. Could there be a more self-defeating tax?

The main obstacle to reform in Nashville is GOP Governor Bill Haslam, who earlier this year acknowledged damage from the tax, saying "There's a whole lot of people who used to live in Tennessee who don't anymore because it's cheaper to die in Florida." But he now says the state needs the revenues, however imaginary they might be. This mistaken logic is also being used to block repeal in Nebraska.

With Ohio and Indiana zeroing out their estate taxes and others likely to follow suit, the remaining high-rate states will have an increasingly hard time holding onto their mobile high-income citizens as they get older. Mr. Obama wants a 45% federal estate tax rate next year, which in many states would mean a more than 50% combined rate. That is not fairness. It is self-defeating confiscation.

Source: WSJ.com

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Thursday, March 29, 2012

Paul Hood on Wandry v. Commissioner: A Significant Taxpayer Win in another Defined Value Case

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

"Congratulations to counsel to the taxpayers for a slam dunk taxpayer victory! You should read this opinion. It is an important extension of defined value gifts and proves that one doesn’t need a charitable or marital “wrapper” for these things to work properly as I have argued in published articles for almost ten years. In my opinion, the bottom line is that properly designed and implemented defined value transfers are more legitimate now than ever before and should be accorded respect for tax purposes, and it is well past time for the IRS to accommodate them with formal guidance. Given the significant string of defeats in these cases, it is time for the IRS to start getting hit with attorney’s fees under IRC Sec. 7430 for continuing this fight.” The case of Wandry v. Commissioner represents another taxpayer win in a “defined value” case, and Paul Hood provides LISI members with his timely commentary on this hot-off-the-press decision that was released on Monday, March 26th.

Before we get to Paul’s commentary, members should take note of the fact that a new 60-Second Planner was recently posted to the LISI homepage. In his PodCast, Bob Keebler provides members with his thoughts on the Wandry decision. You don't need any special equipment to listen, simply just click on this link.

Now, here is Paul Hood’s commentary:

EXECUTIVE SUMMARY:

In this federal gift tax case, the Tax Court determined in a memorandum opinion that the taxpayers’ respective defined value gift clauses were enforceable under state law, were defined value gifts of LLC membership interests instead of gifts of percentage interests and were to be respected for federal gift tax purposes.

FACTS:

On January 1, 2004, Joanne and Dean executed separate assignments and memorandums of gifts (“gift documents”). Each gift document provided:

I hereby assign and transfer as gifts, effective as of January 1, 2004, a sufficient number of my Units as a Member of Norseman Capital, LLC, a Colorado limited liability company, so that the fair market value of such Units for federal gift tax purposes shall be as follows:

Name	Gift Amount
Kenneth D. Wandry	$261,000
Cynthia A. Wandry	$261,000
Jason K. Wandry	$261,000
Jared S. Wandry	$261,000
Grandchild A	$11,000
Grandchild B	$11,000
Grandchild C	$11,000
Grandchild D	$11,000
Grandchild E	$11,000
Total Gifts	$1,099,000

Although the number of Units gifted is fixed on the date of the gift, that number is based on the fair market value of the gifted Units, which cannot be known on the date of the gift but must be determined after such date based on all relevant information as of that date. Furthermore, the value determined is subject to challenge by the Internal Revenue Service (“IRS”). I intend to have a good-faith determination of such value made by an independent third-party professional experienced in such matters and appropriately qualified to make such a determination. Nevertheless, if, after the number of gifted Units is determined based on such valuation, the IRS challenges such valuation and a final determination of a different value is made by the IRS or a court of law, the number of gifted Units shall be adjusted accordingly so that the value of the number of Units gifted to each person equals the amount set forth above, in the same manner as a federal estate tax formula marital deduction amount would be adjusted for a valuation redetermination by the IRS and/or a court of law. [emphasis added]

Corresponding timely adjustments were made to the capital accounts of the members. The transfers were subsequently appraised by a qualified appraiser. The transfers were fully disclosed with all of the documentation on the federal gift tax returns of Joanne and Dean. There was a little discrepancy between the gifts as shown on the gift tax returns, which reflected gifts of interests worth a certain dollar amount, and the supporting schedules, which reflected gifts of percentage interests of 2.39% and .101%, respectively.

On audit of the federal gift tax return, the IRS argued for a higher unit value ($366,000 and $15,400, respectively) than that opined by the business appraiser. Additionally, the IRS argued that the defined value gift clauses granted percentage gifts (2.39% and .101%, respectively) rather than defined value gifts ($261,000 and $11,000) because of the schedules to the gift tax returns. The IRS also argued that the defined value gift clauses were unenforceable and violated public policy.

Joanne and Dean obviously disagreed, and each filed a Tax Court petition. Subsequently, the parties agreed that the values of the gifts were $315,800 and $13,346, respectively, which would require subsequent downward adjustments to the membership interests pursuant to the defined value gift clauses.

In the Tax Court, Judge Haines began with the gift description issue. While the IRS cited Knight v. Comr. in support of its position on this issue, namely, that the schedules to the gift tax returns reflected what Joanne and Dean actually gave, Judge Haines distinguished Knight, noting:

Petitioners have not similarly opened the door to respondent’s argument. At all times petitioners understood, believed, and claimed that they gave gifts equal to $261,000 and $11,000 to each of their children and grandchildren, respectively. In Knight, the taxpayers’ gift tax returns did not report dollar value gifts. In the cases at hand, although respondent relies on the gift descriptions as the basis for the alleged admissions, petitioners’ gift tax returns were consistent with the gift documents. Petitioners’ gift tax returns reported gifts with a total value equal to $1,099,000, and the schedules supporting petitioners’ gift tax returns reported net transfers with a value of $261,000 and $11,000 to petitioners’ children and grandchildren, respectively. Petitioners’ C.P.A. merely derived the gift descriptions from petitioners’ net dollar value transfers and the [business appraiser] report.[Emphasis added]

Judge Haines then addressed the IRS argument, citing a Colorado (applicable law state) case, Thomas v. Thomas, that the capital account adjustments, rather than the gift documents, control and the former described percentage gifts. Judge Haines disagreed with the IRS, noting:

Respondent’s reliance on Thomas is misplaced. Thomas is a case about whether and when a gift of corporate stock is complete, and it has no bearing on the nature of petitioners’ gifts. We do not find respondent’s argument to be persuasive. The facts and circumstances determine [the LLC’s] capital accounts, not the other way around. Book entries standing alone will not suffice to prove the existence of the facts recorded when other more persuasive evidence points to the contrary.

…

In fact, the Commissioner routinely challenges the accuracy of partnership capital accounts, resulting in reallocations that affect previous years. If the Commissioner is permitted to do so, it can be said that a capital account is always “tentative” until final adjudication or the passing of the appropriate period of limitations. Accordingly, [the LLC’s] capital accounts do not control the nature of petitioners’ gifts to the donees.

Even if we agreed with respondent’s capital accounts argument, respondent has failed to provide any credible evidence that the [LLC] capital accounts were adjusted to reflect the gift descriptions. The only evidence in the record of any adjustments to [the LLC’s] capital accounts in 2004 is the capital account ledger and the [LLC’s] members’ Schedules K-1, neither of which provides credible support to respondent’s argument. The capital account ledger is undated and handwritten. There is no indication that it represents [the LLC’s] official capital account records, and it does not reconcile with any of petitioners’ or respondent’s determinations. The capital account ledger is unofficial and unreliable. [emphasis added]

With respect to the argument of the IRS that Petter Est. was distinguishable, Judge Holmes also disagreed, noting:

Respondent argues that the cases at hand are distinguishable from Estate of Petter. Rather than transferring a fixed set of rights with an uncertain value, respondent argues that petitioners transferred an uncertain set of rights the value of which exceeded their Federal gift tax exclusions. Respondent further argues that the clauses at issue are void as savings clauses because they operate to “take property back” upon a condition subsequent.

Respondent does not interpret Estate of Petter properly.

Judge Haines then went on to analyze the subject case documents under the Petter Est. rationale and noted several key points. First, he noted that the only unknown in the mix, i.e., the value of the LLC’s assets as of January 1, 2004, was a constant. Second, both before and after the IRS audit, the donees were entitled to receive the same percentages of LLC interests because the gifts were “essentially expressed as a mathematical formula, as follows:

Value of gift to child = $261,000

FMV of LLC assets

Value of gift to grandchild = $11,000

FMV of LLC assets

After this analysis, Judge Haines concluded:

Absent the audit, the donees might never have received the proper [LLC] percentage interests they were entitled to, but that does not mean that parts of petitioners’ transfers were dependent upon an IRS audit. Rather, the audit merely ensured that petitioners’ children and grandchildren would receive the 1.98% and .083% [LLC] percentage interests they were always entitled to receive, respectively.

It is inconsequential that the adjustment clause reallocates membership units among petitioners and the donees rather than a charitable organization because the reallocations do not alter the transfers. On January 1, 2004, each donee was entitled to a predefined [LLC] percentage interest expressed through a formula. The gift documents do not allow for petitioners to “take property back”. Rather, the gift documents correct the allocation of LLC membership units among petitioners and the donees because the [business appraiser] report understated [the LLC’s] value. The clauses at issue are valid formula clauses. [emphasis added]

Finally, with respect to the Procter public policy argument, Judge Haines also turned it back, expressly noting that “[t]he lack of charitable component in the cases at hand does not result in a ‘severe and immediate’ public policy concern.”

COMMENT:

Congratulations to counsel to the taxpayers for a slam dunk taxpayer victory! You should read this opinion. It is an important extension of defined value gifts and proves that one doesn’t need a charitable or marital “wrapper” for these things to work properly as I have argued in published articles for almost ten years.

In my opinion, the bottom line is that properly designed and implemented defined value transfers are more legitimate now than ever before and should be accorded respect for tax purposes, and it is well past time for the IRS to accommodate them with formal guidance. Given the significant string of defeats in these cases (conjuring up memories of the armies of certain unnamed allies who never win wars), it is time for the IRS to start getting hit with attorney’s fees under IRC Sec. 7430 for continuing this fight.

HOPE THIS HELPS YOU HELP OTHERS MAKE A POSITIVE DIFFERENCE!

CITE AS: LISI Estate Planning Newsletter #1941 (March 27, 2012 at http://www.leimbergservices.com Copyright © 2012 L. Paul Hood. Reproduction in Any Form or Forwarding to Any Person Prohibited – Without Express Permission.

CITES: Wandry v. Comr., 2012-88; Petter v. Comr., T.C. Memo 2009-290, aff’d 643 F. 3d 1012 (9th Cir. 2011); Christiansen v. Comr., 130 T.C. No. 1 (2008), aff’d 586 F. 3d 1061 (8th Cir. 2009); McCord v. Comr., 120 T.C. 358, 364 (2003), rev’d 461 F.3d 614 (5th Cir. 2006); Comr. v. Procter, 142 F. 2d 824 (4th Cir. 1944); King v. U.S., 545 F. 2d 700 (10th Cir. 1976); Knight v. Comr., 115 T.C. 506 (2000); Ward v. Comr., 87 T.C. 78 (1986); Harwood v. Comr., 82 T.C. 239 (1984); Rev. Rul. 86-41; and Hood, Defined Value Gifts and Sales Under the Microscope: What’s Possible and What’s Not-Revisited, BNA Tax Management Estate, Gift and Trust Journal, July 11, 2011.

Sources: Leimberg Information Services & L. Paul Hood, Jr., J.D.

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Friday, March 23, 2012

Steve Oshins on Weddell v. H20, Inc: Nevada Supreme Court Affirms Creditor Protection Benefits of Nevada LLCs

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

“Prohibiting the creditor from exercising the debtor’s management rights reflects the principle that LLC members should be able to choose those members with whom they associate. Thus, the historical rationale for charging order protection was to protect the other members of an LLC where one member has a personal creditor problem.

However, as asset protection planning has evolved and the competition among the states to have the most protective asset protection laws has intensified, the asset protection planners now have the ability to use charging order protected entities to protect their clients’ assets from potential creditors. This tool is so easy, yet it is extremely underused by estate planners who at a minimum should be integrating this form of asset protection planning into their repertoire.”

We close this week with Steve Oshins’ observations on the “hot off the press” case of Weddell vs. H2O, Inc., an opinion issued by the Supreme Court of Nevada on March 1, 2012. As Steve points out in his commentary, this case illustrates the creditor protection benefits of using a Nevada LLC.

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 Chart, which can be downloaded on our website under our Free Resources. 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.

Here is Steve’s commentary:

FACTS:

Between 2000 and 2007, Michael B. Stewart and Rolland P. Weddell entered into a business relationship concerning a number of different projects, ranging from garlic farming to geothermal energy. Several disputes arose between the two parties, ultimately leading to the collapse of their business relationship. Upon the relationship's demise, Weddell filed a complaint asserting numerous claims against Stewart. Stewart also filed a complaint and asserted numerous counterclaims. After a four-day bench trial, the district court found in Stewart's favor on all counts. Weddell appealed the decision.

Stewart and Weddell both owned percentages of Granite Investment Group, LLC (“Granite”) and High Rock Holding, LLC (“High Rock”). In October 2008, in an unrelated matter, the district court granted an application by a creditor to charge Weddell's membership interest in Granite and High Rock, among other Weddell entities, for over $6 million. Pursuant to NRS 86.401.2, the charging order issued by the court entitled the creditor to any and all disbursements and distributions, including interest, and all other rights of an assignee of the membership interest.

Creditor’s Rights under Charging Order

The primary issue in the case was whether the judgment creditor receives any rights to participate in the management of a Nevada LLC upon receiving a charging order over the debtor’s membership interest. The district court had ruled that the charging order against Weddell's membership interests in Granite not only gave the judgment creditor Weddell’s economic rights over the membership interest, but also his managerial rights.

The collection rights and remedies against a member's interest in a Nevada limited liability company are governed by NRS 86.401. This provision recognizes the charging order as a remedy by which a judgment creditor of a member can seek satisfaction by petitioning a court to charge the member's interest with the amount of the judgment. A charging order directs the LLC to make distributions to the creditor that it would have made to the member. As a result, a charging order affects only the debtor's membership interest and does not permit a creditor to reach the LLC assets.

Consequently, the judgment creditor does not step into the shoes of the member. The judgment creditor only receives the rights of an assignee of the member's interest. A judgment creditor, or assignee, is only entitled to the judgment debtor's share of the profit and distributions, takes no interest in the LLC's assets, and is not entitled to participate in the management or administration of the business.

After the entry of a charging order, the debtor member no longer has the right to future LLC distributions to the extent of the charging order, but retains all other rights that the debtor had before the execution of the charging order, including managerial interests. The Supreme Court of Nevada reversed the district court's judgment relating to the scope of the charging order against Weddell's membership interests. The Supreme Court ruled that the charging order only divested Weddell of his economic opportunity to obtain profits and distributions from Granite, not his managerial rights.

COMMENT:

It is no surprise that the Supreme Court of Nevada reversed the district court on the issue of the extent of the rights the holder of a charging order has with respect to the LLC. This decision is in line with decisions in other charging order cases.

This case was decided under the Nevada charging order laws that were modified in the 2003 legislative session and did not include the substantial enhancements made in the 2011 legislative session. See Steve Leimberg's Asset Protection Planning Email Newsletter - Archive Message #180. The 2003 version of Nevada’s charging order laws specifically made the charging order the exclusive remedy of a judgment creditor. However, there were no provisions disallowing the judge from issuing an equitable remedy to find a way around the exclusive remedy language.

For example, the judge could have used one of a number of potential equitable remedies, including the constructive trust theory, the resulting trust theory, the alter ego theory or the reverse veil-piercing theory as a way around the statutory provisions. Maybe none of these potential theories were raised by the attorney for the holder of the charging order or maybe the judge determined that it wasn’t appropriate to go beyond the charging order remedy.

The 2011 legislative changes to Nevada’s charging order laws specifically disallow the issuance of any equitable remedies. Therefore, in future litigation, members of Nevada LLCs will be even more protected than the degree of protection provided by pre-2011 laws.

Planning Opportunities

Prohibiting the creditor from exercising the debtor’s management rights reflects the principle that LLC members should be able to choose those members with whom they associate. Thus, the historical rationale for charging order protection was to protect the other members of an LLC where one member has a personal creditor problem.

As asset protection planning has evolved and the competition among the states to have the most protective asset protection laws has intensified, the asset protection planners now have the ability to use charging order protected entities to protect their clients’ assets from potential creditors. This tool is so easy, yet it is extremely underused by estate planners who at a minimum should be integrating this form of asset protection planning into their repertoire.

By itself, a charging order protected entity almost always causes a creditor to settle a dispute for less than the amount that the creditor would be able to reach if the charging order protected entity did not exist. This is why there are relatively few published charging order cases in comparison to the endless number of litigation cases filed each year. So, at a bare minimum, an LLC (or LP) should be used for almost every client who has sufficient at-risk assets to substantiate the cost of forming and maintaining an LLC (or LP).

Taking this a step further, when the charging order protected entity is combined with an asset protection trust, the odds are even more stacked against a potential creditor from the creditor’s perspective. Thus, there are even fewer published cases involving asset protection trusts. The more roadblocks the planner can include, the more frustrated a potential creditor will get and the better the negotiation will tilt in favour of our debtor clients.

HOPE THIS HELPS YOU HELP OTHERS MAKE A POSITIVE DIFFERENCE!

TECHNICAL EDITOR: DUNCAN OSBORNE

CITE AS: LISI Asset Protection Planning Newsletter #196 (March 22, 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: Weddell v. H2O, Inc., 128 Nev.Adv.Op. #9 (Nev., Mar. 1, 2012); NRS 86.401

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

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Wednesday, March 21, 2012

Polls: Current Financial Concerns Trump Planning for Retirement

Reposted from RegisteredRep.com | By Jerry Gleeson

inancial advisors and RIAs may have more handholding to do with clients. The glum outlook for American retirement appeared little improved with the release this week of two separate reports that showed continued worker skepticism about their prospects.

In its annual survey on the state of retirement, the Employee Benefit Research Institute said the percentage of workers who feel confident about having enough money for a secure retirement is at just 14 percent, statistically unchanged from a year ago.

It remains at the lowest level since EBRI began its annual survey 22 years ago. It also showed that just 21 percent of workers were getting advice from an FA, down from 33 percent two years ago.

Meanwhile, the Certified Financial Planner Board of Standards reported poll results that found 49 percent of respondents were worried about their retirement savings, and 44 percent don’t feel any better about their financial security than they did a year ago.

It wasn’t all gloom. EBRI found that 81 percent of eligible workers are contributing to workplace retirement plans, a figure that has remained relatively stable over the past three years. And the CFP poll found solid optimism among respondents about their financial shape in the months to come—51 percent were “more positive” about their financial situation a year from now, while just 9 percent were “more negative.”

Stronger optimism could support the economic recovery, CFP Chief Executive Kevin Keller said. Concern about their current financial conditions appeared uppermost in the minds of the respondents in the two polls.

“Retirement is not Americans’ major concern. Right now job security and financial security are,” Jack VanDerhei, EBRI’s research director, said during a conference call with reporters this week. “Many workers report they have virtually no savings and investments.”

Indeed, 58 percent of workers with less than $35,000 in income report having less than $1,000 in savings. The percentage of workers who feel they are on track with their retirement savings is just 31 percent, down from 44 percent in 2005.

“Workers are falling further behind, and they know it,” said Mathew Greenwald, co-author of the report.

Scott Mings, associate vice president of Hensley & Mings, a Raymond James & Associates practice in Greenwood, Ind., said he was surprised at the dropoff in Americans using FAs. He said he doesn’t get a lot of pushback on the fees he charges, although questions about fees tend to come up more often during tougher economies.

And more people are investing on their own, he added, spurred on by marketing campaigns by large on-line brokerages that encourage a do-it-yourself approach.

“The market’s going to have to show people some positive returns. Quite frankly, there hasn’t been a lot of added value from advisors on 401(k)s; maybe that’s a reason for a little bit of the dropoff,” Mings said. “If you’re getting advice but your accounts aren’t growing, then what’s the value of the advice?”

EBRI’s finding that 81 percent of eligible workers are contributing to workplace retirement plans bodes well for both investors and advisors; 64 percent of those who contribute to such plans say they are “very” or “somewhat” confident that they will have enough to retire comfortably on, while just 48 percent of those who don’t contribute to such plans feel that way.

The workplace is a good place for advisors to grab a larger share of the market, Greenwald said, as plan sponsors seek ways to help their employees manage money in 401(k) and other plans.

“I think that’s a natural,” he said. “I think there’s various ways a lot of people are going to step up to the plate and try to get more involved in managing money in retirement…It’s just a question of how it’s going to get done. I think we’ll see a lot of experimentation and a lot of success in that area.”

EBRI surveyed more than 1,200 workers and retirees by telephone in January. The CFP telephone survey polled 1,000 Americans across broad income ranges on March 1-4.

Pessimism about economic prospects abounded in the EBRI report. Just 16 percent of workers and 11 percent of retirees were “very confident” that their investments would grow in value; 8 percent of workers and 10 percent of retirees said they were “very confident” that the economy would grow an average of at least 3 percent a year over the next 10 years.

To offset reduced retirement savings, many workers are resigned to postponing retirement and working longer. EBRI noted that workers who expect to retire at age 70 or older has risen from 12 percent in 2002 to 26 percent this year.

But it may not be an option for many, EBRI warns. While 70 percent of workers expect to work for pay in their retirement years, just 27 percent of retirees report actually doing so. Greenwald said many workers underestimate their prospects for this period.

“In many occupations it’s difficult to get the job done as people get into their 60s,” he said. “So the plan to work longer is positive in some respects but risky in other respects.”

Source: RegisteredRep.com

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Wednesday, March 21, 2012

The Drama of Whitney Houston’s Estate Continues to Unfold

Greatest Love of All
Reposted from Trust & Estates | By Michael K. Kirsch

Ever since Whitney Houston’s death on Feb. 11 at age 48, rumors have been circulating about her estate. Would her ex-husband, Bobby Brown, seek to gain control of the money? Did Whitney protect her daughter, Bobbi Kristina, with a trust, or will everything be paid to her at once, since she is 18?

Life Insurance Lawsuit
We know that shortly before her death, Whitney won a court case brought by her stepmother over a $1 million life insurance policy that John Houston, Whitney’s father, had left to Whitney. Barbara Houston, her stepmother, said the policy was supposed to pay off the money that Whitney’s father and stepmother borrowed from Whitney to buy their New Jersey condo. Whitney held a private mortgage on the condo.

Barbara sued after Whitney refused to credit the life insurance money against the mortgage. In December, eight years after John died, an appeals court judge ruled in Whitney’s favor because Barbara didn’t have any documents to prove the insurance policy was meant to cover only the mortgage loan. As the judge noted, its impossible to legally determine what the deceased would have wanted, beyond what’s spelled out in the documents. Had John’s attorneys set up a trust to accept the life insurance proceeds and use them to pay off the loan, his wishes would have been clear, and none of the ensuing legal in-fighting would have been necessary.

Assets in Estate
How much was Whitney worth? Some have speculated that Whitney’s estate will be worth between $10 and $20 million. Others claim she was broke. Back in 2001, she signed the biggest record deal in history, for six albums and $100 million in guaranteed royalties. She died owing Arista three records, so a big chunk of that $100 million could be lost. Regardless of its current value, Whitney’s estate is expected to benefit from the boost in sales since her death. Her estate reportedly has made $700,000 in royalty payments since her death. In August 2012, a movie she did with Jordan Sparks called “Sparkle” will be released. She also owned a home in New Jersey, once worth $6 million, but recently listed for under $2 million.

The Will
As it turns out, Whitney had a will, which was executed on Feb. 3, 1993. The 19-page will names her only child, Bobbi Kristina, as the primary beneficiary. According to the terms of the will, the assets will be placed in a trust with one-tenth of the principal paid to her at age 21, one-sixth at age 25 and the remaining balance at age 30. A codicil to the will dated April 14, 2000, appointed Whitney’s mother, Cissy Houston, as executor and her brother and sister-in-law, Michael and Donna Houston, as trustees. Reportedly, Bobbi Kristina has been struggling with substance abuse issues for years, much like her mother did.

Distributions made outright to a client’s heirs have no protection from the variety of risks to which personally held assets are exposed. Once distributed, the heirs can use those assets as they choose and the assets can be subject to their creditor’s claims. However, bequests that are kept in trust for the benefit of the heirs enjoy protection from creditors, predators (including ex-spouses), irresponsible spending and future estate taxes.

Whitney’s death serves as a reminder to estate planning professionals to make sure their client’s estate plan includes more than a simple will and that they update documents every few years. For the majority of clients with even a modest amount of assets, a will isn’t enough. A properly funded trust, with detailed distribution provisions specifically tailored for your client’s beneficiaries and based on your client’s wishes, is the best way to protect your client’s loved ones.

Celebrities are, for the most part, very difficult clients to deal with when it comes to estate planning. They’re used to having things done for them, and they would rather not deal with all of the issues involved. Many celebrities start the planning process, but never actually finalize it. A number of music/sports stars have died without completing a will. That list includes Sonny Bono, John Denver, Jimi Hendrix and Steve McNair.

________________________

Source: trustandestates.com
Photo Credit: cmgworldwide.com

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Friday, March 16, 2012

Leimberg Information Services: 60-Second Planner on Fifth Circuit Affirms Chilton on Inherited IRAs

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

Nationally renowned CPA, Robert S. Keebler, recently produced an audio recording for Leimberg Information Services on the court ruling in the Chilton case pertaining to Inherited IRAs. CLICK HERE TO LISTEN TO THE LEIMBERG 60-SECOND PLANNER RECORDING

Special thanks to Robert S. Keebler and Stephan Leimberg for sharing this valuable information!

Additionally, Robert Keebler is gearing up for his upcoming Learn it Live 2-day IRA seminar in Green Bay, Wisconsin on May 14-15, 2012 and just announced a June seminar to take place in Minneapolis. The Minneapolis seminar will be held June 20-21, 2012. This 2-day seminar for lawyers, CPAs and financial advisors is titled: "What the Lawyer, CPA and Financial Advisor Need to Know about Sophisticated Planning and Drafting for IRA & Qualified Plan Distributions Including How to Plan with a $5,120,000 Exemption." The seminar provides extensive coverage regarding planning with retirement accounts including: Estate planning for IRAs with a $5,120,000 exemption, the Pension Protection Act, the IRA Regulations, pre-retirement issues, required beginning date issues, the inherited IRA, the minimum distribution rules, spousal rollovers, QTIPing an IRA, charitable bequest planning, beneficiary designation planning, retirement plans payable to trusts, Roth IRA issues, distribution of employer securities, insurance strategies and new, innovative planning strategies. For more information and to register...

Sources: Leimberg Information Services, Inc. & Robert S. Keebler, CPA, MST, AEP

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Thursday, March 08, 2012

MainStreet.com: The Top 15 Richest Counties in America

Much to the pleasure of our Maryland-native Event Coordinator, Megan DeLaGarza, and the many other estate planning professionals based out of the Northeast, we are pleased to repost this article we found on MainStreet.com with the Top 15 Richest Counties in America. Are any of you planning in these counties? If not, you should be! Happy Estate (and Financial) Planning!

The Richest Counties in America
by Kali Geldis

Where the 1% Live
While many Americans struggle to find jobs, balance their budget and get by with less, some folks are still living high on the hog.

Looking at the most recent Census Bureau data from 2010, we chose the 15 counties in the U.S. with the highest median household income. With three counties exceeding the $100,000 mark, life seems pretty good in these areas, even as the U.S. median household income declined 2.3% from 2009 to 2010. Still, the following 15 richest counties still have a median income that is about double the national average of $49,445.

Read on to see if your county made the list.

15th Richest: Charles County, Md.
Median Household Income: $87,007
The first of five Maryland counties to make our list, Charles saw a population burst of 21.6% in the first decade of the 21st century. With Maryland taking up a full third of our list, it’s important to note that this state’s residents took the sixth spot in our ranking of the most generous states in the U.S.

14th Richest: St. Mary's County, Md.
Median Household Income: $88,444
The median household income in St. Mary’s sky-rocketed from about $72,000 in 2009 to more than $88,000 in 2010, the biggest percentage increase (roughly 22%) on our richest counties list. This beautiful county lies on the Chesapeake Bay across from Virginia, and is home to the Lexington Park neighborhood as well as a state park and a regional airport.

13th Richest: Calvert County, Md.
Median Household Income: $88,862
Calvert lies just across the Patuxent River from St. Mary’s County, which holds the 14th spot on our list. The median household income in this county didn’t see the same boom that St. Mary’s saw year over year, though. Its income remained essentially flat, decreasing less than 1% from 2009. Veterans make up roughly 10% of the population, according to the most recent census data.

12th Richest: Montgomery County, Md.
Median Household Income: $89,155
With almost 1 million residents, Montgomery is one of the largest counties on our list. It’s no surprise that this county is so large, since it’s situated just north of Washington, D.C. and only an hour from Baltimore. More than half of the county’s population has a bachelor’s degree or higher and the home values in this area are astounding. The median value of owner-occupied homes was $482,900 from 2006-2010.

11th Richest: Nassau County, N.Y.
Median Household Income: $91,104
Just a hop, skip and a subway ride from Manhattan, Nassau County contains a large chunk of Long Island and Long Beach. The only New York county to make the list, this area has an extremely low poverty rate, with only 5% of residents living below the poverty line. But what really sets Nassau apart is its diversity, with 20.7% of foreign-born residents and 27.3% of its residents speaking a language other than English at home.

10th Richest: Morris County, N.J.
Median Household Income: $91,469
Morris just barely snuck into the top 10 richest counties after its median household income fell by roughly $3,000 from 2009. The county’s residents are less than an hour from Manhattan, and the area includes several lakes and state parks. Golfing is big in Morris county, with about 20 places to tee off.

9th Richest: Prince William County, Va.
Median Household Income: $92,655
Not to be outdone, Virginia matches Maryland with the most counties on our list. Prince William has seen its median household income increase from 2009, even as the national average declined. Prince William is situated outside of Washington, D.C., just like several other on the list. What makes it stand out from the rest though is the 43.2% population boom it has seen in the past decade. The area is home to many historical sites, including the Manassas National Battlefield Park, where two Civil War battles took place.

8th Richest: Somerset County, N.J.
Median Household Income: $94,270
With one of the most prestigious colleges in the country just outside the county line (Princeton University), it’s no surprise that the education levels of Somerset County’s residents are very high. Almost 93% of residents have a high school diploma and roughly 50% have a bachelor’s degree or higher.

7th Richest: Stafford County, Va.
Median Household Income: $94,317
With just 128,961 residents, Stafford County is one of the smallest population areas on our list, but what it lacks in size it makes up for in jobs. The county’s unemployment rate is just less than 5%, much better than the current national average of 8.3%. The wealth of jobs must put residents in the giving mood, since the state of Virginia also came in at the third spot on our list of the most generous states in the U.S.

6th Richest: Douglas County, Colo.
Median Household Income: $94,909
The only Colorado county and the only county west of the Mississippi to make our list, there’s something special about Douglas. The large youth population (30.5% of residents are under the age of 18) suggests that the county is a good place for families. Lying just outside of Denver, residents only need to travel up I-25 to get to the Mile High City. The rural beauty must attract residents, as there are only 339.7 people per square mile and the population has seen a 62.4% increase from 2000-2010.

5th Richest: Arlington County, Va.
Median Household Income: $94,986
Living in Arlington isn’t cheap, so you’d better be making at least the median household income to live in this county that sits just outside of Washington, D.C. Arlington may not be the richest, but it does set a record for real estate values. The median value of owner-occupied homes in Arlington county is $571,700 – almost $70,000 more than any other county on our list. This county also stands out as the most educated on our list – 70.1% of residents hold a bachelor’s degree or higher.

4th Richest: Hunterdon County, N.J.
Median Household Income: $97,874
The richest county in New Jersey, Hunterdon just missed the six-figure mark in median household income. Located just west of Somerset County, which took the 8th-richest county spot, Hunterdon’s income has actually crossed the $100,000 mark before. While some might assume that Hunterdon’s residents make high salaries by commuting to New York City, where salaries are higher than the national average, the truth is that almost 94% of residents stay in-state for work. In fact, more residents commute to Pennsylvania for work than New York.

3rd Richest: Howard County, Md.
Median Household Income: $101,771
With an astounding 58.3% of residents holding a bachelor’s degree or higher, Howard County shows that higher education can pay. One of only three counties that have a six-figure median household income in the U.S., Howard is located between Baltimore and Washington, D.C., attracting the extremely affluent. The median value of owner-occupied homes in the county is $456,200.

2nd Richest: Fairfax County, Va.
Median Household Income: $103,010
Fairfax County is one of the largest counties in terms of population to make our list (1,081,726 residents in 2010), but it is also notable for its real estate. Fairfax is one of only two counties on our list to break the half-million mark in home values. Coming in at $507,800 for the median value of owner-occupied homes, the county truly has some spectacular real estate. Government buffs will be excited to learn that Langley (headquarters of the CIA) is within the county line, so government employees must be making a decent amount of money these days. Also, the unemployment rate in the county has been astoundingly low historically, hitting 1.4% in 1999.

The Richest County in America: Loudoun County, Va.
Median Household Income: $119,540
With a median household income that is a full $16,000 higher than our second-place finisher, Loudoun county has trounced the competition on its way to becoming the richest county in America. Another county surrounding our nation’s capital, Loudoun borders both West Virginia and Maryland and is the home to Washington Dulles International Airport. The Appalachian Trail runs along its western border and the area was largely an agricultural community until the airport was built in the 1960s. The population has continued to increase since then, with the area nearly doubling in population size from 2000 to 2010. The poverty rate is also at an incredibly low 3.2%.

Photo Credit: forbes.com

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Wednesday, February 22, 2012

Senate Bill Threatens Life of Stretch IRAs

Highway bill provision would end tax-deferred stretches of IRAs for beneficiaries other than a spouse, minor children or the disabled

Reposted from AdvisorOne | By Melanie Waddell

Industry trade groups are up in arms over a provision in a Senate highway bill that would reduce the value of inherited IRAs, commonly referred to as stretch IRAs, and are determined to have it removed.

The bill, S. 1813, the Highway Investment, Job Creation, and Economic Growth Act, includes a provision that would no longer permit tax deferred stretches of IRAs for beneficiaries other than a spouse, minor children or the disabled. Others, such as adult children, would only be permitted a five-year window to defer.

The provision would require beneficiaries to pay taxes on inherited IRAs over five years instead of spreading them over their lifetime. If passed, the provision would apply to deaths after Dec. 31, 2012.

The proposal is designed to reduce the value of a tax-planning technique that allows inside buildup of tax-deferred funds inside inherited retirement accounts.

Sen. Max Baucus, D-Mont., chairman of the Senate Finance Committee, added the provision on Feb. 7 during markup of the bill by his committee, but after pushback he promised to have the provision removed.

During the markup of the bill, Baucus said that “IRAs are intended for retirement,” adding that IRAs are being “used by some taxpayers to give tax-free benefits” to future generations. The taxes from the stretch IRAs provision was to be used to help pay for the highway bill, and would raise $4.6 billion over 10 years.

As it stands now, the provision was adopted by Baucus’ committee and remains intact in the highway bill, which awaits action by the full Senate. Once taken up by the Senate, industry officials believe that the IRA provision will be replaced with one that raises the funds by changing the way assets are valued in defined benefit plans.

Judy Miller, chief of actuarial issues at the American Society of Pension Professionals and Actuaries, says that the new provision would likely "reduce the current required contribution to defined benefit plans; when you do that there are fewer deductions taken so it raises money."

But given that the IRA provision has yet to be taken out, the Financial Services Institute is mobilizing its members to have it removed.

Chris Paulitz, spokesperson for FSI, says that FSI “won’t rest" until it's removed. "We’re keeping the pressure on from our members to try and ensure it eventually is indeed stripped out.”

FSI said in a Feb. 15 letter to its members that “while we expect the provision to be removed from the highway bill, it is important that we send the Senate the message that taxes on inherited IRAs should not be used to pay for other governmental spending.”

IRA guru Ed Slott told AdvisorOne on Tuesday that Congress “sees gold in IRAs,” and that the provision on stretch IRAs being inserted into the highway bill “is an indication of where Congress intends to find money to pay for the future.”

Slott said that advisors must “look at the money that their clients may intend to leave over [to heirs] and leverage that now, whether through life insurance or a charitable trust or changing beneficiaries” because Congress believes that IRA money “was never meant to be used as an estate planning vehicle to pass on to beneficiaries.”

Robert Miller, president of the National Association of Insurance and Financial Advisors, told AdvisorOne that NAIFA "is concerned that changing the tax rules on inherited IRAs and other retirement products would place an added burden on middle-income Americans at a time when numerous studies show that Americans are financially under-prepared for retirement."

At the very least, he said, "legislation changing the rules should receive more study rather than being rushed through as part of a highway bill. NAIFA is pleased that the Senate leadership has proposed to remove changes to inherited IRAs from the current bill.”

Photo Credit: advisorone.com

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Wednesday, February 22, 2012

IRS Extends Deadline to Make Portability Election

By Robert S. Keebler, CPA, MST, AEP

On February 17th, the IRS released an important Notice allowing an extension to make a portability election for certain qualifying estates. An executor of a qualifying estate that wants to obtain the extension granted by this notice must file the application for a six month extension no later than 15 months after the decedent's date of death. With the extension granted by this notice, the Form 706 of a qualifying estate will be due 15 months after the decedent's date of death. The first of these extensions (and underlying Form 706) will be due April 2nd. Estates qualifying for this election must meet the following requirements:

The decedent must have a date of death after 12/31/10 and before 7/1/11
The decedent must be survived by a spouse
The gross estate does not exceed $5 million
The estate is not a qualifying estate if the estate effectively requested an automatic six-month extension of time to file Form 706 by timely filing Form 4768 on or before the due date for filing Form 706.

The executor of a qualifying estate may file Form 4768 at the same time as the executor files Form 706, as long as both are filed on or before the date that is 15 months after decedent's date of death. To obtain the extension, the executor must meet the following requirements:

The executor files Form 4768 with the Service office designated in the form's instructions;
The executor files Form 4768 no later than 15 months from the decedent's date of death; and
The executor enters at the top of Form 4768 the notation "Notice 2012-21, Extension for Good Cause Shown" or otherwise sufficiently notifies the Service on or with Form 4768 that Form 4768 is being filed pursuant to this notice.

Photo Credit: corporatevoices.wordpress.com

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Thursday, February 16, 2012

Forbes.com: Obama Declares War On Rich Folks And Wealth Advisors

By Deborah Jacobs
Reposted from Forbes.com

If Pres. Obama has his way, starting next year, it will be substantially more difficult for the ultra rich to pass along wealth to children and grandchildren without giving Uncle Sam his due.

The President’s proposed budget for 2013, issued yesterday, would permanently restore the estate tax rates to those that were in effect in 2009 and severely curtail some popular high-end tools for shifting assets to future generations. The Green Book, as it is called, downloads here as a pdf.

Under current law, we can each transfer up to $5.12 million tax-free during life or at death without incurring a tax of up to 35%. That figure is called the basic exclusion amount. In addition, widows and widowers can add any unused exclusion of the spouse who died most recently to their own. This enables them together to transfer up to $10.24 million tax-free.

Unless Congress acts before then, at the end of this year the current $5.12 million per-person exclusion from the federal estate and gift tax will automatically dip to $1 million and the tax on transfers above that amount will go up to 55%.

The same threat loomed at the end of 2010, and the President capitulated to Republican lawmakers, putting in place the current very favorable system for two years. What will actually happen at the end of this year is anybody’s guess. But the budget gives us a clear idea of what the President would like to do. And it’s not a pretty picture for rich folks or the wealth management industry.

Under the President’s plan, the exemption from the estate and generation-skipping transfer tax would drop to $3.5 million from $5.12 million per person. Perhaps more importantly, the tax-free amount for lifetime gifts would decline to $1 million. And the top tax rate would rise to 45% from 35% for transfers during life or death that exceed the limits.

There’s been talk–and some feeble attempts–for at least five years to restrict what are called leveraging techniques: sophisticated estate planning strategies that pack more into the lifetime exemption amount and minimize the gift tax owed. If the latest budget is any indication, the President means business this time. His budget mentions not only tools that have been a target in the past, but also a hugely popular one that didn’t seem to be previously at risk.

Here’s what’s at play:

NEW TARGETS

Grantor trusts. This is not a single variety of trust, but a set of characteristics that can be incorporated into various types of popular trusts. The term refers to the fact that the person who creates the trust, known as the grantor, retains certain rights or powers. As a result, the trust is not treated as a separate entity for income tax purposes and the grantor, rather than the trust or its beneficiaries, must pay tax on trust earnings.

A 2004 Revenue Ruling made it clear that paying the tax is not considered a gift to the trust beneficiaries. Yet this tax, on income that the grantor probably never receives, shrinks his estate. At the same time, assets can appreciate inside the trust without being depleted by ordinary income taxes or capital gains taxes.

Until now, another attractive feature of these irrevocable trusts is that assets placed in the trust are removed from the senior family member’s estate. From an estate and gift tax perspective, the transfer is treated as a completed gift. The value of the assets is frozen at the time of the transfer, so that future appreciation is not subject to estate or gift tax. These hugely popular trusts have been used for a broad range of people, from young entrepreneurs with mushrooming assets to elderly couples with securities portfolios.

The President’s proposal would eliminate this additional feature of these trusts. This is an enormous change that would wreak havoc with an important tax-saving tool. As the budget states: “The lack of coordination between the income and transfer tax rules applicable to a grantor trust creates opportunities to structure transactions between the deemed owner and the trust that can result in the transfer of significant wealth by the deemed owner without transfer tax consequences.”

Going forward, Obama would like these trusts to be taxable as part of the grantor’s estate. And distributions from the trust to beneficiaries during the grantor’s life would be subject to gift tax.

Dynasty trusts. Some states allow trusts to continue in perpetuity (or for a very long time) and pass wealth through multiple generations without incurring estate, gift or generation-skipping transfer taxes. These trusts are allowed to continue in perpetuity only in states that have abolished the rule against perpetuities. These include Alaska, Delaware, South Dakota and Wisconsin. Residents of other states can choose one of these states as the situs, or location, of a trust; in most cases, some connection to the state is needed and certain conditions apply.

The President’s proposal would do away with dynasty trusts, limiting the generation-skipping transfer tax exemption to 90 years.

OLD TARGETS

The low-risk grantor retained annuity trust or GRAT. This device allows someone to put assets into an irrevocable trust and retain the right to receive distributions back over the trust term. The annuity is equal to the value of what’s been contributed plus interest at a rate set each month by the Treasury called the Section 7520 rate (named after the section of the Internal Revenue Code that applies). For February, this rate is 1.4%.

If the value of the trust assets increases by more than the hurdle rate, the GRAT will be economically successful. In that case, the excess appreciation will go to family members (the remainder beneficiaries) or to trusts for their benefit when the GRAT term ends. If the appreciation never occurs, the trust can satisfy its payout obligations by returning more of the assets to the grantor—the person who created the trust.

For the moment, it is possible to form what’s called a zeroed-out GRAT, in which the remainder is theoretically worth nothing so that there is no taxable gift. The President’s proposal would do away with zeroed-out GRATs. It would also require that a GRAT have a minimum term of 10 years, compared with the current two-year minimum.

This greatly accentuates what is called the “mortality risk” of a GRAT: If the grantor dies during the trust term, all or part of the trust assets will be included in her estate for estate tax purposes. Rich folks would no longer be able to use short-term GRATs to minimize that risk.

Since the proposal would apply only to GRATs put in place after it becomes law, folks who set up GRATs before then would be grandfathered.

Using family entities to achieve discounts. Some people use closely held enterprises, such as family limited partnerships, or FLPs, and limited liability companies, or LLCs, to discount assets before transferring them to family members or trusts for their benefit.

Here is how these family-controlled entities work: A senior family member puts assets, such as marketable securities, real estate or shares of an operating business, into the entity, which is most often an FLP but may be a LLC (some lawyers are more familiar with that structure). Then the individual sells or gives away shares in the entity that holds the assets – not the assets themselves. Since the interests can’t readily be sold outside the family, their value is discounted for both lack of marketability and lack of control (typically a total discount of 20% to 30%).

By reducing the value of partnership units or membership shares for gift tax purposes, discounts enable you to minimize the tax cost of transferring assets.

Valuation discounts have been have been the subject of multiple and protracted tax court battles, and the outcome of some cases are hard to reconcile. The budget proposal suggests that the Administration wants to scale back on the use of discounts, though the contours are not clearly spelled out. However, it clearly indicates that whatever restrictions emerge would apply retroactively to October 8, 1990 (the effective date of section 2704 of the Tax Code).

For more than a decade, fluctuating estate tax rates and political battles–not to mention a volatile economy–have made it extremely difficult for wealthy people to plan for tax efficient transfer of their assets. If even some of the President’s proposals become law, it could put an end to the uncertainty, but perhaps with very unfavorable results. That’s certainly true for wealthy people. It may also be true for the advisors who have reaped huge transaction fees designing complex estate planning strategies for the super rich.

Photo Credit: reason.com

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Monday, February 13, 2012

Bloomberg: Senate Proposes Tougher Requirements for Inherited IRAs

Sen. Baucus Eyes Inherited IRAs for $4.6B

By Richard Rubin
Reposted from Bloomberg.com

The changes that Baucus proposed earlier today would raise $4.6 billion for the Treasury over the next decade by requiring younger beneficiaries to pay taxes over five years instead of spreading them over their lifetimes, according to the Finance Committee. Baucus, a Montana Democrat, had wanted to use the money to help pay for a highway bill the panel is debating.

Under pressure from Republicans, Baucus said he would work with them to find replacement revenue. During the committee meeting, he didn’t provide details about alternatives.

Baucus’s proposal would curtail a tax-planning technique that allows the buildup of tax-deferred gains inside inherited retirement accounts. Currently, holders of inherited IRAs can take required taxable distributions over their anticipated lifespan.

“IRAs are intended for retirement,” said Baucus, who said the current law is being abused. “They’re being used by some taxpayers to give tax-free benefits” to future generations.

Financial advisers and tax lawyers said Baucus’s proposal would significantly alter retirement and estate planning.

Change ‘Playing Field’

“It would really change the whole playing field for retirement planning,” said Ed Slott, an IRA adviser in Rockville Centre, New York. “That would make things simpler, but it would really put a crimp in the whole legacy planning people do for IRAs.”

The proposal includes exceptions for an account owner’s spouse, beneficiaries within 10 years of age of the account owner, and disabled and chronically ill people, according to a summary by the nonpartisan Joint Committee on Taxation. Children would be exempt from the new five-year rule until they reach adulthood.

Owners of regular IRAs must begin taking taxable distributions at age 70 1/2, and they must be taken according to a life-expectancy calculation.

Baucus’ proposal would take effect for people who die starting in 2013.

Late Starter

Senator Jon Kyl, an Arizona Republican, said members of his party found out that the IRA provision would be included early this morning and said it showed that senators’ attempts to limit highway funding sources to items related to transportation and energy had fallen apart.

“I think we’ve lost the opportunity to have a truly bipartisan package,” he said during the committee meeting. He later praised Baucus for his willingness to find a replacement for the provision.

“Perhaps this provision and the subject can be taken up in tax reform,” Baucus said.

Depending on how the language is written, beneficiaries in some cases might be able to use rollovers into their IRAs to avoid the required distributions, said Mary Ann Mancini, who leads the private client group at Bryan Cave LLP in Washington.

Mancini said many of her clients don’t use IRAs as an estate-planning tool because beneficiaries often want to spend their inheritances.

“If you can keep it in the IRA with tax-free growth, the longer you can keep it in the IRA, people can come out with millions,” she said. “The problem is people don’t keep it in the IRA. Young people want the money.”

‘Too Much Invested’

Baucus’s proposal would return IRAs to their intended purpose as a retirement savings tool and not an estate-planning tool known as a stretch IRA, Slott said. The change, if enacted, would cause people to spend the money in their IRAs rather than leave it as an inheritance for their children, he said.

“It sounds good, but I think it’s a nonstarter,” Slott said. “There’s too much invested in the whole stretch IRA concept.”

John Olivieri, a partner in the private clients group at White & Case LLP in New York, said the change could increase the taxable income of heirs each year for five years and may push them into a higher income tax bracket, he said.

Another potential benefit to the federal government is that, because distributions would be taken out faster, there would be less time for the money to accumulate in the IRA tax- free, Olivieri said.

“Once the money is out of the account, it can no longer grow tax-free,” he said. “That’s where the government may be planning to get the most benefit from this.”

Photo Credit: marketwatch.com

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Monday, February 13, 2012

U.S. Treasury Announces President Obama's 2013 Budget and Proposed Estate Tax Law Changes

A special thank you to Robert Keebler of Keebler & Associates, LLP for the heads up that the U.S Treasury just released its FY2013 Greenbook, which provides an explanation of the Administration's revenue proposals for Fiscal Year 2013. The Administration's FY2013 budget proposes tax policy to boost growth, create jobs and improve opportunity for the middle class.

In particular, as estate planning professionals, we are all extremely interested to see what is going to happen with the current Federal Estate Tax Exemption Amount, which is set to revert back to $1 million in 2013. According to this bill, the estate tax exemption amount would revert back to the 2009 $3.5 million level. According to Robert Keebler, that despite this change, the income tax changes would keep us all busy for a decade.

Some estate planning professionals feel that this bill looks very similar to the 2012 Budget Proposal, which was released exactly a year ago on February 14, 2011 and was rejected by the Senate in a unanimous vote of 97 to 0.

To view the explanations of the proposed changes to the Estate & Gift Tax Exemption, click here.

To view the complete FY2013 Greenbook, click here.

Photo Source: AP

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Friday, February 10, 2012

The eBoot Camp's Valentine's Day Gifts to You

Phil Kavesh here to share with you a very special Valentine’s Day Gift that I am passing along from a dear friend of mine.

A little over a year ago, I had the fortunate opportunity to pick up a copy of The eBoot Camp’s President, Corey Perlman’s, book entitled, The eBoot Camp: Proven Internet Marketing Techniques to Grow Your Business. Some of my favorite marketing minds and authors had endorsed the book for small businesses and as a self-proclaimed internet dinosaur, it was not only an easy read, but I could tell that Corey knew what he was talking about.

Corey then informed me of a 2-day Seminar he was holding where he would spend time with me and other attendees on the concepts of internet and social media marketing for our businesses. More so, he was going to give us hands-on, personal consultations about our website and our current internet marketing plans. I was convinced that I needed to go, but the seminar was in Florida and my schedule wouldn’t allow it. He then offered me the option for a personal consultation while he spent a week with several other businesses in Los Angeles - - an offer I couldn’t refuse.

It was time and money well spent and we have already incorporated a lot of Corey’s ideas into not only my law practice, but with The Ultimate Estate Planner, Inc. as well.

Corey sent me an e-mail this morning with my Valentine’s Day gifts from him. Good thing Kristina and Megan monitor my e-mail, because I might have deleted it (joking of course, Corey!). It was filled with different offers that I asked Corey if we could pass along to all of you and he replied back with a resounding, “YES!”. So, here you go.

The eBoot Camp’s Valentine’s Day Gifts to You
by Corey Perlman

Gift #1: A Tip

Engagement is an important piece of the social media puzzle and occasions like Valentine's Day are great for connecting with your prospects and customers.

If you're going to send out a Valentine's Day email or post to your social media sites, here are a few tips:

Give sincere appreciation. Valentine's Day is about telling people how you feel. Take the opportunity to tell your customers, contacts, fans, co-workers, etc. that you appreciate them and are thankful for their business.
Use video or pictures. Two years ago, I posted Happy Valentine’s Day on my Facebook business page and got very little in the form of engagement. Last year, I also included a cute video of a lion and his trainer reuniting after being separated for a year. It got a lot more responses and engagement from others. Videos and pictures are worth 1,000 words!
Ask them to engage! Ask for a funny Valentine’s Day date story or ask them to 'like' your post if you helped remind them to go get something special for their significant other.

________________________________________________________

Gift #2: A Video

My friend Erik Qualman (Social Media Revolution) is at it again and shot a great social media video with a Valentine's Day theme. Enjoy and share it with your community as well: http://www.youtube.com/watch?v=6vY9Nd3Pft8

________________________________________________________

Gift #3: A Free Webinar

Time is limited, budgets are thin. But we all know social media is here to stay. I will share five tips YOU can implement right now to increase your reach and see a better return on your web marketing efforts. If you're in charge of your social media marketing, don't miss this session.

It will be February 23rd from 12pm-1:15pm EST.

Here's the link to register:

Social Media Webinar: 5 Ways to Maximize Your Efforts

________________________________________________________

Gift #4: A Deal

We're at about 50% capacity for our 2-day Workshop in Atlanta, so we're going to have a great group of entrepreneurs, business owners and marketers.

At the 2-day on March 22nd and 23rd, you will:

Receive recommendations to improve your Website.
Make sure you rank well on Google.
Start a Wordpress blog and learn how to update it.
Makeover your LinkedIn profile.
Learn to use Twitter efficiently and effectively - never miss a Tweet about you or your business.
Start using Google+ and I'll share why it's going to rival Facebook and Twitter.
Work on strategies for better email marketing and video marketing.
Leave feeling confident on exactly what you need to do on the web to be successful.

Deal #4 - You're getting $200 off the price.

Deal #2 - You get to bring a colleague for free.

Deal #3 - I'll give you a 1-year subscription to our Geek for 1-Hour a Week program.

That's about $2,000 worth of a DEAL!

Here's the link: www.ebootcamp.com/seminars

Corey really helped my practice out and got the ball rolling for me to enter the 21^st Century in marketing. If you aren’t ready to commit to his seminar, then at the very least, visit the eBootCamp’s website, sign up for his e-mails, read his Blog, and connect with him on Facebook, Twitter, and LinkedIn.

Photo Credit: eBootCamp.com

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Monday, February 06, 2012

Michelle Ward & PLR 201203033: Trust Qualified as Designated Beneficiary After Beneficiary Released Certain Powers

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

EXECUTIVE SUMMARY
In PLR 201203033, a trust qualified as a designated beneficiary after a trust beneficiary released certain portions of a power of appointment. The trustee of the trust was also allowed to transfer the inherited qualified plan to an inherited IRA for the benefit of the trust.

FACTS
“Alex” died at age 62 after establishing a trust that became irrevocable at his death. Alex was survived by his wife, “Lydia”, and his two children, “Nicholas” and “Melissa.”

The trust provided for the creation of a marital trust for the benefit of Lydia. The marital trust was named as primary beneficiary of Alex’s qualified defined contribution plan. The marital trust was to be funded by (in addition to other amounts) the value of any employee benefit plans made payable to the marital trust.

The trust also provided for the creation of "Primary Trusts" and "Exemption Trusts" for each of the two children. The Exemption Trusts receive equal shares of Alex's remaining GST exemption. The Primary Trusts receive the balance of the assets of the trust after all other distributions or allocations under the trust.

Lydia receives all income from the marital trust and discretionary distributions of principal. Upon Lydia’s death, any remaining property in the marital trust passes in this manner: (1) from the marital trust property includable in Lydia’s gross estate, a share equal to Lydia’s remaining GST exemption, to be divided equally between each Exemption Trust, and (2) the
remaining balance, divided equally between each Primary Trust.

During the term of each Exemption Trust, the trustee may distribute to each child the income and principal the trustee considers necessary for the child's health, education, maintenance and support. Upon the death of each child, the child may appoint the remaining principal and accumulated income among Alex’s lineal descendants. To the extent the child does not exercise this power, the remaining principal and income are to be distributed to the child's lineal descendants, per stirpes, and if there are none, to Alex’s lineal descendants, per stirpes.

During the term of each Primary Trust, all net income is paid to the child, plus discretionary distributions of principal. The child may withdraw up to one half of the principal upon reaching age 30, and the entire principal upon reaching age 35. Melissa had already reached age 35 at the time of Alex’s death.

A child who dies before receiving the entire principal of their Primary Trust may appoint any or all of the principal and income by will among one or more persons or organizations; however, the child may not exercise this power of appointment over any portion of the trust in favor of the child, the child's estate, or the creditors of either unless a federal GST tax would be payable.

To the extent that the child does not exercise this appointment power over their Primary Trust, the remaining principal and income are to be distributed to the child's lineal descendants, per stirpes, and if there are none, to Alex’s lineal descendants, per stirpes.
The trust provides that any property not effectively disposed of under the provisions of the trust is to be distributed to a charity.
After Alex’s death but before September 30 of the year following the year of Alex’s death, Nicholas executed a "Partial Release of Power of Appointment". The Release irrevocably released Nicholas’ right to appoint at his death any portion of the Primary Trust in his name to any beneficiary who is not a natural person or who was born before Lydia. Nicholas had no children as of September 30 of the year following Alex’s death.

COMMENT
An individual’s designated beneficiary is determined by September 30 of the year following the year of the plan participant’s or IRA owner’s death. In order for a trust to be considered a designated beneficiary under the IRC Sec. 401(a)(9) regulations governing RMDs from plans and IRAs, the following requirements must be met:

The trust is a valid trust under state law, or would be but for the fact that there is no corpus.
The trust is irrevocable or will, by its terms, become irrevocable upon the death of the employee.
The beneficiaries of the trust who are beneficiaries with respect to the trust’s interest in the employee’s benefit are identifiable within the meaning of Treas. Reg. Sec. 1.401(a)(9)-4, A-1 from the trust instrument.
The documentation described in Treas. Reg. Sec. 1.401(a) (9)-4, Q&A 6 has been provided to the plan administrator (this requirement can be satisfied by providing a copy of the trust to the plan administrator by Oct. 31 of the year following the year of the owner’s death).

If these requirements are satisfied, the beneficiaries of the trust (and not the trust itself) will be treated as having been designated as beneficiaries for purposes of determining the distribution period. Accordingly, the life expectancy of the oldest trust beneficiary can be used to determine RMDs. If the trust does not meet the above requirements, the owner is considered to have no designated beneficiary and the retirement plan must be distributed in five years if the plan owner died, as did Alex, before his required beginning date.

Requirements 1, 2 and 4 are easily met. Most trusts fail to qualify as designated beneficiaries because of the third requirement. While at first blush it may appear simple to identify the beneficiaries of a trust, the analysis is not that straightforward.

One must look at all potential beneficiaries of a trust to determine (1) if such beneficiaries can be identified by September 30 of the year following the year of the plan owner’s death and (2) if such beneficiaries are all individuals with an ascertainable life expectancy.

Accordingly, in PLR 201203033, the potential beneficiaries of the trust upon the death of Lydia needed to be considered in determining if the trust qualified as a designated beneficiary.

A person will not be considered a beneficiary for purposes of determining who the beneficiary with the shortest life expectancy is, or whether a person who is not an individual is a beneficiary, merely because the person could become the successor to the interest of one of the employee’s beneficiaries after that beneficiary’s death. Such beneficiary is referred to as a “mere potential successor.

The above rule does not apply to a person who has any right (including a contingent right) to an employee’s benefit beyond being a mere potential successor to the interest of one of the employee’s beneficiaries upon that beneficiary’s death. Therefore, if benefits will not accumulate in trust for a particular beneficiary under the facts existing at the plan owner’s death, any contingent beneficiary taking as a result of such beneficiary’s death is disregarded. In essence, one would keep going down the beneficiary line to determine the oldest potential beneficiary until there comes a point when the trust would be distributed outright given the facts that exist at the owner’s death.

Because of this “mere potential successor” rule, the potential remainder beneficiaries of Melissa’s Primary Trust did not need to be considered because Melissa was already age 35 at Alex’s death and therefore her Primary Trust would be distributed outright to her if she were living at Lydia’s death.

Nicholas, however, was not age 35 at his father’s death and therefore contingent beneficiaries of his Primary Trust had to be taken into account. If Nicholas were to die before the entire principal of his Primary Trust was distributed, he had the power to appoint the trust among one or more persons or organizations. In addition, to the extent the GST tax would otherwise apply, his power of appointment expanded to include himself, his estate, and the creditors of both. In other words, Nicholas had the power to appoint his Primary Trust to a non-individual or to an individual who is older than Lydia (whose identity could not have been known as of September 30 of the year following the year of Alex’s death).

Nicholas’ power of appointment would disqualify the trust as a designated beneficiary because, as of September 30 of the year following the year of Alex’s death, not all beneficiaries were identifiable and those that were included non-individuals. This situation
was rectified by Nicholas releasing, before September 30 of the year following the year of Alex’s death, his right to exercise his power of appointment in favor of any non-individual or anyone older than Lydia.

Under Treas. Reg. 1.401(a)(9)-4, Q&A 4 (except as provided in Treas. Reg. Sec. 1.401(a)(9)-6) any person who was a beneficiary as of the date of the employee's death but is not a beneficiary as of that September 30 of the year following the year of the employee’s death is not taken into account in determining the employee's designated beneficiary for RMD purposes. As a result of Nicholas’ release, the class of potential beneficiaries as of September 30 of the year following the year of Alex’s death contained only individuals and the beneficiary with the shortest life expectancy was identifiable (Lydia). Accordingly, the trust qualified as a designated beneficiary under the IRC Sec. 401(a)(9) regulations.

The potential charitable beneficiary that would take if there was a total failure of beneficiaries did not need to be considered because the trust would pay outright to a beneficiary at the death of Nicholas. The charity, therefore, was a “mere potential successor”.
Regarding the trustee’s desire to have the qualified plan transferred to an inherited IRA, IRC Sec. 402(c)(11) allows the post-mortem transfer of qualified retirement plans to inherited IRAs by non-spousal beneficiaries when such transfer is done via direct trustee to trustee transfer. As long as the trust qualified as a designated beneficiary, the trustee was entitled to have a direct trustee-to-trustee transfer made of the inherited qualified plan to an inherited IRA. Because the IRS ruled that the trust did qualify as a designated beneficiary, the IRS further ruled that such a transfer would be allowed.

CONCLUSION
Along with being a good example of how a trust is analyzed to determine if it qualifies as a designated beneficiary, this ruling also shows a post-mortem technique (i.e. a release or disclaimer) that can be utilized to save the designated beneficiary status of a trust. It highlights the fact that even if the plan owner has died and the trust does not qualify as a designated beneficiary as drafted, the advisor can explore options such as disclaimers or cashing out a beneficiary to allow the trustee to stretch out required minimum distributions for as long as possible.

CONTRIBUTOR: Michelle Ward, J.D.

TECHNICAL EDITOR: Barry Picker

CITE: PLR 201203033 (January 20, 2012).

CITE AS: LISI Employee Benefits and Retirement Planning Newsletter #594 (February 1, 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 is Prohibited. The Ultimate Estate Planner, Inc. has received permission from Leimberg Information Services, Inc. to repost this newsletter.

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Monday, January 09, 2012

NEWS RELEASE: WealthCounsel® and Trusts & Estates® Announce Findings from the Fifth Annual Industry Trends Survey

NEWS RELEASE from WealthCounsel, LLC - Today, WealthCounsel, LLC and Trusts & Estates magazine released a report of the key findings from the Fifth Annual Industry Trends Survey. The survey is conducted annually and has earned a reputation as the primary resource for insight on the state of the industry and emerging trends. Of the 1,085 respondents, 87 percent were estate planning attorneys, while the remaining professionals were comprised of certified public accountants, certified financial planners, registered representatives and insurance professionals.

“This year’s survey has a broader focus, inviting participation from all professionals involved in estate planning and wealth management,” said Matthew T. McClintock, J.D., Chief Executive Officer of The WealthCounsel Companies. “It is clear from the growing number of participants that the survey has become a valuable business resource for professional advisors engaged in trust and estate planning.”

In addition to questions regarding the impact of the Tax Relief, Unemployment Insurance Reauthorization and the Job Creation Act of 2010, this year’s survey solicited feedback on the economy’s impact on business-owner clients, partisan gridlock in Washington, the unemployment crisis and the connection between financial illiteracy and the subprime mortgage crisis. Key findings include:

57 percent stated that clients are proceeding with planning for non-tax reasons
32 percent believe the 2010 Tax Act has all but eliminated “estate tax avoidance” as motivation to plan
80 percent believe the nation’s economy will continue to suffer due to partisan gridlock in Washington
71 percent believe business incentives are needed to return jobs to the U.S. that have been sent overseas
73 percent believe that the lack of financial literacy contributed to the purchase of adjustable rate mortgages involved in the subprime mortgage crisis

“Despite the challenges over the past year, it is encouraging to see that 89 percent of those surveyed expect to see their practices grow over the next five years,” said Rich Santos, Group Publisher, Trusts & Estates.

A report summarizing the findings appears in the January 2012 issue of Trusts & Estates magazine. Complimentary copies are also available this week at the WealthCounsel and Trusts & Estates exhibit booths located in the exhibit hall at the 46th Annual Heckerling Institute on Estate Planning in Orlando, FL.

Download the 5th Annual Industry Trends Survey

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Previous Posts

TAXES—The Tax Magazine®: The Mathematics of Harvesting Losses and Gains

Out of the Ashes: CPA Robert Keebler is Leading Keebler & Associates LLP to the Cutting Edge of Tax and Estate Planning

Steve Oshins & the Hybrid Domestic Asset Protection Trust

Estate Planning for the Blended Family: The Intersection of the Head and the Heart

Strengthening Your Brand with CPAs

LISI.com - Practice Pointers on the Core Concern of Blended Family Estate Planning: Joint or Separate Representation

Autism Awareness Month: Special Planning for the Future with Autistic Children

IRS’ 5 Tax Tips for Newlyweds, Divorcees

New Book Helps You Plan for and Protect Your Assets

8 Habits of Highly Productive People

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2012

May

TAXES—The Tax Magazine®: The Mathematics of Harvesting Losses and Gains
Out of the Ashes: CPA Robert Keebler is Leading Keebler & Associates LLP to the Cutting Edge of Tax and Estate Planning
Steve Oshins & the Hybrid Domestic Asset Protection Trust
Estate Planning for the Blended Family: The Intersection of the Head and the Heart
Strengthening Your Brand with CPAs

April

LISI.com - Practice Pointers on the Core Concern of Blended Family Estate Planning: Joint or Separate Representation
Autism Awareness Month: Special Planning for the Future with Autistic Children
IRS’ 5 Tax Tips for Newlyweds, Divorcees
New Book Helps You Plan for and Protect Your Assets
8 Habits of Highly Productive People
A Vexing Retirement Planning Problem? Predicting Health Care Costs
Steve Oshins’ 3rd Annual DAPT Ranking Chart & Other Free Updated Charts Available to Download
Practical Planner - Checklist: Capacity (Volume 7, Issue 2)
Keebler & Ward on Taproot v. Commissioner: Roth IRA Not Eligible Shareholder of S Corporation
Baby Boom Good for Life Insurance
Practical Planner: 2012— ACT NOW! (Volume 7, Issue 2)
WSJ.com - Inherited IRAs: A Sweet Deal
5 Important Steps to Update Estate Plans
Trust & Estates: CrummeyService.com - Automating Administration of Crummey Trusts
Attract, Engage & Work with Families with Taxable Estates and Their Advisors
Robert Keebler: Planning for Concentrated Stock Positions, Plus Half Off Bob's Teleconference
TrustAdvisor.com: Does Hartford’s Annuities Exit Signal the End for Others?
How Do You Convince Clients to Actually Do GRATs (and Other Estate Tax Planning)?
Estate Planning for Clients with Beneficiaries Struggling with Substance Abuse
A Funny Thing Happened on the Way To… (Some of My Craziest Seminar Stories from Over the Years)

March

WSJ.com - Death Tax Defying: Estate Tax Repeal Gains Momentum in the States
Paul Hood on Wandry v. Commissioner: A Significant Taxpayer Win in another Defined Value Case
4 Estate and Tax Planning Steps to Take in an Uncertain Year
Steve Oshins on Weddell v. H20, Inc: Nevada Supreme Court Affirms Creditor Protection Benefits of Nevada LLCs
Polls: Current Financial Concerns Trump Planning for Retirement
The Drama of Whitney Houston’s Estate Continues to Unfold
Leimberg Information Services: 60-Second Planner on Fifth Circuit Affirms Chilton on Inherited IRAs
4 Tips for a Better Assistant (and More Efficient and Productive Advisor!)
The 3-Step Process for Closing New Prospects
How to Help Your Clients' Adult Children
Tax Expert Marty Shenkman: Two Tax Mistakes to Avoid With Clients in 2012
MainStreet.com: The Top 15 Richest Counties in America
The Paperless Law Firm - Using Technology for Lowering Overhead and Greater Efficiency
Senate Highway Bill S.2132 Brings Back Mandated 5-Year Rule for Payout of Inherited IRAs
22 Days of Tax Planning Advice: What I Do in My Practice, Pt. 1
2012 Tax Season Survival Guide: 22 Days of Tax Planning Advice

February

February 29th: Fun Facts About Leap Day
An Untapped Source for Financial Advisor Referrals
Adopt Your Girlfriend as Your Daughter Asset Protection Plan Shocks Planning Community
Leimberg Information Services: 60-Second Planner on President Obama's Estate & Income Tax Proposal
How to Thrive in the Under $5 Million Estate Market
Senate Bill Threatens Life of Stretch IRAs
IRS Extends Deadline to Make Portability Election
Whitney Houston Leaves Behind a Legacy of Music and Estate Riddled With Confusion
Forbes.com: Obama Declares War On Rich Folks And Wealth Advisors
Bloomberg: Senate Proposes Tougher Requirements for Inherited IRAs
U.S. Treasury Announces President Obama's 2013 Budget and Proposed Estate Tax Law Changes
The eBoot Camp's Valentine's Day Gifts to You
Financial Planning Magazine: Top Tax Strategies For 2012
Practical Planner: Checklist: More Heckerling Nuggets (Volume 7, Issue 1)
Betting On A Roth Conversion
Michelle Ward & PLR 201203033: Trust Qualified as Designated Beneficiary After Beneficiary Released Certain Powers
Practical Planner: Nuggets from Heckerling (Volume 7, Issue 1)
Forbes.com: The Roth IRA Back Door
Do You Have What Baby Boomer Investors Are Looking For?

January

Retirement Benefits in the Context of Estate Planning
Top 50 Independent Broker/Dealer Women Advisors in 2011
Interview on Dynasty Trusts with Guest Expert, Steven J. Oshins, Esq.
Top 10 Trends in Wealth Management
Full Report of The 46th Annual Philip E. Heckerling Institute on Estate Planning
Bob Keebler on Roth Conversions in 2012: Now's the Time to Convert
8 Ways Leaders Can Motivate Employees Beyond Money
Nevada Ranked as the #1 Jurisdiction for Domestic Asset Protection Trusts
Lawyers & Social Media - What You Need to Know
Sophisticated Trusts in English: DAPTs, BDITs, IDITs and More
NEWS RELEASE: WealthCounsel® and Trusts & Estates® Announce Findings from the Fifth Annual Industry Trends Survey
New Website Launched!
New Blog for The Ultimate Estate Planner, Inc.

The Ultimate Estate Planner, Inc. was formed to assist in the development and growth of estate planning professionals throughout the United States, including but not limited to estate planning attorneys, financial advisors, CPAs, life insurance agents, paralegals and much more. Through education, products and coaching, it is our goal to help estate planning professionals throughout the country unlock their practice’s potential.