IRS Silent So Far On New US Tax Rules For Inherited Wealth

Our trusts are drafted in such a way to account for the change, but still going to be an interesting time figuring it all out.

By Martin Vaughan, Of DOW JONES NEWSWIRES

WASHINGTON -(Dow Jones)- The U.S. Internal Revenue Service is taking a wait- and-see approach on issuing guidance dealing with taxes on inherited wealth, unsure whether Congress will act in the next several months to change the rules again.

Advisers to the wealthy say they are left without a roadmap on a number of issues related to the disposition of assets left behind by those who have died since Jan. 1. In particular, they are looking to IRS for rules on how a new capital gains-tax regime that took effect this year will apply to estates.

"There are no forms that give us any idea how or what we are supposed to report," said Stephen Litman, an estate planner at the Minneapolis law firm of Leonard, Street and Deinard. "This leads to significant administrative challenges for families."

Congress is weighing whether to set permanent rules for taxing estates, and whether to make those rules retroactive to the beginning of this year, but such action is weeks, and maybe even months, away.

The 2001 tax-cut law was aimed at gradually eliminating estate taxes, but repeal proponents at the time lacked the congressional majorities needed to do so permanently.

As a result, the federal estate tax was repealed for 2010 only, and is scheduled to return in 2011 at rates similar to those in effect prior to President George W. Bush's tax cut legislation.

In place of the estate tax for 2010 is a capital gains tax that is levied when assets are sold. Heirs would have to pay capital gains taxes on the full appreciation in value of the asset from the time it was acquired by the deceased benefactor, a concept known in tax circles as "carryover basis."

That means that families have an additional step of searching records to establish the basis value of the asset, which was unnecessary when estate taxes were in place.

"Carryover basis rules have added another level of complexity," said Carol Kroch, head of wealth and financial planning at Wilmington Trust Corp. "Families will have to go through a more difficult process of valuing assets."

The 2010 law provides that heirs can get a "step-up" in basis, meaning no capital gains taxes would be due if the asset is immediately sold, for up to $ 1.3 million of the estate property. Surviving spouses can get a step-up in basis for an additional $3 million in property.

Families will have to decide which assets to protect from capital gains taxes with the basis step-up. For example, property that is to be sold in the near future might be a good candidate, to avoid an immediate tax consequence. It might also be wise to protect property that has been in the family for a long time, and therefore has a low basis, wealth advisors say.

All that said, Congress might pass legislation that reinstates the estate tax for 2010 and eliminates the carry-over basis rules, which would make all such planning moot.

That may explain why IRS for now is waiting for the legislative picture to come into focus.

"We are currently looking at the issues involved to determine the best course of action," said IRS spokesman Bruce Friedland.

Families generally have nine months from the death of the estate owner to file estate tax returns, so there is a little breathing room before they have to make decisions about how to allocate assets.

"I don't think anyone would be distributing assets yet," said Kroch. "Over time, estate executors will have to make a decision about how much to hold in reserve for the estate tax" in case Congress re-imposes it retroactively, she said.

Another option that is getting some discussion by congressional staff is an election that would allow the family members of people who died between Jan. 1, 2010 and when new legislation takes effect to choose between paying estate taxes, for example at the rates in effect in 2009, or the capital gains-tax regime under the current law.

Women, Wisdom, & Wealth: Being prepared means peace of mind

Here is a great little article from a paper down in Florida that stresses the importance of proper estate planning. I really like when she comments: “Over a decade ago as new residents of Southwest Florida, we educated ourselves on proper hurricane preparedness procedures. We took the necessary actions and implemented a plan. We share the details with family members and revisit our plan each year; just in case. The peace of mind of being prepared is priceless. In the event of an emergency the last thing we need is to be searching and scrambling for important documents or contact information. Instead we’re available to help our friends and neighbors.”

By DARCIE GUERIN
Macro Eagle
Tuesday, July 7, 2009

Last week you were introduced to my friend Grace who was recently widowed. She and her husband had the difficult conversations while he was alive and discussed what the future may hold if one of them were to pass. In doing this while he was alive, she was much better prepared to handle the financial responsibilities of widowhood. The rewards were most worthwhile and helped make a very difficult time a little bit easier for her to deal with. Below are a few practical financial matters to be dealt with by widows and widowers.

PROPERTY

How are your assets owned? Is everything titled as joint tenants with rights of survivorship (JTWROS)? If the answer is yes, transfers occur immediately, but this isn’t always the best choice. If property was owned as tenants in common it will go through probate. If property was owned by a trust, the terms of that trust will determine how the property will be distributed. If there is no will, you’ll need to go through probate. You’ll also need to identify ownership of and transfer titles of bank accounts, real estate, stocks, bonds, mutual funds and retirement plans. Call your lawyer and financial advisor for assistance.

LIFE INSURANCE

Be sure to contact the Social Security Administration, current and past employers and any life insurance companies to determine and obtain all benefits you may be entitled to. Don’t forget to check on military benefits if your spouse was in the service. This may be an overwhelming task so start with just one phone call at a time.

RETIREMENT

If you’re the beneficiary of your spouse’s plans you have several options and choices to make on how to receive the benefits. Start by contacting the custodian or trustee of the plan. The selections you make on how to receive these funds are critical to your future financial well-being, so be sure to consult a trusted financial professional for guidance. And don’t forget to update your beneficiaries on retirement plans and life insurance policies.

HEALTH INSURANCE

Coverage will depend on your age and your spouse’s employment status. If covered by an employee group plan you’re probably eligible for continued coverage at a cost through COBRA or you may qualify for Medicare.

TAXES

Seek professional tax advice and request IRS Publication 559 for survivors. You may file a joint tax return and claim an exemption for your spouse in the year he or she dies. If there was a life insurance policy owned by your spouse or if proceeds of a policy were payable to the estate, the death benefit may be included in the estate for estate tax purposes.

INVESTMENTS

Grace’s husband was a savvy investor. He enjoyed keeping up with the markets and monitoring their investments each day. Grace’s primary concern was to identify income sources and evaluate her expenses. Then she determined if the investments were suitable for her needs and risk tolerance. This allowed her to ensure that her immediate and longterm financial needs would be met. Again, it’s helpful to seek professional advice as you work through these choices.

As you can see, there are many important financial matters to consider. You’ll want to coordinate efforts among the team of professionals you already have in place. It’s much easier to develop these relationships over time rather starting from scratch during a crisis.

KEY PLAYERS

Here are a few of the key players in your important decision making: Financial advisor, accountant, attorney, employer’s benefit department and insurance agents.

Over a decade ago as new residents of Southwest Florida, we educated ourselves on proper hurricane preparedness procedures. We took the necessary actions and implemented a plan. We share the details with family members and revisit our plan each year; just in case. The peace of mind of being prepared is priceless. In the event of an emergency the last thing we need is to be searching and scrambling for important documents or contact information. Instead we’re available to help our friends and neighbors.

Lack of preparation is one reason many widows and widowers face financial hardship. It doesn’t have to happen to you. Give yourself the gift of organizing and arranging ahead of time. If you do experience the unfortunate loss of a spouse, at least you’ll be as ready as you can be. There’s no better time than now to take control of the things you can. And in the meantime, after you’ve done your homework, enjoy each other’s company.

Darcie Guerin, Financial Advisor & Branch Manager, Raymond James & Associates, Inc. located at 606 Bald Eagle Drive, Suite 401, Marco Island, and FL 34145 provides this article. If you have questions please contact Darcie Guerin via e-mail at Darcie.Guerin@RaymondJames.com. Phone (239) 389-1041, toll free (866)-343-0882 or at RaymondJames.com/Darcie. Past performance may not be indicative of future results.

Information contained in these postings is for educational purposes only. No warranty, expressed or implied, is made as to their use. No one should consider this legal advice. If you have a question about your own affairs, you should seek the advice of a licensed attorney.

Who would have thought?

When our Firm receives calls from three people (around the age of 50) in one day to suddenly get started with their estate planning, you know there has been a seismic shift in terms of how people think about this work. It’s not just for the elderly. It’s for everybody !

There are very few deaths that will garner more attention than that of a celebrity. Michael Jackson’s recent passing at the age of 50 is one such death that serves as a wake-up call. High-profile deaths often bring about interesting responses from people. In one day we witnessed two. Farah Faucett’s, though tragic, was not unanticipated given her battle with cancer. Michael Jackson’s however, was a surprise for most and a reminder that it can happen at any age.

From what we have been able to ascertain so far (simply by what is made publically available from court filings), Jackson’s Will is similar to the Wills we often provide our clients. It is known as a Pour Over Will and intended to place all of his assets in trust for the children and other beneficiaries in his Family Trust. The Family Trust was likely a Revocable Living Trust (which, if properly drafted, becomes Irrevocable at death.) If handled correctly, we should never know the detailed provisions of the Family Trust since it is not required to be filed with the Court.

However, depending on whether his Family Trust was ‘funded’ during his lifetime, will inform whether we learn more details about his assets. Typically people do not complete this funding process (which essentially involves re-titling of assets from one’s personal name to the name of one’s trust) and instead rely on the Pour Over Will after death to get the assets into the trust. This process is the Probate process that we all know about and usually try to avoid. We will not know for some time yet whether the Pour Over Will is actually going to be used to re-title assets into Jackson’s Family Trust. My guess is yes – and – it will cost the family considerable time and money with lawyers and other professionals to do this which is why we usually recommend to our clients to fully fund, and keep updated and funded, their trusts during their lifetime.

Concern about privacy is obviously important for celebrities – but – it is also important for families wanting to protect their loved ones from unwarranted solicitations from any number of vendors. Keeping details of a family’s finances out of the public eye is an important benefit to doing estate planning with these types of trusts – and funding them during your lifetime and keeping them updated. There is always the risk that somehow (from a beneficiary or otherwise) Jackson’s Family Trust could be leaked to the press and would become publically available anyway.

People have asked us: “What about his debts?” Revocable Living Trusts usually do not a provide any way to avoid debts you accumulate during your lifetime. (This can vary based on state law.) Generally speaking, you are your revocable living trust for purposes of creditors and therefore your debts are not extinguished at death. (There are other types of planning vehicles for asset protection that sometimes can address these issues.) A trust can, if properly drafted, provide certain creditor protections, remarriage protections and other types of protections, but only after the funds have been properly placed into that trust. Michael Jackson’s affairs will need to be put in order including selling property, paying debts, settling claims, etc. After that, any assets left will be available to his children and other beneficiaries through the terms of his Family Trust.

So, while Michael Jackson did indeed have a Will, it is still unclear how the trusts were set up and funded. We will not know for some time whether these were properly drafted to provide the important protections they should. We cannot stress how important it is to update your estate plan.

Deciding if Your Kid Is Trust-Worthy

Parenting is more than reading to your children or getting them to eat their vegetables. It's also about securing their financial future. One way to do that is by drafting a trust and naming a trustee. In this excerpt from her new book "The Wall Street Journal Financial Guidebook for New Parents," Stacey L. Bradford explains why parents may want to consider estate-planning tools beyond a will.

You don't need to be Bill Gates to consider setting up a trust for to manage your child's assets until he reaches 18 or 21, depending on the state.

That property guardian may be a complete stranger who won't understand your values. Perhaps more important, the guardian could add one more layer of bureaucracy to an already complicated situation. When your child needs money, the guardian may have to make a formal request that then goes through the court system. It can be a real headache for your kids to get funds when they need it, and it's not an arrangement that's always in their best interests.

One way around the court system is to set up a custodial account for your kids through your will. In that case, you get to name the custodian, and he decides how the money is spent. Once your son or daughter is legally considered an adult, he or she inherits the money outright. The problem with this setup is that your kid might blow through the money and have nothing left over for college or grad school.

For many parents, setting up a trust is a better alternative that allows them more control over how their money is spent once they're gone. If you have the means and want your child to go to private school, for example, include that in the trust document. A trust can also delay the age at which your kids get their hands on the money.

This is often the biggest selling point for parents. Most people, looking back, would probably agree that they didn't necessarily make the most responsible decisions about money when they were 18 or 21, a time of life when it may have seemed perfectly reasonable to rack up credit-card debt. Even delaying a few more years -- until, say, 25 -- makes the money more likely to be put toward, for example, education or a down payment on a house.

While setting up a trust is a bit more complicated than a custodial account -- it requires a lawyer's assistance, for one thing -- it also provides more financial security for your children and is therefore worth considering. Ideally, you should set up a trust when you draft your will. But you can always add a trust later as your estate gets more complicated or your assets grow. For most parents, a simple trust will do. For more advanced planning purposes, such as reducing estate taxes, you could consider other options, such as a marital bypass trust or a grantor-retained annuity trust.

Here are a few questions to ask yourself to determine if a trust is right for your family:
Do you anticipate leaving your children more than a modest sum of money? A trust may not be worth the effort if you think you'll only be leaving a child (or children) $100,000 or less. On the other hand, if you're leaving life insurance money to cover four years of school and you own a home, there's a good chance a trust would make sense for you.

Do you want to have some say in how your children's money is spent?
A trust allows you to restrict spending to basic support, including food, clothing, education and health care. This is something that can't be done with a custodial account. If the custodian is a soft touch, he could end up lavishing your child with designer jeans and a fancy car, leaving very little left for the college years. Even worse, if the custodian is also the guardian, he could start writing himself large "support" checks to help cover his other expenses.

Would you prefer that your children not inherit the money when they turn 18 or 21?
If you think giving a high-school senior a large sum of cash is a recipe for disaster, then you should consider a trust. The ability to delay inheritance was the main draw for drafting a trust for Laurie and Greg Wetzel, a New York City couple in their mid-30s with three small children. Should something happen to both of them, they decided, their kids will each receive half of their inheritance at age 30, and the remaining amount when they reach 35. "Your 20s are such a transitional time that we don't want our children to have significant financial decisions to make," Ms. Wetzel says.

Do you want the money to be used for a college education?
If you specifically bought life insurance so that there would be enough money to help fund college in the event of your death, then you'll definitely want to delay the age at which your kids inherit your money. Otherwise, your child could think a red Ferrari is a better investment than a crimson Harvard diploma.

Would you like your children to have recourse if their money is mismanaged?
One more benefit of a trust that you don't get with a custodial account is that a trust is a legal contract; the trustee has an obligation to follow your directions and act in a reasonable and prudent manner. If the beneficiary feels the trustee spent the money frivolously, he can demand an accounting, and can sue for reimbursement if the trustee acted improperly with the funds. It may be pretty tough to prove illegal or improper actions with a trust, but just the threat of a possible lawsuit can keep someone in line.Choosing a trustee. The trustee holds the purse strings, so don't delegate this job lightly. You need someone who is trustworthy, is good with money and has great attention to detail. In other words, don't choose your brother who has trouble remembering to pay his own bills.

Your trustee is going to be working with your guardian, so they had better get along. While they don't need to be best friends -- in fact, it's probably better if they aren't -- they also can't be archenemies. You want your trustee to be able to tell your guardian she can't use the money to buy your son a new sports car, but you also want your trustee to take your guardian's phone calls when she needs more money to pay for your son's braces.

Then there's the issue of naming a family member as your trustee. There's no general rule here, and many people prefer to name a sibling since there's no one in the world they trust more. Siblings also typically don't charge to perform the service. On the other hand, my husband and I chose a close family friend. In our case, we felt he would be less biased and more likely to follow through with our wishes without passing judgment on how we want our child's money spent.

You'll also face the debate over naming your children's guardian as the trustee. On one hand, it's rather convenient. The person raising your kids won't have to ask anyone for permission about how the money will be spent. But a division of power can be a safer route. Some estate-planning attorneys worry that having one person fill the dual role leads to a conflict of interest and the risk that the guardian could take money for herself.

If you have a lot of money -- more than a million dollars -- you may want to name a bank or a lawyer to act as trustee. An institution has a lot of experience handling accounts and taking care of all the investments and necessary tax paperwork. You could also offer your trustee the option to hire a bank and act as co-trustee or as an agent, so that he or she still has ultimate control. He or she would basically keep an eye on the bank. Just be aware that a bank's services aren't free. They typically charge an annual fee of 1% to 2% of the principal.Drafting the trust.

Now that you've gotten this far, it's time to hire a lawyer, or use the same one who drafted your will. An attorney may ask you to sign standard forms, but don't feel locked in; you can personalize the trust to better meet your family's needs.

As much as trusts are about maintaining some say in how your money is spent, the language in the document should be vague enough to allow your trustee some leeway should your child's needs change or should something come up that you couldn't have anticipated.

Finally, you'll want to write your trustee a letter expressing your wishes for how you want the money spent on your children. Some parents go so far as to say that some of the money can be used to help raise the living standard of the other kids they may be living with, so everyone feels equal. Of course, it's up to the trustee to crunch the numbers and make sure there is still money left over to meet your main goals.

Adapted from 'The Wall Street Journal Financial Guidebook for New Parents,' by Stacey L. Bradford. Copyright 2009 by Dow Jones & Co. Inc. Published by Three Rivers Press, an imprint of the Crown Publishing Group.

Keep Tabs on Insurance That Covers Estate Tax

By: Arden Dale

Using life insurance to cover the death tax is common practice, but the strategy is blowing up some estate plans now.

The policies are imploding because of low interest rates. An insurance plan issued years ago, when interest rates were higher, may no longer be earning the investment returns it needs to pay premiums as drafted. That shortfall leaves the owner on the hook for unexpected costs.

If the worst happens and a policy collapses, its demise can even result in a big tax bill.
Estate planners are noticing the problem. (It is hardly limited to their arena. A policy can lapse no matter what it is used for.) Some expect it to get worse.

Donald Walters, general counsel for the Insurance Marketplace Standards Association, said IMSA has heard anecdotally of "growing concern" about troubled policies. The group is a nonprofit that develops best practices for the insurance industry.

Insurance consultant Bill Boersma, the founder and president of Opportunity Concepts in Grand Rapids, Mich., said he has worked with many troubled policies recently. He predicts a "tsunami" of lapses over the next few years.

"The worst are going to be from the 1980s and 1990s, when interest rates used for the projections were higher," said Mr. Boersma, who sees most trouble with universal and variable-life policies, although whole-life policies are starting to fail "at an alarming rate."

Problems stem largely from expectations about how well investments in a policy will perform. A policy may have been set up to self-pay premiums, based on the notion that investments will beat the interest rate used. Money then builds up and pays the premiums automatically.

But if interest rates decline over time, trouble can occur. The owner may not be aware that the policy is taking out internal loans to keep up with the premium payments.

Indeed, a lapsed policy often comes as a shock to its holder. Many assume the insurance is paid up or on automatic pilot so that they won't owe anything more out of pocket.

Jere Doyle, senior vice president at BNY Mellon Wealth Management, says he hasn't yet seen lapsing policies. But he says people do need to know that, if a policy doesn't perform as projected because of lagging investment returns, "the insured will have to pay the premium out of pocket longer than expected or for the duration of the policy."

Policies can be structured in many ways, and how the terms are laid out can determine a holder's liability. Knowing those terms is critical.

Advice to those using life insurance in an estate plan: Have an attorney check on the health of the plan. And don't be surprised if that person turns the matter over to an independent insurance expert. Policies are complicated enough that an estate planner or attorney may not feel comfortable vetting them.

Wall Street Journal, May 26, 2009, D2

Choosing an Effective Estate Planning Attorney

This is a great article that everyone searching for an estate planning attorney should read.

A Values Based, Client Centered Attorney Will Help Clients Succeed
By Daniel P. Stuenzi

All successful estate planning is the result of several professions working together for the good of the client. However, professionals of one group sometimes have misconceptions of professionals belonging to other groups. For example, the financial advisor may see the estate-planning attorney as a deal killer or a document peddler. But this is far from the truth. There are hundreds of estate-planning attorneys who are willing to work together with other professionals to help their clients. The key is to find those who are values-based, relationship-driven, client-centered and counseling-oriented.

Searching for gold
So where do you find these rare creatures? How do you know if you’re dealing with the right kind of attorney? The right kind of attorney will have an orientation toward relationship building and counseling rather than document preparation. The first thing he will offer is the ability, through counseling, to draw out the client’s hopes, dreams, fears and aspirations for himself and his loved ones. The attorney will carry on a sensitive dialogue that will enable his client to make clear his wishes to maintain control over his affairs, to be cared for properly in the event of a disability and to provide meaningfully for his loved ones after he is gone.

The right attorney will inquire about:
** the complexities of the family relationships through multiple marriages
** special-health needs of a grandchild
** a son-in-law who is not to be trusted
** the spendthrift daughter

On a more positive note, the right kind of attorney will ask about:
** the client’s wishes to fund the education of his offspring for several generations
** grand philanthropic goals that provide the client with feelings of significance that surpass his
success

In-depth counseling forms the strong foundation on which a long-term relationship is built. The right attorney will involve the other advisors in this process to the degree that the client is comfortable with that arrangement. When a client shares what is really important to him now and after his death, he develops a strong bond with his professional advisors.

An interdisciplinary approach
Another trait of the right kind of attorney is a true commitment to the team approach in estate planning. A good estate-planning attorney recognizes that every member of the planning team (the investment advisor, the insurance professional and the CPA) is vital to the success of the plan.

Legal documents are not enough. Even documents that have been drafted from in-depth counseling and are custom-designed to meet the unique needs of the client are not enough. Documents standing alone are like the proverbial automobile without fuel; the documents’ instructions only apply to assets that are properly owned.

For example, a will only controls those things owned in the individual’s name—not jointly. The trust only controls those things owned by the trustee of the trust. An irrevocable life insurance trust works only if it is properly funded with a suitable insurance policy. Advanced entities require careful balancing of assets for maximum effectiveness. Accurate valuation of the client’s business interests is imperative. New planning tools often require additional accounting and tax advice.

Financial and insurance advisors, as well as accountants, provide the fuel that is needed to help ensure that appropriate financial assets are allocated and funded correctly, offer necessary valuations and tax returns, and provide the means for proper balance within the plan. The estate-planning attorney you work with should not only recognize these truths, he should also be communicating them to your client on your behalf.

Each member of the interdisciplinary team provides third-party credibility for the other members. If there is disagreement among the professionals on a strategy or its implementation, it can be discussed and worked out between them as a team. In this way, the client is served with unanimous agreement.

Mutual respect and clear protocols will characterize the interdisciplinary team that is working well together. Each team member will know exactly what is expected of him, and communication will be constant and clear.

A client-centered relationship
The right kind of attorney will be focused on a long-term (even multi-generational) relationship with the client and his family. The attorney will not have a transactional approach to the estate plan, but rather a process approach. The estate plan is never really done until the client has passed away and every instruction for every beneficiary of every subsequent generation has been carried out. Those who speak of the plan or the client in the past tense may have a shortsighted perspective.

The client-centered attorney wants to ensure that everything possible is done to make sure that the plan is carried to fruition and that the client’s expectations are met.
There is nothing as constant as change. The client’s personal, family and financial situations change all the time. Kids get married and have children; there are divorces and remarriages; and the market goes up or down.

In addition, laws (both tax and nontax) change constantly. We have an estate tax. Then we’re told the estate tax isn’t so bad. The estate tax is abolished. Oops, the estate tax is back. Assets in retirement accounts and trusts are protected from creditors and predators. Some protected assets may not be protected in certain circumstances.

The other thing that should be constantly changing is the growth and education of the attorney and every advisor working with that client. New planning strategies should be developed, new tools should be discovered, and there should be a better way to say something.

The right estate-planning attorney has systems in place to ensure he stays in touch with the client, that the planning team knows of changes, and that there are methods to adjust the plan in light of those changes.

The attorney will also be aware that for a plan to work well, the people who will help in the future need to know what’s going on. If the children will someday serve as trustees and personal representatives, the attorney might tell those children what to do. If ongoing trusts have been established to protect those children and grandchildren, the other advisors should be in a position to continue serving as advisors to the subsequent generations instead of losing those accounts. The client-centered interdisciplinary approach can make that happen.

The right attorney does exist, and is looking for the right financial advisor, insurance professional and CPA to work with. If you share the values and practices outlined, you should look for an attorney with beliefs similar to yours. You might also check with regional and national organizations of attorneys who specialize in this area of the law, visit their events and spend some time getting to know their members.

As every member of the planning team focuses on the needs of the client, the process will run more smoothly, the client will be more comfortable and the practices of all the professionals involved will prosper.

Dan Stuenzi is the director of member development for the National Network of Estate Planning Attorneys.

Posted with author's permission. Originaly printed in 'Advisor Today'.