Estate Planning Bits

2009 tax strategy - now is the time to plan

In keeping with prior tradition, it is important to consider year-end tax planning prior to December 31st. So, here are this year’s tax savings opportunities. Maybe you can find something that can help you:

1. Purchase a car. State and local excise taxes that are paid for the purchase of a vehicle are potentially tax deductible. If you itemize your tax return, you may have the ability to include these taxes as additional deductions. In addition, there are significant tax credits available for energy efficient vehicles purchased before year end.


2. Energy credit for energy conservation. Purchasing insulation for your home that may not only save you money on your heating and air conditioning bills, but will also provide you with an energy-related tax credit. Keep in mind these are credits, not deductions. This means that the credit is a direct amount of money that will be returned to you in the form of an increased refund or lower tax bill.


3. Check gains and losses. You may wish to offset your gains with losses to the extent that you have any gains in 2009. If not, you may wish to sell assets before year end and take the tax loss, which may be utilized up to any gains, and if there are no gains, then up to $3,000.00 from other income for the year, with a carry-forward of the balance. Keep in mind that assets included in retirement plans are normally not tax deductible, so gains or losses are going to be taken on non-retirement plan assets.


4. Charitable deductions. Consider donating property, goods, and other assets, such as cash donations, stocks, bonds, etc. before year end. You may also consider making a 2010 donation in 2009, thus taking advantage of the deduction a year early. Payment of pledges for future obligations may also be made before year end, and these may also be charged to your credit card. By charging them in 2009, they become charitable deductions in this year even though you may not pay the charge card in the same year.


5. IRA Withdrawals. In 2009, it is not necessary to take a minimum required distribution from a retirement plan, thus allowing you to delay taxable withdrawals until the following year. The intent of this law was to allow your fund to accumulate more money for retirement, based on the downswing in the market. However, if you need the money, and if you have other obligations you wish to make, such as gifts or bills paying, consider reviewing the amount of taxable income anticipated for the year and take out only as much as necessary to maintain a low bracket for tax payments. Always be sure to consider the possibility that social security benefits will be taxable if the threshold for income is received based on your marital status.


6. Consider the child care credit or one for dependent care. In many cases, children may be supporting their parents, and they may need to sign a multiple support agreement, whereby the credit for the parent is rotated on an annual basis between multiple children. The credit is eligible for child care expenses as well as the expenses of caring for a disabled spouse or disabled adult who is dependent while you work or look for work.

While there are many other opportunities, these are a few that you can consider before the holidays occur, so there is ample time to attend to any payments, expenditures, or tax issues before December 31.

by: Hyman G. Darling, Esq.

529 Plans: computers and Internet in 2009-2010

Named for Section 529 of the Internal Revenue Code, 529 Plans allow taxpayers to both reduce their taxable estates and to earmark funds for the higher education of a family member. Earnings from 529 Plans are tax-free.

Funds contributed to 529 Plans are invested to pay for an individual’s college tuition, room and board, or other related expenses. Additionally, the American Recovery and Reinvestment Act (AARA,) (also known as the Stimulus Bill,) now permits computer technology and equipment, or Internet access and related services to be purchased for eligible students under a 529 Plan for 2009 and 2010. However, software designed for sports, games or hobbies does not qualify unless it is principally educational in nature.

In 2009, individuals can contribute up to $13,000 per year ($26,000 for a married couple) to 529 accounts without the requirement of submitting a gift tax return. Alternatively, up to $65,000 ($130,000 for a married couple) can be contributed in the first year of a five-year period, as long as there are no additional gifts to that same beneficiary over the same five-year period.

529 accounts can be a great way to move a sizable amount of money out of a taxable estate.

By: Todd C. Ratner, Esq.

Why do I need to file a gift tax return?

A federal gift tax return (Form 709) needs to be filed when you make a taxable gift. A taxable gift is one in which excess of the annual exclusion which in 2009 is $13,000 per donee per year is made. Therefore, until you gift $13,000 in total cash or other assets in any calendar year, a gift tax return is not required to be filed in most situations.

Keep in mind that if a gift of $13,000 is made to one person from another, there is no requirement to file the return. However, if in addition to this $13,000 gift, there is also a birthday present, anniversary present, or other gift, such as paying off a child’s credit card, then this is construed to be a gift, and therefore a gift tax return is required. However, until you give more than $1,000,000 in total gifts, above and beyond the annual exclusion gifts of $13,000, there is no gift tax due, although the return is required to be filed.

The IRS maintains the information in their files, and this is collated with your estate tax return when you die to determine the amount of gifts given during your lifetime, which may utilize some of your total estate tax credit, which is currently $3,500,000. A husband and wife may gift $26,000 to their child on an annual basis, and they are required to file a gift tax return, but they may split the gift as opposed to filing separate gift tax returns, thus requiring only one such form to be filed.

Again, the purpose of the requirement to file the return is to allow the IRS to have the information as to the amounts gifted during one’s lifetime, as these are offset at death. In the event that the total gift during your lifetime is a maximum of $1,000,000, and you die in 2009 with no more than $2,500,000, there will not be any federal estate tax due, as the total exemption of $3,500,000 captures your total assets.

It is also helpful to file a gift tax return in some cases, even when the threshold of $13,000 is not met. This is so that in the event that you need to file for Medicaid assistance, there is a paper trail of the amount of gifts made and the dates those gifts were made within the five year look-back period for Medicaid eligibility. Often times, the state department maintaining control over the Medicaid application process will consider a transfer from a parent to a child as a gift, but in other cases, the authorities may consider the transfer to be a trust or other similar type of technique. Therefore, if the transfer is not considered a gift, then the asset transferred will be construed to be property of the incapacitated parent, and thus, the asset will not be protected for Medicaid eligibility, regardless of the time-frame. When a gift tax return is filed, it is prima facie evidence that the transfer was made as a completed irrevocable gift, and therefore, the Medicaid authority may not reclassify the transfer as a non-gift.

Steve “Air” McNair truly erred – how proper estate planning would have saved his family both money and grief now

As a quarterback in the National Football League, Steve McNair reportedly earned in excess of $75 million dollars over his career. Notwithstanding McNair’s vast wealth and blended family, (as it has been reported that he had two children born out of wedlock,) McNair did not even have a basic will. Without a will in place, McNair died “intestate,” an therefore, state laws will determine who inherits his estate upon his death. As such, the following preventable issues will now have to be addressed:

Laws of Intestacy: According to Tennessee intestacy laws, McNair’s wife is only entitled to only one-third of the estate, and his children will be entitled to the remaining two-thirds. McNair may have intended that a greater percentage be provided to his spouse. As an aside, under the Commonwealth of Massachusetts intestacy laws, both McNair’s spouse and the children would be entitled to fifty percent of the estate.

Estate Taxes: McNair did not plan to shelter any portion of his estate from federal or state estate taxes. Consequently, the assets of his estate will ultimately be subject to both state and federal estate taxes, which will reduce the eventual distribution to his family. McNair failed to use the unlimited marital exemption and to yield the benefits of a Credit Shelter Trust.

Conservatorship: Since all of McNair’s children are under the age of 18, each mother will have to petition the court to be appointed legal conservator of their child’s inheritance.

No staggered distribution: When each child reaches the age of 18, their entire inheritance will be provided to them outright. It is often preferable to stagger the children’s distribution ages to a later point in time to ensure that they have the requisite financial wherewithal to handle such a large sum of money.

Probate: It appears that McNair owned property in Mississippi. If so, McNair’s family may have to probate his estate in both Tennessee and Mississippi, resulting in additional legal fees, costs and publicity.

In the event that Steve McNair had created an estate plan, he may have left more to his spouse, protected his children’s inheritance well beyond the age of 18, avoided the public scrutiny of his affairs, and saved his loved ones momentous money in legal fees, estate taxes and other costs.

By: Todd C. Ratner, Esq.

10 common estate planning pitfalls

1. Not having a Will: Personal wishes, whether written or oral, will most likely not be followed in the absence of a will. Without a plan, your assets will pass to your heirs according to your state’s laws of intestacy.


2. Not funding your revocable living trust: A property drafted trust will prevent putting your loved ones through the expensive, lengthy and emotionally draining court probate process. 


3. Failing to understand the impact of life insurance proceeds: Many people do not realize that life insurance proceeds are normally included in the estate of the deceased, which can result in approximately 50% of the proceeds going to the IRS instead of your intended beneficiaries. Depending upon the situation, an Irrevocable Life Insurance Trust may be appropriate.


4. Failing to adequately plan for children with special needs: A child with special needs risks being disqualified from receiving SSI benefits and may have to use their inheritance to pay for their care. Depending upon the situation, a Special Needs Trust may be appropriate.


5. Not properly planning for incapacity: People are living longer, and therefore the risk of lacking capacity during your lifetime is increasing. Only with proper estate planning can you be sure that your health and financial affairs will be taken care of in the event of your inability to take care of them yourself.


6. Business planning: With a properly executed plan, you can choose who will own and control your business upon your death, which increases the likelihood of the business continuing as a viable operation.


7. Not preparing for minor children: If you have minor children, you should have a will nominating personal guardians for the children, in the event that both you and your spouse should die prior the children reaching the age of 18. Without a plan, the court will decide without your input where the kids will live and who will make important decisions about their money, education and life.


8. Improper beneficiary designations: Not updating the beneficiary designations on bank accounts, life insurance, IRAs and other assets can lead to unintended beneficiaries.


9. Not periodically updating an estate plan: Generally, people do not like to discuss dying, and therefore people often want to simply execute their estate plan documents and be done with it. However, economic, family, and health changes require revisions to your estate plan.


10. Doing it yourself: Even if a self-prepared will or trust is legally enforceable, estate planning is a complex legal process requiring knowledge in several areas of the law, including estate law, tax law and property law as starters.

by: Todd C. Ratner, Esq.

10 perils of joint tenancy

Joint tenancy is a form of co-ownership. Often, owning an asset such as a home or bank account under a joint tenancy relationship is advantageous. For example, when one of the co-owners dies, joint ownership typically provides the surviving co-owner instant access to the jointly held property, eliminating the need for probate. However, joint tenancy can have its perils.

1. Control Issues: By providing someone with co-ownership, you give them control of your asset. If you add another person as co-owner of your home, you cannot sell or mortgage the home unless that person agrees.


2. Creditor Issues: If creditors seek out your co-owner for outstanding debt owed, the creditors may be able to obtain part of your home or bank account that is held in joint tenancy.


3. Relationship Issues: If you and your co-owner experience a falling out, the co-owner may be able to take all of the money out of the bank account without your approval.


4. Substitute for Will Issues: Many times, parents of several children will place one child’s name on an account and assume that that child will divide assets equally among all siblings. However, this method provides no stipulations over control of the money. The surviving co-owner can do with it what he pleases, with no legal obligation.


5. Uncertainty Issues: Unplanned ownership of property often leads to unwanted results, especially for people unable to manage assets.


6. Tax Issues: Careful planning to eliminate or reduce estate taxes can be completely thwarted by an inadvertently created joint tenancy that passes property outright to a surviving joint owner.


7. Long-term Care Issues: Careful planning to reduce long-term care financing can also be thwarted by an inadvertently created joint tenancy that passes property outright to a surviving joint owner.


8. Marriage Issues: Individual property may become marital property once it is transferred into a joint tenancy.


9. Incompetency Issues: In the event that a co-owner becomes incompetent, part of the property may go into a conservatorship, making it burdensome if the other joint tenant wants to sell some or all of the jointly held property.


10. Distribution Issues: Joint tenancies deprive you of the flexibility of a will or trust in which you can stagger the distribution ages of the beneficiaries. In a joint tenancy arrangement, the joint tenant receives the asset all at once.

By: Todd C. Ratner, Esq.

Crisis planning upon institutionalization

When a loved one is institutionalized, your financial situation may be impacted. Here are some tips to help you transition:

1. Engage competent counsel. It is very important to ensure that the lawyer you have selected is knowledgeable in elder law. This sub-specialty of estate planning allows lawyers who are specially trained to assist with tax, estate planning, and asset protection planning for the benefit of a client.
2. Review tax issues. Any time there is a gift, transfer, or any transaction involving real estate, stocks, bonds, and often CD’s or bank accounts, income tax, estate tax, and gift tax consequences must be reviewed. Whether assets pass during lifetime or at death make a significant difference in whether there will be a capital gain or no gain. Similar rules apply relative to real estate, especially whether a person obtains their exemption from tax upon the sale of the principal residence. Tax rules change frequently, and therefore, it is important to be sure that the advisor and accountant are involved in the planning process.
3. Purchase a pre-paid funeral plan. In most states, including Massachusetts, it is permissible to pre-pay a funeral or establish an irrevocable trust for one’s burial expenses. At the current time, any reasonable expenditure as a pre-paid expense is allowable if part of a irrevocable contract. Most funeral homes are aware of the rules of Medicaid eligibility, and if married, the husband and wife are both permitted to pre-pay their funerals without any look-back period.
4. Open burial account. In addition to pre-paying a funeral, any person who is applying for Medicaid is also permitted to have a $1,500 burial account. This account must be listed as a burial account, and no funds may be added in the future or withdrawn except for interest, which may accrue on this account during its lifetime. Again, there is no disqualification period for setting up an irrevocable burial account even when a person is already institutionalized.
5. Purchase a new vehicle if allowable. A reasonable amount may be spent on a car if the person who is institutionalized has a spouse living in the community who is not institutionalized. Transportation is not a necessity, but the regulations permit a car to be purchased. That is not to say that a “luxury car” should be purchased upon a spouse entering a nursing home, but rather, a reasonable sum may be expended.
6. Purchase new home and make home improvements. In the event that a person is renting and has sufficient assets to purchase a house or condominium, this may be an acceptable transaction so long as there is a community spouse who is living at home. However, if a person is institutionalized and is single, without any reasonable likelihood of returning to the community, then clearly, a purchase is not allowable. There are special rules regarding purchases of real estate with one or more names, as well as mortgages and reverse mortgages, all of which are techniques that require special attention. In addition, home improvements and renovations are allowable so long as there is a community spouse living in the premises.
7. Purchase personal items or household goods. Certain items of tangible personal property are allowable to be purchased. These would include new furnishings, carpeting, a new television, clothing, and other goods that are allowable under the regulations. Again, the rules regarding these items vary from state to state and are also changed within a state frequently, so attention must be paid to the regulations regarding asset purchases.
8. Pay debts if legitimately eligible to be repaid. The payment of debts is also allowable, including paying on a mortgage. Other debts, such as outstanding medical bills, credit card bills, etc. are allowable, but the bills may be carefully scrutinized to ensure that the goods charged are for the institutionalized person and/or their spouse.
9. Take a vacation if possible. If able to, the expenditure of money on one’s self is allowable, including the taking of a vacation. However, paying for a vacation for an entire family would be frowned upon. But, as opposed to having funds spent on long-term care, a person may expend funds on himself, such as taking that long deserved and anticipated vacation.
10. Review all proposed expenditures with an elder law attorney before making any payments, decisions, or gifts. Before taking any action in all of the above options, it is vitally important to check with a qualified attorney, preferably an elder law attorney, who will be able to look at each particular situation individually to determine the best course of action. There are no two situations that allow any “boilerplate” technique to be taken, but rather, similar to medical care, each person is looked at individually, and a plan is prepared for their specific situation regarding family, assets, and proposed care.

By: Hyman G. Darling, Esq.

Tax consequences of non-US citizen inheritances

In most situations, a person leaving money to their spouse has what is called an unlimited marital deduction. This means that there is no limit on assets that will be taxed from one spouse to another so long as the surviving spouse is actually a legal spouse, receives the money, and in most cases, is a U.S. citizen.

However, unlimited amounts may not be left to non-citizen spouses because the government is concerned that in the event that the surviving spouse were to receive the funds without any tax, he or she could leave the country and the U.S. government will never have their chance to tax these assets for estate tax purposes. Therefore, there are limitations on the amount that a non-U.S. citizen surviving spouse may receive without any estate taxes.

With good planning, there is a Trust that may be utilized to provide the non-citizen spouse with funds after the death of the U.S. citizen spouse, called a Qualified Domestic Trust (QDOT.) When this Trust is in existence, the estate tax deduction and marital deduction may be utilized to defer taxes until the death of the surviving spouse.

When planning was not completed before the death of the citizen spouse, it is possible that a significant tax may be due. In this case, there may be an alternative. The surviving spouse may then petition the immigration service to become a U.S. citizen. If this occurs prior to the filing of the estate tax return, which is normally due within nine months of date of death unless an extension is obtained, changing of the status of the surviving spouse to that of a U.S. citizen will negate the unfortunate tax ramifications.

If this is not an option due to choice or because the time limitations have already expired, then in the event that the first spouse to die had established a Trust, it is possible to file a petition with the court of competent jurisdiction to amend the Trust and reform it to qualify as a Qualified Domestic Trust. If this is the case, then the Trustee of the QDOT must be a U.S. Citizen or a U.S. Trust entity, as that person or entity is personally responsible for filing tax returns and withholding taxes when necessary. The Government wants to ensure that anyone responsible for the tax liability on this exception in the tax code meets their requirements and that the government has the ability to pursue them in the event that the trustee does not pay the required taxes.

There are also significant limitations on the transfer of funds from a citizen spouse to a non-citizen spouse during lifetime, and it is important to track these transfers for current as well as future gift and estate tax consequences.

It is usually a better tax result when both spouses are US citizens, but sometimes, one spouse elects to return to their native country and does not wish to become a U.S. citizen. This is certainly an option, but the tax effects should be reviewed prior to making that decision.

By: Hyman G. Darling, Esq.

GRAT - What is it and how does it work?

The GRAT or Grantor Retained Annuity Trust allows the transfer of assets, be it real estate, business interests, or other assets to an Irrevocable Trust. A person then receives an annuity payment from the Trust for a specific period of time, and at the end of that period, the Trust terminates, and the assets pass to the children, grandchildren, or other person who is named as the Trust Beneficiary.

There is probably more discussion about what a GRAT is than there are actual clients who execute this type of estate planning document. Since right now we are uncertain about the exact future of the federal estate taxes, including exemptions and rates, you may wish to be proactive and take advantage of benefits before the rules change. However, as oftentimes there are detriments where there are benefits, this is one of those situations where there is a significant benefit due to the very low interest rates as well as depressed values of assets.

When a transfer is made to a GRAT, a gift is made for gift tax purposes, but the person is not taxed on the present value of the annuity, since the Grantor who establishes the Trust is keeping those payments. The lifetime exclusion of $1 Million, (not $13,000.00 as most people believe,) is utilized to avoid or reduce the tax on the gift of the Trust remainder. Since this is a discounted amount, and it is based on interest rates and value of the assets, a significant portion of the assets may be transferred at this time at a much reduced value than they were a year or so ago. Since the annuity stream is based on the interest rates, that results in a lower taxable gift of the remainder, yet any future appreciation will not be subject to gift tax because the gift is made at the inception of the gift, not at the value of the gift when the trust terminates, hopefully having those assets appreciated.

If this becomes a bit more complicated than necessary or desired, then keep in mind that a person may still give up to $13,000.00 a year to as many different individuals as they want every year (this is the 2009 figure) without having to file a gift tax return. Any amount in excess of $13,000.00 per donee per year will require a gift tax return. But again, there is no gift tax due until the total value of all gifts exceeds $1,000,000.00 over the lifetime of the donor. In addition, please keep in mind that recipients of gifts do not pay income tax on their receipt of the gift.

by: Hyman G. Darling, Esq.

One child, two separated or divorced parents. Who gets the tax exemption?

In many cases situations involving divorce, or those where a child is born of two parents who are not married, there is a question about who is allowed to take the child as an exemption on their income tax return. With the exemption at $3,650, and a potential tax credit of up to $1,000 per child, this is an important consideration, as the net amount could mean a significant refund to the taxpayer. The issue of who takes the dependent is hopefully determined at the time that the divorce is granted, or by a separation agreement, or by a judgment of the court.

For tax years beginning after July 2, 2008, the IRS has finalized rules that determine the dependency requirements and clarify who is permitted to take the dependent. In most cases, the dependency will be awarded to the custodial parent unless the non-custodial parent obtains a signed waiver for that tax year and attaches it to their income tax return when filed. This rule applies regardless of what the divorce decree says, so it is important within the divorce decree to not only attend to the exemption allowance, but also to the requirement of the non-custodial spouse to sign the waiver.

In some situations, there is a joint custody agreement designating that each parent basically has the right to the child for an equal period of time. If it is not agreed upon, then detailed records should be maintained so that the person claiming the dependency exemption will be in a position to defend the taking of the exemption of dependency if audited. It is often suggested that a calendar be marked with the days and nights the child is living each the parent. It will probably be nearly impossible to reconstruct the calendar years later, when the IRS challenges the dependency.

When both parents claim the dependency, it is likely that the IRS will question both parents and review both tax returns. In normal cases, the parent with the most number of nights will win, but it is important to maintain accurate records, including vacations and times that the child may be with a grandparent so you’re in a position to count the specific number of nights. However, if a parent has a night shift and therefore is not available to watch the child at night, there is a different test that will be applied by the IRS as to the dependency.

For purposes of medical deductions, both parents may be able to take the deductions on their respective returns to the extent that they paid for medical expenses for the child, even if they are not the custodial parent and may not be the parent who is permitted to take the dependency exemptions. In the event that there is a divorce already granted but is in need of a modification for any terms, it is always important to review tax related issues when considering the net result relative to the tax effect.

By: Hyman G. Darling, Esq.