Estate Planning Bits

Airline miles and points and free stuff… oh my!

Often a person dies without having utilized all of their airline miles, hotel points or other credits they may have earned during their lifetime. While these certainly have value, it has been determined by the Internal Revenue Service that they are not taxable income when earned in most cases, and also, they are not taxed as assets in someone’s estate.

These miles or points may be converted into someone else’s name at death, subject to the various rules and restrictions of each particular plan. Many plans will allow a transfer by the executor or administrator to another family member. Each particular program has various forms, and some impose a fee to effectuate the transfer.

For instance, if a person had 500,000 airline miles at death, and if the transfer fee was $50, this would certainly be an economic situation in which the grantee of the points or miles should in fact pay for them to be transferred. However, sometimes it doesn’t make sense to transfer the miles because the value is low, like 10,000 or 20,000. On the other hand, if the person acquiring them could add them to their account, it could push them to the limit that qualifies them for a free flight for instance. Each situation must be looked at individually to determine the viability of the proposed transfer.

When someone dies it is very important to determine what miles are still in the account and whether any other miles or points are to be credited post-death from purchases made on credit cards, etc. Each provider of miles or points should be contacted to determine their specific policy on transferability, cost, etc.

If there is a situation where a person has become incapacitated either mentally or physically, and has accounts with unused points or miles, the provider should also be contacted as to whether these points or miles may be transferred either with or without a fee during lifetime. If the fees are greater than the value of the points, it possibly would be more prudent to utilize the credits by purchasing a ticket or reserving a hotel room and thereafter transferring the ticket to another person.

In any event, points and miles are hard-earned by people during their lifetime, some who are fanatical about obtaining and utilizing them, and these assets should not be neglected by the fiduciary of an estate.

By: Hyman G. Darling, Esquire

The big tax on your IRA

Many clients wish to gain a specified sum or a goal such as $1,000,000 or $2,000,000 during their lifetime. The pursuit of this goal is merely an artificial number based on some theory that they wish to be a millionaire or multimillionaire. One of the best ways to create significant wealth is through the deferral of income in a 401K or individual retirement account (IRA).

Once the account reaches a significantly high number, it is probable that the required minimum distribution, which you have to take on an annual basis, will probably be smaller than the annual increase in the account on an annual basis. Therefore, for many years, the retirement account will continue to grow even though you’re making a withdrawal.

It must be noted that in most cases, the deferral as well as the initial contribution of the IRA is nothing more than a deferral of the tax, not an elimination of the tax. This is wonderful while you’re is alive, but upon death, this could create a significant tax due to your beneficiaries.

If your estate is greater than $2,000,000 in 2007 or 2008, or if the amounts of your IRA together with all other assets are greater than $2,000,000, there will be an estate tax due. This amount will be in addition to income taxes due upon the withdrawal of the funds by the beneficiary recipient. Also, between estate tax, which will be approximately fifty percent (50%) for state and federal taxes in many jurisdictions, and income taxes, which could be at a rate of forty percent (40%) for state and federal taxes, there are only cents left on the dollar for the recipient.

Although there are strategies where the recipient may in fact withdraw money over time, oftentimes he must withdraw funds from your IRA in order to pay the estate tax. This withdrawal is also taxable income, so there is double taxation on these assets. Therefore, it may be advisable for the owner to withdraw funds even larger than the annual required minimum distribution.

In some cases, you should consider spending IRA funds first and using other money as a backup. Although many financial planners and other investment strategists will attempt to convince you that you should defer income by not spending the money from the IRA, if the calculations are done, it may be more beneficial to consider deferring income until it is time to spend it, and in retirement years, withdrawing funds from the retirement account before spending other assets.

By: Hyman G. Darling, Esquire

Eliminating Mortgage Guaranty Insurance – remember to keep an eye on your loan to value ratio

If you purchased your home with less than a twenty (20%) percent down payment, you are probably paying mortgage insurance premiums that are relatively substantial. As a general proposition, once your loan to value ratio drops below eighty (80%) percent, you are usually able to terminate those insurance payments. Thus, it is important for you to keep an eye on the outstanding principal balance of your loan, as it is lowered by virtue of your loan’s amortization.

If you contrast that figure with the fair market value of your home, which probably appreciated since you purchased it, you may be eligible to eliminate that mortgage guaranty insurance. In fact, depending upon your financial circumstance, if you are in a situation where this insurance premium is being paid each month and you have some additional income that you can apply to your mortgage principal, you might be able to accelerate the time when you can to stop making these payments. This would be an overall benefit to your cash flow and quality of life.

By: Bruce M. Fogel, Esquire

Roth conversion opportunity can provide huge benefits

The Pension Protection Act of 2006, which gave taxpayers over 70 ½ the ability to use their IRA to make charitable contributions during 2006 and 2007, also includes provisions establishing the ability to convert a traditional IRA into a tax free Roth IRA starting in the year 2010 for all taxpayers, regardless of income limitations. This is in sharp contrast to the current income limitations prohibiting such conversions for those taxpayers having income over $100,000.00.

A Roth IRA is a retirement vehicle into which you deposit previously taxed dollars; and which then permits the earnings to be completely tax free at anytime thereafter. Furthermore, the amounts accumulated in the Roth may be withdrawn at any time after you reach the age of 59 ½ completely tax free by either yourself or your heirs with no required minimum distributions, ever.

The conversion will be a taxable event, although you will be permitted to spread the resulting tax over two (2) years. [As an aside, it is my opinion that the reason this tax opportunity was scheduled for 2010 was to try to raise additional revenues during a year when it is projected that revenues might have dropped significantly by virtue of the fact that the Estate Tax may be eliminated in that year.]

Again, this is a strategy that should be discussed with your tax and/or financial advisor with respect to your overall plans and financial circumstance. However, it offers an important planning opportunity that would eliminate the need to begin to withdraw money when you might not otherwise need it or might be in a higher tax bracket than while you were working.

The current application of this planning strategy is to consider taking complete advantage of every opportunity to contribute to your current available pensions in every year between now and 2010, to enable you to have more available for conversion.

By: Bruce M. Fogel, Esquire