Estate Planning Bits

Widow or widowers real estate tax relief

Although the Mortgage Forgiveness Debt Relief Act of 2007 is best known relative to the issues regarding mortgage debt forgiveness as it relates to tax purposes, this Act provided a major benefit to the rules governing the sale of a principal residence by a widow or widower. Previously, a single person could only exclude $250,000.00 of gain on the sale of his or her principal residence, where a married couple could exclude up to $500,000.00 of gain if they filed a joint return.

The new law provides that where an unmarried taxpayer is the surviving spouse on the date of the sale, the period that the unmarried individual owned and used the property includes the period that the deceased spouse owned and used the property prior to death.

In order to qualify for the exclusion, the following conditions must be satisfied:

1. The sale occurred in the year of the deceased spouse’s death;
2. The surviving spouse and the deceased spouse’s Executor or personal representative file a joint income tax return for the year of death;
3. Either the surviving spouse or the deceased spouse met the test of the two-year ownership requirement with respect to the property immediately prior to the spouse’s death;
4. Both spouses meet the two-year use requirement with respect to the property immediately prior to the spouse’s death;
5. Neither spouse was ineligible for the benefits of the exclusion with respect to the property in that the rule was not violated by either of the spouses utilizing a prior exclusion.

It is significant to note that if a spouse dies late in the year, the surviving spouse does not have much time to sell the property to preserve the $500,000.00 exclusion prior to the year’s end.

However, if the property is jointly held, there will be a step up in basis in the property, as to at least 50% of the basis in most situations, upon the death of one spouse, so if the gain is not greater than $250,000.00, based on this step up in basis, the “quick sale” may not be necessary.

Also note that if the surviving spouse remarries before the residence is sold or exchanged, the exclusion exception, in this case of the full $500,000.00 exclusion, would not be obtained. In this situation, the surviving spouse should in fact sell the property prior to remarriage.

By: Hyman G. Darling, Esquire

How divorce affects your estate plan

It is a fact that nearly half of American marriages today are likely to end in divorce. The psychological steps may entail a long and arduous path, but the legal steps to take are fairly straightforward.

Typically, a divorce divides up property rights and custody of children. The next important step is to review your estate planning documents in light of your new circumstances. It’s likely that your spouse was named as an agent under your power of attorney and health care proxy, giving him or her the authority to make decisions for you when you were unable to make them for yourself. Although you are now divorced, your now ex-spouse still has that authority until you change it. Few of us would want our ex-spouse to have the authority to make medical or financial decisions that affect our lives.

Likewise, when you were married, you most likely named your spouse as the beneficiary for life insurance and retirement plans. Even if the beneficiary designation in favor of your now ex-spouse is revoked automatically, you will still need to designate who you want as your new beneficiary.

You will also want to re-consider each individual designated as a trustee, guardian, beneficiary health care agent and power of attorney, among others, in light of your new circumstance. While you may still want your ex-spouse to continue in some roles, such as Trustee for a trust for your joint children, you may not want him or her to continue in other roles. You should review each document and consider whether the estate planning decisions you made when you were married reflect your current sentiments.

By: Todd C. Ratner, Esquire

2008 tax information for retirees and those thinking about it

Right now is the time to plan for 2008 taxes, not this coming December.

Following are some tips about things you might want to consider:

• Social Security payroll tax limitations are increasing from $97,500 in 2007 to $102,000 in 2008. Therefore, $4,500 more of income will be taxed by Social Security in 2008.
• People receiving Social Security will see their benefits increase in 2008 based on an annual cost of living adjustment (COLA) of 2.3%. However, many of these same people will also see their Medicare premium cost increase.
• Big news for Baby Boomers turning 62 in 2008… anyone born on or after January 1, 1946 will have the right to start receiving their benefits at age 62 in 2008. However, these benefits will be permanently reduced based on what that you could have received if you had waited to collect your full Social Security payment at the new retirement age of 66. Nevertheless, you should do the calculations to determine whether early retirement makes sense for you.
• There is also a temporary reduction in benefits for those who obtain them before their full retirement age if those recipients earn more than a certain amount. In 2008, it is $1,130 a month. But those who reach full retirement in 2008 may earn up to $3,010 per month before any reduction from Social Security benefits.
  

While there is no right or wrong, it is important to review all of your options, limitations and decisions with a financial advisor and your accountant before making a decision. Once made, these decisions are irrevocable and may not be changed or amended in the future. There may not be anything wrong with taking an early benefit and sacrificing full benefits, however, it is important to have professional advice before making such irreversible decisions.

By: Hyman G. Darling, Esquire

Britney Spears' Conservatorship – what does this mean?

Spears' recent release states, "You want a piece of me." -- Perhaps she saw the Conservatorship coming.

You’ve probably heard that pop icon, Britney Spears, is under "Conservatorship." I do a poor job at keeping up with popular culture, but when it intersects with "probate" work, my curiosity peaks.

Typically a Conservatorship is sought when a friend or loved one believes that the “Ward” (in this case Britney Spears) does not have the ability to properly manage her own property. The Petitioner (Britney’s father, James Spears) has the burden of proving that the Ward does not have proper capacity to handle her financial affairs, whether due to mental or physical incapacity.

Courts do not accept a Petitioner’s blind assertion of the Ward’s “inability,” and a Medical Certificate (completed by a licensed doctor within a specific period of time) is required, together with the Petitioner’s Affidavit (statement under oath) which contains facts (not opinion) to support a claim for a court to intervene.

In the Spears scenario, if rumor and gossip are correct, it is likely that there are facts to support the Conservatorship in that Britney is currently emotionally unstable and not able to assert her own rights over her finances insofar as she is:

• Being locked out of certain areas of her life by a business manager, or
• Incapable of stopping the draining of her bank accounts or enforcing her contractual rights, or
• Pursuing abuses committed by others, which risks significant harm to her own financial condition.

A Petitioner need not know all facts about a mental, medical or adverse physical condition, but rather, a string of behaviors may be sufficient to illustrate or prove the point.

An individual has wide latitude to make financial decisions for him or herself that are unpopular, modestly negligent or even unreasonable without worrying that a Court will intervene in his or her life. However, Massachusetts Court will step in and appoint a Conservator as a fiduciary for the Ward in the following circumstances:

• When a medical or physical condition beyond the individual’s control causes or contributes to making decisions where there might be a risk of that person becoming a ward of the state, or
• Having the inability to support children where there is such an obligation, or
• Risking a personal fortune, or
• When fairness and equity (that gut feeling backed by some facts) indicate that the proposed “ward” is not really in “control,” and
• That there is a significant risk of harm or incapacity in terms of management of personal affairs.

Where there is an immediate need for action, (for example, to prevent Britney’s assets from being stolen or drained away by another, or where someone is preventing access without authority,) Courts have the authority to appoint someone to act as a “Temporary Conservator,” in this case, Britney’s father, James Spears.

The authority allowed to someone acting in this temporary position however, is frequently limited in time and scope so that only those actions deemed as necessary to avoid an irreparable harm and which authority is needed to “conserve” or gather information for purposes of maintaining the status quo, are allowed. It is likely that Britney’s father would not be authorized to enter into “new” contracts of a significant value to/for Britney or which might be potentially burdensome without reporting back to the Court with additional details and a request for direction.

In Massachusetts a “Conservator” is not authorized to supervise or care for the “person” of the ward (for example engaging doctors to treat the Ward, or getting the Ward proper health care or setting up visitation with others.) In the Commonwealth, a conservatorship is limited to dealing with a ward’s property – whether real or personal (including but not limited to money, stocks, contracts, land and/or a stamp collection).

Some of the on-line articles about Britney’s case suggest that a Temporary Conservator in California may be authorized to address some of her medical (including mental) issues, but a person so appointed in Massachusetts would not have that authority. In Massachusetts, if you wanted or needed the authority to engage doctors to help the ward, or to make the ward attend school, or any other innumerable actions, then you would seek your authority as a “Guardian” and not just as a Conservator.

Although I could go on (and on and on) about the finer points of Conservatorships, I would offer the following. Much of the frenetic, exhausting, and likely expensive court dances which have been chatted about with respect to Britney may have been avoided with a bit of advance planning.

If before all of this, Britney had contemplated and executed a Durable Power of Attorney which named someone who she trusted in an absolute sense to manage her financial affairs, then to the extent that the named “Attorney-in Fact” was not the alleged abuser, there could have already been a person (or persons) in place to assist with her financial management if or when she could not. A Durable Power of Attorney can be tailored to address specific needs under various circumstances.

I strongly encourage adults to contemplate these issues now because you never know when you too might start thinking that others just “… want a piece of me.”

By: Lisa L. Halbert, Esquire

Tax breaks for child care expenses

Do you work? Do you have children? Do you pay a day care provider to take care of your children so that you can work?

If this is the case, you’ll probably be entitled to a child care credit on your Federal Income Tax Return. Perhaps better still, check with your employer to see if there is an opportunity for you to utilize a dependent care spending account. With this, you may use pre-tax dollars from your wages to pay these expenses. The limit is currently $5,000, but this could be a significant benefit, especially if you are in a relatively high income tax bracket.

If your employer doesn’t offer this type of a plan, and if you pay expenses for the care of a dependent under the age of thirteen, you may be entitled to a credit for up to 35% of eligible expenses. In order to claim this credit, you must have paid a caregiver to take care of your child so that you could work. If you are filing a joint return, you both have to work, or at least have looked for work during the year. There is a limit of $3,000 for an individual or $6,000 for two or more qualifying individuals.

Before making a decision whether or not to utilize an available dependent care spending account from your employer or take the federal tax credit, it is important to run the calculations to see which one will be better for you. The combined federal and state tax rate plus the FICA savings may be better than the alternative.

In addition, if you have not paid much for child care in the past year, it may be better to not take the federal credit, as it may be a relatively small. However, if you have two or more dependents, you might find that there is a credit available that falls between the dependent care spending account and the tax credit rules.

While it is relatively easy to perform the calculations, they should be done early enough so that you will know which alternative is best suited to your situation.

By: Hyman G. Darling, Esquire