Estate Planning Bits

Charitable donations and tax deductions: a cautionary tale

In a tax court matter decided earlier this year, (2013,) a man wanted to assist low income individuals and their families with obtaining affordable housing. To that ends, he donated approximately 70% of a privately held entity to a qualified non-profit entity. Included in this gift were many apartments, and on his tax return, the donor claimed a charitable gift of over $1 million.

The value was supported by an appraisal for each of the buildings, but surprisingly, the IRS denied the deduction, not on the valuation, but because the donor lacked a “qualified appraisal.” The court concluded and agreed with the IRS that neither of the appraisals had the correct assets appraised value. Instead of the valuation of the stock being valued, the donor provided appraisals of the apartment buildings themselves.

Unfortunately for the taxpayer, the IRS was correct, and the court held that the appraisals were, “…short of meeting all of those requirements,” as promulgated by the IRS.

One might think that, although the appraisals were not in strict compliance with the internal revenue code, the man substantially complied with what was required in order to take a charitable deduction. The court rejected the man’s argument that he had substantially complied with the IRS’s requirements and said that the details must be complied with or the deductions will not be granted.

Unfortunately for this man, he had made a gift to a non-profit in an attempt to help people, and was then denied the deduction. Although it seems quite unfair, the valuable lesson learned is that one must not only think they are complying with regulations, but must be sure that he is complying when making gifts or taking charitable deductions.

 

Hyman G. Darling, Esq.

Photo credit: Microsoft  

 

 

Should I hire a professional tax preparer?

As the clock keeps ticking and the April 15 filing deadlinefor filing the 2012 income tax returns, (or the April 16 filing deadline for your Massachusetts return,) keeps getting closer, one decision many taxpayers grapple with is whether or not to hire someone to help them prepare their returns. As with many such decisions, the best answer really is “it depends.”

What it depends on is a number of factors including:

• Is it something that you really want to do?
• How complex is your return?
• Has something unusual occurred this past year that needs special attention?
• Are you anxious about getting your paperwork accumulated and filing the return timely and accurately?

Beyond all of those issues, as a general proposition, I believe that most people who have more than wages and bank interest to report on their tax return would benefit from utilizing the services of a tax professional. Perhaps the main reason for this belief is that ‘better’ tax assistance generally comes from those who are not, what I call, “tax historians.” In this context, “tax historians” are tax preparers who receive your information for what transpired in the prior year and put it down on the tax return forms with the primary goal being the size of your refund or how little the balance due is.

I believe that those tax professionals who offer the best value for their involvement are those who get involved in assisting people with their tax filing responsibilities by viewing the tax refund or balance due as not much more than a tollbooth en route to maximizing the total amount of money left in one’s pocket after the completion of the tax return. Furthermore, it is those same tax professionals who use the previous year’s tax return and associated information as a source of inspiration for which strategies, (contributions - whether to charities or retirement plans,) timing of income receipt, and/or expense payments will work best not only in the then current tax year but in the tax years that follow.

How can you do your due diligence in selecting a tax professional to work with? More often than not, the best referral system is inquiring of friends, colleagues, coworkers, and/or relatives whom you trust for their recommendations and experiences. Once you get a name or names, the next step would be for you to interview each person either over the phone or face-to-face in order to get a sense for whether or not there might be the makings of a good, and ideally, long-standing relationship.

Among the questions you might ask during that interview are the following:

 

• What type of tax preparer are you?
  Meaning: are you a tax preparer, enrolled agent, CPA, or tax attorney?
  
  
• Do you have a Preparer Tax Identification Number (PTIN)?
  While the mere fact that someone has one of these is not necessarily a confirmation of their ability, it does indicate that they are registered with the IRS which leads to a conclusion that they are doing more than just several returns and have at least met the IRS minimum threshold to sign returns.

• Do you operate your tax practice/business year-round?
  Clearly, the reason for asking this question is that tax notices do not only arise between January 1 and April 15, and should you receive any correspondence with regard to a prior filing, you want to be able to follow up on it in a timely fashion.
  
  
• What is your typical turnaround time for the completion of the return?
  The issue, from my perspective as a tax attorney, is not simply whether the return will be finalized and filed by April 15, but also includes whether the tax professional is realistic about filing deadlines so that the filings will be taken care of thoughtfully, thoroughly, and timely. This is true whether the returns are filed by the April 15 date or within any allowable extension period, which might be necessitated by either your ability to produce the applicable information or the level of how busy your potential preparer might be based on a somewhat arbitrary filing deadline for everyone, and the delay, (especially this year,) in not only the tax forms becoming available but also the receipt of reporting information from the various sources.
  
  
• If I were to get audited, do I need to meet with the IRS?
  In this instance if he or she answers other than “no, you do not need to meet with them alone”, that would mean that you might well do better looking somewhere else for someone to help you with your filing responsibilities.
  
  
• What will it cost me to engage your services?
  As with almost anything else that you purchase, this is certainly one of those areas where, in most situations, you will get what you pay for. Certainly the cost associated with preparing any return is going to depend on the tidiness of your information presentation, the comprehensiveness of your records and how it is presented. Other factors that will have an impact would include the complexities associated with your return, the accuracy of your information, whether you are self-employed, whether you have rental properties, the nature of some of your investments, etc. Therefore, it is sometimes challenging for the preparer to provide a specific fee quote, but at least you will have a sense for how the costs might run and how it may or may not fit into your budget.

In the final analysis, you are well advised to look for someone who is not just looking backwards at the year just completed, but who is looking forward to help you plan for the future and is available at any time of the year to be able to address issues that might arise from previous filings, in order to address how you might want to deal with something that arises in the course of the current year. In all cases, remember that the person you engage to assist you is working both with and for you.

And in conclusion, under the ‘for what is worth’ heading, I offer for your consideration my opinion that the income taxes we pay are our rent for the opportunity we have to live in our wonderful, if imperfect at times, democracy.

Bruce M. Fogel, Esq.

Photo credit: Microsoft 

Estate Planning for Blended Families: Considerations for cohabitating or married couples with kids from other relationships

The modern family of today is often a mix of spouses, exes, kids, and steps who somehow find a way to make it all work. Estate planning for such an intricate blended family may be a little tricky, and there are lots of factors to consider. 

While traditional estate planning documents are critical, it is also important to consider a prenuptial or a cohabitation agreement. Either one of these agreements should spell out, in as much detail as possible, what will occur if the relationship dissolves, regardless of whether or not the couple is married. 

One of the major issues that this agreement should address is housing. When a couple purchases or rents a home together, if the relationship falls apart, and both parties are liable on a mortgage, what will happen?

Additional life insurance may be necessary if one of the parties is under an order of the court from a prior divorce decree wherein a percentage of assets is required to be maintained for the benefit of children from the prior marriage.

It is also important to consider each party’s health proxy and durable power of attorney. Who will be in charge of making decisions in the unfortunate event that one individual becomes incapacitated?

A will and possibly a trust should also be considered, and provisions within these documents should fairly closely mirror the prenuptial agreement to conform with all of the requirements set forth in that agreement, which may be construed to be a legal contract.

In addition, if there are any requirements under an order of the court from a prior divorce decree, those provisions should also be reviewed and included within one’s will.

When assets of relatively equal value are owned, some couples choose to retain their own assets in the event of a divorce, however, in the event of a death, some additional assets would be left to the survivor. Other options may include a possible phasing in of assets.

Health insurance should also be considered prior to marriage. Both parties may be receiving health insurance from a former spouse. The previous divorce decree, any modifications, and separation agreement should be reviewed carefully ensure that all benefits are maintained or solutions may be implemented.

The issue of life insurance and qualified plans such as 401(k)s, IRAs, 403(b)s, etc. should also be reviewed. It is very important to understand that such assets pass by beneficiary, not by will. Therefore, whoever is named as the beneficiary of these assets will receive them without the need of having those assets pass through probate.

Likewise, if assets are intended to pass to a trust or to individuals listed in a will, it is important to obtain change of beneficiary forms and have them signed and forwarded to the plan administrators at insurance companies when the documents are signed.

The bottom line is that there are many important considerations and decisions to make before remarrying or moving in with another person.

 

Hyman G. Darling, Esq.

Photo credit: Microsoft 

2013 numbers that might matter to you

Every year, many important numbers are adjusted for cost of living increases or other adjustments. 2013 is no exception, and the following is a list of some of the important numbers to be considered: 

Estate and Gift: 

Annual exclusion gifts - $14,000

Lifetime gift credit - $5,250,000

Estate tax credit - $5,250,000 

Medicaid: 

Maximum community resource allowance - $115,920

Minimum community spouse resource allowance - $25,000

Maximum amount Medicaid recipient may own - $2,000

Minimum monthly maintenance allowance - $2,898 (until July, 2013) 

Medicare Part A: 

Hospital deductible (days 1 – 60) - $1,184

Hospital co-insurance (days 61 – 90) - $296/day

Hospital co-insurance (days 91 – 150) - $592/day 

Medicare Part B: 

Deductible - $147/year

Standard premium (if individual’s income is less than $85,000) - $104.90/month 

Income taxes: 

Maximum wages for Social Security tax purposes - $113,700 

Capital gains tax: 

Maximum rate – 20%

Phase-out of itemized deductions: 

Cut by 2% for each $2,500 of adjusted gross income over the same thresholds for phase out of standard deductions.

Phase-out of standard deductions: 

$250,000 for single taxpayers

$300,000 for married taxpayers 

 

The above numbers are the standard numbers for 2013, but many of these may be adjusted for both tax and Medicaid purposes with accounting and/or legal assistance. There are exceptions to both rules and figures, and you should not merely consider that the aforementioned numbers are set in stone without proper planning.

 

Hyman G. Darling, Esq.

Photo credit: Microsoft 

 

Clarifying social security and taxes

While social security was never intended to be taxable income when the benefit was enacted by Congress, it appears that there are over 15 million taxpayers who reported social security as taxable income on their 2009 federal income tax return. Only a portion of social security income is taxable, and it is based on the amount of other income (taxable and non-taxable) that a person receives.

Social security benefits are not taxable if a person’s income is less than $25,000, or less than $32,000 for a married taxpayer who files jointly with their spouse.

Up to 50% of benefits are taxable if income is between $25,000 and $34,000 for a single person, and $32,000 and $44,000 for married taxpayers.

Up to 85% of benefits are taxable if income exceeds $34,000 for a single person and $44,000 for a married taxpayer.

Please note that the government does not “take” 85% of a person’s social security benefit, but rather, this is the maximum amount that could be taxed at the incremental tax bracket of the taxpayer.

There are several things that you may consider when attempting to lower the tax rate or eliminate the taxation of social security benefits.

You may pay off debt, which may or may not be an itemized deductible expense. But in any event, reducing the taxable income of investments will reduce your total taxable income, thereby possibly lowering the portion of your taxable social security income.

The purchase of tax deferred investments, such as stock for capital gain, a tax deferred annuity, U.S. savings bonds, etc., will eliminate the initial impact of taxable income, which may lower a social security sum from being taxable. (Note that purchasing tax exempt securities, such as municipal bonds, does not benefit, as this income is considered part of taxable income for social security purposes, although these investments may produce a lower rate of taxable income.)

By shifting income from one year to another, and by taking more deductions that are otherwise not deductible into one year, such as pre-paying real estate taxes and charitable contributions, one may be able to itemize deductions in one year, where the ongoing payment of these expenses on a yearly basis may not produce any tax benefit.

It is important review these issues before year-end so that action may be take. If you find that you may have significant taxable income in a particular year, you may wish to make an estimated tax payment so that you will not have a penalty or incur a large tax payment on April 15^th.

 

Hyman G. Darling, Esq.

Photo credit: Microsoft   

 

Dispelling Medicaid myths about gifts

It seems like every day someone tells me that they are going to protect their assets from long term care expenses by making a gift of $10,000 to their children. Ah, if only I had a dollar for every time I heard that one! Unfortunately, these people are misinformed.

First of all, the amount that you can gift to a child or another person on an annual basis is $13,000 without having to file a gift tax return. Any amount over this annual amount will require a gift tax return, but currently, the gift exclusion is $5.12 million. Therefore, most people should not be concerned about limiting a gift to $13,000.

For emphasis, this is only a tax rule, not a Medicaid rule. Any amount that is given to another person triggers a 5-year waiting period, which basically means that the amount of the gift, whether it is $10 or $100,000, carries with it a 5-year look-back period. The donor will not be qualified for Medicaid benefits until either the 5 years lapses or all of the funds transferred are utilized for the benefit of the donor. There is no minimum gift threshold that doesn’t trigger the look back, and some states even question and disqualify Christmas, anniversary, and birthday gifts.

Here is a short list of permissible expenditures that do not normally disqualify a person for Medicaid eligibility, the following is a list, although (These amounts may vary from state to state:)

• $2,000 personal needs account
• Prepaid burial account
• $1,500 burial account earmarked specifically for funeral and related expenses
• Purchase of any necessary medical equipment
• Payment of expenses of a home while the person is living there
• A home while the person is living in it (with equity of up to $750,000 in some states)
• Personal belongings and household goods
• 1 car

All other assets, including jointly owned bank accounts, CDs, retirement plans, revocable trusts, second cars, second residences, life insurance, U.S. Savings Bonds, etc, are countable and will have to be spent on a person’s long term care.

However, if a person is married, there are strategies available to assist with saving and preserving assets, since the disqualification rules relative to the 5-year look back do not apply to transfers between spouses.

While repetitive, it is worthwhile mentioning this information again in an attempt to clarify the annual exclusion rule for taxes vs. Medicaid. There is no substitute for good legal advice from a qualified elder law attorney, however, when considering any Medicaid or tax planning strategy or transfer.

 

Hyman G. Darling, Esq.

Photo credit: Microsoft   

Estate planning for blended families: considerations for cohabitating or married couples with kids from other relationships

The days of mostly traditional American families are probably gone for good. The modern family of today is often a mix of spouses, exes, kids, and steps who somehow find a way to make it all work. Estate planning for such an intricate blended family may be a little tricky, and there are lots of factors to consider. 

With blended families, it is important to give significant thought, time, and attention to the many planning issues regarding financial, insurance, and tax related matters. While traditional estate planning documents are critical, it is also important to consider a prenuptial or a cohabitation agreement. Either one of these agreements should spell out, in as much detail as possible, what will occur if the relationship dissolves, regardless of whether or not the couple is married. 

One of the major issues that this agreement should address is housing. Both parties may be liable on a mortgage, and it is very important to consider the status of the real estate upon dissolution of the relationship. 

There may also be provisions within the agreement relative to the distribution of assets upon death. In cases where there is a significant mortgage, the parties may consider purchasing life insurance to cover the outstanding balance of the mortgage so that the survivor may receive sufficient liquid assets to continue paying the mortgage despite the loss of one income. 

Additional life insurance may also be necessary if one of the parties is under an order of the court from a prior divorce decree wherein a percentage of assets is required to be maintained for the benefit of children from the prior marriage. 

These are just a few of the issues that blended families will likely face. For a more comprehensive analysis of your situation, it is recommended that you meet with a qualified estate planning attorney.

 

Hyman G. Darling, Esq.

Photo credit: Microsoft   

 

2012: the year to gift. A gift and estate tax update.

In the spirit of consolidating your financial house, since you’re likely wrapping up your 2011 taxes, now is a great time to go one step further and review your gift and estate tax options as well. 

Remember when 2010 was designated as "the year to die" from an estate planning perspective? Well, for now, it’s looking like 2012 is the year to gift! 

Until the end of 2012, an individual may gift up to $5,120,000 to individuals without paying any gift tax, and this amount is in addition to the annual exclusion gifts of $13,000 per person per year. The $5,120,000 exclusion also applies to generation-skipping transfers for the balance of 2012. At the end of 2012, unless the law changes, the $13,000 exclusion will continue, but any amount over that will then be subject to a $1,000,000 limitation on lifetime gifts. Any amount over that sum will cause a tax to be due at the rate of 55%. 

In the proposal submitted by President Obama, the $5,120,000 exemption would reduce to $3,500,000 in 2013 and for years beyond. However, the generation-skipping exemption will remain at $1,390,000. 

While these numbers seem to be relatively high, if you have greater than these sums upon death, then there will be an estate tax due that would be in the vicinity of 45% on the excess of the exemption amount. Therefore, 2012 is a very important year to make your gifts, since the exemption is significantly higher than it will likely be in the future. Naturally, for a husband and wife, the amounts stated above double in most cases. 

Another important concept that is currently in effect and will hopefully continue is that of allowing the surviving spouse to utilize the exemption that was not used when the first spouse died. This is what is known as portability for estate tax purposes. There are some limitations on the use of the portability exclusion, such as surviving spouse may only use the exemption that is left on the last surviving spouse he or she is married to. 

In addition, a federal estate tax return is required to be filed at the current time on all estates in order to claim the credit, whether or not the estate of the first to die is taxable. This is often a benefit for a spouse who does not wish to set up a trust for the surviving spouse, but rather, wishes to leave all funds to the surviving spouse. The benefit is that the estate planning process is somewhat simpler and less expensive, but it may be more costly in the future. This is due to the fact that the congress and president may change the laws and reduce exemptions or possibly eliminate the benefit of the portability exclusion in future years. 

Another down side is the fact that the assets may in fact increase in value, thus causing the surviving spouse to have more assets in that estate, only to cause an estate tax to be due if the exclusions are exceeded. 

Another down side is that the surviving spouse may remarry, thus allowing the new surviving spouse the opportunity to claim a share of the assets in the event that a prenuptial agreement is not prepared. Furthermore, the assets of the surviving spouse may be available to creditors, taxing authorities, and possibly further spouses in the future event of marital discord. 

Nevertheless, the laws provide that significant gifts may be made through the end of 2012. These gifts do not include amounts transferred to charities, as there are no limits on the amounts that may be gifted to charities, but rather, there may be a limitation on the deductibility of the gift. 

2012 being an election year makes planning difficult as there are usually changes made at either the very end of the year or the beginning of the following year that may have an adverse impact on the amount a person may gift during lifetime and upon death. Little is for certain in these situations, and one must also be mindful of the state gift and estate tax laws when proceeding to complete the lifetime/estate planning considerations. 

As always, it’s best to consult your legal and financial advisors if you want to gift significant assets this year. 

 

Hyman G. Darling, Esq.

Photo credit: Microsoft   

I won the lottery! Now what?

Winning the lottery is fantastic news, but before your claim that prize, stop, don't sign the ticket, put it in a safe deposit box, and call your lawyer. This video will explain why that's critically important. Hyman G. Darling, [email protected], 413.781.0560

 

 

This video has been prepared by Bacon Wilson, P.C. for informational purposes only and is not intended and should not be construed as legal advice. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Viewers should not act upon this information without seeking professional counsel. Do not send us information until you speak with one of our lawyers and get authorization to send that information to us.

Elder law figures for 2012

Every year, the government establishes new numbers and thresholds as allowances for people who are elderly and receive benefits. For the first time in a couple years, the Social Security Administration has increased the amounts based on cost of living calculations for Social Security payments, and the Veterans’ Administration has done the same, increasing benefits that veterans receive on a monthly basis.

The average for a Social Security payment in 2012 will be approximately $1,229.00,and the maximum earnings increases to $110,000.00. Medicare Part D participants will have their Part B premium increased to $99.90 per month as the basic premium, with the maximum Part B premium being $319.70 if one’s income exceeds $214,000.00, or $428,000.00 if married. 

The gift tax exclusion remains at $13,000 per donee per year, which is the amount that any person may gift another person, even if not a relative, without having to file a gift tax return. In addition, one may gift up to $5,120,000.00 over their lifetime and at death before any Federal estate or gift tax would be due. This amount is due to be reviewed before the end of 2012, so someone wishing to make a significant gift should consider making it in 2012. 

If a single person needs long-term care in a facility on a permanent basis, then the amount they may retain continues to remain at $2,000.00. All other assets would have to be expended for that individual who needs care. In Massachusetts, a person who is on Medicaid is permitted to keep $72.80 per month, together with enough other income to cover any medical insurance premiums, with the balance of the funds being spent on their care. 

If a person is married, and that person is living at home, (called a community spouse,) he or she is entitled to keep $113,640.00, but the institutionalized spouse may only keep $2,000.00. There is also a calculation for what is known as the minimum monthly maintenance needs allowance, which permits a person who is home and married to maintain $1,837.75 per month in income, which was effective on July 1, 2011 and will be reviewed again and possibly changed by July 1, 2012. 

The maximum monthly maintenance needs allowance in 2012 also remains at $2,739.00 per month, which may also change on July 1, 2012. There are also additional allowances for standard shelter expenses and utility deductions that change on a yearly basis. These amounts decreased on October 1, 2011 and will probably be reviewed again on October 1, 2012. 

It is important to know the numbers so an individual may make intelligent and informed decisions whan planning for their future, based on all income, including pensions, Social Security, veteran’s benefits, long-term care insurance, etc. Naturally, there are also additional allowances available when there is a special needs planning situation or other situations that permit the exceptions to apply. Good counsel should be obtained before making decisions to assure that the maximum benefits are obtained with the minimum of funds being available for long-term care.

 

Hyman G. Darling, Esq.

 

Photo credit: Microsoft