December 2009

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MONTH YEAR: Lead Article: 1 ¾ pages [2nd page about 45 lines]
Lead Article Title: Maximize Legal Fees and Family StrifeSummary: At a panel discussion for the NYS Foundation for Accounting Education conference all five panelists, led by the famed Sid Kess. and including Daniel Daniels, Esq. of Wiggin and Dana, LLP, James F. Kelly, Esq., of Davidson, Dawson & Clark, LLP, and Steven Siegel, Esq. of the Siegel Group, all complained that few clients heed their advice on planning. But hey, why should clients listen! Ignoring the advice of your advisers is the best way to maximize professional fees, and assure the most family strife. So if that’s what you want to do …. Fine! “We talk to clients until we’re blue and they rarely listen,” lamented Steven Siegel, Esq. So, here’s a checklist of tips to maximize the problems your family and loved ones will face gleaned from the panel discussion:

Outdated Bypass Trust: Don’t update your will merely because its 10 years old. The old formula could trigger state estate tax on the death of the first spouse. More than a score of states use an estate tax exclusion lower then the federal amount (now $3.5M) so that distributing the federal exemption amount will trigger state tax. An old will that distributes the federal exclusion amount to kids could now distribute far more than intended, perhaps your entire estate, to kids from a prior marriage instead of providing for your spouse. When your old will was done the federal exclusion might have been $1M, the increase to the current $3.5M could disrupt your entire plan.

Ignore Spousal Right of Election: State laws provide a right to a surviving spouse to demand a specified portion of a deceased spouse’s estate, regardless of the will providing for less. Ignore your lawyer’s advice to obtain a formal waiver from your spouse of his/her spousal right of election. Leave the door open for your spouse to undermine your entire dispositive scheme. The family business you wanted to go to your daughter whose been running it? Your fourth husband might instead walk off with a piece.

Qualified Personal Residence Trust (QPRT): QPRT is a special trust used to leverage a gift of your house to your children. You can live in the house during the QPRT term. When the trust ends don’t bother leasing the house, signing a lease or paying rent. That requires legal fees. Be penny wise and pound foolish. It’s better to make the IRS’ job easier to prove you had a life estate in the house so that they can tax it in your estate and nix the QPRT plan.

Skip Annual Gifts: You can make annual gifts of $13,000/per donee/per year and in addition pay tuition or medical expenses directly yearly. That is too simple. Instead, wait until health issues make tax planning urgent. Then it will be more difficult, risky and costly to reduce your estate.

Don’t Consider Tax Allocation: Don’t worry which beneficiary pays estate tax. With a marginal state and federal tax cost of possibly more than 50% taxes may be the biggest factor in determining who nets what. Rely instead on whatever boilerplate happens to be in your will. Even better, print a cheap will off the internet that could not possibly address this issue. Be like Alfred E. Neuman … “What, me worry?” Just don’t get mad at your estate planner when the tax dollars hit the fan!

Leave Charity A Percentage Bequest: Leave a percentage of your estate to a charity, not a fixed dollar amount. The state attorney general (AG) will have to get involved. You’ll pit the charity against your heirs. The charity’s board has a fiduciary obligation to protect the charity. The more your assets are valued at the more the charity gets. Your heirs will want to value estate assets as low as permissible to minimize estate tax. The ensuing disputes will assure more costs and angst.

Don’t Review Regularly: Don’t meet with your planners annually. Why keep your plan current and catch loose ends. Better to wait until your health or competency deteriorates to the point where planning is impossible. Keep meetings years enough apart to assure your attorney can hardly remember you. That will make planning really efficient, no continuity. But hey, you’ve saved the cost of all those annual updates.

Divorced – Don’t Change Plan Beneficiaries: The divorce agreement covers it all. Right? Wrong, so leave your miserable ex as the beneficiary under your profit sharing plan. Focus on your new paramour not protecting your desired heirs.

Ignore Citizenship: Gifts to a non-citizen spouse are limited, and there is no estate tax marital deduction without a special trust called a Qualified Domestic Trust (QDOT), but hey, save money and have the attorney who did your house closing draft a form will because it’s cheaper.

Simple Will: Why complicate matters, get a 3 page will. Don’t worry that it won’t address most issues and will result in a complex and costly probate process. You want it simple now, not simple later when it really counts. But hey, you can believe you’re right because the costs and problems will occur when you’re no longer here to know.

No will: The only thing better than an overly simple will to maximize costs and problems is no will. Kids from prior marriage not your current spouse may walk with money you wanted your. The state will distribute your assets as law provides, which is unlikely what you want. A court might appoint Attila the Hun as guardian of your beautiful kid. But think of the legal fees you’ll save!

Disclaimer Plan: Don’t worry whether your plan is practical, just make sure it’s simple and cheap. Given all the uncertainty concerning the estate tax, and the complexity, just give your surviving spouse the right to determine how much of his/her inheritance will go into a tax advantaged bypass trust. Practitioners only see 5-20% of surviving spouses ever address this. So while it sounds good, it’s generally not effective. That will assure less control, more tax and more problems.

Rely on a Safe Deposit Box: Stuff everything important in a safe deposit box so that you increase the chance of needing court proceeding to access the will and other key documents. That will maximize stress and probate costs. Better yet put the only living will in your box so that all decisions concerning end of life and funeral will have to be made in the dark.

Advisers Shouldn’t Meet: Too expensive to have all those folks billing hourly at the same table. You’re right. It’s better that your plan not be coordinated. Why should your accountant review harvesting gains and losses before year end with your wealth manager, or your attorney assure that the corporate kit for the family S corporation be consistent with what your CPA reflects on the 1120-S K-1s and what your will says. Save money. Don’t coordinate.

Bank Teller Does your Planning: You’ve changed wealth managers and banks in light of lousy performance (supposedly 70% of investors have done this in the past year) but in the move all the accounts that were carefully titled by your estate planner to conform with your plan morph into joint ownership circumventing your will and undermining all your planning. That’s OK, rely on the clerk at the new bank or brokerage firm to make these determinations.

Neglect Complex Blended Family: Even if your family tree is as complex as a Banyan tree don’t worry about the implications to your estate plan. Don’t have a will detailing all persons to be included and excluded and clarifying family relationships. And certainly don’t use a revocable trust to minimize probate complexities your complex family structure will cause. Be sure to use standard beneficiary designations that cannot encompass the range of people involved.

Name Uncle Harry as Executor: Don’t name an institution or someone with the real qualifications to be fiduciary. Pick your poker buddy or someone who doesn’t get along with your heirs. That will assure more fireworks. Name your son-in-law without addressing what happens in the event of divorce.

KISS The Guardian and Trustee: Keep it Simple Stupid. Why name multiple fiduciaries so that you have check and balances. Name the same person to wear multiple hats. This is great to increase the likelihood of mismanagement, theft or worse. If the guardian is the trustee who can sue who if there is a problem?

Beneficiary Designations Don’t Send them to Your Planner: Change them each time you change accounts and don’t show your planner. These documents govern distribution of retirement assets, insurance, etc. not your will. So you can easily undermine your entire plan by handling them wrong and your planner’s recommendations are likely to be incorrect if he/she has incorrect information.

Remarriage: Don’t bother with trusts, they’re costly and complicated to operate. It’s better to have your 4th spouse run off with the assets you intended your children to eventually inherit.

Joint Accounts: Don’t do a revocable trust as you age, just title all accounts as joint with the kids. This will almost assure that monies won’t be divided as you wish on death since you cannot predict which accounts what will be spent from. That’s always good for a family fight. If the child is sued, divorced or dies first, your simple joint account approach will assure a battle with the claimant, ex-spouse or IRS as to who really owned the account.

Checklist: Second Article 2 lines less than One Page [about 54 lines]:
Checklist Article Title: Disability Ins. 2

Summary: Last month’s checklist began addressing claims under disability income insurance, business overhead insurance and perhaps disability buyout insurance. This month will provide a few more tips and discuss steps those struggling with their disability companies, and their advisers, can take. Reporters interested in exploring what appears to be a rather significant problem are provided great sources at the end of this checklist.

√ Authorizations. Don’t provide the carrier with an open ended authorization to obtain whatever information they wants. Some authorizations are unreasonably broad. Instead endeavor to reasonably limit authorizations to what is appropriate and necessary. The business overhead carrier will need different information than the disability income carrier. Revoke existing authorizations if they are too broad or are being abused. Ask for copies of all documents obtained on your matter from the insurance company. If they won’t confirm what documents they requested inquire in writing why. Remind them that financial and other confidential information about you should not re-disclosed to the extent feasible (certain data may have to be).
√ Physician Calls. Your physician will get a “peer to peer” call. They might be really busy and not focused if the call comes during the middle of their office hours. This is the same issue as with emails above. Quick answers may just be wrong. If your physician states something incorrectly it could be used to undermine your entire case. Then the insurance company can deny your claim. Consider restricting your physician to only releasing selected data and not speaking on the phone. This should be noted prominently on your patient file.
√ Symptom Worksheet. Prepare a symptoms work sheet and fill it out and provide it to your physician at each visit. Your physician may not have adequate time during a routine office exam to record this level of detail and the insurance carriers may need detail to make determinations. A quick comment in your chart like “stable” might be so general and vague that it is simply inaccurate. But it could be a basis to deny your claim.
√ Remember Home Mortgage Securitization? So you bought a policy from an insurance company with a household name. You pay premiums for years relying on the reputation of the company in case you need ‘em. Years later when you file a claim you learn that the well known company sold your policy (they’ll call it “reinsured”) to a Chinese company who hired a private US company to administer it. When the name brand insurer has no interest in your policy, will it really be administered in the manner you anticipated when you purchased it? Even your agent may have no clue what has transpired. Hasn’t the fundamental nature of the agreement made when you purchased the policy been violated? Some type of disclosure standard, at minimum, should be considered to address this.
√ Monitoring or Pressuring. If you have a progressive chronic illness what purpose is served by a disability company continually requesting reports from your neurologist? Chronic progressive illnesses don’t improve. While one can understand the desire for periodic updates at a reasonable interval, does a substantial increase in requests for data occurring at the same time you have a dispute with the insurer, or are negotiating a buyout, suggest something inappropriate? Reasonable regulation of this process should do nothing to harm insurers protecting their legitimate interests, but it might well give the struggling disabled some protection. How about a recent add directed to the disability insurance industry: “Do you know what your claimants are doing around the upcoming holidays? Find out now at a discounted price. Capture that active claimant on video! An all-inclusive day of surveillance for a low flat rate of: $499.”
√ How to Buy Disability Coverage. If you’re in the market for buying disability coverage, do it right. Most folks focus on premium costs. You’re not buying hamburger! The real shopping you should do is to pick the right agent. Get an agent that really knows the product, and who will stick with you and help you if you have issues later. That’s the smart way to shop.
√ Few Options. What does it mean when a nationally known insurance consultant doesn’t want to bother filing a claim for obviously incorrect actions by a disability insurance carrier with the state insurance commission because he knows nothing will be done? When industry leaders are so jaded another approach is called for.
√ Join the Task Force. The Insurance and Financial Planning Committee of the RPTE Section of the American Bar Association is organizing a task force to explore disability insurance issues, with an emphasis on developing goals and framework for possible state legislation and regulations. One perceived problem is the lack of transparency in the operations of this industry, and the need for consumer oriented regulation. An end product might be a white paper that will be presented to NCCUSL to initiate the process of drafting a uniform law. For info contact David S. Neufeld, Esq. 609-919-0919, [email protected]
√ Reporters. Reporters seeking more information on these issues should contact: ■ Jennifer Jaff, Esq., Advocacy for Patients with Chronic Illness, Inc., (860) 674-1370, [email protected] ■ Bonny G. Rafel, Esq. Livingston, New Jersey (973) 716-0888 [email protected] .
Recent Developments Article 1/3 Page [about 18 lines]:
■ Tax Losses. Businesses May Take Advantage Of Expanded Loss Carryback Option Under New IRS Procedure IR-2009-105 and Rev. Proc. 2009-52. You can elect under IRC Sec. 172(b)(1)(H) to carry back a net operating loss (NOL) for 3, 4 or 5 years, or a loss from operations for 4 or 5 years, against income in those years. An NOL or loss from operations carried back five years may offset no more than 50 percent of a taxpayer’s taxable income in that fifth preceding year. This limitation does not apply to the fourth or third preceding year.
■ Estate Tax. H.R. 4154 would make permanent the current estate tax rate of 45% and the non-inflation indexed exemption of $3.5 million. This means $7 million for couples with proper planning (so you still need to hug your estate planner!). If nothing is done the rate would fall to zero in 2010 and resume 55% in 2011. Compared to the $1M 55% system that existed not so many years ago, this will cost the federal fisc $234 billion! Bottom line, stop ignoring the estate tax and go plan. See the lead article for more reasons why!
■ 2010 Standard Mileage Rates: In 1/1/2010 the standard auto mileage rate will be 50 cents per mile for business purposes, 16.5 cents per mile driven for medical or moving purposes, and 14 cents per mile for charitable purposes. News Release IR-2009-111 and Rev. Proc. 2009-54, 2009-51 IRB.
■ S Corporation: Tough rules govern who can be an S corporation shareholder. Regular IRAs can’t. Rev. Rul 92-73. Don’t get cute, Roth IRAs can’t either! Taproot Administrative Services, Inc. v. Commr., 133 T.C. No. 9 (2009).
■ Grantor Trusts With a Twist: You might be able to structure a trust where the beneficiary, not the settlor setting up the trust, is treated as the grantor for income tax purposes. PLR 200949012. Cool stuff. Dad may be able to set up such a trust for Doctor Daughter so she can sell exposed assets to the trust and achieve asset protection.

Potpourri ½ Page:
■ Roth Conversion Errata. Nov 09 Practical Planner typo. The text incorrectly reads: “be reported 1/2 in 2000 and 1/2 in 2012” should have been “½ in 2011 and ½ in 2012”.
■ Password Encryption. Organizing and protecting passwords, and assuring they are identifiable in the event of disability or death is becoming a more important disability and estate planning step. Consider “KeePass,” homepage http://keepass.info. Thanks to Lynn H Lander.
■ Name a Guardian. If you’re disabled your power of attorney and health proxy will protect you. But what if a court has t appoint a guardian? Who should it select? Make your wishes known now in a guardian designation. For example CT law, § 45a-645, permits you to name your own conservator for future incapacity. You have to be age 18 and of sound mind. You can designate the persons whom you desire to be appointed as conservator of your person, your estate, or both, if you are later found to be incapable of managing your affairs or incapable of caring for yourself. The designation shall be executed, witnessed and revoked in the same formality as required for a will.
■ Tenants in Common (TIC) Accounts. Instead of setting up separate husband/wife brokerage accounts to divide asset to fund a bypass trust you can simplify by having one account titled as TIC. While this can meet the estate tax objectives one Social Security number is on the account. So if that spouse’s Social Security number is caught up in an identity theft mess you may not have access to the entire account while the issue is resolved. TICs might be simpler, but not necessarily better.
■ Estate Tax. ◙ Since it ain’t going away, take action. ◙ Structure irrevocable trusts as grantor trusts. With estate tax likely to be permanent and income tax rates also like to rise this is a great play since the grantor, say mom, can pay tax on trust income growing outside her estate. ◙ Reconsider permanent insurance. Whole life policies have out performed some portfolios over the last decade, the income tax benefits will be more valuable as income tax rates rise, and if owned by an insurance trust its a great estate planning play since repeal of the estate tax is almost assuredly off the table. ◙ Use split dollar arrangements to fund the payment of insurance premiums if you need to use annual gifts to help out heirs hurt by the recession. ◙ Family Limited Partnerships (FLPs) can still be great. Even if discounts are repealed they provide for control and asset protection. Lawsuits won’t disappear. FLPs will be increasingly used to shift income to lower tax bracket family members if income tax rates rise.
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