September 2009

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MONTH YEAR: Lead Article: 1 ¾ pages [2nd page about 45 lines]
Lead Article Title: Stop Heir Loss with Estate Planning Propecia – Part 1Summary: “I’m not only the Heir Club president, I’m also a client.” “Finding the right heir loss solution is an important decision that can accentuate your lifestyle in unimaginable ways. But one size does not fit all heir loss cases.” Estate taxes, medical expenses, jealous siblings, legal fees, or other avoidable problems might infringe on, or even eliminate, your anticipated inheritance. The solution should be as individual as you are. We’ll use the title “parent” and “kid” to simplify the discussion, but the concepts applies to many relationships of benefactors and beneficiaries.Get Involved
Your active participation not only can maximize your inheritance, but can provide tremendous assistance to your parents or other family member or benefactor. Too often, poor planning dissipates money. Although the proposition may offend some people’s sensibilities, you should not feel guilty about planning to maximize your inheritance. Invariably, inadequate planning results in spending significant sums of money on unwarranted legal fees, professional fees, medical costs, and so on. Done properly, maximizing your inheritance will not harm your parents or other benefactors. Rather, it will safeguard their own interests and ensure that asset distribution after their death will reflect their true intent.

Open a Dialogue.
To inherit more, your first step should be to open a dialogue with your parents (aunt, uncle, or other prospective benefactor). Since much of the planning depends on cooperation from your benefactor, without a dialogue there is often little you can do to maximize your inheritance. ◙ You could discuss strategies that might give your parents comfort in later years, ways to assure their financial security, your own estate planning, charitable giving, or religious issues. Pick the most feasible approach, move slowly, and be sensitive. ◙ Focus on how you can help protect your parents. Has an overly aggressive stockbroker undermined your parents’ financial security? Once you are actively talking about your planning, it may become a simple matter to segue from a discussion of your living will to a discussion of theirs. You need only to ask if they agree with your decisions and if they are in any way similar to the decisions your parents made when drawing up their living wills.

2ND Spouse/Partner
◙ The classic 2nd marriage estate-planning approach uses trusts to provide for the new spouse while protecting assets to ultimately be distributed to children from a prior marriage. Typical estate tax bypass and marital (qualified terminable interest property, or QTIP) trusts can accomplish these goals. There are a myriad other variations and options. ◙ A life estate is common. Mom let’s her new husband live in the house for life, but then the house reverts to you and your siblings. Sounds great and seems simple, but it’s not. Although it’s common and inexpensive, it’s not always the best option when you want to maximize your inheritance. Too many ambiguities and issues are left unsettled when implementing a standard life estate. What if the house needs a new roof? What if the new husband moves into a nursing home? ◙ Prenuptial (spouse) or living together (partner) agreements are vital to protecting assets from the new spouse/partner. If dad uses trusts in his will to protect your inheritance, that might be nice, but it may prove academic if his new partner/spouse spends or takes all the assets before his death. Get dad to consider entering into a prenuptial (or postnuptial) or living together contract with his new spouse/partner to minimize the likelihood of legal and financial entanglements if the relationship terminates. ◙ A spousal right of election can be important in determining the ultimate distribution of any decedent’s assets. This is a right under state law for a surviving spouse to take a specified minimum percentage of the deceased spouse’s estate no matter what the will said. Unless your parent has planned to address this, or had the new spouse waive it, you might loose a large chunk of your inheritance.

Insurance Coverage
A conversation about QTIPs may prove irrelevant if key assets are lost to fire or theft. Insurance means more than life insurance. ◙ Life insurance could be essential to protect your parents’ assets by providing for a new spouse, paying estate taxes, or providing liquidity to ride out a downturn in the market before you have to sell. It can be the toupee of planning – covering up for assets bequeathed elsewhere. ◙ A house without fire and casualty insurance may be a total loss in the event of such a calamity. ◙ A theft can be devastating to the financial worth of a parent who has never insured valuable art, coins, or other collectibles, or has insurance that is based on an assessment made 30 years ago. ◙ Elderly parents who have no nursing home or long-term care insurance may deplete their assets to the point that their children must help support them.

Financial Planning/Investments
◙ Consolidation of a parent’s financial assets is a simple, no-cost, step to help your parent achieve important financial goals: control over her finances, safety through better investment planning, simplicity so she can follow the accounts and transactions, etc. Consolidation minimizes probate expenses and delays. ◙ Fewer accounts makes it much easier to maintain an investment allocation consistent with your parent’s risk profile. ◙ Budget is not a 4 letter word. Proper investment decisions require an analysis of financial needs, time frames, and expenses. Who is helping your parents make these decisions? Proper investment and budget planning will assure that your parents’ wealth will, to the extent feasible, last them throughout her lifetime. ◙ Longer life spans mean investment and spending have to consider the real time frame. The average woman will live 22+ years in retirement. In 1950, the figure was only 14 years. That is 8 more years to risk running out of money and to exhaust your inheritance. The only way to assure your parent adequate resources for her retirement years is to put in place an optimal investment strategy. And the real issue is that the preceding figures are averages. An average means a lot of people will live a lot longer in retirement than 22 years. So unlike a popular book about dying broke, your advice to your parents should be to focus on saving and spending so that their money will last to say 95%+ of their life expectancy. ◙ Investment policy statements (IPS) are an essential tool. If your parent hired a professional to manage her money, she should have signed an IPS that clearly identifies heir investment goals and objectives.

Theft and Loss
Theft or loss of valuables is not uncommon. 50% of those over age 85 have some cognitive impairment. ◙ As parents age, the likelihood increases of home health aide walking off with a coin collection and a piece of jewelry inadvertently ending up in the trash. Take steps to account, insure and protect personal property. Move small valuables that are not needed to a safe deposit box. ◙ If a parent dies, secure their residence (change locks and alarm codes or install an alarm if none existed). ◙ If a parent loans family or friends money, encourage them to have a note signed documenting that the advance was a loan and not a gift. Many borrowers seem to have selected memory about the nature of the transaction when questioned at a later date.

Checklist: Second Article 2 lines less than One Page [about 54 lines]:
Checklist Article Title: 2010 Planning

Summary: The economy, the estate tax, investment markets are all making planning feel like the roller coasters at Cedar Point.
The ten year deficit has been estimated at over $9.0 trillion. Taxes aren’t going down Virginia. The share of the tax burden borne by the top 1% in 2007 exceeded the share paid by the bottom 95% of taxpayers combined. Worse for the rich folk is that it’s probably gonna get worse! What should you do in the current climate of uncertainty before 2010 brings more change? The most likely scenario for the estate tax in 2009 is to extend the $3.5M exclusion and 45% rate to 2010 to give Congress a chance to act after health care reform is addressed. In 2010, instead of the repeal that looked so likely only a few years ago, a permanent estate tax, perhaps with exclusion lower than $3.5M could pass to bridge some of the growing deficit.

√ Wide Net. “Wealthy” folk need to watch the developments and stay flexible. Wealthy is in quotes because the next episode of the estate tax may nail many who don’t feel particularly rich (think “AMT”). If the exclusion drops to $1M in 2011 (which is what the law provides), and if inflation kicks up in future years as a result of bailout/stimulus spending, the estate tax net will grow wide. Further, states are hurting for revenue and may step up enforcement of their estate taxes and may even enact tougher taxes. Connecticut’s recent liberalization of its estate tax may prove the rarity.
√ Example: Your estate is $5M. Under current law you and your spouse can, with proper planning, avoid federal estate tax on a $7M estate. But if the exclusion drops to $1M your heirs will have quite the haircut. Action Step: Remove asset from your estate now to flexible structures. Do this before inflation kicks in, while asset values are low, while interest rates are low (it makes many techniques more efficient at shoe-horning value out of your estate).
√ Toggle. Chubby Checkers started it with the Twist, now it’s the Toggle. Tom Bergeron next show will be “Dancing with the Tax Attorney.” Grantor trusts are trusts with the income taxed to you. Set up grantor trusts for kids and if estate tax is repealed, or the exclusion stays high, or if the relationship of marginal to lower income tax rates change (so it’s better for the trust to pay income to your kids to be taxed at a lower rate), your trust protector can turn off grantor trust status to save yourself income taxes. If the estate tax grows nastier, keep grantor trust status activated to continue reducing your estate. See CCA 200923024.
√ DAPT. Set up and make gifts and/or sales to a self settled domestic asset protection trust (DAPT) in a state like Delaware which permits you to remain a beneficiary. If you need money because of future economic issues, you are a beneficiary and the trustee can make a discretionary distribution to you. If the estate tax remains burdensome, the growth in those assets should be outside your estate, generating important estate tax savings. You might also be able to realize a significant current state income tax deduction. If Congress acts to restrict this type of planning, hopefully your completed plan will be exempted (grandfathered). While that might be a risk, isn’t doing nothing a bigger risk?
√ 529. Put money in 529 plans for heirs. If the estate tax is repealed, or the exclusion remains at a level that exempts you can take the money back.
√ Convert. Roth IRA conversions can provide important estate tax savings. In 2010 you can convert without the $100,000 adjusted gross income limitation that had prevented many wealthy taxpayers from changing their regular IRA to a Roth. This is a great opportunity for many in that the income tax you have to pay on the conversion will be outside your estate. For info on teleconferences discussing Roth conversions see www.ultimateiratraining.com.
√ Insurance Trusts. Too many people own insurance in their own name (or set up a trust but never reviewed its operations with their estate planner to be sure its done right). That means the insurance is in your taxable estate. You may have been unconcerned in light of the talk of repeal and the growing exclusion. A $1M exclusion will change all that. If you transfer your insurance to a trust you must survive 3 years for it to be out of your estate. Act now to get the 3 year period tolling. The cost relative to the potential benefit in this new estate tax environment is miniscule.
√ Insurance. Buy insurance! Consider a cheap term policy with some conversion options. This can provide flexibility and security. Example: Your estate is $3M. No tax. Next year Congress reduces it to $1M. You have a stroke and are no longer insurable. Bam! How is that tax going to be paid? A term policy now, while your health permits it, locks in the ability to convert to a permanent policy to use to cover the estate tax if needed.
√ Basics. Don’t forget the basics. Most of you haven’t forgotten, you’re just ignoring them…big mistake! Update your powers of attorney and include a generous gift provision with safeguards. If you become incompetent next year as a result of health problems or an injury, and the exclusion is reduced to $1M, your heirs won’t be able to make large gifts to reduce the estate tax. Don’t get lulled into thinking that your current power works. It’s a different world than just a year ago.

√ Income Tax. Income and estate tax planning is inextricably intertwined. Expect income tax rates to increase on upper middle class and upper class taxpayers at minimum. This changes how you plan. Most people plan to defer income to later years, and especially retirement years, on the theory that they will be in a lower income tax bracket. This may never happen. Try this on for some perspective: According to the US Census Bureau median family income fell in 2008 to $50,303 (lowest since 1997). The wealthiest 10% of Americans earned more than $138,000. So about $140k puts you in the vice! Who do you think the government will have to squeeze for tax revenue?

√ Planning Yoga. Get flexible. Consider planning steps that can be undone, or at least modified, if the eventual tax legislation, or future economic developments, impact you other than as anticipated. Will the recovery have “U”, “V”, “W” or other shape? Have some of the pundits watched too much Sesame Street?

Recent Developments Article 1/3 Page [about 18 lines]:
■ Connecticut Estate Tax Made Less Harsh: ◙ For deaths and gifts on or after January 1, 2010, the Connecticut exclusion is increased from $2 million to $3.5 million. This is consistent with current federal law. ◙ Under old law, an estate or gift valued at $2 million or less was not taxed. However, the full value of any estate or gift valued more than $2 million is taxable. This paradigm resulted in a “cliff” in which a $1 increase in the value of a gift or estate from $2,000,000 to $2,000,001 increases tax liability from zero to over $100,000. ◙ Not all changes were favorable. The new law increased the flat income tax rate for trusts and estates from 5% to 6.5% from 2009 on. ◙ Filing deadlines were also accelerated. An executor (personal representative) will have to file an estate tax return six (rather than 9 under old law) months after the date of death, starting with deaths on or after July 1, 2009.
■ Connecticut Business Tax: Changes will ensnare more businesses in the Connecticut tax system. Under prior law a business needed a “physical presence” in Connecticut to pay tax. The new law is much broader and will subject a business (and/or the equity owners) to Connecticut tax if the business had a “substantial economic presence” in Connecticut, or if it derived income from sources within Connecticut. If your business purposefully directs business into Connecticut it will have a tax nexus. A business’ purpose would be evaluated by the frequency, quantity, and systematic nature of its economic contact within Connecticut.
■ Personal Injury Settlement: Generally not included in gross income, other than punitive damages. IRC Sec. 104(a)(2). This result will be available whether or not the amounts are received by suit or settlement agreement, and whether or not received in a lump sum or as periodic payments by individuals on account of personal physical injuries (including death) or physical sickness. This exclusion had required that excluded damages must derive from a tort claim. This requirement was relaxed in Prop. Reg. 127270-06 9/14/09). The proposed regulations expressly delete the requirement that to qualify for exclusion from gross income, damages received from a legal suit, action, or settlement agreement must be based upon “tort or tort type rights.”
Potpourri ½ Page:
Divorce: Estate Planning Steps
■ Destroy Old Documents: If you have not already destroyed old powers of attorney, health proxies or other documents naming your ex do so. Even if the divorce automatically makes those documents void, why tempt anyone. Do you want your ex to be holding an original signed health proxy authorizing him to pull the plug if you are hospitalized? This is a tricky step since there are often documents that are not obvious, such as a bank power of attorney form for one of your accounts your ex signed years ago that is on file at the bank and for which no one had a copy.
■ Sign new Documents: Usually about the last thing anyone wants to do after a divorce is hire a lawyer or spend more money on legal fees. But you really need to update all of your documents. Frequently powers of attorney, wills and other documents name an ex-spouse, an ex-spouse’s family or friends that have sided with your ex. Revise you’re your documents and name people as fiduciaries you can trust to take care of you and respect your wishes.
■ Revise Beneficiary Designations: If your ex is named as beneficiary of your pension plan he/she might vary well inherit the plan if you die. Don’t count on state law or the fact you’re divorced to change this. Sign new beneficiary designation forms.
■ Address College Savings: If your ex is the account owner listed on your child’s 529 college savings plan he/she can pull the money out at any time. Be sure to get a neutral party listed as account owner. Better yet, you might be able to name a trust with co-trustees as the account owner.
■ Monitor Life Insurance: Most divorces include a requirement that one spouse provide the other with life insurance coverage, but too few divorce agreements address how that coverage should be monitored. Obtain copies of proof of payment and if possible the right to periodically insist on and receive an in force illustration of the policy so you can verify that it is viable. Address the type of insurance coverage required and the amount. Your ex could buy the cheapest which is one year term. But if he develops a health issue in later years the coverage will become unavailable.
■ Property and Casualty Insurance: It is common in many divorces for some co-owned property to continue. For example, one of you might retain the marital residence until the youngest child attains age 18. If you’re a co-owner be sure your name is listed on the insurance policy for the house.
■ Investments: Revise your investment allocations. Most post-divorce portfolios are a mess. Don’t delay, get asset reallocated in a manner that works for you.
Thanks to Deana Balahtsis, Esq. a New York City attorney specializing in Family, Matrimonial and Adoption Law.

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