Wills, Trusts and Estates

FLORIDA ENACTS NEW POWER OF ATTORNEY ACT (November 2011)

Florida recently enacted a new Power of Attorney act. The Act makes a number of changes in Powers of Attorneys under Florida law, from how they are signed to how specific powers are handled.

Any power of attorney executed in Florida prior to October 1, 2011 will continue to be valid if its execution complied with Florida law at the time of execution. Further, even after October 1, 2011, any power of attorney executed in another state will be valid in Florida if, when the power of attorney was executed, the power of attorney and its execution complied with the law of the state where it was signed.

Some of the major changes made by the new Act are:

  • SIGNING FORMALITIES. A power of attorney must be signed by the principal and by two subscribing witnesses, and be acknowledged by the principal before a notary public. The law specifically provides that a photocopy or electronic copy of a power of attorney instrument has the same effect as the original document.

  • SPRINGING POWERS OF ATTORNEY ARE NO LONGER ALLOWED. A "Springing Power of Attorney" is a power of attorney that does not come into effect until the principal is deemed incapacitated. A new Power of Attorney that is to become effective in the future or upon an event will not be effective as a Power of Attorney.

  • MUST ATTEMPT TO PRESERVE ESTATE PLAN. In exercising authority under the Power of Attorney the Agent must attempt to preserve the principal’s estate plan and if authorized to access a safe deposit box must create and maintain an accurate inventory each time the agent accesses the principal’s safe-deposit box.

  • MUST SPECIFICALLY GRANT POWERS. An agent may only exercise the powers specifically granted to the agent in the power of attorney. General provisions are no longer effective to grant any power.

  • MUST SIGN CERTAIN ENUMERATED POWERS. Certain powers can only be granted where the principal signs or initials next to each enumerated power. Among the powers in this group are powers to Create an inter vivos trust; or modify an existing trust; make gifts; Create or change rights of survivorship; Create or change a beneficiary designation; or Waive the principal’s right to be a beneficiary of a joint and survivor annuity, including a survivor benefit under a retirement plan; or disclaim property.

  • GIFT PROVISIONS. Additional provisions also apply regarding the power to make gifts.

Although Powers of Attorneys signed prior to its effective date (October 1, 2011) continue to be valid even if they do not meet the provisions of the new act, we recommend that your power of attorney should also be reviewed and possibly updated. It is likely that within a few years, although older powers of attorneys (as well as those from other states) will continue to be valid that many financial institutions and other entities will be reluctant to accept powers of attorneys that do not meet the requirements of the new act. Should you have any questions about the new act or a power of attorney, desire to have your power of attorney updated or have one prepared if you don’t have a general durable power of attorney, please contact our office.

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SPECIAL NEEDS TRUSTS (April 2010)

Special Needs Trust are designed to allow assets to be held for a person’s benefit without impairing their right to receive governmental benefits. Particular attention must be paid to state and federal law in establishing and administering special needs trusts.

In a recent case, a permanently disabled Medicaid recipient residing in a nursing home challenged an informal rule issued by the federal Department of Health and Human Services which requires that, for purposes of determining the benefits due to a Medicaid-eligible individual, states must consider income placed in a Special Needs Trust for that individual’s benefit. (Medicaid provides joint federal and state funding of medical care for individuals who cannot afford to pay their own medical costs.) The challenged rule effectively prevents Medicaid recipients from using Special Needs Trusts to shelter their monthly Social Security Disability Insurance (SSDI) income from certain Medicaid determinations. In the case before the court, the plaintiff’s legal guardian had created a Special Needs Trust on the plaintiff’s behalf and had been depositing into it the plaintiff’s monthly SSDI benefits, minus some income deductions that were not at issue.

The end result of applying the challenged agency rule is that income placed in a Special Needs Trust is not considered in making the first determination of eligibility for Medicaid, but is considered in making the second determination of the extent of benefits to which an eligible individual is entitled. Relying on the agency rule, appropriate officials may count the income that an institutionalized individual places in a Special Needs Trust when determining how much of the individual’s income he or she must contribute to the cost of his or her care.

In his class action lawsuit, the Medicaid recipient, on his behalf and that of similarly situated persons, unsuccessfully argued that the rule conflicts with the express language of a part of the Medicaid laws. A federal appeals court rejected the plaintiff’s reading of the pertinent statute, instead concluding that Congress did not speak to the precise question presented by his claim. Under accepted principles of administrative law, this meant that the federal agency was free to "fill the gap" left by Congress. When it did so, that was an appropriate exercise of the agency’s authority, to which the court deferred.

Contact us to discuss whether a Special Needs Trust is appropriate for your situation and how it should be structured.

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2010 FEDERAL ESTATE TAX LAW UPDATE (February 2010)

Effect of Possible Repeal of Federal Estate Tax on Estate Planning

A fortune cookie I recently received contained the following message: "A fine is a tax for doing wrong, a tax is a fine for doing well." Normally, I put fortune cookies in the same prognostic category as Groundhog's day, but recent news from Washington clearly has the message that we will be paying more for doing well.

As many are aware, in 2001, amidst a budget surplus, Congress passed tax cuts in the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) which, among other tax relief, provided for phased-in increases in the federal estate, gift and generation skipping tax (GST) exemptions from, $1,000,000 to $3.5 million, lowered the maximum estate tax rate from 55% to 45% and provide for a one year repeal of estate taxes in 2010.

The law also contained a provision that on January 1, 2011 the tax laws (estate and income tax) would revert back to their 2001 status as though EGTRRA had never existed. The effect is that on January 1, 2011 the estate tax exemption will revert to $1,000,000 and the maximum rate will return to 55%. It was widely expected for the last nine years that Congress would fix this situation and not allow the Estate Tax to be repealed for one year and then return to 2001 tax rates and exemption amounts.

Unfortunately Congress failed to take any action and on January 1, 2010 the Estate Tax was repealed (for the current year). Federal Gift tax does remain in effect and the $1 million lifetime federal gift tax exemption and $13,000 per donee annual gift tax exclusion are also continued.  Several key lawmakers have stated an intention to pass legislation to revise the Estate Tax retroactive to January 1, 2010. The newly introduced federal budget assumes that the 2009 estate tax rates will be effect in 2010 and 2011. However caution is needed as last year's budget also assumed the 2009 law would be extended to at least 2010.

At this time it is impossible to know when, or if, any legislation will be enacted, whether the legislation will be retroactive to January 1, 2010 and what effects a likely constitutional challenges about enactment of a retroactive Estate tax will have.

What to do Now

Need for a review of existing Wills and Trusts

As a result of the uncertainty, we are recommending that clients meet with us to review their Wills and Revocable Trusts to determine whether there are formula clauses that may need to be revised in light of the current situation. ("Formula clauses" are allocations expressed in terms related to the estate tax laws, such as "the maximum amount that will result in no federal estate taxation"). Such clauses may provide for an outright distribution to children or to a Bypass Trust or Credit Shelter Trust rather than to your surviving spouse or a trust solely for the spouse's benefit. Your existing documents may result in a distribution scheme you desired assuming there was a federal estate tax, but may produce results that are not palatable to you or your spouse based on the possibility that there is no current federal estate tax. In some cases the terms of the trust(s) to be funded may not meet your desires if that trust is being funded with all your assets and nothing to a Marital Trust or distribution to your spouse.

The repeal of the Estate Tax for 2010 also changes the basis rules for property inherited from a decedent who dies in 2010. There are many questions about how these rules would apply. For those with appreciated property, certain planning techniques should be explored to maximize the potential benefits that may exist during 2010.

There are a number of variations on how an estate plan can be structured during this interim period but the first step is to have your Wills and Trusts reviewed to determine what they currently provide for based on the status of the law as it actually exists today.

For those who have deferred preparing new Wills or revising existing documents awaiting a final resolution of the Estate Tax, we strongly recommend that you move forward with updating your estate plan documents as it is unclear when, if at all, Congress will address the Estate Tax and enact permanent provisions.

Unfortunately, the inaction by Congress has created another fine for doing well and a chaotic time during which there is the potential of causing substantial family conflict by an estate plan that may fail to distribute your assets in accordance with your wishes.

Please contact us or call to schedule a time to meet or just let us know that you would like to have a review of your existing estate planning documents and if needed, revision of your documents.

IRS Circular 230 Disclosure
To ensure compliance with requirements imposed by the U.S. Internal Revenue Service, we inform you that any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding tax-related penalties under the U.S. Internal Revenue Code or (2) promoting, marketing or recommending
to another party any tax-related matters addressed herein.

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CHARITABLE REMAINDER TRUSTS (January 2010)

As the name implies, a charitable remainder trust involves the transfer of assets to a trust with the income going to an individual or individuals (which can include the owner of the assets- the Donor) and with a charity receiving the assets at the expiration of the trust period. Such a trust device benefits the individuals selected by the Donor, transfers assets to the Donor’s preferred charities, and it yields tax savings for the property owner.

If the trust is created during the Donor’s life, there is a charitable tax deduction equal to the present value of the charity's remainder interest, and the transferred property will not be subject to federal estate tax. If the trust is established under a will, the charitable tax deduction will reduce the donor’s taxable estate.

There can be other, not so obvious, benefits. Where the Donor transfers appreciated assets that the Donor would have sold the assets at some point had he not transferred them to the trust, the Donor avoids the capital gains tax that would be imposed upon an outright sale. When the trust sells the assets, it will have no capital gains tax liability because the trust is a tax‑exempt entity.

If the property owner has established the trust in his lifetime, the fact that the trust can sell the property tax-free maximizes the income base for the income beneficiary, which can be the property owner himself. Moreover, if the trust is a charitable remainder unitrust (CRUT), under which the income is measured as a percentage (no less than 5% of the value of the trust property in a given year), the trust can serve as a hedge against inflation for the income beneficiary because as the trust property appreciates in value the income paid out increases (Although in the current economic climate, it is important to be mindful that when the trust property declines in value, the income payout likewise declines). This is not true under the other type of charitable remainder trust, the charitable remainder annuity trust (CRAT), under which a fixed amount of income is paid out each year.

A CRUT can be structured to supplement retirement plans. Although a CRUT usually pays a percentage of the trust's annual value, it can provide that income distributions may not exceed the amount of income actually earned by the CRUT in a given year. Any shortfall in income can then be made up when there is sufficient income. During the Donor’s preretirement years, the CRUT can be invested in growth stocks, thus producing little or no income. Upon retirement, those assets can be sold, with the proceeds invested in income‑producing assets that will yield the agreed‑upon income percentage, plus a "make‑up" portion to compensate for the earlier shortfalls. Thus, income distributions from a CRUT can be minimized during the preretirement years and then maximized for the retirement years. (Again, such a plan is subject the assets having appreciated in value and being able to be invested in sufficiently high yielding income to fund the anticipated payouts.

It is important to remember that a charitable remainder trust must meet a series of technical requirements contact us to discuss how a Charitable Trust can be added to your estate plan to benefit you, your heirs and charities of your choice.

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Living Trusts – A necessary estate planning tool or a waste of money? (December 2009)

Living Trusts have been promoted by some as required by all while many sources indicate that only a handful of people really benefit from establishing living trusts.  Attorney Generals in Pennsylvania, California, Minnesota, Illinois and other states have filed suits to ban some promoters involved in "living trusts scams" or "trust mills" claiming they deceived people by selling living trust products that are not needed.  Even the Federal Trade Commission has issued warnings to consumers about living trust offers.

So, are living trusts needed are just a waste of money?
For many, the answer is: it depends.
To understand about living trusts and probate avoidance is necessary to understand
What is probate?

Probate is a legal process to administer a person's property after their death.

Probate matters are governed by state law and therefore the process and procedure differs from state to state. In some states there is substantial court oversight and requirements to file numerous documents with the court while other states allow the process to occur with minimal court oversight if there are no administrative issues.  These differences in state procedure greatly impact the potential cost of probate.

What Living Trusts Can Do

  • Living trusts can offer a more streamlined administration of property following your death.

Since the trust names a successor trustee there is no delay at your death in the trustee assuming control of property held by the trust and the trust avoids delay which can occur in the appointment of a personal representative by the probate court.

Once the trustee has paid all bills and filed all necessary tax returns, the trustee can distribute the property in accordance with the trust agreement.

During your lifetime in the living trust can be used to administer financial affairs in the event of incapacity.  A well drafted durable general power of attorney can also provide for the same administration of financial affairs.  In some cases the living trust may provide for easier administration and acceptability of the trustee's powers to administer financial affairs then under the general power of attorney.

  • Living trusts potentially offer more privacy than probate of a will. However, in many states the trustee of a living trust is required to file a notice of trust with the probate court and may be required to file the trust agreement with the court. Notice may also need to be sent to beneficiaries and other heirs about the existence of the trust and they may have rights review the trust agreement.
  • If you own real estate in another state, a living trust can be used to wait having to probate through will in this state where a vacation home or other real estate is owned.

What Living Trusts Don't Do

Save taxes.  The estate planning concepts used in living trusts can also be implemented through a will. In Pennsylvania, assets in a Living Trust are still subject to state Inheritance Tax and the tax return needs to be prepared and filed in the same manner as assets going through probate.

Protect assets from creditors. Since you retain the right to revoke the living trust during your lifetime your creditors have the right to reach the assets of the living trust in the event you are sued.

Do Living trusts automatically avoid probate and the need to have a Will?

No. Living trusts only avoid probate to the extent that the trust is funded; that is, that assets are legally titled to the trust.  For real estate, that requires a deed to be recorded transferring the property to the trust. (Depending on the state and your situation, substantial transfer taxes may be incurred in transferring real estate.) For brokerage accounts and bank accounts, new accounts need to be created with the trust as the account owner.  Other personal property such as cars, boats etc. also need to be retitled in the name of the trust.

A will is still needed to address any property that may not have been titled in the living trust and those assets would still need to go through probate.

Are there other ways to avoid probate?

Yes. Common ways to avoid probate include ownership as joint tenants with right of survivorship and transfer on death or pay on death accounts. Also life insurance, retirement accounts and 401(k) plans with named beneficiaries avoid probate. In some state, such as Florida, your primary residence may avoid probate by transfer as a homestead interest.

Costs. Living Trusts cost more create and require more lifetime maintenance than ownership in your name and using a Will to transfer property at death. Also there are costs and potential hassles in transferring assets to the Living Trust. Creating the Living Trust and not properly transferring assets to the Trust results in spending money to create the Trust and still having all of the costs of probate at your death.

Conclusion.

For some people Living Trusts can be a valuable estate planning tool.  For others, the ability to have property able to be quickly and easily transferred at death to beneficiaries may be able to be accomplished in other forms at significantly less expense and hassle.

In very few situations are pre-printed fill in the blank forms adequate to transfer property to your heirs exactly how you want it transfer.

In all cases you need to have a document that is properly prepared and signed to have assets transferred as you wish.

For more information about wills, living trusts and other estate plan ideas please contact us.

© Wiener and Wiener LLP 2009

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ESTATE PLANNING FOR VACATION HOMES (October 2009)

Whether it is a large summer house, the Florida vacation property, or just a rustic cabin in the woods, a family vacation property often carries sentimental value that doesn’t show up on financial ledgers. That is all the more reason why owners of such homes should plan for the orderly transfer of the home for future generations. With the help of some professional guidance, owners can choose from a variety of options tailored to particular situations and priorities.

  • Outright sale of the property to a third party is simplest, but be prepared for substantial capital gains if the property has been in the family long enough to appreciate in value.
  • A simple bequest can be used to keep the home in the family, but, by itself, it may not address issues such as use and maintenance.
  • A trust, in particular a Qualified Personal Residence Trust, has some tax benefits. The grantor gifts the property but retains a right to use it for a definite term. The value of the gift is calculated as the value of the property, less the retained interest. However, if the grantor does not outlive the retained term, the property will be included in the grantor’s estate.
  • A limited liability company (LLC) has the benefit of protecting assets generally and providing a more formal structure for its future ownership. If someone is injured on the property, the owner’s liability would be confined to the ownership interest in the property. The LLC can provide a "corporate like" structure to address use and maintenance issues that arise once multiple family members own the property in some joint ownership arrangement.
  • A trust or partnership has the advantage of a formal structure, but either the Trust or partnership will need additional funds or each partner/beneficiary would have to contribute funds to maintain the property.

The issues that arise most often for second and subsequent generations concern how to allocate both the benefits and the burdens of the vacation home, that is, the use of the home and the expenses of the home, including maintenance, improvements, insurance, and taxes. The benefits and burdens can be spelled out in writing in as much detail as is desired, but it is not advisable to leave these matters to chance. There is the potential for discord and bruised feelings in even the most congenial families if, for example, one sibling is left out of the prime vacation times while shouldering more than his or her share of costs for maintenance and repair. Parents might head off at least some of these issues by setting up some funding mechanism to cover ongoing expenses for the home.

Looking a bit farther down the road, whatever legal forms are used should provide a means by which one or more of the family members can sell his or her interest in the home to the remaining family members and restrict transfers to non family members.

Contact us to discuss how to integrate your family vacation property into your estate plan.

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WHAT GOES INTO AN ESTATE PLAN? (May 2009)

In devising an Estate Plan, the first step is a review of all your financial resources. These include hard assets, such as real estate, including your house, other tangible property, such as cars, boats, jewelry and art; equity investments, such as a business, partnerships or other ventures; marketable investments, such as stocks, bonds, mutual funds, Certificates of Deposits, or similar financial instruments; life insurance policies; 401(k), pension, profit sharing and retirement funds; and "liquid" assets - your checking, savings and money market accounts. It also includes other property such as vacation homes, time share interests, joint bank accounts, stock options, loans to family members or others and may even include an interest in a trust created by someone else.

The next step is the core of your estate plan. It involves your answering some difficult questions in order to establish your objectives. While this sounds easy, it requires very personal decisions about your heirs and making certain that the right questions are asked.

In the distribution of your assets you will have to decide about financial management of your assets upon your death, care for minor children, if any, whether to leave assets to heirs in a lump sum or to provide for periodic distribution over some period of time, the use of life insurance, possible current gifts to heirs and perhaps generation skipping transfers. If you own a closely held business it is necessary that the estate plan address the plans for continuation and preservation of the business or the sale or your interest in the business. Each of these decisions lead to other questions that must be answered to create an estate plan that accomplishes your goals.

Once your goals are clear, the plan must then be set up in a manner that preserves your wealth for your family by reducing potential future estate taxes. The current federal estate tax legislation has added more complexity requiring that your estate plan be flexible to meet the changes contained in the existing law and changes that are certain to follow sometime in the next few years. It is important to move forward with your estate plan now and not wait for resolution about the anticipated changes in Federal Estate Tax Law. Once new legislation is passed, you can make changes to your plan if needed.

These issues can be complex and confusing from a legal perspective as well as the personal decisions that you must make concerning your heirs. We can help you by making certain that the right questions are asked, that the legal issues are explained in simple terms that you understand and not in confusing legal and tax jargon, and that a distribution scheme is created which best meets your goals with minimum taxation. We will explain what the options are and work with you to develop an Estate Plan which best meets your desires for your situation.

Contact us today to find out more about how we can help you preserve your family wealth.

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PRESERVING WEALTH AND PASSING IT ON AS YOU WISH

Before beginning to write a will, the first step is to have an estate plan. It isn't only people with significant wealth that need an estate plan - everyone does, otherwise you may wind up with a will which doesn't really accomplish want you wanted to happen or a will with set of provisions and conflicting beneficiary designations or other documents.

Preparing an estate plan will allow for your assets to be arranged to fulfill your objectives with the minimum expenditure for taxes, and by creating the legal structures to ensure the distribution to your heirs in accordance with your desires. It is a personalized plan since what and when you want to do for your heirs may be different than your neighbor's.

WHAT GOES INTO AN ESTATE PLAN?
In devising an Estate Plan, the first step is a review of all your financial resources.  These include hard assets, such as real estate, including your house, other tangible property, such as cars, boats, jewelry and art; equity investments, such as a business, partnerships or other ventures;  marketable investments, such as stocks, bonds, mutual funds, Certificates of Deposits, or similar financial instruments; life insurance policies; 401(k), pension, profit sharing and retirement funds; and "liquid" assets - your checking, savings and money market accounts. It also includes other property such as vacation homes, time share interests, joint bank accounts, stock options, loans to family members or others and may even include an interest in a trust created by someone else.

The next step is the core of your estate plan.  It involves your answering some difficult questions in order to establish your objectives. While this sounds easy, it requires very personal decisions about your heirs and making certain that the right questions are asked.

In the distribution of your assets you will have to decide about financial management of your assets upon your death, care for minor children, if any, whether to leave assets to heirs in a lump sum or to provide for periodic distribution over some period of time, the use of life insurance, possible current gifts to heirs and perhaps generation skipping transfers. If you own a closely held business it is necessary that the estate plan address the plans for continuation and preservation of the business or the sale or your interest in the business. Each of these decisions lead to other questions that must be answered to create an estate plan that accomplishes your goals.

Once your goals are clear, the plan must then be set up in a manner that preserves your wealth for your family by reducing potential future estate taxes. The current federal estate tax legislation has added more complexity requiring that your estate plan be flexible to meet the changes contained in the existing law and changes that are certain to follow sometime this decade occur in the next few years. It is important to move forward with your estate plan now and not wait for resolution about the anticipated changes in Federal Estate Tax Law. Once new legislation is passed, you can make changes to your plan if needed.

These issues can be complex and confusing from a legal perspective as well as the personal decisions that you must make concerning your heirs. We can help you by making certain that the right questions are asked, that the legal issues are explained in simple terms that you understand and not in confusing legal and tax jargon, and that a distribution scheme is created which best meets your goals with minimum taxation. We will explain what the options are and work with you to develop an Estate Plan which best meets your desires for your situation.

Contact us today to find out more about how we can help you preserve your family wealth.

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ESTATE PLANNING: DEBTS AND TAXES (April 2009)

If you inherit property, of course you should be grateful and count your blessings. Still, consider the possibility that the gift may come with a big string attached—a debt linked to the property, such as is particularly common with real estate or a car. In that event, the question arises as to whether the debt must be satisfied from the particular asset or from the decedent’s estate more generally. How this question is answered can cause a big swing in the respective gift amounts for beneficiaries of an estate.

Historically, the law presumed that the debt was not to be paid from the property that was connected to it. The reasoning was that a true gift should not come laden with such a burden. Over time, as taking on debt became commonplace, this thinking changed and statutes flipped the conventional assumption. Increasingly, these laws start from the premise that the property left to someone includes the debt on the property, unless the decedent in his or her will clearly indicated a different intent. That is where careful estate planning, with professional guidance, comes in.

It is best to leave no doubt for the ordinary lay reader of a will. A general directive in the will to pay all debts of the testator may be too nebulous. Instead, if the intent is for the asset to be given free of the debt, the will should make such provision clear.

This scenario was played out recently in a case in which a farmer left to his (favored?) son three different farms, each of which was encumbered by debt. To his other son he left the residue of the estate. When the father died, the executor used part of the estate proceeds to pay off the loans to the farms, so that the first son would receive them debt-free. Not surprisingly, the second son, whose inheritance was thereby diminished, brought the matter to court.

The second son prevailed, forcing payment of the debts for the farms to come from the farms themselves. The father’s will directed in a general way that debts were to be paid from the estate. However, under the relevant state statute, that was not a sufficiently explicit indication of intent to satisfy the debts on the farms from the residuary estate. In other words, the will had not clearly shown an intent that the first son was to receive the farms debt-free. As a result, the first son got the three farms, but he, not the second son, also got the responsibility for paying off the attached encumbrances, which totaled almost a quarter of a million dollars.

In many estates it is not debts, but inheritance and estate taxes that can significantly alter the distribution of an estate, especially in light of many assets today that pass outside of probate. The Will or Trust Agreement if a revocable trust or Living Trust is used should clearly set forth how the taxes are to be paid and from where they are to be paid.

When property is not equally divided among beneficiaries, such as the farm example in this article, it is important to review how debts and taxes will be handled so that the Testator’s wishes are carried out and litigation among the beneficiaries is avoided.

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WHAT HAPPENS TO YOUR E MAIL AFTER YOU DIE? (June 2007)

When a young Marine died in Iraq and his parents wanted to retrieve his e‑mail as a memorial to him, they came up against the privacy policy of the Internet service provider (ISP), which declined to provide the information. Ultimately, a probate court ordered that the parents be allowed to retrieve the e‑mails.

When a prominent poet died without leaving the password for his e‑mail account, where he kept virtually every significant piece of personal information, his daughter had no means of gaining access to that information so that she could notify others of her father’s death. Citing privacy concerns, the ISP for the account refused to divulge the information to the daughter.

These real‑life stories are the leading edge of what may become a wave of litigation concerning ownership of e‑mail information upon the death of the account holder. The competing interests are the privacy of the account holder, coupled with the ISP’s interest in preserving that privacy, and the survivors’ rights to the property of the deceased.

Most of us think of e‑mail as the modern equivalent of a box of letters belonging to us, when, technically, e‑mail is an intangible form of property owned by the ISP. Nonetheless, if it is possible to spot an early trend on the issue, that tendency is to treat e‑mail information as the account holder’s property upon his or her death. In most states, the issue is still unresolved and without clear case precedents. At least one state has passed a law directing ISPs to turn over the e‑mail of a decedent to the personal representative for the decedent’s estate.

Steps to Take Now
It will be some time before legislatures and courts catch up with the reality that millions of people use their e‑mail accounts as repositories for all sorts of information having sentimental, historical, or economic value. In the meantime, there is some practical advice for facilitating access to e‑mail information "left behind":

Read your ISP’s privacy policy to determine what your survivors may have to contend with to get access to your e‑mails. The policies run the gamut from providing e‑mails to next of kin upon showing a power of attorney over the account and a death certificate, to treating e‑mail accounts as non‑transferable and with no right of survivorship.

As strange as it may sound, consider dealing directly with the issue in your estate planning by including e‑mails specifically in your will, especially if they have monetary value. In connection with this, you should archive the information to your hard drive and be sure that your survivors have any necessary passwords. Conversely, if you want to take your e‑mails with you, in effect, stipulate in your will that no one is to have access to your account.

Talk to us for legal advice, including information as to whether there are any new laws on the subject. They could trump, or at least affect, whatever arrangements you have made or may be considering for disposing of your e‑mails after your death.

While on the subject of computer use and passwords, if you have personal information on your computer that your Personal Representative will need (or even your agent (under a Power of Attorney) during your lifetime) you should also make sure that they know where the information is stored and the passwords to access it. For example, if you handle all of your finances online and store all income and expense information in financial programs such as Quicken, without the passwords, your Personal Representative will be trying to understand your financial information with no account statements and no checkbooks.

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ESTATE PLANNING -- WHAT IS A TRUST? (April 2007)

A trust is a legal instrument that transfers title to designated property from the owner, called the donor or grantor, to a trustee, who holds the property for the beneficiaries of the trust. The grantor can also serve as the trustee, thereby enhancing control over the trust during the life of the grantor. In such a case, a successor trustee is usually named in case the grantor dies or is incapacitated. Depending on the size or complexity of the trust, the trustee, or co-trustee, might be an institution, so as to bring more expertise to the position.

Testamentary Trust
A testamentary trust, created in a will, takes effect when the grantor dies. It names the beneficiaries and gives directions for payment of the income from the trust and for disposition of the assets. The testamentary trust has the advantage of increasing the odds that an inheritance is used prudently. The trustee can manage the assets of the trust until such time as the beneficiaries are prepared to do so, as opposed to an immediate transfer of assets to the beneficiaries.

Living Trust or Revocable Trust
The second category of trusts is the living, inter vivos, or revocable trust, which is created during the grantor’s lifetime. To transfer to the Trust, the assets are retitled in the name of the trust. As the name suggests, a revocable trust may be dissolved entirely by the grantor. But short of that, the grantor may also change beneficiaries, replace the trustee, or change the composition of the assets in the trust. Revocable trusts do not remove assets from the grantor’s estate. The grantor pays taxes on the trust income (on his or her 1040 personal income tax return), and if any assets remain in the trust at the death of the grantor, they are taxable in his estate. A revocable trust will avoid probate, but has few tax advantages.

An irrevocable trust (assuming that the grantor does not retain impermissible strings) permanently takes assets out of the grantor’s estate when the assets are put into the trust.  (A gift tax return may need to be filed.) While tax savings can be realized with an irrevocable trust, this type of trust is not to be entered into lightly, as the grantor will not be able to alter it later. For income tax purposes, the trust typically is a separate entity. (Some trusts are established with the intention of holding assets which are removed from the grantor’s estate but are taxed to the grantor for income tax purposes; these trusts are generally referred to as intentionally defective grantor trusts). Assets in the trust generally are not subject to estate taxes on the death of the grantor, but the transfer of assets into the trust may be subject to gift taxes.

When the grantor for a living trust dies, the trust assets pass directly to the beneficiaries. This can be an advantage over having to go through probate. Depending on the state and type of assets, a potentially costly and time‑consuming process of administering a will. A living trust also maintains the privacy of the estate, because bypassing probate also means that no public record is created, as occurs with probated wills.

Effective use of trusts in estate planning requires not only awareness of these trust basics, but familiarity with specialized trusts that might be a good fit for particular cases, such as those involving life insurance policies and charities.

Contact us to discuss whether and what type of trust may be appropriate for your estate plan

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ROTH IRA CONVERSIONS (January 2007)

A traditional individual retirement account (IRA) is funded with before‑tax contributions and grows tax‑deferred, but not tax‑free. (Taxpayers with a 401(k) plan provided by their employers, and who fall into higher income tax brackets, generally cannot deduct an IRA contribution.) Beginning at age 70‑1/2, the individual must take minimum distributions from a traditional IRA, which are taxed in full at the income rate then applicable to the taxpayer.

By contrast, contributions are made to a Roth IRA with after‑tax money. If the account has been held for at least five years, the accumulated principal and interest in a Roth IRA may be withdrawn tax‑free once the individual reaches 59‑1/2. Unlike a traditional IRA, there are no mandatory minimum distributions for a Roth IRA.

The ability to make contributions to a Roth IRA is phased out for couples with a modified adjusted gross income of between $150,000 and $160,000 ($95,000 to $110,000 for individuals). While those contribution restrictions will remain in place, a new law that goes into effect in 2010 will open up the Roth IRA to higher‑income taxpayers by allowing them to convert a traditional IRA account into a Roth IRA account, thereby benefiting from the Roth features when money is withdrawn. A current provision limiting Roth conversions to those taxpayers with adjusted gross incomes of under $100,000 will no longer be in effect.

When a conversion occurs, the individual withdraws funds from the traditional IRA account, reports those funds as income, and transfers them to a Roth IRA. The conversion must be done before December 31 of the current tax year. If the earlier IRA contributions were taken as deductions, taxes will be due on both the principal and the earnings. Otherwise, taxes will be due only on the earnings. In any event, funds can be converted from a traditional IRA to a Roth IRA without incurring the 10% penalty for early withdrawals.

Why worry now about a law that will not go into effect until 2010? Because proper planning and saving in a traditional IRA between now and then can result in a significant nest egg that can be converted into a Roth IRA when the income restrictions are lifted in 2010. For example, given current and projected limits on contributions to a traditional IRA, a married couple in their fifties, with at least one spouse working, could contribute over $50,000 to a traditional IRA over the next few years, then convert those funds to a Roth IRA, and thereafter reap the benefits of that type of retirement fund. Since some taxes will be due whenever the conversion takes place, it also is advisable to save up some funds outside of the account for that day of reckoning with the IRS.

Together with your accountant and financial advisors, we can help you determine whether and when to convert a traditional IRA into a Roth IRA, Such decisions require considering factors such as your current and anticipated future tax brackets and income, when you want to begin making withdrawals, and your overall estate plan.

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Private Foundations and Donor Advised Funds (November 2006)

A Private Foundation is a tax exempt organization created solely for charitable purposes. Its charitable activity typically involves making grants to other charitable organizations to support the recipient’s charitable activity. Foundations can provide donors significant tax benefits. Donors receive an immediate tax deduction for contributions to the Foundation. The contributed funds are invested and grow tax free until distributed as grants. The money contributed is not included in the donor’s estate for state or federal estate or inheritance tax purposes.

There are however substantial IRS rules regarding operation and distribution of funds by private foundations. While there is not a minimum amount that is needed to create a private foundation, most tax advisors recommend that the donor contribute at least $100,000 or more to make costs and paperwork associated with a private foundation worthwhile.

Foundations are typically established by an individual or family which retains control of the organization. Foundations are run by directors or trustees, sometime called the Board. Most foundation boards consist of family members of the person who creates and initially funds the foundation. The Board controls the foundation’s activities, including decisions about funding grants and investment decisions.

The first major large private foundation, the Rockefeller Foundation was established by John D. Rockefeller. Other well known private foundations include the Ford Foundation, the Robert Wood Johnson Foundation and the John D and Catherine T MacArthur Foundation, each created and funded by the donor for whom the foundation is named.

Recently, Warren Buffet broke that tradition when he pledged to give $30 billion to the Bill and Melinda Gates Foundation. That foundation, funded and operated by Microsoft founder Bill Gates, is already the largest private foundation with over $25 billion in assets, over double the size of the next largest foundation. (Mr. Buffet also made pledges to foundations controlled by his children of an additional $ 7 billion dollars).

For those without such fabulous wealth or lacking the desire to create a charitable vehicle of such size, a Donor Advised Fund (DAF) offers the ability to use this tax method of the very wealthy on a much smaller scale. Many "public charities" (those that get their donations from a wide group of people verses the foundation funding from one or a small number of people) have Donor Advised Funds which allow donors to make contributions today and "advise" the charity later how to use the money or even to give it to another charity, similar to the way the Private Foundation operates.

Donors make a current contribution (and get an immediate tax deduction). The donor then gives advice each year about making distributions from the donor’s funds. The grant is made to the designated charity, often for a specific program or project. Technically, the donor’s direction is advice to the involved charity (and therefore the additional provisions required for private foundations are avoided); in practice the donor’s advice gets followed.

Although private foundations are exempt from income tax, they are subject to a 2% excise tax on the investment income the foundation generates. In addition, there are complex rules on self dealing which limit transactions between the foundation and certain related individuals. Other rules limit the portion of stock that private foundations can own in business entities. Most often this occurs when stock (or other form of ownership interest) in a business is initially contributed by the foundation founder.

The foundations are also required to distribute the net investment income generated by the Foundation with a minimum required contribution of 5% of the fair market value of Foundation assets. Normally this is not a problem, but can cause a Foundation to have to use its principal to make annual distributions if it holds large non income producing assets, such as "growth stock" or undeveloped real estate. Several years ago the Trexler Trust, the Private Foundation created by Harry Trexler to provide for Allentown’s park system and local charities ran afoul of this rule because of the significant value of farm land in it owned adjacent to Trexler Park and the Allentown Golf Course (today the site of several housing developments and Temple Beth El.)

A major benefit of the DAF is that they avoid all of these rules while still allowing the donor to have some retained control over the ultimate distribution of his or her donation. There are also income tax advantages to contributing to a DAF instead of a Private Foundation. When appreciated stock is donated to a public charity, including in a donor advised fund, the donor is entitled to a tax deduction of the current market value of the stock without having to pay income tax on the capital gain. For example if you bought stock at $1 per share and it is now worth $100 per share, if you gift 1 share of that stock to a public charity you are entitled to a donation of $100. If the stock is sold by you, you will have to pay income tax on your gain of $99. In the event the stock is given to a private foundation, the income tax deduction is limited to its cost B the $1.

For large annual gifts to private foundations there are also lower percentage limits then apply to the public charities. Gifts to foundations are limited to 30% of income while gifts to public charities can be deducted up to 50% of income. (Excess amounts can be carried forward.)

The Pension Protection Act of 2006 has added another benefit for tax years 2006 and 2007. Distributions from a traditional IRA or Roth IRA made directly to a public charity are excluded from gross income, up to $100,000 per person. The rule applies only for contributions to public charities and not to private foundations. Any amount can be distributed directly from the IRA up to the $100,000 limitation. And again, any contributions to a donor advised fund qualifies under the public charity rules.

Under prior law (and after 2007) the distribution from an IRA is taxable and the donor receives a corresponding deduction if the amount withdrawn from the IRA is contributed to charity. The new provision benefits some donors who would not fully receive the benefit of the contribution. Since the contribution is excluded from income, the donation is not taken into account for the limitations percentage of income deductible. The rule also benefits those don’t itemize deductions, those subject to phase out of deductions based on income and certain donors receiving social security benefits where the additional income would cause more of their social security benefits to be subject to tax.

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DOMICILE FOR THOSE WITH RESIDENCES IN MORE THAN ONE STATE (November 2005)

If you spend time in any given year in residences in different states the issue of your domicile should be discussed and reviewed with your tax advisors.

In simplest terms, a person's domicile is the place where he or she intends to return after leaving another location. The special significance of where a domicile is established is in tax planning. An individual's domicile determines which state's income, gift, and estate tax laws apply, and in which state or states a person, trust, or estate is taxable. The rules that will govern the administration of an estate also depend on the state of domicile. Inadequate attention to establishing and documenting an intended state of domicile could mean that even the best‑laid estate plan might go awry because the laws of a different state could apply. The end result could be an unexpected tax burden that otherwise could have been avoided.

Although the basic definition of "domicile" is simple enough, many different criteria may be taken into account in pinpointing a state of domicile. No one factor is controlling, and the states differ in the criteria that they use. It is also necessary that you communicate any changes in your domicile to all of your tax advisors to insure consistency. The address included in a person's will may be a good indicator of the person's domicile.

A nonexhaustive list of other factors would take into account the State:

Where a person votes,
Has their main place of employment
Registers an automobile,
Has a driver's license,
Keeps important personal property and has safe deposit boxes,
Address used for federal income tax returns
Files and pays state and local income and personal property taxes,    
Last applied for a passport,
Where a person has membership in churches, synagogues, country clubs,
Where a person is involved in charitable activities

Contact us to discuss your situation and steps you can take to insure that your domicile is appropriately documented.

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AN INTRODUCTION TO COLLEGE SAVINGS PLANS (December 2005)

The steady rise in the cost of attending college may have become one of those few absolute certainties in life, along with death and taxes. Tuition and fees for public and private institutions alike can seem overwhelming, especially if parents have done little financial preparation ahead of time. Some solace can be taken in the fact that there is a wide variety of approaches for saving for college. For parents who have some foresight, the use of a plan that is tailored to their circumstances can at least soften the blow of financing a college education.

529 College Savings Plans
With mutual funds as the primary investment option, state 529 plans are best for those looking to contribute substantial amounts to a college fund. Earnings are tax‑free, as are later withdrawals for qualified education costs. These plans generally are in the parents' names, which means that the plans have minimal effects on the family's eligibility for financial aid. The drawbacks are limited investment options and relatively high fees.

529 Prepaid Plans
A prepaid tuition plan makes the most sense for families that are reasonably certain that their child will attend one of the schools in a state's plan, and that are satisfied with a rate of return that equals the inflation rate for the costs of schools in the plan. Under prepaid tuition plans, you are buying future tuition at a state's public colleges at today's prices. On the downside, payouts from these plans reduce eligibility for financial aid on a dollar‑for‑dollar basis. In addition, states dealing with especially tight budgets have been raising the costs of participating, and in some cases have been temporarily closing off enrollment.

For a group of approximately 250 private colleges, there are independent 529 plans. They work like state prepaid plans, including the dollar‑for‑dollar reduction in financial aid eligibility when funds are distributed. Money from such a plan can be rolled over to a state 529 savings plan or a state prepaid plan without penalty.

Coverdell Education Savings Accounts
If you want the most variety in investment options and lower fees, a Coverdell account may make sense. Joint income tax filers with adjusted gross incomes of up to $220,000 can save up to $2,000 a year, tax‑free, for education expenses. No plan is without its weaknesses, and for the Coverdell accounts it is the adverse effect on financial aid eligibility because the accounts are in the student's name, not the parents' names.

Custodial Accounts
A custodial account is appropriate for those who want to transfer assets, including securities, to a young beneficiary in order to reduce taxes. However, be forewarned that the beneficiary will have control over the account upon reaching the age of majority. Funds can be taken from the account at any time and for any purpose benefiting the child, not just educational expenses. Withdrawals are taxed at the child's rate.

Savings Bonds
If the 529 plans are the show horses of financing in higher education, savings bonds are the workhorses. Returns on savings bonds are usually modest, but the investment could not be safer. Savings bonds may be especially attractive to middle‑ and low‑income households that fall within certain income restrictions. For Series EE bonds issued after 1989, and all Series I bonds, at least some of the interest earned on the bonds is tax‑free if used for higher education expenses.

These approaches to saving for college are not exhaustive, and the descriptions here only scratch the surface. Contact us to learn more about incorporating college savings plans into your estate plan.

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IRS GETS TOUGH ON ESTATE TAX FRAUD (September 2004)

Prosecutions for filing a false Form 706, the federal estate tax return, have been rare. Recently, a federal prosecutor announced a guilty plea by an individual charged with estate tax fraud. The guilty plea may well be a harbinger of a new "get tough" policy by the IRS in an area that up until now has not had a reputation for vigorous criminal enforcement.

The defendant in this case was the executor of her mother's estate. She admitted that she intentionally filed a Form 706 that omitted assets worth about $400,000 that should have been included in the estate. The executor could face a term of imprisonment, followed by a term of supervised release, and a large fine.

Individuals who stand to be affected by the new emphasis from the IRS on using a carrot and a stick include executors, tax return preparers, and essentially anyone responsible for the completeness and accuracy of an estate tax return. It is important to remember that old income tax returns and other documents that the IRS can obtain in an audit often will allow it to discover assets that have gone unreported. The recently publicized guilty plea by an executor is a not‑very‑subtle warning by the IRS that estate tax fraud can have consequences beyond dollars and cents.

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