Drafting an IRA Trust - What You Need to Know

I have previously blogged about IRA Trusts, which are one of my favorite estate planning tools.  This afternoon I presented a 90 minute national continuing legal education teleconference and webinar on the topic.  It was my fourth presentation this week!  I'm thinking about becoming a professional speaker and giving up actually practicing law.  (That's not really true, but I have really come to enjoy helping to educate others).

For those who want an analysis of why and when IRA trusts make sense, an overview of the IRA Required Minimum Distribution rules, and an explanation of the tax issues involved, I offer the manuscript here for the benefit of my readers.

Why Lawyers vs. the Internet - a Baker's Dozen

It's Friday the 13th, and I've been at the University of Miami School of Law's Heckerling Institute on Estate Planning all week.  This morning there was some discussion on the future for estate planning attorneys.  While online documents may have some limited utility, some  feel that online software can take care of all their estate planning related legal needs.  I beg to differ.  Here are 13 reasons why a flesh and blood lawyer beats a computer program any day - a lawyer can:

  1. Listen to your goals and desires and incorporate them into your plan.
  2. Offer advice, not just words on paper.
  3. Help with referrals to other trusted professionals.
  4. Make sure that the documents are properly executed.
  5. Make sure that any trusts are properly funded.
  6. Make sure that beneficiary designations are properly completed.
  7. Make sure that accounts and real estate are  properly titled.
  8. Help with managing assets of incapacitated family members.
  9. Help with probate and trust administration.
  10. Help with income, gift and estate tax matters.
  11. Help ensure governmental benefits for disabled or incapacitated family members.
  12. Serve as an advocate in dealing with financial institution and governmental bodies.
  13. Care about you and your family!

New NC Estates Court Costs in 2012

Effective January 1, 2012, North Carolina has added a couple of new court costs in estate matters:

  1. Will Caveats (will contests) - a $200 filing fee.
  2. Reopened Estates - a filing fee of 40 cents per $100 of property in the reopened estate.  The maximum cumulative fee for estates is $6,000.

These are on top of increased filing fees for estates that took effect last year.  As fees to continue to rise, avoiding probate with living trusts and other planning will save even more money.

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Tax Provisions Expiring December 31, 2011

There a few federal income tax deductions and other provisions that expire this year:

  • Tax-free distributions from IRAs for charitable purposes -  Taxpayers who were at least age 70½ could make tax-free charitable distributions from an IRA up to $100,000.
  • Contributions of capital gain real property made for conservation purposes - The expanded deduction (50% for individuals, 100% for qualified farmers and ranchers) of the value of a qualified conservation easement donated to a qualifying charitable organization. In 2012 and later, the deduction will be limited to 30% for all taxpayers.
  • Deduction for certain expenses of elementary and secondary school teachers - The above-the-line deduction of up to $250 for unreimbursed classroom expenses.
  • Deduction of state and local sales taxes - Taxpayers could choose to deduct, as an itemized deduction on Schedule A, state and local general sales taxes, in lieu of deducting state and local income taxes.
  • Qualified tuition and related expenses - Certain taxpayers were allowed an above-the-line deduction (up to a maximum of $4,000) for qualified tuition and related expenses for higher education.
  • Individual AMT exemption amounts - Individual AMT exemption amounts for 2011 are $74,450 (married filing jointly), $37,225 (married filing separately), and $48,450 (single and head of household). In 2012 the exemption amounts will decrease to $45,000 (MFJ), $22,500 (MFS), and $33,750 (Single/HoH).

It's possible that tax legislation in 2012 could retroactively extend these benefits.  A host of other tax cuts will also expire on December 31, 2012, and I'm sure that Congress will at least attempt to address the issue next year.  Stay tuned for more fun and games from Washington!

Are You Required to Support Your Parents?

Much to my surprise, I recently became aware of the following North Carolina law:

§ 14‑326.1.  Parents; failure to support.

If any person being of full age, and having sufficient income after reasonably providing for his or her own immediate family shall, without reasonable cause, neglect to maintain and support his or her parent or parents, if such parent or parents be sick or not able to work and have not sufficient means or ability to maintain or support themselves, such person shall be deemed guilty of a Class 2 misdemeanor; upon conviction of a second or subsequent offense such person shall be guilty of a Class 1 misdemeanor.  If there be more than one person bound under the provisions of the next preceding paragraph to support the same parent or parents, they shall share equitably in the discharge of such duty.

 

On its face, this law makes it a crime not to support one's parents if they are unable to support themselves.  What about all those elderly persons receiving assistance from the state because they can't pay for nursing home costs themselves?  It might make one think twice about assisting your parents in divesting themselves of assets in order to qualify for Medicaid.  Also, it could make considering long-term care insurance that much more important - who wants their kids to get arrested, even if just for a misdemeanor?

However, on the North Carolina Bar Association's Elder Law Section list serve, there was a recent discussion of the statute and the fact that no one is aware of anyone being prosecuted for violation of the the law.

That's not surprising - even as a estate planning attorney (as opposed to a criminal attorney), I see many problems with the law.  It is so vague that I do not see how it could ever stand up to challenge before a judge.   How does one determine what "sufficient income" is or "reasonable providing."  What about saving for one's own retirement to avoid the same problem with the next generation? What about college expenses for kids? The statute also makes no mention of assets, so apparently one could have a couple of million dollars socked away, and the statute would not apply if one's income was all used for reasonable support of one's immediate family.

Bottom line - you probably don't need to worry about N.C.G.S. Section 14-326.1.  In the unlikely event you are busted for a violation, hire a good attorney.  You'll probably make law by having the statute declared unconsitutional.

 

How to Draft IRA Trusts - Teleconference

Attorneys interested in learning more about IRA Trusts may wish to sign up for my 90 minute teleconference, How to Draft IRA Trusts, to be held on January 27, 2011 at 2:00 p.m. Eastern.  The program may also be of interest to CPAs, financial planners and trust officers.

IRA Trusts are great tool for protecting large IRAs for the benefit of younger generations.  Anyone with an IRA or retirement account over $250,000 or so should consider implementing one.

IRS Requests Comments on Trust Decanting

The IRS is requesting comments on the tax implications of trust "decanting,"  which refers to transfers by a trustee of all or a portion of the principal of an irrevocable trust to another irrevocable trust. Specifically, would like to hear from practitioners regarding when and under what circumstances such transfers that result in a change in the beneficial interests in the trust are not subject to income, gift, estate, and/or generation-skipping transfer (GST) taxes. See Notice 2011-101 for details.

North Carolina and many other states have statutes that expressly allow for trust decanting. In addition, in order to add flexibility and protection for beneficiaries, irrevocable trusts such as life insurance trusts often contain provisions allowing the trustees to transfer some or all of the principal to another trust. Court approval is not required, but certain limitations are imposed to so that the rights of the beneficiaries are not substantially modified.
 

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Duke's OLLI Program to Offer Retirement Course in 2012

Local Financial Planner Janet Ramsey, MBA, CFP will be offering a course entitled To the Health of Your Wealth as part of Duke University's OLLI program.  The course will run from January 11 to March 28, 2012.  Greg Herman-Giddens will speak on non-tax reasons to do estate planning.

For more information click here.

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Tax Information for U.S. Citizens Living Abroad

U.S. citizens must report and pay taxes on their world-wide income, even if living in another country.    U.S. taxpayers are also required to disclose foreign bank and financial accounts (FBARs).  It's important to know and follow the rules in order to avoid civil and criminal penalties.

The IRS has published a guide on income tax filing and FBARs for U.S. Citizens or Dual Citizens Residing Outside of the U.S.

IRS May Allow Late Filing Relief for 706 for Portability

According to Robert Keebler, CPA, the IRS may allow a late filed Federal Estate Tax Return, Form 706, if the only reason for filing the return is for the surviving spouse to claim the deceased spouse's unused estate tax exemption. The current exemption is $5 million, but it is scheduled to reduce to $1 million in 2013.

Form 706 is due nine months after death, with an automatic six month extension available.