Posted on July 29, 2009 by Greg Herman-Giddens

Obama has a Living Will - Do you?

President Obama is visiting Broughton High School in Raleigh today, and conincidently he recently stated in a discussion of health care reform that he and Mrs. Obama have Living Wills and consider them important.  Hopefully they also have Wills, Durable Powers of Attorney, Health Care Powers of Attorney and HIPAA Authorization forms.

These are basic documents that every adult should have, whether age 18 or 88.  An estate plan can help you maintain your dignity, protect your family, preserve your assets, and even save taxes!

 

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Posted on July 28, 2009 by Greg Herman-Giddens

Your IRA may be at Risk

In North Carolina standard IRAs are exempt from creditors' claims, under state law and federal bankruptcy law.  Also, qualified retirement plans, such as 401(k)s and 403(b)s, are protected under the federal ERISA law.

However, ERISA treats employer funded IRAs like SEP-IRAs and SIMPLE IRAs differently from qualified plans, and does not offer creditor protection for such IRAs.  In addition, since ERISA states that it trumps state law with regard to plans covered by ERISA, it is doubtful that the North Carolina statutory exemption for IRAs works to protect SEP and SIMPLE IRAs.

Also, it is questionable whether inherited IRAs are protected from creditors.  At least one federal bankruptcy court has ruled that inherited IRAs are not exempt in a bankruptcy proceeding.

Thus, if you have a SEP, SIMPLE, or inherited IRA, it may be at risk if you are ever sued.

So, what to do?

If you are no longer contributing to the SEP or SIMPLE, you may be able to roll it into a standard IRA so that it's fully protected (under NC law and up to $1 million in bankruptcy).

Another way is to move your IRA offshore to a jurisdiction like Nevis or the Cook Islands.  Your IRA can establish a limited liability company (LLC) in one of these jurisdictions, and then the custodian transfers your IRA funds to the foreign LLC in exchange for the foreign LLC’s membership interest. Your IRA then owns the foreign LLC. Your IRA has no assets within the United States - it owns only the membership of the foreign LLC.

Your IRA would then be protected in the same manner as any LLC in that jurisdiction.  The creditor would have to initiate a lawsuit in the foreign jurisdiction, and in the event it prevailed, would have only a charging order remedy.  This remedy does not allow the creditor to invade the IRA to satisfy its claim, but only get its proportionate share in the event of a distribution from the LLC.

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Posted on July 23, 2009 by Greg Herman-Giddens

NC Democrats Agree on Tax Increases

Democrats in the North Carolina House and Senate reached a compromise on tax increases yesterday.  Briefly, the proposal would:

  • Increase income taxes by 2%
  • Increase sales tax by 1% (to 7.75% in most counties)
  • Increase cigarette taxes by 10 cents per pack
  • Increase beer, wine and liquor taxes

The income and sales tax increases are supposedly temporary, for a two year period.  There are no additional sales taxes for certain services as contained in the earlier Senate proposal.

The only good thing I can say about this proposal is that at least the increased income taxes can be deducted for federal tax purposes (for those that itemize deductions).  Additional sales taxes would not necessarily be deductible for those who deduct income taxes rather than sales taxes.

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Posted on July 21, 2009 by Greg Herman-Giddens

Joint tenancy interests can now be unequal in NC

As of July 10, 2009, there is no longer any doubt as to whether real property owners in North Carolina can create unequal joint tenancy with right of survivorship interests.

Session Law 2009-268, amending N.C.G.S. Section 41-2.

Example: A owns blackacre.  A can deed blackacre to himself, with a 1/2 interest, and B and C, each with a 1/4 interest.  When one owner dies, that owner's share is divided pro-rata according to the surviving owners' respective interests (unless otherwise provided in the deed).  Thus, if B died, 1/3 of his share would belong to C, and a 2/3 share would go to A.

Note:  Unequal tenancy in common interests have been commonly used for years without any dispute about whether such interests were allowable under the law.  However, such interests do not pass to the surviving owners by operation of law, and must be devised under a Will or Trust.

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Posted on July 20, 2009 by Greg Herman-Giddens

Bequests Under Will to Drafting Attorney to be Prohibited

Beginning January 1, 2010, it will be unlawful for North Carolina attorneys to prepare a Will or Codicil naming the attorney as a beneficiary unless the attorney is within five degrees of kinship of the testator, a present or former spouse of the testator, or a parent, sibling or child of a spouse or former spouse of the testator.  If the law is violated the bequest or devise is void.  Inclusion in the Will or Codicil as an Executor or Trustee is permissible.

Drafting such a Will is also viewed as unethical by the North Carolina State Bar, which means that an attorney can be disciplined or disbarred for doing so.

If an attorney does draft a Will or Codicil in which he or she is a beneficiary of an allowable family member, he or she must attach an affidavit to the Will stating that he or she is in compliance with the law.  N.C.G.S. Section 31-4.1.

Also, on every Will or Codicil prepared after December 31, 2009, an attorney must add a statement with his or her name and business address, stating that he or she prepared the Will. N.C.G.S. Section 31-4.2.

Session Law 2009-182

Interestingly, the new law does not mention living trusts, so those desiring to do so could easily skirt the law by preparing a revocable living trust rather than a will.  You can tell we don't have any estate planning experts in the North Carolina General Assembly!

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Posted on July 20, 2009 by Greg Herman-Giddens

Changes to Effect of Will Caveat on Probate Proceeding

Beginning October 1, 2009, when a lawsuit is filed to contest a Will (Caveat), the probate administration will no longer be fully suspended until the caveat is resolved.  Only certain actions, such as distributions to beneficiaries and payment of personal represenative's commissions, will be prohibited.

Session Law 2009-131, amending N.C.G.S. Section 31-36.

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Posted on July 18, 2009 by Greg Herman-Giddens

Spousal Year's Allowance to Increase to $20,000

The "Years Allowance" for spouses is intended to provide support for a surviving spouse during the year after the death of the deceased spouse, and has priority over creditors claims and other beneficiaries.

The allowance has been $10,000 for many years, which, of course, is a pitifully small amount these days.  However, effective January 1, 2010, the amount will increase to $20,000.

Use of the Year's Allowance is also helpful in avoiding the cost and time of a full probate proceeding in some cases.

Session Law 2009-183, amended North Carolina General Statutes Sections 30-15, 30-26 and 30-29.

 

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Posted on July 16, 2009 by Greg Herman-Giddens

Small Estate Amount to Increase by $10,000

Effective October 1, 2009 the threshold for small estate proceedings  (often called Affidavit for/of Collection) under North Carolina General Statutes Section 28A-25-1 will increase to $20,000 for estates where there is no surviving spouse or he or she is not the sole heir, and $30,000 where the surviving spouse is the sole heir.

Using this procedure can avoid the cost and time involved in a full probate proceeding.

Session Law 2009-175, House Bill 203

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Posted on July 15, 2009 by Greg Herman-Giddens

Judicial Creation of Special Needs Trusts Clarified

Governor Bev Perdue recently signed into law Session Law 2009-267, which:

  • modifies North Carolina General Statutes Section 36C-2-203(a)(9) to state the proceedings may be brought before the Clerk of Superior Court to create a trust.
  • Adds a provision to NCGS Section 36C-4-401 providing that a court may create a trust, including a trust pursuant to 42 USC Section 1396p(d)(4) [Special Needs Trust].
  • Adds Section 36C-4-401.2, which provides that any interested party may petition the court to establish a trust pursuant to 42 USC Section 1396p(d)(4.

The changes are effective October 1, 2009.

The new laws will be extremely helpful, as Special Needs Trusts under 42 USC Section 1396p(d)(4) must be established by a parent, grandparent, legal guardian or court.  If there is no parent or grandparent is is willing and able, and no guardian, the only way to protect Medicaid and SSI benefits by using a Special Needs Trust is by having one created by the court.

 

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Posted on July 14, 2009 by Greg Herman-Giddens

Medicare Tax on Investment Income?

The U.S. Senate Finance Committee is considering instituting a 1.45% Medicare tax on investment income, including interest, dividends, capital gain, and partnerships and rentals.  Currently long term capital gains and qualified dividends are taxed at a maximum of 15%, while the other types of income are taxed at ordinary income rates.

See this story on Bloomberg.com for details this proposal for paying for health care reform.

I personally would not object too much to this tax if it only applied to investment income over a certain amount, say $25,000 annually.  With unavoidable multiple state and federal income tax increases on the horizon, I think we'll see an increased interest in retirement savings, life insurance and annuities as a way to defer taxes.

 

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Posted on July 11, 2009 by Greg Herman-Giddens

Intra-Family Loans - Make Sure You Follow the Rules

Loans among family members, especially from parents to children, are very common.  However, most people are not aware of the tax laws regarding such loans.  With certain exceptions, if you make an interest free to loan to a family member (or friend, for that matter), the IRS will impute the interest income to you, meaning that you are required to pay tax on a certain amount of interest, even though you never received it.  Here are the basics:

  • Loans of $10,000 or less.  No interest income will be imputed provided that the borrower does not use the money for income-producing investments.
  • Loans of $100,000 or less.  No imputed interest income provided that the borrower has less than $1,000 of total net investment income each year.
  • Other loans.  Make sure you charge (at least) the Applicable Federal Rate in place in the month during which the loan is made.  These rates, set by the government, change monthly and depend on the length of the loan [(1) up to 3 years, (2) 3 to 9 years, and (3) over 9 years)].
  • Promissory Note.  Make sure you properly document the loan, with interest rate, payment terms and length of loan.  Otherwise the IRS may treat it as a gift, which would require a filing a gift tax return and possible payment of gift tax.  It also can help avoid family disputes in the event of the death of one of the parties to the loan.
  • Deed of Trust/Mortgage.  To secure the payment of the loan by the borrower's personal residence, the borrower can sign a deed of trust, which is then filed in the county Register of Deeds.  The borrower can then deduct the interest payments for income tax purposes.
  • See a Lawyer.  To ensure that you don't run afoul of tax laws and otherwise protect yourself, consult with a tax lawyer, and have him or her prepare the necessary documents.

 

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Posted on July 8, 2009 by Greg Herman-Giddens

Governor Perdue's Tax Proposal

Yesterday North Carolina Governor Beverly Perdue revealed her proposed tax plan, which is designed to raise $1.6 billion in taxes.  Here are some of the highlights:

Income Taxes

  • Reduce individual income tax rates, except for a two-year "emergency surcharge" on single taxpayers with income over $500,000 and married taxpayers with income in excess of $1 million.
  • Reduce the corporate income tax from 6.9% to 5.9% beginning in 2011.
  • Increase the gross premium tax paid by insurance companies to 2.25%.
  • Stop the corporate income tax transfer to the public school capital fund.
  • Apply the franchise tax to limited liability companies.
  • Repeal privilege license taxes.

Sales Taxes

  • Increase state sales tax from 6.75% to 7.75% through September 2011.  Then rate would then decrease to 6.5%.
  • Tax warranties, installations, repairs and some personal services.
  • Tax recreation and entertainment, such as movies, concerts and amusement parks.
  • Tax more online sales, courier services, and storage fees.
  • Tax luxury services such as chartered jets and cosmetic surgery.
  • Increase cigarette tax by 50 cents a pack, to 85 cents.
  • Increase taxes on alcoholic beverages.

Tax Credits

  • Small business tax reduction
  • Expanded college savings credit
  • Create homebuyer's credit

Compare this plan to the Senate and House proposals. 

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Posted on July 3, 2009 by Greg Herman-Giddens

Independence

I'm down in Amelia Island Florida this weekend for a Florida Bar Tax Section meeting.  Today is a day off for many, and will be an afternoon off for me, as I head to the pool and then a movie with the family.

However, it's been a while since I blogged, and I wanted to write a brief note as we approach July 4th.  Our nation has been a free state now for well over 200 years, officially starting with a legal document, the Declaration of Independence.

Individuals can help assure their own independence, too, in a manner of speaking, by making sure that they have important legal documents of their own.   In the event of incapacity, whether temporary or permanent, Living Trusts, Durable Powers of Attorney, Health Care Powers of Attorney, Living Wills and HIPAA Authorization forms can all help avoid the necessity of being declared incompetent and having a guardian appointed.  Choosing the person to handle your affairs and making advance instructions about what you want and do not want will ensure that you maintain a certain level of dignity and independence from the court system.  You should be in charge, or the individual you choose as your representative, not the judge.

Choose independence, just as our forefathers did.

 

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