10 Tips from a Tax Lawyer for 2010 and 2011
Last week I was interviewed regarding income and estate taxes in 2010 and 2011 offering tips and insights based on what I see in my practice. Click here for the text and the podcast.
You Need a Power of Attorney
Giving someone your power of attorney (POA) has been likened to giving a trusted person a spare set of keys to your house or car. If a problem arises -- for example, you lose your keys -- your interests are protected. Otherwise, you're still in control. And just as you can take back your spare set of keys, you can also revoke a power of attorney.
Basically, a power of attorney gives someone the legal ability to act on your behalf in ways you specify. Obviously, you should only give this power to a person you have complete confidence in, such as your spouse, adult child, or trusted attorney. A POA can be as simple as giving your child the legal authority to pay your bills and endorse your checks if you are no longer able to do it. Or it can be more detailed, such as enabling your child to pay the bills and sell a parcel of real estate that you own.
Different Types of POAs
If you're considering granting a power of attorney, here are the basic types available:
General power of attorney - This grants a wide range of powers to act on your behalf -- basically, to do whatever you can do. In the event that you became incompetent or incapacitated or pass away, the POA would automatically be revoked. Because of the sweeping nature of this power, it should be used sparingly.
Health care power of attorney - This authorizes another person to make medical decisions on your behalf and remains in effect even if you have become mentally incapacitated. This type of authorization must be signed in front of witnesses and notarized in order to be valid. The agent (sometimes called the attorney-in-fact) that you appoint must be an adult, and cannot be a person who is paid to provide health care to you. As with other forms of POAs, you can specify the decisions you are authorizing your agent to make, or give them the same authority you have to make decisions for yourself.Special power of attorney - As its name implies, a special POA gives your agent power to act only in specific situations. For example, let's say you need to travel for a long period of time when certain matters need to be concluded at home, such as selling your car.
Springing power of attorney - A springing POA is an instrument that can be written so that it takes effect only if you become incapacitated. You need to be very clear when defining what circumstances will trigger a springing POA.
Durable power of attorney - A durable power of attorney can remain in force even if you become incompetent or incapacitated. This POA generally requires that a family member or close relative be appointed as your agent. It differs from a general POA in that it conveys limited powers to the agent and can be put in place for longer periods of time. It can be desirable for some individuals to separate the duties granted by durable POAs into two types --
medical and financial responsibilities. For example:
A Durable Financial POA Can Take a Load Off Your Mind
Here are some of the duties you can authorize your agent to handle with a durable financial POA:
- Pay bills and the bills of your family, using available assets.
- Pay real estate taxes, maintain your home and buy or sell real estate.
- Manage retirement funds.
- Make decisions necessary to operate your business.
- Calculate, file returns and pay your taxes.
- Buy or sell insurance.
- Handle banking and investing money and collecting government benefits, such as Social Security.
1. A durable medical POA (Health Care Power of Attorney) authorizes an agent to make health care decisions. You can give your agent the same authority to make decisions as you have yourself, or you can limit the authority. This POA becomes effective when a doctor states in writing that you're not able to make your own medical decisions. You may want to include an advance directive (living will), which states your wishes concerning life support, if it becomes necessary.2. A durable financial POA names an agent to carry out your financial responsibilities described in the right-hand box. This type of POA can save your family lots of money and avoid many problems if you become incapacitated.
When Does the Power End? A durable POA ends automatically upon your death. So if you wish to have your agent also wind up your affairs after your death, you need to create a will and name that person as your executor. A durable power of attorney can also end if:
You are mentally competent and choose to revoke the POA.
A court concludes that you signed the authorization while you were incompetent, under undue influence, or a victim of fraud, and therefore renders the POA invalid.
The agent you choose is unavailable, unless an alternate is named.
You get a divorce. This applies if your spouse is your agent and you live in one of several states where a divorce automatically terminates the POA.
If You're Married: Your spouse has some authority over property that you own together. He or she can pay bills from a joint account and manage investments in a jointly owned brokerage account. But in most states, including, North Carolina, spouses are limited in their abilities to buy or sell co-owned property without consent of both parties. And if any property is in your name only, your spouse generally has no legal authority to act without a durable power of attorney.
Getting Your Ducks in a Row
Whether young, middle-aged, or approaching the golden years, everyone needs to give some thought to the future. Obviously, the need increases as you get older. An arrangement such as a power of attorney is a simple way to smooth out bumps before they arise. Contact your attorney to learn more.
Source: TrustCounsel's January eNewsletter from BizActions.
Continue Reading...
More on Estate Tax - for 2010, 2011 and 2012
"Nothing is certain but death and taxes," Benjamin Franklin famously said. In the last decade, another occurrence has been certain: The federal estate tax keeps changing. The tax cut legislation passed recently establishes new estate and gift tax rules for this year, next year and last year. Here is a summary of the rules, along with some estate planning considerations for high-net-worth individuals.
The new tax cut extension package, which was signed into law on December 17, 2010, establishes a new (but temporary) estate and gift tax regime for 2011 and 2012. It also clarifies the situation for the estates of individuals who died in 2010 (see right-hand box).
Here is a brief summary of the relevant estate and gift tax provisions in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.
Note: North Carolina law provides that North Carolina estate tax is due only if federal estate tax is due, so the NC exemption is essentially $5 million as well.
Continue Reading...Estate Planning Humor is Rare - But Here Goes...
This is funny, but seriously, all too true in relation to setting up a estate plan. Most people just ignore planning, or keep putting it off for another day. Isn't your family more important than that?
Obsessed with Taxes - Get the IRS Smart Phone App!
IRS Launches the IRS2Go App for iPhone, Android; To Check Refunds, Get Tax Information
Video: IRS2Go: English
WASHINGTON — The Internal Revenue Service today unveiled IRS2Go, its first smartphone application that lets taxpayers check on their status of their tax refund and obtain helpful tax information.
"This new smart phone app reflects our commitment to modernizing the agency and engaging taxpayers where they want when they want it," said IRS Commissioner Doug Shulman. "As technology evolves and younger taxpayers get their information in new ways, we will keep innovating to make it easy for all taxpayers to access helpful information."
The IRS2Go phone app gives people a convenient way of checking on their federal refund. It also gives people a quick way of obtaining easy-to-understand tax tips.
Apple users can download the free IRS2Go application by visiting the Apple App Store. Android users can visit the Android Marketplace to download the free IRS2Go app.
"This phone app is a first step for us," Shulman said. "We will look for additional ways to expand and refine our use of smartphones and other new technologies to help meet the needs of taxpayers."
The mobile app, among a handful in the federal government, offers a number of safe and secure ways to help taxpayers. Features of the first release of the IRS2Go app include:
Get Your Refund Status
Taxpayers can check the status of their federal refund through the new phone app with a few basic pieces of information. First, taxpayers enter a Social Security number, which is masked and encrypted for security purposes. Next, taxpayers pick the filing status they used on their tax return. Finally, taxpayers enter the amount of the refund they expect from their 2010 tax return.
For people who e-file, the refund function of the phone app will work within about 72 hours after taxpayers receive an e-mail acknowledgement saying the IRS received their tax return.
For people filing paper tax returns, longer processing times mean they will need to wait three to four weeks before they can check their refund status.
About 70 percent of the 142 million individual tax returns were filed electronically last year.
Get Tax Updates
Phone app users enter their e-mail address to automatically get daily tax tips. Tax Tips are simple, straightforward tips and reminders to help with tax planning and preparation. Tax Tips are issued daily during the tax filing season and periodically during the rest of the year. The plain English updates cover topics such as free tax help, child tax credits, the Earned Income Tax Credit, education credits and other topics.
Follow the IRS
Taxpayers can sign up to follow the IRS Twitter news feed, @IRSnews. IRSnews provides the latest federal tax news and information for taxpayers. The IRSnews tweets provide easy-to-use information, including tax law changes and important IRS programs.
IRS2Go is the latest IRS effort to provide information to taxpayers beyond traditional channels. The IRS also uses tools such as YouTube and Twitter to share the latest information on tax changes, initiatives, products and services through social media channels. For more information on IRS2Go and other new media products, visit www.IRS.gov.
Related Item: IRS Goes Mobile With IRS2Go
From IR-2011-8
IRA Charitable Rollover is Back
There's good news if you've reached age 70 1/2, and you have an IRA and philanthropic inclinations. Through 2011, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 resurrected the opportunity to make cash donations to IRS-approved charities directly out of your IRA.
Such qualified charitable distributions are federal-income-tax-free, but you get no itemized charitable deduction on Form 1040. But that's okay. The tax-free treatment of qualified charitable distributions equates to an immediate 100 percent deduction, since the otherwise-taxable IRA dollars are sent directly to charity.
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Who Benefits Most The qualified charitable distribution opportunity is beneficial for taxpayers who:
2. Make charitable donations, but don't itemize deductions. (Under the normal rules, only itemizers get tax-saving benefits from charitable gifts). 3. Make large charitable donations, but their deductions would be delayed by the 50 percent-of-AGI limitation. 4. Want to avoid being taxed on required minimum distributions that they are forced to take from IRAs. 5. Are looking for a quick and easy estate-tax-reduction strategy. |
1. Have reached age 70 1/2.The Basics
A qualified charitable distribution is a payment of an otherwise taxable amount out of a traditional or Roth IRA directly to an IRS-approved public charity. No more than $100,000 can be donated during any one year. However, if both you and your spouse have IRAs set up in your respective names, each of you is entitled to a separate $100,000 limitation.
As things currently stand, the ability to take advantage of this strategy is scheduled to expire at the end of 2011, but Congress may extend it again.
Income Tax Advantages
Qualified charitable distributions are not included in your adjusted gross income (AGI). This lowers the odds that you'll be affected by unfavorable AGI-based provisions -- such as the rule that can cause more of your Social Security benefits to be taxed and the rules that can reduce or eliminate deductions for medical expenses and passive losses from rental real estate.
In addition, you don't have to worry about the 50 percent-of-AGI limitation that can delay itemized deductions for garden-variety charitable donations of cash.
Finally, a qualified charitable distribution from a traditional IRA counts as a payout for purposes of the IRA required minimum distribution rules. Therefore, you can arrange to donate all or part of your 2011 required minimum distribution amount (up to the $100,000 limit) that you would otherwise be forced to receive and pay income taxes on. In effect, you can replace taxable required minimum distributions with tax-free qualified charitable distributions that go to your favorite charities.
Continue Reading...Organ Donation in North Carolina
Do you want to be an organ donor? Do you know how to become one?
There are three ways to become a donor:
1. Request that a heart be placed on your driver’s license at the DMV.
2. Register online at www.donatelifenc.org.
3. Complete a paper enrollment form and mail it to Donate Life North Carolina. To obtain a form, call 1-800-200-2672.
If you want to donate, and you have a heart on your driver’s license, you have already consented to organ donation. That may seem obvious, but what many people don’t know is that until a few years ago, the heart on your driver’s license only indicated your intent to donate organs. In order to actually donate, “first-person consent” was required. That meant that another person, usually a family member, would be responsible for actually making the decision and giving their consent for the donation.
This was often problematic because there is a short window of time in which to preserve organs for donation after death. Having to locate and burden a grieving family member with the decision many times prevented the organs from being donated because too much time elapsed. The Heart Prevails Law, enacted in October 2007, changed the law so that the heart symbol on your driver’s license is now legal consent for the donation of your organs after you die.
Representative Dale Folwell, is responsible for this legislation, which passed unanimously. Since the law went into effect, “North Carolina has seen a 58% increase in organ transplants,” http://www.project-compassion.org/nc-initiatives/stories/68-the-heart-prevails-legislation-in-nc-personal-tragedies-result-in-legislative-change. Click on the link if you want to learn more about Rep. Folwell’s story and what led him to introduce this legislation.
The heart symbol indicates organ and cornea/eye donation only, not tissue. The organs that can be donated include the heart, lungs, liver, pancreas, kidneys, and small intestines. If you want to donate tissue, you should register online or contact Donate Life North Carolina. Tissues that can be donated include skin, bone, corneas, heart valves, and veins. Skin grafts are used for burn victims, dental surgeries and reconstructive surgeries; bone, tendons and ligaments can be used in reconstructive surgeries; corneas are transplanted to give sight; heart valves are used in valve replacement surgery, common in children, and leg veins can be used in heart bypass surgery.
Visit the Carolina Donor Services website for more information: http://www.carolinadonorservices.org/index.php
No more "Do-Over" Strategy for Social Security Retirement Benefits
On December 8, 2010, the Social Security Administration published a new rule eliminating the “do-over” strategy some retirees were using to boost their retirement benefits. The new rule went into effect immediately.
The “do-over” strategy worked like this: a senior retired early, before full retirement age; collected and invested the reduced benefits for several years; then withdrew the initial application, repaid the benefits (interest-free) and re-applied for the higher benefits awarded to those who wait a few more years to start claiming their benefits. It was a way to boost benefits for early retirees who could afford to pay back the benefits and who were willing to bet that they or their surviving spouse would live long enough to come out ahead.
It was a little-known strategy, or one that only a few people stumbled upon naturally, until it became publicized in the media in 2008. At the time, a Forbes article quoted a Social Security Administration spokesperson as saying, "We don't consider it naughty.'' http://www.forbes.com/2008/02/07/retirement-roth-taxes-pf-guru-in_jn_0207retirement_inl.html Apparently, however, the use of this strategy has increased over the past couple of years to the point where the Social Security Administration now does consider it “naughty.”
The new rule sets a 12-month limit for withdrawing an application for benefits, and each person may only withdraw an application once per lifetime. Further, for those already receiving benefits, they may request a suspension of benefits, but it will only suspend benefits going forward. That is, they are not grandfathering in the ability to suspend and repay retroactive benefits to those who are already receiving benefits.
Although the new rule is effective immediately, there is a 60-day period for public comments, and the agency will be publishing another final rule responding to comments and incorporating any “appropriate” changes.
To read the full text of the rule: http://edocket.access.gpo.gov/2010/pdf/2010-30868.pdf
Don't Pay more than 24.5% Tax on Your Roth Conversion
Do you think you have to pay income tax on large ($500k++) Roth IRA conversions at the top marginal tax rates? Think again. I have recommend the following strategy to several of my clients. In most cases, you can stay with your current investment manager.
By utilizing the Jagen™ investment strategy, you may be able to lock in a 24.5*% rate on big IRA conversions.
A lot of advisors don’t like the idea of clients paying taxes early. They adhere to the mindset of “never pay a tax if you don’t absolutely have to.” Some advisors also still believe that clients might be in lower tax brackets later in life and don’t want to recommend taxable transactions at today’s top federal rate of 35%. But what if clients didn’t have to pay at top rates today? A Roth conversion at a 25% or less tax rate now will almost guarantee long-term tax savings for high net worth clients with large IRAs. How many clients with large IRAs will be in a retirement tax bracket less than 25%?
Jagen™ funds are eligible IRA investments and offer access to very high level institutional money management platforms. In addition, the Jagen™ fund design provides for a variance between the net asset value (NAV) and fair market value (FMV) of each investor’s interest in the funds.
For example, an investor might have an IRA holding Jagen™ fund units valued at $1 million NAV. This same account may only have a $700,000 FMV based on a qualified appraisal of those fund units. The reason for this valuation adjustment involves various features of Jagen™ funds which must be taken into account when determining FMV. Each fund is privately owned by a limited number of investors and fund units are not traded on open exchanges. Investors must commit to holding their fund units for specified terms. Thus FMV will typically be less than NAV during the holding period.
Domestic Asset Protection Trusts - What State is Best?
A dozen states now offer what are called Domestic Asset Protection Trusts (DAPTs), which allow a trust grantor to shelter trust assets from creditors while retaining the right to distributions from the trust. North Carolina statutes do not provide for the formation of DAPTs, but NC residents can avail themselves of the laws of the states that do. One requirement of DAPTs is that there be a trustee in the jurisdiction in which the trust was created.
Here's a chart ranking DAPT states, created by Nevada attorney Steve Oshins.
$5 Million Estate Tax Exemption Here to Stay?
This week I'm attending the University of Miami School of Law Heckerling Institute on Estate Planning. Most of the speakers so far are of the opinion of that the current federal estate tax exemption will not be decreased in 2013 when TRA 2010 expires.
Some Taxpayers Must Wait to File 2010 Federal Returns
From today's IRS Newswire:
For most taxpayers, the 2011 tax filing season starts on schedule. However, tax law changes enacted by Congress and signed by President Obama in December mean some people need to wait until mid- to late February to file their tax returns in order to give the IRS time to reprogram its processing systems.
Some taxpayers – including those who itemize deductions on Form 1040 Schedule A – will need to wait to file. This includes taxpayers impacted by any of three tax provisions that expired at the end of 2009 and were renewed by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act Of 2010 enacted Dec. 17. Those who need to wait to file include:
- Taxpayers Claiming Itemized Deductions on Schedule A. Itemized deductions include mortgage interest, charitable deductions, medical and dental expenses as well as state and local taxes (add link to Schedule A). In addition, itemized deductions include the state and local general sales tax deduction that was also extended and which primarily benefits people living in areas without state and local income taxes. Because of late Congressional action to enact tax law changes, anyone who itemizes and files a Schedule A will need to wait to file until mid- to late February.
- Taxpayers Claiming the Higher Education Tuition and Fees Deduction. This deduction for parents and students – covering up to $4,000 of tuition and fees paid to a post-secondary institution – is claimed on Form 8917. However, the IRS emphasized that there will be no delays for millions of parents and students who claim other education credits, including the American Opportunity Tax Credit extended last month and the Lifetime Learning Credit.
- Taxpayers Claiming the Educator Expense Deduction. This deduction is for kindergarten through grade 12 educators with out-of-pocket classroom expenses of up to $250. The educator expense deduction is claimed on Form 1040, Line 23 and Form 1040A, Line 16.
