Posted on February 28, 2011 by Greg Herman-Giddens

Durable Powers of Attorney Don't Allow You to Control Trusts

A Durable Power of Attorney (DPOA) is a part of virtually every estate plan.  The DPOA allows the person who signed the document, the principal, to designate an agent, or attorney-in-fact, who will act in his or her stead.  The idea is to try to avoid the time, trouble and expense involved in an incompetency and guardianship proceeding.

Some estate plans also include living trusts for probate avoidance, which also can be helpful in avoiding the need for guardianship, since the successor trustee can manage the assets in the trust in the event of the incapacity of the trust grantor.

However, what many people don't realize is that the agent under a power of attorney does not have power to control assets in a trust.  It's the trustee that exercises that power.  Thus, if mom's checking account is in the name of her trust, and she develops dementia, the DPOA will not be effective to allow the agent to sign checks on the account.  That authority belongs to the successor trustee, a separate legal role.

For the successor trustee to gain authority, the original trustee (normally the grantor) must resign, or if that is not possible, the provisions in the trust for trustee succession must be followed.  Commonly, the signed statements of two physicians attesting to the incapacity of the grantor are required.  These statements, along with a copy of the trust, then become the written authority for the successor trustee to exercise authority regarding the trust.

North Carolina law requires that a DPOA be registered/recorded in the Register of Deeds office in the county in which the principal resides if it is used after the principal has become incapacitated. However, most financial institutions require registration even if the principal has full capacity.  Only an original document can be registered.  Once registration is completed, certified copies may be obtained from the Register of Deeds.

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Posted on February 22, 2011 by Greg Herman-Giddens

Estate Taxes: The Worst States in Which to Die

Here's a recent marketwatch.com article on State Estate and Inheritance Taxes, and the various exemption amounts for each state.  A majority of states, including Florida, have no state estate or inheritance taxes, and a couple of others effectively have the same $5 million exemption as the federal estate tax. 

As reported in the article, North Carolina falls into that category, although due to an outdated reference to the Internal Revenue Code in the North Carolina statutes, some practitioners are of the opinion that North Carolina's current exemption is only $1 million.  It is expected that the matter will be resolved by a technical corrections bill later this year.  Assuming that North Carolina's estate tax exemption is $5 million, it is certainly not one of the worst places to die, but because the North Carolina tax is merely a deduction, and not a credit, against the federal estate tax, it is also not one of the best.

There are also many states, particularly in the Northeast and Midwest, that have much lower exemptions.  New Jersey is ranked as the worst place to die from a death tax perspective.

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Posted on February 17, 2011 by Greg Herman-Giddens

Tax Law Changes in Obama's Proposed 2012 Budget

 Thanks to Keebler and Associates, LLP, CPAs for portions of this summary:

Limit the tax rate that certain individuals will get a benefit for their itemized deductions - For investors filing joint returns and having income over $250,000 itemized deductions would only reduce the investor’s tax liability by a maximum of 28%. For those investors who purchase securities on margin this limitation could be very costly. Short-term capital gains and interest income would be taxed at a rate of 35% yet the interest expense would only receive a 28% benefit. If an investor earned $100,000 of interest income and incurred $100,000 of margin interest expense, while the investor would have broken even on a pre-tax basis, he would be liable for $7,000 in tax.

 Require a minimum 10 year term for grantor retained annuity trusts (“GRATs”) – Currently, investors are able to contribute property to a trust and retain an annuity interest in the trust. Any excess may be left to anyone the investor desires. The present value of the annuity is subtracted from the contributed amount, and any excess is treated as a gift to the beneficiaries of the trust. The Treasury publishes a discount rate to be used to determine the present value of the annuity. Many investors retain an annuity whose present value equals the fair market value of the property contributed to the trust. In such case, no gift tax is due, and if the trust can earn a rate of return higher than the discount rate, such excess is passed on to the beneficiaries free of gift or estate tax. However, if the grantor dies during the term of the trust, the assets in the trust are included in the grantor’s estate. In order to mitigate that possibility, many of these trusts are set up as two to three year vehicles. The proposal would be to set a minimum term of 10 years for any GRATs established after the date of enactment of the law.

Require ordinary treatment of income from activities for dealers of equity options and commodities – Under current law dealers of equity options, commodities and commodities derivatives treat their income from their dealer activities in Sec. 1256 contracts as 60% long-term and 40% short-term capital gains/losses. Dealers in other types of securities treat all of their income from dealer activities as ordinary income. The proposal would require such dealers to treat all of their income from such securities as ordinary.

Tax carried interests in certain partnerships as ordinary income – Under current law, the character of income flows from a partnership to its partners.  Some partners receive their partnership interests in exchange for services rendered to the partnership. Such interests typically give the partner the right to receive a share of future income from the partnership. At the time the interest is received, the partner would not be entitled to any proceeds if the partnership were liquidated, so there is no taxable income at the time the interest is received. In the future, the partners’ character of the income received from the partnership interest retains the same character that the partnership received. In many cases such income may be either qualified dividends or long term-capital gains, which are taxed at a maximum rate of 15%. The proposal would treat the income on a partnership interest that was not acquired for cash or property as ordinary income, if the partnership is an investment partnership. Gains upon the disposition of such an interest would also be treated as ordinary income. A partnership would be an investment partnership if the majority of its assets are investment type assets, such as securities, real estate, commodities, interests in partnerships, cash or cash equivalents.

Modify rules on valuation discounts – Based on judicial decisions and statutes enacted in many states, valuation discounts are allowed in determining the fair market value of property subject to gift and estate tax even though current tax law states that interests transferred intra-family should not be discounted for “applicable restrictions”.  The proposal would grant the Treasury the authority to write regulations that would define a category of “disregarded restrictions” that would be ignored in valuing property for estate and gift tax purposes.

Require accrual of income from the forward sale of stock by a corporation – Under IRC Section 1032 a corporation does not recognize income or loss from purchases and sales in its own stock. This rule applies when a corporation enters into a contract to issue shares in the future for a sum certain. However, if the corporation issued shares currently and received payment for those shares in the future, a portion of the payment would be treated as taxable interest income. The proposal would impute interest income on the transaction in which the shares are issued in the future. While there are real differences between the two transactions in that there are new shareholders at the time the shares are issued, the Administration believes that the two are economically equivalent and should receive the same tax treatment.

Limit Generation-Skipping Transfer Tax Exemption to 90 Years - GST tax exemption (currently up to $5 million)  allocated to trusts would last for only 90 years, after which it would expire.  This would mean that distributions from the trust after that time would be subject to the 35% GST tax.

Since many states have eliminated or lengthened the rule against perpetuities that limited the time trusts could be in existence, this provision would have a substantial effect on trust creation and administration, severely limiting the use of dynasty trusts.

 Make Permanent Portability of Estate Tax Exemption Between Spouses  - For 2011 and 2012, a surviving spouse make make use of the predeceased spouse's unused $5 million estate tax exemption.  The proposal would make this permanent.

Click here for the Green Book that contains explanations for the proposals.

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Posted on February 15, 2011 by Greg Herman-Giddens

Best Nursing Homes in North Carolina

The U.S. News and World Report has issued a report on the best nursing homes in America. From the website: "All of the homes shown received 5 stars, the highest overall rating, from the federal government's Centers for Medicare and Medicaid Services. A facility's overall rating is geared to its performance in health inspections, nurse staffing, and medical care. Homes are ranked in tiers according to their star ratings in the three individual areas. Within each tier, the order is alphabetical."

Here's the list for North Carolina.

 

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Posted on February 12, 2011 by Greg Herman-Giddens

Depictions of "Reading of the Will" are an Anachronism

Modern day movies and television commercials (including a recent one by DirecTV) sometimes feature a lawyer reading the will of a deceased testator to his family.  Occasionally I even get questions about the ceremony.  However, it is the product of a bygone era, and as far as I am aware, never happens anymore. 

I have been practicing for 23 years and have not once held a "reading of the will." It was a necessity in the days before widespread literacy and the availability of photocopies, but now we can simply mail (or email) a copy of the will to the beneficiaries.  These days, for many decedents the will is not even the primary dispositive instrument - it's a living trust.  One never hears about a "reading of the trust."

So, while scenes of the stuffy old lawyer reading the will can be dramatic or comedic, they are certainly not an accurate representation of practice over the last few decades.

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Posted on February 10, 2011 by Greg Herman-Giddens

Life Insurance to Pay a Future Bill

Second-to-die insurance is traditionally purchased by affluent married couples. How it works: The insurance proceeds are paid out upon the death of the second spouse when the funds are often needed to pay taxes.

Just As the Name Implies

   Second-to-die life insurance doesn't pay off until the death of the second policyholder. Why is it needed? Let's say you own several million dollars worth of assets. By law, you can leave the entire amount to your surviving spouse with no estate tax consequences. But those assets then become part of your spouse's estate and could be taxed after death at rates of up to 35 percent in 2011 and 2012.
   The proceeds from a second-to-die policy can be used to pay the tax bill. 
   Estates of up to $5 million can be sheltered from estate tax in 2011 and 2012.

Unfavorable Rule for Corporate-Owned Life Insurance

    For corporate owned life insurance (COLI) issued after the August 17, 2006, enactment of the Pension Protection Act, an unfavorable provision generally requires businesses to include death benefit proceeds (in excess of premiums paid) in taxable income.
    Exceptions apply in the these situations:
    1. The insured individual was employed within 12 months of the date of death.
    2. The death benefit proceeds are paid to buy back certain equity ownership interests.
    3. The insured individual was a "highly compensated employee" when the COLI contract was issued (defined as someone who is a more-than-5 percent owner, a director, or any employee ranked in the top 35 percent by pay).

But second-to-die insurance can also be used by the co-owners or partners of a business operation. In this scenario, the insurance proceeds are paid upon the second owner's death.

One IRS ruling gives a little more flexibility to policyholders of second-to-die insurance, which is also called "survivorship insurance" in some circles. Specifically, the ruling may allow you to transfer ownership of your policy and get the proceeds out of your taxable estate.

Tax Basics

Generally, life insurance proceeds paid directly to you because of the death of the policyholder are not taxable. However, your taxable estate will include proceeds from a life insurance policy on your life if the money is paid to the estate (or if it's received by someone else for the benefit of the estate). Also, the proceeds are included in your taxable estate if you possess any "incidents of ownership" in the policy, such as the right to change the beneficiaries or borrow against the policy.

If you want life insurance proceeds to avoid federal estate tax, you may want to transfer ownership of your life insurance policy to another person or entity. (See lower right-hand box if the entity is a corporation.)

You can transfer the ownership rights in an existing policy, but the proceeds are still taxable under federal law if you die within three years of the transfer -- and possibly under state law too.  

In the IRS private letter ruling, a couple transferred a second-to-die life insurance policy to an irrevocable trust and named their daughter, who is executor of their estate, as the trustee. They also granted their daughter discretion to use the proceeds to pay estate tax, inheritance tax and other taxes due because of death, but she is under no compulsion to do so.

Result: The IRS said that the life insurance proceeds will not be included in the estate of the second spouse to die, even though the funds could be used to pay estate tax. (IRS PLR 200147039)

Check with your estate-planning attorney to learn whether second-to-die insurance is right for you or whether transferring ownership of a policy is a smart move. Keep in mind that transferring ownership may also have gift tax consequences.

Source:  TrustCounsel''s 2/8/11 BizActions eNewsletter.

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Posted on February 9, 2011 by Greg Herman-Giddens

Am I Ready to Die?

I'm at home today, sick with the flu.  Last night was rough, fever, chills, cough, and inability to sleep, but I feel a bit better right now.  However, during the worst of the night, a thought came to mind that it might actually be a relief if my mortal existence ended.  Not that I really wanted it to, but it made it easier to imagine truly feeling that way in the event of a painful terminal illness.

As I often say, estate planning involves sometimes difficult discussions.  This post is no exception.  This morning I thought to myself, that while I by no means wish to die any time soon, if the time came now, I am ready in many respects:

  • I tell my family members regularly that I love them.
  • I have some regrets, but for the most part I've had a life well-led.
  • I believe that I have been forgiven for the few times that I have regretfully hurt others.
  • My family members know my wishes for a memorial service (party!) and disposition of my remains.
  • My will and trust are up to date and reflect my wishes.
  • The beneficiary designations for my life insurance and retirement are coordinated with my estate plan.
  • For my few important personal possessions - family antiques, Winchester .30-.30, paintings and prints, etc. - I have specified which items will be given to daughter and which to my son. 
  • I have made arrangements for a meaningful charitable gift. at my death.

So, while I hope the rider on the pale horse does not appear on the horizon for me for a few decades, if he comes I will know I have prepared the best I can.

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Posted on February 8, 2011 by Greg Herman-Giddens

IRS Offers 2nd Voluntary Disclosure Initiative for Offshore Assets

Today the IRS announced a new special voluntary disclosure initiative designed to bring offshore money back into the U.S. tax system and help people with undisclosed income from hidden offshore accounts get current with their taxes. The initiative is available through Aug. 31, 2011.

While it is legal to hold assets offshore, the assets must be disclosed to the IRS, and U.S. citizens must pay tax on all earnings worldwide.

See IR-2011-14 for details of the Initiative.

 

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Posted on February 4, 2011 by Greg Herman-Giddens

Estate Tax Claw Back - Don't Worry About It, Says AALU

Since the enactment of TRA 2010 in December of last year, tax practitioners have been concerned that gifts made during 2011 and 2012 may, partially because of the way in which the current Federal Estate and Generation-Skipping Transfer Tax Return (Form 706) is worded, be subject to an estate tax for decedents dying in years after 2012 if the federal estate tax exemption is reduced at that time. This is generally referred to as the "claw back" scenario.

The February 2, 2011 AALU Bulletin article on this subject indicates that taxpayers should not hesitate to take advantage of the $5 million gift and generation-skipping transfer tax exemptions available this year and next and should not be concerned that such gifts will be subject to a claw back in later years:

"What is reasonably clear is that Congress did not intend that gifts made during 2011 and 2012 would be subject to an additional estate tax in 2013 and thereafter.  Furthermore, it is likely that some type of administrative or legislative relief will be forthcoming assuming that an unintended “glitch” does exist.  This relief may be as simple as revising the Form 706."

 

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Posted on February 3, 2011 by Greg Herman-Giddens

Keeping Your Personal Financial Information Safe Online

From guest author Aaron Huber:

Whether you're keep your money in a conventional financial institution or in an internet based bank without a physical location, it’s a good idea to ensure that you’re doing business with a reputable organization and that your money deposited is federally insured.

Listed here are guidelines created specifically for individuals who conduct banking transactions on the internet – which is pretty much everyone these days as traditional banks now charge extra to perform transactions in person or even over the telephone.

1.         Never access your on-line account using open public computers. There might be viruses on those computer systems or even most severe spyware that can keep track of your financial transaction and can steal your identification.

2.         Look at your online bank account on a regular basis to make certain that there aren't any unusual purchases on your statements. If you see any kind of problems, report the incident to your financial institution right away.

3.         Pick a robust username and password or PIN which is tough to guess. A powerful password consists of random sequence of characters with both uppercase and lowercase letters, numbers, and symbols. It is usually not advisable to use any personal information in your password like birthday, address, or anniversaries because these are the first thing that hackers will try to get in your accounts.

4.         Never disclose your personal security details like account number, PIN, or security code to other people even if they claim to work for the bank. The bank may ask for personal information like birth date, middle name, or maiden name just to verify your identity but never the PIN or security code.

5.         Be careful with email messages that appear to come from your bank. Because of so many phishing scams – most banks no longer send their customers email directly. Instead they will send you a message informing you that the bank has a message for you which can be accessed via an internal messaging system on the bank’s website. Although this extra step is a hassle – it protects you from imposters claiming to be the bank.

 

About the Author:

Aaron Huber is a staff writer for Global Finance School. Global Finance School is a leader in producing interactive e-learning courses on finance, accounting, and economics.

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Posted on February 3, 2011 by Greg Herman-Giddens

North Carolina Senior Helpline

Legal Aid of North Carolina has a Senior Legal Helpline for citizens age 60 and older. The toll-free number is 1-877-579-7562.  Intake hours for new callers are 9:00-11:00 a.m. and 1:00-3:00 p.m. Monday through Friday.  Matters covered include Housing Law, Consumer Law, Employment Law, Pubic Benefits, Alternatives to Guardianship and Wills.

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Posted on February 2, 2011 by Greg Herman-Giddens

NC 2011 Tax Return Due Date April 18

From the North Carolina Department of Revenue:

Taxpayers across the nation will have until April 18, 2011, to file 2010 federal returns, extensions, and payments that ordinarily would be due April 15, 2011. The extra time is provided because April 15 falls on Emancipation day, a legal holiday in the District of Columbia.

For individual income tax purposes, North Carolina will follow the April 18 extended filing date and consider any returns and payments that would have been due on April 15 as filed on time if they are filed and paid by April 18. The extended deadline applies to the following State forms and payments:

  • 2010 State individual income tax returns, whether filed electronically or on paper
  • First quarter 2011 individual estimated income tax payments
  • Partnerships
  • Estates and Trusts
  • Applications for extension for any of the above tax forms

The extended deadline does not apply to corporations that file franchise and corporate income tax returns due on April 15, 2011, or to first quarter 2011 corporate estimated income tax payments. 

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Posted on February 1, 2011 by Greg Herman-Giddens

Five Bills to Kill the Estate Tax Introduced in January

Not satisfied with a $5 million estate tax exemption (until January 1, 2014 anyway) and spousal portability of the exemption, on January 5th Republicans introduced five bills to repeal the estate tax.

For details, see Hani Sarji's Estate of Confusion blog posts of January 12 and January 13, 2011.

 

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