North Carolina Estate Planning Blog : North Carolina Estate Planning Lawyer & Attorney : Trust Counsel, PA : Trust Administration : Serving Chapel Hill, Durham, Raleigh, Pittsboro, Orange County, Chatham County

As most people know by now, the $100,000 income limit on the ability to convert a traditional IRA to a tax-free Roth IRA will disappear next year.  In addition, a taxpayer who does a conversion in 2010 can pay the tax due from the conversion in 2011 and 2012 (by including 50% of the conversion income in each year).  There are innumerable articles about Roth conversions and the math involved, with many differing opinions about the advisability of converting.  Bottom line, make sure you hire the appropriate professionals to crunch the numbers and otherwise advise you before making a decision.  You really need to consult your financial advisor, CPA and estate planning attorney to ensure that you are fully informed.

Here's a quick list from tax guru Bob Keebler, CPA:

(1)  Taxpayers have special favorable tax attributes including charitable deduction carry-forwards, investment tax credits, high basis non-deductible traditional IRAs, etc.

(2)  Suspension of the minimum distribution rules at age 70½ provides a considerable advantage to the Roth IRA holder.

(3)  Taxpayers benefit from paying income tax before estate tax (when a Roth IRA election is made) compared to the income tax deduction obtained when a traditional IRA is subject to estate tax.

(4)  Taxpayers who can pay the income tax on the IRA from non-IRA funds benefit greatly from the Roth IRA because of the ability to enjoy greater tax-free yields.

(5)  Taxpayers who need to use IRA assets to fund their Unified Credit bypass trust are well advised to consider making a Roth IRA election for that portion of their overall IRA funds.

(6) Future distributions to beneficiaries are generally tax-free.

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This from Howard Hinds of the Curbstone Group in Boston:

Master Limited Partnerships (MLPs) are excellent tools for estate planning:

1. MLP distributions (around 8% yield right now) are considered return of capital, meaning that distributions reduce your basis in the MLP, while allocated net income increases your basis.

2. Tax Shield: Because MLPs own large hard assets (like pipelines) with high depreciation (non-cash) expenses, allocated income to an investor is usually less than 20% of cash distributions in a given year for the first several years of ownership. This creates a tax deferral, which is recaptured when you sell the MLP.

3. When you sell an MLP: (a) the gains from your purchase price to selling price are taxed at capital gains rates, and (b) the difference between your purchase price and your basis (which has been reduced over time) is taxed at ordinary income rates.

4. But, if you die while holding an MLP, the tax deferrals you have accumulated over time are washed away along with the capital gains taxes, and whoever receives those MLPs after you die has a new stepped up basis, so those tax deferrals are not passed along. This can be a very big deal for someone who has owned Kinder Morgan Energy Partners since 1995 and they have $0 basis and the share price is $55 per share

So in addition to being great income vehicles for someone with large estate, MLPs can be great tax shields as well.

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Wealth Management Exchange is designed for networking and information exchange.  One can sign up to receive email alerts on financial and estate planning topics.

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Self-employed persons or small business owners such as home builders with big tax losses for the year should consider converting their traditional IRAs to Roth IRAs this year to "soak up" some or all of the loss.  This planning could be even more beneficial given that the securities or mutual funds in the original IRA are likely to be depressed in value, which means less income will be realized.

Make sure you speak to your tax advisor soon if you think a rollover may be of benefit to you in 2008.  This plan will not work if you have long term capital losses (e.g. from stock sales) rather than ordinary losses (for example, from a S Corporation or LLC), as only $3,000 in capital loss can be used to offset ordinary income.

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Words of wisdom from a sage investor on the NY Times Website.

It is also important not to use the poor economy as an excuse to neglect protecting what you have by doing sound estate planning.  If you have less, aren't protections against creditors, mismanagement and taxes even more important than when you're flush?

 

 

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IR-2008-118, Oct. 16, 2008

WASHINGTON — The Internal Revenue Service today announced cost‑of‑living adjustments applicable to dollar limitations for pension plans and other items for tax year 2009.

Section 415 of the Internal Revenue Code provides for dollar limitations on benefits and contributions under qualified retirement plans. It also requires that the Commissioner annually adjust these limits for cost‑of‑living increases.

Many of the pension plan limitations will change for 2009 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. However, for others, the limitation will remain unchanged. For example, the limitation under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) is increased from $15,500 to $16,500. This limitation affects elective deferrals to Section 401(k) plans and to the federal government’s Thrift Savings Plan, among other plans.

Effective Jan. 1, 2009, the limitation on the annual benefit under a defined benefit plan under Section 415(b)(1)(A) is increased from $185,000 to $195,000. For participants who separated from service before Jan. 1, 2009, the limitation for defined benefit plans under Section 415(b)(1)(B) is computed by multiplying the participant's compensation limitation, as adjusted through 2008, by 1.0530.

The limitation for defined contribution plans under Section 415(c)(1)(A) is increased from $46,000 to $49,000.

The Code provides that various other dollar amounts are to be adjusted at the same time and in the same manner as the dollar limitation of Section 415(b)(1)(A). These dollar amounts and the adjusted amounts are as follows:

• The limitation under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) is increased from $15,500 to $16,500.
• The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is increased from $230,000 to $245,000.
• The dollar limitation under Section 416(i)(1)(A)(i) concerning the definition of key employee in a top-heavy plan is increased from $150,000 to $160,000.
• The dollar amount under Section 409(o)(1)(C)(ii) for determining the maximum account balance in an employee stock ownership plan subject to a 5‑year distribution period is increased from $935,000 to $985,000, while the dollar amount used to determine the lengthening of the 5‑year distribution period is increased from $185,000 to $195,000.
• The limitation used in the definition of highly compensated employee under Section 414(q)(1)(B) is increased from $105,000 to $110,000.
• The dollar limitation under Section 414(v)(2)(B)(i) for catch-up contributions to an applicable employer plan other than a plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over is increased from $5,000 to $5,500. The dollar limitation under Section 414(v)(2)(B)(ii) for catch-up contributions to an applicable employer plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $2,500.
• The annual compensation limitation under Section 401(a)(17) for eligible participants in certain governmental plans that, under the plan as in effect on July 1, 1993, allowed cost‑of‑living adjustments to the compensation limitation under the plan under Section 401(a)(17) to be taken into account, is increased from $345,000 to $360,000.
• The compensation amount under Section 408(k)(2)(C) regarding simplified employee pensions (SEPs) is increased from $500 to $550.
• The limitation under Section 408(p)(2)(E) regarding SIMPLE retirement accounts is increased from $10,500 to $11,500.
• The limitation on deferrals under Section 457(e)(15) concerning deferred compensation plans of state and local governments and tax-exempt organizations is increased from $15,500 to $16,500.
• The compensation amounts under Section 1.61‑21(f)(5)(i) of the Income Tax Regulations concerning the definition of “control employee” for fringe benefit valuation purposes is increased from $90,000 to $95,000.  The compensation amount under Section 1.61‑21(f)(5)(iii) is increased from $185,000 to $195,000.
• The limitation on wages under Section 45A regarding individuals eligible for the Indian employment credit is $40,000 for tax years beginning in 2008 and will increase to $45,000 for tax years beginning in 2009. The termination date of section 45A was recently extended from Dec. 31, 2007, to Dec. 31, 2009, by Section 314 of Division C of the Emergency Economic Stabilization Act of 2008, P.L. 110-343.

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The recent Bailout law increased the FDIC insurance coverage for bank accounts to $250,000 per person, per bank.  However, different types of accounts, such as joint, POD, etc. affect how the coverage is calculated.  The FDIC provides this handy calculator to estimate the coverage available to you for your accounts at each bank.

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With the recent failure of IndyMac Bank and even large banks like Wachovia reporting astounding losses, some folks are becoming increasingly concerned about the safety of their money.  As most everyone knows, the Federal Deposit Insurance Corporation (FDIC) covers cash deposit accounts up to $100,000 per person.  Persons with over $100,000 in cash deposits often use multiple banks to obtain coverage for all or most of their money.

What about accounts in the name of trusts, since trusts generally have more than one beneficiary?  Luckily, the FDIC has expanded coverage for trust accounts based on the number of beneficiaries.  The FDIC website provides the exact rules.

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North Carolina's own BB&T Wealth Management was rated as the most prestigious regional bank wealth manager by high net-worth consumers, according to the 2008 Luxury Brand Status Index survey.  The survey is conducted by the Luxury Institute in New York, but the results report must be purchased.

BB&T's personalized service was the key to its number one ranking.

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I recently came across a publication entitled If Something Should Happen - How to Organize Your Financial and Legal Affairs.  The booklet is authored by Marla Brill and is published by the American Institute for Economic Research.  Copies can be ordered from the website.

The booklet provides a concise overview of basic estate planning information, including health insurance and burial issues.  It also has several pages for recording important estate, financial, insurance, and medical data.  Having the information in this format could save hours of time and worry for your loved ones.  For $10, I think it's well worth the money.

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How do you go about deciding which financial advisor to hire?  The following, from the Paladin Registry , provides an important list of questions to ask when interviewing prospective advisors.

All advisors claim to be financial experts. They make this statement to win your trust and your assets. But, are they telling you the truth? These 10 questions will help you determine advisor’s expertise and ethics.

Make sure you ask all ten questions and require all advisor responses in writing. Verbal information benefits advisors because it’s easier to misrepresent and disputes are your word against theirs.

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Most folks know that cash accounts in banks are insured up to $100,000, per individual, per bank, by the Federal Deposit Insurance Corporation.  Trusts, of course, can own bank accounts, but often have multiple beneficiaries.  Recognizing this, the FDIC has issued guidelines so that one can calculate the amount of insurance coverage available for trust-owned accounts.

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I'm still in catch up mode from being out a week in early August, which is the reason for my paltry postings of late, but this article on the Chicago Tribune website caught my eye. It describes the financial dangers seniors face by the hands of unscrupulous investment advisers, some of whom who call themselves "estate planners," and others out to defraud the elderly.

Estate planning attorneys can provide a good resource for seniors who are tempted by investment schemes, etc.  We can provide objective advice and help investigate the reasonableness of the claims made by those promoting the investment.  Attorneys with investment training and credentials can be particularly helpful in this regard.

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A recent New York Times article cautions senior citizens that certain designations, such as Certified Senior Adviser (CSA), are used by unscrupulous insurance salespersons and financial advisers to imply knowledge or expertise they do not have.  Many such designations are easily obtainable by taking short courses and passing simple exams, and are practically meaningless in measuring competence or ethical standards.

Other designations, such as Certified Financial Planner (CFP), Chartered Life Underwriter (CLU) and Chartered Financial Consultant (ChFC), require extensive study, rigorous exams, and background checks, and provide a much better method of judging a prospective adviser.

 

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An article in the February 24-25 issue of The Wall Street Journal describes how 529 College Savings plans can be used to reduce estate taxes.  Earnings on the funds invested in such plans are tax-free if used for qualified college educational expenses.  North Carolina residents also get a small tax deduction for contributions to North Carolina sponsored plans (Click "Continue Reading" for more information).

The plans allow the owner to maintain control over how the funds are used, and even change the beneficiary to another relative or the owner himself.  If the funds are not used for educational expenses, taxes are due on the gains, along with a 10% penalty.

Gift tax rules allow using up to five years of the $12,000 annual gift tax exclusion at once, so that one person can put $60,000 into a plan in one year.  For wealthy grandparents with multiple granchildren, this can add up to substantial estate tax savings.  The current estate tax exemption is $2 million, so persons with estates over this amount may want to consider this technique.  Before establishing the accounts, however, be sure to check with a qualified tax and investment advisor.  There are fees associated with 529 Plans, and investment performance in many types of plans have been lackluster of the last several years.

Check out www.savingforcollege.com for a plethora of information on 529 Plans.

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Being in a college town, most of my clients are intelligent and well educated, and many handle their own taxes and investments.  However, there are times when a professional's advice can be invaluable.  This recent article on The Motley Fool website provides some guidance about when to seek advice..

How do you choose a financial advisor?  I recommend working with a Certified Financial Planner (CFP).  CFPs  must pass a rigorous examination on investments, retirement planning, estate planning, taxes, insurance and more.  They are also required to have met educational and experience requirements and must adhere to strict standards of professional conduct.  For a directory of CFPs, take a look at www.cfp.net.

In addition, just as when searching for an attorney, ask your colleagues, friends and other professional advisors for recommendations.

Ideally, your CFP will work with your estate planning attorney and CPA to develop a comprehensive plan that will ensure that your financial future is as secure as possible.

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