2007 Year-End Tax Planning Tips

Year-End Tax Planning Tips

Due to uncertainty over the pending “extender” legislation, this year may prove to be more challenging than usual.
We expect Congress to provide another one-year patch to assure that moderate incomes are not entrapped by the Alternative Minimum Tax (AMT) in 2007; however, there may be other last minute tax increases to pay for this solution.
There are also a number of important tax breaks expiring at the end of 2007. For individuals, these include the above-the-line deductions for qualified tuition expenses and educator expenses, the tax credit for home energy saving improvements, (such as insulation and energy-saving windows), and the option for individuals who have attained age 70½ to transfer IRA funds directly to charity.
The actions below may help you save taxes, but you must act before year-end (not all actions will apply for everyone):
Capital gains and losses If you have recognized any capital gains or losses from the sales of stocks or other capital assets (or you have some that are ripe for sale), it may be advisable to meet to discuss how you can best coordinate timing your gains and losses to minimize tax. Also, reviewing any pending December mutual fund capital gain distributions will be important. A recent Wall Street Journal article suggested that above average capital gain declarations are coming this year-end.
Zero capital gains rate may apply in 2008 If you or a family member are considering a sale of appreciated stock or other capital assets, and the income is not taxed at a rate higher than 15 percent, it may pay to hold off on the sale until 2008. This may result in a zero tax on some or all of the gain. If you sell this year, the 5 percent tax on lower rate capital gains will apply.
Gifts of appreciated assets If you have stock or other capital assets that have appreciated in value, consider making a gift of those assets to a child or other individual in a lower tax bracket.
Kiddie tax changes In 2007, the kiddie tax rules apply to children under age 18. In 2008 and after, they also ensnare most children age 18 and most full-time students age 19-23. If your child holds appreciated stock and is not in kiddie tax territory this year but will be in 2008, consider having the child sell in 2007 ahead of the new rules (or consider a gift of your securities to the child, followed by a sale in 2007). In many cases, this will result in a 5 percent tax on the gain, instead of a 15 percent rate if the sale is postponed until 2008.
Reducing underpayment penalties Those facing a penalty for underpayment of estimated tax may be able to eliminate or reduce it by a last-minute adjustment to tax withholding.
IRAs and charitable contributions If you are age 70½ or older, own IRAs, and are considering any charitable contributions before year-end, consider arranging for the gift to be made directly by the IRA trustee. This can achieve important tax savings, but may not be available after 2007 unless Congress acts to extend the provision.
Self-employed retirement plans Self-employed individuals should consider setting up a self-employed retirement plan, or perhaps modifying the type of plan they use in order to enhance their deduction.
S corporation or partnership losses If you own an interest in a partnership or S corporation, you may need to increase your basis in the entity so you can deduct a loss from it for this year.
Open a Health Savings Account (HSA) For those without employer-subsidized health insurance, consider adjusting your health insurance policy to “high deductible” status ($1,100 of out-of-pocket exposure for individual or $2,200 for family coverage). If done before year-end, you are eligible to fund up to $2,850 for an individual plan or $5,650 for family coverage into a pre-tax HSA.
Timing of itemized deductions Consider prepaying expenses that generate deductions, such as state income taxes, real estate taxes, charitable contributions, and other itemized deductions.
Energy-saving home improvements If you are thinking of making energy-saving improvements to your home, such as putting in extra insulation or installing energy-saving exterior doors or windows, consider doing so before year-end in order to qualify for a tax credit that may not be available after 2007. Some appliances, such as furnaces or hot water heaters, also qualify.
Hybrid vehicle tax credit If you are considering the purchase of a hybrid vehicle, purchase it before year-end to be eligible for a tax credit (but if you are subject to the AMT, the credit is not available).
Donating used autos to charity If you are thinking of donating a used vehicle to charity, consider inquiring about the charity’s plans to sell the car or alternatively use it in its charitable activities. The latter may yield a greater tax deduction for you. If the charity simply sells the auto, the deduction is limited to the charity’s sale price.
Other charitable changes 2007 brings a new harsh rule regarding cash contributions. Only those documented by a cancelled check, credit card charge, or a receipt from the charity qualify. Miscellaneous out-of-pocket cash donations without a receipt are no longer deductible. But on the positive side, Congress has improved the deductibility of qualified conservation charitable easements. In these arrangements, you may be able to retain ownership of the property, but restrict future development. Diminishing the value of the property in this type of permanent easement can create a significant charitable income tax deduction, as well as significant estate tax savings.
Self-rental income Do you lease real estate to your own business entity? If so, the passive activity loss rules present a significant threat. If your 1040 has a mix of positive and negative rental activities, the passive loss risk needs to be carefully assessed.
Gift and estate taxes You can save gift and estate taxes by making gifts sheltered by the annual gift tax exclusion before year-end. You may give $12,000 in 2007 to an unlimited number of individuals to reduce the costs of an onerous 45 percent federal estate tax to your heirs, but you cannot carry over unused gift exclusions from one year to the next.

Sale of Real Property from an Estate

There are some special issues to consider when the seller of real estate is the estate of a decedent.

Real estate held by a decedent’s estate is subject to liens for the payment of any New Jersey Transfer Inheritance Tax, New Jersey Estate Tax, Federal Estate Tax and debts of the decedent.

The N.J. Transfer Inheritance Tax is a state tax imposed on the transfer of property made upon the death of a New Jersey resident and certain non-residents, or made by such a decedent in contemplation of death. N.J.S.A. 54:34-1 et seq. The Inheritance Tax lien lasts for a period of fifteen years following the date of death. N.J.S.A. 54:35-5. This lien is discharged when the tax is paid or a bond given to the State. The N.J. Division of Taxation issues a tax waiver which is then recorded in the county clerk’s office of the county in which the property is situated. Tax waivers can be obtained before a return has been audited by the State upon submission of the estate’s Inheritance Tax return and payment of an amount deemed sufficient by the Inheritance Tax Bureau of the N.J. Division of Taxation.

New Jersey also imposes an Estate Tax on estates of resident decedents dying after December 31, 2001 if the gross value of the estate exceeds $675,000 . N.J.S.A. 54:38-1 et seq. A New Jersey estate may be subject to the N.J. Estate Tax even if it is not subject to the Federal Estate Tax. The N.J. Estate Tax also becomes a lien against property. The N.J. Estate tax lien exists as a lien against the property as of the date of decedent’s death until paid. N.J.S.A. 54:38-6. This lien can be discharged in the same manner as the N. J. Transfer Inheritance Tax lien by the issuance of a tax waiver from the N. J. Division of Taxation.

The Federal Estate Tax may be imposed on estates in the amount of $2.0 million for decedents dying in 2007 ($3.5 million commencing 2008). The Federal Estate Tax becomes a lien on the property in the estate for ten years from the date of death. I.R.C. §6324 (a)(1). To discharge the lien, a Certificate of Release of Estate Tax Lien can be obtained from the IRS and recorded with the County Clerk in the county in which the property is located.

If a tax waiver or release of lien cannot be obtained prior to closing, the buyer’s title company will frequently agree to escrow funds to cover any possible liability and to insure that the selling estate will obtain and record the waiver or release.

Finally, real estate of a decedent is liable for the debts of the decedent for one year after date of death. N.J.S.A. 3B:22-22. If the property is being sold within a year of decedent’s death, the buyer’s title company with generally require information concerning the assets and debts of the estate and a bond from the executor before agreeing to insure the property.

Anna Nicole Smith: A Model for Bad Estate Planning

Anna Nicole Smith rose to fame as a
model for Guess Jeans and Playboy
magazine. Now, her death has given
her newfound fame as a great model for
terrible estate planning.
Forget the fact that you can’t visit a
supermarket without seeing gossip about
her life and death. When push comes to
shove, Anna Nicole, the human being,
was a single mother who was embroiled
in a bitter legal battle over the estate of
her ex-husband, and was suffering from
the sudden and unexpected death of her
son just three days after the birth of her
daughter. Her legal situation becomes
nearly as tragic as her life. She sadly didn’t
take proper measures to protect her baby
daughter from opportunists finagling to
acquire custody in order to have access to
her inheritance.
THE TEACHINGS OF ANNA NICOLE
What can we learn from Anna Nicole’s
tragedy?
Lesson 1: Keep your estate plan current.
Anna Nicole’s will was prepared in 2001,
before she ever conceived of daughter,
Dannielynn. The will leaves her entire
estate to her son, Daniel, and specifically
disinherits any offspring born after the will
was signed. Because she never updated
the will after her son died and her daughter
was born, the document is invalid.
Lesson 2: Hire an experienced attorney. A
licensed attorney in the State of California
prepared Smith’s will. But did he have
extensive probate experience? A qualified
and savvy attorney would have had the
foresight to protect her in the event that she
survived her son.
Lesson 3: Select a guardian. It’s always
a hard decision to make, because no one
can raise your children as well as you can.
But it’s imperative to select someone. You
can always change it later.

Will the Estate Tax Be Resurrected?

When the unknowable meets the possibly very expensive, it pays to plan ahead

A BURGEONING FEDERAL budget deficit may force the early expiration of a tax law that has cheered business owners for years. But experts say early planning may blunt the pain.

A provision of the Economic Growth and Tax Relief Reconciliation Act of 2001 calls for the repeal of the federal estate tax as of Dec. 31, 2009, says Christine Pronek, a manager in the Estate and Trust Group in the Bridgewater office of Amper, Politziner & Mattia. The levy which opponents deride as the "death tax," is scheduled to be resurrected as of Jan. 1, 2011.

However, "the pressure to trim the federal budget deficit means that Congress is likely to revise the law to keep the tax in force through 2010 and beyond," Pronek says.

The estate tax is an assessment based on the value of assets owned by individuals at the time of their death. While $2 million of each individual's net taxable estate is generally exempt from the tax, the remainder is subject to a 47 percent federal tax rate. New Jersey generally exempts up to $675,000, and taxes the rest at up to 16 percent.

Pronek warns her clients, who include the owners of small and medium-sized businesses, not to bank on the planned 2010 repeal of the federal estate tax. For one thing, if it does happen, the repeal will only be in effect for the year 2010.

"The uncertainty of the federal estate tax system shouldn't stop a person from engaging in estate planning as a way to minimize their tax liability" she says. "All estate plans must be tailored to the respective individual's needs, but one frequently used approach is to include qualified disclaimer provisions in a will."

Pronek says qualified disclaimers provide flexibility for the surviving spouse to decide how much of the federal estate tax exemption should be held in a trust-commonly referred to as a credit shelter trust-and protected from being taxed as part of the surviving spouse's estate when he or she passes away

"This flexibility is key to New Jersey residents since the state of New Jersey has an exemption amount of only $675,000/' Pronek says. "With the disclaimer language in the will, the surviving spouse can decide if he or she wants to pay some state estate tax upfiont on the decedent spouse's estate, instead of taking a larger state estate tax hit on the surviving spouse's estate when that person passes.

"Regardless of the future of the estate tax," Pronek adds, "there's one piece of advice that won't change: Meet with your tax or other adviser early so you can plan effectively and be well prepared for the unknown."

10 Most Frequently Asked Questions and Answers for Stretch IRAs

What is a stretch IRA?
Stretching an IRA is simply the ability to have an IRA live longer than the account owner. A stretch IRA is an IRA that uses beneficiary designations to enable assets to continue to grow tax deferred not only beyond the death of the original IRA owner; but even beyond the death of his or her beneficiaries. Until recently, IRA assets were usually liquidated shortly after the beneficiary's death. This put an end to tax deferral and often resulted in large taxable distributions. Thanks to a private letter ruling by the IRS, you can avoid immediate liquidation and extend the life of the IRA because beneficiaries are now allowed to make the required distributions from the IRA over their own life expectancy.The required minimum distributions are calculated each year simply by dividing the account value at the beginning of the year by the applicable life expectancy factor of the beneficiary for that year.By naming your children or grandchildren as beneficiaries, the applicable life expectancy factors are greater resulting in smaller annual required distributions.This allows IRA assets to be passed along the family tree, allowing tax deferral to continue for other generations


What are the benefits of stretching-out an IRA?
By "stretching-out" an IRA, you are maximizing the life of an investment and extending the deferral of taxes on the assets held in it. Stretching out an IRA extends its tax deferred growth for the lifetime of the beneficiaries resulting in substantially more growth than if the IRA were paid out immediately following the original owner's death.
These features make the IRA one of the best investment alternatives for transferring assets to your children and grandchildren.


If a beneficiary of an IRA dies, can that beneficiary's beneficiary now recalculate required minimum distributions (RMDs) based on their own life expectancy?
No. RMDs to the beneficiary's beneficiary must continue over the same period based on the same calculation method as RMDs to the original beneficiary. In order to increase the "stretch-out", name your grandchildren as the beneficiaries of your IRA.
This will decrease the RMD amount because your grandchild’s life expectancy is used to calculate this amount. This is the most effective way to increase the potential for tax deferred growth.
For example, a 5 year old, according to the IRS, has a life expectancy of 76.6 years, which results in an RMD of only 1.3% of the account value. In contrast, a 45 year old has a life expectancy of 37.7 years which results in an RMD of 2.65%, over twice the required distribution for a 5 year old.
Taking smaller distributions leaves more money in the IRA to grow. Consequently, the younger the beneficiary, the greater the stretch.


Does a stretch-out IRA allow an IRA owner’s child to roll over the IRA into their name?

No. Technically, your IRA remains your account as the original owner, even after your death. In order for the stretch to work, the beneficiary must maintain the IRA in the deceased’s name. The only person who can treat a deceased’s IRA as their own is the deceased’s spouse. Only a spouse can roll the IRA into their own IRA account. A non-spouse would base the required distributions on their own life expectancy as stated in the IRS life expectancy tables. This calculation sets up an income stream over a set number of years. The final stage in the stretch involves the ability of a beneficiary to name their own beneficiary. Upon the death of the original beneficiary, the new beneficiary is allowed to continue the income stream previously established. By taking advantage of these options, an IRA can last for decades after the death of the original owner and generate hundreds of thousands of dollars. For example, a $100,000 balance in a 401(k) that a 60 year old retiree with a 58 year old spouse rolls over to an IRA with their 35 year old children as contingent beneficiaries results in dramatic consequences for the wealth of the entire family. Assuming a 12% annual rate of growth and average life expectancies for this couple, taking out only RMDs results in distributions totaling over $470,000 to them and over $5.1 million to their children over their lifetime.



Who can establish a stretch IRA?

Any IRA owner may create a stretch IRA through proper designation of beneficiaries. These beneficiaries must be established prior to death. Establishing primary and contingent beneficiaries on every IRA account is of the utmost importance. The stretch out option give investors greater control over their IRAs and the ability to maximize tax deferral. This can keep an inheritance growing for a longer period of time and can ensure ongoing financial security for one’s heirs.




Does the stretch concept apply to qualified plans such as 401(k)s and other company sponsored plans?


Not Usually. Unlike IRAs, the beneficiary options for qualified plans are plan-specific. No company is going to deal with the administrative headache of distributing between 1% and 5% of the account value over the next 60 years to a 5 year old beneficiary, who inherits an account. Consequently, it is imperative that any 401(k) or other employer retirement plan be rolled over to an IRA in order to preserve the ability to stretch out distributions to beneficiaries over the maximum length of time




Who can I name as a beneficiary of my IRA to accomplish this stretch out option?


Your can name anybody as your IRA beneficiary and you can change your beneficiaries at any time. Typically, your beneficiary is going to be either your spouse, a non-spouse or a trust. As a practical measure, naming your spouse as your primary beneficiary ensures that the IRA is available to help meet their income needs. Upon death, a spousal beneficiary assumes ownership of the IRA and can then name their own beneficiaries. If your spouse has sufficient assets or has predeceased you, a non-spouse beneficiary, such as your children or grandchildren, may be named. In choosing such beneficiaries, one should consider their income needs, marginal tax rates and age. If your children don’t need the additional income that a beneficiary IRA provides, naming your grandchildren as beneficiaries increases the stretching of that IRA due to their longer life expectancy. Since the required distributions are smaller, the taxes payable on the distributions are also smaller. Naming a trust as a beneficiary helps to control what happens to your IRA after your death.


If multiple beneficiaries are named on a Traditional IRA, does each beneficiary have the same stretch options?


Yes. Each beneficiary may establish a separate beneficiary IRA whereby RMDs are calculated based upon each individual beneficiary’s life expectancy. Beneficiary IRAs prevent assets from becoming fully taxable by ensuring that the assets are not placed in the beneficiary’s name. To maximize tax-deferred growth, a non-spouse beneficiary must maintain the IRA in the deceased’s name.




If the beneficiary of an IRA is a trust, can the stretch option still be utilized?


The stretch option may be utilized if the trust is named as the designated beneficiary, clearly names beneficiaries and becomes irrevocable upon the death of the IRA owner. Nelson Investment Planning Services has created a prototype IRA Trust Agreement to accomplish the stretch. This trust provides an IRA owner the ability to protect their family and control distributions. Naming individual beneficiaries may defeat your intention to have the asset extended over the longest possible time. By law, your beneficiary can do whatever they want with the assets – including liquidating the IRA completely – regardless of your plans. An IRA Trust ensures that your desires are fully carried out.


Can I change my distributions?


Of course. At any time, if the owner or beneficiary’s situation changes, the amount of distributions from an IRA can be increased above the RMD amount. If an owner or beneficiary of an IRA needs income or requires a lump sum distribution of any amount, then such distributions can be made at any time. The RMD amounts are just that – the minimum amount that must be distributed. Stretching out an IRA does not limit your ability to withdraw money from the IRA. In addition, since payments to beneficiaries are paid out as death distributions, there is no 10% penalty that would normally apply for premature distributions before age 59 ½. Of course, income tax rates apply to every dollar withdrawn at the recipient’s marginal tax rate.

Estate Planning for Families with Special Needs Children

Families with special needs children must exercise extra care in making their estate plans. This is true whether their special needs child is still a minor or now an adult, and particularly so when the child is – or in the foreseeable future will be -- receiving needs-based public benefits such as SSI or Medicaid. While planning considerations for such a child will vary depending upon the child’s age, competency, and other family considerations, the goal is always the same: parents want their estates utilized to enhance and enrich the life of their special needs child while maintaining the child’s enrollment in essential public benefits programs. These goals can be met through the use of a properly prepared special needs trust.

The essence of all special needs estate planning is to ensure that the portion of the parents’ estate which passes to their special needs child at the time of their death is not considered an “available asset,” as defined by public benefit agencies. Parents must be mindful of both income and principal, as too much monthly income, as well as too much “cash,” can negatively impact their child’s future eligibility for benefits.

Purpose: Special needs planning works to preserve public benefits for the disabled child while supplementing and enhancing the quality of the child’s life. This type of planning is useful for many different purposes, including

lifetime money management for the benefit of the disabled child;
protecting the child’s eligibility for public benefits; and

ensuring a pool of funds available for future use in the event public funding should cease or be restricted.

Planning Options: The options available to families in making an estate plan for a special needs child who is receiving needs-based public benefits include the following:

Disinherit the child. This is the simplest option, but it does nothing to accomplish the essential purpose of enriching the life of the special needs child.
Give the estate to the brothers and sisters. At the parents’ death the entirety of the estate is distributed to the child’s siblings, with the understanding that they will “take care of” their disabled brother or sister. There are inherent risks with such an approach, including claims by the siblings’ creditors, bankruptcy, divorce, mismanagement of funds, etc. This may be appropriate when the child’s potential inheritance is modest.
Leave an inheritance to the disabled child. The outcome of this planning option will be the almost certain negative impact on the child’s continued eligibility for publicly funded benefits. At the least, benefits may be reduced. In the worst case scenario, the child may be rendered ineligible for SSI and Medicaid, and with this ineligibility for assisted housing, supported employment, vocational rehabilitation, group housing, job coaching, attendant personal care aides, and transportation assistance. The key benefit is Medicaid, as this program represents the child’s ability to access not only essential health care but many other public assistance programs.
Leave any inheritance in a Special Needs Trust. This last option will be preferred by most families in their efforts to provide and ensure a positive outcome for a special needs child. By using a properly drafted – and properly administered – Special Needs Trust, the child will continue to qualify for public assistance programs that would otherwise be unavailable to the child, especially the “means tested” programs that require the child to meet strict financial eligibility criteria. A Special Needs Trust works because the assets held in the trust are not “available” to the child. These types of trusts must be discretionary spendthrift trusts, with strict limits on the trustee’s ability to give money to the child. Under no circumstances can the special needs child force the trustee to make trust money available to the child. An additional benefit of the Special Needs Trust is that because the child is often unable to manage his or her own finances, the parents, in creating the trust, will appoint a trustee to act as the child’s money manager, and in so doing, ensure proper financial management after their death.

During Life or at Death? Families have the option of creating a Special Needs Trust at their death by incorporating a trust within a Last Will and Testament – this is called a “testamentary trust.”

The other option is for the parents to create a Special Needs Trust while alive -- not surprisingly, this is often referred to as a “living trust” (or inter vivos trust). The advantages of the living trust include:

the avoidance of a probate;

the creation of a trust to which other family members can make contributions, most usually the grandparents; and
an opportunity for a co-trustee to gain “hands on” experience in administrating the trust.

Revocable or Irrevocable? Tax considerations come into play in the decision to make the Special Needs Trust either revocable or irrevocable. Generally speaking, the family will make the trust revocable whenever:

the goals include maintaining maximum control over the trust; and
the family is not concerned with income tax considerations.
Correspondingly, the use of an irrevocable trust may be appropriate when the family is concerned with:

income tax considerations; and
if more than a million dollars will be going into the trust, possible federal estate and gift taxes.
Tax planning is beyond the scope of this article, so be sure to consult with your attorney, CPA or financial advisor if there are any special tax considerations in the creation of your Special Needs Trust.

Selecting Your Trustee: The Trustee will be responsible for administering your Special Needs Trust. So selecting your Trustee is one of the most important decisions your family will make in ensuring the long-term success of your Special Needs Trust. Given the natural pressures inherent in all families, someone in your family may consider the funds in the Special Needs Trust as “their” money, rather than the money of your special needs child. This can be a dangerous situation, especially as to your child’s continued eligibility for public benefits. In most families, it is best to consider selecting an independent, non-family member to serve as your Special Needs Trustee. The range of options includes:

a parent, sibling or another “distant” relative;
your attorney;
a Trust company or a financial institution;
a non-profit organization -- especially one with experience in special needs; or
co-Trustees, usually a family member acting with a trust company.

The selection of any of these potential Trustees has both advantages and disadvantages. You should closely counsel with your attorney or financial advisor before making your Trustee selection.

Conclusion: This brief summary is just the start of your enquiry as you begin your special needs estate plan. By working closely with your attorney, your CPA, and your financial planner, you will develop a much greater understanding of the options available to you and your family in making an appropriate estate plan for your special needs child. After making your wishes known and getting the appropriate documents in place, you will have taken crucial steps in assuring that this child will receive proper care when you are no longer able to provide that care yourself.

Reference: www.specialneedsalliance.com

Selection of the Trustee of a Special Needs Trust

There are obviously many important considerations to ponder when designing an estate plan for a beneficiary who has special needs. But the most important issue in the planning process is picking the person or persons who will be in charge of managing the special needs trust. This person is known as the "trustee" and he/she has the biggest impact on whether or not the purposes of the trust are actually carried out after you pass away. Pick the wrong person and the whole plan can come crashing down, to the severe detriment of your disabled loved one.

Ideally, you want to have a trustee that is relatively stable and financially savvy since that person may be in charge of investing a great deal of money for your loved one. The trustee should also have a good relationship with the disabled beneficiary. If the trustee interacts with the beneficiary on a regular basis then he/she will have a better understanding of the beneficiary's disability and therefore better able to make appropriate distributions from the trust funds.

A sibling of the beneficiary is often appointed as the trustee in most cases (in the event that the parents are unable to act). This arrangement is usually entirely appropriate. But you should keep in mind that most special needs trusts will indicate that any remaining trust funds will go to the beneficiary's siblings upon the death of the beneficiary. In other words, less scrupulous siblings who have been made the trustee of their sibling's trust may be motivated to withold neccesary distributions to the beneficiary since doing so would water down their future inheritance. This issue is not unprecedented, so it needs to be considered before a sibling is appointed as the trustee.

Finally, you need to have a trustee that is prudent enough to strictly follow the instructions and limitations outlined in the trust language. If the State catches wind of improper distributions from the trust (such as distributions that pays for things that the State is already covering) then there is a risk that the benefits will be cut off. Although this is a self-serving statement, you need a trustee who is wise enough to seek specialized legal guidance if the propriety of a particular distribution is questionable.

In short, you need to give long and serious thought as to who you will name as trustee of your special needs trust. The decision can make or break all of the careful special needs planning you have done.

Asset Protection - Don't Do It Yourself

Jonathan Alper in the Florida Asset Protection Blog has a great post on how standard off the shelf LLC and estate planning forms by non-experts will generally not protect your assets from lawsuits.

A well-conceived asset protection plan can fail because attorneys use standard, off-the-shelf business forms to create legal entities to hold the debtor’s assets. Case in point is a case I worked on with a creditor’s attorney to penetrate a very complex asset protection plan involving domestic limited liability companies whose membership interests were owned by domestic trusts. The planning attorney used llc forms typically used for operating business and standard estate planning trust forms.

Standard LLC forms and estate planning forms are designed to provide current income to the llc owners and trust beneficiaries. These typical forms often provide for mandatory distributions of all current income. In this instance, we convinced the trial judge to compel the llc manager and trustee of the trust to follow the terms of their documents and make current income distributions to the debtor and his family. We were then able to seize the llc required distributions with charging liens and garnishment proceedings.

Asset protection planning is customized. Each and every document must be carefully and intelligently drafted to maximize protection Many clients want legal work and documents to be simple and inexpensive. That approach often works in simple business arrangements; it usually does not provided effective asset protection.

Before you make a mistake that may cost you everything, consult an attorney well versed in asset protection.

Watch Out: The NJ Inheritance Tax

New Jersey imposes a transfer Inheritance Tax, at graduated rates, on property having a total value of $500 or more which passes from a decedent to a beneficiary.

If a decedent's death occurs on or after January 1, 1985, property passing to a surviving spouse is entirely exempt from the tax. If a decedent's death occurs on or after July 1, 1988, property passing to a decedent's surviving parents, grandparents, children, stepchildren or grandchildren is entirely exempt from the tax. If a decedent’s death occurs on or after July 10, 2004, property passing to a surviving domestic partner (Domestic Partnership Act) is entirely exempt from tax.

If a decedent’s death occurs on or after February 19, 2007, property passing to a surviving civil union partner is entirely exempt from tax.

In many instances, if all of a decedent's property passes to a surviving spouse, domestic partner, civil union partner, children, stepchildren, parents, grandparents or grandchildren, it will not be necessary to file an Inheritance Tax return with the Division of Taxation. In such cases, Form L-8 may be used to secure the release of bank accounts, stocks, bonds and brokerage accounts and Form L-9 may be used to secure the release of the State's lien on real property owned by the decedent.

When filing an Inheritance Tax return, Form IT-R should be used for resident decedents, and Form IT-NR should be used for nonresident decedents.

In addition to the inheritance tax, New Jersey imposes a separate Estate Tax. An estate may be subject to the New Jersey Estate Tax even though there is no New Jersey Inheritance Tax payable..For decedents with a date of death prior to January 1, 2002 the New Jersey Estate Tax was designed to absorb the maximum credit for state inheritance, estate, succession or legacy taxes allowable in the Federal estate tax proceeding. It did not increase the estate's total estate tax obligation.For decedents with a date of death on or after January 1, 2002 the New Jersey Estate Tax was decoupled from the Federal estate tax proceeding. For more information see New Jersey Estate Tax: Important Provisions and Filing Requirements.The New Jersey Estate tax is based upon the Federal Estate tax credit for state death taxes which was allowable under the provisions of the Internal Revenue Code in effect on December 31, 2001. The Federal Estate tax does not have a provision providing a deduction for property passing to a domestic partner.

However, if the decedent was a partner in a civil union and died on or after February 19, 2007, survived by his/her partner, a marital deduction equal to that permitted a surviving spouse under the provisions of the Internal Code in effect on December 31, 2001, is permitted for New Jersey estate tax purposes. In these cases, the 2006 Form 706 should be completed as though the Internal Revenue Code treated a surviving civil union partner and a surviving spouse in the same manner.

Asset Protection Mistakes - 13 Tips

These days, just about everyone should take care to protect their assets from possible lawsuits or other problems.

Here are 13 things to watch out for:

1. Don't keep money in a joint account, even with a spouse.
2. Don't own the car of an adult child, or keep him or her on your policy.
3. Don't own vehicles jointly with your spouse.
4. Don't go without sufficient umbrella liability insurance.
5. Don't own rental real estate in your own name.
6. Don't own real estate jointly with someone other than your spouse without a "buy-sell" or joint ownership agreement.
7. Don't leave property, including life insurance and retirement benefits, directly to minor children.
8. Don't operate a business as a sole proprietor.
9. Don't let other people operate any of your motor vehicles, but if you do, make sure your insurance policy covers them.
10. Don't sign a joint income tax return with your spouse if you have any suspicion that he or she is not reporting all income, over-stating deductions, or is otherwise acting fraudulently or negligently.
11. Don't co-sign or guarantee loans to family members or friends.
12. Don't serve on the board of a non-profit organization unless it has sufficient errors and omissions insurance for directors.
13. Don't get married without a comprehensive prenuptial agreement.

While this list can help get one started on an asset protection plan, there is no substitute for seeking the counsel of an experienced attorney to ensure that you and your family are fully protected.

How to S T R E T C H Your IRA

The stretch IRA concept is a wealth-transfer strategy that can help you extend the period of tax-deferred earnings on your retirement assets. After the owner of the IRA dies, the beneficiaries will also have the longest allowable period of tax-deferral on the required distributions of the IRA assets. This strategy can allow distributions from your retirement assets to be extended over several generations. Because of this, your family could save significant dollars in income taxes over their lifetimes.

A stretch IRA strategy can be established at any time, as long as you have named an individual person as the beneficiary. It's also important to name an individual person as a contingent beneficiary in case your primary beneficiary predeceases you. If set up correctly, your beneficiaries should be able to take their required IRA distributions over their individual life expectancies.

However, there are a number of steps that need to be followed to put this strategy in place. These steps include the following:

1. Selection of individual beneficiaries.
As previously mentioned, you will need to designate an individual beneficiary. Although there might be certain reasons for naming a trust as a beneficiary (e.g., asset protection for the beneficiaries), you should keep in mind that you will jeopardize the ability to use this strategy if you do it. Even with a qualified trust, distributions must be paid out over the life expectancy of the oldest beneficiary. With this in mind, you could jeopardize you ability to stretch out distributions to your grandchildren if you name a trust as the beneficiary.

2. Discuss your plans with an experienced advisor.
The benefits of this strategy could also be jeopardized if the IRA is not set up properly. Therefore, you need to speak with an experienced tax advisor who has worked with this strategy before.

3. Establish and maintain separate accounts for your beneficiaries.
If you have two or more beneficiaries, you need to set up a separate account for each one of them. You should also designate a certain percentage of you IRA assets to each of your beneficiaries. By doing this, each beneficiary can then choose to have their share distributed over their individual life expectancy.

4. Inform your beneficiaries of your plans.
You should also let your beneficiaries know about their future interest in your account when you pass away.

There are a couple of other things to keep in mind. The names of the account holder and the individual beneficiary must appear on the IRA account, and the beneficiary distributions must begin no later than Dec. 31 of the year after the death of the account holder. If these rules are not followed, the funds from the IRA could be exposed to a significant income tax penalty for missing the required mandatory distribution (50% of the distribution that should have been taken).

On a final note, it should be remembered that this strategy may not be suitable for everyone. For example, if you think that you will need access to your IRA money to meet your daily living needs during retirement, then this strategy might not help you. Please note I always advise people to consult with their own qualified legal, tax, and financial advisor prior to making any investment decisions.