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.
Monday, July 2, 2007
Thursday, April 5, 2007
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.
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.
Sunday, March 25, 2007
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.
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.
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.
Sunday, December 17, 2006
American Bar Association Publishes Article Entitled "Tax Law” in the October/November 2006 issue of American Bar Association’s GPSOLO magazine
American Bar Association Publishes Local Tax Attorney’s Article
Tax attorney Parag P. Patel, Esq. published an article entitled "Tax Law” in the October/November 2006 issue of American Bar Association’s GPSOLO magazine. The GPSOLO magazine is nationally published and widely circulated by the American Bar Association’s ABA General Practice, Solo and Small Firm Division.
The article highlights various aspects of a tax law practice for future professionals.
Tax Law
As Ben Franklin once said “In this world nothing can be said to be certain, except death and taxes.” If that is true, then the practice of tax law is a niche practice area that may always have work.
Few law students, and even fewer attorneys, seem to like tax law. In fact, one tax attorney claims to say that when asked why he wanted to practice tax, he would reply, "because you don't want to."
Seriously, when a law student or new attorney asks me about what is the best area of law, I reply an area that is specialized in which fewer attorneys practice. For me, that area of practice has been tax law. I have been practicing tax law for the past 12 years since graduating from law school and have thoroughly enjoyed the practice area.
What is tax law?
While it may seem to be a narrow practice area, tax law is very broad with many varieties of practices. For instance, in terms of jurisdictions, there are state and local tax areas, federal tax, and international tax. Within each jurisdiction, there are many subspecialties.
Tax attorneys can be found in many employment settings, in both the public and private sectors, including large accounting firms. Clients can include individuals, government bodies, private and public businesses from a small family business to Fortune 500 corporations. Tax attorneys often work closely with attorneys in other practice areas, as well as other professionals, such as accountants and financial advisors.
Virtually everything an attorney does for a client will have a tax consequence, whether it is a marriage dissolution or drafting a last will and testament, or advising and executing complex commercial transactions. Whether the client is an individual or a huge corporation, the tax attorney's goal is to maximize the preservation of assets and the positive impact on the bottom line. This is accomplished through careful tax planning and counseling of clients, and advising clients on the tax aspects of financing such as public and private offerings, debt instruments, equity stakes and other tax-oriented investments.
Path to Tax Law
What initially attracted me to tax law was my business and accounting background. In law school, tax law courses were easier for me because there was a clear answer to the problem. Although very intricate, there are no wishy-washy answers like in other areas of the law. You looked to the tax code, regulations or maybe a case.
Many tax attorneys have undertaken special coursework or training to become familiar with the many substantive areas of tax law. A master of laws degree (LL.M) in taxation is common among tax lawyers and is considered a “must have” credential for many firms’ tax practice groups. In addition, an LL.M in tax law can allow student or new lawyer to become well versed in tax law quickly. There are over two dozen law schools throughout the United States that offer an LL.M in tax law program.
There are literally hundreds of treatises and resources available to tax attorneys. Since tax law is a rapidly changing practice area, there a dozens of tax journals and periodicals providing updates on the latest tax legislation and rulings. Most tax attorneys read or subscribe to at least one resource to keep up to date with tax developments.
The ABA Tax Section is an active section with dozens of subcommittees focusing on different areas of tax law. The ABA Tax Section publishes the Tax Lawyer, a scholarly law journal, as well as several newsletters. In addition, nearly every state and local bar association has a tax section or committee where tax attorneys can share resources and advice. Some bar association’s tax sections even have a mentorship program where new attorneys and law students can be mentored by an experienced tax attorney.
Tax attorney Parag P. Patel, Esq. published an article entitled "Tax Law” in the October/November 2006 issue of American Bar Association’s GPSOLO magazine. The GPSOLO magazine is nationally published and widely circulated by the American Bar Association’s ABA General Practice, Solo and Small Firm Division.
The article highlights various aspects of a tax law practice for future professionals.
Tax Law
As Ben Franklin once said “In this world nothing can be said to be certain, except death and taxes.” If that is true, then the practice of tax law is a niche practice area that may always have work.
Few law students, and even fewer attorneys, seem to like tax law. In fact, one tax attorney claims to say that when asked why he wanted to practice tax, he would reply, "because you don't want to."
Seriously, when a law student or new attorney asks me about what is the best area of law, I reply an area that is specialized in which fewer attorneys practice. For me, that area of practice has been tax law. I have been practicing tax law for the past 12 years since graduating from law school and have thoroughly enjoyed the practice area.
What is tax law?
While it may seem to be a narrow practice area, tax law is very broad with many varieties of practices. For instance, in terms of jurisdictions, there are state and local tax areas, federal tax, and international tax. Within each jurisdiction, there are many subspecialties.
Tax attorneys can be found in many employment settings, in both the public and private sectors, including large accounting firms. Clients can include individuals, government bodies, private and public businesses from a small family business to Fortune 500 corporations. Tax attorneys often work closely with attorneys in other practice areas, as well as other professionals, such as accountants and financial advisors.
Virtually everything an attorney does for a client will have a tax consequence, whether it is a marriage dissolution or drafting a last will and testament, or advising and executing complex commercial transactions. Whether the client is an individual or a huge corporation, the tax attorney's goal is to maximize the preservation of assets and the positive impact on the bottom line. This is accomplished through careful tax planning and counseling of clients, and advising clients on the tax aspects of financing such as public and private offerings, debt instruments, equity stakes and other tax-oriented investments.
Path to Tax Law
What initially attracted me to tax law was my business and accounting background. In law school, tax law courses were easier for me because there was a clear answer to the problem. Although very intricate, there are no wishy-washy answers like in other areas of the law. You looked to the tax code, regulations or maybe a case.
Many tax attorneys have undertaken special coursework or training to become familiar with the many substantive areas of tax law. A master of laws degree (LL.M) in taxation is common among tax lawyers and is considered a “must have” credential for many firms’ tax practice groups. In addition, an LL.M in tax law can allow student or new lawyer to become well versed in tax law quickly. There are over two dozen law schools throughout the United States that offer an LL.M in tax law program.
There are literally hundreds of treatises and resources available to tax attorneys. Since tax law is a rapidly changing practice area, there a dozens of tax journals and periodicals providing updates on the latest tax legislation and rulings. Most tax attorneys read or subscribe to at least one resource to keep up to date with tax developments.
The ABA Tax Section is an active section with dozens of subcommittees focusing on different areas of tax law. The ABA Tax Section publishes the Tax Lawyer, a scholarly law journal, as well as several newsletters. In addition, nearly every state and local bar association has a tax section or committee where tax attorneys can share resources and advice. Some bar association’s tax sections even have a mentorship program where new attorneys and law students can be mentored by an experienced tax attorney.
Tuesday, July 25, 2006
Evaluating the Special Needs Estate Planning Attorney
Consider the attorney’s:
Education, Certifications and Memberships e.g. Special Needs Alliance (SNA); National Academy of Elder Law Attorneys (NAELA); American College of Trust & Estate Counsel (ACTEC); American Bar Association (ABA); and State Bar Associations
Time/experience in trust, estate, and disability practice
Community Involvement
Articles written (commitment to educating the consumer evident?)
Presentations made (especially to peers)
Educational programs recently attended with respect to trust and estate law and disability issues.
Is the attorney experienced in drafting Special Needs Trusts? Has he/she made it an area of focus in his/her practice?
Can he/she provide references, other professionals who would recommend his/her expertise in Special Needs Estate Planning?
What is the attorney’s commitment to completing a comprehensive assessment of your family’s unique "special needs," concerns and goals for your loved one with a disability?
Is the attorney up to date on any state-specific special rules the SSA (Social Security Administration, Medicaid, or the Department of Mental Health might have for key aspects of Special Needs Trusts? (Distribution terms, required accounting, reports, notices, remainder beneficiary etc.)
In the initial consultation, do you get an overall sense of the attorney’s understanding of and empathy for the unique challenges families face in caring for a loved one who is disabled?
Does an attorney’s high ratings in the qualifications listed above guarantee you a high quality SNT guide? Not necessarily
Do your research - find the best attorney you can and remember you are your loved one's most committed advocate. Keep informed and active throughout the process.
Education, Certifications and Memberships e.g. Special Needs Alliance (SNA); National Academy of Elder Law Attorneys (NAELA); American College of Trust & Estate Counsel (ACTEC); American Bar Association (ABA); and State Bar Associations
Time/experience in trust, estate, and disability practice
Community Involvement
Articles written (commitment to educating the consumer evident?)
Presentations made (especially to peers)
Educational programs recently attended with respect to trust and estate law and disability issues.
Is the attorney experienced in drafting Special Needs Trusts? Has he/she made it an area of focus in his/her practice?
Can he/she provide references, other professionals who would recommend his/her expertise in Special Needs Estate Planning?
What is the attorney’s commitment to completing a comprehensive assessment of your family’s unique "special needs," concerns and goals for your loved one with a disability?
Is the attorney up to date on any state-specific special rules the SSA (Social Security Administration, Medicaid, or the Department of Mental Health might have for key aspects of Special Needs Trusts? (Distribution terms, required accounting, reports, notices, remainder beneficiary etc.)
In the initial consultation, do you get an overall sense of the attorney’s understanding of and empathy for the unique challenges families face in caring for a loved one who is disabled?
Does an attorney’s high ratings in the qualifications listed above guarantee you a high quality SNT guide? Not necessarily
Do your research - find the best attorney you can and remember you are your loved one's most committed advocate. Keep informed and active throughout the process.
Sunday, February 5, 2006
Stretching Your IRA to the Next Generation
It's no secret that retirement accounts come in all shapes and sizes ... from the account that is strictly set aside to generate retirement income to an account earmarked for heirs. For those intending to bequeath their individual retirement account funds to survivors, a change in Internal Revenue Service regulations in January of 2001 (followed by an April 2002 revision) created a wealth-transfer strategy that actually allows for the tax benefits of an IRA to be "stretched" beyond the lifetime of the person who established the IRA.
In the past, IRS law had required non-spouse beneficiaries to completely withdraw IRA assets either within five years of the originator's death or heretofore remaining life expectancy. The stretch IRA allows for the IRA to be passed down several generations over the life expectancies of non-spousal beneficiaries like grandchildren, great-nieces, nephews and others.
The biggest advantage to establishing the stretch IRA is its earning power. The smaller required minimum distributions to younger, non-spouse beneficiaries and the extended time for the investments in IRAs to grow at a compounded, tax-deferred rate allow for the payouts to substantially increase. For example, at an 8 percent annual return, $100,000 inherited by a 20-year-old could translate into distributions totaling $2.9 million during the course of the beneficiary's life expectancy.
Financial institutions should be aware of the stretch IRA for customers for whom it is applicable. It has been around for a while but, surprisingly, it's not being utilized as much as it could be. To make it work, encourage clients to work with estate planning attorneys who have stayed current with these laws.
There are some rather tricky areas in terms of structuring the stretch IRA. For example it is imperative that the IRA remain in the name of the original holder for non-spouse beneficiaries to avoid tax consequences. They cannot simply roll it into their own IRA without tax implications.
"Look-through trust options" add additional flexibility and control for stretch IRAs. There are two effective trust dispositive provisions that "stretch" distributions. The "option" method allows the named beneficiary the option of choosing the amount and timing of the distribution of IRA assets over and above the annual required minimum distribution. The "trustee discretion" method allows for the trustee to distribute additional amounts if the trustee deems advisable in terms of health, education, support and welfare.
Stretch IRAs enhance the element of control a holder can exercise over the disposition of retirement assets. There is no down side for incorporating a stretch IRA into one's financial plan, and the upside can provide ongoing income for several generations.
In the past, IRS law had required non-spouse beneficiaries to completely withdraw IRA assets either within five years of the originator's death or heretofore remaining life expectancy. The stretch IRA allows for the IRA to be passed down several generations over the life expectancies of non-spousal beneficiaries like grandchildren, great-nieces, nephews and others.
The biggest advantage to establishing the stretch IRA is its earning power. The smaller required minimum distributions to younger, non-spouse beneficiaries and the extended time for the investments in IRAs to grow at a compounded, tax-deferred rate allow for the payouts to substantially increase. For example, at an 8 percent annual return, $100,000 inherited by a 20-year-old could translate into distributions totaling $2.9 million during the course of the beneficiary's life expectancy.
Financial institutions should be aware of the stretch IRA for customers for whom it is applicable. It has been around for a while but, surprisingly, it's not being utilized as much as it could be. To make it work, encourage clients to work with estate planning attorneys who have stayed current with these laws.
There are some rather tricky areas in terms of structuring the stretch IRA. For example it is imperative that the IRA remain in the name of the original holder for non-spouse beneficiaries to avoid tax consequences. They cannot simply roll it into their own IRA without tax implications.
"Look-through trust options" add additional flexibility and control for stretch IRAs. There are two effective trust dispositive provisions that "stretch" distributions. The "option" method allows the named beneficiary the option of choosing the amount and timing of the distribution of IRA assets over and above the annual required minimum distribution. The "trustee discretion" method allows for the trustee to distribute additional amounts if the trustee deems advisable in terms of health, education, support and welfare.
Stretch IRAs enhance the element of control a holder can exercise over the disposition of retirement assets. There is no down side for incorporating a stretch IRA into one's financial plan, and the upside can provide ongoing income for several generations.
Thursday, January 5, 2006
Special Needs Planning
One of the best parts of my practice is when I have the opportunity to assist parents of a child with special needs. A concern of all parents, (but especially parents of special needs children) is what will happen to their child/children if something happens to them (parents become disabled or die) and they are unable to care for their child/children.
A typical scenario for parents considering their estate planning is how to leave their estates to their children. When the children are still minors it is best to do so in a trust for the benefit of the child. Then (if the parents so choose) the trust assets may be distributed directly to the child at a time when the parents feel the child is an adult and will be responsible with the money.
Parents of children with special needs must consider other factors. A major difference is that the need for care may continue for the special needs child's entire life and will often incorporate social and government programs and benefits. These programs and benefits may become negatively effected or lost if the child is given money or directly inherits any money from the parents or other individuals. Thus it is very important that parents, grandparents, siblings, and other family and friends find alternatives for leaving gifts or their estates to children with special needs.
One very popular and very effective solution is to use a special needs trust which is specifically designed to address these unique issues and concerns.
A typical scenario for parents considering their estate planning is how to leave their estates to their children. When the children are still minors it is best to do so in a trust for the benefit of the child. Then (if the parents so choose) the trust assets may be distributed directly to the child at a time when the parents feel the child is an adult and will be responsible with the money.
Parents of children with special needs must consider other factors. A major difference is that the need for care may continue for the special needs child's entire life and will often incorporate social and government programs and benefits. These programs and benefits may become negatively effected or lost if the child is given money or directly inherits any money from the parents or other individuals. Thus it is very important that parents, grandparents, siblings, and other family and friends find alternatives for leaving gifts or their estates to children with special needs.
One very popular and very effective solution is to use a special needs trust which is specifically designed to address these unique issues and concerns.
Monday, July 11, 2005
Tax Bite: New Jersey Has Increased its Death Tax
Everyone has heard of the Federal estate tax, sometimes referred to as the “death tax,” but did you know that New Jersey also has an estate tax? And, did you also know that the New Jersey estate tax has recently been changed to prevent a reduction in that tax which would otherwise have occurred as a result of the 2001 reductions in the Federal estate tax?
The Background: Federal tax law changes made in 2001 call for a gradual increase in the Federal estate tax exemption equivalent (the amount which each individual can pass to his/her heirs without incurring Federal estate tax). In 2001 the Federal exemption equivalent was $675,000. Today, the exemption equivalent is $1.5 million, remaining at that level through 2005. It then increases to $2 million in 2006, 2007 and 2008, and to $3.5 million in 2009. The Federal estate tax is eliminated in 2010, but then returns in 2011 with an exemption equivalent of $1.0 million.
The N.J. estate tax, just like the Federal estate tax, is a “death tax” based upon the value of the deceased individual’s estate. It should not be confused with the N.J. inheritance tax which is another “death tax” but is based upon the relationship between the deceased individual and the beneficiary.
Prior to July 1, 2002, if there was no Federal estate tax due, then there would also be no N.J. estate tax. However, if an estate owed a Federal estate tax, then a portion of the Federal estate tax liability would be paid to New Jersey in the form of the N.J. estate tax and the balance would be paid to the Federal government. The N.J. estate tax did not increase the estate’s death tax liability, but rather, resulted in a “sharing” of the Federal estate tax between the Federal government and New Jersey.
The Change: As a result of the gradually increasing Federal estate tax exemption equivalent, New Jersey was facing potential losses in revenue, since there would be no N.J. estate tax until estates exceeded the increased Federal exemption equivalent. To avoid this loss of revenue, New Jersey amended its estate tax law to provide that the N.J. estate tax will be calculated based upon the Federal estate tax as it existed in 2001 (when the Federal exemption equivalent was $675,000).
The Impact: This change in the N.J. estate tax particularly impacts married couples whose estate tax planning includes Wills incorporating so-called “credit shelter trusts” also referred to as A“by-pass trusts” (i.e., a trust funded with the full amount of the Federal exemption equivalent available to the first spouse to die). If such a trust is funded with an amount greater than $675,000, there will be an immediate N.J. estate tax, whereas prior to the change, no N.J. estate tax was due. In short, where previously taking full advantage of the Federal exemption upon the death of the first spouse to die resulted in no Federal or state estate tax liability, now doing so results in an immediate N.J. estate tax which could range between $64,400 (2004-2005) and $229,200 (2009). In light of the changes, both in the Federal and New Jersey estate taxes, it is important to revisit existing estate plans and reexamine existing Wills and Trusts. Failing to do so could result in an unplanned tax bite.
The Background: Federal tax law changes made in 2001 call for a gradual increase in the Federal estate tax exemption equivalent (the amount which each individual can pass to his/her heirs without incurring Federal estate tax). In 2001 the Federal exemption equivalent was $675,000. Today, the exemption equivalent is $1.5 million, remaining at that level through 2005. It then increases to $2 million in 2006, 2007 and 2008, and to $3.5 million in 2009. The Federal estate tax is eliminated in 2010, but then returns in 2011 with an exemption equivalent of $1.0 million.
The N.J. estate tax, just like the Federal estate tax, is a “death tax” based upon the value of the deceased individual’s estate. It should not be confused with the N.J. inheritance tax which is another “death tax” but is based upon the relationship between the deceased individual and the beneficiary.
Prior to July 1, 2002, if there was no Federal estate tax due, then there would also be no N.J. estate tax. However, if an estate owed a Federal estate tax, then a portion of the Federal estate tax liability would be paid to New Jersey in the form of the N.J. estate tax and the balance would be paid to the Federal government. The N.J. estate tax did not increase the estate’s death tax liability, but rather, resulted in a “sharing” of the Federal estate tax between the Federal government and New Jersey.
The Change: As a result of the gradually increasing Federal estate tax exemption equivalent, New Jersey was facing potential losses in revenue, since there would be no N.J. estate tax until estates exceeded the increased Federal exemption equivalent. To avoid this loss of revenue, New Jersey amended its estate tax law to provide that the N.J. estate tax will be calculated based upon the Federal estate tax as it existed in 2001 (when the Federal exemption equivalent was $675,000).
The Impact: This change in the N.J. estate tax particularly impacts married couples whose estate tax planning includes Wills incorporating so-called “credit shelter trusts” also referred to as A“by-pass trusts” (i.e., a trust funded with the full amount of the Federal exemption equivalent available to the first spouse to die). If such a trust is funded with an amount greater than $675,000, there will be an immediate N.J. estate tax, whereas prior to the change, no N.J. estate tax was due. In short, where previously taking full advantage of the Federal exemption upon the death of the first spouse to die resulted in no Federal or state estate tax liability, now doing so results in an immediate N.J. estate tax which could range between $64,400 (2004-2005) and $229,200 (2009). In light of the changes, both in the Federal and New Jersey estate taxes, it is important to revisit existing estate plans and reexamine existing Wills and Trusts. Failing to do so could result in an unplanned tax bite.
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