Pennsylvania Trusts and Estates Blog

 Remember Dabby DeVito and Billy Crystal in Throw Momma from the Train?  Danny Devito is a mystery writer who has had it " up to here" with his overbearing mom.  He makes a deal with Billy Crystal.  Danny will kill Billy's ex-wife and in exchange Billy will kill Danny's mother.

When I gave seminars on the Economic Growth and Tax  Reconcilation Act of 2001 (affectaionely known as EGTRA) I would call it the "Throw Momma from the Train Act."  Why?  Because in 2009 the estate tax exemption is $3.5 million.  In 2011 the estate tax exmeption goes way down to $1 million.  In between?  In 2010 there is no estate tax at all.  So we throw momma from the train in 2010!

I was reminded of this today when I read Barry Nelson's article, "Throw Me From the Train"  at registeredrep.com.  He writes:

"The death tax repeal sunsets in 2011. What should your clients tell their families?

My message is not for the easily offended, but, in the closing months of 2008, I feel this must be said: Congress still has not done anything about the estate tax law. If Congress doesn't act very soon, each one of us should ask our clients some very hard questions: If they fall terminally ill before the end of this year, do they want to be kept on life support for additional days or months into 2009 so that their estates and families can benefit from that year's higher estate tax exemption? 

Or, if they're stricken in 2009 and Congress still fails to act, do they want doctors to keep them alive until 2010 so that they can spare their heirs the additional pain of paying estate taxes at all--since under existing law estate tax is repealed in its entirety for those dying in the year 2010?

And how about if they fall ill in 2010? Do they want their families to pull the plug before 2011 dawns and the estate tax goes back to its previous, onerous state?"

"I know this is macabre, but if estate tax legislation is not enacted before Jan. 1, 2010, then the potential savings of dying in 2010 could be enormous. Similarly, the consequences of dying in 2011 could be burdensome. Death and taxes are certain, but their dates and rates are not."

It has been a lousy year for equity mutual fund investors. According to Morningstar, the average U.S. diversified stock fund is down 33% year-to-date. Adding insult to injury, some mutual fund owners are going to have to pay hefty income tax bills on their mutual funds that lost value. Why? Because of year-end capital gain distributions. Yes, even funds that are way down may be throwing off substantial amounts of income because of sales inside the fund earlier in the year.

Some fund holders may wonder how it is possible for capital gains to be possible in a declining market. The realized gains are from stocks that were in the mutual fund portfolio, perhaps for several years, and when liquidated this year, even in a down market, still had significant gains.

In general, a mutual fund itself is not taxed if it distributes substantially all of its income (at least 98%) to its shareholders. The shareholders must report mutual fund distributions as income. Dividends and interest from holdings inside the fund, as well as any capital gains from the sales inside the fund, are taxed to the shareholders.

There are two types of mutual fund distributions: (1) ordinary dividends and (2) capital gain distributions. Ordinary dividends are taken from the dividends and interest earned inside the mutual fund and are paid out to shareholders, often quarterly. Capital gain distributions are distributions made to fund shareholders when the gains from the fund's sales of securities exceed losses. Capital gain distributions are always treated as long term capital gain, no matter how long you owned the mutual fund shares.

Since mutual funds are required to distribute at least 98% of their income annually, and since net gains and losses cannot be determined with any accuracy until near year-end, many mutual funds make their largest distributions in December. Don't buy mutual fund shares right before a December capital gain distribution. Buying mututal fund shares at this time will result in you paying tax on the distribution, which represents earnings over the course of a year in which you did not participate.

Tom Herman, writing for the Wall Street Journal, points out that despite the stock market's nose dive, many funds are likely to make year-end capital-gains distributions this year. Herman says: "That means it may be a good time to consider selling some underperforming funds before they make a taxable distribution. It also means that bargain-hunters looking to get back into the market now need to be careful. Otherwise they could be saddled with a stiff tax bill that could easily have been avoided."

If you sell fewer than all of your mutual fund shares, you need to determine what is the best way to allocate your basis among the shares. There are three approaches: 1) first-in, first-out (FIFO), 2) average cost, and 3) specific identification.

First-in, first-out assumes that the first shares you bought are the first shares you sold.

Average cost is determined by adding up the total cost of all the shares you own and dividing by the number of shares. It can be done on all shares, or in two categories, the average cost of long-term shares and the average cost of short-term shares.

If you have a record of all the purchase dates and prices of all shares you own, including shares purchased with reinvested dividends, you can pick individual shares to be sold. If you use this method you can pick out the shares that have the highest basis to be the ones you sell, thus, keeping your gain to a minium. To use this method you must indicate to the fund or your broker which shares you are selling - you can't designate them after the fact.

Your mutual fund statement may calculate gain or loss for you. The mutual fund broker usually uses the average cost method. You are not required to calculate your gain or loss using the method shown on the statement. However, once you start reporting using average cost, you have to report all future sales using that method.

Capital gains and losses can offset each other dollar-for-dollar. If your losses exceed your gains, you can deduct $3,000 of capital losses from other ordinary income. Unused losses are carried over into future years.

If you decide to sell a mutual fund to avoid the capital gain distribution and then buy it back because you like it as an investment, beware of the wash sale rules. You can't deduct losses from sales of stock in a wash sale, which occurs when you sell a stock at a loss and buy the same stock within 30 days before or after a sale.

Check out this article  by Al Benelli about so-called financial advisors and "free meal" seminars:

Click here

Excerpt:

"For years I have been warning consumers about the dangers of attending "free-meal" financial seminars. Local, state and federal regulators across the insurance and securities industries have conducted hundreds of investigations into these "selling events." ABC's Nightline even did a feature story on how free-meal workshops are often used as a springboard for financial abuse. 

Some states, like Massachusetts, have actively prosecuted promoters who use false or misleading information to sell inappropriate products and services.

Other states, including Pennsylvania, have done relatively little due to a lack of clear statutes defining such things as minimum education and licensing standards.

In fact, in Pennsylvania, anyone can call themselves a financial advisor without the requirement of any license at all. The legislature in Harrisburg debates whether or not to license interior designers, while leaving the financial services industry alone. Sadly, such is the power of the insurance lobby in Pennsylvania."

Since I grew up in Franklin County (Mont Alto, if you must know) this news about a possible murder mystery with a trusts and estates twist caught my eye.

"A hand-written 2001 codicil to Don Berkebile's last will and testament, coupled with a note to a Public Opinion reporter two years later, indicates the elderly retired Smithsonian curator was concerned that he might die from something other than natural causes."

For more click here.

 Assets in qualified retirement plans such as 401(k) plans, defined benefit pension plans, and profit sharing plans, are specifically protected from the claims of creditors by the provisions of the Employee Retirement Income Security Act of 1974 (ERISA) and a 1992 decision of the Supreme Court of the United States, Patterson v. Shumate.

In contrast with qualified employer plans, IRAs are not covered by ERISA or the Patterson v. Shumate decision. Therefore, the extent to which IRAs are protected from creditors' claims is determined by state law, which varies from state to state. Most states have statutes protecting IRAs to some degree.

Pennsylvania's statute provides significant protection against attachment and execution of judgments against IRAs by creditors. Pennsylvania law protects contributions to an IRA up to $15,000 per year. Contributions over $15,000 per year are available to creditors. Importantly, the Pennsylvania statute was amended in 1998 to provide that rollovers from qualified employer plans do not constitute "contributions" for purposes of the $15,000 limit. Thus, a direct transfer from a qualified retirement plan already subject to creditor protection (such as a qualified employer plan) to an IRA retains the same protection.

A different rule applies if the owner of the IRA is in bankruptcy. In April 2005, President Bush signed into law the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCA). In general, BAPCA not only tightened the rules for personal bankruptcies, but it also made significant changes in the area of retirement plans. Under BAPCA, all retirement funds including IRAs are now protected from the reach of creditors. Finally, there is uniform treatment of IRAs and qualified plans in bankruptcy with one exception - the amount of the protected IRA assets (whether in a traditional IRA or a Roth IRA) is limited to $1 million (adjusted every three years for inflation). The protection of IRAs under BAPCA applies without regard to the state in which the debtor resides and without regard to the extent to which the IRA assets are necessary for the support of the debtor and his or her family.

Distributions from all defined-benefit and defined-contribution employer retirement plans fully retain creditor protection if they are rolled over to an IRA (without regard to the $ 1 million limitation), obviating the "need" to keep assets in ERISA plans for bankruptcy creditor protection. Outside of bankruptcy, the laws in effect prior to BAPCA continue to apply. That means that in Pennsylvania, the status of IRAs is still governed by the state law which refers to the $15,000 per year contribution. In a state where the law does not protect retirement plan assets outside of bankruptcy, the debtor may be forced to file for bankruptcy in order to secure the protection now given by BAPCA.

Since Pennsylvania law allows rollovers to IRAs to be protected, and since the vast majority of IRA owners do not contribute more than $15,000 per year (which is far above the deductible limits), most IRAs in Pennsylvania cannot be reached by creditors either outside of bankruptcy or in bankruptcy.

Theoretically, if an IRA funded with contributions, not rollovers, exceeded $1 million, it would not be 100% protected in bankruptcy, but that would require some phenomenal investment returns if only tax deductible amounts were contributed - so again, in most cases, the IRA cannot be reached.

On October 16, 2008, the IRS announced annual inflation adjustments for 2009.  The adjustments include an increase in the annual gift tax exclusion for present interest gifts to $13,000. The annual exclusion for present interest gifts to a non-citizen spouse will be $133,000.

Who is the heir? This is an age-old question. Simply, an heir is the person who inherits a decedent's property if the decedent left no will. (If the decedent left a will, those who inherit are typically called beneficiaries, not heirs.) Throughout history the answer to who is an heir has changed many times.

Keep in mind that statute determines who the heir is. There is no "right" of inheritance. The law has long dealt with family relationships and procreation. Legislatures have passed laws to determine who inherits a decedent's property based on what most people would want. Doctrines have evolved to cover all sorts of situations. Now, due to new medical technologies and changing mores, "times, they are a-changing." New situations are arising.

It used to be that only the first born male inherited under English primogeniture. In the Torah, sons were the primary inheritors with the eldest receiving a double portion. In all of the United States today, children of both sexes inherit and share equally. Under the common law, any child born in wedlock (even a day after the marriage) is presumed to be legitimate. Legitimate for these purposes means entitled to the support of the father and to be an heir of the father. A child born after the death of his father was also presumed legitimate if the child was "en ventre sa mere" - in the womb of his mother - when his father died. So if birth occurred within 9 months of death, the child was deemed an heir of the father even though born posthumously.

In all of the states, without a will, all Dad's children are his equal heirs. However, Dad's step-children get nothing, even if Dad has raised them since infancy. By statute, adopted children came to be considered heirs of the adoptive parents. Similarly, by statute, adopted children are not considered to be heirs of the birth parents. Today, however, infertile couples don't always adopt children to have a family. Sometimes, there are children born from donated sperm or eggs. Is the baby an heir of the sperm donor? Babies are born to surrogate mothers into whose womb a fertilized egg has been implanted. Is the baby an heir of the surrogate mother? Is the baby an heir of the woman who produced the egg? Spouses have not always been entitled to inherit any of their deceased husband or wife's property.

In the United States today, all fifty stated consider a surviving spouse an heir, entitled to a portion of the estate. Common law marriage is a legal concept that evolved to give support and inheritance rights to men and women who live together, holding themselves out as husband and wife, but never having been legally married. (Note:  Pennsylvania no longer has common law marriage.)  (There are also similar doctrines for adoption where a child is taken in by a family and held out as a son or daughter even though there is no legal adoption.)

In addition, society is now looking to answer a new question: what's a spouse? Laws are being shaped that may define spouses to include others than couple consisting of a man and a women, either legally married or in a common-law arrangement.  In Kansas, as reported in the March 4, 2002, issue of Time Magazine, a son is disputing his father's second wife's right to half of the father's estate. Dad's second wife, Mrs. Gardiner, was born a man and had undergone sex re-assignment surgery and then married Dad. Is she (or he) a wife? Entitled to inherit? Or does the son get everything? Dad could have done anything he wanted in a will. But like so many, he died without a will. His heirs are determined by the Kansas intestacy statute which gives half of his property to his surviving spouse. Kansas law prohibits same-sex marriages. Is this a same-sex marriage? Or does someone who undergoes sexual reassignment surgery have a new gender? What is gender? In May, an appellate panel considering a similar case overturned a February 2000 Federal District Court ruling that sex is determined at birth and can never be changed. The panel, considering statistics that showed that 275,000 to 2.5 million people in the United States were born with a mix of chromosomes, genitalia and hormones that made them neither clearly male nor female, outlined a formula for determining sex based on a mix of psychological and physiological factors. At their core, these cases revolve around the question of what makes a man a man and a woman a woman. If you'd rather not have your estate subject to changing intestate laws, make a will. Your will, which takes precedence over the intestate laws discussed above, will assure that your property will be distributed according to your wishes.

On October 3, President Bush signed into law the Emergency Economic Stabilization Act of 2008, more commonly known as the "Bailout Bill." The financial bailout provisions have had the headlines for days as everyone tries to sort out what on earth the legislation actually does. But the bill also includes a raft of other tax changes (most added by special interests) that affect individuals, corporations, and businesses. Here are some examples:

1. Alternative Minimum Tax (AMT). The legislation includes the 2008 AMT Extenders Act. The AMT exemption for individuals is raised for 2008;$46,200 for singles, $69,950 for married couples, and $34,975 for married couples filing separately. This is a one-year "patch." The Act also liberalizes the AMT refundable credit for individuals with long-term unused minimum tax credits. We hope that the need to reform the AMT tax will be a high priority for the new administration.

2. Extended Tax Breaks. More than 30 tax breaks that either expired at the end of 2007 or will expire soon have been extended by the Act. For individuals, extenders went into effect for the election to deduct state and local general sales tax, the $250 above-the-line deduction for teachers out-of-pocket classroom-related expenses (extended through 2010), and the ability of taxpayers age 70 ½ or older to make nontaxable IRA transfers to eligible charities.

The Pension Protection act of 2006 had amended the IRA distribution rules to allow a tax-free distribution from an IRA owned by a person over age 70-1/2 of up to $100,000 directly to charities. This "charitable rollover" was available in 2006 and 2007. The Act makes it available for 2008 and 2009.

The Housing Assistance Tax Act of 2008 provided a real property tax deduction for non-itemizers. The real property tax deduction is added to the standard deduction up to $500 ($1,000 for a joint return). The Act extends this additional deduction to 2009.

For businesses the following are examples of provisions that were extended: the research credit, the 15-year writeoff for qualified leasehold improvements and qualified restaurant property, enhanced deductions for certain charitable contributions, and the expanding option for qualified environmental remediation expenses.

3. New Tax Relief Measures. There are relaxed write-off rules for film and TV productions, quick 5-year depreciation for many types of farm property, modified rules for the penalty on understatement of a taxpayer's liability by a tax return preparer, mental health parity rules, and liberalized rules for the refundable child tax credit.

4. Energy Incentives. Extensions were enacted for the alternative energy credit, the residential energy efficient property credit, the energy efficient buildings deduction, the credit for energy efficient improvements to new homes, and a new credit for plug-in electric vehicles. Many other tax incentives for alternative energy creation are either extended or created.

5. Disaster Relief. The Act provides a raft of tax relief measures for disaster victims in ten Midwestern states (Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, and Wisconsin) and also creates new national disaster relief for all federally declared disasters occurring after 2007 and before 2010. These provisions include expanded loss deduction rules for individuals, fast writeoffs for business cleanup expenses, and a 5-year carryback for NOLs attributable to qualified disaster expenses.

6. Revenue Raisers. The revenue raisers in the Act include broker reporting of customers' basis in securities transactions, an extension of the 0.2% FUTA surcharge, a limited domestic production activities deduction for the oil and gas industry, and new rules for certain nonqualified deferred compensation.

Congress believes (and they are probably correct) that there is significant under-reporting of capital gain income as a result of taxpayers misreporting cost basis. Brokers now will have to track and report the basis for "covered securities" which are securities acquired through a transaction in the account in which the security is held or transferred to the account from another account where they were covered securities. Securities acquired by gift or inheritance are not covered securities. The method will be first-in first-out (FIFO) unless the customer notifies the broker of a different identification of the stock to be sold.

7. Wooden Arrows. Oh, yes - a very important provision: the Act exempts from excise tax certain wooden arrows designed for use by children. Current law places a 39 cent excise tax on the manufacturer, producer or importer of "any shaft consisting of all natural wood with no laminations or artificial means to enhance the spine of the shaft used in the manufacture of an arrow that measures 5/16 of an inch or less and is unsuited for use with a bow with a peak draw weight of 30 pounds or more." Oregon Senators Ron Wyden and Gordon Smith were the initial sponsors of the provision. According to Bloomberg News, the provision would be worth $200,000 to Rose City Archery in Myrtle Point, Oregon.

For more examples of what the special interests did to his legislation see Have Some Tax Pork by Professor James Edward Maule at Mauled Again.

Jane Herron has published these three excerpts about the workings of the Federal Deposit Insurance Corporation (FDIC) - a subject that should be near and dear to everyone's hearts in view of the current financial crisis:

Click here:        Part 1        Part 2      Part 3

The material is taken from the FDIC's website.  Click here for the complete publication.

'Tis an ill wind that blows nobody any good.

Someone profits by every loss; someone is benefitted by every misfortune.

The decline in the stock market, despite its cause, presents us with a tremendous estate planning opportunity. Make gifts now!

The most basic reason for estate planning is to provide for those you love, and gifts are the simplest estate planning technique. They are easy to understand and easy to implement. Keep in mind the goals of all tax planning: Lower taxes. Higher future wealth. Either way you look at it, the current depressed values of many stocks represent a tremendous opportunity to make gifts.

Much of estate planning is devoted to reducing the value of assets, so that more leverage can be obtained, by making gifts using the $12,000 per year annual exclusion and the currently available $1 million exemption from the gift tax. Now the markets have done this for us. Now is the perfect time to be making gifts of securities.

Don't wait until the end of the year. Make your gifts now. Don't wait for the market to recover. Make your gifts now. Give away the assets that are at the lowest values. Give away the ones that sank to the bottom. Use this opportunity to get future appreciation in the value of stocks out of your estate.

Most people would agree that the value of an asset 25 years from now will be the same despite the current market decline. If you assume that $1 invested in an S&P 500 index fund would increase in value at the rate of 10% per year, 25 years from now, that dollar would be worth $10.83. If a married couple made gifts using their unified credits last year, they would have made gifts of $2,000,000. In 25 years this would be worth $21,660,000. Today, however, last years $1 invested is worth about $0.65. If it will still be worth $10.83 in 2025, that implies an average rate of return of 12.4% over the next 24 years.

Using more sophisticated techniques, the already reduced value of stocks can be reduced even further for transfer tax purposes. This is the perfect time to make a Family Limited Partnership and make gifts of the limited partnership interests. It is the perfect time to create Grantor Retained Annuity Trusts (GRAT's). It is the optimum moment to make a Dynasty Trust. These techniques offer even more leverage and make the estate tax savings even more dramatic.

Seize the opportunity.

Joshua Kennon, writing for About.com puts it in perspective: Remember that the real goal of prosperity is to provide a better life for yourself, your family, and everyone you come in contact with. Our blessings, gifts, and finances only realize their true value when you give them. The guaranteed way to feel wealthier is to give what you already have. You see the joy it can bring others, and you realize that you have a lot more where it came from. The feeling of generosity and happiness that comes with giving is the true kind of wealth we are pursuing - and it's something that money can't buy.

The "Bailout" which is what the public calls The Emergency Economic Stabilization Act of 2008 (H.R. 1424) passed the House and was signed by President Bush on October 3, 2008.  Lot and lots of little "additions" appeared - plus lots of "pork."

Good news for charities - the law extends the IRA Charitable Rollover which allows individuals who are over age 70 to transfer up to $100,000 per year to charities form their IRAs.  It is now applicable for 2008 and 2009.

The charitable rollover is available only for outright gifts to charities, not split interest gifts like charitable remainder trusts. There are four requirements: (1) the IRA gift must otherwise have been includible ordinary income to the IRA owner, (2) the IRA owner must be 70 ½ or older, (3) the gift must be to a qualified exempt public charity, and (4) the recipient may not be a private foundation, supporting organization or donor advised fund.

Blogging credit to the North Carolina Estate Planning Blog