Lancaster PA Probate and Estate Administration Attorney Blog

Are the heirs responsible for a decedent's debts?

2011-12-15T22:40:49Z

When a person dies, any debts he or she owes can be collected from his or her estate. If there is no estate or if the estate is insufficient to pay all debts, then usually no one is liable; and the creditor is out of luck.

That's the law. But the practice in the real world is something different. It is not uncommon for creditors of the deceased to call, write, and repeatedly badger (even harass) family members to pay all or a portion of the decedent's debts. Let me say it again, family members have absolutely no responsibility for a decedent's debts, unless they were a co-signor on a loan or otherwise assumed liability themselves.

The debt doesn't disappear with the death of the debtor. The estate of the deceased person owes the debt. If there isn't enough money in the estate to cover the debt, it goes unpaid. There are a few exceptions to this rule. A family member or friend may be responsible to pay the debt if 1) you co-signed for the loan; 2) you live in a community property state, such as California, where a surviving spouse may have liability; 3) state law requires a surviving spouse to pay certain kinds of debts like health care expenses; or 4) you were legally responsible as executor or administrator for settling the estate and didn't comply with state law.

It the estate has insufficient assets to pay all debts, it is akin to bankruptcy. It is called an insolvent estate, and the law provides a system of priorities for who gets paid in full first. That fact has not stopped the burgeoning industry of debt collections from families of deceased persons.

Jessica Silver-Greenberg writing for the Wall Street Journal says: "No one knows the size of the death-debt collection business, but it appears to be growing, according to court records, regulatory filings and interviews with dozens of lawyers and industry experts. The Federal Trade Commission investigated the industry and issued new guidelines in July after receiving numerous consumer complaints. William Howard, a consumer-rights lawyer with Morgan & Morgan in Tampa, Fla., says he has represented 50 people pursued for debts owed by dead family members so far this year, up from 10 in all of 2010. 'Collectors are starting to realize just how much money you can get from someone when they are at their most vulnerable,' he says."

Some family members claim that debt collectors mislead them into believing they are required by law to pay the debts of deceased relatives. The debt collectors can threaten all sorts of things that are not in fact true or even possible. The collectors can be persistent - racking up hundred of harassing telephone calls to surviving spouses and other family members.

Family members of the deceased, just like all consumers, are protected by the federal Fair Debt Collection Practices Act (FDCPA), which prohibits debt collectors from using abusive, unfair, or deceptive practices to try to collect a debt.

Collectors are allowed to contact third parties (such as a relative) to get the name, address, and telephone number of the deceased person's spouse, executor, administrator, or other person authorized to pay the deceased's debts. Collectors usually are permitted to contact such third parties only once to get this information. The main exception is if a collector reasonably believes that the information provided initially was inaccurate or incomplete, and that the third party now has more accurate or complete information. But, collectors cannot say anything about the debt to the third party.

Even if a third party is authorized to pay a deceased person's debt, the third party can stop the debt collector's contacts. The third party must send a letter to the collector stating that he or she does not want the collector to contact him or her again. The letter should be sent certified mail, return receipt requested so there is proof of mailing and receipt.

David Streitfield, writing for the New York Times, says that collecting money from relatives of decedent's is one of the healthiest parts of the debt-collecting industry. "Some relatives are loyal to the credit card or bank in question. Some feel a strong sense of morality, that all debts should be paid. Most of all, people feel they are honoring the wishes of their loved ones." Usually these people do not understand that they have no legal liability.

If you get a collection call for a family member who is deceased what should you do? First, do not give any of your own personal information such as your social security number. Find out who is the debtor, who is calling to collect, the account number, the amount, and any relevant information. Forward this to the executor or administrator of the estate if there is one. If you have any doubts about whether or not you might be liable, contact your lawyer.

Estate Planning for Marcellus Shale Owners

2011-11-27T20:40:27Z

Many Pennsylvania owners of mountain acreage, summer homes, farms, and hunting camps are now benefitting from the Marcellus Share boom. Marcellus Shale landowners are anticipating significant royalties and bonus payments well into the future. Proper planning is necessary to preserve the value of the asset with a minimum of taxation including federal estate tax and Pennsylvania inheritance tax.

Unknowns

There are many unknowns about the Marcellus Shale. Production estimates continue to increase. It is now estimated at three times the lifetime production of the Barnett Shale in Texas. The U.S. Geological survey has increased its estimate of recoverable gas from Marcellus Shale to 84 trillion cubic feet - which is 42 times its 2002 estimate. Who knows what is the actual number?

Also unknown are the environmental effects including issues about hydraulic fracturing and horizontal drilling. What role future actions of the federal and state governments will have from a regulatory perspective are hard to predict, as are the effects of possible new taxes and fees. What effect will energy prices on the global markets have? What delays will be encountered due to government action? Will well-drillers go to other states? All of these imponderables affect the current and future value of the land and gas rights. There are many competing issues and considerations among the surface owners, environmental interests, and industry groups with millions of dollars at stake.

Planning

As an owner of gas rights, it is very important to plan for the taxation of the rights, to try to reduce the impact of taxes, to determine who should control the rights in the future and who should have the benefit of the income stream.

There are various issues including realty transfer tax, clean and green implications, income tax, and estate and inheritance tax. Obviously, negotiation of the lease is the first step. But that is only the beginning.

Estate planning in this area involves taking advantage of valuation discounts, making gifts, forming entities, perhaps a limited partnership and/or a limited liability company, and making lifetime transfers to individuals and/or various types of trusts.

Planning requires valuations of land and of sub-surface rights. Sooner is better. Since most commentators predict rising values and rising income, it is very important to have your planning, including any contemplated transfers, in place before your assets appreciate substantially. If possible your planning should be in place well before there is drilling activity near you. Once a royalty stream is established, the valuation of the asset increases dramatically, so it is important to act before that run-up in value.

The GRAT

For transfer of assets you expect to increase quickly in value, a Grantor Retained Annuity Trust (GRAT) might work. The Grantor transfers assets to the trust and the trust pays the Grantor an annuity in return. The amount of the annuity depends on that month's Applicable Federal Rate (AFR) for such transfers (1.40% in November 2011) and the number of years of the annuity. Whatever is left after the annuity pays out goes to the remainder beneficiaries tax free.

The GRAT can have a near-zero calculated remainder (the gift part) but thanks to the growth have a significant actual remainder. The leverage of this IRS-approved technique increases with higher growth (great potential for that in Shale assets) and lower AFRs (they can't get much lower 1.4%).

Severability

In Pennsylvania, gas and other mineral rights are completely severable from the surface rights. This means gas rights and royalties can be conveyed and valued separately from surface rights. This can allow separate planning for the sale and income and keep the farm, house or camp separate under separate control and use. This can be particularly attractive to those who want to develop the land and also do effective tax reduction planning for gas rights and royalty streams.

The taxable gift free pass

Until the end of 2012, the federal gift tax exemption is $5 million per donor. The $5 million "window" is guaranteed to be open for only two years - 2011 and 2012. This represents a tremendous opportunity to transfer valuable assets including gas interest and leases. With the tax proposals floating around Congress and the would-be Presidential candidates, it is impossible to predict what will be the tax rates or exemption levels in the future. Given the deficit and the general condition of the economy, I would suspect that taxes will increase, not decrease, including increases in estate taxes and a reduction in the estate tax exemption - but who knows?

Most advisors are recommending that their clients take advantage of the $5 million exemption now, while they can. This is very important for all assets but especially for very valuable assets or assets that are expected to appreciate greatly and/or generate large income streams. Until the end of 2012, gifts up to $5 million per person ($10 million for married persons) can be made with no gift tax. I cannot emphasize enough how important it is to take advantage of this high exemption with valuable assets like Marcellus share interest.

The non-taxable gift exclusion

The annual gift tax exclusion of $13,000 per donee pales in comparison. Not that these are not good planning techniques to use as well, but this (possibly) one-time chance to pass $5 million is important. The exemption also applies to the generation-skipping tax so one could transfer $5 million of property into a generation-skipping trust that will keep the valuable asset untaxed for generations Going once, going twice,...

Guardians for your kids while you're alive but not kicking

2011-11-14T20:33:59Z

For parents, deciding who will raise their minor children if the parents die is one of the hardest decisions to make. In fact, the decision is so difficult that many parents avoid the topic and never do it. Not making a decisions is also making a decision and for those parents who avoid the issue, the route they choose is one of uncertainty, unnecessary costs, and perhaps a stint in foster care for their children. You need to name a permanent guardian and it can only be done in a will. More than half of the population if the US does not have a will - are you one of them?

Jacoba Urist, writing for the Huffington Post lists 4 myths that prevent parents from naming guardians in wills:

Myth No.1. There is a perfect choice who will raise your children exactly the way you would - but you haven't figured out who that is yet. Wrong. No one will do it exactly the same way you would. You must choose the best from the available options - imperfect as they may be.

Myth No.2. Someone will step up if needed. Sure family, friends, neighbors all may love your children and be ready to care for them, but who decides? A Judge who is a stranger to you and your family will make a decision. If two family members are vying for the position, a Judge, Solomon-like, may not appoint either one of them. What happens to the children while this litigation continues? They'll be meeting with lawyers, social workers, psychologists and perhaps be placed in foster care.

Myth No. 3. A letter or an e-mail expressing your wishes is good enough. Wrong again. The only way to appoint a guardian is in a will or standby appointment document. Informal writings and requests carry no weight.

Myth No. 4. There is no need to talk with the guardian. This misconception can cause very unfortunate mistakes and hardships. You should ask anyone you are considering if he or she is willing to serve and give him or her the opportunity to ask questions. Very importantly, they may want to know what financial means will be available for the child's support and education. The person you name may not be able to raise your children because of the demands of work, their own medical issues or extended family obligations.

There can be more than one guardian: One can be appointed for the personal custody of the child and another can be appointed for the child's property. Guardianship is a cumbersome and expensive way to manage financial affairs. I always recommend a trust for the minor children instead of guardianship which, by the way, ends when the child attains age 18. From then on any property left to a child is exclusively owned and controlled by the child which is probably not a good idea.

Standby Guardianships

Since July 1, 2002, Pennsylvania has had a law which allows parents to sign a document designating a standby guardian for their child or children in the event the parent(s) become incapacitated. The guardianship is not activated until a trigger specified in the document occurs, such as a health care professional certifying that the parent or parents have actually become incapacitated. At that point, a notice of the Standby Guardianship must be filed in court. The petition can be filed at anytime prior to the triggering event as well.

This is a missing piece in many estate plans. If you have minor children and have executed a will, you probably named guardians for your minor children in case you die. But what if there is a car accident and the parents are incapacitated - perhaps just for a period of time. Parents and children are taken to the hospital by ambulance. Neither parent is conscious.

Who can make medical decisions for the children? If the children are not badly hurt and can go home, who takes care of them? Who is in charge?

The parents have powers of attorney and health care directives. Their named agent steps in for them, but there is a void for who has authority and custody of the children.

Absent a standby guardianship document, the only answer at this point is to have a judge adjudicate Mom and Dad as incapacitated and appoint a guardian for children. This is expensive, time-consuming, difficult and unweildy.

The better plan is to have formally named a Stand-by Guardian which allows parents to appoint temporary guardians for their children. These Guardians can begin acting only after as specified triggering event. For example, the triggering event could be the "incapacity of both parents as designated by their attending physicians". Triggering events are not listed or suggested in the law; it is up to the parent to make the list of potential events. The Standby Guardian would have all the powers to make medical, legal and financial decisions for the children.

If the document is approved by the court before a triggering event occurs, the standby guardianship can commence immediately upon the triggering event and may continue to act until the child reaches 18 years of age. If the document is not approved by the court before a triggering event occurs, the standby guardianship can commence immediately but a petition must be submitted to the court for document approval within sixty days or else the standby guardian shall lose all authority to act as co-guardian or standby guardian. If the petition is filed within 60 days but the court does not act within the 60-day period, the authority to act as guardian is temporarily continued until the court orders otherwise.
Seems obvious, doesn't it? But many estate plans have this piece missing. Does yours?

Employee Business Expense Deductions

2011-10-05T18:05:00Z

Often employees spend their own money in furtherance of their job. If these costs aren't reimbursed, you may be able to get a tax deduction for them.

If your employer pays for or reimburses you for your business expenses, then you can't deduct them. If your employer has an "accountable" plan, meaning that you must pay your own expenses and give your employer receipts or other proof of payment, then the expenses aren't reported to you as income on your W-2 and you can't deduct them. If your employee has a "non-accountable" plan, then anything your employer pays to you for reimbursement or any allowance given to you is reported as income to you on your W-2 and the only way to not pay tax on them is to deduct them.

If the expenses qualify, they are deductible as miscellaneous deductions on your 1040 Schedule A. Unfortunately you can deduct them only if you itemize deductions, and they are deductible only to the extent the total of your miscellaneous deductions exceeds two percent (2%) of your adjusted gross income. For example, if your adjusted gross income is $30,000, you must have more than $600 in miscellaneous deductions before they save you any taxes.

The 2% floor may seem high, but many folks overlook costs that could be deductible and could get them over the 2% floor.

To be deductible your expenses must have been required for you to carry out the job for which you were hired and must be "ordinary and necessary." An "ordinary" expense is one that is common and accepted in your line of work. A "necessary" expense is one that is appropriate or helpful for the work you do, even if it's not absolutely indispensable to your business.

The expenses are deductible only if they are not reimbursed by your employer. If you receive reimbursement for an expense, then it cannot be deducted.

Deductible expenses include union dues, tools, job-search expenses for a job in your current occupation, tools and supplies used in your work, work clothes and uniforms and their upkeep costs, medical examinations required by an employer, education that is employment related, dues to chambers of commerce and professional societies, home office used regularly and exclusively for your work when your employer does not provide you a place to work, legal fees related to doing or keeping your job, malpractice insurance premiums, passport for a business trip, subscriptions to professional journals and trade magazines related to your work, depreciation on a computer or cell phone required to do your job, and travel, transportation, and gift expenses (up to $25 to any one person) related to your work. Only 50% of the cost of meals and entertaining customers is deductible. Commuting expenses are not deductible. If you have more than one job, you can deduct the cost of traveling between them.

If you use equipment or have expenses for both business and personal purposes, you must allocate the expense between the two types of usage. The allocation must be made on a reasonable basis. If a car is used partly for business and partly for personal use, the allocation is based on the number of miles driven during the year for business, compared to the miles driven for personal use. You can use the standard mileage rate of 51 cents per mile, or you can use the actual cost method and deduct the percentage of gas, maintenance, insurance used for work. If you use a room in your home as a home office, the allocation is based on the number of square feet in the office as compared with the square footage of the entire home.

Some expenses must be treated as capital expenditures. In general, the cost of equipment used for more than one year must be treated as a capital expenditure and depreciated. Employees may claim a depreciation deduction for equipment they need in their job like a cell phone, or a computer. Use Form 4562, Depreciation and Amortization, to compute the proper amount to deduct.

The cost of work clothes and uniforms is deductible only if the clothes are required by your employer and the clothes aren't suitable for everyday wear. A police uniform is a good example.

The total of unreimbursed employee business expenses is entered on line 21 of Schedule A of your 1040. Detail your expenses on either Form 2106, Employee Business Expenses, or Form 2106-EZ, Unreimbursed Employee Business Expenses.

Don't forget other miscellaneous deductions such as tax advice and tax preparation fees, the cost of a safe deposit box to store investment-related material, and legal fees to collect income such as alimony.

If you are an eligible educator, you can deduct up to $250 ($500 if married filing jointly and both spouses are educators) of any unreimbursed expenses you paid for books, supplies, computer equipment, other equipment and supplementary materials that you use in the classroom. This deduction is an "above the line" deduction deductible on line 23 of Form 1040. It is not deducted with other employee business expenses and is not subject to the 2% floor for miscellaneous itemized deductions.

Moving for a New Job? What Expenses are Deductible?

2011-10-03T12:26:00Z

Can you get an income tax deduction for your moving expenses? It depends. If you moved your home due to a change in your job or business location, or because you started a new job or business, you may be able to deduct your moving expenses. The move must be because of a job. It doesn't matter if it's a new job, the same job or your first job.

Moving expense is an "above the line" deduction, meaning it is taken on the first page of your 1040 and you do not have to itemize to use it.

Your move must be closely related, both in time and in place, to the start of work at your new job location. Generally, moving expenses incurred within 1 year from the date you started work at the new location is considered closely related in time to the start of work. You can move before finding work, as long as you actually go to work in that location.

You must pas a two-prong test. 1. The "distance test." Your new workplace must be at least 50 miles farther from your old home than your old job location was from your old home. If you had no previous workplace, your new job location must be at least 50 miles from your old home. 2. The "time test." If you are an employee, you must work full-time for at least 39 weeks during the first 12 months immediately following your arrival in the general area of your new job location. If you are self-employed, you must work full time for at least 39 weeks during the first 12 months and for a total of at least 78 weeks during the first 24 months immediately following your arrival in the general area of your new work location.

If you are a member of the armed forces and you moved pursuant to a military order for a permanent change of station, you do not have to satisfy the "distance or time tests". There are additional exceptions to the time test in case of death, disability and involuntary separation.

Your home can be a house, apartment, condominium, houseboat, house trailer, or similar dwelling. It does not include a seasonal home, such as a summer beach cottage.

For a married couple filing jointly, only one spouse needs to meet both the time and distance tests. This can be a big help. For example, if husband is transferred to a new location 40 miles from home - that does not pass the distance test for deductibility. But if wife is self-employed and works at home, if they move 50 or more miles from their current home, then they could deduct the moving expenses because of the wife's self-employed status. She would then have to meet the 39 and 78 week rule.

Typical moving expense includes the cost of packing, crating and transporting house hold goods and personal effects as well as the members of the household from the old home to the new one. The cost of storing and insuring household goods and personal effects within any period of 30 consecutive days after the items have been removed form the old home before they are delivered to the new home are deductible. Also deductible are the costs of connecting and disconnecting utilities and the costs of shipping vehicles or pets to the new home (who knew the cat gets a moving expense deduction?). The cost of transportation and lodging for the employee and his or her household while traveling are deductible including one day for the day after vacating the old home and one day after arriving at the new home. The cost of meals is not deductible. Expenses are deductible for only one trip by the employer and the employer's household. They need not travel together.

If you use your car to take yourself, members of your household, or your personal effects to your new home, you can figure your expenses by deducting either: 1) Your actual expenses, including gas and oil, if you keep an accurate record of each expense, or the standard mileage rate of 16½ cents per mile. Whether you use actual expenses or the standard mileage rate you can deduct parking fees and tolls. You cannot deduct any part of general repairs, general maintenance, insurance, or depreciation for your car.

Report your moving expenses on Form 3903 which is attached to your Form 1040. If your employer reimburses you for moving expense on a tax-free basis, obviously, they cannot be deducted. You can only deduct expense in excess of any employer tax-free reimbursement. If your employer has included in Box 1 or your W-2 any payments for moving expenses, meaning the employer is reporting the payments as taxable compensation income, then you may deduct them on Form 3903.

You can deduct moving expenses on your 2010 tax return even though you have not met the time test by the date your 2010 1040 is due. If you deduct moving expenses but do not meet the time test in 2011 or 2012, you must either 1) report your moving expense deduction as other income for the year you cannot meet the test, or 2) amend your 2010 return to remove the moving expense deduction.

The engagement is broken. Who gets the ring?

2011-09-14T09:21:00Z

Engagement rings have a long history, dating from Roman times and before. An engagement ring indicates that the person wearing it is engaged to be married. Usually, the ring is presented to the bride-to-be as a betrothal gift by a man when she accepts his marriage proposal.

Not every engagement results in a marriage. If the engagement is broken, the question arises, must the ring be returned to the man or is it the property of the woman? Matches made in heaven must be litigated on earth.

Some states consider an engagement ring to be a conditional gift. That is, the gift of the ring is made in contemplation of marriage. If marriage doesn't occur, the ring must be returned. On the other hand, some states have laws that consider the gift of the ring to be a completed gift. No return required. No ifs, ands or buts.

In the past many jurisdictions based the decision of who gets the ring on whose "fault" caused the broken engagement. If the man broke the engagement, the woman could keep the ring. If the woman broke the engagement, she had to return it. Imagine the testimony trying to prove fault.

Most jurisdictions have generally now moved to a "no-fault" approach. This movement accompanied the creation of no-fault divorce. Prior to no-fault divorce, a person or couple who wanted a divorce where there was no serious misconduct, had to falsely testify (yes, that's right, commit perjury) in order to establish grounds for divorce. Just as with the situation involving the return of the engagement ring, commentators said that requiring a finding of fault added bitterness and hostility to the proceedings, hours of testimony of recounting revolting stories (some true, some not) before the judge, consuming ever scarcer resources. "If there is no longer a viable marriage, the question of fault, of 'guilt' or 'innocence' is irrelevant." (Gleason v. Gleason)

In general, the law has moved away from "fault" in matters of the heart. At common law we had the heart-balm torts - alienation of affections, seduction, criminal conversation, and breach of promise to marry. These torts were often found in conjunction with a dispute over the ownership of an engagement ring. A broken engagement could result in a breach of promise action and a demand for return of the ring. These "heart balm" actions attempted to provide monetary damages for the loss of love. The statutes that abolished these actions are generally called the heart-balm statutes (although more appropriately they would be called the anti-heart-balm statutes).

Pennsylvania abolished the action for criminal conversation in 1976. Pennsylvania didn't abolish the actions for alienation of affection and breach of promise to marry until 1990. Esteemed Law Professors Prosser and Keeton writing in the 1980s said, "There is good reason to believe that even genuine actions of this type are brought more frequently than not with purely mercenary or vindictive motives; that it is impossible to compensate for such damage with what has derisively been called 'heart balm'. . . ."

Similarly, to involve the judicial system in sorting out whose conduct, attitude, words, expressions and peccadilloes were the "cause" of the termination of an engagement is unprofitable at best, and foolish, gruesome and wasteful at worst.

Adoption of the no-fault approach to the engagement ring does not answer the question about who gets the ring. The no-fault rule could equally be that the woman keeps it, regardless of fault, or it is returned to the groom, regardless of fault.

The 1999 case of Lindh v. Surman is the leading case in Pennsylvania and holds that the law in Pennsylvania is that an engagement ring is a conditional gift and that without an agreement to the contrary, it is conditioned upon the marriage taking place. The ring must be returned to the donor if that condition does not occur. The court said: "Thus, we find the gift of the ring to Janis at the time of their betrothal was subject to an implied condition requiring its return if the marriage did not take place."

Not happy with that result? Make your own agreement and put it in writing.

Caution on Interest Free Demand Loans to Family Members

2011-09-06T20:52:00Z

When a person makes a loan to a family member, friend or relative at less than the market rate of interest, there may be adverse tax consequences. There are two tax implications to consider: income tax and gift tax.

Even though the loan is interest free or carries a very low rate of interest, you may incur imputed interest income as a result of making the loan. What is imputed interest? It is interest considered by the IRS for tax purposes to have been received, even if no interest was actually paid.

Imputed interest applies to below-market loans. A below market loan is one that is interest-free or one that carries stated interest below the applicable federal rate (AFR). The AFR is the minimum rate you can charge without creating tax side effects. Every month the IRS publishes AFR's. The AFR for a loan is the interest rate for loans of that duration in the month the loan is made. .

Here is an example: A $300,000 interest-only demand loan is made in September 2011. The borrowers will be making payments of interest only, no amortization of the loan principal (although they may make any principal payments they wish). A demand loan, which means that it can be called as due any time by the lender, is a short-term obligation so it can use the short-term AFR. The annual interest on a $300,000 loan at the rate of 0.26% is $780, or $65 per month.

When the loan is a demand loan, the applicable Federal rate is the applicable Federal short-term rate in effect for the period for which the amount of forgone interest is being determined, compounded semi-annually. If a demand note is outstanding for an entire calendar year, the government's blended rate must be used. In July of each year, the government publishes the blended rate for the current year. For example, the blended rate published in July for 2010 is 0.59%.

Let's say you made a loan today. It was a demand loan for $300,000; the AFR blended rate is 0.59%. If you charge at least that much interest, and the blended rate for subsequent years, you don't have to worry about the rest of this explanation.

If you charge no interest, or interest less than the 0.59% then you are treated as if you made a gift to the borrower. This gift is the difference between the AFR and the interest you actually charged, if any. The borrower is then deemed to have paid that amount back to you as interest (this is the imputed interest). You must report the imputed interest as income on your income tax returns. The borrower may get a deduction depending on what the funds were used for.

If the loan is under $10,000, there is no problem. You can ignore the imputed gift and the imputed interest if the aggregate amount of loans between you and the individual is less than $10,000. Note that all loans outstanding between you and the individual when added up, must be less than $10,000.

If the loan is over $10,000 but less than $100,000, there is another exception to the application of the imputed interest rule which may save you. Taxable imputed interest income to you is zero as long as the borrower's net investment income for the year is no more than $1,000.

That takes care of the income tax. Now for the gift tax. Unfortunately, there is no similar $100,000 exception for the gift tax. The best way to structure the loan for gift tax purposes is as a "demand loan," that is, a note that can be called for full payment by the lender at any time. With a demand loan, the imputed gift amount is computed every year and will fluctuate with the annual blended AFRs published each July. The annual imputed gift will be well under the $13,000 annual exclusion for gifts until the loan exceeds $2 million with the current rates. If the loan, rather than being a demand loan, is a term loan, the gift tax results are less favorable. When the loan is made you are treated as making an immediate gift of the whole terms' worth of below market interest. This will likely exceed the $13,000 annual exclusion and require filing a gift tax return and use of part of your unified credit or actual payment of gift tax if your credit has already been used.

The best thing is to avoid all this complexity. If you make a loan of more than $10,000 to a friend or relative, charge the applicable federal rate of interest.

And get it in writing! If you make a below market loan to a family member, and if the loan is not repaid, the IRS may consider it a gift for tax purposes whether you intended the money to be a gift or not. If this is the case, you may be required to file a federal gift tax return, depending upon the initial amount; and you will not be able to deduct it as a non-business bad debt. If the loan is used by the family member to buy a home, make sure the note is secured by a mortgage. If it isn't, the borrower will not be able to deduct the interest that they do pay to you.

It is always possible to forgive payments on loans, converting a debt obligation to a gift. Since the annual exclusion is $13,000, you can forgive $13,000 of the debt obligation annually with no gift tax consequences .If the loan is from a married couple to a married couple, maybe Mom and Dad to Daughter and Son-in-law, up to $52,000 (4 x $13,000) in interest and principal payments could be forgiven each year with no gift tax consequences. Mom and Dad have interest income to report on their 1040. Son and Daughter-in-law are treated as having paid interest.

Is your 403(b) plan a good investment?

2011-09-01T12:53:00Z

403(b) plans are the retirement savings plans for educators and employees of tax-exempt organizations. They are also known as tax sheltered annuity plans (TSAs). Participants include teachers, school administrators and other personnel, nurses, doctors, professors, librarians, and ministers. Many of these folks also receive a pension, but often the pension is not enough to give them a secure retirement so they add to their retirement savings by reducing their salary and having that amount contributed to a 403(b) plan.

403(b) plans are similar to 401(k) plans available in the private sector whereby employees may make salary deferral contributions, and employers may (or may not) provide a matching contribution. Here are 3 main investment choices: 1) annuity and variable annuity contracts provided by an insurance company; 2) custodial accounts invested in mutual funds; or 3) for churches only, retirement income accounts. Unfortunately, many employers only provide the option to invest in annuities with higher expenses than low-cost mutual funds.

The money in the plan is set aside on a pre-tax basis and the earnings inside the plan also accumulate tax free. Salary reduction agreements for 403(b) benefits do not reduce salary for purposes of computing future social security benefits or for the payment of current social security taxes.

There are limits on the amount of salary that can be deferred. There is an annual Maximum Allowable Contribution (MAC). There are two parts to computing this, your limit on annual additions (which can include any contributions made by the employer) and your limit on elective deferrals. In 2011, the limit for annual additions is $49,000 or 100% of includable compensation. The 2011 limit on elective deferrals is $16,500. There is a special rule that may apply if you have at least 15 years of service. After age 50 there is an opportunity for catch-up contributions up to $5,500. You should consult your plan administrator if you have trouble determining your MAC.

403(b) plans have multiple expenses, including administrative costs and investment management fees. Investment management fees are often charged by the investment company as a percentage of the total assets under management - the total value of your account. These fees range from about 0.2% on the low end to 3% on the high end. There can also be custodial fees, mortality and expense fees in the case of annuities, transfer fees, wrap fees and surrender charges.

If your 403(b) plan investment choices are too expensive, ask you employer to add other lower cost options. Especially make sure there is a low-cost mutual fund option available. These plans are not limited to annuities. If your employer refuses, perhaps a committee of employees would have more clout. In general, unions have not gone to bat for 403(b) plan participants because the investment and financial service companies who are selected for participant investment choices sometimes make big contributions to the unions. The wheels within wheels. . . .

This column examined 401(k) fees a few weeks ago. As high as 401(k) fees can be, unfortunately, most 403(b) plans have higher fees than 401(k) plans. Unlike 401(k) plans, administrators of 403(b) plans are not considered fiduciaries - and, therefore, have no legal or ethical obligation to monitor plans to ensure they're in the best interest of the participants.

Many financial advisors say that if your 403(b) only has high cost investments, you are better off foregoing participation and contributing to a Roth IRA, a traditional IRA, or even in some instances a taxable account. Why? Because high costs can overrun the advantage of the tax deferral.

Robert Brokamp writing for The Motley Fool Retirement Center says, " For most people, annuities are a last-resort investment because they are too expensive, offer mediocre insurance coverage, restrict the owner's investment choices, and lack liquidity. Because of the large fees (read: commissions for your broker) associated with annuities, they are a favorite of brokers and planners. It's not uncommon for Rule Your Retirement members to regale us with annuity pitches offering outrageous claims. When it comes to a legitimate pitch, annuities are most suitable for investors who:
• Have contributed the maximum to their defined-contribution plans and IRAs and desire further tax deferral on investment gains
• Prefer investing in mutual funds as opposed to individual securities
• Will keep the annuity for at least 15 to 20 years
• Are in a 25% or higher income tax bracket today, but expect to be in a lower income tax bracket in retirement
• Don't need the annuity proceeds prior to age 59½
• Are unconcerned that heirs must pay ordinary income taxes on any appreciation
• Desire a 'guaranteed' income for life in retirement"

Tax deferral is important and is a valuable benefit, but its value can be eroded by high fees. Make sure you know what you are paying for your plan.

The Business Trip - Is Your Vacation Deductible?

2011-08-07T13:30:00Z

The cost of a pure business trip is 100% deductible. Unreimbursed hotel, airfare, car expenses, cleaning, telephone, tips, are all 100% deductible as well. Up to 50% of the cost of meals are deductible. In general, travel expenses are the ordinary and necessary expenses of traveling away from home for your business, profession, or job.

What if you add on a few "vacation days"? After all, here you are in Paris, are you going to skip the Louvre? If the trip is an international one, the travel cost is 100% deductible if the trip is at least 75% business. Less than 75% and then the deductible portion of airfare is generally pro-rated based on the number of business days compared to the total number of days. If the business trip is within the United States, the airfare is 100% deductible as long as the primary purpose of the trip was for business. Lodging and meal expenses for business days are deductible, not for vacation days.

With smart phones, laptops and other new-fangled technology, if you spend most of your time at the Louvre answering e-mails and taking phone calls (say 4 hours) - arguably that's a business day as well. A business day is any day you are traveling to or from the business destination, a day when you have a pre-scheduled business appointment (regardless of how long), or a day when you spend at least 4 hours on business.

If the trip is before and after a weekend and it is impractical for the traveler to go home and come back over the weekend, then those weekend days are treated as business days. One hundred percent of the hotel and 50% of meals are still deductible for those weekend days. You can deduct the standard meal allowance instead of keeping track of the cost of meals if you choose. To deduct the weekend expenses you must be able to prove business activity on Friday and Monday.

If your airline offers a special fare for a stay including Saturday night, and the savings on the fare is greater than the Saturday meals and hotel cost, then the Saturday costs are deductible.

Did you ever see those advertisements for trade associations or professional associations putting on seminars in seaside resorts? Those travel expenses are most likely 100% deductible. The seminar or conference fees are deductible as well.

If the trip is primarily for vacation, then you cannot deduct hotel and travel expenses. The IRS says that the "scheduling of incidental business activities during a trip, such as viewing videotapes or attending lectures dealing with general subjects, will not change what is really a vacation into a business trip." On the other hand, if you have actual business expenses (for example, business phone call expenses) while on the vacation, they can be deducted.

If you bring your spouse or a companion along on the trip, their expenses are not deductible unless the spouse or companion is an employee of the taxpayer and travels for a bona fide business purpose and the expense would otherwise be deductible by the spouse or companion. You can't deduct expenses for anyone who is along who is not involved in the business. This may not be such a problem. If you rent a car, the whole price is deductible whether your spouse rides along or not. If you rent a hotel room, the whole cost is deductible even if you spouse occupies the room with you.

A business cruise? To be deductible, it has to be on a U.S. registered ship and avoids foreign ports. The limit to the deduction is $2,000 annually.

It is very important to keep records. Keep receipts and a log of your travel and activities. More detail is better.

Be reasonable. Hiring a luxury limo and driver on the trip when you drive yourself in a used car at home is not reasonable.

If you are an employee, deductible travel deductions are claimed on Form 2106 and are miscellaneous itemized deductions for which you receive a tax benefit only to the extent they exceed 2% of adjusted gross income. If you are self-employed, expenses are deductible on Schedule C or the appropriate business return. You can get more information in IRS Publication 463: Travel, Entertainment, Gift and Car Expenses.

Uncle Sam says, "Hire your kids."

2011-07-27T14:19:00Z

When your children are too old for day care and too young to leave at home to their own devices, hiring them to work for you seems like a good idea. Congress, in shaping public policy through tax laws, seems to think so too. There are tax breaks for the child who works for mom and/or dad, as well as for the parent(s) who employ their children.

Like any other tax incentive, potential for abuse abounds, so rules and restrictions also abound. But the rules for hiring your own children are relatively logical and simple. The logical part requires that the child be a real employee, be qualified to do the work assigned, be doing real work necessary to your business, be paid what others doing similar work are paid, be paid as regularly as unrelated workers are paid, and that hours worked be kept in a businesslike manner.

Pay them by check, not cash. A real business paper trail is required. Pay them regularly. If the IRS sees a lump sum payment of $5,000 at the end of the year, they'll know that tax evasion, not tax avoidance, is afoot. As for a record of hours worked, a time clock is good, but a spreadsheet with hours and work description will suffice. Be sure to print sections of the spreadsheet periodically and sign it as proof of a contemporaneous record. Paying your teenager to maintain your website at a competitive wage is credible. Paying your third-grader for the same work clearly fails the smell test. By paying your child from business income, income is taken from the higher income bracket of the parent and put in the lower income bracket of the child. The child gets a standard deduction of $5,800 to avoid paying tax and beyond that will pay tax at a minimum bracket as opposed to the higher bracket of the parents. The "kiddie tax" which taxes a child's income at the parent's rate only applies to unearned income. There is no kiddie tax for earned income of the child.

If the business is a sole proprietorship, or if it is a partnership with both partners being the child's parents, and if the child is under 18; then no social security tax (by either the employer at 7.65 percent (FICA) or the employee at 5.65 percent FICA) is due. Also, no federal unemployment tax assessment (FUTA) taxes (6.2 percent federal, but usually a net of 0.8 percent due to credit for up to 5.4 percent state unemployment taxes (SUTA) paid) are due.

The whole family saves on taxes. Parents don't have to pay their share of the child's FICA, the child doesn't have to pay FICA, and the parent's self-employment tax is reduced due to the deduction for paying the child. Be sure to issue a W-2 to the child, not a 1099. A 1099 would cause the child to owe self-employment tax!

Children must file an income tax return if 1) they have earned income of $5,700 or higher, 2) they have unearned income (investment income) of $950, or 3) they have gross income (both earned and unearned) in excess of the larger of $950 or their earned income plus $300.

By earning a wage, your child is eligible to put money away for retirement to the extent they earn money. If son Fred earns $5,000 this year, he can put that much into a Roth IRA. He can also put it into a regular IRA. Since he will get a deduction for contributions to a regular IRA (but not a Roth IRA), he'll still have his entire standard deduction available to cover more earnings for the year.

For example, if Fred earns $10,800 in 2011, he can shelter $5,800 with his standard deduction and another $5,000 with his regular IRA contribution deduction. Note that Fred does not have to deposit his pay in the regular IRA. It can come from anywhere, including the largesse of mom and dad. Mom and Dad could make a gift to Fred, and he could use it to fund his regular IRA. Furthermore, if mom and dad are in the 28 percent bracket ($139,350 to $202,300, if joint), they get to deduct $10,800 from their income, yielding an income tax savings of $3,024, a self-employment savings of $1,436, an employer FICA savings of $826.20 and a FUTA savings of $86.40. For those not keeping score at home, that's $5,732 for mom and dad. For Fred, the FICA savings are $610.20 and income tax savings (due to the IRA contribution) of $500.

An employer may create a simple pension plan (SEP) for all employees, and if one is created for the child, contributions by the child and the employer are not reduced by IRA contributions. However, if a SEP is offered, it must be offered to all employees in the same classification.

"Rent-to-own" - How does it work?

2011-07-18T20:38:00Z

"Rent-to-own" is a way of acquiring an asset - most often a principal residence. Usually, a rent-to-own agreement is a lease with an attached option. The landlord sells the tenant an option to buy the property at a fixed price at some point in the future. There may be a small down payment of some "option money." A portion of the monthly rent payments are credited to the tenant as part payment of the purchase price. This can be useful for a tenant who has trouble getting a down payment together (but can afford to put away a little bit each month) or a buyer with credit issues that they're working out (who expects to be in a position to buy within the option period).

Lets assume I rent you my house for $1200 a month. I give you an option to buy the house for $130,000 at any time over the next four years. $200 of every month's rent payment is credited to the purchase. At the end of the four year period, you will have paid $9,600 ($200 x12 months x 4 years) toward the purchase price which acts as your down payment. You can exercise the option to buy, apply for a mortgage, and buy the house at any time during the 4-year period. If you wait until the end, your down payment will be $9,600. If you don't exercise the option - because you decide you don't want to own the house or because you can't get a mortgage, then the deal is over. You do not get any part of your payments back.

Looking at this from the seller's point of view, the Seller has made a deal at a price that is acceptable and either he will sell the property at that price or they will get a premium rent for the 4 year period if the sale doesn't get made. The Seller hopes the tenant will take better care of the property because the tenant hopes to be the owner. The Seller also hopes the tenant will make sure to make rent payments on time so as not to breach the agreement and lose the right to purchase and lose the accumulated "down payment."

The Landlord/Seller's responsibilities do not change under a "rent-to-own" arrangement. The insurance and taxes are paid by the Landlord/Seller. The Landlord/Seller is responsible for major repairs. There is no transfer of title until the tenant/buyer exercises the option and completes the sale.

Unfortunately, rent-to-own is often used to take advantage of unsophisticated renters who want to become buyers but don't have the means. Many times, the tenant who isn't in a position to buy at the beginning of the lease term still won't be able to when the option expires. Tenants who can't buy become very angry when their "down payment" is not returned to them.

If the seller is really willing to provide financing, it would be better for the house to be sold and for the seller to "take back" a mortgage.

Rent-to-own deals have garnered a very bad reputation. People in the business of selling properties on a rent-to-own basis report a 50% or higher, as much as 95%, failure to close rate. That means that the majority of the prospective buyers fail to buy and lose the extra money they were paying the landlord as their "down payment." The set-up has been criticized as taking advantage of poorer, less sophisticated tenants, giving the property owner a premium rent..

In general option money is not taxable to the optionor (the landlord/seller) until the option is exercised. The landlord/seller would not report the part of the monthly payment that is the option price until the tenant buys, at which time it is part of the purchase price and may or may not be capital gain to the landlord/seller depending on his/her situation. If the option expires or is abandoned, the option price is taxable to the optionor (landlord/seller) as ordinary income at the time it expires or is abandoned.

A personal residence sold using rent-to-own may qualify for capital gains exemption. Gains from the sale of a personal residence are exempt so long as the gain is less than $250,000 ($500,000 for married couple). If the lease was "incidental" to the sale, court decisions have held that the property would still qualify as a personal residence and not a rental.

The lease and option payments made by the tenant are not tax deductible if the property is used as a residence. If the tenant purchases the property, his option payments (including monthly rent credits) become part of his tax basis in the property. The tenant's option payments may be deductible as a capital loss if the buyer is an investor.

The rent-to-own agreement is important. There is no standard form. Despite the document being titled "rent-to-own" or "lease option" courts and the IRS may find that the actual agreement is really an installment sale. That receives very different tax treatment, and may change the rights and responsibilities of the tenant/buyer with regard to for the return of the "down payment."

Tax Incentives for Solar Power

2011-07-11T11:30:00Z

"The amount of sunshine energy that hits the surface of the Earth every minute is greater than the total amount of energy that the world's human population consumes in a year!" - Home Power Magazine

Solar energy, heat and light from the sun, has long been used by humans. Solar power, which is the conversion of sunlight into electricity, is a newer technology. Electricity is generated directly by using photovoltaics, by using concentrated solar power, or by creating hydrogen fuel by splitting water using artificial photosynthesis.

A tax incentive is a tax provision designed to encourage a certain type of behavior. Congress has provided various incentives to encourage the development of solar power. These incentives include direct financial incentives at both the federal and state government levels as well as indirect incentives, including the requirement mandated by many states that conventional electric utilities purchase excess electricity generated by private solar energy systems.

The current tax breaks last until 2016. Commentators say this gives the solar power industry "policy certainty" "that will attract investment, expand manufacturing and lower the cost of solar energy for consumers."

Direct Financial Incentives

Internal Revenue Code Section 48 (IRS§48) provides a tax credit equal to 30% of the cost of certain energy property including "equipment which uses solar energy to generate electricity, to heat or cool (or provide hot water for use in) a structure, or to provide solar process heat...[and] equipment which uses solar energy to illuminate the inside of a structure using fiber optic distributed sunlight...". This credit applies "with respect to periods ending before January 1, 2017". The credit can be used by businesses that install solar equipment, and to individuals who install qualifying systems on homes they use as a residence (it does not have to be the homeowner's primary residence, second homes are eligible). These credits are also available for geothermal heat pumps and small residential wind systems. There is no cap on the amount of credit.

The American Recovery and Reinvestment Act of July 2009 established the Section 1603 Treasury Grant Program. This program allows qualified taxpayers to receive a cash grant equal to the tax credit amount as defined in IRC§48 in lieu of the tax credit. This program (as extended in 2010) applies to projects that are begun in 2009, 2010, and 2011 and completed by 2016. Therefore, individuals and entities that cannot use the tax credits, or can only use them over a period of years, can derive an immediate benefit. There is no dollar limit to either the tax credit or cash grant programs. Thus, the federal government is effectively subsidizing 30% of the cost of all solar energy projects placed in service by 2016.

To take advantage of the credit, file Form 5695, Residential Energy Efficient Property Credit, with your 1040.

Effective July 2009, Pennsylvania established the Pennsylvania Sunshine Solar Rebate Program which grants cash rebates to certain residential and commercial owners of solar photovoltaic and solar water heat systems. The program was funded with a special issue of $100 million of state bonds. The program will expire when these funds are fully used. Residential customers receive $.75 per watt up to the lesser of $7,500 or 35% of installed costs. Commercial customers receive $.50 - $.75 per watt up to the lesser of $52,500 or 35% of installed costs. Work must be performed by a program-approved installer. The installer must apply for the rebate.

Indirect Incentives

In 2004 Pennsylvania promulgated the Alternative Energy Portfolio Standards Act (AEPS). This law requires that an annually increasing percentage of electricity sold to retail customers in Pennsylvania is from alternative energy sources. The program requires that retail energy suppliers utilize Alternative Energy Credits (AECs) - sometimes referred to as Renewable Energy Credits (RECs) - to demonstrate compliance with the standard. An AEC is created each time an alternative energy facility produces 1,000 kWh (or 1 megawatt-hour) of electricity.

The AEPS creates two tiers of alternative energy sources that qualify for credits. Tier I includes energy derived from solar photovoltaic energy and solar thermal power. For each reporting year (which runs from June 1 - May 31) retail energy suppliers are required to meet a Base Tier I Requirement, a Solar Photovoltaic Requirement, and a Tier II Requirement. This means that energy suppliers have a separate minimum requirement related to solar specific AECs /RECs which are sometimes referred to as Solar Renewable Energy Credits (SRECs). The price of AECs and SRECs fluctuates with the market. In the 2010 energy year (June 1, 2009 - May 31, 2010) the weighted average price for SRECs was $325.00 with a price range of $235 - $415. In contrast, the weighted average price for base Tier I AECs was $4.77 and the price for Tier II AECs was $0.32. Solar energy system owners can sell their RECs by using an approved broker/aggregator. There is currently considerable uncertainty about the likely future price of SRECS.

The Pennsylvania Utilities Commission established net metering rules in 2006 pursuant to the AEPS. In Pennsylvania, investor-owned utilities must offer net metering to residential customers that generate electricity with systems up to 50 kW in capacity and nonresidential customers with system capacity up to 3 megawatts. Systems eligible for net metering include those using solar photovoltaics, solar thermal energy, wind energy, geothermal energy, biomass energy, and fuel cells, among others.

Amateur Efforts to Avoid Probate Can Be Disastrous

2011-06-24T15:50:00Z

Since 1997 Pennsylvania law has permitted the registration of securities in "POD" or "TOD" form. POD means "pay on death" and TOD means "transfer on death." Titling accounts POD or TOD permits the naming of a beneficiary on all sorts of investments. In the past only life insurance and pension plans had this option available.

Unfortunately, all sorts of tellers, clerks, customer service representatives, brokers, account managers, and other employees of financial institutions are giving customers advice about how to title accounts. This wreaks havoc with many estate plans and causes untold problems. You wouldn't think of letting one of these people write your will - why would you let them prepare beneficiary designations?

Here is an example, provided by one of my colleagues, of what can go wrong:

Son, who is the Co-executor of Mom's will, comes to me for help. A so-called "expert" told Mom that she could avoid probate by changing the title on her brokerage account to read POD (pay on death) to Son, Baby Brother, Sister One, and 3 nephews (sons of deceased Sister Two). Count 'em - that's six beneficiaries. The only asset in the account is one large bond. Mom passed away.

The broker says he cannot divide the large bond 6 ways and he needs everyone to agree
that it should be sold so that he can give cash to the beneficiaries. He can't distribute pieces of the bond. Son is not on good terms with Baby Brother who wants Son to pay for the lost value in the bond (interest rates went up since Mom died) and blames Son that nothing has been done in the three months since Mom passed away. Son is executor but since this account is not probate property, the Executor has no authority over it, so it really is not Son's responsibility. (But tell that to Baby Brother.) Sister One is not speaking to any of her co-owners because she says the 3 nephews (who are getting half of the account, one-sixth each) are getting more than their share. Sister One says that the nephews should only receive the one-fourth share that would have been Sister Two's if she lived. After all, that's what Mom's will says. Of course, the will doesn't operate on the POD account thanks to the advice of the "expert."

The accountant says that since Mom died last year, the sale proceeds should not be reported to Mom's social security number. That makes sense, but not one of the 6 named beneficiaries is willing to have the entire sale proceeds reported to them on a 1099-B; and the broker can only use one social security number for the transaction. Mom's lawyer, who is the other Co-Executor, is angry because the plan he designed is messed up, and it looks like the 6 beneficiaries of the brokerage account are going to have to be treated as a partnership comprised of the 6 beneficiaries for income tax purposes. The partnership's tax ID number then can be used for the 1099 instead of any one of the 6 beneficiaries. That will require a tax I.D. number, a partnership agreement, and federal and state partnership income tax returns - all very costly, time-consuming and unnecessary. Since some of the beneficiaries are unhappy and hostile to each other, getting them to understand and cooperate looks like many hours of legal work.

The three nephews are begging for money. Since their mother died, they are in need of money to pay college tuition. They can't get financial aid because they have an asset that they must spend first. Each owns 1/6 of the brokerage account. One of them is under 18, and the brokerage house will not pay out anything to the minor nephew unless a legal guardian is appointed for them. Ironically, the probate proceeding required for guardianship is much more onerous and expensive than probate of a will.

Mom's will was so simple, she gave everything to her issue per stirpes. If the brokerage account had not been POD or TOD, it would have passed under Mom's will. The 3 nephews would have shared their deceased mother's one-fourth share. The Executors would have authority to sell the bond. Any income tax consequence would be reported and paid handled by the estate. The nephew could have received distribution for tuition. The payment could have been made to the college or to a custodian for the benefit of the minor. No partnership would have to be created, and no partnership income tax returns filed.

The will would have worked beautifully. All of the decedent's and the beneficiaries' goals and needs would have been met. Yes, the POD registration avoided probate, but it created a host of other problems.

When you register an account or an investment in POD or TOD form, you are making your will irrelevant to the disposition of that asset. A dispositive scheme that is carefully thought out and designed is abandoned so that you can "avoid probate."

Probate is the proceeding used to determine the next owner of property titled in the decedent's name alone. The will become the document that governs who gets what and an executor is appointed to administer the estate. The evils of probate are largely imaginary. Seminar hucksters try to drum up business for living trust mills by painting probate as worse than death. Sometimes it is beneficial to use trusts, and there can be good reasons to avoid probate, but for most people, it is not a concern.

Certainly, for Mom in our example, avoiding probate caused many, many problems. The so-called "expert" who advised her really did not have any knowledge, training or experience in estate settlement and the various property law and tax issues involved.

New Account Forms at investment institutions now routinely ask you to name a beneficiary. Do not feel that you have to name a beneficiary. In most cases you're better off leaving that section of the form blank. When the clerk wants you to fill it in, say, "No, thank you. I have a carefully thought out will and estate plan which I intend to use to dispose of my assets."

Remember that how your assets are titled is an important part of your estate plan. The will and any trust you have are designed to work with your assets as they are titled when you made the plan. If you change the title to assets, you are changing the estate plan and often bringing about unintended and inequitable results. Don't change titles or name beneficiaries without reviewing your estate plan with a qualified professional. You could be changing more than you think.

Changing Your Will

2011-06-15T11:51:00Z

codicil (käd' i sɘl, -sil')
noun 1. an addition to a will, that changes, explains, revokes, or adds provisions

If you have a will, congratulations. That's great. Now you want to change it. How do you do that? First: NEVER make changes to a will by inserting, crossing out, or doing anything to alter the will. Any change to a will must be made with the same formality as making the will in the first place. If you make notes or write changes on your will, according to the law you are doing one of two things, you're either voiding the will altogether or making changes that will be ignored.

When we make a will, most of us hope that it will be the last time we have to deal with the fact of our mortality. But things happen: divorce, premature death, remarriage, birth of a special needs child, a rift with a sibling or a child or a parent, major tax law changes, hitting the lottery. There is no end of things that happen in life that force us to revisit our estate plan.

How do you want to change the plan? Blow the whole thing up and start over, or just cut out that charity that treated you so badly last year? Your choice is a new will or a codicil. In olden times, all wills were hand-written and supposedly in the same ink by the same hand. Then came typewriters that made reading easier, but the time to draft a will was still considerable. With the advent of word processors, wills got much longer so that all eventualities could be covered and eliminated the need to retype a page due to an error or the entire will if the client changed his or her mind. While there is still a lot of drafting done even with a thousand wills in a lawyer's library, new wills aren't as labor intensive as they used to be.

If a change is small and the client has finally gotten comfortable with all thirteen pages of the current will, then a codicil is probably the right choice. On the other hand, if a will that had no trust provisions now needs a special needs trust, starting over is probably the best choice to insert the trust provisions, trustee nominations and powers.

What about all the cases between these extremes? Byron Cannon, an Australian attorney, recently posted a list of considerations that work well in any country.

1. If the will is complex and the change simple, a codicil is best.

2. If the will is short and simple, drafting a new will regardless of the simplicity of the change is probably best.

3. If a life event such as marriage, divorce, death of a spouse has occurred, a new will is best. At the end of listing changes, a statement is made that the testator in all other regards republishes his or her original will. This would lead a court to conclude that the provisions for the ex-wife that didn't get replaced were intended to remain in place. When there is a change in the spouse, trustee or executor, it's better to start over.

4. If a former beneficiary has been cut out, making a new will is prudent. A codicil becomes one with the original will. Together they become public records when the estate is probated. A person probably doesn't want it to be public record that his lifelong friend, Joe Smith, had been earmarked for a thousand dollar bequest but in 2001 he was cut out.

5. If a trust is created to manage the funds for a child or children, a parent might have second thoughts about how old they should be before distributing the last of the principal to them. If the distribution age is raised by codicil or worse in several steps by two or three codicils, the paper trail will leave a clear message to the child that their parent's image of them repeatedly diminished. In short, any change that eliminates or delays a beneficiary's inheritance should be done in a fresh document to spare hard feelings after it becomes too late to make amends.

6. Storage of the will and codicils should be considered. If a will gives the farm to the children after 10 years, then a codicil changes that to 20 years; there is a motive for the children to find and "disappear" the codicil. If you vary from the usual distribution scheme, it's best to safeguard your will and codicils in a lock box or in some trusted person's care to avoid any midnight post mortem estate planning.

Some personal advice: Do not give copies of your will to beneficiaries, executors or anyone named in your will. Do not verbally reveal what is in your will. Doing so sets up expectations that the writing of a subsequent will can dash.

You're Getting Married - Now What?

2011-05-26T18:34:00Z

Are you changing your name? Don't think we're only talking about the wife - some states allow men to adopt their wife's last name, and some states permit civil union partners to change their names. Federal agencies generally don't recognize name changes for men after marriage which means the man would need to go through a legal name change authorized by a court.

Some couples choose to adopt a hyphenated or hybrid last name. Then both must change their names.

If you change your name, it should be changed on your social security card, driver's license, vehicle registration, car title, medical and other insurance, bank accounts, investments, credit cards, and your passport. You'll need new checks, business cards, credit and debit cards. Make sure your employer has your new info.

To change the name shown on your card, complete Form SS-5, Application for Social Security Card, and submit evidence of your identity and proof of name change (court order or certified copy of marriage certificate). You can take or mail the signed application with your documents to any Social Security office. Your card will have your new name but the same number as your old card.

To change the name on your passport, use Form DS-19, Passport Amendment/Validation Application, and with it send a certified copy of your marriage certificate or your name change court decree, and your current valid passport to the following address: Charleston Passport Center, Attention: Amendments, 1269 Holland Street, Charleston, SC 29405. There is no fee to have a passport amended.

You'll need a new driver's license. Call your state's Department of Motor Vehicles to get instructions.

Don't forget the postoffice, phone company, utilities, and your voter registration.

Determine your filing status. Married couples have the option to choose to file taxes jointly or separately. You should determine your filing status depending on which status would allow you a lower tax rate. Filing jointly means you and your spouse are allowed to deduct combined deductions and expenses on a single tax return; whereas, filing separately means each spouse can take only his or her individual deductions and credits. If one of you itemizes deductions, the other must also.

You've heard of the marriage penalty? The difference between what you pay in taxes as a married couple and what you would pay as two single persons is often referred to as the marriage tax penalty. The marriage penalty does not apply to all married couples, it depends on the husband's and wife's respective incomes. Tax laws in more recent years have actually eliminated the marriage penalty for tax payers in lower tax brackets. So here's the good news: there's no marriage penalty built into the tax rate schedules in the 10% and 15% tax brackets.

Review your withholding. Changing your filing status to either married filing jointly or married filing separately, will likely change the amount of income tax you owe when you file your 1040. You can change the amount withheld from your salary by submitting a new Form W-4 to your employer. IRS Publication 919, 'How Do I Adjust My Tax Withholding?' gives information on this topic.

Should you have a marriage contract? The fact is, if you're married, you already have a marriage contract. Your marriage contract consists of the obligations imposed on married couples by the laws of the state where you reside. Romantic or not, every married couple has a marriage contract. The only question is whether you have the "one size fits all" marriage contract provided by the state or whether you want to design your own contract.

People routinely change the state law provisions for inheritance rights for married couples - they write wills, often giving the entire estate to the surviving spouse. This is common, socially acceptable, and even encouraged. Marriage contracts and pre-nuptial agreements settling other property rights, however, are less common and, yet, just as important.