Lancaster PA Probate and Estate Administration Attorney Blog

The DIrty Dozen for 2013 - Part 2

2013-04-29T19:06:00Z

Last week we gave you the first six scams of the IRS's "Dirty Dozen." This week's column presents the second half of 2013's "Dirty Dozen". Don't fall prey to these schemes.

Including income that was never earned, either as wages or as self-employment income in order to maximize refundable credits, is a popular scam. Claiming income on your tax return that you did not earn or expenses you did not pay in order to secure larger refundable credits such as the Earned Income Tax Credit (EITC) could result in repaying the erroneous refunds, including interest and penalties and, in some cases, even prosecution.

To many of us it is counter-intuitive to think that if you have more income, you get a bigger refund - but with some refundable credits that is exactly the case. Unlike most deductions and credits, the EITC is refundable -- taxpayers can get it even if they owe no tax.

Because it is refundable, the Earned Income Tax Credit is a magnet for tax fraud. Edwin Rubenstein, president of ESR Research issued a report in 2009 documenting abuse of the EITC. Rubinstein found that, "Year after year about one-third of all EITC returns are based on illegal multiple returns, phony Social Security numbers or claims of nonexistent children or spouses."

The General Accounting Office has reported that the IRS estimates between 27 and 32 percent of EITC dollars are paid erroneously.

8. False Form 1099 Refund Claims

In some cases, individuals have made refund claims based on the bogus theory that the federal government maintains secret accounts for U.S. citizens and that taxpayers can gain access to the accounts by issuing 1099-OID forms to the IRS. In this ongoing scam, the perpetrator files a fake information return, such as a Form 1099 Original Issue Discount (OID), to justify a false refund claim on a corresponding tax return.

7. False/Inflated Income and Expenses

]]> On June 22, 2012, Ronald L. Brekke, of Orange County, California, was sentenced to 144 months in prison, three years of supervised release and ordered to pay $6,206,998 in restitution. Brekke promoted a tax fraud scheme known as "1099 OID" fraud. Promoters of this scheme claim that the U.S. Treasury will pay out tax refunds equal to the value of a person's personal debt. Brekke assisted nearly 1,000 people in three countries to claim over $763 million in fraudulent tax refunds.

9. Frivolous Arguments

Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. Just a few examples of bogus arguments are: wages received for personal services are not income, the federal income tax is unconstitutional because the Sixteenth Amendment wasn't properly ratified, and the IRS is not an agency of the United States.

10. Falsely Claiming Zero Wages

Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. Typically, a Form 4852 (Substitute Form W-2) or a "corrected" Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer may also submit a statement rebutting wages and taxes reported by a payer to the IRS.

11. Disguised Corporate Ownership

Third parties are improperly used to request employer identification numbers and form corporations that obscure the true ownership of the business.

These entities can be used to under-report income, claim fictitious deductions, avoid filing tax returns, participate in listed transactions and facilitate money laundering and financial crimes. The IRS is working with state authorities to identify these entities and bring the owners into compliance with the law.

12. Misuse of Trusts

For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. While there are legitimate uses of trusts in tax and estate planning, some highly questionable transactions promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. Such trusts rarely deliver the tax benefits promised and are used primarily as a means of avoiding income tax liability and hiding assets from creditors, including the IRS.

The Dirty Dozen for 2013 - Part 1

2013-04-24T18:56:54Z

On March 26 the IRS released its annual list of the worst 12 tax scams for the year. The IRS cautions taxpayers not to fall for any of these scams - often these scams are at their peak during the filing season as people prepare their tax returns. This week's column presents one-half of the "Dirty Dozen".

1. Identity Theft and Refund Fraud

Tax fraud through the use of identity theft tops this year's Dirty Dozen list. For the 2013 tax season, the IRS has put in place a number of additional steps to prevent identity theft and detect refund fraud before it occurs. The strategy uses a three-pronged effort focusing on fraud prevention, early detection and victim assistance.

Not this Dirty Dozen.

Taxpayers who believe they are at risk of identity theft due to lost or stolen personal information should contact the IRS immediately so the agency can take action to secure their tax account. Taxpayers can call the IRS Identity Protection Specialized Unit at 800-908-4490.

2. Phishing

Phishing is a scam typically carried out with the help of unsolicited email or a fake website. If you receive an unsolicited email that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), report it by sending it to phishing@irs.gov. The IRS does not initiate contact with taxpayers by email to request personal or financial information.

3. Return Preparer Fraud

About 60 percent of taxpayers will use tax professionals this year to prepare their tax returns. Most return preparers provide honest service to their clients. But some unscrupulous preparers prey on unsuspecting taxpayers, and the result can be refund fraud or identity theft. Taxpayers are legally responsible for what's on their tax return even if it is prepared by someone else.

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4. Hiding Income Offshore

Numerous taxpayers have evaded U.S. taxes by hiding income in offshore banks, brokerage accounts or nominee entities. Others have used foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose. The IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas. "Free Money" from the IRS & Tax Scams Involving Social Security

Flyers and advertisements for free money from the IRS, suggesting that the taxpayer can file a tax return with little or no documentation, have been appearing in community churches around the country. These schemes promise refunds to people who have little or no income and normally don't have a tax filing requirement - and are also often spread by word of mouth as unsuspecting and well-intentioned people tell their friends and relatives.

There are also a number of tax scams involving Social Security. For example, scammers have been known to lure the unsuspecting with promises of non-existent Social Security refunds or rebates.

6. Impersonation of Charitable Organizations

Following major disasters, it's common for scam artists to impersonate charities to get money or private information from well-intentioned taxpayers. In the wake of Hurricane Sandy, the IRS cautions both victims of natural disasters and people wishing to make charitable donations to avoid scam artists by following these tips:

To help disaster victims, donate to recognized charities.

Be wary of charities with names that are similar to familiar or nationally known organizations.

Don't give out Social Security numbers or credit card and bank account numbers and passwords, to anyone who solicits a contribution from you.

While identity theft and refund fraud pose the biggest problem to taxpayers, illegal scams perpetrated by taxpayers can lead to significant penalties and interest and possible criminal prosecution.

Stay tuned next week for the remaining six worst tax scams for 2012.

A Man is Not a Financial Plan

2013-03-29T16:02:34Z

"Remember, Ginger Rogers did everything Fred Astaire did, but backwards and in high heels." - Faith Whittlesey

According to the United States Bureau of the Census, at some point in their lives, an overwhelming majority of American women - fully 90% - will have to bear responsibility for their own financial security by virtue of widowhood, divorce or choosing to remain single.

A recent Forbes article declares that "estate planning is a women's issue" The article notes the fact that women live longer than men do, on average, and are also more likely to marry older spouses. As a result, women are three times more likely than men to be widowed at age 65. As such, the article contends, estate planning is something that affects women more than men, and should be a critical component of any women's retirement planning process.

Women earn an average of 24% less than men doing the same jobs according to the U.S. Department of Labor. Seventy-five percent of all elderly Americans living below the poverty level are women. And these women are getting by on Social Security benefits of about $600 -- 25 % lower than the average benefit for a man. On average, women tend to live seven years longer than men according to the U.S. Census Bureau.

Let's see if I have this straight: Women live longer, make less, and have a 90% chance of being solely financially responsible for themselves at some point in their lives. Is it true that most women are "one man away from welfare?"

As a woman, you owe it to yourself and your family to make sure you are financially secure. This is not something you can let someone else take care of. Do not assume that your husband, father, or boyfriend has taken care of you. Imagine your shock when he passes away, and you find that you are destitute, or if not destitute, at least in straitened financial circumstances. Imagine your position if he leaves, or divorces you, and you are left to support yourself on your own earnings or your own retirement income alone. Worse yet, would you be responsible for someone else's financial problems?

]]> Take a look at Muriel Siebert's website, http://www.wfn.com. One section of the website, entitled, The Women's Financial Network notes that "[w]hen a marriage dissolves, women find themselves at a serious disadvantage financially. Fewer than one-fourth of divorced women age 62 and older receive any employer-sponsored pension income, whether from their own or their ex-husband's past work. An average woman's standard of living drops 45 percent in the year following divorce, while a man's rises 15 percent."

Do you know what you own? Do you know how your assets are titled? Do you own things jointly or are the accounts in his name alone. Do you know what his will says? Does he even have a will? Do you know what your income would be if he dropped dead tomorrow?

What are your debts? What are his debts? Are you liable for his debts? If his business fails, do you lose your house?

Who is the beneficiary of his life insurance? His IRA? His pension plan? Get copies. Don't sign any waivers of spousal rights without a sound understanding and financial reason to do so.

If your husband has to go to a nursing home, how will you pay for it? Can you afford to live at home and also pay for his care?

Do you have small children? If your husband died how would you live? Is there enough insurance? If both of you die, who will take care of the children? How will the children be supported and educated?

You owe it to yourself and your family to make sure your financial affairs are in order. You, and no one else.

What about retirement? Ernst & Young's Financial Planning for Women points out that women take time off to raise families and care for elderly parents. Married women who are currently retired or nearing retirement are less likely to have worked throughout their adult lives than their husbands. Married women are more likely to have worked part time or seasonally. This is also true for single, divorced, and widowed women with children.

Women earn less money than men and work fewer years on average. Women also change jobs more often than men. As a result, they frequently don't qualify for pensions or retirement plans. Women who are currently retired or nearing retirement are less likely to have been eligible for defined-benefit pensions than are men in their age groups.

According to Dr. Nancy Dailey, a woman born during the baby boom will likely be widowed by age 67 and remain a widow for 15 years or longer. Also consider that 53% of women are not covered by a pension compared to only 22 % of men.

Judith Briles points out in her book, 10 Smart Money Moves for Women, that only 2 out of every 100 seniors sixty-five or older are financially independent. The other 98 depend on the government, friends, relatives, or by working until they die.

It's up to you. Take responsibility for yourself. Find out what you can do. Plan ahead. Don't be intimidated. Learn.

Baby on Board

2013-03-28T01:13:37Z

"A baby will make love stronger, days shorter, nights longer, bankroll smaller, home happier, clothes shabbier, the past forgotten, and the future worth living for." ----Author unknown

Congratulations! You're having a baby. It's so exciting, and nerve-wracking, and fun, and OMG how are we going to do this?

You're picking out a crib, wondering which diapers to use, what color should you paint the room. But there is something more important than all of that. You need to make sure your baby will be cared for even if you are not here. Bringing a child into the world means you care for that child, and caring means making sure he or she will be cared for no matter what happens to you.

Did you know that according to the Orphan Society of America, almost three million children are living without parents in the United States? Did you know that 4.1 percent of the children in the United States are parentless?

Suppose a young couple has a three-year-old toddler. Tragically, both parents are killed in a car accident. Their families try to figure out what is best for the child. Imagine the grandparents and aunts and uncles who could be pushing for guardianship of the child. The potential for disagreement is obvious. Without a will where the parents choose a guardian, any family member could create litigation which is costly, detrimental to the child, and puts a strain on family relationships.

The first order of business is to make a will. Maybe you don't have many assets, but you do have something very valuable - your baby. The most important thing you must do in a will is to name guardians. These named individuals are your choice of who will care for and raise your child if you can't. You can even specifically exclude someone from caring for the children.

]]> This is not something you want to leave up to the county judge. You and you alone are in the best position to determine who should take over as parent and who will provide the best care for your child. There are many considerations including the guardian's financial habits, place of residence, health and lifestyle, and religious beliefs, to name a few.

Remember to ask your proposed guardians if they are willing to serve. While a person may seem like a perfect fit, he or she may not be ready or willing to be a parent. It's important to make sure that the person would be ok with the potential relationship. Also consider whether or not your preferred guardian has children of his own. How many children is it good to have in the household?

Any assets you can leave for your child should be held in trust. If you die without a will and your child inherits, there will have to be a court-appointed guardian to handle the child's inheritance. This is expensive, burdensome, and not what most parents want. When you make your will, choose a trustee to manage the child's inheritance. It may be the same person or persons you name as guardian, but it does not have to be. Sometimes you know someone who will be a great substitute parent, but not such a great financial manager, or vice versa. It is fine to have different people in each role.

Don't worry. You won't have to change your will every time you have a new addition to the family. Wills are drafted to include future contingencies like the birth of additional children.

You also need to make a Power of Attorney for financial matters and a Health Care Power of Attorney and Medical Directive (or Living Will).

If you get hit by a truck, what will happen to your family? Life insurance is an important consideration for young families. Thinking about life insurance isn't easy. It forces you to imagine your own death and leaving loved ones behind. Difficult as it is, it's crucial to consider, especially once you become a parent.

By planning for the unthinkable, you can ensure that if you die or become disabled your family will be able to pay for food, housing, and healthcare, handle debts and major expenses (including college tuition) and, generally, maintain the lifestyle to which they're accustomed.

It's never too early to start saving for college. Section 529 College Savings Plans provide for tax-free growth for funds used for qualified higher education expenses. Anyone can open a 529 account. If parents are unable to create one when their baby is born, they can include instructions to fund contributions from life insurance.

Sequestration and What it Means to the People of Pennsylvania

2013-03-11T14:34:07Z

Sequestration is a series of automatic, across-the-board cuts to government agencies, totaling $1.2 trillion over 10 years. The cuts are to be split 50-50 between defense and domestic discretionary spending.

It started in 2011 with the standoff over the U.S. debt ceiling. Congress and the administration agreed to more than $2 trillion in spending cuts. About $1 trillion of that was in the debt-ceiling bill, and the rest were imposed through sequestration -- forced cuts that could only be changed by coming up with an equal amount of spending reductions elsewhere.

While cutting spending reduces the deficit, so does raising taxes. Guess what? The administration wants to include tax increases in any deal. Didn't we already do that at the end of the year?

The March 1 effective date for sequestration has come and gone. People you see every day seem none the worse for it. The effects will be delayed assuming no action by Congress, but there will be some consequences.

First, let's look at what the automatic spending cuts affect. There is discretionary spending and non-discretionary spending. Discretionary spending is divided into military and non-military portions. Non-discretionary spending includes medicaid, medicare, social security and debt service. The cuts are almost entirely to be made in discretionary spending.

The cuts are most severe in 2013 and 2014. Then spending is allowed to increase at 2.2 percent per year (the projected inflation rate) after that.

The White House has published papers showing how the cuts affect each state. They are, of course, politically motivated and contain such judgmental words as "threaten," "vital," and "forcing." The groups affected are wide ranging but the "threats" will affect, among others, "children, seniors, people with mental illness and our men and women in uniform."

]]> After the rhetoric, the paper gets down to more specific cuts for Pennsylvania.

$26.4 million for primary and secondary education
$21.4 million for special education
2,290 fewer work-study jobs will be available
2,300 fewer children will be afforded Heat Start and Early Head Start services
$5,705,000 less in EPA enforcement
$1,448,000 less in fish and wildlife protection
26,000 civilian Defense Department employees would be furloughed one day a week. This amounts to a 20% loss in pay but will not start until 22 weeks before the fiscal year ends October 1. Multiply 20% by 22 and divide by 52 and you get 8.5%, the annualized reduction in pay, corresponding to the 8.5% reduction in hours worked.
$509,000 lest in Justice Assistance Grants
$866,000 less in job search assistance
$361,000 less for vaccines
$1,213,000 less in funds for planning for health threats such as a new widespread virus
$2,930,000 less in treating substance abuse
$639,000 less for HIV tests
$271,000 less for the Stop Violence Against Women Program
$849,000 less for meals for seniors

The White House paper also lists national effects that will surely affect Pennsylvanians. Among the most notable are:

$600,000,000 less for the FAA. Another furlough similar to the Defense Department furlough would take place here. The concerning part here is the reduction in air traffic controllers. Rather than overload controllers, the number of flights will probably be reduced.

While no dollar amount for TSA is mentioned, there would be a hiring freeze and furloughs for all. This may be the one thing that affects the wealthy the most and puts the most pressure on Congress to find non-automatic ways to reduce spending.

If longer waits at airport security doesn't get you to write your congressman, try fewer food inspectors. The FDA could conduct 2,100 fewer inspections, and furloughs for food inspectors will happen.

Who Has to Send 1099s? Do you?

2013-02-19T22:36:28Z

If you are in business, whether self-employed or running a company, you must send a 1099 form (with copies to the IRS) to anyone that you pay money to, unless they meet one or more of the following exceptions:

the recipient is a corporation

you included the payment in a W-2 form (to an employee)

the payment is for a tangible product (office supplies, computers, etc), or

the total payments during the calendar year were less than $600.

To make sure that you are reporting the payment item correctly, you should ask the individual or other payee to fill out a Form W-9, Request for Taxpayer Identification Number and Certification, complete with name, address and social security number or taxpayer identification number. It is recommended that you get the completed W-9 before you make the payment. If you pay someone and they refuse to give you a W-9 or their social security number, you should file the 1099 without the number. The IRS will be in contact with them, and they can explain to the IRS why they won't provide their social security number.

Individuals are not required to send 1099-MISC for personal payments. You are not required to send a 1099-MISC to an independent contractor to whom you made a personal payment unrelated to a trade or business. For example, you don't have to issue a 1099-MISC to your landscaper or house painter.

The IRS started its 1099 information return program in the 1980s. Its purpose is to make it harder for people to work "under the table." The 1099s allow the IRS to run a matching program using social security numbers and tax ID numbers to catch people who receive interest or dividends, receive payment for services, or collect rents but don't report the income.

Most tax practitioners will agree that of all the enforcement programs the IRS has, the 1099 matching program works pretty well.

There are a number of 1099s through which businesses of all kinds report the money they pay, including 1099-INT for interest income, 1099-DIV for dividends and several other 1099 forms to report other specific monetary transactions. 1099-MISCs are used to report free-lance or self-employment income, rental income, prizes and other miscellaneous types of income.

Individual taxpayers are most familiar with a 1099-MISC being used by a trade or business to report payments of $600 or more for services performed by people not treated as employees (such as subcontractors). If you work as an independent contractor, freelancer or consultant, you receive a 1099-MISC reporting what was paid to you from each payor during the calendar year. If you received a 1099, the IRS received a copy of it. Your 1099-MISC income should be reported under schedule C or C-EZ and SE for Self Employment, as part of your regular 1040. Not only do you owe income tax on these earnings, you also owe self employment tax.

]]> You have someone who does graphic design for your firm on an occasional basis. Did you pay her more than $600 in 2012? If so, you must give her a 1099-MISC and send a copy of the 1099 to the IRS with transmittal form 1096.

Landlords are now being required to be sent 1099-MISCs. This means that even small sole proprietors are required to send landlords 1099-MISCs in order to deduct office rent.

1099-MISCs are issued to individuals, estates, partnerships, single-member LLCs and LLCs treated as partnerships. Corporations and LLCs treated as an association and taxed as a corporation are generally not issued 1099-MISCs. Payments to corporations are included only if they are for medical, health care, legal or fishing activities.

IRS regulations require that attorneys always receive 1099s from payers engaged in a trade or business, regardless of the manner in which they do business. (Isn't it funny that lawyers, alone, of all other professions are singled out for this special reporting?)

You must send the 1099-MISC by January 31 for the preceding year. Use Form 1096 to transmit copies of the 1099s you issue to the IRS.

What happens if you don't send a1099-MISC? You could lose the deduction and owe the IRS a $50 penalty for each 1099 form you didn't file. Depending on the extent of the failure and the reasons, some have been liable for tax-fraud.

Emotional Blocks to Estate Planning

2013-02-17T22:24:35Z

Death and taxes - two subjects that are both emotionally charged. Nobody wants to talk about either one of them - together they are, well, taxing and deadly.

Do you break out in a cold sweat when discussing your will? Can you bear to think about whether there will be enough money to live on if your husband dies? Can you even think about which kid will run the business when Dad dies? Let alone talk about it in a family meeting?

The first hurdle to be overcome is facing your own mortality. Whenever I meet a client I try to wait until they use their own euphemism for death, then I use that expression for the rest of the conference. There's a wide selection of substitutions for the "D" word - "pass on," "kick the bucket," "meet my maker," "when something happens to me," "get hit by a truck," "pushing up daisies," "six feet under" - just to name a few. People will say anything rather than "when I die."

Some folks hold to the superstition that making a will brings on death. Superstitious, yes, but nevertheless, it is a real impediment to many people.

The next hurdle is the fear of giving up control. Estate planning doesn't mean giving your assets away. Many people know they must do something to reduce taxes but fear giving control of assets to children. They have heard too many horror stories about ungrateful children who spend the family savings and turn their backs on their parents. Most people want it both ways - they want to retain complete unfettered control over all their assets and also pay no estate taxes. There are techniques that permit transfers while retaining significant control, and there are ways to protect funds. Learning about these approaches is part of the estate planning process.

Fear of dealing with an attorney is another big hurdle. You might be afraid the lawyer will think you are uninformed, unsophisticated. Do you feel uninformed because you have to call the repairman to fix the air conditioner? Of course not. In the same way that you don't know how to fix an air conditioner, you don't know how to do an estate plan. This is no reflection on your intelligence or character.

You might be afraid of being gouged by fees or be afraid the attorney isn't going to listen to you but just forge ahead with a standard plan you don't want. The key to overcoming these fears is finding the right lawyer. Like anything else, a referral from a satisfied client is often the best approach. Ask your friends who they use for an estate lawyer. Like any other important decision, it is good to do research and talk to a few lawyers or firms before making the hiring decision.

]]> What does it cost? Fear of the expense is another thing that keeps people from estate planning. Let's face it. Estate planning is not for you - it's for those you leave behind. You aren't going to be hurt by estate taxes. You will be "long gone." You aren't going to have to negotiate who gets the grandfather clock - the kids are going to have to slug that out. So how much money (not to mention time and emotional energy) are you willing to spend on an estate plan for your family? Estate planning is truly a gift to your family. Recognize it for what it is - caring for others. Leaving a well designed plan behind is the best gift you can give your family. Arrange your affairs to do the most good for your family, friends, and charities.

Don't be afraid to ask how the attorney charges. Most attorneys will charge an hourly rate and you can expect to pay a high rate for a specialist. (Heart surgeons charge more than nurse practitioners.) Some estate planning is done on a flat fee basis, but an estimate can't be given until the attorney knows what will be involved. Almost no one gets a "simple will." More is involved than a will, and every family situation is different.

Tough family decisions are another emotional stumbling block. Is there a divorce looming for one of your children? Does one of the grandchildren have special needs? Will you or your spouse remarry? Who is going to control the family business after the parents are dead? Facing these issues can be so painful that they are avoided indefinitely. Then a real mess is left behind. Avoiding the problem doesn't make it go away.

What if one of the children is in and out of drug rehab, or one of the kids is a successful professional and the other is a struggling single parent with small kids and a minimum wage job. Do these children get treated equally in the estate plan?

What about blended families - the children are yours, mine and ours. Do all of them share equally in both Mom's and Dad's estates? Facing tough decisions like these is hard. The estate planning attorney can help you by giving you options and choices. Do you really want to have someone else make these decisions for you after you are dead? Worse, do you want your family to be torn apart with the fighting over your estate?

New Tax Law Hits Trusts Hard

2013-01-31T17:04:17Z

Most of the tax increases in the American Tax Relief Act of 2012 (ATRA) were aimed at the wealthiest taxpayers. Unfortunately, the tax increases will hit trusts hard.

The Tax Changes

First, the Patient Protection and Affordable Care Act (often called "Obamacare") imposes a 3.8% surtax on net investment income. "Net investment income" generally is the passive investment income earned by a trust or estate.

Second, the top income tax rate went up from 35% to 39.6% and the maximum rate on dividends and capital gains will be 20%, up from 15 % in 2012. (The combined rate will be 23.8%.)

The Collateral Damage

Why are trusts hit so hard? The trust income tax brackets are compressed. For individuals, the Obamacare surtax doesn't hit until a taxpayer has more than $200,000 of income ($250,000 for married filing jointly). For trusts, the surtax hits when income is over $11,950.

For individuals, the top income tax rate of 39.6% doesn't apply until income is over $400,000 ($450,000 for joint). A trust hits the 39.6 % top bracket when trust income is over $11,950.

The 39.6% top bracket plus the 3.8 % surtax, totaling 43.4% is the trust's combined tax on income over $11,950. Ouch, that hurts. $11,950 is not very much income.

Trustees and Executors should pay particular attention to income accumulating in the trust or estate. With the new tax brackets, it will be more important than ever before for trustees and executors to distribute income to beneficiaries so that it can be taxed at beneficiaries' much lower rates rather than being taxed at the trust or estate level.

For capital gains, which do not get passed out to beneficiaries with distributions, trusts and estates will pay 23.8% when income exceeds $11,950. This means that all trusts, including relatively small trusts, will likely have to pay the combined rate of 23.8% on capital gains.

Strategies

For estates and trusts that may be subject to the 3.8% surtax, the time to plan for reducing or eliminating the surtax is now. Strategies for reducing or eliminating the surtax may include: investing in tax exempt bonds, choosing a tax year beginning in 2012 instead of 2013 for estates, making estate or trust distributions to individual beneficiaries who will not be subject to the surtax, and creating above-the-line deductions.

Assets like tax-exempt municipal bonds and life insurance may become more favorable investment options when compared to other investment assets whose income is subject to the surtax. Trustees of trusts with IRA assets, both traditional and Roth IRAs, should consider that these assets will be even more tax-advantaged in 2013 when distributions from these accounts are not subject to the surtax.

Trustees should become familiar with the mechanics of charitable lead trusts and charitable remainder trusts, which may become more popular in light of the income deferral feature of charitable remainder trusts and the ability to shift investment income to charities in charitable lead trusts. Charitable remainder trusts are exempt from the surtax because they are exempt from income tax. Charitable lead trusts will be subject to the surtax, but the surtax may be partially or entirely avoided by the required annual distributions to charities.

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Pressure to Distribute

Trustees must decide whether or not to release more funds to current generations of beneficiaries or to hold on to trusts assets for future generations and pay the higher tax. The basic questions for trustees are, "How much income is to be distributed, who are the beneficiaries and their tax rates and what are their needs?"

These questions are not new, but with the increased taxes inside the trust, more weight (pressure) will be given to making distributions. The question can only be answered for each trust and each trustee depending on the terms of the governing instrument and the individual situations and needs of the beneficiaries. It might even be appropriate to consider trying to terminate a trust to gain better tax treatment.

Being a trustee is a difficult and challenging job. The new tax laws make it even more so.

The New Pennsylvania Benefit Corporation

2013-01-23T21:00:55Z

Pennsylvania has a new corporate form called a "Benefit Corporation".

It was signed into law October 24, 2012. Written by Philadelphia lawyers William Clark and Lizzie Babson, the new law has received wide bipartisan support across the country. Pennsylvania is the 12th state to adopt the legislation, joining California, Illinois, New York and other states. The legislation is currently pending in 15 more states. Several high profile companies, including the California apparel company Patagonia, have already become benefit corporations in other states where the legislation has been adopted.

The current legal framework for companies is structured to ensure profit maximization, not social responsibility. In their white paper, "The Need and Rationale for the Benefit Corporation: Why it Is the Legal Form That Best Addresses the Needs of Social Entrepreneurs, Investors, and, Ultimately, the Public," principal authors William H. Clark, Jr. and Larry Vranka state: "As consumer demand for socially responsible products and companies is increasing, consumer trust in corporations is decreasing.

Marketers use the terms 'green,' 'responsible,' 'sustainable,' 'charitable,' and words like them on a daily basis to describe their products or their companies. However, the more these terms are used, the less meaning they have because there are no standards to back up the claims. This problem, often referred to as 'greenwashing,' is misleading for consumers and frustrating for businesses that try to distinguish themselves based on their social and environmental business practices."

]]> The benefit corporation isn't tax-exempt, nor is it a nonprofit. Benefit corporations are required to create a material positive impact on society and the environment and to meet higher standards for accountability and transparency. It is a new legal structure in response to the rise of "social entrepreneurship."

The three major characteristics of the new benefit corporation form are:

1) a benefit corporation must have a corporate purpose to create a material positive impact on society and the environment;

2) the duties of directors are expanded to require consideration of non-financial stakeholders as well as the financial interests of shareholders; and

3) an obligation to report on its overall social and environmental performance using a comprehensive, credible, independent and transparent third-party standard.

What is different about a benefit corporation and an ordinary Pennsylvania business corporation? The governing law for a benefit corporation

Makes it clear that the fiduciary duty of its directors and officers includes creation of public benefit and consideration of non-financial interests, even in the event of a sale.

Provides legal protection for its directors and officers to consider the interests of its workforce, its community, and the environment when making decision;

Expands shareholder rights to enforce this expanded definition of fiduciary duty and standard of consideration;

Requires a 2/3 super-majority vote of shareholders to remove these higher standards;

Provides the opportunity to name and enforce pursuit of one or more specific public benefit purposes.

Provides greater access to capital than current alternative approaches.

Supporters of the new business form hope that it will differentiate true responsible and green businesses from the false claimers. They also hope that companies will demonstrate leadership by voluntarily electing to hold themselves accountable to higher standards of corporate purpose, accountability, and transparency.

Don't confuse a benefit corporation with "B Corp" certification. B Corp certification can be obtained for a company in any state from B Lab, a Berwyn, Pennsylvania, nonprofit. B Lab has developed a set of standards designed to enable the marketplace to identify and support companies that meet their third-party standards for social and environmental performance. B Lab is also a supporter of benefit corporation legislation.

Some non-profit industry groups are critical on the new benefit corporation legislation. One criticism is that benefit corporations blur the line between nonprofit and for-profit entities, which can result in misleading the consumer. Another concern is that the benefit corporations will compete with non-profits and funding for nonprofit work might be diverted to benefit corporations.

But as Shelly Alcorn and Mark Alcorn, writing for Associations Now put it: "Call us altruistic, but don't nonprofits want for-profit enterprises to do more good for society and the environment? And, as an association leader, if a benefit entity is helping address the same problem as my association, shouldn't I be happy about that? For example, if I lead the American Polio Association and a benefit corporation finds a way to eradicate polio, leaving APA with no reason to exist, should I complain? If you are focused primarily on protecting your turf, you need to do some serious reflecting on your mission."

Unique Opportunity for Charitable Giving in January 2013

2013-01-16T20:21:15Z

The American Taxpayer Relief Act of 2012 ("ATRA") creates a unique opportunity for charitable giving. If a taxpayer acts during January 2013, taxpayers who have attained age 70 1/2 may make a tax-free distribution (commonly referred to as a "charitable rollover") from their IRA to charity of up to $200,000.

In general, distributions from IRAs must be included in gross income in the year in which distribution occurs, and income taxes must be paid on the taxable portion. The advantage here is that a qualified charitable distribution ("QCD"or charitable rollover) is not included in income.

The new tax law reinstates the ability of a 70 1/2 year old individual to make a tax-free IRA distribution or rollover to a charity of up to $100,000 in 2013. The tax law applicable in 2012 did not permit this, it was last available in 2011. The unique opportunity we have now is that during January 2013 (January only), an individual can rollover an additional $100,000 and have it treated as though it were rolled over in 2012. You and your spouse can each make a $100,000 QCD for a total of $200,000 if you file a joint tax return, doubling up for a total of $400,000 in tax-free IRA distributions to charity in 2013.

The donee organization cannot be a non-operating private foundation, a supporting organization or a donor-advised fund, and the individual cannot receive any consideration for the distribution. Distributions from employer-sponsored retirement plans such as SIMPLE IRAs and SEPs do not qualify.

]]> The new ATRA rules for 2012 and 2013 are:

1. An individual who received an IRA distribution during the month of December 2012 may transfer a portion not exceeding $100,000 in cash to a qualified charity before February 1, 2013, and the distribution will be excluded from 2012 income. This option is available only for the month of January 2013.

2. Or, during January 2013, an individual may request that up to $100,000 be transferred directly from his or her IRA to a qualified charity before February 1, 2013 and have that amount excluded from 2012 income.

3. During the remainder of 2013, individuals are also permitted to direct a distribution from an IRA of up to $100,000 to a qualified charity and exclude that amount from 2013 income. In effect, this permits taxpayers who elected the options in (1) or (2) above to transfer a total of $200,000 to charities from their IRA and to exclude the entire $200,000 from income ($100,000 in 2012 and $100,000 in 2013).

Absent the QCD, some taxpayers could achieve the same result by including the IRA distribution in gross income, donating the distribution to a charity and taking an itemized charitable deduction for the donation. However, taxpayers who do not itemize their tax deductions would not benefit as they do from the QCD. Many older taxpayers choose to claim the standard deduction, especially since they often have no mortgage interest to deduct. By using a QCD these taxpayers won't miss out on a deduction for charitable giving.

Taxpayers whose charitable contributions exceed 50% of their gross income can benefit from the rollover, since this technique does not rely on the charitable deduction which contains the 50% percentage limitation.

Not having to declare the income from the IRA withdrawal may also be beneficial if it would cause an increase in Medicare premiums or taxable Social Security income.

Effective January 1, 2013, ATRA has reinstated the "Pease limitation," (named after former Congressman Donald Pease ) which had been eliminated for the 2011 and 2012 tax years. That limitation caps the amount of certain itemized deductions, including the charitable deduction, that an individual may take if his or her adjusted gross income exceeds a certain threshold amount called the "applicable amount." The new law has set the applicable amounts as $250,000 for a single individual, $300,000 for a married couple filing a joint return, and $275,000 for head of household. If a taxpayer's adjusted gross income exceeds the applicable amount, the taxpayer's itemized deductions will be reduced by the lesser of (i) 3% of the amount that a taxpayer's adjusted gross income exceeds the applicable amount, or (ii) 80% of all itemized deductions that are subject to the Pease limitation for the tax year.

For a high-income donor who makes a large gift to charity, the Pease limitation may significantly reduce the amount of itemized deductions that a donor might otherwise be able to take. Using the charitable rollover can avoid these limitations.

Individuals looking to "double up" on IRA charitable rollovers - and contribute up to $200,000 of IRA assets tax free to one or more charities - can do so if they act quickly. Git 'er done before February 1, 2013.

One Fiscal Cliff-hanger is Over

2013-01-10T08:06:54Z

They call it the American Taxpayer Relief Act. Funny, that. Overall it produces tax increases - that's relief?

Early January 1, 2013, the Senate, by a vote of 89-8, passed the "American Taxpayer Relief Act". Late on that same day- after the government had technically gone over the "fiscal cliff" - the House of Representatives, by a vote of 257 to 167, also passed the bill. The Act, which we expect the President to gain imminently prevents many tax increases from going into effect, but it increases income taxes for some high-income individuals and slightly increases estate and gift taxes.

Other fiscal cliffs remain in our future. The debt ceiling cliff is coming in a month or two and the sequester cliff comes in March (since the Act put off the automatic sequester cuts for two months).

Here are the highlights from the new Act:

Estate and Gift Taxes.

The estate tax exemption slated to fall to $1 million has been retained at the 2013 level of about $5.27 million. The top rate was slated to go from 35% to 55%. The Act provides an increase in the top rate to 40%.

For those taxpayers who made large gifts in 2012 to use your exemption before it fell to $1 million, for most of you this was still good planning. Future income and growth on those assets has been removed from your future taxable estates. Plus, who knows how long this law will be with us? There is no "sunset" with this law, but Congress can always create an instant "sunset".

The Act also includes the extension of "portability" which allows the estate of the first spouse to die to transfer his or her unused estate tax exemption to the surviving spouse.

Dividends and Capital Gains.

The maximum rate on dividends and capital gains will be 23.8%, up from 15 % in 2012. The 23.8% rate includes the new 20% maximum capital gains tax plus the 3.8% surtax from the Affordable Care Act. (The surtax applies only to individuals with over $200,000, and married couples filing jointly with over $250,000, in modified adjusted gross income.)

]]>

Individual Tax Rates

. Individual rates have been retained at 10%, 15%, 25%, 28%, 33% and 35% . A new 39.6% rate applies to income of $450,000 for joint filers, $425,000 for heads of household, and $400,000 for single filers. There is a marriage penalty here. Two single people living together could each make up to $400,000 before the 39.6% rate applies. A married couple filing jointly pays the 39.6% when combined income exceeds $450,000.
Alternative Minimum Tax
. The Act has made permanent an increase in exemption amounts, and the index of those amounts with inflation. No more year-end panic waiting for an AMT patch. Before the Act, the individual AMT exemption amounts for 2012 were to have been $33,750 for unmarried taxpayers, $45,000 for joint filers and $22,500 for married persons filing separately. Retroactively effective for tax years beginning after 2011, the Act permanently increases these exemption amounts to $50,600 for unmarried taxpayers, $78,750 for joint filers and $39,375 for married persons filing separately. Beginning in 2013, these exemption amounts are indexed for inflation.
Personal Exemption Phaseout.
Personal exemptions begin to phase out for those making $300,000 for joint filers, $275,000 for heads of household, $250,000 for single filers and $150,000 for married taxpayers filing separately.
Itemized Deduction Phaseout
. Itemized deductions are reduced by 3% of the amount by which the taxpayer's adjusted gross income (AGI) exceeds the threshold amount, with the reduction not to exceed 80% of the otherwise allowable itemized deductions. The starting thresholds are $300,000 for joint filers and a surviving spouse, $275,000 for heads of household, $250,000 for single filers and $150,000 for married taxpayers filing separately.

The effect of these phase-outs is to raise the top bracket from 35% to 41%.

Charitable Contributions from IRAs.

The ability to make tax-free distributions from individual retirement plans directly to qualifying charities has been extended through 2013 and made retroactive for 2012.
Payroll Tax Cut Allowed to Expire.
An extension of the 2% payroll tax cut that expires at the end of 2012 was not included in the Act. These taxes go back up to 12.4% from last year's 10.4%.
5-year Extensions.
The following credits slated to expire at the end of 2012 have been extended for 5 years: Child Tax Credit, Earned Income Tax Credit, and the American Opportunity Tax Credit.

How to Make Gifts of Money or Property to Minors

2012-12-26T19:53:41Z

Many folks wait until the end of the year to make their gifts - both gifts to charities and gifts to individuals. This year the annual exclusion from the gift tax is $13,000. (On January 1, 2013 it rises to $14,000.) A person may give up to $13,000 to as many recipients as he or she wishes. This is a great way to reduce your estate. The gifts are not income to the recipients, and there are no gift tax ramifications. The donor doesn't even have to file a gift tax return. If you have 2 children and 8 grandchildren, you could make ten $13,000 gifts totaling $130,000. That $130,000 is completely gift tax and estate tax free.

If you are married, you and your spouse could each give the ten $13,000 gifts so the spouse could also get $130,000 out of his or her estate.

But, you say, $13,000 is a lot of money to give to a child, not to mention $26,000. You are right. There is a big difference between giving your 16-year old grandson $50 and giving him $13,000, or $26,000. Small amounts can be used for spending money, or maybe your grandson will save part of it in a bank account. But you don't want to give your 16-year old grandson $13,000. Further, if you are serious about reducing your estate, you should be taking advantage of this annual gift tax exclusion by making gifts every year, and these amounts add up. (As Everett Dirkson may have said, "A billion here, a billion there, pretty soon, you're talking real money." )

]]> A parent does not have control over a minor child's money. The law treats the minor as a separate person in his own right, and the control of the minor's property is governed by laws to protect the minor. In Pennsylvania, anyone under the age of eighteen (18) is a minor, and there are several mechanisms for legal supervision and protection of a minor's property. For minor children who come into property by gift or inheritance, or, perhaps, as a damage settlement in a law suit, the law provides alternatives for handling the money. One alternative is a court appointed guardian of the minor child. This approach is expensive and cumbersome.

The Pennsylvania Uniform Transfers to Minors Act (UTMA) is a mechanism under which property can be transferred to a minor, by gift or otherwise, without requiring a court appointed guardian for the minor. It satisfies the IRS requirement for the $13,000 annual gift tax exclusion and is easy to create and administer.

The Pennsylvania UTMA allows the donor of the gift to transfer title to a custodian who will manage and invest the property until the minor reaches age 21 (there are a couple of exceptions which may require distribution at 18, or at 25). Until the minor attains age 21, the custodian holds the assets and may make payments for the benefit of the minor out of the custodial property. (Note that the age of majority in PA is 18, but gifts can be held in an UTMA account until age 21.) If the transfer to a minor is from a will or trust, the document can authorize the UTMA custodian to hold the funds until the minor attains age 25.

The donor selects the custodian when the UTMA transfer is made. Any adult can be a custodian. The donor should not name himself or herself as custodian, because the donor will not get the property out of his or her estate because of retained control over the distribution of the custodial funds. The UTMA account uses the minor's social security number.

Any property in the custodianship legally belongs to the minor. It can't be given back to the donor or given to the minor's parent. The custodian is responsible for safeguarding the property, investing it, delivering it to the minor when he or she attains age 21, and making distributions from it before age 21 in accordance with the law.

A custodian may pay to the minor or expend for the minor's benefit so much of the custodial property as the custodian considers advisable for the use and benefit of the minor, without court order and without regard to (1) the duty or ability of the custodian, personally, or of any other person to support the minor, or (2) any other income or property of the minor which may be applicable or available for that purpose.

When the child attains age 21, he may be convinced to contribute the balance remaining in his or her UTMA account to a trust.

Any income earned on the custodial property is income to the minor and reportable on the minor's income tax return. For a child 18 or under (23 or under if a full time student), the tax is owed by the child, but the rate of tax is determined with reference to the parents' tax bracket if the child received more than $1,900 of unearned income. This is referred to as the "kiddie tax."

How do you open an UTMA account? Any bank account, stock certificate, mutual fund account, or other property may be titled John Q. Public as Custodian under the Pennsylvania Uniform Transfer to Minors Act (PUTMA) for the benefit of Suzy Q. Public. Remember to use the child's social security number on the account.

Affordable Care Act 3.8% Surtax on Net Investment Income

2012-12-19T02:01:15Z

A new 3.8% surtax on certain investment income starts January 1, 2013, as part of the health care reform legislation. It applies to net investment income of higher-income individuals. The 3.8% surtax is in addition to your regular income tax, and it is also in addition to any alternative minimum tax.

"Net investment income" includes interest, dividends, annuities, royalties and rents and other gross income attributable to a passive activity. Gains from the sale of property not used in an active business and income from the investment of working capital are also treated as investment income. Further, an individual's capital gains income will be subject to the tax. This includes gain from the sale of a principal residence (unless the gain is excluded from income under Code Sec. 121) and gains from the sale of a vacation home.

The surtax tax will not apply to nontaxable income, such as tax-exempt interest or veterans' benefits.

]]> In general, there are three types of net investment income: 1) income from interest, dividends, annuities, royalties and rents; 2) income from a passive activity, such as income from closely-held family businesses operating in LLC or S corporation form, where some family members own shares but are not actively involved in the business; 3) Net gain "to the extent taken into account in computing taxable income." This includes capital gain. The term "net gain" implies that capital losses incurred in the current year would be taken into account to determine the net gain. It is not clear is whether capital losses that are carried forward from previous years for regular income tax purposes would be allowed for purposes of calculating "net gain" subject to the 3.8% surtax.

The new 3.8% surtax applies to the lesser of net investment income or modified AGI ("MAGI") above $200,000 for individuals and heads of household, $250,000 for joint filers and surviving spouses, and $125,000 for married persons filing separately. MAGI is AGI increased by any foreign earned income otherwise excluded under Code Sec. 911. MAGI is the same as AGI for someone who does not work overseas.

The surtax is computed on MAGI before any itemized deductions are considered. Therefore, an individual with lots of deductions could be in the lowest income tax bracket and yet have investment income that is subject to the surtax!

Trusts and estates are affected as well. The surtax is applied to the lesser of undistributed net income or the excess of the trust/estate adjusted gross income (AGI) over the threshold amount ($11,200) for the highest tax bracket.

Here are some examples of income that is not subject to the surtax: wages, salary and other compensation income, income on the exercise of compensatory stock options, and qualified retirement plan distributions. All of these types of income, while exempt from the surtax, are still included in MAGI; so they can still affect your exposure to this surtax.

A significant exception is that the 3.8% surtax does not apply to distributions from qualified plans, 401(k) plans, tax-sheltered annuities, individual retirement accounts (IRAs), and eligible 457 plans.

The surtax does not apply to income from the sale of an interest in a partnership or S corporation, to the extent that gain of the entity's property is from an active trade or business. The surtax also does not apply to business entities (such as corporations and limited liability companies), nonresident aliens (NRAs), charitable trusts that are tax-exempt, and certain charitable remainder trusts.

Individuals who expect to be subject to the surtax may want to increase contributions to retirement plans such as 401(k) plans, 403(b) annuities, and IRAs, or to 409A deferred compensation plans. Increasing contributions will reduce income and may help you stay below the applicable thresholds.

Small business owners may want to set up retirement plans, especially 401(k) plans, if they have not yet established a plan. They should consider increasing their contributions to existing plans.

The maximum long-term capital gain rate in 2012 is 15%. It is currently scheduled to increase to 20% in 2013. The 3.8% surtax would make the 2013 maximum rate imposed on capital gain 23.8%. In some cases it could make sense to accelerate gain into 2012 in order to incur the lower rate.

Since the income from a passive activity will be subject to the 3.8% surtax, consider increasing your level of activity so that the business income becomes nonpassive in order to avoid the surtax.

Investing in tax-exempt bonds should be considered since their interest is not subject tot he surtax or the regular income tax. Compare the after-tax yields of both taxable and tax-exempt bonds.

Consider converting your traditional IRA to a Roth IRA. This is a good idea even without the consideration of the surtax. Distributions from a Roth are exempted from the surtax and the income tax. The Roth conversion, when done, will cause the recognition of income. While it's not subject to the surtax per se, it will drive up MAGI which could affect your exposure to the 3.8% surtax in the year of conversion. This is another great reason to convert to a Roth before 2013.

Deductions for Year-end Charitable Giving

2012-12-12T10:20:22Z

Tax uncertainty for 2013 makes 2012 a good time for charitable giving. Don't miss out on making charitable gifts before year-end to get the federal tax rewards that are available.

Donors of large charitable gifts want to take advantage of the tax deductions available to them. The big question mark about what we can expect for 2013 income tax puts donors in a tough spot. On the one hand, it would seem taxpayers should defer charitable donations until 2013 if there are going to be higher income tax rates because the tax deduction for making the gift will be worth more. On the other hand, charitable deductions are itemized deductions; and there is much talk of limiting deduction, especially for high income taxpayers. If deductions are limited next year, it would make more sense to make your charitable gifts in 2012.

]]> Pease Limitations

There are two considerations: Congressman Don Pease was responsible for creating legislation amending the Internal Revenue Code whereby taxpayers who made excess amounts of adjusted gross income would lose their itemized deductions - they would be phased out. This provision is known as the "Pease Limitation". The Pease limitation on itemized deductions for taxpayers with income of more than $174,450 is set to come back to life on January 1 under current law. The phase out works like this: you lose deductions equal to the lesser of 1) 3% of the excess of adjusted gross income over $174,450 or 2) 80% of otherwise allowable itemized deductions including deductions for home mortgage interest, state and local income and property taxes and charitable gifts.

Under Obama's budget proposal the Pease phase out would start at $261,450 for a married couple filing jointly or $209,150 for a single filer.

Deduction Phase out?

The other consideration is the general limit on charitable deductions which under current law is 50% of adjusted gross income (or 30% for appreciated capital gain property). President Obama has proposed limiting the charitable deduction to 28% for families with incomes of $250,000 and up.

Because of these considerations, many advisors recommend giving more before the end of 2012 to lock-in the deductions. Another recommendation is to make contributions to a donor-advised fund. A donor advised fund currently offers the same tax advantages as donating directly to a charity. But a donor who wants to give but has not decided which specific charities to support can still lock in the current treatment of charitable deductions in 2012. The donor makes a contribution to a donor advised fund this year and decides what distributions to make in the future.

Percentage Limitations

There are two limitations on the amount of charitable deductions you can take. The first limit is based upon the type of charity receiving the contribution. If the recipients are "50% organizations," which are churches, schools, public charities, and the like; then the deduction limit is 50% of adjusted gross income. If the gift is to a "30% organization" such as a private foundation, then the deduction limit is 30% of adjusted gross income.

The second limitation is based upon the type of property being donated. If appreciated capital gain property is donated, then the deduction limit is 30% of adjusted gross income. This 30% limit applies even if the appreciated stock goes to a "50% organization." When appreciated capital gain property is donated to a 30% charity, the deduction is limited to 20% of adjusted gross income. You can carry any excess deductions forward for the next five years.

IRA Donations

Unfortunately, the provision in the law that allowed a donor to make a gift to a charity directly from his or her IRA expired at the end of 2011 and has not been renewed as of this writing. This provision allowed IRA owners to contribute up to $100,000 directly from their IRA to a qualified charity without recognizing the donation as income.

It is possible that Congress would reinstate the provision and apply it retroactively for gifts made in 2012. If the donor is sure that he or she wants to make the donation regardless of the tax treatment, the IRA sponsor can transfer the gift directly from the IRA to the qualified charity. If Congress does act to retroactively reinstate the $100,0000 donation provisions, the gift will be excluded from income just as before.

If Congress does not reinstate the rule, any charitable donation made from the IRA would be treated as if it were a withdrawal from the IRA followed by a tax deductible contribution to the charity. The distribution from the IRA would be recognized as income by the account owner, and the gift would later be included on his or her tax return as an itemized deduction. Depending on the size of the contribution and the amount of adjusted gross income, the tax benefit might be limited and carried over to future years.

A Change in Your Circumstances Can Change your Will

2012-12-11T09:49:38Z

The ability to make a will is a right given by state statute. If you don't make a will, the state law of intestacy determines who gets your property. If you do make a will and things in your life change, sometimes state law causes a change in your will. This is called "modification by circumstances." In these cases, what your will states is overridden by the state law.

For example, if you make a will and then get divorced, Pennsylvania law provides that "[i]f the testator is divorced from the bonds of matrimony after making a will, any provision in the will in favor of or relating to his spouse so divorced shall thereby become ineffective for all purposes unless it appears from the will that the provision was intended to survive the divorce." In other words, unless the will states otherwise, a divorced spouse is not entitled to take under a will even if he or she is named as the primary beneficiary. This can be a trap because if death occurs after the divorce is filed, but before it becomes final, the parties are still married and the surviving not-quite-divorced spouse would take under the decedent's will unless adequate grounds have been established for the divorce.

]]> The divorce, however, cannot be fraudulent. How can divorce be fraudulent? A recent New York case comes to mind. David and Vivian Dowers were married for 30 years before his death. David died at age 65. Vivian was still mourning his death when she discovered a divorce decree from 2002 stating that she had abandoned him and that they were legally divorced. They had always lived together and she had received absolutely no notice of the proceeding. She was stunned that he could obtain a divorce without her even knowing about it.

The court decreed that the divorce was a fraud and David and Vivian were not divorced. Apparently, David wanted to give his pension and life insurance to someone else, probably his children from a prior marriage, thus, the attempt at the stealth divorce. Had the court upheld the divorce, the state's statute would have given his estate to his children.

In another twist, while the divorced spouse doesn't take under a pre-divorce will, if children of the divorced spouse are beneficiaries, the law does not modify the will in that case and even though the parent is divorced, the children would still be beneficiaries under the former step-parent's will.

Here is another example: A person makes a will and then gets married. In Pennsylvania, marriage does not revoke the will. However, Pennsylvania law provides that unless the will is made "in contemplation of marriage," the surviving spouse, even if he or she is not mentioned in the will, gets what would be his or her intestate share of the deceased spouse's estate. The spouse has another right, that of electing against the will if he or she has been disinherited. One would need to figure out which is bigger, the intestate share or the elective share.

Making new wills either just before or just after marriage is always a good idea. If done just before the marriage, it is important to state in the will that it is being executed in contemplation of marriage and to name the intended spouse. That prevents the law from imposing its own "codicil".

If the marriage will be a second marriage and a pre-nuptial agreement which determines distribution upon divorce or death is executed, the minimum action needed to prevent the "Modification by Circumstances" law from negating the agreement is a no-change codicil that states that it is being executed in contemplation of marriage to the intended spouse and then reaffirms the last existing will.

If you kill your spouse, or any other person whose will gives you a benefit, you cannot inherit. This is called the "slayer statute" and prevents a murderer from benefitting from his or her crime.

In Pennsylvania, children have no right of inheritance. A parent is free to leave a will that disinherits a child. However, that is not the case for a child born or adopted after the execution of the will. Regarding birth or adoption, the law states that "[i]f the testator fails to provide in his will for his child born or adopted after making his will, unless it appears from the will that the failure was intentional, such child shall receive out of the testator's property not passing to a surviving spouse, such share as he would have received if the testator had died unmarried and intestate owning only that portion of his estate not passing to a surviving spouse."

If this is not what you have in mind for your estate plan, you need to either make a new will or make a codicil stating your intention to exclude any child born or adopted after the execution of your last will.

There used to be a prohibition in the law against any bequests made to charity within 30 days of death, the theory being that such gifts were easily coerced from someone on their death bed. That provision was repealed in 1976.

The bottom line is that when you experience a change in life, you should review your will and other estate planning documents to make sure your intentions are carried out.