Bonds are General Obligation Bonds (GO's) if they are to be paid from the general revenue and assets of the issuers. The repayment of GO's is generally supported by the issuer's taxing power; the issuer pledges its "full faith and credit." Bonds are Revenue Bonds if their repayment is restricted to certain types of revenue received by the issuer. Examples are repayment from bridge tolls or user fees at an airport.

If the bonds qualify as "tax-exempt," the interest income received by the individuals and corporations that hold the bonds is excluded from federal income taxation and usually from the income tax of the state in which they are issued. A bond that is free of federal, state and local taxes is called a "triple-tax free." Usually, since the bonds enjoy this tax preference, they pay a lower interest rate than taxable debt instruments with a similar level of risk. They are most valuable to taxpayers with relatively high marginal income tax rates. However, in the current economic picture, the yield on tax-free municipal bonds is high relative to the yield on most taxable investments, so you should seriously take a look at tax-free bonds as an investment alternative - even if you pay very little income tax.

Not all municipal bonds are tax-free, such as when they finance private activity. Also, bonds issued for some purposes are subject to the alternative minimum tax.

The tax policy behind the interest exemption was to encourage public capital facilities. Bond proceeds can be used for building schools, highways, sewage systems, and a variety of other projects. The tax exemption is limited to bonds that satisfy broadly-defined "public" purposes. Generally, bonds are considered to have a public purpose if they meet one of two tests: 1) no more than 10% of the proceeds is used directly or indirectly in a trade or business, or 2) no more than 10% of the proceeds are secured directly or indirectly by property used in a trade or business. Bonds that can't pass the test are taxable and are referred to as private activity bonds.

Taxes reduce the net income produced by bonds so you cannot compare a municipal bond yield directly to a corporate bond yield. When evaluating tax-free municipal bond investments, you must first determine the "equivalent taxable yield" of the bond. This is done by subtracting your effective tax rate from 100% and dividing the tax-free yield by the result.

Here is an example: If you are a Pennsylvania resident in the 25% federal and 3.07% state tax brackets, your combined tax rate is 28.07%. A 3% yield on a PA municipal bond is equal to earning 4.17% on a taxable investment (3% divided by (1 - 28.07%)). A PA municipal bond paying 4% will pay the same (after tax) as a taxable bond or CD paying 5.56% (4% divided by (1-28.07%)).
If you are looking at a bond from another state (e.g., you live in Pennsylvania, but the bond is issued by a New Jersey municipality), you would only take into consideration the federal tax bracket when calculating the taxable equivalent yield.

If you aren't comfortable with the math, you can go to the Securities Industry and Financial Markets Association (SIFRA) website called www.investinginbonds.com, click on calculators, and let the program do the math.

While it is true that interest on the obligations of state or local governments is exempt from federal income taxes under IRC Section 103(a), there can be some other tax consequences you should be aware of.

• Tax-exempt interest from municipal bonds is included in the calculation of the taxable portion of Social Security and Railroad Retirement benefits. In some cases, each $1.00 in tax-free bond interest can result in an additional 85 cents of taxable income, because the additional interest puts you over the limit and 85% of your social security becomes taxable.

• Tax-exempt interest from "private activity bonds" is a tax-preference for purposes of computing the Alternative Minimum Tax (AMT). If you are subject to AMT, then the interest from municipal bonds could be taxed at a rate of 26% or 28%.

• The income tax exemption is only for the interest. If you sell a municipal bond and recognize a gain, that gain is subject to tax just like the gain on the sale of any other security.

• If you buy tax free bonds with money you have borrowed on "margin", the interest paid on the loan is not deductible as investment interest.

Some municipal bonds are insured, which means that a third-party insurer has assumed the risk of the issuer's default. The bond issuer must pay a premium for this insurance, which has the practical effect of reducing the investor's yield. The value of the insurance depends on the financial strength of the insurance company.

The office of Washington State Attorney General Rob McKenna reached a settlement with an Arizona company accused of violating a three-year-old state law intended to crack down on 'trust mill' schemes.

Under the agreement, The Preservation Group and its founders will offer refunds to more than 60 Washington seniors who purchased living trusts.

"We believe the defendants pushed expensive living trusts on Washington seniors while misrepresenting probate as a time-consuming process that can eat up a nest egg," McKenna said. "This case enforces the law our office requested to ensure that only legal professionals can prepare estate documents."

The AG's Consumer Protection Division accused The Preservation Group, LLC, of Chandler, Ariz., and its owners Kevin D. Boterman and Robert J. Feinholz of violating the state's Estate Distribution Documents Act. The law, requested by the attorney general, prohibits anyone who is not a licensed attorney from marketing living trusts or wills.

Exaggerated benefits
The Preservation Group conducted estate planning seminars throughout Washington from approximately August 2007 to at least September 2008. According to the state's complaint, salespeople promoted the advantages of a living trust while exaggerating the complexity of probate, the court-supervised process by which property is transferred to heirs. They then set up appointments to meet with seniors in their homes.

Seniors who paid $2,195 to $2,995 for living trusts were encouraged to provide details about their finances that the salespeople used to pitch additional insurance and investment products, the state alleged.

At the time of the sales, Boterman and Feinholz were registered to sell insurance in Washington but were not licensed to practice law.

Sales ban
The settlement filed in King County Superior Court doesn't require the defendants to admit any wrongdoing but prohibits them selling estate planning products here in the future. They agree to pay up to $40,000 in restitution to eligible consumers who request refunds, as well as $10,200 to reimburse the state for attorneys' fees and legal costs. A $25,000 civil penalty is suspended provided the defendants comply with the settlement terms.

Properly drafted and executed, a living trust can help someone avoid probate and offer other advantages, but isn't a one-size-fits-all solution. For example, individuals with small estates may avoid probate without a living trust. Joint ownership of assets is another way to avoid probate.

Class A funds are front-loaded. There is an up-front commission that is a percentage of the amount of the purchase. Annual fees, such as management fees and 12b-1 fees, are charged for fund maintenance, sales and distribution. No commission is charged on redemption, although there may be redemption fees charged.

The front-load percent may start out around 5.75 percent but the percentage decreases in steps as the size of the purchase goes up, dropping to zero percent typically at one million dollars. Legally the front-load can go as high as 8.5%.

Other ways to decrease the percentage of front-load fees are by owning other mutual funds offered by the same fund family, committing to regularly purchasing mutual fund shares, and having family members who hold funds in the same fund family.

The 12b-1 fees get their name from the SEC rule that governs them. Investors are not charged these fees directly, but fund managers are allowed to take these fees out of a mutual fund's assets to cover the annual costs of marketing and distribution. Since the fund assets are used to pay these costs, the value of a fund share is reduced and performance is adversely affected.

The current limit on 12b-1 fees is 0.75% per year, but there is no limit on how long a fund can pay these charges if it continues to make significant new sales to investors. As a result, shareholders may pay asset-based charges through the fund for as long as they own the fund.

Class B funds are back-end loaded. They charge higher expenses than Class A shares, usually for a period of four to eight years. Class B shares normally impose a contingent deferred sales charge (CDSC), which is the back-end load. You pay the CDSC if you sell your shares within a certain number of years, normally before the end of six years. Some Class B shares convert to Class A shares after a certain number of years. Class A shares typically have lower management and 12b-1 fees than Class B shares, so it's significant that the back-end commission goes away years down the road and the fees drop.

Class B funds have fallen under scrutiny lately. Purchase of large amounts of Class B funds lose the benefit of the breakpoints inherent in Class A funds, not to mention the higher annual fees generated over the first six to eight years. Large purchases of Class B funds tend to benefit the broker at the expense of the buyer so some broker/dealers cap purchases at $50,000. Several fund families have announced that they are planning to drop their B shares altogether.

Class C funds are like Class B funds except that the back-end load is lower than found in Class B shares (typically around one percent) and is eliminated in a much shorter time, typically a year. However, their management and 12b-1 fees are higher than those of Class A shares. C shares tend to be used by investors who think they may need access to funds within three to four years.

No load mutual funds charge no commission at purchase or at redemption, but are allowed to charge fees within limits. Financial Industry Regulatory Authority (FINRA) rules limit no-load funds to 12b-1 fees of no more than 0.25 percent and total fees of no more than 0.50 percent in order to call themselves no-load funds. By comparison, Class A funds typically charge 1.25 percent per year in fees and Class B and Class C funds typically charge two percent per year in fees.

FINRA also has a "fund analyzer" to let the user compute fund performance net of fees and loads for up to 20 years.

No load funds can be purchased directly without advice, or with advice for an annual fee. This fee is in addition to the fund expenses. So why would managed portfolios hold funds with higher fees and loads? Because the advisors selling the funds get more commission for doing so.

You cannot deduct a commission you pay to a broker to buy investment property, so the loads you pay are not tax-deductible. However, you can use the commission to figure gain or loss from the sale. A front-end load adds to the cost basis of the shares. A back-end load reduces the sale proceeds. 12b-1 fees are not deductible either, but they reduce the return of the investment, and in that way indirectly reduce taxable income.

On the other hand, investment manager and planner fees may be deductible (subject to the 2% floor for miscellaneous itemized deductions) to the extent they relate to taxable income. If the management fee is based on a percentage of assets, it is deductible. Since IRA management fees reduce the value of the IRA, they indirectly reduce the amount of income reportable by the beneficiary. If your IRA custodian permits, you can pay the management fee yourself (instead of having it deducted from the IRA), and then take it as an itemized deduction subject to the 2% floor.

You may have multiple e-mail accounts, personal or family websites and blogs, domain names, important records, collections of digital photographs, a library of e-books and music, games, films, and online bank and brokerage accounts. To whom do these accounts belong? And how can they be passed on to heirs?

Dennis Kennedy recently wrote an article for the ABA webzine, Law Practice Today, entitled "Estate Planning for your Digital Estate." Kennedy presents a five step plan to help survivors deal with digital assets.

Inventory
Make a written list of your hardware and software. This include desktop and laptop computers, discs, DVDs, external hard drives, smart phones, and flash memory.

List where you store your income tax files, Quicken files, and family genealogy. What programs do you use to post to blogs and websites? If you use online backup, you need to let your executor know your user name and password.

If your banking is paperless, a written inventory prepared by you might be the only way your executor even knows about the account. List all the payees who receive automatic payment from your credit cards and checking account so that another six months of health club payments don't get made. List all subscriptions and memberships.

Identify Appropriate Help
You name executors and trustees to manage your estates, but are they computer literate? You might want to add one more co-executor who knows about digital assets. A twenty-year-old you would never allow to handle large sums of money might be just the person you want to wind up your online presence.

With a large digital estate, you may want to ask whether or not the attorney for the estate os able to manage digital assets.

Provide for Access
We are often told never to write down our passwords and to make them secure by choosing ones with letters and numbers and special characters that no one will be able to guess. That is exactly the opposite of what you need to do to make sure your digital assets are handled appropriately when you die.

Make the password list, and make sure it is stored securely - maybe write it on a paper kept with your will.

Provide Instructions
Your digital manager needs to be told which accounts to maintain, for how long, and which to close. Decisions made for some accounts may be different for others. You may want your websites to stay open for six months, then be closed, and some email accounts closed without delay.

If you are working on a long term project such as a book, you may want to make a list of "do-not-delete" files or folders.

Those thousand songs you bought online are worth a thousand dollars or more. You might want to add them to the no-delete list.

Give the Appropriate Authority
The larger the digital estate, the more you might need to name someone in your will to handle your digital assets, maybe even making that person a co-executor limited to handling online assets. That way the co-executor in charge of your digital estate will appear on probate certificates. Without such documented authority, your digital estate manager may meet stiff resistance when trying to deal with third parties.

As for the digital estate manager, Kennedy gives some good advice:
• Get technical help when you need it.
• Use contact lists, Facebook or other social network sites to notify friends of the funeral date.
• Change all passwords as soon as possible.
• Do not start closing inexpensive accounts right away. Websites are especially cheap to maintain and expensive to reconstruct.
• When deleting from drives, use a program to clean up unused space. Use several passes to make a thorough job of it. Deleting a file makes it inaccessible to the average user, but it remains accessible to motivated hackers.
• Invest in two USB hard drives. Transfer all computer files onto one drive and from that drive transfer all the "good stuff" onto the other. When done, wipe the first USB hard drive clean.
• Make copies of websites before taking them down.
• Edit all shopping accounts by deleting all credit card information.
• When it comes to photos, videos and old email, lean more to saving than to deleting.

The technique is so successful that Congress has had this planning technique in its sights for a while, and it looks like the use of short-term GRATs will be curtailed soon. Legislation already passed the House July 1 and is expected to be considered soon by the Senate which would provide: (1) a GRAT must have a minimum 10 Year Term, (2) annuity payments paid back to the grantor can not decrease over the 10 year term, and (3) the remainder interest must have a value greater than zero at the time of the transfer to the GRAT.

The legislation that passed the House provides that the measure is effective for "transfers made after the date of the enactment of this Act." That means that there is still time to use this technique, but you must act quickly.

What is a GRAT?
A GRAT is an irrevocable trust. The creator of the trust, the Grantor, transfers assets to the trust. For a specified term of years, the GRAT must pay an annuity to the Grantor (hence, the "retained annuity"). At the end of the term, the balance remaining in the trust is paid to the beneficiaries. The term of the trust and the amount of the annuity are chosen to make the actuarial value of this gift to the beneficiaries very small. Here is an example:

Grantor transfers $3 million in assets to a 3-year GRAT. The asset transferred is expected to appreciate at the rate of 12% per year. To "zero out the GRAT," each year the GRAT is required to pay $1,056,523 to the Grantor. Since the Grantor can't make a gift to himself, the only gift made is the actuarial value of the remainder interest which is valued at zero. If we assume that the asset contributed to the GRAT grows at the rate of 2.8% per year (which is the current IRS §7520 rate for transfers to GRATs made this month), then at the end of the 3 year term, the Grantor would have received back all of the trust's property as annuity payments. The remaindermen would get nothing. The value of the gift that the Grantor made is thus zero.

However, if the asset in fact appreciated or earned income at the rate of 12% per year, then there would still be $649,650 remaining in the trust. This $649,650 is distributed to the beneficiaries at the end of the 3-year term completely free of gift and estate tax. The greater the growth of the assets inside the trust, the bigger the tax savings. In effect, all growth in excess of the IRS stated rate of 2.8% passes to the beneficiaries estate and gift tax free. If the Grantor can put $10 million in the GRAT the beneficiaries receive $2,165,500 free of estate tax.

For this tax saving technique to work, the Grantor must survive the chosen term of 3 years. If the Grantor dies during the 3-year term, the trust is included in his or her estate. That is one of the reasons why it is preferable to do shorter term GRATs.

If the GRAT asset does not outperform the IRS §7520 interest rate (now 2.8%), then there will be no tax savings. What is the downside? Only the transaction costs of setting the GRAT up and maintaining it . (Translation: attorney fees.)

It is not necessary for the annuity to be paid in cash. Let's say the Grantor transfers stock to the GRAT, perhaps even stock in his or her closely-held business. The annuity obligation can be satisfied by transferring shares of stock back to the Grantor, valued at the time of the payment.

The Grantor can be the Trustee of the GRAT. (Caution: The Grantor should not be the trustee if stock in a closely-held corporation is transferred to the GRAT.) Payment at the end of the term of years need not be outright to the beneficiaries. There could be a continuing trust for beneficiaries. With limited trustee powers, the Grantor could even be the Trustee of the trust after the expiration of the term.

There is an additional income tax advantage. Since all of the GRAT's income is paid to the Grantor, the GRAT is a Grantor trust for income tax purposes. The Grantor pays the income tax on any income earned by the trust. This is an additional estate planning advantage because this tax payment is really for the benefit of the remainder beneficiaries and, yet, it is not treated as a gift.

Because the GRAT allows the remainder beneficiaries to receive the appreciation on all of the trust property, it produces a much better tax result than an outright gift. Other gifts either use up the exemption or cause the payment of gift tax. A properly structured GRAT can shift very significant value to beneficiaries for no tax cost at all.

The important thing is that if a GRAT would be a good planning opportunity for you, act now. The days for GRATs are numbered.

In June 2009 the IRS announced its intention to begin regulating tax return preparers. In January 2010 the IRS released a report proposing the following recommendations for its regulation of tax return preparers:

• All paid tax return preparers must have or obtain a preparer tax identification number (PTIN) and register.

• Other than those exempted, all paid tax return preparers will be tested for competency.

Who will have to obtain a PTIN and register? According to the IRS proposed regulations, by December 31, 2010, all individuals who are compensated for preparing, or assisting in the preparation of, all or substantially all of a federal tax return or claim for refund or who sign, or are required to sign, a federal tax return or claim for refund as paid tax return preparer must obtain a (PTIN) and, if applicable, successfully pass an examination.

Staff members who do not sign returns but assist in their preparation are considered to be tax return preparers and will have to get a PTIN.

As currently understood, only the signing tax return preparer will be required to put a preparer PTIN on a tax return under the proposed PTIN regulations, and the IRS is not expecting signing preparers to check on PTINs from other individuals who are involved in preparing a return. However, the requirement that only the signer put a PTIN on a return does not mean the IRS will not go after tax return preparers other than the signer if there are problems on a return. If another preparer is found to have provided false or insufficient information that was included in the return, the signer will have the ability to point the finger at the other individuals who worked on a return.

All federal tax return preparers, even those who already have a PTIN, will need to register in the new system which will be available on September 1, 2010. Any tax return preparer who presently has a PTIN or gets a PTIN before September 1, 2010, will still need to register and pay a fee once the new online preparer registration system becomes available. The system will ask if you already have a PTIN; and, if so, it will reassign you the same number. The fee is not waived even if you have been assigned a PTIN prior to registering.

During the tax return preparer registration process, the IRS will check to make sure that each applicant does not have a criminal background and actually pays his own taxes. Registration is good for three years. Everyone must be registered by the 2011 tax season. That means the IRS only has a few months to certify more than a million tax return preparers.

The proposed regulations as drafted allow anyone registering prior to January 1, 2011, to obtain a PTIN. However, anyone registering thereafter would first have to pass the competency examination unless he or she is exempted from taking the exam. Because the examination is not expected to be available until April 2011 at the earliest, there will be a substantial period of time during which no one will be able to get a PTIN. This provision is expected to be changed.

The IRS announced on June 15, 2010, that management consulting and outsourcing company Accenture PLC has been awarded a five-year contract to design and operate the return preparer registration program for the IRS. The company will work with the IRS to develop a system for online registration and renewal, collection of user fees and assignment of identification numbers for paid tax return preparers.

Who will be Required to Take the Competency Tests?

Only attorneys, certified public accountants, or enrolled agents who are active and in good standing with their respective licensing agencies are exempt from competency testing. There will be no grandfathering of paid tax return preparers who are not in the exempt category. The tests are expected to be ready in the spring of 2011. They will be available online and will be open book. Each tax return preparer will have to pay a fee to take the tests. It is expected that preparers will be able to take and pass the exam over the three-year transition period.

What are the Competency Tests?

There are two competency tests, but only one has to be passed to be licensed. One will cover Wage and Non-business form 1040. The second will cover Wage and Small Business form 1040. Small business will include Schedules C, E and F and various other 1040 related forms. Even if they do not prepare 1040 returns, preparers of business tax returns who are not attorneys, certified public accountants or enrolled agents will be required to pass the Wage and Small Business 1040 test. The IRS plans to add a third test with regard to business tax rules after the three-year implementation phase is completed.

You can buy actual paper bonds (referred to as "definitive bonds") at banks, or you can buy book entry bonds at TreasuryDirect (referred to as "electronic bonds"). Bonds always earn interest from the first day of the month in which they are issued. There is a maximum purchase limit: $30,000 per series, per type, per social security number, per year.

Each bond must have a registered owner. The bond can include one other name, either a co-owner or a beneficiary. When a bond has a co-owner, the Treasury and the IRS assume that the first named owner is the principal owner, who is the person who will pay the income tax on the interest that the bond has earned. Of course, documentation such as a contract between the parties can show otherwise.

Co-owned or joint paper bonds can be cashed in by either the principal owner or the co-owner. The removal of a co-owner requires both signatures. Co-owned electronic bonds can only be cashed in by the principal owner, and the principal owner can change or remove a co-owner without the co-owner's knowledge or permission.

When a bond is cashed, it is generally accepted that the individual cashing the savings bond is the individual responsible for the interest reporting on that year's income tax return for the interest accrued by the bonds. A 1099-INT is issued by the financial institution for those bonds to that individual who presented the bonds for payment. It may be that this is incorrect income tax reporting. In which case the individual receiving the1099 must report the interest but make an adjustment on his or her 1040 by subtracting the amount reportable by another taxpayer as a nominee distribution, then give the actual owner a Form 1099-INT and file Form 1096 with the IRS.

Some reissue transactions are taxable events and require that the interest earned on the bonds be reported as income for the year in which the reissue occurs.

Consent is not required for the owner to change a beneficiary (except in cases of some older Series E Bonds). Beneficiaries cannot cash in bonds until the owner's death.

If a bond has a co-owner or beneficiary and the co-owner or beneficiary survive the principal owner, then on the principal owner's death, the surviving joint owner or the beneficiary becomes the owner. The bonds may be reissued in the name of the owner or beneficiary. The principal owner's will does not govern who is the recipient of a bond with a second name.

This is an important point. If you have taken care to craft a will with percentage or specific distributions to beneficiaries, putting beneficiaries or co-owners on bonds (or any asset, for that matter) can wreck your carefully laid plan.

Many customer service representatives and other financial institution employees may urge you to add co-owners or beneficiaries, not only to your savings bonds, but to bank accounts, securities and other investments. Often they will tell you that adding a name will avoid probate. That is true, as far as it goes; but if you have an estate plan in place, it is usually best not to add co-owners and beneficiaries because it will defeat a carefully thought out estate plan. Before adding a co-owner or beneficiary check with your estate planning attorney.

The U.S. Treasury has a website that provides information about all kinds of savings bonds: click here. There you can find a calculator which will give you redemption value, current interest rate, next accrual date, final maturity date and so on. You can enter your list of bonds and it will stay there. You can look at the values on later dates.

For further information I also recommend Tom Adams' book, Savings Bond Advisor, Alert Media 2007.

Series EE Bonds. Series EE bonds offer tax-free accumulation of interest until the bond is redeemed or matures. They are purchased for one-half of their face value. Most Series EE bonds have a total interest-paying life that extends beyond the original maturity date, up to 30 years from issuance.

When a Series EE bond matures, whether or not it is cashed in, the accrued interest is taxable. This is a very important point. It is important to keep careful record of your bond maturity dates - not only because they won't be earning interest anymore but also because the maturity is a taxable event. When a bond is cashed in, a 1099 is issued by the bank or financial institution to the person who is cashing in the bond. No 1099 is issued when a bond matures and is not cashed. The taxpayer is on his or her own to report the accrued income on his tax return at maturity. Making a mistake on this can result in interest and penalties owed to the IRS.

Instead of reporting accrued interest when you redeem bonds, you can choose to report the income annually. A taxpayer may elect to report all of the accrued interest on bonds through the end of the year in which the election to switch reporting methods is made. Then, in succeeding years, the individual must report the accrued interest for each year. If this election is made, it applies to all savings bonds. An individual who owns many savings bonds cannot "pick-and-choose" which bonds the election applies to.

An executor can elect to report all the accrued interest up to the date of death on the decedent's final income tax return. Then, when an heir redeems the bonds, the only interest to report will be the interest that has accrued from the date of the decedent's death.

If the election is made the taxpayer must keep careful records. Even if the election to report annually is made, the owner will still get a 1099 for the full amount of interest when the bonds are redeemed. No one wants to pay the tax twice.

Through the Education Savings Bond Program, if you cash in your bonds and use them for qualified higher education expenses, you may be able to exclude that income from taxes. Eligible bonds include Series EE Bonds issued after December 31, 1989 and all Series I Bonds. Series HH bonds are not eligible. Qualified expenses include tuition and required fees at colleges, universities and vocational schools. Room and board and books are not included. Qualified expenses are reduced by the amount of any financial aid received in the same tax year, including the amount of other education tax breaks. There are income phaseouts on the interest exclusion, based on the year in which you redeem the bonds. For 2010, the income phaseouts are $70,100 to $85,100 for single filers and $105,100 to $135,100 for married taxpayers filing jointly.

Series I Bonds. These bonds are sold at face value and grow with inflation-indexed earnings for up to 30 years. They are purchased at face value and you can buy up to $5,000 in I bonds in any calendar year. All Series I bonds have a final maturity at 30 years from the date of issue. The current interest rate for I Bonds purchased May 1, 2010 to October 31, 2010 is 1.74%. I Savings Bonds must be at least 1 year old before they are eligible for cash-in. There is a 3-month penalty for cashing in an I Bond before it is five years old, unless a Federal Disaster is declared.

Series HH Bonds. Beginning September 1, 2004, owners can no longer reinvest matured HH bonds or exchange EE bonds for HH bonds. Existing HH Bonds will be allowed to mature.
Series HH bonds were purchased at their face amount and pay interest semi-annually. They are redeemable at face value, mature in 20 years and were issued from January 1980 to August 2004. When EE bonds were used to acquire HH bonds, the amount of accrued interest in the EE Bonds is "rolled over" into the HH bonds and is not taxable income until the HH bond is redeemed or matures. The amount of accrued E or EE interest rolled over into the H is printed on its face.

Please vote for their idea to renovate an uninhabitable city home while training vocational students:

click here to vote

The nature of our legal system, which is often referred to as a "common law" system, is that it depends heavily on precedent. That means that the outcome in a current case is determined by reference to the outcome in prior cases. Words, phrases, and terms are given meanings that are developed in lines of cases. Thus, so called "legalese," while usually used as a denigrating label, is in fact the technical language of the law.

Do you understand the meaning of these phrases: "Biophilic Design", "microsphere/hydrogel combination system", and "pool boiling curves"? If you don't you are not alone. They come from the technical language of architecture, pharmacy, and nuclear engineering, respectively. These specialized professions employ technical language. As does the legal profession.

There is a movement for Plain Language in legal writing that is very important. Its goal is to eliminate unnecessarily complex language in law, government and business. The improvement of writing clarity should be supported. However, it cannot be expected that a lay person will be able to read and converse freely about the technical aspects of any profession. A physics paper submitted for publication to an academic journal is not readily accessible to the lay reader.

In the law, some writing should be directed at the reader's lay level. A good example is warning labels. It is imperative that a warning label to be affixed to a dangerous machine be clear and easily understood. What is not so clear is that legal documents intended to govern complex relationships and transactions need be or can be written with the same reader in mind. For attorneys the use of traditional legal writing is more efficient because it is most commonly used; therefore, most commonly understood.

Some accuse lawyers of being obscure writers on purposes. Perhaps some lawyers are like that, but many accusations against lawyers for writing "legalese" are unfounded.

If you read a surgeon's textbook giving precise instructions on how to perform a cholecystectomy and you did not understand it, would you think it was a bad textbook? Or would you think that you had a bad surgeon? No, of course not.

Similarly, if your lawyer drafts a will or trust for you and you do not understand all of the provisions, does that mean it's a bad document, or that your lawyer is being an obscurantist? No, of course not.

"Boilerplate" provisions in a contract, will, or other legal documents are sections of routine, standard language. The term comes from an old method of printing. In the late 1800's and early 1900's, "boilerplate" or ready to print material was supplied to newspapers. Advertisements or syndicated columns were supplied to newspapers in ready-to-use form as heavy iron, prefabricated printing plates that were not (and, indeed, could not) be modified before printing. These never-changed plates came to be known in the late 19th century as "boilerplates" from their resemblance to the plates used to construct boilers.

The term "boilerplate" was later adopted by lawyers to describe those parts of a legal document that are considered "standard language," although any good lawyer will tell you to always read the "boilerplate" in any document you plan to sign. Today, "boilerplate" is commonly stored in computer memory to be retrieved and copied when needed.

In a will or trust, sections of boilerplate are often maligned as "legalese." In fact, the choice of boilerplate is crucial. Let me give you a few examples.

Wills should contain a tax clause. A tax clause is a provision that says where the executor should get the money to pay federal and state death taxes. A common boilerplate provision could provide that all taxes are to be paid from the residue of the probate estate. Maybe your will says that.

Boilerplate is often used in a will or trust to provide definitions. For example, the will may refer to children, grandchildren, descendants or issue. Who is included? Is a stepchild included in the class? Is an adopted child included in the class? Are children born of unmarried parents included? If there is a definition in the boilerplate, it may exclude stepchildren as beneficiaries. Is this intended? Perhaps. Then again, perhaps not. This is a case where the definition in the boilerplate goes to the heart of the matter--who is a beneficiary and who gets a share of the estate.

If you name an individual or a bank or trust company as a trustee, can the beneficiaries ever remove that trustee? Thirty years later when the trustee's fees are high, investment performance is poor, and there is inadequate customer service, can the trust be moved? It depends on what it says in the boilerplate.

All boilerplate is not equal. The choice of the boilerplate that is appropriate to the circumstances and is in accordance with the intentions of the parties is very important. There is no standard, across-the-board language for anything. It is all written by someone, the words have meaning, and they are binding.

In most cases, using reasonable assumptions, the Roth IRA conversion usually looks like the better choice, although the psychological hurdle of paying a big income tax bill now still prevents many IRA owners from doing the conversion. (Maybe it's not just psychological - I suppose income taxes could be lower in the future, although that seems to conflict with the reality principle.)

If the beneficiaries intend to liquidate the IRA right away and spend it, the calculation might be close. But transferring a Roth IRA to your beneficiaries on your death can be a VERY valuable opportunity, if they do not miss it. If the beneficiaries, instead of withdrawing the Roth IRA immediately, maintain the Roth IRA as an inherited IRA and take the minimum required distributions over their life expectancies, then they are getting a terrific benefit.

A person who inherits a Roth - unlike the original owner of the account - is required to take a minimum required distribution each year, beginning in the year following the year of death. The beneficiary must withdraw a percentage of the funds annually, based on his/her age. Comparing the traditional IRA against the Roth IRA for the lifetime of the owner and his/her spouse is not enough. To understand what it means to a beneficiary to inherit a Roth IRA, the projections have to keep going.

The beneficiary has an asset which will grow at a compounded rate tax-free for his/her lifetime and any withdrawals made will be completely tax free. There is simply nothing else like it. No other investment will give this kind of return tax-free. Inheriting a Roth IRA is much more valuable than inheriting any other asset. Any other asset - whether it be stocks and bonds, real estate or cash - will be subject to income tax on its income and growth. Traditional IRA distributions will be subject to income tax.

The younger the beneficiary is when the IRA is inherited, the longer the beneficiary can stretch out withdrawals, giving more time for tax-free compounded growth of the investments inside the Roth. The beneficiary's inheritance could get bigger as he or she gets older. It is like giving your beneficiary a tax-free, lifetime annuity.

Since younger beneficiaries with a longer opportunity for stretching out distributions get the most benefit, consider naming grandchildren as your Roth IRA beneficiaries. If you are concerned about leaving a substantial sum to young children, there are solutions. You can name a Custodian under the Uniform Transfer to Minors Act (UTMA) to receive distributions, and then the custodian can accumulate the withdrawals and use them as needed for the child until the child is 21. If you set up a trust as a beneficiary for the benefit of the minor child, the trustee can hold the accumulated distributions until the beneficiary reaches more mature years - age 30, 35 or any other age you would like to specify. For a trust to be able to be used with the stretch-out of distribution, the trust must be carefully drafted to comply with complex IRS rules.

If you cannot bring yourself to pay the current income tax required to convert your traditional IRA to a Roth, and you have reason to believe your life expectancy is limited, then do the Roth conversion in anticipation of death. The income tax due as a result of the conversion will be paid by your executor as a debt of your estate and will be deductible for inheritance and estate tax purposes. Your beneficiaries will get the benefit of inheriting a Roth IRA - the best asset to inherit.

● Joint property. Any asset that is titled to a husband and wife jointly, joint with right of survivorship (JWROS), or as tenants by the entirety, passes to the wife at the moment of husband's death. It does not pass under the will and title vests in the surviving joint owner immediately.

● Beneficiary designations. Life insurance, qualified plans, IRAs, annuities, and other contract rights are paid to the beneficiary that was designated by the owner. For qualified retirement plans (but not IRAs) there are federal requirements that the beneficiary must be the surviving spouse unless the surviving spouse has consented in writing to the designation of another beneficiary.

● Property owned by the deceased husband alone. Any asset that is owned by the husband in his name alone, becomes part of his estate.

● Intestacy. If deceased husband had no will, then his estate passes by intestacy. The portion of the estate wife receives depends on whether or not the deceased husband leaves living issue or living parents. If the deceased husband leaves no living issue (issue are children, grandchildren, etc.) and also no living parent, then the wife receives his whole estate.

If deceased husband leaves no living issue, but leaves a living parent or parents, then the wife gets the first $30,000 plus one-half of the balance of the estate. The parents receive the balance.

If the deceased husband leaves living issue, all of whom are also issue of the wife (in other words, the surviving spouse is the mother by birth or adoption of all of the decedent's children), then the surviving spouse gets $30,000 plus one-half of the balance of the estate.

If there are surviving issue of husband, one or more of whom are not issue of the wife, then the wife receives one-half of the estate and the issue receive the balance.

● If deceased husband left a will, but the will either makes no provision for wife, or very little provision, or if husband has arranged title of assets so that there is no probate estate, the wife is entitled to elect a statutory forced share. (A spouse who for one year or more before the death of the deceased spouse has "willfully neglected or refused to perform the duty to support the other spouse," or who for one year or more has "willfully and maliciously deserted the other spouse" shall have no right of election, or even of receiving an intestate share.)

If wife makes this election, whether the marriage lasted for one day or fifty (50) years, the elective share is one-third (1/3) of: (1) the property that passes under the decedent's will (2) property from which the decedent was entitled to receive the income if that property was transferred by the decedent during the marriage, (3) property transferred by the decedent during life where the decedent could revoke the transfer and get the property back, or could withdraw or invade the principal of the property for the decedent's own benefit (for example, property in a revocable trust), (4) joint property owned with another to the extent the decedent could have conveyed or revoked the joint account, (5) annuity payments to the extent the annuity was purchased during the marriage and the decedent was receiving payments, and (6) gifts made within one year of death to the extent they exceed $3,000 per beneficiary.

The following property interests are not subject to the election: (a) any transfer made with the consent of the surviving spouse, (b) life insurance on the decedent's life, and (3) retirement plans (although many retirement plans other than IRA's must be paid to the surviving spouse unless the surviving spouse consented to a different beneficiary designation).

Note that a spouse cannot take both an intestate share and a statutory forced share. Care must be taken to determine which options are available to the surviving spouse and which option produces the best result.

● If the husband made a will before he married, then the surviving spouse will receive the share of the estate to which she would have been entitled if the husband had died without a will, unless the will gives her a larger share, or unless it appears from the will that it was made in contemplation of the marriage.

● If husband made a will and was later divorced, the law provides that any provision in that will for the benefit of former wife is ineffective. The former wife has no rights in husband's estate, either as a beneficiary or as an executor or administrator. The will is not revoked, it is interpreted as if the ex-wife had predeceased her ex-husband.

All of the scenarios described above state general principles of law in Pennsylvania. Spouses are free to make contracts with each other agreeing to different dispositions. If the spouses made a pre-nuptial agreement or a post-nuptial agreement, the terms of those agreements will prevail.

The "basis" of a piece of property is generally the purchase price of that property and is used to calculate taxable gain (or loss) when property is sold. The basis may be increased by improvement to the property or decreased by depreciation. In the case of stocks and bonds, the basis simply equals the purchase price, while with real estate the basis equals the purchase price plus the value of all capital improvements. The greater the increase in value of property, the greater the taxable gain when sold.

Prior to 2010, the basis of property acquired from a decedent was stepped up (or stepped down) to its date of death value. The basis step-up for property acquired from a decedent allowed individuals to transfer appreciated property to family members and others at death without the transferor, recipient or anyone else having to pay income tax on the pre-death appreciation. The policy behind the step-up was that it would be unfair to subject pre-death appreciation in assets to estate tax and then also to income tax if and when the heir later sells.

For decedents dying after December 31, 2009, the basis of property acquired from the decedent will no longer get a "step-up" in basis to date of death value. It will be replaced by a "modified carry-over basis." In general, for decedents dying in 2010, the basis of property acquired from the decedent will be the lower of the fair market value on the date of the decedent's death or the adjusted basis of the property immediately before the death of the decedent. These basis rules are contained Section 1022 of the Internal Revenue Code.

Carry-over basis generally means the basis of inherited property remains the same as it was for the deceased owner; which potentially increases the amount of gain (and income tax) when the property is sold. However, if the decedent's basis was higher than date of death value, the decedent's basis does not carry-over - it is reduced to date of death value. That is why it is called "modified" carry over basis.

What a mess. That means that in order to determine the basis, the executor will have to research the historical basis of assets - which is going to be extremely difficult since many people do not have records showing the acquisition cost of assets and the executor must value all assets as of the date of death. The basis in the hands of the beneficiary will be the lower of the two values.

Finding the historical basis of assets will be challenging. For example, stock with dividends reinvested gets a basis adjustment each time the dividends are reinvested. Basis changes when companies have been spun off from parent companies. For real estate, basis includes not only the initial acquisition cost, but also the cost of certain capital improvements. Many people are not aware of the basis in their property; and after their deaths, determining basis can be next to impossible.

There are two exceptions to the modified carryover basis rules:

First, each decedent's estate will get a $1.3 million increase in basis which can be allocated among assets by the executor. The $1.3 million is increased by (1) the amount of any capital loss carryover, and net operating loss carryover which would, but for the decedent's death, be carried from the last tax year to a later tax year of the decedent, plus (2) the sum of the amount of certain types of losses that would have been allowable to the decedent, if the property acquired from the decedent had been sold at fair market value immediately before the decedent's death. No increase is allowed for appreciated property acquired by the decedent within three years of death for which a gift tax return was required to be filed.

Second, there is an additional $3 million increase in basis for assets passing to the decedent's surviving spouse either outright or in a qualified terminable interest in property(QTIP) trust. You should have your plan reviewed to make sure that property left to the surviving spouse is eligible for the $3 million spousal property basis increase. Marital trusts that are not QTIP's will not qualify.

There will be a return required. Of course, it has yet to be made available by the IRS. It will be an informational return to report the basis and show to which assets the additional step-ups ($1.3 and $3 million) were allocated. A return must be filed for 2010 decedents who are U.S. citizens or residents whose gross estate exceeds $1.3 million plus the decedent's unused built-in losses and loss carry-overs; or non-citizen, non-residents whose gross U.S. property exceeds $60,000.

- Brick Pollitt, character in the play

Last week my husband and I saw Tennessee Williams' play "Cat on a Hot Tin Roof" at the Fulton Theatre. The theme of truth vs. mendacity runs through the play as a dysfunctional family fights over an inheritance in the Mississippi Delta.

Plantation owner Big Daddy has come home from the clinic on his 65th birthday. In addition to Big Mama, his sons and their families are there to welcome him and to tell him he is dying of cancer! Big Daddy favors his tormented, alcoholic, former-football-hero son Brick, married to Maggie the cat. Their marriage is childless and on-the-rocks. Brick has quit his job and taken to drinking after the death of his friend Skipper, with whom it is intimated he had a homosexual relationship. Gooper, the less-loved son, and his over-bearing wife Mae are there with their 5 children (no-neck monsters) and another on the way.

Everyone except Big Daddy knows that he does, in fact, have terminal cancer. The maneuvering begins for the inheritance. What does Big Daddy own? "Close on ten million in cash an' blue-chip stocks, outside, mind you, of twenty-eight thousand acres of the richest land this side of the valley Nile!"

As the family quarrels and postures, trying to gain control of Big Daddy's estate, we are given lessons in human nature, family dynamics and estate planning:

1. Make your will now. Big Daddy couldn't decide whether to leave the plantation to older son Gooper, whom he hates, or younger son Brick, whom he loves but knows is an alcoholic. "I didn't make up my mind at all on that question and still to this day I ain't made no will! - Well, now I don't have to. The pressure is gone. I can just wait and see if you pull yourself together or if you don't." The audience knows he is in fact dying - so it looks as though he will die without a will. Don't wait until there is a crisis situation to make a will. If drafted in response to a crisis, the disposition of your estate may not be the result of thoughtful, careful consideration but a knee-jerk reaction influenced by the situation.

2. Is blood thicker than water? Should it be? Big Daddy's hesitation over leaving the plantation to Brick is two-fold: 1) he is an alcoholic and Big Daddy doesn't want to "subsidize a [@#$%&*] fool on the bottle," and 2) Brick has no children so that Big Daddy's legacy will not continue past Brick's generation. An estate plan can address questions such as 1) do I need to control distributions to a beneficiary who is incapable of handling money, 2) do I want to provide for future generations or 3) are there beneficiaries other than family members I want to consider.

3. Even with an estate plan, don't think there won't be sibling rivalry. Even if your kids get along with each other and you, they may have spouses. Gooper and Mae pretend to be the dutiful, attentive son and daughter-in-law, when in truth they are driven solely by the desire for material gain. Children who keep their animosity damped down while you are around lose that inhibition when you are gone. No matter what Big Daddy does, it appears that the sequel to Cat on a Hot Tin Roof will be Cat and the Will Contest.

4. Don't try to use your money to control people. They may be nice to your face, but behind your back they will hate you. Who could expect Big Daddy's statement to Brick as to who will inherit the plantation, "I can just wait and see if you pull yourself together or if you don't," to produce anything but Brick's disdain for his father.

5. Provide for your spouse. What about Big Mama? It becomes clear that Big Daddy hates her, although he puts on a show of caring for her. What does she get when Big Daddy dies? No one seems to think she will inherit - it's only the two sons. If you are married, make sure your spouse is providing for you adequately. If your spouse dies without a will in Pennsylvania, you do not inherit the whole estate. If there are children, you get the first $30,000 and one half of the remaining amount with the kids getting the other half.

6. Bring out the skeletons. There are repressed ideas in Cat on a Hot Tin Roof that are finally revealed at the climax of the play. But in many lives, hidden secrets are never exposed. Don't assume you know and understand everyone in your family. If there are difficult situations or problems, your attorney needs to know.

The biggest lesson of all? In Big Daddy's words, "You can't buy back your life when it's finished."

For federal tax purposes, U.S. Armed Forces include officers and enlisted personnel in all regular and reserve units controlled by the Secretaries of Defense, of the Army, Navy, and Air Force. The Coast Guard is included, but not the U.S. Merchant Marine nor the American Red Cross.

Combat Pay Exclusion

Soldiers deployed to Iraq, Kuwait, Afghanistan and other countries in that theater or otherwise considered to be in a combat zone, along with those countries in the Balkans, are allowed extra time to file and pay their income taxes. Click here for a list of 2009 combat xones. Soldiers will have at least 180 days after they redeploy home to file their federal tax returns, and no penalty or interest will accrued during this period.

U.S. Armed Forces civilian employees and contractors deployed to a combat zone in direct support of the military are also eligible for these tax extensions.

Soldiers also do not pay any income taxes on the wages they earn while deployed in a combat zone, nor do they pay taxes on hazardous-duty pay. For enlisted troops and warrant officers, if any part of a month is spent in a combat zone, then that entire month's wages are exempt. For officers, the exclusion is limited to the highest rate of enlisted pay.

Afghanistan has been considered a combat zone since Sept. 19, 2001. Jordan, Pakistan, Tajikistan, Kyrgystan and Uzbekistan have also been designated as areas in direct support of the military operation for Enduring Freedom. Kuwait was declared a combat zone in 1991 along with the Persian Gulf, the Red Sea, Gulf of Oman, Gulf of Aden Iraq, Saudi Arabia, Oman, Bahrain, Qatar and the United Arab Emirates. That designation has never been lifted. Bosnia and Herzegovina, Croatia, Macedonia and Kosovo are considered hazardous duty areas and soldiers serving there receive the same deferral on their taxes as those in combat zones.
If you're serving in a designated combat zone or hazardous duty area, much of your military pay and reimbursements will be exempt from federal tax.

To determine exactly what compensation or benefits are taxable and what are exempt, see IRS Publication 3, Armed Forces Tax Guide (see http://www.unclefed.com/IRS-Forms/2002/p3.pdf or call 1-800-829-3676)

For enlisted troops and warrant officers, if any part of a month is spent in a combat zone, then that entire month's wages are exempt. For officers, the exclusion is limited to the highest rate of enlisted pay. There are also automatically later deadlines for filing tax returns, paying taxes, submitting refund claims or taking other actions with the IRS. The basic extension period is 180 days, but it might be lengthened depending upon when in the tax season you were shipped to a combat zone.

You don't have to be in a combat zone for IRS relief rules to apply. If you are deployed to a region in support of but not directly involved in combat, you also receive the 180-day (or more) extensions. In addition, the deadline for the IRS to take certain actions, such as tax collection and examination of your returns, is extended and no penalties or interest will be imposed for not filing or paying taxes during this time.

The extension of time to file also applies to spouses of military members deployed to combat zones. On the other hand, if a family is owed tax refunds and wants to get money back immediately, the spouse back home can file tax returns on behalf of the deployed soldier.

What about Pennsylvania?

Military pay earned by PA residents is fully taxable unless received while on federal active duty or federal active duty for training outside Pennsylvania. Income received by a PA resident for military service performed inside Pennsylvania, even if on federal active duty or federal active duty for training, is fully taxable as compensation.

Income received for military service outside Pennsylvania while on active duty as a member of the Armed Forces of the United States is not taxable as compensation. You may deduct such income if included in your W-2 form. Therefore, when completing your PA income tax return, do not include military pay earned outside of Pennsylvania on Line 1a. of yourPA return. Attach a copy of your orders to the copy of your W-2 along with an explanation of the amount of income excluded from Line 1a.

PA reservists and National Guard members ordered to active duty for training pursuant to Title 10 or Title 32 of the U.S. Code are on federal active duty. When performing active duty service outside Pennsylvania, such military pay received is not taxable.

For more information see https://revenue-pa.custhelp.com

Soldiers and Sailors Civil Relief Act

This federal statute can help servicemen and women stop a civil legal action ( not a criminal action) and avoid default judgments if they cannot attend court due to military obligations. Civil actions that can be stopped include (but are not limited to) bankruptcy, foreclosure, and divorce proceedings. It also provides some other relief provisions including protection from lease termination in certain circumstances, limiting the interest rate on certain debts, and protection from some state taxes.

Federal soldiers' relief acts date back to the Civil War. The policy behind Congress' passage of these acts was two-fold: (1) it wanted service members to fight the war without worrying about problems that might arise at home, and (2) most of the soldiers and sailors were not well paid, so it was difficult for them to honor pre-service debts such as mortgages or other credit.

Our current Soldiers and Sailors Relief Act is circa 1940 and has been effective since then. It is a very powerful protection for service men and women.