http://www.usatoday.com/money/perfi/taxes/2010-07-21-estatetax21_CV_N.htm
Excellent article that follows up on the status of the Federal Estate Tax and how timing is everything. George Steinbrenner's heirs will save somewhere between $450 million - $550 million in Federal Estate Taxes based upon his death in 2010 vs. 2011.
Thursday, July 22, 2010
Wednesday, July 21, 2010
Enforcing Employee Benefits: Navigating the ERISA Nebula
Introduction
Most private sector employees that participate in an employee welfare benefit plan (such as a health care plan, disability plan, or retirement plan) are subject to a 1974 federal law called "ERISA." ERISA is the acronym for the Employee Retirement Income Security Act. Despite the name, ERISA applies to all sorts of employee benefit plans, not just retirement plans.
ERISA applies to health and medical insurance plans, short and long term disability income insurance plans, and retirement plans such as pension plans, 401K plans, and other retirment plans that are sponsored by private sector employers.
Congress enacted ERISA to regulate abuse and misuse of employee welfare benefit plans, require equality in application and enforcement, and try to establish a more uniform administration of very complex benefit plans. In recent years, the focus on health care reform has shed light on a number of problems that evolved partly because of the gaps and shortcomings that exist in ERISA.
Over a multi-part series, just as with the prior discussion on the Federal Estate Tax, I will attempt to provide a common sense approach to ERISA and employee benefits that will hopefully give you a better understanding of the procedures and legal rights available to plan beneficiaries when an insurance company, plan administrator, or employer fails to live up to its obligations to provide benefits.
Does ERISA apply to my benefits?
Not all employee benefit plans are covered by ERISA. Government employers on the state, local, and federal level are exempt from ERISA. There are also other limited types of employers that are exempt from ERISA's coverage. However, most private sector employers are subject to ERISA's provisions.
The more difficult question many times is whether or not the employer's particular benefit plan is covered by ERISA. Not all private sector employer plans qualify as ERISA plans. This issue is a particularly complicated one that is dependent upon whether the employer is not only sponsoring, but also funding part or all of the cost of the plan or benefits provided. There are other factors too that can determine whether or not the plan is governed by ERISA.
One sure way to know whether or not your employee benefit plan is an ERISA plan is to request a complete copy of the plan agreement. Employers and their administrators are required to provide the plan documents to their eligible employees, and the plan documents themselves many times explain whether or not the plan is subject to ERISA.
If you are a private sector employee, and your employer provides an employee benefit to all of its employees, and the employer either funds the plan or pays part or all of the premiums, the chances are good that it is an ERISA plan.
If my ERISA plan benefits are improperly denied, can I bring a lawsuit?
The short answer is yes. Plan participants, including the employee and the employee's family members that may also be plan participants, have the right under ERISA to bring a civil action to enforce the plan benefits. ERISA permits a civil enforcement action to be filed either in state court or federal court. ERISA also allows the plan member to recover attorneys fees (in the Court's discretion) in the event that he or she is successful in the action. A recent U.S. Supreme Court decision has made it much easier to recover an award of attorneys fees if the plan participant is successful in the enforcement action. Prior to that case, awards of attorneys fees were not as certain.
Many people have the misperception that a plan participant can collect punitive damages, emotional distress, or other similar types of damages if their benefits are improperly denied. ERISA makes it very clear that the sole remedy to a plan participant seeking to enforce his or her right to benefits is an order that enforces the plan benefits and the reimbursement of attorneys fees and legal costs. Punitive damages, emotional distress damages, pain and suffering, and the like are not available remedies.
Is it a waste of time to try to appeal the denial of my benefits under an ERISA plan?
Not only is it NOT a waste of time, you are legally required to exhaust all appeal remedies that are available to you under the plan agreement before you are permitted to file an enforcement action. Failing to timely appeal the denial of benefits or adverse decision through the plan's appeal procedures will allow the Court to dismiss your claim EVEN IF YOU ARE RIGHT! Therefore, it is absolutely critical that you follow your plan's appeal procedures, file all appeals to the appropriate persons, and raise every reason why the decision is incorrect.
As long as I appeal and state the reason for my appeal, do I have to have supporting documents?
Yes! Unlike most lawsuits, ERISA enforcement actions are essentially just another level of appeal to the Court. The Court typically will not permit you to rely upon medical records, documents, witness testimony, or other types of evidence that are not already contained within the claim file and appeal that was developed by the insurance company or plan administrator before the enforcement action was filed.
This means that not only do you have to raise every argument as to why the decision is improper, you also need to make certain that you submit to the insurer / administrator a complete set of all documents that support your arguments. This may include medical records demonstrating your condition, and why it is a covered condition. It may also include your physician's letter explaining the medical records and further explaining why you qualify for benefits. It may include affidavits setting forth witness testimony that supports your claim for benefits. It may include treatises or other supporting documentation.
To put yourself into the best possible position to win an enforcement action, the work must be done before the enforcement action is even filed. Typically, plan participants are well-advised to engage experienced legal counsel during the appeal process so that all information can be well-developed, fully documented, and incorporated into an argument that considers the terms and conditions of the plan agreement itself.
Insurance companies and plan administrators can and do reverse initial denials when they believe that there was an error, or that they failed to consider all of the evidence. However, even if the insurer / administrator does not reverse the denial, the proper documentation of the file will preserve your ability to argue the case before a Court that will be independent in its review of the facts.
In the next installment, I will discuss some issues faced by persons that become disabled and unable to perform their job duties. If there is a disability income plan, will it provide you with coverage?
Most private sector employees that participate in an employee welfare benefit plan (such as a health care plan, disability plan, or retirement plan) are subject to a 1974 federal law called "ERISA." ERISA is the acronym for the Employee Retirement Income Security Act. Despite the name, ERISA applies to all sorts of employee benefit plans, not just retirement plans.
ERISA applies to health and medical insurance plans, short and long term disability income insurance plans, and retirement plans such as pension plans, 401K plans, and other retirment plans that are sponsored by private sector employers.
Congress enacted ERISA to regulate abuse and misuse of employee welfare benefit plans, require equality in application and enforcement, and try to establish a more uniform administration of very complex benefit plans. In recent years, the focus on health care reform has shed light on a number of problems that evolved partly because of the gaps and shortcomings that exist in ERISA.
Over a multi-part series, just as with the prior discussion on the Federal Estate Tax, I will attempt to provide a common sense approach to ERISA and employee benefits that will hopefully give you a better understanding of the procedures and legal rights available to plan beneficiaries when an insurance company, plan administrator, or employer fails to live up to its obligations to provide benefits.
Does ERISA apply to my benefits?
Not all employee benefit plans are covered by ERISA. Government employers on the state, local, and federal level are exempt from ERISA. There are also other limited types of employers that are exempt from ERISA's coverage. However, most private sector employers are subject to ERISA's provisions.
The more difficult question many times is whether or not the employer's particular benefit plan is covered by ERISA. Not all private sector employer plans qualify as ERISA plans. This issue is a particularly complicated one that is dependent upon whether the employer is not only sponsoring, but also funding part or all of the cost of the plan or benefits provided. There are other factors too that can determine whether or not the plan is governed by ERISA.
One sure way to know whether or not your employee benefit plan is an ERISA plan is to request a complete copy of the plan agreement. Employers and their administrators are required to provide the plan documents to their eligible employees, and the plan documents themselves many times explain whether or not the plan is subject to ERISA.
If you are a private sector employee, and your employer provides an employee benefit to all of its employees, and the employer either funds the plan or pays part or all of the premiums, the chances are good that it is an ERISA plan.
If my ERISA plan benefits are improperly denied, can I bring a lawsuit?
The short answer is yes. Plan participants, including the employee and the employee's family members that may also be plan participants, have the right under ERISA to bring a civil action to enforce the plan benefits. ERISA permits a civil enforcement action to be filed either in state court or federal court. ERISA also allows the plan member to recover attorneys fees (in the Court's discretion) in the event that he or she is successful in the action. A recent U.S. Supreme Court decision has made it much easier to recover an award of attorneys fees if the plan participant is successful in the enforcement action. Prior to that case, awards of attorneys fees were not as certain.
Many people have the misperception that a plan participant can collect punitive damages, emotional distress, or other similar types of damages if their benefits are improperly denied. ERISA makes it very clear that the sole remedy to a plan participant seeking to enforce his or her right to benefits is an order that enforces the plan benefits and the reimbursement of attorneys fees and legal costs. Punitive damages, emotional distress damages, pain and suffering, and the like are not available remedies.
Is it a waste of time to try to appeal the denial of my benefits under an ERISA plan?
Not only is it NOT a waste of time, you are legally required to exhaust all appeal remedies that are available to you under the plan agreement before you are permitted to file an enforcement action. Failing to timely appeal the denial of benefits or adverse decision through the plan's appeal procedures will allow the Court to dismiss your claim EVEN IF YOU ARE RIGHT! Therefore, it is absolutely critical that you follow your plan's appeal procedures, file all appeals to the appropriate persons, and raise every reason why the decision is incorrect.
As long as I appeal and state the reason for my appeal, do I have to have supporting documents?
Yes! Unlike most lawsuits, ERISA enforcement actions are essentially just another level of appeal to the Court. The Court typically will not permit you to rely upon medical records, documents, witness testimony, or other types of evidence that are not already contained within the claim file and appeal that was developed by the insurance company or plan administrator before the enforcement action was filed.
This means that not only do you have to raise every argument as to why the decision is improper, you also need to make certain that you submit to the insurer / administrator a complete set of all documents that support your arguments. This may include medical records demonstrating your condition, and why it is a covered condition. It may also include your physician's letter explaining the medical records and further explaining why you qualify for benefits. It may include affidavits setting forth witness testimony that supports your claim for benefits. It may include treatises or other supporting documentation.
To put yourself into the best possible position to win an enforcement action, the work must be done before the enforcement action is even filed. Typically, plan participants are well-advised to engage experienced legal counsel during the appeal process so that all information can be well-developed, fully documented, and incorporated into an argument that considers the terms and conditions of the plan agreement itself.
Insurance companies and plan administrators can and do reverse initial denials when they believe that there was an error, or that they failed to consider all of the evidence. However, even if the insurer / administrator does not reverse the denial, the proper documentation of the file will preserve your ability to argue the case before a Court that will be independent in its review of the facts.
In the next installment, I will discuss some issues faced by persons that become disabled and unable to perform their job duties. If there is a disability income plan, will it provide you with coverage?
Saturday, July 10, 2010
Federal Estate Tax 2011: Part 3
In this final part of the Federal Estate Tax 2011 series, I hope to simplify some additional opportunities for minimizing or even eliminating the Federal Estate Tax that appears likely to return on January 1, 2011 to pre-2001 rates. In Part 2, the charitable deduction, marital deduction, and usage of both spouses' unified credits were explained as techniques that can be used to minimize or eliminate the Federal Estate Tax. In this Part 3, I will explain how life insurance policies can avoid the Federal Estate Tax if proper planning is used. In addition, gifting strategies during an individual's lifetime can be used to obtain additional Federal Estate Tax savings.
I. The irrevocable life insurance trust ("ILIT").
Part 1 explained that the death benefits of a life insurance policy are subject to the Federal Estate Tax. For individuals that own, or plan to own, a large life insurance policy, the death benefit payout can lead to a large estate tax bill. Fortunately, with proper planning, and the use of an ILIT, the entire life insurance policy can avoid estate taxation.
This process requires that an irrevocable trust be created. As the name implies, the trust cannot later be changed or revoked. Once established, it is permanent, so care must be taken when establishing the trust.
Once the trust is created, the owner of the life insurance policy must transfer the policy to the trustee of the trust. The trustee (someone other than the original life insurance policy owner, who is the insured life) takes over the ownership of the policy and pays the premiums. The trustee is also named as the recipient of the death benefits upon the original policy owner's death.
The trust identifies the beneficiaries to whom the trustee will eventually pay the death benefits after the trustee receives them from the life insurance company. The original owner's surviving spouse should not typically be the sole beneficiary of the trust because the goal is to pass these assets to future generations in a way that will avoid the Federal Estate Tax. Distributing them to the surviving spouse simply creates a larger taxable estate upon the surviving spouse's subsequent death.
Obviously, the payment of premiums during the insured's life requires a source of cash. This requires the original owner to make periodic gifts of cash to the trustee in order to fund those premium payments. The trust agreement must include certain provisions that allow the original owner to make these cash transfers in a way that takes advantage of the annual gift exclusion and provides the ultimate beneficiaries with a withdrawal right so that the trust can qualify for the exemption from estate taxation.
Term life insurance policies are the easiest to transition to an ILIT. This is because they normally have no investment value to them. Instead, relatively small amounts of premiums are paid over a term period in exchange for the obligation of the life insurer to pay a defined death benefit to a beneficiary upon the insured's death during that term.
Life insurance policies that contain some type of investment value (universal, whole life, etc.) may be more difficult to transfer to an ILIT if they are transferred after they have already been purchased and have built up a substantial cash surrender / investment value. However, they can be transferred to the ILIT as long as there is appropriate planning. If the owner has not yet purchased the policy, then the ILIT can be created prior to the purchase of the policy in order to maximize the use of the ILIT, maximize tax savings, and reduce transfer complications.
Properly established and administered, use of an ILIT can completely eliminate a very large life insurance policy from estate taxation and create a significant source of tax-free cash for use by the beneficiaries upon the death of the original life insurance owner.
II. Gifting strategies using the annual gift exclusion
Implementing many of the techniques discussed in this series requires the use of particular legal documents. A "Do-It-Yourself" approach is never recommended and can lead to disastrous legal or tax consequences. Family disputes may arise and litigation may occur even though you thought you created a simple and easy-to-follow plan. Talk to your estate planning professionals. Proper planning can save significant amounts in taxes, avoid family disputes, and provide for a smooth transition during a very difficult time for your family.
I. The irrevocable life insurance trust ("ILIT").
Part 1 explained that the death benefits of a life insurance policy are subject to the Federal Estate Tax. For individuals that own, or plan to own, a large life insurance policy, the death benefit payout can lead to a large estate tax bill. Fortunately, with proper planning, and the use of an ILIT, the entire life insurance policy can avoid estate taxation.
This process requires that an irrevocable trust be created. As the name implies, the trust cannot later be changed or revoked. Once established, it is permanent, so care must be taken when establishing the trust.
Once the trust is created, the owner of the life insurance policy must transfer the policy to the trustee of the trust. The trustee (someone other than the original life insurance policy owner, who is the insured life) takes over the ownership of the policy and pays the premiums. The trustee is also named as the recipient of the death benefits upon the original policy owner's death.
The trust identifies the beneficiaries to whom the trustee will eventually pay the death benefits after the trustee receives them from the life insurance company. The original owner's surviving spouse should not typically be the sole beneficiary of the trust because the goal is to pass these assets to future generations in a way that will avoid the Federal Estate Tax. Distributing them to the surviving spouse simply creates a larger taxable estate upon the surviving spouse's subsequent death.
Obviously, the payment of premiums during the insured's life requires a source of cash. This requires the original owner to make periodic gifts of cash to the trustee in order to fund those premium payments. The trust agreement must include certain provisions that allow the original owner to make these cash transfers in a way that takes advantage of the annual gift exclusion and provides the ultimate beneficiaries with a withdrawal right so that the trust can qualify for the exemption from estate taxation.
Term life insurance policies are the easiest to transition to an ILIT. This is because they normally have no investment value to them. Instead, relatively small amounts of premiums are paid over a term period in exchange for the obligation of the life insurer to pay a defined death benefit to a beneficiary upon the insured's death during that term.
Life insurance policies that contain some type of investment value (universal, whole life, etc.) may be more difficult to transfer to an ILIT if they are transferred after they have already been purchased and have built up a substantial cash surrender / investment value. However, they can be transferred to the ILIT as long as there is appropriate planning. If the owner has not yet purchased the policy, then the ILIT can be created prior to the purchase of the policy in order to maximize the use of the ILIT, maximize tax savings, and reduce transfer complications.
Properly established and administered, use of an ILIT can completely eliminate a very large life insurance policy from estate taxation and create a significant source of tax-free cash for use by the beneficiaries upon the death of the original life insurance owner.
II. Gifting strategies using the annual gift exclusion
As discussed in the prior installment, individuals can make annual gifts to other persons up to the amount of $13,000 per year, per person. With a large family, and by using both spouses' annual exclusion to split gifts, this annual exclusion can allow for large transfers of assets in a relatively short period of time.
Here's an example: Fred and Donna have 4 children and 8 grandchildren. They have a combined estate of $1,800,000 which includes a large amount of cash in certificates of deposit and savings accounts. If they chose to make annual gifts to their 4 children, they could each make a gift of $13,000 to each child ($26,000 per child by split gifting) and transfer $104,000 in one year, reducing their combined estate to $1,696,000. If they chose to also include each of their grandchildren, then $312,000 could be gifted in one year simply by maximizing the annual gift exclusion.
Individuals that wish to make gifts to minor children can use certain types of trusts to receive such gifts in order to protect the cash from being used too early by the child. Gifts of marketable securities, interests in real estate, and other types of assets are all eligible to be transfered in this manner.
Individuals must be very careful to consider all of the potential issues that come with making unrestricted gifts. Recipients of such gifts may use the gift foolishly, and recipients that are eligible for certain types of governmental assistance may lose their eligibility upon receiving gifts that have any significant financial value.
III. Conclusion
When considering your potential liability for estate tax, and evaluating various ways to minimize that liability, it is crucial that you discuss these issues with an attorney that is experienced with estate tax, trusts, and probate planning.Implementing many of the techniques discussed in this series requires the use of particular legal documents. A "Do-It-Yourself" approach is never recommended and can lead to disastrous legal or tax consequences. Family disputes may arise and litigation may occur even though you thought you created a simple and easy-to-follow plan. Talk to your estate planning professionals. Proper planning can save significant amounts in taxes, avoid family disputes, and provide for a smooth transition during a very difficult time for your family.
Tuesday, July 6, 2010
The Federal Estate Tax in 2011: Part 2
I. The Federal Gift Tax is alive and well in 2010 even though the Federal Estate Tax is in temporary repeal.
In the last segment, I introduced the basics behind the Federal Estate Tax and the fact of its return on January 1, 2011 if Congress takes no action before then. I also explained the Federal Gift Tax which prevents individuals from avoiding the Federal Estate Tax by simply giving enormous amounts of money to their children and grandchildren to avoid the Federal Estate Tax.
In 2001, when Congress enacted the legislation which gradually eliminated the Federal Estate Tax by 2010, Congress may actually have anticipated the events that are currently unfolding. Knowing that the Federal Estate Tax would return in 2011 absent an extension of the 2001 law, Congress did NOT eliminate the Federal Gift Tax. That effectively prevents individuals from giving away their wealth to future generations in 2010 while the Federal Estate Tax temporarily disappeared.
Is there any way to minimize the effect of the estate tax if Congress takes no action and the tax returns to pre-2001 levels? Yes.
II. The unlimited marital and charitable deductions.
The Federal Estate and Gift Tax allows for unlimited tax-free transfers between spouses as long as both spouses are United States citizens. This means that you can give unlimited wealth to your spouse during your lifetime without paying any gift tax. Likewise, you can leave unlimited wealth to your surviving spouse upon your death and pay no estate tax.
Most married couples already incorporate this deduction into their estate plans by simply designating each other as the primary beneficiary of each other's estate. In such cases, no estate tax is due upon the death of the first spouse because the surviving spouse inherits the entire estate. The theory behind this deduction is that the assets will ultimately be taxed once the surviving spouse dies and the assets pass to the children and/or grandchildren (or other beneficiaries of the married couple).
The same unlimited deduction is also available for gifts and bequests to charitable organizations. While there may be limitations on an income tax deduction for gifts to charity, there is no limitation on the deduction for purposes of the Federal Gift Tax and the Federal Estate Tax. Therefore, individuals making gifts to charity during their lifetime, or leaving assets to a charity upon death, can significantly reduce the size of their taxable estate. Use of charitable lead trusts, charitable remainder trusts, charitable gift annuities, and many other charitable gifting vehicles provide a number of tax advantages.
III. Shouldn't I just leave all of my assets to my surviving spouse to defer the payment of the Federal Estate Tax for as long as possible? NO!!
If Congress takes no action, and the Federal Estate Tax returns to 2001 levels, the unified credit amount for each person will effectively shield $1,000,000.00 in assets. This unified credit amount is not for each married couple; it is for each individual.
If it is for each individual, shouldn't each person take full advantage of his or her unified credit amount to shield more money from the Federal Estate Tax? The answer is obviously yes. However, as mentioned above, most married couples have a simplified estate plan that leaves the entire family estate to the surviving spouse; thus wasting one spouse's $1 million unified credit.
Confused? Here's a simple example. Sam and Judy are married and have 3 sons. Sam and Judy own a home, a checking account, savings account, some mutual funds, each has an IRA, and Sam owns a life insurance policy naming Judy as the beneficiary. Sam dies in January 2011 and Judy receives all of the assets. In July 2011, Judy dies. At the time of her death, all of the combined family assets have a value of $1,750,000. Her will provides for the estate to be divided equally among the three sons. Judy's estate will pay Federal Estate Tax at a rate of 37% of $750,000 (taking into consideration the $1 million unified credit that shelters the first $1 million from taxation). Judy's sons therefore get the privilege of paying the IRS approximately $277,500 in Federal Estate Tax. Ouch.
If Sam and Judy had planned better, their sons in the above example could have paid $0.00 in Federal Estate Tax. If Sam and Judy would have prepared credit shelter trusts before Sam's death, Sam's estate would have set aside the amount of $1 million in a credit shelter trust. The remaining assets ($750,000) could be available for Judy's unrestricted use. For even more flexibility, the credit shelter trust can be drafted in order to allow Judy to use the income and some of the principal of the credit shelter trust should she actually need it. The ultimate beneficiaries of the credit shelter trust (upon Judy's death) are the 3 sons. Upon Judy's death, the $1 million credit shelter trust created upon Sam's death, as well as the $750,000 that is owned by Judy upon her death pass to the three sons free of any Federal Estate Tax. Sam's unified credit of $1 million was used to shelter the first $1 million. Judy's unified credit of $1 million was used to shelter the remaining $750,000.
IV. I'm not a millionaire, so I don't need to worry.
These numbers may appear very significant, but when you stop to think about all of the assets that are included in an estate tax caluclation, you may actually have something to worry about.
Do you have a large life insurance policy? If you have a life insurance policy, through your employer or one you purchased yourself, the death benefits from that policy are included in the estate tax. Do you own a home? The equity in that home is included in the estate tax. Have you been saving for retirement in an IRA or employer-sponsored plan? Include all those assets as well. Your bank account balances, investments (including stocks, bonds, and mutual funds), and any real estate is included. Own a small business or a farm? The appraised value of that business or farm is included in the estate tax as well. Are you close to or over $1 million yet? Have you considered how much you want to pay in Federal Estate Tax?
In Part 3, we will discuss some other planning methods to reduce or minimize the Federal Estate Tax.
In the last segment, I introduced the basics behind the Federal Estate Tax and the fact of its return on January 1, 2011 if Congress takes no action before then. I also explained the Federal Gift Tax which prevents individuals from avoiding the Federal Estate Tax by simply giving enormous amounts of money to their children and grandchildren to avoid the Federal Estate Tax.
In 2001, when Congress enacted the legislation which gradually eliminated the Federal Estate Tax by 2010, Congress may actually have anticipated the events that are currently unfolding. Knowing that the Federal Estate Tax would return in 2011 absent an extension of the 2001 law, Congress did NOT eliminate the Federal Gift Tax. That effectively prevents individuals from giving away their wealth to future generations in 2010 while the Federal Estate Tax temporarily disappeared.
Is there any way to minimize the effect of the estate tax if Congress takes no action and the tax returns to pre-2001 levels? Yes.
II. The unlimited marital and charitable deductions.
The Federal Estate and Gift Tax allows for unlimited tax-free transfers between spouses as long as both spouses are United States citizens. This means that you can give unlimited wealth to your spouse during your lifetime without paying any gift tax. Likewise, you can leave unlimited wealth to your surviving spouse upon your death and pay no estate tax.
Most married couples already incorporate this deduction into their estate plans by simply designating each other as the primary beneficiary of each other's estate. In such cases, no estate tax is due upon the death of the first spouse because the surviving spouse inherits the entire estate. The theory behind this deduction is that the assets will ultimately be taxed once the surviving spouse dies and the assets pass to the children and/or grandchildren (or other beneficiaries of the married couple).
The same unlimited deduction is also available for gifts and bequests to charitable organizations. While there may be limitations on an income tax deduction for gifts to charity, there is no limitation on the deduction for purposes of the Federal Gift Tax and the Federal Estate Tax. Therefore, individuals making gifts to charity during their lifetime, or leaving assets to a charity upon death, can significantly reduce the size of their taxable estate. Use of charitable lead trusts, charitable remainder trusts, charitable gift annuities, and many other charitable gifting vehicles provide a number of tax advantages.
III. Shouldn't I just leave all of my assets to my surviving spouse to defer the payment of the Federal Estate Tax for as long as possible? NO!!
If Congress takes no action, and the Federal Estate Tax returns to 2001 levels, the unified credit amount for each person will effectively shield $1,000,000.00 in assets. This unified credit amount is not for each married couple; it is for each individual.
If it is for each individual, shouldn't each person take full advantage of his or her unified credit amount to shield more money from the Federal Estate Tax? The answer is obviously yes. However, as mentioned above, most married couples have a simplified estate plan that leaves the entire family estate to the surviving spouse; thus wasting one spouse's $1 million unified credit.
Confused? Here's a simple example. Sam and Judy are married and have 3 sons. Sam and Judy own a home, a checking account, savings account, some mutual funds, each has an IRA, and Sam owns a life insurance policy naming Judy as the beneficiary. Sam dies in January 2011 and Judy receives all of the assets. In July 2011, Judy dies. At the time of her death, all of the combined family assets have a value of $1,750,000. Her will provides for the estate to be divided equally among the three sons. Judy's estate will pay Federal Estate Tax at a rate of 37% of $750,000 (taking into consideration the $1 million unified credit that shelters the first $1 million from taxation). Judy's sons therefore get the privilege of paying the IRS approximately $277,500 in Federal Estate Tax. Ouch.
If Sam and Judy had planned better, their sons in the above example could have paid $0.00 in Federal Estate Tax. If Sam and Judy would have prepared credit shelter trusts before Sam's death, Sam's estate would have set aside the amount of $1 million in a credit shelter trust. The remaining assets ($750,000) could be available for Judy's unrestricted use. For even more flexibility, the credit shelter trust can be drafted in order to allow Judy to use the income and some of the principal of the credit shelter trust should she actually need it. The ultimate beneficiaries of the credit shelter trust (upon Judy's death) are the 3 sons. Upon Judy's death, the $1 million credit shelter trust created upon Sam's death, as well as the $750,000 that is owned by Judy upon her death pass to the three sons free of any Federal Estate Tax. Sam's unified credit of $1 million was used to shelter the first $1 million. Judy's unified credit of $1 million was used to shelter the remaining $750,000.
IV. I'm not a millionaire, so I don't need to worry.
These numbers may appear very significant, but when you stop to think about all of the assets that are included in an estate tax caluclation, you may actually have something to worry about.
Do you have a large life insurance policy? If you have a life insurance policy, through your employer or one you purchased yourself, the death benefits from that policy are included in the estate tax. Do you own a home? The equity in that home is included in the estate tax. Have you been saving for retirement in an IRA or employer-sponsored plan? Include all those assets as well. Your bank account balances, investments (including stocks, bonds, and mutual funds), and any real estate is included. Own a small business or a farm? The appraised value of that business or farm is included in the estate tax as well. Are you close to or over $1 million yet? Have you considered how much you want to pay in Federal Estate Tax?
In Part 3, we will discuss some other planning methods to reduce or minimize the Federal Estate Tax.
Monday, July 5, 2010
The Federal Estate Tax in 2011: "I'll be back" (Part 1)
For persons dying in 2010, the good news (at least for now) is that there currently is no Federal Estate Tax. Thanks to a 2001 law enacted by Congress, the decades old estate tax was slowly phased out of existence.
However, that 2001 Act contained a sunset provision that expires on December 31, 2010. The Terminator's famous line is probably an appropriate quote to describe what will happen with the Federal Estate Tax on January 1, 2011 if Congress continues in its stalemate on legislation on the topic. That's really bad news for individuals and married couples that have a combined wealth in excess of $1 million and have not carefully reviewed their estate plan recently. Absent action by Congress, on January 1, 2011, the estate tax rates will range from an eye-popping 37% (the lowest rate) and go up to an incredible 55%.
However, the good news is that with proper planning, you can minimize (and sometimes even eliminate) the effect of this tax. This can save tens of thousands, maybe even hundreds of thousands, of dollars in taxes.
In the coming weeks, I hope to provide a multi-part series on the importance of this legislative development to stress just how important this is, and how important it is to discuss this development with your estate planning attorney so that you and your family can determine what you can do to avoid, or at least minimize, this tax.
I. What is the Federal Estate Tax?
The Federal Estate Tax is a tax that the federal government levies upon each and every asset owned by an individual citizen that dies. This tax applies to every asset that is owned by the deceased individual (referred to in legal and tax jargon as the "decedent"). Even if the decedent owned only a partial interest, the decedent's partial interest is valued and included in this tax calculation.
Many people have the misconception that if you plan your estate to avoid probate, you avoid the estate tax. This is completely false. The estate tax applies to every asset owned by the decedent at the time of his or her death, regardless of whether or not the asset is included in the decedent's probate estate, a trust owned/controlled by a decedent (although certain types of trusts may be used to bypass the estate tax and will be discussed in a future part), or is left to a beneficiary by way of a beneficiary designation.
The estate tax is basically calculated by adding up the fair market value of all of the decedent's assets at the time of his or her death. Certain deductions may be taken from that total. The remaining amount, after deductions, is taxed. As indicated before, if Congress takes no action, the tax rate percentage that is applied to this number is somewhere between 37% and 55% depending on the size of the estate. The larger the estate, the larger the tax rate.
The Federal Estate Tax includes certain tax credits which can also reduce the amount of the estate tax. The most important credit is the "unified credit." Since 2001, the unified credit amount was gradually increased so that more and more estates were exempted from the Federal Estate Tax until 2010 when Federal Estate Tax disappeared. On January 1, 2011, absent Congressional action, the unified credit will return to the 2001 credit amount. This means that the unified credit will shelter only $1 million from federal estate taxation.
II. What assets are included in the estate tax calculation?
In short? Everything!
*Bank accounts (including checking, savings, money market, certificates of deposit)
*Stocks and bonds (including United States Savings Bonds and municipal bonds of all types)
*Mutual funds
*Annuities
*Life Insurance policies (includes the death benefit amount and accrued interest and dividends regardless of whether the policy is a term policy, universal life, or other form of life insurance policy)
*Accidental Death policies
*Real estate (including your home, vacation home, timeshare interest, investment property, or vacant land)
*Retirement accounts (including Roth IRA's, traditional IRA's, SEP's, SIMPLE's, 401k, Keough, and all other employer provided retirement account benefits)
*Tangible personal property (including vehicles, boats, trailers, campers, collectibles, artwork, cash on hand, and household contents)
*Family Business / Farm Interests (including close corporation interests, farms, partnership interests, or other forms of small business ownership and investment interests)
If the value of all these various types of assets added together is more than $1 million, and Congress takes no action to address the Federal Estate Tax, you need to evaluate your exposure to this tax immediately by consulting with an attorney experienced in estate tax planning.
III. What if I just give it away to my beneficiaries before I die?
Congress already thought of that loophole. That is why there is not only an estate tax, but also a gift tax that provides for comparable tax rates as the estate tax. If you give someone else (other than your spouse or a charity) more than the annual gift tax exclusion (2010's annual gift tax exclusion is $13,000 per donee), you must pay a tax on that gift.
However, in the next installment, we will discuss how gifting strategies during an individual's lifetime can help that individual significantly minimize estate taxes, as well as how married couples should take full advantage of both the husband's unified credit and the wife's unified credit rather than the natural inclination by couples to waste one of their unified credits.
However, that 2001 Act contained a sunset provision that expires on December 31, 2010. The Terminator's famous line is probably an appropriate quote to describe what will happen with the Federal Estate Tax on January 1, 2011 if Congress continues in its stalemate on legislation on the topic. That's really bad news for individuals and married couples that have a combined wealth in excess of $1 million and have not carefully reviewed their estate plan recently. Absent action by Congress, on January 1, 2011, the estate tax rates will range from an eye-popping 37% (the lowest rate) and go up to an incredible 55%.
However, the good news is that with proper planning, you can minimize (and sometimes even eliminate) the effect of this tax. This can save tens of thousands, maybe even hundreds of thousands, of dollars in taxes.
In the coming weeks, I hope to provide a multi-part series on the importance of this legislative development to stress just how important this is, and how important it is to discuss this development with your estate planning attorney so that you and your family can determine what you can do to avoid, or at least minimize, this tax.
I. What is the Federal Estate Tax?
The Federal Estate Tax is a tax that the federal government levies upon each and every asset owned by an individual citizen that dies. This tax applies to every asset that is owned by the deceased individual (referred to in legal and tax jargon as the "decedent"). Even if the decedent owned only a partial interest, the decedent's partial interest is valued and included in this tax calculation.
Many people have the misconception that if you plan your estate to avoid probate, you avoid the estate tax. This is completely false. The estate tax applies to every asset owned by the decedent at the time of his or her death, regardless of whether or not the asset is included in the decedent's probate estate, a trust owned/controlled by a decedent (although certain types of trusts may be used to bypass the estate tax and will be discussed in a future part), or is left to a beneficiary by way of a beneficiary designation.
The estate tax is basically calculated by adding up the fair market value of all of the decedent's assets at the time of his or her death. Certain deductions may be taken from that total. The remaining amount, after deductions, is taxed. As indicated before, if Congress takes no action, the tax rate percentage that is applied to this number is somewhere between 37% and 55% depending on the size of the estate. The larger the estate, the larger the tax rate.
The Federal Estate Tax includes certain tax credits which can also reduce the amount of the estate tax. The most important credit is the "unified credit." Since 2001, the unified credit amount was gradually increased so that more and more estates were exempted from the Federal Estate Tax until 2010 when Federal Estate Tax disappeared. On January 1, 2011, absent Congressional action, the unified credit will return to the 2001 credit amount. This means that the unified credit will shelter only $1 million from federal estate taxation.
II. What assets are included in the estate tax calculation?
In short? Everything!
*Bank accounts (including checking, savings, money market, certificates of deposit)
*Stocks and bonds (including United States Savings Bonds and municipal bonds of all types)
*Mutual funds
*Annuities
*Life Insurance policies (includes the death benefit amount and accrued interest and dividends regardless of whether the policy is a term policy, universal life, or other form of life insurance policy)
*Accidental Death policies
*Real estate (including your home, vacation home, timeshare interest, investment property, or vacant land)
*Retirement accounts (including Roth IRA's, traditional IRA's, SEP's, SIMPLE's, 401k, Keough, and all other employer provided retirement account benefits)
*Tangible personal property (including vehicles, boats, trailers, campers, collectibles, artwork, cash on hand, and household contents)
*Family Business / Farm Interests (including close corporation interests, farms, partnership interests, or other forms of small business ownership and investment interests)
If the value of all these various types of assets added together is more than $1 million, and Congress takes no action to address the Federal Estate Tax, you need to evaluate your exposure to this tax immediately by consulting with an attorney experienced in estate tax planning.
III. What if I just give it away to my beneficiaries before I die?
Congress already thought of that loophole. That is why there is not only an estate tax, but also a gift tax that provides for comparable tax rates as the estate tax. If you give someone else (other than your spouse or a charity) more than the annual gift tax exclusion (2010's annual gift tax exclusion is $13,000 per donee), you must pay a tax on that gift.
However, in the next installment, we will discuss how gifting strategies during an individual's lifetime can help that individual significantly minimize estate taxes, as well as how married couples should take full advantage of both the husband's unified credit and the wife's unified credit rather than the natural inclination by couples to waste one of their unified credits.
Friday, July 2, 2010
Using Joint Accounts: Is it always a good idea?
I. Introduction to the Joint Account
Joint accounts are extremely popular because of the convenience they provide to bank customers and individual investors. Joint accounts allow two or more people to share one account, assist each other with paying bills and making deposits, and (sometimes) allow for an easy transition of account ownership when one of the joint owners dies.
However, use of the joint account in particular situations can lead to confusion, family disputes, and even litigation if the owners do not have a thorough understanding of potential risks and do not give careful thought to their overall estate plan. Worse still, well-meaning bankers or brokers that may not fully understand the legal ramifications of creating a joint account may unintentionally mislead customers with questions about setting up a joint account. This article seeks to provide some basic information for you to consider when opening a joint account. As always, you should consult with your estate planning attorney before incorporating a joint account into your estate plan.
II. Joint or Joint With Rights of Survivorship?
Most people (unfortunately this sometimes includes the banker or brokerage professional that assists the customer in setting up a joint account) have no idea that there is actually a difference between these two types of accounts. While both offer some forms of convenience mentioned above, they have very different features when one of the owners dies.
In Ohio, when two or more persons create a "joint" account, and one owner dies, that owner's share of the joint account must be administered by the deceased owner's estate representative through probate court. If the deceased owner intended the surviving owner to receive the account without probate court administration, then this was the wrong account to use. However, if the deceased owner intended his or her will to govern the distribution of the deceased owner's share in the account to other beneficiaries, then this is the correct account to use.
If two (or more) persons create a joint account "with rights of survivorship" (sometimes referred to as "JTWROS"), then the surviving owner(s) receives the entire account upon the other owner's death. The deceased owner's share in the account is NOT governed by the deceased owner's will. The surviving owner receives all of the account, and the deceased owner's beneficiaries (pursuant to the will) receive no part of the account even if the deceased owner actually intended for them to receive it. Worse yet, if the customer does not specifically tell the banker or broker that they want a "joint" account rather than a "joint account with rights of survivorship" many banks and brokers simply default to the JTWROS account without taking the time to ask the owners if that is in fact how they wish the account to be titled!
Do you see the potential problems yet? Here's one example of a misguided use of a JTWROS account:
Mrs. Smith is an elderly widow with 4 adult children. Her will provides for all her assets to pass equally to all four children upon her death. Mrs. Smith lives in an apartment and has all of her life savings in a checking and savings account. Mrs. Smith adds her daughter, Laura, as a joint owner on the account to make it easier for Laura to help her pay her bills. The banker simply assumes that Mrs. Smith wants the accounts to be joint accounts with rights of survivorship and does not inquire about Mrs. Smith's true ultimate intentions (i.e. that the accounts be distributed upon her death equally to all of her four children, not just Laura). Mrs. Smith then dies. Laura, as the sole surviving owner, receives all of the account balances and the other three children are effectively disinherited because the accounts avoid probate administration and pass directly to Laura.
If Laura chooses to keep the money and not share it with her siblings, there is very little that her siblings can do except resort to litigation to try to set aside the JTWROS designation. What if Laura decides to follow her mother's will and share the account with her three siblings? If she transfers more value to each sibling than the annual gift tax exclusion, she will incur a gift tax that she must pay in the year that she shared the accounts with her siblings. What a headache! It could have easily been avoided.
III. For Married or Committed Couples
The most common and safest use of a joint bank account or joint brokerage / securities account is by a couple that is either married or devoted to a long-term, committed relationship. The use of a joint account with rights of survivorship in such situations typically makes sense because both partners have equal access and ability to use the account to make purchases, withdrawals, and deposits. If one partner dies, the surviving owner is the owner of the account without the need to probate the deceased owner's share.
Persons that are married or in a long term commited relationship should consider whether the other owner has a high risk career or significant debt that could lend to garnishment of the account that contains assets of the innocent owner. Persons in second marriages with more complex estate plans should also be careful to consider whether a joint account is appropriate in conjunction with their overall estate planning intentions.
IV. Other Risks / Misconceptions
1) The federal and Ohio estate tax cannot be avoided by naming someone as a joint owner of an account. Both the federal and Ohio estate tax includes any amounts contributed to the account by the deceased owner that remain in the account at the time of death of the deceased owner.
2) Naming another individual as a joint owner to an account can potentially subject your assets to the claims of that other individual's creditors even if you contributed all of the account assets.
3) As mentioned earlier, your intentions set forth in your will (or trust) have absolutely NO effect on the distribution of the account upon your death if it is a joint account with rights of survivorship. The surviving owner(s) receive the account automatically upon your death regardless of whether or not you actually intended them to inherit that account.
Think carefully about whether or not to use both the "joint" account and the "joint account with rights of survivorship." Using either form of account can pose risks and problems that include those identified in this article. You should consult with your estate planning attorney before incorporating any joint account into your estate plan; especially if the joint account holds a significant amount of your assets.
Introduction
Tzangas, Plakas, Mannos & Raies, Ltd. is pleased to present this resource of legal information to assist people in better understanding a wide variety of legal issues. Our hope is that this information will be helpful to you in identifying issues, potential problems, risks, and planning opportunities. Please keep in mind that nothing in this blog should be considered legal advice or a substitute for legal advice. No blog can possibly anticipate the unique facts and legal issues that may arise in any particular matter, case, or transaction.
This resource is intended only to provide you with information that will allow you to better understand various legal concepts. We suggest that you should contact a qualified, licensed attorney to obtain specific legal advice with regard to any questions you may have.
This resource is intended only to provide you with information that will allow you to better understand various legal concepts. We suggest that you should contact a qualified, licensed attorney to obtain specific legal advice with regard to any questions you may have.
Subscribe to:
Posts (Atom)