Several stories have popped up referencing a recent study that showed half of all adult Americans do not have any estate planning. One of the top three reasons given for lack of estate plan is the belief that it isn’t necessary. When I ask these people if they’ve read the probate code or if they have some other knowledge on which to base their belief, their answer is almost always “no”. They just assume that the default plan designed by politicians is perfectly suited to their situation. (When said like that, it sounds kind of silly, right?) Of course, there are many cases where not having a plan may be acceptable, but are you comfortable that you aren’t an exception?

Do you have minor children? If you don’t nominate a guardian, you’ve given the court zero guidance in determining your wishes. Your parents, siblings and friends could all submit competing petitions to take care of your children. If you’re like me, you can quickly come up with several names in each category who would raise your children over your dead body! Indeed. Don’t make them guess. Your Last Will tells the court that you’ve given the issue some thought and that you have someone in mind.

Are you comfortable with your children getting their complete inheritance when they reach age 18…and have no parents? I imagine what I would have done with all of my parents money and no parents at age 18 (hint: it would involve copious amounts of comic books). At the very least, estate planning can help delay the age at which your children would control their inheritance. In the meantime, you can appoint someone who can give them guidance and responsibility in the investment of their future inheritance.

These are just two of the many reasons why you might be an exception to the default estate plan. The best way to know for sure if you need a will? Talk to an estate planning attorney.

Over the last decade and a half, our federal estate tax exemption has been on a roller coaster: gradually rising from $600K in 1997 to $3.5 million in 2010, then unlimited in 2011, then $5M in 2012 and scheduled to go back down to $1M in 2013. Similarly, the rates have gradually dropped from 55% in 1997 to 35% today but are scheduled to go back to 55% next year. The gift tax exemption has not necessarily tracked the estate tax exemption but this year they happen to be the same at $5M.

This means that an individual can give away $5M of their wealth before they incur a gift tax. People with significant taxable estates may have a brief opportunity for the remainder of 2012 to transfer significant wealth to their children without having to pay Uncle Sam for that privilege. But what about the future?

What happens if you transfer $5M this year and Congress allows the estate tax exemption to be reduced to $1M next year and you die while this lower exemption is in effect? Will you be required to pay the difference between the exemption and the gift ($4M) at a rate of 55%, writing a check to the IRS for $2.2M? I have a hard time believing the IRS will take this position but it is certainly a possibility and should be considered prior to taking any action. Ultimately, even if Congress doesn’t grandfather-in the 2012 gift exclusion amount and rate, it may still make sense to make the gift, essentially deferring taxes on the transfer until your death.

But as always in these situations, don’t do anything before consulting with your attorney and accountant.

A few years ago, the IRS changed the way they handled inherited IRAs. Up to then, an IRA would often need to be fully distributed within five years of the death of the owner. The increased income would often push the inheritor into a higher tax bracket during the five years that they were forced to take withdrawals. The rules were changed to allow most inheritors (even trusts, if they qualified) to take distributions according to the life expectancy of the inheritor/beneficiary. Particularly for younger inheritors, their distributions would be small and therefore wouldn’t push them into a higher-rate tax bracket.

This change also caused many IRA owners to think of these investments as vehicles for transferring wealth to children, in a managed, potentially asset-protected manner. Instead of IRAs being an estate-planning burden, they became an estate planning opportunity. With proper planning, the tax-deferral and tax-minimizing properties of an IRA were a blessing to planners and investors.

What Congress giveth, Congress can take away. As they attempt to find revenue to support their spending, Congress is looking at these revised IRA rules and considering proposals to go back to the old system…and even expand the old system. They’re no longer content to just tax the income over the life of the beneficiary. They want to make sure that the IRA is taxed as soon as possible and at the highest rates possible.

More information can be found at the Wall Street Journal (incidentally, an excellent source of information on estate planning) in an article entitled “Congress Eyes New Rules For Inherited IRAs”.

Many, but not in all cases, the full extent of client issues and problems don’t become apparent until well into the initial interview and disclosure processes. A recent client case presents a particularly illuminating example. The client’s name has been changed to protect his privacy concerns.

Ivan, a self-employed investor that was introduce to me through a common professional relationship, requested a meeting for the sole purpose of getting some advise on his 2 investment accounts, one taxable and the other a traditional IRA. Ivan is 59 yrs. old, unmarried, but involved in a long-term relationship on both a personal and business level. His sole source of income is real estate owned for rental purposes, and held in the name of an LLC entity. In addition to the rental property, Ivan owns his own home, but holds an adjustable rate mortgage that is due to reset after 7 yrs, which is this year.

My initial meeting, which was expected to last no more than 2 hours, was originally intended to provide a preliminary evaluation of his investments to better suite his current situation. As with almost all clients, my interview was directed toward learning as much as relevant about Ivan’s desired lifestyle needs and spending requirements, retirement plans, and other relevant financial concerns. In the course of reviewing tax returns and the LLC agreement, I found potential areas that were not necessarily structured in the most advantageous manner for Ivan’s plans. We also identified budgeting and accounting issues that could be improved for general financial management purpose. Finally, Ivan disclosed that he is due to be the sole survivor of a multi-million dollar trust once certain conditions were met in the near future. Under current estate exemption provisions, Ivan’s estate could have potentially significant tax issues as a result.

While my initial meeting was successful in uncovering various areas for helping Ivan, these required that I bring in legal/estate, bookkeeping and debt management professionals to further completely evaluate the nature of the potential problems and recommend solutions that would work together as part of an overall financial plan that I was developing. As the rental property plan was to be sold in the next 5 -10 years, we were also able to introduce Ivan to an experienced professional real estate member of Pantheon that could provide current advise that would better position the property for an eventual sale.

Our solutions resulted in reallocating the investment portfolio to be more suited to Ivan’s short and long-term cash needs. The LLC agreement was modified to fix a few critical operational and ownership issues, Ivan’s books were set up to provide better information on managing the rental property, and his mortgage was refinanced to better fit into his overall financial situation.

This case study touched on many specialized areas in which the Pantheon Wealth Advisory Council was able to provide professional advice in a coordinated manner: legal, bookkeeping, debt management, and real estate. While a bit too far into the future at this point, Ivan could eventually need help with a transition to living accommodations that would be more suited to his advancing age, which would involve another of our Pantheon member’s help (Kris Griffith). Rather than the client being independently responsible seek out all of the advisors that may need to be engaged, and making sure that there advise was compatible with each other, we were able to recommend our members and help ensure that the solutions were presented in a comprehensive and integrated manner.

As 2011 draws to a close, every investor should take a little time to consider decisions that can be made before year end that can have a significant impact on his or her financial situation. It’s not known what changes to tax policy will occur starting in 2013, but until then, there are advantageous tax provisions that may be in place only through 2012. Investors should not necessarily make decisions based only on tax regulations as there are typically other factors to consider in making an overall beneficial financial choice. We’ll look at a few key areas that should be evaluated.

Capital Asset Planning/Harvesting Losses:

Investors should consider selling assets that have unrealized losses and offsetting these against assets that have capital gains. Investors should first evaluate positions in terms of appropriate investment management as the priority. The second consideration is whether to recognize gains as short term or long term. Due to the extension of the so-called “Bush tax cuts”, relatively low income tax rates on in effect at least through the end of 2013. After matching short-term gains and losses and long-term gains and losses, taxpayers can deduct currently up to $3,000 of net capital losses to offset against ordinary income. For higher-bracket taxpayer, this can be more advantageous that holding on to assets with losses and recognizing capital gains that are taxed in 2011 and 2012 at 15% for taxpayers at the 25% and above tax bracket.

The final consideration should be in which year to recognize the losses. If the investor, for example, anticipates that his capital asset short term capital gains will be significantly higher in 2012, it may be more advantageous to holding off on recognizing the losses this year and delay the selling in to 2012. Please note, consideration has to be given to the “wash sale” rule. This rule applies if the investor either bought the same, or substantially same security as that sold at a loss in either the 30-day period prior to the sale or the 30-day period following the sale. This “wash sale” rule prevents recognizing the loss, and instead transfers the loss in lowering the basis of the recently purchased security.

Retirement Planning/IRA Account Contributions:

Year end is an appropriate time to consider funding Traditional and Roth IRA accounts as part of an investor’s retirement planning. For investors under age 50, the limit for 2011 is $5,000, and for age 50 and older, the limit is $6,000 (maximum amount subject to taxable compensation). Consult with your tax advisor on deductibility, as it may be reduced, or eliminated entirely, depending on your modified adjusted gross income.

Roth IRA Conversion:
Converting a rollover-eligible 401(k) or a Traditional IRA account to a Roth IRA involves considerations beyond the tax liability. Investor’s age, retirement plans, tax situation and other factors should be considered before making the final decision. However, for younger taxpayers whom have experienced a depreciated value in their IRA account portfolio may want to consider a conversion in 2011 or 2012 in order to minimize the tax liability that the lower value would entail. For conversions in 2011, taxpayers have until October 15, 2012 to undo the conversion if the converted assets further depreciate.

Charitable Donations:
Maximizing Deductions in High Income Years

Making additional charitable donations of cash or low basis stock can result in tax savings in 2011. These charitable donations, if you itemize your deductions, can offset ordinary income taxed at your highest bracket. If your income has increased in 2011 consider accelerating charitable contributions into 2011 to potentially offset this income dollar for dollar. There are AGI limitations to deductibility and a 5 year carryover of unused charitable contributions so for large charitable gifts please consult with your tax advisor. Any gifts over $250 require a written receipt to support your deduction.

2011 Gifting:
Removing Future Appreciation and Income from Estate

A donor can make unlimited gifts of $13,000 per donee in 2011 thereby reducing their taxable estate for both federal and Washington State. Gifts up to this annual exclusion amount of $13,000 per donee do not require any gift tax reporting on Form 709.

In addition there is currently a $5,000,000 lifetime gift exemption available in 2011 & 2012. This is an opportunity to transfer wealth, at today’s fair market value, and remove the future appreciation and its income from your taxable estate. These gifts should be discussed with your tax advisor to determine the most appropriate assets to transfer and how to determine their gifted values.

LPL Financial does not offer tax advise. Investors should consult with their estate planning attorney and tax advisor.

Congress made some major tax changes in late 2010 that will impact American taxes for many years in the future. It extended some of the Bush 2001 tax cuts such as the dividends and long term capital gains rate of 15% through 2011 & 2012.

Most of the biggest tax changes will occur after 2012 and will involve a 3.8 percent Medicare tax on investment income.This new tax will apply only to those single taxpayers who earn at least $200,000 and any married couple earning at least $250,000 ($125,000 if filing separately–note the marriage penalty). The tax also applies to estates and trusts (but not to any charitable trusts that are otherwise exempt from paying taxes).

For purposes of this new tax, “investment income” includes income from interest, dividends, annuities, capital gains, royalties, and rents. For any rents and royalties, the tax would only apply to a net amount (after expenses). The tax does not apply to tax-exempt bond interest and gains from the sale of a principal residence (unless there is a tax due after the exclusion has been claimed). Thus, if you are planning to sell your primary residence in the next year or two and will have a taxable gain (if the gain exceeds the $250,000 or $500,000 exclusion amounts for single or married taxpayers), it would be wise to consider selling the home before 2013 so that the gains are not hit with an extra 3.8 percent tax. The tax savings could be material, depending upon the extent of the overall gain that is taxable.

This same rule applies to sales of second homes or other investment real estate (not rental properties). Therefore, if you are planning on selling a second or vacation home soon, it may make a lot of sense to sell before 2013 if there will be a taxable gain.

Given that tax-exempt municipal bonds are exempt from this tax, many financial planners might be recommending these tax-favored investments when the new 3.8 percent tax goes into effect. This 3.8 percent tax increase will be in addition to any other tax increases in the future. It is highly likely that tax rates will increase, even before 2013. The tax on dividends and long-term capital gains could be increased from 15 percent to at least 20 percent. Beginning in 2013 for high-income taxpayers, this tax will actually be 23.8 percent (assuming the 20 percent rate prediction is correct). Thus, this new tax will certainly cause many people to think about selling appreciated assets before the tax increase goes into effect.

There are a few other planning opportunities to consider. The new tax does not apply to business income earned from a trade or business. It does not matter how the business is set up, as this will not apply to business income from a sole proprietorship, partnership, LLC, or S corporation. It will apply to any business that results in passive income, so entities such as limited partnerships may be subject to this extra tax.

One investment that is specifically excluded is distributions from tax-favored retirement plans, including individual retirement accounts (IRA) and qualified employer plans (such as 401(k) or 403(b) plans). This will make these plans even more advantageous than they are today. If you are not fully funding a retirement plan at work or contributing the maximum to an IRA every year, it would be a good idea to review this plan and see if you can now fully fund these plans.

If you fund a taxable account and then receive dividends or capital gains, this income would be subject to the 3.8 percent tax. But if you make these same exact investments in a retirement plan, these will NOT be subject to the 3.8 percent tax. A Roth IRA will not generate any taxable income in most situations and thus the 3.8 percent tax will not apply to Roth IRA distributions. If you are considering a rollover to a Roth IRA from a regular, traditional IRA, it again should be done before 2013 as this rollover will count in your overall income for purposes of the threshold for the 3.8 percent tax. Thus, if you are married filing jointly and your income is $250,000 (the threshold), converting an IRA to a Roth IRA would push your income over the threshold and subject some of your investment income to the extra taxes.

Tax planning will become even more key in the upcoming years as we work to find ways to legally minimize taxes payable.

Pursuant to U.S. Treasury Circular 230, this communication is not intended or written to be used, and it may not be used by you or any other person or entity, for the purpose of (i) avoiding any penalties that may be imposed on you or any other person or entity under the United States Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is addressed herein.

I often get the question on how long to retain tax records. After filing your income taxes, the Internal Revenue Service may select your tax return for an audit.  Since an audits can be frustrating having the old tax records in support  can help to ease through the whole process.How long a person should keep the tax records does varies based on the situation. The Internal Revenue Service bases this time on their statute of limitations for various offenses.

Tax Return Calculated A Tax 

• You need to keep all documents a minimum of three years in case you owe a  future tax liability from any old returns.

• If you failed to report income that  is greater than 25 percent of your reported gross income, you should keep these  tax records for six years.

• There is no statute of limitations for fraud. Therefore, if a taxpayer might  face fraud charges, he should keep his tax records indefinitely.

• If you failed to file a return for a year, you must keep all associated tax  documents indefinitely.

• If a taxpayer did not claim a legitimate credit or  refund, she should keep the records three years from filing the return, or two  years from the tax payment date, whichever is later.

• If you had a loss due to worthless securities or bad debt, keep the records  seven years.

• A taxpayer should keep any tax records related to employment for a minimum of  four years after the  tax due date or the payment date, whichever is  later. Your earning records should be compared to your records at the social security administration to insure that they match before being destroyed.

• Support of your cost basis, orignal purchase price and other improvements, in any real estate holdings or investments held should be retained until the holding is sold than for a length of time under the tax retention record provisions above.

Supporting checks, Form 1099s and Paperwork

• All support for any tax year should be retained per each tax year in a file. Once the statute of limitations passes per above the records can be destroyed unless regarding cost basis of asset still held.

Pursuant to U.S. Treasury Circular 230, this communication is not intended or written to be used, and it may not be used by you or any other person or entity, for the purpose of (i) avoiding any penalties that may be imposed on you or any other person or entity under the United States Internal Revenue Code, or
(ii) promoting, marketing, or recommending to another party any transaction or matter that is addressed herein.

What is LTC (Long-Term Care Coverage)?  The National Clearinghouse for Long-Term Care Information (2008) refers to long-term care as a variety of services and supports that meet health or personal care needs over an extended period of time.  Getting help performing everyday Activities of Daily Living (ADLs), which are: bathing, dressing, toileting/caring for incontinence, transferring, and eating typically requires non-skilled personal care assistance is the nuts and bolts benefit of qualifying for a LTC insurance benefit.

As a society, we are living longer with chronic helath conditions, and the need for long-term care insurance is increasing.  Saving enough money to adequately pay for the possibility of long-term care is not an option for many of us, and the belief that Medicare/Medicaid programs will support us is just a myth.  The Centers for Medicare and Medicaid Services (2008) estimate that 60 percent of the peopoe over the age of 65 will need some form of long-term care. 

Informal care provided by family menbers and friends is the most common form of assistance required by aging citizens.  Although there is often no cost related to this type of care, there are often costs borne directly by caregivers. They may have to reduce their working hours, see their doctors and take medications for a decline in their own physical and mental health, bear transportation costs, etc.  Paid caregivers (paraprofessionals such as certified nursing assistants, home health aides and companions) can be costly if a person requires full time supervison and assistance.  This is especially true of those individuals living with Alzheimer’s Disease.

In order to purchase long-term care insurance, one must be healthy.  Waiting too long to do so may make it impossible for you to obtain coverage.  I see this every day in my business; people wish they could purchase a policy when they land in a skilled nursing facility and realize they’re going to need caregivers for a lengthy period of time, often for the rest of their lives.  If you’re 50 years old or older, it’s time to have a conversation regarding the different types of policies available and what might work best for you.