April 5, 2010
The health care legislation recently passed by Congress and signed by the President, the Patient Protection and Affordable Care Act, imposes an additional Medicare tax of 3.8% on “net investment income” or the excess of modified adjusted gross income over a “threshold amount”. The “threshold amount” is $250,000 for married taxpayers and $125,000 for single taxpayers. (It is $200,000 for other taxpayers – trusts, for example).
“Net Investment Income” includes interest, dividends, capital gains, rents, royalties and passive activity income. It does not include income from an active trade or business, or a source of income (interest or dividends, for example) to the extent derived from an active trade or business.
One should not engage in long term planning for the sole purpose of avoiding a possible 3.8% tax over a certain income threshold. However, if there are choices concerning long term planning, the following techniques might be used to minimize the impact of the Medicaid tax on net investment income in the long term:
- Maximize contributions to §401(k), §403(b), §457 and IRA retirement plans.
- Where appropriate (particularly small business owners and professionals), consider anew the feasibility of a defined benefit or cash balance pension plan. (A defined benefit or cash balance plan combined with a §401(k) plan often maximizes benefits).
- Municipal Bonds
- Tax Deferred Annuities
- Life Insurance
- Roth IRA conversions
- Roth IRA distributions
These approaches will minimize modified adjusted gross income and will therefore tend to keep income under the “threshold amount”, thus avoiding the Medicaid tax.
Clients who have questions concerning how the new legislation affects their investments and their wealth should call Northbrook and Chicago business attorneys, Kaufman Law Group, at (847) 521-4900.
Posted in Elder Law, Estate Planning, Long-Term Planning, asset protection.
Tagged with Estate Planning, Long-Term Planning, Medicaid Tax.
February 11, 2010
Now more than ever, people with wealth are “sitting ducks,” particularly if they have real estate holdings or significant professional incomes.
Consider the following: More than 90 percent of all lawsuits in the world are reportedly filed in the United States, and 78 percent of defendants in those suits thought “it could never happen to me.” According to the National Center for State Courts, more than 18 million incoming civil cases were filed in state courts in 2007 (the last year of full reporting) representing an increase of more than 4.5 percent from the previous year. Anecdotally, the numbers have risen even more dramatically as the economy has shifted downward.
That is why asset protection planning should be an important part of every estate plan.
The substantial assets of a physician, attorney or other professional should always be protected in the event of a lawsuit for professional or personal liability. A middle class family’s assets also should be protected in the event a husband or wife needs nursing home or medical care for an extended period of time. Business owners might think their assets are protected because they have a corporation or a limited liability company, but the corporate veil of protection can be pierced in some situations and the owners can also be sued for torts or other acts committed in their personal capacity.
One national expert defines asset protection planning for such individuals as, “the adoption of planning techniques that tend to place assets beyond the reach of future potential creditors”.
Some of these planning techniques include planning for sufficient personal liability and “umbrella” insurance coverage and holding title to your residence by optimal designations (such as “tenants by the entireties”). In Illinois, it can also be advantageous to maximize assets invested in certain areas, such as retirement plans, disability benefits, homesteads and certain other qualified property. These are simple, but less than perfect solutions for asset protection.
Asset protection plans can also be set up to utilize the laws of other jurisdictions. Some states, (such as Alaska, Nevada and South Dakota) have statutes that are more friendly to those who are seeking to protect their assets. There are also offshore options available where domestic structures are insufficient.
But you must be aware of the legal limits of asset protection as well. Asset protection does not include committing fraud or perjury or engaging in fraudulent transfers.
Beginning in April, we will conduct a series of workshops entitled, “Asset Protection for Business Owners”. It is our experience that most business owners have a false sense of security and need to better understand the risks to their business and assets and the options available. Watch this blog and our Web site for announcement of the dates and times beginning in April.
Posted in Estate Planning, asset protection.
Tagged with asset protection, estate plan, law suits, litigation.
January 19, 2010
In my last blog post, I explained the stealth estate tax created by the so-called “carry-over” basis that will apply to administration of estates in 2010, due to the U.S. Senate’s failure to act to continue the law in effect in 2009.
Pursuant to this carry-over basis, those who inherit assets in 2010 can expect to pay more taxes upon the sale of those assets because the tax basis of the assets will now be set at the price at which they were acquired by the benefactor (instead of the fair market price on date of inheritance).
Now, I want to share my crystal-ball look into the future and explain how clients can do flexible estate planning to avoid getting trapped by this stealth tax or other issues that could arise from further legislative tinkering.
The best-known national experts in taxation believe that the current election year environment is too politically charged to support any active legislative effort at estate tax reform. They also note that President Obama, since his election, has been silent about the estate tax issue, making it clear that he intends to let “the Bush tax cuts” expire.
So what could happen? Many experts believe nothing will happen in 2010, which would result in a 2011 return to estate tax provisions that existed in 2001. This would allow an exemption from federal tax for the first $1 million of estate value per decedent, but it is hard to predict with certainty against a shifting political landscape.
That is why I tell almost every client that the most important element of an estate plan is always flexibility. Often, this is overlooked by inexperienced estate planners. But in the long term, this is an essential feature of any well-crafted estate plan that will stand the test of time.
In volatile times, it is easy to put off a review of one’s will, trusts or estate plan. “I’ll wait until the dust settles and we know what the law is,” many clients say. But this approach is not the wisest. There are steps you can and should take today to respond to the stealth tax and to give your estate the flexibility necessary to adapt to future legislative changes. We can use flexible formulas in your estate direction that fit the current environment, but adjust in relation to future changes. The present circumstances suggest now is a good time to do that.
At the end of the month, I’ll be attending the Heckerling Estate Planning Institute sponsored by the University of Miami Law School. It is the largest convocation of estate planning professionals of its kind. They have scheduled several sessions just to deal with the “stealth estate tax” problem, so I will have more to report upon my return.
Meanwhile, check out the estate planning section of our newly revised and updated website, on estate planning, and call us if you have any questions.
Posted in Estate Planning.
Tagged with carry-over basis, Estate Planning, estate tax.
January 8, 2010
In 2001, Congress revised the federal estate tax schedule, gradually increasing the individual exemption from estate tax from year to year. Pursuant to this legislation, the exemption was raised to $3.5 million per person ($7 M per couple) in 2009, and there is a scheduled one-year exemption from all federal estate tax for 2010. But not many people realize that this one-year “gift” is really a Trojan tax horse!
At first glance, the one-year repeal would appear to be a good thing; however, it is not. The sunset of the estate tax is accompanied by a stealth tax increase delivered by means of a crazy tax concept called “carry-over basis.”
Prior to 2010, when a person died (the “benefactor”) the tax basis of his assets was their fair market value on date of death (and not their fair market value on the date of acquisition). Thus, when the heirs sold an inherited asset, their gain was the fair market asset value at time of sale minus the fair market asset value at the time of the benefactor’s death (and not minus the value of the asset when the benefactor acquired it, which would yield a much greater gain).
But now the 2010 ”carry over basis” provision ties the gain on sale of inherited assets to the price that the benefactor originally paid for the asset (plus the cost of improvement or reinvested dividends, if any).
There are steps you can take to plan around this disaster, and you can still take advantage of Section 1022(b) of the Internal Revenue Code, which provides for a carry over basis exemption of $1.3 million for individuals or Section 1022(c), which provides for an exemption of $3 million for any amount held by the surviving spouse. But without proper planning and legal assistance, your heirs could be exposed to increased stealth taxes in 2010, and perhaps beyond (depending on what Congress does this year).
In my next blog post, I will discusss what steps need to be taken in order to avoid the stealth tax increase and why it is important to review existing estate plans now. In the interim, if you want to schedule a meeting with one of our professionals or just learn more about our estate planning work, you can visit our website.
Posted in Estate Planning, asset protection.
Tagged with carry-over basis, Estate Planning, estate tax.
December 28, 2009
On Jan. 1, 2010, Illinois is joining more than 20 other states that have passed laws that prohibit texting while driving.
So why is this important to your business or estate plan? In two words: Asset Protection. If you or your employee should get into an accident while texting, a violation of this law could provide the basis for liability in a civil action, and the damages could exceed your insurance limits or the act of texting could negate your coverage. As a result, your business or estate could be at risk if you don’t act to prevent texting in your vehicles.
Business owners, professionals, individuals with substantial assets, families with teenage drivers and others need to observe the statute carefully and develop an asset protection plan to ensure that a bad habit of texting (or any other kind of bad action) does not have devastating results.
Look for our workshops on asset protection in 2010 and check out our asset protection services.
More details on the new law for those who are interested:
This new law prohibits while driving the use of ANY electronic communication device to compose, send or read electronic messages. Such devices include: wireless phones; personal digital assistants; or portable computers.
Navigation or global positioning systems built into the vehicle are excluded, as are messages in commercial vehicles displayed on permanently installed screens (as in FedEx trucks). Motorists using hands free devices, reporting emergencies, and pulled over on roadways or stopped in traffic may also be exempt under the statute, depending on the facts of the situation.
Posted in asset protection.
Tagged with asset protection, Estate Planning, texting while driving.
December 16, 2009
Many of us live an “online” life. We have user names and passwords for bank accounts, brokerage accounts, 401(k) accounts, children’s investments, credit cards, mortgage accounts, and other necessities of life; and we guard these secret identities carefully.
So where will our spouses or trustees find these identities and vital passwords in the event of an unexpected incapacity or sudden death? Our online information can be just as critical as our valuable papers, especialy for those who maintain most of their data electronically.
There are many possible solutions, but one of my favorites is a program called KeePass which creates a “Password Safe” for all passwords associated with your network, Internet, e-mail, and Windows useage. It requires only that you set and remember just one master password. You can keep the database on a USB flash drive and/or a backup drive, and the program allows you to print out the database and put a copy in your estate plan (or provide an additional flash drive for your lawyer/trustee).
This program is free shareware and can be downloaded at http://keepass.info/
Online life is a reality. So make sure that your important online information, including user names and passwords, is available to those who will need it in case of emergency!
For more information about how to plan for the death, disability or incapacity of a family member or business partner, see my Website at: http://www.jckpc.com/estate-planning.
Posted in Estate Planning.
Tagged with estate plan, passwords.
November 24, 2009
Q4 Illinois Estate Planning Newsletter to Clients
JTV is a five minute video viewed over the internet. Jay gives our clients their personal briefing on the latest developments as well as timely wealth-accumulation and tax-saving tips.
We hope you enjoy this short update created especially for our family estate-planning clients.
Feel free to share the link with your family and friends.
We’d like to know what you think of our video newsletter.
Email or call Karen at 847-521-4909 or
Karen@kaufmanlawgroup.com
At this special time of the year, Kaufman Law Group thanks you for your continued confidence and loyalty. We wish all our clients, their families and friends a Happy Thanksgiving and a healthy, happy holiday season.
Posted in Estate Planning.
Tagged with Estate Planning, Q4 2009.
