Estate Planning and Tax Lawyer Blog

More than eighty percent of American households use either a paid tax preparer or tax preparation software to help them file their taxes. The Internal Revenue Service (IRS) recently announced that they are proposing new registration, testing, and continuing education of tax preparers for the 2010 tax year.

The IRS believes that higher standards will serve to protect taxpayers and increase compliance with tax laws. The goal of the new program is to ensure that taxpayers receive competent, ethical service from qualified professionals.

The requirements will include:

• All paid tax return preparers will have to register with the IRS to obtain a preparer tax identification number (PTIN). They will be subject to a limited tax compliance check to qualify.

• Competency tests for all paid tax return preparers who are not attorneys, certified public accountants (CPAs) or enrolled agents.

• Continuing education for all paid tax return preparers who are not attorneys, CPAs, or enrolled agents.

• The ethical rules which currently only apply to attorneys, CPAs and enrolled agents who practice before the IRS will now be required of all paid preparers.

Read more about the new requirements for paid tax preparers at IRS Proposes New Registration, Testing and Continuing Education Requirements for Tax Return Preparers Not Already Subject to Oversight.

If you require assistance with tax planning, please contact a tax professional for tax planning and legal counsel.

Although there is currently no estate tax (which could change any day), there are eight basic estate planning steps that everyone should take, no matter what your net worth is. 

The first step is to have a financial power of attorney.  The financial power of attorney appoints someone to handle your financial affairs if you are unable to do so yourself.  This document ensures that all of your assets are taken care of and your bills are being paid.  The person appointed can be appointed immediately or only upon your disability.  Without a financial power of attorney, your family will have to go to court to have permission to deal with your assets.  State laws change frequently, make sure your financial power of attorney is valid under your state’s law.

Step two is to make sure you have a valid health care power of attorney and living will.  The health care power of attorney allows someone to make health care decisions for you if you are unable to make them for yourself.  A living will states what your intent is if you are in a persistent, vegetative state.  More commonly stated as “whether or not to pull the plug”.  Your health care power of attorney needs to have the HIPAA authorizations within it, otherwise it is not a valid document.

Step three is to calculate your net worth.  You may be surprised where you stand financially.  This is important from a tax standpoint but you will also get a hold of everything you own.  Sometimes assets fall through the cracks and are not properly planned for because they were not brought up during the estate planning discussion.

Step four is to review your beneficiary designations.  Upon your death, your beneficiary designations control how that specific asset will pass.  A will or trust has no say.  If your ex-spouse is named accidently, the ex-spouse will receive that asset.  Beware, it happens everyday!

Step five is to create or update your will.  A will allows you to determine how your assets pass to your loved ones.  If you do not have a will, the state where you live has graciously set one up for you but it probably does not pass your assets according to your wishes.  This is especially true when you are remarried and have children from your current and/or previous marriage. 

Step six is to plan for your state’s estate tax.  The District of Columbia and23 other states have their own estate or inheritance taxes.   If you don’t plan for them, you could inadvertently cause a state estate tax upon your death.

Step seven is to check how your assets are currently titled.  Do you have everything titled jointly?  If you have a trust, does your trust own your assets?  If you are unsure how your assets are titled, please review the title of your assets as it makes a big difference upon your death.

Finally, the last step is to gift while you are alive.  Currently, you can give $13,000 per year to anyone you wish.  You can stand outside of your church and write a $13,000 check to everyone who passes by.  Additionally, you can pay anyone’s college or private school tuition or medical bills so long as they money goes directly to the educational facility or medical provider.

If you need help with any of the above estate planning steps, please consult an estate planning attorney for estate planning legal counsel.

Many people prefer a relative to be a trustee of their trusts.  However, in some situations, hiring an independent corporate trustee may be the smarter decision.

A corporate trustee brings impartiality, experience and expertise at a time that is often filled with emotion.  A corporate trustee will remain neutral in the face of family disagreements.  A lot of attorneys frequently recommend hiring corporate trustees, rather than naming family members for the following reasons:

• Corporate trustees have record keeping systems in place to guarantee timely, accurate accounting of principal and income as well as production of regular statements.
• Past history with family members can impair decision making.  A corporate trustee can ensure decisions are made on facts and not feelings.
• Privacy is a fiduciary duty of the corporate trustee.
• In matters pertaining to your legacy and your beneficiary’s inheritance, it is important to have someone with experience at the helm.
• Corporate trustees are consistently available, devoting full attention and resources to achieving the results required of a trustee.
• Substantial capital surplus and insurance coverage are carried by reputable corporate trustees for liability purposes.
• Perpetual existence assures a capable, professional organization is ready to complete the trust tasks required for decades going forward.
• There are strict compliance standards set by State and/or Federal regulatory agencies, as well as audits conducted by an independent auditor at least annually.
• Corporate trustees are required by law to faithfully perform all its duties and follow the trust document terms to the letter.
• Specialization in trust administration provides services in an efficient, cost-effective manner for reasonable fees.

If you’d like to discuss the value of a corporate trustee further, please contact an estate planning attorney for further information.

Did you know you can deduct some or all of the sales tax you paid when you bought your car last year?  If you bought your car between February 16, 2009 and December 31, 2009, you can deduct the sale tax, limited up to $49,500 of the purchase price, you paid for your vehicle.  For example, if your car cost $20,000, you could deduct all the sales tax paid for that vehicle.  However, if your vehicle cost $60,000, you could only deduct 83% of your sales tax because you are limited to the amount of the tax you paid on $49,500.

This deduction is available for individuals with incomes of $125,000 or less or married couples filing jointly with incomes of $250,000 or less.  The deduction phases out and is not available for individuals with incomes greater than $135,000 or $260,000 for married couples filing jointly.

Remember, this is a deduction and not a tax credit.  A deduction reduces the amount of taxable income you have whereas a credit reduces the amount of tax you owe.  For example, if you have a $1000 deduction and you made $50,000 in taxable income last year, you would report only $49,000 of income.  Whereas if you had a $1000 tax credit and after all the calculations, the IRS said you owed them taxes of $1001, you would only owe them $1 since the credit reduced the actual tax bill.

If you think this deduction is applicable to you or you want to know more about other possible deductions, please consult with a tax professional in regards to your tax needs.

Ever wonder what happens to your pets after you pass away?  Most pet owners consider their pets as a member of their family.  It, however, is not uncommon for pets to be left behind as their owners pass away.  What can you do to ensure that your pet is taken care of upon your passing?  Estate planning for pets became more popular in the 90s and pet trusts are now legal in most states.

Legally, your pet is deemed to be tangible personal property that would pass to your heirs or beneficiaries by law.  With a will or a trust, you can control who will get your pets and how they should be taken care of.

Typically a pet trust sets aside a certain amount of money that is dedicated to caring for the pets you owned upon your death.  Once the last of the pets pass, any remaining funds pass to your beneficiaries.  There are decisions to be made though in setting up the pet trust.

The most important decision is who will serve as the trustee of the trust and caretaker of the pets.  Friends and family are usually thought of first.  Although they may enjoy playing with your pets, the enjoyment may diminish quickly.  A good way to test whether or not they will be a good caretaker is to have them pet-sit for several days. 

Another decision to be made is how much, if any, to compensate the caretaker for their services.  If you compensate them too little, they may not adequately care for your pets.  If you compensate them too much, they may keep a suffering pet alive too long.  There is a story about a caretaker who found a new black dog whenever the old black dog passed away to ensure they continued to receive compensation.  You want to avoid this situation.  There are always non-profit organizations who will gladly care for your pet under a pet trust.

If you would like to discuss the possibilities of a pet trust further, please contact an estate planning attorney to draft the legal documents necessary to ensure your pets are taken care of upon your passing.

Are inherited IRAs asset protected?  The answer, unfortunately, seems to be that it depends on which state and which court you are in.  There are state courts all over the United States which have ruled that an inherited IRA is not protected from a creditor of the beneficiary. 

Recently, a Florida state court ruled that an inherited IRA is not asset protected from a judgment creditor.  The facts of the case were that the creditor obtained a judgment against the debtor and served a writ of garnishment to obtain the funds held by the debtor in an inherited IRA received from his deceased father.  The Florida District Court of Appeal ruled that Florida Statute 222.21(2)(a) does not apply to inherited IRAs because the language of the statute references only the original “fund or account” and also that an inherited IRAs tax consequences are different from the original IRAs tax consequences.

However, even more recently, a Bankruptcy court in Minnesota ruled that an inherited IRA is protected in bankruptcy.   In that case, the debtor claimed exemption under 11 U.S.C. Section 522(d)(12).  The court ruled that 11 U.S.C. Section 522(d)(12) does apply and, therefore, the inherited IRA is exempt in the bankruptcy proceeding.  This court however seemed to limit its ruling to the facts of the case.

The easiest way to ensure that your inherited IRA is asset protected is through a trust setup specifically to deal with the inherited IRA upon the IRA owner’s death.

If you have questions regarding inherited IRAs and other assets being protected as they pertain to judgments, bankruptcy and other proceedings, please contact a legal professional for legal counsel.

Currently, the basis of property acquired from a decedent generally is the fair market value of the property on the decedent’s     date of death.  Property included in the decedent’s gross estate for estate tax purposes must be valued at its fair market value on the date of death.

A donee’s basis in property received by gift generally is the donor’s adjusted basis in the property, increase by the gift tax, if any, paid on the transfer.  If the donor’s basis exceeds the fair market value of the property on the date of the gift, the donee’s basis is limited to that fair market value for purposes of determining any subsequent loss.

President Obama recently proposed a consistency and reporting requirement to the above basis in his proposed budget rules.  He is proposing that the basis of inherited property equal the value of that property determined for estate tax purposes.  He is also proposing that the basis of property received by gift must equal the donor’s basis.  The reporting of the basis would be imposed on the executor of the estate and on the donor of a lifetime gift to both the recipient of the property and the IRS.

This may mean that every estate may have to file an estate tax return or any gift may require a gift tax return to report the basis of the property transferred.

If you require assistance with tax planning, please contact a tax attorney for tax planning legal counsel.

The second reason to become a Florida resident is that Florida has favorable asset protection laws to protect its residents.  The most widely used asset protection technique is the homestead.  Only a few states even recognize some sort of homestead protection to protect ones home from a forced sale (subject to three exceptions in Florida).  In order to qualify for the homestead exemption, you must 1) intend to permanently reside in Florida; 2) have legal or beneficial title in equity to the real property on the 1^st of January; 3) reside on the property; and 4) in good faith make the property their personal residence.  There are land limitations on the homestead though.  If the land is within a municipality, the protection is limited to one-half.  If located outside a municipality, then the limitation is to 160 contiguous acres.  Further, due to the Bankruptcy Act of 2005, for the first 1,215 days your own your homestead, you only have an exemption of $136,875.  This prevents someone from moving to Florida, putting all their money into their homestead and then filing bankruptcy.

Life insurance proceed are also exempt from the creditors of the insured unless the policy or a valid assignment provides otherwise.  The cash surrender value of insurance policies insuring the life of a Florida resident and the proceeds of an annuity contract issued to a Florida resident are exempt from the reach of creditors.  Money or other assets payable from a qualified retirement or profit-sharing plan are exempt from claim of creditors of the beneficiary and participant.  Assets set aside in a medical saving account, college trust fund or 529 plans are protected from creditors.  Finally, assets titled as tenants by the entirety, only available to husband and wife, are exempt from the creditors of one spouse.  If the creditor is a creditor of both spouses, this protection does not exist.

Becoming a Florida resident is easy as Florida is an intent state, meaning if you intend to be a Florida resident, then you can be.  The bigger problem is having the state you have left no longer claim you as a resident.  A few simple steps can allow you to show your intent and hopefully break any connection you may have with your old state of residency.

Florida residents and others should consult with an estate planning and tax attorney to review the various documents and strategies to take full advantage of the asset protection benefits under Florida law.

There are many reasons why the State of Florida is a great state to declare your residency in besides the year round golfing.  I meet with clients and prospective clients all the time who are residents of another state and talk to them about why they should consider becoming a Florida resident.

The first reason to become a Florida resident is that there is no Florida income, estate, inheritance, gift, intangibles or generation-skipping tax.  Most states impose at least one of the above taxes on its residents.  Real property and tangible personal property are generally subject to estate tax by the state in which the property is located.  All other property such as bank and investment accounts are generally subject to the estate tax laws in place in the state the decedent resided in prior to their death.

An example that demonstrates this is Bob.  Bob has a checking account in a Florida bank, has him home in Florida homesteaded, a car, an IRA and a vacation home in New York.  Upon Bob’s death, his vacation home in New York would be subject to New York estate taxes but the rest of his property would pass estate tax free under Florida law.  I won’t discuss the federal estate tax as that is a completely different animal.

Florida residents and others should consult with an estate planning and tax attorney to review the various documents and strategies to take full advantage of the tax benefits under Florida law.