Estate Planning and Tax Lawyer Blog

Although Florida is a great state for individuals to move to from a tax standpoint, Florida still has a tax system, both for individuals and business entities.  Unless they are exempt, a business that earns and receives income in the State of Florida must file a corporate income tax return.   Sole proprietorships, individuals, estates and certain trusts do not have to file an income tax return since they are exempt.  An LLC (unless it is a single member LLC owned by an individual), partnership, joint venture and C corporation must file a state income tax return.  An S corporation usually will not have to file a return unless they have federal taxable income, in that case they must also file a state income tax return.

The amount of money taxed in Florida is based upon the federal taxable income modified by certain Florida adjustments to come up with your Florida net income.  The tax rate is 5.5%.  If your business owes more than $2,500 in Florida income tax annually, then it must make estimated payments.

There are many other rules involved in dealing with your business taxes in Florida.  To discuss Florida’s business tax rules as they relate to you, please contact a tax professional to set up a meeting to discuss your situation.

One of the most popular charitable contributions here in Florida is to donate your car or boat to a charity and get a nice charitable deduction.  Prior to 2006, most folks would just use the blue book to determine the value of the contribution.  However, the Pension Protection Act of 2006 made significant changes to the definition of a “qualified appraiser” and “qualified appraisal” when it comes to donations of any non-cash contribution deduction that exceeds $5,000.  The IRS, through tax regualtions and recent case law, now mandates the donor to 1) obtain a qualified appraisal for the contributed property; 2) attach a fully completed appraisal summary (form 8283) to the income tax return on which the deduction is claimed; and 3) maintain records pertaining to the claimed deduction.

A “qualified appraisal” must include (among other things) 1) a description of the property in sufficient detail for a person who is not generally familiar with the type of property to ascertain that the property appraised is the property that was contributed; 2) description of the property’s physical condition; 3) valuation method used to determine the fair market value; and 4) the specific basis for the valuation.

The scary part is that if you take the deduction, are audited and then lose your argument for the deduction, you may be subject to a penalty of 20%.  However, below is a checklist of steps to take if you plan on taking a charitable deduction for non-cash property donated in excess of $5,000:

1. Obtain a qualified and timely appraisal for the property  contributed– no earlier than 60 days before the date of the contribution and no later than the due date of the return, including extensions.
2. Be sure the appraisal describes a) the property in sufficient detail for a person who is not generally familiar with the type of property to ascertain that the property appraised is the property that was contributed; b) the property’s physical condition at the date of the donation; c) how fair market value was determined, and d) the specific basis for the valuation.
3. Attach a fully completed appraisal summary (form 8283) to the tax return on which the deduction is claimed and stating the property’s cost and how it was acquired.
4. Maintain meticulous records pertaining to the claimed deduction, and
5. Obtain a contemporaneous written acknowledgment from the done that gives a) a description of the property received, b) a statement as to whether the done was provided any goods or services in exchange, and c) a description and good faith estimate of the value of such goods or services.

If you use the above as a guideline when making non-cash charitable deductions in excess of $5,000, then you will be properly prepared in case of an audit.  To make sure you have properly documented your charitable donation, consult with a tax advisor or legal counsel.

Although there currently is no estate tax in place, it is scheduled to rear its ugly head once January 1^st rolls around again.  This time though, it comes back with a vengeance at a $1,000,000 exemption and a 55% tax rate for anything over the exemption.  However, if you plan now, there are ways to effectively pay or reduce your estate taxes.

First, you can just pay the taxes.  It is a very rare sight to see, but some folks like to pay taxes.  They feel it is their civic duty.  Again, this is VERY rare.  Second, you can spend all your money.  Clients have told me that they hope to spend every last penny before they die.  Although very admirable and probably the most enjoyable of all the alternatives, it most likely will not happen.  If you have an estate that is taxable, the estate grew to become a taxable estate due to saving and not spending.

Third, you can make charitable donations.  You can make them during your life or at death.  Fourth, you can start a family gifting program.  You may currently give $13,000 per year per person to anyone you want.  So you may give a $13,000 to everyone in your family this year and then on January 1^st, do it again.  The earlier you do this, the more money you will be able to get out of your estate.  Further, you may give an unlimited amount to anyone for education and medical expenses, as long as the money goes directly to the education or medical provider.

Fifth, you may create an irrevocable life insurance trust, also known as an ILIT.  An ILIT is a special type of trust that will own your life insurance and be the beneficiary of it upon your death.  Since you no longer own the life insurance at death, it cannot be included in your estate.  There are a lot of pitfalls though which much be avoided for this to work correctly.

Finally, you can do other advanced planning techniques to shrink your estate.  One technique removes your primary or secondary home from your taxable estate.  Another technique deals with setting up a business and gifting a percentage of the business away on an annual basis.  There are well over 60 different techniques that can be used and each offers a different level of complexity.

If you would like to further discuss ways of reducing your estate taxes, please consult an estate planning attorney.

On February 16, 2010, I wrote a blog about whether or not an inherited IRA was asset protected and I said that it depends on what court you are in.  The latest inherited IRA case proves that to be true.

A bankruptcy court in Texas this week has ruled that an inherited IRA is not asset protected in bankruptcy.  The debtor chose to use the federal exemption under section 522(d)(12).  The Texas court used a two part test: 1) where the funds “retirement funds”; and 2) if they were such, were they exempt from taxation under the applicable Code provisions.

The court first ruled that the funds were not “retirement funds” since they are distributed to the beneficiary without regards to age or working/retirement status.  Simply stated, an inherited IRA in their minds is not equivalent to an IRA.  The court then said, for arguments sake, that if an inherited IRA contained “retirement funds”, the inherited IRA account is not a traditional IRA that is exempt from taxation.  To be exempt from creditors under 522(d)(12), the inherited IRA must be exempt from taxation under one of the IRS code sections enumerated in 522(d)(12).  An inherited IRA is not tax exempt under one of 522(d)(12)’s enumerated tax sections. 

I will try and follow this case as I believe it was looked at by the court very narrowly.  This ruling is completely opposite of the ruling last month, eventually they will have to be reconciled.  For now, at least in Texas, an inherited IRA is not asset protected in bankruptcy.  If you need help with estate planning, please consult an estate planning attorney to discuss your particular situation.

Estate planning is such a broad term.   Estate planning includes wills, trusts, taxes, business succession, asset protection and many other documents and practice areas.  Estate planning also includes long-term care insurance and elder care.   It is all about planning for the future.   The time to plan for a nursing home placement or admission is not the first day of the admission.  Ideally, the best time to plan is when there is no pressure to find a facility, when the person is healthy and able to make an informed decision about long-term care, and when there are funds and insurance plans available to purchase to complete or put in place the planning process.   Douglas K. Gitter, J.D. of Northwestern Mutual will be making a presentation this Sunday, March 14, 2010 on the importance of Long Term Care insurance in estate and succession planning.  According to Gitter, in discussions with clients many of them were unfamiliar with the overall effect long term care can have on their assets.  Take Charge of Your Future is a detailed educational seminar, which illustrates the importance of long term care planning to ensure financial security.   Martin Goetz, CEO of River Garden will also be speaking about his top-rated, five star, long term care facility.

Please join us to learn more at the Brotherhood Sponsored Community Breakfast this Sunday from 10:00 am to noon.  There is a $5.00 per person charge with RSVP to TempleBrothersJax@yahoo.com or $6.00 at the door.    

This is a community event open to all interested in attending.  While Wood, Atter & Wolf are not sponsors or speakers at this event, Wood, Atter & Wolf supports and commends people and organizations promoting good estate planning as well as the proper and dedicated care of the elderly and those in need of long-term nursing home care.

To learn more about Doug and his practice, please visit his website at http://douggitter.nmfn.com/.

A very popular estate planning technique is to transfer assets into a Family Limited Partnership (FLP) and then claim a valuation discount on the interests that the estate still owns upon a person’s death.  The IRS has questioned this technique and is starting to litigate cases that fall within certain parameters.  In fact last year, the IRS hired 14 new estate tax attorneys and plans on hiring 10 more this month.  In doing so, the IRS is looking at estate tax returns that claim reduced values of the estate based upon FLP interests.  The IRS has hinted as to what “red flags” they look at when determining whether or not to litigate a case where an estate valuation discount is taken.  The following is a list of some, but not all, of those “red flags”:

• Near death creation of the FLP
• Decedent retained no assets for living expenses
• No contributions by other partners
• Nature of assets (person use assets)
• Failure to observe partnership formalities
• Commingling of personal and partnership  assets
• Post-death distributions or borrowing from the FLP (ex. Loan taken out by estate to pay taxes)
• Non pro rata distributions if the decedent is the only person receiving distributions
• No real business or investment purpose or creditor protection purpose
• Achieving discounts seems to be the real reason for creating the FLP

If you have created a FLP or are thinking about creating a FLP, please consult with an estate planning or tax attorney for advice or to review how you have been conducting business through the FLP.

The IRS has several free tax programs to help prepare tax returns for those who are eligible for the programs.  The Volunteer Income Tax Assistance Program (VITA) offers free tax help to low to moderate income people who cannot prepare their own tax returns.  The income cut-off is generally around $49,000.  The Tax Counseling for the Elderly Program (TCE) provides free tax help to people 60 years of age or older.  Both programs are run by trained volunteers.  I was a coordinator for the VITA program years ago and we were able to help out those who were in need and were able to get extra money for those who qualified for the Earned Income Tax Credit.

Items that you need to bring with you to have your taxes prepared are the following: 1) proof of identification; 2) Social Security Cards for you, your spouse (if any) and dependents (if any); 3) birth dates for you, your spouse (if any) and dependents (if any); 4) current years tax forms sent to you in the mail (if any); 5) all wage and earnings statements such as W-2s and 1099s; 6) interest and dividend statements on a 1099; 7) copies of last years tax returns; 8 ) your check book if you want your refund directly deposited; 9) total paid for daycare provider and their tax ID number (if applicable) and 10) if filing jointly, both spouses must be present.

It is very important that you bring your social security cards or a letter from the Social Security Administration verifying your social security number.  The IRS, in training the volunteers, stresses the importance of making sure the social security number matches the proof of identification.  I know this from personal experience.  Without a social security card and proof of identity, the volunteers are told to not prepare the return and have you come back later when you have the social security information and proof of identification with you.

To find the nearest VITA site, please call 1-800-829-1040.  To find the nearest TCE site, please call 1-888-227-7669.

For further questions in regards to these tax programs, contact Wood, Atter & Wolf, P.A. for further information.