Newsletter Word Template
Single Spaced Times Roman New 10 point bold
MONTH YEAR: Lead Article: 1 ¾ pages [2nd page about 45 lines]
Lead Article Title: Scheduled Maintenance Guide
Summary: So you bought a new car and you want it to work right and last. A good first step is to check out the Scheduled Maintenance Guide. Yep, change the oil every 5,000 miles, but a lot more is recommended. Doesn’t your estate plan deserve the same care? Page references are to the 2010 Ford Motor Company Scheduled Maintenance Guide. For some reason most folks understand that their car needs TLC, but they don’t apply the same logic to their estate and financial plans.
◙ Warning: The Ford Scheduled Maintenance Guide cautions readers [p.2]: “Today’s vehicles are more sophisticated than ever and need to be properly maintained to help ensure that they operate at the highest level.” Well, Henry, your grandmother may not have drive a Model T, but her estate plan surely didn’t have split-dollar loans, trust protectors, directed trusts, unitrusts, GRATs, discounts, guarantee fees, and all the other bells and whistles your plan has. So if your estate plan is a tad too complicated to crank out on legalzoom, then the maxim for car maintenance assuredly applies to your estate and financial plan as well.
◙ General Maintenance: The Ford Scheduled Maintenance Guide provides recommendations for different mileage markers. The basic service at a 7,500 mile marker includes expected stuff like changing oil, filters, tire rotation and performing a “multi-point inspection.” [Ford Manual p. 14]. For your estate plan, each year you should do some of the basics like: ■ Update key data including balance sheet and family/personal data. Your advisers need current data to advise you about the adequacy of your current planning and documents, and especially in the event of an emergency. ■ Review the ownership (title) of your assets and beneficiary designations to assure that they are consistent with your plan. Values change, liability exposure can shift, tax rules change, and annual monitoring is pretty important to assure that your plan is working. Regular monitoring, just like oil changes, is pretty inexpensive and can avoid much more costly problems. ■ A quick conference call between your various advisers keeps your “team” coordinated. Often this might require modest time. Assure that your investment adviser and CPA are on the same page as to capital gains and losses, marginal tax rates, etc. With the uncertainty about estate tax repeal and carry over basis rules your estate planner needs to be in on that call too. Business succession planning requires coordination of your estate and corporate attorneys, CPA and insurance consultant. ■ Don’t forget your “multi-point inspection.” [Ford Manual p. 14]. For your estate plan, just like your car, that means running through details that your advisers deem important to assess the functioning of your planning. Consider: How is your asset allocation disbursed to different trusts and entities (asset location) and does the approach remain optimal? Is your insurance coverage adequate in light of current circumstances and are policies performing as expected. And so on.
◙ Special Operating Conditions: Before relying on just the regular maintenance schedule, you need to first determine whether you operate your car in a more demanding special condition. If you tow an Airstream trailer, that’s a “special operating condition” and you need to have some items “maintained more frequently”. Works for your car, works for you estate plan! If you’re towing a heavy load then you need more frequent maintenance. Most plans should be reviewed every couple of years. These are plans that are for an intact non-blended family, face no estate tax issues or the tax costs are simply solved, no sophisticated trusts, etc. If you have “special operating conditions” you need to “inspect frequently, service as required.” Special conditions might include: closely held business with buy out provisions; complex blended family (unless your last name is Brady, it’s probably complex); family partnerships or LLCs (achieving estate tax minimization and asset protection goal is never normal maintenance); all but the most basic of trusts; etc. The manual recommends much of the basic service every 5,000 miles instead of every 7,5000 miles. [Ford Manual p. 41]. Ditto you your estate and financial plan.
◙ Idle Hours: If your car is used for police, delivery or other purposes it may experience significant idle time. Idle time is like stealth miles – it doesn’t appear on your odometer, but idle time is insidious and potentially damaging to your car. Even though your odometer is not registering wear and tear, each hour of idle time can be the equivalent of 33 miles of driving. [Ford Manual p. 43]. Your estate plan can similarly be undermined by issues that are hardly registering on your radar screen. Spending rates can inch up ever so slightly such that continuing an annual gift program to the kiddies could begin to erode your financial security. Court cases could reinterpret nuances of provisions in your documents that only a professional reviewing your entire plan could identify.
◙ Deferred Maintenance: Would you ever think of like showing up at your dealer for your first oil change with 50,000 miles on your SUV? No, but why do so many clients not talk to their insurance consultant or estate planner for a decade or longer after their trust was signed? Would you blame your mechanic if you’re SUV we’re a bit cranky after 50,000 miles with no care? Why are your professional advisers somehow responsible for similar owner neglect? When your insurance plan was formulated and implemented the estate tax exclusion was $600,000, last year it was $3.5 million (this year we’re still wondering what it is!). When you show up to the dealer 10,000 miles late for your last service call and get tagged with some extras to you accuse your dealer of bilking you or do you thank the mechanic for catching a problem before it became an even bigger and more costly issue? When you’ve skipped the recommended scheduled maintenance you expect the bills to more costly and the repairs more difficult. The moral of the story for both your car and estate plan, is service both regularly and properly.
◙ Emergency Repairs: You hit a pot hole and blow out your tire. Your car may be new, but the bottom line is you have to fix the tire. If you’re lucky you can plug the hole. If you not so lucky you have to replace the tire. If you’re more unlucky you may have thrown the alignment out of whack and have to have the tires aligned. So you just signed your will, but the unimaginable happened and Congress actually let the estate tax lapse in 2010. You really need to update it, regardless of how new your car is! Pot holes don’t differentiate the damage they’ll cause by how recent the vintage of the car driving over them is. Neither does Congress! A named trustee turns out not to be so trustworthy, a responsible heir turns out to be anything but. Your insurance company’s performance is less than stellar jeopardizing your plan. Your wealth manager changes his name to Willie Sutton. Estate and financial plans hit unexpected potholes: marriage, divorce, re-marriage, new children, significant changes in wealth, diagnosis of a major health issue, change in residency/domicile, and more. Just because you spent a lot of time, money and effort implementing a comprehensive and flexible plan doesn’t mean you can ignore emergencies any more than you can ignore the thud of a flat tire.
◙ Replacement: “In general, tires should be replaced after 6 years, regardless of tread wear.” [Ford Manual p. 9]. But how old did you say your will is? Whoever drafts your documents updates and refines their forms and drafting all the time. States adopt new laws. Courts interpret tax laws. The Treasury department issues new regulations. Practitioners write and lecture about new techniques. Forms and techniques evolve and older approaches simply become less beneficial, some could become dangerous. After some number of years your documents should be replaced even if your situation hasn’t changed. Updating existing documents is analogous to balancing and rotating tires. You can maintain your tires to increase their longevity, but at some point you just really need new tires to be safe. Ditto on your will and other planning and documents.
◙ Conclusion: You take care of your car knowing that regular maintenance avoids worse problems. Your estate plan involves exponentially more money, and can similarly impact the security of your loved ones. Don’t settle for less for your estate plan than you do with your oil changes!
Checklist: Second Article 2 lines less than One Page [about 54 lines]:
Checklist Article Title: GRAT Decisions
Summary: To make great decisions for your GRAT you need to think creatively. The following checklist will help. But for those who missed the lecture on GRATs in acronym school, it stands for Grantor Retained Annuity Trust. It is a trust to which you can transfer assets, receive back an annuity for a specified number of years and thereafter the appreciation of the assets in the GRAT in excess of a federally mandated hurdle rate, inure to the benefit of your children. It’s a great estate tax plan for many well do to folks. As with all planning techniques, a broad perspective considering a range of issues, will server you best.
√ Financial: Which assets should go into which GRAT? How should your overall asset allocation be placed in your GRATs and other trusts (asset location). Should you use single asset class GRATs? Be sure that your wealth manager leads the way with whatever investment strategies are optimal.
√ Term: How long should your GRAT last? A common planning approach has been to use two year GRATs and to re-GRAT the large annuity payments each year. But the Obama administration has proposed 10-year minimum GRATs. So the 2 year re-GRAT’ing game may be in the ninth inning. Should you use a long term GRAT to lock in the current low interest rate hurdles?
√ Legal: State law considerations – should you be in Delaware? How should grantor trust status be structured? How should power to substitute be used?
√ Remainder Beneficiary: If your GRATs succeed, who should get the benefits? If you name children, should their distributions be outright or in trust? Trusts are preferable from a tax, control, safety and flexibility perspectives, but what terms? If the remainder beneficiary is a trust should that trust be a grantor trust after the GRAT term? That would permit you to continue to pay the income tax on trust earnings even though your children are the beneficiaries. That’s a powerful wealth transfer technique! What about naming your insurance trust (ILIT) as remainder beneficiary? That can provide a very tax efficient method to shift dollars into the ILIT without being limited by annual gift tax exclusion amounts. If your ILIT is party to a split-dollar arrangement the GRAT proceeds can be used to tax efficiently rollout (unwind) that arrangement.
√ Accounting: If funded with business or real estate interests rather than stock, proper operation of entities held by the GRAT is essential. Have your CPA review of expenses and deductions on entity to avoid indirect additional contribution to GRAT, maintain records for the trust and monitor payments. If you’ve been earning a $1M salary and cut it to $250,000 and a GRAT owns 50% of the stock in the business that could be viewed by the IRS as an additional gift of $375,000 to the GRAT thereby disqualifying it.
√ Annuity: Some advisers prefer the annuity be paid based on a December 31 year end so that it is due when you’re your April 15 tax return is due. Easier to remember. Some recommend that the annuity be paid based on the anniversary date of the GRAT. But that can be a funky date more easily overlooked. With a two year GRAT basing it on the anniversary date means two annuity payments instead of one. However, if the Obama 10 year GRAT rule is enacted, it would mean 11 instead of 10, not such a big deal. While you can defer the annuity payment until say April 14. Doing so might give you more opportunity to grow assets outside your estate. However, if interest rates are insignificant, or you don’t anticipate market appreciation of other GRAT assets that will be paid out, waiting may actually be detrimental.
√ Insurance: Have your property and casualty insurance consultant review business and real estate transferred to GRATs to assure that they are properly insured. Using life insurance to back stop mortality risk of GRAT is important to evaluate if you use longer term GRATs. While it can be done for a two year GRAT few view the risk as worth addressing. But if the Obama administration 10 year minimum GRAT term is enacted, buying a term policy to backstop your GRAT (if you die before the GRAT ends all the assets are back in your estate) will become commonplace.
√ Trustee: Some wealth managers prefer a domestic trust (formed in your state of residence) with you the grantor as the sole trustee since this simplifies it all, and gets plan in place cheaper. However, your estate planner may prefer an institutional trustee and basing the trust in Delaware, South Dakota, Alaska or another state with favorable laws and taxation.
Recent Developments Article 1/3 Page [about 18 lines]:
■ Roth Tax Tip: A common conversion approach is to divide your IRA into separate IRAs converting each with investments in different asset classes. The ones that don’t appreciate you re-convert to regular IRAs so you don’t have to pay income tax on a unfavorable investment result. Everyone in your foursome converted their IRA to a Roth so you jump on the bandwagon. Check out your State estimated tax payments. If you don’t pay in enough your extension may not be valid. This can be tricky. If you made estimates assuming some IRAs would be reconverted from Roth to regular IRAs, you could void your state extension. Pay estimated state tax as if reconversion isn’t an option
■ Roth Drafting Tip: If you have a large Roth conversion consider amending your durable power of attorney and will to authorize your fiduciaries (agent, executor) to reconvert a Roth back to a regular IRA, or to convert a regular IRA to a Roth. Caution – if the beneficiaries of the IRA (regular or Roth conversion) are different then those receiving gifts under your power, or bequests under your will, clarify how this should be addressed.
■ FICA Taxes: Severance payments made by a bankrupt retailer to employees were not subject to Social Security taxes. Quality Stores (D.C. Mich). The IRS is likely to appeal this pro-taxpayer court ruling so the “jury is still out.” However, it may be advisable for companies to file protective refund claims on Form 843. The statute of limitations (the time period during which a claim can be filed) for 2006 years is almost over (3 years after the due date of tax return). Severance payments refunds may also be available for 2007 and 2008, and you will need to take this new case into consideration for 2009. Thanks Julie Welch, CPA, CFP, of Meara Welch Browne, P.C., Kansas City, MO.
Potpourri ½ Page:
■ Deteriorating Competency: Standard planning is set up and fully fund a revocable trust to manage assets. Consider also setting up a small balance checking account, with an attached credit/debit card, in your own name and outside the trust. If checks are inappropriately written, or the card is lost or stolen, trust assets can’t be reached. This can preserve independence while protecting almost all assets.
■ Annual Meetings versus Consents: Closely held businesses commonly sign unanimous consents in lieu of formal meetings. Consider instead an in-person annual meeting and signed minutes as taxing authorities can be hyper-sensitive about formalities for businesses owned by related parties. A meeting may be viewed as more formal even though annual written consents clearly indicate action by the various entities and are signed by their shareholders/directors.
■ Disability Income Replacement Insurance versus Disability Buyout Insurance: Many lay people are aware of the latter and some–as well as some lawyers– may confuse it with the former. Disability income insurance replaces your earnings if lost due to disability. Disability buyout insurance can be used to fund the repurchase of your equity in a closely held business if you’re disabled. Many closely held businesses purchase life insurance to fund death buyouts, but far fewer address disability insurance to fund a buyout if an equity owner is disabled. Proper planning requires addressing both needs. Thanks Stuart L. Pachman, Esq. of Brach Eichler, Roseland, NJ.
■ Gift tax returns don’t get enough respect. Evaluate whether you should file to elect out of 2009 GST automatic allocation rules. Also, consider filing every year and reporting and disclosing Crummey (annual demand notices). Few CPAs encourage this but it is a great way to run the statute of limitations on Crummey powers. Although nearly ubiquitous in trust planning (most insurance trusts have them) their common usage should not mask the complexity and audit risk they create. To meet the adequate disclosure rules the trust will have to be disclosed to the IRS, crummy powers attached, and perhaps more. Check with your CPA.
■ Lost Wallet. A prior Potpourri snippet suggested that if your wallet is lost or stolen you should report it to the IRS. The reader called the appropriate IRS office and they required a form to be filled out for someone who is a victim of identity theft. For the next 3 years your returns are flagged and your 1040 will be delayed as a human has to look at your taxes rather than a computer. The reader felt this was a bit much to endure. As with all planning, you have to weigh the pros and cons.
Back Page Announcements:
Publications: Estate Planning for People with a Chronic Condition or Disability by Martin Shenkman, CBA, MBA, JD was nominated for the 2009 Foreword Magazine Book of the Year Award. To obtain the book at a 20% discount go to www.demoshealth.com. Enter the code Foreword09 at checkout. All royalties go to charity.
Save to Y:\ARTICLES\FIRMNEWS\MONTHYEAR\MONTHYEAR#.DOC
Scheduled Maintenance Guide
Roth Tax Tip
Roth Drafting Tip
Annual Meetings versus Consents
Disability Income Replacement Insurance versus Disability Buyout Insurance
Gift tax returns don’t get enough respect
Scheduled Maintenance Guide
- So you bought a new car and you want it to work right and last. A good first step is to check out the Scheduled Maintenance Guide. Yep, change the oil every 5,000 miles, but a lot more is recommended. Doesn’t your estate plan deserve the same care? Page references are to the 2010 Ford Motor Company Scheduled Maintenance Guide. For some reason most folks understand that their car needs TLC, but they don’t apply the same logic to their estate and financial plans.