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MONTH YEAR: Lead Article: 1 ¾ pages [2nd page about 45 lines]
Lead Article Title: Golf Conversation – Font 9

Summary: So you’re spending a lot of time on the golf course? What you really want are some great fairway conversation tips. You want something that will impress your foursome as you walk each of the 18 holes. Try the following to excite your buddies.
Hole #1 As soon as you finish singing “Auld Lang Syne” convert your IRA to a Roth. The income limits that prevent you from having the conversion disappear in 2010. The IRA pundits will tell you conversion will prove a winner for most folks that can pay the tax due on conversion with non-IRA funds. Considering that income tax rates will rise in the future, it’s a slam dunk. But just like with the ShamWow! commercial, there may be a “Special Double Offer!” If your state protects Roth IRAs from creditors conversion could give you an asset protection benefit — Wow! Send the IRS cash that is exposed to creditors to pay the tax due (e.g., the cash outside your IRA you’ll use to pay the IRS for taxes due on the conversion). Even the most tenacious plaintiff’s attorney isn’t likely to chase the IRS if they can avoid it. Meanwhile you’ll enhance the real value of what is in your IRA by transmuting pre-tax dollars into whole after tax dollars.

New Jersey, as an example, provides in NJSA 25:2-1 25:2-1 the following as to IRAs:

Conveyances of personal property in trust for use of persons making them void as to creditors; exemptions, definition 25:2-1. Conveyances of personal property in trust for use of persons making them void as to creditors. a. Except as provided in subsection b. of this section, every deed of gift and every conveyance, transfer and assignment of goods, chattels or things in action, made in trust for the use of the person making the same, shall be void as against creditors.

b. Notwithstanding the provisions of any other law to the contrary, any property held in a qualifying trust and any distributions from a qualifying trust, regardless of the distribution plan elected for the qualifying trust, shall be exempt from all claims of creditors and shall be excluded from an estate in bankruptcy, except that:

(1) no exemption shall be allowed for any preferences or fraudulent conveyances made in violation of the “Uniform Fraudulent Transfer Act,” R.S.25:2-20 et seq., or any other State or federal law;

(2) no qualifying trust shall be exempt from the claims under any order for child support or spousal support or of an alternate payee under a qualified domestic relations order. However, the interest of any alternate payee under a qualified domestic relations order is exempt from all claims of any creditor of the alternate payee. As used in this paragraph, the terms “alternate payee” and “qualified domestic relations order” have the meanings ascribed to them in section 414(p) of the federal Internal Revenue Code of 1986 (26 U.S.C. s.414(p)); and

(3) no qualifying trust shall be exempt from any punitive damages awarded in a civil action arising from manslaughter or murder.

For purposes of this section, a “qualifying trust” means a trust created or qualified and maintained pursuant to federal law, including, but not limited to, section 401, 403, 408, 408A, 409, 529 or 530 of the federal Internal Revenue Code of 1986 (26 U.S.C. s.401, 403, 408, 408A, 409, 529 or 530).

Amended 1993, c.177; 2001, c.153.

Hole #2 Think lease options. In recent years, when every property owner assumed values were increasing at 20% a year (more if the property was in hot spots like Florida or Las Vegas) so why give a lease option to a tenant. Now, if you’re negotiating a lease, try to get a credit for rent towards a future purchase. In a soft market more landlords might consent to crediting say 20% of rent to a future purchase just to get a property leased. You might even be able to negotiate a lock-in value for the purchase price, perhaps at current value if you buy in a year, or say 105% of current value if you buy after 1 year but by the second anniversary, etc. For a financially strapped tenant a lease option is a great idea. This is a buyer/renter’s market so use these approaches to get a great deal for down the road when you will be more financially able to consummate a purchase.
Hole #3 Anyone who recently lost a spouse/partner should not make any significant decisions for say 3-6 months unless there is a real time deadline. You need time to adapt and gain perspective. The vultures circle pretty quickly looking to sell everything from high commissioned annuities to your IRA to the Brooklyn Bridge. But it can be tough to tell people, especially your brother-in-law “no”. So don’t say no, tell them: “Call my lawyer he/she is handling those matters.” If the pitchman actually calls your lawyer they’re probably for real. Few if any will. In 15 years of offering to field such calls for free we’re still waiting for the first call!
Hole #4 The State of New York requires LLC’s, upon formation or authorization to do business in NY, to be published in local newspapers. Then a Certificate of Publication has to be filed with the State of NY. Section 206(a) of New York LLC Law. Many folks still ignore these requirements. If within 120 days after formation, proof of such publication has not been filed with the department of state, “the authority of such limited liability company to carry on, conduct or transact any business in this state shall be suspended, effective as of the expiration of such 120 day period.” Whoa, that’s serious.
Hole #5 Do your estate planning documents include incentive trusts? Lots of folks thought these were the cat’s meow to motivate Junior to be productive and not become a trust fund baby. Some incentive trusts, for example, grant a beneficiary a distribution dollar for dollar to that beneficiary’s earned income. Earn a dollar, get rewarded with a dollar. Smarter folks were aware that Forrest Gump trust planning, “Simple Is As Simple Does,” never was the right approach. A common problem with incentive trusts is that if Junior became a porno king he’d get a big incentive trust distribution, but if he joined the Peace Corp. to save the world, he’d get a pittance. Well, in case you hadn’t noticed we’re in a recession. Junior may have been industrious but lost his job due to no fault of his own. So incentive trust fund kids are being hung out to try. Instead of their trusts helping them through the lean years, they’re being told to beg elsewhere. Not a great result. Does it make any sense to limit distributions if the beneficiary lost her job because her employer declared bankruptcy? (What if she quit her job, not because she was retreating from the job, but because she was advancing her career in another direction?) The impact of the recession on a poorly drafted incentive trust could be disastrous to the intended beneficiary. If you set up an incentive trust, review it now with your advisers to see what can be done to infuse a bit of compassion and rationality into the distribution provisions. Smarter folks, instead of memorializing incentive provisions in legal documents, explained in nonbinding personal letters how such wishes should be considered. These personal explanations should be reconsidered in light of current circumstances.
Hole #6 If you’ve used private financing (i.e., not bank financing, etc.) to fund premiums on a life insurance policies, there is one requirement that must be met that some practitioners have overlooked. Both parties to the insurance financing transaction (e.g., an insurance trust and perhaps yourself, your spouse or another family trust that is loaning funds) must add a signed statement with both of their income tax returns each time a loan is made. That often means every year since each payment towards a premium is treated as an additional loan. Section 1.7872-15(d) spells out the requirements and the form of the statement to be filed. Whether or not you thought the loan is covered by the split-dollar regulations the regulation is so broad that it probably is. In fact, if you did a sale to a grantor trust (often called an IDIT or IDIGIT) for a note and that trust also purchased life insurance, it may fall under the spell of the split-dollar regulations. The positive to that is that you can guarantee loan treatment by following the procedure noted above. This little gem was recently overhead as small-talk by Richard Harris, BPN Montaigne LLC, entertaining other golfers on the green.
Hole #7 Compensation should be structured in a manner that motivates what is good for the business or professional practice. Too often compensation, as the result of interpersonal dynamics and firm politics, moves away from what is really in everyone’s best interest. Example: A physician group compensates physician/partners based on tenure. The result likely encourages the partners to compete for time off, less call, and other perquisites. Often it is better for the practice and the partners to have a productivity based compensation structure that motivates everyone to contribute to practice profitability. Thanks to Gene Balliett, Balliett Financial Services, Inc., Winter Park, Florida.
Hole #8 Consider empowering beneficiaries. Everyone’s heard stories of wayward trustees. But few people affirmatively empower beneficiaries to protect themselves. While the beneficiary’s role has traditionally been viewed as passive, this is not required or necessarily advisable. The extent to which beneficiaries have a right to be informed of the financial transactions and other aspects of a trust will depend on both the trusts instrument and local law. While many grantors prefer to keep beneficiaries uninformed, that has two negative consequences. The beneficiaries lose out on the opportunity to enhance their financial acumen under the guidance of the trustee, and they have less or even no ability to monitor the trustee’s performance and conduct. Beneficiaries, if reasonably empowered, can serve as a check and balance on the trustees. Rather than relying on state law, and the governing law of a trust which can be changed in many instances, consider embodying in the trust agreement specific powers for the beneficiaries. For example, the trust could expressly state that the beneficiaries should be given a copy of the trust agreement, perhaps the investment policy statement, and possibly even periodic financial information. When setting up a trust, “She says, hey beneficiary, take a walk on the wild side….doo doo….” Trusts can get more wild and grant beneficiaries the power to even remove or replace a Trustee.
Hole #9 Horace Greeley famously advised “Go West, young man.” But today he would have advised “Go South, retired person.” So you “moved” south to Florida to escape Northern taxes perhaps more than Northern climes. You need to revise your will and other estate planning documents to reflect Florida law. Some of the changes to make include: ◙ An executor must be a Florida resident or have a certain degree of relationship to the testator. ◙ Tangible personal property (e.g., jewelry) can be disposed of pursuant to a separate writing signed by the testator and dated. ◙ A spendthrift clause is only valid if it restrains both voluntary and involuntary transfers. ◙ The executor can only sell real estate without a court order if the will expressly specifically grants such power. ◙ In terrorem clauses (you sue you lose your bequest) are not valid under Florida law. ◙ A Florida will executed in a different state is valid if executed in accordance with the laws of the state where executed. Thanks to Benjamin Shenkman, Esq. of Gonzalez & Shenkman, P.L., Wellington, Florida.

OK Paul, you’ll have to wait until next month for nine more tidbits to get you through the back 9.
Checklist: Second Article 2 lines less than One Page [about 54 lines]:
Checklist Article Title: Infirm Financial Abuse

Summary: Elder financial abuse is widespread and is probably getting worse as a result of the recession. Don’t assume it doesn’t apply to your parent or grandparent because of the level of their wealth or their perceived social status. Yes Virginia, it even happens in your circles, and even in nice neighborhoods. 50% of the people over 85 have cognitive impairment. So the number of elderly at risk is substantial. But more than the elderly are affected. Anyone with a cognitive or other disability that infringes on their ability to protect themselves is at risk. 90 million Americans have chronic health issues, and so many of them face the same risks and need the same protections. So while most call it “elder abuse” it is really “Financial Abuse of the Infirm.” Just no one in the media seems to write about it! How do you prevent financial abuse of the infirm?

√ Acknowledge the risk and that it may affect you or a loved one. Even if your kids (niece, cousin, neighbor….) is too good to do that, temptation especially if compounded by dire financial circumstances can push even “good” people to do bad stuff. Do you really know that your home health aide is more concerned about your financial well being than that of his or her family back home (wherever that might be)? Your wealth relative to that of a home health aide or distant relative or even neighbor, may be perceived as being so great that their helping themselves or their loved ones who are in greater need may not be viewed as infringing on your financial security.

√ One of the most significant steps is to encourage the person at risk to establish a funded revocable living trust with an institutional co-trustee. With a bank or trust company as co-trustees along with the individual involved, they will remain in control as long as feasible, and financially safe from abuse. Fund the trust. The more assets (other than IRAs, a professional practice, or certain other assets) for which they transfer ownership into the trust the more secure they will be since the institutional co-trustee can help keep tabs on them. The person at risk requires contractual competency to establish and fund a trust. This is a greater level of competency than required to execute a will. Additional protection can be obtained for the at-risk person by their naming a succession of individual trustees to protect their interests. Also, someone should have the right to replace the bank/trust company. The at-risk person can hold this if they are capable, but a better approach might be to provide this power to an independent trust protector who cannot also serve as trustee.
√ A durable power of attorney is an essential step to protect the at risk person. But it is not enough to sign a standard form without carefully evaluating its provisions. If the at-risk person really does not have a taxable estate, or any persons he or she is responsible to support financially, the power might expressly state that the agent has no authority to make gifts. Gift language of various sorts is routinely included in many standard powers (even costly lawyer prepared documents) when in fact the temptation for the agent is not worth the possibility of the agent abusing the gift power. Consider appointing co-agents and an independent “monitor” charged with providing some degree of oversight of agent actions. These checks and balances are an important step to making a power of attorney protective rather than a tool for abuse of an infirm grantor.
√ Yep it sounds simple and costs nothing but consolidating assets into one institution (or as few as feasible in light of reasonable concerns about financial institution viability and insurance limits) is one of the most powerful steps to avoid financial abuse. A secure public institution with adequate insurance is ideal. For those CD lovers pick an institution that participates in the Certificate of Deposit Account Registry Service (“CDARS”), program. It allows investors to keep up to $50 million invested in CDs managed through one bank with full FDIC insurance, and under one agreement. We’re not advocating CDs as an investment choice, but we are advocating consolidation and organization to protect the at-risk person.
√ Have a duplicate copy of the at-risk persons monthly statements sent to a trusted person. A long time independent CPA is a great choice. If a cost effective arrangement can be made for the CPA to balance all the monthly statements and send out a periodic report, even better. This assures that at least a bookkeeper at the CPAs office is reviewing everything. The at-risk person might also name an adult child who is not their agent under their power of attorney (nor the current co-trustee under a revocable trust) to receive monthly statements. The consolidation, simplification and independent review can minimize the temptation that agents and others in confidential and private relationships with the at-risk person might feel. That creates real checks and balances.
√ Set up accounts for automatic bill payment, payment to credit cards, payment plans with utilities and others that equalize payments every month, etc. Anything that can simplify and create regularity can make aberrations due to theft, fraud or other abuse more obvious to spot.
√ Include in powers, revocable trusts and other documents a periodic mandatory inspection, interview or meeting by a social worker or similar independent organization with the person at risk, and a requirement that they report in writing to at least two fiduciaries. This can create another important check on personal as well as financial security.
Recent Developments Article 1/3 Page [about 18 lines]:
■ Parents of disabled children should be able to exclude reimbursements for non-public school services from their income according to a recent IRS announcement. Information Letter 2009–0124. The general tax rule, which should come as no surprise, is that reimbursement of any personal expense is taxable as income unless a special rules provides to the contrary. A board of education may be required to pay for non-public education services obtained by a parent for a child if: (1) the services offered by the board are inadequate; (2) the services the parent secures are appropriate; and (3) equitable considerations support the parent’s claim. If these conditions are met, the school board must pay for the cost of the non-public education in order to satisfy its legal obligation to provide a free appropriate education.
■ Single member LLCs are disregarded for tax purposes, but that doesn’t mean they don’t have a tax consequence as taxpayers recently learned in New Jersey. Kaplan v. Director Division of Taxation, Docket No. A-3758-07T3, 2/11/09. The taxpayers held commercial real estate in single member disregarded LLCs. These generated losses to be reported (since the LLCs were disregarded) on their personal 1040 which would not be deductible. So the taxpayers tried to report income realized on other rental real estate partnerships (RELPs) as rent income to offset the LLC losses. NJ headed that one off at the pass. So the taxpayer tried to argue that the single member LLCs were actually tenant in common interests and hence the losses were reportable as partnership results that would offset the RELP income. The court held that the attempts to transmute income into whatever category seemed to provide a tax benefit wasn’t cricket.
■ Income from artistic performances isn’t subject to sales tax. Strippers doing a pole dance were found to be part of the dramatic arts so that the sales tax exemption under Sec. 1105(f)(1) applied. The judge found that: “The pole maneuvers in particular are no small feat to accomplish…” Neither was such legal reasoning! Matter of 677 New Loudon Corp d/b/a Nite Moves 821458. NYLJ 3/26/09.
Potpourri ½ Page:
■ Insurance: Before lapsing an insurance policy carefully evaluate your potential future needs for the policy (you may no longer face an estate tax but may face liquidity or other needs), consider the impact of possible income taxes and surrender charges (if any) in your analysis, will health issues impact your ability to obtain insurance if you need it in the future?
■ Reminders: For those suffering from cognitive issues try the creative use of the website www.rminder.com. Set reminders and your cell phone will get a call to remind you of what you need to do at the appointed time. If you have vision impairment and use special computer equipment the rminder converts your text to voice. Sync with recurring entries in your Outlook calendar to make it even easier and more automatic.
■ Roth IRA Contributions versus Mortgage Repayment: Hey Roth contributions can be a tax (and maybe asset protection – see lead article) home run (Rich even I know what that is). But before you convert, do the math. If you have a home mortgage which is a better financial option? Paying down your home mortgage or contributing to a Roth IRA? From an asset protection perspective if your state doesn’t protect tenants by the entirety home ownership between spouses from creditors, but does protect Roth IRAs, the asset protection answer may be simple. For some investors pencil pushing is necessary. Variables include marginal tax rates, how much interest expense would be deductible above the standard deduction, when and how tax rates may change, after tax returns estimated for each option and the risk associated with each.

■ Michael Jackson’s Estate May Own the Taxman but Not Owe the Tax Man! The untimely death of famed pop singer Michael Jackson raises some interesting estate tax issues. For estate tax purposes, assets generally must be valued at their fair market value at the time of the decedent’s death. Treas. Reg. Sec. 20.2031-1(b). Assets are valued at their “fair market value”. This is defined as the price at which the property would change hands between a hypothetical willing buyer and hypothetical willing seller, assuming neither is forced into the transaction and that both parties are reasonably informed about the facts relevant to the sale. The price is normally determined based on the market in which the item is most commonly sold to the public. Treas. Reg. Sec. 20.2031-1(b) and 25.2512-1. For anyone that owns a television or has been on the internet, the fascination with all things Michael Jackson has exploded. It seems pretty incontrovertible that the value of licensing anything with his image or log, or songs, has exploded in value. Yet the value for tax purposes is determined at the date of death when the discussion was of a possible comeback final tour. Might just be that the entire post-death increase in value escapes the tax man. There will likely be some pretty technical valuation analysis done to prove the difference in value of his assets pre- and post-death. Could the estate show that the value of his licensing rights, songs, etc. was quite a bit lower at death. Perhaps the difficulty or limited guarantees for his planned European tour might be used to support low values. If the publicity surrounding his death can be demonstrated to have increased these values, might the estate successfully argued that these were due to post-death events and not appropriately reflected in his date of death asset values? If this were to succeed, especially in light of some of the supposedly high debts Michael Jackson supposedly had, his estate may escape the Taxman, while leaving a tremendous financial legacy to his heirs.
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