Friday, April 27, 2012 Election to Board of Laguna Beach Seniors, Inc.
I was recently elected, along with Linda Butterwick and Debbie Meeker, to the Board of Laguna Beach Seniors, Inc., a 501(c)(3) tax-exempt organization devoted to enhancing the lives of seniors through programs and services promoting independence, wellness and community. I currently provide pro bono legal advice to seniors at the organization's Susi Q Senior Center on a monthly basis. In my capacity as a Board member I will be serving on the Planned Giving Task Force.
Friday, March 30, 2012 Tax & Estate Planning Tip #12: Seven Tips for a Worry-Free Retirement
In our practice we often work with young professionals and parents with minor children, but many of our clients are over the age of 50 and are thinking more about retirement or are already retired. Following are some tips for a worry-free retirement:
1. Maximize the quality of your life. Your health is your greatest wealth; so continue to eat right, exercise, and stay engaged by doing volunteer or part-time work. Frequent contact with family and friends is what makes most retirees happy, while others value travel and new experiences. We have noticed our clients who seem to live the longest, happiest lives, and who stay mentally sharp into their 90s are walkers - they walk a half hour or more a day - virtually every day.
2. Time when you draw Social Security benefits. Social Security provides an inflation-adjusted annuity for life. Many start to draw a reduced annuity at 62 and later regret it. Unless you have a shorter-than-normal life expectancy, usually the better strategy is to wait until 70. If you are married, draw the lower-earning spouse’s benefit at 66 and the higher-earning spouse’s benefit at 70.
3. Watch your spending. You should limit your withdrawals from your investment portfolio to about 4% per year if you want the portfolio to last your lifetime. Adjust your standard of living so your Social Security, pension, and 4% investment withdrawals cover your spending.
4. Don’t change your investment strategy. If you switch to a conservative portfolio, inflation will chip away at your standard of living. Investors with a longer than five-year investment horizon (time before you expect to die, not retire) should continue to allocate about 60% of their investable assets to stocks and about 40% to fixed-income investments.
5. Look into buying long-term care insurance. Nothing zaps a family’s resources and legacy more rapidly than the cost of end-of-life medical and long-term care. What is your family’s history with longevity and dementia? Retirees should look into tax-favored long-term care insurance before they have a medical event which makes it unavailable.
6. Get your estate in order. Experience the peace of mind of knowing you are not leaving behind a mess for your loved ones. A well-done estate plan generally includes a revocable living trust, pour-over will, financial power of attorney, advance health care directive, and HIPAA authorization. The plan names decision makers who will manage your affairs when you are incapacitated and distribute your assets after you die.
7. Get the input of others before making important decisions. Sometimes it is not best to be a do-it-yourselfer. Family and friends can help with most decisions, but for some decisions you may need the advice of experts, such as physicians, attorneys, accountants, and financial planners.
Friday, March 16, 2012 Tax & Estate Planning Tip #11: Look Before You Leap
“Is now the right time to start my business?” is a common question we analyze for clients. Favorable labor, rental, and lending rates make it appealing to start a business, but it is difficult to give up the security and fringe benefits of a job in this uncertain market.
Many people do not realize that nearly all the deductions available to self-employed individuals, such as advertising, mileage, phone charges, internet fees, computers, travel, entertainment, education, subscriptions, office supplies, contract labor, etc., are also available to employees if the expenses are not reimbursed by the employer.
The expenses are deducted in different places on the Form 1040 – from adjusted gross income (AGI) on Schedule C for self-employed individuals and from AGI on Schedule A (itemized deductions) for employees. This treatment favors self-employed individuals, especially considering that employee expenses are subject to a 2% of AGI floor, but it does not consider the self-employment tax (13.3% for 2012 under proposed legislation).
Consider this contrast: Self-employed Barbara and employee Ed both gross $120,000 and have $20,000 of business-related expenses. Both are in the 34% marginal tax rate bracket. Barbara will have net income of $100,000 on which she will owe approximately $13,300 of self-employment tax. Half of this self- employment tax is deductible for income tax, giving Barbara $93,450 of taxable income and $31,773 of income tax, for a total tax of $45,073.
Ed’s entire salary of $120,000 is subject to payroll tax of approximately $6,360. His $20,000 of expenses must be reduced by $2,400 (2% of $120,000), meaning his taxable income is $103,600 and his income tax is $35,224. His total tax is $41,584.
What are other considerations? Self-employed individuals can make larger deductible contributions to retirement plans and take deductions for health insurance premiums, but they must pay higher amounts for tax return preparation, are audited by the IRS at a rate of 5% compared to 1% for individuals, and should pay estimated taxes throughout the year. In contrast, employers often match employee retirement plan contributions and subsidize health insurance and other fringe benefits.
Although the decision whether to leave an employer to start your own business is based primarily on non-tax factors, it is important to consider the tax aspects as well.
Friday, March 09, 2012 Tax & Estate Planning Tip #10: Selecting and Maintaining Appropriate Fiduciaries in Your Estate Plan
In Tax & Estate Planning Tip #9 we mentioned the importance of carefully selecting and maintaining appropriate fiduciaries in an estate plan and building in mechanisms to remove and replace them when necessary. People often name spouses, if any, followed by family members or friends as successor trustee(s), executor(s), and agent(s) on financial powers of attorney. However, in conflicted families or in complex estates, this may not be the best choice.
Where subtrusts are created after the first spouse’s death to protect his or her assets for beneficiaries such as children from a prior marriage, couples may want to consider having someone other than the surviving spouse serve as trustee, or having the surviving spouse serve with a co-trustee. Only in the friendliest families, however, should a remainder beneficiary, such as a stepchild, serve with the surviving spouse because of the conflicts of interest involved.
After the spouse, people often name children to serve. However, will naming one child cause friction among other children? If children serve jointly will it be cumbersome to get all signatures for all actions taken? What is the tiebreaking mechanism if they cannot agree? People may name other family members or friends for this reason. But if there is no one with the requisite skills, there are other options, such as naming a CPA or other advisor.
In a complex or conflicted family situation, a corporate trustee, who brings experience, objectivity, and impartiality to the situation may be a good option. Corporate trustees should always be considered as a backstop fiduciary in an estate plan because of their perpetual existence.
Another option is to name a private professional fiduciary. Although not as highly regulated as corporate trustees, a good private professional fiduciary can provide similar organization skills and objectively.
Estate planning documents should always contain mechanisms to remove and replace fiduciaries when appropriate. Specifically, if an acting fiduciary is incapacitated but will not step down, documents may provide that he or she will have 10 days to submit to a medical evaluation to prove otherwise or the successor will step in. Documents may also specify that a designated person, or group of people, may remove and replace a “bad” fiduciary, or a trust protector may be named for this role. If there is a fiduciary vacancy, documents may specify how that vacancy can be filled without having to go to court.
Friday, February 24, 2012 Tax & Estate Planning Tip #9: Your Parents' Estate Plan
Getting your parents to create or update their estate plan is a sensitive issue. As we watch our parents age, remarry, and/or become infirm, the need to plan becomes more urgent. Here is what your parents should consider while they still have capacity:
-
Prepare basic estate planning documents to designate people to handle health care and financial matters upon incapacity and death without a conservatorship or probate.
-
Build in flexibility for tax purposes. Many plans split into A-B subtrusts when the first spouse dies even though the current portable estate tax exemption of $10 million per couple doesn’t necessitate it. Flexibility can be built into the plan instead to create subtrusts after the death of a spouse only if necessary.
-
Consider an irrevocable C (QTIP) subtrust for control purposes if you and your spouse have children from different marriages and you want to protect your children’s interests.
-
Selecting appropriate fiduciaries is among the most important decisions your parents will make and will be explored in an upcoming column.
-
Determination of incapacity. Your parents should decide whether two licensed physicians or their attending physician will determine their incapacity, the trigger for a fiduciary to step in.
-
Plan for the family business with a buy-sell agreement or by equalizing assets between children who will be taking over the business and those who will not.
-
Keep the family vacation home in the family for generations by creating a vacation home limited liability company.
-
Protect a child’s inheritance from creditors, predators, and divorce by leaving it to the child in a lifetime trust.
-
Designate recipients of important personal effects in the estate planning documents in order to avoid conflict.
-
Seek professional advice. Do-it-yourself planning, such as adding children to title on real property can have unintended consequences, such as losing the full step up in cost basis they would have received if they had inherited the property at death.
Starting the discussion is the most difficult step, and a child must avoid the appearance of undue influence. If your parents already have an estate plan, suggest they have an estate planning attorney review it. Many attorneys review plans and make recommendations at no charge. Otherwise, start by discussing end-of-life health care decisions. This dialogue often leads to more comprehensive planning.
Friday, February 10, 2012 Tax & Estate Planning Tip #8: Maximize the Tax Benefits from Your Rental Property
If you have real estate you rent to others, losses from those rentals can provide a tax shelter, but the losses are often limited by the “passive activity loss” rules. In short, the passive loss rules stop you from using losses from tax shelters to reduce your income from wages, self-employment income, interest, and dividends.
To illustrate, assume Chris has $100,000 of wage income, $10,000 from a natural gas limited partnership (Passive Investment 1), and $30,000 of loss from a rental home (Passive Investment 2). Chris’s desired income is for income tax reporting purposes is $80,000 ($100 + 10 - 30). Instead Chris must report income of $100,000 ($100 + 10 – 10). The extra $20,000 of loss from the rental is postponed until Chris has more passive income or sells the rental home. However, there are three exceptions (opportunities) that would allow Chris to report the desired $80,000 of income.
First, Chris could use the “middle class rental real estate” exception that allows owners to deduct $25,000 of rental real estate loss if the owner owns more than 10% of the rental property and the owner is actively involved in the rental, meaning he or she approve new tenants, sets the rental terms, collects checks, and oversees repairs. This exception is not available when the owner’s total income exceeds $150,000.
A second way for Chris to deduct the rental real estate losses is to obtain a real estate license and use the “real estate professional” exception. To qualify as a real estate professional, the owner must work more than half time and at least 750 hours per year in real estate businesses.
A third way for Chris to report the desired income of $80,000 is to qualify for the “significant personal services” exception. If an owner rents his or her property for more than 30 days on average and provides significant personal services for tenants (gardening, housekeeping, sightseeing suggestions, transportation), the owner can deduct losses if he or she is actively involved in the real estate business, meaning the owner (and his or her spouse’s) involvement is more than 100 hours and no one is more involved than the owner and his or her spouse
Friday, February 03, 2012 Tax & Estate Planning Tip #7: What You Can Do with a Life Insurance Policy
Many people are finding their need for cash is greater than their need for life insurance. Fortunately, there are numerous ways to get cash out of your policies.
Borrow money from a cash value policy. Proceeds from borrowing are not taxable and the interest rate on the loan is usually less than 4%. The downside is the loan will reduce the insurance proceeds received at death.
Viaticate your policy. If you are terminally or chronically ill, you may be able to receive tax-free benefits from your policy while you are alive. You are terminally ill if a physician certifies you have an illness that will result in death within 24 months. You are chronically ill if a licensed health care practitioner certifies you need assistance performing at least two specified activities of daily living.
Surrender your policy. Even if you are not ill, you can redeem your policy for cash value. You recover the premiums you paid tax free. If the cash value exceeds your premiums, you must report the excess as taxable ordinary income. If the cash value is less than the premiums paid, the cash you receive is not taxable, but you cannot claim a loss.
Sell your policy. There is an active market of independent investors and life-settlement providers who may be interested in buying your policy, even if it is a term policy. Assume you own a $1 million policy. Over 20 years, you have paid premiums of $100,000. The cash value is $130,000, but a life settlement provider has offered you $180,000. If you sell the policy, you will report an $80,000 gain ($180,000 – 100,000). The $30,000 difference between the cash value and your basis is ordinary income. The $50,000 amount received in excess of the cash value is long-term capital gain, taxed at a beneficial 0% or 15% rate.
Exchange your policy tax free for one more suited to your needs, such as one that can convert cash value to long-term care benefits.
Consider holding on to the policy. Although premium payments are not deductible and the policy proceeds are subject to estate tax (unless the policy is held in an irrevocable life insurance trust), cash value growth and proceeds received by beneficiaries at death are not subject to income tax.
Wednesday, February 01, 2012 Selecting and Maintaining Appropriate Fiduciaries in An Estate Plan
Read my article in the February 2012 edition of the Journal of Financial Planning entitled Selecting and Maintaining Appropriate Fiduciaries in an Estate Plan, which focuses on the trustees, executors, and agents on powers of atttorney for property and health care named in your estate planning documents. Recent litigation against successor trustees for breach of fiduciary duties, including the "prudent investor rule," highlight the importance of not only carefully selecting fiduciaries, but also building mechanisms into your estate plan to have them removed and replaced when necessary - without ending up in court.
Friday, January 27, 2012 Tax & Estate Planning Tip #6: Asset Protection Planning
We face potential liability every day – whenever we get behind the wheel of a car, sign a contract, buy, sell, or rent real estate, sell a product or service, hire a contractor, fire an employee, or babysit a neighbor’s child.
Some assets are exempt from creditor claims by law (e.g., social security payments). Thereafter, our first line of defense is generally insurance, including considerable amounts of umbrella insurance, which you can generally obtain for a just a few hundred dollars per year.
The next layer of protection is to use entities such as corporations, limited liability companies (LLCs), and limited partnerships (LPs). For instance, a physician may set up a professional corporation (PC) or professional limited liability company (PLLC) to hold minimal assets and then set up one or more LLCs to hold valuable professional business equipment and lease it back to the PC or PLLC. A real estate investor, on the other hand, may set up family limited partnership (FLP) or family limited liability company (FLLC) to hold rental properties. This approach isolates liability arising from the rentals inside the FLLC, rather than exposing the investor’s other assets to the claims of renters.
Another layer of protection is to set up a domestic asset protection trust (DAPT) in a jurisdiction which permits them, such as Nevada. If no claim is made against assets in a Nevada DAPT for two years, they become exempt from creditor claims.
Setting up a foreign asset protection trust (FAPT) is another option. Offshore asset protection trusts in jurisdictions such as the Cook Islands provide creditor protection as soon as the offshore custodian obtains custody of the assets. The Cook Islands do not recognize U.S. judgments, forcing a creditor to litigate there - a significant deterrent.
Finally, at your death, you can provide your beneficiaries with the gift of asset protection by drafting provisions into your estate plan to protect their inheritances from divorce, creditors, and predators. Once they receive the inheritance “in hand” it may be too late.
The best time to undertake asset protection planning is now - before a creditor claim arises. Otherwise a creditor can attack the asset protection plan, including transfers to family members and business associates, as fraudulent conveyances.
Friday, January 13, 2012 Tax & Estate Planning Tip #5: Yes, You Can Deduct Your Home Office
Many people do not claim home office expense deductions, fearing that doing so may trigger an IRS audit. While such audits received much press in the 1990s, today with more people than ever working from home, the rules are more taxpayer- friendly. Don’t fear taking a legitimate home office deduction.
Essentially, you can claim a home office deduction for a room or a separately identifiable space, such as portion of a room or a storage area in your garage, that you use regularly and exclusively for business. Business is defined broadly. Using the space to manage your rental properties is a business use, but tracking your stock investments is not. The location has to be the main office for any business (primary or secondary) you run. Even if you work as an employee outside of the home, you may be able to claim a home office if you meet clients at your home or if your employer does not provide you with an office and you need a place to work.
How much can you save? Assume you own a 1,600 square-foot home with a purchase price of $1,000,000 ($800,000 home, $200,000 lot). Your home-related expenses are $60,000 (real estate taxes $10,000; interest expense $40,000; insurance $2,000; maintenance $3,000; and utilities $5,000). You use 160 square feet (10% of the home) to run your consulting business. You can claim a home office deduction of $8,050 ($6,000 (10% of $60,000) plus depreciation of $2,050 ($800,000/39 years x 10%)). Because this deduction offsets self-employment tax as well as federal and state income taxes, you will probably reduce your taxes by 50% ($4,025) or more.
When you sell your home, you will have to report the depreciation you claimed as income, but you do not have to report the business-use portion of the gain (10% in our example) as income and you can still use the $250,000/$500,000 exclusion on the entire gain.
One of the main benefits of claiming a home office deduction is the business mileage rules apply as soon as you leave your driveway. If you drive 10,000 business miles at 55 cents per mile, that’s an additional $5,500 deduction ($2,250 tax savings) for the year
|