It’s almost 2012. Your business has done better than expected. Here are a few things you may consider to help lower your tax liability before year end, but you had better hurry!

1. Donations. Cash donations are always deductible, but you may also have items lying around your house that could benefit someone else. Donating these items to Goodwill or similar organizations is tax deductible. We recommend keeping an itemized list of the things you are giving away and assign a value to each item.
2. College Savings. Saving for your child’s college is always advised, but a GA 529 plan carries an additional tax benefit. All Georgia taxpayers may now contribute and deduct up to $2,000 each year on behalf of any beneficiary regardless of their annual income. Georgia taxpayers are not required to itemize deductions to make this adjustment to income. Please note that a transfer of funds from another state’s 529 plan is not eligible for the Georgia income tax deduction.
3. Prepay State Tax. For those who will owe Federal and State tax for 2011, you can prepare a draft tax return to estimate your GA tax liability. If you prepay this tax in 2011, it becomes a credit on your federal tax return, thus reducing your federal tax liability.
4. Small Business Retirement Plan. Look at opening a Simple IRA or a SEP IRA to shelter income and save for your retirement. The amount that you put into these type accounts is not taxed in 2011, but will be taxed when you withdraw the money at age 59 ½ or greater. When you are retired, the idea is that you will be in a lower tax bracket and thus you will pay less tax on your money earned in 2011. See our blog on “retirement plans for the self employed” for more information.

This reported demise of the credit trust reminds me of Mark Twain’s famous observation, after his obituary had been mistakenly published by the New York Journal, that “The reports of my death are greatly exaggerated.” Like Mark Twain’s “death,” it seems to me that reports of the demise of the credit trust are greatly exaggerated.

Understanding portability involves mastering two new estate tax terms: the basic exclusion amount and the deceased spousal unused exclusion amount (DSUEA). The basic exclusion amount is the surviving spouse’s applicable exclusion of $5 million, reduced by lifetime taxable gifts. The DSUEA is the predeceased

Tax Act Terms

As keen-eyed readers will note, the definition of the basic exclusion amount and the DSUEA provides the first hint that the importance of portability may be exaggerated. Both definitions include a reference to an applicable exclusion of $5 million, which is available under the 2010 Tax Act only for people dying during the 24-month period beginning January 1, 2011, and ending December 31, 2012. As of the date of writing this column, portability will exist only if both spouses die within the next 18 months.

A second fly in the ointment is created by Section 303(a)(5) of the 2010 Tax Act, which provides that the surviving spouse may only make use of his or her predeceased spouse’s DSUEA if the predeceased spouse’s estate files a timely estate tax return that shows the amount of the DSUEA and contains an irrevocable election to the effect that the surviving spouse may use such DSUEA [NOTE: big problem. How many of your clients will do this?  Geri] Advocates of using portability in lieu of credit trusts argue that portability reduces the cost of estate planning because plans relying on portability will be simpler documents to draft and the survivor will be faced with less post-death complexity because the number of trusts the survivor must contend with will be reduced. Both assumptions are questionable.

Portability vs. Credit Trust Costs

Portability may actually increase the cost of administration by requiring the filing of an estate tax return that otherwise would not be necessary. For example, assume that a husband dies in 2011 with an estate of $3 million, all of which he leaves to his wife, who has an estate of $5 million. No estate tax return is required because the husband’s estate is less than his applicable exclusion. In order for the wife to make use of the husband’s DSUEA, a timely estate tax return must be filed with the appropriate irrevocable election. The cost of preparing an otherwise unnecessary estate tax return could easily equal or exceed the cost savings of not including a credit trust in the husband’s estate plan. Moreover, complexity is actually increased because the client must not only file an otherwise unnecessary estate tax return but that return must be filed timely and must contain the appropriate election.

Reliance on portability in lieu of the use of credit shelter trusts creates several other problems as well. Although the 2010 Tax Act provides that the $5 million applicable exclusion amount is subject to an inflation adjustment, that adjustment ceases to apply once the taxpayer dies. Unlike a credit trust that shelters post-death appreciation in value, the amount of the DSUEA is fixed as of the date of the pre-deceased spouse’s death and does not protect post-death increases in value of the pre-deceased spouse’s assets. Returning to the example of the husband who dies in 2011 with an estate of $3 million, all of which is left to a widow with a separate estate of her own of $5 million, assume that the husband’s assets appreciate in value to $10 million and the widow dies on December 31, 2012. Had the husband left his estate in a credit shelter trust, the entire appreciated value of the assets would have been excluded from the widow’s taxable estate, as well as having been exempt from the generation-skipping transfer tax. Because the parties relied on portability, the husband’s DSUEA is fixed at $5 million. The surviving spouse’s taxable estate amounts to $15 million (her $5 million plus the husband’s $10 million) and her applicable exclusion amount is $10 million, consisting of her basic exclusion amount of $5 million and her husband’s DSUEA of $5 million. The remaining $5 million of the widow’s taxable estate would be subject to a 35 percent tax rate, producing an entirely unnecessary estate tax of $1.75 million.

Blended Family Estates

Reliance on portability may also defeat, either intentionally or unintentionally, the testamentary plan of the pre-deceased spouse. It is common today for one or both spouses to have children by prior marriages. There is no assurance that a surviving spouse who inherits outright the estate of his or her pre-deceased spouse will leave that property to the pre-deceased spouse’s children. It is equally common for a surviving spouse to remarry. If such a remarriage ends in divorce, it is possible that some or all of the inherited assets may be subject to division by the family law court. If the marriage is successful, it is equally possible that the surviving spouse will leave his or her new spouse some or all of the assets inherited from the pre-deceased spouse.

It is interesting to note that estate planners were having this same discussion of the drawbacks of leaving property outright to a surviving spouse in the 1960s and 1970s prior to Congress amending the estate tax laws to create the QTIP trust, thereby permitting a pre-deceased spouse to qualify for the marital deduction but still control the ultimate disposition of property left a surviving spouse. I am reminded of a George Santayana remark that those who cannot remember the past are condemned to repeat it. On the other hand, assets left in a credit shelter trust in which the surviving spouse has a life estate—like assets left in a QTIP trust—pass to the designated remainder beneficiaries at the surviving spouse’s subsequent death.

Tax Considerations

A credit shelter trust is also potentially more tax efficient than reliance on portability. A properly drafted credit trust can be used to sprinkle taxable income to beneficiaries in lower tax brackets, which cannot occur when property is left outright to the surviving spouse. Principal distributions may be made from a credit trust to children during the lifetime of the surviving spouse without such distributions being treated as taxable gifts. If portability is relied upon and the pre-deceased spouse leaves his or her estate to the survivor, transfers by the surviving spouse to children during his or her lifetime will constitute taxable gifts to the extent they exceed the surviving spouse’s annual exclusion.

Lastly, planners should keep in mind that portability will sunset for people dying on or after January 1, 2013. Planners relying on portability are limited to factual situations in which both spouses die prior to that date. In most situations, it appears estate plans that use credit trusts are far more practical and far less dangerous than reliance on portability.

Jon J. Gallo, J.D., chairs the Family Wealth Practice Group of Greenberg Glusker Fields Claman Machtinger & Kinsella LLP in Los Angeles, California. Together with his wife, Eileen Gallo, Ph.D., he is a founder of the Gallo Institute and the author of two books on children and money. Their websites are www.galloinstitute.org and www.fiparent.com.

Endnote

1. Officially, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111-312, 124 Stat. 3296.

Here is a brief summary of the estate planning components of the new law:

*     Originally there was no estate tax in 2010.  Now there is a RETROACTIVE ESTATE TAX on amounts over $5.0 million per individual which will be taxed at a 35% rate.  However, estates of individuals passing away in 2010 will get to CHOOSE between the RETROACTIVE TAX or the “NO TAX” AND IT’S CARRYOVER BASIS.

*       The estate tax will be imposed on individual estates in excess of $5 million in 2011 and 2012 at a rate of 35%.

*       THE GIFT TAX EXEMPTION WILL BE $5 MILLION.  That’s right – MUCH higher than it has been or anyone anticipated it would be.  This will allow for some incredible, once-in-a-lifetime opportunities to create a legacy that will last for generations to come.

*       PORTABILITY IS ADDED.  This is a new concept to many people (and many attorneys and planners too!).  For married couples, any unused portion of the estate tax exemption from the first spouse to die can be used as an added exemption when the second spouse passes.  Watch out though, as there are certain procedures that must be followed when the first spouse passes for this to work.  More to come on that later.  This doesn’t invalidate the need for proper estate planning – just the opposite.

*       THE GENERATION SKIPPING TRANSFER TAX EXEMPTION amount is increased to $5 million as well.  One significant planning Christmas gift that Congress gave us is NO GST TAX THIS YEAR!  If you have a client who wanted to set up trusts for grandchildren or skip persons – you only have until December 31st to do so!!  The Act provides that for any GST made after December 31, 2009 but before January 1, 2011, the GST tax rate is ZERO.  What Congress has done by reviving the GST tax for 2010 and setting the rate at 0% is to acknowledge that GST’s may be made in 2010 and such GST’s are subject to taxation, albeit at a tax rate of 0%.

The critical thing is that the new tax law ONLY LASTS FOR TWO YEARS!  It seems that hasn’t had much play in the media yet, but two years will go very fast, and what planning do we need to do after that?  Still up in the air. Congress came close to letting the law revert back to 2001 law this time, so what will they do next time?  We still are in a state of flux for planning purposes.

The bank and its securities division are in business to make money. This is okay if the compensation among all the bank’s product offerings were the same, allowing for unbiased advice. This is not the case, however, as annuities provide the biggest payday to the bank and its sales force (6-7% average commission for the salesperson).

Annuities are costly because they are insurance-based products that have to make up the cost of what they are guaranteeing you. For example, many annuities guarantee that you will never lose principle, while at the same time allowing you to make money through separate accounts similar to mutual funds. The reality is, and a better explanation of this offer is, that your beneficiaries are guaranteed your principle upon your death, not you. This guarantee had little benefit during the financial crisis if you were at the doorstep of retirement.

According to Morningstar, the average expense of a variable annuity is 2.2%. If you invest $10,000 into an annuity and the market returns 8%, in 20 years you should have $30,882 including fees. If you instead invested in an index portfolio costing you 0.20%, you would have $44,498; that’s $13,616 more!

For younger investors, the annuity is pushed as a tax deferral investment program. A variable annuity will give you that at a cost. For those investors who are maxing out their 401k and IRAs and looking for tax sheltered retirement savings, I have determined that the best vehicle is a taxable, tax efficient portfolio. With the growing popularity of Exchange Traded Funds (ETFs), an investor can build a very tax friendly portfolio at an investment cost less than 0.30%.

Why do consumers fall for the annuity bait and switch? It comes down to the persuasion of the salesperson and the bank playing to the consumer’s fears of investing. Many bank-going consumers would probably never invest in the market at all, deeming it too risky. The annuity appears to have the safeguards that the consumer wants. Just remember that there is no such thing as a free lunch. If it sounds too good to be true, it is. There are many alternatives to managing investment risk that will cost you one tenth of the average annuity. A fiduciary fee only advisor can help you explore these options.

Top 5 estate planning mistakes

I recently read a report that suggested that only about 20 percent of the population has a formal estate plan. After reviewing the points below, please take a minute to consider whether it’s time for you to create or update your estate plan.

Here are a few of the top 5 avoidable estate planning mistakes:

1. Dying without a will or trust – If you die without a will or trust, the state in which you reside and the IRS will simply make one for you.  Of course, they have no interest in avoiding or reducing estate taxes, minimizing estate administration costs or protecting your family and legacy. The distribution of your assets will just be turned over to the Probate Court. The probate process is needlessly time consuming, frustrating and expensive. It is also open to the public, meaning creditors, predators or anyone else will have complete access to all information about your estate. For the vast majority of people, the benefits far outweigh any initial costs.

2. Having an “I love you” will – An “I love you” will is one in which all the decedent’s assets have been left to the spouse. On paper, it might seem to be a caring, thoughtful gesture, but the reality is quite different, because such a will simply passes the complex issues and problems associated with transferring and protecting wealth onto the spouse or other loved ones.  It creates more problems than it solves, particularly for future generations.

3. Giving property outright to your children – Here is another solution that might sound good at first, but ignores several important realities. For instance, what if the child in question is too immature to handle the responsibility of a large sum of money on his or her own? What if the child suffers a severe financial setback that puts the inheritance at risk to creditors?  What if the child marries a fortune-hunter, is addicted to drugs or alcohol, gets divorced or remarried? You may need to protect your children and heirs from their own poor decisions.  These assets are also gifted assets which carry potentially large IRS penalties if not handled properly.

4. Owning property jointly – There are two types of joint ownership, Joint Tenancy with Right of Survivorship (JTWROS) and Tenants in Common (TIC).  Problems with JTWROS include postponement of probate only until last tenancy, the loss of the double step-up in tax basis creating more to pay in capital gains taxes, and outright distribution.  With TIC, you also lose the double step-up in tax basis where it’s available, and your property is subject to the estate plan of each tenant as well as probate for each tenant.

5. Not having a trust – A trust is the single most effective estate planning tool available. There are many different types of trusts.  Among the better known and more commonly used are revocable trusts, irrevocable trusts and testamentary trusts. A trust protects your privacy, and will help you leave what you want, to whom you want, in the way you want at the lowest possible cost overall.

Dawn R. Levine – Attorney at Law – Marietta, GA

www.GaEstatePlan.com

As of December 2009, the national unemployment rate was above 10%. In Cobb County, we are not far behind at 9.3%. Each month, the unemployment rate increases and many agree that the real national rate is around 15%. (Chart HERE) The US Government has tried unsuccessfully to stimulate the economy. It has spent more time debating the unaffordable health care bill that makes us more dependent on Government Bureaucracy than on ways to stimulate the economy. They still plan to raise taxes in 2011, making small businesses reluctant to hire. What will return America back to solvency and prosperity? The same thing as during the Great Depression, WWII, 9/11 and many other times of hurt in America- the will of the American People. In times of crisis, the American people band together to help one another get back on their feet and once again work for the American Dream.

Wiser Wealth Management wants to help those currently unemployed by offering a free, CPA prepared 2009 Federal and State tax return. There are no strings attached. We want to use our tools to help those in our community in this time of need. We hope that other businesses follow our example and offer services to help those in our community get back on their feet. All you need to do  is to call our office at 678.905.4450 ext 1 or 3 to set up an appointment.

Casey T Smith

President

The death tax has always been a hot topic as many believe that this money has already been taxed and should be left alone. Others see the dead as easy targets to generate tax revenues for their favorite government projects.

You should always do financial planning on current laws versus what might be.  In this case, it appears that the tax is not going away.

Casey T Smith, Master of Estate Preservation (MEP)

Currently, if you die in 2009, the Federal Government will not tax your estate unless your net worth is over 3.5 million. After this individual exemption, a maximum tax rate of 45% applies. If you die in 2010, there is no death tax regardless of the value of your estate; there are rumblings that the House of Representatives may extend the 2009 schedule for one year, but the Senate wants a much larger exemption and significantly lower rates.

Currently, beginning in 2011, the death tax will come back with an exemption of 1 million per individual and a top tax rate of 55%. It is highly unlikely that Congress will do nothing since these 2010 and 2011 numbers seemed so far away when the estate tax laws were modified.

There are three key estate tax bills floating out there: Senate Bill 722, House Bill 2032 and House Bill H.R. 436.

Senate Bill 722 would make permanent the 2009 3.5 million exclusion and the top 45% tax rate. The bill will also reunify the estate and gift tax credit, allow for the transfer of a deceased spouse’s unused exemption to the surviving spouse and index the exemptions for inflation.

House Bill 2032 will make permanent the exemption level at 2 million, index that level for inflation and establish a progressive tax rate of 45 percent for estates valued between 2-5 million, 50 percent  for estates valued at 5-10 million and 55 percent  for estates over 10 million. The bill will also reunify the estate and gift tax, create exemption portability, restore the state estate tax credit and provide indexing for inflation.

House Bill 436 would freeze the exclusion and tax rate at the 2009 levels, reunify the estate and gift tax so that the cap on tax free lifetime gifts would go from the present 1 million to 3.5 million, limit the valuation discount for family limited partnerships and provide strict valuation rules for transfer of non business assets.

The Congressional Budget Office has a report out that offers four additional options.

Alternative 1 would set the exemption for the combined tax at 5 million starting in 2010, index that for inflation, set the tax rate equal to the top tax rate on capital gains, allow stepped-up basis for assets transferred from a decedent and deny a deduction or credit for state death taxes.

Alternative 2 would be the same changes as 1, but apply a two tiered rate where the first 25 million transferred would be taxed at the highest capital gains rate. Anything above 25 million would be taxed at 30% and indexed for inflation.

Alternative 3 would retain the 3.5 million exemption, index that for inflation, set the top tax rate at 45%, retain the step up in basis and allow a deduction for state death taxes.

Alternative 4 repeals the estate tax in 2010, retains the 1M gift tax exemption and institutes a carryover basis regime.

With respect to the four CBO options,  Ron Aucutt of McGuire Woods, LLP points out that “CBO reports like this, which are issued from time to time, are usually routine contributions to the data available to Congress. They analyze the estimated spending and revenue impacts of proposals known to be under consideration or seriously proposed. They typically do not develop new options on their own or make recommendations among options. Usually, the reports get relatively little public attention. But this time, presumably because of the high political profile of the cost of health care reform and the recent political spotlight on the CBO (including the unusual invitation of the CBO Director to the White House), this report inevitably has a higher profile. As with past reports, it purports only to analyze known options for altering federal spending and revenues.”

• S&P Pharmaceuticals ETF (NYSE Arca: XPH)
• Lehman Aggregate Bond ETF (NYSE Arca: LAG)
• Lehman 1-3 Month T-Bill ETF (NYSE Arca: BIL)

What this means

ETFs are known for their tax advantages over mutual funds who often give investors unwanted taxable capital gains at the end of the year.  What drives many out of these funds if getting hit with capital gains and big loses.  This capital gains issue represents a big mismanagement by SSgA and they should be scolded since they are a leader in the industry.

Read a full article about it here

This November as a new president is decided for America, the Dow Jones Industrial Average drops over 500 points in one day (September 15), the S&P 500 is 28% below its high posted 11 months ago signaling that we are in a Bear Market, Lehman Brothers files bankruptcy putting $600 Billion of its assets up for sale, and AIG, Fannie Mae, and Freddie Mac should have gone under if not for bail outs to continue operations from the Federal Reserve and Treasury.  In the amidst all of this unemployment is above average, inflation is high, the dollar is weak, and gas is outrageous.  Terrorist still threaten what America stands for and American Soldiers give their lives to protect America everyday, very far from home.  This is a very brief list of examples of why November matters.

Capital-gains tax was lowered by Bill Clinton to 20% from 28%.  George W. Bush, once in office, lowered this tax rate on long-term capital gains tax to 15% where it currently is now.

• John McCain has made it clear that if elected he will maintain the 15% tax rate on the ‘unearned income’ called capital gains.
• Barack Obama has been unclear on a number but has said that “… we can have a capital-gains tax higher than 15%.”  However he has made it clear that he would not extend the highest rate that Clinton had in office of 28%.  Obama says that this decision to raise capital gains tax comes from advice from “people like Warren Buffet” who say that an increase in the range of 20-25% will not change investment decision making

Commentary:

The most common form and most efficient way Americans save for retirement and the needs of their families when they are unable to earn income is through the Capital Markets (stock market and bond market).  As they invest through the years holding assets or debt of public companies, the value of the assets increases by price increases and dividend payouts.  Once in retirement, these assets are sold over time to provide current income from past savings.  Capital-gains is the difference between the selling price and the buying price.  This ‘profit’ is taxable when held outside of a tax-sheltered account, and even some of these tax sheltered accounts force one to move money out at a certain age.

Until recently large companies would pay excess profits to shareholders in the form of dividends and these dividend checks would provide current income in retirement and more savings before retirement.  Today, These large companies are using the profits that they usually would have used for dividends to buy back company stock and retire the shares.  There are three reasons management of a company would do this: 1.  buying back company stock and retiring the shares increases the price and value of the remaining shares on the market, increasing capital gains.  2.  Management of companies are more and more compensated by stock options which increase in value as the stock price of the company increases in value.  3.  the income from dividends has long been taxed at an investors income tax rate which is usually much higher than the capital gains rate.

Stock buy back is an effective way to compensate shareholders but since there has been a shift in how baby boomers will ‘cash out’ there their retirement portfolio to live off of, there is a new focus on the tax rate that they will pay on their savings.

Also, with a stock Market that is so efficient with thousands of professionals following every stock in the US and everything that happens on Wall Street, the individual investor will be very disadvantaged when the stock market enviably has a massive sell off of stocks to capture the current low capital gains rate when a president is elected who will raise capital-gains taxes.

In Closing:  having the right to choose between two very different presidential candidates is an important symbol of the freedoms we have in America.  This log was certainly biased against Senator Obama since he has the least favorable tax policies for professional money managers who deal with clients portfolios, but when evaluating a candidate it is important to think about the situation as ‘do the benefits outweigh the cost.’

Source: Financial Intelliegence Report