The taxation of life insurance policies – part 1

Many clients come into my office and indicate that they have life insurance coverage and that they were told by their insurance agent that they would be protected from all taxes by the life insurance death benefit. They are also told that they can access the cash value of their life insurance policies on an income tax free basis during their life for retirement, or other purposes (paying for children’s college expenses, medical needs, etc.). While all of these statements are generally correct, I often meet with people who have misunderstood their life insurance agent or who really do not understand the different ways that a life insurance policy can be subject to taxation. My goal in this multiple part series of posts is to identify some of the common misconceptions regarding the taxation of life insurance and educate you on what you should look for when you are reviewing your own planning to identify potential problems that need to be fixed.

Initially, we must deal with the income and estate taxation of the death benefit of the life insurance policy. Under section 101(a) of the Internal Revenue Code (26 USC §101(a)), the general rule is that, “gross income does not include amounts received (whether in a single sum or otherwise) under a life insurance contract, if such amounts are paid by reason of the death of the insured.” Based on this statute, the death benefit of life insurance is generally exempt from income taxation. We will see some situations in future posts where this may even be incorrect, but the general rule is that there are no income taxes payable due to the receipt of a death benefit under a life insurance policy.

Unfortunately for many people they do not understand that just because the proceeds are not subject to income taxation, this does not mean that they are not subject to some other tax that is set forth in the internal revenue code. If the owner of the policy is the insured under the policy and they continue to have the power to change the beneficiary of the policy throughout their lifetime, then the death benefit will still be income tax free when it pays out, but under section 2042 of the Internal Revenue Code the proceeds of the life insurance policy will be subject to estate taxes. This means that while income tax will be avoided, estate taxes will not.

To illustrate this, an example may be of some help. Let’s say a single individual has a 1.0 million estate and has a life insurance policy of 5.0 million dollars on him or herself. Let’s also say that this insured has one child who is the beneficiary of the life insurance policy. When this person dies, the death benefit of the insurance (the 5.0 million) is paid to the child who receives the death benefit income tax free. However, since the insured owned the policy and had the ability to change the beneficiary through his or her lifetime (what the Internal Revenue Code refers to as the “incidents of ownership”), that death benefit will be added to the decedent’s other property and be subject to estate taxes. Based on that, the gross estate for estate tax purposes will be 6.0 million. By doing a rough calculation of the estate taxes payable in 2009 on such an estate, we would take the 6.0 million, reduce it by the individual’s estate tax exemption (currently 3.5 million) and then take the net result (2.5 million) and multiply that by the highest marginal estate tax rate of 45%. This would mean that while the child received 5.0 million income tax free, 1.125 million would have to be paid for the taxes on the estate based on the inclusion of the death benefit in the taxable estate (and would be due within nine months of the date of death of the insured). This is a rough estimate which could change with other planning or variables, but it shows the initial issue that the owner of a life insurance policy should not always be the insured. In the next post we will look at some ways to deal with life insurance policies that are owned outright in your own name and some other planning techniques that can both keep the death benefit income tax free but also estate tax free. If you have any questions about this or anything else on this blog, do not hesitate to contact me at mziebold@ferruzzo.com.

Upcoming Asset Protection Society Meetings

Many people have asked for the schedule for the next few APS meetings. Here are the dates, speakers and topics for the next three meetings. If you are interested in attending any of these meetings, feel free to contact me at mziebold@ferruzzo.com to RSVP.

Tuesday, November 24, at 7:00 PM – Todd Rustman will be presenting on principally protected investment vehicles for your clients with some time spent on current premium financed life insurance programs.

Tuesday, January 19, at 7:00 PM – Jason Forsyth of FFG Valuations will be presenting on valuation topics (exact topic TBD), but will at least go over the changes in valuations due to any changes that occur in the legislation that passes throughout the end of 2009.

Tuesday, March 16, at 7:00 PM – Hilary Schneider of ESOP Corporate Resources is going to be presenting on planning with ESOPs (Employee Stock Ownership Plan) for income tax planning, asset protection, and a wide range of other applications.

Next Asset Protection Society Meeting

We have scheduled the next Orange County Asset Protection Society Meeting for Tuesday, November 24, at 7:00 PM in our office located at 3737 Birch, Suite 400, Newport Beach, CA 92660. Todd Rustman of GR Capital Asset Management (www.gr-cam.com) will be speaking on principally protected investment options for your clients and include a discussion on some of the current options involving premium financed life insurance. If you are looking for investment options for your clients who have suddenly become much more risk adverse in this economy, you will not want to miss this discussion. Non financial advisors will also be in attendance to discuss the asset protection characteristics of these planning structures and how to ensure that your client is as protected as he or she can be. Please RSVP by emailing me if you would like to attend and if you have any other questions do not hesitate to contact me to discuss. Any advisor, client, or other people may attend by RSVP'ing with me at mziebold@ferruzzo.com.

The Next Business Killers Presentation

We had a wonderful turnout for the first Business Killers presentation and will be doing another one on November 12 from noon to 1:30. This presentation covers important topics for business owners that I regularly see in my practice. Some of these topics are buy/sell agreements, key person insurance, valuations of businesses, business succession planning, and many others. If you are interested in learning more, then you can read about the presentation here: ( http://www.businesskillers.com ). If I can answer any questions about these topics or if you would like to attend this presentation, feel free to email me at mziebold@ferruzzo.com. The next upcoming presentation will be held on Wednesday, September 30from noon to 1:30.

Next Asset Protection Society Meeting

A reminder that the next meeting of the Asset Protection society in Orange County will be on Tuesday, September 22 at 7:00 PM. We have had an overwhelming response to this event and we have had to change the location of the event due to that response. We currently have over forty certified public accountants, financial advisors, insurance agents, attorneys and other advisors who will be attending this event. If you are interested in attending, we do have a few more spots open so contact me to RSVP.

The speaker will be David Shaver of Ferruzzo and Ferruzzo, LLP. David Shaver's bio can be found here: ( http://www.ferruzzo.com/staff/dshaver.asp ). David is the partner in the firm that handles all of our trust, estate, and fiduciary litigation and he will be speaking to the CPA's, Financial advisors, and any other advisor who regularly works with trustees and others who are in fiduciary roles such as these about common mistakes that people in these positions make that generate liability not only for the trust, estate, or other entity, but also for the person individually and possibly for the other advisors.

If you advise fiduciaries, trustees, executors, administrators, conservators, guardians, or anyone else who has these increased duties, then you will not want to miss this presentation. Individuals who are acting in these capacities for family members may also want to attend as there will be a time for questions and answers on what they should and should not be doing in these roles. If you are interested in attending, please feel free to contact me at mziebold@ferruzzo.com to RSVP for this event. IF YOU DO NOT KNOW OF THE NEW LOCATION OF THIS EVENT, CONTACT ME FOR THE NEW ADDRESS.

Premium Financed Life Insurance Programs

A client recently asked me about his options for paying for life insurance. His agent told him that he should not own the policy as the death benefit would be included in his taxable estate, so he should have his children purchase the life insurance on his life and be the beneficiaries of the policy. His concern was over the method to transfer enough to the children to pay for the premiums without gift taxes. I told him that gift taxes in that context would be a concern but from an asset protection perspective he probably would not want the children to own the policy outright. If the death benefit paid out directly to them, then they would be open to lawsuits, transmuting the separate property gift to community property (and leaving it open to divorces), etc.

The conversation then turned to using an Irrevocable Life Insurance Trust (ILIT) but the same concerns arose regarding the gift tax consequences of funding the trust with enough assets to pay for the premiums on the life insurance. With the withdrawal notices that most estate planners draft into ILITs, the annual gift tax exclusion gifts can be used to place a certain level of assets into the trust, but otherwise (especially if a client has a small amount of heirs or beneficiaries) the gifts will be taxable or use up some of their lifetime gift tax exemption amount (currently 1.0 Million per person). We then had a discussion on premium financed life insurance and the client both enjoyed the idea and decided to move forward with implementing this strategy.

Premium Financed Life Insurance is a planning strategy that uses third party financing to pay for the premiums. Usually the Life Insurance Policy is used as the primary collateral and the lender will credit a portion of the cash value of the policy against the overall collateral requirement. Any shortfall in the collateral position must be made up by someone, either the trustee of the trust or the insured or a beneficiary. By borrowing the premiums, the Trustee can enter into a variety of strategies to fund the insurance policy, such as:

1) Using Equity Indexed Universal Life policies to attempt to grow the cash value faster than the loan.

2) Having the insured gift an amount of funds to the trust on an annual basis to cover the interest payments on the loan.

3) Do one of the above and enter into other advanced estate planning such as a rolling GRAT (Grantor Retained Annuity Trust) strategy to place other assets inside of the trust on a tax efficient basis.

4) One of the other various programs that are out in the marketplace today.

Some of the important issues to keep your eye on with regard to premium financed life insurance strategies is the management of the third party loan (ensuring that the LIBOR or other interest rate is kept as low as possible throughout the term of the loan), the growth of the policy (if using a cash value strategy), and the requirements to either pay interest or to manage those interest payments during the lifetime of the loan.

I have reviewed many of the premium financed life insurance programs that are out in the marketplace and have an opinion on the best strategies from the legal perspective (as I am not insurance licensed and do not share in any of the commissions paid on any of these insurance products). If it has ever been suggested that you enter into a premium financed life insurance program and it did not make sense to you or there was something about the program that you did not like, then you may have been told about some of the inferior programs that are out in the marketplace. I advise many clients about the proper use of life insurance in their comprehensive estate plans for the payment of taxes, replacement of income of a deceased spouse, for charitable gifting after death, or for other reasons. All of these can be met with a premium financed life insurance program if the plan makes sense for you and your situation. If you have questions about this or would like to talk further about what planning options are available for you, do not hesitate to contact me at mziebold@ferruzzo.com or 949-608-6900.

Business Killers Presentation

For those of you who are business owners, you will not want to miss these upcoming presentations. I will be speaking at several upcoming events that will highlight many of the issues that face business owners in regard to current and future planning. The presentation is named "Business Killers" as it deals with several topics that I see in my practice quite often that are very important but often neglected such as buy/sell agreements, key person insurance, valuations of businesses, business succession planning, and many others. If you are interested in learning more, then you can read about the presentation here: ( http://www.businesskillers.com ). If I can answer any questions about these topics or if you would like to attend this presentation, feel free to email me at mziebold@ferruzzo.com. The next upcoming presentation will be held on Wednesday, September 30, from noon to 1:30.

Estate tax savings with a Trust under the current law

The question regularly comes up as to why a married couple should create a trust that splits into one or more subtrusts on the death of the first individual. While this discussion can be a rather lengthy one, the answer is that the internal revenue code does not currently allow the first spouse's estate tax exemption amount to be added to the surviving spouse's exemption amount for purposes of calculating the estate tax liability of the estate. Therefore, if a family wants to use both spouse's estate tax exemptions, they must create one or more irrevocable trusts on the first individual's death to use that person's exemption, and then on the surviving spouse's death, they may use their exemption amount on the remaining property that is contained in their taxable estate. If a family does not have an estate that is greater than one spouse's estate tax exemption amount (currently 3.5 million per person), then a trust can be set up that gives the surviving spouse access to and absolute control over all of the assets held in the estate. However, if the estate is greater than 3.5 million, then the splitting of the trust into two or three trusts on the death of the first person is necessary to maximize the two exemptions that are available to them.

One other reason that will also be investigated in a future post is that if the trust does not split into different trusts, then the surviving spouse may change the disposition plan over all of the assets. This often occurs when the surviving spouse remarries and there may be other children or beneficiaries that become people to whom the survivor wants to distribute assets to. By setting up a trust that becomes partially irrevocable on the death of the first spouse, there is certainty that the deceased spouse's wishes will be fulfilled with at least half of the estate.

In summary, if you have an estate that is worth over 3.5 million in 2009, then you should consult with your attorney to determine if you have an appropriate level of tax planning built into your revocable trust. More will be written on this topic in the future as we see what changes to the estate tax law the Federal Government makes.

New Location for Next Month's Asset Protection Society Meeting

For those of you who have contacted me about the next Asset Protection Society meeting, here is an update. We have had such a large response that we are going to change the location of the meeting. If you would like to attend and have not yet RSVP'd with me, please contact me to do so. I will then provide you with the new location and answer any questions that you may have.

Next Asset Protection Society Meeting

The next meeting of the Asset Protection society in Orange County will be on Tuesday, September 22 at 7:00 PM. The speaker will be David Shaver of Ferruzzo and Ferruzzo, LLP. David Shaver's bio can be found here: ( http://www.ferruzzo.com/staff/dshaver.asp ). David is the partner in the firm that handles all of our trust, estate, and fiduciary litigation and he will be speaking to the CPA's, Financial advisors, and any other advisor who regularly works with trustees and others who are in fiduciary roles such as these about common mistakes that people in these positions make that generate liability not only for the trust, estate, or other entity, but also for the person individually and possibly for the other advisors.

If you advise fiduciaries, trustees, executors, administrators, conservators, guardians, or anyone else who has these increased duties, then you will not want to miss this presentation. Individuals who are acting in these capacities for family members may also want to attend as there will be a time for questions and answers on what they should and should not be doing in these roles. If you are interested in attending, please feel free to contact me at mziebold@ferruzzo.com to RSVP for this event.

Speaking at NBI Seminar in Irvine on December 9, 2009

I have been asked to speak at a continuing education event on December 9, 2009, in Irvine, California on the Top Ten Estate Planning Techniques. This is held by National Business Institute (www.nbi-sems.com) and it should be a good event. I will be speaking on Charitable Giving and Grantor Retained Annuity Trusts. More information on this event will be published later as I am told where it will be held.

Other websites

Some people have asked where they can find out more information about my background and other things about me. You can find more information on these websites:

http://www.ferruzzo.com/staff/mziebold.asp

http://www.linkedin.com/in/markziebold

http://www.avvo.com/attorneys/92660-ca-mark-ziebold-119392.html

http://twitter.com/markziebold

http://www.naymz.com/search/mark/ziebold/1800194

http://lawyers.justia.com/lawyer/mark-allen-ziebold-79731/

That should get you started if you are wondering if I would be a good fit to work with on your tax or estate planning matter.

3rd meeting of the Orange County chapter of the Asset Protection Society

Tomorrow evening at my office we are hosting the third meeting of the Orange County Asset Protection Society chapter. If you are interested in attending or would like to find out more about our meetings feel free to contact me at mziebold@ferruzzo.com

Different uses for Life Insurance and Life Insurance Trusts

I had an interesting discussion with a client the other day about using life insurance for different planning techniques that you would normally perform with a different planning vehicle. For example, many of my clients retain my Firm to create private foundations or public charities so that they can govern the use of those contributed funds and obtain an income tax deduction. Many people use private foundations to accomplish this but then later shut them down when they realize how many rules there are from the IRS and how they are limited in running the organization. This specific client decided that the deduction was not the main goal, but to create a vehicle that could be used for many years by family members to facilitate gifting to other charities.

Based on this idea, we started discussing how an Irrevocable Life Insurance Trust would fulfill these goals, and at the end of the discussion the client said that of the two options where he or his family would retain full control over the assets within the trust, he was leaning towards using an ILIT instead of a private foundation. If the drafting attorney spends some time developing appropriate trustee provisions and ways for other family members to get involved (as co-trustees or on an advisory committee), you can do much of the same things with the proceeds of the life insurance trust (just without the income tax deduction).

If a client decides to be extremely creative, in many situations I will recommend that they consider using a properly drafted ILIT to further those goals or to be the main vehicle to fulfill them. Think about using Life Insurance to create a foundation type organization that is not subject to the rules of private foundations (but not free from tax), planning for death taxes in the traditional ways, using cash value in an ILIT to purchase assets from an estate (best for rapidly appreciating assets), Using insurance to fund a Health and/or educational trust in a jurisdiction like Delaware with a long rule against perpetuities so that the funds will always be available for the purposes in which you set them up for.

The client left my office with a new understanding that insurance is not just for the protection of your family anymore, but it is also a very cost effective way of leaving a legacy for yourself or your family in one or more different ways.

California State Tax Treatment of Ponzi Schemes

Today's release by the Franchise Tax Board:

Date: March 27, 2009

Subject: Franchise Tax Board News Release
tel 916.845.4800 | Public Affairs Office
cell 916.416.6931 | Brenda Voet
Brenda.Voet@ftb.ca.gov
For Immediate Release

03.27.2009

FTB Offers Tax Guidance for Ponzi Scheme Victims
Sacramento - The Franchise Tax Board (FTB) today offered guidance on theft-loss deductions for California taxpayers who had losses from investment schemes.

“Tax remedies are available for victims of Ponzi schemes,” said State Controller and FTB Chair John Chiang.

State and Federal law allow taxpayers to deduct some uncompensated losses on their tax returns. A recent IRS ruling, Revenue Ruling 2009-9, clarifies the treatment of losses from investment schemes, including the nature of such losses (theft losses), the amount of such losses to be allowed, and the year of deductibility. The IRS also plans to follow a new procedure, Revenue Procedure 2009-20, which provides an optional “safe-harbor” for determining the year in which the losses occurred and a simplified method of computing the amount of the loss. A “safe-harbor” allows taxpayers to avoid later IRS challenges.

California will follow this guidance, and FTB will accept the form provided in Appendix A to Revenue Procedure 2009-20for those taxpayers who choose to participate in the safe harbor provision for California purposes. However, a taxpayer that takes advantage of the safe harbor for federal purposes is not required to do so for California purposes.

State law differs from the Federal law in two key areas. In these areas, State law controls:

· Statute of limitations for filing a claim for refund.
· Deductibility of net operating loss (NOL) carryforwards or carrybacks. (NOL carryforwards are suspended for most taxpayers for 2008 and 2009. Carrybacks are allowable but only for NOLs attributable to 2011 or later.)

FTB will soon offer more detail on the differences in a FTB Taxpayer Notice. Interested taxpayers should check FTB’s website at ftb.ca.gov for updates.

It looks like California will also be giving tax relief to those who are victims of fraudulent Ponzi Schemes. I will update everyone once the Franchise Tax Board offers more details on their treatment.

Introduction to the Asset Protection Society

For those of you who are looking for additional information on asset protection, let me suggest the following resource. The website for the Asset Protection Society is: www.assetprotectionsociety.org . Once a potential client takes the time to review the depth of material on the website, they generally come away with some information that they do not know before visitng the website. From asset protection statutes in the various states to ratings of local advisors who practice in this field, it is a great resource to both the individual and professional.

For Orange County, we are planning the second local Asset Protection Society meeting and details will soon be mentioned on this blog. If you are an individual who would like to hear more about these topics and discuss issues with advisors in a friendly setting, feel free to email me and I will give you information on the meeting.

Ponzi schemes and Federal Tax Treatment

A client called me the other day and mentioned that he and his CPA were having some arguments over the tax treatment of a bad investment. After discussing the issue with the client, it came out that the client had been involved with a Ponzi Scheme and had lost all of his investment in the program. This is not the BIG Ponzi Scheme that came up recently with Bernard Madoff, but the end result was the same.

This topic will not apply to 99.9% of the readers out there, so I will not spend a lot of time on it. Note though that the CPA wanted to be conservative and treat the investment as a long term capital loss (limited to $3,000 deduction per year) and the client wanted to deduct it according to the tax rules regarding theft.

After doing a bit of research, the IRS has come out with two rulings this year to help taxpayers who have been subject to this type of scheme. Revenue Ruling 2009-9 deals with the exact question as to whether these are theft losses or capital losses and goes on to deal with questions such as what year are the deductions available, how is the value of the loss determined, what limits prevent a person from taking the whole amount as a deduction, and other aspects. The IRS also published Revenue Procedure 2009-20, which provides safe harbor treatment for those who were subject to such schemes and report the losses in a certain way. If you were one of the people who were affected by one of them, then you should speak to your CPA and show him or her these two IRS Rulings to ensure that you are able to properly treat the theft that occurred to you.

Registration of foreign business entities in California

I often receive questions about forming limited liability companies, corporations, and limited partnerships in other states besides California. The reason being that California imposes a minimum $800 franchise fee and a gross receipts tax on limited liability companies. Furthermore, many jurisdictions such as Delaware, Nevada and others have preferential corporate codes that would apply to businesses formed in those states. With these facts, many people would say that they should form any and every business entity outside of the state, but California also has rules regarding when a foreign entity (a business entity formed in another state) has to register to do business in the state of California.

If a foreign entity is doing business in the state of California, then the entity is required to register with the California secretary of state. If that occurs, then the foreign entity will be subject to the California fees outlined above. Many people after hearing this explanation will expect that there is a straightforward answer as to what level of intrastate business creates this requirement, but the corporations code states that "Transact intrastate business" means to enter into repeated and successive transactions of business in this state, other than in
interstate or foreign commerce. Section 17001 of the California Corporations Code also states that simply being a member of an entity or a shareholder is not enough to subject the entity to the California taxes. Based on this, many people who believe that being a resident of the state of California is enough of a requirement to register their out of state businesses are incorrect. However, if you take the next step and try to determine what level requires you to register, then that requires a detailed facts and circumstances analysis that your corporate attorney and accountant will have to make in order to make that decision for you.

If you have a business formed in another state and you have had questions about registering the entity to do business in California, feel free to contact me to discuss. Many times a discussion with the individual's CPA will answer many of their questions, but it often requires ongoing discussions in order to save you from an unpleasant surprise from the state of California.

2nd Orange County Asset Protection Society Meeting

The date for the second Orange County Asset Protection Society Meeting has been set. It will be on Tuesday, May 12, at 7:00 PM. The website for the Asset Protection Society is here: www.assetprotectionsociety.org . The members are both advisors and individuals who have a desire to learn about and implement various asset protection structures for protection. If you would be interested in attending or have questions about the meeting or the society, contact me to discuss.

First Asset Protection Society meeting in Orange County

For any potential client or advisor who would be interested, we are having the first local meeting of the Asset Protection Society (http://www.assetprotectionsociety.org) in Orange County, California, on Tuesday, March 10, 2009, at 7:00 PM. The location will be at the Law Office of Ferruzzo and Ferruzzo, LLP, which is located at 3737 Birch, Suite 400, Newport Beach, CA 92660. The initial meeting will be to discuss options for having ongoing meetings in Orange County and many of the members of the asset protection society who are in this area have decided to attend. If you are not a member of the asset protection society but would be interested in meeting some of the advisors who are members of the society, please email me for more details and I will give you more information for the March 10 meeting.

H.R. 436

A few advisors that I work with have asked me to give my opinion on one of the proposed bills in the House of Representatives (HR 436) and specifically on the proposed changes to transfer tax valuation rules contained in the bill.

You can find the proposed text of the bill here: http://www.opencongress.org/bill/111-h436/text

While the bill does propose changes to the estate tax exemption amount, the proposed changes to the valuation rules are on the minds of many advisors. If you look at the Bill, it states,

"In the case of the transfer of any interest in an entity other than an interest which is actively traded (within the meaning of section 1092)

(A) the value of any nonbusiness assets held by the entity shall be determined as if the transferor had transferred such assets directly to the transferee (and no valuation discount shall be allowed with respect to such nonbusiness assets), and

(B) the nonbusiness assets shall not be taken into account in determining the value of the interest in the entity."

The first item to consider is what is a transfer "in an entity" and second, the issue of eliminating valuation discounts. The first issue is explained simply by pointing to many different kinds of estate planning techniques that advisors have used in the past and are currently using today. These vehicles for transfer planning are generally called family limited partnerships, family limited liability companies, or some other type of business entity owned primarily by one member of a family who begins gifting or selling those interests to younger individuals in the same family.

The second issue is the lack of valuation discounts for these types of transfers. In the past, the value of the business interest that was transferred could be reduced under several theories. These theories are usually discounts for lack of marketability (as closely held business interests generally do not have a market in which they are bought and sold) and lack of control (as the interest that is transferred by gift or sale is usually a minority interest).

The good news is that this bill has not yet been passed in the House of Representatives, but it continues to gather support from Representatives across the country. The bad news is that if this bill passes, then many estate plans or planning techniques that have used a family entity (Limited Liability Company or Limited Partnership) may lose their effectiveness for transferring future interests. If this bill passes, it is unlikely that it would have any kind of retroactive effects upon transfers, but any future transfers would be subject to the bill itself.

Based on this, I am recommending to my current clients that have family entities to consider completing their gifts or transfers before this bill is passed into law, or if they are not comfortable or able to conclude these transfers at the present time, to understand that future estate planning will be needed to eliminate any additional estate taxes based on the elimination of these discounts. If you or any of your family members or friends have been using a family limited partnership or family limited liability company to transfer wealth, it is as important now as it ever has been to make sure all of the administrative requirements are fulfilled (proper valuations of the interests, gift tax returns filed on an annual basis, interest payments made on installment sale promissory notes to trusts for the benefit of family members, etc.) and to continue to speak to your advisors about this Bill to find out if it passes in the future.

If you have one of these kinds of entities and you are uncertain as to whether or not you have been handling the administrative aspects of the entity correctly, or if you have questions about this proposed bill or any other estate planning question, do not hesitate to contact me.

A Great Time to do Advanced Planning

With the current economic slowdown and the very real losses that have been incurred in people's retirement and other investment accounts, many people feel that this is not a great time to do estate planning. Most of the people that I have spoken with are waiting to see what the new congress and president do once they are sworn in, and they are happy and content to sit by and watch what happens.

Unfortunately for many of them they are missing a great time to do some advanced planning. I have not had an opportunity to blog on many advanced estate planning techniques yet, but there are several that depend on several key federal interest rates. Two important rates for many advanced planning techniques are the applicable federal rate and the 7520 rate. Future blog posts will investigate both of those rates and how they are used for various planning techniques, but for January of 2009, the long term applicable federal rate compounded annually is 3.57% and the January 2009 7520 rate is 2.4%. These rates are very low and are used for various planning techniques such as installment sales to defective grantor trusts, Grantor Retained Annuity Trusts, and other techniques.

In addition to the above, the fair market value of businesses, real estate, and investments in general are extremely low. These lower fair market values, coupled with the low rates described above, have made it a very good time to do advanced planning if you are a candidate for business succession, or are a high net worth individual who wants to transfer as much of your estate to your heirs in a tax efficient manner as possible. If you have additional questions about these issues, feel free to contact me to discuss and I will be expanding upon these issues in future posts.

New Years Resolutions

Believe it or not, but I had a New Year's resolution to blog more often. I've heard from a few people that the posts are helpful in thinking about what they should be planning for, and the idea was that I would try to write at least a post or two per week in the new year. Well, it is now January 19, and here is the first post of the new year. My point is not that we should be focused on any type of failure on a New Year's resolution, but from a planning perspective we often have the best of intentions and we often leave them incomplete thinking that we will have another day, another week, another month to finish them. While it is difficult for us to think about what would happen to our families if we do not plan for the worst, things do happen that show us how important it is to plan and complete the planning that must be completed.

One example is of a client of mine. This client came into my office at least six months ago and we discussed several things that he and his wife needed to do in order to clean up their existing planning that a prior attorney had drafted for them. The changes were mostly things like changing trustees (due to the fact that the people who were named as successor trustees had all moved out of the area and had lost contact with them), their health directives were missing the relatively new HIPAA authorizations, and they had no powers of attorney for asset management. However, the biggest portion of the clean up work was trust funding. Very few of their accounts were titled in the name of their trust and only one of their multiple real estate holdings were properly titled. We started working on these items and I had draft documents to them in a matter of weeks. Unfortunately life happened and the weeks turned into months and my messages, emails and phone calls were continually returned with excuses such as "we haven't read them yet, we need more time, life is really busy at the moment".

Then the holidays arrived and they asked me if we could set a meeting after New Years in order to finalize the drafts that they had had for six months. Unfortunately for the clients, the husband passed away over the holidays and we are now dealing with the ramifications of not completing the documents that they had had for over half of a year. When I tell this story to friends and colleagues they almost all ask about the age of the decedent. Would you be amazed if I told you he was in his mid fifties?

Based on this story I have convinced many people to finish their planning or to start if they have not given any of these issues proper attention. The goal that I have with this is that every reader should at least stop and consider what the status of their own planning is and what they need to do in order to finish it. If you haven't thought about your own planning or if you have planning that is less than complete, then make sure that you contact your estate planning attorney in order to finish it.