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By Editor, January 19, 2012

The following is a summary of the many important tax developments that have occurred in the past three months that may affect you, your family, your investments, and your livelihood. Please call us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.

Payroll tax cut temporarily extended. The Temporary Payroll Tax Cut Continuation Act of 2011 was enacted late last year. It temporarily extends the two percentage point payroll tax cut for employees, continuing the reduction of their Social Security tax withholding rate from 6.2% to 4.2% of wages paid through Feb. 29, 2012. Shortly after its passage, the IRS instructed employers to implement the new payroll tax rate as soon as possible in 2012 but not later than Jan. 31, 2012. The law also includes a “recapture” provision, which applies only to those employees who receive more than $18,350 in wages during the two-month period (i.e., two-twelfths of the 2012 wage base of $110,100). This provision imposes an additional income tax on these higher-income employees in an amount equal to 2% of the amount of wages they receive during the two-month period in excess of $18,350 (and not greater than $110,100). In addition, under the new law, the social security tax rate for a self-employed individual remains at 10.4%, for self-employment income of up to $18,350 (reduced by wages subject to the lower rate for 2012). Congress is going to try to negotiate a deal to extend the payroll tax cut for all of 2012. If a deal is struck to extend it for the full year, the recapture provision for employees would not apply.

Credit for hiring veterans extended and enhanced. A law enacted last November extended and enhanced a credit for hiring qualified veterans. Before the law was passed, the credit would have been available only if the qualified veteran were hired before Jan. 1, 2012, and only certain veterans were considered qualified veterans. The new law extends the credit for hiring qualified veterans, adds two new classes of veterans who are considered qualified veterans, increases the credit for hiring certain qualified veterans, “fast-tracks” the process for certifying that an individual is a qualified veteran, and provides tax-exempt employers with a credit against payroll tax for hiring qualified veterans. The credit amount varies depending on a number of factors. It can be as high as $9,600 for hiring a qualified disabled veteran. For an employer to qualify for the credit, the qualified veteran must begin work for the employer before Jan. 1, 2013 and other requirements must be met.

New rules for deducting or capitalizing tangible property costs. The IRS has issued new regulations for determining whether amounts paid to acquire, produce, or improve tangible property may be currently deducted as business expenses or must be capitalized. The regulations will affect virtually all taxpayers that acquire, produce, or improve tangible property. They are comprehensive, voluminous and virtually rewrite the rules in this area. For example, they provide detailed definitions of “materials and supplies” and “rotable and temporary spare parts” and prescribe new rules and elective de minimis and optional methods for handling their cost. They also have rules for differentiating between deductible repairs and capitalizable improvements, among many other items. The regulations generally are effective in tax years beginning after Dec. 31, 2011. However, to add to their complexity, some of the new rules in the regulations do not supersede prior IRS guidance.

New foreign asset reporting guidance and form. The IRS issued detailed guidance on the new law requiring individuals with an interest in a “specified foreign financial asset” during the tax year to attach a disclosure statement to their income tax return for any year in which the aggregate value of all such assets is greater than $50,000 (or a dollar amount higher than $50,000 as the IRS may prescribe). In addition, the IRS issued Form 8938 (Statement of Specified Foreign Financial Assets), which individual taxpayers will use starting in the 2012 tax filing season to report specified foreign financial assets for tax year 2011. The guidance consists of detailed temporary regulations. They define terms that apply for purposes of the reporting requirement; provide rules to determine if a specified individual must file a Form 8938 with their annual return; define what are specified foreign financial assets; detail what information needs to be reported; provide guidelines for valuing specified foreign financial assets; list exceptions to the reporting requirements; and describe the penalties that apply for failure to comply with the reporting requirements.

Standard mileage rates flat or lower. The optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) is 55.5¢ per each business mile traveled after 2011. For 2011, it was 55.5¢ for miles driven after June 30 and 51¢ per mile for miles driven before July 1. Further, the 2012 rate for using a car to get medical care or in connection with a move that qualifies for the moving expense deduction is 23¢ per mile. For 2011, it was 23.5¢ for miles driven after June 30 and 19¢ per mile for miles driven before July 1.

New Form 8949 replaces Form 1040, Schedule D-1. Many transactions that, in previous years, would have been reported on Form 1040, Schedule D or D-1 must be reported on Form 8949 if they occurred in 2011. Specifically, a taxpayer uses Form 8949 to report:

• The sale or exchange of a capital asset not reported on another form or schedule,
• Gains from involuntary conversions (other than from casualty or theft) of capital assets not held for business or profit, and
• Nonbusiness bad debts.

The taxpayer uses Schedule D to figure the overall gain or loss from transactions reported on Form 8949 and to report capital gain distributions not reported directly on Form 1040, line 13, a capital loss carryover from 2010 to 2011, and certain specialized items.

Withholding requirement for government contractors repealed. A law enacted in 2005 was to have required the Federal government and the government of every state, political subdivision of a state, and instrumentality of a state or state subdivision (including multi-state agencies) making certain payments to a person providing any property or services (e.g., payments to a government contractor) to deduct and withhold 3% from that payment. Although the withholding requirement was originally set to apply to payments made after 2010, it was subsequently deferred to apply to payments made after 2012. A law enacted in November 2011 repealed the government contractor withholding requirement.

If you have any questions regarding these tax developemtns, please contact your Warren Averett Wilson Price accountant. 

Circular 230 Notice: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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By Editor, May 4, 2011

IRA owners and beneficiaries who have reached age 70 1/2 are permitted to make cash donations to IRS-approved public charities directly out of their IRAs. These so-called qualified charitable distributions, or QCDs, are federal-income-tax-free to you, but you get no itemized charitable write-off on Form 1040. That’s OK because the tax-free treatment of QCDs equates to an immediate 100% deduction without having to worry about restrictions that can delay itemized charitable write-offs. QCDs have other tax advantages too. Here is what you need to know.

QCD Basics

A QCD is a cash payment of an otherwise taxable distribution, by your IRA trustee, directly to a qualified public charity. The funds must be transferred directly from your IRA trustee to the charity. You cannot receive the funds yourself and then make the contribution to the charity. However, the IRA trustee can give you a check made out to the charity that you then deliver to the charity.

You cannot arrange for more than $100,000 of QCDs in any one year. If your spouse has IRAs, he or she has a separate $100,000 limitation. If you are the beneficiary of an IRA (as opposed to an account owner), you too are eligible for the QCD deal if you are at least age 70 1/2.

You must get and keep substantiation of the contribution from the charity. Also, you must not have received any benefit in return for making the contribution.

The QCD privilege is scheduled to expire at the end of this year, so if you want to take advantage of the idea, it is not too soon to start thinking about it.

Income Tax Benefits

QCDs are not included in your Adjusted Gross Income (AGI). This lowers the odds that you’ll be affected by various unfavorable AGI-based phase-out rules. In addition, you don’t have to worry about the 50%-of-AGI limitation that can delay itemized deductions for garden-variety cash donations to public charities.

QCDs count as a payouts for purposes of the Required Minimum Distribution (RMD) rules. Therefore, you can donate all or part of your 2011 RMD amount (up to the $100,000 limit on QCDs) and thereby convert taxable RMDs into tax-free QCDs.

Does the QCD Deal Work for You?

The QCD privilege is beneficial for seniors in the following circumstances:

• You don’t itemize deductions. Under the “normal” rules, only itemizers get any income tax benefit from charitable donations. Making QCDs will save taxes whether you itemize or not because neither you nor your heirs will ever have to pay income taxes on the donated amounts.
• Your itemized charitable donations would be delayed by the 50%-of-AGI limitation. Making QCDs will avoid this unfavorable limitation.
• You want to avoid being taxed on RMDs that you are forced to take from your IRAs. The QCD strategy does the trick while also allowing you to satisfy your charitable inclinations.

Conclusion

If you’re interested in taking advantage of the tax-saving QCD strategy for 2011, you will need to arrange with your IRA trustee for money to be paid out to one or more qualifying charities by year-end.

If you have questions about QCDs or want more information, your Wilson Price accountant.

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By Editor, December 21, 2010

The recently enacted “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010″ is a sweeping tax package that includes, among many other items, an extension of the Bush-era tax cuts for two years, estate tax relief, a two-year “patch” of the alternative minimum tax (AMT), a two-percentage-point cut in employee-paid payroll taxes and in self-employment tax for 2011, new incentives to invest in machinery and equipment, and a host of retroactively resuscitated and extended tax breaks for individuals and businesses. Here’s a look at the key elements of the package:

• The current income tax rates will be retained for two years (2011 and 2012), with a top rate of 35% on ordinary income and 15% on qualified dividends and long-term capital gains.
• Employees and self-employed workers will receive a reduction of two percentage points in Social Security payroll tax in 2011, bringing the rate down from 6.2% to 4.2% for employees, and from 12.4% to 10.4% for the self-employed.
• A two-year AMT “patch” for 2010 and 2011 will keep the AMT exemption near current levels and allow personal credits to offset AMT. Without the patch, an estimated 21 million additional taxpayers would have owed AMT for 2010.
• Key tax credits for working families that were enacted or expanded in the American Recovery and Reinvestment Act of 2009 will be retained. Specifically, the new law extends the $1,000 child tax credit and maintains its expanded refundability for two years, extends rules expanding the earned income credit for larger families and married couples, and extends the higher education tax credit (the American Opportunity tax credit) and its partial refundability for two years.
• Businesses can write off 100% of their equipment and machinery purchases, effective for property placed in service after September 8, 2010 and through December 31, 2011. For property placed in service in 2012, the new law provides for 50% additional first-year depreciation.
• Many of the “traditional” tax extenders are extended for two years, retroactively to 2010 and through the end of 2011. Among many others, the extended provisions include the election to take an itemized deduction for state and local general sales taxes in lieu of the itemized deduction for state and local income taxes; the $250 above-the-line deduction for certain expenses of elementary and secondary school teachers; and the research credit.
• After a one-year hiatus, the estate tax will be reinstated for 2011 and 2012, with a top rate of 35%. The exemption amount will be $5 million per individual in 2011 and will be indexed to inflation in following years. Estates of people who died in 2010 can choose to follow either 2010′s or 2011′s rules.
• Omitted from the new law: Repeal of a controversial expansion of Form 1099 reporting requirements.
• Also not included: Extension of the Build America Bonds program, which permits state and localities to issue federally-subsidized municipal bonds.

Return of the estate tax in the 2010 Tax Relief Act

The estates of wealthy individuals who died in 2010 didn’t pay any federal estate tax, but that situation is about to change. Under the recently enacted “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010,” the federal estate tax, which disappeared for 2010, springs back to life in 2011 and is imposed at the top rate of 35% of the estate’s value after the first $5 million.

New law

The new law brings back the estate tax, for 2011 and 2012 anyway. During 2011 and 2012, the top rate will be 35%. For 2011, the exemption amount will be $5 million per individual (indexed for inflation after 2011). At those levels, the vast majority of estates (all but an estimated 3,500 nationwide in 2011) will not be subject to any federal estate tax, and the tax will raise about $11.4 billion for the government. By way of comparison, the 55% tax with a $1 million exemption would have resulted in about 43,540 taxable estates in 2011, and raised about $34.4 billion. Tax historians would also note that except for the temporary repeal of the estate tax in 2010, the estate tax rate has not been less than 45% since 1931.

The new law also gives heirs of decedents dying in 2010 a choice of which estate-tax rules to apply – 2010′s or 2011′s. That’s important because although there is no estate tax in 2010, some inherited assets are subject to higher capital gains tax under the 2010 rules, a situation that actually raises the tax burden for some heirs. Inherited assets under the 2010 rules have a tax basis equal to the price when they were purchased (referred to in tax parlance as “carryover basis”) rather than the price at death. That could lead to a significant tax burden for heirs who sell assets such as stocks that had been held for many years and have greatly appreciated in value. Under the 2011 rules, by contrast, heirs will be allowed to inherit assets with a “stepped-up basis.” While most heirs would choose the 2011 regime ($5 million exemption from both estate and generation-skipping tax and an unlimited step-up in the basis of assets to their current market value), the heirs of superrich decedents could find it more advantageous to elect the 2010 law (limited step-up in the basis of assets and no estate tax). If the executor makes the election to have the 2010 rules apply, the estate tax return’s due date will not be earlier than the date that’s nine months after the new law’s enactment date.

For gifts made after December 31, 2010, the gift tax will be reunified with the estate tax. Under the new law, the estate and gift tax exemptions will be reunified starting in 2011, which means that the $5 million estate tax exemption will also be available for gifts. The law in effect prior to 2010 provided a $3.5 million lifetime exemption for estates, but only $1 million for gifts. The gift tax rate, starting in 2011, will be 35%. The exemption from the generation-skipping tax (GST) – the additional tax on gifts and bequests to grandchildren when their parents are still alive – will also rise to $5 million from the $1 million it would have been without the new law. The GST tax rate for transfers made in 2011 and 2012 will be 35%.

From a planning standpoint, a nice feature of the new law is that it makes it easier to transfer the $5 million exemption to a surviving spouse, so married couples can shield $10 million of their assets from taxes. In the language of tax professionals, the estate tax exemption will be “portable.”

We hope this information is helpful. If you would like more details about the estate tax or any other aspect of the new law, please do not hesitate to call or email anyone here at Wilson Price CPAs and Consultants.

Circular 230 Notice: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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By Editor, November 10, 2010

The IRS has still not finalized the form executors will use to report and allocate the basis of property received from a decedent in 2010.

We do know for certain, however, that a lot of information will be required for this filing.

Required Reporting

If you are an executor of a 2010 decedent, you will be required to file an informational return with the decedent’s final income tax return if:

The fair market value of all property (other than cash) exceeds $1,300,000 or

• The decedent transferred assets by gift or other lifetime transfer for which a gift tax return was required within the three year period preceding the decedent’s death

Note: if the decedent was a Nonresident, noncitizen of the United States, the filing is required if property situated in the United States exceeds $60,000

Information needed for preparation of the form

The form will be due April 15, 2011 along with the decedents final FORM 1040 return, with extensions permitted.  Executors will need to gather the following information to assist in preparation of the form.

• The decedent’s death certificate
• Marital status of the decedent
• Legal domicile and year domicile established
• Executor name, address and social security number
• Full name and social security number for surviving spouse
• Full name and social security number for all other beneficiaries
• Certified copy of decedent’s will
• Copy of decedent’s most recently filed individual income tax return
• A list of all assets owned by the decedent, solely and jointly with others, including:
  • A description of the asset
  • Date decedent acquired the asset
  • Indication if asset was acquired by gift
  • Adjusted basis of the asset at decedent’s date of death
  • Fair market value of the assets at decedent’s date of death
  • Indication if any gain in the asset would be an ordinary gain

Written statement to beneficiaries

After filing the informational form, executors will have 30 days to provide to each beneficiary a written statement that includes the information reported with respect to the property that the beneficiary acquired from the decedent. Failure to provide each beneficiary with this statement could result in a penalty of $50 for each failure.

Allocation of basis

In this year of estate tax repeal, the basis “step-up” rules do not apply.  Instead, basis of assets received from a decedent is the lesser of (1) the adjusted basis of the property at the decedent’s date of death or (2) the fair market value of the property at the decedent’s date of death.  Thus, a “step-down” is a possibility.  The law provides, however, basis increases for certain property.  The allocation of basis increases will be reported on the same form above.

General basis adjustment - a basis adjustment increase is allowed for any property acquired from a decedent for up to $1.3 million.  The executor will allocate this amount among the unrealized gains of the assets of the estate, as seen appropriate.

Additional basis adjustment – an additional increase of up to $3 million can also be applied to qualified spousal property, which would include property transferred to the spouse outright or to a QTIP trust where the spouse has a qualified income interest for life. 

Increases to basis adjustment amounts – if the decedent had any losses, such as capital loss carryforwards, net operating loss carryforwards, or certain built-in losses in 2010, these amounts could increase the general basis adjustment by the amount of the losses.  Additionally, if any assets received a “step-down” in the basis allocation process, the general basis adjustment of $1.3 million would be increased by that amount as well, thus keeping the aggregate increase in values at $1.3 million.

Property ownership

The basis increase adjustments cannot be allocated to property not owned by the decedent at death, which might be questionable in certain situations that are specifically addressed in the code.

Owned by decedent – property transferred by the decedent to a qualified revocable trust is considered to be owned by the decedent.  Additionally, if the decedent has at least one-half interest in community property, then for purposes of fulfilling the ownership requirement, this asset is considered 100% owned.

Not owned by decedent – the decedent is not considered to own property by means of holding a power of appointment over such property.

Partially owned by decedent:

• Jointly owned with surviving spouse – the decedent is considered to be owner of one-half of the property.          
• Jointly owned with someone other than spouse – the decedent is considered owning a percentage proportionate to the consideration provided.
• Jointly owned with someone other than spouse and was acquired by gift, bequest or inheritance – if parties interests are not otherwise fixed, the decedent is considered to own a percentage equal to one over the number of tenants.

Other information

There are additional provisions that should be considered:

• If the decedent is a nonresident, noncitizen of the United States, the basis increase adjustment is limited to $60,000
• IRAs, retirement plan benefits and other items of income in respect of a decedent (IRD) are not eligible for the basis increase adjustment
• Property acquired by the decedent by gift or other intervivos transfers for less than adequate consideration during the three year period preceding the date of death are not eligible for the basis increase adjustment

Penalties

Failure to report information to the IRS regarding an estate valued over $1.3 million or for certain transfers made within three years of death, will subject the executor to a penalty of $10,000. If the failure to report was an intentional disregard of the rules, the penalty could be as much as 5% of the fair market value of the property for which reporting was required.

So where is the form?

An unofficial draft (FORM 8939) has been circulating amongst professionals, but has not been officially released by the IRS.  IRS representatives say the official draft will be released to the public on their website, www.irs.gov. 

Please contact us if we can help you navigate through the administration of a 2010 estate.

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By Editor, November 10, 2010

From an estate planning perspective, these two 2010 opportunities make perfect sense on paper for many clients.  Both strategies, with proper planning, can save these taxpayers and their heirs a significant amount in estate taxes and income taxes.  However, most people are not eager enough to pay Uncle Sam any earlier than they have to, and the fear of uncertainty in estate tax laws brings only further hesitation.

The following thoughts may add appeal and ease fears…

MAKING THE MATH MORE APPEALING

If coming out of pocket now on the taxes is where you draw the line, consider adding life insurance to the equation.  It is common practice to include life insurance in an estate plan to add liquidity to pay estate taxes and expenses or to replace wealth given to charities.  The same methodology can apply here when considering making a taxable gift or paying income taxes on Roth conversion income.  Even though you are coming out of pocket now, you are reducing your estate by the income taxes paid and you can replace the wealth outside of your estate with a life insurance plan and life insurance trust. 

GIFTING

The gift tax is not an issue until you have exhausted your $1 million gift tax exemption.  The law also allows you to make annual exclusion gifts (free of gift tax) of up to $13,000.  Additionally, you can make an unlimited amount of payments for tuition or medical expenses directly to providers without incurring a gift tax.  If you have not used up your gift tax exemption, 2010 is an optimal time to do so, as asset values are depressed, interest rates are low, and valuation discounts are still available.  These factors allow you to maximize the amount of future value that you transfer.

Note: If you have made taxable gifts in previous years in excess of $500,000 but less than $1 million, you have already used up part of your unified credit based on higher tax rates.  As a result, you may not be able to gift the full balance of the $1 million without paying gift tax.

If you have used up your lifetime gift tax exemption, the potential for transfer tax savings by making taxable gifts in 2010 are even more significant than they may appear at first glance.  The gift tax rate is 35%, which is the lowest it has been since the 1930’s, but if you do the math, the effective rate is really less than 26% when compared to the estate tax.  Here is a general example:

Assume an individual would like to reduce his estate by $5,000,000 in 2010.  He makes a taxable gift of $3,703,704, paying 35% gift tax of $1,296,296; thereby transferring a total of $5,000,000 out of his estate. However, if he forgoes making a gift this year and dies next year with all $5,000,000 still in his estate, then he will potentially pay 55% estate tax of $2,750,000, leaving only $2,250,000 to his heirs. See the illustration below: 

Gift tax                                                    Estate tax

$5,000,000                                              $5,000,000

$3,703,704 to heirs                                 $2,250,000 to heirs

$1,296,296 tax (25.9% of $5m)               $2,750,000 tax (55%)

By taking advantage of the low gift tax rate this year, our individual could transfer $1.35 of value for every dollar gifted, and paying tax only on $1.  Conversely, if he happens to make the gift in 2010 and also dies in 2010, than he has paid the $1.2m in tax, but would have owed no estate tax.  Fortunately, there are ways to deal with this uncertainty.  Here are a few thoughts:

Plan now – gift later – Making a taxable gift involves some advance planning.  Establish a plan now, and then make the gift late in the year, perhaps between December 26 and the 31^st.  Make sure gifts by check clear the bank before December 31; timing of a gift is very important to ensure it is a “complete gift.” 

Gift now – plan to reverse – If you plan now and wait to make the gift towards the end of the year, you still run the risk of missing out on the opportunity if Congress enacts a higher gift tax rate before the end of the year (seemingly more and more unlikely, but nevertheless, a possibility).  Consider making the gift now, but rather than directly to family members, making it to a trust with your family members as beneficiaries.  With the right trust provisions, the gift could be “reversed” through disclaimers.  In essence, this is sending the property back to the donor as if it were never gifted. 

If you are married, a lifetime marital trust or “QTIP” trust would also work if you want to make transfers to your children this year.  By setting up a QTIP trust for the benefit of our spouse during her life, which passes to your children at termination, your spouse could disclaim an amount in favor of your children. If the 35% gift tax rate changes or is repealed, then your spouse does not disclaim.        

Gift with little tax cost – There are several estate planning techniques commonly used to transfer highly appreciating assets with little or no gift tax.  Though some of these opportunities may be fleeting, they are currently still available. A grantor retained annuity trust (GRAT) would allow you to transfer significant value over a period of time with minimal or no gift tax cost. 

If you are planning to make a substantial charitable gift, but would still like to benefit family members as well, a charitable lead annuity trust (CLAT) will allow you to benefit a charity and your family with a single vehicle.  If you are considering converting to a Roth IRA this year, a CLAT could also offset some of your Roth conversion income (more on this below).    

Please contact us to help you with your gift or estate planning.

OFFSETTING ROTH CONVERSION INCOME

Converting a traditional IRA to a Roth IRA for many individuals works out great on paper, but writing the check to pay the income tax is where most lack enthusiasm to execute the switch.  Yet, you can’t beat the allure of the tax-free growth a Roth IRA has to offer.  Most importantly, if estate taxes ARE a factor for you, converting to a Roth IRA is virtually always a good idea.  There are ways to ease the tax bite.

Charitable gifts – Making a charitable gift of non-IRA assets to offset all or a portion of the conversion income could save tax dollars in favor of charitable dollars.  Perhaps you have a charitable deduction carry-forward that will soon expire, or you plan to make a large gift in 2011 that you could double up in 2010.  With some advanced planning needed, you could set up a charitable lead annuity trust (CLAT), which could benefit your charity, your family and reduce your conversion income.  Gifts of appreciated securities held for more than a year carry the additional benefit of avoiding capital gains taxes if they were to be sold.

You don’t have to convert everything – You may feel an “all or nothing” pressure to convert your entire IRA, but you don’t have to. This conversion opportunity is a permanent change that extends beyond 2010.  Converting only a portion of your IRA or spreading it out may make the tax bill more affordable.

Convert one into many – More than one Roth conversion can be made in a single year.  For example, as long as the money used does not come from a recharacterization, you could convert $500,000 in one transaction or you could do five separate $100,000 conversions. Separating the IRAs by asset class, can also be beneficial if any particular class does not perform as expected, you can recharacterize a subset of the conversion, rather than the entire amount.

Consider your losses – If you are anticipating a business loss in 2010 (as long as it’s not passive) or if you have net operating loss (NOL) carry-forwards, these can reduce your conversion income.  If you separate your conversion into multiple IRA accounts, you can recharacterize only the portion not covered by your NOL (once known for sure on your tax return).  A portion of one Roth IRA account can be recharacterized, but it has to be prorata by asset class.

Extensions – Extend the filing of your 2010 individual income tax return to October 15th.  This will allow you the most amount of time to determine the amounts of your NOLs or whether you should recharacterize due to a decline in value of the converted Roth IRA.

FUND A CREDIT SHELTER TRUST WITH A ROTH IRA

Because of the income tax burden, estate tax liability and the required minimum distributions (RMDs), a traditional IRA is not typically an asset used to fund a credit shelter trust.  Conversely, a Roth IRA may be the best asset to fund such a trust.  Since the asset grows tax free, has not RMDs and no income tax liability, it has a greater opportunity to be stretched over multiple generations.

Please contact us to help you evaluate your Roth conversion needs.

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By Editor, November 10, 2010

A special needs trust is designed to benefit an individual who has a disability by enabling them to have an unlimited amount of assets, while preserving governmental benefits, and protecting resources.

This type of trust is an important tool to set up early, even if you don’t have assets to fund the trust now or don’t think you will need governmental benefits.

Why a special needs trust?

To preserve

Disabled individuals of any age who qualify or may qualify in the future for Medicaid and SSI benefits could benefit from a special needs trust.  If you have a loved one who has a disability and you are providing all of their support now, the need for governmental support may not arise until after your death.

For purposes of qualifying for certain governmental benefits available to physically or mentally disabled individuals, a person cannot have personal assets greater than $2,000. If a qualifying individual were to receive third party funds, such as a bequest from a relative or life insurance proceeds, these monies could disqualify the recipient from their benefits.  A special needs trust is set up to provide supplemental care over and above what the government provides and is authorized to hold non-countable assets; thus, providing the disabled individual with a means to receive unlimited amounts of assets, while preserving their benefits.

To enable

A special needs trust is not only meant to maintain benefits eligibility, but to also enable the individual to enjoy new experiences, provide opportunities for a fulfilled and happy life, and to enhance their quality of life.  A special needs trust can act on a sliding scale, providing for needs where governmental benefits don’t and can be used to fund additional services such as recreational and vocational activities, hobbies, travel, communication equipment, a pet or service animal, or domestic and personal assistants.

To protect

Even if qualifying for governmental benefits is not a concern for your disabled loved one, a special needs trust can provide protection of funds, which are not subject to creditors or seizure if your beneficiary should ever be sued.  Spendthrift trusts or family trusts are not appropriate for disabled beneficiaries because they do not address the specific “special needs” of the individual or their future lifestyle. 

Similarly, a special needs trust guarantees that the funds will be held and used only for the benefit of the special needs beneficiary.  If funds were left outright to a sibling or guardian to be used to take care of the individual, the assets are again at risk in the event the non-disabled fund holders become subject to liabilities or judgments such as automobile accidents, bankruptcy or divorce.  Also, proper use of the funds would be difficult to ensure and legal action is challenging with an informal relationship; whereas, trustees are legally obligated to follow the terms of the trust document and action cannot be taken against them as can be a trustee.

Who can set up a special needs trust?

Anyone can set up a special needs trust for the benefit of a disabled individual; they do not have to be a relative. Likewise, anyone can contribute to a special needs trust and there is no limit to the number of trusts that can be created for a beneficiary.

How should the trust be funded?

A special needs trust is a legal, “stand alone” document that will be signed and notarized.  Once you receive a tax ID number for trust, you can open a bank account with a minimal deposit.  Additional property can be put into the trust will you are alive, or can be funded at your death through a will, living trust or beneficiary designation.

Most commonly, a special needs trust is funded with a second-to-die life insurance policy, but it can hold virtually any type of property, including stocks, real estate, collectibles, or a business interest.  The primary purpose of the trust is to supplement the beneficiary’s governmental benefits, so funding the trust with liquid assets makes the most sence.  However, the trustee typically has the authority to sell property in the trust to raise cash.

Please contact us for more information on special needs trusts.