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As we enter the summer of 2012, few people are concerned with year-end matters. However, when the ball drops on New Year’s Eve, there is a scheduled increase in income tax rates nonetheless. As a result, now may be a great time to “Roth” IRAs.
Roth IRA Conversion
A Roth IRA is similar to a traditional IRA in that the assets in the IRA build without income taxation. However, there are a few features that are different from a traditional IRA. There is no income tax deduction upon contribution to a Roth IRA. So, why would one want to invest in a Roth IRA? Neither the assets, nor the growth of the assets, are subject to income taxation upon withdrawal.
While there are income limitations upon contributions to a Roth IRA, there is no income limitation for conversions from a traditional IRA to a Roth IRA. Thus, for those with significant traditional IRAs or with the ability to rollover a qualified plan to a traditional IRA, they could create a large Roth IRA by converting their existing plan.
Income Tax Timing
With income tax rates scheduled to increase next year, now may be the best time in the foreseeable future to convert. The converted amount would be subject to income taxation at this year’s lower income tax rates.
In future years, when distributions are taken, not only will they avoid the income tax hike occurring next year, they will not be taxed at all.
No Estate Tax on Income Tax
This is also a good estate planning tool. Because they are income tax-free, Roth IRAs are particularly potent assets to leave to beneficiaries. Essentially, it is like being able to set aside money today to pay the beneficiary’s income tax later. However, it’s even better. The income tax which was paid in the conversion process is removed from the estate.
Thus, the Roth IRA conversion process has reduced estate tax concerns by pre-paying income tax and thus shrinking the size of the taxable estate.
Summary
As we’ve seen, converting a traditional IRA to a Roth IRA in 2012 may make a great deal of sense for Income Tax and Estate Tax reasons. Throughout the rest of 2012, I’ll keep you current on ways to take advantage of the ever-narrowing opportunity available before “Taxmageddon” at the end of this year.
Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com
I just saw an interesting conversation take place between members. What are your answers to these questions—please share!
I have always followed the recommendation to never let the person who prepares the checks for accounts payable, sign the checks. Additionally, I have always been told to never let them reconcile the bank statements or any credit card statements.
Unfortunately, the person reconciling the statements is me, and I no longer want to continue doing so. Therefore, I wonder how the rest of you handle this issue. The questions below assume that someone other than you prepared the checks. More specifically:
- Who signs your A/P checks? Staff? CPA? Third party bookkeeper? What is the cost of same if the signer is other than staff?
- What checks, if any, can a staff member sign?
- If a staff member can sign a check, is there a limit on the size of the check to be issued?
- Who reconciles the bank statements? Is it the same person that paid the A/P?
- Who reconciles the credit card statements? Is it the same person that paid the statement?
- Do you have your CPA perform the reconciliation process? If so, what is your usual monthly cost for same?
- Do you use an outside third party to perform the reconciliation process? If so, what is your usual monthly cost for same?
- Other thoughts and/or suggestions on the matter?
If you’re interested in an Academy Report on the Financial Benchmarks of a Successful Estate Planning Practice, email info@aaepa.com and request that we send you this free report.
Jennifer Price
Director, Member Services, Marketing & Recruiting
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com
Seriously, who knows what a Hashmark is? If you know, stop reading, and hit the like button for me on Facebook or leave a comment in the blog.
My doctor is a female doctor about 33 years old, and she has no idea what a 52 year old woman needs…Yet I stick with her. Why? She cares. She knows who I am when I come in. She knows my history. She asks about it. In a conversation about my issues a couple of years ago, she mentioned she’d had a baby since we last saw each other. She’s a proud, happy mom sharing something about herself in the routine conversation during my appointment.
Then she disappeared, and she’s on an extended leave… A year later I asked her staff what exactly her leave was tied to and found that it was because the baby she is so in love with has special needs and, for the past couple of years, took a priority over her career. I actually care about her, and I even worried about her a little.
I hadn’t quite earned one Hashmark in the Marine Corps a lifetime ago, but I look at this doctor with her compassion and her ability to relate to people, combined with her relative inexperience in the medical field, and I can’t wait until she has a couple of Hashmarks under her belt. She cares about the people she works with, but she’s too young to identify with what they need. When she earns a couple of Hashmarks, she’s going to be a priceless physician. In the meantime, I’d rather stick with her than go to some cerebral, smart/know-it-all doctor who can’t hear me. While she doesn’t have all the experience that she will have, she has the ability to listen and she sees the importance of relating and learning.
What kind of doctor are you in your law practice? Do you use the Hashmarks you’ve earned or are you hiding out behind all the degrees that define you?
Connect with people. Don’t lecture. Don’t pretend that you know it all. Be real. Show people that you’re willing to learn about what they are experiencing. Be that attorney. It’s got to be easy to be the A student. As lawyers, you’ve probably spent your entire life being an A student. Sometimes an A student can miss out on relationships. They get A’s in the concepts of things but not in the real-life things. Anyone can spout accurate tidbits of data – all they need these days is Google. Who connects? Who applies 4 Hashmarks of experience in “how life actually applies to what you know” to what they hear clients telling them?
By the way… “Hashmark [noun] an insignia worn to indicate years of service.” In the Marine Corps, each Hashmark represents 4 years of service and a LOT of experience.
Jennifer Price
Director, Member Services, Marketing & Recruiting
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com
The Grantor Retained Annuity Trust or “GRAT” is a great vehicle which may be used to transfer a great deal of value for little or no estate, gift, or generation-skipping “cost.” Thanks to some Wal-Mart heirs’ shrewd planning, this even works if the GRAT is “zeroed-out.”
Let’s take a closer look. A GRAT is a trust in which the grantor retains a right to a stream of annuity payments for a term of years. During that term, the grantor gets these payments and whatever remains goes to the remainder beneficiaries. It might go to those beneficiaries outright or in trust.
For example, the grantor could contribute $1 million into a GRAT in June 2012. The 7520 rate in that month will be an exceptionally low 1.2%. That is the rate the IRS will assume that the assets will return. Based on that, if the annual payments to the grantor were $106,718 for ten years, then the actuarial value of the remainder interest would be zero. Thus, it would be a “zeroed-out” GRAT.
Let say that the assets are invested in the stock market and earn a 2% dividend yield and a 7.5% growth in assets. At the end of the term, after making the tenth and final payment of $106,718 to the grantor, there would still be money left in the trust. In fact, based on these assumptions, there would be $828,724 left in the trust. The phenomenal thing is that these assets would go down to the beneficiaries without any transfer tax of any kind.
During the term of the GRAT, it is a grantor trust for income tax purposes. In other words, the income from the trust, the 2% dividend in our example, is taxed directly to the grantor. So, the trust is not diminished by this income taxation. If desired the beneficiaries could be left the remainder in a continuing grantor trust. Thus, the $828,724 could continue to grow tax-free for the beneficiaries.
How is this possible? It’s not in an IRA or ERISA plan. The assets would grow tax-free because the grantor would be paying the tax from his or her own assets, freeing the remainder assets from that burden.
The GRAT is such a great strategy, it has been targeted by the Administration for limiting legislation. The Administration would like to require a 10% minimum value to the remainder interest, as well as other restrictions, including a 10-year minimum GRAT term.
Right now, clients are awash in today’s $5.12 million of applicable exclusion. But, come New Year’s, clients will be much more concerned with conserving their comparatively paltry $1 million applicable exclusion. This will make the GRAT the strategy du jour in 2013. Start learning about it now!
Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com
Embalming is one of the “ickier” aspects of funerals that keep people from considering funeral planning in advance. That’s a shame, because no state laws require embalming. It comes down to the question of viewing.
Embalming was first utilized broadly in the United States during the Civil War. Back then, surgeon-embalmers utilized chemical compounds, including mercury and arsenic, to preserve soldiers’ bodies long enough to ship them from the battlefield to their hometowns.
Embalming involves draining the blood and replacing it with a chemical solution that includes formaldehyde and other toxic fluids that sanitize microbes in the body. This retards, but does not stop, the process of decomposition.
Most funeral directors require embalming if the body will be put on display for viewing. It’s a misconception that this absolutely must be done. Federal Trade Commission’s Funeral Rule of 1984 dictates disclosure that embalming is not required.
Refrigeration will suffice if the viewing is just for the immediate family and for 30 minutes or less. Refrigeration can adequately preserve a body for up to four days before burial.
Both Jews and Muslims traditionally avoid embalming and bury the body within 24 hours. This practice originates in a hot desert culture before the advent of refrigeration. Without cooling, a body starts to decompose within the first 24 hours after death.
Many funeral homes have refrigeration units, especially those that offer Jewish funerals. Mortuaries that offer green burial are also likely to have refrigeration units.
The judicious use of dry ice is another option to keep a body refrigerated at a funeral home, during ground transportation, or in a private home. Care must be taken to provide plenty of fresh air in the room. Dry ice is a solid form of carbon dioxide, and without adequate ventilation it can cause asphyxiation as the dry ice evaporates.
Don’t let the fear of embalming keep your clients from this important aspect of planning. Funeral planning before there’s a death helps the family save money, avoid stress at a time of grief, and allows time to create a meaningful, memorable “good goodbye.”
Gail Rubin is a Certified Celebrant who brings light to a dark subject and helps get funeral planning conversations started. Her book, A Good Goodbye: Funeral Planning for Those Who Don’t Plan to Die, has won multiple awards. Learn more at www.AGoodGoodbye.com. Gail is an ongoing contributor to the Academy blog. Contact: 505-265-7215 or email Gail@AGoodGoodbye.com.
Academy Guest Blogger
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com
Williamsburg, home of William and Mary… and amazing golf courses. Kings Mill and The Golden Horseshoe courses got the same rave reviews as the Academy Summit did!
When 125 elder law and estate planning law firms get together each Spring, the energy is difficult to describe. With Academy members from all over the country catching up with attorneys they consider close friends – the conversation in the hallway is exciting.
On Thursday, the Summit opened with announcements about new training available for Elder Law. Looking at Elder Law or Medicaid services as a slice of the estate planning that should be discussed with clients – rather than a separate service, was a wonderful conversation.
Friday delivered “Success Stories” from around the country ranging from how Steve Mendel’s firm in Houston went from 49 fans on Facebook to 1,332 fans in the past 6 months all the way to how Brad Anderson’s Reno law firm treats the 550 clients that subscribe to his estate planning maintenance program. We also spent lunch that day with the law firms who submitted their financials for 2011 and discussed the benchmarks and some statistics we see in the areas of marketing expenses, staffing costs and revenue in specific areas across the country. It’s exciting to see the growth of so many firms over the years!
Saturday the Sudden Death or Disability session was a hit along with a number of other substantive topics… ending the day with a wonderful roundtable of about 8 or 9 members discussing how they handle Elder Law cases in their practice. The Sunday sessions featured a guest speaker on the topic of Elder Law Abuse as well as the topic of Do Over – Reforming Trusts: Decanting, Reformation, and Other Ways to Modify the Irrevocable.
The social event was something out of a MOVIE on the beautiful grounds of the Colonial Inn and Lodge (my favorite that evening was the conversation and of course the Virginia ham and pecan pie).
This behind us leaves us happily exhausted and back at the office starting to layout our next big event which is in San Diego on October 4th through the 7th. Feel free to mark your calendars now if you missed this event!
Jennifer Price
Director, Member Services, Marketing & Recruiting
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com
Mark Zuckerberg and Dustin Moskovitz have come a long way since 2004, when they started Facebook in their Harvard dorm room. Zuckerberg is currently CEO of Facebook, while Moskovitz left the company in 2008. Both hold substantial shares of Facebook stock, and are among the wealthiest people in the world.
As you have no doubt heard, Facebook is poised to go public. TechCrunch has reported the company is looking at a May 17 IPO date, with an anticipated value of $100 billion.
By all indications, Zuckerberg and Moskovitz have carefully planned for the coming increase in their already substantial net worth. According to Forbes magazine, back in 2008 they made an extraordinarily smart move – particularly for a couple of unmarried twenty-something guys with no kids. They each transferred a sizable portion of their Facebook stock into a Grantor Retained Annuity Trust (GRAT).
A GRAT is an irrevocable trust that, when well-planned, can be a valuable gift tax savings tool.
The grantor transfers assets – in this case stock that is anticipated to appreciate quickly and significantly – into the trust for a predetermined term of years. Normally, the term of the GRAT is between two and fifteen years. During this term, the grantor receives an income stream, or annuity, from the trust. At the end of the trust term, any assets remaining in the trust go to named beneficiaries. If the value of the retained annuity is sufficiently high, the value of the remainder interest can be zero. The remainder assets are transferred at the end of the term free of gift tax. Often, these remainder beneficiaries are the grantor’s children. Since the Facebook founders are childless, it’s more likely that each of them named a trust as the beneficiary of his GRAT.
The twofold trick to successful GRAT planning is:
- Choosing the right trust term. If the grantor dies before the trust expires, the trust fails and the assets are included in the grantor’s estate for estate tax purposes. Mark Zuckerberg and Dustin Moskovitz are both 27 years old, so chances are this is not much of a concern.
- Using the right assets. With a “zeroed-out” GRAT, the grantor’s annuity is equal to the value of the assets transferred to the trust, plus an interest rate assigned by the IRS, known as the Section 7520 rate. When the grantor is projected to regain his initial transfer plus interest, there is no gift tax on the transaction. This is known as a “zeroed-out GRAT”, and it’s what the Facebook founders did. The key to this strategy is funding the trust with assets whose growth is anticipated to outpace the Section 7520 rate during the term of the trust. This way, there are (hopefully significant) assets left over for the remainder beneficiaries, allowing the grantor to transfer wealth and take advantage of the gift tax savings.
According to Forbes magazine’s estimates, the Facebook founders’ GRAT assets are not just poised to appreciate, they’re set to explode. Forbes had its expert crunch the numbers and he came up with these conservative estimates:
|
Zuckerberg |
Moskovitz |
| Transfer to GRAT |
$3,023,128
(3,642,323 shares) |
$11,955,748
(14,404,516 shares) |
| Tax-Free Remainder |
$37,315,513 |
$147,573,190 |
If you have clients who could benefit from a GRAT, now might be the time to get them into your office for a discussion. Not only are section 7520 rates favorably low, but the opportunity to use zeroed-out GRATs might be short-lived. President Obama’s proposed 2013 budget would do away with this planning strategy altogether.
Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com
I recently returned from the Academy’s semi-annual Summit in Williamsburg, VA. As always, it was wonderful to reunite with the Academy members. This cohesive group has a great deal of camaraderie and energy, and I always look forward to going.
I have been attending these Summits for 15 years. What I find striking each time is just how much a relationship can develop in short spurts over a long period. I see these folks for a few days at a time, twice a year. We catch up on changes in their firms and changes in their personal lives. It’s similar to the relationship with an old friend or with out-of-town extended family. We’re not in each other’s lives on a daily basis, but it’s great to come together, catch up and reconnect.
It’s like this with your estate planning clients, too. This is why, I think, the Academy is stressing to its estate planning firms the importance of having an annual client maintenance program and helping firms establish them. (For those of you not familiar with this term, a “maintenance program” is a set of annual client services delivered to the client for a set annual fee. It often includes basic document updates and client education/appreciation programs, among other offerings.)
Yes, the obvious goals of a client maintenance program are to help clients keep their estate plans up-to-date, and to add some extra income to the bottom line in the short term. But even more fundamentally, the goal is to nurture the ongoing relationship between the attorney and the client.
A maintenance program creates the structure that allows firms to reconnect with clients at least annually, and to do so efficiently. You and your clients can see each other in the flesh once a year (or at least offer them the opportunity to see you); clients learn something useful and maybe even have fun at your annual client education or client appreciation day. Some years, you may empathize with them over a death or illness that results in the need to make a change in their estate plan; other times, your staff may answer a quick question that puts a client’s mind at ease.
These brief but periodic contacts make clients feel connected to you, and you to them.
A maintenance program helps firms achieve that holy grail of estate planning — the long-term client relationship — where the client considers you an ongoing trusted advisor. You become someone clients think to turn to in a time of new need, new financial opportunity, or family crisis.
Why? Clients feel that they can easily pick up where they left off with you last. Reaching out to your firm poses a smaller psychological barrier and takes less emotional work for them, because they don’t feel that they’re recreating the relationship from scratch.
Does it take some work to create a maintenance program? Sure. But maybe not even as much as you think. And, there are also tools and systems that can help you do it.
Randi J. Siegel, MBA, is the President of DocuBank (docubank.com), the largest advance directives registry in the U.S., which ensures that the emergency information and healthcare directives of its 190,000 enrollees are immediately available 24/7/365. Working with estate planning professionals since 1997, Randi frequently speaks at national estate planning conferences and has appeared on radio and television as an authority on registries. She is active in health policy and health education related to advance care planning and advance directives and serves as Pennsylvania liaison to the National Healthcare Decisions Day initiative. Randi is an ongoing contributor to the Academy blog.
Academy Guest Blogger
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com
I was the final speaker at the Academy’s Spring Summit event in Williamsburg, VA, which ended a few days ago. The speaker immediately preceding me was Dana Fitzsimons, who gave a great talk on Elder Abuse.
Elder abuse can take many forms:
Whatever form abuse takes, there are a few things we know about it:
- It is prevalent. Elder abuse is underreported, but the U.S. Administration on Aging believes that nearly two million older Americans are abused each year.
- It crosses racial and socioeconomic borders. Wealth, and even fame, does not provide immunity from abuse. Consider the cases of Mickey Rooney and Brooke Astor.
- Most elder abuse is perpetrated by caregivers – often these caregivers are family members.
As estate planning and elder law attorneys, we are in a unique position to be able to identify and help abuse victims. Not only do we encounter aging clients and their families on a regular basis, we’re often privy to sensitive, personal information. So, we need to be prepared in case we suspect an instance of abuse.
The first order of business is to know the signs of elder abuse. Considering our line of work, we should be particularly alert to the signs of financial exploitation. Perhaps the bigger issue, though, is what to do if you suspect abuse.
First, talk to the older person when you are alone with them to gather more information about what is actually going on. Be aware, though, that victims of abuse are rarely eager to identify themselves as victims.
Second, familiarize yourself with your community’s resources, and take steps to get help for the victim:
- Contact your state “Adult Protective Services” (or similar agency), your local police department, and/or another local agency tasked with investigating allegations of abuse.
- Find out how your local courts address elder abuse cases, and whether there are specific programs or services available. Seek a temporary protective order on behalf of the victim.
- Consult the ElderCare Locator (1-800-677-1116) to find out about local counseling, support, and other services.
Have you encountered victims of elder abuse in your practice? If so, what have you done about it?
Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com
In recent years, uncertainty has been the name of the game when it comes to tax planning. This year is no different.
The Bush tax cuts are set to expire on December 31, which means that absent intervention by Congress:
- Tax rates for ordinary taxable income will increase, with taxpayers in the highest bracket paying 39.6%
- The number of taxpayers subject to the Alternative Minimum Tax will expand significantly
- Maximum long-term capital gains rates will increase from 15% to 20%
- Stock dividends will be taxed as ordinary income, meaning a maximum rate of 39.6% rather than the current cap of 15%
- The estate and gift tax applicable exclusion, currently $5.12 million, is scheduled to reset to $1 million. The maximum estate and gift tax rate is scheduled to increase to 55%, with a 5% surcharge for estates that exceed $10 million.
There are several proposals pending that would soften the impact of all these tax changes. For example, President Obama has proposed a return to the $3.5 million estate tax applicable exclusion and top estate tax rate of 45% that were in effect in 2009. Other proposals would maintain the current $5 million or repeal estate taxes altogether.
But this is an election year. Therefore, Congress is unlikely to take any action until late November at the earliest.
With tax laws once again in limbo, clients can be even less eager than usual to commit to a plan – what is an estate planning attorney to do?
- Be sure to consider the impact of an applicable exclusion in flux. If you are giving the applicable exclusion to a bypass trust at the death of the first spouse, consider that it may be anywhere from $1 million up to the entire estate. If this is not what is intended, be sure to draft limits on the size of the bypass trust.
- Take advantage of today’s $5.12 million gift tax applicable exclusion. It may not be there next year.
- For a client with an even larger estate, take advantage of “zeroed-out” GRATs.
I’ll discuss “zeroed-out” GRATs and how they can be used successfully in my next blog.
Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com
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