Tis the Season . . .

December 31, 2013 is fast approaching and the deadline for making charitable gifts and receiving an income tax deduction is fast upon us. I often wonder who is giving and how much is being given. One source for such statistics is the National Philanthropic Trust.

Some of the numbers are encouraging, especially in light of the Recession of 2007 – 2009. The percentage of U.S. households which give to charity is 88%.  Charitable giving is up 3.9% which exceeds the consumer price index. Of total giving, the largest source is from individuals (73%), followed by foundations (14%), bequests (8%), and corporations (5%) [Yes, there are rounding errors—not my issue]. [Read more…]

Essential Health Benefits: Pablum for the Masses

I am having entirely too much fun with the Affordable Care Act. The next item I would like to review is the list of Essential Health Benefits. I have entitled the posting “Pablum for the Masses.”

Pablum is an entendre on several levels: it means bland or insipid, which this Act most certainly is. It is a bland soft cereal for infants, and our government is certainly treating its citizens as infants by the passage of the act. Finally, it may mean simplistic writing, speech, or conceptualization, and the act is simplistic to the point of absurdity. [Read more…]

Follow the Money

Wisdom counts and appearances can be deceiving! For decades the phrase “Follow the money” had been attributed to the character Deep Throat in Bob Woodward and Carl Bernstein’s book All The President’s Men. It had been reported that this phrase was whispered to reporter Bob Woodward by Deep Throat as a path to cut through the lies and deceptions, and to discover the truth about the Watergate scandal.

In 2012, the writers of the screenplay for All The President’s Men, Bob Woodward and William Goldman, admitted this phrase was not in the book and that it was never spoken by Deep Throat. Yet today “Follow the Money “continues to be misattributed to Deep Throat and the book.

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IDGT: The Multi-purpose Tool for an Integrated Financial Plan

In my previous post I provided a brief history of IDGTs, the applicable exclusion amount and the need for a trust to be the owner and beneficiary of a life insurance policy on the life of the grantor. The primary reason for trust ownership was to remove the death benefit from the taxable estate. However, as a result of American Taxpayer Relief Act (ATRA) of 2013, this reason was eliminated due to the applicable exclusion amount being raised to $5,250,000. An additional benefit of a properly drafted IDGT is asset protection for the trust corpus.

The trust may hold assets used to pay the insurance premiums on a life insurance policy, which insures the life of the grantor. This is one of the requirements necessary for a trust to be considered intentionally defective. A properly drafted IDGT allows the grantor access to the trust assets either through themselves or a non-donor spouse (spousal lifetime access). Having these assets inside of the IDGT trust provide asset protection for the beneficiaries and the grantor!

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Wrapping Up Loose Ends with an IDGT

This week I am finishing my review of the applications of an Intentionally Defective Grantor Trust (IDGT) in an integrated financial plan. The last application on my ‘punch list’ is the use of an IDGT with life insurance in financial planning. For decades an IDGT has been used to exclude the life insurance death benefit from the grantor/insured’s taxable estate. If an IDGT were the owner of a life insurance policy on the grantor, and all of the mandated formalities were observed, the proceeds of the insurance policy are not included in the grantor’s estate.

However, the use of an IDGT as the owner of a life insurance policy has fallen out of favor as a result of the American Taxpayer Relief Act (ATRA) which was signed into law on January 2, 2013. This new law makes permanent the changes enacted by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act which was enacted in December 2010. Some of the areas of tax law affected were federal estate taxes, gift taxes and generation skipping transfer taxes.

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Revocable Living Trusts – “All is fair in love and war”

The quote used in the title of this blog entry is often incorrectly attributed to William Shakespeare.  However, it is John Lyly, an English dramatist and writer who first coined the phrase. It means that in matters of war and love, there are ‘no holds barred,’ and that an individual should not be blamed for acting in their own interest. Their actions, no matter how deceitful or morally wrong, are justified as a means to an end.

“All is fair in love and war” is how I begin my conversations with clients regarding their estate planning. Family members, once amenable to one another become hostile antagonists. The system of probate court, established to protect the creditors and the heirs of an estate, becomes a party to an industry which preys upon individuals at their weakest moments.

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Pitfalls of Required Minimum Distributions

According to the Oxford English Dictionary a pitfall is a trap or a snare. Typically this trap is a pit flimsily covered or camouflaged. Another definition for pitfall is a hidden or not easily recognized danger or difficulty. Pitfall is the most appropriate word to describe the difficulty a taxpayer encounters when trying to navigate Required Minimum Distributions (RMD) and account types.

Almost everyone has heard about, or read the phrase, Required Minimum Distribution. The RMD is a requirement that taxpayers begin to take distributions from their retirement accounts. This is the government’s way of finally making you pay taxes on all those deferrals and the tax deferred growth in those accounts. The RMD is to begin no later than April 1 of the year after the taxpayer turns 70 and a half. So with that said: Are you beginning to see a pitfall?

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When it comes to Life Insurance and Property Settlements, Spouses Beware!

Not long ago, I received a question from an adviser. The adviser  had a client who routinely prepared her own tax returns. She had telephoned the adviser because she had received a Form 1099-R from Podunk Mutual Life Insurance Company. The Form 1099 included a gross distribution of $190,000, and the taxable amount was $147,000. The client said she had not received a check and was wondering why she had received a form 1099-R.

In 1976 her former husband purchased a whole life insurance policy with a death benefit of $145,000. He was the insured and the owner of the policy. Over the years, he borrowed against the life insurance policy for a variety of reasons. In 2001, the couple divorced. As a result of the property settlement, the former husband transferred ownership of the life insurance policy to her.

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The Right Perspective of the S Election

There are many questions circulating regarding the S election for a corporation. I always welcome the opportunity to put into writing the financial planning issues, which an S election creates. I also want to address the down side, too. Let’s begin with what an S corporation is: an S corporation is a corporation treated for tax purposes, as a pass-through entity. In a pass-through entity all items of income and expense “pass through” to the shareholder: this is the genesis of the problems in planning with an S corporation.

I do want to acknowledge that from a planning perspective, S corporations do fit in a limited set of facts and circumstances:  the need for a corporate veil to provide asset protection and the “pass through” of losses to the shareholder’s form 1040. Frankly, in 20 years no one has said to me, “I really need some pass-through losses on my 1040.”

Distributions, also called pass-through income, from an S corporation have been under IRS scrutiny for several years. Why is this? S corporation pass-through income enjoys an employment tax advantage. This advantage was created in Revenue Ruling 59-221, which held that a shareholder’s undistributed share of S corporation income is not treated as self-employment income.

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A Critical Question — A Surprising Answer

A question that I’m often asked, particularly by other advisors, has to do with retirement income analysis. People want to know if I will recommend a financial planning program for this area that is unbiased, objective, and not product-driven.

Before I answer, I want to offer an observation on software used in financial planning. No software is a ‘be all and end all’ for financial planners. The software used in financial planning is not yet at the place where an advisor is able to input the data, push go, and have the results displayed.

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