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A deferred annuity is one of several investment options you can choose from to fund your IRA. You might think that a deferred annuity isn't suitable as an investment option for an IRA, since both deferred annuities and IRAs generally provide for the deferral of income taxes on earnings until they're withdrawn. However, there are several reasons, aside from tax deferral, that may make a deferred annuity a sound funding choice for your IRA. Common features of IRAs and deferred annuitiesIRAs and deferred annuities share several common features. Both IRAs and deferred annuities:
Many deferred variable annuities offer a variety of investment options called subaccounts within which you can allocate your premium payments. A variable annuity's subaccount choices will be described in detail in the fund prospectus provided by the issuer. However, with the exception of the guaranteed* subaccount, you assume all the risk related to subaccount performance, and while you could experience positive growth in the subaccounts, it's also possible that the subaccounts will perform poorly and you may lose money, including principal. Nevertheless, many variable annuities allow you to reallocate among available subaccounts without cost or restriction. This feature provides you with investment flexibility, because each subaccount is typically based on a different investment strategy. But, the common features shared by deferred annuities and IRAs do not necessarily make them mutually exclusive. IncomeDeferred annuities offer the opportunity to annuitize the account, which involves exchanging the cash value of the deferred annuity for a stream of income payments that can last for the lifetimes of the contract owner and his or her spouse. That can help in retirement by providing a steady, reliable income. But converting your account to an income stream means you're generally locked into those payments unless the annuity provides a commuted benefit option allowing you to "cash out" the balance of your income payments. Another income option offered by some deferred annuities provides guaranteed* income payments without relinquishing the entire cash value of the annuity. The guaranteed* lifetime withdrawal benefit allows you to receive an annual income for the rest of your life without having to annuitize the annuity's entire cash value. Some deferred annuities offer a rider that provides you with a minimum income equal to no less than your premium payments less prior withdrawals. With this rider, you are assured of receiving minimum income payments based on the premiums you paid into your annuity, even if the annuity's accumulation value has dipped below your investment in the contract due to poor investment performance. Principal protectionDeferred annuities may offer protection of your principal. Fixed deferred annuities guarantee* your principal and a minimum rate of interest as declared in the contract when you buy the annuity. However, the interest rate the annuity pays may actually exceed the minimum rate and may last for a certain period of time, such as one year, after which the rate may change. Deferred variable annuities also may offer principal protection through riders attached to the basic annuity (annuity riders typically come with an additional cost). For example, a common annuity rider restores your annuity's accumulation value to the amount of your total premiums paid if, after a prescribed number of years, the accumulation value is less than the premiums you paid (excluding any withdrawals). Death benefitAnother benefit offered by some deferred annuities is a death benefit guaranteed* to equal at least your investment in the contract. Most annuity death benefits provide that if you die prior to converting your account to a stream of income payments (annuitization), your annuity beneficiaries will receive an amount equal to your investment in the contract (less any withdrawals you may have taken) or the accumulation value, whichever is greater. Why an annuity might not be a good ideaFees: Some deferred annuities charge mortality and expense fees in addition to other fees that may be greater than fees charged in other investments. Specifically, deferred annuities may charge fees for a death benefit, minimum income rider, and principal protection. Required minimum distributions: As an owner of a traditional IRA, you are required to take required minimum distributions (RMDs) beginning at age 70½. Deferred annuities outside of IRAs do not have this requirement. So buying an annuity within an IRA now adds the RMD requirement to the annuity. Surrender charges: Deferred annuities come with surrender charges, which charge a penalty for taking withdrawals from the annuity prior to maturity. These surrender charges may make deferred annuities less liquid than some other types of investments. However, many deferred annuities waive surrender charges for withdrawals up to a certain amount, such as 10% of the account value; for RMDs; for withdrawals based on a guaranteed* minimum withdrawal rider; and if the annuity is annuitized into a stream of payments. Tax deferral: Deferred annuities offer deferral of income taxes on gains and earnings of account values within the annuity. IRAs also offer tax deferral of gains and earnings. So, you are receiving no additional income tax benefit by investing in a deferred annuity through an IRA. Is an annuity right for you?Some deferred annuities afford benefits that may not be available in other types of investments, making annuities an option to consider for your IRA. However, most of these benefits come at a cost that can reduce your account value. Before funding your IRA with a deferred annuity, talk to your financial professional. You'll want to know:
If annuity benefits fit your financial plan, a deferred annuity may be a good option for your IRA. Note: Variable annuities are sold by prospectus. Variable annuities contain fees and charges including, but not limited to, mortality and expense risk charges, sales and surrender (early withdrawal) charges, administrative fees, and charges for optional benefits and riders. You should consider the investment objectives, risk, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the variable annuity, can be obtained from the insurance company issuing the variable annuity or from your financial professional. You should read the prospectus carefully before you invest. |
The window of opportunity for many tax-saving moves closes on December 31. So set aside some time to evaluate your tax situation now, while there's still time to affect your bottom line for the current tax year. With that in mind, here are 10 things to consider as the curtain closes on 2011.
1. Deferring income to 2012 means postponing taxes
Consider opportunities you might have to defer income to 2012. You might be able to delay a year-end bonus, for example. If you're able to push what would have been 2011 income into 2012, you may be able to put off paying income tax on the deferred dollars until next year.
2. Paying deductible expenses sooner may help you in 2011
Does it make sense for you to accelerate deductions into 2011? If you itemize deductions, it might help your 2011 bottom line to pay deductible expenses like medical costs, qualifying interest, and state and local taxes before the end of the year, instead of waiting until 2012.
3. Income tax rates to remain the same in 2012
The same six federal income tax rates that apply in 2011 will apply in 2012. So, depending upon your income, you'll fall into either the 10%, 15%, 25%, 28%, 33%, or 35% rate bracket. And, as in 2011, long-term capital gains and qualifying dividends will continue to be taxed at a maximum rate of 15% in 2012; and if you're in the 10% or 15% tax rate brackets, a special 0% tax rate will generally continue to apply.
4. Is AMT a factor?
If you're subject to the alternative minimum tax (AMT), special rules apply. For example, the AMT rules can effectively disallow a number of itemized deductions, making it a potentially significant consideration when it comes to year-end planning. You're more likely to be subject to AMT if you claim a large number of personal exemptions, deductible medical expenses, state and local taxes, and miscellaneous itemized deductions. If you've been subject to the AMT in the past, or think that you might be for 2011, you'll want to make sure that you understand how the AMT rules might affect you.
5. IRA and retirement plan contributions
Employer-sponsored retirement plans like 401(k) plans and traditional IRAs (if you qualify to make deductible contributions) present an opportunity to contribute funds on a pre-tax basis, reducing your 2011 taxable income. Contributions that you make to a Roth IRA (assuming you meet the income requirements) aren't deductible, so there's no tax benefit for 2011--they're still worth considering, though, because qualified distributions are free from federal income tax. The window to make 2011 contributions to your employer plan closes at the end of the year, but you can generally make 2011 contributions to your IRA up to April 17, 2012.
6. Special distribution requirements at age 70½
Once you reach age 70½, you're generally required to start taking required minimum distributions (RMDs) from any traditional IRAs or employer-sponsored retirement plans you own. It's important to make withdrawals by the date required--the end of the year for most individuals. The penalty is steep for failing to do so: 50% of the amount that should have been distributed. Barring additional legislation, 2011 will be the last year to take advantage of a popular provision allowing individuals age 70½ or older to make qualified charitable distributions of up to $100,000 from an IRA directly to a qualified charity (these charitable distributions are excluded from your income, and count toward satisfying any RMDs that you would otherwise have to take from your IRA for 2011).
7. Depreciation and expense limits to drop for business owners and the self-employed
If you're a small business owner or a self-employed individual, you're allowed a first-year depreciation deduction of 100% of the cost of qualifying property acquired and placed in service during 2011; this "bonus" first-year additional depreciation deduction will drop to 50% for property acquired and placed in service during 2012. For 2011, the maximum amount that can be expensed under IRC Section 179 is $500,000, but in 2012 the limit will drop to $139,000.
8. Last chance to deduct energy-efficient home improvements
This is the last year you'll be able to claim a credit for energy-efficient improvements you make to your home (up to 10% of the cost of qualifying property). Improvements can include a qualifying roof, windows, skylights, exterior doors, and insulation materials. Specific credit amounts may also be available for the purchase of energy-efficient furnaces and hot water boilers. However, there's a lifetime credit cap of $500 ($200 for windows). So, if you've claimed the credit in the past--in one or more years since 2005--you're only entitled to the difference between the current cap and the amount you've claimed in the past.
9. Other expiring provisions
Barring additional legislation, this is the last year that you'll be able to elect to deduct state and local general sales tax in lieu of state and local income tax, if you itemize deductions. This also will be the last year for both the above-the-line deduction for qualified higher education expenses, and the above-the-line deduction for up to $250 of out-of-pocket classroom expenses paid by education professionals.
10. Get help
Making effective year-end moves requires a solid understanding of the rules that are in effect for both 2011 and 2012. It also requires a comprehensive grasp of your overall financial situation. A financial professional can help you evaluate potential opportunities, and can keep you apprised of any last-minute legislative changes.
If you have any questions, please call me at 502.657.6428|
What is incapacity? Simply stated, incapacity (sometimes referred to as incompetency) means that you are either mentally or physically unable to take care of yourself or your day-to-day affairs. More accurately, incapacity means the inability to properly care for one's property or person or to make or communicate rational decisions concerning one's person. Generally, incapacity can result from serious physical injury, mental or physical illness, mental retardation, advancing age, and alcohol or drug abuse. The following examples should help illustrate incapacity: Example(s): Example 1: Sue, age 40, has been in a car accident. She has received serious head injuries and will probably be in a coma for the rest of her life. Example 2: Ken, age 58, was diagnosed with cancer a year ago. His chemotherapy and radiation treatments worked for awhile, but now his cancer is slowly spreading and he's unable to get out of his hospital bed. The pain medicine he's taking keeps him asleep most of the time, but even when he's awake, he doesn't know what day it is. Example 3: Jane just turned 91 years old. She's in a nursing home and can get around only in a wheelchair. She has been diagnosed with Alzheimer's, does not know any family members when they come to visit, and cannot care for herself. Technical Note: An incapacitated or incompetent person is also called a ward, usually in the context of a court proceeding to establish guardianship or conservatorship. Tip: Protective services exist for persons with diminished capacity (someone who needs only some help, such as an elderly person). The social services office in your state can help you locate someone whose responsibilities are tailored to the person's needs (such as home day care or chore services). Your state's social services office should be listed in your phone book. Why should you care? You need to be concerned about incapacity because in today's modern age of medical miracles, it is a very real possibility that incapacity may strike you or your spouse. Medical science has increased your life expectancy and consequently increased your chances of becoming physically or mentally incapable of managing your medical or financial affairs. A devastating illness or serious accident can happen suddenly at any age. Old age can bring senility, Alzheimer's disease, or other ailments that affect your ability to make sound decisions. You may not be able to make decisions about your health, pay your bills, write checks, make deposits, sell assets, or otherwise conduct your business. This can prolong your life against your wishes, devastate your family, create debt, exhaust your savings, or undermine your financial, tax, and estate planning strategies. Unless you have authorized someone to carry on your affairs, a relative or friend will have to resort to a drastic measure--asking the court to appoint a guardian. This public procedure can be embarrassing, emotionally draining, time-consuming, and expensive. By planning in advance for incapacity, you select the person you trust to make decisions for you and keep the courts out of it. How is incapacity determined? Incapacity is determined in one of the following ways. Physician certification By including a provision in a durable power of attorney, you can designate a physician (or physicians) who will determine whether you are incapacitated or not. You may also state that your incapacity will be determined by your attending physician at the relevant time, whomever that might be. Judicial finding The court may be petitioned for a determination as to whether you are incapacitated. The proper court in which to file varies from state to state, but it is generally the probate court. Who has standing to petition the court also varies from state to state. Generally, any interested person may file a petition (an interested person is defined by state law and, in practice, is usually your spouse, parent, or child). After a legal proceeding, called a hearing, where medical and other testimony is heard, a judge will decide whether you are incapacitated according to standards determined by your state's laws. Check with an attorney or the clerk of courts at the court nearest you to find out how to, and who may, file such a petition. Why do you need to plan for incapacity? Managing medical decisions Say that you become very ill and incapacitated and are unable to make your own medical care decisions. What will happen? Without someone authorized to make those decisions for you, your medical care providers are obligated to prolong your life, using artificial means if necessary. With today's modern technology, this means that physicians can sustain you and prolong your dying for days and weeks (if not months or even years!). Rather than experiencing a sudden death, you may die slowly over an extended period of time. If you were to fall into a coma, you could be kept alive for years. If you want to avoid the possibility of this happening to you, you must plan in advance. You need to understand and implement one of the devices that may be available to help you if you become unable to help yourself. Managing your property Who will manage your property if you become incapacitated and can no longer handle these responsibilities for yourself? If you have not planned ahead, the answer is either no one or a court-appointed guardian. If no one looks after your financial affairs while you can't, your property may be wasted, abused, or lost, and your family may suffer. A court-appointed guardian may offer some help, but this procedure is very difficult on you and your family. If you want to protect your property and avoid guardianship, you need to know about and implement at least one of the options you may have to protect your property against incapacity. |
Note: Private Letter Rulings are issued at the Taxpayers request. They are made public but anonymous. They are non-binding on other taxpayers, but are frequently used by tax professionals as guidance.
Dear * * *We have considered your ruling request dated June 1, 2010 requesting a ruling that the proposed sale of limited partnership interests qualifies for the estate administration exception to self-dealing as contained in section 4941 of the Internal Revenue Code ("Code"). FACTSYou are the estate of the Decedent. During Decedent's lifetime she established the Unitrust, a testamentary charitable lead unitrust. All but one of Decedent's heirs are trustees of the Unitrust. You have represented that Unitrust will be allowed a deduction under section 2055 of the Code with respect to the charitable interests. During her life and at the time of her death, Decedent was a beneficiary of her marital trust. The marital trust owned interests in four limited partnerships. Your executor proposes to cause the sale of such specific property interest owned by the Decedent's marital trust to each respective limited partnership at fair market value, and to pay the cash proceeds of those sales to the trustees of Unitrust. You have represented that the sale will be completed prior to your termination. The marital trust was created by the will of the Decedent's husband which made her the sole beneficiary and granted her a general power of appointment over the undistributed income and principal of this trust. She exercised that general power of appointment pursuant to her will to bequeath a percentage of the limited partnership interests to the trustees of Unitrust, subject to the terms of any buy-sell agreements with respect to the limited partnership interests (the "Buy-Sell Provisions"). Those percentage amounts are the amounts that have a fair market value equal to the bequeathed values stated in her will. The bequeathed values are fixed dollar amounts. Each partnership agreement includes the Buy-Sell Provisions which are triggered when a partner makes certain bequests of all or part of a partner's partnership interests to an organization described in section 501(c)(3) of the Code. The Buy-Sell Provisions then require your executor to sell the limited partnership interests and that the limited partnerships buy them, for cash or other partnership property. You have represented that the limited partnerships will pay one hundred percent of the purchase price in cash for your limited partnership interests. The amount of limited partnership interests sold is the percentage amounts which have fair market values equal to the bequeathed values. Fair market value is determined by an independent appraiser selected by the executor. The manager of each limited partnership may also select an independent appraiser. If the two appraisers cannot agree they select a third appraiser and fair market value is determined by a majority vote. The Buy-Sell Provisions also include a positive/negative adjustor should a court of competent jurisdiction or U.S. administrative agency make final determination for Federal tax purposes that the fair market value was different than that determined by the appraiser(s). You have represented that the Buy-Sell Provisions in conjunction with the will require your executor to sell the limited partner interests. Unitrust and each beneficiary have consented to the sales and distribution of the cash proceeds to Unitrust. The state probate court with jurisdiction over you issued an order admitting the will and appointing your executor as an independent executor pursuant to the will. The same court has jurisdiction over Unitrust. State statute limits the power of the court to require pre-approval of acts of the independent executor except as expressly authorized by the statute. The statute requires filing of inventory, appraisement, and list of claims, but does not require court pre-approval to the sale of limited partnership interests. The statute does not limit the beneficiaries' right to obtain ex ante court rulings on acts of an independent executor. Thus, Unitrust has obtained a ruling from the state probate court with jurisdiction over it recognizing that the Buy-Sell Provisions of the will require the executor of the estate to sell the limited partnership interests to the limited partnerships, and approving the transaction. RULINGS REQUESTEDThat the proposed sales of limited partnership interests by the executor to the limited partnerships qualify for the estate administration exception in section 53.4941(d)-1(b)(3) of the regulations and thus do not constitute acts of self-dealing within the meaning of section 4941 of the Code. LAWSection 501(c)(3) of the Code exempts from federal income tax organizations organized and operated exclusively for exempt purposes.Section 507(d)(2)(A) of the Code defines substantial contributor to include and person who contributes or bequeaths an aggregate amount of more than $5,000 to a private foundation, if such amount is more than 2 percent of the total contributions and bequests received by the foundation before the close of the taxable year of the foundation in which the contribution or bequest is received by the foundation from such person. In the case of a trust, the term "substantial contributor" also means the creator of a trust. Section 4941(a)(1) of the Code provides for the imposition of tax on each act of self-dealing between a disqualified person and a private foundation.Section 4941(d)(1)(A) of the Code provides that the term "self-dealing" means any direct or indirect sale or exchange, or leasing of property between a private foundation and disqualified person. Section 4946(a)(1) of the Code defines the term "disqualified person" with respect to a private foundation to include a person who is: (A) a substantial contributor to the foundation; (B) a foundation manager; (C) an owner of more than 20 percent of any entity that is a substantial contributor to the foundation; or (D) a member of the family (defined in subsection (d) as spouse, ancestors, children, grandchildren, great grandchildren, and the spouses of children, grandchildren, and great grandchildren) of a substantial contributor or foundation manager; (F) a partnership in which persons described in subparagraph (A), (B), (C), or (D) own more than 35 percent of the profits interest. Section 4947(a)(2) of the Code provides that some chapter 42 Code sections including section 4941 (relating to taxes on self-dealing) shall be applied to trusts as if they were a private foundation if the trust is not exempt from tax under section 501(a) of the Code, not all of the unexpired interests in which are devoted to one or more of the purposes described in section 170(c)(2)(B) of the Code, and it has amounts in trust for which a deduction was allowed under section 2055 of the Code to the extent applicable to a trust described in this paragraph. Section 53.4941(d)-1(b)(3) of the regulations provides that the term "indirect self-dealing" shall not include a transaction with respect to a private foundation's interest or expectancy in property (whether or not encumbered) held by an estate (or revocable trust, including a trust which has become irrevocable on a grantor's death), regardless of when title to the property vests under local law, if- (i) The administrator or executor of an estate or trustee of a revocable trust either -(a) Possesses a power of sale with respect to the property,(b) Has the power to reallocate the property to another beneficiary, or (c) Is required to sell the property under the terms of any option subject to which the property was acquired by the estate (or revocable trust);(ii) Such transaction is approved by the probate court having jurisdiction over the estate (or by another court having jurisdiction over the estate (or trust) or over the private foundation); (iii) Such transaction occurs before the estate is considered terminated for Federal income tax purposes pursuant to paragraph (a) of Sec. 1.641(b)-3 of this chapter (or in the case of a revocable trust, before it is considered subject to section 4947); (iv) The estate (or trust) receives an amount which equals or exceeds the fair market value of the foundation's interest or expectancy in such property at the time of the transaction, taking into account the terms of any option subject to which the property was acquired by the estate (or trust); and, (v) With respect to transactions occurring after April 16, 1973, the transaction either-(a) Results in the foundation receiving an interest or expectancy at least as liquid as the one it gave up,(b) Results in the foundation receiving an asset related to the active carrying out of its exempt purposes, or (c) Is required under the terms of any option which is binding on the estate (or trust).In Estate of Bernard J. Reis v. Commissioner, 87 T.C. 1016 (1986), the tax court held that self-dealing with respect to property of an estate will also be regarded as self-dealing with respect to the assets of a private foundation that has a beneficial interest in the estate's property. ANALYSISAs a charitable lead unitrust under section 664(d) of the Code, Unitrust is a split interest trust described in section 4947(a)(2) and, therefore, subject to section 4941 which imposes an excise tax on each act of self-dealing. Section 4941(d)(1) provides that the term "self-dealing" includes an indirect sale or exchange of property between a private foundation and a disqualified person. Section 4946(a)(1) of the Code provides that the term "disqualified person" includes, with respect to a private foundation, a person who is a substantial contributor, a foundation manager, or a member of the family either of the above. Section 507(d)(2) defines a "substantial contributor" as one who, in the case of a trust, is the creator of the trust. The Decedent is a disqualified person with respect to Unitrust under section 507(d)(2)(A) because she is the creator and a substantial contributor. All of decedent's heirs are disqualified persons with respect to Unitrust under section 4946(a)(1)(D) because they are family members of a disqualified person. The limited partnerships are each a disqualified person with respect to Unitrust under section 4946(a)(1)(F) of the Code because the Decedent owned more than a * * * percent profits interest in each limited partnership. A partnership is a disqualified person within the meaning of section 4946(a)(1)(F) if a substantial contributor, foundation manager, or member of a family of a disqualified person owns more than * * * percent of the profits interest. All of the partnership interests of each limited partnerships are owned between the Decedent and the respective heir. Accordingly, under section 4946(a)(1)(F) each limited partnership is a disqualified person. The sales of the limited partnership interests are indirect acts of self dealing under section 4941(d)(1) of the Code unless an exclusion applies. Section 4941(d)(1) defines self-dealing to include any indirect sale of property between a private foundation and a disqualified person. In Estate of Bernard J. Reis the tax court held that where a private foundation has a beneficial interest in estate property and that estate sells that property to a disqualified person with respect to that private foundation, then such sale will be an act of indirect self-dealing unless an exclusion applies. The limited partnership interests are property of the estate because the will names Unitrust as a beneficiary and directs you to contribute the limited partnership interests to Unitrust subject to the Buy-Sell Provisions. This conditional bequest creates a beneficial interest in the limited partnership interests by Unitrust. Accordingly, any sale of the limited partnership interests by you to the limited partnerships is an act of indirect self-dealing between a private foundation. However, transactions during the administration of an estate regarding the private foundation's interest or expectancy in property held by such estate are not self-dealing if all five conditions set forth in section 53.4941(d)-1(b)(3) of the regulations are met. This exclusion to the self-dealing rules is commonly referred to as the "estate administration exception." The first requirement of the estate administration exclusion is section 53.4941(d)-1(b)(3)(i) of the regulations, which provides in part, that the administrator of an estate must (a) possess a power of sale with respect to the property; (b) have the power to reallocate the property to another beneficiary; or (c) be required to sell the property under the terms of any option subject to which the property was acquired by the estate. Generally, powers of sale are granted in a will or trust agreement. Here, the bequest of limited partnership interests to Unitrust in the will is expressly subject to the Buy-Sell Provisions which in turn provide for the sale of limited partnership interests. You have represented that the buy-Sell Agreements in conjunction with the will obligate your executor to sell the limited partnership interests to the partnerships. All beneficiaries, including Unitrust, have consented to the sales. Accordingly, your executor has a power of sale. The second requirement is that the transaction is approved by the probate court having jurisdiction over the estate or by another court having jurisdiction over the estate (or trust) or over the private foundation. See section 53.4941(d)-1(b)(3)(ii) of the regulations. You are an independent estate and your executor is an independent executor under state law. While court power to intervene sua sponte in acts of independent executors is limited by state statute to filing of inventory, appraisement, and list of claims, that statute does not limit the right of Unitrust seek the court approval required by section 53.4941(d)-1(b)(3)(ii) of the regulations. Thus, Unitrust obtained a court order decreeing that your executor is required by the will to sell the limited partnership interests, and approving the transaction. The third requirement, pursuant to section 53.4941(d)-1(b)(3)(iii) of the regulations, provides that such transaction occurs before the estate is considered terminated for Federal income tax purposes. Here, according to the facts you have represented that the transaction will occur before you are considered terminated for federal income tax purposes. Thus, the third condition has been met. The fourth requirement described in section 53.4941(d)-1(b)(3)(iv) of the regulations is that the estate receives an amount which equals or exceeds the fair market value of the foundation's interest or expectancy in such property at the time of the transaction, taking into account the terms of any option subject to which the property was acquired by the estate (or trust). This requirement is satisfied because (i) Unitrust will receive the bequeathed values in cash, (ii) its expectancy is in amounts of limited partnership interests with fair market values equal to the bequeathed values, and (iii) the fair market values will be determined by appraisal that is subject to a positive/negative adjustor should a court of competent jurisdiction or U.S. administrative agency make final determination for Federal tax purposes that the fair market value was different then that determined by the appraisal. We have not determined whether the methodology to be used to determine fair market value of the limited partnership interests is proper. Therefore, based solely on your representation we assume that the appraisal will reflect fair market value. The final requirement described in section 53.4941(d)-1(b)(3)(v) of the regulations is that the transaction either -- (a) results in the foundation receiving an interest or expectancy at least as liquid as the one it gave up, (b) results in the foundation receiving an asset related to the active carrying out of its exempt purposes, or (c) is required under the terms of any option which is binding on the estate. Unitrust will receive cash and give up an expectancy in limited partnership interests. Cash is more liquid than limited partnership interests, which satisfies section 53.4941(d)-1(b)(3)(v) of the regulations. RULINGThe proposed sales of the limited partnership interests by your executor to the limited partnerships do not constitute acts of self-dealing within the meaning of section 4941 of the Code.This ruling will be made available for public inspection under section 6110 of the Code after certain deletions of identifying information are made. For details, see enclosed Notice 437, Notice of Intention to Disclose. A copy of this ruling with deletions that we intend to make available for public inspection is attached to Notice 437. If you disagree with our proposed deletions, you should follow the instructions in Notice 437. This ruling is directed only to the organization that requested it. Section 6110(k)(3) of the Code provides that it may not be used or cited by others as precedent.This ruling is based on the facts as they were presented and on the understanding that there will be no material changes in these facts. This ruling does not address the applicability of any section of the Code or regulations to the facts submitted other than with respect to the sections described. Because it could help resolve questions concerning your federal income tax status, this ruling should be kept in your permanent records. If you have any questions about this ruling, please contact the person whose name and telephone number are shown in the heading of this letter.In accordance with the Power of Attorney currently on file with the Internal Revenue Service, we are sending a copy of this letter to your authorized representative. Sincerely,Theodore R. Lieber
Manager
Exempt Organizations
Technical Group 3If you have any questions, please e-mail me or schedule a call or appointment with my online system above. Thanks
Definition
Either Click on Schedule a Call or Schedule an appointment and I would be happy to discuss with you.
In return for your payment of premiums, a long-term care insurance (LTCI) policy will pay a selected dollar amount per day (for a set period of time) for your skilled, intermediate, or custodial care in nursing homes and, sometimes, in alternative care settings (such as home health care). The risk of contracting a chronic debilitating illness (and the resulting catastrophic medical bills incurred) is considered by many to be one type of risk best transferred to an insurance company through the purchase of (LTCI).
Prerequisites
· You recognize the potential need for long-term care, you wish to protect assets, and you can afford to pay the premiums
Key Strengths
· Subsidizes nursing home bills
· Allows you to preserve assets
· Allows you to maintain control over your assets
· Premiums may be tax deductible
Key Tradeoffs
· May be too expensive for people of modest means
· Risk is involved
· Not necessary if you'll qualify for Medicaid (however, Medicaid may not cover all nursing home costs)
Variations from State to State
· Check the laws of your state
How Is It Implemented?
· Compare policies and benefits, and check the financial security of the companies you're reviewing
· Review policy provisions carefully to ensure that it offers the features you require
Either Click on Schedule a Call or Schedule an appointment and I would be happy to discuss with you.
Plans to Implement CLASS Are Halted
No Way Found to Make Program Financially Self-Sustaining
The Obama administration has put an end to the Community Living Assistance Services and Supports (CLASS) program after failing to find a way to make the program financially self-sustaining. No Way Found to Make Program Financially Self-Sustaining
In a letter to Congress released last Friday, HHS Secretary Kathleen Sebelius wrote, "Despite our best analytical efforts, I do not see a viable path forward for CLASS implementation at this time."
HHS had been working on plan design options for 19 months, hoping to find a way to meet the health care law's requirement that CLASS be both actuarially sound and financially solvent for at least 75 years. Their failure to find a solution may have centered around projections that not enough young healthy people would sign up, creating a vicious cycle of higher and higher premiums and fewer and fewer healthier people willing to pay them.
Sebelius pledged to continue to pursue the goal of "making sure Americans can get the long-term care they need " by offering viable options for those "unable to access private long-term care insurance."
| The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Act) includes new gift, estate, and generation-skipping transfer (GST) tax provisions. The 2010 Tax Act provides that in 2011 and 2012, the gift and estate tax exemption is $5 million (indexed for inflation in 2012), the GST tax exemption is also $5 million (indexed for inflation in 2012), and the maximum rate for both taxes is 35%. New to estate tax law is gift and estate tax exemption portability: generally, any gift and estate tax exemption left unused by a deceased spouse can be transferred to the surviving spouse. The GST tax exemption, however, is not portable. These major changes are temporary: absent further legislation, in 2013, the exemptions are generally scheduled to drop to $1 million, the maximum rate will jump to 55%, and portability will be repealed. You should understand how these new and temporary rules may affect your estate plan. Exemption portabilityUnder prior law, the gift and estate tax exemption was effectively "use it or lose it." In order to fully utilize their respective exemptions, married couples often implemented a bypass plan: they divided assets between a marital trust and a credit shelter, or bypass, trust (this is often referred to as an A/B trust plan). Under the 2010 Tax Act, the estate of a deceased spouse can transfer to the surviving spouse any portion of the exemption it does not use (this portion is referred to as the deceased spousal unused exclusion amount, or DSUEA). The surviving spouse's exemption, then, is increased by the DSUEA, which the surviving spouse can use for lifetime gifts or transfers at death. Example: At the time of Henry's death in 2011, he had made $1 million in taxable gifts and had an estate of $2 million. The DSUEA available to his surviving spouse, Linda, is $2 million ($5 million - ($1 million + $2 million). This $2 million can be added to Linda's own exemption for a total of $7 million ($5 million + $2 million). The portability of the exemption coupled with an increase in the exemption amount to $5 million per taxpayer allows a married couple to pass on up to $10 million gift and estate tax free in 2011 and 2012. Though this seems to negate the usefulness of A/B trust planning, there are still many reasons to consider using A/B trusts.
A/B trust plans with formula clausesIf you currently have an A/B trust plan, it may no longer carry out your intended wishes because of the increased exemption amount. Many of these plans use a formula clause that transfers to the credit shelter trust an amount equal to the most that can pass free from estate tax, with the remainder passing to the marital trust for the benefit of the spouse. For example, say a spouse died in 2002 with an estate worth $5 million and an estate tax exemption of $1 million. The full exemption amount, or $1 million, would have been transferred to the credit shelter trust and $4 million would have passed to the marital trust. Under the same facts in 2011, since the exemption has increased, the entire $5 million estate will transfer to the credit shelter trust, to which the surviving spouse may have little or no access. Review your estate plan carefully with an estate planning professional to be sure your intentions will be carried out under the new laws. Wealth transfer strategies through giftingBecause of the larger exemptions and lower tax rates, 2011 and 2012 provide an unprecedented opportunity for gifting. By making gifts up to the exemption amount, you can significantly reduce the value of your estate without incurring gift tax. In addition, any future appreciation on the gifted assets will escape taxation. Assets with the most potential to increase in value, such as real estate (e.g., a vacation home), expensive art, furniture, jewelry, and closely held business interests, offer the best tax savings opportunity. Gifting may be done in several different forms. These include direct gifts to individuals, gifts made in trust (e.g., grantor retained annuity trusts and qualified personal residence trusts), and intra-family loans. Currently, you can also employ techniques that leverage the temporarily high exemptions to potentially provide an even greater tax benefit (for example, creating a family limited partnership may also provide valuation discounts for tax purposes). For high-net-worth married couples, gifting to an irrevocable life insurance trust (ILIT) designed as a dynasty trust can reduce estate size while providing a substantial gift for multiple generations (depending on how long a trust can last under the laws of your particular state). The value of the gift may be increased (leveraged) by the purchase of second-to-die life insurance within the trust. Further, the larger exemptions enable you to increase, gift tax free, the premiums paid for life insurance policies that are owned by the ILIT or other family members. Premium payments on such policies are taxable gifts, so these premium payments are often limited to avoid incurring gift tax. This in turn restricts the amount of life insurance that can be purchased. But the increased gift tax exclusion in 2011 and 2012 provides the opportunity to make significantly greater gifts of premium payments, which can be used to buy a larger life insurance policy. The increased exemption may also prove beneficial for same-sex couples whose estate planning is limited due to a lack of gift or estate tax marital deduction. At least for 2011 and 2012, assets of significant worth can be transferred between partners without gift tax consequences. Before implementing a gifting plan, however, there are a few issues you should consider.
Caution: The amount of gift tax exemption you used prior to 2011 will reduce the $5 million available to you under the 2010 Tax Act. For example, a person who used $1 million of his or her exemption prior to January 1, 2011, will be able to make additional gifts totaling $4 million during 2011 and 2012 free from gift tax. Tip: In addition to this limited opportunity to transfer a significant amount of wealth tax free, it's important to remember that you can still take advantage of the $13,000 per person per year annual gift tax exclusion for 2011 and 2012. Also, gifts of tuition payments and payment of medical expenses (if paid directly to the institutions) are still tax free and can be made at any time. |
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Introduction If you haven't done any asset protection planning, your wealth is vulnerable to potential future creditors and, should the worst happen, you could lose everything. Lawsuits, taxes, accidents, and other financial risks are facts of everyday life. And though you'd like to believe that you're safe, misfortune can befall even the most careful person. What can you do? First, identify your potential loss exposure, then implement strategies that are designed to help reduce that exposure without compromising your other estate and financial planning objectives. First, a word about fraudulent transfers Part of your overall asset protection plan might include repositioning assets to make it legally difficult for potential future creditors to reach them. This does not, however, extend to actions that hide assets or defraud creditors. If a court finds that your asset protection plans were made with the intent to defraud, it will disregard those plans and make the assets available to creditors. How can you avoid running afoul of the fraudulent transfer laws?
Where the dangers lie Unexpected liability can come from just about anywhere:
Asset protection techniques There are three basic asset protection techniques: insurance, statutory protection, and asset placement. None of these techniques is a complete solution by itself, but may make sense as one limited component of an asset protection plan. Insurance The simplest way to cope with risk is to shift the risk to an insurance company. This should be your first line of defense. Before you do anything else, review your existing coverage. Then consider purchasing or increasing coverage on your insurance policies as appropriate. You should be adequately insured against:
Statutory protection Creditors can't enforce a lien or judgment against property that is exempt under federal or state law. While exemption planning can't offer total protection, it can offer some shelter for certain assets. Both federal and state laws govern whether property is exempt or nonexempt in nonbankruptcy proceedings (separate federal and state laws govern whether property is exempt or nonexempt in bankruptcy proceedings). Generally, you can choose whether the federal exemption or the state exemption applies. When looking at exemption laws, be sure to find out how much of an exemption is allowed for a particular type of property--it may be completely exempt, or exempt only up to a certain amount or restricted in some way. Types of property often receiving an exemption include:
Tip: In those jurisdictions that recognize ownership by tenancy by the entirety (TBE), creditors of the husband or creditors of the wife cannot reach TBE assets. Asset placement Asset placement refers to transferring legal ownership of assets to other persons or entities, such as corporations, limited partnerships, and trusts. The basis for this technique is simple--creditors can't reach property that you do not own or control. Shifting assets to the spouse who is less exposed to claims If you have high exposure to potential liability because of your occupation or business, it may be advisable for you to shift assets to your spouse. Your spouse would retain the assets that are subject to the exposure as his or her separate property, and you would retain assets that enjoy statutory protection, such as the homestead, life insurance, and annuities, as separate property. Furthermore, the shifting of assets to a spouse or children may help accomplish other estate planning goals. Caution: To avoid complications in the event that your marriage ends in divorce, both you and your spouse should agree to the division of assets in writing. This is especially important in community property states. C corporations If you own a business and aren't already a C corporation, changing your business structure to a C corporation will make it a separate legal entity in the eyes of the law. As such, a C corporation owns the business assets and is responsible for all business debts. Thus, incorporating your business separates your business assets from your personal assets, so your personal assets will generally not be at risk for the acts of the business. Caution: The limited liability feature may be lost if, for example, the corporation acts in bad faith, fails to observe corporate formalities (e.g., organizational meetings), has its assets drained (e.g., unreasonably high salaries paid to shareholder-employees), is inadequately funded, or has its funds commingled with shareholders' funds. Caution: A number of issues should be considered when selecting a form of business entity, including tax considerations. Consult an attorney and tax professional. Limited liability companies (LLCs) and partnerships (LLPs and FLPs) An LLC is a hybrid of a general partnership and a C corporation. Like a partnership, income and tax liabilities pass through to the members, and the LLC is not double-taxed as a separate entity. And, like a C corporation, an LLC is considered a separate legal entity that can be used to own business assets and incur debt, protecting your personal assets from other nontax claims against the LLC. Professionals (e.g., doctors, lawyers, and accountants) face liability for damages that result from the performance of their professional duties. While no business structure will protect you from personal liability for your professional activities, an LLP will protect you from the professional mistakes of your partners. That is, if one of your partners is sued, and the LLP is also named in the lawsuit, any malpractice judgment is the personal liability of the partner who's been sued, but a business liability for you and the other partners. Your personal assets aren't at stake if your partner commits malpractice, although your investment in the business may still be at risk. An FLP is a limited liability partnership formed by family members only. At least one family member is a general partner; the others are limited partners. A creditor can't obtain a judgment against the FLP--it can only obtain a charging order. The charging order only allows the creditor to receive any income distributed by the general partner. It does not allow the creditor access to the assets of the FLP. Thus, a charging order is not an attractive remedy to most creditors. As a result, the limitation to seeking a charging order can often convince a creditor to settle on more reasonable terms than might otherwise be possible. Protective trusts in general A protective trust can protect both business and personal assets from most creditors' claims. A trust works because it splits ownership of trust assets; the trustee has equity ownership and the beneficiaries have beneficial ownership. Essentially, a protective trust works like this: Example(s): Harry would like to leave property to Wendy. However, Harry is afraid that his creditors might claim the property before he dies and that Wendy will receive none of it. Harry establishes a trust with both himself and Wendy as the beneficiaries. The trustee is instructed to allow Harry to receive income from the trust until Harry dies and then to distribute the remaining assets to Wendy. The trust assets are then safe from being claimed by Harry's creditors, so long as the debt was entered into after the trust's creation. Under these circumstances, any of Harry's creditors would be able to reach assets in the trust only to the extent of Harry's beneficial interest in the trust. Say that Harry's interest in the trust is a fixed income distribution each month in the amount of $1,000. Assuming Harry's creditors obtained a judgment, they would only be entitled to the $1,000 per month. Irrevocable trusts As the name implies, an irrevocable trust is a trust that you can't revoke or change. Once you have established the trust, you can't dissolve the trust, change the beneficiaries, remove assets from the trust, or change its terms. In short, you lose control of the assets once they become part of the trust. But, because the assets are out of your control, they're generally beyond the reach of creditors too. You may further protect those assets from your beneficiaries' creditors by using special language (known as a spendthrift clause) in the trust. Caution: Unlike an irrevocable trust, a revocable trust provides the assets in the trust with absolutely no legal protection from your creditors. Offshore (foreign) trusts It's possible to transfer assets to trusts that are formed in foreign countries (certain countries are preferred). While the laws of each country are different, they share one similarity--they make it more difficult for creditors to reach trust assets. Here's how it works: In order for a creditor to be able to reach assets held in a trust, a court must have jurisdiction over the trustee or the trust assets. Where the trust is properly established in a foreign country, obtaining jurisdiction over the trustee in a U.S. court action will not be possible. Thus, a U.S. court will be unable to exert any of its powers over the offshore trustee. So, the creditor must commence the suit in the offshore jurisdiction. The creditor can't use its U.S. attorney; it must use a local attorney. Typically, a local attorney will not take the case on a contingency fee basis. Therefore, if a creditor wants to pursue litigation in the offshore jurisdiction, it must be prepared to pay the foreign attorney up front. To make matters even less convenient, many jurisdictions require the creditor to post a bond or other surety to guarantee the payment of any costs that the court may impose against the creditor if it is unsuccessful. Taken as a whole, these obstacles have the general effect of deterring creditors from pursuing action. Domestic self-settled trusts The laws in Alaska, Delaware, and a few other states enable you to set up a self-settled trust. Alaska was the first state to enact such an anti-creditor trust act, and Delaware quickly followed. Hence, this type of trust is often called an Alaska/Delaware trust (sometimes also referred to as a domestic asset protection trust, or DAPT). A self-settled trust is a trust in which the person who creates the trust (the grantor) can name himself or herself as the primary beneficiary. These trusts give the trustee wide latitude to pay as much or as little of the trust assets to any or all of the eligible beneficiaries as the trustee deems appropriate. The key to this type of protective trust is that the trustee has the discretion to distribute or not distribute the trust property. Creditors can only reach property that the beneficiary has the legal right to receive. Therefore, the trust property will not be considered the beneficiary's property, and any creditors of the beneficiary will be unable to reach it. |
What is the Medicare open enrollment period?
The Medicare open enrollment period is the time during which people with Medicare can make new choices and pick plans that work best for them. Each year Medicare plans typically change what they cost and cover. In addition, your health-care needs may have changed over the past year. The open enrollment period is your opportunity to switch Medicare health and prescription drug plans to better suit your needs.
When does the open enrollment period start?
This year, the Medicare open enrollment period begins earlier than in prior years. Open enrollment starts on October 15 and runs through December 7 (previously, open enrollment ran from November 15 through December 31). Any changes made during open enrollment are effective as of January 1, 2012.
What should you do?
Now is a good time to review your current Medicare plan. There are some factors you may want to consider as part of that evaluation. For instance, are you satisfied with the coverage and level of care you're getting with your current plan? Are you able to see the medical professionals of your choice, or are you restricted as to the staff and facilities you're able to use?
Are your premium costs or out-of-pocket expenses too high? For example, Medicare Part B and Part D premiums can increase if your income exceeds a certain level. On the other hand, if you have a Medigap or Medicare Supplement plan, you may find that your out-of-pocket costs are increasing due to co-payments and deductibles. If you are enrolled in a Medicare Advantage or Part C plan, those benefits and costs may change as well.
Has your health changed, or do you anticipate needing medical care or treatment? Now is the time to determine if your current plan will cover your treatment and what your potential out-of-pocket costs may be. If your current plan doesn't meet your health-care needs or fit within your budget, you can switch to a plan that may work better for you.
Where can you get more information?
Determining what coverage you have now and comparing it to other Medicare plans can be confusing and complicated. Pay attention to notices you receive from Medicare and from your plan, and take advantage of help available by calling 1-800-MEDICARE or by visiting the Medicare website, www.medicare.gov.
If you have any questions, please do not hesitate to e-mail me at dkdowell@dkdcpa.com