Friday, August 26, 2005

Savings Bonds (Part 1) - Learning More about those Bonds

Category: Elder Law, Estate Planning, Tax Law and Planning, Probate and Estate Administration, Financial Planning

Many people have invested in saving bonds at one time or another, or another has done so for them. For the most part, they sit in a safe deposit box until cash is needed (or you remember that you have them). However, there may be a need to find out more about the bonds or liquidate them as part of estate planning, estate administration, or elder law, or just sound financial planning for yourself.

Savings bonds are investment in the US government. There are various types of bonds, that earn interest in different fashions, and have unique tax consequences. Luckily, there are some wonderful resources on the web to cut through all of this information.

The US Government provides a very informative website at that goes through the purchase and redemption of various government investments (T-Bills, T-Notes, T-Bonds, I Bonds, EE Bonds, HH Bonds) and explains the differences between the various investments.

There is a very useful toolbox a the website for determining the current and future value of your investment:

Have Your Treasury Securities Stopped Earning Interest?

Savings Bond Wizard

Savings Bond Calculator

Growth Calculator

Savings Planner

Tax Advantages Calculator

Another excellent site is This is a commercial site oriented to financial planning. It does have excellent step-by-step guides on bond redemption, including the practicalities of redemption and guidelines to the tax consequences.

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Thursday, August 25, 2005

Energy Tax Incentives Act of 2005 - Dollars to you? Tax Matters: What the New Energy Bill Means for You describes some generous new tax incentives for consumers.

"The best part: They all come in the form of tax credits, the very best kind of tax break. A credit lowers your federal income tax bill dollar for dollar. In contrast, a deduction lowers only the amount on which you're taxed, so your bill is reduced only by a percentage of the write-off. "

Some highlights from the Article:

Four New Tax Credits for Energy-Efficient Vehicles

Credit No. 1 for Hybrid Vehicles: Up to a maximum credit of $3,400.

Credit No. 2 for Lean-Burn Technology Vehicles: "Qualified "lean burn" vehicles are passenger cars and trucks with internal combustion engines that use a direct injection of a fuel mix with a higher-than-normal percentage of air." The credits are still unknown.

Credit No. 3 for Fuel-Cell Vehicles: "Qualified fuel-cell vehicles include, for example, cars that run on hydrogen cells." The credit amount can be as high as $12,000.

Credit No. 4 for Alternative-Fuel Vehicles: "Qualified alternative-fuel vehicles include cars and trucks that run solely on compressed or liquefied natural gas, liquefied petroleum gas, hydrogen, or any liquid that is at least 85% methanol...The maximum credit for garden-variety autos and light trucks is $4,000."

New Tax Credit for Residential Energy Improvements
"This personal tax credit has a $500 lifetime limit, but it's broad enough that many folks will benefit even though the numbers won't be very big."

New Tax Credit for Other Residential Energy Equipment
"You can also collect a completely separate personal tax credit equal to 30% of the cost of:

* Qualified solar water-heating equipment (maximum credit of $2,000).
* Qualified electricity generating solar photo-voltaic property (maximum credit of $2,000).
* Qualified fuel-cell property (maximum credit of $500 for each 0.5 kilowatt of capacity)."

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Wednesday, August 24, 2005

Married and Don't have a Will? New Jersey has one for you

Category: Estate Planning, Probate and Estate Administration

Surprise! If you don't make your own Will, the State of New Jersey has one for you. While this might seem like a generous thing, the question is whether the will that New Jersey made for you matches what you would like done with your assets.

Survived by Spouse, not survived by parents or descendents: 100% to Spouse.

Survived by Spouse, and survived by descendents of both spouses (ie: no step-children: 100% to Spouse.

Survived by Spouse and a parent, but no descendents: the first 25% of the estate (no less than $50,000 and no more than $200,000) PLUS 50% of the balance of the estate to Spouse; the remaining balance of the estate to parents.

Survived by Spouse and a descendant who is not also a descendant of the Spouse (i.e.: a stepchild): the first 25% of the estate (no less than $50,000 and no more than $200,000) PLUS 75% of the balance of the estate to Spouse; the remaining balance of the estate to children.

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Tuesday, August 23, 2005

The Value of an Inheritance? Preserve the Family History

Category: Elder Law, Estate Planning

This story from San Francisco reminds us that the memory of a loved one is not about the size of the bank account inherited, but the family history - Baby boomers value family history over inheritance: "[B]aby boomers say their parents' personal keepsakes, family stories and final instructions are more important than the oft-publicized trillions of dollars they're expected to inherit."

Those memories, stories, values and wishes can be easily lost. Why not take some steps today to preserve them?

  • Get those old family stories on tape. When I was a child, I had to "interview" my grandmother for a class project. On those tapes is her history, from her memories of when Queen Victoria died (1901), how she came over to Ellis Island, being an immigrant in America, and traveling home to Ireland to see the changes of her home country over nearly a century. Maybe this could be a project for the kids during the next family gathering - put that digital camcorders to use.

  • Identify who is in old family pictures. You may have inherited the dusty box of family photos. Many times the older generation can identify who is in them - knowledge that can be later lost. You can even copy them all to the computer and upload them to a family website to get everyone's comments as to who is who, and allow others to download copies.

  • Have a frank conversation about burial options. In the event of an unexpected death, the last thing you want to be doing is find out what a person "would have wanted". Discuss burial, cremation and what to do with the ashes. What kind of remembrance would the person want? One client wanted everyone to wear purple to the funeral as it was her favorite color.

  • Create a list of who gets what personal property. Many times one to the most contentious issues in an estate administration is who gets the jewelry, artwork, etc., and what happens to any personal items nobody wants. You may decide to let your kids duke it out among themselves. Or, you may want to create a list identifying items of special significance to go to friends and family members.

  • Appreciate what is being given to you. Many times children don't have an expectation of inheritance and downplay it ("I don't need or want your money", they say to their parents, "I just want you.") However, I have found in my practice that the older generation, who survived depression and are proud to still be independent and debt free, are equally proud to have something to give. So be gracious in your acceptance of gifts, and remember how much harder it was for them to create what it is they have given you then for you to create it yourself.

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Monday, August 22, 2005

Best Places To Die?

Category: Elder Law, Estate Planning

It is quite a tongue-in-cheek question, but is there a best place to die? Being that I practice in New Jersey and New York, which both have a state estate tax and state income tax, significant numbers of clients move to other jurisdictions (e.g. Florida) as they get older to avoid those taxes. However, I don't know of any that have really thought about quality of end-of-life issues as another point of consideration in where they settle down to spend their golden years. has prepared a list of "Best Places to Die", looking at health care and long term care quality. Looked at by reverse rankings, it is also a list of "Worst Places to Die" list.

Of the "Best Places to Die", Utah ranks number 1. New Jersey ranks 46 (ouch!) and New York ranks 30. Note that Florida only ranks 21, scoring high marks for legal protections granted to the elderly, and low marks for quality of health care.

The States are further sub-ranked by Quality of Health Care (New Hampshire scores number 1 here, New Jersey 43 and New York 24); Legal Protection (Delaware tops the list, with New Jersey getting a grade of "B" and New York a grade of "B+"); and Most Likely to Die in a Nursing Home (here Rhode Island gets the dubious honor of top grade with 45% of its residents with cancer likely to die in an institutional setting. New Jersey and New York both come in at 20%)

The premise of Best Places To Die - is: "In America, the way we die is largely determined by where we live. Geography dictates what kind of care is provided to the dying and whether death following a long illness occurs at home, in a hospital or in a nursing home. But don't move just yet. Patients can gain control over how they die by talking about end-of-life care with their families and physicians. If patients speak up, sheer numbers will force the health care system to take better care of the dying. Over the next 30 years, the number of people older than 85 will more than double to 9 million."

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Friday, August 19, 2005

Financing Your Business While Maintaining Equity? Options to Consider

Category: Business Law and Planning

You have a great idea for a business - you form the business - now you need money to get the business off the ground. Is taking in a partner and giving her an equitable stake the only option? The article Bplans Blog: Financing While Maintaining Equity discusses sources of small business financing other than an equity swap, including bank loans, home equity loans, private placement, "angel" investors, accounts receivable specialists.

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Thursday, August 18, 2005

So You Want to Be a Landlord - Tax Benefits

Category: Tax Law and Planning, Financial Planning

I have discussed here before some of the risks with owning rental real estate in your own name ("Rental Real Estate - What are the Risks?") - it should be titled to an LLC or some other entity to create a barrier between your personal assets and the property. As a general rule, if rental real estate is owned by an LLC, the LLC is the only entity that is liable in the event of a lawsuit, and only to the extent of its assets.

The article - Tax Matters: So You Want to Be a Landlord discusses the income tax benefits of owning rental real estate (as opposed to purchasing real estate to fix up and flip).

"But the real kicker is that you can depreciate the cost of residential buildings over 27.5 years, even while they are (you hope) increasing in value. Say your rental property (not including the land) cost $100,000. The annual depreciation deduction is $3,636, which means you can have that much in positive cash flow without owing any income taxes. That's a pretty good deal, especially after you own several properties. Commercial buildings must be depreciated over a much longer 39 years, but the write-offs will still shelter some cash flow from taxes. "

Since an LLC is a pass-through entity for tax purposes, if the rental real estate is owned in an LLC, the tax benefits will flow through to your personal return.

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Wednesday, August 17, 2005

Buy-Sell Agreements - Questions to Ask Yourself

Category: Business Law and Planning

A Buy-Sell Agreement should be a central cornerstone of your business. However, most business owners haven't really considered (1) if they need a buy-sell agreement (if you have partners, you absolutely do), (2) what it should say (some questions to consider are below), or (3) if they already have a Buy-Sell agreement in place, what that existing agreement says, and if it continues to meet your needs (which can be the most dangerous situation as you are contractually bound to something that no longer makes sense).

A Buy-Sell Agreement is designed to facilitate a more orderly transition in the event of situations such as these where one or more of the owners:
  • is fired or quits
  • wants out (either to the remaining owners or a third party)
  • dies or becomes disabled (do you really want to be partners with your partner's spouse????>
  • wants to buy-out another owner(for example, as a management transition, or to make her shares a greater percentage of the whole)

Some questions to consider in crafting your agreement (note that I always encourage my clients to hammer out a term sheet from a template I give them before we start drafting - a lawyer acts to advise and raise issues; as the business owners, you need to decide what your risk tolerance is and what works best for you):

  • Can an owner sell her interest during her lifetime? If so, to third parties or just to other owners. If to third parties, do the remaining owners have a right to purchase the interest first (a "Right of First Refusal")
  • Can an owner transfer his interest to a family member during his lifetime? If so, under what circumstances and to which family members. Do the family members have voting authority. Are there "drag-along" rights if the owner leaves - ie: if the owners sells out, must his family members sell as well.
  • What happens if an owner is fired or quits? Does it matter if it is for cause or not. Should there be some sort of penalty discount to the value of the owner's interest in this situation.
  • Who is going to purchase an owner's shares if he dies or becomes disabled and can no longer contribute to the business - the company or the other owners? Or can the family remain an owner.
  • Will there be a mandatory buy-out of one of the owners at some point? What is the triggering event for the buy-out?
  • How will the purchase price of the ownership interest be determined - by a formula relating to earnings, by one or more outside appraisers, by the owners determining a fixed value each year, by insuranance proceeds? Consider if the purchase price will have a discount percentage or inflation percentage in different situations (such as a discount if leave in first 5 years, or increase in the value in the event of meeting a triggering buy-out event?
  • How will the payment of the purchase price be structured? Consider having a certain percent down, and monthly or quarterly payments for a period of time thereafter. Will the payments have a floor or ceiling cap depending on how well the business is doing. Will the remaining owners be subject to restrictions during the payout period (ie: they cannot increase salary, take loans from the company, or get financing) without approval of the owners being bought out.

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Tuesday, August 16, 2005

Chart: Only .5% of US Estimated to Pay Estate Tax (and other op-eds for reform)

Category: Estate and Inheritance Tax

September 6 is when Congress comes back to take up the question of repeal of the Estate Tax. A recent report from the Congressional Budget Office shows that for all its publicity as the killer of small business, the federal estate tax impacts a miniscule portion of the population (see recent Y&Y post). From all my reading, my position is neither for or against repeal - instead, I question in what manner the lost revenue will be made up? One thing is for sure - the government needs money to operate, it currently doesn't have enough, and at some point the tax will be coming to all of us to make up the difference. If not through the estate tax, fine; but don't kid yourselves into thinking that when the dollars brought in through the estate tax go away that the need for those dollars will also go away.

Two recent op-eds questioning the need for repeal:

Death Tax? Double Tax? For Most, It's No Tax - New York Times

"A report last month by the Congressional Budget Office found that in 2000 only 2 percent of all estates - about 52,000 - were subject to any estate tax. At that point, taxes were imposed only on estates worth $675,000 or more. The limit rose to $1.5 million in 2004, and if that limit had been in effect in 2000, only 13,771 estates - fewer than 1 percent - would have been subject to the tax. All but 740 of them would have had enough in liquid assets to cover estate tax liabilities, the office estimated."

Fix Estate Tax, Don't Gut It - Wisconsin State Journal

"The federal estate tax ought to be reformed, but the super-rich should not get off virtually tax-free. That's why the Senate should adjust its aim as it works on a compromise reform plan."

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Monday, August 15, 2005

Effects of the Federal Estate Tax on Farms and Small Businesses - Congressional Budget Office Paper

Category: Estate and Inheritance Tax,

The Congressional Budget Office (the "CBO") is a non-partisan entity charged with providing Congress with objective analyses needed for economic and budget decisions and with the information and estimates required for the Congressional budget process.

The CBO has just issued a new paper, Effects of the Federal Estate Tax on Farms and Small Businesses (a .pdf link). As a non-partisan entity, the CBO does not make recommendations; instead, in analysis actual information, sans spin.

Whether you support or oppose the repeal of the federal estate tax, I find it interesting that the claim that "the death tax is killing America's small businesses and farms" is so widespread, when the actual impact of the estate tax on those same small businesses and farms is so minimal (e.g.: between 1999 and 2000 a TOTAL of 302 actually could have been negatively impacted by the claim that the "death tax kills small business".)

Some facts culled from the paper:

  • "In recent years, fewer than 2 percent of all estates have
    had to pay estate taxes.

    "CBO's analysis examined data from estate tax returns filed in 1999 and 2000
    (the most recent data available when the analysis was conducted). Determining from tax returns what constitutes a family farm or small business is difficult, however...For lack of better identifiers, this analysis considered the estates of farmers to be those reporting an occupation of either farmer or farm worker (about 4,500 estates per year) and the estates of small business owners to be those claiming the QFOBI deduction (about 1,500 per year)." [Note: So, the total persons possibly impacted by the estate tax out of the entire United States population in this two year period is 6000.]

  • "The vast majority of estates, including those of farmers and small-business owners, had enough liquid assets to pay the estate taxes they owed. However, estates involving farms or small businesses were less likely than the average estate to have sufficient liquid assets to cover their estate taxes. In 2000, about 8 percent (or 138) of the estates of farmers who left enough assets to owe estate taxes faced a tax payment that exceeded their liquid assets, compared with about 5 percent of all estates that owed taxes. For estates claiming the QFOBI deduction, the corresponding figure was about 34 percent (or 164 estates). Those numbers are upper bounds, however, because the definition of liquid assets used on estate tax returns excludes
    some money held in trusts, which could also be used to pay estate taxes.: [Note: So the maximum number of people who possibly could have had to sell the family business to pay taxes is 302.]

    "For returns filed in 2000, the threshold for filing was gross assets worth at least $650,000 or $675,000, depending on the year of death—less than half the 2005 level of $1.5 million. Had the current filing threshold been in effect in 2000, far fewer estates, especially those of farmers, would have had to file estate tax returns."

The balance of the paper is an excellent summary of the history of the estate tax, a numerical analysis of its impact on the 302 families described above, as well as analysis of the impact of repealing the tax versus raising exemptions. While it is fair to note that much of the study is by nature subjective (does the existence of an estate tax suppress entrepreneurialship?), the balance of the study definitely suggests that the public belief that the "death tax kills small business" is blown way out of proportion.

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Friday, August 12, 2005

Practical Thoughts for an Executor - an Outline of your Role

Category: Probate and Estate Administration

Estate administration is the process by which a deceased person's property, known as the 'estate,' is passed to his or her heirs and legatees (people named in the will). Estate administration encompasses all assets of the decedent - real estate, joint accounts, insurance, IRA', etc. - anything and everything a decedent had any interest in when they died. Probate is a subset of estate administration - dealing solely with those assets owned in a persons sole name, with no beneficiary designation at the time of his or her death. The are known as "probate assets". Probate assets are controlled by the will, and the procedure of probate is governed by the Surrogate court. The entire process is a lengthly one, taking a year, or in many cases, several years.

The emotional trauma brought on by the death of a close family member often is accompanied by bewilderment about the financial and legal steps the survivors must take. The spouse who passed away may have handled all of the couple's finances. Or perhaps a child must begin taking care of probating an estate about which he or she knows little. And this task may come on top of commitments to family and work that can't be set aside. Finally, the estate itself may be in disarray or scattered among many accounts.

Below is a general outline of the steps the surviving family members should take. These responsibilities ultimately fall on whoever was appointed executor (or personal representative if there was no will). Note that matters can be much more complicated in the absence of a will, because it may not be clear who has the responsibility of carrying out these steps.

First, secure the tangible property. This means anything you can touch, such as silverware, dishes, furniture, or artwork. You will need to determine accurate values of each piece of property, which may require appraisals, and then distribute the property as the deceased directed. If property is passed around to family members before you have the opportunity to take an inventory, this will become a difficult, if not impossible, task.

Second, take your time. You do not need to take any other steps immediately. While bills do need to be paid, they can wait a month or two without adverse repercussions. It's more important that you and your family have time to grieve. Financial matters can wait.

When you're ready, you should meet with an attorney experienced in estate planning and estate administration to review the steps necessary to administer the deceased's estate. An attorney will review and organize as much information as possible about the decedent's finances, taxes and debts and use that to identify the executors responsibilities, any areas of potential liability, and map out a plan of action.

The exact rules of estate administration differ from case to case, but the following order generally applies:

1. Filing the will and petition at the surrogate court in order to be appointed executor or personal representative. In the absence of a will, heirs must petition the court to be appointed "administrator" of the estate. An adminstrator will likely be required to post a bond.

2. Marshaling, or collecting, the assets. This means that you have to find out everything the deceased owned - not always an easy task. Many times we recommend that you consolidate all the estate funds to the extent possible, to make the situation more manageable. Bills and bequests should be paid from a single checking account, either one you establish or one set up by your attorney, so that you can keep track of all expenditures.

3. Paying bills and taxes. If an estate tax return is needed it must be filed within 9 months of the date of death. If a New Jersey inheritance tax return is needed, it must be filed within 8 months of death. If you miss these deadlines, severe penalties and interest may apply. If you do not have all the information available in time, you can file for an extension and pay your best estimate of the tax due.

4. Filing tax returns. You must also file a final income tax return for the decedent and, if the estate holds any assets and earns interest or dividends, an income tax return for the estate.

5. Distributing property to the heirs and legatees. Generally, executors do not pay out all of the estate assets until all liabilities are known, including a final approval of any tax returns.

6. Filing a final accounting. The executor may file an informal account with the beneficiaries, or a formal account with the surrogate court (depending on the circumstances. This accounting will list any income to the estate since the date of death and all expenses and estate distributions. Once the court approves this final account, the executor can distribute whatever is left in the closing reserve, and finish his or her work.

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Thursday, August 11, 2005

Need a Nursing Home? Where to Begin your Search

Category: Elder Law

A common question when exploring whether or not a nursing home is necessary for a loved one is "Where do I begin?". One starting place in the Nursing Home Report Card produced by the New Jersey Department of Health and Senior Services.

From here you can search function to quickly find the performance report results for a particular facility. The performance report is compiled by the NJDHSS as a result of its full, on-site licensure and Medicare/Medicaid certification inspections. The search can be performed for a city or county, which then return comparable ratings of facilities. The top rating is 100, as you can quickly see which facilities are close to that top rating.

You will need to visit various facilities yourselves, preferably several times, to decide what is the best location for your family based on everyone's needs and means. This Report Card won't tell you what is the "best" nursing home for your loved one, but it will give you that elusive starting place.

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Wednesday, August 10, 2005

Federal Estate Tax Compromise Solutions - One opinion from the NY Times

Category: Estate and Inheritance Tax

A New York Time editorial dated August 8, 2005 entitled The State of the Estate Tax highlights issues in the current estate tax repeal to date. The editorial takes the position that in an era of huge federal deficits, a total repeal of the federal estate tax would be unlikely. The editorial goes on to describe how the US Senate plans to take up the debate on the repeal of the federal estate tax when they return from summer break in September, and focuses on a critique of the compromise solution offered by Sen. Jon Kyl of Arizona (Republican).

Mr. Kyl's approach is two-fold:

  • An increased personal exemption from federal estate tax to $3.5 million (which would in effect be $7 million per married couple).

    The editorial states that "With an exemption of $3.5 million, only the top 0.3 percent of estates would be subject to the tax. Huge estates are precisely those that should be taxed most heavily, because the larger the estate, the more likely it is to be made up of investment gains that were never taxed during the owner's lifetime."

    This comment refers to the little publicized fact about the "step-up in basis" available at death. Under Section 1014 of the Code, when a person dies, their heirs receive a "stepped-up" basis in inherited assets (with some key exceptions, such as retirement plan assets). The heirs' basis is the fair market value of the assets on the date of death (ie: the basis is "stepped-up" in value to the fair market value). Section 1014 thereby effectively wipes out any tax on unrealized appreciation during the person's lifetime. In this light, it can be argued that the estate tax acts in lieu of the capital gains tax.

  • A reduction in the estate tax rate to 15%, to make it equivalent to the capital gains tax rate. In the limited context of describing the purpose of the estate tax as replacement to the capital gains tax, this makes sense. However, the editorial goes on to point out that:

      "Mr. Kyl contends that a 15 percent estate tax rate is fair, because it is the same as the capital gains tax rate that is applied to investment profits during one's lifetime. That's a false comparison. The capital gains tax law does not allow you to exempt a huge portion of your profits before the tax rate is applied. The estate tax law does. Once the $3.5 million exemption and other deductions were factored in, a 15 percent tax rate would translate into a mere 6 percent levy on a $20 million estate."

    Another concern with describing the estate tax as replacement to the capital gains tax is that it oversimplifies the role of the estate tax. There are other theoretical underpinnings of the estate tax such as acting as a backstop to lower income tax rates during lifetime (allowing you to spend more during your life, and saving the timing of the tax until your death and basing it on what you did not spend during your life), as well a belief in a progressive tax system where the share of those with more dollars is greater.

The editorial misses another underlying benefit of Mr. Kyl's solution over outright repeal. If the federal estate tax were repealed, Section 1014 and the "step-up" in basis would no longer function in the relatively simple manner they do today. Under current law, your basis in inherited property in the fair market value at date of death. If an estate tax return is prepared, this is a simple matter of looking up the basis, even years later. If there is no federal estate tax, then Section 1014 would not wipe out unrealized gains during lifetime (subject to a blanket granting of basis under the law - ie: at death you can apply $1 million of basis to any estate assets, or something along those lines). This means that when you go to sell the inherited GM stock, you may need to figure out what the decedent paid for it - which will often be an impossible task. The result is that people may end up paying more capital gains tax then should be assessed if they cannot prove the basis of the assets sold. Most estate planners see this as a nightmare waiting to happen as people will need information that only a dead person may have. By keeping the federal estate tax, but tying it more closely with the capital gains tax, Mr. Kyl's proposal avoids the basis tracking issues.

Having said that, the estate tax repeal debate should really be stripped of all ideological underpinnings and approached from a practical and business-like manner. Fact: The estate tax brings in dollars today. Fact: The government needs those dollars to operate today - there is an astronomical federal deficit. Question: If the government no longer takes dollars from the estate tax, and given that it still needs those dollars to operate, how are those dollars being replaced? You can be sure the dollars will come from somewhere - just because the estate tax is repealed doesn't mean that taxes are repealed. These are the questions that need to weighed. From this approach, some people may find they prefer a tax that focuses on what you didn't spend before you died.

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Tuesday, August 09, 2005

Practical Thoughts for an Agent under a Power of Attorney

Category: Elder Law, Estate Planning

The simple General Durable Power of Attorney ("POA") is arguably the most important document in a person's estate plan. A properly drafted POA will let another person make financial decisions for you when you are not able - such as if you are incapacitated, or on even on an extended trip out of the country. As you age, a POA could also assist you in avoiding a costly and burdensome Guardianship provision - if you have not named someone to act on your behalf, the court will have to.

While many articles have described questions regarding the formation of a Power of Attorney (an excellent FAQ from the Office of New York State Attorney General Eliot Spitzer can be found here), one items that is discussed less often is what does it mean to be named an agent under a POA? If you are acting as agent to your spouse, or in a limited capacity (ie: a real estate closing) then the responsibilities of being an agent under a POA are not that burdensome. However, if being named agent under a POA involves suddenly managing another persons finances, with which you have no familiarity, the task can seem enormous.

Below are some practical tips that focus on what it means to act as a Power of Attorney, emphasizing the need to be organized and to understand your role as another person's agent. Note that the person executing the POA is the "principal" and the person empowered by and acting under the POA is the "agent":

  • An Attorney to Advise You: If you find yourself suddenly acting as an agent under a POA, one of the first things you should do is speak to an attorney to clarify your role and advise you of some do's and don'ts. Not all POA are drafted the same: some have broad sweeping powers, others very limited powers that only apply in a small set of circumstances; some allow gifting or modifying beneficiary designations, others do not; some give the agent total discretion, others give the agent limited direction. You cannot act as the agent unless empowered under (i) the Power of Attorney document itself, and (ii) state law. Sometime state law will fill in powers not stated in the POA itself; other times state law might limit or forbid an action stated in the POA.

  • Understand that you are a Fiduciary: When you are acting as an agent under a POA, you are acting in that person's best interest, not your own. Being named a fiduciary is being in a position of trust. This is manifest in clear concepts, like don't take another person's money for yourself (such as making accounts joint so they go to you on death, not through the Will). However, this tenent also colors all your actions as agent: how you invest, who you invest with, how you budget, who you pay and when, how you deal with third parties, how and if you take compensation. A general rule is that you owe the principal a higher duty of care then you would pay to yourself, as most people take shortcuts here and there that are not permissible for a fiduciary.

    Furthermore, as a Fiduciary, you are not only responsible to the principal, but to other interested parties that might question you on the principal's behalf, such as other family members, a third party who you are dealing with, or a court. If a court were to find that you did not act in a prudent manner as a Fiduciary, or that you are self-dealing (ie: taking advantage of being an agent to forward your own interests) then you can be found personally liable for any waste of the assets.

  • Get a good Accountant: If the principal had an accountant, a top item should be to set up a meeting with him or her. At the meeting, you can learn about a person's customary income and expenses, as well as find out all the account information by looking at copies of the 1099s and other supporting income tax documents in the accountants files. Armed with this information, you will be in a position to take two more important steps (i) consolidate and control assets, and (ii) budget for income and expenses.

  • Consolidate Assets and Income: When you are examining someone else assets, you will find it is amazing how many large and small accounts people can have (remember when you got a free toaster if you opened a new account?) When the multiple accounts are yours, they tend to be an annoyance, generally to be dealt with on another day. When the accounts are another persons, and you aren't familiar with them, nor the underlying investment, multiple accounts present a huge headache. First, you need to have all account statements directed to you. Next, as a Fiduciary you need to have a reasonable investment scheme. This is all much easier to accomplish with one or two accounts then ten. So, you may want to direct assets to be consolidated. Beware, however, of the tax consequences of large scale liquidation. You may want to speak to a financial planner with a tax background before you act.

    Also, you should try to get all income direct deposited to a single account from which you can write checks. This can be arranged with most employers, pension plans and investment houses.

  • Prepare a Budget: Once you know the assets, anticipated income stream and expenses, prepare a budget to forecast where you will be if things don't change in 6, 12, 18 months. Then factor in the cost of anticipated changes (ie: might a move from assisted living to a nursing home be required?). Do you have enough money? If not, what other sources of financing the costs of living are available (Medicaid, Long Term Care insurance, Reverse Mortgage, etc.) From the budget you will be able to work with the Financial Planner to prepare an investment scheme to meet the principal's needs.

  • Communication is Key: Do yourself a favor, tell your the principal's family what is going on. Get Quicken and email a report on a quarterly basis. Keeping everyone in the loop avoids problem, like your sister claiming she is going to sue you because you stole mom's money. The information in the report would be available if a claim were made anyway, so let everyone know what is going on so the family can deal with issues together.

  • You are not Alone: As a follow up to the point above, another benefit of communication is that other people can help you. Just because you are the named agent, you don't have to do everything. You can delegate tasks to other people. Not only are other family member's there to support you, but there are knowledgeable professionals you can rely on. The principal likely didn't name you as the agent for your financial expertise - the principal probably named you because he or she thought you would make the best decisions. To assist you in making those decisions, professional advisors such attorneys, accountants, financial planners and social workers can inform you of your options, and in some cases reduce your burden by carrying out your wishes.

  • You are not Personally Financially responsible: Unless you did something bad (or are married to the principal), when you are an agent, you are charged with spending the principal's assets on the principal's behalf. You are not obligated to use your own money, and there are laws in New Jersey and other states making it illegal to condition acceptance of a facially valid Power of Attorney on a personal guarantee of the agent named in the documents. Having said this, I have seen many examples of poor drafting in legal agreements, particularly with assisted living facilities and nursing homes, that appear to make the agent liable on the principal's behalf. This might manifest in language that the "agent guarantees the principal's obligations". While you can agree to use the principal's assets to meet his or her obligations, you cannot be forced to put your own assets at risk when the principals run out - you are the agent, not the bank. So rest assured that you can do a good thing for someone you care about without putting yourself at risk.

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Monday, August 08, 2005

Federal Estate Tax Exemption to $2 million in 2006 - Effect on NJ Residents

Category: Estate Planning, Estate and Inheritance Tax

The Federal Estate Tax ("FET") Exemption amount is currently scheduled to increase from $1.5 million to $2.0 million on January 1, 2006. While Congress has a September agenda item to hammer out a permanent repeal of the FET, NJ residence should understand what impact the increasing FET exemption may have on them.

On one hand, a sign of relief can be made by those with more then $1.5 million in assets and less than $2.0 million ($3.0 million and $4.0 million for married couples with a properly planned estate) - FET will no longer be a worry. On the flip side, the New Jersey Estate Tax ("NJET") will play an even larger role. The Exemption from the NJET is frozen at $675,000. This means that only those estates valued at less than $675,000 escape estate taxation in New Jersey. In 2005, an estate of $1.5 million is exempt from FET, but owes NJET of $64,400. In 2006, an estate of $2.0 million will be exempt from FET, but owe NJET of $99,600.

There is no cap on the NJET. As your assets increase, so does the NJET. Also, the NJET does not depend on the FET. If there is no FET, a NJET will still be due and owing.

Many steps can be taken to reduce the bite of the NJET - including gifts, creating exemption trusts in the wills, life insurance planning, and more sophisticated techniques. Unfortunately, many New Jersey residents don't think ANY estate tax applies to them since their assets are below the exemption level for the FET. Or, they confuse the New Jersey inheritance ("NJIT"), which exempts lineal descendents and spouses from tax, from the NJET, which only exempts assets passing to spouses from taxation.

Many clients come to our offices thinking the NJET is not such a big deal - but starting 1/1/06, you can pay no FET and have to write a check to NJ for $99,600 - that is a lot of real money that could go to your family with proper planning instead of the State.

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Friday, August 05, 2005

Where does Medicare End - Activities of Daily Living (ADL's)

Category: Elder Law

A common question with seniors when there is a medical crisis is "Where does Medicare end?" There is always great confusion around what Medicare covers and what is does not.

I think that the most useful distinction to understand is that Medicare is a health insurance program NOT a long term care program. As a health insurance program, Medicare focuses on making you well. As a general rule, if you are stabilized and no longer improving from a medical perspective, Medicare will not cover the cost of your care.

Another way to look at it is that Medicare is not designed to pay the costs of Activities of Daily Living, or ADL's. These are the providence of long term care insurance. Activities of Daily Living are generally considered to be mobility (e.g., transfer from bed to chair), dressing, bathing, self-feeding and toileting. If you require help with these, but are no longer medically ill, Medicare will not cover the costs.

It is also useful to consider who Medicare pays. Medicare is designed to pay doctors, nurses, physicians assistance, therapists, hospitals and sub-acute care or rehabilitation facilities. All of these are dealing with your health. Medicare will not pay a nursing home, which is geared towards providing for your ADL's when you can no longer provide for the same in your home.

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Thursday, August 04, 2005

Google Earth - Uses in a legal practice

Category: Miscellaneous Musings

A tool often used in our office is Google Earth (review and download at Google Earth). It is an amazing resource that "combines satellite imagery, maps and the power of Google Search to put the world's geographic information at your fingertips." Once downloaded (you must have a newer machine to run), you can literally fly over the earth from one location to another, and actually look at a location and its surrounds. Want to see a map overlay? Click a button. Looking for nearest hospital? Click a button. Beyond being a really neat tool to check out your house, there are some practical applications to consider

* In Elder Law .... Your parent lives far from you and is considering moving. You can get a birdseye view of the neighborhood and proximity to other locations.

* In Business Law ... Look at the locations of your customers and competitors business to get a sense of who they are. Small shop or large? Class A space or Class D space?

* In Real Estate ... Look at properties and their neighbors. If selling, see how yours compares to the neighborhoods in size and location. If buying, what else is around.

* In Estate Planning ... Plan a vacation to celebrate that your finally completed your estate plan, named guardians, did asset protection planning, and otherwise put an important aspect of your life in order.

Google Earth allows you to "see" things from your computer that otherwise would require an exploration trip in the car. There are many more creative uses, but it is also fun to fly around the world at the flick of your fingertips.

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Tuesday, August 02, 2005

Medicaid insures historic number - USA Today

Category: Elder Law

The number of poorer Americans who get health insurance through Medicaid has grown from covering 34 million people in 1999 to 47 million in 2004. This means that in combination with Medicare, the military and federal employee health plans, the government has become the country's number one health insurer. This article from USA Today looks at some of the costs of Medicaid. Medicaid Insures Historic Number:

However, the article fails to delve into the divisiveness of the issues. Medicaid offers access to health care for the poor. This is generally perceived as a "good thing" when addressing children - which it is undoubtedly is. The article points out that record numbers of our children now have access to health care through the Medicaid system.

The issue become more murky with the adult "working poor", who in some articles on the subject are perceived as somehow trying to "fleece" the system. A related article, Welfare Reform Opens Medicaid to Millions explores how access to Medicaid can change the lives of working Americans, and the incentives for people to who financially qualify for Medicaid to use the program in lieu of more expensive private health insurance - which many times is simply unaffordable for a family earning $35,000 - $45,000 a year.

The issue reaches an even more controversial point where Medicaid is paying for the long term care costs (ie: nursing home costs) of the elderly - something that Medicare (the governments private pay insurance program for seniors) does not provide for. At this point, there is even more of a misconception that the rich are playing the system to keep money in their own hands. Unfortunately, this belief fails to consider the basic point of Medicaid - you must be poor to qualify for it; not just struggling to make ends meets, but unable to make ends meet without cutting back on life essentials such as food, shelter, and medical care. For the elderly poor, living on a fixed income, depleting savings, and looking at a future with ever increasing costs of living, Medicaid offers a lifeline answering the question of "who will take care of me?". It is frightening to be old and poor in this county - and Medicaid is the only option that many people have. The fact is that people will get old and not be able to pay for their care - especially when one spouse needs care and the other spouse needs to be able to afford to remain at home. Medicaid is not the best solution to the problem, but many times it is the only solution.

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Monday, August 01, 2005

Vote on Estate Tax Repeal (a/k/a "The Paris Hilton Benefit Act") Postponed Until Fall

Category: Estate and Inheritance Tax

From Vote on Estate Tax Repeal Likely in Fall - Elder Law Answers Articles: "Senate Majority Leader Bill Frist (R-Tenn.) has postponed a vote on repeal of the estate tax until September, but lawmakers are likely to take up measure shortly upon returning from their August recess.

The Death Tax Repeal Permanency Act of 2005, which would repeal the estate tax permanently beginning in 2011, passed the House earlier this year by a 272-162 vote. However, Senate Republicans probably lack sufficient votes to block a Democratic filibuster of the measure, which its opponents have dubbed 'The Paris Hilton Benefit Act.'

The decision to delay the vote gives more time for compromise negotiations between Senate Finance Committee ranking minority member Max Baucus (D-Mont.), and Senate taxwriter Jon Kyl (R-AZ), according to Cowles Legal Systems.

Sen. Kyl has proposed a compromise that would make the estate tax rate equal to the capital gains rate, which is currently 15 percent, and exempt from taxation the first $3.5 million of an individual�s estate ($7 million per couple), with the exemption amount indexed to inflation in years after 2010. (Under current law, the per person exemption amount is $1.5 million in 2005, rising to $3.5 million in 2009.) The Center on Budget and Policy Priorities estimates that the Kyl proposal will cost the nation $595 billion between 2012 through 2021. Sen. Baucus has not yet presented an alternative proposal.

Repeal of the tax would mean that while the wealthiest Americans still cannot escape death, they will be able to avoid that other inevitability. The estate tax currently affects only the richest 1 percent among the deceased, those with inheritable estates worth more than $1.5 million. The Center on Budget and Policy Priorities estimates that after taking account of deductions an"

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You and Yours Blawg is Back

After a month-long hiatus, You and Yours Blawg is back. I look forward to continuing to share my thoughts and hear yours about issues relevant to Your life and Your assets within the world of elder law, estate planning, tax planning and business planning.

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