If you have a child with special needs, you should think carefully about whether it is advisable to retire before what Social Security calls your “normal retirement age” or “NRA.” Social Security has a formula for reducing retirement benefits depending upon how many years before NRA a worker retires (but not younger than age 62). NRA varies between age 65 and 67 depending on the worker’s date of birth. Social Security has a chart showing retirement ages. The NRA has gradually increased over time. For many years NRA was 65 for everyone, but now it is as high as 67 for people born after 1959.
If you retire before your NRA, your Social Security benefit amount will be reduced by a mathematical formula based on how many months before your NRA you retire. So for example, if you retired at age 62 and your NRA was 66, your retirement income will be reduced by 25%. If you retired 2 years before your NRA, the reduction in your Social Security benefits would be about 13%. You can calculate your estimated NRA by going to Social Security’s web site. AnalyzeNow, a private web site with a mission to “disseminate inexpensive retirement planning tools,” also has a useful retirement calculator program.
There are several articles on the pros and cons of applying for Social Security retirement benefits before reaching your NRA. Many of the articles discuss what is referred to as the “break even” point. The idea is to try to calculate whether you will receive more money over your lifetime if you receive a smaller amount starting at age 62 or a larger amount starting at a later age. There are calculator programs to determine how long you would have to live before the amount you would receive at the NRA rate would be greater than the smaller amount you would receive over a longer period of time if you elected early retirement.
These articles and calculators fail to take into account one factor that is of critical importance to parents with a special needs child. Your child may be eligible for a Social Security benefit that is based on your retirement benefit. The less you receive in retirement income, the less your child’s benefit will be for his or her lifetime.
Child Disability Benefits
If a child is disabled before the age of 22, he or she may be eligible for Child Disability Benefits (CDB) when the parent retires, becomes disabled or dies. The child must be at least 18 years old, and the parent must have paid into the Social Security system while working. (A detailed discussion of CDB is beyond the scope of this article.) The child’s benefit amount is 50% of the parent’s Social Security benefit if the parent is living. If the parent dies, the CDB benefit is increased to 75% of the parent’s benefit amount. If both parents are retired, disabled or deceased, the child will receive the CDB amount based on the higher earning parent’s Social Security benefit. Occasionally a child will not get the full CDB benefit amount because other family members are also entitled to Social Security benefits based upon the parent’s account. There is a maximum “family benefit” that can be paid based on any one person’s Social Security contributions.
Many adult disabled children are already receiving SSI benefits when they qualify for CDB after their parent retires, becomes disabled or dies. CDB will replace or offset the SSI benefit dollar for dollar. If the CDB amount is less than the SSI benefit amount, the child can receive both CDB and enough SSI income to bring the child’s total income up to the SSI benefit amount plus an additional $20.
The federal SSI benefit amount for 2010 is $674. Some states pay a supplemental amount to increase the total SSI payment. So, for example, if Tim was previously receiving SSI and his CDB benefit is $600 per month, he will be eligible for an additional SSI benefit of $94 per month ($74 + $20). If Tim’s CDB benefit is $800 per month, he will receive no SSI benefits because the CDB amount exceeds the SSI benefit amount.
How Retirement Age Affects Child Disability Benefits
The CDB amount paid to your child is based upon your actual Social Security benefit amount. Applying for early retirement Social Security benefits will not only reduce your Social Security benefit amount for the rest of your life, but it will also reduce your child’s CDB benefit.
For example, Kate is 61 years old and is trying to decide whether to take early retirement at age 62 or wait until her NRA at 66. Kate has a 30 year old son, Scott, who is currently receiving SSI benefits of $674 per month. Scott has had cerebral palsy since birth.
Using the Social Security benefit calculator, Kate determined that her NRA is 66, because she was born in 1949, and that if she waited until age 66 to retire, her monthly benefit would be $1250 per month. If she retired at age 62, her retirement benefit would be about $900 per month.
Based upon the above estimates, Kate then calculated Scott’s CDB if she died. Scott would be entitled to half of Kate’s benefit amount when she retires, but her primary concern is how to provide for her son at her death. If Kate waited until her NRA of 66, Scott’s CDB would be $937 per month (75% of $1250). If Kate instead retired at 62, she estimated that Scott’s CDB benefit would be $675 per month (75% of $900). In doing these rough calculations, Kate did not take into account annual cost of living adjustments (COLA) and she disregarded the CDB benefits Scott would not receive if she delayed her retirement by four years.
The difference in Scott’s CDB amount depending upon whether Kate retired at age 62 or 66 amounted to $262 per month or $3144 per year. Projecting out this increased benefit amount over 40 years, Scott would receive approximately $125,000 more in CDB income if Kate waited to apply for Social Security at 66 when she reaches her NRA. Keep in mind that the above projections are based upon Kate’s employment history, so the projected CDB benefits for her son will not be the same as another parent with higher or lower earnings.
There are many factors to take into account before deciding when to apply for Social Security retirement benefits, and there is no single right answer to the question, “is early retirement a good idea?”
• For some families there are economic, health or employment issues that make early retirement necessary regardless of the impact on a child’s CDB amount.
• For some families there are significant assets to leave to their children in a special needs trust, making additional monthly income from delayed retirement less significant.
• Some children contribute almost all of their income as a co-payment towards residential care paid by the Medicaid program, so additional monthly income will not impact the quality of their life.
• Some children with disabilities have their own employment history through supported work that gives them a higher disability benefit than what they would receive on a parent’s Social Security account.
• The child is entitled to the higher benefit amount if both parents are deceased, retired or disabled and in insured status with Social Security. For example, if Scott’s father has an account with Social Security that is close to or higher than Kate’s, she may be less concerned about the effect of her retirement age on Scott’s CDB benefit amount.
All of the above factors should be weighed carefully before you decide whether to apply for early retirement with Social Security. Your financial planner can give you guidance on the best age for you to retire based upon your net worth. But if you have a special needs child who was disabled before the age of 22, no decision should be made before considering the impact of your retirement age on your child’s future Social Security benefits.
Source: www.specialneedsalliance.com, July 2010 - Vol. 4, Issue 11
Thursday, August 26, 2010
Thursday, August 5, 2010
MEDICARE REFORM MEANS SOME SENIORS FACE BENEFIT CUTS
First, the good news: According to a report released by the White House on Monday, America’s new health reform law will generate $575 billion in Medicare cost savings over the next decade, allowing the program to survive until 2029. The report says this will result in lower Medicare premiums of nearly $200 a year by 2018.
Part of those savings, amounting to $5.3 billion by 2011, will come from reduced “overpayments” to Medicare Advantage, a system that allows Medicare recipients to receive benefits via private health insurance providers. The savings associated with Medicare Advantage efficiencies will rise to $145 billion by 2019.
Now for the bad news: Seniors enrolled in Medicare Advantage may soon find that their benefits have been cut. Under changes contained within America’s new health reform law, reduced payments to private insurers may lead to a reduction in benefits such as dental coverage and free eyeglasses. That could trigger an exodus from Medicare Advantage plans back to traditional fee-for-service Medicare, though at much higher costs.
Shrinking the Subsidies
Since 2003, when the subsidies offered Medicare Advantage were greatly increased, the number of enrollees in such plans – which are offered by a number of private insurance companies – has soared. Roughly one in four Medicare recipients is now on a Medicare Advantage plan because of all the extra benefits that were offered.
The issue has become a central concern to many seniors, because the health reform law passed in March makes deep cuts in the subsidy payments Medicare makes to private Medicare Advantage plans. The Obama administration report says Medicare paid Medicare Advantage plans 14%, or $1,000 per person on average, more for health services than traditional Medicare, with “no measured differences in health outcomes.” It is those extra payments that will now be eliminated.
Yet in one change to the rules which has not been widely reported, people enrolled in a Medicare Advantage plan will no longer be able to switch to another Medicare Advantage program. Instead, they will have no option but to join the traditional Medicare program if they decide to leave their current plans because benefits have been reduced under the new law.
Peter Ashkenaz, deputy director of media affairs at the U.S. Health and Human Services department of Medicare and Medicaid services, confirmed that as of Jan. 1, people enrolled in Medicare Advantage will have 45 days of open enrollment “to return to the fee-for-service program.” But, he added, users will not be able to switch to another Medicare Advantage plan, as they have been able to do for the past decade.
The Challenge of Change
“Obviously if you’re taking away subsidies, then companies that provide Medicare Advantage’ plans will have to review what they are doing,” says David Certner, legislative director for AARP. “We’re likely to see some changes in some of the plans.”
AARP, which supported the health care reform law, also offers Medicare Advantage and Medigap insurance policies to its members. Certner says AARP’s position is that its business side should conform to its policy side, and “that we needed to reduce some of these excess payments, but our plans would continue to operate in whatever the regime was.”
Certner says the savings outlined by the Administration means the “financial solvency of Medicare is going to be improved by 12 years – that’s pretty significant.”
But, he added, there are concerns that projected savings in payments to health care providers like hospitals and nursing homes might limit access to those facilities. “Those are not likely to happen as much in the near term, “ but over longer periods of time they might have an impact, and “that’s certainly something we’ll be keeping our eyes on.”
Mind the Gaps
Joseph Antos, a health care scholar at the American Enterprise Institute, says this change could prove extremely costly to retirees. That’s because most seniors on Medicare Advantage don’t have so-called Medigap policies, which are private insurance plans that pay the “gaps” in traditional Medicare coverage such as hospital deductibles and doctor co-payments.
Antos says that when patients switch from Medicare Advantage to traditional Medicare, “they will pay much higher premiums than they ever imagined possible for Medigap insurance.” The reason is that most people take out Medigap coverage when they turn 65 and are healthy, while those who are older and in poorer health will now have to pay much more.
Antos said that based on the analysis of Richard S. Foster, the chief actuary of the Medicare service, some large hospitals and nursing homes may withdraw from providing Medicare services because the reimbursements are too low to be cost-effective.
Source: www.dailyfinance.com, Charles Wallace, 8/3/10
Part of those savings, amounting to $5.3 billion by 2011, will come from reduced “overpayments” to Medicare Advantage, a system that allows Medicare recipients to receive benefits via private health insurance providers. The savings associated with Medicare Advantage efficiencies will rise to $145 billion by 2019.
Now for the bad news: Seniors enrolled in Medicare Advantage may soon find that their benefits have been cut. Under changes contained within America’s new health reform law, reduced payments to private insurers may lead to a reduction in benefits such as dental coverage and free eyeglasses. That could trigger an exodus from Medicare Advantage plans back to traditional fee-for-service Medicare, though at much higher costs.
Shrinking the Subsidies
Since 2003, when the subsidies offered Medicare Advantage were greatly increased, the number of enrollees in such plans – which are offered by a number of private insurance companies – has soared. Roughly one in four Medicare recipients is now on a Medicare Advantage plan because of all the extra benefits that were offered.
The issue has become a central concern to many seniors, because the health reform law passed in March makes deep cuts in the subsidy payments Medicare makes to private Medicare Advantage plans. The Obama administration report says Medicare paid Medicare Advantage plans 14%, or $1,000 per person on average, more for health services than traditional Medicare, with “no measured differences in health outcomes.” It is those extra payments that will now be eliminated.
Yet in one change to the rules which has not been widely reported, people enrolled in a Medicare Advantage plan will no longer be able to switch to another Medicare Advantage program. Instead, they will have no option but to join the traditional Medicare program if they decide to leave their current plans because benefits have been reduced under the new law.
Peter Ashkenaz, deputy director of media affairs at the U.S. Health and Human Services department of Medicare and Medicaid services, confirmed that as of Jan. 1, people enrolled in Medicare Advantage will have 45 days of open enrollment “to return to the fee-for-service program.” But, he added, users will not be able to switch to another Medicare Advantage plan, as they have been able to do for the past decade.
The Challenge of Change
“Obviously if you’re taking away subsidies, then companies that provide Medicare Advantage’ plans will have to review what they are doing,” says David Certner, legislative director for AARP. “We’re likely to see some changes in some of the plans.”
AARP, which supported the health care reform law, also offers Medicare Advantage and Medigap insurance policies to its members. Certner says AARP’s position is that its business side should conform to its policy side, and “that we needed to reduce some of these excess payments, but our plans would continue to operate in whatever the regime was.”
Certner says the savings outlined by the Administration means the “financial solvency of Medicare is going to be improved by 12 years – that’s pretty significant.”
But, he added, there are concerns that projected savings in payments to health care providers like hospitals and nursing homes might limit access to those facilities. “Those are not likely to happen as much in the near term, “ but over longer periods of time they might have an impact, and “that’s certainly something we’ll be keeping our eyes on.”
Mind the Gaps
Joseph Antos, a health care scholar at the American Enterprise Institute, says this change could prove extremely costly to retirees. That’s because most seniors on Medicare Advantage don’t have so-called Medigap policies, which are private insurance plans that pay the “gaps” in traditional Medicare coverage such as hospital deductibles and doctor co-payments.
Antos says that when patients switch from Medicare Advantage to traditional Medicare, “they will pay much higher premiums than they ever imagined possible for Medigap insurance.” The reason is that most people take out Medigap coverage when they turn 65 and are healthy, while those who are older and in poorer health will now have to pay much more.
Antos said that based on the analysis of Richard S. Foster, the chief actuary of the Medicare service, some large hospitals and nursing homes may withdraw from providing Medicare services because the reimbursements are too low to be cost-effective.
Source: www.dailyfinance.com, Charles Wallace, 8/3/10
Thursday, July 22, 2010
Senators Move to Revive Estate Tax at Reduced Rate
WASHINGTON – The federal estate tax would be revived, but at a reduced rate, under a plan being pushed by two senators, a Democrat and a Republican.
Democrat Blanche Lincoln of Arkansas and Republican Jon Kyl of Arizona hope to attach the new estate tax to a small business lending bill pending in the Senate. Their bill would set the top estate tax rate at 35 percent, with a per-person exemption of $5 million, indexed to inflation.
In 2009, the top estate tax rate was 45 percent with a per-person exemption of $3.5 million. Congress allowed the estate tax to expire this year, but it is scheduled to come back next year with a top rate of 55 percent, unless Congress acts.
"It's time to take decisive action on the estate tax, and provide the permanent solution that Arkansas' hardworking farmers and small businesses are desperately seeking," Lincoln said.
The Senate, as part of a nonbinding budget resolution, voted last year in favor of a proposal similar to the one pushed by Lincoln and Kyl. The House, however, voted to extend the 2009 rates, and the two sides were unable to reach an agreement.
The Senate is expected to take up the small business lending bill next week, though leaders have not indicated whether they will allow a vote on the estate tax as part of the debate.
"If the Small Business Lending bill is intended to help small business create jobs, wouldn't it make sense to provide small business owners with the certainty that their tax rates aren't going to skyrocket at the beginning of next year?" Kyl said.
Democrat Blanche Lincoln of Arkansas and Republican Jon Kyl of Arizona hope to attach the new estate tax to a small business lending bill pending in the Senate. Their bill would set the top estate tax rate at 35 percent, with a per-person exemption of $5 million, indexed to inflation.
In 2009, the top estate tax rate was 45 percent with a per-person exemption of $3.5 million. Congress allowed the estate tax to expire this year, but it is scheduled to come back next year with a top rate of 55 percent, unless Congress acts.
"It's time to take decisive action on the estate tax, and provide the permanent solution that Arkansas' hardworking farmers and small businesses are desperately seeking," Lincoln said.
The Senate, as part of a nonbinding budget resolution, voted last year in favor of a proposal similar to the one pushed by Lincoln and Kyl. The House, however, voted to extend the 2009 rates, and the two sides were unable to reach an agreement.
The Senate is expected to take up the small business lending bill next week, though leaders have not indicated whether they will allow a vote on the estate tax as part of the debate.
"If the Small Business Lending bill is intended to help small business create jobs, wouldn't it make sense to provide small business owners with the certainty that their tax rates aren't going to skyrocket at the beginning of next year?" Kyl said.
Friday, June 25, 2010
"Legacy for One Billionaire: Death but no Taxes"
The following article is reprinted from www.msnbc.msn and originally appeared in the New York Times on Wednesday, June 9, 2010. It is entitled, “Billionaire’s legacy – death, but no taxes”.
Earlier this year, we released information regarding the unique situation that would occur in 2010 regarding the estate tax laws. In addition, we held several client seminars in an effort to explain the consequences of this repeal. This article illustrates how the estate tax changes for 2010 effect an estate and we’d like to share it with you.
A Texas pipeline tycoon who died two months ago may become the first American billionaire allowed to pass his fortune to his children and grandchildren tax-free.
Dan L. Duncan, a soft-spoken farm boy who started with $10,000 and two propane trucks, and built a network of natural gas processing plants and pipelines that made him the richest person in Houston, died in late March of a brain hemorrhage at 77.
Had his life ended three months earlier, Mr. Duncan’s riches – Forbes magazine estimated his worth at $9 billion, ranking him as the 74th wealthiest in the world – would have been subject to a federal tax of at least 45 percent. If he had lived past January 1, 2011, the rate would be even higher – 55 percent.
Instead, because Congress allowed the tax to lapse for one year and gave all estates a free pass in 2010, Mr. Duncan’s four children and four grandchildren stand to collect billions that in any other year would have gone to the Treasury.
The United States enacted an estate tax in 1916, and when John D. Rockefeller, America’s first billionaire, died in 1937, his estate paid 70 percent. Since then, the rates have fluctuated, but this is the first time the tax has been repealed altogether.
The bonanza in tax savings for Mr. Duncan’s descendants is sure to be unsettling to those who have paid estate taxes on more modest wealth – until January 1 of this year, it applied to any estate valued at more than $3.5 million, taxing only the money exceeding that threshold, or $7 million for a couple’s estate.
Incendiary issue
Although the tax affects only about 5,500 estates a year, it is such an incendiary issue that when Congress unexpectedly let it lapse at the end of 2009, financial advisers warned that it might play a macabre factor in the end-of-life decisions being weighed by heirs of elderly Americans. Some estate lawyers worried that tax considerations might prompt their clients to keep an ill relative on life support through the end of 2009 to get the favorable treatment – or worse, resist life-prolonging measures to hasten a relatives demise before the end of 2010.
The one-year lapse in the estate tax was signed into law by President George W. Bush in 2001, an accounting quirk in his package of tax cuts. Although Democrats pledged to close that gap and reinstate a tax for 2010 when they took control of Congress, they failed to reach an agreement last December. The Senate Finance Committee is not trying to forge a compromise that would reinstate the tax, but even if that effort succeeds, it is unclear whether any changes might be retroactive and applied to those who have died so far in 2010.
Many lawyers say Mr. Duncan’s heirs have the means and motivation to wage a fierce court battle to challenge the constitutionality of any retroactive tax.
Representatives of Mr. Duncan’s family, his estate and his business interests did not return calls about the matter. Mr. Duncan’s will, which is on file at the Harris County Probate Court in Houston, was written in 2006 and amended in 2008, a time when most estate planners assumed that Congress would not allow the tax to lapse. Federal law has long allowed an unlimited amount of assets to pass untaxed to a surviving spouse, and Mr. Duncan left his home and ranch to his wife of more than 20 years, Jan, along with stock valued at hundreds of millions of dollars.
But the bulk of his estate is left to his children and grandchildren, and would have been taxable in 2009 or 2011.
5,000-acre hunting ranch
In addition to personal effects bequeathed to his descendants – boats, jewelry, automobiles, shotguns and a 5,500-acre Texas hunting ranch stocked with wild game – he passed on his holdings in EPCO and Dan Duncan L.L.P., two entities in the natural gas and pipeline empire he built. The stock involved includes more than 100 million shares in Enterprise GP Holdings, which closed at $43.23 the last trading day before Mr. Duncan died. That asset alone could have resulted in a $2 billion estate tax.
The Treasury collected more than $25 billion in estate taxes in 2008, the most recent year for which data is available.
Elaborate estate plans with sophisticated trusts are often made many years before death to reduce estate taxes owed by the richest.
Advocates of the tax say it is unconscionable that Congressional leaders have allowed the richest Americans to reap a new tax break at a time when deficits are soaring and the income gap between wealthy and poor citizens remains near historic levels.
“The ultrawealthy in this country will still be able to pass on enormous wealth to the next generation,” said Chuck Collins, who studies income inequality and has worked with billionaires like Warren E. Buffet and Bill Gates to promote an estate tax. Mr. Collins argues that the tax is a “recycling program for economic opportunity.”
But opponents, who label it a death tax, say it is unfair because it taxes the same income twice – once when it is earned and again when it is passed on to heirs.
Mr. Duncan’s eldest daughter, Randa Duncan Williams, is serving as executor of the estate and is a voting member of the family trust that will now control her father’s interest in Enterprise GP Holdings.
Should the family trust sell these inherited shares, capital gains taxes would presumably be owed on the difference between Mr. Duncan’s original cost, which could be quite low, and their market value when sold. Capital gains taxes are capped at 15 percent.
Ms. Williams, who has served as a director and general partner at the family’s energy businesses for years, was deeply involved in her father’s philanthropic efforts and is expected to continue much of that charitable work.
During his life, Mr. Duncan contributed to a wide assortment of wildlife foundations and community institutions like the Houston Zoo and Houston Museum of Science, and an assortment of medical institutions. The various medical centers at Baylor College of Medicine received more than $250 million from Mr. Duncan and his wife, with more than $100 million used to found the Dan L. Duncan Cancer Center.
Mr. Duncan’s will designates a handful of nonprofit groups and charitable foundations that will receive donations, all of which would have been tax-exempt even in years when the estate tax was in effect.
An avid big game hunter – Mr. Duncan has more than 500 entries in the Safari Club International record book for killing animals including polar bears, rhinoceroses, bighorn sheep, lions and elephants – he made a $1 million donation in his will to the Shikar Safari Club International Foundation.
The will also directs that any money or assets not otherwise specified for a relative or charity be deposited into two family charitable trusts, which can be used to donate to causes deemed worthy by his heirs.
Earlier this year, we released information regarding the unique situation that would occur in 2010 regarding the estate tax laws. In addition, we held several client seminars in an effort to explain the consequences of this repeal. This article illustrates how the estate tax changes for 2010 effect an estate and we’d like to share it with you.
A Texas pipeline tycoon who died two months ago may become the first American billionaire allowed to pass his fortune to his children and grandchildren tax-free.
Dan L. Duncan, a soft-spoken farm boy who started with $10,000 and two propane trucks, and built a network of natural gas processing plants and pipelines that made him the richest person in Houston, died in late March of a brain hemorrhage at 77.
Had his life ended three months earlier, Mr. Duncan’s riches – Forbes magazine estimated his worth at $9 billion, ranking him as the 74th wealthiest in the world – would have been subject to a federal tax of at least 45 percent. If he had lived past January 1, 2011, the rate would be even higher – 55 percent.
Instead, because Congress allowed the tax to lapse for one year and gave all estates a free pass in 2010, Mr. Duncan’s four children and four grandchildren stand to collect billions that in any other year would have gone to the Treasury.
The United States enacted an estate tax in 1916, and when John D. Rockefeller, America’s first billionaire, died in 1937, his estate paid 70 percent. Since then, the rates have fluctuated, but this is the first time the tax has been repealed altogether.
The bonanza in tax savings for Mr. Duncan’s descendants is sure to be unsettling to those who have paid estate taxes on more modest wealth – until January 1 of this year, it applied to any estate valued at more than $3.5 million, taxing only the money exceeding that threshold, or $7 million for a couple’s estate.
Incendiary issue
Although the tax affects only about 5,500 estates a year, it is such an incendiary issue that when Congress unexpectedly let it lapse at the end of 2009, financial advisers warned that it might play a macabre factor in the end-of-life decisions being weighed by heirs of elderly Americans. Some estate lawyers worried that tax considerations might prompt their clients to keep an ill relative on life support through the end of 2009 to get the favorable treatment – or worse, resist life-prolonging measures to hasten a relatives demise before the end of 2010.
The one-year lapse in the estate tax was signed into law by President George W. Bush in 2001, an accounting quirk in his package of tax cuts. Although Democrats pledged to close that gap and reinstate a tax for 2010 when they took control of Congress, they failed to reach an agreement last December. The Senate Finance Committee is not trying to forge a compromise that would reinstate the tax, but even if that effort succeeds, it is unclear whether any changes might be retroactive and applied to those who have died so far in 2010.
Many lawyers say Mr. Duncan’s heirs have the means and motivation to wage a fierce court battle to challenge the constitutionality of any retroactive tax.
Representatives of Mr. Duncan’s family, his estate and his business interests did not return calls about the matter. Mr. Duncan’s will, which is on file at the Harris County Probate Court in Houston, was written in 2006 and amended in 2008, a time when most estate planners assumed that Congress would not allow the tax to lapse. Federal law has long allowed an unlimited amount of assets to pass untaxed to a surviving spouse, and Mr. Duncan left his home and ranch to his wife of more than 20 years, Jan, along with stock valued at hundreds of millions of dollars.
But the bulk of his estate is left to his children and grandchildren, and would have been taxable in 2009 or 2011.
5,000-acre hunting ranch
In addition to personal effects bequeathed to his descendants – boats, jewelry, automobiles, shotguns and a 5,500-acre Texas hunting ranch stocked with wild game – he passed on his holdings in EPCO and Dan Duncan L.L.P., two entities in the natural gas and pipeline empire he built. The stock involved includes more than 100 million shares in Enterprise GP Holdings, which closed at $43.23 the last trading day before Mr. Duncan died. That asset alone could have resulted in a $2 billion estate tax.
The Treasury collected more than $25 billion in estate taxes in 2008, the most recent year for which data is available.
Elaborate estate plans with sophisticated trusts are often made many years before death to reduce estate taxes owed by the richest.
Advocates of the tax say it is unconscionable that Congressional leaders have allowed the richest Americans to reap a new tax break at a time when deficits are soaring and the income gap between wealthy and poor citizens remains near historic levels.
“The ultrawealthy in this country will still be able to pass on enormous wealth to the next generation,” said Chuck Collins, who studies income inequality and has worked with billionaires like Warren E. Buffet and Bill Gates to promote an estate tax. Mr. Collins argues that the tax is a “recycling program for economic opportunity.”
But opponents, who label it a death tax, say it is unfair because it taxes the same income twice – once when it is earned and again when it is passed on to heirs.
Mr. Duncan’s eldest daughter, Randa Duncan Williams, is serving as executor of the estate and is a voting member of the family trust that will now control her father’s interest in Enterprise GP Holdings.
Should the family trust sell these inherited shares, capital gains taxes would presumably be owed on the difference between Mr. Duncan’s original cost, which could be quite low, and their market value when sold. Capital gains taxes are capped at 15 percent.
Ms. Williams, who has served as a director and general partner at the family’s energy businesses for years, was deeply involved in her father’s philanthropic efforts and is expected to continue much of that charitable work.
During his life, Mr. Duncan contributed to a wide assortment of wildlife foundations and community institutions like the Houston Zoo and Houston Museum of Science, and an assortment of medical institutions. The various medical centers at Baylor College of Medicine received more than $250 million from Mr. Duncan and his wife, with more than $100 million used to found the Dan L. Duncan Cancer Center.
Mr. Duncan’s will designates a handful of nonprofit groups and charitable foundations that will receive donations, all of which would have been tax-exempt even in years when the estate tax was in effect.
An avid big game hunter – Mr. Duncan has more than 500 entries in the Safari Club International record book for killing animals including polar bears, rhinoceroses, bighorn sheep, lions and elephants – he made a $1 million donation in his will to the Shikar Safari Club International Foundation.
The will also directs that any money or assets not otherwise specified for a relative or charity be deposited into two family charitable trusts, which can be used to donate to causes deemed worthy by his heirs.
Tuesday, June 8, 2010
MAKE SURE YOUR LIFE INSURANCE IS NOT TAXED AT YOUR DEATH
Although your life insurance policy may pass to your heirs income tax-free, it can affect your estate tax. If you are the owner of the insurance policy, it will become a part of your taxable estate when you die. While the federal estate tax is currently zero, the exemption will be $1 million and the rate will increase to 55 percent on January 1, 2011, if Congress fails to act in the interim. And state estate taxes are still in effect now. You should make sure your life insurance policy won't have an impact on your estate's tax liability.
1. If your spouse is the beneficiary of your policy, then there is nothing to worry about. Spouses can transfer assets to each other tax-free. But if the beneficiary is anyone else (including your children), the policy will be a part of your estate for tax purposes. For example, suppose you buy a $200,000 life insurance policy and name your son as the beneficiary. When you die, the life insurance policy will be included in your taxable estate. If the total amount of your taxable estate exceeds the estate tax exemption, then your policy will be taxed.
In order to avoid having your life insurance policy taxed, you can either transfer the policy to someone else or put the policy into a trust. Once you transfer a policy to a trust or to someone else, you will no longer own the policy, which means you won't be able to change the beneficiary or exert control over it. In addition, the transfer may be subject to gift tax if the cash value of your policy (the amount you would get for your policy if you cashed it in) is more than $13,000. If you decide to transfer a life insurance policy, do it right away. If you die within three years of transferring the policy, the policy will still be included in your estate.
If you transfer a life insurance policy to a person, you need to make sure it is someone you trust not to cash in the policy. For example, if your spouse owns the policy and you get divorced, there will be no way for you to get it back. A better option may be to transfer the life insurance policy to a life insurance trust. With a life insurance trust, the trust owns the policy and is the beneficiary. You can then dictate who the beneficiary of the trust will be. For a life insurance trust to exclude your policy from estate taxes, it must be irrevocable and you cannot act as trustee.
If you want to transfer a current life insurance policy to someone else or set up a trust to purchase a policy, consult with your elder law attorney.
Source: www.elderlawanswers.com; 5/10.
1. If your spouse is the beneficiary of your policy, then there is nothing to worry about. Spouses can transfer assets to each other tax-free. But if the beneficiary is anyone else (including your children), the policy will be a part of your estate for tax purposes. For example, suppose you buy a $200,000 life insurance policy and name your son as the beneficiary. When you die, the life insurance policy will be included in your taxable estate. If the total amount of your taxable estate exceeds the estate tax exemption, then your policy will be taxed.
In order to avoid having your life insurance policy taxed, you can either transfer the policy to someone else or put the policy into a trust. Once you transfer a policy to a trust or to someone else, you will no longer own the policy, which means you won't be able to change the beneficiary or exert control over it. In addition, the transfer may be subject to gift tax if the cash value of your policy (the amount you would get for your policy if you cashed it in) is more than $13,000. If you decide to transfer a life insurance policy, do it right away. If you die within three years of transferring the policy, the policy will still be included in your estate.
If you transfer a life insurance policy to a person, you need to make sure it is someone you trust not to cash in the policy. For example, if your spouse owns the policy and you get divorced, there will be no way for you to get it back. A better option may be to transfer the life insurance policy to a life insurance trust. With a life insurance trust, the trust owns the policy and is the beneficiary. You can then dictate who the beneficiary of the trust will be. For a life insurance trust to exclude your policy from estate taxes, it must be irrevocable and you cannot act as trustee.
If you want to transfer a current life insurance policy to someone else or set up a trust to purchase a policy, consult with your elder law attorney.
Source: www.elderlawanswers.com; 5/10.
Wednesday, May 26, 2010
ESTATE TAX REFORM - Spring 2010
The following is an estate tax reform update, various possible outcomes and several interpretations from estate planning and tax attorneys throughout the United States. We thought we’d keep you up to date and share some of the interesting comments:
1. Late last year (2009) the House passed HR 4154 which permanently extended the $3.5 million dollar exemption (this is per person) for estates from estate tax. For a couple this meant they could
shelter $7,000,000. [Note: In 2011 the exemption will return to $1,000,000 per person unless Congress changes the law. This change is what we are talking about.] Furthermore, the House
legislation does away with the carry over basis rules which are being applied for decedents dying in 2010 and which have created such a nightmare in the administration of estates.
2. The Senate is trying to pass legislation itself, but has not been able to do so. This is where the hangup is at this time. If it does pass any reform then any Senate bill will need to be reconciled with the 2009 House bill before a compromise bill can be sent to the President for his signature. Any Senate bill will require 60 votes in the Senate to make the reformation permanent.
As of today, it is being reported Senate Finance Committee member Jon Kyl, R-AZ has reached an agreement with Senate Finance Commitee chairman, Max Baucus, D-MT to have the
finance committee propose legislation (in the form of a Senate bill) to allow an exemption of $5 million and an estate tax rate on amounts in excess of this amount at 35%. Many details would
still need to be worked out including whether it would be retroactive to January 1, 2010, whether it will be indexed to inflation, what any phase in might look like, how it would be reconciled with the House bill, portability or a variety of other issues under consideration.
3. There are only 13 "legislative weeks" remaining this year. At the end of August Congress will head out for recess and campaigning. If something is not done by then it is likely there will be no estate reform until perhaps after the elections have been completed.
4. In 2010 Congress passed the "Pay-as-You-Go Law" which requires Congress to find other sources of revenue for losses in revenue from tax cuts. In other words if a permanent repeal of
estate taxes is passed and if the exemption level which is set results in a tax cut being given then revenue must be found elsewhere in the budget to make up for the lost revenue from the estate
tax cut. Under current Pay-as-You-Go parameters Congress could pass a law allowing for the 2009 exemption amounts through 2011. This is a short term solution and not really preferred by
anyone in Congress, although some would argue is a step in the right direction. [Note: Getting a two year reprieve is not of much help to those with potentially taxable estate. It only continues the uncertainty for any client expecting to live beyond 2011.]
5. Senators Kyl (R-Ariz) and Lincoln (D-Ark) are the Senators who are leading the charge in the Senate Finance Committee to get something done. I am not sure how Senator Lincoln fits into
the agreement reached between Senators Baucus and Kyl as indicated above. They are pushing for a $5 million exemption and a rate on estates above this amount of 35%. To get to these
exemption amounts they must find revenue offsets [more on this below], which they may or may not be able to do.
6. So how does Congress get out of this hole and find a solution? There appears to be several options and each will require serious consideration and negotiations, not only amongst the
Senators, but the House and perhaps the office of the President. From the chatter (and my own thoughts) here are the possible solutions:
a) Option #1 Do nothing and let the estate tax exemption fall back to $1,000,000 starting in 2011. This does not seem like a popular solution in an election year. It would continue to show
Congress cannot work in a bi-partisan fashion to craft a remedy to give certainty to the electorate in planning their estates in an environment where inflation could rise pushing more and more
individuals into the dreaded estate tax zone. Furthermore, it does appear there is a real push to try to get something done as is evidenced by the chatter.
b) Option #2 The Senate could declare the estate tax reform to be an "emergency" and as such it would be exempt from the Pay-as-You-Go rules. Congress has only known about this possibility
if they failed to act for 10 years and now arguing it is an emergency would seem a bit ingenuous and likely to raise further furor at the ballot box.
c) Option #3 Congress could find offsets for the lost revenue. Again, this could be politically unpalatable if the offsets come from programs which do not impact the wealthy. This would be
reverse Robin Hood where taking from the poor and giving to the wealthy may not set well at the ballot box. To find offsets which impact only the wealthy Congress could (1) look to the
elimination or reduction in the use of the Grantor Retained Annuity Trusts; (2) eliminate the use of "discounts"; (3) eliminate the state death tax credit; (4) eliminate the use of Qualified Personal Residence Trusts and (5) allow for the use of something called a Prepayment Trust, which would allow you to prepay your estate tax. On the Prepayment Trust you can draw a parallel to the Roth Conversion idea where you give the IRS your money now to avoid later taxation. Some argue the offsets need to be found only for the amount of any lost revenue above the
amount in the House bill which made the repeal permanent at the $3.5 million dollar level. If this is the case it is possible the offsets needed may not be as great. It also leaves open the option of simply staying with the $3.5 exemption amount.
d) Option #4 Congress could amend the Pay-as-You-Go rules to provide for an exception for estate tax reform. Try to sell that one back home! Furthermore, the Blue Dog Coalition in the
House would likely not support this approach.
e) Option #5 If Congress wanted to they could just pass the new legislation and worry about making up the deficit in revenue by cutting other programs later in the year.
There does not appear to be any discussion about the concept of "portability" in the discussions with the Senate staffers. Portability would have simplified the planning process by allowing a
surviving spouse to have an exemption of twice the exemption amount ($7 million if the exemption were $3.5 million per person). This would make planning for when the first spouse
much easier and would do away with the need to create the "Bypass Trust." So stay tuned. These are exciting times. If the current chatter amongst our colleagues and the
Congressional staffers and quotes by key members of the Senate are any indication, estate reform could be coming in the next months. We will try to keep you up to date. If you have questions in
the meantime then come in and set a time to visit.
Source: Baird D. Brown, Attorney at Law, Grand Junction, CO - 5/18/10.
1. Late last year (2009) the House passed HR 4154 which permanently extended the $3.5 million dollar exemption (this is per person) for estates from estate tax. For a couple this meant they could
shelter $7,000,000. [Note: In 2011 the exemption will return to $1,000,000 per person unless Congress changes the law. This change is what we are talking about.] Furthermore, the House
legislation does away with the carry over basis rules which are being applied for decedents dying in 2010 and which have created such a nightmare in the administration of estates.
2. The Senate is trying to pass legislation itself, but has not been able to do so. This is where the hangup is at this time. If it does pass any reform then any Senate bill will need to be reconciled with the 2009 House bill before a compromise bill can be sent to the President for his signature. Any Senate bill will require 60 votes in the Senate to make the reformation permanent.
As of today, it is being reported Senate Finance Committee member Jon Kyl, R-AZ has reached an agreement with Senate Finance Commitee chairman, Max Baucus, D-MT to have the
finance committee propose legislation (in the form of a Senate bill) to allow an exemption of $5 million and an estate tax rate on amounts in excess of this amount at 35%. Many details would
still need to be worked out including whether it would be retroactive to January 1, 2010, whether it will be indexed to inflation, what any phase in might look like, how it would be reconciled with the House bill, portability or a variety of other issues under consideration.
3. There are only 13 "legislative weeks" remaining this year. At the end of August Congress will head out for recess and campaigning. If something is not done by then it is likely there will be no estate reform until perhaps after the elections have been completed.
4. In 2010 Congress passed the "Pay-as-You-Go Law" which requires Congress to find other sources of revenue for losses in revenue from tax cuts. In other words if a permanent repeal of
estate taxes is passed and if the exemption level which is set results in a tax cut being given then revenue must be found elsewhere in the budget to make up for the lost revenue from the estate
tax cut. Under current Pay-as-You-Go parameters Congress could pass a law allowing for the 2009 exemption amounts through 2011. This is a short term solution and not really preferred by
anyone in Congress, although some would argue is a step in the right direction. [Note: Getting a two year reprieve is not of much help to those with potentially taxable estate. It only continues the uncertainty for any client expecting to live beyond 2011.]
5. Senators Kyl (R-Ariz) and Lincoln (D-Ark) are the Senators who are leading the charge in the Senate Finance Committee to get something done. I am not sure how Senator Lincoln fits into
the agreement reached between Senators Baucus and Kyl as indicated above. They are pushing for a $5 million exemption and a rate on estates above this amount of 35%. To get to these
exemption amounts they must find revenue offsets [more on this below], which they may or may not be able to do.
6. So how does Congress get out of this hole and find a solution? There appears to be several options and each will require serious consideration and negotiations, not only amongst the
Senators, but the House and perhaps the office of the President. From the chatter (and my own thoughts) here are the possible solutions:
a) Option #1 Do nothing and let the estate tax exemption fall back to $1,000,000 starting in 2011. This does not seem like a popular solution in an election year. It would continue to show
Congress cannot work in a bi-partisan fashion to craft a remedy to give certainty to the electorate in planning their estates in an environment where inflation could rise pushing more and more
individuals into the dreaded estate tax zone. Furthermore, it does appear there is a real push to try to get something done as is evidenced by the chatter.
b) Option #2 The Senate could declare the estate tax reform to be an "emergency" and as such it would be exempt from the Pay-as-You-Go rules. Congress has only known about this possibility
if they failed to act for 10 years and now arguing it is an emergency would seem a bit ingenuous and likely to raise further furor at the ballot box.
c) Option #3 Congress could find offsets for the lost revenue. Again, this could be politically unpalatable if the offsets come from programs which do not impact the wealthy. This would be
reverse Robin Hood where taking from the poor and giving to the wealthy may not set well at the ballot box. To find offsets which impact only the wealthy Congress could (1) look to the
elimination or reduction in the use of the Grantor Retained Annuity Trusts; (2) eliminate the use of "discounts"; (3) eliminate the state death tax credit; (4) eliminate the use of Qualified Personal Residence Trusts and (5) allow for the use of something called a Prepayment Trust, which would allow you to prepay your estate tax. On the Prepayment Trust you can draw a parallel to the Roth Conversion idea where you give the IRS your money now to avoid later taxation. Some argue the offsets need to be found only for the amount of any lost revenue above the
amount in the House bill which made the repeal permanent at the $3.5 million dollar level. If this is the case it is possible the offsets needed may not be as great. It also leaves open the option of simply staying with the $3.5 exemption amount.
d) Option #4 Congress could amend the Pay-as-You-Go rules to provide for an exception for estate tax reform. Try to sell that one back home! Furthermore, the Blue Dog Coalition in the
House would likely not support this approach.
e) Option #5 If Congress wanted to they could just pass the new legislation and worry about making up the deficit in revenue by cutting other programs later in the year.
There does not appear to be any discussion about the concept of "portability" in the discussions with the Senate staffers. Portability would have simplified the planning process by allowing a
surviving spouse to have an exemption of twice the exemption amount ($7 million if the exemption were $3.5 million per person). This would make planning for when the first spouse
much easier and would do away with the need to create the "Bypass Trust." So stay tuned. These are exciting times. If the current chatter amongst our colleagues and the
Congressional staffers and quotes by key members of the Senate are any indication, estate reform could be coming in the next months. We will try to keep you up to date. If you have questions in
the meantime then come in and set a time to visit.
Source: Baird D. Brown, Attorney at Law, Grand Junction, CO - 5/18/10.
Friday, May 14, 2010
FIVE YEARS AFTER SCHIAVO, FEW MAKE END-OF-LIFE PLANS
The following is a reprint of an article that we’d like to share with you from msnbc.com on March 30th of this year. Several years ago, when the Terri Schiavo case was forefront in the news, we here at Davidow, Davidow, Siegel & Stern, spent a good amount of time explaining the specifics surrounding the case and why it should prompt everyone to plan ahead. If you or a loved one has not considered making such crucial plans, do it for yourself now so that someone else doesn’t have to do it for you later.
Five years after the court fight over allowing Terri Schiavo to die, most Americans still don’t draft the legal documents that spell out how far caregivers should go to keep them alive artificially.
Schiavo’s life and death captivated the country and fueled conversations about the necessity of the documents, known as advance directives or living wills. Even though millions witnessed a worse-case scenario, there’s no indication it had a lasting impact on getting more people to make their wishes known.
“The gap is so big,” said Paul Malley, president of Aging with Dignity, which advocates advance directives and which saw an increase in interest during the Schiavo case. “Even a significant impact from the Schiavo case doesn’t put a dent in the need that’s out there.”
The protracted family fight over keeping Schiavo alive, and her ultimate death March 31, 2005, plastered her story in headlines and prompted an immediate spike in Americans filling out advance directives. But while Schiavo’s struggle remains in the minds of many, the momentum it created for writing the instructions appears to have ebbed.
End-of-life experts estimate 20 to 30 percent of U.S. adults have advance directives, the same as before the Schiavo case. Even in polls of older Americans, who fill out such forms at higher rates, there is little if any change from 2005.
“Awareness is up,” said Kathy Brandt, a vice president of the National Hospice and Palliative Care Organization. “But I don’t know that people understand any better and I don’t know that we’re ever going to get better than a third of Americans.”
Much of the problem with advance directives is people aren’t entirely sure what they do, or fear they mean they’d be forced to forgo lifesaving treatment. In fact, they can be changed by the patient and would only be used in limited grave circumstances, typically in which they can no longer communicate their wishes.
Living wills spell out desires regarding the use of respirators, feeding tubes and other life-support efforts, and to what lengths a person wants to be kept alive in the face of brain damage, comas and other conditions.
Schiavo, who collapsed at her St. Petersburg, Florida, home in 1990, had no such instructions in writing. Her heart stopped and she suffered what doctors said was irreversible brain damage that left her in a permanent vegetative state.
Her husband said his wife would not have wanted to live in a vegetative state; her parents wanted to keep her alive. The result was an epic legal battle that involved dozens of judges in numerous jurisdictions, including the U.S. Supreme Court.
In the end, her feeding tube was ordered removed two weeks before she finally succumbed.
Still, while the paperwork on end-of-life wishes is vital – particularly in cases such as Schiavo’s, when family members disagree – family discussions that precede such documentation can be even more important.
“It’s an ongoing conversation,” said Sally Hurme, who works on consumer health education for AARP, an advocacy group for older people. “Your views may change, your health circumstances may change and you need to keep your family up to date.”
Malley says advance directives should be part of a broader conversation about what an individual wants out of their final years, how they want to be cared for, where they want to live and so on. Even when someone does have a living will, they often haven’t had such a conversation with their loved ones.
“When people are asked what’s important for them at the end of life, they talk about being at home, with family, not in pain,” he said. “A lot of times we only ask the question about life support treatment and tubes and ventilators.”
Even for those who deal with death daily, though, thinking about one’s own can be difficult.
Dr. Gail Cooney, a 57-year-old neurologist who is medical director at the Hospice of Palm Beach County, had spent more than 20 years preaching to patients and family alike the necessity of having advance directives. She knew full well the importance and had seen what could happen without something in writing.
But, still, it took a diagnosis of ovarian cancer and subsequent major surgery before she took her own advice.
“I knew what I wanted but I had never written it down until I was sitting there waiting for surgery in that stupid little hospital gown,” she said.
Five years after the court fight over allowing Terri Schiavo to die, most Americans still don’t draft the legal documents that spell out how far caregivers should go to keep them alive artificially.
Schiavo’s life and death captivated the country and fueled conversations about the necessity of the documents, known as advance directives or living wills. Even though millions witnessed a worse-case scenario, there’s no indication it had a lasting impact on getting more people to make their wishes known.
“The gap is so big,” said Paul Malley, president of Aging with Dignity, which advocates advance directives and which saw an increase in interest during the Schiavo case. “Even a significant impact from the Schiavo case doesn’t put a dent in the need that’s out there.”
The protracted family fight over keeping Schiavo alive, and her ultimate death March 31, 2005, plastered her story in headlines and prompted an immediate spike in Americans filling out advance directives. But while Schiavo’s struggle remains in the minds of many, the momentum it created for writing the instructions appears to have ebbed.
End-of-life experts estimate 20 to 30 percent of U.S. adults have advance directives, the same as before the Schiavo case. Even in polls of older Americans, who fill out such forms at higher rates, there is little if any change from 2005.
“Awareness is up,” said Kathy Brandt, a vice president of the National Hospice and Palliative Care Organization. “But I don’t know that people understand any better and I don’t know that we’re ever going to get better than a third of Americans.”
Much of the problem with advance directives is people aren’t entirely sure what they do, or fear they mean they’d be forced to forgo lifesaving treatment. In fact, they can be changed by the patient and would only be used in limited grave circumstances, typically in which they can no longer communicate their wishes.
Living wills spell out desires regarding the use of respirators, feeding tubes and other life-support efforts, and to what lengths a person wants to be kept alive in the face of brain damage, comas and other conditions.
Schiavo, who collapsed at her St. Petersburg, Florida, home in 1990, had no such instructions in writing. Her heart stopped and she suffered what doctors said was irreversible brain damage that left her in a permanent vegetative state.
Her husband said his wife would not have wanted to live in a vegetative state; her parents wanted to keep her alive. The result was an epic legal battle that involved dozens of judges in numerous jurisdictions, including the U.S. Supreme Court.
In the end, her feeding tube was ordered removed two weeks before she finally succumbed.
Still, while the paperwork on end-of-life wishes is vital – particularly in cases such as Schiavo’s, when family members disagree – family discussions that precede such documentation can be even more important.
“It’s an ongoing conversation,” said Sally Hurme, who works on consumer health education for AARP, an advocacy group for older people. “Your views may change, your health circumstances may change and you need to keep your family up to date.”
Malley says advance directives should be part of a broader conversation about what an individual wants out of their final years, how they want to be cared for, where they want to live and so on. Even when someone does have a living will, they often haven’t had such a conversation with their loved ones.
“When people are asked what’s important for them at the end of life, they talk about being at home, with family, not in pain,” he said. “A lot of times we only ask the question about life support treatment and tubes and ventilators.”
Even for those who deal with death daily, though, thinking about one’s own can be difficult.
Dr. Gail Cooney, a 57-year-old neurologist who is medical director at the Hospice of Palm Beach County, had spent more than 20 years preaching to patients and family alike the necessity of having advance directives. She knew full well the importance and had seen what could happen without something in writing.
But, still, it took a diagnosis of ovarian cancer and subsequent major surgery before she took her own advice.
“I knew what I wanted but I had never written it down until I was sitting there waiting for surgery in that stupid little hospital gown,” she said.
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