Estate Tax Confusion Continues

October 11, 2010 by

The families of wealthy people who died early in 2010 are starting to confront a confused set of deadlines in this rare year of no estate tax. The estate-tax lapse, which some tax advisors predicted would never happen, is here. The Bush tax cuts of 2001 steadily pared the tax rates and increased the dollar amount at which an estate qualifies to be taxed, and Congress didn’t step in to prevent the one-year repeal for 2010. Next year, the top rate on estates over $1 million will be 55 percent unless Congress makes a change.

Federal tax returns are normally due on Form 706 (Estate Tax Return) nine months after death. But none are due in 2010. In many cases heirs still have to think about state estate taxes. Twenty-one states have an estate tax, but Wisconsin does not.

Nine months after death is also the time for a tax maneuver known as a disclaimer, which has special implications for heirs this year. Disclaimers are used to move assets from one generation to another, or to right some inequity in a will, or further the wishes of the deceased. A spouse may disclaim assets she would otherwise inherit, and let them pass instead to children to take advantage of the lack of an estate tax. Children may also disclaim to pass assets to grandchildren and avoid another potential tax in their own estates.

Some attorneys are advising families of those who died this year to defer disclaimer decisions until the deadline is about to expire. Although it’s unlikely, Congress could still enact a retroactive estate tax, making a disclaimer disadvantageous.

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Congratulations are in order…

October 6, 2010 by

My granddaughter and her mom

It is with great pleasure that I announce the latest addition to our family law practice. Miss Fey has been appointed Director of Family Perspective by virtue of her birth.  Although we generally oppose nepotism, we are happily waiving that policy in this particular case. Miss Fey’s arrival also makes me a grandfather, and I couldn’t be more delighted.

My daughter and colleague, Emily Fey, and her husband, Brian, are the proud parents of a baby girl born early this morning (Oct. 6, 2010). Both mother and child are doing well.

College Financing 101

October 5, 2010 by

College might still be in the distant future, but it’s not too early to start thinking about how you’re going to pay for your child’s education. Here are a few interesting facts I found in a recent article in the Wall Street Journal

Over any 17-year period, college costs go up by about a factor of three. The average in-state tuition for a public four-year university for the 2009-2010 school year was $7,020, which means children born in 2009 going to school 17 years later should reasonably expect to pay an average of $21,060. New parents looking to start saving for college now should probably save at least $200 a month from the birth of their child to cover the cost of a public four-year university and $430 for a non-profit four-year university.

The Free Application for Federal Student Aid, or FASFA, determines a student’s eligibility for federal financial aid, which includes Pell grants, Stafford loans and Perkins loans, by looking at the applicant’s “available income.” Available income includes taxed and untaxed income, but excludes some tax credits such as the Earned Income Tax Credit and funds from public assistance such as Temporary Assistance for Needy Families. IRA deductions, child support, and capital gains from investments are included in the calculation.

There are several different types of savings plans designed to help families set aside funds for future college costs.

There are two different types of 529 Plans—a prepaid program and a savings plan. The prepaid plan works like an annuity contract, essentially allowing you to pay for one to four years of college at today’s cost. These don’t tend to be as popular, because the guarantee is usually based on tuition at in-state public schools and most people can’t predict where their kids will ultimately go to school. The savings plan is similar to an IRA or 401(k), where savers invest their contributions in products like mutual funds and can make withdrawals tax-free if the money is used for higher education.

Coverdell Education Savings Accounts – also known as Education IRAs – are trusts that can be used to cover qualified education expenses for college as well as for kindergarten through 12th grade. Currently, the maximum contribution allowed for a Coverdell is $2,000 per year per beneficiary and can be made until the beneficiary is 18 years old, but this is slated to change at the end of the year when a 2001 tax law expires. At that time the contribution limit will fall to $500 a year unless Congress acts to extend the benefit. The law’s expiration also means that withdrawals to pay for K-12 expenses will no longer be tax-free, but they will remain tax free for college expenses.

What is the difference between a 529 college-savings plan and a Coverdell Education Savings Account?  Income-based contribution phase-outs for Coverdells begin between $95,000 and $110,000 for single filers and between $190,000 and $220,000 for those who are married filing jointly. In contrast, there are no income limits for 529 college savings plans, and contributions are considered completed gifts, meaning that generally speaking, an individual can contribute up to $13,000 annually per beneficiary or a married couple can contribute $26,000 annually per beneficiary without incurring a gift tax. A special rule for 529 plans allows a contributor to make five years’ worth of gifts in one year to the plan without incurring a gift tax. Also, tax-free withdrawals from 529 savings plans can be used only for college-related expenses, such as tuition and fees, room and board, books and required supplies.

College savings plans like a 529 or Coverdell can affect financial aid. FASFA looks at both the assets of the parents and the students to determine eligibility for financial aid, and savings plans are generally considered to be assets, not income. However, distributions from savings plans not used for qualified educational expenses would be considered taxable income. College savings plans in either the parents’ or child’s name are reported as parental assets on FASFA, while those held by others like an aunt or grandparent are not reported, despite the child being the beneficiary.

Families often overlook Hope Scholarship Tax Credit, which is a program targeted at middle-income families. The credit is worth up to $2,500 per student per year for qualified higher-education expenses during the first four years of college, and income phase-outs start at $80,000 up to $90,000 for single filers, and $160,000 up to $180,000 for those married filing jointly. As of 2009, the credit is not subject to the Alternative Minimum Tax.

Caregivers Should Have Contracts

September 30, 2010 by

Recent studies indicate that approximately 43.5 million Americans look after someone age 50 or older. It is not known how many are paid for doing so, but the numbers are rising. If that caregiver is a family member, it’s important to draft a formal employment agreement – and disclose the arrangement to the entire family.

Employment agreements should document a caregiver’s responsibilities and hours, and set a rate of pay that’s in line with local practices. Both the caregiver and care recipient should sign the contract and disclose it to the rest of the family to avoid causing family tension or running afoul of Medicaid eligibility requirements.

If a parent will rely on Medicaid to cover future nursing-home costs, a family must pay the caregiver in a way that’s permitted under Medicaid law. Before Medicaid will pick up the tab for nursing-home costs, it requires applicants to recoup certain payments made to relatives over the previous five years to pay the nursing home.

But if payments to relatives are made under the terms of a written employment agreement, often called a personal-care contract, the law allows it as long as the contract was in place before the services are rendered.

What’s in a name?

September 27, 2010 by

It goes without saying that employers should strive to be proactive in eliminating harassment and discrimination in the workplace. This may require that steps be taken to ensure that employees are trained to recognize, appreciate and respect ethnic characteristics beyond those associated with one’s skin tone or physical attributes.

The Wisconsin Law Journal recently published an article stating that ethnic characteristics can include ethnic names and conceivably encompass speech patterns unique to a particular ethnic group and customs and traditions of various ethnic groups.

The article includes the following hypothetical situation:  Over the last several months one of your managers, Teddy, has gone around on several occasions referring to Alonzo Ramirez, a sales representative of Hispanic descent, as “Al” to other employees and to potential customers during sales calls. For Teddy, whose full name is Theodore Adams, this is a way to help make Alonzo (like he has successfully done for himself) more personable to staff and customers alike. Alonzo, however, does not agree and begins to insist that Teddy refer to him by his birth name. Teddy, honestly seeing no harm in what he’s doing, continues to call Alonzo “Al” on occasion, particularly during sales calls.

Alonzo is convinced that Teddy’s deliberate and routine “Americanizing” of his Hispanic name over his objections has created a racially harassing and hostile work environment. He contacts you and threatens suit unless something is done quickly.

Can Teddy’s repeated references to Alonzo as Al, which on its face are racially neutral, serve as the basis of a successful harassment/hostile work environment claim? The short answer is yes, even if there is no evidence of discriminatory intent other than the Westernizing or Americanizing of an ethnic name. The 9th Circuit Court of Appeals recently dealt with this very issue. Ethnic characteristics protected by the law include more than just a person’s skin color and physical traits. The court noted that names in and of themselves are often a proxy for race and ethnicity.

The court determined that the defendant’s refusal to refer to the plaintiff by his given ethnic name was based on his race/ethnicity. Further, even if there was no direct evidence that the defendant believed his actions had racial implications, his decision to discriminate against the plaintiff’s Arab name in favor of Western names provided sufficient evidence of prohibited discriminatory intent. It supported a finding of a racially hostile work environment.

So what does this all mean for you in dealing with Alonzo’s problems with Teddy? It means you should take his concerns seriously. If the story he relays to you can be substantiated, it could very well mean that he has in fact been harassed and subjected to a hostile work environment in violation of the law. To avoid liability, you should take prompt appropriate remedial action including, but not limited to, disciplining Teddy, reassigning him to another location or terminating his employment. The same holds true even if you conclude after your investigation that Teddy, in his mind, had noble intentions. Good intentions in this regard will likely not be enough to overcome racial or ethnic insensitivity and discriminatory preference.

Protecting Privacy on Facebook

September 23, 2010 by

The social networking phenomenon has millions of Americans sharing their photos, pastimes and details about their class reunions on Facebook, Twitter and dozens of similar sites. You can certainly enjoy networking and sharing photos, but you should know that sharing some information puts you at risk. Experts advise there are some personal details you should never reveal.

•  Your full birth date. It’s an ideal target for identity thieves, who could use it to obtain more information about you and potentially gain access to your bank or credit card account. If you’ve already entered a birth date, go to your profile page and click on the Info tab, then on Edit Information. Under the Basic Information section, choose to show only the month and day or no birthday at all. A study done by Carnegie Mellon showed that a date and place of birth could be used to predict most — and sometimes all — of the numbers in your Social Security number.
•  Vacation plans. That’s like putting a “no one’s home” sign on your door. Wait until you get back to tell everyone how awesome your vacation was and be vague about the date of any trip. Don’t invite criminals in by telling them specifically when you’ll be gone.
•  Home address. A study recently released by the Ponemon Institute (which does independent research on privacy, data protection and information security policy) found that users of social media sites were at greater risk of physical and identity theft because of the information they were sharing. Forty percent listed their home address on the sites, 65 percent didn’t even attempt to block out strangers with privacy settings, and 60 percent said they weren’t confident all their “friends” were really people they know.
Confessions. You may hate your job, lie on your taxes, or be a recreational user of illicit drugs, but this is no place to confess. Employers commonly peruse social networking sites to determine who to hire and, sometimes, who to fire. One study done last year estimated that 8 percent of companies fired someone for “misuse” of social media.
•  Password clues. If you’ve got online accounts, you’ve probably answered a dozen different security questions, telling your bank or brokerage firm your mother’s maiden name; the church you were married in; or the name of your favorite song. Got that same stuff on the information page of your Facebook profile? You’re giving crooks an easy way to guess your passwords.
•  Risky behaviors. You like to soar above the hills in a hang glider, or smoke like a chimney? Insurers are increasingly turning to the web to figure out whether their applicants and customers are putting their lives or property at risk.
•  Your child’s name in a caption. Don’t use a child’s name in photo tags or captions. If someone else does, delete it by clicking on Remove Tag. If your child isn’t on Facebook and someone includes his or her name in a caption, ask that person to remove the name.

Common mistakes include:
•  Having a weak password. Avoid simple names or words you can find in a dictionary, even with numbers tacked on the end. Instead, mix upper- and lower-case letters, numbers, and symbols. A password should have at least eight characters. Better yet, 12 characters – not 11 or 13. Experts say 12 is the best. One good technique is to insert numbers or symbols in the middle of a word.
•  Overlooking useful privacy controls. For almost everything in your Facebook profile, you can limit access to only your friends, friends of friends, or yourself. Restrict access to photos, birth date, religious views, and family information, among other things. You can give only certain people or groups access to items such as photos, or block particular people from seeing them. Consider leaving out contact info, such as phone number and address, since you probably don’t want anyone to have access to that information anyway.
•  Letting search engines find you. To help prevent strangers from accessing your page, go to the Search section of Facebook’s privacy controls and select Only Friends for Facebook search results. Be sure the box for public search results isn’t checked.
•  Permitting youngsters to use Facebook unsupervised. Facebook limits its members to ages 13 and over, but children younger than that do use it. If you have a young child or teenager on Facebook, the best way to provide oversight is to become one of their online friends. Use your e-mail address as the contact for their account so that you receive their notifications and monitor their activities.

FDIC Insurance Coverage Permanently Increased

September 21, 2010 by

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which permanently raises the current standard maximum deposit insurance amount to $250,000. The FDIC insurance coverage limit applies per depositor, per insured depository institution for each account ownership category.

The standard maximum insurance amount had been temporarily raised from $100,000 to $250,000, effective from October 3, 2008, through December 31, 2013. This permanent increase of deposit insurance coverage means depositors with CDs worth more than $100,000 but less than $250,000 will no longer have to worry about losing coverage on those CDs maturing beyond 2013.

Insured deposits provide peace of mind to depositors that their money is 100 percent safe – provided they keep their deposit balances within the insurance limits. The FDIC encourages all bank depositors who have questions about their insurance coverage to visit their website or call 1-877-ASK-FDIC.

Congress created the Federal Deposit Insurance Corporation in 1933 to restore public confidence in the nation’s banking system. The FDIC insures deposits at the nation’s 7,932 banks and savings associations and promotes the safety and soundness of these institutions by identifying, monitoring the addressing risks to which they are exposed. The FDIC receives no federal tax dollars. Insured financial institutions fund its operations.

Jumbo Mortgage Rates Falling

September 17, 2010 by

(Jason Marsh is a well-respected mortgage broker with Mortgage Services III, LLC in Waukesha, Wisconsin. His firm has been a trusted source for mortgage financing for more than 30 years.)

There has been a change in the jumbo mortgage market. Up until recently jumbo mortgage rates were as much as two percentage points higher than conventional mortgage rates. Last year at this time a conventional mortgage was at about 4.875 percent, whereas a comparable jumbo mortgage was as much as 6.875 to 7.5 percent. Recently that pricing has changed dramatically.

Today you should be able to get a 30-year jumbo mortgage in the 5.5 percent range. Of course rates and terms will vary from funding source to funding source, and it might become somewhat dicey if the new jumbo is replacing a first and second mortgage. A second mortgage is often treated as a cash-out transaction and that may get in the way of getting a jumbo.

The defining difference between a conforming mortgage and a jumbo mortgage is the size of the loan. Fannie Mae and Freddie Mac are the federal government organizations that purchase mortgages from lenders and securitize them so that lenders have more money to issue mortgages with the goal of making mortgages more readily available. Each year, the federal Housing Finance Agency updates the conforming loan limits, which specify the maximum mortgage size that Fannie Mae can purchase from lenders. For 2010, the general mortgage limit is $417,000.

Interest rates on jumbo loans are typically higher than conforming loans because of the risk the lender assumes by issuing the loan, and because the lender has to keep the loan rather than selling it. In addition, jumbo loans are almost exclusively adjustable rate mortgages whereas conforming loans can have either an adjustable rate or a fixed rate.
Lenders have higher standards for jumbo loans. In order to qualify for a jumbo loan, you will need at least a 20 percent down payment, a credit score of 720 or higher, and verified income to prove you can repay the loan.

Jumbo mortgages also have caps on DTI ratios (debt to income ratios) of 45 percent. Your DTI is determined by dividing all of your monthly debt including your mortgage by your income. For example, $4,500 in total monthly debt divided by $10,000 in gross income equals 45 percent . You qualify!

*** Important note regarding income: It is calculated on your gross income and not your net take home pay after taxes.

Nonprofits Must File by Oct. 15 to Maintain Status

September 15, 2010 by

Small tax-exempt, nonprofit groups are now required to file a tax form with IRS, or risk losing their tax-exempt status. Many should have filed in May, but the IRS has granted a one-time relief program that extended the filing deadline to Oct. 15.

Congress passed legislation in 2006 that requires all tax-exempt organizations, except churches and religious organizations, to file an informational 990-N return annually with the IRS starting in 2007. Before that legislation, organizations that collected $25,000 or less in a year were not required to file. For the first time those that didn’t file for three consecutive years are at risk of losing their tax-exempt status. That three-year window hit in 2010.

Even though the IRS sent out one million letters to inform these groups of the new regulation, many still didn’t file and are in jeopardy. Wisconsin has an estimated 6,000 small, tax-exempt organizations affected by this legislation. Close to 1,000 organizations In Milwaukee are on the list.

The form is short and takes just a few minutes to fill out. It contains eight questions, such as the employer identification number, name of organization, address, principal officer, etc. It can be found on the IRS website and can be filled out electronically.

Requiring this has given the IRS a means of creating an accurate, updated list of charitable organizations so people can determine whether an organization is tax-exempt and their contribution is deductible.

Coping With Age-Related Changes

September 10, 2010 by

“A person is always startled when he hears himself called old for the first time.”
— Oliver Wendell Holmes

Coping with changes that affect an older person’s independence isn’t easy. An article I read recently in USA Weekend offered these tips to help with the difficult conversations you may need to have with your older parent, spouse, sibling, or other relative:

Giving up the car keys
•  Get an evaluation. Most states let anyone report an at-risk driver. Most also have an evaluation process to determine whether seniors are a danger to themselves or others. Often, people whose driving skills don’t pass muster will stop driving because they realize they’re no longer up to it.
•    Be direct. Telling a parent that he or she has to give up driving can be difficult, but important. It’s one thing if you kill yourself, but what if you kill somebody else? That thought may get the at-risk driver to stop.
•  Involve the doctor. If a physician reports an at-risk driver, the driver must, at minimum, take another road test.
•  Arrange alternatives. Set up transportation alternatives before a parent stops driving. Set up home delivery for groceries.

Moving to assisted living
•  Put yourself in the senior’s shoes. Frame the discussion from the elderly person’s point of view. For many, the pinnacle achievement in life was to buy a house, pay it off with the idea of living in it forever. It’s not just a house, it’s history and memories.
•  Try it out. Many major assisted-living companies offer respite visits. Seniors can stay a week or two to try it out, and then go home.
•  Don’t sell — yet. Wait to sell the house until the senior is comfortable in assisted living. If you need to sell right away, move the senior first. In this market most houses aren’t going to sell right away, and if assisted living doesn’t work out, you can always take the house off the market.
•  Be patient. Satisfaction rates in assisted living are in the 80 to 90 percent once the resident is settled in. Allow three to four months for seniors to accept the change.

Handling finances
•  Understand the senior’s point of view. Today’s seniors are the generation of savers. It’s hard to give control of their money to a younger person who doesn’t have the same view of saving and spending. Show that you understand your loved one’s point of view and offer reassurance that his or her wishes will be honored.
•  Be tactful with suggestions. Be sensitive to the senior’s tolerances. Automatic bill-paying and online banking may seem ideal to you, but some elderly people don’t like the idea of giving access to their bank account to anyone. Explain how you use these tools. Walk your loved one through the process.