In the final hours of 2010, Congress passed the Tax Relief Act of 2010.  As part of that act, the estate tax continues for two more years with an exemption level of $5 million and a maximum tax rate of 35%.

            The key issue is that the extension is only for two years.  The possibilities as of January 1, 2013 include (a) possible total repeal; (b) the 2011 and 2012 rules become permanent; (c) we have an ultimate sunset and return to the $1 million exemption level.  Personally, I am making no predictions on this round. 

            Planning in 2011 creates both opportunities and pitfalls.  Key planning opportunities are as follows:

            $5 million exemption for estate and gift taxes.  For 2011 and 2012, we return to a unified credit for estate and gift taxes. Any donor (or later decedent) can transfer up to $5,000,000 to his or her heirs gift and estate tax free.    

            For those individuals with assets well in excess of $5,000,000, the law presents an opportunity to consider aggressive lifetime gifts. The caveat of many advisors is a concern as to what will happen if there is a return to the $1 million dollar level.  For those with an estate in the vicinity of the exemption amount, consideration must be given to whether there will be more benefit from a step-up in basis, which results with an at death transfer, than there will be from a lifetime gift.

            With respect to any estate plan, the higher exemption amount creates the opportunity to focus more on desired disposition of assets rather than avoiding estate taxes.  Income tax planning becomes a more significant factor than estate tax planning.

            Portability of exemption.  The law allows the executor of a deceased spouse’s estate to transfer any unused exemption to the surviving spouse. That is, if the first spouse to die has an estate of $2 million dollars, such spouse’s unused exemption will be $3 million dollars. That exemption can be passed to the surviving spouse, who then has an $8 million dollar exemption.

            While some commentators view the portability of the exemption as a panacea and eliminating the need for trusts, my view is that the portability simply offers added flexibility but has limited usefulness in estate plans of those who have been married more than once and/or have children from various marriages.  Even in the cases of first marriages, the available unused exemption is limited to the unused exemption of the most recent deceased spouse.  Thus, if the surviving spouse remarries and is predeceased by her new spouse, the available transferred unused exemption will be that of the later spouse.

            My recommendation.   For the next two years, I am not recommending dramatic changes to estate plans. I do recommend review. Most should review current disposition structure and consider whether there are any short term planning opportunities under the law as it exists for two years.

Author’s Note: While medical practices generally are not considered to have goodwill, a dental practice can be distinguished and may have goodwill.

© 2010 Parsonage Vandenack Williams LLC

  For more information, contact info@pvwlaw.com

Hire Now Tax Cut

$13 billion in tax breaks  are available to qualified employers both in the form of payroll forgiveness for Social Security taxes paid for qualified new hires, as well as a tax credit to employers for keeping those employees on payroll for 52 consecutive weeks.

Social Security Tax Forgiveness

Qualified Employer. A qualified employer is any non-governmental entity hiring in the United States. Federal, state or local governments or instrumentalities, except for state colleges and universities, do not qualify. Any employer may choose to opt out of the forgiveness program.

Qualified Employee. A  qualified employee is any previously unemployed individual hired between February 3, 2010 and January 1, 2011.  The individual must be able to show no more than 40 hours employment in the 60 days prior to hiring. The new hire cannot replace an employee unless the replaced employee’s departure was either voluntarily or for cause. Relatives of the employer, or shareholders owning more than 50 percent of the business, are not eligible employees.

Retained Worker Tax Credit

Employers will be eligible for an additional tax credit for each qualified retained worker kept on the payroll for 52 consecutive weeks. That credit will come as an increase to the Code Sec. 38(b) credit by the lesser of $1,000 or 6.2 percent of wages paid during the 52-week period.

 Qualified Retained Worker. A new worker kept on the payroll for 52 consecutive weeks might qualify as a retained worker. To ensure just pay, that worker needs to earn an amount equal to at least 80 percent of his or her first 26-week accumulated wage in his or her second 26 weeks.

 Employers may claim the retained worker credit only if the full 52-week period is met. Should a worker spend 51 consecutive weeks in employment and then leave, the employer would not be eligible for any portion of the tax credit.

© 2010 Parsonage Vandenack Williams LLC

  For more information, contact info@pvwlaw.com

Link for website: http://www.ustaxcourt.gov/InOpHistoric/PRICE3.TCM.WPD.pdf

© 2010 Parsonage Vandenack Williams LLC

  For more information, contact info@pvwlaw.com

Unless specific requirements are met, amounts deferred under a nonqualified deferred compensation plan are includible in gross income under Section 409A to the extent that the deferred amounts are not subject to a substantial risk of forfeiture and were not previously included in income. The amounts includible in income are also subject to two additional taxes.

Nonqualified deferred compensation plans must comply with Section 409A in both form and operation. The newly issued guidance mainly addresses the failure to comply with Section 409A in form (i.e. document compliance).

The IRS guidance, issued in Notice 2010-6, includes the following information:

1. Clarifies that certain language that is commonly included in plan documents will not cause a document failure.
2. Provides relief by allowing certain document failures to be corrected without current income inclusion or additional taxes under Section 409A as long as the corrected plan provision does not affect the operation of the plan within one year following the date of correction.
3. Provides relief by limiting the amount currently includible in income and the additional taxes under Section 409A for certain document failures if correction of the failure affects the operation of the plan within one year following the date of correction.
4. Provides relief by allowing certain document failures to be corrected without current income inclusion or additional taxes under Section 409A if the plan is the service recipient’s first plan of that type and the failure is corrected within a limited period following adoption of the plan.
5. Provides transition relief by allowing certain document failures to be corrected without current income inclusion or additional taxes under Section 409A if the document failure is corrected by December 31, 2010, and any operational failures resulting from the document failure are also corrected in accordance with Notice 2008-113 by December 31, 2010. Many examples of common types of failures and the related corrections are also provided.

Modification of Notice 2008-113. The newly issued guidance also modifies Notice 2008-113, which addresses certain operational failures of nonqualified deferred compensation plans. The areas of Notice 2008-113 that have been clarified include: (1) the application of the subsequent year correction method to late payments of amounts deferred; (2) the calculation of the amount that must be paid to the service provider as a correction of a late payment of an amount deferred under a plan if the payment would have been made in property; and (3) the calculation of the amount that must be repaid by the service provider as a correction of an early payment of an amount deferred under a plan if the early payment was made in property.

Modification of Notice 2008-115. Notice 2008-115, I.R.B. 2008-52, 1367, which relates to reporting and wage withholding for 2008 and subsequent years, has also been modified. Specifically, the notice has been modified with respect to: (1) the amount that is required to be included in income by a service provider under Section 409A, and (2) the amount that is required to be reported by the service recipient as an amount includible in income under Section 409A on Form W-2 or Form 1099-Z.

© 2010 Parsonage Vandenack Williams LLC

  For more information, contact info@pvwlaw.com

http://www.pvwlaw.com/CM/Articles/Power%20Point-Skills%20for%20The%20Estate%20Planning%20Process%20(00058118).PPT

© 2009 Parsonage Vandenack Williams LLC

For more information, contact info@pvwlaw.com

 The value of all property that is subject to a general power of appointment exercisable by the decedent will be included in the decedent’s estate pursuant to § 2041.  A general power of appointment means a power that is exercisable in favor of the decedent, his estate, his creditors or the creditors of his estate.  The term includes all powers that are, in substance and effect, powers of appointment, regardless of the nomenclature used in creating the power and regardless of local property law connotations.  A power to consume, invade, or appropriate income or corpus, or both, for the benefit of the decedent which is limited by an ascertainable standard relating to the health, education, support, or maintenance of the decedent is, by reason of § 2041(b)(1)(A), not a general power of appointment.  A power is limited by such a standard if the extent of the holder’s duty to exercise and not to exercise the power is reasonably measurable in terms of his needs for health, education, or support (or any combination of them).  As used in this subparagraph, the words “support” and “maintenance” are synonymous and their meaning is not limited to the bare necessities of life.  A power to use property for the comfort, welfare, or happiness of the holder of the power is not limited by the requisite standard.  Examples of powers which are limited by the requisite standard are powers exercisable for the holder’s “support,” “support in reasonable comfort,” “maintenance in health and reasonable comfort,” “support in his accustomed manner of living,” “education, including college and professional education,” “health,” and “medical, dental, hospital and nursing expenses and expenses of invalidism.” In determining whether a power is limited by an ascertainable standard, it is immaterial whether the beneficiary is required to exhaust his other income before the power can be exercised.

 If the power of appointment may be exercised by the decedent only in conjunction with (1) the creator of the power, or (2) a person who has a substantial interest in the property that is subject to the power and such interest is adverse to an exercise of the power in favor of the decedent, the power is not considered to be a general power of appointment.

 The following powers are defined by Regs. § 20.2041-1 as not constituting a power of appointment for § 2041 purposes:

 The power to amend only the administrative provisions of the trust, which cannot substantially affect the beneficial enjoyment of the trust property or income;

1. The power of management, investment, custody of assets, or the power to allocate receipts and disbursements as between income and principal, exercisable in a fiduciary capacity where the holder has no power to enlarge or shift any of the beneficial interests except as an incidental consequence of the discharge of the fiduciary duties; and
2. The right of a beneficiary of a trust to assent to a periodic accounting, thereby relieving the trustee from further accountability, as long as such does not consist of any power to enlarge or shift the beneficial interest.

The common element in each of the above is that the power cannot be used to enlarge or shift any of the beneficial interests. Thus, powers that may be thought of as administrative in nature will not result in estate tax inclusion under § 2041.

© 2009 Parsonage Vandenack Williams LLC

For more information, contact info@pvwlaw.com

The Internal Revenue Code normally requires individuals over age 70 ½ with retirement accounts to make MRDs annually based on the size of the account balance at the beginning of the year and the age of the account holder (or the account beneficiaries in some cases). The new law suspends the MRD requirement for 2009. The law attempts to avoid the significant depletion of account assets that may result if MRDs were required following significant market losses in 2008 and allows the funds to be kept in the account and possibly recover some losses. This waiver is available to all defined contribution plans, including 401(k), 403(b), 457(b) and Individual Retirement Accounts (IRAs) regardless of the total account balance. The new law does not affect 2008 MRD requirements regardless of whether the distribution is made in 2009 for tax year 2008.

The new law also makes numerous technical corrections to the Pension Protection Act of 2006. The most significant is that, for tax years beginning after 2009, plan sponsors must offer non-spouse beneficiaries a rollover option. This gives much-needed flexibility to those who inherit retirement plan accounts from someone other than their spouse.

© 2009 Parsonage Vandenack Williams LLC

For more information, contact info@pvwlaw.com

http://www.pvwlaw.com/CM/Articles/American%20Recovery%20and%20Reinvestment%20Act%20of%202009%20(00085797).PDF

© 2009 Parsonage Vandenack Williams LLC

For more information, contact info@pvwlaw.com