By Loren Acuña

Written or edited by Loren Acuña. Please feel free to add to the thoughts presented here by posting a comment or question.

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Friday, December 30, 2011

Reimbursable Expenses for Estate Representatives in 2012

2012 Reimbursable Mileage & New Postage Rates below!

Did you know that not only do attorneys and fiduciaries need to stay on top of changes in the State of California Probate Code; but they also must monitor the California Rules of Court; the Business & Professions Code; and, the state, federal and local tax rules?  In addition, each court publishes local rules to clarify how they interpret codes or rules. These codes and rules can change each year. 

To help the attorneys and fiduciaries we serve, we have put together a “cheat sheet” for selected counties in Northern California.  Take a look at our website page Tidbits & Morsels to get a quick look at how each court views fees, costs, and reimbursable expenses, such as mileage, copies, postage, telephone, internet, etc.  Each local court views fees and costs differently.

Most expenses incurred by an Executor, Estate Administrator, Conservator, or Guardian must be approved by the court before reimbursement to the personal representative.   Some courts allow reimbursement for some of these miscellaneous expenses and others do not.  It pays to keep track of your expenses, but remember that your attorney may choose not to submit all expenses you incur in handling a loved one’s estate. Check with your attorney.

Actually, fiduciaries must be aware of a wide variety of areas that touch on the different types of cases they handle.  This means they need to know how to evaluate and hire the additional professional expertise required for each situation they encounter.  Enter your email address to the left to receive regular emails from The ACE Fiduciary Group Blog - The 5th Chapter.  This way, you’ll receive our posts on topics and resources that can help personal representatives and professional fiduciaries.

Remember to note business related mileage in a small pocket calendar or other manner that can be to used as back-up for your tax return or for your attorney, if requested.                    
2012 IRS business mileage reimbursement rate is 55.5 cents per mile, 23 cents medical mileage, and 14 cents for charitable mileage. 
US Postage rates will increase to 45 cents for a first-class single letter on January 22, 2012.

Stay warm, healthy, and have a Happy New Year!

Saturday, December 24, 2011

The Big Gift - Do You Have The Financial Management “X-FCTR”?

Let’s start this one with a puzzle.   Here is a new brain teaser. Below is a proverb with all of the vowels removed. Put the vowels back to find the proverb.   (Note: the letters have not been grouped by word, rather by four letters in a line.)
FLND HSMN YRSN PRTD

Congratulations if you got it.  You’ll find the answer on our website.  Congratulations also to Melanie Amaro, with the angel voice, winner of the X-Factor.  Read on to find out how to solve some puzzles about windfall earnings, like those Melanie Amaro will receive.

A $5 million dollar contract and the opportunity to launch a recording career.  What a gift!  She earned her top spot and it is a very large amount of overnight wealth for anyone to receive.  A recent article by Robert Frank, “The Truth About Wealth” in the Wall Street Journal, December 17, 2011 refers to a Federal Reserve study on the top 1% of income earners (those earning over $343,000 in 2009).  The study revealed that 60% of the super wealthy did not remain in the top 1% of income after a couple of years.  Wealth is hard to hold onto. 

You may not have just won the X-Factor, but you might receive a large settlement, inheritance, lottery, bonus or stock option. Just in case, pay attention before you take any action to maximize the wealth available to you over your lifetime.

Scenario #1 - No Plan

If the winner of a $5,000,000 lottery or game show or bonus or stock option lived in California (Melanie is lucky since Florida has no income tax), without planning, the winnings would be taxed at the highest combined rate.  California tacks on 10.5% plus the 35% federal rate, makes a top 45.5% income tax rate.  This would reduce the amount available to the winner to $2,725,000.   If the winner wanted to be conservative and only use the income from this remaining amount to live on, they might be able to invest to earn $136,250 annually, which is then taxed a bit over 30%. 

Many people do not have competent legal or investment advice, but instead use the winnings to fund the family gifts, toys and fun that we all love to imagine.  In that case, most of it the windfall is gone within approximately 5 years.  Remember, income from inheritance or legal settlements is income taxable, but the principal is not.  Windfall earnings or lottery winnings are taxed at the highest possible income tax rate in the year they are paid.

Scenario #2 - Structured Payments

If Melanie is lucky, her winning contract will pay her a set monthly amount at a level that will keep her tax rate below 30%.  Given a 5% annual investment rate, she could see approximately $144,0000 per year for 20 years, which is approximately a $5,000,000 present value contract.  With no tax deductions, this would leave her with $103,680 in annual income over twenty years.  While not the millions it seems at first, this type of settlement effectively guarantees income for life at a lower tax rate than taking the entire amount immediately.  Also, this type of structure offers a base “safety net” of income should Melanie’s singing career not provide her with a steady income. Structured settlements are often used in personal injury settlements.  Often a neutral 3rd party trustee is named to handle a litigation special needs trust for the benefit of the injured party.  In the case of windfall earnings or winnings, if the payment can be taken over time, the temptation to spend it all is reduced and the tax rate can be reduced.

Scenario #3 - Give It Away

While the winner of $5,000,000 does not save in income taxes by creating a charitable trust with the winnings, if a large lump sum is received from inheritance, winnings, or un-exercised stock options, charitable trusts can be used to save the estate from paying estate taxes.  This is especially useful when low basis assets are re-valued upon the death of a parent.  This scenario can also save the estate from losing value by avoiding capital gains taxes if properly handled.

If someone receives a large inheritance, many estate planning attorneys will recommend placing some or all assets into a charitable trust.  If an employee receives stock options and the value of the stock dramatically increases, a great strategy can include a charitable trust to obtain income and lock in values. The charitable trust can be set-up to give assets to a church or other charity near to your heart.  The trust manages the money and passes on the income to you until death, when the charity receives the assets.

Word to the wise: if you anticipate or receive a windfall payment or have stock options you want to exercise, it pays to see a qualified, competent estate planning attorney who can help you coordinate with other professionals to lower taxes and help you maximize your windfall.  Otherwise, you might be the subject of the above proverb.


Merry Christmas to all and to all a good night!!

Thursday, December 1, 2011

Simple Gifts

    Our family continues a tradition during Thanksgiving weekend that was started when our kids were young.  We all write Santa “wishlists”.  We told the girls that they could put whatever they wanted on the list and Santa might choose one thing on the list to bring as a present on Christmas Eve. In our family Santa was dwarfed by the other “visitors” of the season during the 12 days of Christmas....angels, shepherds, wise men and others.  Our kids had simple wishes on their Santa lists - cute fuzzy socks, books, new art pens and other small toys.  We didn’t watch television so the kids did not have constant ads to “help” them want lots of stuff.

    These days, our adult family lists can include a lot crazy things. One year someone wrote down World Peace, and he got a bowl of Whirled Peas. Another year someone wrote down "help in the garden" and she got a bag full of dirt (and some help).  Sometimes we all have trouble thinking of things to put on our list because, well, we already have enough.

    The fun of Christmas is the magic of finding just the right gift for someone and seeing their face light up.  Or seeing surprises lurking inside beautiful packages. It is a real talent to find just the right gift for someone. It also takes gracious acceptance of gifts we did not expect or particularly want.  Every so often, we hit the sweet spot and remember the giving moment or person for years to come, even if the item becomes tarnished with age.  The best gifts include three elements: involvement; shared memories; and, attention to what is important to the receiver.

    Since this is the giving season, we've started December with some ideas to help spur your thinking about giving with Legacy Planning in mind.  Some are simple treasures passed on with a flair; others are designed to build into your children the joy of giving to others; and some are just practical tips on gifting that can help your estate grow or further a beloved cause.

    1)    Alternative gift giving is a great way to involve the whole family. Many churches and synagogues sponsor gift events.  Here is a simple way to have fun, teach kids about responsible giving and build in some magic into giving. Each person in the family researches a charity. They can wrap a “gift”, make a power point presentation, make a small ornament, draw a picture, or sing a song to explain why they want to help this organization.  Then the family chooses a charity from those presented.  Based upon their budgeted amount of giving for the year, they might decide to give some to each charity or only one.  The rule is both time and money needs to be devoted to the charity.  Next year, the member who suggested the charity can give a short report on it and whether they think it is worth supporting again  This one little addition to holiday giving can teach your children a lot about giving.  A good resource to use in researching charities is  http://www.charitynavigator.org/  This site evaluates charities' stewardship of  their resources.  It does not evaluate  religious organizations that are exempt from filing the Form 990 (like the Salvation Army or your local church), but there is a wealth of information on many good causes. 

    2)    Begin to gather some special mementos; small knick knacks; jewelry or small items you no longer need, but that hold a special memory to you and possibly others.  Think of who in your family or circle of friends might like the item to remember you with. Write a short story, note or other simple memory to explain the item.  Wrap it up; tie it with a bow; label the item and then put it in a special memory box.  Be sure to put your memory box somewhere that can be found later and write it down in your estate planning documents. You can either give these as a birthday gift or just keep adding gifts to the box as you think of it.  This could be your final surprise gift to others.

    3)    Gifts can help you avoid paying some types of taxes.  Gifts to charities are income tax deductions in the year you make the gift.  This is established social policy to insure that our society continues to retain the social benefits of services provided by non-profit organizations. Gifts to friends or family members in 2011 and 2012 can be up to $13,000 per person ($26,000 if you are married) or unlimited if for education, without incurring a gift tax.  Gifts to family and friends do not reduce your taxes, but exceeding the annual gift limits will reduce your total excludable amount which could lead to your estate paying more in taxes. This year the total lifetime gift amount was raised by congress to $5,000,000.

    4)    Non-cash gifts to charities are also a good way to promote re-use and provide a way to move personal assets on to organizations that can use the resources which you can no longer use.  If this amounts to more than $500 in any year, your tax professional will want to see a completed IRS form 8853 which lists items, values and has the signature from the charitable organization.

    5)    Larger gifts can be used as part of an overall estate planning strategy to lower estate taxes and increase the size of the estate you leave behind.  Ask your attorney whether you might benefit from a Crummy Trust, a Charitable Lead or Charitable Remainder Trust.  These can be useful tools to insure income for yourself while providing a gift to a worthy cause after you pass away. Your attorney can help you determine if these types of techniques would help your estate pay less in estate taxes and leave a legacy to a beloved cause.  Hint: remember to consider naming a professional fiduciary for complex trust arrangements to reduce the risk of IRS reclaiming gifted assets into your carefully constructed charitable trust and gift trusts.

Enjoy the season!!