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Newsletter: March/April 2012

March 27, 2012

Wealth Management Through Estate Planning; Tax Law Changes & Retirement Planning; Estate & Trust Administration

WEALTH MANAGEMENT THROUGH ESTATE PLANNING

Coming this spring: the highly anticipated Fourth Edition of Wealth Management Through Estate Planning.

Lindsey has been hard at work this winter preparing important updates and revisions to his very popular book, Wealth Management Through Estate Planning. The book, which will be released this spring in its fourth edition, includes a complete discussion and analysis as to both proposed and actual changes to tax law, as well as new developments in the laws affecting estate planning and other related topics.

We are also excited to announce that the fourth edition of the book will include a completely new chapter on Life Care Planning written by Holly Denham, who is in charge of our Life Care Planning practice group. This new chapter, which discusses and explains the strategic change in our firm's strategy to pursue a more holistic approach to addressing the multiple and diverse needs of seniors and their families, will replace the Medicaid planning chapter contained in earlier editions of the book.

Originally published in 2000, there are approximately 7,000 copies of Wealth Management Through Estate Planning in current circulation. Publication of the widely anticipated fourth edition is scheduled for May of this year. Complimentary copies of the book will be provided to advisors and other allied financial services professionals upon request once the fourth edition is released.

Please contact N. Lindsey Smith at Smith and Condeni LLP for more information regarding any of the matters discussed in this article.

TAX LAW CHANGES & RETIREMENT PLANNING

Inherited IRA's and government revenues: What does the future hold?

Your client has worked hard, likely accumulating significant assets in his or her company retirement plan or IRA. Retirement funds are rapidly replacing personal real estate as the largest component of most clients' total family wealth. The client has probably envisioned and planned for what will happen to those funds if he or she were no longer around, but is that planning certain?

One of the unknowns lurking in the shadows for many retirement plans, including traditional and Roth IRA's and 401(k)'s is future taxation. Especially in tough economic times, there is a strong tendency for governments to turn their attention to previously untapped revenue sources. Since undistributed retirement accounts represent a large pool of unrealized tax revenue, legislators frequently contemplate ways to "improve" government access to these funds.

In February, Montana senator Max Baucus, the chairman of the Senate Finance Committee, floated a proposal as part of the Senate's recently passed highway funding bill, to target inherited IRA accounts, commonly known as "stretch IRA's," by requiring them to make a full distribution within five years after the death of the IRA owner. Traditionally, designated beneficiaries of stretch IRA's have been able to take distributions from those accounts over their lifetimes, rather than over five years, or over the life expectancy of the deceased account owner. Senator Baucus estimated that the proposal would generate $4.6 billion in revenue over ten years. The proposal was, however, removed prior to the bill's passage in the Senate.

According to William Sweetnam, a former top Treasury Department official during the Bush administration, the provision was removed because senators did not want to use a pension-related revenue raiser on a non-pension related bill. A second reason it was removed is that the Senate leadership wanted to study the proposal more. Translation? This is unlikely to be the last we hear of such a plan.

The original premise of the proposal was that tax incentives for retirement saving were not intended to provide tax-deferred accumulations over multiple generations. Interestingly, the American Bar Association Section of Taxation, in a draft report issued last year, also recommended such an approach.

Will the proposal be resurrected, perhaps in conjunction with a pension-related bill? What will the impact be on your clients' retirement and estate planning? Will there still be opportunities, perhaps as some have speculated, by an increase in the use of charitable stretch IRA's, whereby retirement benefits are paid to a split interest trust which then distributes an annuity or unitrust amount to individuals, with the remainder passing to a qualified charity? Stay tuned...

Please contact Robin Rose Stiller at Smith and Condeni LLP for more information regarding any of the matters discussed in this article.

ESTATE & TRUST ADMINISTRATION

Communication between a client's professional advisors is crucial to the efficient administration of the client's final affairs upon his or her death.

When a client dies, communication between the financial advisor, the attorney and the accountant is crucially important. This is true whether the client has a sophisticated estate plan or just a simple Will.

Oftentimes, the most difficult task in handling an estate is collecting accurate and complete asset information for the deceased. Unlike income tax returns, the IRS reviews each estate tax return filed. To avoid questions and potential audit, we attach documentation supporting each asset listed on the return and its value. The surviving spouse and children sometimes forget about assets or are even unaware of them. Clients often do not realize that we need to know about life insurance policies and jointly held assets. Talking to the financial advisor is vital to make sure that we have complete and up-to-date asset information.

Communication with the financial advisor about re-titling assets held in the decedent's name or trust is also very important. We, as the attorneys, must be on the same page as you, the financial advisor, to make sure the decedent's assets are dealt with properly and that no planning opportunities are missed for our mutual client. In this regard, the attorney and financial advisor should always discuss what should be done if the deceased client had an IRA before action is taken. In a situation with a surviving spouse, a rollover into the surviving spouse's name is typically the best option, but sometimes having the spouse disclaim his or interest in the IRA and having the IRA go to the contingent beneficiary is the better option.

Also, if the deceased client has a revocable trust, then trust account titles and other information must be updated. A tax identification number must be obtained and used. If there is a surviving spouse, the trust account may be split into two separate accounts known as Trust A and Trust B. How that split is made and which trust assets go into which account needs to be discussed as well. If the decedent's trust is being divided among his children, then a separate trust account, each with its own tax identification number, will need to be established. Again, the attorney and financial advisor should discuss how this split is being made. Are the trust assets being divided equally among the children, or is one child taking another asset outside of the trust and, therefore, entitled to receive a lesser amount from the trust?

Communication with the accountant is also very important. Seeing copies of recent income tax returns is a good way to make sure that we are aware of all of the decedent's assets. Also, we need to know if the decedent ever filed gift tax returns during life and whether any of his or her available exemption was used as a result thereof. The attorney and accountant also need to talk about deductions. In many cases, if an expense is taken as a deduction on the estate tax return it cannot be taken on an income tax return, so the attorney and accountant should work together to decide where the available deductions are best taken.

When a client dies, communication between all of the professionals involved is vital. Having a meeting with the surviving spouse and/or children, the financial advisor, the accountant and the attorney is always helpful, especially when handling a larger estate.

Please contact Jennifer B. Cusimano at Smith and Condeni LLP for more information regarding any of the matters discussed in this article.