March 2013

CURRENT ISSUES IN THE AREAS OF ESTATE, TAX

AND PERSONAL AND BUSINESS PLANNING

The information that follows summarizes some of the current issues in the areas of estate, tax and personal and business planning which may be of interest to you. Although this information is accurate and authoritative, it is general in nature and not intended to constitute specific professional advice. For professional advice or more specific information, please contact my office.

SWIRCA & More 2013 Rivercity Masquerade Ball and Auction. This wonderful annual event will be held on Saturday, March 16, 2013. For those readers who are unable to attend, please consider making a donation to this outstanding organization which provides essential help to people in need of all ages. SWIRCA & More provides assistance to children as well as adults and the elderly with its principal goal being to enhance opportunities for independent living. SWIRCA & More provides a myriad of services which include serving almost 300,000 meals each year in its six-county service area including Gibson, Perry, Posey, Spencer, Vanderburgh and Warrick counties, screening all persons who may require admission to a nursing home to be sure that the need for long-term care exists and that people are not simply being “warehoused” when other arrangements or facilities would be more appropriate, and helping the disabled to circumnavigate the complex processes of the Medicare and Medicaid programs, and helping the elderly to make choices pertaining to their insurance, including Medicare supplemental coverages and Part D prescription coverage. The foregoing is a very short list of only a few of the many services provided by SWIRCA & More. There is virtually no one who will not be impacted by SWIRCA & More at some point in his or her life, and when one considers the aging nature of our population, it is likely that our famiies will benefit from the efforts of SWIRCA & More staff at several different times during our lives. Please consider this wonderful organization when making decisions about the charities that you intend to support. Tax deductible donations may be made payable to SWIRCA & More and sent to Post eOffice Box 3938, Evansville, Indiana 47737-3938. Please consult the website of SWIRCA & More www.swirca.org.

Additional Thoughts About “Portability”. The January newsletter included a few brief comments about the “fiscal cliff” legislation and the enactment of the American Taxpayer Relief Act of 2012 (“ATRA”). As explained in that commentary, the federal estate tax exemption equivalent amount, which is currently $5.25 million, will apply to both the husband and the wife so that a total of $10.5 million can pass in the case of a husband and wife without being subject to the federal estate tax. When the first spouse dies, the deceased spouse’s unused exemption (the “DSUE”) will pass to the surviving spouse as long as a federal estate tax return is filed for the deceased spouse even though a federal estate tax return would not have been otherwise required. Stated differently, if a deceased spouse has a taxable estate of $4 million, and does not file a federal estate tax return, then the DSUE of $1.5 million will not be available to the surviving spouse. Consequently, at the time of the surviving spouse’s death, the surviving spouse would have available only the same $5.25 million exemption equivalent amount rather than the additional DSUE amount.

For people with estates that are substantially less than $10 million, the impression may develop that there is no need to consider tax or estate planning. Of course, such a philosophy is a foolish one, for many reasons. Not only may the rules change, but there are a number of other considerations that must be taken into account. For example, there may be a very good reason to use a trust in order to protect assets for the deceased spouse’s family, including the surviving spouse, and it is possible for that trust to be written in such a way as to maximize the DSUE that will be available for the surviving spouse. Tax basis considerations must also be considered. For example, if a particular plan is in place at the time of the first spouse’s death, and if pursuant to that plan, certain assets will not be included in the taxable estate of the surviving spouse at the time of the surviving spouse’ death, then those assets will not be subject to the basis step-up for capital gain tax purposes. That means that more capital gain could result from the sale of that property after the death of the surviving spouse, when it would have been possible to have taken advantage of the basis step-up without necessarily leaving the assets outright to the surviving spouse. The common scheme of leaving all outright to the surviving spouse does not always make sense, particularly when the goal is asset protection, including planning for long-term care. Federal estate tax and other estate and financial planning considerations are as important now as prior to ATRA.

Another Retirement Plan Suggestion. Many taxpayers who have an interest in a 401(k) or other qualified retirement plan (“QRP”) may take a “roll-over” from the QRP to an IRA. One reason for doing so is to obtain more flexible post-death distribution options. For example, many QRPs require a lump-sum payout at the time of death, which would mean that the beneficiaries would be forced to take what could be a substantial amount of money and pay all of the taxes immediately or within a relatively short period of time. A lump-sum payout to a spouse may not be disadvantageous because of the “roll-over” option which is available to a surviving spouse, which would not be available to another beneficiary, such as a child. It should be noted that even though plans are required to allow beneficiary roll-overs, a beneficiary would lose the benefit of the life expectancy payout if the participant died before his required beginning date and the beneficiary failed to complete the roll-over to an inherited IRA by the end of the year following the participant’s death. Consequently, it is generally a good idea for a QRP participant to roll his benefits over to an IRA as soon as he is permitted to do so.

An Observation About TOD Transfers. Indiana’s Transfer-on-Death Property Act offers flexible options to avoid probate, but such TOD arrangements should be used with caution. In Indiana, a pay-on-death (“POD”) arrangement and transfer-on-death (“TOD”) arrangement are the same since the terms are synonymous. However, banks typically still utilize the POD designation in conjunction with bank accounts, while investment companies utilize the TOD designation. Also, even though Indiana’s Transfer-on-Death Property Act will allow certain flexible transfer alternatives, particular banks or investment companies may not allow certain arrangements. Consequently, there are results that can be legally obtained which cannot be accomplished as a practical matter because the particular institution will not permit it to occur. TOD transfers can be used very flexibly. However, clients must be advised about the consequences of certain arrangements which may not have been anticipated. For example, in Indiana, an owner of property can sign and record a TOD deed, the result of which is the property will pass directly to the children or the other TOD designees at the time of the death of the owner without probate consequences. The problem is that the designated TOD designees would then be co-owners of the property and no one would be in a position of control. Any co-owner could object to the sale of the property, or the terms of sale, and even the process of effectuating the sale would be made more difficult because all parties would need to sign all contract and transfer documents. The probate process might be necessary in such case in order to deal with such issues, or a trust arrangement might be more appropriate depending on the particular circumstances. The point to be made is that if a person dies and all assets pass directly to the beneficiaries so that there is no one in a position of control, there may be no one who can be sure that tax returns are filed, or that taxes and pre-death liabilities are paid, that expenses of administering the decedent’s property are paid, or that appropriate arrangements can be put in place to effectuate the sale of the property.