Tuesday, October 25, 2011

Last week, the IRS issued a press release announcing its 2012 cost-of-living adjustments for retirement plans. The chart below reflects the qualified plan limits for calendar years 2009-2012.

Type of Limitation

2012

2011 

2010

2009

Elective Deferrals (401(k) and 403(b); not including adjustments and catch-ups)

$17,000

$16,500

$16,500

$16,500

457(b)(2) and 457(c)(1) Limits (not including catch-ups)

$17,000

$16,500

$16,500

$16,500

Section 414(v) Catch-Up Deferrals to 401(k), 403(b), 457(b), or SARSEP Plans (1)

$5,500

$5,500

$5,500

$5,500

SIMPLE 401(k) or regular SIMPLE plans, Catch-Up Deferrals

$2,500

$2,500

$2,500

$2,500

415 limit for Defined Benefit Plans

$200,000

$195,000

$195,000

$195,000

415 limit for Defined Contribution Plans

$50,000

$49,000

$49,000

$49,000

Annual Compensation Limit

$250,000

$245,000

$245,000

$245,000

Annual Compensation Limit for Grandfathered Participants in Governmental Plans Which Followed 401(a)(17) Limits (With Indexing) on July 1, 1993

$375,000

$360,000

$360,000

$360,000

Highly Compensated Employee 414(q)(1)(B)

$115,000

$110,000

$110,000

$110,000

Key employee in top heavy plan (officer)

$165,000

$160,000

$160,000

$160,000

SIMPLE Salary Deferral

$11,500

$11,500

$11,500

$11,500

Tax Credit ESOP Maximum balance

$1,015,000

$985,000

$985,000

$985,000

Amount for Lengthening of 5-Year ESOP Period

$200,000

$195,000

$195,000

$195,000

Taxable Wage Base

$110,100

$106,800

$106,800

$106,800

FICA Tax for employees and employers

        7.65%

        7.65%

       7.65%

       7.65%

Social Security Tax for employees and employers

        6.2%

        6.2%

       6.2%

       6.2%

Medicare Tax for employees and employers

        1.45%

        1.45%

       1.45%

      1.45%

Reflects the issuance of IRS News Release IR-2011-103, October 20, 2011

(1) This number is only the catch-up available under Code Section 414(v).  Code Sections 457(b)(3) and 402(g) provide separate catch-up rules, which must also be considered in appropriate cases.

Tuesday, October 25, 2011

A client recently asked me about the status of Georgia common law marriage, and in answering him, I thought it might be a good time for a reminder for all of us (including those in other states) that even if a state no longer recognizes common law marriage, usually such marriages remain valid if formed prior to the date of a statutory enactment prohibiting them. In addition, most states also recognize common law marriages formed in other states.

For example, the State of Georgia recognizes common law marriages formed prior to January 1, 1997 as well as valid common law marriages formed in other states.   Under Georgia law, a valid common law marriage may be formed between a man and a woman if they have (1) the capacity to make a marriage contract, (2) actually entered into a nuptial contract (usually proven by evidence of the couple holding themselves out publicly as spouses), (3) consummated their union by cohabitation, and (4) achieved all of the above prior to 1997.

Why is this important?   At death, spouses are entitled to certain rights, such as a right to years support (or “elective share” in some states) and a right to inherit from his or her spouse who died without a Will.   Achieving the status of “spouse” is critical in the ability to claim these rights which can be the basis of significant asset value.   Proving (or disproving) common law marriage is a very fact-sensitive endeavor, fraught with litigation potential.

The moral of the story?   Work with your estate planner to ascertain marital status with certainty before death so that desired outcomes can be achieved and unwanted outcomes can be avoided.  How long a couple has been in a relationship while in the state could be a critical fact.   Also, if the couple entered into the relationship while residing in another state which honors common law marriage, marriage likely is presumed in a state that does not currently recognize common law marriage.

Here is a link with more specific state information from the National Conference of State Legislators.

Monday, October 24, 2011

During a participant’s lifetime, his or her IRA is considered “retirement funds” that are protected from the participant’s creditors, even if the participant files bankruptcy.   But, what happens to the creditor protection after the participant’s death?  Is the IRA now protected from the beneficiary’s creditors?  Whether post-death creditor protection is available to inherited IRAs under the 2005 Bankruptcy Act has been the subject of a number of cases decided in the last year.

The argument made by bankruptcy trustees is that, on the death of the initial IRA owner, the IRA ceases to be “retirement funds”, as it is not the retirement funds of the beneficiary, and therefore loses the protection afforded to the IRAs under the Bankruptcy Code. (more…)

Monday, October 24, 2011

As a result of inflation, the IRS has increased the basic exclusion amount for the estate of a decedent dying in 2012 from $5,000,000 to $5,120,000.

http://www.irs.gov/pub/irs-drop/rp-11-52.pdf

Friday, October 21, 2011

For those of you who are named as Executor or Personal Representative under the Last Will and Testament of a friend or loved one who recently passed away, below is a simple “to do” list that lays out steps you should take in preparation for your initial meeting with an estate planning attorney. Please realize that this list is not exhaustive! Rather, it is intended to help you gather necessary materials and take actions that may enable you and the estate administration attorney to streamline the estate administration process.

  • Cancel any club memberships in the decedent’s name.
  • Prepare a list of all assets owned by the decedent and indicate whether those assets were held in the decedent’s sole name, in the name of the decedent’s revocable trust (if applicable), or held jointly with another person.
  • Determine whether the decedent had any safe deposit boxes and, if so, prepare an inventory of what items were held in them (if you know this).
  • Obtain copies of statements for the decedent’s bank and brokerage accounts for the month in which the decedent died and for the month following the month in which the decedent died. If possible, have the financial institution prepare a statement that shows each such account’s balance on the date of the decedent’s death, as well as a detailed list of the assets in the account on the decedent’s date of death.
  • Gather copies of the decedent’s federal and state income tax returns for the three years prior to death.
  • Gather copies of all prior gift tax returns, if any.
  • Gather statements for all dividend reinvestment plans, if any.
  • Gather copies of form 1099s and year-end tax summaries for the year in which the decedent died.
  • Obtain copies of the deeds for any properties owned by the decedent or that the decedent held jointly with someone else.
  • Obtain copies of any car titles and vehicle information numbers (VIN) for automobiles, boats, etc., owned by the decedent.
Thursday, October 20, 2011

The November 2011 7520 Interest Rate stayed the same as October at 1.4%.

The November 2011 Applicable Federal Rates can be found here.

Tuesday, October 11, 2011

As Luke Lantta recently wrote in our sister-blog, bryancavefiduciarylitigation.com, “A power of attorney in the wrong hands can be a dangerous thing, undoing years of asset protection and estate planning.  The rise in estate litigation concerning powers of attorney and increased media attention on elder abuse and exploitation have revealed powers of attorney to be potential ‘vehicles for fraud.’  The danger lies in the sweeping power afforded to the agent under a power of attorney.”

A Power of Attorney for financial purposes designates an attorney-in-fact to act on your behalf in all financial, tax, legal, investment, and insurance matters (these powers can be limited as you feel appropriate).  In most states, powers of attorney can become effective (1) upon a certain date; (2) only  if you are declared incapacitated and no longer able to make decisions for yourself relating to your financial matters; or (3) immediately upon execution of the power of attorney.  As the principal under a power of attorney, it is your decision as to when your power of attorney becomes effective.

Sometimes, you know in advance that you are going to be unavailable or unable to handle your financial affairs for a certain period of time.  For example, when I studied abroad in college, I executed a power of attorney, granting my parents the right to act on my behalf for any financial matters that arose during the 10 months I was out of the country.  This type of power of attorney is generally limited as to the amount of time it is effective, and also as to the scope of the powers that the attorney-in-fact is given.  However, sometimes you want to plan ahead for the unexpected and want to give someone the power to handle your financial affairs over an extended period of time, with no end date, just in case.

Some people want their power of attorney to only be effective if they are incapacitated and cannot handle their own affairs.  This avoids the necessity of your loved ones having to go to court to have the court declare you incapacitated and appoint a conservator to handle your financial affairs until such time as you regain capacity.   Court proceedings can be time-consuming, costly, and emotionally draining.  By appointing someone in advance under a power of attorney, you ensure that the person you want handling your affairs when you are incapacitated is the person who actually has the authority to act, instead of a person appointed by the court.

As Luke’s post shows, a power of attorney can be a potential “vehicle for fraud” if your attorney-in-fact is not trustworthy.  Luckily, an attorney-in-fact owes a fiduciary duty to you, as the principal, to act in your best interests.  Therefore, if he or she acts inappropriately, a court can attempt to rectify the matter.  However, that can be time-consuming and costly, and you may never see results.  Therefore, when creating a power of attorney, it is very important that you choose someone who you know you can trust.

 

Friday, October 7, 2011

Under the American Invents Act passed by Congress on September 8 of this year and signed into law by President Obama, among the many patent reforms is a ban on patenting any strategy for reducing, avoiding, or deferring tax liability, whether known or unknown at the time of the alleged invention or patent application (with certain limited exclusions related to software technology).  This type of patent application will no longer be able to be filed or prosecuted with the U.S. Patent and Trademark Office.

In essence, this legislation stated that tax strategies are indistinguishable from prior strategies and therefore cannot be patented as a novel or non-obvious invention.

It is important to note that this legislation does not invalidate any patents that have already been issued by the U.S. Patent and Trademark Office, which continued to issue such patents as late as the week immediately prior to the passage of this legislation.

Friday, October 7, 2011

The instructions for completing Form 8939 can be found here.

Thursday, October 6, 2011

The IRS has released Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent.  Instructions for completing the Form have not been released.

This Form is to be used by the estates of decedents who died in 2010 and have elected not to be subject to the federal estate tax.  While the estate will not be subject to the federal estate tax, the estate’s executors will only be able to allocate up to $1.3 million in basis increase to the decedent’s assets, plus an additional $3 million in basis increase for certain gifts to a surviving spouse (outright gifts and qualified terminable interest property “QTIP”) .