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Same-sex marriages filing jointly with the IRS…

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Kiplinger’s Tax Newsletter reports:

Same-sex couples are one step closer to joint filing of their federal returns. An Appeals Court scrapped a law barring them from being treated as married for purposes of federal law, even though they are legally married under state law. This part of the Defense of Marriage Act is unconstitutional (Gill v. OPM, 1st Cir.).
This decision will almost certainly be appealed to the Supreme Court, delaying any final resolution until next year. So until the High Court gives the nod, all same-sex couples remain barred from filing joint income tax returns with IRS.
In the interim, married same-sex couples should file protective refund claims with IRS on Form 1040-X if joint return status would save them tax. The Service will hold the protective claims in abeyance until there’s a final decision in the case.

Same-sex couples also can enroll in long-term-care insurance programs that states offer to their employees. A federal district court struck down a U.S. law
that disqualifies state-maintained long-term-care plans if married same-sex couples or domestic partners are covered (Dragovich v. Treasury Department, D.C. Calif.).

We will continue to track this…..

Simple words to encourage – to remind yourself or to pass on

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Sometimes you know these lessons and sometimes you forget, or you wish you could pass them on to others

I thought the following list from a Morningstar article on a petite woman now flying 757s was a good summary to pass on:

Here are five lessons Ellen passed on to me that I believe every financial advisor can take away from her story:

1. Don’t let anyone tell you that you can’t do it!
2. Dreams are the beginning of your destiny.
3. Be willing to chip away at your goals for years–success doesn’t have to happen overnight.
4. Always be enthusiastic about your work.
5. Never quit. A lot of people say they want to be great at what they do, but only those with determination and perseverance to push through the difficult days will make it to their goal.

Hope this helps you are someone important to you

Update on estate planning – what should you gift now?

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Estate planning remains stuck in limbo. That is, after 2012, the $5 million credit for gift and estate taxes goes away and we could be back at a $1 million credit. Also, the generation skipping tax limit now at $5 million would decrease. Finally, the portability of estate tax exemptions between spouses expires, meaning that the survivor can no longer use any credit amount not used by the first spouse, which would allow more to pass on estate tax free.
So far, Congress has taken no action. Many expect the 35% rate and a credit of at least $3 million to be the law for 2013 on. However, Congress failed to fix the estate tax for 2010 so nothing is certain.

Planning: This means you need to review your estate plan, especially your gifting strategies, and act now to take advantage of the higher gift tax credit. You can gift up to $5 million of assets free of gift tax now, or $10 million for married couples. The benefit is that all future income and appreciation on these gifts is removed from your estate. The downside is that the gifts are irrevocable, so you must be certain that what you pass on now you will not need later.
You always want to select assets that you expect will grow in value. If the assets decline, the strategy is frustrated. An example of what could go wrong is gift of a home at peak values that is now worth far less.

Remember that you have the annual gift tax exclusion allowing you and your spouse can each give $13,000 per year to any individual without eating away at your gift and estate tax credit. And note: any payments made to colleges or hospitals for the benefit of another person are not counted at all. (No gift tax return is required for these excluded amounts.)

How do you effectively structure the gift? Here are some examples:
• Family limited liability company (FLLC): With real estate or business assets, you can transfer minority interests in the FLLC to children or grandchildren. You retain control and the amount you gift is discounted because the minority interests lack control and lack marketability. You will need an appraisal for the value and the discount.
• Dynasty trust: This type of trust is designed to pass assets on multiple generations. Distributions can be made to the first generations, but they never actually receive a final amount – they rely on the trustee for any amounts to be distributed to them.
• Grantor retained annuity trust (GRAT): This trust transfers assets to children after a specified term while retaining a fixed annuity. The amount you gift is discounted, because children do not receive it until the end of the term. If the amount transfers, you succeed in transferring a discounted amount that becomes worth much more to the next generation.
• Qualified Personal Residence Trust (QPRT) Like the GRAT, your children receive your house in the future, so the value of the gift made now is discounted. You can even stay in the house after that term, but you have to pay rent, which is in effect another gift.

One note of caution: some have expressed the concern that if Congress does not act, the IRS could try to take back the excess in some fashion. Be sure to consult with your estate tax advisor before taking any moves.
We added gifting as a “to do” on the Finance Health Day page .

Keeping perspective while the debt ceiling “crisis” continues ….

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While Congress and the President continue the political battle on the “debt crisis,” here is more for proper perspective:

First, the yield on Treasuries if falling, not rising. If there were a serious issue about the US ability to repay, then US bonds would see high rates. That is, unlike Greece, which is in real trouble, or even Spain or Portugal, the US is still able to borrow at very favorable rates. So, the markets in general, up to this point, believe that the “crisis” has nothing to do with the economy or the strength of the US relative to other nations.

Second, the debt issues have come about after the extended bull market ended in 2008. That is, high stock values and prosperous markets yielded high tax revenues. With this, there were years of budget surpluses, even after tax cuts were enacted. But, post 2008, that has changed. The change in the economy and stock values, even with some markets approaching their 2008 high points, has led to much lower tax revenues.

Finally, from Floyd Norris in the New York Times, we have this summary:

“If rationality does prevail, the debt ceiling will be raised. For that matter, there is no good reason to have a debt ceiling other than to give politicians a chance to grandstand. The important decisions for Congress and the White House concern spending and taxing. Borrowing, or paying back debt as happened for a couple of years before the Bush tax cuts, is a result of the interplay of those decisions and the state of the economy.”
And
“There is a risk that many analysts now are making the opposite mistake. Deficits have skyrocketed in recent years for reasons that are clearly temporary, or that will be temporary if the economy recovers. In some of the debate, the short-term problems are mixed up with longer-term demographic concerns caused by the aging and retirement of the baby boomers and the rising costs of Medicare, the health insurance program for Americans over the age of 65.”

So, with fingers crossed for the prevailing of rationality soon, that is my update. Let me know if you have questions or comments

New Estate Planning Pitfalls – Need for careful planning and follow-through

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The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 gives us a two year window for significant estate tax planning, ending December 31, 2012. However, this comes with some serious planning issues. Here are two:

One pitfall of the new law: The new portable credit requires a proactive election by the executor at the first death. Like the frequent failure to make proper QTIP and GST allocation elections, this is an area subject to risks. For example, if the assets are in trust, the survivors may choose not to appoint an executor, missing the opportunity to save the unused credit for the second death.

Also, the portable exemption amount only applies to the unused exemption from the last spouse. For multiple marriages, only the most recent spouse’s amount is available. In addition, an election must be made in the estate of the first spouse to die to preserve the unused exemption and allow for its use by the last deceased spouse.

Second, old trusts that had too much going to the credit portion, the beneficiaries of which are not your spouse, then he or she could be left with very little from your estate.

Please see Estate Planning Overview for definitions and tax impacts, and “to do” list.