1. Fate of Bush-era tax cuts unresolved

2011 ended without any resolution of the fate of the Bush-era tax cuts. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 Tax Relief Act) extended the Bush-era tax cuts through 2012. President Obama and House Speaker John Boehner, R-Ohio, reportedly came close to an agreement in August 2011 to extend some of the Bush-era tax cuts as part of a comprehensive deficit reduction package. When their agreement fell apart, many Washington observers predicted the Joint Select Committee on Deficit Reduction would address the Bush-era tax cuts in a deficit reduction package. The Deficit Reduction Committee announced in November that it failed to reach an agreement and disbanded.

Comment

The fate of the Bush-era tax cuts may ultimately be decided by the lame-duck Congress, which will meet after the November 2012 elections. The outcome of the presidential election and which party controls the House and Senate will undoubtedly influence whatever decision lawmakers take over the Bush-era tax cuts.

2. Rollback of tax legislation

Congress repealed three tax laws in 2011: expanded business information reporting, real property expense reporting and three percent government withholding.

Business information reporting. The Patient Protection and Affordable Care Act (PPACA) required businesses, charities and government entities to file information returns (Forms 1099) for all payments of $600 or more in a calendar year to a single vendor, other than a tax-exempt vendor. The PPACA also repealed the long-standing reporting exception for payments made to corporations. The PPACA’s expansion of business information reporting proved universally unpopular. Congress passed the Comprehensive 1099 Taxpayer Protection Act in April 2011. The Comprehensive 1099 Taxpayer Protection Act repeals the expanded business information reporting provisions in the PPACA as if they have never been enacted.

Rental property expense reporting. The Small Business Jobs Act of 2010 required landlords to file a Form 1099 to report certain rental property expense payments of $600 or more. The Comprehensive 1099 Taxpayer Protection Act also repealed rental expense reporting as if it had never been enacted.

Government withholding. The Tax Increase Prevention and Reconciliation Act of 2007 imposed three percent withholding on payments for goods or services to contractors made by federal, state and local governments. In November 2011, President Obama signed the 3% Withholding Repeal and Job Creation Act, which repeals three percent government withholding as if it had never been enacted.

3. Foreign accounts

The Treasury Department and the IRS continued to focus on foreign account reporting in 2011. Three developments were interconnected: implementation of the Foreign Account Tax Compliance Act (FATCA), FBAR filings and the 2011 Offshore Voluntary Disclosure Initiative (OVDI).

FATCA. The IRS continued to implement the Foreign Account Tax Compliance Act (FATCA) in 2011. FATCA generally requires certain U.S. taxpayers holding specified foreign financial assets to report information about these assets on a new form to be attached to the taxpayer’s return. Additionally, foreign financial institutions must report certain information about accounts held by U.S. taxpayers. In July 2011, the IRS announced it intended to provide for a phased implementation of the FATCA requirements for foreign financial institutions. In December 2011, the IRS issued guidance about new Form 8938, Statement of Specified Foreign Financial Assets.

FBAR. The Treasury Department issued final rules on Form TD-F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR) in February 2011. The final rules retain and clarify the requirement to report signature or other authority over a foreign financial account. The final rules also reserved the treatment of investment companies other than mutual funds or similar pooled funds. In related news, the Treasury Department announced that taxpayers may electronically file the FBAR; previously, electronic filing was not an option for the FBAR.

OVDI. The IRS launched a campaign in 2011 to encourage taxpayers to voluntarily disclose unreported offshore accounts. The 2011 Offshore Voluntary Disclosure Initiative (OVDI) rewarded taxpayers who came forward voluntarily with a reduced penalty framework (although not as generous as a similar program in 2009). The 2011 OVDI closed on September 9, 2011. In December, IRS Commissioner Douglas Shulman reported that the agency has received more than 33,000 voluntary disclosures since 2009.

4. IRS help for distressed taxpayers

The IRS announced in February 2011 a series of measures intended to help good-faith taxpayers who cannot meet their tax obligations. The IRS “Fresh Start” initiative generally allows lien withdrawals for taxpayers entering into direct debit installment agreements (and for taxpayers who convert from a regular installment agreement to a direct debit agreement). The IRS also announced it would make streamlined installment agreements available to more small businesses. Qualified small businesses with $25,000 or less in unpaid taxes can participate in the streamlined installment agreement program.

Comment

According to Commissioner Douglas Shulman and other top agency officials, IRS personnel have been instructed to be more flexible in helping distressed taxpayers.

5. Worker classification

The IRS launched a new program in September 2011 to enable employers to voluntarily reclassify their workers for federal employment tax purposes and take advantage of a reduced penalty framework. The Voluntary Classification System Program (VCSP) is open to employers currently treating their workers as independent contractors or other nonemployees and who want to prospectively treat the workers as employees. The employer must not be under audit and satisfy other requirements. The IRS has not announced an end-date to the VCSP.

6. Basis overstatement regs

The Supreme Court agreed in September 2011 to resolve a split among the federal courts of appeal over IRS regs (TD 9515) that impose a six-year limitations period on assessments due to overstated basis (Home Concrete & Supply, LLC, 2011-1 ustc ¶50,207). The government asked the Supreme Court to decide, among other questions, whether an understatement of gross income attributable to an overstatement of basis in sold property is an omission from income that can trigger the six-year assessment period.

Comment

In March 2011, the Court of Appeals for the Federal Circuit upheld the basis overstatement regs under Chevron-deference (Grapevine Imports, Ltd., 2011-1 ustc ¶50,264).

7. Mid-year mileage rate increase

For the third time in six years, the IRS announced a mid-year adjustment to the business standard mileage rate because of rising gasoline prices. The business standard mileage rate increased from 51 cents-per-mile to 55.5 cents-per-mile for the second half of 2011. The medical/moving standard mileage rate increased from 19 cents-per-mile to 23.5 cents-per-mile for the second half of 2011. Congress did not make a mid-year adjustment to the charitable standard mileage rate, which remained at 14 cents-per-mile for the second half of 2011.

Comment

For 2012, the business standard mileage rate is 55.5 cents-per-mile and the medical/moving standard mileage rate is 23 cents-per-mile. The statutorily-determined charitable standard mileage rate remains at 14 cents-per-mile for 2012.

8. Return preparer oversight

The IRS moved forward with its return preparer oversight initiative in 2011, defining the new designation “registered tax return preparer” and launching the registered tax return preparer competency examination. In June, the IRS issued final Circular 230 regulations, which clarified professional standards for certified public accountants (CPAs), enrolled agents (EAs) and registered tax return preparers. The IRS also fine-tuned its online preparer tax identification number (PTIN) registration system. Additionally, the IRS announced it would revisit its proposal to fingerprint certain PTIN applicants; a proposal which many tax professionals criticized as duplicative of their own employee background checks and too costly.

9. Mandatory e-file for preparers

Beginning January 1, 2011, specified tax return preparers who reasonably expected to file 100 or more covered returns in calendar year 2011 were required to file those returns electronically. The e-filing requirement was put in place by Congress in 2009. The IRS phased-in the requirement over two years (2011 and 2012). For calendar year 2012 (and subsequent years), the threshold for mandatory e-filing by specified tax return preparers is 11 or more covered returns. Firms must compute the number of covered returns in the aggregate that they reasonably expect to file as a firm. If the number is 11 or more in calendar year 2012 and subsequent years, all members of the firm must electronically file covered returns.

10. Updated PAL rules

The IRS issued proposed regs in November 2011 updating the definition of an interest in a limited partnership as a limited partner for purposes of the Code Sec. 469 passive activity loss (PAL) rules. Under the proposed regs, an interest in a limited liability company is treated as a limited partnership interest for the PAL rules.

Comment

The proposed regs reflect the evolution of the rules for limited partners since passage of the Uniform Limited Partnership Act of 1916.

Honorable mention

• Congress bans tax strategy patents;
• IRS helps organizations regain tax-exempt status after automatic revocation;
• IRS responds to Hurricane Irene and many other natural disasters in 2011;
• FUTA surtax expires mid-year;
• Congress expands Work Opportunity Tax Credit (WOTC) for veterans;
• Supreme Court agrees to hear arguments on PPACA;
• IRS issues final regs on Code Sec. 6707A penalty.

Spousal Benefits

Spouses are entitled to benefits if the marriage lasted at least 10 years. A spouse is entitled to an amount equal to one-half of the worker’s full retirement benefit. To receive this benefit, you must be at your full retirement age or caring for a child who is under 16 years old. In addition, your spouse must have filed for Social Security retirement benefits even if he or she isn’t receiving them.

If you could receive more from Social Security based on your own earnings record than through the spousal benefit, the Social Security Administration will automatically provide you with the larger benefit. If you have reached your full retirement age, you may also elect to receive spousal benefits and delay taking your benefits, allowing your own delayed retirement credits to accrue, and switch to your own benefit at a later date. However, you cannot elect to receive spousal benefits below your retirement age and later switch to your own benefits.

If you begin collecting your spousal benefit before your full retirement age, your spousal benefit will be permanently reduced.  But if your spouse retires early, but you wait until your full retirement age, you will still receive benefits based on one-half of his or her full retirement benefit.  

For more from the Social Security Administration on spousal benefits, click here.

Divorced spouses

An ex-spouse is also entitled to receive one half of the worker’s full retirement benefit as long as the marriage lasted at least 10 years. Unlike a current spouse, a divorced spouse can begin receiving benefits even before the worker has applied for benefits. The worker must be at least 62 years old and the divorce must have been final for at least two years.

For more from the Social Security Administration on qualifying for divorced spouse benefits, click here.

Survivor Benefits

If you are a surviving spouse at full retirement age, you are entitled to the worker’s full retirement benefits. If the worker delayed retirement, the survivor’s benefit will be higher. Survivors are entitled to benefits even if they are divorced as long as they had been married for at least 10 years. If you file for benefits before you are over age 60, but below full retirement age, you will receive a reduced percentage of the worker’s benefits. Surviving spouses who are younger than 60 receive benefits only in limited circumstances, such as cases of disability or caring for a disabled child.

For more from the Social Security Administration on the requirements for survivor benefits, click here.

In general, for a decedent dying in 2012, a net taxable estate valued at $892,865 or less will not be subject to Rhode Island’s estate tax. (In certain circumstances, the Rhode Island estate tax will not apply no matter the estate’s size: Rhode Island General Laws Chapter 44-22 provides full details on the computation of the tax, including such factors as the marital and charitable deductions.)

A trust is a legal arrangement through which one person (or an institution, such as a bank or law firm), called a “trustee,” holds legal title to property for another person, called a “beneficiary.” If you have been appointed the trustee of a trust, this is a strong vote of confidence in your judgment.

A trustee’s duties include locating and protecting trust assets, investing assets prudently, distributing assets to beneficiaries, keeping track of income and expenditures, and filing taxes. (For more information on a trustee’s duties, contact estate planning attorney Jill E. Sugarman) As a trustee, you have a fiduciary duty to the beneficiaries of the trust, meaning that you have an obligation to act in the best interest of the beneficiaries at all times. It also means you will be held to a higher standard than if you were just dealing with your own finances.

A trustee is usually entitled to hire an attorney (and other professionals like an accountant) to assist in trust administration. The attorney’s fees will be paid from the trust funds. While hiring an attorney will cost money, not having an attorney at all could cost a trustee much more if errors are made.

A trust can be administered without court involvement, but that doesn’t mean that the administration is simple. There are many areas where problems can arise — for example, if assets aren’t invested properly, taxes are late, or if proper records aren’t kept. If something goes wrong during the administration of the trust, the trustee can be removed and held personally liable for any costs incurred or losses suffered. Even if a spouse is the trustee, he or she should still consult with an attorney. Many couples have so-called “AB” trusts to take advantage of the maximum estate tax exemption; these trusts require special knowledge to determine whether the trusts are properly funded and the taxes filed. 

For more information about trusts, contact estate planning attorney Jill E. Sugarman, at JSugarman@McLaughlinQuinn.com or by phone at 401-421-5115 ext. 215.

The study, published in the October 5, 2011, issue of the Journal of the American Medical Association, found that in regions of the U.S. that tend to spend the most on end-of-life care, patients who have “advance directives” cost Medicare about $5,600 less per person.  (Advance directives allow patients to communicate their end-of-life wishes if they are unable to do so themselves.)  These patients’ quality of life also appeared to be better; they were more likely to receive hospice care and to be at home when they died.

But the differences in spending and care did not hold up in regions of the country with low- to average end-of-life expenditures.  The researchers speculated that in these areas, less aggressive care at the end of life is already the norm and more in line with what many patients want.  In high-spending regions, by contrast, an advance directive may embolden caregivers to go against the local norm of aggressive treatment and prolonged hospital care.   In 2006, treatment during the last year of life accounted for more than one-quarter of Medicare expenditures.  

Advance directives typically include a “living will” that gives instructions regarding treatment if the individual becomes terminally ill or is in a persistent vegetative state.  It may contain directions to refuse or remove life support in the event the individual is in a coma or a vegetative state, or it may provide instructions to use all efforts to keep the person alive, no matter the circumstances.  Most participants in the study who had advance directives specified that they wanted to limit treatment.

“[The study] absolutely highlights some of the reasons why you should both talk to family, friends and physicians about the type of care you might want to receive, should you be unable to make your own decisions,” said Lauren Hersch Nicholas, the study’s lead author and a health economist at the University of Michigan.

Second Study: Aggressive Treatment Doesn’t Prolong Life

A related study just published in the medical journal The Lancet has found that nearly one of every three Medicare beneficiaries had an operation in their last year of life. 

Operations were more likely in regions with a greater availability of hospital beds and higher levels of Medicare spending.  But the higher rates of surgery didn’t necessarily pay off.  The regions where doctors were more likely to operate had higher patient death rates.

“This level of surgical intensity doesn’t seem to be having much in the way of benefit for the population,” Dr. Ashish Jha, the study’s author and an associate professor of health policy at the Harvard School of Public Health, told ABC News. “Our sense is that there are probably lots of unnecessary procedures that go on at end of life.”

Each state has its own laws on advance directives.  Caring Connections, a site run by the National Hospice and Palliative Care Organization, offers state-by-state information on advance directives

Advance medical directives are an integral part of the estate planning services provided by elder law attorneys.  To speak with a qualified elder law attorney  and for more on health care decision-making, contact elderlaw attorney Jill E. Sugarman at 401-421-5115 ext. 215 or by e-mail at JSugarman@McLaughlinQuinn.com.

Self-Directed IRAs, Roth IRAs, SEP IRAs, Solo(k) Plans and the like are a huge untapped capital market for alternative asset investments.  Are you up to speed?  If you’re not, or you’re not sure, or you just want to brush up, you should attend: 

ADVANCED TRAINING IN SELF-DIRECTED RETIREMENT ACCOUNTS™

October 26, 2011, 8:30 AM to 4:00 PM

Presented by:

Frank L. Bridges, J.D.

Sponsored by:

HeritageDesign™ Law Group LLC

Special Luncheon Provided by:

PENSCO Trust Company

At The Learning Center, 199 Wells Avenue, Suite 302, Newton, Massachusetts.

This seminar is a must for:

• Registered Investment Advisors who want to help their clients invest retirement funds in alternative assets and learn how this untapped private capital market fits into their practice (even if they have a broker-dealer);
• Accountants who want to gain confident expertise to advise their clients in this developing area (Continuing education credits available);
• Real estate professionals who want to use this untapped capital source to facilitate real estate deals;
• Entrepreneurs and private offering organizers who want to learn how to attract and work with self-directed retirement account investors;
• Bankers who want to attract more business accounts;
• Investors who want to diversify their retirement savings with alternative assets.

Content Summary:

1. Part 1 – The basics – What you can do with a self-directed retirement account (e. g., types of accounts, investment policy and diversification, mechanics of setup…)
2. Part 2 – Rules of the Road (e.g., prohibited transactions, disqualified persons, plan asset rules, operating companies, co-investing and enabling, fiduciary duties…)
3. Part 3 – Successful Venture Design and Implementation (e.g., investment return and UBIT, management and governance issues, private offerings to SDRA™ investors, valuation and the “Supercharged” Roth conversion, practical considerations…).
4. Part 4 – Planning for SDRA™ Investors (e.g., special retirement and estate planning issues, business succession issues, buy-outs and business exit strategies)

Case studies will be used to illustrate key issues and solutions.

About Mr. Bridges:  Mr. Bridges, a nationally recognized expert on self-directed retirement accounts, offers years of case experience and, as an estate planner, a unique perspective on the topic.  You will especially enjoy his entertaining lecture style and his passion for the subject.

PENSCO Trust Company, one of the leading specialized custodians for self-directed retirement accounts, will provide lunch and information about their institutional platform for advisors.

SEATING IS LIMITED.  This seminar is limited to 20 participants, so reserve your seat now!

To reserve your seat send an email to asweeney@hdlawgroup.com with the subject “SDRA Seminar Reservation” and your contact information.  We will send you information on how to register.

                                                Registration Fee:         $95

For more information, contact:

Alicia Sweeney, Program Coordinator

HeritageDesign™ Law Group LLC
199 Wells Avenue

Suite 302
Newton, MA 02459
617-630-5700
617-630-0003 (Fax)
www.heritagedesignlaw.com

According to the AARP, the Federal Trade Commission (FTC), and a number of state attorneys general, these high-pressure con artists have built an industry around older people’s fears that their estates could be eaten up by probate costs or taxes, or that the distribution of their assets could be delayed for years. The solution, they claim, is a living trust.

“What these fast-talking crooks don’t tell their clients,” AARP Volunteer Consumer Affairs Specialist Irma Swantner says, “is that the “living trust” they’re selling could become the buyer’s “living hell.”

The living trust is an estate planning device that eliminates the need for probate of the individual’s estate at his death. Assets are held in the trust and then distributed outside of probate at the time of death.

There is nothing wrong with a living trust or with trying to avoid probate. Attorneys may recommend a living trust as an estate planning device for some of their clients where it is appropriate for their particular needs. However, salespeople masquerading as professional estate planners are working the provinces trying to convince older Americans that such trusts are for everyone. Going door-to-door or using phone solicitation, they often greatly exaggerate the costs and delays of probate and are unlikely to mention that the vast majority of estates are not subject to federal or state estate taxes. Their products are “cookie-cutter” living trusts, sometimes in the form of living trust kits.

The problem is that many people don’t need a living trust, a trust from a kit may not meet a particular client’s needs, and often these companies charge more than the service is worth. In addition, according to the FTC, some companies are using the living trust concept merely as a way to gain access to consumers’ financial information and sell them other financial products, such as insurance annuities.

Among the dangers of “one-size-fits-all” living trusts, say AARP officials, is that in many cases they won’t make the grantor and spouse eligible for Medicaid reimbursement of nursing home costs. In addition some trusts improperly instruct the trustee to distribute property to beneficiaries immediately upon the death of the grantor. If creditors make a claim against the trust after asset distribution, the trustee becomes personally liable for any valid claims against the trust.

According to an AARP study published in 2000, about four million people older than 50 with less than $25,000 in annual income may have purchased costly, unnecessary, and potentially dangerous living trusts as a result of high-pressure sales tactics by firms masquerading as AARP affiliates. In fact, AARP is not associated with and does not endorse any company that markets or sells living trusts.

The Federal Trade Commission also reminds consumers of the “Cooling-Off Rule,” which provides that if you buy a living trust in your home or somewhere other than the seller’s permanent place of business (say, at a hotel seminar), the seller must give you a written statement of your right to cancel the deal within three business days.

To help older adults and families make better decisions about annuities, the Healthcare and Elder Law Programs Corporation (H.E.L.P.) has created a Web site, annuitytruth.org.

Or, better yet, seek the advice of a qualified elder law attorney, such as Jill E. Sugarman, before signing anything. You can contact Jill at 401-421-5115 ext. 215 or by e-mail at JSugarman@McLaughlinQuinn.com.

Where to keep a will
The safest place to keep the original copy of your will is in a bank safe deposit box, but it may not always be the most practical. If the will is in a safe deposit box, it may be difficult for your family to access the box after you die. A better option may be to keep it at home in a fire-proof safe. Just make sure your family members know how to open the safe.

Some attorneys may keep the original copy of the will. But if you leave the will with your attorney, make sure the attorney receives updated contact information from you when you move. That way if the attorney moves offices or retires, he or she will know where to find you and you will know where your will is.

If you do use a safe deposit box or your attorney’s office, you may want to keep a copy of your will at home with your other financial documents. It is usually not a good idea to give a copy to family members or friends because you may want to change the distributions at some point and may need the will back.

What do you do with an old will?
Once you have written a new will, your inclination may be to destroy the old will, but this may not be a good idea. If, for some reason, your new will is invalidated, the court may be willing to reinstate an old will rather than allowing your estate to pass intestate (according to state law). It is likely that your old will adheres more closely to your wishes than an intestate distribution. If the will is destroyed, it cannot be reinstated.

On the other hand, if you have made a major change in your will, by all means destroy the old one. Otherwise, someone who did better under the old will may argue that you were incompetent or under undue influence when you executed the new will. Also, their feelings may be hurt if they see a change in your sentiments towards them.

Making changes to a will
If you want to make changes to a will, do not mark up the will by hand, even if you have only small changes to make. A court could take a marked-up will as a sign that you intended to revoke the will. If you want to make a change, contact an attorney who can draft an amendment to the will (called a codicil).

For more information on estate planning, contact estate planning and elderlaw attorney Jill E. Sugarman at 401-421-5115 ext. 215 or by e-mail at JSugarman@McLaughlinQuinn.com.