Not the \”Bump\” Couples Want…
High income households can strategically plan their income tax payments to better limit their Alternative Minimum Tax (AMT) liability exposure. The AMT structure differs from the regular tax system in that it subtracts fewer deductions and instead deducts one significantly larger exemption. This exemption phases out once a threshold is reached and as income increases. The AMT applies a tax rate of 26% on the first $175,000 of income and 28% thereafter. Households pay the AMT when a great tax liability results when using the regular system; thus, paying the AMT usually results in reduced marginal tax rates. However, as the AMT exemption phases out, the marginal tax rate increases and approaches a “bump zone” of tax rates. The marginal tax rates jump to 32.5% and 35% until the exemption completely phases out. After this, the marginal tax rate returns to 28%. Appropriate tax planning allows households to avoid “the bump” of rising marginal rates. Deferring income at the lower end will preserve the exemption taken. If income is higher, accelerating additional income to exit the zone and completely phase out the exemption would return the 28% marginal rate. However, accelerating too much income may subject a taxpayer to the regular 39.6% marginal tax rate instead of the 28% AMT rate. The phaseout threshold depends on the taxpayer’s state income tax rate and how much in excess AMT-adjusted deductions the taxpayer has. To maximize the AMT exemption and avoid the unwanted \”bump,\” taxpayers should consult with their tax advisor to discuss anticipated income and deductions in addition to identifying potential areas of liability. Timing can be everything. — Danielle Haseman, Team Max Elliott Law
Our Readers\’ Top 5 Articles from 2013
Like most, The Shark Free Zone took a little time off to reflect over last year’s work and our readers’ preferences. So before the “reflection” month of January is over, below are the top 5 articles from 2013. Enjoy! NUMBER ONE. The popularity of our top article for 2013 may have had a little to do with its melodramatic title, “Infants, Stairwells, & Burning a Million Dollars.” The premise was less dramatic than the title, but still important: If professionals or smallbiz owners fail to protect their assets by not planning, they might as well set their income and belongings on fire. Of course, we’re not advocating arson, but if someone slips and falls on your property or a toddler visiting with Mom finds his or her way into a non-child-proof cabinet, oh woe… Click here to read the star of The Shark Free Zone for 2013 and feel free to pay it forward. TWO. \”What the Civil Union Means…to Many,\” was a spillover all the way back from 2011, providing useful information on LGBTQ couples considering or entering into Illinois Civil Unions. It\’s continued popularity was likely because it resonated with many concerned about the economic benefits that can be reaped when discrimination ends. It’s a somewhat moot now that Illinois has passed the Religious Freedom and Marriage Fairness Act, providing marriage equality to Illinois LGBTQ couples. However, the article has many relevant points, so you can read it here. Our article on marriage equality in Illinois is forthcoming, so stay tuned! THREE. Smack dab in the middle is our series, whose information, is rising to the top of the news charts as more statistics and reports are being shared daily about the large aging Baby Boomer population. We first mentioned the Baby Boomer issue, or “Silver Tsunami,” a few years ago. It is now abundantly clear to all advisors that almost everyone is or will be affected by the Boomer generation, especially families that are unprepared. Don’t get caught by the Boomer wave. Prepare for the Silver Tsunami by checking out this middle entree. FOUR. Fourth in last year’s popular articles again involved marriage equality, particularly DOMA’s undoing. Our series, “The IRS Takes a Bite Out of DOMA” highlighted the complex estate and financial planning machinations LGBTQ couples had to take before the U.S. Supreme Court’s ruling in U.S. v. Windsor and the subsequent IRS ruling 2013-17 that removed a lot of that complexity for legally married LGBTQ couples, and especially those in \”friendly\” states. Tap here to read the beginning of this important 4-part series. FIVE. Rounding out our top 5 is “The Money Talk.” Recently, a relative became engaged, which will likely happen with many couples next month on Valentine’s Day. As couples take this loving step, it’s critical to know and understand each other’s mindset as it relates to saving, spending, investing, charitable giving, and a host of other related issues. So before you say “yes” or consider putting a ring on it, consider having this conversation. So there you have it: The top interests of 2013 were about love, money, and justice. What else is there to be interested in, except a pair of good looking shoes, right?
Wealth Preservation: When Your Pocket Shouldn’t Be the Payroll
People often confuse estate planning with wealth preservation, aka “asset protection.” The confusion is understandable for 2 reasons. First, estate planning and wealth preservation have overlapping areas and considerations. Second, and probably the most popular reason is that legalese is confusing when it refers to almost everything. Estate planning, while it involves planning for asset maintenance during your lifetime, that planning typically addresses emergencies. Accordingly, the documents needed are powers of attorney and medical release forms. Some trusts may also assist in asset maintenance, such as Qualified Personal Residence Trusts (QPRTs) and even revocable living trusts that provide income during the life of the beneficiary/trustee. However, estate plans generally address the transfer of assets to loved ones upon death. Wealth preservation, conversely, addresses the issue of keeping and enjoying the fruits of your labor during your lifetime and, most importantly, keeping it out of the reach of others. Many individuals think that the big other is Uncle Sam. The contrary is true. Most lawyers who prepare wealth preservation plans repel the idea of tax evasion; it’s against the law. Do we use the law to help minimize tax burdens? Yes. But the operative phrase is “use the law” not evade the law. Thus, we only work with clients who are willing to comply with tax laws and if potential clients don’t like the sound of that, those of us who want to keep our licenses, gently tell those potential clients to seek counsel elsewhere. The “others” we really want to keep away from your “fruits” are menacing, frivolous plaintiffs. These plaintiffs are individuals who believe that because you work in a particular profession, that they should be on payroll even though they don’t deserve a penny of your earnings. Usually, the clients who confront menacing plaintiffs are either business owner or those in “high risk professions” that attract unwarranted lawsuits – doctors, lawyers, architects, engineers, and hazardous chemical delivery. Occasionally the lawsuits are valid and settlements are reasonable and on other occasions, the lawsuits are unwarranted or the settlements are egregiously large, causing the defendant to lose everything. To prevent financial disasters such as this, clients seek the services of attorneys who provide wealth preservation services that include a number of strategies: Liability insurance in the millions of dollars. A Limited Liability Company (LLC) or a Family Limited Partnership (FLP) and if one is nearing retirement, we look to maximize retirement earnings being mindful however, that retirement vehicles are often emptied in large risk events such as a litigation settlement; A Domestic Asset Protection Trust (DAPT) in a state that allows DAPTs and to ensure that you have a substantial relationship to that state. FYI – Illinois is not a DAPT state; and An international trip to a jurisdiction that allow offshore trusts whereby the financial institution is the trustee and you are the beneficiary. Admittedly, many individuals don’t like the idea of living in one country while most of their assets are in another but when they learn of the thousands of frivolous lawsuits that are filed because a plaintiff thinks they should have a payday of which they are non-deserving, some change their mind. Hopefully, you found this helpful and have started planning for both your today and tomorrow, as well as the tomorrow of your loved ones, and the plan isn’t being an unwarranted payroll.
3 Reasons to Be Stingy
The primary problem with financial accounts held jointly is that one cannot predict the financial outlook of another person. These days, we can barely predict our own financial future, let alone anybody else’s, even if that person is a spouse. People still, however, assume that married couples are safe when they join finances, but let’s look at Keith and Richard. As newlyweds, Keith and Richard were head over heels in love. So when the CPA suggested that they keep their own separate accounts and establish a joint account for household expenditures, they smiled and told her she didn’t understand how they wanted to share everything. Ms. CPA just politely smiled back. Several months later, Keith phoned her to find out how to recover money from long overdue child support payments that were taken out of his and Richard’s joint account by Richard’s former partner who lived across country and was the mother of his child. The CPA recommended that Keith contact a lawyer who specialized in child support issues. However, the damage was done; even if the lawyer could recover what was withdrawn, Keith still had to pay the lawyer. So Keith also started thinking about calling another different kind of lawyer. Next: It\’s typical and, at first glance, reasonable for a senior loved one to place a younger family member on the senior’s account jointly. Grandma Adams may say to her granddaughter, “Liz, if I get sick, I want someone to be able to pay my bills and take care of me.” Liz says, “OK, Grandma.” Liz has the best intentions in the world because she has a nice job and doesn’t need Grandma’s money. However, what Grandma and Liz don’t know is that Liz is about to be laid off because her company just lost its best an only client and, as a result, must shut its doors. Liz has a car note, insurance, credit cards, and charge cards. Even if Liz doesn’t touch Grandma’s money, Liz’s creditors can if she stops making payments. Elderly parents, like grandparents and for the same reasons, also consider it a good idea to allow children to be on their account jointly, even if the parents have more than one child. Yet, what if the parent wanted the children to split everything equally upon the parent’s death? Do we really believe that Chloe isn’t going to keep all of the remaining money in the account to herself and not split it with her brother? The best way for an elder to manage this issue is to designate someone as an agent under a property power of attorney. That way, he or she must comply with a higher standard of legal ethics, must keep detailed records, and the agent\’s creditors cannot touch the principal’s funds.
Infants, Stairwells & Burning a Million Dollars
Wealth preservation aka “asset protection” is slowly rising to the top of the mainstream American lexicon, much like estate planning did a couple of decades ago. However, though related, the 2 activities are quite different. A solid estate plan’s end goal is to ensure that your intended beneficiaries obtain what you intend for them in the most efficient and least adverse manner possible. Retirement and tax planning are a substantial part of the estate planning process but the primary beneficiary at the end of the game is someone else, not you. Conversely, a solid wealth preservation plan will ensure that you don’t go broke before, during, or after retirement and fulfill your intentions toward your beneficiaries, tying it into estate planning. But the primary beneficiary of wealth preservation is not someone else; the primary beneficiary is you. Estate planning and wealth preservation are technically linked because the core documents and the fiduciary roles are primarily the same. Both include trusts and, consequently, trustees. Both might even include a LLC. The fundamental distinction is jurisdictional, i.e., what law governs the trust. Typically the laws in states that have asset protection statutes and are referred to as Domestic Asset Protection Trusts (DAPTs) govern wealth preservation instruments whose jurisdiction is in the U.S. Instruments whose jurisdiction is outside the U.S. are governed by the laws, or lack thereof, in those particular countries and are known as “offshore” trusts. Now before you start getting all antsy with thoughts of tax evasion, let me squash that thought like a bug. The only way to ensure that one doesn’t incur Uncle Sam’s penalties is by being completely compliant with the U.S. tax code. Now before going too far into the different schools of thought surrounding DAPTs and offshore trusts, you may be thinking, “I don’t have a gazillion dollars, so this doesn’t apply to me.” But before I lose you to Facebook or an incoming text message – wait. If you live in America, you live in one of the most lawsuit crazed countries in the world. So while you may not have a gazillion dollars, consider the following stats: 99% of doctors in high risk specialties will be sued; 75% of doctors in low-risk practice areas will be sued; Every 6 minutes a child under the age of 5 is treated for an injury sustained on a residential stairwell; In 2012, a woman was awarded about $833,000 for an injury sustained on her landlord\’s property ; Over a 10-year period, 15-21 lawsuits were filed per 100 architect firms; I won’t mention lawyers, it’s a given, people hate us, think we have deep pockets, so they sue us. So if you know your liability insurance won’t cover a potential lawsuit or the cost of litigation in successfully defending an unscrupulous claimant, how comfortable are you holding a “fire sale”? If you’re not thrilled about selling your home and liquidating all of your assets, including your retirement portfolio, to settle a claim, then wealth preservation may be needed sooner rather than later. Then again, maybe you have a million dollars to burn…
3 Tips on Succession Planning – Before Needing an Airbag
The previous article discussed succession planning formula for a more successful business today. This week I’ll briefly cover how succession planning helps improve retirement and more importantly, when that succession planning should begin. At its core, succession planning is about tomorrow, our “retirement.” And proper succession planning creates important retirement benefits. As an estate planner with a number of financial planning colleagues, I can attest to the fact that we may have several methods and vehicles to protect and grow your assets and with a proper succession plan, those options may increase dramatically. However, without a proper succession plan, the options could dramatically decrease. Added benefits to retirement include: Being able to withstand harsh bear markets; Having a more secure retirement because your plans are more realistic; Retiring more efficiently and with fewer adverse tax implications; and A Less stressful retirement, even if you experience 1 or 2 bumps in the road. Most importantly, a properly executed succession plan eliminates the need for a “garage sale.” So as I said previously, in addition to making more money, establishing and implementing a succession plan results in an even more successful business today and a relatively stable and peaceful retirement. Now, some of us have a good idea on when we would like to retire but there is an ideal time to start succession planning and that time is before opening your doors for business. If you incorporate succession planning when drafting your business plan, then you will ultimately use and allocate resources more efficiently and plan realistically. Moreover, you\’ll establish processes that are key to a successful business sale or shareholder transfer. You may also realize that the most important factor in executing a successful succession plan is having a well-developed successor. Sometimes, we don’t start actually planning at the beginning. Many of us just do and do and do without stopping and taking the time to think about where all this “doing” is leading. But even if you’re 10 years into your business with about 10-15 years to go, it’s not too late. You probably have some advantages, e.g., a steady clientele or a steady and established referral base; a solid understanding of the rules, regulations, and best practices applicable to your business; “brand equity” among your peers and in your community; staff, if you have them, who are loyal; and if you’re anal, like me, you have helpful processes and spreadsheets in place to get you through the day, week, month, year, and decade. Conversely, 10 years in you may have some disadvantages: too many processes, some of which are inefficient or redundant; and you could be stuck in a time warp working against yourself, treating yourself like an employee and your business like a job, instead of CEO and enterprise. New business owners even with great business plans are also disadvantaged because the business is…new. So mistakes are going to be made and newbiz owners won’t be able to plan for all of them. It is when the business shingle is rusty that folks should proceed quickly but with caution. At age 60-65, triage may be needed, but there\’s still hope. At 66 – 70, like Will Smith said in the movie, Independence Day, “I hope ya gotta an airbag!” And at 70 ½, I think land in Jamaica is reasonable. Knowing why and when to start succession planning, we can move on and discuss the personal and professional practical considerations..Next week! The Smallbiz Success Series: Decision 3 | Succeed Today | Personal & Practical Points | Relax & Retire
3 Reasons for Essential Family Talks and How to Manage Them, Despite Science-Fiction and Poker
Lawyers are no different from other groups when it comes to disagreeing with each other and, in fact, are probably worse. So while attending a recent seminar on trusts and estate planning, I was pleasantly surprised when my colleagues and I all agreed on one thing: People don’t like having the conversations needed for drafting adequate trusts and planning for the future, especially Baby Boomers and young couples. For example, a friend once told me that he and his wife hadn’t revisited the issue of guardianship for 13 years because it created such a stir the first time. Understandable. What man wants to tell his wife that instead of his mother-in-law, he’d rather have the kids raised by Darth Vader? Disclaimer: My friend did not say that about his wife’s mother. Baby Boomers don’t like talking about this issue because we cannot fathom that the world will continue to exist without us. Similarly, young couples, especially young parents, tend to believe that they are the world. Why not? Still, conversations about retirement and the Golden Years are essential and should be had a lot sooner than the appearance of the first strand of grey. How can we lawyers help if the conversations are sidestepped? Well, we try to provide compelling reasons for having these important chats, such as the following: If you’re a couple in your 20s or 30s the world is at your feet and you should do what you can to protect your world. Have you thought about your values and who in your families, outside of your partner, most accurately reflects those values? When you take vacations without the children and/or pets are you comfortable that your values are supported or do the children need reeling back in when returning from 3 weeks with Grandma? Perhaps you should gently suggest that Uncle Bob or Aunt Carol help Grandma out a few evenings. However, if Grandma rebukes the suggestion by playing the “grandparent trump card”: “I’m a grandparent and can do what I want for my grandchildren,” tell Uncle Bob or somebody to be at Grandma’s a few times a week. When Grandma huffs, blame it on a lawyer. Leaving the healthcare debate for another time, if you’re a Baby Boomer, you probably know that medical wonders abound to provide you or your parents with the physiological retirement deserved. Have you found a way to ensure that when their knees need replacing, Mom or Dad will be able to recuperate in the manner to which they’ve become accustomed without sacrificing your lifestyle or their independence? If, when approaching the subject, they start moaning about you deserting them and them living out their final moments with cold mashed potatoes and a checkerboard, suggest interviewing in-home, part-time caregivers and a cruise that gives AARP members discounts. If that doesn’t work, blame the cold potatoes on a lawyer. If you are a small business owner, your business may be your most valuable asset. When you are ready to release the reigns, at least a little bit, are you and your family comfortable with your individual successor or the successor management? Maybe one family member knows the business inside out and the other family member has no clue but 2 people are needed to run it. Update your business plan and bring the other family member in on management selection of neutral parties. If he or she doesn’t want to be involved from that perspective, blame the million-dollar IPO that the family member got locked out of on an accountant.