Plan & Preserve

Changes in Illinois Estate Tax Laws

2012-01-18T07:58:00.000-06:00

On December 16, 2011, Governor Patrick Quinn signed into law Public Act 97-0636 (the “Act”). The Act received much press at the time as it was primarily meant to address tax incentives for Sears Holdings Corp. (“Sears”) and the CME Group, Inc. (“CME”) which operates the Chicago Mercantile Exchange (in response to Sears’ and CME’s threat to leave Illinois and take their jobs with them). However, contained in the very last two pages of the lengthy Act are new rules regarding Illinois’ state estate tax exemption.

Illinois imposes its own state-level estate tax on decedent’s estates (in addition to the Federally-imposed estate tax). Illinois also provides an exemption to the state estate tax such that estates valued below a certain threshold are not subject to the state estate tax at all. Traditionally, Illinois’ state estate tax exemption was tied to, or “coupled” with the Federal estate tax exemption. For example, in 2008 both exemptions were $2,000,000. In 2009, however, the Federal exemption increased to $3,500,000 where Illinois’ stayed at $2,000,000. This divergence is referred to as “decoupling”, and can result in unintended estate tax liability unless proper language is included in estate planning documents.

In traditional estate plans for married couples, upon the death of the first-to-die spouse, his assets are split into two trusts, the marital trust and the family trust. The family trust is funded with the applicable Federal estate tax exemption amount, and any excess is used to fund the marital trust. Because the marital trust qualifies for the marital deduction from estate tax, no estate tax would be due upon the death of the first spouse. However, in this scenario, although no Federal estate tax would be due, Illinois would nonetheless impose its own, separate estate tax on the funds in the family trust that exceed Illinois’ exemption level. For example, for 2009 decedents, this would mean a potential Illinois estate tax liability of over $200,000.

With passage of the Act, Illinois eased the decoupling-burden slightly—over the next several years, the Illinois exemption will increase to a maximum of $4,000,000. In particular, the Act provides exemption levels of:

$2,000,000 for persons dying prior to January 1, 2012;
$3,500,000 for persons dying on or after January 2, 2012 and prior to January 1, 2013; and
$4,000,000 for persons dying on or after January 1, 2013.

However, Illinois’ exemption will still not equal the Federal exemption of $5,000,000. Therefore, decoupling remains an issue. To deal with the potential state-level tax, we have crafted language that allows the Executor of the estate to make a marital deduction with respect to a portion of the family trust for Illinois purposes only. In practical terms, upon the death of the first-to-die spouse, the family trust would be fully funded with up to $5,000,000 and qualify for the Federal estate tax exemption amount. The Executor would then make an election as to the assets in excess of the Illinois estate tax exemption amount (currently, as described above, $3,500,000) in the family trust to qualify for the marital deduction for Illinois purposes only. This allows maximization of both the Federal and Illinois exemptions without subjecting assets to either Federal or Illinois estate tax.

If you have a taxable estate above $3,500,000, and thereby are above the Illinois estate tax exemption, you should consider other “estate tax minimization” strategies to minimize your estate tax liability. We can assist you with such strategies as gifting, charitable planning, sales to defective grantor trusts, and other advanced techniques to minimize estate tax exposure.

If you want to implement any of these “estate tax minimization” strategies or modify your estate planning documents to take into account of the above-described changes in Illinois law, contact me at eosborne@stahlcowen.com or 312-377-7761!

NEW Illinois Tenancy by the Entirety Law

2011-12-06T08:27:00.001-06:00

The simplest asset protection measure a couple can take is to own their home as tenants by the entirety (“TBE”). In Illinois, the only asset you can own as TBE is your principal residence. Under TBE ownership, your home is deemed to be owned by both parties as a fused marital unit (or a fused civil union unit). Therefore, an individual creditor of either person would be unable to reach the primary residence in satisfaction of a debt.

Traditionally, spouses/partners would have to choose between asset protection concerns (TBE ownership) and estate planning concerns (ownership in a living trust)—the two concepts were mutually exclusive. However, effective January 1, 2011, spouses and civil union partners in Illinois can hold title to their primary residence in their living trusts, as TBE. In other words, they can now have the best of both worlds.

Note that this protection is not automatic—the deed conveying title must specifically reference not only the applicable living trust(s), but also TBE language.

Illinois Civil Union Act

2011-11-02T08:19:00.001-05:00

On January 31, 2011, Governor Patrick Quinn signed into law the Illinois Religious Freedom Protection and Civil Union Act (the “Civil Union Act”). The effective date was June 1, 2011. The Civil Union Act provides that parties to a civil union are “entitled to the same legal obligations, responsibilities, protections, and benefits as are afforded or recognized by the law of Illinois to spouses.” The Civil Union Act also provides for reciprocity—Illinois will recognize a “marriage between persons of the same sex, a civil union, or a substantially similar legal relationship other than common law marriage, legally entered into in another jurisdiction.”

In other words, parties to a civil union or other similar relationship are governed by, and may take advantage of, all of the Illinois laws applicable to same-sex married couples, “whether they derive from statue, administrative rule, policy, common law, or any other source of civil or criminal law.” Both same-sex and opposite-sex couples may enter into an Illinois civil union. Note, however, for Federal purposes, The Defense of Marriage Act (“DOMA”) is still in effect and thus there is no recognition of same-sex relationships for Federal purposes.

What does this mean for parties to a civil union in Illinois? Some of the rights, benefits, and protections include:

Protection from disinheritance (if a person dies without a Will, his or her civil union partner is entitled to all (if no children) or 50% (if children) of the decedent’s estate);
Domestic relations rights and procedure, including protection as to “marital property” upon dissolution of a civil union;
Adoption and parental rights;
Spousal treatment for Illinois income tax purposes;
Spousal testimonial privilege;
State spousal benefits such as workers’ compensation and spousal pension coverage; and
Emergency medical decision-making power and hospital visitation rights.

In addition, civil union partners are treated as spouses for Illinois estate tax purposes, including the marital deduction for estate taxes. BUT, because Federal law does not recognize civil unions, additional estate tax minimization planning must be considered for those with gross estates in excess of $2,000,000 (the current Illinois estate tax exemption). Gifting is a great tool for estate tax minimization, particularly in 2012 while favorable Federal laws remain in place. Civil union partners can also benefit from irrevocable life insurance trusts (“ILITs”). By making the owner and beneficiary of any life insurance policy an ILIT, the death benefit can be passed to beneficiaries of the ILIT (which can include a civil union partner) both estate and gift tax free at the Federal and State level.

Basics of Asset Protection

2011-08-10T16:21:00.001-05:00

I don’t have enough assets to protect. I’ve been operating just fine for years, and nothing bad has happened. I haven’t done anything wrong; I’m an honest business person, so my assets are safe. These are the most common knee-jerk reactions people have when thinking about “asset protection.”

First, asset protection is not only for the mega-wealthy. Asset protection is relevant to all stages of life and wealth. Entrepreneurs need to safeguard against future ventures, professionals with a high degree of liability (doctors, lawyers, real estate investors/developers, landlords, etc.) need to safeguard against certain lawsuits, and even retirees need to preserve assets against costs such as medical care.

Second, asset protection is really just another form of insurance. Some things are out of your control. No matter how well you maintain your home, there is always a risk that the proverbial (and literal) lightening will strike. That’s why you have home insurance. No matter how well you maintain your business or how carefully you save your funds, there is always a risk that a tenant could slip and fall, a client could file a frivolous lawsuit, and so on. You hope for the best, but should plan for the worst.

Third, asset protection does not have to be overly complicated! The core principle is ownership—there are certain ways to own your assets that maximize asset protection.

Tenancy by the Entirety

Tenancy by the entirety (TBE) is a form of ownership reserved solely for a husband and wife. Where an asset or interest is owned or held TBE, the asset is not considered as owned by wife and/or husband individually, but rather as a “fused marital unit.” Therefore, neither a creditor of wife individually, nor a creditor of husband individually, may reach an asset owned TBE—only a joint creditor may reach such an asset.

In Illinois, you can only own your primary residence as TBE. In certain other states such as Delaware, you can own many types of assets as TBE. A relatively simple asset protection strategy is to form a trust under Delaware law where the beneficial interest is held as TBE, and transfer assets to that trust.

Owning Assets in an Entity

It is generally beneficial to segregate ownership of assets. Where you, individually, incur a liability, anything you own in your individual name can potentially be reached to satisfy that liability. Owning an asset in an entity, rather than your name, helps shield it from creditors’ reach.

Suppose you own a rental property in your individual name. A tenant slips and falls and sues you. Tenant wins a monetary judgment against you and seeks out assets on which he can collect. He can potentially reach your bank account, other real estate, personal property, etc.

But, if you had transferred those assets to LLCs, your creditor would have to first attach to your LLC membership interests to try to reach them. LLC membership interests have a special asset protection feature built-in under most state statutes known as “charging order protection.” A charging order is a remedy granted to a creditor, and is similar to a lien in that the creditor gets to attach to your LLC membership interest. But, a creditor cannot foreclose upon the interest. The creditor is only an assignee of your economic rights, with no management or voting rights. The end result is, the creditor can take your share of any distributions that are made, but the creditor has no power to force distributions—you, as manager, maintain control over all the assets you own in the LLC.

Certain states have better charging order protection statutes than others. Delaware and Nevada, for instance, have superior statutes to Illinois.

Remember, “Substance Over Form”

It is often thought assets are protected against one spouse’s liabilities by simply transferring them to the other spouse completely. This is usually not the case. Most courts would hold that if the couple is still treating the asset as if beneficially owned by the spouse with the liability (e.g., if that spouse is making all decisions, receiving all income, or using his/her income to pay for expenses related to the asset), creditors of that spouse could still lien on the asset. TBE is generally much more effective asset protection planning that moving assets to one spouse.

Beware of Fraudulent Conveyances

One legal limitation on any asset protection planning is the concept of fraudulent conveyances. If assets are transferred solely to thwart a creditor after the creditor’s liability has accrued, the creditor could argue that a fraudulent conveyance has occurred and “unwind” the transfer. Fraudulent conveyances are assessed on a creditor-by-creditor basis; thus, even if you have an existing creditor, it may be beneficial to implement a plan as to future potential creditors.

NOTE: Proper asset protection planning is customized for each person’s specific situation. This material is for informational purposes only with no warranty as to applicability/accuracy to a particular set of circumstances. You should consult with an attorney before acting on anything contained herein.

Illinois Landlords - New Lock & Key Requirements

2011-07-06T10:13:00.001-05:00

UPDATED 1/2012

A new provision in the Landlord and Tenant Act was proposed by the Illinois legislature, and has passed both Houses. The bill was sent to the Governor for signature. Once he signs, it will become law and go into effect as of January 1, 2012. THIS BILL HAS BEEN SIGNED INTO LAW AND IS NOW IN EFFECT!

The law would require landlords to “change or re-key” locks of rental property after a renter moves out if the new renter has a written lease agreement. If the landlord doesn’t do this, the landlord is liable for any damages for theft that occur.

The law would exempt (1) apartment buildings with four units or less if the owner occupies one of the units, and (2) dwelling spaces where the rented room is in a private home also occupied by the owner. Also, the provisions would not apply if the lessee has the right to change or rekey the dwelling unit lock pursuant to a written lease agreement.

Finally, the law only applies to counties in Illinois with a population of 3,000,000 or greater. Therefore, the law really only applies to Cook County landlords.

5 Estate Planning Myths Debunked!

2011-05-16T12:30:00.001-05:00

“Estate planning.” The phrase just sounds so dry and foreboding. But, despite appearances, estate planning is a valuable and relatively easy way to avoid the uncomfortable situations that we imagine with those icky conversations about death and money.

In fact, that’s Myth 1: Estate planning is just about death and money. No! You need not consult the Grim Reaper when you think about this planning...the focus is really on caring for your loved ones.

Myth 2: Que Será, Será

I don’t care what happens to my possessions after I’m gone, so I don’t need to do any planning.

Upon your death, your estate (no matter how big or small) will come into contact with a court (known as Probate). If you die without any documents in place, a court will allocate your possessions according to the State’s “intestate” rules. Court is not free, either of expense or time. And since you will not be around, your family will be left to deal with it. Is that what you really want?

Plus, an estate plan can address important matters other than your possessions—you appoint a guardian to care for minor children through your estate plan. If you do not do so, your relatives would petition a court for the right to care for them. Would you trust a judge, unfamiliar with your family, to decide who should gain custody? What if she picked your in-laws?!?

Myth 3: Too Rich for My Blood

I don’t own enough stuff to make an estate plan worthwhile.

Estate plans do manage assets, and also incorporate important tax-savings provisions for those with estates that would be subject to estate tax. But, they also can include documents that operate during your life regardless of the value of your assets. For example, an estate plan includes Powers of Attorney for Property and Powers of Attorney for Health Care. Powers of Attorney allow you to appoint an agent who will act on your behalf in the event you are unable. Without them, your spouse, closest relatives or companion will have to ask a court for authority over your financial affairs and health care provision. In addition, if your relatives go to court to get someone appointed to manage your affairs, they must ask a judge to rule that you cannot take care of your own affairs—a public airing of a very private matter.

Consider also that you and the IRS may disagree on what you “own” for estate tax purposes—the death benefit of any life insurance policy that you own and the value of certain gifts you made before your death are just a couple of the things the IRS considers taxable at your death. A proper estate plan will minimize tax liability (and consequently maximize the assets left to pass to your loved ones).

Myth 4: All in the Family

My family knows what I want and they’ll make sure everything is handled.

Without an estate plan, your family has no control over how your assets are administered (see Myth 2)—the State’s laws will determine who gets what. Illinois law provides that if a married person dies without an estate plan, ½ of the assets go to the surviving spouse, and the other ½ is split between descendants (e.g., children). The rules favor blood relatives, which may be problematic for blended families—descendants may not include those who you actually consider your children. In particular, stepchildren would not share in your estate under the intestate rules. However, in an estate plan you can provide that stepchildren are to be treated the same as your natural children.

Myth 5: The First Thing We Do, Let’s Kill All the Lawyers

I don’t have the time or money to meet with an attorney.

It is best to have an attorney prepare your estate plan. Laws can be very specific, and often forms available online do not take into consideration nuances in states’ laws. Plus, an attorney can help sort out complex family or financial situations. But it doesn’t have to cost a fortune or be a big ordeal. Many estate planning attorneys provide free consultations, make house calls, and offer flat fee packages based on your needs.

Drafting the Key Players in your Estate Plan

2010-09-01T10:33:00.000-05:00

When the coach of a football team is planning for the season, he has many decisions to make, from scheduling practices to considering what plays to run. But, the first priority that must be addressed is the roster—who will the coach draft as his key players? They will determine how the coach’s objectives are ultimately carried out and they will be the decisive factor in the team’s performance.

Similarly, when planning for your future, you have many decisions to make as far as managing your estate during your life, and “post-season” upon your passing. As a threshold, you need to determine who you want to draft as the key players on your team—not only your attorney, or financial advisor, but also those people you will name to carry out your wishes upon your death, and who will help make decisions for you during your life, in the event you are unable.

These are among the most important decisions you will make, and in order to make the proper draft picks, you need to understand the role of each position on your team.

THE EXECUTOR

The position of Executor involves carrying out the wishes you specify in your Will. He or she will have to deal with the legal formalities involved in administering the estate of the deceased. Therefore, he or she will be called into the game immediately upon your passing. The position is important, but often thankless. You need a person who can stay organized and work well under pressure, despite coping with the loss of a friend or family member. Some of the typical plays the Executor will be expected to handle include:

Make funeral arrangements;
Gather the assets of the estate and create an inventory of them;
Pay the debts and expenses of the estate;
Handle tax payments and necessary tax return filings;
Keep detailed accounts of how he or she spends the money in the estate and report such to beneficiaries if required; and
Distribute the money according to specific bequests, or gifts, made in the Will (if any).

THE TRUSTEE

The Trustee is the fiduciary (and manager) of a Trust. The position of Trustee involves similar duties as the Executor, and therefore often times the same person is drafted to take on both positions. In fact, if your Will has a “pour over” provision whereby assets are distributed pursuant to a trust, the Executor will transfer those assets to the Trustee for him or her to distribute accordingly, or for continued management (depending on the terms of your trust). In this way, unlike the Executor, whose duties are generally over within, at most, a few years, the Trustee’s duties can continue for generations. In other words, the Trustee could be the main player responsible for handling the majority of your estate, like your quarterback—involved in every play. The typical plays the Trustee will be expected to coordinate include:

Collect trust assets;
Invest money;
Pay bills;
File accountings (quarterly or annual);
Manage money for the beneficiaries; and
Respond to beneficiaries’ requests and ensure they are provided for according to the terms of your trust.

The Trustee will have to work with the beneficiaries; he or she will consult with them about the amount of funds they need distributed, what expenses beneficiaries need paid on their behalf, and what withdrawals of the trust principal will be allowed. Therefore, as the name implies, trustworthy players are needed to fill this important role. You need someone who you trust to carry out your terms in an unbiased way; someone who is extremely responsible, and someone with whom your beneficiaries will feel comfortable.

THE GUARDIAN

If you have minor children on your team, you will need to draft the position of Guardians. There are two types of Guardians: Guardian of the Estate and Guardian of the Person. Again, one person can fulfill both positions.

Guardian of the Estate is responsible for managing your children’s property and assets bequeathed under your Will, and held in custodial accounts. However, if your estate plan includes a trust, the Trustee will be the “first string” player responsible for managing assets for any minor children held in trust. Guardian of the Estate will only step in when assets are distributed out of the trust to minor children.

Guardian of the Person is responsible for caring for your children in the instance both parents are unable to act (for example, providing health care and education). In essence, Guardian of the Person will step into your shoes as parent. Therefore, you should consider drafting a player who has similar qualities as you do—perhaps similar cultural or social background, a similar belief system—and someone who you believe will have a positive influence over your children’s lives. In considering candidates, think about the following:

Is he or she in good health and able to handle the responsibilities associated with looking after your children?
Does he or she have the time and the money to provide your children with the kind of education and environment you prefer? Remember, this is a life-long commitment you are asking the Guardian to take on.
Will he or she get along with your other family members, so that your children will stay connected with those other important team members?
If you choose different people to act as Guardian of the Estate and Guardian of the Person, make sure they will get along—the Guardian of the Person may need access to the funds that the Guardian of the Estate is managing.

THE AGENTS

The Agents have two positions to fill: Agent for your property, and Agent for your health care. You can draft different agents, or have one player assume both positions. Think of the Agents as a player on your “special teams” roster—they will only be called out onto the field in certain circumstances. The will act only during your lifetime, and only if you are physically and mentally unable to make financial or health care decisions on your own.

Your Agent for property decisions will handle your financial affairs should you become incapacitated. In this way, the Agent for property should have similar characteristics as the Executor or Trustee—responsible, and fiscally knowledgeable.

Your Agent for health care decisions will make medical decisions for you should you become incapacitated. These decisions would include things like nursing home care, medications, surgeries and termination of life support. Again, pick someone you trust, and someone who you feel is capable of handling the pressures associated with making these tough decisions.

Once your team members have been drafted, you should keep in mind the following:

Not all of your draft picks may accept, or they may accept and then later become unavailable…name back-ups for your bench (also known as “successors”).
Although you have no doubt assembled a great team, you will likely want to provide some guidance for them…keep in mind that you can provide a “playbook”. The documents under which you name your players all allow you to leave specific instructions as to how you wish for each player to carry out your plans, and factors you wish for them to consider in doing so.
Over the course of the “season”, circumstances may change, and you may wish to make some “trades”…remember, your team’s roster is NOT permanent! Your documents can be amended at ANY time.

As the coach, you have the task of drafting the players you think best suit your “estate plan team.” But, just like a professional football team needs the “general manager” to handle the logistics, you need your attorney to define, or codify, your team’s operations. Preparation of proper legal documents is essential to ensure successful team performance.

WHBAA - How to Leverage EXPANDED Net Operating Loss Legislation

2010-04-03T17:58:00.000-05:00

The Worker, Homeownership, and Business Assistance Act (“WHBAA”), signed into law on November 6, 2009, once again amended the tax law concerning net operating losses (“NOLs”).

NOTE: An NOL is the excess of business deductions (computed with certain modifications) over gross income in a particular tax year. This loss can be deducted in another tax year where gross income exceeds business deductions. When deducted against previous years, the NOL is said to have been “carried back”. Alternatively, a taxpayer can “carry forward” an NOL for up to twenty years.

Under this new legislation ANY taxpayer who suffered a business loss during 2008 and/or 2009 (except any taxpayer who received TARP funds) may elect to offset the loss against income earned in up to five prior years, rather than two.

Previously, the American Recovery and Reinvestment Act (“ARRA”), signed into law on February 17, 2009, provided that “eligible small businesses” who incurred an NOL in 2008 could make the expanded election. See my ARRA post for further details on ARRA legislation.

WHBAA serves to expand not only the pool of eligible taxpayers, but also to extend the tax years at issue; where ARRA was limited to NOLs incurred in 2008, WHBAA applies to NOLs incurred in 2008 AND 2009.

This means virtually all taxpayers that suffered big business losses in 2008 and/or 2009 given the state of the economy can use those losses to offset income earned before the recessionary-effects were felt. This could provide taxpayers with a much needed quick cash infusion by generating a refund of taxes already paid. Further, the IRS provides accelerated methods by which to claim a refund, to get the cash in business owners’ pockets now, rather than later (see below).

MAXIMIZING THE CARRY BACK

The new NOL rules, under both WHBAA and ARRA, could result in a refund by allowing a taxpayer to offset income that has already been taxed. Under the traditional rules, a taxpayer could not use an NOL to offset income from the 3rd, 4th, or 5th year preceding the NOL, and therefore could not receive a refund for taxes paid in these years.

ARRA allowed only small businesses to carry back their losses generated during tax-year 2008. WHBAA allows virtually all taxpayers take advantage of this potential refund opportunity.

WHBAA example: ABC, LLC has an applicable NOL (i.e., an NOL which arose in tax years ending after December 31, 2007 and before January 1, 2010). ABC, LLC had taxable income in 2005 (on which it paid federal taxes), but no taxable income in 2006 or 2007. Under the traditional rules, ABC, LLC would only have the option to carry back the NOL to 2006 or 2007, where it was of no use to the company. ABC, LLC would have to wait until later years when it had taxable income to carry forward the NOL and receive a tax benefit. Now, under WHBAA, ABC, LLC will receive a refund of some (or even all) of the taxes it paid on the 2005 income.

Points to consider:

o The election is irrevocable, and can only in general only be made for one tax year. Thus, taxpayers must consider—in which preceding year will a carry back generate the most tax savings?

o If the applicable NOL is equal to the total combined income for all three preceding years (or greater), then the NOL should be carried back to the 5th year so it could be utilized in all three years. Any remaining NOL could still then be used to offset 2009 income (if any), or carried forward to future years. In this way, a taxpayer takes full advantage of the new law.

o On the other hand, if the applicable NOL is less than the total combined income for all three years, it would be most beneficial to carry the NOL back to the year in which the taxpayer’s income was taxed at the highest rate, because this will generate the highest refund.

o Under WHBAA, the amount of an NOL that a taxpayer elects to carry back to the fifth taxable year is limited to fifty percent (50%) of the taxpayer’s taxable income for that fifth taxable year.

o This limit does NOT apply to the other preceding years, and does NOT apply to elections made by small businesses under ARRA.

o Any remaining NOL can fully offset taxable income in the remaining four carry back years.

o Small businesses who already carried back certain 2008 losses under ARRA can ALSO now carry back their 2009 losses under WHBAA!

ELIGIBILITY

WHBAA: An eligible taxpayer is any taxpayer with business losses under Section 172 of the Internal Revenue Code EXCEPT taxpayers that received certain benefits under the Emergency Economic Stabilization Act of 2008 (i.e., TARP recipients), regardless of whether the TARP funds were paid back.

Further, life insurance companies, under Section 810(b) of the Internal Revenue Code, are now eligible to carry back applicable losses from operations.

ARRA: An eligible taxpayer must be a small business (i.e., a corporation or partnership or limited liability company) whose average annual gross receipts (as defined under Code section 448(c), and modified by the ARRA) are $15 million or less, for the three-year tax period (or shorter if the entity has not been in existence for three years) ending with the tax year before the year in which the loss arose.

NOTE: The normal two-year carry-back period remains available for business who do not qualify as an eligible small business, or for taxpayers who do not elect the special carry back provision.

MAKING THE ELECTION

In order to take advantage of the expanded carry back provisions created under WHBAA, procedure must be followed and deadlines must be met. Much is dependent on the status of the taxpayer’s 2009 return.

In general, a taxpayer must make the WHBAA election by the due date (including extensions) for filing its 2009 income tax return. This is true regardless of whether the election is made for losses incurred in 2008 or 2009.

The election is made in one of two ways:

1. Attach an election statement to the federal income tax return, or amended return, for the tax year in which the loss incurred; OR

2. Attach an election statement to the carry back form itself.

Election Statement: The taxpayer must state the following: (1) It is electing to apply Section 172(b)(1)(H) (or Section 810(b)(4) in the case of a life insurance company) under Rev. Proc. 2009-52; (2) It is not a TARP recipient, nor was it a TARP recipient during 2008 or 2009; and (3) The length of the carry back period (three, four, or five years).

Carry back form: Form 1045 for individuals, and Form 1139 for corporations is used to specifically elect NOLs to be carried back to previous years. Using the carry back form, as opposed to filing an amended return for previous years, will accelerate payment of any refund. Thus, it is preferable for a taxpayer to file a carry back form (with the appropriate election statement) for taxable years where the income tax return was already filed, rather than file an amended income tax return.

Already filed a two-year carry back for 2008? No problem! Taxpayers may now make the WHBAA election by either filing an amended 2008 return, or simply filing an amended carry back form for 2008. Be sure that the election statement is included.

Remember, in order to take advantage of the legislation, you must ACT before the favorable tax treatment expires!!

Illinois Supreme Court rules - NO LIMITS on Medical Malpractice Liability

2010-03-15T12:52:00.000-05:00

On February 4, 2010, the Illinois Supreme Court made national news when it issued its opinion in the case of Lebron v. Gottlieb Memorial Hospital. The Court overturned as unconstitutional Illinois’ medical malpractice cap on damages. Specifically, the Court found that the Illinois cap violated the “separation of powers” clause because damages determinations are to be made by the judicial branch, and not the legislative branch, of government.

The effects of this decision on physicians and hospitals are potentially enormous in scope. Previously, plaintiffs could be awarded no more than $500,000 in non-economic damages against physicians, and $1,000,000 against hospitals. Non-economic damages are, in general, damages for pain and suffering, disability, and disfigurement. Now, this ceiling is removed and juries are allowed to award an unlimited amount of both non-economic and economic (e.g., lost wages) damages to a plaintiff in a medical malpractice suit (subject to judicial review).

Therefore, physicians are now at a much greater risk of subjecting their personal assets to satisfaction of a malpractice judgment. For example, medical malpractice insurance may have a limit on the amount it will pay on a physician’s behalf in the event of a judgment. Because now there is no cap on the amount of a judgment, the physician could be left to make up the difference—however substantial that difference may be.

We have developed sophisticated asset protection structures that can enable you to protect your personal assets from creditors’ claims, while still allowing you to maintain control over your assets and their administration. A key criteria to a successful asset protection structure is an early start, before any creditor issues arise. Contact me to discuss your liability exposure and review opportunities to increase your asset protection, particularly in light of the Lebron decision.

No Estate Tax in 2010? Not Necessarily a Good Thing!

2010-02-11T10:04:00.004-06:00

The terms of The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) provided for a lapse in the federal estate tax for the 2010 calendar year. In other words, under the current regime, individuals who die in 2010 can pass an unlimited amount of assets to named beneficiaries.

Many assumed Congress would enact a permanent revision to the federal estate tax, however no such law has been passed. The House of Representatives and Senate continue to argue over the specifics of the law, in addition to several other critical issues which are taking priority. Therefore, it is crucial for estate plan documents to take current laws into consideration.

At first blush, the ability to pass an unlimited amount of assets sounds great. However, as is often the case with legislation, taxpayers would be well advised to read the fine print first!

Critical issues associated with the 2010 Estate Tax Regime may include the following:

• NO ASSETS will to pass to your surviving spouse

• Significant INCOME TAX consequences

• Bequests to grandchildren may be DISREGARDED

These issues are very complex and must be examined in the context of your personal asset portfolio and your existing estate plan. The purpose of the summary below is to highlight some of the most critical issues associated with the 2010 Estate Tax Regime. But don’t worry – these issues can be addressed by reviewing and updating your existing estate plan.

Do you intend for NOTHING to pass to your surviving spouse?

For a married couple, assets are typically divided into two separate trusts upon the death of the first spouse. Traditionally, the “Family Trust” (or Residuary Trust) is funded with the federal estate tax exemption (the maximum amount that would pass estate tax free). In 2009, for example, the federal estate tax exemption was $3,500,000. Therefore, for individuals who died in 2009, the Family Trust was funded with $3,500,000. Any assets in excess of the exemption were used to fund the “Marital Trust” (which is solely for the benefit of the surviving spouse during his/her lifetime).

However, in 2010 the exemption is unlimited. Therefore, the “maximum amount that would pass estate tax free” would be the entire estate, and the Marital Trust would never be funded. That is not necessarily problematic, UNLESS the trust terms of the trust do not allow the surviving spouse access to the Family Trust. Some trust documents provide that the surviving spouse is only a beneficiary of the Marital Trust (and not the Family Trust). As such, under the current regime the surviving spouse may be disinherited.

Furthermore, regardless of whether the surviving spouse is a beneficiary of the Family Trust, failure to fund a Marital Trust can create unintentional income tax consequences associated with basis (see “Basis Shmasis” below).

Basis Shmasis!

Basis is an important aspect of income tax. Essentially, basis is the “cost” of a particular asset against which taxable gain is calculated. With regard to bequests/gifts made pursuant to an estate plan, Internal Revenue Code Section 1022 provides that for years PRIOR to 2010, upon death, assets passing to beneficiaries get a “step-up” in basis. For example, if Uncle Jerry purchased a home in 1970 for $100,000 that was now valued at $1,000,000, upon Uncle Jerry’s death in 2009, the beneficiaries would get a “step-up” in basis to the $1,000,000 fair market value. Subsequently, upon selling Uncle Jerry’s home, the beneficiaries would realize no gain on the $1,000,000 sale for income tax purposes.

Under the current 2010 regime, for individuals dying in 2010, beneficiaries are required to take the decedent’s “carry-over basis”, subject to certain exceptions. Thus, Uncle Jerry’s $100,000 basis would “carry-over” to the beneficiaries, and if the property was sold for $1,000,000, they would recognize tax on the $900,000 gain ($1,000,000 minus $100,000).

To complicate matters, there are two exceptions to the carryover basis provisions:

1. The executor can allocate up to $1,300,000 (increased by unused losses and loss carryovers) to increase the basis of assets; and

2. The executor can also allocate up to $3,000,000 to increase the basis of assets passing to a surviving spouse.

However, in true legislative-style, there are exceptions to the exceptions!

First, these allocations may not increase the basis of an asset above its fair market value as of the decedent’s date of death. Second, in order for assets passing to the surviving spouse to qualify, the decedent must have provided that the assets go to the spouse either outright or in a Qualified Terminable Interest Property (QTIP) trust (i.e., a special trust solely for the benefit of the surviving spouse during her lifetime, such as a Marital Trust). Thus, if no Marital Trust was created (discussed above), even if the surviving spouse was a beneficiary of the Family Trust, assets allocated to her from this trust would not be eligible for the $3,000,000 basis increase.

Generation Skipping Transfer Tax – Skips Right Out of the Picture!

The generation skipping transfer tax (“GST Tax”) refers to the tax imposed on outright gifts and transfers in trust to beneficiaries who are a “skip person” (i.e., gifts or transfers to related persons more than one generation away from the decedent; for example, money that passes to an individual’s grandchildren, skipping his/her children). The EGTRRA also provided for the GST Tax to disappear in 2010.

The issue is, some documents may provide a gift to grandchildren where the amount is calculated based solely on the GST Tax Exemption. However, such language may be interpreted so that NOTHING passes to the intended beneficiary!

The Magic Eight Ball Dilemma – “Not Sure, Ask Again Later”

Congress has intimated several different and even conflicting courses of action, none of which are guaranteed to come to fruition in the near future. If Congress fails to take ANY action, EGTRRA provides that starting in 2011, the federal estate tax exemption amount plummets to $1,000,000, and the maximum estate tax rate increases to 60%. This would dramatically increase the number of estates subject to estate tax and the amount of tax due.

Another idea set forth is that Congress may pass legislation to “freeze” the 2009 estate tax regime. This would mean the exemption level would be set at $3,500,000 with a maximum federal estate tax rate of 45%. An additional issue is whether such legislation would be in effect on a going forward basis, or whether Congress would call for such legislation to be retroactive with an effective date of January 1, 2010. If the latter, then none of the 2010 issues would apply. However, the constitutionality of retroactive legislation is questionable.

Yet another option is for Congress to enact an entirely new estate tax regime, either on a going forward basis or retroactively.

Bottom Line

Have your existing documents reviewed to ensure they provide flexibility to deal with the uncertainties of 2010 and beyond.

IRS' Top 10 List for Taxpayers with Kids

2010-01-13T12:09:00.006-06:00

TOP 10 TAX TOPICS FOR TAXPAYERS WITH KIDS

As the saying goes, "kids change everything!". Not surprisingly, "everything" includes parents' tax situation. Listed below are the top 10 things parents should consider this tax season:

1. Dependents: In most cases, a child can be claimed as a dependent in the year he or she was born.

2. Earned Income Tax Credit (EITC): The EITC is a benefit for certain people who work and have earned income from wages, self-employment or farming. EITC reduces the amount of tax you owe and may also give you a refund.

3. Higher Education Credits: Education tax credits can help offset the costs of education. The American Opportunity and the Lifetime Learning Credit are education credits that reduce federal income tax dollar-for-dollar, unlike a deduction, which reduces taxable income.

4. Coverdell Education Savings Account: This savings account is used to pay qualified educational expenses at an eligible educational institution. Contributions are not deductible, however, qualified distributions generally are tax-free.

5. Children with Investment Income: Under certain circumstances a child’s investment income may be taxed at the parent’s tax rate.

6. Children with Earned Income: If a child has income earned from working, the child may be required to file an individual tax return rather than report on the parents' personal return.

7. Adoption Credit: Parents may be able to take a tax credit for qualifying expenses paid to adopt an eligible child.

8. Child and Dependent Care Credit: Parents may be able to claim the credit if theypay someone to care for their child(ren) under age 13 so that they can work or look for work.

9. Child Tax Credit: Parents may be able to take this credit on their tax return for each of their children under age 17. Even if a parent does not benefit from the full amount of the Child Tax Credit, the parent may be eligible for the Additional Child Tax Credit. The Additional Child Tax Credit is a refundable credit and may yield a refund even if no tax is owed.

10. Student Loan Interest: Parents (or children) may be able to deduct interest they pay on a qualified student loan. The deduction is claimed as an adjustment to income so there is no need to itemize deductions.

If any points on this Top 10 List hit home, contact me to discuss how we can maximize the tax laws to your parental advantage!
-Derived from IRS TAX TIP 2010-08

Set Your Sights on "Situs" Considerations

2009-11-25T10:44:00.001-06:00

WHAT IS "SITUS" AND WHY DO I CARE?

“Situs” is Latin for the location or position of something for legal purposes. In other words, situs means “the law of the place where the thing in issue is situated”. In the context of business entity issues, the situs of an entity determines the jurisdiction that governs the entity. Because certain states have more favorable debtor laws than others, situs determinations can have a critical impact on the outcome of litigation. Illinois, for example, has laws which cater to creditors, thereby making it a “creditor friendly” state. On the other hand, Delaware and Nevada have among the most favorable debtor legislation in the nation, often referred to as “debtor friendly” laws. As such, Delaware and Nevada are generally preferable jurisdictions in which to situs a business entity.

IMPACT OF SITUS

Situs impacts two aspects of an entity’s legal affairs: (1) the law that will govern adjudication of the events at issue in a lawsuit; and (2) the state in which an organization may be sued.

Essentially, by creating an abundance of contact with a debtor-friendly state (such as Delaware or Nevada), an entity can reinforce the assertion that such state’s law will be applied to any legal issue. Simultaneously, a concentration of contacts with a “debtor friendly” state also works to minimize contacts with a “creditor friendly” state (such as Illinois) and can therefore negate application of such state’s “creditor friendly law”.

For example, even if an entity is formed under Delaware or Nevada law, a creditor could nonetheless establish that Illinois law should apply to a given issue if the entity has an Illinois presence through utilizing an Illinois address and accepting mail in Illinois. On the other hand, when an entity has an address within Delaware or Nevada, and conducts business through such address, it is more likely that Delaware law or Nevada law will govern. In essence, formation in a state, without situs in such state, will likely not help an entity take full advantage of such state’s laws.

1. Choice of Law Provisions

A general principle of law is that the interests of the parties are determined by the law of the state which has the most significant relationship to the issue involved and the parties. Accordingly, an entity with a “Delaware-situs” will have a significant relationship to the State of Delaware and its laws, and an entity with a “Nevada-situs” will have a significant relationship to the State of Nevada.

2. Establishing Jurisdiction

Jurisdiction, in particular “personal jurisdiction”, is the power of a court over the defendant’s person or property. There are two types of personal jurisdiction: (a) general; and (b) specific. When a court has general personal jurisdiction over a defendant, the defendant may be sued in such court for any issue. In order for a court to have specific personal jurisdiction over a defendant, the act in the state must have a specific connection with the law suit filed.

A defendant can subject himself to general personal jurisdiction in a particular state’s court by doing business in that state. “Doing business” is generally defined as regular, systematic, ongoing, in-state business. Merely soliciting business in a particular state is not enough to subject a defendant to general personal jurisdiction.

Whether an entity is “doing business” in a particular state is a fact-intensive, case by case inquiry. Therefore, for situs purposes, it is important to establish favorable facts and connections to a state with “debtor friendly” laws, and minimize connections with “creditor friendly” states.

For example, maintaining a business address in Delaware or Nevada, accepting mail in Delaware or Nevada, and housing corporate records in Delaware or Nevada, are all favorable connections with the State of Delaware or the State of Nevada, as the case may be. These connections would therefore enhance the position that Delaware law or Nevada law, as the case may be, is applicable to any issue.

HEIGHTENED ASSET PROTECTION

“Debtor friendly” laws provide heightened asset protection to entities governed by them. This point again underscores the importance of “situs” in preferable jurisdictions.

For example, unlike most jurisdictions, Delaware law allows any asset to be owned as tenancy by the entirety, including interests in business entities. Tenancy by the entirety is a form of ownership reserved to husbands and wives, whereby the husband is not considered to own an interest and the wife is not considered to own an interest, but rather the fused marital unit is considered to own the entire interest.

Tenancy by the entirety ownership provides heightened asset protection because a creditor of the husband cannot reach the asset to satisfy a debt, and a creditor of the wife cannot reach the asset to satisfy a debt; only a joint creditor may reach the asset to satisfy a debt under which both the husband and wife are jointly liable.

Another “debtor friendly” concept is that of charging order protection. Suppose a creditor was owed a debt by an individual debtor. In order to collect on the debt, the creditor would petition a court for an “interest” in the debtor’s assets, such as the debtor’s membership interest in a limited liability company (for example). A judge could issue a charging order in favor of the creditor, which is similar to a lien against the membership interest. However, a creditor has no ability to foreclose upon such interest granted by the charging order. Thus, the creditor will not be able to own or possess such interest. Further, a charging order does not grant the creditor any management or voting rights because the creditor has only the rights of an assignee/transferee. In other words, the creditor’s remedy is limited to the debtor’s share of distributions, yet the creditor has no power through which to force the entity to make distributions.

Charging order protection, in general, can be viewed as an asset protection tool. However, not all charging order protection statutes are created equal. Certain “debtor friendly” states have enhanced their statutes to maximize protection afforded to entity interests. For example, under both Delaware law and Nevada law, charging order protection is a creditor’s exclusive remedy with regard to partnership and limited liability company interests.

Traditionally, charging order protection has not been afforded to corporations. Thus, upon default, a creditor could step into the shoes of a debtor, gaining access to the rights a debtor has regarding stock owned, including the right to share in profits, the right to share in liquidation proceedings, and the right to vote for directors of the corporation. In this way, the creditor has the power to reach the stock of the corporation, particularly if the creditor steps into the shoes of a majority shareholder.

However, recently, Nevada enacted “debtor friendly” legislation making it the only state in the nation to offer charging order protection to corporations, in addition to partnerships and limited liability companies.

This is an important distinction to note: while corporations are often thought of as having “limited liability”, the limited liability is with regard to the individual shareholder when the corporation itself is sued. Conversely, unless the corporation is incorporated under Nevada law, the same limited liability does not apply to the corporation (i.e., the stock of the corporation) when the shareholder is sued.

In conclusion, when forming an entity, “situs” issues should be considered. An entity formed under a jurisdiction with “debtor friendly” laws such as Delaware and Nevada can achieve not only “litigation advantages”, but can maximize asset protection afforded to the entity and its owners.

"De-coupling" May "De-plete" Your Assets

2009-10-08T09:05:00.000-05:00

(UPDATED to address Illinois Public Act 96-0789)

Estate tax is imposed on the value of a decedent's (i.e., the deceased's) "gross estate". A person's gross estate is made up of all the assets owned as of the date of death. Currently, the maximum estate tax rate imposed at the Federal level is 45%. Illinois also imposes a separate, additional estate tax at the maximum rate of 16%. When combined, and after factoring in the Federal deduction for any Illinois estate taxes paid, the maximum rate is roughly 54%.

Both the State of Illinois and Federal government provide for exemptions from their respective estate taxes for gross estates that total less than a certain threshold. If the gross estate is less than the exemption amount, no estate tax is due.
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Traditionally, the state of Illinois and the Federal government have had the same applicable exemption amount—in other words, Illinois estate tax exemptions were “coupled” with Federal estate tax exemptions. For example, in 2008 both Illinois' and the Federal government's exemption amounts were $2.0 million. Thus, so long as a decedent's gross estate was less than $2.0 million, no estate tax would be due.
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However, in 2009 Illinois' applicable exemption remains limited to $2.0 million while the Federal applicable exemption has increased to $3.5 million. This is referred to as "de-coupling", and could result in an state-level estate tax of over $200,000.

TRADITIONAL ESTATE PLANS MAY NOT BE SUFFICIENT

In a traditional living trust for a married couple, upon the death of the "first-to-die" spouse, the decedent's estate is divided into two separate trusts: (1) the “Family Trust”; and (2) the “Marital Trust”. Upon the first spouse’s death, the Family trust is funded first with the applicable Federal exemption amount and all property is designed to pass estate tax-free. The Family Trust is held for the benefit of the surviving spouse and children. The Marital Trust is funded with the excess amount over the exemption, and is for the benefit of the surviving spouse only. Because the Marital Trust is solely for the benefit of the surviving spouse, all property that passes in the Marital Trust qualifies for the marital deduction. The Executor would make a QTIP election with respect to the Marital Trust and any potential tax would be postponed until the second spouse’s death. Therefore, traditionally, upon the death of the first-to-die spouse, no tax would be incurred.
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With the inception of de-coupling, however, state level taxes may nonetheless be imposed on the first spouse’s death unless specific provisions are included. In particular, if the Family Trust is funded with the applicable Federal exemption amount ($3.5 million), although no Federal tax would be due, Illinois would impose estate tax on the $1.5 million excess over Illinois’ $2 million exemption. This could result in tax liability in excess of $200,000.
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HOW TO ADDRESS THE PROBLEM

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To deal with the potential state-level tax, trusts can be drafted (or existing trusts can be amended) to allow the Executor of the estate to make a marital deduction (i.e., QTIP election) with respect to a portion of the Family Trust for Illinois purposes only. As of September 8, 2009, Illinois law (Public Act 96-0789) specifically sanctions a QTIP election for state purposes only. In practical terms, upon the death of the first-to-die spouse, the Family Trust would be fully funded with $3.5 million and qualify for the Federal estate tax exemption amount. The Executor would then make an election as to the assets worth $1.5 million in the Family Trust to qualify for the marital deduction for Illinois purposes only. This allows maximization of both the Federal and Illinois exemptions without subjecting assets to either Federal or Illinois estate tax on the death of the first spouse.

Brand Theft Facebook

2009-09-18T12:51:00.012-05:00

Social networks such as Facebook, Myspace, and Twitter have reached mainstream popularity. As such, businesses are quickly picking up on the advertising potential these sites offer as a way to market mass audiences. But in a race to reach the consumer, companies may be left in the dust by social-network-saavy entreprenuers, who snatch up valuable online intellectual property.

For example, Facebook recently offered users the option to create a personalized direct link to their Facebook page (i.e., www.facebook.com/[insert-personalization-here]). Perhaps most Facebook users would use their name to personalize their page, but what if Joe Smith used the name of his favorite soda? The company producing that soda would then be unable to create a direct link to a page devoted to promoting its product. While this scenario obviously creates a marketing issue for the soda company, it may also create a legal issue for Joe Smith.

If Soda Company had trademarked the name of its product, Joe Smith would be committing a trademark violation by using the name without Soda Company's consent. Maybe it was an innocent mistake on Joe's part. However, this type of situation often results in the illegal practice of "cybersquatting"--the act of obtaining a domain name with the bad faith intent to profit from the goodwill of a trademark by offering to sell the domain to the trademark-holder at an inflated price.

INTELLECTUAL PROPERTY LAW

In general, "intellectual property law" covers trademarks, copyrights, and patents. Most relevant to the concept of "cybersquatting" is a trademark. A trademark is a word, phrase, logo or other graphic that a company uses to distinguish its product or products from those of others. The main purpose of a trademark is to designate the source of goods or services. Essentially, a trademark is the commercial equivalent of a signature. Trademarks are protected under the common law by use, even when they are not registered with the federal government. In order to gain federal protection, a trademark must be (1) distinctive rather than merely descriptive or generic; (2) affixed to a product that is actually sold in the marketplace; and (3) registered with the U.S. Patent and Trademark Office.

In the context of the internet and “e-commerce”, Federal courts have held that the use of other’s trademarks in website domain names constitutes trademark infringement. In the Lanham Act, the Federal government codified various laws designed to protect trademarks in the context of e-commerce. The act also provides trademark holders with protection from cybersquatting by outlawing the practice.

HOW TO PREVENT BRAND THEFT AND TRADEMARK VIOLATIONS

Companies should actively monitor social networking sites in order to prevent trademark violations and to prevent others from “squatting” on their intellectual property rights. Facebook offers an online form that companies can fill out to report and eliminate trademark infringements. The form can be accessed by clicking here.

Moving beyond Facebook, companies should also consider creating specific groups or divisions responsible for monitoring the various social networking sites such as Twitter and Myspace. For example, Twitter also uses usernames. Any Twitter user could create a username that illegally uses another’s brand name. Every social networking site creates the potential for brand theft. Therefore it is imperative to monitor the sites and keep up to date with new developments in how the sites are used.

One of the most effective ways to monitor these sites is to use them as part of a marketing strategy. By creating a Facebook or Twitter site, the company not only helps to ensure that its brand is not being used by another, but also gains access to valuable consumer information. These sites will allow the company to directly communicate with a massive group of potential consumers in ways which are not otherwise possible. It will also create an official brand site, for which consumers may already be looking. There are currently over 200 million users on Facebook alone, and over 1 billion messages transmitted on the site daily. Establishing a free brand site on the network will prevent others from stealing a company’s brand name, while simultaneously providing the company with access to a massive consumer market.

CDARS Accounts Can Capitalize on FDIC Coverage

2009-06-26T11:53:00.027-05:00

As part of President Obama's "economic recovery" strategies, Federal Deposit Insurance Corporation ("FDIC") insurance coverage limits have recently been expanded (see my blog post Maximizing FDIC Insurance Coverage Through a Living Trust). This was done in an attempt to restore consumers' faith in banking institutions, and encourage deposits to strengthen our lending industry. However, for those interested in protecting large sums of money through a low-risk investment such as certificates of deposit ("CDs"), the standard FDIC coverage may not be sufficient. Enter the CDARS program.

WHAT IS CDARS?

A Certificate of Deposit Account Registry Service ("CDARS") account is a special network of banking institutions that work together to capitalize on Federal Deposit Insurance Corporation ("FDIC") insurance coverage. Essentially, CDARS is a network of FDIC insured banks that, when pooled together, can offer FDIC insurance coverage of up to $50 million for one depositor, rather than standard the $250,000 limit per account owner.

HOW DOES IT WORK?

A depositor deposits funds with a bank who is a member of the CDARS network. The bank then places the funds with other banks in the CDARS network. CDs are issued by banks in the network, but the depositor receives interest payments, bank statements, and one consolidated 1099 from the originating bank only. In general, the interest rate your earn on your deposit is determined by the CD maturity and deposit size. You earn one rate on your entire investment.

WHAT IS THE BENEFIT?

The main benefit is efficiency. Rather than splitting up your investments into multiple CD accounts at multiple banks in order to gain full FDIC coverage, you can deposit a much higher amount (up to $50 million) with one bank, in one account, and yet maintain full FDIC coverage. In this way, you only have to manage a single account!

In today's turbulent market, a CDARS investment is a safe way to preserve your assets while earning interest on your investment. Note also that CDARS accounts may be owned in the name of a family limited partnership or limited liability company, thereby "asset protecting" the underlying investment to a further degree.

If a CDARS investment may compliment your planning strategies, contact me to help you explore the option further. I would be delighted to facilitate an introduction to my contacts in the CDARS network, obtain current interest rate quotes, and advise as to ownership/term options.

Note the New Illinois Notary Requirements

2009-06-05T12:32:00.002-05:00

Effective June 1, 2009, the Illinois Notary Act (the “Act”) has been revised to impose additional identification and record-keeping requirements to which notaries, and their employers, must adhere. In particular, a “Notarial Record” must be executed when title to residential property located within Cook County, Illinois is transferred by deed (with certain exceptions discussed below), and must retain such forms for 7 years through proper record-keeping procedures.

The Notarial record-keeping is meant to help minimize mortgage fraud that has gone rampant in Illinois, and Chicago in particular. Cook County is the “test pilot” for the initiative, and if successful, the rules will be expanded to other counties. Nonetheless, the Act’s revisions have immediate and wide-reaching scope for all notaries and their employers.

SUBJECT CONVEYANCES

The new requirements affect conveyances of “Residential Real Estate”, located in Cook County, Illinois, with certain “Exceptions”. Applicability, therefore, depends on the definition of these terms:

“Residential Real Estate” means a building(s) that contains 1 to 4 dwelling units, or an individual residential condominium unit. In other words, the new rules apply to transfers of single family homes, condos/townhomes, and apartment buildings with up to 4 units, but only if such properties are located within Cook County.

“Exceptions” were created for certain conveyances that do not pose as great a risk for mortgage fraud. For example, deeds prepared merely to transfer title from the grantors as joint tenants, to the same grantors as tenants by the entirety (tenancy available only to husbands and wives), are exempt from the new requirements. Thus, no Notarial Record must be created upon notarizing such a deed. Other “Exceptions” include, without limitation:

Deeds prepared pursuant to a court ordered conveyance (e.g., pursuant to a divorce decree or marriage settlement agreement);
Judicial sales and deeds executed in lieu of foreclosure; and
Deeds transferring title from the grantor to a trust of which the grantor is a beneficiary.

NOTARIAL RECORD & RECORD-KEEPING

The Form: The Notarial Record itself consists of a single-page document (a copy of which is available here) that requires information about the (1) property; (2) the notary; and (3) the grantor(s). Required information for each includes:

Property: the type of deed, permanent identification number (“PIN”), address, date of notarization and fee for notarization (if any).
Notary: name, phone number, commission expiration date, address, name of employer (if any), and signature.
Grantor: name, address, signature, means of identification presented to the notary to confirm identity, and right thumbprint. Yes—a thumbprint for each grantor must be obtained by the notary.

Record-keeping: In general, for all applicable conveyances, a Notarial Record must not only be completed, but also must be retained for 7 years thereafter. The purpose of retention is that the documents should be available in the event they are subpoenaed as part of a lawsuit. Responsibility for such document-retention depends on the notary’s employment.

Notary’s EMPLOYER is responsible if: the employer is a Title Insurance Company/Agent, Financial Institution, or Attorney. The notary must deliver the completed Notarial Record to his/her employer within fourteen days, and the employer must then keep the forms with his/her business records for seven years.
NOTARY is responsible if: he/she is employed by anyone else, or self-employed. Then, the notary must deliver original Notarial Records within 14 days to the Recorder of Deeds of Cook County, Illinois, and pay a fee of $5.00. The Recorder’s office is then responsible for retaining the forms for the requisite 7 years. Note, a notary is allowed to charge up to $25 per notarial act subject to the new requirements, which charge may be used to offset the filing fee.

FAILURE TO COMPLY

Any person who fails to comply with the new requirements will be guilty of a Class A misdemeanor for a first offense, and a Class 3 felony for subsequent offenses committed within 5 years of a previous conviction.

HEIGHTENED DUTY OF EMPLOYERS

It is extremely important to note that notaries’ employers are responsible for training and supervising their notaries as to proper procedure. In a recent Illinois Appellate Court case (Vancura v. Katris), the Court ruled than an employer had direct liability for damages resulting from its notary notarizing a forged signature on a mortgage assessment. The Court specifically stated that an inadequately trained or supervised notary poses the type of danger or risk of harm to third parties from which an employer has a duty to protect.

EFFECT ON RECORDATION OF DEEDS

The Notarial Record is separate and apart from the actual deed of conveyance. In fact, when a deed is presented for recordation at the Recorder’s office, the Notarial Record does not need to be presented with the deed. The Recorder’s office will not examine, review, or record the Notarial Record. Execution requirements for deeds themselves are unaffected by the new provisions in the Act.

What should you do if you have a deed fully executed prior to June 1, 2009, but it has not yet been recorded? Record the deed—there is no need to re-execute. But, where possible, complete the Notarial Record with regard to the conveyances. It is not an issue that the form will be completed at a different date than the actual notarial act, and as always, it is better to be safe than sorry.

BOTTOM LINE

The new requirements under the Act are generally basic—essentially, completion of a single-page form. However, they nonetheless call for record-keeping systems to be implemented and maintained for a significant period of time. Further, Illinois’ governing bodies are showing that they are serious about curtailing mortgage fraud, starting with simple acts of notarization. Not only should notaries be conscious of their duties to obtain adequate identification, but employers must be aware of their responsibility to ensure all obligations are satisfied.

The Perfect Tax Storm

2009-05-24T10:19:00.003-05:00

The current economic market demands that consumers look for new and innovative ways to save money. Often times this can be accomplished by leveraging the tax code to your advantage. In fact, the collision of two worlds can create the perfect tax storm and save you more than $37,500 in taxes. But the amount saved can be much more, depending on the value of the underlying property.

World one – IRS Tax Code §121 allows a taxpayer to exclude gain realized on the sale of your principal residence, up to $250,000 ($500,000 if married filing jointly). Its easy to apply – just live in your home for at least two of the last five years, and you can exclude the gain on your sale.

World two - IRS Tax Code §1031 allows a taxpayer to defer any gain realized on the sale of business or investment property. Here, you have to purchase similar, or “like-kind”, property at the same time you sell your investment property, or shortly thereafter.

How can these two worlds collide? Through perfect timing. By following the IRS’ time frames, you can leverage both of these tax-saving provisions in a single transaction, and have “the best of both worlds”. Provided certain timing requirements are met, a single exchange may qualify for tax gain exclusion under § 121 as well as tax gain deferral under § 1031.

Here’s an example of how to achieve the perfect-tax-storm: Live in your property for at least two of the last five years, and then convert the property to a rental. Use the property as a rental for at least two years before the exchange, renting it out for at least two weeks each year (and not using it yourself for more than that). Upon the sale of this property, you can exclude $250,000 gain (or $500,000 if married and filing jointly), and any additional gain is deferred and rolls into your newly purchased investment property.

The IRS’ recent revenue procedure lays out the specifics, and should be followed closely. If you need to know more, contact an attorney to help guide you through the process so you can save and defer taxes.

First-time Homebuyer Tax Credit - Read the Fine Print First

2009-05-16T17:35:00.005-05:00

As part of the American Recovery and Reinvestment Act of 2009 (ARRA), eligible first-time homebuyers can get up to $8,000 from the government in the form of a refundable tax credit, and can even expect the cash to arrive quickly (within 10 days of filing) with certain “strategizing.” But, as with most tax-related legislation, this credit is laden with qualification requirements that must be followed before any checks will be mailed out.

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Note: A “refundable tax credit” means a taxpayer can claim the credit even if he or she has little or no income tax liability to offset. For example, say you owed $3,000 in federal taxes on your 2008 return, but you qualify for the maximum first-time homebuyer credit, you would pay the government nothing AND you would get a check for $5,000. Even better, if you were due to get a refund of $2,000, for example, and qualify for the maximum first-time homebuyer credit, now you would get a check for $10,000.
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ELIGIBILITY
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First-time homebuyers are taxpayers who have not owned a principal residence during the three-year period before the purchase date. This means you may be eligible even if you owned a home many years earlier. For married couples, both spouses must fit the definition of a first-time homebuyer. On the other hand, in the context of joint purchases among unmarried people, not every buyer must be a first-time homebuyer. For example, John and Jane (who are not married to each other) want to purchase a home together. John currently owns his own home, and Jane has always been a renter. In this instance, Jane is considered a first-time homebuyer but John is not. When it comes time to claim the credit, assuming all other eligibility requirements are met, Jane simply applies the entire credit on her return only.

Qualifying homes that can be purchased are expansive in type. Virtually all residences—single family, townhome, condominium, mobile home, even a house boat—fall under the purview of this legislation, so long as you use it as a principle residence. Even new construction is included.

Purchase means any acquisition, except one from a person related to you (such as your parents or your grandparents), and except if you inherited the property or it was otherwise gifted to you.

DOLLAR AMOUNTS

While $8,000 is the maximum possible credit, every taxpayer will not necessarily qualify to claim that full amount. The amount of credit that can be claimed depends on two things:

The purchase price of the property; and
The taxpayer’s income.

In general, you can claim 10% of the purchase price of the property, up to $8,000. This means, if you purchase a property for $70,000, the maximum credit you may claim, assuming all other eligibility requirements are met, is $7,000. Any purchase price of $80,000 or above, assuming all other eligibility requirements are met (see below), will yield an $8,000 credit.

Allocating the allowable credit may get tricky when multiple purchasers are involved. If you are married and filing separately, and both you and your spouse are first-time homebuyers, you can each claim half the credit on your individual return; this is the only allocation method allowed. But, if two eligible, unmarried, individuals purchase a home together, they may allocate the credit between them using “any reasonable method,” which may include 100 percent to one individual. TIP: it would be wise for the parties to execute an agreement confirming their agreed allocation at the time of closing so the issue is resolved between them. As discussed above, if only one purchaser is eligible, he or she may be allocated 100 percent of the credit.

Even assuming a purchase price of $80,000 or more, you may not be eligible for the full credit, or any of the credit for that matter, if your income exceeds certain thresholds. This is known as “phasing out”. The portion of the credit you may claim based on your income is determined as follows:

Full Credit: if your “modified adjusted gross income” (MAGI) is less than $75,000, or $150,000 if married filing jointly, you may claim the full amount of credit available based on your purchase price;
Partial Credit: if your MAGI is more than $75,000, or $150,000 if married filing jointly, but less than $95,000, or $170,000 if married filing jointly, you may only claim a portion of the credit available based on your purchase price. The calculations for determining the value of the partial credit are based on a specific formula issued by the Internal Revenue Service (IRS); and
No Credit: if your MAGI exceeds $95,000, or $170,000 if married filing jointly, you cannot claim any credit, regardless of the purchase price of your property.

Note: MAGI is determined by first looking at “adjusted gross income” (AGI). AGI is total income for the year (e.g., wages, salaries, interest income, dividends and capital gains), minus certain deductions (known as “above-the-line deductions”). This first calculation is made based on values before itemized deductions from Schedule A (or personal exemptions) are subtracted. Next, certain amounts are added to AGI to arrive at MAGI (e.g., foreign income, foreign-housing deductions, student loan deductions, IRA-contribution deductions, and deductions for higher-education costs).

TIMING – WHEN YOU MUST PURCHASE

In order to claim the credit, you must purchase (and by purchase, the IRS means actually close the transaction) between January 1, 2009 and December 1, 2009.

Note: Under the previously enacted Housing and Economic Recovery Act of 2008, taxpayers who purchased (i.e., closed on) a home on or after April 8, 2008 may qualify for a maximum $7,500 credit (with the same additional eligibility requirements discussed above). However, this credit acts more as an interest-free loan, rather than an actual credit, because it must be repaid over 15 years (in 15 equal installments). Nonetheless, the possible $7,500 “credit” remains available to qualifying purchases made in 2008.

STRATEGIZING – WHEN TO CLAIM THE CREDIT

The credit can be claimed on either your 2008 or 2009 tax federal tax return. But, one option may be more beneficial than the other, depending on your situation.

For example, income levels may change from 2008 to 2009, perhaps due to loss in investment income or unexpected loss of employment. Taxpayers who expect lower income in 2009 may actually qualify for a higher credit on their 2009 return due to the “phase out” provisions. Therefore, it would make more sense to wait to make the claim in order to maximize the benefits.

For taxpayers who can fully maximize the credit on 2008 returns, there are further filing strategies:

If you already filed your 2008 return: once you make an eligible purchase, you can file an amended return or refund form, rather than wait until next year. TIP: file Form 1045 for a refund on taxes paid rather than an amended return. This form accelerates refunds for individuals so that they can receive the cash more quickly. Plus, the IRS has added operations to ensure timely processing, given the expected influx; or
If you filed an extension for your 2008 return: you have until October 15, 2009 to file and claim your credit, rather than waiting until next year. If you file electronically, you can still receive a refund within 10 days by direct deposit.

For Federal Housing Administration (FHA) loans, it is possible to immediately apply the tax credit toward a down payment. The U.S. Department of Housing and Urban Development (HUD) issued on May 29, 2009 Mortgagee Letter 2009-15, which provides guidelines as to such use of the tax credit. FHA’s approved lenders will be permitted to “monetize” the tax credit through short-term bridge loans. Alternatively, the lender may “purchase” the tax credit from the borrower. The lender may deduct attendant costs, not to exceed 2.5% of the credit amount, from the “purchase price”. This will allow eligible buyers to access the funds at the closing table. A significant limitation is that borrowers cannot use the credit toward the minimum 3.5% down payment required for FHA-insured mortgages. Rather, the credit can be used as an additional down payment, or towards other closing costs. This could, however, help achieve a lower interest rate for the borrower.

A NOTABLE CAVEAT

Unlike the previous first-time homebuyer legislation for 2008 purchases, this credit does NOT have to be repaid—UNLESS—you stop using the property as your principal residence within 36 months of your purchase. This includes situations where you sell the home, convert it to business or rental property, or the home is destroyed or condemned. You repay the credit by including it as additional tax on the return for the year the home ceases to be your principal residence.

STATE AND LOCAL CONSIDERATIONS

Many jurisdictions at the state and local level have adopted their own first-time home buyer credit. You should inquire as to whether you qualify for additional benefits at these legislative levels.

For example, as of May 12, 2009 the State of Georgia enacted legislation granting its own version of a first-time home buyer credit to residents of up to $1,800, payable over 3 years, for purchases closed during the next 6 months.

Cook County, Illinois, on the other hand, provides the American Dream Down Payment Initiative Program (ADDI). Under ADDI, eligible first-time home buyers are given cash to meet closing costs and a down payment in the form of an interest-free, five-year, forgivable loan. The loan would be a second lien on the purchased property, held by Cook County. 20% of the loan will be forgiven each year for the five following years. However, eligibility for ADDI is even more limited than the Federal tax credit. Most significantly, the applicant’s income must be 80% or less of the median income for the area. Therefore, only low income taxpayers will qualify.

ARRA: How to Leverage New NOL Legislation

2009-04-25T10:31:00.007-05:00

The American Recovery and Reinvestment Act of 2009 (“ARRA”), signed into law on February 17, 2009, amended the tax law concerning net operating losses (“NOLs”) for qualifying small businesses. Eligible small businesses with an NOL incurred in 2008 may now elect to offset the loss against income earned in up to five prior years, rather than two as under the previous law.

This means small businesses that suffered big losses in 2008 given the state of the economy can use those losses to offset income earned before the recessionary-effects were felt. This could provide small businesses with a quick cash infusion by generating a refund of taxes already paid. Further, the IRS provides accelerated methods by which to claim a refund, to get the cash in business owners’ pockets now, rather than later (see below).

Note: An NOL is the excess of business deductions (computed with certain modifications) over gross income in a particular tax year. This loss can be deducted in another tax year where gross income exceeds business deductions. When deducted against previous years, the NOL is said to have been “carried back”. Alternatively, a taxpayer can “carry forward” an NOL for up to twenty years.

MAXIMIZING THE CARRY-BACK

The new NOL rules could result in a refund by allowing a taxpayer to offset income that has already been taxed. Under the previous rules, a taxpayer could not use an NOL to offset income from the 3rd, 4th, or 5th year preceding the NOL, and therefore could not receive a refund for taxes paid in these years.

For example: Suppose XYZ, Inc. (a qualifying small business) has an applicable NOL for 2008 (i.e., an NOL which arose in tax years ending after Dec. 31, 2007). XYZ, Inc. had taxable income in 2005 (on which it paid federal taxes), but no taxable income in 2006 or 2007. Under the old rules, XYZ, Inc. would only have the option to carry the NOL back to 2006 or 2007, where it was of no use to the corporation. XYZ, Inc. would have to wait until later years when it had taxable income to carry the NOL forward and receive a tax benefit. Now, under the new rules, XYZ, Inc. will receive a refund of some (or even all) of the taxes it paid on the 2005 income.

Certain “strategizing” could further leverage use of a 2008 NOL. A taxpayer must consider in which year preceding the 2008 NOL – 3rd (2005), 4th (2004), or 5th (2003) - a carry-back will generate the most tax savings. If the 2008 NOL is equal to the total combined income for all three years (or greater), then the NOL should be carried back to the 5th year so it could be utilized in all three years. Any remaining NOL could still then be used to offset 2007 or 2008 income (if any), or carried forward to future years. In this way, a taxpayer takes full advantage of the new law.

On the other hand, if the NOL is less than the total combined income for all three years, it would be most beneficial to carry the NOL back to the year in which the taxpayer’s income was taxed at the highest rate, because this will generate the highest refund.

ELIGIBILITY

For purposes of the new NOL provisions under the ARRA, an eligible small business is a corporation or partnership (including limited liability companies) whose average annual gross receipts (as defined under Code section 448(c), and modified by the ARRA) are $15 million or less, for the three-year tax period (or shorter if the entity has not been in existence for three years) ending with the tax year before the year in which the loss arose.

Note: The normal two-year carry-back period remains available for business who do not qualify as an eligible small business, or for eligible small businesses who do not elect the special carry-back provision.

IMPORTANT DEADLINES

In order to utilize the 2008 NOLs under the new rules created by the ARRA, deadlines must be met, depending on the status of the taxpayer’s 2008 return (or the rerun for the applicable NOL taxable year, if other than a calendar year).

Not yet filed: the taxpayer must attach a statement to the federal income tax return to be filed stating that such election is being made, and the length of the carryback period elected, and must file the return/statement by the due date of the return (determined including extensions).
Already filed and did NOT elect to forgo the NOL carryback period: the taxpayer must file an amended return or applicable refund form by the later of (a) six months after the due date of the return (determined without extensions); or (b) April 17, 2009.

Tip: It is a good idea for a taxpayer to file the appropriate refund form (Form 1065 for individuals and Form 1139 for corporations), as compared to an amended return, because these forms accelerate the payment of refunds. Thus, the taxpayer will not have to wait until the IRS processes the return for the NOL year to get the refund.

Already filed and elected to forgo the NOL carryback period: the taxpayer must have filed an amended return or applicable refund form by April 17, 2009.

Note: Returns and statements must have the proper labels, as mandated by the IRS revenue procedure issued on March 16, 2009.

Maximizing FDIC Coverage Through a Living Trust

2009-04-19T14:40:00.007-05:00

In today's difficult economic environment, many are concerned about whether their bank accounts are subject to Federal Deposit Insurance Corporation ("FDIC") insurance coverage. Generally, bank accounts covered by FDIC insurance include checking, savings, certificate of deposit, and money market deposit accounts. Under recent legislation, FDIC insurance for bank accounts was increased from $100,000 to $250,000 for the interim period of October 31, 2008 through December 31, 2009.

NOTE: As of May 20, 2009, President Obama EXTENDED the time period for the increased covered to December 31, 2013.

DETERMINING COVERAGE
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The level of FDIC coverage is determined based on account ownership at each institution. Consider the following example: Jane Doe has the following accounts at her local bank, all held in her individual name:

Savings Account - $125,000
Certificate of Deposit - $100,000
Money Market - $50,000
Negotiable Order of Withdrawal - $50,000

Thus, Jane has a total of $325,000 deposited at her bank. But, Jane's total level of FDIC insurance coverage is capped at $250,000. Therefore, $75,000 of Jane's assets are UNINSURED!

INCREASING INSURANCE COVERAGE

In order to fully insure her assets, Jane Doe could open accounts at multiple banks. But this creates a cumbersome situation for Jane in that she has to manage relationships with multiple banks and monitor multiple statements. A more efficient mechanism would be to simply re-title all or a portion of her existing accounts to an ownership form that yields greater coverage.

One technique available to maximize FDIC insurance coverage for an account owner is to own such bank account through a properly drafted revocable living trust ("Living Trust"). A Living Trust can offer expanded FDIC insurance coverage with respect to a bank account because coverage is applied on a beneficiary basis, rather than an ownership basis.

Consider the following example: Same facts as above, except this time Jane titles each asset in the name of Jane Doe Living Trust. Under the terms of Jane's trust, her two children are beneficiaries. Accounts held in the name of Jane's Living Trust are entitled to $500,000 in FDIC insurance coverage ($250,000 x 2 beneficiaries). Therefore, Jane's investments are FULLY INSURED! Note that the levels of FDIC insurance coverage for a Living Trust are calculated differently when more than 5 beneficiaries are named.

Increased FDIC insurance protection is another reason (in addition to avoidance of the adverse effects of probate and reduction of estate-tax liabilities) to own your bank accounts through a properly drafted Living Trust.

CAVEAT

It is important to note that a properly drafted Living Trust (and not simply any Living Trust) is needed to maximize FDIC insurance coverage for a bank account. Specifically, the FDIC insurance protection can be expanded based on the terms and conditions of the Living Trust, including without limitation, to cover the following situations:

Including intended beneficiaries of the Living Trust as eligible beneficiaries for FDIC insurance purposes;
Adding contingent beneficiaries to the Living Trust to be eligible beneficiaries for FDIC insurance purposes; and
Treating "specific bequest / specific distribution" beneficiaries as eligible beneficiaries for FDIC insurance purposes.

It may be necessary to amend an existing Living Trust to take advantage of significantly increased FDIC insurance protection for a bank account.