Obama and The Fate of your Estate

We are getting closer to some permanency in terms of future estate tax. US Congressman Earl Pomeroy (D - SD) has stated that  nearly every family, farmer and small business in America will be exempt from paying any estate tax under a bill passed by the House of Representatives on December 3, 2009.

The Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009 (HR 4154), authored by Pomeroy, would make  the 2009 estate tax exemption level of USD $3.5m permanent for an individual ($7m for a married couple) and a maximum tax rate of 45%.  The bill also maintains the “step-up in basis” tax rules, which protect many heirs from paying additional capital gains taxes on appreciated assets they inherit.

The bill was approved by 225 votes to 200, but must be passed by the Senate and signed by President Obama before it can become law.

Without change, the estate tax is scheduled to enter one year of full repeal (no taxes at all) in 2010 followed by a return of the estate tax in 2011 with much lower exemption amount ($1,000,000m per person or $2,000,000 for a married couple) and a much higher maximum tax rate (55%)…ouch!!!

The one year of estate tax repeal was also coupled with the enactment of  “carryover basis” tax rules, which will require heirs in 2010 to pay capital gains taxes on inherited assets based on the decedent’s original purchase price.

Under the step-up in basis rules, continued under Pomeroy’s bill, the value of the asset is calculated at the time of the decedent’s death. It is claimed that preserving the step-up in basis rules will protect small businesses from paying an estimated $34,000,000,000 billion in capital gains taxes so who knows if this bill will make it because they could really use this to pay for bailout and TARP funds.

According to the United States Department of Agriculture’s Economic Research Service, the continuation of the$7m exemption for couples will help the vast majority of family farmers, as the average farm household’s net worth ranged from $586,000 for small farms to $2,200,000m for very large farms in 2008.

“By making the 2009 estate tax level permanent, we will make the estate tax go away for 99.75% of all percent of families, farmers, and small businesses in this country,” Pomeroy observed, concluding that: “It’s time to resolve this issue once and for all, and this bill is the fair way to do it.”

We so desperately need to know the rules of the game so we can start playing to win it again and hopefully Senate and the President can get on board and make this happen.

Untaxingly,

James Burns, Esq.

Estate Planning and New Estate Tax Laws

There are three estate tax bills on the table and each one makes  you feel like why bother trying to get wealthy if they are going to take it away when I die.

First there is S.722 which is introduced by Sen. Max Baucus, D-Mont., Chairman of the Senate Finance Committe which proposes a freeze on the estate tax exclusion rate at 2009 ($3.5 million per person). S.722 also provides for reunification of the estate and gift tax credit (use $3.5 towards estate or gift tax) and is indexed for inflation.

Also in the House is H.R. 2032, sponsored by Rep. McDermott, D-Wash., who would like to make the estate tax exemption permanent at $2million per person ($4mil for husband and wife) and index for inflation with progressive estate tax rates of 45% for estates valued between $2 million and $5 million; 50% for estates at $5 million to $10 million; and 55% for estates valued over $10 million…makes you want to go out right now and make over $10 million so you can give 55% back to a government that can’t balance its budget and just put a couple trillion worth of bailout money on the equivalent of a credit card.

Finally, there is Bill H. R. 436 which is introduced by yet another Democrat Rep. Earl Pomeroy, D-N.D. and it would freeze the exclusion at 2009 level (same as above) and reunify the estate and gift tax. However, this nasty pernicious Bill would wack out the opportunities found with Family Limited Parnterships (FLIPs) which is valuation discounts so you can remove highly appreciated assets out of your estate.

You need to contact your representatives and give them a piece of your mind before they rule on some of the most anti-wealth legislation in recent years punishing those who do well and want to leave a legacy for their family or charity.

In order to protect your assets there is a new form of asset protection which is protection against adverse legislation. Every American’s retirement hangs in the balance especially if you have a large IRA that would run afoul of these potential laws.

Untaxingly,

James Burns, Esq.

Using Other People’s Money to Create Wealth

We all love the idea of creating something out of nothing but this is usually fantasy and does not exist…right? A famous saying in business is that you should always use ‘Other People’s Money’ (OPM) which is great way to get ahead with no money out of pocket and no personal risk.

There are strategies to create wealth for you and your family using other people’s money in the same way you used the bank’s money to purchase your home or investment properties and that is by using leverage.

Using other people’s money, or leverage, to increase your own financial gain is an established practice. Today, though, leverage is being used to purchase life insurance, and has gotten the attention of insurance promoters and financial professionals. It’s important, though, to examine all the angles before trying something like this.

The technique is called Premium Financing and allows a wealthy family or a corporation looking to create a continuity plan by funding an insurance policy can do it using the bank’s money. By borrowing the money to pay the life insurance premiums with a loan, the insured individual/s free up capital that can be used more efficiently. The use of premium financing may lower out-of-pocket costs the potential gift taxes.

The lender bases the current loan interest rate on the one-year London Interbank Offering Rate (LIBOR), adding a profit margin spread of 175 to 250 basis points. Essentially, lending rates are determined on a case-by-case basis, taking into consideration the loan amount and the lenders’ risk exposure. Loan interest rates can be fixed on an annual basis, but may vary from year to year, based on fluctuations in LIBOR or changes in the borrower’s financial conditions, which must be updated annually.

The twelve-month LIBOR is a common index as well as the prime rate. If there is a fixed interest rate, it is important to determine how long it will be fixed. In many instances, the fixed rate is only fixed for a certain time period, such as five or ten years. A cap will be set on how high the loan interest rate can go during the loan term. So, while the loan interest might be variable, there is a cap that will limit how high the interest rate can grow, such as eight percent.

You can also secure what’s called a “collar,” which is when a loan has both a cap and a floor on the interest rate. It basically keeps the interest rate from spiraling too high but ensures that the lender can charge a minimum in exchange for that security.

Caps are more expensive than collars because caps protect only the consumer, while collars offer some protection to the lender. Because of this, the extra costs are usually built into a loan origination fee or into the amount of spread placed in the offer. Caps and collars are usually only offered on loans greater than $1 million.

The best candidates for premium-financed life insurance typically have a minimum net worth of $5 million. Collateral for the loan usually consists of personal assets and can be reduced by the cash value in the policy being financed.

Plan highlights include:

· Target market: at least $5million estate and minimum of $100,000 annual life insurance premium.

· Frees up business or personal investment capital for more efficient usage.

· Leverages available assets to provide needed insurance coverage with minimal out-of-pocket expenses.

· Potential to reduce gift taxes.

· Loan rate typically tied to a published rate like LIBOR, plus a spread.

· Required collateral can be offset by cash values growing tax-deferred in the policy.

· Can provide substantially greater internal rate of return on the life insurance policy death benefit over non-financed payment methods.

The power of premium financing lies with the same simple concepts related to leveraging of permanent life insurance for estate liquidity and wealth transfer in uncertain financial and political times. It also provides an excellent tool to insurance key executives of a business so that unwanted family members do not become partners. The key is to evaluate premium financing not as a stand-alone transaction, but as an alternative to the traditional funding of life insurance.

I have been involved in cases where it made sense not to drain cash flow and instead use leverage to accomplish payments of the life premiums. If the structure is designed properly, it can have an exit strategy built in. There is also one planning technique for families that have done no estate planning but are uninsurable and have healthy children. This planning tool is too technical to discuss here, but if you’re reading this and know someone who has an illness, no estate plan and over $10,000,000 of net worth, you can have them give my office a call.

James Burns, Esq.

(949) 440-3243