Health (scare) Care Reform and an Insidious Tax it Releases

The new Health care reform bill includes a 3.8 percent Medicare tax on unearned income including annuities, and possibly income recognized from the surrender or sale of life insurance.

Many clients have asked how to get out of annuities they don’t need to minimize a potential huge tax hit. This is only if you don’t think you’ll need this income as we can move it to an insurance policy that is free of the tax, leaves a legacy and still provide some income for you and your family.

This strategy spreads out potential tax payments over a 7-year period and moves funds from an existing annuity where funds are trapped and destined for taxes to efficiently transfer your wealth through life Insurance.

The benefit to you is that you keep more of what you earned and leave more to your family who should be the recipients of all your hard work.

Don’t fail to plan or get information on how this might affect you as the outcome could be disastrous.

James Burns

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.

Extension on Offshore Account Disclosure

The US Internal Revenue Service has announced an extension of the deadline for special voluntary disclosures by taxpayers with unreported income from offshore accounts.

The extension, announced by the IRS on September 21, gives taxpayers until October 15, 2009, to make a disclosure.

Under special provisions issued in March, taxpayers with undisclosed offshore accounts originally had until September 23, 2009 to come forward. Those taxpayers who do not voluntarily disclose their hidden accounts by the new deadline face much harsher civil penalties and possible criminal prosecution.

Usually if  the IRS  discovers that a taxpayer has not reported an interest in an offshore account or income on such accounts, the IRS may impose penalties of up to 50% of the balance of each offshore account for each year the account remains undisclosed. The taxpayer will also be liable for additional tax on income earned by the foreign account plus interest on the additional tax. Additional penalties may include a fraud penalty of up to 75% of unpaid taxes and a penalty equal to the greater of $100,000 or 50% of the offshore account balance for willful failure to file a Report of Foreign Bank and Financial Accounts form for each offshore account.

Making a disclosure under this program, the taxpayer will be liable for a reduced single penalty equal to 20% of the amount of the offshore account for the one day in the past six years in which the account had the highest aggregate value. However, this penalty could be reduced to just 5% under certain circumstances.

The IRS warned that it has no intention of extending the deadline and those who do not voluntarily disclose shall face the fullest of the penalties.

Untaxingly,

James Burns, Esq.

“The Sensation with Inflation”

There is a lot of confusion as to where we are headed right now so I thought I would break down the different flations and maybe we can all decide which one is the fit right now.

Inflation is a where your currency buys less due to a rise in the price of goods and services; accordingly, inflation is the erosion in the purchasing power of money. Over time, as the cost of goods and services increase, the value of a dollar is going to fall because a person won’t be able to purchase as much with that dollar as he/she previously could.

What cost $29,900 in 2000 would cost $37031.75 in 2008. Also, if you were to buy exactly the same products in 2008 and 2000, they would cost you $29900 and $24235.11 respectively.

As a harbinger, gold recently rallied above $1,000 an ounce and many experts think that this is partly due to the Fed’s continued money-printing campaign over the past year will cause the dollar to weaken even further than it already has.

That’s putting upward pressure on other commodities. Oil is trading around $71.50 a barrel, an increase of about 20% over the past six months. The prices of sugar and copper have shot up.

Deflation: A decline in price levels caused by a decline in the supply of money or credit. Deflation often includes the side-effect of enlarged unemployment because of the lower demand for goods and services in the financial system.

Stagflation: High inflation and high unemployment occurring simultaneously.

Taxflation: aka bracket creep the gradual movement of income into a higher federal income-tax bracket as a result of wage and income increases intended to help offset inflation. It can also affect the liquidity of an estate by increasing the estate tax burden.

Example – single person with estate worth $5,000,000 and in 2009 that would cost the estate $1,200,000 or represent shrinkage of 24%.

If they pass away in 5 years or 2014- and was growing at 8% per year. The estate will have grown to approximately $7,346,640.38 the federal estate taxes would be $3,893,719 and represent shrinkage of about 53%.

It looks like we have a combination of them all but I would say Taxflation and stagflation are a good fit but it really is anyone’s guess.

“THREE WAYS YOU CAN AVOID GOING BROKE IN THE NEW ECONOMY”

The first thing you can do as illustrated in “The 3 Secret Pillars of Wealth” book is take ownership of your monthly expenditures by having a family budget and a family balance sheet you observe with conviction. If you’re desirous of change, you have to do the work since the only place success comes before work is the dictionary.

Number two, if your home payments are too high because you’re job or industry has fallen off, seek a loan workout with your lender or use a law firm to assist you that has a success rate.

Mr. Burns also states that if you are carrying too much bad debt like credit cards and you’re slowing sinking into the quicksand, think about debt settlement or management services that don’t have an upfront cost and can get you from point A to point B in terms of eliminating this debt. While it may have a temporary blemish on your credit score, at least you get back to the surface where you can breathe.

Lastly, if you’re crunched for cash to invest or pay down bills, look if you or your parents have an old universal life or convertible term life insurance policy that has underperformed or is not really needed and consider having it sold in the secondary market as a life settlement.

More power solutions are available right here so stay tuned, get involved and please send in comments so we can save or pick up lives in this down economy. In numbers we are strong.

James Burns, Esq.

Tax Free Retirement Cash Flow

Overfunding is a strategy that focuses on accumulating cash in the policy rather than paying for the death benefit which is the payout to your loved one’s when you pass away. This approach leverages the highest policy premium that is allowed with the lowest life insurance death benefit so that your cash accumulation exceeds your policy net insurance costs over at least 10 years. There are fundamentally 4 steps to determining the combination of maximum premiums and minimum death benefits necessary to selecting the most leveraged indexed universal life policy:

4. Finally, you must pay close attention to the maximum premiums allowable under the  Internal Revenue Code which is referred to as the seven-pay premium limitation.[1] As long as the total premiums for any seven-year period are equal to or less than the maximum allowable premiums for the seven-pay test,[2] you’ll be able to access the cash values in the policy at any time, tax-free and relatively liquid.

In essence, a life insurance contract that fails to meet the seven-pay test will be classified as a modified endowment contract (MEC). The seven-pay test is not met if the accumulated amount paid at any time during the first seven years is more than the total of the net level premiums that would normally have been paid on or before such time if the contract provided for paid-up future benefits after payment of seven level annual premiums

Want to see if this is a fit for you? If you’re healthy it may very well be a great tool in your arsenal to slay the bailout dragon for your retirement.

Invest Like the Wealthy and Wise

When a judgment is won against a person for a particular amount, the first choice is cash. The next choice would be the quick sale value of real estate, including forcing foreclosure on your home. One of my colleagues still does this work to this day and while he does not enjoy having people removed from their homes, he has to get paid along with his client and that means every asset is up for grabs.

If the bank and other friendly creditors own the property then there is nothing to turn over. At the end of the day, the creditor or their counsel is looking for how much equity you have in the home.

If you are in business or have a sizable estate, you may want to keep your equity lean so that it is off the negotiation table. Stripping equity makes sense on so many accounts. First, we’ve all heard the cliché that it is unwise to have all your eggs in one basket. Why? Because if you drop the basket with all your eggs they are all finished. The old adage is not just for the sake of it but is a wise wealth-making concept. Do you think the folks in Laguna Beach whose homes slide down the side of the hill were better off if the home was completely paid or outside of that home earning interest somewhere or invested in another piece of property? I hope the answer is obvious to you that you would want it outside of that now demolished home so that you had access to it.

Where should I put it you ask? Many readers are using real estate in multiple jurisdictions and this makes sense. You should not keep more than 10% of your equity in the properties unless that would not pencil out properly in having the renter cover your loan. The other significant asset many clients are using is savings grade life insurance because this contract can be structured to not provide for creditors of the beneficiary during a period when you are under attack. You can also put a large amount into a single premium immediate annuity (SPIA) that is irrevocable and you divest your control over it while it pays directly to the insurance company to fund your tax-advantaged savings account, better known as the investment grade life insurance.

If you’re not sure about investments, you can also get personal equity lines from family and friendly companies. A good idea is to get a loan from family members, create a functional promissory not that has flexible payments and higher interest rate for the premium of having the flexibility e.g., pay in lump sum 5 years from now. Then they put a deed of trust on the property and that encumbers a portion of the equity.

This process involves:

A friendly third party that holds a lien on your property.  This friendly party may be a corporation, which you control.  The “friendly” corporation places liens against your real estate and other immovable assets to strip the valuable equity.

HIGH ASSET PROFILE

Before:

Appraised Value $200,000

- $40,000/Mortgage             

+ $160,000 = Equity (at risk)

Now this same asset with an equity strip.

After:

Appraised Value $200,000

- $40,000/Mortgage

- $150,000/ Lien

+ $10,000 = Equity

Real estate is immovable.  Therefore, there are specific challenges to reducing the amount of equity accessible to abusive creditors.  We reduce the equity, through equity stripping.

This process works wonders along with a Delaware Series LLC because you can have a property seeded in one of the Series and another Series that has its own bank account and name as a creditor on the property with a filed deed of trust on the property. You have to create a credible document to substantiate the financial substance but this is done all the time with businesses and real property to keep the ownership reduced.

What if I lose a case and a creditor finds out I control the entity that has a lien against the property. This is one of the little risks but is difficult to lose as long as you run your entity like it has a real business purpose and respect the transaction like it is a true arm’s length dealing.

You can always use a global solution as many of my clients have using a foreign bank to take out up to 90% of the available equity and then settling the money on a trust that has an agreement with the bank to oversee it. The capital never transfers out of the jurisdiction, costs about 1.5% per year on the loan amount to maintain, offers a rate of return on the CD that offsets other fees so it is a wash but it protects property like nobody’s business. There are so many interesting ways to provide for estate taxes, create wealth abroad that is legitimate and protects the money that we can explain them all in this article but we invite any of Rick Stuart’s readers to request an appointment if they have any concerns in their financial and estate planning strategy. Even that little hairline fracture left untreated over time can have cataclysmic results in your financial planning structure.

James Burns

Law Office of James Burns

“How to Save Your IRA from Destruction”

If you have an IRA and you’re concerned about how to pass it on to your loved ones, an approach of naming a trust as the designated beneficiary has several benefits over directly naming the beneficiaries. The issues that can affect the named beneficiary to name a few are they could be a minor, they might not be careful with money, or they may have marital or creditor issues, and could be disabled to the extent the inheritance would affect their governmental benefits. Next, if the beneficiary dies before distribution, the alternate beneficiaries may not be accurate. Another condition we often see is the beneficiary may purposely or accidentally withdraw monies from the IRA causing adverse tax consequences. Additionally naming the client’s revocable living trust as the beneficiary, even with the appropriate language that extends payout called “conduit provisions” may create issues with the age of beneficiaries in order to “stretch-out” the required minimum distributions.

However, in 2005, the IRS issued Private Letter Ruling 200537044 (the “PLR”) that approved a new type of revocable trust created solely to be the beneficiary of an IRA account. As a result of this PLR, it is now possible for you to create an individual trust known as an IRA Beneficiary Trust® which provides maximum protection and flexibility for your retirement investments.

This IRA Beneficiary Trust® insures that your beneficiaries will extend (“stretch-out”) their taxable Minimum Required Distributions (MRDs) on the IRA over a much longer period of time. By using this trust, the age of each beneficiary becomes the effective age for that beneficiary’s required minimum distribution. As an effect, the IRAs can continue to compound for many years free of income-tax and may literally grow to be worth millions of dollars! This type of trust goes by many names and has also been called an IRA trust, an IRA Inheritance Trust, a standalone IRA trust, an IRA stretch trust or an IRA protection trust.When your loved one/s inherit your IRA fund and they keep the funds in the IRA over their lives and only take the minimum required distributions each year (the “stretch-out”), the amount of money that can accumulate and be paid to them should be massive in comparison to taking the monies directly and facing the immediate tax on them. For example, assume you have a $150,000 IRA account; we will also further assume you have two different ages (10 and 25) for your beneficiaries and presume that the account averages an annualized 7% return. First, for the beneficiary who is age 35[i] and inherits IRA proceeds upon your departure, the total benefit is $1,212,165 of after-tax benefit as opposed to $663,496 for taking the proceeds directly without the stretch-out. For the 10 year old beneficiary,[ii] they will receive approximately $4,589,236 after-tax benefit as opposed to $2,641,198 which is what they would receive lacking the stretch-out because of the immediate taxes due when they receive your funds directly.

Therefore, you can see that this wealth amassing strategy only works if the beneficiaries hold the inherited funds inside the IRA account. If a beneficiary takes all of the funds out of the IRA account (referred to as a “blow-out” because it blows the stretch-out), this wealth accumulation technique is lost. One great reason to create an IRA Beneficiary Trust® is to preserve the stretch-out and prevent a blow-out. Unfortunately, we see this blow-out too often and it jeopardizes wealth that must be saved. Many times your beneficiaries will not be aware of the tax rules and their distribution choices, so they’ll withdraw from the IRA funds at the first opportunity or do a forbidden rollover. Even if you hope that your children or beneficiaries will do the right thing by keeping the funds in the IRA account for their lives to “stretch-out” payments, they may expose it to numerous threats and hope is not a planning strategy as I’ve indicated in my book “The 3 Secret Pillars of Wealth.”

Some of the threats come in the form of a divorce where your beneficiary’s spouse could seek half of the inherited IRA if they live in a community property state. The divorce rate is out of control and a huge numbers of inherited money has become a target for the ex-spouse. Even though inherited property is considered separate property it may become the only thing available and because divorces can be very costly and last for years, your beneficiary may succumb to the pressures of long and nasty divorce litigation and be willing to surrender a large portion of the IRA account just to settle the divorce.

If you have a reasonable IRA you want to pass down or don’t think you’ll need to live on your IRA you absolutely should be thinking about this strategy.

James Burns, principal of the Law Office of James Burns and author of the international best seller “The 3 Secret Pillars of Wealth” shows unassuming investors how naming a trust as the designated beneficiary of their IRA has several very important advantages over directly naming the beneficiaries.

In addition, Burns says: naming the client’s revocable living trust as the beneficiary, even with the appropriate “conduit-trust” language, may create issues with the age of beneficiaries in order to “stretch-out” the required minimum distributions.

Burns’ office is one of few that offer the IRA Beneficiary Trust® which insures that your beneficiaries “stretch-out” their taxable, required minimum IRA distributions over a much longer period of time. And, if you do it right, the IRAs can continue to compound for many years income-tax free  and can literally grow to be worth millions of dollars!

Even if you assume that your children or beneficiaries will do the right thing – that is, keep the funds in the IRA account for their lives to maximize the income tax “stretch-out” of the IRA – the IRA may still be seriously exposed to one or more of the following threats that can arise years after you depart.

If you have a reasonable IRA you want to pass down or don’t think you’ll need to live on your IRA you absolutely should be thinking about this strategy.

The Law Office of James Burns provides debt settlement services, bankruptcies, short sales and estate and wealth planning with emphasis on real estate investing.

Untaxingly,

James Burns, Esq.

“Loan Modification or Complication?”

The plan centers on Fannie Mae and Freddie Mac, which between them own or back about 31 million mortgages worth a combined $5 trillion. The federal government took over the firms in September due to mounting losses on their portfolios of mortgages.

Eligibility is determined by several factors: Homeowners must be 90 days or more late in their mortgage payments, owe at least 90% of their home’s current value, live in the home on which the mortgage was taken and have not filed for bankruptcy.

Their mortgage payments would be adjusted through lower interest rates or longer repayment schedules with the goal of bringing payments below 38% of monthly household income. Interest rates could be lowered for five years and then raised to a predetermined level. Loan terms could be lengthened to 40 years.

Officials said the standards for loan modifications should fast-track changes in payments. The standards will be applied to loans owned and guaranteed by Fannie and Freddie, but officials said they hope they will also be adopted industry wide.

“We expect that it could significantly increase the number of modifications completed,” said James Lockhart, director of the Federal Housing Finance Agency, the regulator that oversees Fannie and Freddie. …

Fannie reported this week that 1.7% of its mortgages by value are delinquent by 90 or more days. Fannie’s filings suggest that it has about 18 million mortgages on its books, which would work out to about 300,000 mortgages that could potentially be eligible. The borrower will ultimately be responsible for paying the full amount of the principal borrowed, but payment on part of the principal can be deferred to make the monthly payment affordable.

Homeowners who purposefully default on their mortgage to get a modification will not be eligible. Borrowers will have to submit a statement showing financial hardship or a change in financial circumstances, along with proof of their income. The modification will become final once a borrower has made three payments under the modified terms.

But even in cases where declining home prices have taken the value of a home to less than is owed on the mortgage, the balance of the loan will not be lowered under this program.

“This is not loan forgiveness; the loans will be paid but at terms affordable for borrowers,” said Brian Montgomery, commissioner of the Federal Housing Administration.

The fact that mortgage balances will not be reduced for the so-called underwater mortgages — those in which a homeowner owes more than the home is worth — will limit the use and impact of the program, according to some experts.

However, there is a competing interest in getting modifications done and that is the investors who purchased these loans. Some hedge funds, including Greenwich Financial Services and Braddock Financial, told banks in October that they might sue the banks if they changed mortgages that were within mortgage bonds that the hedge funds had purchased. Modifying the terms of mortgages underlying mortgage bonds can change how much those bonds are worth.

Investor rules and underlying servicing contracts with respect to modifications are not uniform and may prevent us from doing modifications that would benefits borrowers and investors.

Under the plan, Fannie Mae, Freddie Mac and other mortgage firms will rewrite the terms on some overdue mortgages so the homeowners won’t pay more than 38% of their monthly income. Modifications could include deferring some of the principal owed, lowering interest rates or extending maturities to as much as 40 years. The process will be streamlined and uniform.

If you know someone in need of saving their home have them contact my office after downloading our questionnaire which should be faxed back to use…get it here .

James Burns, Esq.