With apologies to Alice, and to Lewis Carroll: the Bandersnatch seems to be alive in 15 states who separately tax estates (and some also tax inheritances). The range of ravagement on a $5 million estate, which is exempt from Federal Tax, is a low of $64,400 (Hawaii) to a high of $425,000 (Oregon). The majority of these states are in the mid-to-high $300,000 range. Remember that this doesn’t start at $5 million, but generally at $1 million, and is progressive.

Check the list below. If your friends or relatives with nice net worth have notionally considered moving to Florida, the estate tax savings probably pays for most of a home purchase here today. Here is the Jabberwock list:
CN, DC, DE, HI, IL, MA, MD, ME, MN, NY, OH, OR, RI, TN and VT.

Firstly: Gifts and Inheritances are generally not income taxable. Any “gift tax” is generally the responsibility of the donor.
Exception 1: Savings bonds with built-in gain – the gain is income taxable to the recipient.
Exception 2: some states impose additional tax, but not Florida.
Caution 1: A gift of a capital asset (i.e. a share of stock) has a “basis” for measuring later gain at sale that is equal to that of the donor. Politely ask for a statement of the “cost basis” for your records, and explain why.
Caution 2: Gifts from foreign persons of over $100,000 requires filing IRS Form 3520.
Caution 3: Employer or business gifts which exceed certain limits and do not qualify as an “Employee Award” under a proper, written plan are probably income, thus income taxable.

Secondly: Gifts of over $10,000 a year are not gift taxable – well, sort of. The annual exclusion amount for gifts is now $13,000; plus, husband and wife may “join” in gifting (you file an election form with your Form 1040) resulting in $26,000 per year, and that is measured per recipient. If a gift is for health care of anyone, it must be made directly to the service provider to have that gift excluded – which then does not reduce the annual exclusion. PLUS you presently have a lifetime exclusion for up to $5 million (you must file a gift tax return, but no tax is due). This is counted against your Federal Estate Tax exclusion of $5 million on a dollar for dollar basis.

Planning Idea: You want to be generous with a child, grandchild, or someone close to you. You are willing and able to make a generous gift of a modest home of $150,000; however, your estate is large enough to be taxable. Make an initial gift up to the annual exclusion, then loan the balance as a mortgage loan. Check with your CPA or Tax Attorney and set the loan up at the “Applicable Federal Rate” and have all the customary documents, including recording the mortgage, at closing. Then every year you may choose to forgive the annual exclusion amount.

Thirdly: Charitable contributions are deductible on your income tax return. There will be no net tax savings unless you itemize, and your itemization exceeds your standard deduction. AND even if it does generate a tax savings, it is limited to no more than 50% of your “Adjusted Gross Income” for certain qualified charities, and 30% for private foundations.

For those outside of Florida, be cautious! This is based primarily on Federal tax rules, and Florida law. Some states and municipal governments have the ability to add taxes to an already overly complicated system! Fortunately, at least in respect to personal income taxes, Florida has none, and has limited estate taxation.

     Sponsored by the National Hospice & Palliative Care Organization, NHDD or National HealthCare Decisions Day – the 4^th Annual such day, on April 16 – focuses attention upon the complexities of healthcare at or near the end of life. Too often the decline in health and mental acuity leaves us or our family members at the mercy of physicians and healthcare workers. Some are truly caring, but all too many are insensitive or misguided in their perception of the needs of the patient and family.

      In response to this acute issue, “Physicians Orders for Life-sustaining Treatment Paradigm” or POLST, which is both an organization and a medical process (including formalized directions to and through physicians) is promoting a change in methods of care.  Numerous states, predominantly on the West Coast of the United States, have adopted POLST legislation allowing the patient to direct the nature and level of care in respect to end of life issues.

     Florida is said to be “developing” a POLST program. At this point, the “Living Will” directives proscribed by Florida law limit what may be chosen.  Along with a Healthcare Authority, sometimes called a healthcare surrogacy or power of attorney, the Living Will provides a much improved set of choices over the prior absence of legal, therefore enforceable options. Our firm regularly prepares Living Wills and Healthcare Authority documents for our clients as part of their planning. We recommend that personal preferences be included in a separate direction or list to assist the holder of the Healthcare Authority in decision making. POLST offers much improvement to our present legal limitations, if adopted; we strongly support this concept. 

     For further information, the following Websites offer more on this issue: 

How do you teach your children responsibility to others, and in their finances? If you are an entrepreneur, you might consider requiring their serious efforts at your business or practice. At a young age, children can perform many meaningful and needed jobs, from running the vacuum and other cleaning tasks, to sorting and filing. At an older age, they may even research issues with which they are more familiar, such as use of social media, selection of the most utilitarian smart phones, articles for your company Website (or creating website if you are too retro to have done so). Thus we inform and educate our children to the responsibilities involved in a working world – but how is this useful to teach financial responsibility? Let’s take it by the numbers -

How valuable is this? For 2011, the amount which will result in NO INCOME TAX is $5,800 and you still take your child as a dependent for your tax return. If you can justify more income (summer work at more hours, for example), you may add $2,000 and direct that much to a deductible IRA for your child. Consider that $100 per week is $20 per day, possibly at $8 to $10 per hour for a 5 day week, and weekends may add to the result.We all know that after school activities have become an important part of child raising, and the balance may be difficult. If it works for you, it may be valuable in more ways than economic.

Now, if you are single and have a net worth including death benefits from personally owned life insurance, group life and retirement plans of ALL types of over $5 million, then you are subject to estate tax. The rate is 35% of the excess. NOTE: your proper administrative costs are also deductible, so if you are just over, your estate isn’t likely to suffer the tax.

If you are married, your tax situation improves if you are leaving assets to your spouse. There is no tax on assets left to a spouse – or those provided as gifts to a spouse during lifetime. If a well considered trust is created, a married person can create benefits for a surviving spouse and children, and exempt a total of $10 million – $5 million for each spouse.

Estimates are that less than 1% of residents to whom this law applies will actually be taxable. The gift and estate tax combined has never raised over 6% of the Federal Budget. It has remained conceptually one of the more irritating taxes ever imposed, even for those whom it does not affect.

OK, so your estate is going to be taxable. You get it. Your family will be paying out a chunk. In order to be prepared for that reality, you can choose to keep that chunk in cash or near cash assets – which we all know gives pretty poor returns AND isn’t always possible to do. Just to be realisitic, you may have mortgages or lines of credit that will be called due at death. Read your promissory note sometime; death is usually a basis for the lender to demand full payment. Or they could just “deem themselves insecure.” Had a bad day? Feel a little insecure? Call in some loans!!

Wouldn’t it be nice if you could buy that money at the very time it is needed at a discount? You are right, that is life insurance. Pay a little each year over your lifetime and a lot is paid out where you want it at your death. Sorry, not a lot of fun for you, but boy, it will care for the people you care for! Great. Buy life insurance and it increases your estate tax! About one-third to one half of the added insurance will go to taxes – - – unless you create an Irrevocable Life Insurance Trust to buy and own the insurance. If you do that, the money needed will be there without estate tax. The amount saved is truly free!

How does it work? You – called the “Settlor” or “Grantor” – create a special type of trust called an Irrevocable Life Insurance Trust, or ILIT for short. It may be just labeled as an Irrevocable Trust, but have extra language that facilitates the ownership, management and use of the life insurance death benefit to coordinate with your estate. If so, it is an ILIT, a carefully designed trust for a very specific purpose. In the ILIT you name someone other than yourself as Trustee. Usually the Trustee is a professional or institutional trustee, because it is important enough to use professionals, a little complex, and a bit of a burden to family and friends. The professionals will cost something, probably $2,000 to $5,000 annually, depending on a number of factors.

You as the Settlor make a contribution to the trust. In the Trust, you have named certain persons to be “present interest” beneficiaries, with a right to receive a pro-rata share of any contribution. They are entitled to receive notice of the contribution, and may exercise their withdrawal right for up to thirty days following receipt of the notice. Currently the annual gift exemption is $13,000 per donor, and per donee. Married persons may join with each other to make gifts. So if there are three “present interest” beneficiaries named in the trust, and spouses join together to make the contribution to the Trust, the maximum amount which can be treated as annual exempt gifts is:

The Trustee says: “Settlor, I have the money you contributed, and the notices to the present interest beneficiaries have come back with all of them waiving their withdrawal rights. I would like to buy life insurance on your life, and have arranged with this fine representative to do that.” The life insurance is owned by the trustee on behalf of the Trust, and is NOT part of your estate. If you transfer existing life insurance to an ILIT, the Internal Revenue Code treats it as taxable in your estate if you die in three years or less.

Now what? You continue to make contributions to the Trust. Contributing more than is needed for the insurance premium is wise, and the Trustee will invest it, probably in cash accounts until there is enough to do something else. Variable Life Insurance would allow most of the extra contribution to be invested within the life insurance, into the various investment funds available.

The best part is there is more “FREE MONEY.” Investment yield “inside” a life insurance policy is not income taxable until a policy is surrendered. That’s right, not even at death! The proceeds of the death benefit are both income and estate tax free in the ILIT. The ILIT is both authorized and directed to use the proceeds to loan to your estate, or buy assets from it. Your estate (or living trust) then has the cash it needs to pay loans and estate taxes. The assets now held by the ILIT are used for the benefit of your beneficiaries – and note – the “present interest” beneficiaries may not all be the ultimate beneficiaries!

ILITs are therefore “free money,” and one of our favorite tools to preserve families and their assets.

1. Limited liability of owners and managers for entity level acts;
2. Limited ability to “take” an ownership interest away to collect for an outside personal liability.

Single member LLCs (just one owner) were determined to be unprotected in the decision of the Florida Supreme Court in Olmstead v. Federal Trade Commission, SC08?1009 (June 24, 2010) http://caselaw.findlaw.com/fl-supreme-court/1528945.html.  That decision reached beyond the question asked by the 11th Federal Circuit Court of Appeals to frame a solution which effectively recast interests in LLC to have the same legal attributes as stock in corporations. That means that such interests are legally freely transferable, and capable of seizure and sale in judicial process.

The Florida Bar has sought a middle ground in negotiation with the banking lobby to protect multi-member LLCs.  Legislation is expected to be signed by Governor Scott shortly.  However many of us are not convinced that the legislation cures the patient’s ills, and firmly believe that this is a palliative at best.

LLCs have been the most popular form of business today due to their supposed dual protection attributes of protecting individual owners as to operational liability, and limiting third party collection.  We have devised alternative planning for our clients, and will continue to seek to improve protective plans and choices.  LLCs have been a very capable tool in estate planning as well as business, allowing the grouping of assets, structuring buy-sell agreements, providing for active business continuity, and for post-death control by the best equipped person. 

Regretably, the influence of the large banking lobby on this legislative “fix” (and the level of campaign contributions made by banking interests) has damaged the reputation of Florida in the business and estate planning arena beyond that which favorable weather will offset.  There are other place to live or move your business to.  We already have seen the movement away from our state, and expect more.

However, the rules are not as clear in respect to non-business expenses.

Second Rule: To be deductible, a non-business legal expense must be incurred under one of the following circumstances:

• The collection or production of taxable income.
• Managing, conserving or maintaining income-producing property.
• The determination, collection or refund of any tax.

Legal expenses of a purely personal nature are not tax deductible. Frequently legal services involve a mixture of personal and business matters which require the attorney to be aware of applicable tax law, and to perform a proper allocation within an opinion letter to the client for tax purposes.

Third Rule: If the fee incurred is associated with acquiring a capital asset, to the extent it is deductible, it is generally first capitalized into the asset acquisition cost, then depreciated or amortized.

TAX COURT CASE: Melat divorced his wife in 1989. In the division of marital property, Melat presented expert testimony on the value of his law partnership to the court. On his 1989 Federal Income Tax return, Melat deducted legal fees respecting his divorce of $28,000, which was 75% of his total fees.

Fees paid in connection with a divorce are usually nondeductible personal expenses. Melat claimed that the fees were deductible because they were incurred to conserve “the future stream of income” from his law practice. The Tax Court noted that the underlying action was personal in origin. Result: no deduction (Melat, TC Memo 1993-247).

Note: Only fees in connection with a rental property or other income producing property may be deducted from gross income. Other legal fees which fit into the “determination, collection or refund of taxes” category generally must be deducted as miscellaneous expenses. Miscellaneous expenses are deductible only to the extent in excess of 2% of your adjusted gross income.