Archive for January, 2011

Should or Can Your Clients Undo Large Taxable Gifts from 2010?

Monday, January 31st, 2011

Last year, many clients were encouraged by their estate planning attorneys to make taxable gifts before tax rates were expected to raise this year. 

The advice made sense since lifetime gifts are a key estate planning tool.  They reduce tax burdens on an estate, and if the assets increase in value after being disbursed, the appreciation is tax free.  With both the gift tax and the estate tax automatically scheduled to increase to 55% in 2011, last year’s 35% gift tax rate of gifts greater than $1 million seemed like less of a sting. 

Expect the Unexpected

However, Congress did what we might expect it to do.  As a result, many of those same lawyers are now trying to figure out how to reverse those 2010 taxable gifts. 

They’re scrambling because of a sweeping tax overhaul that President Obama signed December 17th.  Under the new law the amount you can transfer tax-free during life went up from $1 million to $5 million ($10 million for married couples).  If some of these lawyers had instead told clients to wait until 2011 to make gifts, it might have been possible to avoid gift taxes entirely. 

What’s more, the tax on transfers that exceed the limit stayed at 35% instead of going up to 55%.  The new rules don’t affect the annual exclusion.  Clients can still give as much as $13,000 per year ($26,000 for couples) to as many people as they like without it counting against the lifetime limit. 

However, clients who were far more generous than that could develop a bad case of donors remorse on April 15th. 

So now what?

Unfortunately, fixing this problem isn’t as simple as returning an ugly tie to a department store.  The formal act of turning down a gift or inheritence is called a disclaimer.  The receiver of the gift must disclaim within 9 months of receiving it and may not have accepted any interest in the asset or any of it’s benefits. 

These rules might not pose an obstacle for clients who transferred shares in a family limited partnership.  But if a client transferred shares of publicly traded stock or cash and the recipient did anything to make the disclaimer invalid, it is a problem. 

Your client may also be out of luck if the gift receipts sold the assets or otherwise already benefited from them.  If your client made a $1 million cash gift last year to a child who has already spent most of the money, then there is no chance of a disclaimer.

You Don’t Have to Re-Write History

Simply returning a gift might seem like a smooth fix.  But the person returning it, in turn, making a gift of his own, which requires using his own gift tax exemption.  Plus, it does not keep an original donor from owning a tax on April 15th. 

One possible solution being suggested is a legal doctrine called rescission.  You must show that there was a mistake in judgment made based on what the tax rates were expected to be in 2011, rather than a mistake of material fact.

Be aware that if there is no third-party record of a gift, a client might resort to rewriting history, meaning that those gifts suddenly “never happened.”  This is a bad idea and you should caution clients against trying to defraud the IRS.

In end that wasn’t the fault of the estate planning attorney how advised your client to make taxable gifts in 2010.  That advice was good at the time, and no one has a crystal ball on what Congress will ever do.  As always I hope this article has helped you and your clients.  If you have a specific case or concern, please call our office (909)981-6177.

Choosing an Insurance Company

Monday, January 10th, 2011

How do I choose an insurance company?

There are a number of factors that go into picking the right insurance company or companies for your insurance needs.  The final decision will depend on what you are trying to accomplish.  Some factors that are commonly used by advisors when consulting with clients about their insurance needs include the following:

  1. Ratings.  Ratings help in a general way to determine which companies are the strongest financially.  Most ratings systems work on an easy-to-understand alphabetical structure similar to the credit markets.  So a company that has a triple-A (AAA) rating is likely to be more financially sound than a company with a B rating.  These ratings involve the opinions and judgments made by the ratings service.  There are also five key ratings services in the market today, including Standard and Poor’s, Dun & Bradstreet, Weiss Research, Moody’s Investor Services and A.M. Best.  The problem is that these various agencies have different scales with different letter ratings that do not necessarily correspond from one agency to another.
  2. Underwriting.  In addition to ratings, another key factor in your decision will be to look at how each insurance company rates you as the insured person.  This is important because the better the rating you are assigned, the lower the insurance cost.
  3. Years in Business.  How long a company has been in business in some ways speaks to an ability to stay in business.  On the other hand, a number of larger companies who had been in business for many years have been struggling with changing markets and the economy in general; and some of that group have merged out of existence or been purchased by other more successful insurance companies.
  4. Insurance Pricing.  The actual pricing offer you receive for your insurance is also a factor in choosing a company.  In larger cases, you will want to make sure that your underwriting file is seen by more than one company so that you will receive competitive bids.
  5. Costs and Internal Rate of Return.  A calculation of internal rate of return (available from most companies as part of their illustration) will help you to compare one policy illustration or design with another.  Because insurance costs, crediting rates, expenses, and other moving parts in an insurance contract vary from company to company, a way to compare the whole picture is to look at the death benefit at a given point in time relative to the premiums paid to that point in time.  A good place to start is to look at the period of time around your life expectancy.  If one policy shows that the internal rate of return (IRR) of 8.5% at life expectancy and other is showing an IRR of 6.8%, you will want to explore the policy features that are creating the difference.
  6. History of Paying Dividends or Consistent Crediting Rates.  Another important feature to examine is the financial performance of each company under consideration as reflected in the actual performance of their insurance products.  This is important because part of what you are evaluating is the ability of the insurance company to earn a return on your money for the cashe value component of your life insurance product.

I hope this is helpful with making your life insurance decisions.  Please don’t hesitate to contact our office for more information (909)981-6177.