IRS Announces August 2017 Applicable Federal Rates and 7520 Rates

Posted in Internal Revenue Code, IRS

The Internal Revenue Service (“IRS”) publishes a monthly update to the applicable federal rates (“AFRs”) and 7520 rates.

Planning professionals and their clients should take note of fluctuations in these rates and be mindful of planning opportunities that come with rate changes.

The AFR is calculated by the IRS under Section 1274(d) of the Internal Revenue Code (the “Code”) and is used for many purposes. One of its most common applications is to establish the minimum interest rate that can be charged on an intra-family loan without income or gift tax consequences.  These “safe harbor rates” are dependent upon two factors: (i) the term of the loan and (ii) the frequency of compounding of interest.

For these purposes:

  • Demand notes and notes with a term of three years or less are considered short-term obligations,
  • Notes with a term of more than three years but less than nine years are considered mid-term obligations, and
  • Notes with a term of more than nine years are considered long-term obligations.

The 2017 AFR rates are as follows:

The 7520 rates are used to calculate the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest. They are calculated by the IRS under Code Section 7520 (hence, the name “7520 rates”) and are always 120% of the AFR for mid-term obligations with semi-annual compounding.  The 7520 rates for 2017 are as follows:

Rates are typically published by the 20th day of each month and provide planning opportunities for certain estate planning vehicles which are interest rate sensitive.  For example:

  • Lower rates are generally preferable for intra-family loans, grantor retained annuity trusts (“GRATs”), installment sales to grantor trusts and charitable lead annuity trusts (“CLATs”).
  • Higher rates are generally preferable for qualified personal residence trusts (“QPRTs”) and charitable remainder annuity trusts (“CRATs”).

As rates continue to change, advisors and clients should maintain an open dialogue so that clients can take advantage of any planning opportunities tied to increasing or decreasing rates.

Maryland Reduces Evidentiary Requirements to Exempt Primary Residence of Domestic Partners from Inheritance Tax

Posted in Death Taxes, Estate

On May 4, 2017, Maryland’s Governor signed into law H.B. No. 1104, effective July 1, 2017, reducing the evidentiary documentation required from domestic partners to evidence the qualification of their joint primary residence for the Maryland inheritance tax exemption.

Maryland law provides that, in a domestic partnership, the inheritance tax will not apply to the surviving domestic partner’s receipt of the predeceasing partner’s interest in the joint primary residence if the property (1) was held as a joint tenancy by both domestic partners at the time of death and (2) passes to or for the use of the surviving domestic partner.

As of July 1, 2017, to evidence a domestic partnership for purposes of qualifying a joint primary residence for Maryland’s inheritance tax exemption, the surviving domestic partner can provide EITHER (1) an affidavit signed under penalty of perjury by the two individuals stating that they established a domestic partnership (DP affidavit) OR (2) any two of the following documents of proof (DP proof documents):

  • Joint liability of the individuals for a mortgage, lease, or loan;
  • Designation of one of the individuals as the primary beneficiary under a life insurance policy on, or a retirement plan of, the other;
  • Designation of one of the individuals as the primary beneficiary of the will of the other;
  • Health care or financial durable power of attorney granted by one individual to the other;
  • Joint ownership or lease by the individuals of a motor vehicle;
  • Joint checking account, joint investments, or a joint credit account;
  • Joint renter’s or homeowner’s insurance policy;
  • Coverage on a health insurance policy;
  • Joint responsibility for child care, such as guardianship or school documents; or
  • Relationship or cohabitation contract.

Before enactment of this new law (and until July 1, 2017), the surviving domestic partner had to provide BOTH the DP Affidavit AND two DP proof documents to qualify for the exemption.

Cites:  See Md. Ann. Code § 6-101(b); Maryland H.B. 1104 (2017).

*Admitted to the practice of law in Florida.

Making the Move to Another State? Consider These Actions to Avoid Dual State Residency

Posted in Income Tax, State Tax, Tax Planning

Whether to be closer to family member or a new job opportunity, individuals are increasingly relocating to another state.  If reduction in the applicable state income tax is a motivating reason, avoiding dual-residency should be a primary objective.  It is very common for owners of certain assets (closely-held businesses, highly-appreciated assets, and/or highly compensated executives receiving unique bonuses or substantial compensation upon retirement or another corporate change in control) to attempt to change their applicable state residency prior to a sale or monetization of any such assets.  Others will want to leave and move to a state without an estate tax.  Certain states (e.g., California, New York, New Jersey) are arguably more organized and effective at identifying, challenging, and auditing any such taxpayers and may have rules that require accrual of income upon a change of residence.  Careful planning and timing can help achieve desired objectives.

If you plan to make a permanent move to a new state, it is important to take certain actions, as soon as possible, in order to establish legal domicile in the new state.  In general, the term “domicile” is defined as the place that an individual intends to be his or her fixed or permanent home or the place to which he or she intends to return after a temporary absence. Taking care of the basics – registering to vote, relocating to a new house, and obtaining a driver’s license – is only the first step of establishing your domicile in the new state. Below are a few additional actions you can take to affirmatively change your domicile from one state to another:

  • Register your vehicle in the new state;
  • Open bank accounts in the new state and close bank accounts in the old state;
  • Sell or rent out your residence in the old state;
  • Spend more time in the new state and keep a log to track your days spent in the old and new states (be wary of certain mobile device apps that track your time in different jurisdictions, as such information may be discoverable and be used negatively against you);
  • Change your mailing address;
  • Update your legal documents, such as wills, passports, and insurance policies, to show your new state of domicile; and
  • Move your family members, pets to the new state.

Keep in mind that the list above is not exhaustive and the burden is on the individual claiming the new domicile to prove a change from the former state to the new state; keeping documentation of all of these actions is vital to establishing a new domicile.

Since there is no uniform set of laws to determine state tax residency and the definition of domicile varies from one state to another, it is important to understand the particular rules that apply in both the prior state and desired new state.  In addition, several states (including New York) will impose their income tax on a non-domiciliary if they have a permanent place of abode in the state and spend more than 183 days or parts of days in the state.   Therefore, before packing up and uprooting your family (and pets) to a new state, consult with experienced tax advisors in your current and future states to understand the state income tax consequences and what factors each applicable state looks at in determining whether a domicile is established (and terminated) as it relates to your particular residency in such states.

*Admitted to the practice of law in Florida.

The Sooner the Better: Planning with Long-Term Care Insurance

Posted in Estate Planning, Insurance

With the skyrocketing cost of long-term care, nursing homes, assisted-living facilities and home health care, many families are recognizing the importance of long-term care insurance.  People in their late 50s and early 60s are the most common purchasers of long-term care insurance.  However, those purchasers may find that the premiums on long-term care insurance policies are higher than expected or that coverage is completely unavailable to them due to a pre-existing condition.  Unfortunately, trying to convince those in their 30s and 40s to pay up for a long-term care insurance policy that’s unlikely to be relied upon for decades, can be difficult unless they have already faced the challenge of providing for their own parents’ long-term care.

Typically those who do secure coverage earlier in life will not only pay lower premiums but will pay less over the lifetime of the policy, so it is something that families of all ages should consider as a part of their estate plan.  For many families, long-term care insurance may not make sense if the premiums are insurmountable and Medicare or Medicaid may eventually pick up the tab.  But for many others, who have a legacy that they wish to protect for future generations, it could be a sound investment.

A comprehensive, holistic legacy plan should include a discussion of whether or not long-term care insurance makes sense given the client’s facts and circumstances.  An advisor experienced in long-term care is an important part of any advisory team.

IRS Announces July 2017 Applicable Federal Rates and 7520 Rates

Posted in IRS

The Internal Revenue Service (IRS) publishes a monthly update to the applicable federal rates (AFRs) and 7520 rates.

Planning professionals and their clients should take note of fluctuations in these rates and be mindful of planning opportunities that come with rate changes.

The AFR is calculated by the IRS under Section 1274(d) of the Internal Revenue Code (the Code) and is used for many purposes. One of its most common applications is to establish the minimum interest rate that can be charged on an intra-family loan without income or gift tax consequences. These “safe harbor rates” are dependent upon two factors: (i) the term of the loan and (ii) the frequency of compounding of interest.

For these purposes:

  • Demand notes and notes with a term of three years or less are considered short-term obligations,
  • Notes with a term of more than three years but less than nine years are considered mid-term obligations, and
  • Notes with a term of more than nine years are considered long-term obligations.

The 2017 AFR rates are as follows:

july irs 1

The 7520 rates are used to calculate the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest. They are calculated by the IRS under Code Section 7520 (hence, the name 7520 rates) and are always 120% of the AFR for mid-term obligations with semi-annual compounding. The 7520 rates for 2017 are as follows:

july irs

Rates are typically published by the 20th day of each month and provide planning opportunities for certain estate planning vehicles which are interest rate sensitive. For example:

  • Lower rates are generally preferable for intra-family loans, grantor retained annuity trusts (GRATs), installment sales to grantor trusts and charitable lead annuity trusts (CLATs).
  • Higher rates are generally preferable for qualified personal residence trusts (QPRTs) and charitable remainder annuity trusts (CRATs).

As rates continue to change, advisors and clients should maintain an open dialogue so that clients can take advantage of any planning opportunities tied to increasing or decreasing rates.

Sudden Wealth – How to Make it Last

Posted in Investing, Tax Planning

You see it in the news all the time: a lottery winner ends up filing for bankruptcy only a few years later, or a business owner has nothing to show for all of her hard work following the sale of her successful business.  In the event of a sudden influx of wealth, even a reasonably prudent and intelligent person can suffer financially in the absence of a well-thought-out financial plan.  Professional advisors are critical to ensuring newly acquired wealth may be managed to support your lifestyle for the rest of your life and for future generations, not just a few years.

When an individual suddenly comes into wealth, there is an understandable desire to enjoy the moment and perhaps to even share the wealth – literally.  Being the recipient of a financial windfall is a dramatic event, one that can challenge any individual as they struggle to adjust to a new lifestyle and cope with newly found wealth.  Therefore, it is crucial to act early in order to provide a cushion and a sustainable plan beyond the immediate enjoyment.  Ideally, an advisory team should be in place and provide advice prior to the influx of new wealth.

Of course many find it hard to resist the “urge to splurge.” An advisory team can help remind you to pause and not make any dramatic changes in lifestyle or significant commitments until a comprehensive plan is in place.  Be reminded that large ticket purchases, such as a new home or boat, are expensive to insure and maintain.  Focus on a lifestyle that may be maintained over time, and an investment plan that will generate the necessary income to support that plan.  Also, exercise restraint in sharing the news of a sudden windfall.

Regardless of the source of sudden wealth, one of the first steps an individual in such circumstances should consider is to hire a financial advisor.  Ideally, the recipient of a sudden windfall should consider putting together a team of advisors to manage their financial affairs rather than a single person.  Having a team of advisors affords diverse points of view and expertise, while providing an opportunity for brainstorming and the assurance that all team members prioritize the client’s interests.  Members of the team could include an investment advisor, a tax attorney, and a certified public accountant, to name a few.

Greenberg Traurig Moves to No. 1 in Law360 Ranking

Posted in Firm News

Digital legal news service Law360 has named global law firm Greenberg Traurig, LLP as the largest law firm in the United States on its Law360 400 list, based on number of U.S. lawyers. The firm is celebrating its 50th anniversary year.

The full article announcing the ranking is found here: Turning 50, Greenberg Traurig Tops The Law360 400

In the Law360 article, Greenberg Traurig Chief Executive Officer Brian L. Duffy is quoted as saying, “…There’s nothing magic about being a larger firm, but it is important to always, every day, be a better law firm.”

Disability Planning: The Bare Essentials

Posted in Legacy Planning

Planning for disability is just as important as estate planning and can help minimize family conflict, protect family members, and ensure security and access to financial assets during incapacity. Mental or physical disability can occur at any time, often unexpectedly, and may last for years. Failure to plan accordingly can trigger protracted court proceedings to appoint a guardian (at potentially significant costs), emotional distress for the family, and the sacrifice of individual privacy. For these reasons, individuals should consider having each of the following documents:

  1. Financial Power of Attorney. A general financial power of attorney appoints an attorney-in-fact to handle the individual’s financial and personal business matters (such as filing tax returns, paying bills and expenses, managing and selling assets, etc.) during the individual’s life. The power of attorney should be durable (DPOA), which means the power will remain in effect if the individual becomes incapacitated (but it will terminate upon the individual’s death). Other considerations include:
  • Springing Powers. A DPOA can be drafted to “spring” into effect only if and when an individual becomes incapacitated.
  • Determining Incapacity. The DPOA should clearly state the procedures for determining if the individual is incapacitated (particularly important for springing DPOAs). For example, the DPOA may require the opinion of two doctors, one of whom is the individual’s regular, primary physician (if one exists).
  • Additional Powers. In addition to basic financial matters, a DPOA can authorize the agent, on the individual’s behalf, to engage in estate planning, make loans and gifts to family members and/or charities, change beneficiaries of retirement account and life insurance, etc.
  • Agent Selection. Individuals should carefully select the initial and successor agents under DPOAs. While financial institutions are generally unwilling to serve, not all family members and friends will have the requisite sophistication to manage an individual’s financial matters.

2. Health Care Power of Attorney (HCPOA). A HCPOA appoints an agent to make medical decisions on an individual’s behalf if he or she is unable to do so. The HCPOA also can address the individual’s wishes with regard to organ donation, participation in medical studies or trials, etc. As with the DPOA, the HCPOA should clearly state the guidelines for determining if an individual is incapacitated. Also, the individual should select agents that will honor the individual’s wishes and are readily accessible, as they may be called on to interact daily with medical staff and others if the individual is severely incapacitated for a period of time.

3. Living Will. A living will specifies an individual’s wishes regarding end-of-life care and the provision or withholding of life-prolonging treatment. It may be incorporated into a HCPOA. To help avoid potential conflict and court actions, an individual’s living will should clearly state his or her wishes regarding the provision of extraordinary measures to continue or extend life in the event of a terminal illness or persistent vegetative state.

4. Nomination of Guardians. Forms that nominate a guardian of the individual and guardian (or conservator) of the individual’s estate can help avoid protracted or contested court proceedings if appointment of such guardians becomes legally necessary. If state law allows, these appointments may be incorporated into DPOAs and HCPOAs.

5. HIPAA Authorization. A HIPAA Authorization allows an individual’s medical care providers to disclose otherwise private (and federally-protected) medical information to the individual’s designated agents, family members, and other selected persons.

Notice to Agents. Individuals should consider providing copies of their powers of attorney and other authorization forms to the applicable parties (financial institutions, agents, doctors, etc.), so these documents are already on file in the event of incapacity.

Periodic Reviews. An individual’s wishes or family dynamics may change and/or agents may become unavailable. Accordingly, incapacity plans should be reviewed annually and updated, if needed.

Know the Legality of Electronic Signatures

Posted in Trusts

In a time of global transactions which more often than not occur without a single physical meeting between the parties, it is important to understand when an electronic signature is legal and appropriate. The two federal statutes that address this question are the Electronic Signatures in Global and National Commerce Act 2000 (ESIGN) and the Uniform Electronic Transactions Act 1999 (UETA).

Both ESIGN and UETA establish that electronic signatures are legal, but are subject to certain exceptions including contracts or other records to the extent they are governed by: (i) a statute, regulation, or other rule of law governing the creation and execution of wills, codicils, or testamentary trusts; or (ii) a state statute, regulation, or other rule of law governing adoption, divorce, or other matters of family law. There also are several exceptions to consumer-related transactions and notices.

On a federal level, ESIGN creates a standard for legal recognition of electronic signatures in the case of transactions pertaining to interstate or foreign commerce, which states may modify, limit, or supersede, subject to certain requirements. UETA on the other hand applies only to transactions between parties when all parties have agreed to conduct transactions electronically.  To substantiate this requirement, it is often recommended that parties include a provision in the applicable document whereby they agree to transact electronically.

The UETA does not eliminate requirements of notarial law, such as a requirement that a notary physically witness the party’s signature but it does permit any document that requires a notary signature may be signed electronically. Likewise, the UETA does not supersede manual signature requirements for certain contracts and records, including requirements for the execution and creation of wills, codicils, and testamentary trusts regulated by state statute.  Forty-seven states and the District of Columbia have adopted the UETA; however, each state’s UETA statute should be carefully reviewed for exceptions which may differ between jurisdictions.

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