Suttons Bay Law

Important events require careful planning. For example, what happens to your assets, who will care for your children, will your business survive or will your children be able to protect a legacy asset such as a cottage or vacation property in the event of your incapacity or death all involve critical decisions. Planning “in time” does not necessarily mean that the planning is “on time.” Any ambulance driver will tell you that lying on a stretcher on your way to the hospital is not the time to begin working on your estate plan or business succession plan. On a number of occasions, the importance of timely planning has been dramatically presented to me. In each situation, clients with entirely different types of estates and needs had one thing in common, they waited to plan until it was almost too late. Sometimes the risk of delayed planning “on time” becomes “in time”.

Each of these examples involve critical decisions and require careful planning.

One such client was a mother of two minor children, a business owner and estranged from her husband who suffered from a substance abuse problem. In this article, I will give her the assumed name of Sarah. Sarah cared for her children on a full-time basis, was the sole means of financial support and was self-employed in her own business. Tragically, Sarah was diagnosed with cancer two years ago. She was losing a valiant battle with her illness and had been hospitalized on several occasions prior to the day we met at my office. A mutual friend suggested Sarah contact me to develop and establish an estate plan and business succession plan to protect Sarah, her children and to preserve her business that employed several people.

I first met Sarah on a Thursday morning. She came to my office in a wheelchair accompanied by her sister. This same sister was also caring for Sarah and her children during Sarah’s illness.

After listening to Sarah’s explanation of her situation, I recommended to Sarah that she establish an estate plan to protect Sarah’s assets, provide for the appointment of her sister as Sarah’s children’s legal guardian and adopt a succession plan for her business to give a key employee the chance to purchase the business in the event of Sarah’s death. This planning would insure that Sarah’s assets would not be subject to a claim by her estranged, addicted husband, and that the assets be managed and support her children so that their lives, as much as possible in her absence, would remain stable and financially supported into the future. The business succession plan, notably, provided additional proceeds to be paid over time to support Sarah’s children, but also protected the jobs of her employees who relied on Sarah’s business to support their families.

I copied and collected all the information I needed from Sarah to draft her estate and business plan documents. I advised Sarah that although the process of completing these plans typically can take weeks or even months, given her declining health, I would draft her documents right away. I sked if she could return the following day to review and sign her plans. Sarah responded that she might not live to sign the planning documents the next day. Based on my observations of Sarah during the initial part of our meeting, I had no reason to doubt that possibility.

Together with my staff, I proceeded to prepare her estate and business succession plans for her signature that day. We also coordinated with her financial advisor the transfer of assets into a Trust created by Sarah for her children’s benefit. It was quite an emotional day. My staff and I raced against each precious moment that passed to consolidate Sarah’s planning process into one day. Sadly, Sarah died the next day. Fortunately, Sarah’s plan continues to govern and support her children and business as well.

During the span of my career, I’ve drafted estate and business plans solving various issues for clients to avoid significant problems. I have reviewed and obtained signatures in critical care units of hospitals, nursing home rooms and literally, in one case, we obtained a client’s signature on his estate planning documents while walking beside his hospital gurney as he was being wheeled to the operating room for emergency heart surgery. While I have many success stories for people who planned “in time”, there are extraordinary risks involved in not planning “on time”.

Dan A. Penning
231.271.4500

Tags: Asset Protection, Business Succession, Estate Planning, Know it Now by Dan Penning
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As we approach the holidays, we want to express thanks to all of you that have supported our practice this past year. In this spirit we say, simply but sincerely,

Thank you and may you, your family, and loved ones have a
Merry Christmas and Best Wishes for the New Year.

The attorneys and staff of Wright Penning & Beamer, P.C.

Tags: Know it Now by Dan Penning
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As we quickly approach the end of the year, you may want to consider the following information that could impact the amount of income tax you pay for the year 2009.

Home Energy Tax Credits

The American Recovery and Reinvestment Act (Recovery Act) enacted earlier this year expanded to home energy tax credits which are the Non-Business Energy Property Credit and the Residential Energy Efficient Property Credit.

The Non-Business Energy Property Credit. The Non-Business Energy Property Credit equals 30% of what a homeowner spends on eligible energy saving improvements, up to a maximum tax credit of $1,500.00 for the combined 2009 and 2010 tax years. Certain high efficiency heating and air conditioning systems, water heaters and stoves that burn biofuel along with labor costs for installation of these items all qualify as energy saving improvements and qualify for the credit. In addition, the cost of energy efficient windows and skylights, energy efficient doors, qualifying insulation in certain roofs also qualify for the credit.

By spending as much as $5,000.00 before the end of the year on eligible energy saving improvements, a homeowner can save as much as $1,500.00 on his/her 2009 Federal Income Tax Return. Due to the limits placed on tax liability, other credits claimed by a particular taxpayer and other factors, actual tax savings may vary. These tax savings are on the top of any energy savings that may result.

The Residential Energy Efficient Property Credit. Homeowners who are interested in “going green” should also check out a second tax credit designed to spur investment in alternative energy equipment. The Residential Energy Efficient Property Credit equals 30% of what a homeowner spends on qualifying property such as solar electric systems, solar hot water heaters, geothermal heat pumps, wind turbines and fuel cell property. In addition, all labor costs are generally included when calculating this credit. Finally, no cap exists on the amount of credit available except in the case of fuel cell property.

Eligible homeowners can claim both of these credits when they file their 2009 Federal Income Tax Return. Because these are credits, not deductions, they increase a taxpayer’s refund or reduce the tax he or she owes. An eligible taxpayer can claim these credits regardless of whether he or she itemizes deductions on Schedule A. Use Form 5695, Residential Energy Efficient Property Credit to figure and claim these credits. A draft version is available now on irs.gov.

First Time Homebuyer Credit

If you are in the market for a new home, you may still be able to claim the First Time Homebuyer Credit. Congress recently passed the worker, home ownership and business assistance act of 2009 extending the First Time Homebuyer Credit and expanding who qualifies.

Here are the top ten things the IRS wants you to know about the expanded credit and the qualifications you must meet in order to qualify for it:

1. You must buy, or enter into a binding contract to buy a principal residence, on or before April 30, 2010.

2. If you enter into a binding contract by April 30, 2010 you must close on the home on or before June 30, 2010.

3. For qualifying purchases in 2010, you will have the option of claiming the credit on either your 2009 or 2010 return.

4. A long time resident of the same home can now qualify for a reduced credit. You can qualify for the credit if you lived in the same principal residence for any 5 consecutive year period during the 8 year period that ended on the date the new home is purchased and the settlement date is after November 6, 2009.

5. The maximum credit for a long time resident is $6,500.00. However, married individuals filing separately are limited to $3,250.00.

6. People with higher incomes can now qualify for the credit. The new law raises the income limits for homes purchased after November 6, 2009. The full credit is available for taxpayers with modified adjusted gross incomes up to $125,000.00, or $225,000.00 for joint filers.

7. The IRS will issue a December, 2009 revision of Form 5405 to claim this credit. This December, 2009 form must be used for homes purchased after November 6, 2009, whether the credit is claimed for 2009 or 2010, and for all home purchases that are claimed on 2009 returns.

8. No credit is available if the purchase price of the home exceeds $800,000.00.

9. The purchaser must be at least 18 years old on the date of purchase. For a married couple, only one spouse must meet this age requirement.

10. A dependent is not eligible to claim the credit. For more information about the Expanded First Time Homebuyer Credit, visit irs.gov/recovery.

Estate Planning Review

Generally speaking, your estate plan should be reviewed at least every 2 years to determine whether it needs to be changed or updated.

Additionally, if any of the following events occur, you will probably need to update your estate plan (i.e., your Living Trust, Will, health care documents, powers of attorney, life insurance coverage and post mortem letters).

* Divorce
* Marriage or remarriage
* Birth/adoption of a child
* Death of a spouse or child
* Sale of residence or purchase of new residence
* Retirement
* Enactment of new tax laws*

*The current law regarding estate tax is due to expire at the end of December 31, 2010. There are several legislative actions being taken to address the estate tax law. Stay tuned for further updates.

Here are some of the steps you may need to take:

1. Change the Successor Trustee of your Living Trust or Personal Representative of your Will.

2. Revise your plan to account for an increase in assets.

3. Reassess your life insurance needs.

4. Add or change a power of attorney.

5. Change legal documents to comply with state laws if you move to a different state.

6. Change Trust and Will instruments to account for changes in beneficiaries.

Pre-Retirement Checklist

In the event that you are considering retirement in the near future, there are various matters that you should consider. Here are some of the items that you should be aware of:

1. Health Insurance. Will you continue to be covered by your health insurance after retirement? If not, you will need to replace that coverage.

If you’ll be eligible for Medicare, you will want to start checking up on “Medigap” coverage. Before you retire, take care of any non-emergency medical, dental or optical needs if your employee plan coverage is broader then Medicare.

2. Other Insurance. Once you retire, you may need to replace employer provided life insurance by added life insurance. You should also consider purchasing long term health care insurance to cover the risk that you will need a lengthy nursing home stay in the future.

3. Social Security. Decide whether you want to take social security benefits if you are retiring before your full retirement age. You can get 80% of your benefits at age 62. For most people, taking social security benefits at their full retirement age makes the most financial sense. Be sure to discuss this with a financial adviser if you think you might need to take early benefits.

4. Company Plan Pay Out. It is important to plan well in advance how you will take the pay out from your pension plan or 401K plan. In most cases, it is advisable to transfer funds to an IRA in that you can transfer the funds “in kind” which maintains the character of the investments but yet allows you to name beneficiaries who could ultimately take advantage of the “stretch out rules” for income tax purposes. You should speak with your legal or financial adviser regarding these strategies.

5. Relocation. If you are planning on moving to another state, check out the various states to see what financial ramifications of living there will be. If you are relocating it may be a good idea to buy a new home before retirement.

Dan A. Penning

Tags: Asset Protection, Business Succession, Cottage Law, Estate Planning, Know it Now by Dan Penning
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On December 3, 2009, the House of Representatives passed a bill introduced by Rep. Earl Pomeroy (D-ND) that addresses the federal estate tax: H.R. 4154 - “A bill to amend the Internal Revenue Code of 1986 to repeal the new carryover basis rules in order to prevent tax increases and the imposition of compliance burdens on many more estates than would benefit from repeal, to retain the estate tax with a $3,500,000 exemption, and for other purposes.” This straightforward bill, which has no cosponsors, provides for the following:

- Repeal of the 2010 repeal of the federal estate tax as provided in the Economic Growth and Tax Relief Reconciliation Act (”EGTRRA”).

- Maintaining the $3,500,000 federal estate tax exemption in 2010 and beyond.

- Freezing the maximum gift tax rate and estate tax rate at 45%.

Legislation enacted in 2001 gradually phases out the estate tax and ultimately repeals the tax in 2010. However, without congressional action to make the repeal permanent, the tax will revert in 2011 to the pre-2001 rates.

There are currently 16 bills that address estate tax reform in various ways circulating in the House of Representatives and three circulating in the Senate.

Under current law, a $5 million estate in 2009 would pay $675,000 in federal estate taxes, according to an analysis by Deloitte Tax. In 2010, no estate tax would be due, but the estate would be subject to a 15 percent capital gains tax. In 2011, the $5 million estate would pay $2,045,000 in estate taxes, according to the analysis. Under this House bill, $675,000 in estate taxes would be due, regardless of which year the estate is inherited.

With the current estate tax law expiring after 2010, H.R. 4154 provides certainty to help business owners plan for the estate tax and it maintains stepped-up basis. However, a $3.5 million exemption per person and a 45 percent rate do not provide adequate protection for many small businesses and farmers. In addition, the $3.5 million exemption is not indexed for inflation; protection from the estate tax will erode each year.

Often, it is not a pile of liquid assets (cash) that is taxed, but the land of a family farm, personal effects, or the capital and assets of a family-owned small business. Without the cash on hand to pay these taxes, heirs are forced to sell off businesses and small farms that have been in the family sometimes for generations.

Estate taxes fall disproportionately on small business owners and farmers because many of the assets are illiquid. For example, approximately 80 percent of farm assets are land based. Surviving family members may be forced to sell land, buildings, equipment, livestock, etc., to keep their businesses operating. In many cases, however, the assets that must be sold to pay the estate tax are the most important inputs needed to maintain the business.

Employing the proper estate planning techniques can minimize and sometimes eliminate the federal estate tax burden on your estate. The attorneys at Wright, Penning & Beamer have assisted numerous families and businesses in regards to protecting the assets they have worked hard to earn during their life, minimizing the impact of adverse tax consequences. The result is maintaining the value of these assets that our clients work hard to acquire.

Dan A. Penning

P.S. Check out the IRS’ 2010 Auto Mileage Deduction Rates Below:

The Internal Revenue Service has issued the 2010 optional standard mileage rates that are used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning Jan. 1, 2010, the standard mileage rates are:

50 cents per mile for business purposes
16.5 cents per mile for medical or moving purposes
14 cents per mile in service of charitable organizations

The 2010 rates for business, medical and moving purposes are lower than last year’s, reflecting generally lower transportation costs compared to a year ago.

Tags: Asset Protection, Business Succession, Estate Planning, Know it Now by Dan Penning
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