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In October 2010, the IRS issued Revenue Ruling 2010-25 and addressed the issue of whether mortgage indebtedness, in excess of $1,000,000, can constitute “home equity indebtedness” within the meaning of § 163(h)(3) of the Internal Revenue Code. Under §163(h)(3), acquisition and home equity indebtedness can be incurred by a taxpayer to acquire, construct, or substantially improve a qualified residence. This benefit can add an extra tax decution to Sarasota, Bradenton and Lakewood Ranch Florida residents with mortgages in excess of $1,000,000.  

In 2009, a taxpayer purchased a principal residence for $1,500,000. The taxpayer paid $300,000 and financed the balance ($1,200,000) through a loan secured by the residence.  Under §163(h)(3)(B)(ii), the taxpayer was limited to $1,000,000 being treated as acquisition indebtedness. In addition, §163(h)(3)(C)(i) provides that home equity indebtedness is any indebtedness secured by a qualified residence other than acquisition indebtedness, to the extent the fair market value of the qualified residence exceeds the amount of acquisition indebtedness on the residence. Section 163(h)(3)(C)(ii) further limits the amount of indebtedness treated as home equity indebtedness to $100,000.

In issuing the ruling, the IRS concluded that the taxpayer may deduct, as interest on acquisition indebtedness under § 163(h)(3)(B), interest paid on $1,000,000 of the $1,200,000 indebtedness used to acquire the principal residence. The taxpayer also may deduct, as interest on home equity indebtedness under § 163(h)(3)(C), interest paid on $100,000 of the remaining indebtedness of $200,000.

The ruling reflects a change from the previously followed decisions in Pau v. Commissioner, T.C. Memo. 1997-43; and Catalano v. Commissioner, T.C. Memo. 2000-82. The IRS found that the holding in Pau was based on “the incorrect assertion that taxpayers must demonstrate that debt treated as home equity indebtedness was not incurred in acquiring, constructing or substantially improving their residence.”  The IRS reasoned that “home equity indebtedness,” as defined under IRC § 163(h)(3)(C), does not contain that restriction.

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Sarasota and Manatee County Florida homeowners are always looking for a way to lower their monthly mortgage payments, even those who have already refinanced their mortgage to a lower interest rate. The concept is known as "recasting" or "re-amortizing" and allows a homeowner, for a small fee and lender approval, to lower their monthly payment without having to pay reappraisal and other fees.

Recasting involves the payment of a large sum of cash, with lender consent, against the principal of an outstanding mortgage. Normally this payment would solely decrease the principal balance due on the mortgage while maintaining the same monthly income and principal payment. In contrast, recasting allows a homeowner to have their monthly income and principal recalculated to a lower amount for the remaining term of the loan.

Recasting can be an excellent tool for homeowners who have cash and want reduced monthly mortgage payments but who can't refinance their mortgage (due to credit issues, strict lending requirements, etc.).  It may also be utilized by individuals implementing asset protection techniques by protecting cash from creditor claims (equity in ones principal residence is protected from all creditors) while decreasing their monthly mortgage obligation to correspond with exempt monthly income.   

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2011 will be the second consecutive year that Social Security recipients won't get any cost-of-living increase in their monthly checks. Recipients may get a bit of relief in the form of a $250 payment.

First, the bad news about continuing flat Social Security benefits. January 2010 marked the first time since automatic cost-of-living adjustment, or COLA, calculations began in 1975 that recipients of Social Security, Supplemental Security Income, Veterans Administration Pension and Disability Compensation and Railroad Retirement benefits did not receive a hike in their government checks.  Continued stagnation of these benefits will continue in 2011. There won't be an increase when January 2011 rolls around.

In both 2010 and 2011 the problem for benefits recipients is low inflation. When consumer prices remain low, there is no COLA. Calculated Risk provides a detailed analysis of what goes into the COLA calculation. 

This relevation will adversely impact Sarasota and Manatee County Florida residents who rely upon these benefits to pay their monthly bills and expenses.

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The new Foreign Account Tax Compliance Act (“FATCA”) is the U.S. governments newest form of attack on wealthy clients with assets in offshore tax havens. FATCA means stricter filing requirements in the next tax season.Both Sarasota and Manatee County Florida have a large number of individuals who own assets the United States.

FATCA will result in duplicate reporting for some taxpayers and steep penalties for those who fail to comply. A taxpayer with more than $10,000 in an offshore account is currently required to file a Report of Foreign Bank and Financial Accounts with the IRS. Under FATCA, an individual with at least $50,000 in a foreign account must report it separately. As a result, individuals already reporting on a foreign bank account will also have to file a separate foreign tax compliance form. Individuals holding real estate overseas in a foreign entity will have to file both a FATCA form and a Form 5471. If the asset is held in a foreign partnership, the FATCA form will be required in addition to Form 8865. In addition, the law taxes foreign banks that don't share information about U.S. account holders

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It is not uncommon for Sarasota and Manatee County financial and tax planners to focus on insuring their clients have an estate plan in place without ever inquiring whether the Florida estate planning documents accomplish their clients objectives. A recently released “IRS Private Letter Ruling” (PLR 201021038) imposes new requirements for IRA beneficiary trusts and other retirement plans. Failure to meet these requirements can preclude a beneficiary’s ability to utilize an income tax "stretch-out" of required minimum distributions. To add injury to insult, the IRS further proclaimed an unwillingness to accept a post-death court modification intended to cleanup drafting mistakes. 

Under the PLR’s facts, a surviving spouse named a bypass trust created under his wife's revocable trust as the beneficiary of her IRA. The Bypass Trust provided that upon the husband's death the remaining property would be divided between two trusts for the benefit of each of the surviving spouse's children.  The trust terms authorized the trustees to distribute income and principal for the children (and their descendants') health, maintenance, support and education. Each child also possessed a lifetime and testamentary power of appointment over her trust, which included charities as permissible appointees.

The Trust instrument further included a provision that the settlor intended the trustees to make appropriate elections to defer the payments from retirement plans payable to the trusts and use the minimum distribution rules to structure payments according to the “stretch IRA” rules. Under Section 401(a)(9)(B) of the Internal Revenue Code, when the owner of an IRA dies after reaching his or her required beginning date, the payments are calculated using the life expectancy of the deceased IRA owner. However, if the IRA has a designated beneficiary, payments from the IRA may be made over the life expectancy of the beneficiary.

To stretch-out the IRA distributions, all of the beneficiaries must be individuals (Treasury Regulations Section 1.401(a)(9)-4). If the trust requires that all IRA distributions be currently paid out to the beneficiaries (a conduit trust), then they will be considered the designated beneficiaries and the objects of the powers of appointment will not be considered a beneficiary. However, under the PLR, the trustee was empowered to receive distributions from the IRA and accumulate them in the trust. The accumulated distributions were subject to each beneficiary’s power of appointment, which were exercisable in favor of charities. Therefore, since IRA distributions to the trust could ultimately be appointed to non-individuals, the IRA didn't have designated beneficiaries for purposes of IRC Sec. 401(a)(9) and the stretch-out could not be utilized.

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The failure of Congress in allowing the federal estate tax exemption to expire in 2010 has created chaos with many client estate plans. While the unlimited estate tax exemption has been a windfall for beneficiaries of wealthy individuals who pass away in 2010, it has also resulted in many marital trusts not being funded and spouse’s being forced to rely on a trustee to maintain their standard of living. While Congress continues to debate the issue, on May 27, 2010, Florida Governor Christ signed into law legislation designed to protect surviving Florida spouse’s rights to an inheritance. 

The legislation comes at a time when many Florida resident estate plans contain provisions designed to eliminate, minimize or defer the payment of the federal estate tax. These provisions are typically crafted in terms of a formula intended to produce the optimal result under the law prevailing at the time of application of the formula. The legislation is designed to eliminate the uncertainty created by the unlimited federal estate tax law in 2010 and how to interpret the formulas. 

Federal Unified Tax Credit:

The Florida legislation creates a new Section 733.1051 and 736.04114 of the Florida Statutes. Section 733.1051 provides a Florida Probate court, upon application of a personal representative or a beneficiary of the estate, the ability to interpret the terms of a Last Will and Testament (“Will”) and the Federal Unified Tax Credit as if the decedent passed away in 2009.  In interpreting the document court may consider the terms and purposes of the Will, the facts and circumstances surrounding the creation of the Will, and the testator’s probable intent.

Section 736.04114 provides a Florida Probate court, upon application of a trustee or any qualified beneficiary of the trust, the ability to construe the terms of a Trust that is not then revocable to define the respective shares or determine beneficiaries in accordance with the intent of the settler. Similar to the provisions contained in Section 733.1051, when interpreting the document a court may consider the terms and purposes of the Trust, the facts and circumstances surrounding the creation of the Trust, and the settler’s probable intent.

Legislative Intent:

The legislation operates retroactively for decedent estate and trust proceedings beginning January 1, 2010, and ending on December 31, 2010, or the earlier of the day before the date that a law having the effect of repealing or modifying s. 901 of the federal Economic Growth and Tax Relief Reconciliation Act of 2001 becomes effective. However, neither statutory provision will apply to a disposition that is specifically conditioned upon no federal estate or generation skipping transfer tax being imposed.

As a result, a surviving Florida spouse may elect to allow either the unlimited federal estate tax exemption (Florida has no state estate tax) or the new Florida law to dictate how a decedent’s estate planning formula is applied to their deceased spouse’s documents.  Wealthy families may benefit from the unlimited amount of funds that can pass free of any federal estate tax to the next generation (either outright or in trust). Alternatively, a surviving spouse could limit the federal estate tax exemption amount to $3.5 million dollars and insure they have control over sufficient funds for the remainder of their life.  Several practitioners have classified the new law as type of “limited power of appointment” in that it provides a surviving spouse the ability to impact the amount of funds that will pass federal estate tax free to a decedent’s heirs in the present. 

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Many Florida residents structure their Florida estate plans to control how quickly their children and heirs can draw down the retirement accounts they inherit. "Every tax practitioner has seen parents leave a lot of money that took a lifetime to save, and then watched the children go through it in less than five years."

Recent IRS rulings and court rulings have raised Florida estate planning concerns. Adult children with spendthrift ways, contentious marriages or careers that leave them vulnerable to lawsuits has become the norm. Bankruptcy and civil courts, which generally shield IRAs from creditors for their original account holders, have been divided over the treatment of such accounts when they are inherited. A Florida state court ruled last year that inherited IRAs aren't sheltered from creditors in civil lawsuits outside of bankruptcy court. But recent bankruptcy cases in Minnesota, Idaho and Pennsylvania resulted in judgments preserving inherited IRA assets.

To protect heirs, Florida estate lawyers are advising parents to name an irrevocable trust as the IRA beneficiary — and to name their heirs as beneficiaries of the trust. An unfortunate downside to this type of Florida estate planning is that required annual withdrawals must be taken based upon the life expectancy of the oldest heir, instead of utilizing each heir's individual life expectancy. Alternatively, the main Florida estate planning concern for children with low-risk, stable jobs and happy marriages, is insuring they can stretch out their inherited-IRA withdrawals over their individuals life expectancy.

In reality, no one knows what the future holds for your children? To protect against the unknown, Florida estate plans should include a conduit trust for reirement account assets with a "toggle switch." The IRA distributions could then be either paid outright to the trust beneficiary or contained in a protective trust. In a private-letter ruling five years ago, the IRS said that a trust with that option met its standards.

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This month, Roy Rogers Jr. parted with Trigger, the horse made famous by his singing cowboy father. The palomino, mounted and preserved, sold for $266,500 at Christie's in New York. Over the next four decades it is estimated that $41 trillion in wealth will transfer between generations. A significant portion of the wealth in Sarasota and Manatee county Florida will be in the form of art, jewelry and other heirlooms that have filled attics, safe-deposit boxes and hallways for decades—and for which economic values can be as difficult to ascertain as sentimental ones.

This year, with the estate tax temporarily suspended, wealthy Sarasota and Manatee county families will benefit as estates pass to the next generation tax-free.  However, the loss of the step-up in basis, under which heirs inherit assets valued as of the date of death, will be taxing on future generations.  Family members inheriting assets will owe capital-gains taxes measured from the original owner's purchase price.

If your Florida estate plan includes leaving your heirs valuables, the tax code requires that objects worth more than $3,000 must have their value confirmed by an appraiser. To prepare, valuables should be appraised at least once every five years.  The valuables also need to be insured and listed on a rider to an existing homeowner's insurance policy.

If the estate tax returns in 2011 or should Congress reinstate it retroactively in 2010, Sarasota and Manatee county residents may consider donating collectibles to a museum or other charity. This would allow them to deduct a portion of their value from his or her estate.

Heirs shouldn't neglect to insure the valuables after they have changed hands. You can add a rider to get extra coverage, or buy specialized coverage from a company focused on insuring collectibles.

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The 2011 increase in Federal income taxes will be so dramatic that it has been prevented from being discussed during the 2011 federal budget process.  Expiration of the 2001 and 2003 Bush tax cuts will make Federal income taxes the single largest expense to every Florida resident. Margaret Thatcher said it best when she said, "Socialism always fails because eventually it runs out of other people's money."

Currently all federal income tax brackets will be hit in 2011:

  • The 10 percent bracket will rise to 15 percent
  • The 25 percent bracket will rise to 28 percent
  • The 28 percent bracket will rise to 31 percent
  • The 33 percent bracket will rise to 36 percent
  • The 35 percent bracket will rise to 39.6 percent

Itemized deductions and personal exemptions will be phased out, which is the same thing as raising taxes even higher than just the effect of the above bracket increases.

The estate tax exemption will revert back to $1 million, and the top bracket for the death tax will be 55 percent.

Capital gains tax rates will rise from 15 percent to 20 percent.

The dividend tax when stock is held for less than one year goes from 15 percent to 39.6 percent. This will then rise another 3.8 percent, to 43.4 percent in 2013.

The new tax legislation will add over 20 new taxes, the first to go into effect on January 1.

  • Health savings accounts will no longer be available, nor will flexible spending accounts or health reimbursement accounts.
  • Businesses will no longer be able to expense their purchases of equipment to reduce their income by the same amount to save on taxes. They will be forced to depreciate equipment purchases, thus another tax increase.
  • The Alternative Minimum Tax will ensnare a projected 28 million families, up from four million last year.
  • Charitable giving from an IRA will no longer be allowed.

Current Economic Policy: In a good economy, federal income taxes bring in $2.5 trillion per year. Currently our government is spending $3.5 trillion plus annually. As of May 2009, 46 cents of every dollar spent by our government is being borrowed. The President of the Federal Reserve Bank of Kansas City, Tom Hoenig, has stated that just to meet the future promises of Medicare, Medicaid and Social Security, the United States would have to have a marginal tax rate of 80 percent.

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Nevada passed a law this year applying the charging lien remedy to stock in a multi-shareholder Nevada corporation. Charging liens are the creditor’s remedy to attack a Florida debtor’s interests in limited partnerships and LLCs in most states. Prior to the Nevada law, no state had said that judgment creditors are restricted to a charging lien, instead of levy and sale,of a debtor’s stock in a corporation.

Does the Nevada statute provide an asset protection tool for Sarasota and Lakewood Ranch Florida debtors? There are no cases on this brand new statute, but the likely answer is that a Florida creditor may levy upon a Sarasota or Lakewood Ranch Florida debtor’s stock in a Nevada corporation notwithstanding the Nevada statute stating that creditors a limited to charging liens. A levy is an action against the debtor’s stock certificate and not against the corporation. A creditor does not have to make the corporation a party in a levy proceeding, and therefore, the forum of the corporation is not controlling on the Florida remedy. A Florida judge will be able to permit creditors to levy upon Nevada corporate stock.

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