SSA Updates Social Security Taxable Wage Base for 2018

By Joshua A. Diveley

In October, the Social Security Administration (SSA) announced an adjustment to the Social Security taxable wage base to take effect in January based on an increase in average wages. Based on the wage data Social Security had as of October 13, 2017, the Social Security taxable wage base was set to increase to $128,700 in 2018, from $127,200 in 2017. Based on newly released data obtained by SSA, the new Social Security taxable wage base for 2018 is $128,400.

This lower taxable amount is due to corrected W2s provided to Social Security in late October 2017 by a national payroll service provider. Approximately 500,000 corrections for W2s from 2016 were received by SSA and resulted in the downward adjustment for 2018.

For more information about the updated 2018 taxable maximum amount, please visit www.socialsecurity.gov/oact/COLA/cbb.html

 

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Court Ruling Sheds Light on Estate’s Ability to Access Digital Information

By Monte L. Schatz

The Supreme Judicial Court of Massachusetts issued a ruling on October 16, 2017 that empowers administrators of estates to access digital content of deceased persons.

Federal statutes 18 U.S.C. §§ 2701 through 2712 titled The Stored Communications Act created privacy rights to protect the contents of certain electronic communications and files from disclosure by certain online service providers. If the Act applies, the online user account service provider is prohibited from disclosing the contents/files to the estate or trust representatives and family members unless there is an exception under the Act. The result of this legislation was that many digital communications and accounts of a deceased person were inaccessible

The Stored Communications Act provides for certain exceptions in § 2703 (b). One of the exception states that, “[A] provider may divulge the contents of a communication… with the lawful consent of the originator or an addressee or intended recipient of such communication.” The language of this exception did not clarify if the recipient could include a fiduciary of a trust or estate.

In Ajemian v. Yahoo, 478 Mass. 169 (2017) the administrator and siblings of a deceased brother’s estate sought to gain access to information from the son’s Yahoo email account. In that capacity, they sought access to the contents of the e-mail account. While providing certain descriptive information, Yahoo declined to provide access to the account, claiming that it was prohibited from doing so by certain requirements of the Stored Communications Act (SCA), 18 U.S.C. §§ 2701 et seq. The Supreme Judicial Court of Massachusetts stated in its decision that, “Nothing in this definition would suggest that lawful consent precludes consent by a personal representative on a decedent’s behalf. Indeed, personal representatives provide consent lawfully on a decedent’s behalf in a variety of circumstances under both Federal and common law.” The court relied on Massachusetts’ provisions in the Revised Uniform Fiduciary Access to Digital Act that has been adopted in 36 states including Nebraska and Iowa. This legislation provides a clear state law procedure for fiduciaries to follow to request access to or disclosure of online account contents and other digital assets.

Though the Massachusetts state court ruling isn’t binding on other states, this case will provide valuable precedent and guidance in interpreting and applying a standard that allows estate administrators to gain access to digital information of a deceased that previously was prohibited under strict interpretation of federal law by certain digital service providers.

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Internal Revenue Service and the Department of Treasury Withdraw Estate Valuation Regulations

by Monte L. Schatz

Historically, valuation discounts have been used as an estate planning tool to minimize estate, gift and generation-skipping taxation.  The ability to minimize taxation of ownership interests in closely held corporations, limited liability companies and partnerships has been critical in helping to assure the preservation and continuity of those businesses by legally avoiding tax obligations that would adversely affect the liquidity and cash flow of operating businesses.  The use of valuation discounts has been in a state of uncertainty for the past several months. Proposed regulations published by the Internal Revenue Service would have restricted valuation of discounts previously recognized under Internal Revenue Code § 2704.

The 2704 valuation discount provisions allow for statutorily recognized reductions in value resulting from the restrictions, illiquidity and reduced marketability of closely held business interests.  The 2704 discounts were particularly helpful for entities that were family owned businesses.  The proposed regulations published on August 4, 2016 would have provided for disregarding restrictions placed upon shareholders, partners or members for sale of their interest.  The practical result of disregarding those business entity restrictions would be elimination of any discount from the fair market value for those interests.  The entity would be taxed at fair market value thereby potentially increasing estate, gift or generation-skipping taxes for holders of those interests.

On April 21st, 2017 the President issued Executive Order 13789 instructing the Secretary of Treasury to review all significant tax regulations that:

i. impose an undue financial burden on U.S. taxpayers;

ii. add undue complexity to the Federal tax laws; or

iii. exceed the statutory authority of the IRS.

The Secretary of Treasury submitted a final report to the President on September 18, 2017 recommending a complete withdrawal of the proposed regulations that would have eliminated certain valuation discounts for closely held businesses.  The report has been filed as of October 17th and is set for Publication on October 20, 2017.

§ 2704 Valuation discounts have been preserved for taxpayers who own closely held businesses.   The continued recognition and reaffirmation by the Treasury Department and Internal Revenue Service of valuation discounts preserves a critical estate planning tool for legal professionals to assist minimizing taxation of their client’s estates and helping to preserve the continuity and preservation of taxpayer’s ownership interests.

SOURCES:  https://www.gpo.gov/fdsys/pkg/FR-2016-08-04/pdf/2016-18370.pdf
https://s3.amazonaws.com/public-inspection.federalregister.gov/2017-22776.pdf

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PLANNING FOR MENTAL DECLINE

by Monte L. Schatz

When the topic of estate planning comes to mind, most individuals think about the distribution of their assets at death.   The increased longevity of our population requires equal attention to diminished cognitive skills caused by dementia or other diseases that affect normal cognitive functioning.

Dementia is a syndrome in which there is deterioration in memory, thinking, behavior and the ability to perform everyday activities.  An estimated 5.5 million Americans of all ages have Alzheimer’s disease.  One in 10 people age 65 and older has Alzheimer’s dementia.  The average survival time for people diagnosed with dementia is about four and a half years, new research shows. Those diagnosed before age 70 typically live for a decade or longer.  The time frame from mild cognitive decline to the onset of dementia averages seven years.   Typically, when an individual is in the moderately severe cognitive decline, assistance may be required for daily activities and management of the person’s financial affairs.

The difficulties that families encounter is determining when the person no longer can manage their own affairs or maintain his or her own physical well-being.  The ultimate question of capacity is a legal determination and in some cases a judicial determination, not a clinical finding. A clinical assessment stands as strong evidence to which the lawyer must apply judgment considering all the factors in the case at hand.  While psychologists and other health professionals may use different terms than lawyers, conceptually the clinical model of capacity has striking similarities to the legal model.

The best estate planning approach is to take proactive legal steps ahead of mental decline to assure adequate personal and financial care and to minimize unnecessary legal costs or litigation expenses.  The legal tools available to circumvent legal capacity issues include:

  • A will drafted in advance of cognitive decline to minimize heirs contesting an estate.
  • A living trust should be considered to assure proper management of assets and continuity of financial management by a trustee for the incapacitated person’s benefit.
  • A durable power of attorney for financial matters designating a trusted and financially responsible individual to manage assets upon the onset of mental incapacity.
  • A health care power of attorney or directive that provides for a designated person to make health decisions in the event of incapacity.
  • A living will that outlines, in advance, the wishes of a person who receives artificial life sustaining treatment.

Thoughtful estate planning in advance of mental decline can help avoid expensive court alternatives that can include court conservatorships or guardianships during life and/or estate litigation after the person’s death.  More importantly, well designed advanced planning minimizes the possibility of disputes among heirs that may disrupt family relationships.

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Maximizing Social Security Benefits

By Monte Schatz

Changes in legislation always require an adjustment period and time for understanding.  The Social Security Administration approved legislation in October 2016, effective January 2, 2017.  Their changes affected six major areas: payments, tax cap, earnings limit, maximum benefit, double claims, and suspended payments.

  1. Payments. The payments change is a 0.3% increase which although modest amounts to an average of $5 per retired claimant per month. This change also affects the maximum possible benefit for retirees, increasing by $48 per month.
  2. Tax Cap. The tax cap increase changes the amount of income, upon which the 6.2% earnings tax applies, from $118,500 to $127,200. This increase results in an average additional $45 of tax withholding monthly if you earn more than $127,200 annually. There are no changes to the withholding amounts if you make less than the previous limit.
  3. Earnings Limit. The earnings limit is affected by two major changes.
    • The first is an increase in the allowed amount for those receiving benefits but not yet at full retirement age (65 and younger) from $15,720 to $16,920. The $1200 annual increase allows a worker to earn this additional amount annually, before being subject to decreased monthly social payments.
    • The second earnings limit change reduces the payment withholding to $1 for every $3 earned in excess of $16,920.  Previously, payment withholding was assessed on $1 for every $2 limit of earnings in excess of the full retirement age limit
  4. Maximum Earnings. The earnings the reduction of payment withholding will be  particularly beneficial for those who elect to defer receiving benefits at full retirement age (66 years of age and older). Benefits for those who elect to wait until full retirement age increases by $3000 annually to a limit of $44,880.
  5. Double Claim. The double claim adjustment seeks to close a previous loophole which allowed individuals to claim spousal payments at an early age and then claim individual payments after reaching full eligibility age. This change removes the ability to elect a different payment option for married retirees and automatically entitles the recipient to the higher of the two at the time they elect to receive.
  6. Suspension Procedure. Finally, the changes to the suspension procedure prevents an individual from filing for retirement and then suspending receipt of benefits. This previously allowed a recipient to suspend their benefits until they reached the full benefit age while still collecting allowing their spouse or dependent to benefit at the reduced level. Other than an exception for divorced spouses, if the entitled recipient elects to suspend benefits, all related family entitlement will be suspended for the same period.

With these changes, it is important to understand the impact on individual retirement planning. The most significant long term change is the increase in earnings limit, expected to impact twelve million wage earners.  If your income exceeds the previous limit you are now subject to a tax on more of your earnings, although this tax is nominal it does affect retirement planning.  With a decrease in available net earnings, if earning more than $118,500 a careful review of planned retirement investment amounts is necessary for your own personal portfolio.

The other significant change is the combination of suspension payments and double claim rules.  A best practice to maximize social security benefits for retirement is to wait to claim until full benefit age is reached and not just retirement age.  This practice continues to be the more prudent decision if health and ability restrictions do not limit your capacity for earning.  The new wait and suspend changes, your monthly total benefits will be higher but you will not be able to double dip meaning you cannot have one wage earner and one benefit recipient in the same household.  A careful review of financial status and evaluation of ability to wait and receive both payments at the higher amount instead of both at a reduced amount is a beneficial practice for retirement future.

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Selection of Asset Protection Trust Jurisdiction

By Monte L. Schatz

A lawsuit for wrongful death and negligence was filed February of 2017 in the Los Angeles Superior Court by parents of their 21 year old son who drowned July of 2015 in the pool of celebrity Demi Moore’s Beverly Hills residence. The suit is being filed against two individuals (Demi Moore’s employees who managed the house) as well as the Tree House Trust. Moore’s property was strategically titled in this trust for asset protection purposes. Moore is not likely to be named individually in the lawsuit because of her residence being held in an asset protection trust.

Most clients should consider effective asset protection strategies. Asset protection requires many legal and tax considerations unique for each client’s situation.

Historically, many trusts placed heavy reliance upon trust spendthrift clauses. These clauses often protected the trust from creditors from satisfying judgments against property held within the trust. However, once a distribution is made from the trust to a beneficiary, the creditor can attach those distributed trust assets to satisfy their judgments. Also, many states exempt certain classes of creditors as a matter of public policy from spendthrift provision. Examples include creditors who have provided essential services, or individuals who have judgments for unpaid alimony or child support liens.

Irrevocable asset protection trusts can provide additional protection from creditor claims. Asset protection trusts can be “domestic” or “offshore”. Before 1997, most asset protection trusts were set up in “offshore jurisdictions” outside the United States and generally were used by only the extremely wealthy. In 1997, Alaska adopted the first state laws for “domestic asset protection” statutes. Many states have since adopted similar laws and other states are considering adopting asset protection laws. The primary differences between the two types of asset protection trusts is that domestic asset protection trusts are not as likely to raise concerns with the IRS as offshore asset protection funds. Creditors may have a more ability to attack a domestic asset protection trust as they are within United States jurisdiction, the fact remains assets are kept offshore in a secure account is something that will raise IRS scrutiny due to prior historical IRS tax evasion scams utilizing offshore trusts.

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Proposed Basis Consistency Regulations

The Internal Revenue Service released proposed and temporary regulations to further consistency in the reporting of the tax basis of certain property received by a beneficiary of an estate or trust. These regulations provide guidance regarding the basis consistency requirements under IRC 1014(f) and reporting requirements under IRC 6035.

For estates with tax due after July 31, 2015, the executor or trustee is required to file Form 8971 indicating information about the beneficiaries, the property to be acquired by the beneficiaries, and the estate tax value of the property. The initial basis of the beneficiary may not exceed the basis reported to the IRS on such form. The executor is also required to furnish a statement (Schedule A of Form 8971) to each beneficiary who will acquire property from the estate including the value of the property. Estates filing tax returns to elect portability for a surviving spouse are not required to file the basis consistency reports. The regulations also establish penalties for inaccurate basis reporting and failures to furnish correct statements.

 Generally, Form 8971 must be filed with the IRS no later than 30 days after the estate tax return is due or filed and is required to be filed separately from the estate tax return. Effective March 23, 2016, the IRS announced that additional time will be granted to estates currently required to file Form 8971 and delayed the time to file and furnish the statement to beneficiaries until June 30, 2016.

© 2016 Vandenack Williams LLC
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New Nebraska Law for Accessing Digital Assets of Deceased

On April 13, Nebraska passed legislation for handling digital assets for those that die or become unable to manage their own assets. LB 829 authorizes four types of individuals to manage the digital assets, similar to how they would manage tangible property, for the deceased or incapacitated. This law follows the Revised Uniform Fiduciary Access to Digital Assets Act, as finalized by the Uniform Law Commission in 2015.

Prior to this law, managing the digital accounts of the deceased was difficult and time consuming, especially in situations where the fiduciary does not have the passwords for the deceased. This new law works in conjunction with Nebraska probate, guardianship, trust, and powers of attorney laws. For executors or administrators of deceased individual estates, court-appointed guardians or conservators, agents appointed by a power of attorney, or a trustee, they will now have a legal basis for accessing digital assets.

When a fiduciary is in a situation needing to access the deceased digital assets, the law creates a tiered system for access. Generally, if the digital asset has an online portal maintained by a third party that allows the user to grant access to another, those rules take priority. However, failure to use such an option or if no tool exists, the new statutory power granted to the fiduciary will apply.

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Preventing Financial Abuse of Elders

Elder abuse can take many forms, but according to a True Link report, 36.9% of elder abuse takes the form of financial abuse in any five year period. This same True Link report estimates that financial abuse of elders costs $36.48 billion, annually. One particularly challenging area of financial elder abuse stems from high-pressure selling tactics for estate planning tools, such as living trusts, that are unnecessary for the senior.

Although living trusts have many benefits, the seniors targeted by the high pressure sales tactics tend to have few transferrable assets, which makes the benefits of having a living trust relatively small. What’s worse, when a sales tactic is successful and the senior signs up for a living trust, usually that relationship leads to an estimated $2,000 of needless financial products sold to that senior for every $20 lost to the initial exploitation. Overall, this type of financial elder abuse costs seniors an estimated $17 billion dollars, with trust abuse at $6.7 billion, annually.

For elders, prior to agreeing to a living trust or other financial vehicle, speaking to another financial professional will aid in combating these abusive sales tactics. Moreover, if you purchase a living trust agreement in a location other than the seller’s place of business, you have three days to cancel the deal. Finally, take the time to verify any facts presented in a high pressure sales effort.

© 2016 Vandenack Williams LLC
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Using Intra-Family Loans to Transfer Wealth

Intra-family Loans can be a great opportunity for families to give their children or relatives additional funds, or if a relative is looking to make a significant purchase, a relative can borrow from a member of the family at a much better rate than going to a financial institution. Most individuals are familiar with the idea of making gifts to their children or relatives of an amount below the annual gift exclusion of $14,000, but those seeking to make transfers to their family that exceed the annual exclusion should be considering intra-family loans because of current low interest rates.

If making such a loan, the loan should be properly documented and interest must be charged and paid. If these requirements are not met, the Internal Revenue Service (“IRS”) may recharacterize the loan as a gift. If treated as a gift, the loan will reduce the lender’s gift and estate tax exemption or may cause the gift to be taxed at the current gift tax rate of 40%. It is recommended that the loan be documented with a promissory note and a fixed payment schedule. An interest rate equal to or above the Applicable Federal Rate (AFR) must be charge on the loan. The AFR will depend on the length of the loan. For loans with an annual compounding interest, the January interest rates are as follows: short-term (< 3 years): .56%; mid-term (3-9 years): 1.68%; and long-term (> 9 years): 2.61%. The recommended length and structure for repayment of the loan will likely depend on the AFR at the time of the loan, the financial needs of the lender, and the funds available to the borrower.

As an example of the effectiveness of such a loan, Parent makes a loan to Child for $500,000 and Child invest such funds with an annual return of 5%. If the loan is for a term of 9 years with a balloon payment at the end of such time, the applicable January mid-term rate would be 1.68%. At the end of the 9 year period, Child would have $775,664. The payment due on the loan would be $580,885. Child nets $194,779. Parent would be required to report the amount of interest, $80,885, as interest income.

While current rates remain low, it is likely that the rates will increase over the course of 2016. If you want additional information or would like to take advantage of the current interest rates, contact the attorneys at Vandenack Williams LLC.

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