Steven L White

When is the last time you reviewed your will? 
Do you remember your attorney discussing a concept known as the unified credit? 
Did your attorney discuss an amount that was exempt from estate taxes?  Not that long ago, this exemption amount was $1,000,000. 

As a result of various laws within the past 10 years or so, the exemption amount has steadily increased to $3,500,000 today. Many estate planners believe that this exemption amount may be made permanent. And, with a recession, even individuals who formerly were concerned about estate taxes, may no longer be because of a significantly reduced net worth. The problem, however, is that many people believe that if they don’t have a federal estate tax problem, they don’t need to review their wills or estate plan. Unfortunately, that inaction may result in a surviving spouse being disinherited.

Many estate plans for married couples are set up so that when the first spouse dies a certain amount of money and property is allocated to a family trust equal to the exemption amount.  The balance of the estate is usually left outright to the surviving spouse or to a marital trust for his or her benefit.  The purpose of this common estate plan design is for a married couple to shelter as much assets as possible from estate taxes. This was a great estate plan, and hence its popularity, when the exemption amount was $1,000,000 and the economy was growing. 

Now, in a recession, and with an exemption amount of $3,500,000, that estate plan could be disastrous. Let’s take a simple example.  Bill and Mary are married.  Bill has an estate of $3,500,000.  He dies in 2009.  His will was drafted prior to 2002 and directs his executor to fund a
family trust with property equal to the exemption equivalent.  When Bill drafted the will, the exemption amount was $1 million, so he believed his surviving spouse would receive a bequest of $2,500,000.  Upon Bill’s death, assuming that his estate is still worth $3,500,000,
the family trust will receive the entire estate because the exemption amount is now $3,500,000.

Bill probably did not intend to disinherit his surviving spouse.  Mary now only has the assets in her name, and probably an income interest from the assets held in Bill’s family trust.  It is probably safe to say that Mary is not at all happy with this result. To complicate matters, a surviving spouse may have the option of contesting a will or trust if he or she is not provided a certain amount of money. 
States that are considered “separate property” states (as opposed to “community property” states) usually have “right of election” laws that prevent  an individual from disinheriting a spouse – intentionally or unintentionally.   Even with this right of election, however, the result for the surviving spouse may not be what was intended.

Individuals like Bill should review their estate planning documents with their attorneys and financial professionals to determine the impact of the increasing exemption on their estate.  Indeed, estate planning is an evolving process.  In fact, all individuals should have their estate planning documents reviewed periodically and certainly whenever there are tax law changes or major life or economic events.  In this way, your attorney can have the documents updated  to reflect the changes in the tax laws, financial environment, or changes in intent.

Steven L White
Wealth Strategies Group

In recognition of the financial crisis and the significant loss in value of many individual retirement accounts (“IRAs”) and qualified retirement plans, President Bush signed The Worker, Retiree, and Employer Recovery Act of 2008 (“the Act”) into law on December 23, 2008. 
The Act waives the requirement that a required minimum distribution (“RMD”) be taken for 2009 from the IRAs and employer sponsored qualified retirement plans.  The Act does not impact the requirement for RMDs for 2008.

As a result of the recession and marked downturn of the stock market, many retirees saw their account balances for their IRAs and qualified retirement plans drop precipitously.  Reacting to public sentiment, The Worker, Retiree, and Employer Recovery Act of 2008 was enacted, in part, to try to provide some relief.
Prior to the Act, owners of individual retirement accounts and participants in employer sponsored qualified retirement plans (i.e., 401k, profit sharing, money purchase pension plans, and defined benefit plans) were subject to the “required minimum distribution” (RMD) rules under the Internal Revenue Code (IRC).  These rules generally provide that individuals who have attained age 70 ½ must start to take distributions from these retirement plans.  The RMD is determined based on the value of the IRA or interest in the qualified plan as of December 31st of the previous year, divided by their life expectancy as determined from Internal Revenue Service (IRS) tables.  The RMD is required to be taken by April 1st of the year following the calendar year during which the person attains age 70 ½.
There are penalties for failing to timely take the RMD.  In addition to ordinary income tax, there is a 50% excise tax on the RMD not taken.  These same rules also apply to designated beneficiaries of inherited IRAs, although spousal IRAs and IRAs with charitable beneficiaries are subject to a different special set of rules.  In addition, where there is no “designated beneficiary” eligible for inherited IRA distribution options, the IRA must be distributed no later than December 31st of the 5th year following the year of the IRA owner’s death (the “5-year rule”).
As a result of the economic downturn, it did not seem appropriate to force retirees to take distributions from their distressed retirement accounts or to assess penalties on financially strapped individuals.  Hence, the enactment of the RMD waiver provisions in the Act. 

The Act waives the requirement that an RMD be taken for 2009 from:
(1) defined contribution plans, as described in IRC Code Sections 401(a), 403(a), or 403(b);
(2) IRC Sec. 457(b) eligible deferred compensation plans, but only if the plan is maintained by a state, a political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state; and
(3) individual retirement plans.

The provisions of the Act do not apply to defined benefit plans.
Here’s how the waiver applies:  If someone is age 70 ½ entering 2009 or attains age 70 ½ during 2009, the RMD rules are waived.  That person’s next RMD would be for calendar year 2010 to be paid by April 1, 2011.  If someone is already taking RMDs, there is no requirement to do so in 2009.  In the case of the application of the 5-year rule, 2009 will not count toward the 5 years, so if the 5 years encompasses 2009, the rule, in effect, becomes a 6-year rule.
Clearly, however, despite good intentions, the RMD waiver provision benefits primarily those retirees that have other income sources and do not need to rely on their RMDs for their lifestyle expenses.  These individuals will now have another year to see distressed investments recover, and wealthier but older clients need not take RMDs which would probably be quite large.  This provision may also have the effect of reducing taxable income for 2009.  That may help to avoid or mitigate the effects of various tax breaks based upon adjusted gross income.  Unfortunately, individuals that rely on their RMDs to maintain their lifestyles may have to take withdrawals from their accounts despite the loss in account values.
Institutional Reporting Financial institutions that sponsor IRAs are required by law to report certain contribution and account value information to account owners no later than January 31st following each calendar year on IRS Form 5498.  Since the Act does not waive RMDs for 2008, institutions still have the responsibility to report for 2008 by January 31, 2009.  However, the Act requires that all 5498 forms sent out should indicate that there are no RMDs required for 2009.
Many institutions indicated they could not change their processing programs in time to comply with this new requirement.  Accordingly, the IRS Issued Notice 2009-9, providing that issuers of Form 5498 should not put a check in Box 11, which normally would be checked to indicate that the IRA owner is required to receive an RMD in 2009.  If the box is checked because of the process programming issue, the IRS will not consider the form issued incorrectly, provided that the IRA owner is notified no later than March 31, 2009, that no RMD is required for 2009.
In addition, RMD information for 2009 need not be sent in 2010.  If a financial institution issues a Form 5498 for 2009 in 2010, it must show the RMD for 2009 as -0-.
Please consult with your Guardian Financial Representative if you have any questions concerning this document. The foregoing information regarding estate, charitable and/or business planning techniques is not intended to be tax, legal or investment advice and is provided for general educational purposes only.  Neither Guardian, nor its subsidiaries, agents or employees provide tax or legal advice. You should consult with your tax and legal advisor regarding your individual situation.

Steven L White
Wealth Strategies Group