Do I Need A New Will?
Q: Susan and Tom,
I have just moved to Georgia from North Carolina. My current will is only a year old. Do I need to get a new will? I just paid for this one.
Great question!
First, we are not attorneys and we do not practice law. Now that we have “disclaimed” ourselves, here comes the advice:
Wills, probate and such are state specific issues. You do need to consult an attorney in Georgia to determine whether or not the North Carolina will is still valid. State laws regarding Wills vary, and you shouldn’t assume that your old will meets your new state’s requirements.
Other reasons to change or update your will:
Your marital status has changed
You are now a parent, or you have more children than when you originally drew up your will
Your children have reached the age of majority
It’s been more than 5 years since an attorney last reviewed your will.
by Thomas N. Tillery
Q. Tom, sorry if this is a little long . . .
I have a new client that has a simple tax return. She usually prepares the return the herself; however, this year she has a 1099-R from Podunk Mutual Life Insurance Company: Gross distribution $190K taxable $147K as a “total” distribution.
Her story:
Her former husband purchased a whole life insurance policy in 1976 with a death benefit of $145,000: he was the insured and the owner. Over the years, he borrows against it for a variety of reasons. They get divorced and he promises to keep the insurance in force. He has more financial problems and in 1990 the ownership is changed to my client.
It appears that interest due on the loan continued to accrue and was capitalized. In addition, the policy premium was being paid out of the dividends.
Bottom line:
The interest could no longer be capitalized, and the policy loan – $184,000 – exceeded the policy cash values. My client was asked to make a premium payment, could not afford it and did not do so. My client did receive a letter from Podunk explaining that the “policy would be terminated due to excess loan situation” and she would receive a 1099-R.
Since this is a “retirement” distribution and not “loan forgiveness”, I can’t see how we can go the “insolvency” route and in sketching out her balance
sheet it appears that she isn’t insolvent enough.
Since the initial loans were made by her former husband, is there relief as an “innocent spouse” or possibly a business bad debt to offset the income?
Unfortunately, no, the innocent spouse rule is not applicable in this situation (see an upcoming blog for a discussion on the innocent spouse rule). It also would not be considered a business debt. This is clearly a case of “phantom income.” The life insurance policy was “over loaned” and lapsed for non-payment of premium.
Generally, a loan taken from a life insurance policy is not includable in the policy holder’s income at the time of the loan because it is not treated as a taxable distribution (§72(e)(5)). If a loan is outstanding when the policy lapses, the loan amount is added to the cash value for purposes of calculating the gain in the contract. The gain is equal to the excess of total cash value over the basis and is taxable as if the owner had actually received the cash in the transaction.
There is a wonderful Tax Court Summary 2008-163 which clearly illustrates the matter at hand that we recommend for your review.
Sadly, your client received poor counsel with regards to receiving this type of property distribution in her divorce. Spouses beware: do not accept life insurance contracts as part of property settlement if there is a loan against the policy.
What is Ancillary Probate?
by Thomas N. Tillery
Q. My attorney says that I am subject to ancillary probate. What is it?
Ancillary probate is a probate proceeding conducted in a different state from the one in which deceased person resided in at the time of death.
Typically ancillary probate involves real property. Your attorney has brought to your attention that an estate administration proceeding has to be conducted in each state in which a deceased person owned property.
Ancillary probate leads to increased delays in settling the estate, as well as increased expenses. One such expense is engaging local counsel to handle each ancillary probate proceeding.
At What Age Can Someone Stop Filing Tax Returns?
By Thomas N. Tillery
Q: My grandmother told me that because of her age, 83, she no longer has to file a federal income tax return. Is this true?
The long and the short of it is you must file a tax return if your income is above a certain level. The income amount varies depending on filing status, age and the type of income you receive.
From your question, I will assume your grandmother is single and may not be claimed as a dependant on someone else’s return. If your grandmother’s gross income is above $10,950 (2011) then she will need to file a federal income tax return.
Even if your grandmother is not required to file a federal income tax return based upon income, she will need to file if she is due a tax refund or is eligible for a refundable credit. A refund could result if Federal Income Tax is withheld from distributions from her qualified plans. She may qualify for a refundable credit even if she did not owe any tax.
Other examples that may require her to file a return:
Did she sell her home?
Was she born before July 1, 1937 (age 70 1/2) and not take the minimum required distribution from her qualified retirement plan?
So in other words, whether or not someone has to file a return is based upon their personal situation, not upon age.
By Thomas N. Tillery
Q. Both my CPA and tax attorney have recommended a Section §1244 election. What is this election and how does it benefit me?
§1244 of the Internal Revenue Code is the small business stock provision. It was enacted to allow shareholders of domestic small business corporations to deduct as ordinary losses any losses sustained when they dispose of their small business stock. To qualify as §1244 stock each of the following requirements must be met:
1. The corporation issuing the stock must qualify as a domestic small business corporation. This means that it must be created under the laws of the United States and its aggregate capital must not exceed $1,000,000 at the time the §1244 stock was issued to its shareholders.
2. Both common stock and preferred stock issued after July 18, 1984 qualify as §1244 stock. The stock must be issued and the consideration paid by the shareholder must consist of money or other property, not services.
3. §1244 is available only for losses sustained by shareholders who are individuals.
If all of the above requirements are met, the benefit to you is your losses on the sale or exchange of your Section 1244 stock are treated as an ordinary loss vs. capital loss. The amount of ordinary loss that an individual taxpayer may realize by reason of the small business stock provision is subject to limitations. Amounts of §1244 loss in excess of this limitation are treated as capital losses. For losses incurred in taxable years beginning after 1978, the maximum amount that a taxpayer may claim as an ordinary loss for all losses sustained on §1244 stock in a taxable year is $100,000 when a joint return is filed ($50,000 single).
What is The Present Value of A Future Benefit?
By Thomas N. Tillery
Q. I have a client who will receive a stream of income beginning at age 61. The client is 41 years old. The future benefit is $961.00 per month and will be adjusted annually for inflation. The client has asked me to assume this income will last to age 100. Is there any way to determine a present value for this future benefit? Additionally, the client feels that inflation will average 4.5% during the retirement years and that 6% is a safe rate of return for her/his assets.
The answer to your question is “Yes”; this is a Time Value of Money question and you can calculate the present value of this future income stream.
Two steps are required to determine the Present Value of this future benefit.
Step 1. Solve for the Present Value of an Annuity.
What is the present value of this future benefit at age 61? Another way to ask this questions is, “How much money do I need at age 61 to support this stream of income?”
These are the inputs for any financial calculator:
P/YR (Payments per year) 12
BEG/END (Begin or end mode) Begin
PV (Present Value) ? (This is what you are solving for)
n (Number of periods) 39 (Age 100 – age 61 = 39)
i (Interest) 1.4354 (Inflation adjusted return [(1.06/1.045)-1] x 100)
PMT (Payment) 961.00 (Positive – money is going into the account)
FV (Future value) This number is not required
These are the specific keystrokes for the following calculators:
HP12c HP17BII
Begin Mode Begin Mode, set for 12 payments per year
39, g, n 39 shift key, N
1.4354, g, i 1.4354, I%YR
961.00 PMT 961.00 PMT
PV -344,659.69 PV -344,659.69
$344,659.69 must be deposited into your clients account at age 61 in order to support the payments to age 100.
Step 2. Solve for the Present Value of a Single Sum.
How much money must I deposit today (age 41) in order to have $344,659.69 at age 61?
These are the inputs for any financial calculator:
P/YR (Payments per year) 1
BEG/END (Begin or end mode) End (Interest is credited at the end of the period)
PV (Present Value) ? (This is what you are solving for)
n (Number of periods) 20 (Age 41 – age 61 = 20)
i (Interest) 6 (An inflation adjustment is not required)
PMT (Payment) This number is not required
FV (Future value) 344,659.69
These are the specific keystrokes for the following calculators:
HP12c HP17BII
End Mode End Mode, set for 1 payment per year
20, n 20, n
6, i 6, I%YR
FV 344,659.69 FV 344,659.69
PV -107,466.52 PV -107,466.52
The Present Value of your client’s future benefit is $107,466.52.
By Thomas N. Tillery
Susan / Tom,
Can either of you weigh in on the quality of an investment my brother is recommending? He is involved with an investment firm called Dewey Cheatham & Howe Resources. My mom, age 90, is looking for something better than CDs and this looked interesting to him.
Thx for any insights.
B
Great question!
We appreciate your mother’s predicament. Many individuals who have left the work force, and are dependent on their savings, have seen the yields on Certificates of Deposit decline precipitously since 2008. Also, the run up in yields for CDs just prior to 2008 created a false sense of security in the reliability of their investment cash flow.
As a result, investors are looking for alternatives to the low yields provided by Certificates of Deposits. The most recent return for the Certificates of Deposit Index (CODI) is at 0.315%! Ouch!
We researched Dewey Cheatham & Howe Resources, and here is what we discovered. The firm provides mortgages to businesses that are unable to obtain financing through traditional means (caveat emptor!). They generate the capital to lend by creating “certificates” which investors purchase as an alternative to a traditional CD.
The “certificates” are unregistered securities. Please note: security and unregistered. The “certificates” are not Certificates of Deposit and are not FDIC insured. Also, the “certificates” are not registered with either the Securities and Exchange Commission or the Secretary of State where Dewey Cheatham & Howe Resources is domiciled.
Please tell your mom: the certificates are not secured by collateral; the certificates are not insured by the FDIC; the certificates are subordinated to senior secured indebtedness of Dewey Cheatham & Howe Resources which puts your mom last in long line of creditors of the firm.
We look to the Financial Industry Regulatory Authority (FINRA) as our ‘True North’ when it comes to an investment. FINRA states that, “If you can’t explain it, don’t buy it.” Your brother may understand the investment; this does not mean that you, or your mom, understand the investment.
To cut to the chase, we would advise against your mother’s purchase of this unregistered security.
