Put off that new boat and start by deciding which needs are urgent and which are
merely important to you. Paul Katezeff, a staff writer with Investor’s Business Daily writes, millions of families have taken the hint. With the economy weak and layoffs rising, they are beefing up the household balance sheet by slashing expenses.
"More people are taking action even if layoffs have not struck their family,” says Bruce Bickel, of PNC Wealth Management in Pittsburgh. The key to cutting expenses is to form a budget. You've got to know what you are spending and where to decide how to cut back. For many people, especially high net worth people, budgeting and reducing their expenditures are tough because they've never done it before. The task can also be tough for emotional reasons. "Some. people hesitate to budget due to pride and embarrassment," says Bruce Bickel. "They always felt above such things." But it's got to be done if you want to avoid a fiscal calamity. Each family member must start by listing their expenses.
Each item should then be categorized as urgent, important or entirely discretionary. The tough part is often distinguishing between urgent and important. The decision especially for high net worth families can hinge on such things as what a family wants its legacy to be. Urgent items are the last to be deleted as you decide where to trim your spending. Next comes the budget itself. It is suggested to set aside 10% of income for long-term goals such as retirement and children’s education.
Then 70% of income should go to the regular living expenses. The final 20% should be for a buffer fund. “That prevents people from living on credit” Bickel said. The buffer fund is also for emergencies.
Cutting back on credit use is a key to making a budget. For one thing, credit can entail interest charges; for another, credit makes it easier to spend beyond your income.
Anne Uno, a financial adviser and tax preparer in Arlington, VA. suggest looking at your loan payments and credit card bills. “Pay off the ones you can, starting with the higher interest-rate debts”. Whether paid by credit or not, the next group of expenditures to tackle are big ticket items. Consider getting rid of these items:
Club Members. Whether it’s a country club or golf club, memberships are important at best but certainly not urgent. They can be extremely expensive and you can save thousands of dollars. No club membership is more important than keeping your home or putting food on the table.
Automobiles and boats. Postpone buying a new car or boat. If the old one breaks down totally, buy a less expensive replacement than whatever you had in mind. Leasing a car or boat. Don't. You don't build equity. You can't resell it. It just adds to debt.
Vacations. Take them less often and make them shorter. Also, consider alternative formats. Look into home exchanges. Travel by train, which cuts down on hotel
stays. And piggyback on professional conferences. That way part of the trip is paid for by your business. Part may be deductible also. Another scenario is to visit grandma and grandpa instead of cruising the Caribbean. You may eliminate hotel costs or slash them altogether. Mom and dad can stay at a motel while the kids bund at their grandparents home.
Dining out. Visit fancy restaurants less often. Don’t be shy about taking home a doggie bag.
Installment payments. If you must buy on credit, shop for a longer
payback period. You'll pay more interest over the long run; but it will cut your monthly bills in the near- term.
Insurance. Shop around. You can often find the same coverage for much less money. You can also save hundreds of dollars a year by cutting more mundane
expenditures.
Service expenditures. Visit beauty salons and barbers at longer intervals. The same goes for things like housecleaning. Instead of scheduling the service monthly, make it every six weeks. And forgo indulgences. Either don't get silk-wrapped nails, or do them yourself. Temporary sacrifices should be spread as evenly as possible through the family. For example, children may have to
go without summer camp this year. Or they may have to make do with fewer weeks. Another option: Day camp instead of overnight camp.
Cable TV. Relax, you don't have to eliminate it completely. How about just trimming some of the bells and whistles? Consider moving down to a less expensive package. That's easiest if you give up multiple movie, channels or
specialty channels. You can give up one or more premium movie channels.
Try using Netflix instead.
Warehouse shopping clubs. Go with a friend and split purchases that you both would make anyway. People often don't use all of their bulk buys, and it goes to waste. Avoid that.
CALL ON US
This intellectual capital is of general nature and should not be acted upon without professional guidance. So if you know someone that is looking for a way to save taxes, avoid audits, and remain invisible to the IRS, call me at 702-642-8953 or write us at isueirs@aol.com. With us there are No exceptions, No time limits; No conditions; No IRS.
Sunday, February 14, 2010
SHARPEN YOUR ESTATE TOOLS BEFORE YOU NEED THEM
The U. S. intends to blunt estate devices like Grantor Retained Annuity Trust (GRATs), so advance planning is important.
President Obama and Congress are taking positions against two popular estate planning tools. Tax advisers are urging clients to prepare to adjust their plans if proposals move forward. One involves family limited partnerships (FLPs), used by the wealthy to pass real estate, businesses and other assets to heirs in a tax advantaged way.
FLPs allow sizeable discount, typically 35% to 40% of the value of the property conveyed. Today, you can make a gift of $13,000 to each heir per year without incurring any gift tax. If you go over the limit, then you cut into an additional $1,000 million lifetime exemption. But if you can discount the value of the property using an FLP, then you can transfer even more wealth without paying tax.
Suppose you have an apartment building and stocks worth $2 million. You put these assets in an FLP and create 10 partnership units. Each unit is a portion of ownership, like stock. Under current law, each partnership unit could be worth as little as $120,000 instead of $200,000. That is because the owner of a unit typically cannot sell the interest easily. He also can’t control how the assets are managed.
Those restrictions reduce the value of the units; therefore a professional appraiser would set the unit value. Obama’s proposal would require more backup for the discount claims, says Bruno Graziano, a tax analyst with CCH in Chicago.
If Obama’s final language makes it retroactive to the birth of the FLP, then all FLPs active since 1990 would be more vulnerable to an audit, especially those whose main or sole purpose to the IRS seems to be conveying assets from one family member to another to avoid taxes, says estate planning attorney Martin Shenkman, of Paramus, N.J.
FLPs are supposed to have a business purpose, not just tax benefits. For example, it is legitimate to put income producing real estate into a Family Limited Partnership, to limit individuals’ personal liability, create a mechanism for paying dividends to family members and to enable them to buy and sell portions of ownership.
But where the IRS does not see a business purpose, it often alleges that an FLP’s sole purpose is avoidance of tax. The IRS also questions the size of the discounts. FLP advocates say that discounts typically reflect the extent to which an individual partner is barred from realizing the value of their investment.
For example, an owner of units in a FLP that owns an apartment building may not receive a portion of rents or even any dividends. The partner may be blocked from selling his interest, at least without the consent of the other partners. On the other hand, many restrictions can later be removed. As ownerships units pass out of the hands of older family members due to death or retirement, surviving family partners can vote to amend the FLP’s operating agreement.
In addition to the Obama proposal, another bill in Congress, HR 436 would end discounts on nonbusiness assets in FLPs such as stocks, bonds and money market securities. The bill would also freeze the estate tax exemption at $3.5 million, 2009’s level. Unlike Obama’s plan, it would not be retroactive.
Bottom line is the IRS appears to be on a path to become more hostile to discounts for cash and securities. If your FLP has lots of those, being able to prove that you run it like a business can help preserve full discounts. Have meetings, take minutes. Separate its accounts from your personal assets,
Another potential change from Congress would curtail the estate tax benefit of grantor retained annuity trusts (GRATs). In a GRAT, mom for example, places an asset such as the apartment building into a trust. It counts against her gift tax exemption, but at a discounted value. And she gets an annuity-like payment for the term of the trust.
It’s a sweet deal because Mom pays no income tax on the payout. She is deemed to have made an equal exchange rather than a profit-making transaction. She also gets the apartment building out of her estate, and away from the IRS.
One catch is if she dies during the term of the trust. Then, the trust terminates. The apartment building which in normal times typically rises in value goes back into her estate and could be subject to estate tax.
If she outlives the trust, then the apartment goes it beneficiaries she named, free of gift tax. Attorneys have set up GRATs with terms as short as two years to cut the impact of an untimely death. The Obama administration seeks a 10 year minimum life for GRATs. This would discourage GRATs’ use by older benefactors. Unlike the FLP change, this would only apply to trusts created after enactment.
So if you’re planning to create a GRAT, try to act before any new regulation is enacted. The length of the GRAT term should not matter. If a new law is enacted first, you will have to obey any new minimum term rules.
CALL ON US
This intellectual capital is of general nature and should not be acted upon without professional guidance. So if you know someone that is looking for a way to save taxes, avoid audits, and remain invisible to the IRS, call me at 702-642-8953 or write us at isueirs@aol.com. With us there are No exceptions, No time limits; No conditions; No IRS.
President Obama and Congress are taking positions against two popular estate planning tools. Tax advisers are urging clients to prepare to adjust their plans if proposals move forward. One involves family limited partnerships (FLPs), used by the wealthy to pass real estate, businesses and other assets to heirs in a tax advantaged way.
FLPs allow sizeable discount, typically 35% to 40% of the value of the property conveyed. Today, you can make a gift of $13,000 to each heir per year without incurring any gift tax. If you go over the limit, then you cut into an additional $1,000 million lifetime exemption. But if you can discount the value of the property using an FLP, then you can transfer even more wealth without paying tax.
Suppose you have an apartment building and stocks worth $2 million. You put these assets in an FLP and create 10 partnership units. Each unit is a portion of ownership, like stock. Under current law, each partnership unit could be worth as little as $120,000 instead of $200,000. That is because the owner of a unit typically cannot sell the interest easily. He also can’t control how the assets are managed.
Those restrictions reduce the value of the units; therefore a professional appraiser would set the unit value. Obama’s proposal would require more backup for the discount claims, says Bruno Graziano, a tax analyst with CCH in Chicago.
If Obama’s final language makes it retroactive to the birth of the FLP, then all FLPs active since 1990 would be more vulnerable to an audit, especially those whose main or sole purpose to the IRS seems to be conveying assets from one family member to another to avoid taxes, says estate planning attorney Martin Shenkman, of Paramus, N.J.
FLPs are supposed to have a business purpose, not just tax benefits. For example, it is legitimate to put income producing real estate into a Family Limited Partnership, to limit individuals’ personal liability, create a mechanism for paying dividends to family members and to enable them to buy and sell portions of ownership.
But where the IRS does not see a business purpose, it often alleges that an FLP’s sole purpose is avoidance of tax. The IRS also questions the size of the discounts. FLP advocates say that discounts typically reflect the extent to which an individual partner is barred from realizing the value of their investment.
For example, an owner of units in a FLP that owns an apartment building may not receive a portion of rents or even any dividends. The partner may be blocked from selling his interest, at least without the consent of the other partners. On the other hand, many restrictions can later be removed. As ownerships units pass out of the hands of older family members due to death or retirement, surviving family partners can vote to amend the FLP’s operating agreement.
In addition to the Obama proposal, another bill in Congress, HR 436 would end discounts on nonbusiness assets in FLPs such as stocks, bonds and money market securities. The bill would also freeze the estate tax exemption at $3.5 million, 2009’s level. Unlike Obama’s plan, it would not be retroactive.
Bottom line is the IRS appears to be on a path to become more hostile to discounts for cash and securities. If your FLP has lots of those, being able to prove that you run it like a business can help preserve full discounts. Have meetings, take minutes. Separate its accounts from your personal assets,
Another potential change from Congress would curtail the estate tax benefit of grantor retained annuity trusts (GRATs). In a GRAT, mom for example, places an asset such as the apartment building into a trust. It counts against her gift tax exemption, but at a discounted value. And she gets an annuity-like payment for the term of the trust.
It’s a sweet deal because Mom pays no income tax on the payout. She is deemed to have made an equal exchange rather than a profit-making transaction. She also gets the apartment building out of her estate, and away from the IRS.
One catch is if she dies during the term of the trust. Then, the trust terminates. The apartment building which in normal times typically rises in value goes back into her estate and could be subject to estate tax.
If she outlives the trust, then the apartment goes it beneficiaries she named, free of gift tax. Attorneys have set up GRATs with terms as short as two years to cut the impact of an untimely death. The Obama administration seeks a 10 year minimum life for GRATs. This would discourage GRATs’ use by older benefactors. Unlike the FLP change, this would only apply to trusts created after enactment.
So if you’re planning to create a GRAT, try to act before any new regulation is enacted. The length of the GRAT term should not matter. If a new law is enacted first, you will have to obey any new minimum term rules.
CALL ON US
This intellectual capital is of general nature and should not be acted upon without professional guidance. So if you know someone that is looking for a way to save taxes, avoid audits, and remain invisible to the IRS, call me at 702-642-8953 or write us at isueirs@aol.com. With us there are No exceptions, No time limits; No conditions; No IRS.
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