Small Business Gets Help

This subject is a bit removed from our usual estate planning, probate and Medicaid matters. Many of our readers are retired, but we also have professional advisors and CPA's on our distribution list. The occasion for our rambling into the business arena is the passage by the US Senate of HR 5297 Small Business Jobs and Credit Act.

One of the particular highlights of the new law, aimed at propping up small business and providing access to capital, is the expanded definition of a Small Business.

Media Attention on Small Businesses. Anyone reading the paper or watching TV is aware that all politicians are focused on helping "Small Business." We also know from media publicity that Small Business creates 70% of all new jobs. Over the past several months we have heard complaints that Small Business cannot get access to loans, because of the crisis in the financial sector.

This should change in the next few months. Professional advisors should be alert to the new opportunities for their small business clients. By customary definitions, many businesses would not qualify for SBA assistance because of a revenue cap of $6.0 million.

Now, in lieu of a $6.0 million revenue cap, the standard, as we understand the bill, will be tangible net worth of $15.0 million and two year average net income of $5.0 million or less.

We have read that approximately 90% of all companies in America will now qualify for SBA loan assistance. This can be a big deal, as explained below.

What Kind of Assistance Does SBA Give? SBA - Small Business Administration has typically arranged for government guarantees on loans made by banks to "small businesses." Limits on guaranteed loans to small businesses have been increased substantially:

1) General purpose working capital loans for existing or start-up small business, the 7(a) loan program, have been increased from $2.0 million to $5.0 million.
2) Express loans - turn around time 36 hours, have been increased from $350,000 to $1.0 million.
3) The second mortgage loan limit has been increased from $1.5 million to $5.0 million.

These are huge increases, some of which will expire December 31, 2010, unless Congress extends them.

Fee Reduction. The new law eliminates origination fees on all SBA loans through December 31, 2010. This is a huge saving for small businesses, as the up front fees have been a major deterrent to the use of SBA financing.

Increase in SBA Guarantee. While the percentage of SBA Guarantee may vary according to the size and amount of the loan, the former maximum 75% SBA Guarantee has now been increased to 90%. This reduction of risk for banks and other lenders should be a great incentive for them to make SBA loans.

Bottom Line. This advisory letter is not intended to be a thesis on SBA loan programs. This is an alert for all advisors that know business owners and entrepreneurs. If financing is a problem, the government is offering a new, much broader scope for relief. Supporting small business is a stated priority for both political parties!

Conclusion. Our firm is in contact with many active SBA lenders who are looking for business. Our business attorneys are skilled and experienced in expediting these matters. Any person you know who is interested in more facts, should call Doug Shepherd, Tom Pezzetti, or any of the attorneys listed below.

Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Matthew D. Vermetten, Thomas A. Pezzetti, Jr., James R. Modrall III, Susan Jill Rice, Gary D. Popovits, H. Douglas Shepherd, Laura E. Garneau, David H. Rowe, Nicole R. Graf, Priscilla V. Hirt at (231) 941-9660

BRANDT, FISHER, ALWARD & PEZZETTI, P.C.

This newsletter is provided for informational purposes and should not be acted upon without professional advice.

Is Your Estate Plan Bullet Proof?

What Do You Mean By Bulletproof? By "bulletproof" we mean the ability of others to change or challenge a trust or will. For example, a person makes a trust and transfers real estate and securities to the trust. Since the trust is revocable, the trustor (settlor or grantor) has not bothered to change the provisions regarding disposition of property at death. One of trustor's children moves in with him to provide care. The care giving child feels that there should be some special recompense for giving up part of her independent life to be a care giver.

Then comes the important question, whether the trust can be validly amended to change the provisions for equal distributions among all children?

Now What Happens? This scenario can be a perfect setting for a legal battle after Dad dies.

A couple of things often happen:

1) Care giver takes Dad to an attorney for a trust amendment, giving care giver the house or a larger share (sometimes everything).

2) Care giver has Dad sign over property during lifetime, with or without an attorney, or adds care givers name to bank accounts or securities.

We have covered in a prior newsletter the estate planning problems presented by joint accounts.

What Are The Legal Challenges In These Circumstances? The first challenges that are presented to a family and their legal counsel are Dad's legal competency and the question of undue influence. Questions in Michigan about the level of competency required to make or amend a trust have been resolved by Michigan's new trust law, which explicitly states that the legal standard for trusts is the same as the standard of capacity to make a will. This standard of competency is quite low. It does not require Dad to count backward by threes from 100. Dad merely has to understand what his property is, who the objects of his beneficence are, and the consequences of the action being taken. Nonetheless, the case law is replete with challenges to competency, conflicting evidence and testimony and, ultimately, decisions by a judge or jury.

Undue influence is also asserted in these circumstances. Care giving creates a presumption of undue influence that has to be initially overcome by credible evidence. Care giver has to support any favorable action by Dad with testimony from third parties, or sometimes writings. Care givers and counsel need to anticipate potential challenges and make sure that the case to support Dad's changes can be made after the fact.

Durable Power of Attorney. What authority does the agent named in a Durable Power of Attorney (DPOA) have to make changes? First, the DPOA cannot make a will. Second, a DPOA can often amend a trust. However, because a DPOA is a fiduciary, the validity of a trust amendment made by a DPOA will likely be subjected to the same challenges discussed above and will require supporting evidence that the changes were really Dad's wishes and directions.

The Case For the Care Giver. Our experience is that the services provided by a care giver are often unappreciated by other members of the family who are not providing the same time and effort. Sometimes the care giver is regarded is a free loader "living off Dad's money". Added to a care giver's frustration is a presumption by the Michigan Department of Human Services that family members are supposed to provide care giving service to a parent or spouse for free, absent a written care contract executed in advance.

Unfortunately, families usually do not address these issues ahead of time. Claims are made after Dad's death that he promised payment or promised a particular asset or extra share for services being rendered. Generally, these claims and legal battles are a continuation of early sibling rivalry, which surface after Dad is gone.

Equal Is Not Always Fair. This is an axiom that we often repeat to clients of both generations. A care giving child should have his or her time and effort recognized. It is usually best if other members of the family are both knowledgeable and approving of arrangements. Unfortunately, however, lack of communication, secrecy or procrastination are often present and contribute to legal battles and family disharmony.

Competent elder law attorneys can help lay the ground work and counsel Dad, care givers and other family members ahead of time to work out a fair and just solution to the dilemma of recognizing care giver's services without destroying family unity and good will.

If you or a friend are facing issues of care giving and their effect on estate plans, please contact Jim Modrall, Priscilla Hirt or any of the attorneys listed below.

Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Matthew D. Vermetten, Thomas A. Pezzetti, Jr., Susan Jill Rice, Gary D. Popovits, H. Douglas Shepherd, Laura E. Garneau, David H. Rowe and Nicole R. Graf at (231) 941-9660

BRANDT, FISHER, ALWARD & PEZZETTI, P.C.

This newsletter is provided for informational purposes and should not be acted upon without professional advice.

Joint Ownership - Open Door to Litigation?

Avoiding Probate. We often counsel clients on the methods for avoiding probate, among which are revocable trusts and joint ownership.

Joint Ownership - JTWROS. As it is sometimes called in Michigan, JTWROS means that the surviving joint owner owns the property outright when other joint owners have died. At most financial institutions, this is an alternative to TOD (Transfer on Death) and POD (Payable on Death). In all three cases, JTWROS, TOD and POD, the surviving person or persons own the asset when the other named account owner dies. Many people are not aware of the alternative, or of the hazards that any particular account designation can present.

Two hazards should be considered when choosing a form of survivorship designation.

First Is Exposure to Creditors. This means, simply, that a mother who puts a son on her security account or certificate of deposit as JTWROS, may subject that account to attacks by the son’s creditors, even during the mother’s lifetime. This is a compelling reason not to use JTWROS. Personally, we have experienced clients with many sleepless nights when a son or daughter files bankruptcy. These claims can be avoided by using the TOD or POD account designations. Using either of these, the son’s creditors would have no recourse against mom’s financial assets.

Second Hazard - Litigation. The second hazard of any non-probate asset transfer has to do with litigation that can arise when other family members challenge the JTWROS, or other transfer designation, as being inconsistent with mom’s overall estate plan, which leaves property to all children equally, for example.

Michigan law, and the law of most states, creates a presumption that the surviving owner takes the property. However, that presumption can be overcome by evidence of undue influence or lack of capacity, or evidence that mom really intended that the account was a "convenience" account and that the son, as joint owner, would share the property would the siblings.

Generally, the son will usually counter that the special designation of him alone as a joint owner of the asset was in repayment for special care services rendered by the son, or an action separate from mom’s Will.
　
The recent Novosielski case in Pennsylvania is an example of a Treasury Direct account taken out in the name of Alice Novosielski and Tom Proach, her nephew, in the amount of $500,000. You can guess the result. Ms. Novosielski died and the nephew claimed that she intended that all of the Treasury Direct account belonged to him, even though that wish was inconsistent with her Will.

The Pennsylvania Courts have spent nine years trying to sort through litigation about what Ms. Novosielski’s intent was, whether there was undue influence and whether she had legal capacity to understand what she was doing. The nephew, Thomas Proach, was an agent under a Durable Power of Attorney, which creates a fiduciary relationship in itself.

What To Do In These Circumstances. In our experience, often the holder of a Durable Power of Attorney is in an excellent position both to influence the older person and to take self-benefitting actions that are generally questioned after the senior’s death. To avoid litigation, the senior’s intention should be fully documented. Is the account considered a "convenience" account for managing investments and paying bills? Or, is it intended to compensate the agent for end of life services? Did Ms. Novosielski intend that this joint account supersede the wishes expressed in her Will?

Dealing with seniors is a delicate matter, both to document and establish the competency of the senior, which is her understanding of the nature and consequences of her actions. Put another way, did she really know and understand what she was doing?

If a non-probate transfer is different from a Will, it is helpful to have a Codicil explaining intentions and reasons for differences. Absent any such explanations by the senior, self-serving joint account arrangements, or even TOD and POD designations are likely to be challenged in Court.
　
What Lessons Do We Learn From The Novosielski Case? We have outlined above some of the points that the attorneys, either for the nephew or Mrs. Novosielski, should have addressed when the joint account in question was established. If the nephew wanted to be sure that the joint account designation would hold up in Court, he should have made sure that Ms. Novosielski’s intentions were documented and that there were credible witnesses to her competency in doing so. Failure to take these precautionary steps is often a red flag that there has been fraud, lack of capacity or undue influence. In our experience, there is usually very little or no evidence, either supporting the account designation or evidence that the designation was for "convenience". Protracted litigation is the price of this lack of attention to proper details, or at a minimum, the price will be permanent disharmony and anger among the family.

Conclusion. Joint accounts, TOD’s and POD’s are important parts of estate planning. Often they are just as important as the provisions of Wills and Trusts. The same thing holds true with beneficiary designations for insurance and retirement plans. All of these methods of property transfer should be addressed in formulating an estate plan and keeping it up to date. If you, or anyone you know, is acting as a DPOA for an older family member, please let Jim Modrall, Priscilla Hirt or any of the attorneys listed below, assist in making sure that the estate plan in question avoids litigation and carries out the intention of the senior family member.
　
Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Matthew D. Vermetten, Thomas A. Pezzetti, Jr., Susan Jill Rice, Gary D. Popovits, H. Douglas Shepherd, Laura E. Garneau, David H. Rowe and Nicole R. Graf at (231) 941-9660

BRANDT, FISHER, ALWARD & PEZZETTI, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional advice.

IRA TRAPS AT DEATH

IRA Owner Dies - What Happens? As IRA owners age, death of an IRA owner will become a frequent event. What challenges and decisions confront the beneficiaries, family members, and their professional advisors?

Our thanks go out to Attorney Robert Anderson of Marquette, who published a succinct summary of the decisions facing advisors and beneficiaries in a 2009 edition of the NAELA News. This newsletter will recap some of those decisions and problems that need to be confronted.

Owner Over Age 70-1/2. The issue here is the Required Minimum Distribution (RMD) for the year of death. The RMD for the year of death has to be taken by December 31 by the designated beneficiary if the owner had not taken his or her RMD prior to death.

Owner's RMD has to be taken by the beneficiary, and the beneficiary pays the tax regardless of stretch or rollover possibilities discussed below. Tax is paid by the beneficiary making the withdrawal. If there is more than one beneficiary, any beneficiary can make the required RMD withdrawal.

If RMD is not taken by December 31 of the year of death, a steep 50% penalty applies.

Is Disclaimer Advisable? Some estate planning attorneys use disclaimers as an active estate planning device. A disclaimer is legal action by the beneficiary to refuse to accept a property right (IRA account ownership) by a "disclaimer." A disclaimer has the effect of passing the property right to the contingent beneficiary, if one is named. If there is no contingent beneficiary, the disclaimed interest would pass to the owner's estate (which is usually not a good option).

Why Would A Beneficiary Disclaim? A disclaimer can transfer ownership of property to a younger or lower-tax beneficiary, which could save estate, gift or income taxes, depending on the family circumstances.

The disclaimer should be considered by beneficiaries and their advisors. However, note the requirements:

1) A qualified disclaimer must be made within nine months of death;
2) The disclaimant cannot receive any funds from the account before disclaiming, including the RMD.
3) A disclaimer can be made for the beneficiary's total share, a specific dollar amount, or a percentage;

Decisions in the Year After Year of Death. If not made before, there are certain decisions that need to be made before September 30 of the year after the year of death. First, and most common, is a spousal rollover. A surviving spouse can "rollover" a spouse' IRA into the survivor's own IRA. The survivor can designate new beneficiaries and obtain a new stretch payout option.

Why Would a Surviving Spouse Not Do a "Rollover"? One reason would be if the surviving spouse is under 59-1/2 and wants to start taking withdrawals. Another reason might be that the beneficiary is older than the owner and would have a less advantageous stretch option.

Keep in mind that the Five Year Rule is a default option in just about all situations. In smaller IRAs this might be a good choice.

September 30 Cleanup Deadline. The September 30 year after year of death deadline is important to get rid of unqualified beneficiaries, whose existence might taint the whole IRA and prevent utilizing the stretch. This can be done by paying off any non-individual beneficiary, such as a charity or estate. Remember all IRA distributions are subject to income tax at ordinary tax rates. It is advantageous from an income tax standpoint to delay distributions as long as possible and accumulate appreciation and income in the IRA account, income tax free. However, this can be done only if there are no "unqualified beneficiaries", which would be charities, estate or unqualified trusts. Only individual beneficiaries get the stretch. (Trusts can qualify if properly drafted.)

Conclusion. IRA accounts are an increasingly important part of family wealth. The death of an IRA owner requires consultation with professional advisors to make sure that the proper decisions are made on a timely basis. If your IRA account is important part of your estate plan, contact Jim Modrall, Priscilla Hirt, or Tom Pezzetti or any of the attorneys listed below.

BFAR is proud to announce the addition of Attorney Priscilla Hirt to its roster of qualified professionals. Priscilla has over 30 years experience in probate, trusts and estate planning in Southeast Michigan and brings the benefits of her knowledge and experience to the probate, estate planning and elder law practice of the firm.

Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Matthew D. Vermetten, Susan Jill Rice, Gary D. Popovits, H. Douglas Shepherd, Laura E. Garneau, David H. Rowe and Nicole R. Graf at (231) 941-9660.

BRANDT, FISHER, ALWARD & PEZZETTI, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional advice.

Heads Up - Roth Conversions Looking Better

Attention High Income Taxpayers. Several months ago our newsletter was devoted to the favorable tax law provisions for Roth conversions in 2010. Since then there has been continued publicity in the financial press about this opportunity for high income taxpayers to make a Roth conversion. The year 2010 offers special benefits for Roth conversions, spreading the taxable income into 2011 and 2012, delaying the final payment of the tax until 2013.

While 2010 offers favorable tax results, there are new rules to the game since our August, 2009 newsletter.

New Tax Looms. High income taxpayers need to be especially vigilant about tax increases that:

1) Have already been included in the new health bill; and,
2) Pending increases in tax rates on ordinary income, capital gains and dividends.

Health Bill. The new health bill has two surtaxes which are interactive. First is a 0.9% levy on earned income. The second is a 3.8% Medicare surtax on unearned income. While taxable income recognized on a Roth conversation from an IRA payment may not be subject to surtax, it may have the effect of pushing up Adjusted Gross Income (AGI), subjecting other income to a Medicare surtax.

New Tax Proposals. As everyone knows, the 2001 tax cuts expire at the end of 2010. Tax rates on ordinary income, capital gain and dividends would go up in that event. There are several proposals around Washington, including those proposed by the Obama Administration that would significantly change the tax consequences of Roth conversion income for high income taxpayers. At this point, no one knows what will come out of Congress to address the staggering high deficits the country is incurring.

The bottom line is that high income tax payers need to be in continuous communication with their financial planners and CPA's to analyze what the financial impact would be from both the health care bill, new income tax legislation and the Roth conversion provisions, including the 2010 option to defer income.

From today's perspective, it appears that tax rates on all type of income are likely to increase for high income taxpayers. Therefore, deferral of income recognized on Roth conversions in 2010 may not be such a good idea.

Run The Numbers. No matter how these changes come about, each taxpayer has to run the numbers on his or her situation, types of income and future expectations to determine the best course of action from a tax standpoint. Overall, it would appear that high income taxpayers are going wind up paying more after 2010 so Roth conversions this year look appealing for these individuals.

Recharacterization. In this whole area of planning, an important aspect is the ability, after the fact, to reverse course, put the funds back into a regular IRA, and treat the whole Roth conversion as never having happened. In other words, a taxpayer gets a limited benefit of 20/20 hindsight and can reverse prior action without suffering a tax liability or penalty. This makes action in 2010 pretty appealing, if you can study tax rates, which may not be finalized for future years. For example, the 2010 election might bring about some changes in legislation that would increase taxes on conversions made this year. If those changes come about, recharacterization and reversing course might be a good alternative.

Bottom Line. Our never simple tax system is getting more complicated for high income taxpayers. So what else is new! It will behoove high income taxpayers, especially older individuals with large IRA�s to study the potential of Roth conversions in 2010, run the numbers and see if higher tax rates in the future make a 2010 Roth conversion a sound plan.

Beneficiary Designations. One further note, beneficiary designations on all retirement plans, including IRAs and Roths are generally an important part of estate planning for high net worth individuals. Financial planners often recommend individual beneficiaries without studying the impact that decision has on the overall estate plan. Sometimes, benefits should be divided among family members. Sometimes a trust is the best beneficiary to accomplish family objectives.

With the crazy estate tax situation in 2010 not yet remedied, estate planning for higher net worth individuals is important and constant vigilance needs to be maintained, especially this year.

Conclusion. If you want a current review of your estate planning documents with the estate tax limbo we now live in, please call James R. Modrall III or Thomas A. Pezzetti, Jr. or any of the attorneys listed below.

Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Matthew D. Vermetten, Susan Jill Rice, Gary D. Popovits, H. Douglas Shepherd, Laura E. Garneau, David H. Rowe and Nicole R. Graf at (231) 941-9660

BRANDT, FISHER, ALWARD & PEZZETTI, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional advice.

Going Into Reverse - Coming Out Ahead

Reverse Mortgages. Persons 62 and older are eligible to take out a Reverse Mortgage on their residence. Read on to learn more about this strange animal called a Reverse Mortgage.

A Reverse Mortgage is a first lien on a residence that has no monthly payments. In many cases, the borrower withdraws all or part of the loan in monthly installments, thus the term "Reverse Mortgage". The lender pays the borrower monthly rather than vise versa.

The idea is to permit seniors to tap the equity in their residence, or pay off an existing home equity loan or mortgage, avoiding a monthly payment, and augmenting retirement income. The borrower has a choice of benefits, lump sum, monthly payment or a combination.

Example. Take the hypothetical case of a 76 year old widow with an $300,000 condo subject to a $80,000 home equity loan on which the monthly interest at 6% is $400 per month. The widow's retirement income (social security and pension) is $1,600 per month. She can hardly afford the monthly payment on the home equity loan and might not qualify for a regular mortgage because of her low income. Solution: A Reverse Mortgage which pays off the home equity loan and provides a monthly income of $350 per month for the widow's lifetime. Her monthly available cash, therefore, has improved by $750 per month, the $400 interest payment she saves, plus the monthly cash disbursement by the lender. The widow makes no monthly payments on the loan but still has to pay for insurance and taxes, which are expenses she had anyway.

How Does The Loan Work? Reverse Mortgages are guaranteed by the federal government so there is generally a saving in the interest rate. The lender's interest accrues, adding to the outstanding loan balance each month. Included in the interest accrual is an insurance premium. Also, included in the loan balance are the initial expenses for the lump sum payment to the government, the lender's origination fee, appraisal and closing costs. In my experience, these fees and costs generally run $9,000-$20,000, depending on the amount of the loan. Fees have often been cited as a strong negative to Reverse Mortgages, as they may reduce the amount of the equity in the property that is available to the borrower's heirs. However, the benefits outweigh the negatives for many seniors.

Ultimate Payoff. The lender has to get paid its principal and interest somewhere along the line. There is no free lunch. The typical Reverse Mortgage terms provide that the loan becomes due at the death of the borrower or if the borrower moves out, for example to go to a nursing home. The borrower, or the borrower's representative, has six months in which to sell the property and pay off the loan. Generally, an additional six months is granted to reflect market conditions. If the property is not sold, the lender takes over the property and has to sell it. Since the loan is guaranteed by the federal government, the lender can't lose on the deal. The lender has no claim against the borrower's estate.

Whether there is any equity in the property left for the borrower's heirs, will depend on how much money the borrower has drawn and how long the borrower lives or stays in the house. For this reason, an older borrower, with a shorter life expectancy, is permitted to withdraw more money from the Reverse Mortgage loan than a younger borrower with a longer life expectancy. The insurance premiums paid to the federal government are supposed to cover variations in market values and life expectancies.

The program is relatively new, but is gaining in popularity because of bad market conditions, outstanding loans, and the squeeze felt by many retirees in their pension and social security income. In some ways, the program can be looked upon as a government incentive to seniors for staying in their own homes.

Down Sizing. Another use for a Reverse Mortgage is in financing a new, smaller home. For example, a married couple want to down size and realize $400,000 from the sale of their primary residence. They want to buy a smaller condo in Florida for $200,000. Based on their ages, they may be able to borrow $100,000 on a Reverse Mortgage on the new Condo This reduces their out of pocket purchase costs to $100,000, and leaves investable funds of $300,000. They have no mortgage payments on the new house and have substantial liquid funds for investment, living costs, or assisting family members.

New Competition. As pointed out by a recent Wall Street Journal Article, competition is heating up the Reverse Mortgage market. Active lenders are Genworth Financial, Bank of America, Wells Fargo and Financial Freedom. Also, the Article points out that Met Life is also dropping its Reverse Mortgage origination fees and servicing charges. Because the Reverse Mortgage scene is constantly changing, clients are advised to do comparative shopping, which has potential to save thousands of dollars in origination fees and servicing charges.

Conclusion. Reverse Mortgages can be a useful tool for financial planners, seniors and estate planning advisors. We have had several clients tap their home equity with a Reverse Mortgage, enabling them to stay in their homes, augment their income and improve their standard of living. We suggest that an interested borrower get quotes from several lenders. A Reverse Mortgage generally involves modifications of a client's Will or Trust, as well. If you, friends or relatives want to consider a Reverse Mortgage and discuss its impact on overall estate planning, please call James R. Modrall III or Thomas A. Pezzetti, Jr. or any of the attorneys listed below.

Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Matthew D. Vermetten, Susan Jill Rice, Gary D. Popovits, H. Douglas Shepherd, Laura E. Garneau, David H. Rowe and Nicole R. Graf at (231) 941-9660

©BRANDT, FISHER, ALWARD & PEZZETTI, P.C.

This newsletter is provided for informational purposes and should not be acted upon without professional advice.

Tax Impact - New Health Care Bill

Keebler Analysis. Credit for this summary alert goes to Bob Keebler, a Wisconsin CPA who advises affluent clients throughout the country. Bob has analyzed the important income tax provisions of the 2010 Health Care Bill and has posted his narrative on our Leimberg estate planning listserve. This is a synopsis of his presentation. I have to confess that I have not read the new health care bill. As passed, it will have an impact on affluent clients, meaning singles with income over $200,000 and married couples with income over $250,000, the "Threshold" amounts.

Medicare Surtax. The 2010 Bill establishes a 3.8% Medicare Tax on passive net investment income in excess of the threshold amounts. This newsletter will attempt to summarize Bob Keebler's analysis of the new Surtax.

The 2010 Health Care Bill establishes a third tier of income tax calculations. We are familiar with the first two tiers, the regular tax calculation and the AMT (Alternative Minimum Tax). We now have a third tier, Surtax calculation, for higher income tax payers. Also, it is important to remember that the Bush tax cuts expire in 2010. Therefore, the highest marginal effective tax rates are likely to increase from 35% to 43.4%, effective January, 2013.

Investment income would normally be royalties, dividends, interest, and capital gains. The new tax will be levied on "passive" investment income as opposed to "active" investment income, a distinction which has been present in the Code for many years. An example of this distinction would be a landlord who actively manages rental properties vs. rental income from partnerships, or income from oil and gas investments, where the taxpayer is not "active" in management.
Modified Adjusted Gross Income. The measuring rod for the Surtax will be Modified Adjusted Gross Income ("MAGI"). MAGI will include capital gains and all other income, including pensions, deferred compensation, etc.

It is important to note that distributions from qualified retirement plans are not subject to the Surtax. However, taxable distributions will push up MAGI so that other passive investment income, becomes subject to the tax.

Two Important Points. With increasing rates ahead for high income taxpayers, Keebler makes two important points for them and their counselors:

1. Death in 2010. For taxpayers dying in 2010, prior to November 30, representatives should choose a fiscal year ended November 30 to achieve maximum avoidance of increased tax rates, particularly the Surtax. Under special provisions of the Internal Revenue Code, estates and revocable trusts can elect fiscal years other than the year ended December 31. This is a commonly used tax deferral technique, which will now help avoid some of the rate increases and Surtax.

2. Roth Conversions. We have written previously about the advantages of Roth conversions in 2010. We see increased publicity for this technique in the financial press. The new Surtax makes Roth conversions in 2010 look even more attractive. The distribution from a regular retirement plan will be taxable in 2010. However, the 2010 tax rate appears to be much lower than affluent taxpayers will face in future years, especially those higher income taxpayers who will be facing the large increase in the top bracket.

Conclusion. Many professionals have not yet had an opportunity to analyze the impact of the new Health Care Bill on client taxes. Suffice it to say that if you advise higher income clients or if any reader fits this category, be alert to these changes. Make sure that you, or your client, sit down with a financial planner or CPA, to analyze the potential impact that the bill will have after 2010 and consider what steps you can take this year to minimize your potential tax exposure in the future.

We get involved with estate and trust administration which will have potential impacts under the new legislation. Roth conversions also impact estate planning by beneficiary designations, etc. If you have questions regarding any of the above, please contact James R. Modrall III or Thomas A. Pezzetti, Jr. or any of the attorneys listed below.

Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Matthew D. Vermetten, Susan Jill Rice, Gary D. Popovits, H. Douglas Shepherd, Laura E. Garneau, David H. Rowe and Nicole R. Graf at (231) 941-9660

©BRANDT, FISHER, ALWARD & PEZZETTI, P.C.

This newsletter is provided for informational purposes and should not be acted upon without professional advice.