Wednesday, April 20, 2011

May 2011 AFRs Announced

Very little change will be seen from April to May in the federal AFR. For the month of May 2011 the AFRs will be as follows:

In May the 7520 rate will remain unchanged at 3.0%, for the third month in a row. To go directly to the IRS' publication of these rates, please visit the following website: http://www.irs.gov/pub/irs-drop/rr-11-11.pdf.

Tuesday, April 12, 2011

Change Social Security?

It's official: High unemployment and a resulting decline in payroll-tax collections have taken a toll on the Social Security program. Benefits exceeded revenues for the first time in 2010–six years ahead of previous projections–according to the Social Security Trustees' 2010 report. But the nation's vital retirement program is expected to slip back into the black–at least temporarily–when the economy recovers, before posting increasingly larger deficits as more baby-boomers reach retirement age.

Projections suggest that there will still be plenty of reserve funds to continue paying full benefits for nearly 30 years. But without reform, the trust fund is projected to run dry around 2037, when tax revenues may only be sufficient to pay only about three-fourths of promised benefits. "The sooner action is taken, the more options will be available and the fairer reforms will be to our children and grandchildren," said Treasury Secretary Timothy Geithner in response to the trustees' report.

Reform proposals include raising the retirement age for full benefits to age 70, changing the formula for calculating annual inflation adjustments of benefits, and lifting the cap on the amount of wages subject to Social Security tax–currently $106,800–to upwards of $185,000. While each of these proposals would effectively equate to a “disguised cut” to our Social Security benefits, it is clear that something must be done, sometime, to improve the long-term health of our county’s social insurance system. The only question facing this eventuality is whether the political commitment to make these necessary changes yet exists?

 - James M. O'Reilly, Certified Elder Law Attorney

Wednesday, April 6, 2011

Contest of Will or Trust

There’s a funny commercial on TV lately. It involves a wealthy family gathering for a reading of the Will. If I recall correctly, most of the estate goes to the new (blonde and young) companion. But the only son of the Testator gets the satellite/cable TV package so that he can stream movies and TV shows directly to his television. He then goes berserk with joy. (view commercial here)

That commercial got me thinking about contests or challenges to established planning. Most clients want to avoid their heirs fighting over the estate or having to defend the estate from an unintended heir. It can be a financial and emotional drain on the beneficiaries of the estate. Estate Planners try to do their best to ensure that the formalities are followed when estate planning documents are signed and that the person executing the documents has capacity and understands the effect of the documents.

I recently read an interesting article on this topic. (A Will and a Way, WALL STREET JOURNAL, by Anne Tergesen) The article points out that Nevada (among a handful of other states) now allows for pre-mortem probate. What this means is that a person can present his or her planning documents to the court and require a contesting beneficiary to present his challenges to the court before the Testator (person who signed the Will or Trust) passes away. The advantage is that the best witness for the court is still alive to defend his or her actions. The disadvantage is that the client must disclose his or her documents with the court and make the contents known to the beneficiaries. The result is that if the person later changes his or her Will or Trust, then the process must occur again. It’s an interesting idea and I don’t know if our firm has handled a case like this in our local probate court. But as a planner, it’s important for me to know that this is available.

The article points out some other tools that estate planners may use to prevent a challenge to a Will or trust after the client passes away:

1. Use a video message from the Testator to explain provisions of the Will. This may soften the blow to beneficiaries, but might also backfire if the Testator says something inconsistent with the Will.

2. Include a no-contest clause. We do this at our firm, and they are fun to talk about and point out to the client, but are not always enforceable and would not be enforceable if there was a genuine concern that the Testator had capacity or was subject to undue influence.

3. Provide a gift of cash or other property to a person that is suspected to challenge the Will. (I’ve never heard of this one and it made me chuckle). If the person accepts a gift from the Testator at that time, it will be difficult for the person to claim that the Testator was incapacitated at the time of the gift.

Other standby techniques not discussed in the Wall Street Journal article include:

1. Making a specific bequest to a potential challenger which then gives the no-contest provision some effect (they stand to lose something if they challenge and lose).

2. Contract around the challenge: use a family settlement agreement (signed by all family members including potential challengers).

3. Leave the person the satellite/cable TV package so that they can stream hundreds of movies and TV shows directly to their TV. (Probably won’t work).