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Personal Wealth Advisors: The Longview

The Longview: 2015 Outlook

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January 21, 2015

Clients of EisnerAmper Personal Wealth Advisors face the challenge and opportunity of both preserving and growing wealth. They weigh the elements of risk against potential for reward, and focus to ensure   wealth strategies are built and goals are established – with both being adjusted  over time.

Clearly stated goals are the hallmarks of implementing successful wealth strategies. We believe that when setting goals, it is always worthwhile to examine the economic and geopolitical factors which exert significant influence over wealth-related decision making.   As we look back at 2014 and ahead into 2015, the following are the primary concerns.

From a macro-economic perspective, a number of events captured share-of-mind in 2014 and will most likely continue to impact planning in 2015: the proxy war in the Ukraine, the wide-ranging impact of the decline in oil prices, the buoyancy and volatility of the equity markets, global interest rates at almost zero over an extended period of time, an improving American economic performance, and a Republican House and Senate.

Looking closer:

  • 2014 was a year of increased global equity volatility largely arising from changes in U.S. monetary policy, geopolitical events, and election year changes in America’s political and social views regarding the economy. Abroad, uncertainty in Russia and the conflict in Ukraine contributed to a 14.5% fall in the German stock market. Brent crude collapsed nearly 40% in 2014 and at the beginning of the year was hovering around $40 per barrel.
    The decrease in the Brent benchmark price could continue into late 2015 Q2. Oil supplies are likely to grow this year, with the US shale oil industry still increasing production. Result – lower energy costs could help grow energy dependent industries and increase profits while significant savings at the pump potentially increases discretionary consumer spending. A further result – destabilization in Latin American and Middle Eastern oil producing nations with all the attendant consequences.
  • There is still room for growth in the U.S. labor force which could cause the Federal Reserve to defer an increase in interest rates beyond late Q2 and Q3.  The U.K. is witnessing rapid economic growth, however, with a productivity challenge leaving little capacity in the economy. Result – logically, a modest acceleration in U.S. growth in the year ahead, with low interest rates and increasing labor environment, and rising (and still-low) interest rates, should help corporate earnings and resultant equity valuations. The countervailing force, of course, is the possibility of the EU slipping back into recession.

Drilling down further:

  • Globally, persistent jobless growth, which refers to the phenomenon in which economies exiting recessions demonstrate economic growth while merely maintaining – or, in some cases, decreasing – their level of employment, remains a real concern.
  • Income disparity – In the U.S., in 2013 the top 1% of families received nearly 22.5% of income, while the bottom 90% share was below 50% – a level not seen since 1928. In many developed and developing countries, the poorest half of the population controls less than 10% of wealth.  
  • Demographics – Are we in the U.S. an aging population? Changing demographics and hiring pool statistics tell the tale: In the U.S., Gen Y (age 17 to 31) comprises 39% of the work force; Gen X (age 32 to 47) represent 23%, while Baby Boomers (age 48 to 66) are at 38%. The fertility rate of the total U.S. population is 1.9 children per woman; the population age 65 and older is expected to more than double between 2012 and 206.     

Our Flat World:

  • The rise of economic competition among countries is a global trend. 
  • Striving to increase labor migration is a growing, global concern even while developed, underdeveloped, and emerging economies are integrated on an unprecedented level; where goods, services, knowledge, information and people, naturally flow from one part of the world to another to the other.
  • In the Middle East and North Africa, the workforce has grown at the fastest annual rate in the world (2.7% in the past 10 years); however, youth unemployment is also the highest, at around 25% of the population.
    • In South Africa, education and skills development is the biggest challenge; projections show that soon the region will be home to 50% of the world’s illiterate population. 
  • In Latin America, business leaders perceive lack of trust between corporations is biggest threat to growth.
  • In Asia, geopolitical tension has been centered upon the South China Sea and on maritime disputes among China and Vietnam and Japan and the Philippines, due to long-standing territorial and border disputes. The North Korean dilemma persists.

The certainty is that U.S. and global economic and geopolitical forces will always create obstacles to growth and open new doors to development. The best response to these enduring realities is sound planning; a resistance to changing one’s wealth strategy in a panic or just for the sake of changing; understanding market fundamentals and being alert to those outliers that can churn even the most placid of waters.  The twin goals of wealth preservation and growth depend to a large degree on how well you think through and implement a game plan designed by and for your personal and unique situation.

Blogging from Heckerling – The Devil is in the Details

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January 15, 2015

Talibi_Barbara newBy Barbara Taibi, CPA, PFS

Continuing with our reports from the Heckerling Institute on Estate Planning, January 2015

 M. Reed Moore of McDermott Will & Emory LLP led a very informative discussion on the importance of “Adequate Disclosure” as it pertains to gift tax returns. Final regulations on this matter were issued on 12/3/1999.  Adequate disclosure is extremely important because if the IRS determines that the standards of the regulations have not been met, no statute of limitation applies.  The gift return is open for audit until corrected.  You can imagine the serious consequences if this incomplete gift tax return is found upon audit of the donor’s estate and significant tax is now owed by the estate or beneficiaries.

To assure adequate disclosure on a gift tax return, the transfer needs to be reported in a way that the IRS can determine the nature of the gift and basis for the value reported.  The speaker stated the following 5 elements are required to achieve adequate disclosure:

  1. A description of the transferred property and any consideration received by the recipient
  2. The name of and the relationship between the transformer and transferee
  3. Any property transferred in trust must also report the trust ID#, and either a description of the trust terms or a copy of the trust
  4.  A “Qualified Appraisal” if required under the Treasury Regulations or, if not required, a detailed description of the method used to determine FMV.
  5. A statement describing any position taken on the gift returns that is contrary to any proposed, temporary or final regulations published at time of gift.

Corrective measures should be taken as soon as a possible lack of adequate disclosure is discovered.  If it is determined that an amended return is required, it is again very important to know that the IRS has specific regulations on the information that must be provided.  You need to be sure these requirements are met or all your good efforts won’t fix anything. As we have always been told – “do it right the first time.”

For more content stemming from the 2015 Heckerling Institute on Estate Planning, please click here.

Blogging from Heckerling – Digital Assets of a Decedent

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January 14, 2015

Arrigo_MarieBy Marie Arrigo, CPA

Continuing with our reports from the Heckerling Institute on Estate Planning, January 2015

Suzanne Brown Walsh of Murtha Cullina discussed digital assets of a decedent. Although there is no universal definition of digital assets, it has generally come to mean electronic records which are accessed by tangible devices, such as a computer, smartphone, tablet or a server. Many individuals own online gaming pieces, photos, digital music, client lists, financial institution accounts, business records, frequent flyer and rewards programs, social media accounts, and more. There are 30 million Facebook accounts that belong to dead people. Some service providers have explicit policies on what will happen when an individual dies, but most do not. Digital assets are generally governed by contracts known as Terms of Service Agreements ("TOSAs") which control the relationship between the account holder and the custodian, and include terms of use, end-user license agreements and privacy policies. Many of these TOSAs do not authorize fiduciaries to have access to the decedent's digital assets.

Fiduciaries need to access digital assets in order to prevent identify theft. Fiduciaries are obligated to preserve the assets of the estate they are managing. When an individual is unable to continue to monitor his/her online accounts, it becomes much easier for criminals to hack these accounts, open new credit cards, apply for jobs, obtain identification cards, etc. Thus, a fiduciary needs to monitor and protect these accounts as part of his/her fiduciary responsibilities. Further, the fiduciary must marshall and collect assets, and this is becoming increasingly impossible to do in today's internet environment.

State laws criminalizing unauthorized access to computers and data, as evidenced by the Federal and State Computer Fraud and Abuse Acts, often prevent fiduciaries from accessing decedents' accounts, Further, federal privacy law and TOSAs also impede the fiduciary's access to digital assets. The fact that a fiduciary is authorized by the owner or state law to use a computer or to act for an account user is not an absolute bar to prosecution, as he/she may be violating the TOSA. TOSAs are frequently silent as to fiduciary access or postmortem options, or they may simply prohibit postmortem transfer altogether.

The Uniform Fiduciary Access to Digital Assets Act ("UFADAA") was drafted by a committee appointed by the Uniform Law Commission for the purposes of creating a uniform act to vest fiduciaries with the authority to access, manage, and distribute digital assets. UFADAA aims to resolve many of these impediments to fiduciary access, so that they can carry out their duties. UFADAA is ready for consideration and enactment by states.

In the interim, estate planners can ask their clients to inventory their online accounts and passwords. Also, documents should provide for authorization of the fiduciary to access and terminate such accounts.

For more content stemming from the 2015 Heckerling Institute on Estate Planning, please click here.

Blogging from Heckerling – Transferring Wealth to Younger Family Members

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January 14, 2015

Goldberg, KarenBy Karen Goldberg, JD, LLM

Continuing with our reports from the Heckerling Institute on Estate Planning, January 2015

Steve Akers of Bessemer Trust spoke about self-cancelling installment notes (“SCINs”) and private annuities.   These techniques are typically used to transfer wealth to younger family members at no gift or estate tax cost. However, they are most successful if the senior family member dies prematurely. Therefore, the ideal candidate is someone in poor health, whose death is imminent.

With a SCIN, a parent typically sells property to a child in exchange for a note that is cancelled if the parent dies prior to the expiration of the note term.  As a result, the remaining note payments that would have been payable had the parent lived are not includible in the parent’s estate.  Obviously, the sooner the parent dies, the better, as fewer assets will be includible in his estate.   

Nevertheless, SCINs have inherent uncertainties.  Because of the mortality risk, the seller must be compensated for the note’s potential cancellation at death by either a higher purchase price or a higher interest rate.   However, there is no universal agreement as to how to determine the premium because there is no clear answer concerning how to value the payments in terms of the appropriate mortality tables and discount rate.  In addition, if the SCIN’s term equals or exceeds the seller’s life expectancy, the SCIN might be characterized as a private annuity.  

With a private annuity, a parent typically transfers property to a child in exchange for fixed annual payments for the remainder of his lifetime.  If the parent dies before his anticipated life expectancy, he won’t receive payments equal to the value of what he transferred, thereby reducing his estate.  A potential risk, however, is that if the annuitant outlives his life expectancy, he will receive “too much” for the transferred property.  Because of adverse income tax effects that likely apply if an asset is transferred to an individual in exchange for a private annuity, it is more attractive to do the transaction with a grantor trust for the benefit of the annuitant’s family.  However, this strategy has its own issues, including determining how much the trust must have so that it will be deemed capable of satisfying the annuity for the annuitant’s life expectancy.

For more content stemming from the 2015 Heckerling Institute on Estate Planning, please click here.

Blogging from Heckerling – Estate Planning Post ATRA

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January 14, 2015

By Barbara Taibi, CPA, PFS

Continuing with our reports from the Heckerling Institute on Estate Planning, January 2015

Marriage, divorce, birth, death have always been reasons clients want to revise previously set estate planning transactions that no longer accomplish their original goals. Now ATRA may be one of the biggest reasons that current estate plans need to be revised.

Only 15 years ago, the estate tax exemption was $675,000 ($1,030,000 for GST); the top estate tax rate was 55% and any unused exemption amount was lost by the surviving spouse.  Fast forward to 2015 and as a result of ATRA, the current estate tax exemption is $5,430,000 (same for GST), the top estate tax rate is 40% and we have portability. While the estate tax burden has decreased, the income tax burden for individuals and trusts has significantly increased.  The top income tax rate on ordinary income has gone from 35% to 39.6%, long-term gains from 15% to 20% and we have a new 3.8% Medicare tax on net investment income. A New York City resident is looking at a top effective rate on income of 52.26%!

John F. Bergner of Winstead P.C. suggested several new estate planning strategies post ATRA.  One of the concepts discussed was to think about avoiding valuation discounts on assets.  While in past years estate planners put much effort into setting up ownership structures that would permit a valuation discount due to (1) fractional interest, (2) lack of control or (3) restrictions on outright sale, the post ATRA world could make these structures detrimental to the overall tax burden of a family. 

Remember: The estate tax value of an asset is what determines basis for income tax purposes of the inherited property.  If the decedent’s total assets do not exceed the current estate tax exemption ($5.34M); a reduced fair market value will produce no federal estate tax savings AND will increase the gain that will have to be recognized on the eventual sale of the property by the beneficiary. 

Example: The client owns a 25% interest in a family limited partnership (“FLP”) that has been discounted down to a value of $3M.  If he owned these assets outright, the value would be $4.5M.  His only other assets are valued at $750,000.  If the client dies with these asset values, there would be no estate tax either with or without the discount.  The discount provided no estate tax benefit.   However, assuming that the client holds this discounted FLP interest at death, the beneficiary has a built in gain of $1.5 million that will cause additional capital gains tax on the eventual sale. 

For more content stemming from the 2015 Heckerling Institute on Estate Planning, please click here.

Blogging from Heckerling – Portability

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January 14, 2014

Goldberg, KarenBy Karen Goldberg, JD, LLM

Continuing with our reports from the Heckerling Institute on Estate Planning, January 2015 

Diane Zeydel of Greenberg Traurig spoke about  portability, the estate tax provision that allows a surviving spouse to inherit his or her predeceased spouse’s unused estate tax exclusion (“DSUE”). She discussed its benefits and drawbacks, as well as potential planning strategies. One advantage is that spouses can leave their property outright to each other without having to fund a credit shelter trust to preserve the estate tax exclusion of the first spouse to die. Another advantage is that assets passing outright to the surviving spouse, rather than to a credit shelter trust, receive a second step-up in basis when the surviving spouse dies.    

A potential drawback of portability is that the unused generation-skipping transfer tax (“GST”) exemption of the first spouse to die could be lost because the GST exemption is not portable. Nevertheless, this risk can be overcome and the benefits of portability preserved if, upon the first spouse’s death, that spouse’s GST exemption amount passes to a Qualified Terminable Interest Property ("QTIP") trust for the surviving spouse. The QTIP trust is eligible for the marital deduction and therefore does not affect the portable amount. Furthermore, because the QTIP assets are includible in the surviving spouse’s estate, they are subject to a second basis step-up at the surviving spouse’s death.

One of the several planning techniques that Diane discussed included how the surviving spouse can use portability to leverage the predeceased spouse’s DSUE by making a lifetime gift of the DSUE amount to a grantor trust for descendants. The assets in such a trust, rather than a testamentary credit shelter trust, can grow tax-free because the surviving spouse is responsible for paying the income tax on the trust income.

For more content stemming from the 2015 Heckerling Institute on Estate Planning, please click here.


News from the Heckerling Institute on Estate Planning

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January 13, 2015

By Marie Arrigo, CPA

Arrigo_MarieThis week, the 49th annual Heckerling Institute on Estate Planning convened in Orlando, Florida. Heckerling is the largest and most prestigious estate planning conference in the country. This year's Institute has drawn more than 3,000 attendees.

Several EisnerAmper professionals are attending this week's Institute and are reporting on "hot" topics being discussed. This is the first of a series of blogs on the Institute.

Howard M. Zaritsky and Lester B. Lee started off the proceedings with a primer on basis of property.

As first discussed at the 2014 Institute, the American Taxpayer Relief Act of 2012 (“ATRA”) has significantly changed the income tax and estate tax regime, particularly for those who reside in states with high income tax rates and modest or low estate tax rates. Many have an income tax rate that is higher than the estate tax rate. Estate planners therefore must consider both the estate and income tax rates, including the 3.8% surtax on net investment income, as implemented by the Health Care and Education Reconciliation Act of 2010, amending the Patient Protection Act, when determining what assets, if any, should be transferred to other family members.

This paradigm shift has made the calculation of basis very important. Without basis, one cannot readily determine gain or loss on the sale of property. Basis measures the accretion of wealth and recognition of revenue when assets are bought, sold, exchanged and otherwise disposed of under Internal Revenue Code section 1012(a). Simply put, basis is your investment in property and is a unique tax concept.

Some planning strategies to maximize basis on gifts include:

  • Shifting a taxable gain to a donee by shifting taxable gain on the potential sale of the property to a donee with an available capital loss carryover. The donee is then able to partially or entirely offset the gain with the loss, thereby minimizing or eliminating the capital gain on the transaction.
  • A donor should compare the income tax effects of a gift transfer with the estate, gift and GST tax savings. The carryover basis rules for gifts create a risk that a significant taxable gain will be recognized on a later sale of appreciated property that was gifted. A bequest or devise of that property will give the donee a step-up in the income tax basis equal to the value at either the date of death or, if the executor so elects, the alternate valuation date, which is generally six months after the date of death. However, the value of the property would be subject to the estate value.
For more content stemming from the 2015 Heckerling Institute on Estate Planning, please click here.


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