Wisconsin Estate Planning and Tax Law Blog

Happy 4th of July

As we celebrate the 233rd birthday of our great country I thought it would be an appropriate time to take a quick look at the history of income taxes in the U.S.  The U.S. Treasury website has a page titled:  Fact Sheet: Taxes - History of the U.S. Tax System - that you might find interesting. 

It is hard for me to imagine things without taxes being part of the equation, but as you can see the U.S. income tax system didn't exist with any permanency until the 16th amendment was ratified by the requisite number of states in 1913.  With this version of income taxes being 96 years old there are still people living that might be able to imagine a world without them.  We've come a long way since the days when rates ranged from 1 to 7 percent.

With that it is now time to celebrate the 233rd anniversary of America's independence.  Have a fun and safe holiday weekend. 

Wisconsin State Budget 2009-10

The Legislature passed it, the Governor exercised a number of vetoes, and then Governor Doyle signed the state budget on June 30, 2009.  It was the first time the budget has been done on time since 1977.  I hate to date myself, but that is just slightly longer than I have been on this planet.  I previously discussed three of the tax related items in Doyle's proposed budget.  Those three items made the final budget.  In fact, the capital gains tax exclusion dipped to 30% from the originally proposed 40%.   

As a cynic would expect it did not end with the Governor's pen dashing across the paper.  Apparently Doyle "inadvertently" used a "Frankenstein Veto" on one item in the budget bill.  Up until last budgetary cycle that was not a problem, but the voters in Wisconsin amended the state constitution last year to make the "Frankenstein Veto" unconstitutional.  In any event, Wisconsin has a budget so I thought I'd take a quick look at the tax aspects of it:

• Change from a 60% exclusion to a 30% exclusion for capital gains taxes (100% exclusion for investments in certain Wisconsin start-up companies)
• Cut $1 million off the tax credit for movie production in Wisconsin
• $0.75 increase to the State's cigarette tax
• $0.75 per line cell phone tax
• Expansion of enterprise zone tax credits
• High Earner Tax Bracket (additional 1% tax rate on individual income in excess of $300,000 for joint filers and $225,000 for individual filers)

That is very brief overview of a handful of tax related items in a massive budget bill.  I will provide a link to the actual text of the budget bill as soon as one is available.

IRS Letters and Notices

As the 2008 tax seasons comes and goes I thought it would be prudent to provide a link to the IRS website that describes various correspondence from the IRS that some clients have received in the past or may receive in the future.  The IRS website provides a page titled Letters and Notices Offering an Appeal, which contains short descriptions of various IRS examination or collections letters.  The five letters/notices that I typically see from new clients are the following:

• Letter 525 – General 30 Day Letter
• Letter 531 – Notice of Deficiency
• Letter 11 – Final Notice of Intent to Levy and Notice of Your Right to a Hearing
• Letter 1058 – Final Notice Reply Within 30 Days
• Letter 3172 – Notice of Federal Tax Lien Filing and Your Rights to a Hearing under IRC 6320

One of, if not the most important aspect of these letters is the deadline by which the recipient has to respond.  In most cases the recipient has to respond within 30 days from the date of the letter.  In the case of Letter 531 - Notice of Deficiency, the taxpayer has 90 days to petition the tax court.  If the taxpayer does not file the petition with the tax court within 90 days, the tax court no longer has jurisdiction and cannot hear the case.  This is extremely important since the tax court is the only forum (the other two options are the U.S. District Court for the taxpayer's jurisdiction or the U.S. Court of Federal Claims) that does not require the taxpayer to first pay the alleged tax liability before seeking a refund through the Federal District Court or the Court of Federal Claims.

Therefore, the main purpose of this post is very straightforward:  Read the IRS letters and notices and strictly adhere to the deadlines contained therein.  As always, please consult a qualified tax attorney or CPA to assist you with tax issues of this kind.

Wall Street Executive Bonuses: The Firestorm Rages On

I have not had the opportunity to fully research and review all of the material involved with the executive bonuses saga that has engulfed all of us in recent weeks, but I wanted to provide some brief commentary on the topic.  It is relevant to this blog because the most popular ideas currently discussed by the government involve the enactment of an excise tax on executive bonuses received after January 1, 2009.  In fact a Bill was introduced by the Rep. Charles B. Rengel (D-NY) today.  The legislation is referred to as H.R. 1586 and the full text can be found at the House Ways and Means Committee website in pdf here.  The Taxgirl has a great discussion of this bill in her post, Legislation Introduced to Tax Bonuses at 90%.

According to Reuters.com, House votes to recoup bonuses from bailed-out firms, the House overwhelming passed the Bill by a 328-93 split.  An article, House Opens Debate on Bill to Tax Wall Street Bonuses, by Martin Vaughan on CNNMoney.com , discusses some of the partisan debate on the topic including the argument from some Republicans that the Bill is unconstitutional and that more effective alternatives are available.  This article by David Stout on NYTimes.com, House Passes Heavy Tax on Bonuses for Rescued Firms, also provided a nice overview of today's events and the debates that will no doubt linger for at least a bit longer.

As I read through the New York Times article I was struck by a number of things but nothing drew my attention quick as much as the comments made by Rep. Earl Pomeroy (D-ND).  Rep. Pomeroy was as saying, “The people have said ‘no.'  In fact, they said ‘hell no, and give us our money back.’”  I am not intending to take sides in today's great debate, but I am intrigued by Pomeroy's comments for three reasons.  First, I was born and raised in North Dakota so I always get a kick out of seeing the state's long Representative in the news.  Second, until recently I have heard virtually nothing about or from Pomeroy.  Now I see his name in regards to the Wall Street Bonuses topic and he has one of the most popular proposals regarding Federal Estate Tax in H.R. 436: Certain Estate Tax Relief Act of 2009.  Third, I'm completely convinced that Pomeroy's "hell no" clearly eliminates any ambiguity as to his true feelings on the matter.  That direct, no-nonsense delivery is what I attribute to the stereotypical North Dakotan.

One other quote that I thought was noteworthy is from the Bill's sponsor Rep. Rangel.  According to FoxNews.com, Rangel said, "We figured that the local and state governments would take care of the other 10 percent."  So let there be no confusion as to the government's intentions.  While the bonus recipients may face a 90% tax at the Federal level they should also expect the states to gobble up the remaining 10%.  That's one way to recoup the TARP money I guess.

Wisconsin Tax Summary 2009 to 2011

Given the fact that we are approaching the tax deadline and that Governor Doyle's 2009-11 biennial budget includes a few important tax changes, I thought it would be worthwhile to summarize the tax climate in Wisconsin. 

I admittedly did not read the entire budget bill or the budget adjustment bill, but I have reviewed portions of them and I have reviewed various summaries prepared by reputable people.  It is beyond the scope of this blog post to launch into a full scale critique of the budget bill, so instead I have decided to focus on the tax related issues at a relatively high level, including the High Earner Tax Bracket, Wisconsin Capital Gains Tax and Combined Reporting.  I have also provided a link to a post from The Tax Foundation that provides an overview of taxes in Wisconsin.

Wisconsin 2009-11 Budget 

High Earner Tax Bracket

Governor Doyle's budget includes a proposed additional 1% tax rate on individual income in excess of $300,000 for joint filers and $225,000 for individual filers.  The Individual income tax is applied to net income from the following business entities: sole proprietorships, partnerships, tax options (S) corporations and limited liability companies ("LLCs").  This will bring Wisconsin top income tax bracket to 7.75%.

Wisconsin Capital Gains Tax

 The budget aims to reduce the amount capital gains income that is exempt from Wisconsin income taxes.  It is important to remember that Wisconsin applies its normal income tax rate to capital gains.  This differs from the federal government approach, which treats capital gains separately at lower tax rates.  The proposal includes a reduction in the capital gains exemption from 60% to 40%.  The Governor's office has felt it important to point out that the top 5% of earners in the state would receive approximately 78% of the benefit of the capital gains exemption.  The top 1% earners would recieve 57% of the exemption benefit.   Therefore, the cost of lowering the exemption will be borne by the state's top earners.

Combined Reporting

There are currently 20 states that require combined reporting.  The Governor's office projects that 13% of corporations in Wisconsin will be affected by combined reporting.  Combined reporting is a legal requirement that all related corporations that are operated as a single business enterprise, any part of which is being conducted in the state, be treated as a single taxpayer for apportionment purposes.  Governor Doyle also made sure that Wisconsin implemented the single sales factor apportionment formula, which will be used to calculate the percentage of a corporation's combined reporting income is properly apportioned to Wisconsin.  The corporation will then be taxed on that amount.

As mentioned above, I have provided the following link to an article from The Tax Foundation titled, The Facts on Wisconsin's Tax Climate.  This articles provides an overview/summary along with national rankings in different tax cateqories for the periods of the 2008 through 2009. 

Three Certainties in Life?

It appears that I have discovered a third certainty in life during the time I have written (or more appropriately, not written) this blog.  As you most likely surmised from that first sentence the third certainty to date has been my less then stellar updating of this blog.  Well just as I have set out to address the two most notable certainties in life, death and taxes, by focusing my practice on those issues, I have decided to quash the third certainty as well. 

It is nearly two and a half months into the new year and two weeks into the Lenten season, yet here I sit finally getting around to my resolutions.  Amongst other things of course I intend to concentrate more time and energy on the development of informative content for this blog.  As all of you know, time is finite and prioritization is essential. 

My goal is to author a new post at least once a week.  It is safe to assume that some weeks will be "better" than others, but I will do my best to provide information and commentary that I hope will be of value to you. 

FDIC: Deposit Insurance Regulations; Revocable Trust Accounts

    The FDIC recently came out with an interim final regulation regarding deposit      insurance for revocable trust accounts.  The FDIC summarized the interim         rule as  follows:

SUMMARY: The FDIC is adopting an interim rule to simplify and modernize its deposit insurance rules for revocable trust accounts. The FDIC's main goal in implementing these revisions is to make the rules easier to understand and apply, without decreasing coverage currently available for revocable trust account owners. The FDIC believes that the interim rule will result in faster deposit insurance determinations after depository institution closings and will help improve public confidence in the banking system. The interim rule eliminates the concept of qualifying beneficiaries. Also, for account owners with revocable trust accounts totaling no more than $500,000, coverage will be determined without regard to the beneficial interest of each beneficiary in the trust.

Under the new rules, a trust account owner with up to five different beneficiaries named in all his or her revocable trust accounts at one FDIC-insured institution will be insured up to $100,000 per beneficiary. Revocable trust account owners with more than $500,000 and more than five different beneficiaries named in the trust(s) will be insured for the greater of either: $500,000 or the aggregate amount of all the beneficiaries' interests in the trust(s), limited to $100,000 per beneficiary.

Federal Register: September 30, 2008 (Volume 73, Number 190).

Attorney Neil Hendershot at the PA Elder, Estate & Fiduciary Law Blog provided a great post on the interim rule titled, FDIC's Interim Rule for Living Trust Deposits.  Instead of reinventing the wheel I'm happy to defer to Attorney Hendershot on this topic.  As you will see from Attorney Hendershot's post, this is not the first time that FDIC has attempted to clarify deposit insurance in regards to revocable trusts.

One item of note given the recent passage of the $700 billion dollar bailout plan is that the $100,000 per depositor limit was temporarily raised to $250,000 through December 31, 2009.  Since the interim rule came out a week prior to the temporary increase it does not expressly state whether it is applicable to revocable trust.  It is logical that the temporary $250,000 per depositor increase also applies to each beneficiary of a revocable trust.  I will continue to research that aspect and report back any findings. 

AARP Research Report: A Balancing Act: State Long-Term Care Reform

Link:  AARP Research Report:  A Balancing Act: State Long-Term Care Reform.   The AARP Public Policy Institute recently published a research paper that looks at how the states have developed or revised their respective long-term care systems.  The full-report can be download from the AARP website by following the above link and clicking on the "Full Report (PDF)" link.  Also available on that page is a link to individual reports for each of the 50 states.  The state-specific reports can be accessed by clicking on your state of choice on the map of the United States or by clicking on the text link towards the bottom of the page.

The Full Report contains a wealth of information including each of the state-specific reports.  Therefore, if you download the full report you do not have to also download the different state reports that may interest you.  I have to admit that I have not reviewed the Full Report with a fine tooth comb, but my cursory review has peaked my interest.  As you have seen from my prior posts on this blog I view planning for long-term care as a major issue for many people.  It is a fact that we are living longer and our life expectancy continues to increase.  On top of that long-term care can be very expensive.  For many people the cost of long-term care may be overwhelming when viewed relative to the size of their gross estate. 

Funding a Revocable Living Trust

As we've discussed previously on this blog, the term Estate Planning can be a somewhat confusing term if taken without additional explanation.  Estate Planning, in my mind, is approach we must all take to properly direct who will inherit our assets and whether they will inherit directly or in trust.  It is also the process through which we nominate a person or persons to be in charge of everything from caring for minor children, managing our finances or making healthcare decisions while we are alive but unable,  administering trusts, or administering the probate estate.  The term itself does not describe whether a Will or a Revocable Living Trust is the main document in the plan.  I will elaborate on that topic in the near future, but for the purposes of this post I want to discuss what may well be one of the most important steps in the estate planning process that tends to be overlooked.

The step I am referring to is where assets are transferred or retitled to the revocable living trust.  The fact is that one of the reasons that the cost of a revocable trust based plan exceeds that of a will based plan is the additional work required to fully fund the trust.  A revocable trust operates at its utmost efficiency and effectiveness when the attorney and the client work to retitle and fund the revocable trust during the client's lifetime.  Accomplishing this step prior to death will keep the estate out of probate and ensure that the process is private and as seamless as possible.  In the end the additional work up front will go a long way toward limiting administration expenses and eliminating many of the difficulties that families may face if the estate planning is not proactively addressed.

Over the next two weeks I will discuss the various "typical" asset classes that I see in my practice and the different ways to deal with those asset classes to maximize the effectiveness of a revocable living trust.  As I publish those additional posts I will provide update links below.

Long-term Care Insurance Partnership Program

I wanted to briefly mention the adoption and implementation of the LTCI partnership program in Wisconsin.  This program is based on the concept that people who purchase qualifying policies and deplete their insurance benefits may then retain a specific amount of assets and still qualify for Medicaid, provided they meet all other Medicaid eligibility criteria except for the asset test.  For example, if a single person purchases long-term care insurance with $100,000 of benefits and then uses those insurance benefits to pay for long-term care, he or she would be permitted to retain $102,000 of assets and still qualify for Medicaid.  Contrast the $102,000 of assets with the otherwise applicable asset level for a single person of $2,000 and the impact is significant.

At this time, the Wisconsin legislature is working on the details of the LTCI partnership program with a target date for implementation of January 1, 2009.  As we progress towards the implementation date, more details will become available.  For now, it is important to keep in mind and prepare for the planning opportunities that some form of the LTCI partnership program in Wisconsin will present