Year End Charitable Donation Strategies

The right strategy for giving can stop the IRS from taking!

By Alan G. Orlowsky, J.D., C.P.A.

This article has been updated several times. Additionally, Sally Foley, CPA, contributed to this article.

"Charity begins at home" is an appropriate maxim for most people who are struggling to raise their children, support their families and save for their retirement. But for those who are fortunate enough to have the necessities of life and the resources to provide for a rainy day, philanthropy is an affordable and gratifying option.

Give During Your Lifetime

When discussing the tax consequences of charitable giving with a client, I usually advise, if possible and affordable, that they should make donations during their lifetime, rather than at death. The purpose of this advice is two-fold:

If you donate during your lifetime, you can enjoy the blessings of giving and the gratitude of those to whom you give. Secondly, not only are you removing these funds from your taxable estate, they also qualify for a deduction on your personal income tax return. If such gifts are made subsequent to your death, there is only an estate tax savings, and hence the government's share of the gift giving burden is far less.

For example, if you are an 80-year-old individual with a $5 million dollar estate, you fall into the 45% estate tax bracket. If you make a $100,000 gift to charity this year, your income tax savings is $36,000 (assuming a 36% income tax bracket).

If you then die in 2008, at that time there is $64,000 ($100,000-$36,000) less in your estate because of the gift in 2007, and therefore an estate tax savings of $28,800. The aggregate tax savings is $64,800 ($36,000 plus $28,800).

If you had waited until your death to make the gift, the tax savings would only be $45,000 (45% of $100,000).

Thus, by making donations while you're still alive, you realize an additional $19,200that you can give to your family.

By giving now you can have your cake and eat it too.

Charitable Remainder Trust

If you are not ready to make an outright gift during your lifetime, you may consider establishing a charitable remainder trust (CRT). With the CRT you can make a charitable contribution to the trust at any time. The assets in the trust will go to the charities of your choice after your death, but during the remainder of your lifetime you will retain income from the donated asset! Still, you are permitted to take an income-tax deduction for the year in which you make the donation.

Better yet, a CRT lets you sell highly appreciated assets, such as a low-yielding stock, free of capital gains tax, and turn it into a lifetime income stream.

Here's how it works:

To establish a CRT, you either visit your attorney who will help you draft the trust document, or contact the selected charity -- some charities will set up the trust for you and cover the cost of doing so, as long as they are the designated beneficiary.

The trustee then sells the donated assets at fair market value (incurring no capital gains tax liability), and reinvests the proceeds in income-producing assets such as corporate bonds, say at 7 percent interest. For the rest of your life, and that of your spouse if you so desire, the trust pays you the interest income. When you die, the remaining trust assets pass to the charity or charities you have selected.

In this way, the CRT allows you to reduce your income taxes now, avoid capital gains taxes, and reduce estate taxes upon your death. More importantly, it allows you to give more to a charity or charities that have special meaning to you, all at the expense of the IRS!

The Charitable Foundation

Another vehicle for making charitable gifts, either during your life or subsequent to your death, is the charitable foundation. Individuals and corporations establish charitable foundations for a number of reasons:

Foundations can make a major difference in the lives of others.

They can make a powerful statement about you and your values.

Substantial tax benefits are available to foundations.

The foundation can live well beyond the life of its founder.

You can use it as a vehicle to encourage charitable giving by other relatives

Although the benefits of foundations are significant, there are considerable administrative and regulatory requirements. Large foundations are subject to yearly audits. All foundations must file IRS Form 990 each year, which includes both financial and administrative information. Furthermore, there are restrictions on self-dealing, conflicts of interest, political activities, etc.

For smaller estates and smaller gifts to existing charities, a foundation is not the recommended vehicle of choice. Unless your gift is greater than $500,000, I do not advise creation of a foundation because, unless the funds are substantial, the burdens of administration outweigh the benefits of creation.

Donor-advised Funds

There is a way to enjoy many of the benefits of a charitable foundation while avoiding the administrative hassles. Donor-advised funds (DAFs) are charitable accounts that you establish in your name (like naming your own foundation), but the funds are held by an organization such as a community foundation, university, religious federation, public charity, hospital, or trust company. More recently, brokerage firms have established DAFs for their clients. A popular community foundation in the Midwest, for example, is the Chicago Community Trust (312-372-3356).

Your DAF is a component of the organization, which administers the funds and makes the grants to charities. You can recommend which charities it should distribute the funds to, but the organization is not obligated to follow your recommendations. For that reason, you should choose an organization that routinely donates to charities that you favor.

DAFs typically require a minimum initial donation of anywhere from $1,000 to
$250,000. You can make subsequent contributions -- which are irrevocable -- at any time, typically in increments of $1,000. You enjoy an immediate income tax deduction for your donation, even if the DAF does not make a grant in the same year. In addition, funds in your DAF are not included in your estate for tax purposes. And like a CRT, you may avoid paying capital gains tax on appreciated assets that you donate.

Complex regulations

If you are considering donating large sums of money to one or more charitable organizations, you should meet with your attorney or accountant to determine the best tax strategies for making such gifts. The laws in this field are complicated. Choosing the proper strategy will not only allow you to leave more money for family members, but will also allow you to pass on more to your favorite charities.

CRT Benefits in Black & White

Here's an example that illustrates the generous tax advantages of a charitable remainder trust (CRT). Fred and Irma, ages 72 and 73, are planning to retire next year but need a steady stream of income. About 15 years ago they purchased stock in Microsoft for $20,000, and now it is worth approximately $500,000. The stock pays no dividends, so they would like to sell it and then purchase corporate bonds with the proceeds. Upon their deaths they would then like the remaining funds to go to their favorite charity.

In Scenario A, Fred and Irma sell the stock without use of a CRT. A capital gains tax of $96,000 is due ($500,000 minus $20,000 equals $480,00 in capital gains, at a tax rate of 20%) , which would leave them with $404,000 after the sale. If they invest the remaining funds in bonds yielding a 7 percent return, they would have a yearly income of $28,280 (7% of $404,000).

In Scenario B, they donate the entire $500,000 worth of stock to a CRT. The CRT sells the stock and buys bonds yielding 7 percent. No capital gains tax is due. Fred and Irma would have a yearly income of $35,000 (7% of $500,000), which is $6,720 more than if they had not used a CRT. Moreover, the charity gets $96,000 more than in Scenario A ($500,000 - $404,000), and the couple enjoys a larger charitable deduction on their income tax return for each year they make a donation to the CRT. This is truly a win-win situation for all parties except the IRS.

About the Author

Alan G. Orlowsky, President of Orlowsky & Wilson, Ltd. in Lincolnshire, Illinois, has been counseling people on estate planning for 28 years. He previously worked for the IRS in its Estate and Gift Tax Division. He also worked for the Deloitte & Touche accounting firm, and he has taught taxation and accounting at Loyola University of Chicago, School of Business.

If you have questions about this post or about a particular legal situation, please contact Alan Orlowsky by calling 847-325-5559.

Five Common AND Costly Estate Planning Mistakes

I have been helping people plan their estates for over 26 years, and I have seen just about every kind of mistake that can by made by attorneys, individuals, families, beneficiaries, trustees, etc. In most cases the mistakes were made by well-intentioned people who nonetheless failed to take advantage of opportunities to accumulate wealth, shelter their assets from estate tax, and protect their estates for future generations. In some cases they were negligent or even malicious. In all cases the mistakes were costly.

I'll describe some of the most common estate-planning mistakes that I've dealt with (the names have been changed to protect confidentality), and how to avoid making them yourself. By taking action and exercising care now, you can save a fortune later.

1. Neglecting items of sentimental value
Several years ago the executor of an estate, a woman named Marie, hired me to probate the estate of her father, Neil. Marie had two siblings. She also had a step-mother, Neil's second wife, who did not get along with Neil's children.
Neil´s will left a portion of the estate to the stepmother and the balance to his children in equal shares. Unfortunately, the will was silent as to distribution of his personal property, which included a collection of firearms and numerous paintings of purely sentimental value. The stepmother felt she was entitled to most, if not all, of the paintings. Marie, on the other hand, distributed the paintings among the three children (and took the guns for herself). The stepmother hired an attorney to fight for the paintings, which were ultimately divided evenly among the four beneficiaries. But the legal fees far exceeded the value of the property, family relations were further strained, and in the end nobody was happy.

Solution: Some people wrongly believe that there is no place in a will for personal property that does not have significant monetary value. If you are leaving items of personal property, whether of actual or sentimental value, clearly state in your will how you would like them to be distributed.

2. Failing to secure the documents
A few years ago my client Christine informed me that her Uncle Leo, with whom she had a close relationship, had died. Leo had prepared a will but it was nowhere to be found. Christine said Leo had promised her a substantial inheritance, but because the will was missing and she was not related to him by blood, the Illinois Public Administrator's Office gave the entire estate to nieces and nephews who lived in Europe -- and who Leo had never met!

Solution: Make copies of your documents and store them in a safe place. Put the original in a bank safety deposit box; even if the key is lost and the whereabouts of the box is unknown, it can always be located by a vault box search. Give copies to your executor and attorney. And keep a copy in a safe place at home.

3. Keeping secrets
In a recent case, an elderly woman named Gwen died and left a bequest of about $40,000 to her devoted caretaker. The other beneficiaries of Gwen's seven-figure estate included four nephews and nieces, who were jealous of the caretaker's close relationship with their aunt, and who were surprised to discover, when the will was read, that Gwen had left such a sum to the caretaker -- in fact they expressed shock, anger, and bitterness. The nephews and nieces argued that the caretaker had exercised undue influence over the deceased, and therefore was not entitled to the bequest -- which to me seemed trivial relative to the size of the estate. Although the bequest was upheld in court, the challenge was costly, it caused delays, and it upset Gwen's devoted caretaker.

Solution: Make your feelings known to your executor and beneficiaries -- preferrably before you die -- about which people you wish to leave bequests to. If you think this may cause conflict, explain in a letter why you feel the way you do; send the letter to all relevant beneficiaries and attach a copy of it to your will. Ideally, you should resolve potential disagreements and quell hostilities (as much as possible) while you are still alive.

4. Naming an unqualified trustee
Rosita, a hard-working, 54-year-old, divorced mother of one child, died recently after a long battle with AIDS. Fortunately, she had revised her estate plan immediately after her divorce, removing her former husband as the beneficiary, executor and trustee. Rosita named her daughter, a junior in high school, as the sole beneficiary; and named her best friend Carly as executor and trustee.
I had advised Rosita against naming Carly as trustee because Carly had no experience managing a trust, nor was she equipped to handle the conflicts that I expected to arise with the ex-husband. I suggested an institutional trustee, but Rosita insisted on naming Carly, whom she trusted. When Rosita died, the ex-husband indeed hired a lawyer and demanded control over the estate, claiming he would do a better job than Carly in managing the trust funds for his daughter's benefit. Noting that he was insolvent, at Carly's request I spent a considerable amount of time convincing the ex-husband's lawyer that he could not possibly win this battle, before they backed off. But the ex-husband conceivably could cause more trouble down the road. This was all too much for Carly -- she resigned as trustee and gave the job to the successor trustee, a large financial institution.

Solution: If there is any chance of a conflict or dispute among family members, appoint an institutional trustee. Your best friend may feel honored to be appointed, but the work of resolving conflicts can be substantial -- not to mention the work of investing, managing, and distributing trust funds.

5. Procrastinating
Howard was in the hospital being treated for cancer when he decided to amend his will -- which he had meant to do for a number of years. His lawyer brought the documents to the hospital and Howard signed them, witnessed by two of the lawyer's assistants. Howard died quite suddenly soon thereafter. A disgruntled heir challenged the amendment in court, claiming that Howard had been incapacitated while in the hospital.

Solution: First of all, Howard should have amended his will years earlier, when there was no question about his competence. But in this situation, the lawyer should have brought along two witnesses in the health care or social services fields, who could testify authoritatively as to Howard's competence. Better yet, the lawyer could have videotaped the signing to further prove his client's competence.

About the Author

Alan G. Orlowsky, President of Orlowsky & Wilson, Ltd. in Lincolnshire, Illinois, has been counseling people on estate planning for 28 years. He previously worked for the IRS in its Estate and Gift Tax Division. He also worked for the Deloitte & Touche accounting firm, and he has taught taxation and accounting at Loyola University of Chicago, School of Business.

If you have questions about this post or about a particular legal situation, please contact Alan Orlowsky by calling 847-325-5559.

Property Disclosure: What are They Obligated to Tell You?

• Before you buy a home, understand the seller's obligation to disclose defects, and your right to inspect.
  
  By Alan G. Orlowsky, J.D., C.P.A.
  
  A version of this article was published previously. Debra Fox, Attorney at Law, helped prepare this article.
  
  In many cases, people are so in love with a house or condo, and they're so eager to sign a contract and close the sale, that they gloss over the inspection process. Often, when they are advised by an inspector that there might be a significant defect such as a leak or a boundary dispute that's worth investigating further, they tend to downplay it or even ignore it rather than risk delaying -- or worse, scotching -- the deal.
  
  That kind of wishful thinking and denial sometimes lands buyers in a heap of trouble. Once you close the deal and move into the place, if you find a defect and suspect the sellers of fraudulently concealing it, your remedies are much more limited than if you had discovered it (or addressed the issue) well before closing. Fixing a serious defect such as asbestos or water contamination could cost you tens of thousands of dollars. In the worst cases, families have had to move out shortly after moving in, due to such a catastrophe.
  
  The bottom line is, don't rush through the inspection process. Read the seller's disclosure statement carefully and critically, ideally before you make an offer. Never sign a contract that doesn't contain an inspection contingency. Hire a competent home inspector -- and if necessary a specialized engineer -- and thoroughly investigate all indications of a possible defect. If you discover a defect that wasn't disclosed, pursue remedies immediately.
  
  Here is an explanation of the law and available remedies:
  
  Disclosure rule
  
  The Illinois Residential Real Property Disclosure Act (RRPDA) requires sellers to complete a disclosure report indicating whether they are aware of any "material" defects in the home or on the property.
  
  The Illinois Residential Real Property Disclosure Act (RRPDA) requires sellers to complete a disclosure report indicating whether they are aware of any "material" defects in the home or on the property.
  
• The term "material" isn't defined by the Act, but such defects may include:
• Flooding or recurring leaks in the basement; property located in floodplain
• Cracks or other defects in basement walls or foundation
• Roof or ceiling leaks
• Defects in plumbing, electrical, heating, ventilation, air conditioning, or sewer systems
• Lot line or boundary disputes
• Presence of asbestos, lead-based paint, water contamination, high levels or radon
• Underground storage tanks that may leak
  
  Many sellers complete the disclosure form and give it to their realtor as soon as they put their house or condo on the market. They should make the report available to prospective buyers at the outset. According to the RRPDA, they must provide this information to prospective buyers before entering into a contract with the buyer. But as a matter of common law, the buyer may decide to waive this requirement, although it's usually not a good idea. If they provide the disclosure report after you sign a contract but before closing, you have three business days in which to rescind the contract if you're not satisfied with the report.
  
  Law or no law, you should ask to see the disclosure form before you make an offer. If the seller´s realtor refuses to show it to you at this point, ask why. If the reason doesn't seem to make sense, you may still decide to go forward with an offer, but be wary and give yourself plenty of time for an inspection and, if necessary, rescission.
  
  If you see the disclosure report and it contains a defect that you're not willing to live with (literally), you have three options: ask the seller to fix the defect at their expense, decide that you will bear the expense of fixing it, or withdraw your offer.
  
  Seller´s obligations
  
  The sellers are not required to actively look for defects, only to state what defects they are aware of, if any. For example, they do not need to hire an engineer to assess the property's structural integrity or review floodplain maps.
  Sellers also do not have to disclose previous defects that have since been corrected. If a flood control system has been installed in the basement, for instance, the sellers would not have to disclose previous flooding problems - assuming the problems have not recurred since the system was installed.
  
  Inspect, No Matter What
  
  Even if you receive the seller´s disclosure report and are satisfied with it, you should conduct a thorough inspection of the property. Take the time to find a qualified inspector: Get recommendations from friends, your lender, or real estate professionals who aren't involved in your deal. (Realtors involved in the deal are likely to favor lenient inspectors who will understate defects, because they want the deal to settle quickly.)
  
  Generally, a sales contract will include an inspection contingency clause, which makes the contract contingent on a satisfactory inspection by the buyers within a limited period, typically five to ten days.
  
  Post-inspection options
  
  If your inspector finds defects that weren't in the disclosure report, that doesn't necessarily mean the seller concealed or intentionally omitted them. They simply may not have been aware of them. At this point, your main concern is not whether the inspection report was fraudulent, but how serious the defect is and what you want to do about it.
  
  You have several options:
  
• Terminate the agreement
• Ask the seller to repair the defect
• Revise your offer (lower the price)
• Don't change the deal (repair the defect at your own expense)
• You should also conduct a final walk-through inspection immediately before closing, especially if the seller has removed furniture and furnishings since your inspection.
  At this point, the sellers have a legal obligation to report any new defects, or defects that they become newly aware of. But you do not now have a right to rescind the contract unless the seller knew of the defect prior to completing the disclosure form.
• Fraud
  
  If you discover, after you close the deal and take possession of the property, a significant defect that was not disclosed by the seller, you can certainly contact the seller and ask them to pay the expense of repairs. In some cases, they might comply with your request in order to avoid legal action.
  
  On the other hand, they might respond: We didn't disclose that problem because we didn't know about it, so we're not obligated to pay? Maybe they're telling the truth, maybe not. If you think they're lying, and they falsified the disclosure report, you can bring an action under the RRPDA (within one year of closing) or sue for fraud in state court. If you win the lawsuit, the sellers must pay the cost of repairing the defect, plus court costs and possibly attorneys fees.
  
  To prevail in court, of course, you would have to prove that the seller was actually aware of the defect and failed to disclose it. Your attorney can do this by introducing repair estimates, inspection reports, appraisals, or statements from contractors or neighbors who were aware of the problem before the property went up for sale.
  
  Anxiety and Excitement
  
  Often the sellers are anxious to sell their property, and fail to adequately reveal defects hoping that they'll be overlooked. At the same time, many buyers are excited about the property and tend to rush through the inspection phase of the negotiations. Protect yourself by taking advantage of every opportunity that the law allows to uncover possible problems before you make what might be the biggest investment of your life.
  
  About the Author
  
  Alan G. Orlowsky, President of Orlowsky & Wilson, Ltd. in Lincolnshire, Illinois, has been counseling people on estate planning for 28 years. He previously worked for the IRS in its Estate and Gift Tax Division. He also worked for the Deloitte & Touche accounting firm, and he has taught taxation and accounting at Loyola University of Chicago, School of Business.
  
  If you have questions about this post or about a particular legal situation, please contact Alan Orlowsky by calling 847-325-5559.

Downsizing and Hiring Freelancers? Here's the scoop on The Tax Implications

How to treat freelancers as independent contractors, so you won't be liable for their payroll taxes and healthcare benefits

By Alan G. Orlowsky, J.D., C.P.A. and David M. Freedman

In the 1990s, Microsoft Corp. supplemented its workforce by hiring "freelance" computer programmers. The freelancers signed agreements when they were hired, stipulating that they would work as independent contractors, receiving cash payments for their services. In the agreement the freelancers also stated that they would be responsible for paying their own social security, unemployment, and workers' compensation taxes.

By treating those workers as independent contractors, Microsoft believed it could avoid the cost of providing benefits and paying employment taxes.

Microsoft made a very costly mistake. The company integrated the freelance programmers into its workforce. They worked on projects with regular employees, under the same supervisors, using the same supplies and equipment, during roughly the same hours, performing similar tasks, and on the company´s premises.

Microsoft believed that merely executing a formal agreement, in which the freelancers classified themselves as independent contractors, would insure the freelancers´ independent-contractor status.

The IRS, on the other hand, believed Microsoft was treating the freelancers as if they were employees. As a result of an IRS action, Microsoft agreed to pay all the freelancers´ back employment taxes plus penalties. But the company was in for an even bigger shock.

In 2000, the United States Court of Appeals, reviewing the case of Vizcaino vs. Microsoft, decided that since the freelancers were really employees, Microsoft should have provided them the same benefits that all regular employees enjoyed -- including group health insurance and 401(k) plans. Now Microsoft must pay those freelancers millions of dollars in "back benefits."

Guidelines, Not Laws

The rules for hiring and compensating independent contractors are not precisely defined or uniformly applied. The IRS might view your situation one way, and the National Labor Relations Board or the Wage and Hour Division of the Department of Labor might see it another way. And your state department of revenue might not agree with the feds.

Although the government doesn't provide clear, concrete rules for distinguishing freelancers from employees, the guidelines given below will help. Be sure to consult your attorney and your accountant to formulate your hiring policy, and any work contracts, before you engage a freelance newsletter writer, editor or designer.

Control Over Work Methods

The most important test of whether a worker qualifies as an independent contractor is how much control he or she has over the methods and means used to accomplish the assignment.

For example: An independent contractor (IC) should be free to decide how, when, and where the assigned work is done.

The IC should use his or her own equipment, transportation, and supplies whenever possible.

The employer should not have to train the IC for the assignment.

Compensation

An IC should be paid by the job, upon submitting an invoice or series of invoices to the employer, and not according to a monthly or yearly salary. At the end of each year the employer should file Form 1099 for each IC who was paid at least $600 during the year.

A Freelancer Should Run a Real Business

The independent contractor usually has his or her own office that they operate out of, even if it's little more than a desk and a phone in a spare bedroom. If you provide the IC regular desk space on your premises, the IRS might consider that worker your employee.

Other considerations: Most freelance writers, editors and designers make their services available to many publishers in the marketplace. If yours is the only 1099 attached to an IC's income tax return, expect an IRS audit.

ICs should have the ability to subcontract the work you assign to them, or reassign the work to an assistant who works for the IC.

Workers are more likely to be considered ICs if they advertise their services, use their own printed business cards and letterhead, carry business insurance, and have a separate business telephone line.

Industry Standards

Some industries -- including publishers, professional practitioners, consultants, and marketing firms -- customarily hire freelance writers and designers more than other industries, and the IRS knows who they are. If your company is in any of those fields, you are more likely to convince the IRS that the ICs you hire are really not your employees.

If your company reports significantly more IC compensation than is standard in your industry, you'll attract IRS attention.

Contracts

As the Microsoft case illustrated, a written contract won't guarantee a worker IC status if all the other factors point to a classification of employee. But getting an IC's signature on a work-for-hire contract will help reinforce your efforts to comply with the rules. At the very least, such a contract should spell out the nature of the assignment, deadlines, compensation, and an acknowledgement of the worker's IC status. Check with your attorney to see if other provisions are also necessary.

About the Authors

Alan G. Orlowsky, President of Orlowsky & Wilson, Ltd. in Lincolnshire, Illinois, has been counseling people on estate planning for 28 years. He previously worked for the IRS in its Estate and Gift Tax Division. He also worked for the Deloitte & Touche accounting firm, and he has taught taxation and accounting at Loyola University of Chicago, School of Business.

David M. Freedman is a Chicago-based writer, editor, and newsletter developer. He is the founder and director of Newsletter Strategy Session, a website for publishers of non-commercial newsletters.

If you have questions about this post or about a particular legal situation, please contact Alan Orlowsky by

email

by calling 847-325-5559.

Boomers: Do Your Parents Have an Estate Plan?

By Alan G. Orlowsky, J.D., C.P.A. and David Lansky, PhD.

Baby Boomer Joe McGill (not his real name) loved his parents, and when they died, Joe and his sister grieved. The fact that his parents left their estate in a chaotic mess didn´t diminish Joe´s affection for them, but it did cost him and his sister hundreds of thousands of dollars in estate tax and legal fees, plus many hours of administrative hassles. Since their mother´s will was confusing, Joe and his sister feuded when deciding which of them would keep their mother´s collection of fine sculptures, because Joe wanted to keep it intact rather than divide it.

The taxes and fees were paid by the estate, to be sure. But if the older McGills had planned their estates wisely, their children - not the IRS and the lawyers - would have inherited that money.

Estate planning not only preserves wealth for succeeding generations, it also gives the aging parents satisfaction and peace of mind. If they really think about it, most parents would rather leave behind a grand legacy than a costly mess - not to mention help their children and grandchildren achieve their dreams and goals.
We´ll explain what a good estate plan consists of, and then suggest strategies for raising the subject of estate planning with your parents if they normally avoid talking about their financial situation with you.

What´s in a good estate plan?

Each of your parents (in fact, every parent and person with substantial assets) should have a solid estate plan. At the very least, such a plan includes a will, durable power of attorney for property, and power of attorney for health care. Affluent parents should also use revocable trusts to keep trust assets out of probate - which in Illinois can take months or years.

Depending on the value of the estate, the nature of the assets, and the family relationships, a plan might also include a life insurance policy and irrevocable life-insurance trust, or a generation-skipping gift trust, for example. Irrevocable trusts help protect assets from estate tax.

If your parents have trusts, each year they should transfer new probate assets to their trusts. probate assets include cash, stocks and bonds, limited partnership shares, valuables, and collectibles.

An estate plan may also involve life insurance to provide estate liquidity, if a substantial portion of the estate comprises illiquid business interests or real estate.

Each parent should appoint a competent and reliable executor (in the will), trustee (for a trust), and agents (for powers of attorney), and update those designations over the years if any of those people die or become disabled.

Finally, if either parent´s estate is worth more than $2 million in 2005 ($4 million for a married couple), they should give annual tax-free gifts of up to $12,000 to each of their children and to as many others as they wish.

Raising the subject

In many families, especially in your parents´ generation, talking about your personal finances is taboo. Some parents don´t feel comfortable telling their adult children how much money they have and what´s going to happen to their wealth when they die. In some families, if adult children ask their aging parents about their assets, wills, trusts, beneficiaries, or heirs, the parents might suspect their children of having purely selfish motives. If the children raise the subject of powers of attorney, the parents might wonder if their kids are trying to take control of their property. And they might feel a little wary suspicious if you advise them to give you and your spouse and your children $12,000 each, this year and every year.

Before you raise these issues with your parents, discuss them with your siblings, so you present a unified, concerted message. Then you can either approach your parents as a team, or approach them alone, acting as the quarterback of the team with their consent.

Here is the best way to raise the subjects of money, death and taxes with parents who don´t normally discuss those topics with you. First - maybe over the course of several visits - ask them questions about their lives, their ancestors, and your family history. Ask them how they hope to live out the rest of their lives, their dreams and goals, their worries and concerns, how they would like to be remembered, what they would like their grandchildren to know about them, and what family values they want you to preserve.

These questions, and the discussions that follow - if you are sincerely interested in the answers - will not only give you and your children a sense of continuity and heritage, they will also build trust and open up an avenue for talking about sensitive issues like money, estate planning, their health and welfare, and other personal concerns that your parents were previously reluctant to reveal.

If you still have trouble getting through to them, you might suggest that they talk to their legal and financial advisers about their future - including their financial security, estate plan, long-term health care, and future residential options.

If that suggestion fails, you may have no other alternative than to contact your parents´ legal and financial advisers yourself, and explain to them that you are concerned about your parents´ well-being and, frankly, your own. There´s no shame in wanting to help your parents protect their estates from the ravages of taxes, or the greedy fingers of unscrupulous advisers and peddlers of fraudulent investments.

There is also no shame in wishing to preserve your parents´ wealth for the sake of your children and future generations.

About the Authors

Alan G. Orlowsky, President of Orlowsky & Wilson, Ltd. in Lincolnshire, Illinois, has been counseling people on estate planning for 28 years. He previously worked for the IRS in its Estate and Gift Tax Division. He also worked for the Deloitte & Touche accounting firm, and he has taught taxation and accounting at Loyola University of Chicago, School of Business. Al is a contributing author of the book 21st Century Wealth (Esperti Peterson Institute, Denver, 2000), and has written numerous articles on the subject of estate planning. Contact Alan Orlowsky by email or call 847-325-5559.

David Lansky, PhD, is a clinical psychologist who has been working with families and organizations for over a decade. His involvement with business-owning families and families in transition focuses on team building, conflict management

A Checklist for Life's Only Certainty

Planning ahead can bring comfort when a loved one is dying.

Hopefully you won't need this checklist soon, but keep it in a safe place -- you will need it someday.

By Alan G. Orlowsky, J.D., C.P.A.

When a loved one is gravely ill or suffers a life-threatening injury, you may be too distraught to think rationally about that person's financial and legal affairs. But someone will need to take care of those matters, to protect your loved one's estate and prevent matters from falling into neglect or chaos.

All too often, a client calls my office in a state of panic, saying something like, "My father (or my spouse) is dying, I don't know where his money is or how to pay his bills, I don't know where the deeds and titles and tax returns are, I can't find the name of his accountant, I don't even know if he has a will. What should I do?"

I can't tell you how many times that conversation has taken place even though I had advised the same client years earlier to discuss those matters with their spouse or parents, in order to prevent an estate-planning train wreck in the family.

Even if you do have such discussions and become familiar with your loved ones' estate, when the time comes that you must take action to protect the estate, you may be too distraught to remember all the tasks that must be accomplished and phone calls that must be made. That's when you need a checklist like the following -- keep it in a safe place with your own estate planning documents.

The deathbed checklist

Talking to a dying loved one about money and burial instructions may seem difficult now, but in most cases the loved one derives comfort from knowing that his or her wishes will be noted and followed.

Here is a list of tasks to undertake in tending to the last wishes of a loved one:

Ask if there are any last-minute instructions, changes, or wishes regarding funeral and burial arrangements. If so, prepare a letter to be signed by your loved one.
Make sure you know where estate planning documents and other important papers are stored, including a will, trusts, powers of attorney, insurance policies, buy-sell agreements, real estate deeds, contracts, and business agreements. If any documents have been misplaced, check to see if copies are in the possession of an attorney, financial adviser, or insurance agent. If your loved one is competent, ask him or her to review the will to see if any last-minute changes are necessary.

If there is no will or power of attorney, encourage your loved one to hire an attorney to prepare one as soon as possible.

Prepare an updated list of assets (including business assets and partnership interests), as well as the locations of safety deposit boxes (and the keys to them).
Assemble the most recent bank account, brokerage account, and pension plan statements.

If the person has young children and there is no other surviving parent, then a guardian should be appointed; otherwise the courts will make this appointment.

Make a list of the loved one's professional advisers, with contact information. Include lawyers, CPA, banker, broker, financial planner, and any other professional who has knowledge of the estate.

Become familiar with the debts and obligations that must be paid before and after death.

Make a list of individuals to be contacted before and/or after the loved one's death.

Urge your loved one to prepare a list of important items of personal property such as jewelry, collectibles, clothing, art, and furnishings, and the people to whom those items should pass before or after death.

Post-death checklist

After your loved one passes on, you will have to take care of the following additional matters:

Notify the Social Security Administration, Veterans Administration, and other state and federal government pension providers -- as well as any private providers -- if the individual is receiving benefits. If there is a surviving spouse or minor children, they may be entitled to continued benefits.

Contact life insurance providers to obtain claim forms. Gain access to safety deposit boxes.

Determine if it will be necessary to open a probate estate.
Notify all executors, trustees, beneficiaries, potential heirs, and creditors. If you haven't done so already, prepare an inventory of assets.

Pay off current bills.

Contact legal and financial advisers. They may have information that you'll need to properly administer the estate, and they may be able to shed light on missing assets not previously inventoried.

These checklists are not necessarily all-inclusive -- some estates are quite complex, especially when they are complicated by divorce, blended families, complicated business relationships, adopted children, hostilities among family members, disputes with or distrust of advisers, etc. But the checklists touch on the most common and most important items that you'll deal with upon the death of a loved one.

The ABC's Of Michael Jackson's Will

By Alan G. Orlowsky, J.D., C.P.A.

For the past several months we all have been witness to the drama surrounding the death of Michael Jackson. His personal life, played out on the public stage, was by any reasonable standards as bizarre as it was tragic. However, notwithstanding his failings of character and eccentricities, he died a very wealthy man, was revered by many and possessed the common sense to reduce his testamentary wishes to paper.

Unlike many "relatively normal well adjusted" entertainers, Michael "got it" and understood that he needed to prepare a Will to protect his family.

So, what did Michael´s Will state? What did he declare therein to protect his family and perpetuate his legacy that we can learn from? And how did he overcome the psychological hurdle of confronting his own death when most other mortals could not?

The ABCs of the Will of Michael Joseph Jackson

What was declared therein and the filing thereof are as follows:

A. Michael´s Will was filed in the Superior Court of California, County of Los Angeles on July 1, 2009, shortly after his death on June 25, 2009. Upon filing it was made public to the whole world!

B. Publication of the Will was immediately requested so that the statute of limitations for contesting such wills would immediately begin to run, thus barring claims against the estate as quickly as possible.

C. Surety Bond was waived by the Will and, hence, not required, perhaps saving the estate from tens of thousands of dollars of unnecessary bond premiums.

D. Michael appointed 3 individuals as co-executors, namely, John Branca, John McClain and Barry Siegel. Only McClain now acts as executor.

E. Michael was a US citizen and a resident of California at the time of his death, although he spent most of his time out of country.

F. Paul Gordon Hoffman, Attorney filed the Will.

G. Character and estimated value of the property of the Estate were reported as follows: "The petitioners are not certain of the value of the Estate. Petitioners believe that the value of the Estate exceeds $500 million. Petitioners believe that almost all of the Estate consists of non-cash, non-liquid assets, including primarily an interest in a catalogue of music royalty rights which is currently being administered by Sony ATV, and interests in various entities. Petitioners do not have any information at this time regarding the liquid assets of the Estate."

H. Michael was divorced and had no registered domestic partner.

I. Michael declared 3 children, natural born or adopted, namely, Prince Michael Jackson, Jr., Paris Michael Katherine Jackson and Prince Michael Joseph Jackson, II.

J. The entire estate was given to the Trustee of the Amended and Restated Declaration of Trust executed on March 22, 2002 and named the "Michael Jackson Family Trust."

K. Michael specifically excluded his former wife, Deborah Jean Rowe Jackson, from taking under the estate.

L. Katherine Jackson, Michael´s mother, was named guardian of his children and Diana Ross successor guardian.

Was Michael´s Will well drafted?

In my opinion... yes!

It has served him well by providing for the transfer of his assets to his Family Trust, by providing that his trusted mother be appointed guardian of his children and, so far, by withstanding attack from outsiders. Also, since Trusts are not subject to public scrutiny, Michael was able to keep the disposition of his estate free from the public eye. One omission I am able to infer from the filing of the Will is the failure by Michael´s attorney to have re-titled his considerable assets in the name of his Family Trust prior to death...a common mistake which not only subjects estate assets to potentially costly probate proceedings, but also to otherwise avoidable public view.

What we learn from Michael´s Will is that good planning can prevent a clash of family members and outsiders who may otherwise have pitted themselves against each other in order to lay claim to Michael´s considerable estate and to the custody of his beloved children. Clearly, millions of dollars were saved and lengthy litigation avoided because Michael planned.

Why did Michael plan while many others fail to do so? Maybe Michael understood the fragility of life and was not in denial about his risky behavior. Perhaps Michael had a death wish or just wanted to protect his children. Perhaps he had a proactive attorney who made it crystal clear that catastrophe would ensue if he suddenly died having failed to plan. We will never know for sure his reasons for planning, but you can take a cue from his forward thinking and establish a plan to protect your family as well as he protected his.

For more information on Personal Estate Planning or Asset Protection for your business, contact Alan Orlowsky at 847-325-5559.