NJ Phone: 609-818-1555 * FL Phone: 561-247-1557

Monday, January 29, 2007

SEP IRA is a protected asset in NJ

I was asked earlier today whether a SEP IRA is protected against creditor lawsuits. Without doing a lot of in depth research, I have found that the answer is generally yes. The answer is not the same in all states as it is dependent upon state statute.

New Jersey exempts the claims of creditors from qualifying trusts. See N.J.
STAT. ANN. § 25:2-1. Qualifying trusts include trusts created or qualifying under the Internal Revenue Code §§ 401, 408. (i.e. IRAs, SEP IRAs and 401(k) plans)

Additionally, there is a New Jersey bankruptcy case on point. See In re Lamb, where the court held that 25:2-1 exempts IRAs. See In re Lamb, 179 B.R. 419, 427 (Bankr. N.J. 1994).

Since SEPs are a type of IRA, all of the IRA requirements and benefits, other than the contribution limits, apply to SEP-IRA accounts as well.

The protection is limited by The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which does not protect IRAs in excess of $1,000,000.

I also found this interesting site which appears to have a lot of information on the topic: http://www.aicpa.org/pubs/jofa/jan2006/altieri.htm

As always - if a transfer of assets is made prior to a lawsuit, it's good planning. If you do it afterwards, its FRAUD.

Friday, January 26, 2007

Tax Filing Deadline

Just an FYI in case you weren't aware:

The tax filing deadline is Tuesday, April 17th this year due to the 15th falling on a Sunday and a major holiday, Emancipation Day, falling on th the 16th.

This means you will have an extra couple of days not only to file your returns, but to contribute any amounts you might want to contribute to your ROTH or traditional IRA.

Thursday, January 25, 2007

Fake Will - Just so you see what you are really doing if you don't have a Will


I, "WILL" LESS, do hereby forfeit my right to make, publish, and declare a Last Will and Testament.

A. If my spouse survives me and my parents are deceased, then my spouse shall receive my entire estate, and nothing shall go to my descendents (children or grandchildren) unless they are not my spouse’s children also. My spouse shall receive the entire amount even if we are in the process of getting a divorce and the divorce is not yet final.
B. If, however, I have descendents that are not descendents of my spouse and my spouse survives me, then I leave to my spouse 25% of my estate, but not less than $50,000.00 nor more than $200,000.00, plus one-half of any balance of my estate, the other one-half shall go equally to such surviving descendents who are not related to my spouse.
C. If, however, I do not have any descendents and my spouse survives me and at least one of my parents also survives me, then I leave to my spouse 25% of my estate, but not less than $50,000.00 nor more than $200,000.00, plus three-fourths of any balance of my estate, the other one-fourth shall go to my parents, not to my spouse.

A. My spouse will be appointed the guardian of my children, but shall be required to report to the Probate Court, at such intervals as the court requires, to render an accounting of how, why, and where she spent the children's money if the annual income for each child is greater than $5,000.
B. When a child of mine shall reach the age of 18 years, such child shall have the right to demand of my spouse, his/her mother or father, a complete accounting of all financial transactions pertaining to his/her money.

A. Whatever poor soul decides to figure out my estate and pay my bills shall be required to purchase, at the expense of my estate, and produce to the Probate Court a Performance Bond to guarantee that she will exercise proper judgment in handling, investing, and spending the children's money. This Bond shall remain in force until the youngest of my children reaches the age of 18 years.

A. When one of my issue shall reach the age of 18 years, he shall have an unfettered right to withdraw and to spend his share of my estate. No person or court may question the beneficiary's readiness to manage large sums of cash and other property.

A. I forfeit my right to nominate the guardian of my children in case my spouse should predecease me or die while any of my children are minors.
B. Instead of my having nominated a guardian of my choice, my friends and relatives shall be permitted to select a guardian by mutual agreement, if same be possible.
C. In the event that they fail to agree, the Probate Court shall select the guardian of my children. The person selected may be a total stranger to me, or worse, someone I would not have chosen.

A. I give, devise, and bequeath to Uncle Sam and to the Governor of New Jersey the maximum amount of federal and state death taxes payable as the result of my death.

IN WITNESS WHEREOF, I have set my hand and seal to this, my Last Will and Testament, on this _____ day of ____________________, 20__.


Wednesday, January 24, 2007

Benefits of a Life Insurance Trust

I. What is a Life Insurance Trust?
A. Legal Relationship - A trust is a relationship that exists when one person or an entity (the Trustee) holds legal title to money or property for the benefit of one or more individuals or organizations (the Beneficiaries). The terms of the relationship are decided by the person providing money for the trust (the Grantor), and are usually evidenced in writing.
1. Grantor/Settlor - The Grantor or Settlor is the person or entity that creates the trust by providing the money or insurance to fund it.

2. Trustee - The Trustee is the person or entity that manages the trust assets for the benefit of the beneficiaries of the trust. The trustee is bound by a fiduciary duty to act in the best interests of trust, as directed by the Grantor or Settlor.

3. Beneficiary - A Beneficiary of a trust is a person or entity that is entitled to receive money from the trust. The manner in which a person receives such money varies from trust to trust, and generally a Grantor may put in a range of provisions to restrict a Beneficiary’s access to the money.
B. Design - A life insurance trust is specifically designed to hold life insurance.
1. Irrevocable – Once created, a life insurance trust is almost impossible to change.

2. Loss of Control - Generally, the insured must give up all rights to control the trust and the life insurance policy in favor of a trusted advisor. The Grantor should decide the terms of the trust upfront so that the Trustee may carry out the Grantor’s wishes.

3. Tax - A life insurance trust is typically designed to save money on estate and inheritance taxes. It should also allow the Grantor to use his or her annual gift tax exclusion so that the premium payments are not treated as a taxable gift.

II. What are the benefits of an insurance trust?
A. Reduces estate and inheritance taxes - If life insurance is owned by a trust, and the trust is structured properly, the proceeds from the life insurance will NOT be includible in the taxable estate of the Grantor. Note: A trust must purchase the life insurance, otherwise there is a three year look-back period.

B. Allows for control of assets after you die – Despite the fact that the trust is irrevocable and you lose control once it is established, with proper planning, the trust can allow a Grantor to decide when and how his or her heirs should get the proceeds of the life insurance.

C. Asset protection – By giving money to your heirs in trust, it ensures that your heirs are less likely to squander their inheritance. It also protects it from creditors.

III. Who should consider an insurance trust?
A. Recent Divorcees – Many divorce decrees call for an insurance trust to be established. It benefits the custodial parents by giving them assurance of the existence of the policy. It benefits the non-custodial parent by giving them a voice in when the child gets the money and ensuring that they money benefits the children, and not the person they just divorced.

B. Individuals with Significant Assets – Individuals with substantial wealth may benefit from a life insurance trust as a way to reduce taxes or to create liquidity for an estate that may have other tax or cash flow issues.

C. Individuals with Large Insurance Policies – By itself, a large policy can create estate tax issues, so even if a person is not otherwise wealthy, it makes sense to transfer the wealth you do have with minimum tax consequences.

D. Same Sex Couples – Despite the recent changes in some states, including New Jersey, that benefit same sex couples, many states and the federal government still treat same sex couples as nothing more than friends for tax purposes. Accordingly, a life insurance trust will ensure that your loved one benefits upon your death without a large tax bite.

E. Individuals married to Non-Citizen Spouses – A non citizen spouse is not entitled to the unlimited marital deduction for estate and gift tax purposes. Accordingly, if you are married to a non-citizen spouse, the best way to avoid a large estate tax upon your death is to create a life insurance trust.

Tuesday, January 23, 2007

Reasons for a Will

  1. General Benefits
    a) Ensures a clear WRITTEN clear plan for the distribution of assets after your death
    i. Provides proof of plan
    ii. You get to choose who serves as executor, trustee and guardian
    iii. A clear plan can help avoid infighting amongst surviving family members
    b) Important means of ensuring that money will go to whom you wish it to go rather than according to state law
    c) Eliminates need for Insurance bond for Trustees and Guardians (Savings of approximately $500 for every $100,000 that the estate is valued at)

  2. Establish trusts for your children/grandchildren
    a) Minors – allows for both discretion over distribution and control over timing of distributions
    i. Tiered distribution – traditional means of giving money to children (age 21, 25, 30)
    ii. Dynasty trusts – stays in family blood forever if funded with enough money.
    b) Problem children – can give trustee discretion as to when to distribute money out

  3. Flexibility
    a) A Modern Will should allow for a great deal of flexibility because of the ever-changing tax laws.
    i. Regardless of whether a Testator’s estate goes up or down, the will should contain formulas to take into account the current state of the tax laws and future anticipated changes.
    ii. Ability to take into account State Tax laws in conjunction with Federal Tax Laws
    b) Trustee provisions - Many problems occur when beneficiaries are stuck with trustees whom they cannot remove. A modern Will should have the ability for trusted beneficiaries to replace trustees and appoint independent trustees to allow for invasion of principal to beneficiaries in a way that will not produce adverse tax consequences.
    c) Post mortem planning - A will should allow for the surviving spouse or an independent executor to do planning after the death of the testator including tax planning.
    i. Disclaimers
    ii. Limited Powers of Appointment – You can allow the surviving spouse to appoint the balance of a trust among your children as he or she sees fit. (This is especially useful when children have varied income levels.)
    iii. Granting of a General Power of Appointment for tax purposes.
    d) Side letters – Under New Jersey law, a testator may revise the provisions regarding disposition of tangible personal properties without redoing the entire will. (E.g. You can easily change your mind about who you want to leave your golf clubs to without redoing your Will.)
    e) Combining trusts – A well drafted will (and trust) should allow you to combine two or more trusts with similar terms to save time and money.

  4. Minimization of Tax consequences
    a) Establishing trusts allows couples to make full use of both spouses’ tax exemptions.
    b) Anyone who plans to distribute to non-lineal descendents, up or down, must plan to minimize inheritance taxes
    c) Establishment of multiple trusts for minimization of Generation Skipping Transfer Tax (GST tax)

The Pension Protection Act



In addition to requiring corporations to more fully fund their pension plans, the Pension Protection Act (“PPA”), which was passed on August 17, 2006, provides or extends numerous tax benefits that could affect you or your employer. The PPA recognizes the reality that the government and many companies are pushing the responsibility of saving for retirement on to individuals. To help us take on that responsibility, the PPA provides greater tax deferred savings opportunities for all and offers favorable tax treatment for certain beneficiaries named under a Retirement Savings Account.

Estate Planning – Additional Opportunities for Your Loved Ones to Stretch Your Retirement Savings after your Death

From a planning perspective, perhaps the most important new provision of the PPA is to allow non-spousal beneficiaries to “roll over” assets inherited from a qualified retirement plan into an IRA. The beneficiary will avoid tax on the rollover, and will be taxed only when the assets are withdrawn. Previously, this tax treatment was available only for people who inherited retirement assets from a deceased spouse. The new law extends treatment that already exists for IRAs and will primarily benefit children, grandchildren domestic partners and non-traditional couples.

Specifically, the surviving beneficiary will now be able to “roll over” the decedent’s retirement funds into an Individual Retirement Account (IRA) and either draw down the benefits over a five-year period or over such beneficiary’s own life expectancy. Since the terminology in this particular field is imprecise and confusing, it must be clearly stated that the term “roll over” as used here does NOT allow a non-spousal beneficiary to merge the decedent’s qualified retirement plan with their own. It merely allows the beneficiary to take withdrawals over the beneficiary’s life expectancy rather than being forced to withdraw the entire amount as a lump sum and incur immediate tax charges. This particularly important because this forced withdrawal often bumped the survivor into a higher tax bracket as the withdrawal is counted as taxable income to the beneficiary.

In order for your loved ones to benefit from this new law, you MUST properly designate a beneficiary under your retirement account. If you have not done so, contact your employer’s benefits coordinator and fill out a beneficiary designation form, otherwise they will not receive the benefit of this new law. Unfortunately, the pension plan that your employer uses still determines who you can name as beneficiary. If the pension plan currently does not allow distributions to anyone other than to a spouse, this provision in the PPA will not help you.

The amendments made by this section of the PPA shall apply to distributions after December 31, 2006

Note: The transfer to the beneficiary must be done as a direct rollover, also known as a Trustee to Trustee transfer, otherwise the tax benefits of this rollover will be lost! The direct transfer must go to a properly titled inherited IRA, which means the inherited IRA must be maintained in the named of the deceased plan participant. For example, “Grandpa’s IRA (Deceased March 1, 2007) FBO grandson”.

Retirement Planning Opportunities

The new law extends a number of retirement benefits. The contribution limit for IRAs will be $4,000 in 2006 and 2007, $5,000 in 2008, and adjusted for inflation after 2008. Catch-up contributions for individuals age 50 or older will be $1,000 for IRAs, $2,500 for SIMPLE-IRAs, and $5,000 for 401k plans. IRA catch-up contribution limits, however, will not be adjusted for inflation. SIMPLE and 401k catch-up contributions will be adjusted in $500 increments based on inflation.

The new law permanently allows for Roth 401k and Roth 403b plans. Under the sunset provisions of the previous tax law, Roth-type 401k and 403b plans were not allowed after 2010. The new law removes this sunset provision. Like a Roth IRA, an individual makes post-tax contributions to a Roth 401k or Roth 403b plan, up to the plan limits. The assets grow tax-deferred and may be withdrawn tax-free in retirement.

If you are in a low income tax bracket, you may wish to take advantage of a provision in the PPA that allows a direct rollover from a 401k to a Roth IRA, with the rollover treated as a Roth conversion.

The new law also permanently allows the Retirement Savings Tax Credit, which would have expired at the end of 2006.

How the PPA may affect an Employer

Employers may now automatically enroll their employees into a 401(k) retirement plan using default contribution levels. Employees will need to opt-out of the 401(k) if they don't want to utilize the 401k plan.

Military Personnel

Military personnel who are called to active duty between September 11, 2001 and December 31, 2007, may now take a penalty-free withdrawal from their 401(k) or IRA. However, these individuals must re-deposit the withdrawal within two years from time their active duty ends in order to avoid paying income tax on the withdrawal.

Hardship Withdrawals

The PPA makes it much easier to make hardship withdrawals from 401k plans including allowing hardship withdrawals "with respect to any person listed as a beneficiary under the 401(k) plan." Beneficiaries such as siblings, parents, same sex couples, and children may now draw on a retirement fund in the case of a qualifying medical or financial emergency. In the past, the federal law covered only the spouses or dependents of employees when it came to accessing retirement funds during an emergency.

Stricter Rules for Charitable Donations

Under the new law, taxpayers must keep records of all cash donations to charity. Individuals must show a receipt from the charity, a canceled check, or credit card statement to prove their donation. No charitable tax deduction will be allowed if the taxpayer cannot provide any supporting documentation. Taxpayers will not need to mail in the receipts with their tax return. Instead, taxpayers will need to keep receipts and other documentation with their copy of the return in the event of an IRS audit. The Law Office of Kevin A. Pollock LLC strongly recommends that you maintain all such records for a minimum of seven years.

The new law also toughens the rules for non-cash donations. Donated items, such as clothing, cars, and household goods, must be in good condition. Unfortunately, the new law does not offer any guidance as to what “good condition” means.

Charitable IRA Donations

The Pension Protection Act allows taxpayers to donate up to $100,000 to charity directly from their IRA account in 2006 and 2007. The distributions will be tax-free and avoid the penalty on early withdrawals. Taxpayers are allowed to donate up to $100,000 per year from their IRA. Since the distribution will not be included in taxable income, individuals will not be able to claim a tax deduction for the charitable contribution.

Qualified Charitable Distributions from IRAs Allowed

· Under pre-Act law, there was no provision permitting the tax-free distribution from an IRA where the distribution was to be donated to a charity. The Act provides a favorable new rule that permits an exclusion from gross income, not to exceed $100,000 per year for otherwise taxable distributions from a traditional IRA or a Roth IRA that are made:

o directly by the IRA trustee to qualified public charities and certain private foundations (but not to most private foundations, supporting organizations and donor advised funds);

o on or after the date the IRA owner attains age 70½; and

o only for distributions made in 2006 and 2007, without carryover to any subsequent year.

· Distributions that are excluded from gross income are not taken into account in determining the IRA owner’s deduction for contributions to charity, but are counted as part of the IRA owner’s required minimum distribution for that year.

· The benefit arises from not including the IRA distribution in adjusted gross income, those affected by limitations on itemized charitable donation deductions, and for taxpayers who do not itemize their deductions.

Section 529 College Education Plans Made Permanent

· Withdrawals from Section 529 Plans for qualified college expenses have been completely exempt from Federal income taxes since 2002. However, this valuable tax benefit was set to expire in 2011. The new Act makes permanent the tax benefits of Section 529. Distributions for qualified educational expenses (including special needs services) and certain rollovers Section 529 plan accounts, will continue to be permitted under the new law. This benefit is particularly welcome for those saving for college in light of recent changes to the “kiddie tax” provisions which were the subject of our June 2006 Alert.

Gifts of Fractional Interests in Tangible Personal Property

· The Pre-Act law allows a charitable deduction for a contribution to charity of a fractional interest in tangible personal property if the contribution satisfies requirements for partial and future interests, and in later years the donor makes additional charitable contribution of interests in the same property. A common use of this provision was to make a gift of a percentage interest in a painting or other artwork to an art museum; in theory, the museum must have use and possession of the art for part of each year commensurate with its percentage interest.

· For contributions, bequests and gifts made after August 17, 2006, the Act limits the charitable deduction for such fractional interest contributions, provides rules for valuing the donor’s additional fractional interest contributions and provides for recapture of the tax benefits under certain circumstances.

· The Act requires that the charitable entity receiving a fractional interest must take complete ownership of the item within 10 years of the gift, or the death of the donor, whichever first occurs. Further, the entity must take possession of the item at least once during the 10-year period as long as the donor is living, and use the item for the entity’s exempt purpose. Failure to comply results in the recapture of all tax benefits plus interest and imposition of a 10% penalty. The more restrictive 10-year rule is likely to deter many younger donors from making fractional interests gifts, since enjoyment during the balance of the donor’s lifetime is no longer possible.

· There are also special rules for deductions of future gifts of partial interests in the same property. In general, for items that are contributed to further a donee’s exempt purposes, the deduction will be equal to the fair market value of the interest. The fair market value of an additional contribution of a partial interest in this case is the lesser of the item’s fair market value at the time of the initial contribution or the fair market value at the time of the current contribution. The additional rules that limit the charitable deduction which apply for income tax purposes, also apply for gift and estate tax purposes. There is a potential gift and estate tax trap when the donor makes a transfer of his remaining interest in the property if the property has appreciated in value from the time of the initial contribution, since the interest that remains in the donor’s estate at the time of his death is valued at its full value, while the estate tax deduction is limited to the value of the property at the time of its contribution.

Tougher Record Keeping Required for Charitable Gifts of Money

· The Act disallows any charitable deduction for contributions of cash, check or other monetary gift made after December 31, 2006, unless the donor maintains a written record of the contribution, regardless of the amount. For a contribution of cash, the donor must maintain one of the following (i) cancelled check, (ii) receipt (or letter or other written documentation) from the entity showing the name of the entity, the date and amount of the contribution or (iii) other reliable written records showing the name of the entity, the date and amount of the contribution. The existing rule for requiring a written receipt from the charity for cash contributions of $250 or more remains in effect.

Limitations for Charitable Gifts of Clothing and Household Items

· The Act restricts the charitable deduction for donations of clothing or household items unless they are in good used or better condition. Thus, effective after August 17, 2006, items donated in poor condition will not result in a charitable deduction.

Tougher Rules for Donated Tangible Personal Property

· For contributions made after September 1, 2006, there is a recapture of the tax benefit for charitable contributions of tangible personal property exceeding $5,000 for which a fair market value deduction is claimed unless the charity uses the property for its exempt charitable purposes. If the charity disposes of the donated property within 3 years from contribution, the donor is subject to an adjustment of the tax benefit arising from the contribution. However, there is no adjustment if the donee entity makes a proper certification to the IRS, a copy of which must be given to the donor.

Conservation Property

· To encourage charitable contributions of real property for qualified conservation, the Act increases the percentage limitation applicable to qualified contributions of real property from 30% to 50% (100% for qualified ranchers and farmers) and increases the carryover period for qualified conservation contributions that exceeded percentage limitation from 5 to 15 years. This provision is effective for contributions in 2006 and 2007.

New Taxes on Prohibited Benefits Received from Donor Advised Funds

· In order to close a perceived loophole under current law, the Act provides that if a distribution from a donor advised fund results in a donor, donor advisor, or a related person receiving, directly or indirectly, more than an incidental benefit as a result of the distribution, then: (i) a tax is imposed on the fund manager equal to 125% of the amount of the benefit is imposed on the advice of any related person to have a sponsoring organization make the distribution and such person who advises that the distribution be made or who receives the benefit pays the tax; (ii) a tax equal to 10% of the amount of the benefit is imposed on the agreement of any fund manager who makes the distribution that confers a benefit up to a maximum of $10,000. This provision is effective for tax years after August 17, 2006.

Benefit to S Corporation Shareholders for Charitable Contributions

· Under the Act for tax years beginning in 2006 and 2007, if an S corporation makes a charitable contribution, its shareholders will now reduce their basis in the stock of the S corporation only by their pro rata share of the adjusted basis of the contributed property. Under the prior law, their stock basis had to be reduced by their pro-rata share of the entire charitable contribution. This provision now treats S corporation shareholders the same as partners in a partnership. For example, if an S corporation having a sole shareholder makes a charitable contribution of stock with a basis of $200 and a fair market value of $500, the shareholder will be treated as having made a $500 charitable contribution and will reduce the basis of his or her stock by $200. This is only a temporary tax incentive to encourage S corporations to make charitable donations of appreciated assets in 2006 and 2007.

Enhanced Taxpayer Penalties for Valuation Misstatements

· For returns filed after August 17, 2006, the Act increases the accuracy-related penalties imposed on taxpayers for income, estate or gift tax understatements of value. Under the Act, a “substantial” estate or gift tax valuation misstatement occurs when the claimed value of the property is 65% (previously 50%) or less of the correct value. A “gross” estate or gift tax valuation misstatement exists when the claimed value is 40% (previously 25%) or less of the correct value.

Filing Requirements for Split-Interest Trusts

· The Act increases the penalty on split-interest-trusts (e.g. charitable remainder annuity and unitrusts and pooled income funds) for failure to file a return and failure to properly report required information. The penalty is $20 for each day the failure continues up to $10,000. For trusts with gross income in excess of $250,000, the penalty is $100 per day up to $50,000. If any officer, director, trustee or other individual under a duty to file or include required information, knowingly fails to file the return or include required information, such person is personally liable for such penalty, in addition to the penalty imposed upon the entity. This provision is effective for taxable years after December 31, 2006.

Use of Educational Savings Accounts in Light of the Revised “Kiddie Tax”


The Tax Increase Prevention and Reconciliation Act of 2005 (P.L. 109-222) further restricted the ability of parents to shift their income tax burden to their minor children so that such money would be taxed at the child’s lower rates. This shifting tax burden, known as the “Kiddie Tax”, previously only applied to minor children who had not reached the age of 14 by the end of the taxable year. Now, parents of children under the age of 18 will be taxed on the unearned income of their children.

Specific Application

In 2006, the unearned income of a minor, up to $850, is not taxed. Unearned income greater than $850 but less than $1,700 is taxed at the minor’s rate. However, a minor’s unearned income over $1,700 is taxed at the parent’s highest marginal rate, if application of that rate results in a higher tax than the minor would have otherwise paid as a single person. In certain circumstances, a parent may make a “pick up” election to include the minor’s gross income (in excess of $1,700) on the parent’s own return. The threshold of $1,700 will be indexed for inflation. The Kiddie Tax does NOT apply to qualified Disability Trusts.


As a result of this change in the law, parents and grandparents now have one more reason to set up a Coverdell Education Savings Account (CESA) or a Qualified Tuition Program (529 plan) as opposed to a custodial account to save for a child’s college education. Both the CESA and the 529 plan permit tax-free accumulation of the principal contributions and the ability to roll over the accounts to other children. Most importantly, assets transferred to one of these plans will NOT be included in the donor’s estate for estate tax purposes.

Many of you are probably now familiar with a 529 plan, but parents should also consider the use of a CESA. A CESA is available for individuals with an income less than $110,000 married parents with an income below $220,000 (with a phase-out starting at $95,000 and $190,000, respectively) and permits parents to direct the investments in the account. The disadvantage of a CESA is that no more than $2,000 may be contributed per year for each child, regardless of who establishes or contributes to the accounts. A parent or legal guardian of the designated beneficiary of the CESA, may change the designated beneficiary to a family member of the original beneficiary, provided the new beneficiary is under the age of 30. Unfortunately, unlike a 529 Plan, if the money in the CESA are not used for college, they cannot be refunded to you, but will be distributed to the designated beneficiary thirty days after such beneficiary attains age 30, if the account is not rolled over prior to that date.

There are two types of 529 plans, a prepaid plan and a savings plan. A prepaid plan allows the parent to prepay the tuition at an eligible educational institution, thereby guarding against the inevitable tuition increases. A savings plan involves investment in mutual funds that will grow tax free. Anyone may open up and fund a 529 for a child. The account owner retains may change the beneficiary to any other member of the original beneficiary’s family without adverse tax consequences. Further, although there is no annual limit on contributions to a 529 Plan, generally a person will not want to gift more than the annual exclusion amount (currently $12,000) or it will be a taxable gift to that child. A special gift tax election may be made to gift up to 5 years worth of contributions to a 529 plan in the first year, but no other tax free gifts may be made to that child for the next 5 years. It should be noted that if the donor dies prior to the expiration of the 5 year period, a portion of the gift will be added back to the donor’s estate when calculating the estate tax.

Unqualified distributions from either a CESA or a 529 plan will result in a tax on the accumulated income plus a 10% penalty tax.

Get Thee a POA

Don’t have a Power Of Attorney (“POA”) yet? You are not the only one. Millions of Americans find out too late that a POA is a very useful and inexpensive document to obtain. If you do not have a POA, in order for your spouse or loved ones to make financial and medical decisions for you, they must institute a guardianship proceeding.
A guardianship proceeding starts with the prospective guardian hiring an attorney and obtain at least two medical opinions about the alleged incompetent’s condition. The Court will appoint an independent attorney for the benefit of the alleged incompetent person, and that attorney must submit a report to the Court. Assuming there are no issues, the judge will hold a hearing and officially name a guardian.
Usually the judge will allow for attorneys fees, often about $10,000, and require the guardian to pay for an insurance bond. The fee for the bond depends upon the value of your assets, but it can cost several hundred dollars per year even for a small estate. (More than most attorneys charge for a POA.)
The whole process typically takes several months, which can delay important financial and medical decisions. Additionally, if anyone contests the guardianship, the costs will skyrocket and delay the proceeding.
Having a valid POA minimizes the hassles and cost of a guardianship proceeding. A POA is a legal document that allows others to act on your behalf when making financial and medical decisions. Your decision maker is known as your “attorney-in-fact”.
There are two kinds of POA. A traditional POA is only effective in the event of incapacity. A Durable POA is effective as soon as you sign it. Your choice of POA will be dependent upon your relationship with the attorney-in-fact. For example, you might exercise a Durable POA in favor of your spouse, but a traditional one in favor of a friend.
If you are planning to save some money and buy a POA from the internet or on CD, just remember, you get what you pay for. Some of the software is missing vital components. For example, it may not contain the requisite HIPPA language or the power to make gifts.
HIPPA language is important because of new laws regarding health care disclosure. Many doctors will not release your medical information without proper authorization, and your attorney-in-fact may still have to institute a guardianship proceeding.
The power to gift is essential if you wish to provide for your spouse or your heirs, particularly if you wish to engage in tax or Medicaid planning. Absent this power, your attorney-in-fact may only use your money for your benefit.
Remember, to save time, money and countless hours of aggravation, a POA must be in place BEFORE you become incapacitated.