Wealth Law Blog : Oregon Asset Protection Lawyers & Attorneys : Samuels Yoelin Kantor Seymour & Spinrad Law Firm : OR Estate Planning, Fiduciary Litigation

I had the pleasure of attending a meeting for The Link for Women and Sunny Kobe Cook was the guest speaker.  For those of you that do not know her,  "The Mattress Queen" Sunny Kobe Cook - a secretary with a high school diploma - founded Sleep Country USA with $5,000 in 1991, serving as CEO and company spokesperson for many years, with stores in the US and Canada.  She completely changed the business of how mattresses were sold. 

She then sold it for a gigantic pile of money and never has to work another day in her life, retiring at the ripe old age of 42.  So the woman knows a thing or two about business. 

Here are her three top tips for success, that are definitely worth sharing:

1.     Talk to Everyone.  Chat up people in the elevator.  Talk to people as you wait in line for your coffee.  Have no expectation that you will make any sort of business connection – just talk to people.  The goal is to keep your social muscles exercised by using them repeatedly, so that when you do have to go to that marketing event and work the room or when you do have to speak to someone important, you will feel comfortable.  She says the reason we don’t like to go into a room and talk to people we don’t know is because it’s scary, but the more you do it, the less scary it becomes.  

2.     Do Something New Every Day.  Even if it is something simple like taking a new route to work or buying a different coffee at Starbucks, do one new thing every single day.  We all get stuck in ruts.  We all get to a point where we choose inaction and passivity over change, because – again – it’s a little scary.  By taking a small step in a new direction every single day, when you do have to make a bigger leap, it won’t be that daunting.

3.     Be Grateful.  People do not begrudge others’ success stories, if those with success are grateful.  People want to help those that are grateful.  It is a positive energy that should be routine.  For the last 30 years, before going to sleep, she has identified three things that she is grateful for – and she said that on some days, she was just grateful that the day was over.  She used to write it out, but then she and her husband changed it so that they tell each other and it has become a part of their routine – and as she pointed out, when you are sharing your grateful list with your significant other, you normally include something about them, which is a pretty good way to live as well.  Also, if you end your day with thoughts of gratitude, you will sleep better and awake with a positive mindset. 

It was a terrific presentation and she is a remarkable woman. 

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Surprise, surprise! Congress still has not come up with an answer to the lingering estate and generation-skipping transfer (GST) tax question for individuals who die this year. And, with the lack of a step-up in basis, some heirs will face higher combined estate and income tax costs for deaths occurring this year rather than in 2009. What a topsy-turvy world we live in.

There is still a possibility that Congress will retroactively reinstate the estate and GST taxes to the beginning of the year, but as each day goes by, this gets more and more unlikely. Even if the House could get their act together, I would be surprised to see anything come out of the Senate Finance Committee.

Apart from tax uncertainty, the continuing inaction could also pose a problem for individuals with wills using formula clauses. These clauses work well when the estate tax is in force but they may produce unintended consequences when there is no estate tax. Action may need to be taken if it becomes clear that Congress will not be addressing the situation.

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I have spoken with several charities lately regarding their fundraising efforts. It seems that when the economy goes south, the charities take it on the chin more than other businesses. This is due to the fact that they rely on charitable contributions to operate. For many of these charities, now, more than ever, is when they need charitable contributions to fulfill their mission.

If you are charitably inclined, there are tax-advantaged ways to make a gift to a favorite charity while enjoying the income from that gift during your lifetime. Many educational and charitable organizations offer plans that combine the benefits of an immediate income tax deduction and lifetime income from the charitable gift. In most cases, you can make the gift in cash or securities. Here is a brief overview of the major types of deferred charitable gifts.

(1) A pooled income fund is probably the most common type of deferred giving plan. It closely resembles a mutual fund. When you make a gift to a pooled income fund, it is merged with gifts of other donors, and you receive your allocable share of the income earned by the fund. Distributions from the fund are usually made quarterly and are taxable as ordinary income. There is no guarantee as to the rate of earnings; that depends on the fund's success.

You get an immediate income tax deduction for the year in which you make a gift to a pooled income fund. The amount of your deduction depends on a combination of your age and the fund's highest rate of earnings in the previous three years. The deduction will be less than the full value of your contribution, because it represents the present value of the funds that the charity will withdraw from the fund after your death.

(2) In a charitable remainder unitrust (CRUT), a separate fund is set up to hold your gift until your death, at which time it will become the charity's property. You decide at the outset on the annual percentage of the fair market value of the assets that you are to receive as income for life. For example, you may make a $50,000 gift to a CRUT and specify an 8% return. Your annual income will be $4,000. If the value of the CRUT assets drops in the next year to only $40,000, your income that year will be $3,200. If the value goes up to $60,000 in the following year, your income that year will be $4,800.

Unlike a pooled income fund, a CRUT is handled individually. Therefore, gifts using a CRUT are usually larger than those to a pooled income fund. Just as with a pooled income fund, your deduction for a gift to a CRUT will be less than the full value of your contribution.

(3) A charitable remainder annuity trust (CRAT) is similar to a CRUT in that your gift to the charity is placed in an individual trust. The CRAT provides an annual payment of a fixed dollar amount for your lifetime. This differs from a CRUT, which provides a fixed percentage of the asset value.

For example, say that you make a $50,000 gift to a CRAT that will pay you $4,000 a year for life, after which the trust principal passes to the charity. If the CRAT earns less than $4,000 a year, it will sell assets to make up the difference. If it earns more than $4,000, it will pay you $4,000 and add the excess to the trust principal.

Your income tax deduction from a gift to a CRAT is based on your age and the amount of your annual payment. As a rule of thumb, the older you are, the larger the deduction, and the greater the annual payment, the smaller the deduction.

(4) In a charitable gift annuity, you make a gift to charity in exchange for a guaranteed income for life. This is very much like buying an annuity in the commercial marketplace, except that you get an immediate charitable deduction equal to the excess of what you paid over what the annuity is worth, based on IRS tables.
Unlike the pooled income fund, CRUT, and CRAT, your income from the charitable gift annuity is an obligation of the charity that does not depend on investment results. The rate of return on your gift annuity is not variable, as in a pooled income fund, or negotiable, as in a CRUT or CRAT. Instead, it is most likely to come from a table based on your age at the time of the gift.

A portion of each year's payment is tax-free, because the tax law allows you to recover your original payment over your life expectancy. In the year when you buy the annuity, you get a charitable deduction for a portion of the purchase price, determined from an IRS table geared to your age.

If the idea of deferred charitable giving appeals to you, please give us a call. We can discuss the pros and cons of the various types of deferred giving, and arrive at an arrangement that is right for you.
 

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Conveniently tucked between April Fool's Day and Tax Filing Day is the little heralded "National Be Kind to Lawyers Day."

You can participate in a variety of ways.  A few suggestions from the N.B.K.T.L. website:

• Switch your ring tone to the "dah-dah" sound from NBC's "Law & Order."
• If you accidentally say something wrong or inappropriate on this day, just follow it up with the words, "Strike that from the record."  Then continue talking as if nothing happened. 
• Do some simple repairs around the house with a gavel instead of your trusty hammer.

Here's to hoping this turns into the next best thing to the Fourth of July, including requisite parades, fireworks, and good friends and family gathered around the backyard barbeque. 

Cheers. 

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In the coming months (possibly years), tax lawyers and accountants will be analyzing the ramifications to business of the new health care legislation which was recently signed into law by President Obama. One of the new provisions of this law marks the first time in history that the federal Medicare tax will be extended beyond wages and self-employment income to interest, dividends, capital gains, annuities, royalties and rents. This new tax applies to individuals with adjusted gross income above $200,000 and joint filers over $250,000.

For individuals above the $200,000/$250,000 thresholds, the tax will apply to all “net investment income”. In addition to all applicable income taxes, the new Medicare tax will be 3.8%. For regular wages, the new law also adds an additional 0.9% tax on wages over the threshold amounts (thus increasing the current tax on such wages from 1.45% to 2.35%).

One noteworthy aspect of this provision is that several types of income are excluded from the definition of “net investment income” and hence are not subject to the new tax. First, the tax does not apply to income from the operation of a trade or business. Therefore, the law appears to retain the current law’s exemption whereby the Medicare tax does not apply to S corporation distributions. 

The Medicare tax applies to income that is derived from rental income only if the landlord is a passive investor under the Tax Code’s current “passive activity” rules. Hence, if the landlord is a sole proprietor or an active investor in a partnership, LLC, or S corporation, the Medicare tax does not apply. Note, however, that if the landlord is a sole proprietor or an active investor in a partnership or LLC (but not an S corporation), income from the activity may be considered trade or business income that may already be subject to the Medicare self-employment tax, which the new law separately increases from 2.9% to 3.8% for high earners.

Capital gains are generally included in the new Medicare tax. However, gain from the sale of an interest in a partnership (including an interest in an LLC that is taxed as a partnership) or S corporation is subject to the new tax only to the extent that the gain is attributable to passive investment assets and not property held by the entity which is attributable to an active trade or business.

Finally, the Medicare tax does not apply to distributions from qualified retirement plans. This exclusion extends to distributions from employee profit-sharing and 401(k) plans, IRAs, Roth IRAs, and 403(b) plans from tax-exempt organization.

The new Medicare tax will become effective on January 1, 2013.

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The Oregon Legislature just passed Senate Bill 1045, which Governor Kulongoski signed on Monday, March 29, 2010, that will prohibit an employer from obtaining or using a credit history report of an applicant or current employee in order to make employment hiring, firing, and promotion decisions. The new law is effective as of July 1, 2010. If an employer violates this new law, it will be liable for compensatory and punitive damages.

The Bill has a number of exceptions. First, if the employer is a bank or a law enforcement agency, the restriction does not apply. Second, if the employer is required to check credit history under federal law, the restriction does not apply. Last, if the employer can show that the information is “substantially job-related” and the reasons for the employer’s use of the information are disclosed to the applicant or employee in writing, the restriction does not apply.

Unfortunately, the Legislature did not define what it considers to be a “substantially job-related” reason for a credit history check. This could allow for judicial interpretation that produces unexpected results for both employers and employees. The courts could make the substantially job-related exception so expansive that any employer can fit within the exception when it gives its employees a boiler-plate form stating the importance of good credit history. On the other hand, the courts could make the exception so narrow that employers will face liability for relying on credit history, even when they have a valid reason to do so.

The Oregon Bureau of Labor and Industries will seek public comments on possible regulations that will interpret Senate Bill 1045. In the meantime – that is, once the bill is effective on July 1 of this year – employers should reevaluate their systems and procedures for using credit checks in employment decisions.
 

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