What is a specal needs trust in a will?

A third party special needs trust ("SNT"), generally included in a person's will, is a supplemental needs trust established by a person for the benefit of someone who is disabled. In a will, property that would otherwise have been distributed to the disabled beneficiary outright will instead be held in a SNT for his or her benefit. The SNT is designed so that the trust property will not be counted as an available resource when determining whether the disabled beneficiary is eligible for public benefits. As long they do not have the legal ability to revoke the trust or direct that the trust assets be distributed for their benefit, the assets in the SNT will not be counted as the disabled beneficiary's assets when determining his or her eligibility for Medicaid. A third party SNT has no payback provision to the State of Texas. Also, the trust can be written so that the property of the trust which remains upon the disabled beneficiary's death can be distributed to other family members or beneficiaries of your choosing. These are the major benefits of a third party SNT.

If you need a Texas estate planning lawyer, contact Peterson Law Group.

What changes have been made in dealing with estates?

Under the now-repealed estate tax laws, property passing from a decedent used to receive a step-up in cost basis equal to the property's fair market value as of the decedent's date of death. That tax benefit has been eliminated for persons who die in 2010, and instead, the basis of property acquired from a decedent will be the lesser of the decedent's adjusted basis or the property's fair market value on the decedent's date of death. Under this rule, it is possible that the cost basis of property will be stepped down.

These new carryover basis rules will not only cause the imposition of capital gains taxes that previously were avoided following a person's death, but the beneficiaries who inherit your estate now need to know what your cost basis was in the properties they receive. In this regard, you should endeavor to organize your records so that the beneficiaries of your estate will be able to calculate your cost basis in the properties you own. For many people who inherit property in 2010, records will not exist or will be incomplete, thus making it difficult or impossible for them to determine a particular property's cost basis.

There are two important exceptions to the carryover basis rules. A decedent's Executor is allowed to allocate up to $1,300,000 to various assets owned by a decedent, thereby increasing the cost basis of those assets. Also, an additional $3,000,000 of basis increase can be allocated to properties passing to a spouse or to a special "qualified terminable interest property" trust for the spouse (often called a "QTIP" trust or a "marital" trust). Under the tax laws in 2010, just like the laws which existed prior to estate tax repeal, any person may give an unlimited amount of property to his or her spouse or to a QTIP trust (the "Marital Deduction") without generating any gift or estate taxes.

For estate planning help, contact Peterson Law Group.

What changes have been made to the Federal generation skipping transfer tax?

Like the estate tax, the skipping transfer tax has been repealed the 2010 tax year. Under the old law, each person could give away during lifetime or at death up to $3,500,000 (the "GST exemption") without owing the generation skipping transfer tax. Any gifts to grandchildren or great-grandchildren (and to certain other persons two or more generations younger than the person making the gift) in excess of the GST exemption would have been subject to the GST tax which was equal to the highest marginal estate tax bracket (45% in 2009). Although the GST tax has been eliminated for 2010, it will be reinstated in 2011, and the available GST exemption will be reduced to its former level of only $1,000,000 (although this amount will be indexed for inflation) and with a 55% rate of tax.

If you need a Texas estate planning attorney, contact Peterson Law Group.

What changes have been made to the federal gift tax?

Contrary to what many think, the Federal gift tax has not been repealed. However, the gift tax rate has been lowered to 35%, down from the 45% rate in 2009. Under the current gift tax law, each person may give away (during his or her lifetime) as much as $1, million in cash or other property without paying any gift taxes. Any gifts which exceed this amount will be taxed at 35%. However, the gift tax will not apply to most of the gifts people make because each person can give $13,000 per year to any person without reducing the $1 million exemption. This $13,000 per year exclusion from the gift tax is known as the "Annual Exclusion." The Annual Exclusion, combined with other estate planning techniques, can help to reduce your estate for estate tax purposes and transfer wealth to your children and grandchildren.

If you need estate planning help, contact Peterson Law Group.

Do I need to file gift tax returns?

Gifting property to children can be a great way to reduce your estate tax burden, but when you make gifts that exceed a certain threshold amount, you will want to file a gift tax return.

It is important that you file gift tax returns (IRS Form 709) each year to report gifts you make which exceed the annual exclusion from the gift tax (currently $13,000 per donor per donee each year). Gift tax returns may also need to be filed for generation skipping transfer ("GST") tax purposes if you have a GST trust where distributions are made during the term of such trust or upon the termination of such trust to any of your grandchildren or great-grandchildren (or to other persons who are "skip persons" for GST purposes). Imposition of the GST tax can be avoided if you allocate (or are deemed to have allocated) a portion of each of your $3,500,000 GST exemptions as you make gifts in trust each year.

If you gift tax returns, they will be due at the same time as your Federal income tax return, normally April 15th of the year following the gift, unless extended.

If you need a Texas estate planning lawyer, contact Peterson Law Group.

What is an ILIT?

An Irrevocable Life Insurance Trust, or ILIT, is a way to avoid estate taxes by removing life insurance proceeds from your estate. By giving an existing life insurance policy to this Trust or by giving cash to the Trust which is ultimately used to purchase a life insurance policy, you should effectively remove the proceeds of the insurance from your estate according to the IRS.

If you transfer an existing life insurance policy to the Trust, you must outlive the transfer by three years in order for the proceeds to be excluded from your estate. Any new insurance which is purchased by the Trust is not subject to this three year rule.

Once the Trust owns a life insurance policy, the Trust becomes obligated to pay all premiums which come due on the policy. Since the Trust will need funds to pay for the insurance policy, you would make gifts to the Trust each year in the amount of the insurance premiums.

It is important to remember that gifts to the Trust will be irrevocable once made, and you cannot take back a gift once it is made. In addition, all income which accrues to the gifted property will benefit the Trust, not you.

For many, an irrevocable life insurance trust has numerous estate tax benefits and is a great method to transfer wealth to their children.

If you need an Irrevocable Life Insurance Trust lawyer, contact Peterson Law Group.

What is the status of the estate tax currently?

As of January 1, 2010, the Federal estate tax has been repealed -- but only for one year. As part of the 2001 tax act, Congress increased the amount persons could give away tax-free at death (the "Exemption Amount"),. This amount increased each year over a 10 year period. The Exemption Amount reached $3,500,000 in 2009 and ultimately became unlimited this year. In other words, the Exemption Amount in 2010 is equal to the value of your entire estate.

However, tax law changes were limited to a 10 year duration. Thus, in 2011, the estate tax will be reinstated with an Exemption Amount of only $1,000,000 and a rate of tax equal to 55%, the same exemption and tax rate as in 2000. Larger estates will also have an extra 5% tax that was repealed 2001, but be reinstated in 2011.

If you have questions about how the estate tax affects you specifically or if you need a Texas estate planning lawyer, contact Peterson Law Group.

Key Elder Law Numbers for 2010

ElderLaw Answers released a short summary of the key elder law numbers for different federal tax and benefit programs for 2010. The summary is much better than sifting through the various governmental portals for this information.

The highlights include:

• Gift tax exclusion stays at $13,000
• There was no cost of living adjustment to Social Security and SSI since the consumer price index did not increase
• Medicare premiums, deductibles and copayments increased slightly
• The amount you could deduct from your taxes for buying long term care insurance increased slightly
• Medicaid's community spouse resource allowance, monthly mainteance and income cap remained the same as in 2009.

If you need a Texas Estate Planner, contact Peterson Law Group.

Estate Tax under Obama's Budget

Folks have been worried for some time about the changes to the current estate tax system with the change in President. President Obama's current budget does make a coupld of significant changes to the current estate tax system.

First, the estate tax exemption for 2010 is replaced in toto. Previously, there was an unlimited exemption in 2010, which meant that no estates would be subject to estate tax. Now, that has changed, and the unlimited exemption has been removed for 2010.

Second, the estate tax exemption amount for 2010 and the following years has been changed to $3.5 million per individual. Thus, with proper estate tax planning, a married couple can shield $7 million from the estate tax.

While it would have been nice to have the unlimited exemption in 2010, the 2011 exemption is a significant increase from the $1 million exemption amount that was scheduled for those years. Thus, although there is some disappointment in this news, there is also a significant silver lining that will probably be a bigger benefit to more Americans.

2009 First Time Home Buyer Tax Credit

There is a new tax credit available for first time home buyers. The tax credit is $8,000 and does not have to be repaid.

Am I eligible?

To qualify, you must be a buyer who has not owned a principal residence in the 3 years prior to this purchase, and you must be a US citizen who files tax returns.

Does it matter how much money I make?

You can claim the full tax credit if you are single and make less than $75,000 or married and make less than $150,000. You can take a partial credit if you make less than $95,000 as a single person or $170,000 as a couple. The credit is not available if you make more than those amounts.

When do I have to buy a home?

Home purchases made between January 1, 2009 and December 1, 2009 qualify for the tax credit. The transaction must officially "close" during that time period, so don't wait until the last minute.

What types of homes qualify?

All single family homes, townhomes and condominiums qualify as long as you plan to use it as your principal residence (and meet the other requirements above).

How does the credit work?

When you file your tax return, you will apply the tax credit against the amount of income taxes you owe. So, if you owe $10,000, your tax bill will be reduced to $2,000. If you owe $5,000, you will get a tax refund of $3,000. Remember that if you are employed and have been paying withholding from your paycheck or have paid quarterly estimated taxes, you already have tax money stored up with the IRS. This credit is in addition to what you have personally paid.

To find out more information, check out www.federal housingtaxcredit.com.

Handy tips for choosing a tax preparer

The IRS has a handy tip sheet for choosing a tax preparer. Click here for the link. Some of the more helpful tips include:

-A paid preparer must sign the return as required by law.
-Avoid preparers who claim they can obtain larger refunds than other preparers. If your returns are prepared correctly, every preparer should derive substantially similar numbers.
-Beware of a preparer who guarantees results or who bases fees on a percentage of the amount of the refund. A practitioner may not charge a contingent fee (percentage of your refund) for preparing an original tax return.
-Understand that the most reputable preparers will request to see your receipts and will ask you multiple questions to determine your qualifications for expenses, deductions and other items. By doing so they have your best interest in mind and are trying to help you avoid penalties, interest or additional taxes that could result from an IRS examination.
-Choose a preparer you will be able to contact and one who will be responsive to your needs. Ask who will actually prepare the return before engaging services. Avoid firms where your work may be delegated down to someone with less training or some unknown worker. You should know exactly who works with your tax matters at all times and how to contact him or her; after all, you are paying for it. Determine if the preparer is exporting your return to a foreign country for preparation. Foreign countries do not have the same security and privacy laws as the United States nor is there any recourse should your information be compromised as a result of lax or nonexistent privacy procedures.
-Investigate whether the preparer has any questionable history with the Better Business Bureau, the state’s board of accountancy for CPAs, the state’s bar association for attorneys or the IRS Office of Professional Responsibility (OPR) for enrolled agents or the oversight agency in states that license or register tax preparers.
-Determine if the preparer’s credentials meet your needs or if your state mandates licensing or registration requirements for paid preparers. Is he or she an Enrolled Agent, Certified Public Accountant (CPA) or Tax Attorney? Only attorneys, CPAs and enrolled agents can represent taxpayers before the IRS in all matters including audits, collection actions and appeals. Other return preparers may represent taxpayers only in audits regarding a return that they signed as a preparer.
-Find out if the preparer is affiliated with a professional organization that provides or requires its members to pursue continuing education and holds them accountable to a code of ethics.
-Check IRS.gov for information regarding abusive shelters and other tax schemes and scams.

Remember, if it sounds too good to be true, chances are it is.

IRS Small Business Guide is available online now

The Small Business Resource Guide 2008, a one stop source for all the information a small business owner needs to comply with federal tax laws, is now available on IRS.gov.
You can also order a CD version online, or call (800) 829-3676 and ask for Publication 3207, revision March 2008.

Texas Vehicle Exemption for Personal Vehicle Used in Business

The following reminder comes from the Texas Association of Realtors:

"Don't ignore April 1 deadline for exempting your vehicle from taxationYou already know you aren't required to pay property tax on your personally owned vehicle that you also use for business purposes. But do you know how your local appraisal district is handling this exemption?
"Each of the 253 appraisal districts in Texas is handling the exemption of these so-called mixed-use vehicles from taxation differently. Some districts don't require an exemption form for such a vehicle if the owner was not charged property tax on that vehicle in 2007. If you haven't previously had to pay property tax on your personally owned vehicle that you use for business, check with your local appraisal district before you make the decision to not file an exemption form. Without filing an exemption form, there is no guarantee that the appraisal district won't tax you. A list of county appraisal districts with each district's contact information is available online. Those districts that require an exemption to be filed must receive your 2007 exemption by April 1; your 2008 exemption is due April 30."

For all of your legal needs, contact us at 979-680-9993 or via our website, BrazosLawyers.com.

Business Mileage Rates Increase for 2008

This just came out from the IRS:

Beginning Jan. 1, the 2008 optional standard mileage rate for business use of a car (including vans, pickups or panel trucks) is 50.5 cents per mile. The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile.

Related Link:
IR-2007-192, IRS Announces 2008 Standard Mileage Rates; Rate for Business Miles Set at 50.5 Cents per Mile

Like Kind Exchanges (1031 Exchanges)

The IRS recently came out with a new fact sheet answering some of the most common questions involving like-kind exchanges. The new fact sheet can be found below or by clicking this link.


Like-Kind Exchanges Under IRC Code Section 1031

FS-2008-18, February 2008 WASHINGTON — Whenever you sell business or investment property and you have a gain, you generally have to pay tax on the gain at the time of sale. IRC Section 1031 provides an exception and allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange. Gain deferred in a like-kind exchange under IRC Section 1031 is tax-deferred, but it is not tax-free.
The exchange can include like-kind property exclusively or it can include like-kind property along with cash, liabilities and property that are not like-kind. If you receive cash, relief from debt, or property that is not like-kind, however, you may trigger some taxable gain in the year of the exchange. There can be both deferred and recognized gain in the same transaction when a taxpayer exchanges for like-kind property of lesser value.

This fact sheet, the 21st in the Tax Gap series, provides additional guidance to taxpayers regarding the rules and regulations governing deferred like-kind exchanges.

Who qualifies for the Section 1031 exchange?

Owners of investment and business property may qualify for a Section 1031 deferral. Individuals, C corporations, S corporations, partnerships (general or limited), limited liability companies, trusts and any other taxpaying entity may set up an exchange of business or investment properties for business or investment properties under Section 1031.

What are the different structures of a Section 1031 Exchange?

To accomplish a Section 1031 exchange, there must be an exchange of properties. The simplest type of Section 1031 exchange is a simultaneous swap of one property for another.
Deferred exchanges are more complex but allow flexibility. They allow you to dispose of property and subsequently acquire one or more other like-kind replacement properties.
To qualify as a Section 1031 exchange, a deferred exchange must be distinguished from the case of a taxpayer simply selling one property and using the proceeds to purchase another property (which is a taxable transaction). Rather, in a deferred exchange, the disposition of the relinquished property and acquisition of the replacement property must be mutually dependent parts of an integrated transaction constituting an exchange of property. Taxpayers engaging in deferred exchanges generally use exchange facilitators under exchange agreements pursuant to rules provided in the Income Tax Regulations.

A reverse exchange is somewhat more complex than a deferred exchange. It involves the acquisition of replacement property through an exchange accommodation titleholder, with whom it is parked for no more than 180 days. During this parking period the taxpayer disposes of its relinquished property to close the exchange.

What property qualifies for a Like-Kind Exchange?

Both the relinquished property you sell and the replacement property you buy must meet certain requirements.

Both properties must be held for use in a trade or business or for investment. Property used primarily for personal use, like a primary residence or a second home or vacation home, does not qualify for like-kind exchange treatment.

Both properties must be similar enough to qualify as "like-kind." Like-kind property is property of the same nature, character or class. Quality or grade does not matter. Most real estate will be like-kind to other real estate. For example, real property that is improved with a residential rental house is like-kind to vacant land. One exception for real estate is that property within the United States is not like-kind to property outside of the United States. Also, improvements that are conveyed without land are not of like kind to land.

Real property and personal property can both qualify as exchange properties under Section 1031; but real property can never be like-kind to personal property. In personal property exchanges, the rules pertaining to what qualifies as like-kind are more restrictive than the rules pertaining to real property. As an example, cars are not like-kind to trucks.

Finally, certain types of property are specifically excluded from Section 1031 treatment. Section 1031 does not apply to exchanges of:
Inventory or stock in trade
Stocks, bonds, or notes
Other securities or debt
Partnership interests
Certificates of trust

What are the time limits to complete a Section 1031 Deferred Like-Kind Exchange?

While a like-kind exchange does not have to be a simultaneous swap of properties, you must meet two time limits or the entire gain will be taxable. These limits cannot be extended for any circumstance or hardship except in the case of presidentially declared disasters.
The first limit is that you have 45 days from the date you sell the relinquished property to identify potential replacement properties. The identification must be in writing, signed by you and delivered to a person involved in the exchange like the seller of the replacement property or the qualified intermediary. However, notice to your attorney, real estate agent, accountant or similar persons acting as your agent is not sufficient.

Replacement properties must be clearly described in the written identification. In the case of real estate, this means a legal description, street address or distinguishable name. Follow the IRS guidelines for the maximum number and value of properties that can be identified.
The second limit is that the replacement property must be received and the exchange completed no later than 180 days after the sale of the exchanged property or the due date (with extensions) of the income tax return for the tax year in which the relinquished property was sold, whichever is earlier. The replacement property received must be substantially the same as property identified within the 45-day limit described above.

Are there restrictions for deferred and reverse exchanges?

It is important to know that taking control of cash or other proceeds before the exchange is complete may disqualify the entire transaction from like-kind exchange treatment and make ALL gain immediately taxable.

If cash or other proceeds that are not like-kind property are received at the conclusion of the exchange, the transaction will still qualify as a like-kind exchange. Gain may be taxable, but only to the extent of the proceeds that are not like-kind property.

One way to avoid premature receipt of cash or other proceeds is to use a qualified intermediary or other exchange facilitator to hold those proceeds until the exchange is complete.

You can not act as your own facilitator. In addition, your agent (including your real estate agent or broker, investment banker or broker, accountant, attorney, employee or anyone who has worked for you in those capacities within the previous two years) can not act as your facilitator.
Be careful in your selection of a qualified intermediary as there have been recent incidents of intermediaries declaring bankruptcy or otherwise being unable to meet their contractual obligations to the taxpayer. These situations have resulted in taxpayers not meeting the strict timelines set for a deferred or reverse exchange, thereby disqualifying the transaction from Section 1031 deferral of gain. The gain may be taxable in the current year while any losses the taxpayer suffered would be considered under separate code sections.

How do you compute the basis in the new property?

It is critical that you and your tax representative adjust and track basis correctly to comply with Section 1031 regulations.

Gain is deferred, but not forgiven, in a like-kind exchange. You must calculate and keep track of your basis in the new property you acquired in the exchange.

The basis of property acquired in a Section 1031 exchange is the basis of the property given up with some adjustments. This transfer of basis from the relinquished to the replacement property preserves the deferred gain for later recognition. A collateral affect is that the resulting depreciable basis is generally lower than what would otherwise be available if the replacement property were acquired in a taxable transaction.

When the replacement property is ultimately sold (not as part of another exchange), the original deferred gain, plus any additional gain realized since the purchase of the replacement property, is subject to tax.

How do you report Section 1031 Like-Kind Exchanges to the IRS?

You must report an exchange to the IRS on Form 8824, Like-Kind Exchanges and file it with your tax return for the year in which the exchange occurred.
Form 8824 asks for:
Descriptions of the properties exchanged
Dates that properties were identified and transferred
Any relationship between the parties to the exchange
Value of the like-kind and other property received
Gain or loss on sale of other (non-like-kind) property given up
Cash received or paid; liabilities relieved or assumed
Adjusted basis of like-kind property given up; realized gain

If you do not specifically follow the rules for like-kind exchanges, you may be held liable for taxes, penalties, and interest on your transactions.

Beware of schemes

Taxpayers should be wary of individuals promoting improper use of like-kind exchanges. Typically they are not tax professionals. Sales pitches may encourage taxpayers to exchange non-qualifying vacation or second homes. Many promoters of like-kind exchanges refer to them as “tax-free” exchanges not “tax-deferred” exchanges. Taxpayers may also be advised to claim an exchange despite the fact that they have taken possession of cash proceeds from the sale.

Consult a tax professional or refer to IRS publications listed below for additional assistance with IRC Section 1031 Like-Kind Exchanges.
References/Related Topics
Publication 544, Sales and Other Dispositions of Assets
Form 8824, Like-Kind Exchanges (PDF)
Form 4797, Sales of Business Property

For your real estate legal needs, please contact Chris Peterson at 979-680-9993 or on the web at BrazosLawyers.com.

New service from the IRS -- verifying Social Security information and identities

The IRS now has a website that allows employers to verify social security numbers and match them to the correct names. The announcement from the IRS with links is below:

"Use the Social Security Number Verification Service to verify your employee names and SSNs match Social Security's records. "

This should be a nice feature for small business owners that need a fast way to accomplish this with new employees.

For small business advice, contact Peterson & Swearingen, LLC at 979-680-9993 or through our website, BrazosLawyers.com.

What changes were made to the minimum wage law?

The Fair Labor Standards Act increases the federal minimum wage in three steps:

July 24, 2007, $5.85 per hour

July 24, 2008, $6.55 per hour

July 24, 2009, $7.25 per hour

See the U.S. Department of Labor’s Wage and Hour Web site or call the DOL toll-free help line at 1-866-4US-Wage (487-9243) for more information and a copy of the poster every employer with employees subject to the Fair Labor Standard Act’s minimum wage provisions is required to display at their business.

For any legal matter involving your business, please contact Peterson & Swearingen, LLC at 979-680-9993 or through our website BrazosLawyers.com.

Do I geta tax break for officing at home?

Yes, you can but it is subject to certain rules. The IRS website generally explains them as follows:

"If you use a portion of your home regularly and exclusively for business purposes, you may be able to take a percentage of your expenses as a home office deduction. Expenses may include the business portion of real estate taxes, mortgage interest, rent, utilities, insurance, depreciation, painting and repairs."

Related Links from the IRS:
Publication 587, Business Use of Your Home
Form 8829, Expenses for Business Use of Your Home
Form 8829 Instructions
FS-2006-25, Home Office Deduction Reminders
Publication 4035, Home-Based Business Tax Avoidance Schemes

For all of your business' legal needs, contact Peterson & Swearingen, LLC at 979-680-9993 or through our website, BrazosLawyers.com.

I sold my home for a profit. Do I have to pay taxes on that?

If you sell your home, you may be able to exclude from income any gain (the amount of your profit) up to a limit of $250,000 ($500,000 on a joint return in most cases). To exclude the gain:

1. You must have owned and lived in the property as your main home for at least 2 years during the 5-year period ending on the date of sale.

2. You must not have, within the past 2 years, sold another home at a gain and excluded all or part of that gain.

If you cannot exclude gain, you must include it in income.

To determine the maximum dollar limit you can exclude and for additional information, refer to IRS Publication 523.

Unfortunately, you cannot deduct a loss on the sale of your home.

For any real estate need, please contact Chris Peterson at 979-680-9993 or www.BrazosLawyers.com.

How do we report taxes for a small business owned by my husband and I?

New legislatiev changes by Congress have simplified this procedure. The following article is from the IRS website and explains these changes.

"Legislation signed last week simplifies reporting for husband and wife owned businesses.
The new law, effective for tax years beginning after Dec. 31, 2006, allows a husband and wife who file a joint return to elect to report income or losses in proportion to their interest in the business and not as a partnership.

"The husband and wife must be the sole owners of the business and both spouses must materially participate in the business to make this election.

"See page 10 of the technical explanation of the Small Business and Work Opportunity Tax Act Of 2007 for more information on the Section 8215, Family Business Tax Simplification."

If you are a small business owner and need legal advice or help in starting up, please contact us at 979-680-9993 or via our website, BrazosLawyers.com.