“Farm Bill” Creates a Short, but Wide Open “Window”

Conservation Easements create an opportunity for a landowner to own and use their land, pass them to successive generations, and realize substantial tax benefits.

Traditionally, the Federal Tax Code has allowed deductions for the value of a “Qualified Conservation Easement”, for Income and Estate Taxes.  These provisions apply to any landowner who creates an easement for permissible conservation purposes, as defined by the code and regulations.  A “Qualified Conservation Easement” must be a permanent restriction on land, generally limiting its use to conservation (open space, wetlands, nature preserves, etc.), agriculture or historic preservation purposes.  The easement itself must be donated to either a unit of government or a qualified charitable organization (often, a Land Trust).  But the landowner continues to own and use the land.

The value of the easement, is eligible for a charitable deduction.  The deduction may be taken in the year of the donation, and any unused amounts carried forward for additional years.  Traditionally, this carry-forward has been limited to 5 years, and, because land is a capital asset, the amount of the deduction has been limited to 30% of a taxpayer's adjusted gross income.

The 2008 Farm Bill dramatically changes this, but only for a short time!  "Qualified Farmers and Ranchers" may now deduct up to 100 percent of their Adjusted Gross Income, and may carry forward the unused deduction for 15 years.  Unfortunately, this very favorable provision applies only to donations made before January 1, 2010.  A "Qualified" Farmer or Rancher is one whose gross income from Farming is more than 50% of his total gross income in the year of the contribution.

There is good news for other landowners, too (subject to the January 1, 2010 deadline).  Now other donors of  “Qualified Conservation Easements” may deduct up to 50% of their adjusted gross income and may carry unused deductions forward for 15 years.

Other tax benefits from Conservation Easements still remain.  A deduction from Federal Estate Taxes may be taken (even on easements created post mortem, by an estate or heirs).  The easement, itself, should also reduce the value of the property for real property tax purposes (A 2006 Michigan State Tax Commission letter in fact, directs assessors to take this into consideration).  And, there is currently pending Michigan Legislation which would allow a tax credit of up to $10,000 for a donated conservation easement.

This Newsletter is intended to be informational, only and does not constitute legal advice.  If you have questions, concerns or comments, please contact me at: arichards@smithbovill.com, or by Telephone at 989-652-9923.

Andy Richards

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Beneficiary Designations on “Tax-qualified” investments

Wow.  Its hard for me to believe is has been a year since my last newsletter!  I owe readers a huge apology.  About 9 months ago, I asked a number of you if you would like to receive this as a “pdf” document in your e-mail and the response was mostly affirmative.  I had the best of intentions of sending out at least one last mailing asking for a choice between e-mail and regular mail.  Obviously, the e-mail route is (currently) a more “economic” choice for me.

  But I digress.  The apology.  I promptly dropped the ball and never produced a newsletter during the 2007 calendar year.  What can I say that doesn’t ring of “dog ate my homework,” and acknowledge that the “road to Hell is paved by good intentions?”

Being near the year-end, it may be a good time for a reminder on beneficiary designations for qualified retirement plans, individual retirement plans, and certain non-qualified annuities.

Those of you who know me, have worked with me or heard me speak know that I am an advocate for the revocable living trust as a planning tool.  However, every “rule” has at least one, notable exception.

In this case, these “investments” create a very significant exception which may militate against using the revocable trust with them.  They are, as a general rule, the only assets clients have which have an “unpaid” income tax component to them.  Qualified retirement assets are generally all income taxable to the recipient (whether the plan participant, or an heir).  Non-qualified annuities are at least partially income taxable.  Both are subject to regular income tax rates.

The problem arises because over the years the IRS has been less than clear about how these items will be taxed if payable to a trust.  The regulations require special, often complex language be included in the trust document and perhaps in the beneficiary designation.  They also require the Trustee or other administrator to be savvy about the elections necessary and the timing of those elections.

My “rule of thumb” advice to clients about treatment of these investments in the estate plan is that if you have responsible adult beneficiaries, you should name them directly, bypassing the trust on these assets.  Only if there is a compelling reason (e.g., minor children or other incapacity), should you name a trust as beneficiary, and then only if the trust has been drafted or amended to include particular provisions for proper treatment of these assets.

As another year comes to a close, I want to thank all of you for our professional relationship and your support and friendship through the years.

Best wishes to all for a happy and healthy holiday season.

This Newsletter is intended to be informational, only and does not constitute legal advice.  If you have questions, concerns or comments, please contact me at: arichards@smithbovill.com, or by Telephone at 989-652-9923.

Andy Richards

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Annuities: Tricks and Traps

Annuities present some unique opportunities for your clients.  But for the unwary agent and client, they also present some dangerous pitfalls.  The Annuity enjoys its own multiple-page, multiple-subsection, provision in the Internal Revenue Code.

Annuities afford clients a way to “park” assets and let them grow tax deferred.  One of the most important aspects, therefore, is to make sure they maintain their tax-deferred status.  The tax code is very specific about the limited instances in which a Trust can be the owner of an annuity.  Generally, qualified retirement plan trusts and Grantor Revocable Trusts are the only ones which will not cause an annuity to lose its tax exemption.  Therefore, when using estate planning trusts as owners of an annuity, care must be taken to consider the consequences of the death of the grantor.

An annuity is a contract.  The tax code allows the contract to be structured in a way that causes deferral of taxation of growth.  But each annuity contract is created by the underwriting company.  Thus, the options available to the owner and/or beneficiary, and the consequences of either changes of ownership, or death of the owner and/or annuitant can vary from contract to contract.  Not knowing what those options and consequences are can come back to “bite” the advisor (as well as her/his client).

Some annuity contracts do not directly address what happens in certain circumstances.  Take, for example, an annuity in which the annuitant is someone other than the owner and beneficiary.  What happens if the owner of the annuity dies, but the annuitant and beneficiary are still living.  In one case I am aware of, though the contract did not address this issue, the issuer took the position that the annuity could only be transferred from the deceased owner’s probate estate, to his heirs.  One of the “selling” points of an annuity contract is generally its transfer-on-death character, usually avoiding the need for probate.

Another common concern involves how an annuity will be treated in the event the owner is required to go into a long-term care scenario.  For purposes of qualifying for Medicaid, annuities are usually countable assets.  Medicaid exempts only very specifically structured annuities, and current new law has now even made them no longer viable.  There is a misconception out there that an irrevocable annuity will be exempt from Medicaid.

Like any other financial or estate planning tool, the annuity is a powerful planning option in the right circumstances and with the right plan design.  But like any powerful tool, care and skill should be exercised when implementing it.

This Newsletter is intended to be informational, only and does not constitute legal advice.  If you have questions, concerns or comments, please contact me at: arichards@smithbovill.com, or by Telephone at 989-652-9923.

Andy Richards

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