Thursday, August 11, 2011

Taxes: A Vexing Subject; But Whose Money Is It Anyway?

Taxes: A Subject That Vexes; But Whose Money Is It Anyway?

"Oh boy, Bernie's back with more stuff on taxes." Well yes, but from a perspective that you may not have taken before. Here, I'm not going to try and teach you about taxes, we have plenty of time for that in other articles.

No, here I want us to focus on what taxes are, what their purpose in our system is, and when we talk taxes, whose money are we really talking about. So strap in because this can get bumpy.

Taxes in the news.

You have may have noticed that taxes are in the news quite a bit. And not just now, taxes are always in the news, it just seems like it's more now. Why? Why does the subject of taxes cause so much noise, commotion and controversy? Well, that's the point of this article. The controversy? Taxes involve someone's ox getting gored for the benefit of someone else. No matter how you approach the topic, because of that simple little truth, it will always be controversial.

The controversy is growing due to the country's budget and deficit crises. The so-called "Super Congress", actually a committee, must decide on new tax policy and deficit reductions in the next several months to prevent massive tax increases and budget cuts. The possibility of their success is beyond the scope of this discussion.

What are taxes?

Taxes are nothing new. They were invented the first time that someone decided they were sovereign over someone else. But for our purposes, you may remember the concept of, "rendering unto Caesar". So the simple explanation is that taxes are amounts that the government takes from it's citizens in exchange for the government and services they supply back. The quality of those services is also beyond the scope of this discussion.

In the U.S. the legislative history of our tax system indicates that the purpose of taxes is to redistribute wealth via government. That makes taxes a political animal. Again, the wisdom of this and it's historical results are not our subject today.

What are the main taxes?

While there are several hundred forms of taxes and fees that we pay to various governmental entities, the taxes I focus on here are:

1. Income taxes.
2. Capital gains taxes.
3. Gift taxes.
4. Estate taxes.
5. Taxes imposed on transfers to grandchildren or the generation skipping tax.

Let's expand on each of these so we know what they are:

1. Income Taxes.

Income taxes are imposed on your income as you earn it. You get to see these taxes up and personal every two weeks, or quarterly if you make quarterly estimates. Each pay period you can see what is coming out of your pay. In our system, we have what is referred to a "progressive" income tax. That means the more you make, the higher percentage of tax you pay. Currently, if your income is below a certain amount, you pay no taxes at all.

2. Capital Gains Taxes.

Capital gains taxes are incurred when you sell something that has increased in value. To buy that thing, remember you have already paid income taxes on the income you earned to buy the thing. Let's make the thing your home. If you sell your home and it has increased in value since you bought it (good luck with that given the recent past) then that increase is called gain. After certain exclusions, you would have to pay the capital gains tax.

3. Gift Taxes.

If you make gifts those gifts are subject to the gift tax. Dang, we can't even give something without a tax. That's right. Again after exclusions and exemptions if you make a gift, you may have to pay the gift tax.

4. Estate Taxes.

The estate tax is imposed against your property when you die if you die owning more than the exempt amount. Due to politics, these exemptions have been changing from year to year and the cause of many estate planners like myself going prematurely grey or even worse.

5. Transfers to Grandchildren or the Generation Skipping Tax.

Not believing the first four types of taxes were enough, the government decided that gifts to grandchildren or beyond the generational level of children should also be taxed. So after the exemptions available, this last tax is also imposed.

So to sum it up, you pay taxes as you earn your pay, taxes if what you own increases in value, taxes if make gifts, taxes when you die and taxes if you want to help your grandchildren and great-grandchildren. That's quite a few oxen getting gored.

The answer to my question above, about whose money is it anyway should be clear. It's your money!! We are talking about the government taking your money for it's various purposes. And do you know what all the controversy is about? The controversy is all about "fairness". What is a fair rate of tax for the government to take is also beyond the scope of this discussion. But I would sure like to hear your opinion on that topic!

To boil down the budget crises debate, it's all about whether the government should spend less, or should increase taxes on you. Those are the only two issues that are really going on. The reason it boils down that way is because money will not fall on the government from some aliens visiting (at least as far as we know now). Revenues to any government are enhanced by either spending less, or by collecting more.

Historically, governments are not too successful at spending less. They are very famous for increasing taxes. That's a very tender balance also. Increase taxes too much and the people who pay them are unhappy, sometimes to the point of replacing those politicians. Decrease spending too little and the budget crises remains unsolved.

What makes the current budget problem so intractable is we are attempting to solve a complicated non-political problem with many moving parts politically. It may not happen. But that too is a topic for another day.

So that's my little primer for you about taxes. What do you think? Where do you stand? Comment back and sound off, let's start a dialogue on the subject of taxes. It may not be fun, but it may be necessary because I'm not sure I trust the folks in Washington to solve this one.

Bernie Greenberg

Monday, August 8, 2011

Is the World End Near? Ummm, No.

Sorry for those who are waiting, but all indications are the world is not coming to an end.

Usually you expect me to be writing on an estate planning topic of some kind. Something about estate taxes and the like. Not this time though. Reports in the media over the weekend got me thinking resulting in this missive.

After distilling several dozen reports from the numerous medial outlets and supposed experts that I follow, I expected to wake up this morning to mass destruction and devastation. What a surprise when the day dawned bright and sunny here in Colorado with nary a destruction in sight. Oh well.

I am always reminded of the lessons of the one of the most important books of the last 100 years, The Black Swan. I recommend this book to everyone for many reasons. Today that reason is the absolute folly of attempting to understand what is happening in our world from reading the news (rare today I know) or watching it on TV or your computer. That exercise is simply unsuccessful.

You see, the media exists in it's own world of self hypnosis or more accurately, self-induced hysteria and insanity. According to the media (all the media) "if it doesn't bleed, it doesn't lead". The only reason I actually know what that means is because a reporter told me. It means, what the media wants to report on is: death, destruction, and mayhem. They WANT blood and in our world, if you look for that, you'll find some.

So, according to the media, (especially MSNBC who expects the world to end hourly)what is going on out in the world is unrelenting war, famine, destruction, chaos and mayhem. Might as well pack it all in right now if we are to believe them. But it's not true, not any bit of it. So sorry you Mayan world destructionists and other looney rapture and alien watchers, none of that is gonna happen.

The end of the world (or days if you will) has been predicted, prophesied and expected for thousands of years. Recently, we had two rapture non-happenings, preceded by: total world meltdown, total world freezeups, and the year 2000, all of which turned out to be much hysteria about nothing. In just a few months, according to some deluded and long dead Mayans, supported by a ridiculously bad movie from Hollywood, we will get 2012, another end of the world non-happening.

"How can you be so confident Bernie?" Well, it's easier for me to say than you might think. For me it's simple arithmetic. There have been approximately 13 million end of the world predictions in the last thousand years. Their batting average? A big fat 0. So, I'm not really going out on the limb at all when I say, it's just not happening. The odds are way in my favor.

So, how to avoid all this talk of doomsday, armageddon and just sad stuff? Don't watch or take seriously what you see on TV or read daily in the news. Here's the truth: just because something bad happens somewhere (and there's no shortage of that) there is no equation that says that it means anything. "Gasp!!" I hear you now. "It doesn't mean anything? Ridiculous." Maybe so, but if it did, you wouldn't be here now to read this article now would you?

That is the point of The Black Swan. In our effort to find meaning, we personalize things that have nothing to do with us so we can pretend that they do. Well, they don't. It doesn't mean that we shouldn't care and we shouldn't try to make our world better, we absolutely should. But let's not get swept up in the media's attempts to hypnotize us into thinking that the end is near. If we should have learned one thing as a species on this planet, it's that we just keep keeping on, especially here in the land of the free and the home of the brave. Let's not ever forget that is our birthright, and our gift to the rest of humanity.

So, let's knock off the talk of the end and focus more on the beginning. And let's get those knuckleheads in Washington to actually get something done. But more on politicians another time.

Let me know what you think. Is the media really just the bearers of bad news? I look forward to your comments.

Bernie Greenberg

Monday, August 1, 2011

Six Sure Fire Ways to Make Sure Your Will is Up to Date

Six Sure Fire Ways to Make Sure Your Will (and Estate Plan) is Up to Date

Here are six sure fire ways to make sure your Will is up to date and current. I am often asked how someone can make sure about this. Let's discuss how you can tell if it's time for you to get your Will and estate plan reviewed.

If your Will or estate plan falls into any of the categories below, it is OUT OF DATE and requires immediate attention.

1. You signed your Will in 2009 or earlier.

If your Will or estate plan is from 2009 or earlier, it is out of date and probably obsolete. Many things have changed since 2009, including dramatically different laws and rules concerning estate taxes.

2. You don't have Durable Powers of Attorney than name a HIPAA Personal Representative.

With the introduction of patient privacy laws under HIPAA several years ago, it is vital that your Powers of Attorney comply with these federal rules. Failure to do so could result in many problems for your family and decision makers if you are sick or injured.

3. You have moved to a state different from where your Will was created.

Since the laws vary from state to state, when you move to a new state, it is always advised to have your existing Will and other documents reviewed. This guidance also applies to your titles and beneficiary designations.

4. You have either: gotten married, divorced, had a child or children or had any other significant event in your life

Life brings changes, some good, some not. These changes must be considered to make sure your Will and estate plan remains appropriate for you. If life has brought you a significant event, it's time to get your Will and estate plan reviewed.

5. You have an A-B Trust, or any any other kind of estate plan that mentions the marital deduction and estate tax exemption.

These kind of Wills and estate plans are now obsolete and hazardous to your wealth. If you don't know how the estate tax changes of 2010 impact your plan, and you don't amend your plan accordingly, your family is at risk.

6. You have a fill-in-the-blank form or Will from any internet site.

It is a certainty that your Will or estate plan is out of date and obsolete if you have one of these. Not only are these forms dangerous for your family (See, the several articles below on internet Wills), they are even illegal in some states. If you have these kind of documents, get them reviewed and replaced immediately to protect yourself and family.

There are many other methods we use to determine the soundness of your Will and estate plan. So we don't stop with only these six. These six ways are a good way for you to start and I encourage you to see if any of these apply to you.

Let me know your thoughts and comments and any question is welcome. Thank you for your interest.

Bernie Greenberg