How Proper Planning Can Save You Thousands in Estate Taxes

December 1, 2011 by · Leave a Comment 

By Adil Daudi, Esq.

trust-estateUnless one of your primary objectives is to fund the government with more of your money, taking the initiative of planning your estate should be one of your top priorities. Far too often people find it an inconvenience to plan their estate; however what is commonly misunderstood is that by taking the time to structure your estate, you could potentially save upwards of thousands of dollars.

One of the optimal tools to use when it comes to estate planning is the creation of a Revocable Living Trust. However, what many attorneys sometimes fail to explain is that even within a Trust, there are certain methods that can be used to help reduce the amount of estate taxes one would normally pay. This trust is commonly referred to as the “AB Trust.”

Under an AB Trust, married couples are given the ability to maximize the use of their federal exemptions from estate taxes. Currently, any estate valued over $5M would be subject to the tax (for the amount in excess of $5M). However, although the current exemption limit is set at $5M, there are strong indications that Congress is to reduce that limit back down to $1M in 2013.

So let’s give a brief breakdown on how an AB Trust works:

How the AB trust system works

In order to avoid being a victim to a steep estate tax, spouses have the option of setting up an AB trust, where each spouse leaves their property to a trust. An AB Trust is created by establishing a living trust with an AB provision. Although the trust remains revocable while both spouses are alive, when the first spouse passes away, the trust becomes irrevocable and is split into two separate components: the A trust and the B trust. Under the A trust, the surviving spouse holds his/her half of the estate, and controls all the property while receiving distributions of income and principle on a need-basis.

On the other hand, the B trust contains the deceased spouse’s share of the estate. Typically, the funds transferred into the B-Trust belong to the beneficiaries, who are usually the children. However, the surviving spouse has the right to use the property during his/her life and is allowed to receive any income, if needed. It is upon the death of the surviving spouse that the property in the B-Trust passes to the beneficiaries designated in the original trust document, as well as the assets contained in the A-Trust.

Advantages of an AB Trust

The property that is contained in the B-Trust is never considered part of the surviving spouse’s estate; therefore it is not subject to estate taxes. It is only the property contained in the A-Trust that is subject to estate taxes at the time of the surviving spouse’s death, but if the A-Trust contains less than the estate tax exemption, then no estate taxes will be imposed. Although many presume an AB Trust is only appropriate if you carry in excess of $5M, which is the current estate tax threshold, this is not necessarily the case because it is always important to note that the current laws may not be the laws in the future. The laws change on a constant basis, and a proper estate plan takes into consideration not just what applies today, but what could apply in the future.

Disadvantages of an AB Trust

With every good comes a little bad. There are disadvantages to an AB trust. After the death of the first spouse, the A and B trusts requires separate tax returns. In addition, the AB trust can limit the surviving spouse’s rights to the trust property, depending on how it is worded.

It is always important to note that an AB Trust is not suitable for every household. With all its benefits, there are reasons for families to not implement such a Trust and to instead utilize the regular Revocable Living Trust. However, it should also be noted that consulting with a professional in the field could prove to be vital as it could potentially save you hundreds, if not thousands of dollars.

Adil Daudi is an Attorney at Joseph, Kroll & Yagalla, P.C., focusing primarily on Asset Protection for Physicians, Physician Contracts, Estate Planning, Business Litigation, Corporate Formations, and Family Law. He can be contacted for any questions related to this article or other areas of law at adil@josephlaw.net or (517) 381-2663.

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Elasticity

September 15, 2011 by · Leave a Comment 

tufailIn physics, elasticity (or stretchiness) is the physical property of a material that returns to its original shape after the stress (e.g. external forces) that made it deform or distort is removed. The relative amount of deformation is called the strain.

The elastic regime is characterized by a linear relationship between stress and strain, denoted linear elasticity. The classic example is a metal spring. This idea was first stated by Robert Hooke in 1675 as a Latin anagram “ceiiinossssttuu” whose solution he published in 1678 as “Ut tensio, sic vis” which means “As the extension, so the force.”

This linear relationship is called Hooke’s law. The classic model of linear elasticity is the perfect spring. Although the general proportionality constant between stress and strain in three dimensions is a 4th order tensor, when considering simple situations of higher symmetry such as a rod in one dimensional loading, the relationship may often be reduced to applications of Hooke’s law.

Because most materials are elastic only under relatively small deformations, several assumptions are used to linearize the theory. Most importantly, higher order terms are generally discarded based on the small deformation assumption. In certain special cases, such as when considering a rubbery material, these assumptions may not be permissible. However, in general, elasticity refers to the linearized theory of the continuum stresses and strains.

Above a certain stress known as the elastic limit or the yield strength of an elastic material, the relationship between stress and strain becomes nonlinear. Beyond this limit, the solid may deform irreversibly, exhibiting plasticity. A stress-strain curve is one tool for visualizing this transition.

Furthermore, not only solids exhibit elasticity. Some non-Newtonian fluids, such as viscoelastic fluids, will also exhibit elasticity in certain conditions. In response to a small, rapidly applied and removed strain, these fluids may deform and then return to their original shape. Under larger strains, or strains applied for longer periods of time, these fluids may start to flow like a liquid, with some viscosity.

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Playing With Default

June 9, 2011 by · Leave a Comment 

By Joe Conason

The current puppet play in Congress—where Republicans sponsored a bill to raise the nation’s debt ceiling only because they wanted to vote it down—would be funny, if only they weren’t risking economic disaster. Unfortunately they’re not joking, as they push the country closer and closer to a potentially ruinous default.

If the showdown over debt and spending between the House majority and the White House isn’t resolved before the first week of August, the federal government will no longer be able to send out Social Security checks, run Veterans Administration hospitals, pay Medicare costs or operate the national park system, to mention just a few significant items. Hundreds of thousands of federal workers would be furloughed without pay, and millions of seniors would stop spending money, slamming an economy that already seems stalled.

But the consequences of that unprecedented situation would reverberate around the world, as nearly every expert—from the top bond trader, Mohamed El-Rian, to former Fed Chair Alan Greenspan—has warned.

Because both the U.S. dollar and U.S. Treasury notes are so important to world trade and investment, a default on U.S. debt could drive the global economy into a recession worse than that from which we have been slowly emerging. The same experts have warned against the Republicans’ insistence on forcing more budget cuts before they will pass a higher debt ceiling.

Indeed, Greenspan is so concerned with the prospect of a debt default, either now or in the future, that he had advocated increasing taxes to the same level as before the George W. Bush tax cuts. Congress must approve a higher debt ceiling, said the conservative fiscal guru—or risk catastrophe if the United States does not meet its obligations. The brinksmanship that had led to the current impasse in Washington, he told CNBC, is “an extraordinarily dangerous problem for this country.”

Why is it so perilous for Republicans and their tea party backers to push toward default? The rating firm Moody’s, following a similar warning weeks ago from Standard & Poor’s, is threatening to downgrade U.S. Treasury securities if an agreement isn’t reached within the coming month. Such a historic event would be much worse than embarrassing—and the Moody’s analysts now believe that a default is increasingly likely.

“Although we fully expected political wrangling prior to an increase in the statutory debt limit,” said a statement issued by the ratings firm, “the degree of entrenchment into conflicting positions has exceeded expectations.”

Political polarization over the debt limit “has increased the odds of a short-lived default,” it said, meaning that Moody’s doesn’t believe even the Republicans would permit the default to continue. But the nasty reverberations of even a brief default could last far longer, with sharply rising interest rates, crashing stock prices, a plunging dollar, and yet another blow to America’s prestige and power.

Most economists also believe that the Republican insistence on cutting spending in a slowing recovery is simply wrong because it will reduce demand and cost jobs. The party’s congressional leaders have yet to explain how they will boost the economy by throwing yet more people off federal and contractor payrolls, which will further depress the housing market, as well.

Remember that these are the same geniuses who opposed the auto bailout two years ago—which has now proved not only to have saved hundreds of thousands and perhaps millions of jobs, but at a very low cost. Somehow they seemed to believe that Europe and China should build cars while we let our auto industry wither.

While cutting spending and restraining the debt sound appealing, they must be done with great care. The Republican claim that there will be no harm in approaching default, or actually defaulting, is ridiculous to anyone who actually understands how markets work—and the damage they can sometimes wreak.

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Federal Government Reinstates the Estate Tax – What That Means to You

May 26, 2011 by · Leave a Comment 

By Adil Daudi, Esq.

FeaturedImageRecently, the Federal government has reinstated a law that will have a significant impact on how we manage our estate. Beginning in 2011, the Federal government brought back the federal estate tax, which imposes a 35% tax on any estate exceeding $5 million, or $10 million for married couples.

An estate tax is defined as a tax imposed on your gross estate that exceeds the exemption limit. For example, if John dies leaving a gross estate of $6 million, his total taxable estate would be $1 million ($6M – $5M). Thus, his estate would pay $350,000 in estate taxes to the government ($1M x 35%). Note: only assets owned by you individually at the time of your death are included in your estate.

Although the common citizen may overlook this law due to the large required estate, it is important to note that many experts consider this $5 million exemption to only be temporary. By the end of 2012, it is widely speculated that federal lawmakers will revert back to the pre-2001 days, where there was only a $1 million exemption and a tax rate of 55%.

Whatever the exemption amount, there are certain tools at your disposal that can assist you in lowering your estate for purposes of avoiding the estate tax altogether, or lowering the amount of money that you will be required to pay to the government. The following are certain deductions that are available to reduce your estate taxes:

(1) Marital Deduction: any property transferred to your spouse upon your death is excluded from your estate;

(2) Charitable Deduction: donations made to a charitable organization are deducted from your estate (creating a charitable remainder annuity trust – CRAT – is beneficial in this regard);

(3) Irrevocable Trust: this is a trust that takes ownership away from you individually and transfers title to your trust’s name; therefore, because you no longer claim individual ownership, the size of your estate is reduced.

The above options are effective means to help reduce your estate; however, you are not restricted to just those. That is why it is always advised that you consult with an attorney who is well-versed in estate planning and asset protection to ensure that you have structured a sound estate plan. Remember, although the exemption may not apply to you this year, there is a strong likelihood that the exemption limit will dramatically decrease by 2012. Plan now to be assured that you have the utilized the right tools to reduce your estate. After all, it is always better to pay your heirs as opposed to the government.

Adil Daudi is an Attorney at Joseph, Kroll & Yagalla, P.C., focusing primarily on Estate Planning, Shariah Estate Planning, Asset Protection, Business Litigation, Corporate Formations, Physician Contracts, and Family Law. To contact him for any questions related to this article or other areas of law, he can be reached at adil@josephlaw.net or (517) 381-2663.

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High Frequency Trading High-tech Highway Robbery

April 22, 2010 by · Leave a Comment 

By Mike Whitney

April 18, 2010  — The Securities and Exchange Commission (SEC) knows that High-Frequency Trading (HFT) manipulates the market and bilks investors out of tens of billions of dollars every year. But SEC chairman Mary Schapiro refuses to step in and take action. Instead, she’s concocted an elaborate “information gathering” scheme, that does nothing to address the main problem. Schapiro’s plan–to track large blocks of trades by large institutional investors– is an attempt to placate congress while the big Wall Street HFT traders continue to rake in obscene profits. It achieves nothing, except provide the cover Schapiro needs to avoid doing her job.

High-frequency trading (HFT) is algorithmic-computer trading that finds “statistical patterns and pricing anomalies” by scanning the various stock exchanges. It’s high-speed robo-trading that oftentimes executes orders without human intervention. But don’t be confused by all the glitzy “state-of-the-art” hype. HFT is not a way of “allocating capital more efficiently”, but of ripping people off in broad daylight.

It all boils down to this: HFT allows one group of investors to see the data on other people’s orders ahead of time and use their supercomputers to buy in front of them. It’s called front-loading, and it goes on every day right under Schapiros nose.

In an interview on CNBC, HFT-expert Joe Saluzzi was asked if the big HFT players were able to see other investors orders (and execute trades) before them. Saluzzi said, “Yes. The answer is absolutely yes. The exchanges supply you with the data, giving you the flash order, and if your fixed connection goes into their lines first, you are disadvantaging the retail and institutional investor.”

The brash way that this scam is carried off is beyond belief. The deep-pocket bank/brokerages actually pay the NYSE and the NASDAQ to “colocate” their behemoth computers ON THE FLOOR OF THE EXCHANGES so they can shave off critical milliseconds after they’ve gotten a first-peak at incoming trades. It’s like parking the company forklift in front of the local bank vault to ease the transfer of purloined cash. Due to the impressive research of bloggers like Zero Hedge’s, Tyler Durden and Market Ticker’s, Karl Denniger, many people have a fairly good grasp of HFT and understand that the SEC needs to act. But Schapiro has continued to drag her feet while issuing endless proclamations about pursuing the wrongdoers. Baloney. She needs to stop yammering and shut these operations down.

In a recent posting, Market Ticker explained some of the finer-points of high-frequency trading, such as, how the banks/brokerages probe the exchanges with small orders in order to find out how much other investors are willing to pay for a particular stock. Here’s a clip:

“Let’s say that there is a buyer willing to buy 100,000 shares of Broadcom with a limit price of $26.40. That is, the buyer will accept any price up to $26.40. But the market at this particular moment in time is at $26.10, or thirty cents lower.

So the computers, having detected via their “flash orders” that there is a desire for Broadcom shares, start to issue tiny “immediate or cancel” orders – IOCs – to sell at $26.20. If that order is “eaten” the computer then issues an order at $26.25, then $26.30, then $26.35, then $26.40. When it tries $26.45 it gets no bite and the order is immediately canceled.

Now the flush of supply comes at $26.39, and the claim is made that the market has become “more efficient.”

Nonsense; there was no “real seller” at any of these prices! This pattern of offering was intended to do one and only one thing – manipulate the market by discovering what is supposed to be a hidden piece of information – the other side’s limit price!

With normal order queues and flows the person with the limit order would see the offer at $26.20 and might drop his limit. But the computers are so fast that unless you own one of the same speed you have no chance to do this – your order is immediately “raped” at the full limit price!

The presence of these programs will guarantee huge profits to the banks running them and they also guarantee both that the retail buyers will get screwed as the market will move MUCH faster to the upside than it otherwise would.

If you’re wondering how Goldman Sachs and other “big banks and hedge funds” made all their money this last quarter, now you know.” (“High-Frequency Trading is a Scam”, Market Ticker)

The HFT uber-computers are able to find out the highest price that traders will pay in a millisecond and then extort that full amount millions of times to maximize profits. Clearly, this has nothing to do with efficiency or innovation. It’s high-tech highway robbery; institutional bid-rigging on a grand scale, tacitly sanctioned by industry lackeys operating from within the administration. Schapiro was picked by Team Obama for this very reason; because she was known as a regulator with a “light touch” when she headed Finra the financial industry’s self policing agency. As Finra’s chief, Schapiro managed to keep her head in the sand during the Madoff scandal and the auction-rate securities flap. She also issued far fewer fines and penalties than her predecessor. Here’s an excerpt from the Wall Street Journal which sums up Schapiro’s regulatory doctrine:

“The Financial Services Institute, a trade group, was meeting, and Ms. Schapiro addressed the crowd about Finra’s efforts to fight frauds aimed at senior citizens. Frank Congemi, a financial adviser, asked what Finra was doing to regulate “packaged products” such as complex mortgage securities. Mr. Congemi says that Ms. Schapiro replied: “We have rating agencies that rate them.” The credit-rating agencies, by this time, were being heavily criticized for having given triple-A ratings to mortgage bonds that became unsalable as foreclosures rose.” (Wall Street Journal)

If the financial crisis has taught us anything, it’s that the system is NOT self-correcting. And it takes more than just rules. It takes regulators who are willing to regulate.

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