Noteworthy Changes to Coverdell Accounts Demand Consideration

Families interested in opening a Coverdell Education Savings Account this year for college savings should consider doing so before April 15. That would allow them to invest as much as $4,000 in one of these tax-advantaged accounts this year—twice the maximum for annual contributions—since money deposited before April 15 can be counted against the previous year's limit.

But families planning to use a Coverdell account to pay for pre-college education expenses should think twice about opening or contributing to an account this year. Starting next year, withdrawals from Coverdells to pay expenses from kindergarten through 12th grade will no longer be tax-free, unless Congress acts to extend that benefit, which is far from certain.

Another prospective rule change would lower the limit on annual contributions to $500 starting next year, making Coverdells less useful for college savings. Already, the $2,000 limit has made Coverdells much less popular than 529 college-savings plans, which offer similar tax benefits for college costs and a roughly $300,000 limit on contributions overall. But even some people who are putting away more than $2,000 a year for college have included Coverdells in their savings plans, because Coverdells offer a greater range of investment options than 529 plans, and more freedom to switch investments.

Another benefit that could expire at year's end is the ability of an investor to claim a Hope or Lifetime Learning tax credit for education in the same year they use Coverdell funds, as long as the tax credit and Coverdell money aren't used for the same expense. For example, an investor can take a tax credit for tuition in the same year s/he is using Coverdell money for books.  This benefit is scheduled to sunset at the end of this year,  resulting in the two tax benefits becoming mutually exclusive. 

Avoiding Sham Trusts and Trust Scams: Part I - Sham Trusts

Legitimate trusts are tools used by qualified estate planners and their clients to achieve certain objectives, including, but certainly not limited to, controlling the disposition of assets, avoiding probate, reducing administration costs, saving estate taxes, and preserving family wealth for future generations. Unfortunately, trusts are often used for improper purposes. Lurking in the shadows are con artists who promote sham trusts and trust scams for their own gain. These con artists rely on the ignorance of the public, and only education and information can prepare you for their pitch.

Sham trusts and trust scams are usually sold at high pressure seminars, by door-to-door salesmen, and on the internet. In some cases, they are recommended by well meaning but poorly informed CPA's, financial advisors, friends, or business acquaintances. The marketing techniques can be persuasive, and are aimed at all classes of people.

What is a Sham Trust?

A sham trust is any trust created for an improper or illegal purpose. For example, "trusts" or "contracts" which purport to avoid, or significantly reduce, all taxes, including all income taxes, for individuals and, in some cases, businesses, are almost always sham trusts. These often use a complex structure that involves the "irrevocable" transfer of your assets to one or more business or trust entities which you control. The promoters claim that the arrangement will significantly reduce or eliminate state and federal income taxes.

Although there are legitimate estate tax objectives that may be accomplished with trust planning, income tax planning is quite a different matter. Generally speaking, someone is going to have to report taxable income, as well as pay income taxes thereon. While there are legitimate credits, deductions, and exemptions available under state and federal law, there is no trust or business entity into which you can convey all of your property and thereby avoid all income taxes. These trusts sometimes come with seductive names. Moreover, when the justification for the trust somehow involves the unconstitutionality of the IRS or of income taxes, you are best advised to seek additional or alternate legal counsel.

Avoiding Sham Trusts and Trust Scams - Part II - Trust Scams

Although trusts are excellent tools used by legitimate professionals to accomplish a variety of worthwhile objectives, there are a wide variety of con artists who prey upon the public using the lure of trust planning. These con artists rely on the ignorance of the public. They generally provide poorly conceived and implemented estate plans, poor service, and often do more harm than good to their customers. These schemes are usually encountered at high pressure seminars.

What is a Trust Scheme?

Several years ago, the Supreme Court for the State of Ohio fined a company and a group of individuals including several attorneys one million dollars for selling unnecessary and potentially damaging legal services to seniors. Several years later, the State of Ohio fined a pre-paid insurance company and a group of attorneys for similarly cheating seniors. The State of Texas is currently investigating a Ponzi scheme in which seniors are alleged to have lost tens of millions of dollars. What these schemes have in common is that each involved the marketing and sale of living trusts.

Living trusts are so advantageous and so readily accepted by the general public that scam artist will often sell a living trust as a front for selling some other illegitimate scheme or investment. Once confidence of the public is attained, the sham artist will sell the client stock in companies that do no exist, unregistered and risky securities, poorly capitalized limited partnership interests, and just about any fraudulent investment or business scheme imaginable. Promising returns that are usually too good to be true, the scam artist assures their clients that the investment is safe. The scam artist is almost never an attorney, and the trust is almost always incidental to their "product." Moreover, the investments that they offer are almost always unwise.

Most Do Not Have Advanced Directives

"Five years after the court fight over allowing Terri Schiavo to die, most Americans still don't draft the legal documents that spell out how far caregivers should go to keep them alive artificially."  This according to an Associated Press article published in the Washington Post.  According to the article:

"Schiavo's life and death captivated the country and fueled conversations about the necessity of the documents, known as advance directives or living wills. Even though millions witnessed a worse-case scenario, there's no indication it had a lasting impact on getting more people to make their wishes known."

"The gap is so big," Paul Malley, president of Aging With Dignity, is quoted as saying.  Aging With Dignity  advocates advance directives and saw an increase in interest during the Schiavo case. "Even a significant impact from the Schiavo case doesn't put a dent in the need that's out there."

Underwriting Ceases on National Flood Insurance

FOR IMMEDIATE RELEASE
FROM THE OHIO DEPARTMENT OF INSURANCE

Monday, March 29, 2010

CONSUMER ADVISORY:

National Flood Insurance Program Not Issuing New Policies

COLUMBUS — Ohio Department of Insurance Director Mary Jo Hudson is advising consumers that the National Flood Insurance Program (NFIP) ceased issuing new policies or renewing policies to cover flood damage, following the expiration of the program’s federal authorization at midnight March 28, 2010. Congress will not act again on reauthorization legislation until after it returns to session on April 12.

The NFIP sunset could cause short-term problems for consumers waiting to close on the sale of a property within a Special Flood Hazard Area. However, consumers with current policies are still covered by the federal program. Only those seeking to purchase a policy during this time will be affected. Until Congress approves this reauthorization, the NFIP cannot issue new policies, increase coverage or approve renewal policies.