Personal Wealth Law News

Dagwood Bumstead, featured in the long-running comic strip Blondie, has worked for more than 70 years for J. C. Dithers, the model for many a law firm senior partner. But that was not the way he started out comic strip life. His saga tells an interesting story about family business succession.

Dagwood began as the heir to an industrial empire, the Bumstead Locomotive Works. He fell in love with Blondie Boopadoop, whom his family considered beneath him socially. When he insisted on marrying Blondie anyway, his father disinherited him. Thus ended his future of becoming an executive in a large industrial concern, and he turned instead to more than 70 years of wage slavery, carpools, running into the mailman, etc. He seems to have become stuck as the equivalent of a third year associate. Meanwhile, Blondie started her own business, and the Bumstead Locomotive Works has disappeared. Perhaps Dagwood could have saved the company and redirected its business to defense contracting or microchips.

What’s the lesson for those thinking about family business succession, which is one of the most difficult goals to achieve but one of the most satisfying when it is achieved? It’s a better course of action for the family members to discuss each of their goals and plans. Bumstead Senior should have realized the consequences of leaving no one to follow him in the business. Dagwood could have suggested that he come into the business on a lower level so that he could prove himself. Senior’s lawyer could have explained how disinheriting his son would probably put an end to the plans to have the business remain in the family and successful. But I suppose that wouldn’t make for a good comic strip; better to feature big sandwiches and funny bowties.

Here are two sources of learning on the process of business succession, very different but both helpful. One is a book titled “Estate & Business Succession Planning,” by Russell J. Fishkind and Robert C. Kautz. The second is a series of programs on succession planning that feature a theatrical performance of vignettes in the story of family businesses. These programs have been arranged by a psychologist, Dr. Scott Budge, who has spoken for PBI on business succession planning. They are presented in Philadelphia from time to time.

Republished with permission of The Legal Intelligencer.

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The San Diego Union-Tribune has been reporting for some time on the ongoing woes plaguing that city’s retirement system. A story reported on June 14, 2008 indicates that the city had hired a large law firm to look into the problems and to represent it in an investigation by the Securities and Exchange Commission. But, as it turned out, that created a conflict of interest- how could the law firm investigate the problem and at the same time defend the city in the SEC matter? Apparently, it could not, and the city sued the law firm for a very large sum of money. The case was just settled, with the law firm agreeing to return $3.25 million in fees and to forgive outstanding bills of another $1.1 million. This illustrates a couple of points: first, pension plans are important and complicated, and it’s not difficult to cause problems if you’re not sure of what you’re doing. Second, if you are a public entity and you hire someone to straighten out a problem with your pension system, that’s what they should do, not try to minimize or gloss over the problem. Even in private businesses, it makes sense to have someone, such as a law firm that knows what it’s doing, review the administration of retirement plans from time to time, to avoid lawsuits and government investigations.

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Part of planning for the future is deciding where to spend the golden years, as marketing types like to call them. For those people who have an option where to live in retirement, there are the usual suspects: Florida, Arizona, North Carolina and there is the state that is one of the most popular among retirees, Pennsylvania.

By the way, the idea that you need to remain in the city where your law practice is located in order to continue to have an involvement in that practice is fast fading away. Just last week, a lawyer from a suburb of Detroit, who is suing one of my clients, called me from somewhere deep in the heart of North Carolina, from where he is able to be heavily involved in the frivolous litigation he is pursuing.

Why is Pennsylvania so popular among retirees, especially those in the neighboring states of New York, New Jersey, Delaware and Maryland? One important reason is the taxation of retirement income, such as Social Security and retirement plan distributions. There is no income tax imposed by Pennsylvania on bona fide retirement income, which is not the case in the neighboring states. If your income in retirement consists only of Social Security benefits and amounts you withdraw from a 401(k) plan, for example, your Pa. income tax will be zero. That is not the case, again for example, in New Jersey. And if you worked in New Jersey to earn a retirement benefit, New Jersey can’t reach across the river to tax it if you move to Pennsylvania, under federal law. (But here’s a caveat: Be sure to check the Pennsylvania rules to be certain that your retirement distributions qualify. Nearly all distributions after age 59 1/2 will qualify, but check the rules anyway.)

Yes, we have a sales tax, which Delaware does not have (although there are a large number of “big box” stores suspiciously close to the Pennsylvania border) and yes, we still have the state store system (again, some really good wine stores just across the border in New Jersey and Delaware, I’m told), but Pennsylvania has a big advantage in the taxation of retirement income. That, combined with reasonable property taxes and access to a world of sports, culture and recreational activities, is why Pennsylvania has one of the largest populations of retirees of any state.

Republished with permission of The Legal Intelligencer.

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A new book by Alice H. Munnell and Steven Sass, titled “Working Longer: The Solution to the Retirement Income Challenge”, published by the Brookings Institution Press, makes some important points about planning for retirement. Americans, they say, need to work longer because of a contracting retirement income system, the longer lifespans now enjoyed by many of us, and the rising cost of healthcare.

The aim, they suggest, should be to move the average retirement age from 63 to 66. This will increase Social Security benefits payable, permit workers to build up larger retirement balances and reduce the period during which they must rely on retirement assets. One way of encouraging this trend might be to increase the earliest age for receiving Social Security benefits, which is now age 62.

But here’s another one, which I have suggested in earlier posts: provide income tax incentives for workers to continue working beyond age 62. For instance, for those age 62 and over, the federal income tax rate on the first $50,000 of income could be set at 10%, with a 15% rate on the next $50,000. This would surely encourage people to continue working, adding more to Social Security trust funds and delaying the payout of benefits.

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Section 409A of the Internal Revenue Code was enacted in reaction to concerns about the taxation of deferred compensation, especially some of the abuses uncovered in the failure in recent years of several large corporations, including Enron. The law was enacted in 2004, but several extensions were granted of the time to amend plans and arrangements to comply with the new law. Those extensions will come to an end on December 31, 2008. This year it is still possible to make certain types of changes in deferred compensation plans and arrangements without adverse tax consequences, but there will be significant penalties assessed if compliance has not been achieved next year.

This is a good time to review what deferred compensation plans and arrangements are now in effect, whether they need to be amended and how they will be amended. Deferred compensation can be a valuable tool for businesses to provide incentives to executives, but it’s important that the new law be satisfied.

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Actually, the Warren Zevon song refers to “Lawyers, Guns and Money,” but the Internal Revenue Code can also be a dangerous weapon. Now that the campaign for president has reached the general election stage, it’s time to realize that whoever wins the election; there are massive changes in our federal tax system looming ahead. These changes will affect us and our clients in various ways. In some cases, there will be little that can be done but to accept the changes; in other situations, there may be planning that can be used to reach a better result. Here are a couple of areas where change may occur:

• Federal estate tax: This discussion has been going on for several years, with much misinformation being spread about. (Read “Wealth and Our Commonwealth” by William H. Gates and Chuck Collins for a good review of this debate.) But there will be changes in our federal estate tax system in the future because leaders in both parties agree that the tax must be revised to include only the truly wealthy, not those who bought a home in a good neighborhood. There might be relief for small businesses and farmers, but in general the tax should be one that allows people to pass on some of the fruits of their life’s work without destroying the incentive of the next generation to take part in life’s struggle.
• Federal income tax: The reductions in income tax rates that were enacted in 2001 are scheduled to phase out in a few years. One solution is to extend indefinitely, but this easy answer has to be balanced against the colossal budget deficits that have resulted, in part, from those tax reductions. The view that those budget deficits can go on forever and will somehow be resolved or will disappear as a result of future growth is now classified with bedtime stories.
• Alternative minimum tax: Whose idea was this anyway? In the past few years, we’ve had small bandages applied to this gaping wound in our tax system. Some have suggested just repealing it, which would only result in even larger budget deficits. But reducing its effect to those who are perceived as not paying a fair share of taxes, which was the original intent of the law, will require that some difficult choices be made. Doing nothing (which is a skill of both political parties): not an option.
• Social Security taxes: Someone will have to finally accept that this problem also can’t be ignored or magically wished away with private accounts, and that higher taxes will only be acceptable to a limited degree. As last week’s blog indicated, you can either increase revenues or reduce benefits; there’s no third way.

All of these problems will have to be addressed by our next president, either John or Barack. In the course of resolving them, many provisions of our tax laws will be placed on the table: taxation of life insurance, employee benefit taxation, relief for older taxpayers and those with children. Many constituencies will be contending for their interests. It’s important for all of us to know what’s happening, and to plan for change, for us and for our clients.

Republished with permission of The Legal Intelligencer.

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I know it was discussed extensively over the past few years, but is it no longer front-page news because the problem has been fixed? Apparently not. It’s more likely that the nation is suffering from attention deficit disorder and can only think about high gas prices right now.

But this problem isn’t going away, nor is the Medicare problem on the verge of resolution. Both of these programs face long-term funding challenges and waiting another few years to think about them again isn’t going to make their solution any easier.

An interesting Web site is maintained by the Center for Retirement Research at Boston College, and included on the Web site is a publication called the “Social Security Fix-It Book.” There are only a certain number of possible solutions to these problems, and the center has summarized them in 52 clearly written and entertaining pages. The publication begins with basic facts about how Social Security works and then makes the following fairly simple statement: The only two ways to fix the problem are to cut benefits or increase revenues. There is no magic formula that will painlessly make Social Security financially solvent for the indefinite future.

There are a couple of ways to cut benefits:

• An across the board percentage benefits cut that affects everyone, including those now receiving benefits.
• Raising the normal retirement age for full benefits, as has already occurred.
• Freezing the purchasing power of benefits, which means that future benefit amounts would be lower than under the current law.
• Freezing the purchasing power, but to a lesser degree for lower income earners.
• Changing the cost of living adjustment for benefits.
• Doing nothing and cutting benefits all at once in 2040

And, there are a couple of ways to increase revenues:

• Increasing the payroll tax rate today.
• Raising the cap on earnings subject to Social Security taxes.
• Financing Social Security with revenues from the federal estate tax.
• Transferring Social Security’s startup costs (from benefits paid in the early years of the program) to general revenues.
• Increasing the rate of return on assets held in the Social Security Trust Fund.
• Waiting until 2040 to raise taxes.

What to do? The publication ends by asking these three questions, the answers to which will determine how to fix Social Security:

• Do we want to keep benefits about where they are now? If so, how should the burden be shared?
• Do we want to keep taxes about where they are now? If so, how do we cut benefits?
• Finally, should each generation pay about the same tax and get about the same benefits?

Republished with permission of The Legal Intelligencer.

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