Summary: Winter 2003

Summary

Winter 2003

TAX BRIEFS

2003 AnnualExclusion Gifts
A donor can exclude from his taxable gifts this calendar year the first $11,000 of gifts to each donee. The annual exclusion is available to all donors, including non-resident citizens. Also, spouses who consent to split their gifts may transfer up to $22,000 per donee in 2003 free of gift and generation-skipping transfer tax.

Tax Season
Tax season is upon us. Federal and state income tax returns must be filed on or before Tuesday, April 15, 2003. It's always a good idea to look at last year's tax return while gathering important tax information to make sure that you have all of your 1099s, W-2s and other important information necessary for preparation of your tax return.

SAVING FOR COLLEGE

According to the U.S. Department of Education, over the past decade, public four-year college tuition and fees increased by 40 percent. Here are some college saving strategies:

529 Plans
Contributions made to state-sponsored qualified tuition programs, commonly known as "529 Plans" (named after the Internal Revenue Code section that authorizes them) are made with after-tax dollars and any earnings grow tax-free at the federal level. Earnings withdrawn to pay for qualified higher education expenses are free from federal income tax for state-sponsored programs and will be tax-free beginning in 2004 for programs of any eligible higher education institution. 529 Plans are advantageous for income tax and also for federal estate tax reasons. Even though the donor retains control over the account as the owner, at death, the value of the account is not included in his taxable estate for federal estate tax purposes.

Anyone can contribute to a 529 plan, including grandparents, other relatives and even friends of the family. Currently individuals can contribute as much as $55,000 in one year ($110,000 for married couples) treated as five separate $11,000 annual exclusion gifts (one for the current year, then one in each of the next 4 years). There are 2 types of plans: (1) prepaid tuition; and (2) college savings. Each state's plans are different with their own requirements, investment options, contribution maximums, and state income tax treatments.

Prepaid Tuition Plans
Prepaid Tuition Plans allow an individual to prepay a student's future tuition and fees at today's rates, providing protection from future increases in tuition. The Illinois program is College Illinois! If the beneficiary decides to attend a public university or community college in Illinois, the program pays 100% of tuition and mandatory fees for as many semesters as were purchased, regardless of how much the tuition and fees increased since the time purchased. If the beneficiary decides to attend a private college in Illinois or out-of-state college, the program will pay the mean-weighted average of tuition and fees at comparable public universities or community colleges in Illinois.

College Savings Plans
The Illinois college savings plan is an investment program with Salomon Smith Barney called Bright Start. The proceeds can be used to pay for qualified expenses such as tuition, fees, room and board, books and other required supplies at eligible schools nationwide, including public or private, colleges, universities, graduate schools, community colleges or vocational schools. If the beneficiary chooses not to attend an eligible school, the owner of the account may change the beneficiary to another family member of the current beneficiary without penalty.

The earnings from the proceeds grow tax-free and qualified withdrawals are tax-free at the Federal level and for Illinois residents, at the state level, as well. Illinois residents can also deduct their contributions to a Bright Start account from Illinois state income taxes. The Federal exemption will expire on December 31, 2010, unless extended by new law.

Coverdell Education Savings Accounts
The Coverdell Education (formerly known as Savings Accounts Education IRAs) is another college saving strategy. Anyone can invest up to $2,000 per year, per beneficiary until each beneficiary is 18 and withdrawals must be made by the time the beneficiary reaches 30. The account may be transferred to another member of the current beneficiary's family. Unlike the 529 Plans, these accounts can be used for qualified expenses for public, private, or religious primary or secondary schooling as well as at any accredited college or university in the U.S., including graduate schools, community colleges, and vocational and technical schools.

UGMA and UTMA Accounts
Gifts to minors by a UGMA (Uniform Gift to Minors Act) account or a UTMA (Uniform Transfers to Minors Act) account are also a way to save for college. The account custodian acts as a fiduciary and manages the account, making investment decisions, until the minor reaches majority, at which time the investment and control is transferred to the beneficiary. Unlike other plans, once an account is established the beneficiary may not be changed and not all of the earnings are tax-free at the federal or state level. On the plus side, these accounts are not limited to educational use.

CHANGES IN SOCIAL SECURITY AND RETIREMENT PLAN LIMITS

The limits for Social Security, Medicare, and retirement plans are adjusted annually to account for inflation or changes in federal law. Some of the limits for retirement plans increased dramatically in 2002 as a result of the Economic Growth Tax Revenue Reconciliation Act ("EGTRRA").

This law is intended to provide an incentive for individuals to contribute more money to retirement savings accounts. Older individuals, 50 and up, nearing retirement, can also make catch-up contributions. These higher level contributions can be made to IRA's, Roth accounts (said to be one of the best kept retirement savings secrets), and retirement accounts held through an employer, provided the employer has amended its Plan to allow for the additional contributions.

EXECUTIVE COMPENSATION

Much controversy has arisen in the past years concerning corporations such as Enron, Tyco, WorldCom, and Adelphia. The controversy arose when these institutions experienced financial trouble and their values plummeted. Along with the decline in the company value went the value of the company stock. With so many people investing their retirement money in stocks, and the value of those investments declining, the issues involved became personal for investors. However, severance payments were still made to executives of the failing companies under the obligation in the employment agreements.

The CEO and many of the top executives of these controversial companies raised the ire of the investing community because while they led their companies to financial ruin, via scandalous accounting practices and bogus shell corporations, they were still able to collect huge sums of money upon termination. The general contention of investors was that while their stock investments were declining, executives from large corporations were leaving with a windfall and the courts were relatively powerless to help the investor.

These are the more dramatic and superficial aspects of a few corporations. In reality, thousands of corporations across the U.S. follow the rules and ensure that their businesses perform admirably while staying in compliance with the rules. For the executives of these corporations, executive employment and severance agreements are just as important.

Executive Compensation is an area of law usually covered under the umbrella of Employee Benefits Practice. Executive Compensation focuses on the negotiation of employment and severance contracts for individuals who have higher than average income levels and a benefits package that may be somewhat more complicated in certain tax aspects due to stock option plans and additional retirement savings vehicles.

One of the more engaging areas of the practice is in the arrangement and negotiation of severance agreements. Employment and severance agreements are often negotiated before employment begins and they define, among other things, what the company will pay an executive upon termination of employment and what the executive must accomplish to be eligible for such a payment.

Lewis Overbeck & Furman, LLP is able to provide consultation, drafting and negotiation of employment and severance agreements. The firm is also able to provide a review of existing agreements for estate planning, taxable events and divorce settlements. These services can include a review of stock option and non-compete clauses within the agreements. Please contact any of our attorneys to make arrangements for a consultation.

PROPORTIONATE LIABILITY

Section 1117 of the Illinois Code of Civil Procedure states that when any person is found to be less than 25% of the total fault for a tort injury the person is responsible for just the part of the damages his conduct caused, and not for more.

In Unzicker v. Kraft Food Ingredients Corporation, the Illinois Supreme Court has found this rule to be valid.

Unzicker, an employee of Nogle & Black Mechanical, Inc., was injured by a co-employee driving a forklift owned by Kraft while working on the Kraft premises. Unzicker sued Kraft under the Structural Work Act and for negligence. Kraft then sued Nogle for contribution. The trial court found in favor of Unzicker on the negligence count and allocated 1% of the fault to Kraft and 99% to Nogle. Applying Section 1117, the court entered a judgment against Kraft for $99,280 ($91,400 of medical damages plus 1% of non-medical) and in favor of Kraft on the third party complaint against Nogle for $90,486 which represented 99% of the total medical damages.

Since Nogle's liability for contribution was limited to what it had already paid Unzicker under the Workers Compensation Act, Unzicker recovered very little from Kraft. Consequently, Unzicker challenged the trial court's application of Section 1117. Rejecting Unzicker's challenge, the Supreme Court found that the exclusive remedy provision of the Act provided Nogle with an affirmative defense that could have been raised if it had been sued by Unzicker, so that Nogle was "subject to liability in tort" for purposes of Section 1117.

BANK ACTING IN "BAD FAITH"

A bank can be sued for paying an item in "bad faith" even though the customer failed to report the errors on his statement within a year after receiving it as required by the Uniform Commercial Code (UCC).

In Falk, II v. Northern Trust Company, the Illinois Appellate Court was presented with a situation where the customer's personal assistant, who was a signatory on the customer's account, misappropriated funds in excess of $2,000,000 from the customer's account over a 4 year period.

The personal assistant drew large amounts of cash from the customer's account in checks payable to cash and then used the cash to pay off her personal obligations, which included a personal equity credit line and mortgage at the bank, and obligations of her business associates and friends at the bank. The court ruled that the bank failed to investigate and acted in bad faith in paying the items, so that the UCC notice requirement could not be used to defeat the customer's claim.

BEFORE WE GO...

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NOW THE FINE PRINT

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