Intuit Deathwatch

Mike Block for Quickbooks-blog writes: This will be the first of a long series of posts.

Intuit began in 1983. It quickly killed 46 competitors in the home checkbook market. It later crippled small business accounting program competitors. A national conference keynote soon told CPAs:

For those thinking of fighting QuickBooks,
the war is already over and QuickBooks won.

Intuit soon bought the best consumer tax program. It competed in predatory ways, adding rebates, cutting prices, giving away programs and adding many features if challenged. This made even Microsoft keep failing when competing with Intuit. 

Intuit soon had 95% of the small business accounting market, around 95% of the home checkbook market and around 80% of consumer tax. As a QuickBooks insider for more than 11 years, I exchanged countless emails with two Intuit CEOs and many of their top assistants. Highlighs included getting  Intuit to build a feedback website (almost) as I suggetsted and getting it to make a QuickBooks program change in four days, the week before Christmas.

I also got permission to publicise and encourage QuickBooks hosting for many years, despite contrary Software License Agreements. Intuit then used these agreements to force ridiculous terms on hosting companies. They included:

• A four-year so-called beta test for three companies
• The companies advertised that they were the only licensed companies
  (CPAs are risk adverse)
• Pay $3,000 with hosting application (no approval guarantee)
• Give all financial, operating, customer, sales and security data
• Let Intuit make data public and use it to compete
• Pay $15,000 more, plus $5/month/customer, increased at any time

About 15 hosting companies may now have some allegiance to Intuit, but about a thousand others and their users despise it. In addition, many of the 500,000+ QuickBooks hosting users know that Intuit now charges an extra $5/month to let them use QuickBooks efficiently.

I especially despise this because I initially got permission (direct from Brad Smith, now Intuit CEO) to publicize hosting. This came after getting near unanimous support from fellow ProSeries (professional TurboTax) Advisory Council users and Intuit staff. I then had repeated requests ignored, for Software License Agreement changes, so it would be legal. I even had an Intuit VP later say I was violating a non-disclosure agreement, when everything I wrote was not only with Brad's permission, but was made public initially by discussions with people from my QuickBooks hosting company (who did not sign non-disclosure agreements).  

As it is, the QuickBooks Software License Agreements make it illegal for you to share QuickBooks (when visiting clients) or to use internal file servers with different users (even if each has a copy of QuickBooks).

It is outrageous that Intuit would make all hosting company applicants disclose operating, financial, customer, sales and security data, especially without guaranteed hosting approval. It is far more outrageous that hosting applicants must agree to let Intuit make this public or to use it to compete against them, since they apparently update this data annually. Everyone expresses shock or amazement on first learning this.

I also never understood why the Department of Justice let Intuit flout anti-trust laws, especially as it conspired not to hire employees of other tech companies. However, monopolies rarely survive. As later posts will show, an Intuit deathwatch has now begun.

I may be uniquely qualified to predict this. I told Brad Smith he would be the next Intuit CEO two years before he was. However, the evidence is now far more compelling.

10 Tough Lessons For College And Retirement Savers--And Tax Reform

Janet Novack for Forbes writes:  Before you put your money in a special tax favored account for college or retirement, make sure your tax savings won’t be stolen away by excess fees—and be ready to walk away from a tax break if they will. Those are two of the tough lessons to be drawn from a new study of 529 state college savings plans by Cornell University economist Vicki Bogan.  The money in these accounts—now more than $180 billion– grows tax free provided withdrawals are for higher education. While there’s no federal deduction for contributing to a 529 account, 34 states and the District of Columbia offer residents a deduction or credit for their contributions to the state’s plan.

A great deal? Not necessarily. Bogan shows, as others have, how high 529 fees can eat up tax savings. In addition, she uncovers this disturbing correlation:  the more valuable the state tax break, the higher the fees in a state’s plan.  “This suggests that government policies designed to make college more affordable could enable investment firms to charge excess fees,” she concludes.

Bogan’s paper, which will be published in Contemporary Economic Policy, only covers plan data through 2006 and Joe Hurley, a CPA and  529 expert who runs savingforcollege.com,  notes that costs (or at least those for plans sold directly to consumers and not through brokers) have dropped a lot since then.  Nevertheless, the fees charged for mutual funds in 529s remain generally higher than for comparable direct or broker sold funds held in regular old taxable accounts. Indeed, recent developments in both the 401(k) and 529 markets, suggest some cautionary lessons for individual investors and for Congress—assuming, that is, the politicians create savings tax incentives to help families and not the financial industry lobbyists who fill campaign coffers. 

1. Tax complexity creates hidden costs.  We all know that Americans spend an obscene amount of  time and money complying with the 3.8 million words in the tax code. Yet some of the ancillary costs aren’t as well understood.  There are 11 different and sometimes overlapping federal tax breaks for education and Bogan theorizes that the time and effort an investor must put into understanding college breaks helps explain why half of  529 money is currently held in expensive broker sold plans. “You have information costs and that’s why people might rely on brokers more even though the brokers’ fees are very exorbitant and it’s not clear how much value added they’re getting,’’ the economist says. As evidence, she points to the cost of 529s invested only in index funds, with their asset allocation set automatically based on a child’s age–meaning, the broker isn’t making allocation decisions every year. Such funds sold directly cost an average of 0.42% of assets a year, compared to 1.53% for broker-sold C shares (with no upfront sales charge) and 0.78% for broker sold A shares (with an upfront sales charge), according to themost recent 529 report  from Morningstar, Inc.  (I’d argue that coordinating the use of 529s with college financial aid and the $2,500 American Opportunity Tax Credit  is so complicated, most of the brokers collecting those hefty fees for their information probably don’t know all the tax angles and traps anyway.)

2. Complexity costs the little guy the most. It’s no accident that smaller 401(k) and 529 plans tend to have higher costs.  Administrative costs get spread over fewer participants and financial companies don’t compete as aggressively (on cost that is) for their business. And then there are those pesky information costs:  a small business owner doesn’t have time to master the legal ins and outs of retirement plans (say, the nondiscrimination rules) or to shop around.  “Your insurance agent is going to make it really easy for you and you can spend your time doing 100 other things for your business. But GE has a whole department of people dedicated to putting their 401(k) out for proposal and getting the best program and lowest fees,’’ observes Brooks Herman, BrightScope.com’s director of research.  BrightScope, which compiles audited financials that must be filed with the Department of Labor for 401(k) plans with more than 100 participants, finds costs average 0.51% of assets a year in plans with 10,000 or more participants and 0.91% at firms with 100 to 500 participants.  What about even smaller plans?  The Society of Human Resource Management reports those with just 50 participants had average total expenses of 1.46% of assets in 2012—nearly triple what big company workers paid. Perhaps one of the most telling moments in The Retirement Gamble, the recent controversial PBS/Frontline take-down of 401(k)s,  occurred when the show’s correspondent, Martin Smith, discovered high and hidden fees in the plan he offers workers at his tiny film company. Smith is a veteran, award winning investigative reporter who went Hunting Bin Laden in a prescient 1998 documentary, yet he didn’t chase down the fees in his own 401(k) until it was part of a story.

3. High costs compound, just as returns do.  Vanguard founder Jack Bogle calls this the “tyranny of compounding costs.”   Invest $10,000 in  a 529 when your child or grandchild is born, and, assuming  6% returns a year (before fees), you’ll have $27,682 when he’s 18, if you’re paying the  flat 0.17% of assets (with no annual fees) charged by New York’s direct sold 529, which uses Vanguard Group index funds. Fees over that period: $582.  In Montana’s direct sold 529 you’ll pay  0.89% a year for the Vanguard LifeStrategy Growth Portfolio for your newborn – the same 0.17% for the Vanguard fund, plus  0.72% a year in administrative fees.  Over 18 years, you’d pay $2668 in total fees and end up with only $24,301—$3,381 less.  (Your losses are greater than your actual out-of-pocket fees, because the money you shell out in fees in early years reduces what’s left to grow for you, i.e. fees compound.)  Use a mutual expense cost calculator like this one at Dinkytown to do your own calculations. Excessive fees have an even more pernicious effect over the 30 or 40 years you’ll be saving for retirement.

4.  Disclosure helps reduce costs. When 529s were first widely offered in 2001, their charges were often difficult, if not impossible, to ferret out.  But in 2004, state treasurers (operating through the College Savings Plan Network) moved to head off regulation and quiet the critics by developing voluntary disclosure standards, including the use of fee tables. Hurley credits that disclosure, along with increased competition, with driving down average costs in directly sold plans.  Similarly, in 2012, the Department of Labor began requiring 401(k) sponsors to provide better disclosure to participants, including of investment and administrative expenses, the performance of investments and benchmarks each fund’s performance could be compared to.

5.  But investors must use that disclosure.  “You need to be proactive and educate yourself not just about the different investments, but about the fees,’’ says Bogan, who happily saves in the New York plan for her own kids.  On the Internet, you’ll find a lot of the spade work has been done for you.  Hurley compares the fees and 10 year cost of all direct sold plans here. Morningstar produces an even more detailed (but arguably less user friendly) report here that lists fees (although not 10 year cost comparisons) for all plans, both broker and directly sold. What about 401(k)s? A recent survey from the Employee Benefit Research Institute found just 7% of workers hadmade changes in the funds they hold as a result of the newly required disclosure.  Here’s a quickie check, if there are 100 or more participants in your plan: see how your 401(k) compares to those offered by similar firms atBrightScope.com.

6. Tax  breaks hold investors hostage. Most states allow 529 deductions only for contributions to their own plans. Meanwhile, the U.S. tax code tethers regular employees to the workplace for the biggest retirement tax breaks. For 2013, a worker is allowed to make $17,500 in employee contributions to a  401(k) ($23,000 for those 50 or older),  but can put only  $5,500 ($6,500 for those  50 plus) in an individual retirement account. Moreover, higher income workers eligible for a 401(k) plan can’t deduct IRA contributions from their currently taxable income, as they can 401(k) contributions.  (With a little fancy footwork,  however, even the well paid can contribute to  a Roth IRA. There’s no upfront tax break for a Roth, but the money grows tax free.) Yes, there are some good policy reasons for linking tax breaks to the workplace: it encourages bosses to offer 401(k)s and to make  matching contributions, if they want to grab maximum breaks for themselves. Moreover, given both human nature (saving is hard) and the complexity of using retirement breaks (those pesky information costs again), people are more likely to save when money is automatically deducted from their paychecks. But they also have less ability to fight excessive fees.

7. Automatic saving can induce somnolence. In 2006, Congress made “automatic enrollment” in 401(k)s more attractive to employers and designated target-date funds (which adjust the asset allocation based on a worker’s years to retirement) a default option for workers who don’t  bother to choose their own investments.  Today, a stunning $500 billion in 401(k) money is invested in target date funds and an SEC study found nearly half of workers wrongly believe target-dates provide a guaranteed income in retirement.  But are  robo-savers being well served,  particularly if automatic everything means they aren’t regularly scrutinizing their investments? According to Morningstar’s most recent report, the average asset weighted fee for a target date fund was a hefty 0.91% in 2012.  Granted, that was down from 0.99% in 2011—largely because two of the priciest target-date providers, the Goldman Sachs Group and Oppenheimer Holdings, pulled out of the business and more dollars moved to low cost providers.  As in the 529 market, there are huge cost differences, even among target date funds using exclusively what should be low cost index funds. While Vanguard charges an average of 0.15% of assets and Fidelity’s Freedom Index Series 0.19%, ING Inc.’s Index Solution Series costs 0.90% and Nationwide’s Target Destination Series charges 0.93%.  The most expensive actively managed target funds:  Legg Mason’s at 1.47% a year and Franklin Templeton’s at 1.36%.  (The free Morningstar  report also provides extensive comparison on asset allocation by age—glide path it’s called—and performance.)

8. Even hostage investors can lobby for change.  When it comes to 529s, investors are also voters who can demand change when government policies promote excessive fees. After complaints from residents about high 529 costs, Montana first replaced the investment manager (yep, it used to beeven more expensive) and this past May, Gov. Steve Bullock signed a parity law extending the state’s $3,000 per individual/$6,000 per couple tax deduction for contributions to its own plan to contributions made to other states’ 529s too, retroactive to Jan. 1, 2013. That made Montana the sixth state to extend parity, Hurley says. (The others are Arizona, Kansas, Maine, Missouri and Pennsylvania.) What f you’re stuck in a 401(k) with only high cost funds? Use newly available disclosure to lobby your boss for a better plan and/or a  “brokerage window” that allows you to buy outside funds and ETFs.  Offer to do some of the leg work for him. If need be, remind your boss of his  “fiduciary duty”  as a plan sponsor.

9. If fees remain excessive, weigh them against the savings.  If the fees look high, do the math.  On Hurley’s site, he has already calculated the annualized value of each state tax break based on your time horizon.  North Dakota’s direct sold plan, like Montana’s, uses cheap Vanguard funds but then tacks on stiff administrative fees, for a 0.85% total charge each year. But unlike Montana, North Dakota still restricts its $10,000 per couple deduction to investments in its own plan.  Over 18 years the state tax deduction adds just 0.17% a year to returns, but over two years it’s worth 1.57% a year, his calculation shows. (Note, however, that according to Hurley, the state doesn’t claw back its deduction if a resident moves his money to a 529 in another state. So a North Dakotan with a high tolerance for paperwork could theoretically claim the tax break one year and roll the money over to New York in a later year.)

10. Finally, be ready to say no to a tax break. “Don’t let the tax tail wag the investment  dog,” is the operative cliche here.  Usually, that’s taken to mean don’t buy an investment—or hold one you should sell—simply based on tax consequences. But it applies as well to the investment vehicles you use. “Just going after the tax break may not be the smart thing,’’ says Bogan.   Skip your state’s 529 if you’re giving back your tax savings in excess fees or lousy returns.  If the costs are too high or investments unsuitable in your 401(k), and your lobbying doesn’t sway your boss, limit your contributions to those necessary to earn your employer’s match (assuming there is one) and do the rest of your savings in IRAs and taxable accounts.  And next time you switch jobs, roll that 401(k) balance into an IRA.  If you’re old enough, you may even be able to roll over your money without switching jobs.  Remember, there are other gotchas (besides fees) in tax favored accounts— including penalties on certain withdrawals.

Xero saves money on accounting, but the cloud model has other perks

Jordan Norvet for VentureBeat writes: For companies evaluating accounting software, paying less than legacy options is great. Cloud-based Xero can do that, its customers said at VentureBeat’s CloudBeat 2013 conference today. But you get a few other advantages when going with an earlier-stage player like Xero, including support for mobile devices, clearer design, and more responsive customer support.

Jamie Sutherland, the president of Xero’s United States operations, pitched the company as nimbler and more contemporary, and, indeed, more affordable than accounting-software heavyweight Intuit and its Quickbooks. Xero customers sitting on the panel had things to say about that.

“It turned out it was going to be $75,000 within the first three months. After that, $79 a month from that point on,” said Scott Hansbury, the chief operating officer and executive vice president of Axxess Unlimited. In other words, it’s just a bit more affordable than a product with a $500,000 or $750,000 price, presumably the cost of a QuickBooks deployment.

Paying less for accounting software means more money flows toward research and development, Hansbury said. But he and other customers onstage showed how the benefits go beyond money as they spoke of the simple integration with other web applications dealing with money, such as shopping carts for e-commerce and a receipt-collection application.

Xero is still small enough to provide fast answers to customer questions, primarily over e-mail but also over the phone if need be, Sutherland said. And if a customer does have an issue, Xero by nature can adjust its product sooner than a big company with official updates rolling out every few months. A fix might come down the line in two or three weeks, while it would “take two to three weeks to find the right person to talk to at Intuit,” claims Rob Hoppin, the president of Hillenby.

Looking ahead, Sutherland told VentureBeat Executive Editor Dylan Tweney that Xero is building a “conversion service” to get people off of QuickBooks and on his application within a few hours. “Hopefully in the very near future, we’ll be announcing that,” Sutherland said.

The company is now publicly listed in Australia and New Zealand with a market cap approaching $2 billion and $40 million in revenue, Sutherland claimed. Signing up many more customers is a key aim, he said.

The company could find itself hitting snags as it keeps growing, though. Support, for example, could become less intimate as Xero’s customer base swells, and there’s no guarantee prices will stay put as competition heats up. But for now, the company does look edgy and appropriate for cash-starved startups that want to lean on cloud services as much as possible.

Supporting Unrelated Persons: Any Tax Breaks?

JK Lasser writes: Family units today may be unconventional, with extended families, multigenerations, and other persons living together to save expenses and support each other. From a tax perspective, do the same tax breaks for family members apply to unrelated persons?

Recently, the question came up in a Tax Court case (John Edge, TC Summary Opinion 2013-68) involving a hardworking individual who supported his fiancé, her two children (who were not his biological children), and his fiancé’s mother. The answer is that some breaks may apply while others do not.

 Dependency exemption

A dependency exemption for an unrelated person may be claimed if all of the following conditions are met:

• The taxpayer provides more than half of the unrelated person’s support.
• The unrelated person’s gross income does not exceed the dependency exemption amount ($3,900 for 2013).
• The unrelated person resides with the taxpayer for the entire year (not counting temporary absences).

In the case, his future mother-in-law was his dependent because he satisfied all of the tests. She lived with him for the full year, other than for a vacation at Christmas. However, his fiancé’s children were not his dependents because they are qualifying children of their parents (not their mother’s fiancé).

Tax credits

The earned income tax credit and the child tax credit can be claimed by a taxpayer for a qualifying child. There is a relationship test for being a qualifying child, something that an unrelated person cannot met. Thus, these tax credits cannot be claimed by a parent’s fiancé with respect to the fiancé’s children.

The credits can apply if the taxpayer adopts the children, which is something that sometimes happens after marriage to the children’s parent. However, the costs of adopting a spouse’s children do not qualify for the adoption credit.

Head of household

Head of household filing status entitles the taxpayer to more favorable tax rates and a larger standard deduction than allowed for other single individuals. While this issue was not raised in the case noted above, the status may apply when a taxpayer supports an unrelated person. To claim head of household status, all of the following conditions must be met:

• The taxpayer is unmarried at the end of the year.
• The taxpayer pays more than half the cost of maintaining a home for a qualifying person (dependent). If the qualifying person is the taxpayer’s parent, the parent need not live with the taxpayer (the parent may, for example, live in an assisted living facility); all other qualifying persons must live in the taxpayer’s home for over half the year.

 Conclusion

The personal issues involved when unrelated people live together can be huge. Tax issues can make the situation even more complex. Talk with a tax advisor to resolve the tax issues for your particular case.

Fixing a Twenty-Year-Old Tax Mistake

• V.L. HARTMANN for the Wall St. Journal writes:  
A man in his thirties had just inherited his grandfather's large estate, which included a bypass trust and a marital trust. But the legacy came with a big tax bill.  The heir and his lawyer had sought help sorting out the implications of the trusts from estate planning and trust expert Steve Kunkel. The trusts were created by the grandfather's wife, who had died 20 years before him, and when Mr. Kunkel checked the details of her estate plan he discovered a problem: The assets in those trusts weren't only subject to estate tax, but to a large amount of generation-skipping transfer, or GST, tax as well.

"They weren't set up right originally," recalls Mr. Kunkel, a managing director at CBIZ MHM in Los Angeles, Calif., where he advises hundreds of clients on specialized estate and financial planning issues.

At the time of the grandmother's death, the GST tax exemption was $1 million. However, the grandmother's adviser only considered gift taxes, not GST tax, when creating those trusts. As a result, they put only $600,000-the maximum gift exemption at the time-in a bypass trust that was exempt from both estate and GST tax.

The remaining estate assets, worth several million dollars, were placed in a marital trust. But if the GST tax exemption had been considered at the time, the grandmother could have put an additional $400,000 in a separate marital trust that was exempt from GST tax, Mr. Kunkel says.

The assets had grown considerably over the two decades, and were now worth well more than the grandfather's $5.12 million estate tax and GST tax exemption. As a result, overlooking that additional $400,000 exemption would cost the family six figures in taxes.

"In my business, it's a sin to pay taxes that you didn't have to owe," Mr. Kunkel says. "My first thought was: There's got to be away to fix this."

Mr. Kunkel wanted to do a reverse Qualified Terminable Interest Property election, a common ruling used to avoid GST tax. The strategy would break the original marital trust into two trusts. One would hold $400,000, plus twenty years of average appreciation, to retroactively take advantage of the missed GST-tax exemption. The remaining assets would be placed in a separate, non-exempt trust.

To enact the strategy, Mr. Kunkel needed a private-letter ruling from the IRS sanctioning his request to split the marital trust and do the reverse QTIP election. He had researched similar rulings and felt confident that the IRS would grant the ruling.

However, the court has jurisdiction over changing irrevocable trusts. So the IRS ruling was contingent on filing a petition with the state's probate court. Mr. Kunkel filed a petition that explained why they were seeking the split and how it would benefit the trust's beneficiaries.

"The key argument for the probate court was that the partitioned trusts would have the same provisions as the original trusts and the beneficiaries would receive the economic interest that the trustor intended," Mr. Kunkel says.

The probate court reviewed the petition, approved it, and the IRS subsequently granted the private-letter ruling. The process took approximately nine months because of delays in the court system and at the IRS national office, but the tax savings made the wait worthwhile.

"The good news is that even though it was a mistake of 20 years duration, it was still possible to fix," Mr. Kunkel says.

Deducting Interest Paid On Student Loans (Even If You Don't Pay The Loans)

Kelly Phillips Erb for Forbes writes:  With the cost of a college education continuing to climb, more and more students are taking on student debt. Collectively, as a country, we currentlyowe $1 trillion in student loans.

I’ve been very open about the fact that I am still paying off my school loans. I could not have afforded to go to school without taking on some debt and I borrowed for college and for law school. I paid off my undergrad loans (whew!) but am still paying for law school.

To help ease the pain of paying off all of that debt, Congress has made it tax favorable. That hasn’t always been the case: beginning in 1986, you couldn’t claim a deduction for interest paid for personal reasons (one glaring exception being the home mortgage interest deduction). However, in 1997, as part of the Taxpayer Relief Act of 1997, interest paid for student loans was deemed to be deductible. For more on the history of student loans, check out this prior post.

Today, there is a deduction allowed for paying interest on a student loan used for higher education. The student loan interest deduction is available even if you don’t itemize. It’s technically as an adjustment to income but is sometimes called an “above the line” deduction since you reduce your taxable income on the front page of your return without regard to any deductions claimed on a Schedule A.

Of course, there are rules. This is tax law. There are always rules.

First, there is a cap on the amount of interest you can claim each year. You can reduce your income subject to tax by up to $2,500 of qualified student loan interest annually. This amount includes both required and voluntary interest payments – it’s not just what the loan folks want you to pay. The more you pay, the more you can deduct, assuming you don’t go over the cap.

Next , your student loan must have been taken out solely to pay qualified education expenses. This includes tuition and fees; books, supplies, and equipment; and other necessary expenses such as transportation. Room and board may also be included if the cost is not more than the allowance for room and board included in the cost of attendance at your school for federal financial aid purposes or the actual amount charged if you live in housing owned or operated by your school.

Now read this part carefully: the loan does not have to come solely from PHEAA, TERI or another institutional student loan provider. You can include other debt, such as credit cards and line of credit IF you use it only to pay student debt (don’t commingle). Bank and other loans also qualify but the borrowed funds cannot be from a related person or made under a qualified employer plan.

For purposes of the deduction, the student who borrowed the funds must be you, your spouse, or your dependent, and must have been enrolled at least half-time in a degree program when the loan was taken. And don’t get your terms confused! For purposes of the deduction, an individual can be your dependent even if you are the dependent of another taxpayer; even if the individual files a joint return with a spouse and even if the individual had gross income for the year that was equal to or more than the exemption amount for the year.

As with other education tax breaks, you must reduce your qualified education expenses by the total amount paid for employer-provided educational assistance; tax-free distribution of earnings from a Coverdell education savings account or a qualified tuition program (QTP); U.S. savings bond interest previously excluded from income; tax free scholarships, fellowships and grants; and veteran’s benefits.

You can typically deduct all of the interest you paid on your student loan until the loan is paid off. There are limits and phaseouts, however, depending on your income. The student loan interest deduction is phased out (reduced) if your modified adjusted gross income (MAGI) is between $60,000 and $75,000 ($125,000 and $155,000 if you file a joint return). You cannot take the student loan interest deduction at all if your MAGI is $75,000 or more ($155,000 or more if you file a joint return). Additionally, you may not deduct your student loan interest if you file as married filing separately or if someone else claims an exemption for you on his or her tax return.

And one more thing (this is the best part!): if someone else makes a payment on your behalf, you are treated as though you made the payment. Yes, you read that correctly. If, for example, your mom and dad pay some of your loans, you can still claim the interest for purposes of the deduction (but be careful and read the criteria above: if your parent claims you as a dependent but you are legally obligated to pay the loan, then neither one of you can take the deduction). There’s practically never the case in the Tax Code. Fantastic, right? It’s always nice to have someone help you out.

The Demise of Estate Tax Planning Sends Lawyers Scrambling For New Work

Howard Gleckman for Forbes writes: A fascinating story in last Friday’s Wall Street Journal reports what I suppose was an inevitable trend: With the estate tax exemption now up to $5.25 million ($10.5 million for couples) estate tax lawyers are running out of work. So, writes the Journal’s Arden Dale, they are turning to income tax planning for high-net worth clients.

The Tax Policy Center estimates that this year only 3,780 estates will have assets exceeding $5 million and barely 2,000 of those will have $10 million or more. Since it is likely that most people with estates of this size have already done their tax planning, there is just not going to be a lot of new business out there.

Of course, some states have lower thresholds that will keep estate tax attorneys busy. And the wealthy have reasons other than than pure tax savings to do estate planning. But still, what’s a lawyer to do? Some are even urging clients to unwind their trusts.

Dale finds that some have turned to another form of tax planning—finding ways for rich clients to shuffle money to relatives with the aim of reducing income tax liability. As Dale notes, this sort of asset shifting is much simpler than the complex world of trusts.

For instance, a high tax-bracket parent could lend money to a lower-bracket child at today’s very low interest rates. The child could invest the funds and live off capital gains, dividends, and interest but the parent would get the initial loan back.  Or, a wealthy client can maximize contributions to retirement plans such as 401(k)s and Roth IRAs since distributions from those accounts are not subject to the new 3.8 percent investment tax that was enacted as part of the 2010 Affordable Care Act.

There is nothing new about wealthy people hiring lawyers to help them reduce their income taxes. For years, they’ve been turning ordinary income into capital gains, deferring income, or shifting income offshore in order to lower their taxes.

But it is interesting that, as the estate tax exemption has steadily increased (under a Democratic president of all things), estate tax lawyers are scrambling for work. With both income tax rates and estate tax exemptions rising it is hardly surprising that enterprising tax lawyers will follow Willie Sutton’s timeless advice and go where the money is.