December 6, 2012 – Democratic Dissent on the Estate Tax Exemption, Crucial Information About Gifting for Grandchildren and Children and Loan Qualification or Disqualification, and the Top Five Interesting Facts About Thursday

DEMOCRATIC DISSENT ON THE ESTATE TAX EXEMPTION: Max Baucus Supports Keeping the Lifetime Exemption as Is!

Oops, Grandpa’s Gift Caused His Grandchild to Be Disqualified from a Scholarship!

TOP FIVE INTERESTING FACTS ABOUT THURSDAY: Do You Know which Element Is Associated with Thursday?

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This report and other Thursday Reports can be found on our website

Max Baucus Supports Keeping the Lifetime Exemption as is!

Last week, Montana Democratic Senator Max Baucus told his local newspaper that he is in favor of retaining the current $5,120,000 lifetime exemption. Baucus joins three other Democratic Senators, Claire McCaskill of Missouri, Jon Tester of Montana, and Mark Pryor of Arkansas, in supporting the continuation of the $5,120,000 per person estate tax exemption. As the Democratic Senate Finance Committee Chairman and the Senate’s top tax law writer, Baucus is the highest profile Democratic Senator to support the extension of the current tax rates. This small but growing dissent among Democratic Senators is very promising for your more affluent clients.

Crucial Information about Gifting for Grandchildren and Children and Loan Qualification or Disqualification: Oops, Grandpa’s Gift Caused His Grandchild to Be Disqualified from a Scholarship!

From time-to-time a client will ask us what the possible impact of gift planning would be on a child or grandchild applying for Federal Student Aid assistance.

Some gifts or arrangements do not count at all, while others can have a severe detrimental effect—even resulting in the loss of a grant or an interest rate twice as high on student loans!

For example, 529 Plans owned by a parent for the intended benefit of the child will not be considered the child’s asset for financial aid purposes—the most critical factor in determining student aid eligibility! If the parents simply gave the student the same amount of money instead of using a 529, the student would be almost certain to pay 6.8% interest on any student loans, instead of the lowest available interest rate, 3.4%.

Also, many clients are unaware that federal loans for $5,500 a year are automatic for any person in school, and the interest is typically deferred until after graduation. So why not have every child or grandchild borrow $5,500 a year and simply help them repay the loan as soon as they graduate if the student loan interest rate at that time (presently 3.4 or 6.8%) exceeds market rates, assuming the child is behaving. J

Further detail and other pertinent information is as follows:

Several critical dates for helping your clients plan their children’s or grandchildren’s educations are approaching. For those with children who will be attending school in the future, January 31, 2013 is the last day to lock in a 529 prepaid plan at the prior year’s rates.

Even more important in the immediate future are students who will be attending school in the upcoming fall. Free Applications for Federal Student Aid (FAFSA) are due by February 1, 2013 for some schools, meaning that if your clients’ finances are not optimized to obtain the most Federal Student Aid possible for their student, now is the time to begin planning.

To that extent, we explore how eligibility for Federal Student Aid is calculated and also discuss some strategies to maximize aid.

For undergraduate school, there are five basic types of Federal Student Aid:

(1) Pell Grants: These are reserved for low-income students. Grants do not need to be repaid. If your clients are able to afford estate planning, their student is not likely to be eligible for a Pell Grant.

(2) Subsidized loans: Currently 3.4%. (Federal Direct Stafford Loans under 20 U.S.C. § 1078, See attached 20 U.S.C. § 1087e on terms and conditions of loans). While the school will determine the actual loan amount available, first-year undergraduates are eligible for up to $3,500 in subsidized loans. Interest is not charged on subsidized loans while the student is enrolled at least half-time and during deferment periods.

(3) Unsubsidized loans: The current interest rate for unsubsidized loans is 6.8%. The amount of the unsubsidized loan available depends on whether the student is dependent or independent. An independent student is one of the following: (1) at least 24 years old (or as we like to say, “Rule 24, your parents count no more!”); (2) married; (3) a graduate or professional student; (4) a veteran; (5) a member of the armed forces; (6) an orphan; (7) a ward of the court or someone with legal dependents other than a spouse; (8) an emancipated minor; (9) or someone who is homeless or at risk of becoming homeless. Dependent students are eligible for up to $5,500 in unsubsidized loans. Independent students are eligible for up to $9,500 in unsubsidized loans. These are also the total loan limits for student loans. In other words, a first-year undergraduate dependent student may receive up to $5,500 in loans, of which $3,500 may be in subsidized loans. Unsubsidized loans begin bearing interest immediately.

(4) Work-study – These are programs where the student works for the school to pay for school.

(5) Federal Perkins Loan Program – These are similar to federal loans, except the school lends federal money to the student and charges 5% interest rate. These loans are for students with exceptional financial needs, and availability depends on the school.

For more information on the above types of financial aid, see the U.S. Department of Education’s website on Federal Student Aid:

In order to receive Federal Student Aid, all students must fill out a Free Application for Federal Student Aid (FAFSA), available at the following link: The Federal Student Aid Office offers a free online tool to determine loan eligibility prior to filling out a FAFSA, which can be found here.

As long as they meet the basic eligibility requirements (e.g. attending a recognized educational institute, being a citizen, etc.), all students, regardless of resources, are eligible for some amount of unsubsidized student loans. Currently, at very minimum, first-year undergraduates enrolled in a college or university can receive at least $5,500 per year in unsubsidized loans, currently at 6.8%.

In order to determine eligibility for grants, the amount of a grant or a loan, and, whether any loans are subsidized or unsubsidized, the U.S. Department of Education Federal Student Aid Office uses a need-based formula called the Federal Need Analysis Methodology.

Federal Statutes 20 U.S.C. § 1078(a)(2) and § 1087kk provide the framework for the Federal Need Analysis Methodology. 20 U.S.C. § 1087vv (f)(1) provides the definitions for the formula. The numbers to be used in the formula are determined each year by the Education Department. Click here for the numbers to be used in the 2013-2014 Award Year.

The Federal Need Analysis Methodology formula determines how much a student and his or her parents should reasonably be expected to contribute to the student’s education. The formula takes into account the parents’ and the student’s income and asset net worth. Grandparents’ and other relatives’ assets are not included in the formula.

The formula weighs a student’s assets much more heavily than the parent’s assets because it assumes that the child will contribute a much greater portion (“student’s amount of need for a loan based on the student’s estimated cost of attendance”) of his or her assets (and income) than the parents (“expected family contribution (as determined under part E of this subchapter), subject to the provisions of subparagraph (D)”). The parents are still expected to use the majority of their assets to maintain their own household. Depending on the amount of the parents’ wealth, the parents’ assets typically have little to no impact on the needs-based formula. See 20 U.S.C. § 1078(a)(2); Federal Need Analysis Methodology for the 2013-2014 Award Year: Federal Pell Grant, Federal Perkins Loan, Federal Work-Study, Federal Supplemental Educational Opportunity Grant, William D. Ford Federal Direct Loan, and TEACH Grant Programs, 77 FR 31600-02.

In other words, the goal for parents and students applying for federal aid is to minimize the student’s assets prior to filling out the FAFSA. Experts recommend using all of the student’s assets prior to applying for Federal aid.

The Tricks

There are two ways to save for a child’s education outside of the parents or other relative simply paying for them. Both are savings strategies that optimize student’s need-based aid eligibility. While for the student’s benefit, both of the options are treated as assets of the parents (or whoever’s name is on the account), thus minimizing the impact on the student’s financial aid eligibility.

1) 529 College Savings Plans and Prepaid Tuition Plans – We are big proponents of 529 plans—both as a way to save for a child’s college education expenses and as a creditor-protection tool. See our Thursday Report from September 13, 2012, on some uses of 529 plans. Click here for September 13’s Thursday Report.

Indeed, 529 plans should always be your primary tool for saving college expenses. If your client has not already done so, they should fund a 529 savings plan to the greatest extent possible for students entering school soon.

Although it is too late for students entering school next September, for use for a child’s education expenses we generally recommend a 50 by 5 strategy: a 529 college savings plan funded with $50,000 by the time the child reaches 5 years old. This should provide the account with plenty of time to “cook” up to an amount that will put a significant dent in college education expenses.

2) Coverdell Education Savings Account – formerly known as Education IRAs. For more on Coverdell Education Savings Accounts, click here for an IRS Publication 970, which explains Coverdell accounts starting on page 45.

After funding a 529, parents should fund their investment and retirement funds with any extra assets not needed in the short term. Parents’ investment and retirement funds are not counted against the student in the need-based formula. See 20 U.S.C. § 1087vv(b)(1)(H) (“the term untaxed income and benefits means . . . payments to individual retirement accounts and Keogh accounts excluded from income for Federal income tax purposes).

Here are a couple of other strategies to consider, particularly for grandparents who would like to help with the grandchildren’s educations:

Alternative Strategy #1: Certain types of assets do not count as assets for the purposes of the formula: Automobiles, computers, boats, furniture, appliances, books, clothing, and school supplies. So if the parents or grandparents were to purchase these sorts of items for the student, they would be able to assist the student directly while not impacting the student’s aid eligibility. This strategy can be particularly helpful because the average freshman college student needs a lot of miscellaneous things for their new apartment or dorm room: bedding, bicycle, school supplies, laptop computer, television, small refrigerator, etc. Buy these items now, before applying for financial aid, and then store them in the closet until next September (except maybe the car)!

Alternative Strategy #2: If grandparents would like to contribute, have them pay off the student’s loans after the education. This will maximize the grandparents’ contribution while not affecting the student’s eligibility. Or, if the student’s graduation date is sometime in the distant future, considering giving the funds to the parents with the understanding they are to pay off the loans. This will have less of an effect on the student’s financial aid eligibility than if the student received the funds directly.

Alternative Strategy #3: Some schools allow grandparents to pay tuition directly to the school without impacting the child’s eligibility for financial aid. The ability to do this is school specific. In most cases, however, the money won’t be treated as a payment on account, but as untaxed income to the student (reducing aid eligibility by 50% of the amount paid) or as a resource (reducing aid eligibility by 100% of the amount paid).

The Traps

For purposes of the need-based formula, custodial accounts are considered the student’s asset. So these would be one of the least effective means of increasing eligibility. If the student already has a custodial account, the account might be liquidated and the funds can be placed into a 529 plan.

The result of a transfer from a custodial account to a 529 account will be a custodial 529 account. Despite being in the student’s name, dependent student’s custodial 529 accounts are treated as the parent’s asset when determining the student’s financial aid eligibility. For independent students, a custodial 529 account will still be treated as the student’s asset.

While some might think that purchasing a house or condo for their children to use at college, a house in the parents’ name would be an asset to be calculated in the formula, and therefore not an effective strategy to assist the student. See 20 U.S.C. § 1087vv (f)(1) (defining assets as (1) The term “assets” means cash on hand, including the amount in checking and savings accounts, time deposits, money market funds, trusts, stocks, bonds, other securities, mutual funds, tax shelters, qualified education benefits (except as provided in paragraph (3)), and the net value of real estate, income producing property, and business and farm assets) and 20 U.S.C. § 1087vv (g) (defining assets as “The term “net assets” means the current market value at the time of application of the assets (as defined in subsection (f) of this section), minus the outstanding liabilities or indebtedness against the assets ”).

Further, a house in the child’s name would have an even more severe negative impact on the needs-based formula because it would be counted as an asset against the student. A house in a grandparent’s or other relative’s name may be a way around this, but this may cause tax implications for the purchaser. Plus this option would have to take into account all of the other myriad issues surrounding home ownership. If a number of children were to attend the same school, this idea may be more viable.

With the exception of 529 plan trusts and trusts being restricted or frozen by a court, trusts funds are counted against need-based eligibility. See 18 U.S.C. § 1087vv (f)(1). Basically, the owner (either the student, spouse, or parents) must report the net present value of the portion (principal, assets, right to receive trust principal in the future) of the trust they own. If the trust does not specify a percentage or amount that each beneficiary owns, then the entire trust is divided equally between all beneficiaries. Even in a blind trust, the trustee must report the amounts. Even worse, if trustees are not able to spend the principal, the entire trust may be counted against the student’s finances.

There are financial aid consultants who specialize in maximizing student aid and locating other scholarships for students. Before contacting one, always make sure to check on their credentials and the legitimacy by visiting the following websites:

· U.S. Department of Education
· Federal Trade Commission
· Better Business Bureau

Do You Know which Element Is Associated with Thursday?

“This must be Thursday. I never could get the hang of Thursdays.”
Douglas Adams, The Hitchhiker’s Guide to the Galaxy.

After publishing over twenty Thursday Reports, we decided to investigate the origins of the word “Thursday.” Along the way, we found some very interesting facts that we have listed below. How many did you know?

1. Elections are traditionally held in the United Kingdom on Thursdays. One theory for the reason why elections are traditionally held on Thursday is that Thursday was the last day before paydays on Friday, meaning Thursday was the day voters were most likely to be sober!

2. While almost everyone knows that Thursday was named after Thor, the Norse god of Thunder, many of the Romance languages, like Spanish, French, and Italian, named Thursday after the Roman god Jupiter, also a god of thunder.

3. Many languages simply call the day by the number day of the week they consider Thursday. Thursday would be called either fourth or fifth, depending on whether the country considers the week to begin Sunday or Monday.

4. Some Eastern languages, such as Japanese and Korean, name days of the week after elements of nature. In Japanese, the element associated with Thursdays is wood or trees.

5. According to the book of Genesis, Thursday, the fifth day, was the day God created the insects, fish, reptiles, and birds. Insert your own lawyer/reptile joke here.


To view a chart of this month, last month’s, and the preceding month’s Applicable Federal Rates, because for a sale you can use the lowest of the 3 please click here.



THURSDAY, December 13, 2012, 12:30 – 2:00 p.m.
Alan S. Gassman, Esq., Kenneth J. Crotty, Esq. and Christopher J. Denicolo, Esq. will be presenting a webinar for Bloomberg BNA Tax & Accounting on Final EGT Planning in 2012: How to Design, Explain and Implement Dynasty Trusts and Asset Protection.

MONDAY, January 7, 2012, 12:30 p.m.
Please join us for Lunch Talk, a free monthly webinar series sponsored by the Clearwater Bar Association and moderated by Alan S. Gassman, Esq. This month’s topic is the first part of a two part series with Shannon Waller from Strategic Coach. The topic for the two part series is Accelerating Law Office Teamwork with Interesting Tools You Can Use Immediately. To register for the webinar please visit the

Tuesday, January 8, 2013 5:00 – 5:30 pm
How to Land That First Job After College or Graduate School – What the Placement Office Hasn’t Told You. Recent college and graduate school graduates are having a difficult time finding their first professional job and are unaware of many proven techniques to help them find their first position. Job consultant Darry Griffis has an excellent track record in this area and will be sharing ten important techniques that your children or the children of your clients need to know to help find their first professional position.

THURSDAY, January 24, 2013, 4:00 – 4:50 p.m.
Please join us for the 444 Show. A monthly CLE webinar for professionals sponsored by the Clearwater Bar Association and moderated by Alan S. Gassman. This month’s topic is Real Estate Tax Laws PALS & WOWS with Rick Buschart and Mike O’Leary. To register for the webinar please click here.

MONDAY, FEBRUARY 4, 2012, 12:30 -1:00 p.m.
Please join us for Lunch Talk, a free monthly webinar series sponsored by the Clearwater Bar Association and moderated by Alan S. Gassman. This month’s topic is the second part of the two part series with Shannon Waller on Accelerating Law Office Teamwork with Interesting Tools You Can Use Immediately. To register for the webinar please visit


FRIDAY, JANUARY 18, 2013 Florida Bar Seminar
Save the date for a three day weekend in Ft. Lauderdale! The Florida Bar Continuing Legal Education Committee, the Health Law Section and the Tax Law Section present Representing the Physician 2013: Practical Considerations for Effectively Guiding Physicians and Their Practices. The seminar will be held at the Sheraton in Ft. Lauderdale, Florida. Please Click Here to register. Speakers include Lester J. Perling, Esq., on the topic of Federal and Florida Health Law: Hypothetical Situations that Are Often Overlooked by Physicians and Alan S. Gassman on the topic of It is Not Just Health and Tax Laws: Charting Florida Waters When Designing Physician and Medical Group Arrangements. Laws you Knew or Wish you Knew.

15th Annual All Children’s Hospital Estate, Tax, Legal and Financial Planning Seminar. All Children’s Hospital Foundation is hosting the Estate, Tax, Legal and Financial Planning Seminar at the All Children’s Hospital Education Conference Center in St. Petersburg. Programs and presenters include Samuel A. Donaldson on the topic of Federal Tax Update, Jonathan Blattmachr on Myths & Realities of Charitable Trusts and Some Really Cool Generation Skipping Tax Ideas, Investments in Trusts: Charting a Prudent Course by Tami Foley Conetta, and Alan S. Gassman on the topic of Avoiding Disaster in the Sunshine State – Tricks, Traps, and Nuances That Make Florida Planning Interesting and Unique.

Christopher Denicolo, J.D., LL.M. is a partner at the Clearwater, Florida law firm of Gassman, Crotty & Denicolo, P.A., where he practices in the areas of estate tax and trust planning, taxation, physician representation, and corporate and business law. He has co-authored several handbooks that have been featured in Bloomberg BNA Tax & Accounting, Steve Leimberg’s Estate Planning and Asset Protection Planning Newsletters and the Florida Bar Journal. is also the author of the Federal Income Taxation of the Business Entity Chapter of the Florida Bar’s Florida Small Business Practice, Seventh Edition Mr. Denicolo received his B.A. and B.S. degrees from Florida State University, his J.D. from Stetson University College of Law and his LL.M. (Estate Planning) from the University of Miami. His email address is

Kenneth J. Crotty, J.D., LL.M., is a partner at the Clearwater, Florida law firm of Gassman, Crotty & Denicolo, P.A., where he practices in the areas of estate tax and trust planning, taxation, physician representation, and corporate and business law. Mr. Crotty has co-authored several handbooks that have been published in BNA Tax & Accounting, Estate Planning, Steve Leimberg’s Estate Planning and Asset Protection Planning Newsletters, Estate Planning magazine, and Practial Tax Strategies. Mr. Crotty is also the author of the Limited Liability Company Chapter of the Florida Bar’s Florida Small Business Practice, Seventh Edition. He, Alan Gassman and Christopher Denicolo are the co-authors of the BNA book Estate Tax Planning in 2011 & 2012. His email address is

Thank you to our law clerks that assisted us in preparing this report:

Kacie Hohnadell is a third-year law student at Stetson University College of Law and is considering pursuing an LL.M. in taxation upon graduation. Kacie is also the Executive Editor of Stetson Law Review and is actively involved in Stetson’s chapter of the Student Animal Legal Defense Fund. In 2010, she received her B.A. from the University of Central Florida in Advertising and Public Relations with a minor in Marketing, and moved to St. Petersburg shortly after graduation to pursue her Juris Doctor. Her email address is

Alexandra Fugate earned her B.A. in English from the University of Florida in 2008, and J.D. from Stetson University College of Law in 2012. She has been a Guardian ad Litem for the past two years, a judicial intern for the Twelfth Circuit in Bradenton, and was recently admitted to the Florida Bar. She wants to pursue a career in business, employment, and labor law. Her email is

Eric Moody is a third-year law student, scheduled to graduate in December 2012, at Stetson University College of Law and is considering pursuing an LLM in estate planning upon graduation. Eric is also an Articles and Symposia Editor for Stetson Law Review. In 2009, Eric received a B.S. in Business Management from the University of South Florida. Eric’s email address is