In THIS ISSUE Tax Law Changes   The Impact State Death Tax Credit Carryover Basis Impact IRA Distribution Elder Law Elder Fraud Alert

We greet our clients with unusual solemnity this Fall in light of recent tragic events in New York, Washington D.C., and Pennsylvania. As proud supporters of democracy, we join with each one of you in celebrating and upholding the Constitution of the United States and the rule of law it provides. May we, and all citizens, find pride and comfort in working together to ensure the unity and stability of our great nation.

Once again, Fall is in the air, and this season is a particularly beautiful time to begin healing our country's wounds. As autumn leaves turn red and orange, magnificently adorned mountains create a backdrop of strength and stability, reminding one and all that change is an integral part of life's cycle, and that even when changes are most difficult, our resilience as a people will sustain us.

On a lighter note, Carney Law Firm is making a few changes of its own. Don't get the wrong impression; the employees and offices are exactly as you remember them, but something else is brand new: our website! Yes, at long last the site is up and running, and we're excited about offering clients another option for interacting with our Firm. You can access the site at www.carneylawfirm.com, so be sure to visit us soon.

We're pleased to announce our Fall Seminar on November 8, 2001 at 7:00 p.m., entitled "Getting Up to Speed on Estate and Gift Taxes and IRA Distributions." We hope you will take advantage of this opportunity to understand how recent changes will affect your financial situation. Please feel free to invite any friends who might benefit from this information.

We have been reviewing with interest the opinions of various experts around the country who have analyzed and reported on the impact of the Economic Growth and Tax Relief Reconciliation Act of 2001 (the Act.)

Most resources distributed to the public only scratch the surface of the Act, detailing the Act's basic information including the exemption amount increases and the tax rate decreases. While these resources are quick to refer you to your tax advisor for more detailed information, most do not analyze what is seen by many experts as the underlying impact of this tax law.

The majority of experts do agree that the Act will not remain in its present form through the date of the repeal of the estate taxes. It is believed that Congress will enact changes to this Act prior to 2010. As no legislation has been proposed through the date of this newsletter, it is unclear exactly how those changes will impact our planning efforts. At this point, the difficulty involves creating an estate plan which will incorporate the increases in the exemption amounts, plan for the repeal of federal estate taxes in 2010, and still be flexible enough to revert back to our current exemption levels and tax rates in 2011. The planning opportunities surrounding the new Act are numerous and complex. We plan to discuss the major opportunities in our Fall Seminar and hope that you will join us.

One of the biggest surprises to the American people is that the estate tax liability may actually increase due to the phaseout of the State Death Tax Exemption. In California, state death taxes are only imposed in an amount equal to the credit. This means that as the State Death Tax Credit is phased out over four years, the amount of tax flowing to California's treasury will be reduced. In California, as the state death tax cannot be re-instituted without a vote of the people, it is unlikely that such a tax will be implemented. However, we presume that the loss in revenue will have to be recaptured elsewhere.

In some of the other states, the State Death Tax is not tied to the Federal credit at all. In those states, as the credit on the Federal return is repealed, the taxes paid will actually increase. This result is not widely known and will be shocking to those citizens who expected this tax change to result in lower taxes.

In 2010, and potentially beyond if additional legislation is enacted, the federal estate taxes will be completely repealed. At that time we will be subject to a modified carryover basis system, which means that all beneficiaries will take assets with the decedent's income tax basis. The modification to the system gives a $1.3 million increase in basis for assets passing to any beneficiaries, and an additional $3 million increase in basis for assets passing to a surviving spouse. For large estates with highly appreciated assets, the carryover basis will have a significant income tax impact upon beneficiaries when those assets are sold.

While it is unclear if the modified carryover basis system will still be the law in 2010, when it is set to begin, we must nevertheless plan for it. With that goal in mind, records must be maintained which would substantiate the basis claims for every asset. Consequently, we will include a form, as part of the next Retainer Packet, on which you will detail the basis in every asset you currently own; and we will try to assist you throughout the years in maintaining this vital information.

Simplified Required Distribution Rule for Retirement Plans
Proposed regulations have been issued by the Internal Revenue Service which govern required distributions from IRA's, TSA's, and qualified retirement plans. The proposed effective date of these regulations is January 1, 2002, although taxpayers may choose the old or new rules for distributions in 2001. While these changes have obvious impact on your retirement planning, they also provide better estate planning options, which were previously limited.

The calculation methods for minimum distributions during lifetime have been simplified. Minimum distributions must still begin in the year a participant turns 70_, although technically the first distribution can be delayed until that April 1st following the year the participant reaches age 70_. The distribution amount is calculated based upon the participant's age; and, in some cases, the age of the designated beneficiary.

The biggest changes come in the area of post-death distributions. The rules regarding the required distributions to the designated beneficiary from the plan after the participant's death have been simplified and provide greater flexibility. In addition, the rules surrounding qualification as a designated beneficiary have been relaxed, providing substantial planning opportunities. For example, it is now easier to name a trust as the designated beneficiary, subject to certain restrictions. Furthermore, a charity can now be named as a beneficiary of a certain portion of a retirement plan without violating the "individual only" requirement of a beneficiary designation. Disclaimers can also be used more effectively now for post-death estate planning without breaching the beneficiary designation provisions.

Our client Seminar will discuss these new rules in great detail, providing you with information regarding the new planning opportunities that are now available. As retirement plans often constitute a majority of an estate, we hope you will choose to attend this Seminar and learn ways to take advantage of the new beneficiary options.

Elder Law
Acute and Post Traumatic Stress Disorders
When tragedy strikes in a manner that shakes the entire nation's sense of security, we should assume ours will be shaken as well. Every American has been knocked off center by the loss and destruction in New York and Washington DC, but the elderly are especially vulnerable.

Recently, the Washington Post outlined the symptoms of Acute Stress Disorder, a condition which frequently precedes the onset of Post Traumatic Stress Disorder. ASD is an acute stress reaction occurring in the first 2-30 days following a trauma, while PTSD is the chronic form, diagnosed when symptoms are observed for over 30 days.

The diagnostic criteria is the same for both conditions. Depression and anxiety, including symptoms of irritability, sleeplessness, poor concentration, hypervigilance, heightened startle response, and restlessness are commonly seen. Serious manifestations are nightmares, detachment, numbing or absence of emotional response, and depersonalization. If an elderly person appears to be "in a daze" or is less responsive than usual, he or she may need treatment.

The elderly tend to be more isolated, which increases susceptibility to both ASD and PTSD. Socialization is crucial for older people who may be living alone. One woman tells a story of her 91-year-old father who, after watching TV coverage of the disaster non-stop for over a week, was found in soiled pajamas with considerable beard growth. Her phone conversations with him prior to that time had become increasingly less coherent. As he spent time with people who cared for him and was encouraged to talk about the attacks, his situation improved rapidly.

Even elderly relatives who show no signs of pathology should be given special attention in coming weeks. Short term memory often suffers during the grieving process; encourage lists and note-taking if this is an issue. Immune systems weaken; blood pressure rises, and adequate exercise and rest becomes critical. A trip to the doctor may even be necessary for these conditions and others. Diabetes frequently goes out of control in times of stress, and cancer previously in check can resurface. Finally, social skills may diminish temporarily, so be careful not to take unusual outbursts personally.

Of course, the elderly are not the only people who can benefit from this advice. Families, friends, and other caretakers would do well to pay close attention to their own needs as our country recovers from the shock of September 11th. Remember, those who do not take care of themselves will be unable to take care of loved ones.

The Better Business Bureau cautions donors to beware of fraudulent appeals for aid to victims of September 11th terrorist attacks. These solicitations, designed to take advantage of a citizen's generosity, are made by mail, phone and over the internet, at shopping malls and busy intersections, door-to-door, and via media announcements. The following recommendations have been made: