Date: Friday, May 18, 2012

REPORT FROM COUNSEL

FALL 2010 ISSUE

WHEN CAN, WHEN SHOULD COUPLES START SOCIAL SECURITY BENEFITS?

Baby boomers have not been among the most active thinkers about Social Security Benefits, but their onslaught into full retirement age begins in 2012.

Spousal Benefits

A spouse has dual entitlement to Social Security Benefits. Either spouse is entitled to the larger of 100% of his benefits at full retirement age or up to 50% of his spouse's full retirement age benefits. For the oldest of the baby boomers, full retirement age (FRA) will be age 66; the benefit amount is calculated on the earnings record of the retiree or the spouse.

When someone applies for benefits before attaining FRA, SSA calculates the benefits based on his own earnings record and also the spouse's record, and then pays whichever amount is larger. However, if he applies for benefits after having attained FRA, he can begin benefits based on his spouse's record and later switch to benefits based on his own record. A person seeking spousal benefits, but who has not reached FRA, only receives spousal benefits for the earnings record of a spouse who has both reached FRA and filed for benefits. Once that spouse himself has reached FRA, however, he may receive the spousal benefits whether or not his wife has filed for benefits.

Example

Consider a couple, Sally, age 63, and Jack, age 66; each has an FRA of 66. Sally's projected income amount (PIA) is $800. Jack's PIA is $2,200. Sally could begin receiving her benefits, today, at $640 per month; because she is 36 months short of reaching FRA she receives 80% of her PIA. Alternatively Sally may elect to receive spouses' benefits based on Jack's earnings record. If she had already attained FRA, Sally would be entitled to 50% of his PIA, $1,100. Again, because she is 36 months short of FRA she can draw 75% of that amount, or $825. It is thus to her advantage to elect the spousal benefit.

But what if Jack wishes to continue working? Because Jack has reached his FRA, Sally can receive the spousal benefit if Jack will file for his benefits and then immediately suspend them. This suspension can take place in his application for benefits, by stating so in the "remarks" section. If Jack begins benefits based on his own earnings record at age 69, 3 years after having reached FRA, his benefits would reflect a 24% delayed retirement credit (to $2,728), but Sally's spousal benefits would remain the same.

CLIENT CORNER

The Owl's Nest Recovery Center was named one of the top twenty-five alcohol and addiction recovery centers in the United States for 2009. At position fourteen, the Owl's Nest was only three places behind the more well known Betty Ford Center.

PIRATES: AN ENTREPRENEURIAL OPPORTUNITY?

2009's spate of Somalia pirate attacks brings Article I Section 8 of the U. S. Constitution to mind again. The Congress has the power to authorize private parties to attack pirate ships under little-used instruments called "letters of marque and reprisal." They allow private parties to attack and seize the property of people who have committed violations of international law, usually pirates.

Congress has the power to grant such letters and the United States made significant use of them during the Revolutionary War and the War of 1812. They were revived again during the 1898 Spanish-American War and World War II.

Competitive Enterprise Institute analyst Michelle Menton noted, "issuing letters of marque is one way to foster the protection of American citizens abroad without requiring an American military presence in the foreign territory."

LAW FIRM NEWS

J. Scott Kozacki has been selected to serve on the School Board for St. Anthony's School.

Walker H. Willcox has been named a Partner in the Firm.

Mark W. Buyck, III has been recognized as one of the Best Lawyers in America.

BETTER(?) DISCLOSURE FOR MORTGAGE CONSUMERS

The federal Real Estate Settlement Procedures Act (RESPA) is a consumer protection law for homebuyers that is enforced by the Department of Housing and Urban Development (HUD). The thrust of the law is to require that loan originators make certain disclosures to borrowers so that they can be more informed consumers, entering into more transparent transactions. HUD recently wrote new regulations requiring that borrowers receive both a standard Good Faith Estimate (GFE) that discloses key loan terms and closing costs and a new "HUD-1" settlement statement.

The format of the new GFE is supposed to simplify the process of originating mortgages by consolidating costs into a few major cost categories. The former GFE had a long list of individual charges. The new version includes this list, but also has a summary page containing the key information for comparison shopping by the consumer.

The new GFE also has a set of tolerances on originator and third-party costs. Originators must adhere to their own origination fees and give estimates subject to a 10% upper limit on the sum of certain third-party fees. The idea is to encourage loan originators to seek out lower costs for third-party services, to the benefit of borrowers.

The main changes in the HUD-1 settlement statement involve new language and the organization of charges that should make it easier to compare the GFE and the settlement statement, in order to confirm whether the tolerances in the new GFE have been exceeded. It will also be easier for the consumer to verify that the loan terms summarized on the GFE match those in the loan documents, including the mortgage note.

Mixed Reaction

Reaction to the new regulations has been mixed, with some consumers complaining about their complexity and vagueness and other consumers wondering if the regulations will, in fact, serve to enhance protection for consumers. Since the forms provide for lumping lenders' fees together rather than detailed itemization, some consumers think that lumping the fees together could make it harder to detect questionable charges.

In any event, the "bait and switch" tactic in which artificially low estimates of costs mysteriously balloon at closing has been addressed by HUD. Now a lender is largely tied to its good-faith estimates provided for such mortgage fees as points, origination costs, and appraisals.

NO ESTATE TAXES FOR POD BENEFICIARY

Before James died without a will, and with an estate valued at about $12 million, he had designated his teenage goddaughter, Jessica, as the beneficiary on two payable on death (POD) accounts worth almost $4 million at his death. Jessica and her parents were then sued by James's estate, which was seeking reimbursement for the federal and state estate taxes that were attributable to the POD accounts.

A state supreme court ruled that Jessica had no obligation to pay any of the estate taxes. The starting point for the analysis was the general rule that the probate estate pays such federal estate taxes as may be generated by nonprobate assets, such as life insurance proceeds, jointly held property, and POD accounts. An exception to this rule exists for transfers by the decedent during his lifetime with a retained life estate, but Jessica's case did not come within that exception. A POD account transfers no property to the recipient during the decedent's lifetime, since the depositor remains free to make changes in the account, or even to close it, at any time before his or her death. The result was the same for the claim based on state estate taxes.

A final argument directed at both Jessica and her parents, on a contractual theory, also failed. Jessica's parents had signed a two-sentence agreement with the estate to retain 50% of all sums payable on the POD accounts "for the purpose of paying required estate taxes." This did not obligate Jessica or her parents to pay a portion of the estate taxes attributable to the accounts, since the accounts were not otherwise required by law to pay any estate taxes.

In short, there were no "required estate taxes," as referred to in the agreement. Not only that, but Jessica, the only named recipient for the accounts, did not sign the agreement and was not a party to it, and the agreement did not suggest that Jessica's parents were signing in any capacity other than for themselves.

DEBIT VERSUS CREDIT CARDS

When you are pulling out the plastic to make a purchase, will it be debit or credit? It makes sense to know how each works, and their respective advantages and disadvantages. The bottom line is that debit cards are fine for small and/or routine purchases, but credit cards, as a rule, are better for major purchases and online transactions because they offer more protections if something goes awry.

Debit Cards

A debit card is like an electronic check--the consumer is spending money that he or she already has. As compared with credit cards, debit cards carry the potential for greater liability if the card is lost or stolen. Under federal law, liability is limited to $50 for the fast-acting consumer who notifies the bank within two days after discovering an unauthorized transaction. After that, the cardholder could lose up to $500, or even more in some cases. On its own, a bank may choose to waive liability for unauthorized transactions if the consumer has taken reasonable precautions, but, of course, this varies depending on bank policies.

For transaction errors, banks, as a general rule, have up to 10 days to investigate after receiving notice from the cardholder, or up to 45 days in special circumstances. Pending the outcome of the review, banks generally must credit the account for the amount of the alleged error.

As with credit cards, debit cards offer convenience and an alternative to carrying cash. But, unlike credit cards, the consumer is not taking on debt when using a debit card. Nor is the consumer paying interest or an assortment of fees, assuming that the account is not overdrawn. It may be possible to avoid even the overdraft fees by linking a checking account to a savings account or a line of credit. A debit card can also be used to obtain cash without incurring charges that usually come with cash advances by means of a credit card.

When there is a problem with purchased merchandise, there is no right to withhold payment if the consumer has used a debit card, as might be an option with a credit-card transaction. Another drawback for debit cards is the practice of putting "holds" on funds. If the final amount is not yet known, a merchant may place a temporary hold on funds for more than is actually spent, which denies the consumer access to that amount until the hold is lifted later.

Credit Cards

Federal law limits a consumer's losses to a maximum of $50 if a credit card is lost or stolen, and also provides protection against credit-card billing errors. Unlike with debit cards, federal law also may allow the user of a credit card to withhold payment under certain circumstances until a problem with purchased merchandise is rectified.

The most commonly cited drawbacks for credit cards concern fees, interest rate increases, and penalties. In addition to annual fees for some cards, there are usually fees for paying late and for exceeding the credit limit. Of course, unless a consumer is in an interest-free grace period, interest accumulates and adds to the overall debt, especially if the cardholder pays only the minimum amounts due each month. As any holder of a credit card can attest, having a credit card also makes overspending very easy, especially with high credit limits and enticements such as rewards programs.

KNOW ABOUT THE "NO-ZONE"

All drivers should be aware of the "no-zone," the area on the sides and rear of 18-wheelers where the truck driver cannot see a car. This dangerous area is easy to locate: If you can't see the driver of the truck in his mirror, then he can't see you.

The no-zone is dangerous for two reasons. First, if the truck driver cannot see you, he might try to pull into your lane, causing a crash. Second, if you drive in the no-zone, the truck and its trailer cut off your view to the side and reduce your view to the front, making it harder to avoid accidents.

If you are behind a truck, stay out of the no-zone so that the driver can see you. If you are passing a truck, do not linger in the no-zone--get through it as quickly as you can while still driving safely. Remember: No matter who has the right of way, when an 18-wheeler and a car collide, the car always loses.

WEBSITES AND WHERE TO SUE

After she became dissatisfied with the services of home remodeling contractors that she had obtained through an Internet referral website, Victoria sued the referral business for breach of contract, fraud, misrepresentation, and negligence.

The referral website involved a series of web pages. Victoria entered project information on the first page, clicked to the next page, entered more information, and so on. Each page was hyperlinked to the referral company's terms and conditions, one of which was a forum selection clause limited to Denver County, Colorado. Victoria never actually looked at the terms and conditions before she brought suit in her home state of Missouri. The dismissal of the suit for being in the wrong jurisdiction was upheld on appeal.

The process by which Victoria agreed to sue only in Colorado was not as clear-cut as when a customer shows assent by clicking to show acceptance of terms and conditions (a "clickwrap" agreement), but it still was sufficient to bind the website user. The referral business had not unreasonably hidden the terms and conditions. Victoria assented to the forum selection clause contained in the website "browsewrap" agreement, although assent did not require a "click," where the website placed an immediately visible notice of the existence of license terms on the site by stating "[b]y submitting you agree to the Terms of Use," and by placing a blue hyperlink next to the button that the user clicked.

There was also a second link to those terms that was visible on the same page without scrolling, and similar links were on every other website page. In short, the referral business was sufficiently up front about the forum selection clause, and it was not its fault that Victoria had not actually navigated on the website so as to read about that term.

The court acknowledged that the legal effect of online agreements may be an "emerging area of the law." Nonetheless, courts still apply traditional principles of contract law, which means focusing on whether the plaintiff had reasonable notice of, and manifested assent to, the agreement and all of its terms and conditions. Since notice and assent were both present in Victoria's case, she had to sue the referral business in Colorado or not at all.

MINIMUM IRA DISTRIBUTIONS

When retirement plans suffered big losses in 2008, Congress enacted a one-year moratorium, for 2009, on the requirement that retirees over the age of 70-1/2 withdraw a certain amount from their individual retirement and 401(k) accounts. Since the distributions are subject to taxation, retirees could avoid the taxman in 2009 by not having to take the usual minimum distributions, not to mention avoiding the investment mistake of "buying high and selling low."

2009 is history, and the required minimum distributions are back, even if most retirees' account balances have not fully recovered to prerecession levels. Retirees with affected retirement plans need to make sure that the necessary distributions resume in 2010, lest they incur a hefty penalty from the IRS for failing to do so.

Some advisors have counseled retirees to try to wait until the end of 2010 to take the minimum distributions--for two reasons. First, the longer that the money stays in the account before withdrawal, the more it can grow. Second, Congress conceivably could act to extend the moratorium on mandatory distributions for another year.