Archive for the ‘Estate Planning’ Category

After more than a year’s worth of wrangling (and our yapping about it here and here), our elected officials in Washington finally made a deal to settle the uncertainty surrounding the estate tax.  Naturally, they could not come to a long term agreement.  But, they patched the hole, and at least until the end of 2012, we know what the federal tax will look like.

The estate tax now in place includes an exclusion of $5 million – that is, no estate worth less than $5 million is subject to the tax and estates worth more are not taxed on the first $5 million.  The maximum tax rate for taxable estates is 35%.  But, like the last time this deal came around, it isn’t permanent – it applies only through the end of 2012.  Come January 1, 2013, the law reverts to its old formula, with a $1 million exclusion and a 55% top tax rate.   It seems like a pretty safe bet, then, that we’ll be having this fight again at the end of next year.



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An article in Forbes this week highlighted a recent national poll which showed that 65% of all American’s don’t have a will.  More than 70% don’t have a living will to make known their views on end of life medical care.  The article notes the Big 4 of estate planning documents: a will, a living will, a medical power of attorney and a financial power of attorney and states that even among Americans over 55, only 3/4 had signed even one of the documents.

Most folks don’t get estate planning documents for financial reasons: either they think the documents are too expensive, or they think they don’t have time to prepare them right now because they’re so focused on keeping their job and paying their bills.  And we can understand those concerns, the current economic crisis has affected us all.  But, the fact is, they aren’t very good reasons compared to the costs of not preparing the right documents.  If something happens to you and you can’t make medical decisions for yourself, if you don’t have a valid power of attorney, someone in your family is going to pay thousands and thousands of dollars trying to convince a judge to appoint them as your representative.  And, worse, if two people in your family disagree about your care, well, you remember Terry Schiavo, right?

The fact is that we all need to face our end in whatever way we see fit (as the author of the New Jersey Estate Planning & Elder Law blog put it, that 65% of people don’t have a will is staggering considering 100% of them are going to die one day).  And we all have affairs to put in order.  From issues as innocent as ‘who should get my stamp collection’ to those as profound as ‘who should care for my children,’ your opinion matters.  Make sure it’s heard, especially when you’re gone.

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As we’ve discussed previously, right now there is no estate tax.  As a result of a prior tax deal, the estate tax was phased out as of January 1, 2010 and is scheduled to return on January 1, 2011 with an exemption amount of $1 million per individual and a top tax rate of 55%.  Most folks assume, however, that the estate tax will be reintroduced in some form before then, with different exemption amounts and rates.

President Obama released his budget earlier this week and, no surprise here, he seeks to reinstate the estate tax at 2009 levels.  This would mean individual exemption amounts of $3.5 million and a top rate of 45%.  Yesterday, CNN reported that the Senate is considering a different, and more generous proposal, which would grant exemption amounts of $5 million per individual and a top rate of 35%.  Both Treasury Secretary Timothy Geithner and Senate Finance Committee Chairman Max Baucus indicated yesterday that they support making the estate tax, in whatever form it finally materializes, retroactive to January 1, 2010. (thanks to TaxProf Blog for linking to the Geithner and Baucus statements).  We will keep you updated as the debate continues.

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In today’s New York Times, the Gray Lady herself published an article called “A Bizarre Year for the Estate Tax Will Require Extra Planning.” In it, the author discusses what we’ve written about previously – that the estate tax is currently dead but certainly not buried (we also wrote about it here and here).  Not to rehash our prior posts, but the current estate tax is gone, Congress intends to re-enact it – in some form – and probably will make the new legislation retroactive to January 1, 2010.

An interesting thread in the piece, that we haven’t written about, is the interplay between the estate tax and the capital gains tax.  Previously, the estate tax scheme valued property at the time of he owner’s death and did not calculate any gain on the value of an asset.  But, with the estate tax out of commission, the capital gains tax steps in to fill the void.  So, let’s say someone bought a house in 1975 and died this week, leaving the house to two children.  If the children sell the house, they will be responsible for paying tax on the appreciation in the house’s value from 1975 to 2010.  Ouch (there is an emergency IRS ruling that grants a small capital gains exemption on some property, and a larger exemption for surviving spouses, which should ease some of the pain).  And that, sadly, is the easy part.  Assume that instead of a house, that same person spent $10,000 in 1975 on stocks.  What price per share did s/he pay (unlike houses, there are no public records of every stock share transaction)?  Have the shares split?  Was the company bought?  Does the broker who sold the stock still exist?  Headaches galore…

Not only will the capital gains tax affect some heirs significantly, it will affect many more heirs than the estate tax would have.  Early estimates assume that about 70,000 people will be hit by the new capital gains tax requirements.  About 5,500 would have been affected by the estate tax at 2009 rate and exemption levels.  Are you one of those people?  As the articles goes on to say, the best way to figure out what this all means is to sit down with your financial advisor and estate planning attorney and make sure that your estate plan still fulfills your needs.  We couldn’t have said it any better ourselves.

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In response to a recent post about estate taxes, a reader sent in a request that we explore some of the potential pitfalls of the probate process.  It’s a great question, and a topic that we plan to address in detail.  But, we thought it better to outline the general probate process so that everyone has a frame of reference for future discussions of discrete issues.

“Probate,” generally, refers to the court supervised process for organizing, collecting and distributing the property of a deceased individual.  Importantly, not every deceased person’s affairs must be resolved via probate – there are methods to avoid probate that we will review in future posts.  But, to the extent that a person dies owning property that is not automatically transferred by other means (such as a trust, or beneficiary designation on a life insurance policy), then that property will pass through probate.

The first step is a trip to the probate court in the city or town where the deceased person lived (for this post, we’ll call the deceased person Smith).  The Secretary of State maintains a current list of probate court contact information.  The purpose of the trip is to designate Smith’s personal representative.  If Smith had a will, it usually designates an executor.  If Smith did not have a will, or the individuals nominated by Smith are unable or unwilling to serve as executor, the court will appoint an administrator.

It is the personal representative’s job (let’s call the personal representative Jones) to complete the probate process, subject to supervision by the appropriate probate court.  Jones may be aided by an attorney, an accountant and sometimes other professionals.  Which can be very helpful, because Jones has a lot of work to do.  First, Jones must send a notice to all of Smith’s potential beneficiaries and take possession of all of Smith’s property and prepare a thorough inventory.  Then, Jones must collect any money due to Smith (for example, if Smith owned income property, Jones would have to make sure the tenants continued to pay rent to Smith’s estate until the property is transferred).  Jones must determine Smith’s outstanding debts and pay them from the assets of Smith’s estate.  Jones has to prepare, file and pay state and federal estate taxes .  Finally, assuming there is some money left over in the estate after payment of all debts, Jones must distribute those assets according to the terms of the will or, if there is no will, according to Rhode Island laws of intestate succession.  Finally, Jones must secure the probate court’s approval of all of the above.

There are a few important deadlines as well.  First, the state and federal estate taxes must be filed within nine months of the date of Smith’s death.  Second, the estate must remain “open” to the probate process for at least six months.  The law guarantees at least that much time for Smith’s creditors to file claims with the estate.  As a practical matter, however, the probate process can take a lot longer.  There are a lot of reasons why this may be the case, but the real killer is litigation.  Probate litigation arises from many causes, they are all expensive and some, like family disputes over who was supposed to inherit a particular piece of property, can be very nasty (in 2003, the R.I. Supreme Court awarded more than $16,000 in legal fees to a woman who had a $28,000 dispute with her sister over their mother’s estate).  They are to be avoided whenever possible.

There are some good resources that can help.  In addition to the contact information above, the Secretary of State maintains an online library of probate forms.  Also, the Rhode Island Bar Association’s website contains a brief overview of the probate process.  And, of course, you are always free to contact an attorney with your questions.

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As we earlier wrote about here and here, Congress has been trying to figure out what to do about the estate tax.  It is set to expire on December 31, 2009.  It will be gone for a year and then return on January 1, 2010 at the same rates in existence ten years ago – during the last decade the rates have been declining and the exemption amounts have been increasing.  We were under the impression Congress would make a deal to patch the hole, but it doesn’t seem like it’s going to happen before the end of the year (this despite pressure from a New York Times editorial yesterday).

A report in today’s USA Today says that the House and Senate intend to patch the hole, sometime in 2010, but nothing is set in stone.  Lawmakers are considering making the tax retroactive, meaning an individual who dies on January 2, 2010 would be required to pay a tax enacted by Congress later in the year, a controversial (and, possibly, unconstitutional) result.

Leaving aside the issue of how legislators will craft a deal, the real problem (from our perspective) is the inability to plan under the current scheme.  As the USA Today article noted, the situation has devolved into “a guessing game for taxpayers, accountants, estate planners and tax lawyers.”  While we won’t offer our opinion on what we think the tax should look like, it is simply unacceptable that we don’t know what it will look like.

As an aside, the crush of the season has left us with less time than we’d like to post updates over the last few weeks.  We’ll be getting back up to speed over the next week.  We hope everyone has a great holiday season and a safe and happy new year.

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As we previously discussed, Congress is working on new estate tax legislation.  As of now, the estate tax is set to expire in 2010 and return in 2011 with a $1 million exemption and top rates of 55%.  Last week, the House of Representatives voted to make the current estate tax rates permanent.  That means that individual estates larger than $3.5 million ($7 million for married couples) are subject to the tax, and the top tax rate would be 45%.  The Senate still hasn’t acted on the legislation, and most likely won’t do so until after it deals with the health care debate.  We’ll keep you up to date.

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