California Living Trusts

More Than Just $5 Million

2010-12-20T11:16:00.000-08:00

H.R. 4853, the bill that President Obama signed Friday to extend the Bush tax cuts, changes estate planning in some major ways besides increasing the exclusion amount to $5 million. Newspaper coverage of the estate planning sections of the bill has been superficial, leaving out important new provisions that will affect many estates.

l. The gift tax exemption has been increased to $5 million from the previous amount of $1 million. This means a married couple can give away $10 million of their net worth without paying any gift taxes. The drawbacks are the same as before, however: Gifts don't get a step-up in basis, and gifts made under this provision will reduce the unifed credit of $5 million per person.

2. Portability of the exemption from the estate tax is a subject that has been discussed, but never enacted until now. In the future surviving spouses get the benefit not only of their own $5 million exemption, but also their deceased spouse's $5 million exemption. This change benefits procrastinators who never get around to signing an estate plan, or updating their current plan. In the past the deceased spouse's exemption has been lost if it was not used in an A-B trust, for example, or inherited by someone other than the surviving spouse. This innovative change to the law could eventually make A-B trusts obsolete.

3. Estates of decedents who died in 2010 have been stuck in a tax world that did not have an estate tax, and also lacked a step-up in basis for assets exceeding $1.3 million (or $4.3 million for surviving spouses). Those estates now have the option of paying the estate tax and also getting a step-up in basis, or skipping the estate tax and dealing with the lack of step-up. The answers to these situations are less obvious than appear at first glance because of the difference in tax rates (35 percent for the estate tax and 15 percent for the capital gains tax), and the fact that some estates have few appreciated assets.

4. Indexing for inflation will be allowed for the $5 million exemption, which will go up in multiples of $10,000. The annual gift tax exclusion is already indexed for inflation at multiples of $1,000.

5. But there's a catch related to all of these developments: The Bush tax cuts and all of the new tax benefits will expire on Dec. 31, 2012. After that we're back to where we were in 2001, with a $1 million exemption from the estate tax. Will Congress give the Bush tax cuts a last-minute reprieve in 2012? Unfortunately nobody knows the answer, so don't give up on those A-B trusts yet.

What the Agenda Doesn't Include

2010-12-03T13:51:00.000-08:00

The Senate will meet tomorrow (Saturday, Dec. 4) to discuss extending the Bush tax cuts for the middle class. The bill under discussion, H.R. 4853, was passed by the House on Thursday, but newspaper coverage of the details of the bill was, as usual, minimal.

But reading the summary of H.R. 4853 on Thomas shows that this is an income tax bill only. Although the estate tax was one of the original Bush tax cuts, it is not part of H.R. 4853. Whether the Senate passes this bill will make no difference to the estate tax, scheduled to return to 2001 levels in just 28 days.

The Senate would have to consider H.R. 4154, which is an estate tax bill, if it wanted to prevent the estate tax from affecting middle class taxpayers. H.R. 4154 would restore the estate tax to its 2009 levels, which include a $3.5 million exemption from the tax. But H.R. 4154, passed by the House last Dec. 20, doesn't seem to have much support in this lame duck session.

Of course, the provisions of H.R. 4154 could always be tacked onto H.R. 4853, which is already an odd collection of tax subjects, starting with the Airport and Airway Tax Fund. When it was strictly an airport bill, H.R. 4853 was passed by the Senate earlier this year and sent to the House, where it has stagnated until the House suddenly decided it really ought to be called the Middle Class Tax Relief Act of 2010. That's the bill that will be on the Senate calendar tomorrow.

What's The Hurry?

2010-11-24T11:13:00.000-08:00

The Senate will return to its lame-duck session at 2 pm on Monday, Nov. 29, and once again the senators will avoid any debate about the estate tax. Starting at 2 pm? Most of us start our day a little earlier than that, but the Senate apparently isn't concerned about the lack of time remaining to wrap up a multitude of important issues.

Congress will have only four weeks to work on bills concerning nuclear weapons, immigration, Don't Ask Don't Tell, the federal budget, and the sunset of the Bush tax cuts. The Senate, of course, will discuss none of these subjects on Monday, because the schedule calls for debate of the Food Safety Modernization Act. I'm sure that's a worthy subject, but it is obvious that finally resolving the tax issues is far more important at this point.

At this point it looks like Congress will not reach agreement on the tax issues, meaning that starting Jan. 1:

1. Most taxpayers will wind up in a higher income tax bracket.

2. Dividends will no longer be taxed at 15 percent; instead they will be taxed at the taxpayer's marginal rate, which could be as high as 39.6 percent for some taxpayers.

3. Capital gains taxes will go up from 15 percent to 20 percent.

4. And, of course, the estate tax will affect thousands of decedents whose estates are larger than $1 million.

We are not optimistic about the chances that the Congress will find a compromise on the estate tax issue. A House bill, H.R. 4154, has been sitting on the Senate calendar for the past 11 months and no action has been taken. That bill would restore the estate tax at its 2009 level, with a $3.5 million exemption and a 45 percent tax rate. For a married couple it would allow $7 million of the couple's assets to avoid the estate tax.

However, the Republicans want a $5 million exemption and a 35 percent tax rate for the estate tax. The Democrats are digging in at $3.5 million for the exemption and a 45 percent tax rate. Is there room for a compromise here? How about a $4.25 million exemption and a 40 percent tax rate? Is that too reasonable to be suggested inside the Beltway?

Whether it is reasonable or not, it looks like we are 37 days away from a $1 million exemption and a 55 percent tax rate. At that point the House will change leadership and there will be bills coming out of the House to correct this problem. Those bills will get a chilly reception in the Senate, and the few bills that get out of the Senate will probably get vetoed by the president.

In other words, once we get back to a $1 million exemption, don't expect any major changes until after the 2012 election, if then. That's right, we're going to be stuck with the $1 million exemption and 55 percent tax rate for at least two years. It will be good for the federal budget, bringing in an additional $250 billion per year, and it will be good for estate planning attorneys and CPAs, but it will be bad for the taxpayers.

How Much Is A Million Bucks?

2010-10-20T13:17:00.000-07:00

It's enough to get your estate into the dreaded land of the federal estate tax, starting in January.

That's assuming that Congress is unable to take action on the estate tax, when the lame-duck session convenes in mid-November. If Congress can't agree on the estate tax before the end of this year, the estate tax will be revived, and any estate that totals more than $1 million could be subject to the tax.

That means a 41 percent (and somewhat higher) tax rate for smaller estates, and estates greater than $3 million of taxable assets will be paying at a 55 percent rate. Substantially larger estates will be paying a 60 percent tax.

Why shouldn't Congress finally reach agreement on an important issue such as this? Because Congress hasn't been able to do that all year, and it is unlikely that the lame-duck session will produce anything new. We are talking about exactly the same cast of characters, right? And even if the Republicans have an enormously successful election, they won't have 60 votes in Senate next year, where House bills go to die because they can't surmount the vote level needed to prevent a filibuster.

My advice to clients these days is to include protections in your estate plan that will reduce the estate tax, such as an A-B trust, or a gifting plan, or an insurance trust, or any other means of reducing your estate. These protections might not be needed, but we'll worry about that unlikely event later.

We're getting ready for a year with a $1 million exemption, and a 55 to 60 percent tax rate. Are you?

No Hurry Is There?

2010-09-20T13:00:00.000-07:00

Don't expect any action by Congress on the federal estate tax before mid-November. There are still several appropriations bills to take care of, and Senate Majority Leader Harry Reid also wants to bring up an immigration bill. Those topics should take care of the Senate's free time between now and Oct. 11, when the election recess starts.

What will happen in November? If the Republicans win big, we can expect that they will want to wait until January to discuss tax law. But that means that the $1 million exemption for the estate tax will return on January 1, and could affect the estate of every decedent with a net worth of more than that amount until a bill is passed (although it could be retroactive to January 1.)

If the Democrats win or at least hold their own, a stalemate on taxes is a possibility because that is exactly what happened last year. On Dec. 20 the House passed a bill that extended the $3.5 million exemption, but the Senate went home for the holidays without taking action. Democrats in the Senate don't have 60 votes on this issue, and if no action is taken, the Bush tax cuts expire and we're back to a $1 million exemption.

Either way the results don't look good, and if you have an estate that is greater than $1 million for single persons or $2 million for married couples, you should start thinking about revising your estate plan to avoid the tax.

Let's Talk Taxes

2010-08-13T10:45:00.000-07:00

One month from today the Senate will return to talk about a number of new subjects, including taxes. At least that's what some commentators are predicting, but only Harry Reid knows for sure. In the event that the Senate actually discusses taxes, and, in particular, the estate tax, here are three issues that deserve attention:

1. Predictability of the Estate Tax. As things stand know, we don't know which way the estate tax will go, and the possibilities range from no tax at all to a harsh $1 million exemption. Planning estates is difficult in this freeform climate and will likely lead to mistakes in the future. We need some tax laws that will remain the same for the indefinite future.

2. Retroactivity of the Estate Tax. If the tax is reinstated, it should be retroactive to Jan. 1 of this year. But the retroactivity should not be mandatory because it would be quickly overturned by the courts. Retroactivity is needed for trusts that include a funding clause for an A-B trust that will not adequately fund the trust during the repeal year. If there had been an estate tax this year, funding these exemption trusts would be simple - the maximum amount is the amount of the exemption. But when the exemption amount doesn't exist, thanks to repeal, the amount that can be funded to an A-B trust is zero. There may be funding formulas that provide otherwise, but many will not adequately fund the exemption trust in a typical trust. That can be corrected by making the estate tax retroactive, provided the trustee or executor has the authority to elect retroactivity.

3. Step-up in Basis at Death. For the past eight months, the step-up in basis for capital gains purposes has been limited to $1.3 million worth of assets for transfers at death to beneficiaries other than a spouse. This is a confusing issue that is causing many taxpayers problems as they try to research decedent's records to find out what the purchase price was, or how the value was changed by mergers, etc. Stepping up the basis for all of a decedent's appreciated assets has been the law for decades, and it is time to return to the full step-up rules. This also should be retroactive to Jan. 1.

Although I am hopeful that some action will be taken on the estate tax next month, I realize it is more likely that Congress will wait until after the November election to make decisions on these issues. But even that will be better than no action at all this year.

Six Months to Go

2010-07-06T13:40:00.001-07:00

The federal estate tax has been repealed for six months now, and the loss to the treasury has been about $12 billion. We never thought the Congress would allow the repeal to go this long, but this is a Congress that doesn't like compromise.

As the months pass, the future of the estate tax is becoming more obvious. The tax will be back on January 1, 2011. Estates greater than $1 million will be taxed, and the highest tax rate for many estates will be 55 percent. Estates with extraordinary bad planning could see higher rates, such as more than 80 percent. How do you get that high? Just give your $20 million estate to your grandchildren and trigger the generation skipping tax in addition to the estate tax.

But why would the Democratic leadership in Congress allow the estate tax to make a comeback? The reason is simple: Taxes can be raised and the deficit can be decreased without having any member of Congress vote on federal estate taxes. Do nothing and the Bush tax cuts will expire without any outside help. They are part of a 10-year bill that expires on Dec. 31 of this year.

How much will the death of the Bush tax cuts raise? About $250 billion a year from the new estate tax and about $150 billion a year from higher income tax brackets, a 20 percent capital gains tax, and other increases. That's $400 billion a year.

All of this can be accomplished by having the Congress do nothing. But don't blame the House for this little problem. The House has sent hundreds of bills to the Senate this year, and not gotten much in return. The Senate will be the place where nothing will get done because of the 60 percent cloture votes needed to stop filibusters.

Failure to pass these cloture votes has stopped the Senate from taking action on several issues, but the Bush tax cuts won't be one of them. There will be no cloture vote needed to take no action on the Bush tax cuts. All the Democrats need to do is take it easy until Dec. 31.

The Republicans will be apoplectic, of course, but what are their options? The Democrats don't have to compromise on the tax issue, and the solutions that appeal to the Democrats are not acceptable to the Republicans. The Republicans can't push bills through the Senate because they're not in charge. There might even be some Republican deficit hawks who like the idea of cutting $400 billion out of the deficit. And, of course, they don't need to vote on this issue either.

I'd rather see a compromise solution to the tax problem right now so I can go back to helping my clients with their estate tax problems. But you have to admit that the non-action on the Bush tax cuts is going to become much more interesting and humorous as the months pass. It might even become the biggest political prank of the decade.

For more estate planning, go to California Living Trusts.

Responsible Estate Tax Act

2010-06-24T10:12:00.000-07:00

The Senate may be coming out of glacier mode with some new ideas about the estate tax.

Senator Bernie Sanders today introduced the Responsible Estate Tax Act, co-sponsored by Senators Tom Harkin, Sheldon Whitehouse, and Sherrod Brown. According to Sen. Sanders' website, the bill would:

• Exempt the first $3.5 million of an estate from federal taxation ($7 million for couples), the same exemption that existed in 2009. That would leave 99.75 percent of all estates exempt from the federal estate tax next year.

• Create a progressive rate so the super wealthy pay more. The tax rate for estates valued between $3.5 million and $10 million would be 45 percent, the same as the 2009 level. The rate on estates worth more than $10 million and below $50 million would be 50 percent, and the rate on estates worth more than $50 million would be 55 percent.

• Include a billionaire's surtax of 10 percent. According to Forbes Magazine, there are only 403 billionaires in the United States with a collective net worth of $1.3 trillion. Clearly, the heirs to these multi-billion fortunes should be paying a higher estate tax rate than others.

• Close estate and gift tax loopholes as President Obama proposed in his budget for next year. The White House estimated that closing the loopholes would generate at least $23.7 billion in revenue over 10 years.

• Protect family farmers by allowing them to lower the value of their farmland by up to $3 million for estate tax purposes. The bill also would increase the maximum exclusion for conservation easements to $2 million. The non-partisan Tax Policy Center has estimated that only 80 small businesses and farm estates throughout the country paid an estate tax in 2009, affecting only three out of every 100,000 people who passed away.

Euthanasia, the Latest Tax Strategy

2010-05-21T09:46:00.000-07:00

We're almost five months into the repeal of the federal estate tax, and Congressional action that would bring back the tax for 2010 on a retroactive basis is starting to look unlikely. Considering that Congress is crowded with politicians who don't take chances with their careers in government, no action on the estate tax should be expected until after the November elections.

It is likely that a wealthy person who dies between now and November will not have any estate taxes due from their estate. This is the first time this has happened since World War I, when the current estate tax got its start. The odds are that Congress will reinstate the estate tax in November at the same levels as in 2009 - with a $3.5 million exemption and a 45 percent tax rate. The worst case scenario is that Congress can't reach agreement on the estate tax and, starting on Jan. 1, the tax comes back with a $1 million exemption and a top tax rate of 55 percent.

How does euthanasia fit into this? If your rich uncle, with a net worth of $10 million, dies during the repeal period, and you are the beneficiary of his estate, you will save between $2.9 million and $4.9 million in estate taxes, depending on what Congress does. I'm not advocating pulling the plug on your uncle if he winds up in the hospital, but you can imagine the temptation that some nephews and nieces might feel in that situation.

It is a tax situation that most tax advisors thought would never occur, but it is real and it is happening now. Should the government encourage euthanasia through its tax policies? No, but that's what we're getting from the repeal of the estate tax, followed by the reinstatement of the estate tax.

It's Getting Expensive

2010-05-11T16:01:00.000-07:00

It has been more than four months since the federal estate tax disappeared, thanks to the Senate's lack of action. That's a total loss of about $8 billion that the treasury will most likely never recover.

How much is $8 billion? Well, look at it this way - the budget for the Army Corps of Engineers for this year is $5.1 billion. The budget for the Social Security Administration is $9.7 billion. And the budget for the EPA is $10.5 billion. At a loss of about $2 billion per month, not having an estate tax could run as much as $24 billion for the entire year. And that's a lot of tax money to waste.

Not that I like taxes, but when a tax is fairly easy to collect and has been in place for 70 years, it's lazy and unimaginative to not try to collect it. Not to mention the fact that the federal budget is nowhere close to being balanced.

For those who haven't been following the estate tax dilemma, here's a recap: This is the tenth year of a 10-year bill that steadily increased the exemption from the estate tax to $3.5 million during the ninth year of the bill. Then the tenth year eliminated the estate tax, as part of a compromise reached back in 2001. Nobody thought that we would ever get to the repeal year, but the Senate failed to take action on a House bill last December, and the tax suddenly disappeared. A few Senators think that they can cover the mounting losses with a retroactive tax, but the further we get from Jan. 1, when the tax was repealed, the less likely that is.

The Senate could still take up that House bill to extend the estate tax, but at this point it seems to be the furthest thing from their collective minds.

The Next Generation

2010-04-28T11:23:00.000-07:00

Occasionally clients ask, "What will a living trust do for me?" The answer is not a whole lot. But it will help your children and other beneficiaries by keeping your estate out of probate. For larger estates, a trust can also avoid the federal estate tax (I'm assuming that it is coming back some day.)

A trust, or a simpler estate plan, can make a huge difference for your children. For one thing, it can prevent your children from inheriting your estate at age 18. That's the age of adulthood in California, and if there is no estate plan, that's when young people will receive their inheritances. A living trust, or a testamentary trust included in a will, can specify that the children won't receive the bulk of their inheritances until an older age, such as 25. The trust can also make funds available for the child's education, medical expenses, and support.

Your estate plan can also nominate guardians for your children if they lose both parents before age 18. It is important that you nominate guardians to ensure that the child's adoptive parents are someone who you believe can do a good job. The person who is nominated will need to petition the court to become the guardian, and your nomination will provide helpful guidance to the court.

Is Probate Really Necessary?

2010-04-23T09:24:00.000-07:00

I got a call a few days ago about an estate that included several joint tenancy bank accounts and one account that was in the decedent's name only. The good news was that the joint tenancy accounts avoided probate. The bad news was that account that was in the decedent's name only had a balance of $102,000. The caller knew from my web page about probate that if the probate assets in an estate total less than $100,000, no probate is required due to the small estates exception. But if the assets total more than $100,000, probate is required.

Surely, the caller pleaded, there must be some way to bring this account under the small estates law and avoid probate. The difference, after all, was only $2,000. And that $2,000 was going to cost the caller a legal fee of at least $4,000, and court costs of somewhere between $600 and $800.

The answer, however, is that if the assets in the probate estate amount to more than $100,000, a probate is required. Who enforces this? The bank, believe it or not, because it won't hand over the account to anyone else without seeing a probate court order first.

There are many ways to avoid probate in this situation, such as a joint tenancy account, or a pay on death (POD) account. Even a simple trust would work in this situation. But if you don't take advantage of any of these procedures, your heirs will have to start a probate.

Was There a Will?

2010-04-16T10:04:00.000-07:00

"Mom died suddenly and I need to know if she had a will or trust because I think I'm mentioned in it."

This is a request that I hear frequently because the caller has seen my website and is looking for some quick and inexpensive way of seeing the will or trust. Often the caller was estranged from the person who died, or they would found some easier way of getting the information, such as asking them while that person was still alive.

Here are the basic details on how to find out if your relative left you anything:

1. After a person dies in California, state law requires that their will be filed with the Superior Court clerk's office in the county where the decedent lived. Go to the Superior Court and ask if the will has been filed.

2. If a probate has been started, you can look at the will, if there was one, in the file. Go to the Superior Court and ask to see the file. The name of the case will be Estate of (fill in name). If there was no will, you may be entitled to part of the estate through intestate succession.

3. Also, if there is a probate and you are one of the heirs, you should have been notified as part of the probate process. If you were not notified, and you are also entitled to part of the estate, you should retain a lawyer and make an issue out of this.

4. You can learn if the decedent had a trust by looking in the county recorder's records for any county in which the decedent owned real property. If the decedent had a trust, he or she probably had transferred the deed to the trust. The current deed will show the owner as trustee of his or her trust.

5. If a trust was involved and you were an heir of the decedent, you are entitled to a notice when the trust becomes irrevocable, in other words, when the trustor of the trust dies. This applies regardless of whether you will receive anything from the trust.

6. You can also write a letter to the trustee of the trust, or the personal representative of the probate, demanding a copy of the will or trust. If that doesn't work, hire a lawyer to demand the copy of the will or trust.

Too Much Trouble To Get A Will?

2010-04-12T16:17:00.000-07:00

The couple had a modest house in one of California's rural counties, and the value of the house was $165,000 at the time the husband died. It was a second marriage for the couple, and they were living in husband's house from his first marriage, which ended when his first wife died. The deed was in his name only, and the couple had no community property agreement. Husband had two children from his first marriage. Husband had no will.

Question: Who gets the house when Husband dies?

Answer: Everybody gets the house, but they won't get it until the probate is completed.

Why? Because California intestacy law provides that when a decedent's estate includes separate property, the separate property is split between the spouse and the children. In this case, the spouse gets one-third of the house, and the children get two-thirds. Because the children's share is greater than $100,000, a probate will be needed. It could take upwards of a year and $7,000, including court costs, to complete the probate.

How could this have been avoided? Assuming that the decedent wanted his spouse to have the entire house after he died, he could have accomplished this with a simple will that gave everything to his wife. She would have used a spousal property petition, instead of a full probate, to take title to the house. No probate, no need to share the house with the children.

But, assuming that the decedent wanted the children to take part of his estate and still avoid probate, he could have created a living trust and put the house in it. There would be some trust administration fees, but no probate.

The decedent had a choice: Do nothing and cause a problem down the road, or do something now and avoid future problems. The difference can be summarized as being remembered as "Dear Old Dad", or "that blankity-blank idiot."

News From The Senate

2010-03-05T09:48:00.000-08:00

This just in from Sen. Dianne Feinstein:

Dear Mr. Gruber:

Thank you for writing to express your concerns about the estate tax. I appreciate the time you took to write and welcome the opportunity to respond.

As you know, the estate tax is currently repealed for 2010, but will reset to a 55 percent rate with a $2 million exemption for couples in 2011. President Obama's budget for both fiscal years 2010 and 2011 proposes permanently freezing estate tax levels at the 2009 rate of 45 percent with a $7 million exemption for couples. I support permanently extending the estate tax at these levels because I believe it is a reasonable and fiscally responsible tax policy. Our nation's budget deficit is projected to be $1.6 trillion this year and our national debt now stands at over $12.4 trillion. Tax policies and spending priorities must be carefully balanced to ensure that American families are not overly burdened and critical federal programs are sustained.

The House of Representatives has already passed legislation (H.R. 4154) to permanently extend the 2009 estate tax levels. Because the tax is currently repealed, I hope that the Senate will act quickly to do the same. I am very concerned that the Federal Government is not currently collecting any needed revenue from this source. Please know that I will keep your thoughts in mind about this important issue should further legislation to reform the estate tax come before the full Senate.

Once again, thank you for writing. If you have any additional questions or concerns, please do not hesitate to contact my Washington, D.C. office at (202) 224-3841. Best regards.
Sincerely yours,
Dianne Feinstein
United States Senator

Interesting letter, right? The Senator knows that something is wrong, and she knows there is a House bill that can solve the problem, but what is she going to do about it? Well, if "further legislation" shows up on her desk, she might do something.

Next question, Senator: What is wrong with H.R. 4154, and why won't you and the other Senators do something to push it through? It's simple, it's fair, and it exempts most of the estates in this country from the estate tax.

Of course, Sen. Feinstein is not the only Senator at fault here. There are 99 other Senators who are also doing nothing.

Is Repeal Close to Being Repealed?

2010-02-24T13:52:00.000-08:00

The Senate has passed the jobs bill, and health reform seems to be on the back burner for a while. Harry Reid says travel promotion is next on the agenda for the Senate, and after that could be some tax legislation. Perhaps within a few days.

Of course, on this blog, when we're thinking tax legislation, we're thinking estate tax legislation. Senator Jon Kyl, as quoted by The Hill, seems to like that idea, and there may be several others in the Senate who are willing to bring the estate tax into the tax debate. Kyl likes a 35 percent tax rate and an exclusion amount of $5 million, and that may be too high for the Democrats. But we would rather see the Senate at least discussing the issue instead of ignoring it.

Perhaps the Senate is beginning to feel some pressure from constituents. We're nearly two months into repeal, and there hasn't been even the briefest discussion of the estate tax on the floor of the Senate. The Treasury loses money every day that repeal remains in effect. But it's not too late yet.

Stuck In The Snow

2010-02-10T13:11:00.000-08:00

The Senate is still stuck in the snow, literally, and as far as the federal estate tax is concerned, but there may be some progress if you look hard enough.

An $80 billion jobs bill is being crafted by Sen. Harry Reid, in consultation with his Republican counterparts, and the estate tax may be one of the subjects of the bill. The expectation on the Democratic side of the aisle is that enough Republicans will support the estate tax part of the bill to pass the entire jobs bill. Exact details aren't known yet, but we'll accept anything at this point because certainty is way ahead of uncertainty when it comes to tax law.

And in another development, at another Senator is waking up to the fact that the future of the estate tax is problematical. Sen. Maria Cantwell is trying to stir up some interest concerning the tax, according to her website:

“Senator Maria Cantwell and several Senate colleagues have requested information from the Congressional Joint Committee on Taxation about several ideas concerning the estate tax, which has expired. Senator Cantwell is seeking data to discuss with constituents and colleagues. Information requested from the committee includes the following concepts: establishing a lower-rate prepayment option; the elimination of loopholes and special carve outs from the estate tax; the elimination of special capital gains tax breaks for surviving spouses; and various levels of overall exemptions from the estate tax. Senator Cantwell looks forward to getting the data from the Joint Committee on Taxation and sharing the information with constituents.”

Meanwhile, the Senate has two days left to consider the jobs bill before taking off for another break. Maybe it will stop snowing by the time the Senate reconvenes on Feb. 22.

Eleven Months Left

2010-02-03T15:46:00.000-08:00

It's difficult to blog about the Senate's progress on H.R. 4154 when there is no evidence of any action on the estate tax. The Senate came back late from the holidays on Jan. 19, and has spent the last two weeks apparently doing nothing about the estate tax. H.R. 4154 was passed by the House on Dec. 3, but has not been the subject of any hearings in the Senate, nor has it been placed on a calendar for a Senate debate.

There was talk late last year that Sen. Baucus wanted to introduce a bill similar to H.R. 4154, which continues the estate tax with a $3.5 million exclusion amount. Sen Baucus's bill would make the estate tax retroactive to Jan. 1, instead of allowing any period of repeal. A check of Sen. Baucus's website shows no mention of such a bill, and a search of his committee websites also produces no results. Must have been a nasty rumor.

In any event, the longer this goes, the less chance there is that retroactivity will work. The Supreme Court might have bought into a few weeks of retroactive tax legislation, but several months or an entire year probably would be rejected by the justices.

So here we are: One month down the drain, 11 months left until we're back to where we would have been if the current tax bill had not been approved in 2001. And that's a $1 million exclusion and a maximum tax rate of 55 percent. Sound too bad to be true? Wake up some Senators and ask them.

Progress?

2010-01-22T16:22:00.000-08:00

The Senate is quiet these days concerning the federal estate tax, but there may have been some slight progress. As you may recall from the early days of this saga, the House passed H.R. 4154 on Dec. 3 and sent it over to the Senate. The House bill would extend the $3.5 million exclusion amount for the estate tax and make it permanent. The Senate's original reaction seemed to be complete indifference and nothing apparently got done. In the meantime the federal estate tax was repealed for a year by a law passed in 2001.

But on Dec. 24 H.R. 4154 was read for the first time, and after the lengthy Senate recess, it was read for the second time on Jan. 20 and placed on the Senate Legislative Calendar under General Orders. Somebody is pushing this bill forward and perhaps it will come up for a vote someday. At least it wasn't tabled in committee.

Finally getting a definitive answer on the estate tax is something every estate planner is looking for. I was at an estate planning class earlier today and heard some of the top estate planning lawyers in this county say that they don't know what to do next. Several of them have written letters to their clients about the estate planning problems that we now face, but none of them have actually mailed the letters. We are all concerned about upsetting clients over a problem that seems real this week, but could disappear as soon as the Senate passes a bill such as H.R. 4154.

Which Way Will It Go?

2010-01-13T10:06:00.001-08:00

Congress has several options available as it considers the federal estate tax:

1. Extend the $3.5 million exclusion on a permanent basis, and also make the law retroactive to Jan. 1. Although Sen. Baucus has advocated this approach, Rep. Rangel, chair of the House Ways and Means Committee, is now backing off of retroactivity. In any event, a retroactive law is a guarantee of litigation that will leave estate planning up in the air for years.

2. Extend the $3.5 million exclusion, but don't make it retroactive. This is what Rep. Rangel is talking about, and since he's chairman of the House Ways and Means Committee, it could stand a chance. Much less chance of litigation, although a few estates will slip through and never be taxed. But that's the chance the Senate took when it went home on Dec. 24 without voting on the estate tax.

3. Do either 1 or 2 above, but insert your favorite number for an exclusion amount. A popular substitute has been $5 million.

4. Take no action and allow all of 2010 to roll by without any estate tax, and go into 2011 with only a $1 exclusion and a 55 percent maximum tax. This is the default situation, and we'll get there if Congress does not take action. There are pros and cons for each party: The Republicans get a full year of repeal, but 2011 brings a much harsher estate tax. The Democrats have to put up with a full year of repeal, but in 2011 they get a new revenue source that could help balance the budget. And, even better, no one is on record as having voted for it! It's harder to be criticized for a non-vote that increases taxes than an actual vote for increasing taxes.

Whatever happens, one thing seems to be sure: It won't happen soon because the health care bill has to be decided first.

Procrastination Can't Delay Karma

2009-12-09T14:36:00.000-08:00

Whenever he saw me, John (not his real name) would tell me he was going to come to my office to start work on his estate plan. His second wife had died two years before, and he had inherited her substantial estate, including a $500,000 IRA. His intention was to leave everything to his second wife's side of the family, because he had no relatives except for a daughter who he had not seen since she was two years old. His second wife had always discouraged John from having any contact with his first wife or with his daughter, who, as a result, had grown up without a father.

John died suddenly one weekend, and he had gotten no further with his estate plan than a promise to make an appointment. That meant that his estate would have to be probated and intestate succession would determine who inherited his estate. John had only one child, the daughter he had ignored for 30 years. She became the sole beneficiary of the estate, a result that would have startled John's late wife.

But not having a will wasn't the only mistake that John made. When he filled out the beneficiary form for the IRA that he inherited from his second wife, instead of making members of his second wife's family the beneficiaries of the IRA, he simply put in the words "my estate" as the beneficiary. It was a $500,000 mistake, because that meant that the IRA had to be probated, and then distributed to the sole heir of the estate, John's daughter. If John had gotten the beneficiary correct, the IRA would not have been probated and would have gone to his second wife's family.

The daughter was delighted, to say the least. She wound up with the IRA, a house, investments, bank accounts, and everything else her absentee father had owned. It was hard to think of a person more worthy of such an inheritance: she had bills to pay, a job with no future and a dismal economic outlook. Maybe it was Karma, or maybe it was an example of procrastination crashing into reality.

He Never Gave Up Hope

2009-12-08T15:49:00.000-08:00

When clients ask me about Do Not Resuscitate (DNR) orders or ending life by stopping life support with an Advance Health Care Directive, I like to respond with a story about a client who had a stroke a few years ago. She was taken to a local hospital, where she went into a coma.

Usually this is the end of the story. The patient dies while in the coma, and we administer his or her trust or start a probate. But this woman's husband was stubborn. He didn't give up hope, and he didn't use her Advance Health Care Directive to stop life support. Instead, the husband went to the hospital every day, and sat at his wife's bedside most of the day, talking to her, or sometimes just sitting there. Could she hear him? I don't know. When visiting hours ended, the nurses would shoo the husband out, but when they weren't looking, he would come back, and sit at his wife's side a while longer.

This went on for nearly three months, and the husband was there every day. He never stopped hoping and he also never used the Advance Health Care Directive that his wife had signed a couple of years earlier.

Then one afternoon the wife started waking up. The husband summoned the nurses, who called the doctors, and within a few hours the wife was fully conscious. The coma was over and she left the hospital a week later. She lived a normal life for another three years before dying of an illness not related to the stroke or the coma.

The point of this story is that although an Advance Health Care Directive is one of the most important documents in your estate plan, it can be misused by using it too quickly to stop medical treatment. Furthermore, a DNR is an often misunderstood document that can prevent useful medical care in an emergency. If you life in a place where the residents are encouraged to have DNRs, talk to your physician about the problems that DNRs can cause.

Repeal the Estate Tax?

2009-12-08T14:47:00.000-08:00

Last week that the House of Representatives passed H.R. 4154, which authorizes a permanent extension of the current $3.5 million exclusion amount for the federal estate tax. Congress has had all year to work with tax issues, but it took until Dec. 3 for the House to take action.

Now it's up to the Senate to take action on this bill. Action? Aren't the Senators busy with the health care bill that might not be resolved until next year? Can the Senate work on two different bills at the same time? So far the answer is probably not.

But what is the problem with not taking action on the federal estate tax before Dec. 31?

The problem is that current law is part of a 10-year bill that expires at the end of 2010. The last year of that bill repeals the estate tax, but only for a year. In other words, if the Senate does not take action during the next 23 days, the estate tax will disappear until Congress can pass a new bill.

Think of it as the Year of the Government Assisted Suicide. What if a patient with a net work of $1 billion is in the hospital, being barely kept alive by a respirator and feeding tube? If the patient dies during 2009, the approximate tax on the estate is about $450 million, but if the patient dies during repeal, even if repeal is only for a month, there is no tax. In other words, the government is providing a financial incentive for you to keep your wealthy relative alive during 2009 so that the plug can be pulled during 2010.

Will life support be cut off for our fictional billionaire patient? Stay tuned for further details in about 23 days.