South Florida Estate Planning Law : Florida Estate Planning Lawyer & Attorney : David Shulman Law Firm : South FL Wills & Trusts

The Year Without an Estate Tax continues.  

As I have previously written, due to Congress's extreme irresponsibility and inability to get anything done at all, the Estate and Generation Skipping taxes are repealed in 2010, but for one year and one year only.  Last December, in a post entitled, The Real Danger of the Expiring Estate Tax: Existing Documents, I discussed that the biggest concern among estate planners is that none of the documents that we've been drafting for clients make any sense.  They don't "work."

The problem is that the dispositions of property in the documents are often worded in such a way that they take the estate tax into account.  Take a look at the following examples that might be found in an existing Will or Trust:

1. "I give to my children an amount equal to my remaining estate tax exemption, and give the balance of my estate to my spouse."
2. "I direct that my Personal Representative set aside an amount equal to my remaining generation skipping tax exemption, and said amount shall be held in trust for my grandchildren."  
3. "I give to the United Way the minimum amount necessary to reduce my estate tax liability to zero, with the remainder of my estate to be equally divided among my children."

If there is no estate tax, then if each of the above formula dispositions are literally followed, then they will result in a disposition of the estate that the testator did not intend.  Although the estate tax is federal law, the interpretation of wills and trusts and other documents is state law.  So, like usual, the states are left to deal with Congress's irresponsibility.

I saw, via, Miami Attorney Juan Antunez's Florida Probate & Trust Litigation Blog, the Forbes Magazine article, States Race to Clean up Congress's Estate Tax Mess.  The article explains that the lapse in the estate tax could, "lead to the unintended disinheritance of spouses, which could in turn lead to expensive legal fights among family members and, ultimately, the impoverishment of some widows or widowers."  Apparently, various state legislatures are introducing legislation to try to insert some sanity -- or at least a roadmap -- for fixing these problems.

For the full text of Florida's proposed fix, along with a copy of Florida Attorney Bruce Stone's presentation from the Heckerling Institute, see Juan's blog.  Below is some selected language from Florida's proposed fix:

1) Upon the application of a trustee or any qualified beneficiary of a trust, a court at any time may construe the terms of a trust that is not then revocable to define the respective shares or determine beneficiaries, in accordance with the intention of the settlor, if a transfer occurs during [a time when the tax is repealed] and the trust contains a provision that:

(a) includes a formula devise referring to the "unified credit", "estate tax exemption," "applicable exemption amount," "applicable credit amount," "applicable exclusion amount," "generation-skipping transfer tax exemption," "GST exemption," "marital deduction," "maximum marital deduction," or "unlimited marital deduction;"

. . .

(3) In construing the trust, the court shall consider the terms and purposes of the trust, the facts and circumstances surrounding the creation of the trust, and the settlor's probable intent. In determining the settlor's probable intent, the court may consider evidence relevant to the settlor's intent even though the evidence contradicts an apparent plain meaning of the trust instrument.

 

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President Obama released his 2011 proposed budget yesterday.  In it, the estate tax will be returned to the 2009 levels of a $3.5 million exemption and a 45% rate.  Of course, a budget proposal is just that.  

Stay tuned

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If you read the tabloids, or even the mainstream press, you may have come across the sad tale of Casey Johnson. Johnson was one of the great-great granddaughters of Robert Wood Johnson I, and an heiress to the Johnson & Johnson fortune. Her father, Woody Johnson, owns the New York Jets.

Johnson's life, to put it mildly, was a mess. A contemporary of Paris Hilton, she had a long history of alcohol and drug problems, public battles with family members, and a recent"engagement" to reality tv star Tila Tequila (if you don't know who that is, do your own internet search. But the images might not be safe for work). The thirty year old woman was found dead in her home on January 4, 2010, leaving behind an adopted four year old daughter. Police are saying that she could have been dead for several days.

I'm sure there are going to be criminal investigations, recriminations, lawsuits, and possibly a messy probate, which I may or may not write about as it happens. For now, I am only interested in one aspect of this: the estate tax.

I don't know what Johnson's financial situation was at her death, I hear that she was "cut off" and broke, but it's also quite possible that she had substantial assets in trust that would be includable in her estate for estate tax purposes, but was beyond her reach for her own protection. This amount could be several million or even tens of millions of dollars.

As I have been discussing, 2010 is currently the year without an estate tax. That means that if Johnson died in 2010, no matter how large her estate was, it will not be subject to the federal estate tax. If she died in 2009, then her estate is taxed at 45% of its value over $3.5 million . If she had a taxable estate of $10,000,000, then her estate will owe $2,925,000 in taxes to the federal government. . I believe (although I do not know for sure) that her death certificate shows the date of death as the date she was found, January 4, 2010. However, if the evidence shows that she died in 2009, then her estate is liable for the tax.

Let's take this one step further. Assume that she did die in 2010. Most people think that Congress is going to retroactively reinstate the estate tax back to January 1, 2010 at some level -- probably the 2009 exemption of $3.5 million. Most legal scholars also believe that it is constitutional for Congress to do so. If someone dies during that time and owes a minimal amount of tax, then it's likely their estate will just pay it, instead of challenging the constitutionality in court, which of course requires hiring attorneys. But if there is enough money at stake, then I wouldn't be surprised if Johnson's estate does challenge it. It would be worth the risk to see how the Roberts, Scalia, Thomas, Alito Court would rule.

Of course, none of this would be an issue if Congress weren't so deadlocked, so incompetent, so unable to get anything at all done. But that's for another day.

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I honestly never believed that it would happen.

I never thought that Congress would actually be this irresponsible.  After all, they've known that it was happening since 2001.  But here we are.  It is 2010 and there is no estate tax.  For now.

What does this mean?

First, remember that in 2009, the estate tax only applied to a person who died owning assets in excess of $3.5 million.  So for most people, it means absolutely nothing.  

However, along with the temporary repeal of the estate tax, there is also a temporary repeal of what's known as step up in basis.  Let me explain.  Generally, when you inherit assets from someone, your basis in the asset is the value at the time of death.  So that when you go to sell the 100 shares of IBM that you inherited from Grandma, you don't have to figure out how much she paid for it.  You only have to figure out what it was worth at the time of her death.

With the repeal of the estate tax, there is also a repeal of the step up in basis rules.  Instead there is "carry-over basis" and a decedent's estate will have $1.3 million of basis to spread around their various assets.  How will this be done?  I don't know.  But the effect is actually a tax increase on estates valued between $1.3 million and $3.5 million.

Then, one  year from now, the estate tax comes back to life with a $1 million exemption, and a 55% rate.  

Of course Congress could change all of this.  Most people agree that they can retroactively change the law to reinstate the estate tax.  I'm sure there will be lawsuits if they do though.  

What is going to happen?  I have no idea and anyone who says they do is lying.  I was so sure that they weren't going to let repeal happen, and I was wrong.  So we'll just have to wait and see.

But don't throw momma from the train just yet.

 

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Could the estate tax really expire?  I've been pretty adamant in my belief that Congress won't let that happen.  I still tend to believe that they will rush through a one year extension around the 27th or so.

But it's becoming more and more possible.  

Stay tuned.

 

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I don't think I've taken a posistion on this blog pro or con as to whether the estate tax should be repealed. I have clients who have taxable estates and I have clients without taxable estates. As planning for the estate tax is only a part of what I do, I'll be able to continue to help my clients protect and provide for their loved ones after their deaths, whether the estate tax exists or not. As to the politics of it, well, because of what I do, I can certainly see both sides of the issue.

As I write this, today is November 30, and we still don't know what is happening with the estate tax next year. If you are unfamiliar with the status of the Estate Tax, check out my August 26 post. However, here are the CliffsNotes:

The Lifetime Exemption, that is the amount that you can own when you die without being subject to the estate tax is currently $3.5 million. Any amount over that is taxed at a rate of 45%. Pursuant to a law passed in 2001, on January 1, 2010 the estate tax goes away for one year only.

Pursuant to that same law (passed by a majority Republican Congress and Republican President Bush), on January 1, 2011, the lifetime exemption, that is the amount you can own before you are subject to the estate tax goes to $1 million, and the rate goes to 55%. All of this -- the one year only repeal, and the reinstating of the estate tax at a much lower threshold with a much higher rate happens automatically.

If Congress does nothing it will happen.

Naturally, a situation in which there is no estate tax for one year only, and the following year in which there is a significantly higher estate tax is untenable. Congress is --finally-- working on a solution. The solution that might be voted on this week was submitted by Congressman Earl Pomeroy (D- North Dakota) which would permanantly set the exemption at $3.5 million and the rate at 45%.

Which brings me to the Heritage Foundation.
On their blog, known as The Foundry, author Curtis Dubay writes the following story:

"House Votes to Raise Estate Tax This Week."

In his post he writes, "The bill it will consider, sponsored by Rep. Earl Pomeroy (D-North Dakota), would extend permanently the death tax at its current 45 percent rate and $3.5 million exemption. This extension would be a drastic tax increase since the death tax expires on January 1, 2010." (emphasis added).

That's just wrong. I would like to give Mr. Dubay the benefit of the doubt, but if you go to his post, and click in the link in his post to the Dow Jones Newswires Story on the subject, the very article he links to says "The Pomeroy legislation, backed by President Obama, would cost $233 billion over the next 10 years since it represents a tax cut when compared to current law" (emphasis added by me).

Read that again. Despite the "one year repeal," the House will be voting to lower the estate tax and not raise it.

Of course, I wonder how many of the Foundry readers will actually investigate these facts themselves. I'm all for a healthy debate, but let's keep it honest please.

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As the Festivus shopping season begins this Cyber Monday, I'd like to remind my readers of a few facts about gifting.

First, the "annual exclusion" for 2009 is $13,000.  That means any person can give any other person a minimum of $13,000 without having to worry about the gift tax.  A married couple can give a combined total of $26,000 to any one person free of the gift tax.  The couple does not have to play any silly games in which the husband gives the wife money and then the wife makes the gift.  Generally, either the husband or the wife can give the full $26,000 to any person.

In larger families, this allows a tremendous amount of wealth transfer, tax free from the older generation to the younger generation.  A married couple can give $26,000 to each of their adult children, their adult children's spouses, their grandchildren, etc., without having to file a gift tax return.

Second, there are certain types of "gifts" that don't even count towards that $13,000 annual limit. For example, a person can pay the tuition and medical expenses of any other person, and that amount is not deducted from the $13,000.  The tuition or medical expenses have to be paid directly. A grandparent can pay the private school tuition, whether grade school or college of their grandchild.  Plus, they can still give each of that grandchild and her parents $13,000 (or $26,000 if married) in that same year.

Finally, a gift does not have to be in cash.  Gifts of stock or other property can be a wonderful way to transfer not just the stock out of your estate, but the appreciation on the stock too.  A gift of $10,000 worth of stock in Apple Computer on January 1, 2000 would be worth $71,807 today.  

Not bad.

If you can do that for your children and grandchildren, then they'll have nothing to say during the "Airing of Grievances." 

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A recent Forbes Magazine article discusses that even though the Federal Estate Tax exemption is $3,500,000, and is scheduled to disappear next year, there are still 17 states and the District of Columbia that still have either an estate tax or an inheritance tax.

As I've written about before, one of the benefits of living in Florida is that there is no state estate tax. There is also no income tax.

It's not just the weather that brings the retirees down here.

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I keep seeing stories about various estate tax reform bills that have been introduced in Congress. They range from repealing it, to extending the exemption, to raising the exemption to lowering it, etc.

I'm not going to waste time and effort reading the various bills and the tea leaves.  When Congress actually does something, I'll report on it.  Until then, we're still in limbo.

 

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In today's (October 15, 2009) Wall Street Journal, there is an article entitled "Is There a Trap Lurking in the Language of your Will?" written by reporter Laura Sanders. The article correctly points out that many semi-wealthy couples may have a serious problem in their Wills.  By "semi-wealthy" I mean estates worth up to $4 million.  Yes, I know for most people that is "superwealthy" but bear with me.

As the article explains it, the problem is that since 2001, the lifetime exemption, that is the amount of assets one could have at death before being subject to the estate tax, has increased from $675,000 to $3,500,000.  With proper estate planning, a married couple is able to use the exemption of both spouses. What happens is that upon the death of the first spouse, the amount of the remaining exemption is set aside.  This is generally done through what is known as a "bypass" or "credit shelter" trust, but sometimes can be given to the children directly or set up in a trust for their benefit.

The problem is that when an estate planning attorney drafts the will or the trust, they do not know what the exemption will be at the time of the client's death, and they don't know how much of the exemption the client will have already used up during their lifetime. 

Estate planning attorneys draft around this problem by using formula clauses.  A Will might leave as the article states, "the full amount of the estate tax exemption to go into the bypass trust when the first spouse dies."  If the will was drafted when the exemption was $675,000; with a $3.5 million exemption, a bypass clause could potentially and unintentionally deprive the surviving spouse of the entire estate! (Assuming there are no elective share rights).

However, not all credit shelter clauses are used to have the assets go in a manner that deprives the spouse of all use of them. Often the credit shelter trust provides the surviving spouse with all of the income, plus principal for his or her health, education, support, and maintenance.  Each situation is different. 

What the article didn't mention is what I find the much more interesting scenario.  As of right now, there is no estate tax next year.  It is scheduled to expire, only to come back at a lower exemption and a higher rate in 2011. Now, I'm a firm believer that Congress will do something to prevent repeal from happening.  Most likely, they will extend the 2009 levels for another year, to, as usual, put off making any decision for as long as possible.

But let's say that they don't; and it's 2010 and there is no estate tax.  Let's also say that a person dies with a Will that leaves the "smallest pecuniary amount which, if allowed as a federal estate tax marital deduction, would result in the least possible federal estate tax being payable by reason of my death" to a marital deduction trust.  If there is no estate tax, how much is the marital deduction trust funded with?  If there is no estate tax, the smallest amount which if allowed as a federal estate tax deduction would result in the least possible federal estate tax is probably zero.  Would we have to fund bypass trusts if there is no tax?

We live in interesting times.

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No surprise here.  With its "busy fall agenda" the debate over the estate tax is likely to wait.  It's not like they haven't known of this upcoming problem for the past 9 years or so.

A split among Democrats and a busy fall agenda is likely to have lawmakers hold off this year on debating the future of the estate tax, even though it expires at the end of the year.

Experts and aides say a more realistic scenario involves Congress passing a one-year extension and then tackling the issue as part of broader tax reform next year.

The estate tax hits people who inherit high-value property after a death, and Democrats are keen on avoiding the loss of much-needed revenue when it expires.

For more, see Debate over estate tax likely to wait, The Hill, September 15, 2009.

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As anyone who has followed my blog knows, on January 1, 2010, the federal estate tax is repealed for one year and one year only, after which it comes back into effect, at a lower exemption ($1,000,000) and a higher rate (55%) than before.

Congress knew that this has been coming since 2001, and yet has continued to procrastinate.

As I've said before, tick tock, Congress.

 

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One of the cool things about having a blog is looking at "the stats."  The stats are the internal analytics of the blog, where I can see how many people have visited, what articles they read, and if they came here from Google or another search engine, what terms they were searching for.  It's always nice to see that people are looking for certain topics, and I hope that my post answers their question.  Of course, I also hope that if they are in Fort Lauderdale, Broward County, or elsewhere in South Florida, that they'll consider hiring me as their attorney too.

Recently though, I have seen a lot of people coming to my blog with using the search term "Florida Estate Tax" or some variant thereof.  I can only assume that they want to know if you die in Florida, what is the estate tax, and how much they'll have to pay.

I'd like to put their mind at ease and say that for anyone dying after 2004, there is no estate tax in Florida.

(If that was your question, you don't have to read any further.  If you'd like a little bit of an explanation, read on).

There used to be a Florida estate tax.  The way it worked, is the Florida Estate Tax was known as a "pick up tax."  That is because the Federal Estate tax allowed a tax credit as opposed to a deduction for any state death taxes.  The Florida Estate Tax was equal to the maximum amount of the Federal Estate Tax's death credit.  Economically, this resulted in a decedent's estate paying no more in taxes -- just some of it went to the state of Florida instead of the federal government.

As part of the gradual estate tax repeal, the state death tax credit was turned to a deduction.  Because there is no more state death credit, there is no more Florida estate tax.  Could that change in the future?  Possibly.  We'll have to wait and see.  

Note:  This just means that there is no State of Florida estate tax.  The Federal Estate tax still applies.

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I am getting a lot of questions from clients and friends about what the status is of the estate tax. Additionally, a lot of people coming to my blog from Google are searching for answers also.

First, some review.

There are two important components to remember when discussing the estate tax -- the exemption, which is the amount of property that an individual may transfer at death before the tax kicks in, and the rate, which is when an individual has a gross estate that is larger than the exemption, the amount (percentage) that the property over the exemption is taxed at.

In 2001, the Republicans tried to repeal the estate tax (which at the time had an exemption of $675,000 and a rate of 55%), but because of budget and reconciliation rules they couldn't really do it. So they did it over 10 years. The exemption gradually went up and the rate gradually went down. 

In 2009, the exemption is now up to $3.5 million -- meaning that anyone that wishes to pass on less than three and a half million is not subject to the estate tax (and a married couple that engages in proper estate planning can have an exemption of $7 mil), and the rate is 45%.

In 2010 as the law now stands, there is no estate tax at all. That means that you can transfer an unlimited amount at your death, and not have it subject to the estate tax. The gift tax exemption is still $1,000,000, so you can't give it all away while you're alive.

In 2011, as the law now stands, the estate tax kicks back in and the exemption goes down to $1,000,000 and the rate goes up to 55%. Before the housing crash, a $1,000,000 exemption really wasn't that high.

So estate planners are calling next year "Throw Momma from the Train" year, because of the enormous possibility of having one year without any estate tax.

It's important to realize that the gross estate, includes all of your assets, including not just cash in the bank, but your home, your stocks and bonds, your 401(k), any life insurance you own on your life, and even certain property that you thought you gave away.

If there is going to be an estate tax, 99% of Americans only care about the exemption. Make the exemption high enough, and it won't apply to them. On the other hand, that 1%, the super rich, don't care at all about the exemption. Does it matter for Michael Jackson's estate whether the exemption is $1 million, or $3.5 million or $10 million? His estate will still be subject to tax at 45% on a significant amount of money.

So if you accept the fact that there is going to be an estate tax, there are different lobbies involved now. There is the lobby of the super-rich who wants to lower the rate down as much as possible (I've heard 15%), and then there is the lobby for less wealthy interests who are in favor of raising the exemption up as high as possible, say $15 or $20 million and does not care so much about the rate.

So that's where we are.  January 1, 2010 is approaching fast, and there are a number of bills kicking around Congress right now. Ignoring the unrealistic "let's just repeal the whole thing" bills, almost all of the bills do the same thing*. 

They punt.

Instead of fixing the long term problem, they all extend the 2009 numbers for one more year, so that Congress can deal with it sometime next year, which is an election year.  We won't have a situation where people will die with no estate tax at all, but the problem isn't fixed either.
 

*The various bills have different tweaks involving things such as "portability" and banning valuation discounts for family limited partnerships, but that's less important than the overall picture.

 

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The clock is ticking.  If Congress doesn't act, on January 1, 2010, the Federal Estate Tax will be repealed.  While I'm sure that many people think that this is a great thing, it is not.

First, it will be repealed for one year and one year only. Not only that, when it returns on January 1, 2011, the lifetime exemption, that is the total amount of property that a person may own at the time of their death, goes from $3,500,000 today back to $1,000,000.

Estate planners are referring to 2010 as "Throw Momma From the Train".

Tick tock, Congress.  Tick tock. 

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Below are some articles from other blogs that I read.  All of these blogs are in my RSS Reader and I find them essential in keeping up with the world of probate, tax, and estate planning.  Note that these are not all of the blogs that I read.  Just some of them that had posts over the past week or so that I thought my readers might find interesting.

1. Ask the Taxgirl: Income Tax on Gifts (Cliff's Notes: There is none)
2. The Tax Lawyers Blog: 4 IRS Forms to Know if you are Getting a Divorce
3. Don't Mess with Taxes: Back to School. Tax Holidays on Tap
4. Elder Law Today Podcast: I have a Living Trust, So I'm covered, right?
5. Tax Guru-Ker$tetter Letter (no article in particular, but a well writing and amusing tax blog)

Again, this list is by no means complete.  It's just a few things that caught my eye recently.

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 A recent Associated Press article on the Estate Tax provides some basic background information.   Read the rest of the article, with more questions and answers here.

 Q: What assets are included in an estate?

A: The federal estate tax is calculated by adding up the fair market value of what you own — cash and accounts, stocks and bonds, real estate, trusts, life insurance, businesses, personal property like art work or collectibles, and so forth — at the time of your death. In certain cases, it may also include money or property that was transferred during the deceased's lifetime. The total is called your "gross estate."

Then certain deductions may be taken, like mortgages and other debts, and property left to your spouse or to charity. The amount that remains is your "taxable estate."

Q: Who has to pay estate tax?

A: For 2009, up to $3.5 million per person in assets are excluded from the federal estate tax. The value of property above that level is taxed at a rate of 45 percent. An estate worth less than $3.5 million doesn't even have to file a federal return, said William E. Massey, senior tax analyst for Thomson Reuters.

State thresholds vary, and not every state has an estate tax. Check your state's tax department Web site for details.

Besides the first $3.5 million, everything that is left to a surviving spouse is exempt from federal estate tax. The taxable estate may also be reduced by deductions, funeral expenses and any claims against the estate.

In 2010, the federal tax as it currently stands will expire; if Congress does not change the law, there will be no estate tax next year. In 2011, the old exclusion of $1 million returns, and the top rate for holdings above that amount would jump back to 55 percent, where it was in 2001.

Several bills have been proposed in Congress to address the issue, but none has passed yet.

Whether or not a person has a will doesn't affect the tax their estate owes, said Lynette Atchley, an accountant and certified financial planner in Redlands, Calif.

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In contrast to my recent postings about Michael Jackson who appears to have engaged in professional estate planning before his death, there are reports that former NFL quarterback Steve McNair died intestate, or without a will.  His wife (the wife he was cheating on with the woman who killed him) was appointed “administrator” of his estate.  According to reports, McNair had a wife, two children from his marriage to this wife, and two children from a previous relationship.  Instead of being able to decide himself how his property should be distributed, the distribution of his assets is determined by a formula set forth under state law.

I am not a Tennessee attorney, but according to my Internet research, the state’s laws of intestacy provide that McNair’s wife will receive 1/3 of the estate, and his children will divide the remaining 2/3 among themselves.  Also, there appears to be an “elective share” rule in Tennessee, in which a surviving spouse can take a greater amount of an estate under certain circumstances.

There are a number of problems here for McNair’s estate and his heirs.  First, instead of being able to distribute the assets in trust, they are distributed outright to everyone.  This causes all sorts of creditor protection and tax problems.  If McNair’s children are minors, then there will likely be a Guardianship set up to manage the assets until the minor reaches the age of majority, upon which he receives the funds outright.  Those assets should have been left in trust and protected from creditors and from the child them self until a later age.  His wife’s assets should also have been left in a trust too, to protect her.

Additionally, by dying intestate he missed the opportunity to engage in sophisticated tax planning.  Below I will show the disastrous estate tax consequences and the incredible opportunity that he missed. Assume the following:

1. The value of McNair’s gross estate is $25,000,000.
2. His wife takes an “elective share” of 40% of the estate
3. The remaining 60% is divided among McNair’s children.
4. There was no estate planning done at all — no gifting, no insurance trusts (ILITS), nothing (this is a big assumption which I hope turns out to be not true).

From the in ital $25,000,000, the 40% being distributed to the surviving spouse ($10,000,000) is subtracted from the taxable estate because of the marital deduction.  That leaves $15,000,000 remaining.  Of that $15,000,000, there is a lifetime exemption in 2009 of $3,500,000, which is subtracted from the $15,000,000, leaving $11,500,000.  Upon that $11.5 million there is an estate tax of forty five percent, or $5,175,000.  After the $5,175,000 is paid to the government, there is $6,325,000 remaining to be divided among McNair’s four children, or $1,581,250 each.

With proper estate planning, McNair would have owed zero estate tax upon his death.  If he had done nothing else but leave everything to his wife outright, that would have resulted in zero estate tax because of the marital deduction.  A simple credit shelter trust would have resulted in zero estate tax and protected $3,500,000 (in today’s dollars and subject to grow) from the estate tax upon his wife’s subsequent death.  Granted, with someone that was worth $25,000,000 and had children from a prior relationship, the planning would be more extensive and would likely involve insurance trusts, certain family entities, and gifting that would have started a long time ago.  And this only scratches the surface.

The lesson to learn from all of this?  Too many people put off estate planning until sometime “later.”  They think that they can wait because they don’t think that they will die tomorrow.  Unfortunately, tragic, sudden deaths happen all of the time, and you owe it to your family to be prepared.  You are not immortal.  The time to engage in proper estate planning is now.

  

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Today I am going to use the Michael Jackson case (yet again) as an example to discuss the important issue of timing when determining the value of assets included in a Decedent's estate for estate tax purposes.  As I’ve written before, the estate tax generally is imposed upon the value of a decedent’s estate at the time of his death.  Technically, according to Section 2001 of the Internal Revenue Code (the Code), “a tax is hereby imposed on the transfer of the taxable estate of every decedent who is a citizen or resident of the United Sates.”  The “taxable estate” is the “gross estate” with certain deductions and adjustments.  The key is determining the “value” of the gross estate. 

(Note to estate planning and tax professionals, I will be ignoring the alternate valuation date for now)

Under section 2031 of the Code, “the value of the gross estate of the decedent shall be determined by including to the extent provided for in this part, the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated.”  But what does “at the time of his death” mean?  Section 2033 of the Code provides that the “value of the gross estate shall include the value of all property to the extent of the interest therein of the decedent at the time of his death.”  Furthermore, the regulations provide, “the value of every item of property includible in a decedent’s gross estate. . .is the fair market value at the time of the decedent’s death.  The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.”

Does it mean at the instant of death? 

For most people and for most property, the question is moot.  The value of cash, stocks, bonds, real estate, is not going to change from the second before death to the second after death.  But for Michael Jackson, it will make a big difference.  The value of his image and his name, and his right of publicity are obviously worth a lot more after he died than beforehand.  (For more on this see the TaxProf, Michael Jackson’s Looming Estate Tax Disaster, quoting Professor Caron’s previous article on Estate Planning Implications of the Right of Publicity. 

So is valuation on this property done the second before death or the second after (or at) death? 

It seems logical that the value should be the second before death, because that what it would be worth if Michael Jackson sold the rights if he were alive.  The mere lapse of time, or the event of his death itself, shouldn’t cause an increase in the estate tax.  It wouldn’t be “fair.”  Note however, that there is some property in which, at least in part, uses a post death valuation.

For example, stocks that are traded on an exchange are valued at the mean of the highest and lowest quoted selling prices on the date of death.  In a volatile market, this could provide a substantially different value of the stock from the instant of death, especially if the decedent has a large interest in it.  If Bill Gates were to die, each 1/8 of a dollar in Microsoft’s value could result in millions of dollars of difference in the gross estate.

But the property being discussed here is not stocks or bonds.  It’s publicity rights, and the interest in the music.  As such, I believe that the correct value should be the instant before death, and not at the much higher value afterwards.

 

 

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One of the blogs on my daily reading list is the “Tax Girl” (a/k/a Kelly Phillips Erb, a Philadelphia tax attorney).  She has a regularly occurring feature on her blog called “Ask the Tax Girl” which she uses to answer readers’ tax questions (and sometimes, when necessary, gives her readers the motherly advice that they deserve ).  She recently tweeted that she had received a tax question about Michael Jackson, and I replied that I’ve been blogging about the estate tax issues involved in the case and that I would be happy to answer her reader’s question.

Sigh.  Me and my big mouth. 

Note to self: Never underestimate the sophistication and intelligence of Taxgirl’s readers.  While I was expecting a rather basic, easy to answer, yes or no question, what I got instead was:

• Are Michael Jackson’s funeral costs ordinary and necessary and are they deductible on his estate tax return?

Not necessarily the easy yes or no answer that I had hoped for, but hey, if it were an easy question, the reader wouldn’t have had to ask it.  First some background information.

• As I previously blogged, the estate tax is imposed upon the “taxable estates” of citizens or residents of the US.  Each estate is entitled to a lifetime exemption of $3,500,000, which generally means that the first $3,500,000 of assets are not subject to the tax.  I am not going to explain it again in this post, but please read my previous posts here, here, and here for more detail.
• The term “taxable estate” is defined in Internal Revenue Code Section 2051 as the “gross estate” (which is the net value of the property in the estate) minus “the deductions allowed.”  Just as an individual is entitled to deductions on their income tax return, for example, the charitable deduction and the mortgage interest deduction, an estate is also entitled to deductions that reduce the gross estate, and thus the amount of estate tax owed.
• Section 2053(a)(1) of the Code provides, in part, that one of the deductions allow is that for “funeral expenses.”

For “ordinary run-of-the-mill” estates, the estate deducts the costs of the funeral from the gross estate on the estate tax return.  But in death, as in life, there is nothing “ordinary run-of-the-mill” about Michael Jackson.  What the reader is asking is whether Michael Jackson’s estate can deduct the millions of dollars associated with not just the funeral, but with the memorial service that was held yesterday. 

Section 20.2053–2 of the Treasury Regulations provides that for an estate to take a deduction for funeral expenses, the amounts paid must actually be expended out of property subject to claims.  In other words, in order to take the deduction, the estate itself has to pay the costs. Also, those costs must be out of property that are “subject to claims,” that is property that can be used to pay creditors under local law.  So first of all, any of the costs involved that were not paid by the estate but instead was paid by the taxpayers of the state of California or the city of Las Angeles are obviously not deductible.

The regulation continues, “A reasonable expenditure for a tombstone, monument, or mausoleum, or for a burial lot, either for the decedent or his family, including a reasonable expenditure for its future care, may be deducted under this heading, provided such an expenditure is allowable by the local law. Included in funeral expenses is the cost of transportation of the person bringing the body to the place of burial.”

While there is a requirement for the costs to be “reasonable” that determination is made on a case by case basis.  Reasonable for you and me is not necessarily reasonable for someone with a few hundred million dollars.  So will the costs be deductible?  Like many other tax questions, and many other questions about Michael Jackson, the answer is going to be — it depends. 

Here is my take:

1. Everything involved with the funeral (not the public memorial but the private funeral) itself, no matter how extravagant or expensive will be allowed as a deduction.
2. Everything involved with purchasing and maintaining the burial site itself should also be deductible, even if they build a monument to him.  In a 1927 case a $21,000 mausoleum was deemed reasonable.  That’s over $250,000 in today’s dollars.
3. The costs of transporting Michael Jackson’s body from the hospital, to the funeral home, to the memorial, to wherever his final resting place may be will probably also be deductible.  This includes any costs that the estate reimburses any local jurisdiction for police escort, shutting down city streets, extra security, etc.  Even though the public memorial location is not technically included, I think it would be allowed. 
4. Any other costs paid for by the estate for the public memorial which was not part of the funeral should not be allowed as a deduction.  The public memorial, while touching, was not really part of the funeral, and the IRS would have a strong argument if they chose to disallow the deduction.  However, that being said, I wouldn’t be surprised if the estate took the deduction, and the IRS allowed it.  The larger estate tax battle is going to be over the valuation of Michael Jackson’s intangible intellectual property and the actual size of his liabilities.

Phew.  Thanks for letting me assist, Taxgirl.  I think.

 

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Beth Shapiro Kaufman of Caplin & Drysdale recently published an article in Estate Planning Magazinerecently published an article in Estate Planning Magazine entitled “United States: Estate Tax Legislation In 2009: Avoiding The Train Wreck.”  In it, she discusses the fact that the estate tax is scheduled to disappear next year and come back with a vengance ($1 million exemption, 55% rate) in 2011, which would certainly be a train wreck.  Kaufman lays out the various proposals on the table, but at this point, I’m not sure if her crystal ball is better than anyone else’s.

I just wish Congress would decide something.  The whole point of estate planning is to use the rules to come up with the best results. 

Planning can be very difficult if you don’t know what the rules are.

 

 

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As I have previously written, the estate tax is imposed upon taxable estates of more than $3,500,000.  Any amount over $3,500,000 is currently taxed at the rate of 45%.  As an estate planning attorney, my clients generally fall into one of three categories:

1. People whose assets are far below the lifetime exemption
2. People whose assets are somewhere between slightly below and slightly above the lifetime exemption
3. People whose assets are considerably above the lifetime exemption.

For clients in the first category, which these days is the vast majority of my clients, there is very little “tax” planning.  Estate planning consists of lifetime incapacity planning, and determining the best way to transfer assets to heirs while protecting those assets from potential creditors and maintaining some level of control, if so desired.  For clients in the second category, most of the tax planning involves structuring the client's assets so that the estate tax does not apply to them.  One strategy would involve a husband and wife dividing their assets between them, so that neither one owns assets above the lifetime exemption.

However, there are certain clients whose wealth is so far above the lifetime exemption, that no amount of planning is going to make the estate tax not apply.  For them, their estate is going to owe a tax on 45% of their taxable estate.  The question then becomes, what is the fair market value of the property in the estate?  For money, stocks, and bonds the answer is easy.  For other intangible property, the question is a lot more difficult.  There are techniques that estate planning attorneys use both when a client is alive and after the client has died to set the value of specific assets.  I will discuss some of these methods in future posts, probably in regards to the Michael Jackson estate.

Know for now that with regards to the estate tax, “The fair market value is the price at which the property would change hands between a hypothetical willing buyer and a hypothetical willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.” 

 

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In my last couple of posts I explained that if Michael Jackson left assets to his mother Katherine in trust, a trust with certain specific rules, then upon Katherine’s death, those assets would not be subject to the estate tax a second time.  If Jackson engaged in proper estate planning, then he could accomplish his goal of taking care of his mother for the rest of her life, without losing millions of dollars to the government upon her death.

This is something that could, and should, be done by almost everyone, and not just the super wealthy.  Most people do not have to worry about the estate tax because their assets are far below the minimum threshold of the lifetime exemption.  Even so, there are a number of important non-tax reasons why people should leave their assets in trust — these involve protection and control.

I know I am starting to sound like a broken record, but everything I write here is pure speculation.  The Michael Jackson Family Trust has not been released.  However, if a client told me that they wanted to take care of their mother if they should die first this would be one of the methods that I would suggest.

CONTROL.  As I’ve written previously, I am sure that Jackson wanted to be able to support and provide for his elderly mother in the event that he died before she did, and left a sizeable amount of his assets for that purpose.  However, what he did not want was to give his mother the ability to determine what happens to those assets after she died. If Michael left the 40% (or any percent) of his estate to his mother outright, then upon her death, there would be nothing preventing her from leaving those assets to LaToya, Reebee, Tito, or her husband Joe, who Michael has accused on more than one occasion of beating him.  But by leaving the assets to her in trust, then Michael Jackson retains control from the grave over the disposition of the assets.  This is how it might work:

The assets are held for Katherine Jackson’s benefit in a trust. An independent trustee, probably John Branca, John McClain, or Barry Siegel, controls the distribution of assets to Katherine Jackson.  They will most likely be very liberal with this decision, giving her anything she needs to continue a lavish lifestyle.  However, there is no reason to give her more than her expenses.  In fact, they might just pay her bills directly.  When she dies, the remaining trust principal will be distributed pursuant to the Trust’s terms.  Most likely, it will go to Michael’s children, or to be more accurate, will be added to the trusts established for them.

ASSET PROTECTION.  The second non-tax reason why the property should be transferred in Trust and not outright is for asset protection purposes.  I want to be careful and point out that I am a Florida attorney and not a California attorney.  The laws regarding asset protection are generally state law based (with some federal bankruptcy law mixed in too).  But the basic premise is that if the assets are owned by the Trust, and if someone sues Katherine Jackson personally, then the person suing her can not collect against the trust’s assets.  There is no minimum or maximum that can be placed in trust.

A well planned estate is not just about avoiding taxes, and is not just for multimillionaires.  Through proper estate planning anyone can have the peace of mind that after their death their assets will go to benefit the people they want, and be protected from their beneficiaries’ creditors.

 

 

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In my previous post, I wrote that contrary to media reports, that it was highly likely, if not impossible that the Michael Jackson Family Trust (which has not yet been released) distributed his assets to his mother and his children outright.  (Various sites are reporting that the mother “gets” 40%, the three children receive 40% between them and that various charities will receive 20%).  I showed that his estate has to pay an estate tax of 45%, and if a distribution was made outright to his 79 year old mother of 40% of his assets (which could possibly be over $100 million) then when she dies, there would be another tax of 45% on the value of her estate.

Again, as the Trust has not yet been released, everything I write is pure speculation.

Most people don’t expect to die before their parents, and I can assume that when drafting his Will and Trust, Michael Jackson felt the same way.  However, he loved his mother and wanted to take care of her for the rest of her life should he pre-decease her. But giving her the money outright would be a tax disaster (and a bad idea for other reasons that I will discuss in later posts).  The solution?  Leave the property to her in a trust with certain rules.

Without going into too many technical details, when a person dies their estate is subject to tax on property they own, and ownership is largely determined by control.  If Katherine Jackson is distributed the property directly, she certainly controls it.  Also, if it is distributed to her in a trust in which she is the sole trustee and has unfettered access to the principal, she is in control.

However, if the property is distributed to a trust in which an Independent Trustee is responsible for determining when, and for what purposes, the trust assets are distributed to her, then upon her death, the property in the Trust will not be subject to the estate tax a second time.  In fact, Katherine Jackson can even be the Trustee herself and make distribution decisions, if the reasons for the distributions are limited to what are known as certain “ascertainable standards.” This means that a trust could be created in which she has the power to withdraw property for her health, education, support, and maintenance.  Upon her death, the property in the trust would not be subject to the estate tax, however, anything that she withdrew from the trust and still owned would be.

By engaging in proper estate planning, Michael Jackson could take care of his mother so that she lives not just comfortably, but in absolute luxury for the rest of her life, and then upon her death, those assets would not be subject to the estate tax a second time.

In a future post I’ll discuss the non-tax reasons why this type of planning is a good idea for everyone, even if you do not have millions of dollars.  This involves protecting the assets from your heir’s potential creditors, and controlling the ultimate disposition of them. 

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In my previous post, I speculated that the published reports stating that Michael Jackson left 40% of his estate to his mother Katherine Jackson, 40% to his children and 20% to charities was not, could not be entirely accurate.  Although I have not seen it the Michael Jackson Family Trust document, I am sure of the fact that instead of having the trustee distribute his assets to his mother and his children outright, that instead, the property was kept in trust.  The three reasons I set forth were (1) the estate tax, (2) creditor protection, and (3) control.

In this post, I will discuss why anyone who has significant assets should leave their property to their relatives in trust, and the potential tax disaster that awaits them if they do not.

For the sake of simplicity, assume that Michael Jackson had a taxable estate, of two hundred million dollars ($200,000,000) and that he left half to his mother outright and half to be divided among his three children outright.  I removed the charity to make the math more simple.  Also, while there are issues legal involved when significant assets are left outright to minor children, this post is only about the estate tax aspects, so ignore that for now.

Taxable Estate	$200,000,000
Tax Rate	45%
Tax Owed	$90,000,000
Amount Available for Distribution to heirs	$110,000,000

Michael Jackson Estate Tax — Al numbers are hypothetical and are used for example purposes only.

Notice that the estate is confiscatory.  If Michael Jackson’s taxable estate is $200,000,000, then the federal government will receive ninety million dollars in taxes!  The distribution to his mother and children are as follows:

Remember however, that Katherine Jackson is 79 years old.  When she dies, all of those assets will be subject to the estate tax again!  Anything she left to her husband Joe Jackson would not be subject to the estate tax because of the marital deduction.  But then when he died it there would be an estate tax.  If her taxable estate is $55,000,000, then that’s another $24,750,000 to the IRS.  However, if instead of leaving the assets to his mother directly, he left them in trust for her, a trust with specific rules, then upon her death the assets will not be subject to the estate tax.

I will explain how this is done, and what the rules are in my next post. 

 

 

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It’s not my intention to turn this blog in to a celebrity gossip site.  However, there are a number of legal issues regarding Michael Jackson’s estate that are continuously being reported on by reporters who do not fully understand (or do not care about) the nuances involved.  The latest batch of confusion involves the disposition of Jackson’s assets in the Michael Jackson Family Trust.

As I previously posted, on July 1, Jackson’s Will was filed with the Cour  along with a Petition for Probate.  His will is what is known as a “Pourover Will” because it pours over any assets that Jackson owned in his individual name and not in the name of the Michael Jackson Family Trust, into the Trust.  The Petition for Probate listed Jackson’s mother Katherine and his three minor children as primary beneficiaries, along with a number of other Jacksons (who I assume are his nieces and nephews) as secondary or contingent beneficiaries.

There is no legal requirement for a Trust to be released to the public.  In fact, one of the reasons to do a Trust, especially if you are very wealthy or a celebrity is to keep your affairs private after your death.  That being said, like everything else involved in this case, I expect a full version of the Trust to be leaked any day now.  Already the press is reporting on, as TMZ so bluntly put it, “Who Gets What”.  According to the reports, “Katherine Jackson will get 40% of the assets.  Michael's 3 kids will get another 40%. And the remaining 20% goes to several children's charities.”

This cannot be completely accurate.  While I have not yet seen the document, I am 100% positive that each of Jackson’s mother, and his children are to receive their shares in trust, with a the trustee having the power to make or not make distributions of income or principal according to certain standards.

There are a number of reasons for this, from a tax perspective, from a creditor and asset protection perspective, and from a “Control” (yes, that’s Janet, not Michael) perspective. 

Later today I’ll explain why.  (I’d do it now but I have to go to a client meeting.  Blogging is fun but doesn’t pay my mortgage).

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I have previously written in the blog about the Estate Tax, but I’d like to revisit the subject using the real life example of the Michael Jackson estate.  First, some review of the basics.

The estate tax, which is often, but inaccurately called the “death tax” by people who oppose it, is not an income tax.  It is an excise tax on the value of assets transferred by an individual at the time of their death.  This includes not just money in the bank, but all assets owned by the individual, i.e. cash, stocks, bonds, real estate, Beatles songs, and Elephant Man bones.

A person dying in 2009 has a lifetime exemption, that is the amount of assets they can transfer at death before the estate tax applies, of three million five hundred thousand dollars ($3,500,000).  After that, the rate of tax on that person’s assets is 45%.  Interwoven with the estate tax is the gift tax which is a tax based on inter vivos (which means lifetime) transfers.  However, for the sake of simplicity, I will assume that Michael Jackson did not make any taxable gifts, that is, he did not make any gifts that would affect the estate tax.

Much of the public debate over the estate tax involves the lifetime exemption.  The higher the exemption is, the fewer people there are that would be subject to the estate tax.  A decade ago, the lifetime exemption was only $600,000, so a great many people were subject to the estate tax.  As it is now, very few Americans have estates that are worth $3,500,000 (especially with the stock market and real estate crash).  A married couple that engages in proper estate planning can leave $7,000,000 to their children (or to anyone they want) tax free. 

But for the Michael Jackson’s of the world, the amount of the exemption is irrelevant.  When you have hundreds of millions of dollars in assets, it does not matter whether the lifetime exemption is $1,000,000 or $3,500,000 or even $10,000,000.  What really matters is the rate, that is what percentage of the assets will be subject to the tax.  As I wrote earlier, Michael Jackson’s estate is looking at a possible estate tax liability of 45% on his taxable estate.  And the IRS doesn’t take payments of Red Zippered suits.  Cash only please.

There are a few things that should lessen the amount of the estate tax that he owes however.  First, the tax is only imposed on the net value of his assets.  The estate can deduct from the value of the assets any liabilities that the decedent had at the time of his death.  And according to published reports, Michael Jackson had very significant liabilities.  In fact, his liabilities may be so large that his estate could be worth far less than anyone would expect.  Second, just like there is an income tax charitable deduction, there is also an estate tax charitable deduction.  Any money that Michael Jackson left to charity will be deducted from the value of his taxable estate, and thus reduce the amount of estate tax that he owes.  Third, the estate may deduct the costs involved in administering the estate, which I also suspect will be substantial.

Although news reports say that it will take years and years to sort all of this out, the estate tax is due and payable nine months after death before interest and penalties (which are substantial) start kicking in.  So whoever is in charge of the Form 706 Estate Tax Return has their work cut out for them.

In a future post I will talk about the essential question of valuation, that is how do you determine what an asset is worth.  Cash and stocks and bonds are easy to value and even real estate has comps.  But how do you value the future income stream of the Beatles catalog?  What is the likeness and image of Michael Jackson himself worth?

Tough questions.  Stay tuned.

 

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Here is the link to Michael Jackson’s Last Will and Testament.

The will is what’s known as a “pourover” will.  In other words, instead of the will itself disposing of all of his assets directly, it instead transfers all of his assets to the “MICHAEL JACKSON FAMILY TRUST” as amended and restated on March 22, 2002.  The terms of his revocable trust will govern the disposition of his property.  I assume that most of the assets will remain in trust for his children and their children, with significant distributions to other family members and charities.

However, I don’t know.  I’m only assuming.

A will is public and is filed with the court.  A trust is not.  There is no obligation to disclose the terms of the trust to the public.  Certain beneficiaries are entitled to copies of the trust however, and it’s possible that one of them might leak it at some later point in time.

The executors of the will (which in Florida would be called personal representatives) are John Branca, John McClain, and Barry Siegel.  Their primary responsibility will be to transfer the estate’s assets, that is the assets that were not already owned by the trust, to the trust.  The successor trustee (whoever that might be) is then responsible for managing the trust estate.

He did nominate his mother, Katherine Jackson as the guardians of his minor children.  In the event of the death, inability, or refusal to act of Katherine Jackson, he nominates, believe it or not, Diana Ross!

Those are the only details now.  It’s a short five page will.  Unless there is a subsequent will, or the trust somehow becomes public, this is all the information that will be public.

I’m actually impressed.  It seems that as irresponsible of a person as he was, he might have actually done this correctly.  CF Anna Nicole Smith.

 

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I'll write more on this myself as it develops, but here are some articles to check out:

Smart Money: Michael Jackson's Death and Your Estate Plan

Reuters: Hello Goodbye: Jackson's Beatles rights at risk

Wall Street Journal: Getting Personal: Jackson Estate a Tangled Affair

Business Week: Settling Michael Jackson's Estate may be a Thriller.

 

At this point, all anyone is doing is speculating.  No one knows if he had a will or where it is.  At least no one who is talking.  There is a "rumor" going round the internet that "Michael Jackson willed his control of the Beatles songs to Paul McCartney."  That is almost certainly not true.

First, unless MJ specifically said this somewhere, how would anyone know it?

Second, the asset is highly leveraged with many secured creditors.

Finally, it's probably the most valuable thing that he owns.  Why would he do that to his children?

This is going to be fascinating from an estate planning and tax and administration perspective.  And I haven't even talked about what happens to his children yet.

Stay tuned.

 

 

 

 

 

 

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Yesterday the New York Times published an article about how gay and lesbian couples are engaging in "adult adoption," in effect adopting each other, in order to secure inheritance rights to family trusts.

In "Adult Adoption a High Stakes Means to an Inheritance" writer Deborah L. Jacobs writes that while it is not necessary to use this strategy to transfer your own assets, which can be left to anyone you choose, it can be useful for certain trust beneficiaries.

For example, often when I draft a Trust, the Settlor will provide that upon his death, the property will go in Trust to his child, X, for life.  X is entitled to all of the income from the trust, plus principal for X's health, support, education, and maintenance.  Upon X's death, the trust monies will go to X's children, either in further trust, or outright.  Sometimes, depending on the wishes of the Settlor and what type of tax planning we are trying to accomplish, X will have a power to appoint the property upon X's death to someone else.  Sometimes the power will be limited to X's children or the Settlor's descendants, and sometimes the power will be more broad.

If cases in which the property will automatically go to X's children, or when X is limited in his power to appoint the property, an adult adoption may allow X to direct the property to X's partner.  Of course, as the article points out, this strategy is fraught with danger.

An adult adoption clearly is an attempt to frustrate the intention of the Settlor, who wished for the property to go to further generations.  If X has a sibling, Y, who is married, Y can not leave the property to Y's spouse, which is in effect what X is trying to do. 

As the article points out, "The lessons here? Family opposition to an adult adoption should never be underestimated. And family members should be informed about your intentions; don’t surprise them."

 

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There is an article today on CNN's site, taken from its Time-Warner Sister Money Magazine entitled "Rethinking your estate plan."  In it, the author interviews a couple whose assets have recently fallen 15% in value (which actually isn't bad compared to most people).  The couple, Les and Anna Glowacz executed estate planning documents five years ago, but due to the decrease in the value of their assets and the increase in the lifetime exemption to $3.5 million, they are unsure whether or not their plan still makes sense.

I am not going to reprint the entire article here.  However, I made some comments in the parentheticals below re: their questions.

1. Give gifts now or later (I think that now is probably the best time in history to give gifts as their values are low, interest rates are low, and there is uncertainty over what will happen with the estate tax)
2. Does your state have a state death tax?  (Florida currently does NOT).
3. Should you split your property among your children "equally" or "fairly?"  (Generally, "equal" is "fair" but not necessarily in all circumstances).
4. Simple or complicated? (This depends on the circumstances.  Simple situations, such as a couple in their first marriage with adult children and significantly less than $3.5 million might have two simple wills.  However, the more complicated the larger the estate and the more complicated the family dynamics, the more complicated the documents).
5. Do you want to give to charity? (With regards to charitable donations, there are a number of decisions to make, as to whether to give now or at your death, what assets to give, and whether to make a "split interest" gift, such as through a charitable remainder trust).

 

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This past weekend was the annual conference of the American Bar Association Section on Taxation. At one of the sessions focused on the estate and gift tax, aides to Senate Finance Committee Member Charles Schumer (D-NY) and John Kyl (R-AZ) appeared jointly. According to Sen. Schumer's aide, there will much more likely be a "patch" then any long term reform this year.

My guess continues to be that they will just take the 2009 exemption and rates and extend it outwards -- without portability, without changing the rules regarding GRATs, and without changing valuation rules with family limited partnerships.

But we'll see.

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Paul Caron, a tax professor at the University of Cincinnati College of Law,  and who has the #1 Tax Blog out there, has provided a recent round up of Estate Tax news. 

Most of the articles that he linked to involve the fact that the Estate Tax is set to expire next year (and come back into full force the following year), and the various proposals to "fix" the problem.

 

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There has been a lot of talk recently about "portability," that is the ability for one spouse to leave their unused lifetime exemption to their surviving spouse upon their death.  Portability is included in Senator Baucus's tax bill. For more on the subject see the link above at Greg Herman-Giddens's North Carolina Estate Planning Blog.

The question that I haven't really seen answered is "How will it work?"  Greg wrote in his blog that

A change that will require modifications to most large estate plans is the proposal to pass "marital deduction portability." If a surviving spouse passes away with an estate larger than the applicable exemption, he or she will be able to use the "aggregate deceased spousal unused exclusion amount."

In order to use a portion of the first decedent spouse's exclusion, his or her executor must make an election on that estate tax return. If the "Spousal Unused Exclusion" election is made, the surviving spouse may then use the remaining unused exemption.

If this bill becomes law, the full estate could be transferred to surviving spouse and he or she will have an estate exemption of $7 million.

Does this mean that everyone will have to file a Form 706 Estate Tax Return? 

Let's say H and W each own $2 mil in assets and the exemption is $3.5.  H dies.  I understand that the concept of portability says that H can leave W the remaining $1.5 exemption.  But to use it, will H have to file a 706 to lock it in even though he doesn't have a taxable estate?  Will attorneys now be required to advise everyone, no matter how small their estate is to file an Estate Tax Return?   Will it be malpractice if they don't?  I can see all sorts of scenarios in which there was no return filed on the first death because the attorney did not think the surviving spouse would need the extra exemption, and then the attorney turned out to be wrong.   While it doesn't seem like it these days, assets can still appreciate it value. 

I can see portability being both an administrative nightmare and a huge revenue generator for estate planning attorneys.

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In writing a blog, or in writing anything, the most important question is "Who is your audience?"  So far, my posts have been aimed towards what I call "the sophisticated layman."  I have been writing for the educated reader who is not an expert in matters regarding estate planning or tax, and is interested in learning more. 

But every now and then there is "breaking news" in the estate tax world, that most laymen, sophisticated or not, probably would not be interested in, but would be of interest to estate planning and tax experts. This is one of those times. 

Yesterday, the US Tax Court's issued its opinion in Estate of Jorgensen v. Commissioner, ruling that the entirety of assets transferred to a family limited partnership were included in the gross estate of a decedent under s. 2036(a)(1) of the Internal Revenue Code.

Like many other cases in which there is a complete victory for the Government, the most important lessons in this case for Estate Planning attorneys is "Don't do this." 

More after the jump

Continue Reading...

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I am waiting to see if my Internet ordered trust is sent to me before making any more posts on that topic.  While waiting, I want to write again about the estate tax.

In 2001, the Republicans finally "won" their 30 year battle to repeal the estate tax, in a way that only a Congressperson could have dreamed of.  The exemption, that is the amount a person could own at their death went up from $600,000 in 2000 to $3,500,000 in 2009. The rate, that is the amount the government taxed over the exemption went from a marginal rate of 55%+ to 45% in  2009.  Then in 2010, the Estate Tax would be finally repealed for once and for all!

That is until 2011, when the 2001 exemption of $1,000,000 and rate of 55% kicks back in.  This was done for various budgetary and political reasons.  In 2001 there was no one who thought that we'd be here in 2009 and not have a "fix."  In 2005 there was hardly anyone who thought that.

But here we are.  After 9/11 and the Iraq War and the run up in the economy and the economic collapse and the Democratic takeover of Congress and the White House, we are still scheduled to have no estate tax next year and then a lower exemption and a higher rate the year after that. (For an excellent read on the history of the battle against the Estate Tax, pick up a copy of Death By a Thousand Cuts: The Fight Over Taxing Inherited Wealth by Michael Graetz and Ian Shapiro).

As an Estate Planner, I hate the situation we're in.  My job is to plan, which can be very difficult if I have no idea what the rules are going to be less than a year from now.  I've long thought that Congress was just going to take the 2009 rules and extend them.

Now, according to the Wall Street Journal, Republican Senator Charles Grassley, a longtime opponent of the Estate Tax seems to think that things look pretty good for Estate Tax Opponents. 

"If Republicans stick together, we can do better than $3.5 million and a 45% tax rate," Grassley told reporters after his speech. "Maybe not a whole lot better, but we ought to be able to do a little bit better."

He said Republicans could press for an exemption closer to $5 million or $6 million, and a tax rate closer to 35%.

Grassley said Democrats will be eager to avoid having the tax go to zero on Jan. 1, 2010, only to have to reverse that by reinstituting it through legislation later. Republicans should be able to exploit that urgency to press for better terms, he said.

"This is where Republicans have got some leverage, it seems to me," said Grassley.

Democratic-written budget blueprints unveiled in the House and Senate on Wednesday include authority to freeze 2009 estate tax levels through 2014, at a cost of about $72 billion.

Rep. Richard Neal, D-Mass., told reporters after the same tax conference Wednesday that the House was likely to consider an estate tax fix this year that is shorter than five years, in order to reduce costs.

For more, see Sen. Grassley Says GOP Will Have Clout On Estate Tax Fix.

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The New York Times published a good article yesterday laying out what I've been telling everyone lately -- that it's time for everyone to reevaluate their estate plan. In Smaller Though It May Be, It's Time to Look at the Estate NYT writer Paul Sullivan states:

But estate planning is not primarily about avoiding a tax that few have been subject to since it was instituted in 1916. The primary goal has always been how to bequeath what you have to the heirs you picked. And if handled wrongly, wills can become a vehicle that destroys families.

 The most important points that I hope people take from this article are that:

1. The Estate Tax is here to stay.  Virtually every Estate Planning attorney will tell you that repeal, fought so hard for by Republicans is dead.
2. The "exemption," that is the amount a person can die owning before being subject to the estate tax is currently $3.5 million, and probably will be at least that amount in the future.
3. Over the past two years, many people who are (or were) subject to the Estate Tax lost a substantial amount of their wealth.  Not only that, their successful adult children, who didn't necessarily need an inheritance from their parents have also lost a substantial amount of wealth.  I've heard anecdotal evidence that sales and rentals of this movie have skyrocketed (just kidding).

 Those three above factors result in many estate plans being very problematic.  They may have been perfect when drafted.  The problem is the attorney who drafted it did not anticipate the fundamental change in the economy.  No one did.

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There was a short article yesterday in the Bristol (CT) Press by Connecticut Attorney Daniel O. Tully pointing out that "If your finances have changed markedly since you wrote your will, you should check your estate plan to see if you need to make any changes."  This is especially true if your plan includes "specific bequests" which are gifts of specific property upon your death.

For example, your Will might currently state, "I give, devise, and bequeath my 10,000 shares of my Citibank stock to my son Barack, and the rest, residue, and remainder of my estate to my daughter Michelle" 

Assume you executed your Will on March 16, 2004.  On that date, 10,000 shares of Citibank was worth close to $500,000. Today, after the perceptions decline in the stock market,10,000 shares of Citibank is worth about $17,000.  If you died today with those provisions in place, this could create an inequity that you hadn't intended.  Therefore, it is a good idea to review your documents to see if you made any specific bequests, and contact your estate planning attorney to discuss whether or not a change is necessary.

Also, as I have written about before, I believe that this decline in the world economy provides the greatest opportunity for gift and estate tax planning in years, possibly ever.  Note that I am not talking about Citibank, or any specific stock or asset in particular, but just assets in general.

Currently -- and I am simplifying this -- the US imposes a gift tax on the value of assets that you give away during life, and on the value of assets that you own upon your death.  One of the benefits of giving away assets now is that you are only subject to tax on the current value of the asset, and all of the future appreciation is removed from your estate and not subject to the gift or estate tax.  If you are relatively young and healthy, and you believe that in the long term that the value of the assets you own will appreciate, you should evaluate whether it makes sense to give some property to your children or even grandchildren now, so if the value of that property comes back up, it will be out of your estate and not subject to the estate and gift tax.  Even after the current stock market decline, $10,000 invested in Microsoft in early 1990 would be worth $282,200 today.  A gift of Microsoft stock in 1990 would have removed all of that appreciation from your estate.

I realize that many people are concerned about giving away assets now -- either because they do not believe that their children are ready to handle large amounts of money or they are afraid that they themselves will need the money to live later in life.  Depending on your individual circumstance, there may be solutions to each of these problems, which your estate planning attorney can discuss with you.

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 On February 25th, the New York Times published an article entitled Study Estate Plans Before Laws Shift.  The author Deborah L. Jacobs, points out what most estate planners have been saying for a while -- that there is going to be a new law (hopefully) by the end of 2009.  With the lifetime exemption most likely staying at $3.5 million and with people being worth a lot less than they used to be due to the market collapse, the article states that estate planning documents should be reviewed now, to make sure that they still do what they are supposed to do.

It's important that you contact an attorney that specializes in estate planning to review your documents, to ensure they still "work."  The article discusses concepts that your estate planning attorney should be familiar with, including credit shelter trusts, family limited partnerships, and grantor retained annuity trusts (GRATs).

It also points out that it is essential that your beneficiary designations, on your life insurance and 401(k)s and IRAs are properly completed.  Your estate planning attorney should be able to assist you with that also.

 

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H.R. 533, "the Opportunity for Family Farms and Small Businesses Act of 2009" was introduced by Rep. Randy Neugebauer, a Republican of Texas.  The Bill tries to repeal the estate tax with one sentence, stating, "Section 901 of the Economic Growth and Tax Relief Reconciliation Act of 2001 shall not apply to title V of such Act. "

In 2001 (before the 9/11 attacks), Congress passed a Bill, signed into law by President Bush, that would "repeal" the estate tax over a period of 10 years.  The "applicable exclusion amount" (often mistakenly called the "unified credit") increased from $600,000 in 2001 to $3,500,000 today.  This is the amount of assets that a person can own at their death before their estate is subject to the estate tax.

The law as written provides that in 2010, the estate tax is repealed, but for one year and for one year only.  Then, in 2011, the law goes back to what it was in 2001 (after the passage of the act, not before), with the applicable exclusion amount going down to $1,000,000.  Also, the rate, that is the percentage amount that an estate has to pay is scheduled to go up too, but that is a topic for another post.

In a simplified example, the law as it is currently written provides that if a person dies in 2009 owning $10,000,000 in assets, their estate will owe $2,925,000 in estate tax.  ($10,000,000 minus the $3,500,000 exclusion = $6,500,000, and $6,500,000 X 45% is $2,925,000).

If that same person died in 2010, then the amount of estate tax their estate will owe is zero.  That's why 2010 is being called the "Throw Momma from the Train Year."  In 2011, the exclusion goes back down to $1,000,000 and the rates go up, making the amount owed to Uncle Sam even higher.

Rep. Neugebauer's bill would take the law as it stands in 2010, and extend it forever.

Nice try, Rep. Neugebauer, but the Democrats control and House, the Senate, and the Presidency, and the economy is down, so it ain't happening.

I don't think the law as it stands will happen either.  My prediction is that the 2009 rules will be extended into the future, with a possible inflation adjustment.

But permanent repeal is dead.

 

 

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