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Estate Planning News
Death of estate tax leaves some heirs worse off
Kathleen Pender on 01/11/2010 at 3:34pm (UTC) | | |
Astonishing just about everyone in the estate planning world, Congress let the estate tax expire in 2010.
While people who support the death of the estate tax might be jumping for joy, its temporary expiration comes with side effects and unintended consequences that will perplex many people and leave some worse off than they were last year.
People who set up bypass trusts leaving some money to their kids and the rest to their spouse and those whose assets have more than $1.3 million worth of appreciation might want to consult their estate planner.
What's really bewildering is the possibility that Congress will impose an estate tax retroactively to Jan. 1 (which probably would be challenged in court) or do nothing and let the estate tax come back with a vengeance in 2011.
"There is a list of potential implications as long as your arm as to what could happen this year," says Steve Leimberg, a Philadelphia attorney who publishes a newsletter for estate-planning professionals. (A recent one was titled "Don't light your hair on fire.")
"We were all suggesting throw mama from the train (in 2010) but now we don't know if that's right anymore," he adds.
This madness started in 2001, when Congress passed a law that gradually shrank the estate tax by reducing the rate and increasing the exemption, which is the amount a person can leave free of estate tax.
In 2009, the exemption was $3.5 million per person and the top rate was 45 percent.
The law called for the estate tax to disappear in 2010 but reappear in 2011 in vampire fashion - with a $1 million exemption and a maximum rate of 55 percent.
Rather than allow such an inequitable tax, most people assumed Congress would extend the 2009 estate tax into 2010 and tackle a longer-term solution this year. But lawmakers did nothing before year-end, allowing it to temporarily expire.
Not to be trusted
This is wreaking havoc on estate plans written under the assumption there would always be an estate tax.
For example, many wealthier people set up a bypass trust that essentially said, "I want the amount that will not create any federal estate tax to go to my kids. I want everything else to go to my spouse."
This allowed each spouse to maximize his or her exemption because an unlimited amount can pass from one spouse to the other without estate tax, but when the surviving spouse dies, anything exceeding the exemption is taxed. A spouse who left everything to the other spouse would squander the exemption.
Some lawyers fear that if there is no estate tax, the kids in the bypass trust could inherit everything and the spouse nothing. A judge could decide that's not what the couple intended and reallocate the money to the spouse, or could let the kids have it all.
"This could intensify the food fight" that often occurs when someone dies, says Michael Jones, a certified public accountant in Monterey. Jones says some attorneys might advise clients to add a provision to their wills and trusts saying what should happen if there is no estate tax.
Losing a break
An underplayed portion of this year's estate-tax repeal scales back a long-standing tax break known as the step-up in cost basis. Left as is, this will create a record-keeping nightmare for heirs of people who die this year and could leave some worse off.
Cost basis is what you paid for an asset, plus or minus certain adjustments such as trading commissions or improvements to real estate.
Normally when you sell an asset, you owe capital gains tax on the difference between your sales proceeds and your cost basis.
When a person dies, the cost basis is generally stepped up to the value on the date of death. When the asset is later sold, only the difference between the sales proceeds and the date-of-death value is taxed.
This is a big tax break and before this year, it applied to an unlimited amount of assets.
For someone who dies in 2010, however, heirs can apply the step-up in basis to only $1.3 million worth of appreciation. An additional $3 million in appreciation can pass to a surviving spouse.
An example
To make it simple, suppose Uncle Harry has $2 million worth of assets with a cost basis of $100,000. If he sold them, he would owe capital gains tax on $1.9 million. Instead, he leaves them to his niece, Honey.
If Harry died last year, Honey would be sitting pretty. There would be no estate tax because it was less than $3.5 million and Honey would inherit assets with a cost basis of $2 million. The $1.9 million in appreciation would escape taxation. When Honey sold the assets, she would only be taxed on the difference between her sales proceeds and $2 million.
If Harry died in 2010, she would be worse off. There would be no estate tax, but Honey could shelter only $1.3 million in appreciation from capital gains tax.
She would first have to figure out Harry's cost basis, which could be maddening if he bought the assets decades ago or kept lousy records or owned real estate. If she can't establish his basis, it would be zero.
Then, the executor would have to choose which assets would get the step-up. Any remaining assets would retain Harry's cost basis or the date-of-death value if it was lower. If Honey sold everything immediately, she would owe capital gains tax on $600,000.
Leimberg says Congress paid for repealing the estate tax by imposing a capital gains tax, which will fall hardest on middle-income people who can't afford to hold on to inherited assets.
This is especially true in the Bay Area, where middle-income people might inherit million-dollar homes. However, it appears that if an inherited house would have qualified for the capital gains exclusion on primary residences, then an additional $250,000 could be excluded from capital gains tax when the home is sold, says William Fuller, an estate lawyer with Howard Rice in San Francisco.
Leimberg says the estate-tax repeal "was a con game from the very beginning. They tried to hide how much it would cost by spreading it over 10 years and then made it appear as if poof ... we made your taxes go away. What really happened is we made them go away for the ultra wealthy."
What comes next?
The unlimited step-up in basis is scheduled to return next year, along with the estate tax.
Professionals are hoping for clarity before then.
"We are hopeful Congress will pass some legislation in the next few months and fix the mess they made," Fuller says. But so far they seem to be bogged down in health care. We haven't heard a peep about estate taxes since the end of the year.
Fuller is recommending a "wait-and-see approach" for most of his clients.
Jones says at his firm, "We are doing triage. We are looking for clients with the largest estates and the closest proximity to death. We want to deal with them first."
Estate tax madness
Under current law, the estate tax is zero this year and will come roaring back in 2011. Estates under the exemption amount are not subject to the estate tax.
Year Exemption Top rate
2009 $3.5 million 45%
2010 Unlimited 0
2011 $1 million 55
Source: Chronicle research
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US House To Vote On Permanent Estate Tax Bill Next Week
By Martin Vaughan, Of DOW JONES NEWSWIRES on 12/01/2009 at 4:55pm (UTC) | | | WASHINGTON -(Dow Jones)- The U.S. House of Representatives next week will vote on legislation to extend current estate tax rates permanently, but when and what action the Senate might take on the bill remains unclear.
The House will vote next week, Wednesday at the earliest, on estate tax legislation from Rep. Earl Pomeroy (D., N.D.), according to a schedule released by House Democratic leaders.
The Pomeroy bill would make permanent a 45% rate on inherited wealth, with the first $3.5 million exempt from the tax. Without congressional action, the tax will be repealed in 2010 and return in 2011 at a 55% rate with a $1 million exemption.
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. House Democrats earlier this year agreed that the cost of the bill would not have to be paid for--as long as Congress passes a law to make sure new discretionary spending or tax cuts are paid for in the future.
However, the Senate on Monday is set to begin a debate on health-care overhaul legislation that is expected to take several weeks. In addition, there are enough opponents of the Pomeroy bill to block action in the Senate.
That includes Republicans and several Democrats who favor lowering or abolishing the estate tax.
-By Martin Vaughan, Dow Jones Newswires; 202-862-9244; martin.vaughan@ dowjones.com
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IRS Continues to Lose
Published by Brian Dooleyon October 7, 2009in IRS.Gov. on 10/11/2009 at 8:21pm (UTC) | | | IRS defeats continue and this last defeat is a real embarrassment.
First, asset protection, The Appeals Court for the Fifth Circuit has affirmed a district court opinion that granted summary judgment (which means the IRS had no case, in the first place) to a decedent’s relatives in the government’s suit challenging the disposition of an estate that was placed in a trust that called for the diversion of trust assets away from a niece who was liable for unpaid taxes. (Flowers, Ellen Hunt, et al. v. U.S.). In this case, an inheritance trust was designed before the death to keep assets away from the IRS. The decedent’s will directed her estate to be paid to the asset protection trust. The Court told the IRS that they never had a chance of collecting. So, the IRS appealed, (which was a mistake) and lost again. Now, this case is a blue print for asset planners.
Next, another Tax Shelter defeat and a re-affirmation of the value of a CPA’s tax advice. The Appeals court for the Seventh Circuit has affirmed a district court decision that found that a company that engaged in son-of-BOSS tax shelter (one which the IRS considers evil and is now a listed transaction) transactions had reasonable cause for its tax underpayment and wasn’t liable for accuracy-related penalties, finding no clear error in the district court’s factual findings or in its legal determinations. (American Boat Co. LLC et al. v. U.S.). Once again, an IRS goofs. Since the case is an appeals court case, there is another blue print.
Lastly, Sean Kieran Hegarty and Kerry Ann Hegarty ran a charter boat in Florida. One could say it is a hobby with $9,000 of income and $74,000 of expenses. Representing themselves they beat the IRS hands down, in the Tax Court (which is an IRS friendly court).
Some day the IRS will learn that it is better to walk away with your tail between your legs.
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Elder Law: Certain annuities may allow veterans' benefits
William Edy • October 4, 2009 on 10/06/2009 at 1:08pm (UTC) | | | Although some studies estimate that the number of American veterans will decline over the next 10 years, VA statistics also reflect that the number of veterans age 85 or older will triple over that same period.
This will create a strain on the increased need for custodial and assisted living health care, in addition to skilled care nursing care.
Medicaid contributes to the cost of skilled nursing home care, paying what the patient's income cannot pay, assuming that the single person has assets or savings not exceeding $2,000.
Medicaid does not pay for assisted living and only in certain extremely limited areas, such as Miami, offers help for home health care.
Tax attorney Dale Krause, a well-known speaker on Medicaid and veterans planning, spoke last week at the National Network of Estate Planning Attorney's Fall Collegium in San Antonio, Texas. Member attorneys may be located at nnepa.org.
Krause quoted the Genworth Cost of Care Survey for 2009 indicating that the average monthly rate of a Medicare certified home health aide was $3,527.33, while a private one-bedroom unit in an assisted living facility was $2,825.25 a month, while a semi-private room in a skilled care nursing home facility approaches $6,000 a month, and often exceeds that amount in our area.
While some may never need skilled care where a nurse would be on duty 24 hours a day, many will need what is considered help with their activities of daily living, which are "eating," which is defined as manipulating utensils and eating independently; "bathing," which is defined as getting in and out of a bathtub or shower and washing; "dressing," which is defined as being able to manipulate buttons and zippers while dressing; "continence," which is defined as maintaining bladder and bowel control; "transferring," which is defined as moving independently from one place to another, from the bed to the chair or sofa; and "toileting," which is defined as using the toilet without assistance.
These six ADLs often define disability for long-term care insurance purposes. Help with one of these activities may result from old age, but help with two or more may indicate the need for custodial care, even if full-time skilled nursing care is not prescribed.
With the cost of long-term care increasing while client's investment portfolios are diminishing, seniors are looking for additional funding sources for long-term care. Although long-term care insurance is ideal, it is usually unaffordable and unavailable because of expense and preexisting conditions. Waiting to apply for long-term insurance until an illness appears is like waiting to obtain fire insurance until your house starts burning.
While Medicaid is the largest payor of long-term care services in a nursing home, most government programs provide little or no funding for services provided in the home or assisted living facility. One exception is the Veterans Administration benefits offered through the Aid and Attendance program, or A&A.
In order for a veteran to qualify for the A&A benefit, he or she must have served at least 90 days of active military service, with at least one day being during wartime, but not necessarily in a war zone, must have received any discharge other than dishonorable, must be totally disabled, have nominal assets and low monthly income, and, most important, be in need of daily aid and assistance of another person to avoid the everyday hazards of life.
Their disability does not have to be service connected, and is presumed if the veteran is in a nursing home for long-term care because of disability, receiving Social Security disability benefits, is unemployable because of disability expected to last indefinitely, or is suffering from a disease that renders them totally disabled as determined by the secretary of the VA.
To receive A&A, the veteran may only retain nominal assets. Most literature puts this limit at $80,000, but Krause states a single applicant should retain no more than $30,000, although there is actually no set limit according to the official VA Web site.
The applicant should retain no more than enough to pay his or her un-reimbursed medical expenses, including medical bills, durable medical expenses, medical transportation, invoices from home health care agencies and assisted living facilities.
If the single veteran, for example, can show that his or her monthly un-reimbursed medical expenses exceeds his or her income from Social Security and pension, the veteran will be eligible for the maximum monthly A&A benefit of $1,644. Un-reimbursed means expenses not covered by Medicare or other health insurance.
Krause discussed the case of a widowed 76-year-old man suffering from Parkinson's disease, whose doctor indicated he could live for seven to 10 years with help with his ADLs in an assisted living facility.
With his assisted living facility charging $3,800, together with his part B premium of $96.50 and prescription drug costs of $154.60, he had un-reimbursed medical expenses of $4,051. His only other expenses were $110 for cable and phone, which are not medical expenses.
His income was $1,500, resulting in a shortfall of $2,661. If he applied all of his $185,000 savings to the shortfall he would not have sufficient money to meet his expenses for his lifetime.
Krause's plan was to have the veteran hire a elder law attorney for $10,000, purchase a prepaid funeral plan for $7,500, retain $30,000 in his savings account jointly titled with his daughter to avoid probate, and purchase an immediate annuity for $137,500, certainly not a Medicaid compliant annuity, which would pay him $1,017 a month for 178 months, for a total payout of $181,028.
Because his annuity payment increased his monthly income to $2,517, which is $1,534 less than his un-reimbursed medical expenses of $4,051, he was entitled to receive his A&A benefit of $1,644, enough to cover his full monthly expenses of $4,161.
Next week I will discuss how much of his savings was used to meet his expenses and what happened when in four years he needed to apply for Medicaid for skilled care nursing home and how this non-Medicaid compliant annuity was handled by his elder law attorney, as well as how much his daughter received at his death.
Source:
http://www.news-press.com/apps/pbcs.dll/article?AID=2009910040340
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Gay married couples fork over $467,000 more than straight married couples in the US
October 3, 11:00 PMGay & Lesbian Issues Examiner - Kelvin Lynch on 10/06/2009 at 1:30am (UTC) | | | The New York Times published a piece today estimating the price a gay couple will pay relative to a heterosexual couple over their lifetime, because of the Defense of Marriage Act (DOMA).
The price tag? Upwards of $467,000, when you account for the 1138 federal rights and benefits afforded to heterosexual couples that are denied to same-gender couples. That's how much the Times estimates a gay couple will pay -- in a worst case scenario -- over the span of their lifetimes for extra costs related to health care, legal affairs, and other issues.
The Times created a hypothetical same-gender couple whose real life situation might mirror that of a straight couple. They looked at the three states with the largest LGBT populations - New York, California and Florida -- and merged data from those three states to determine annual gross incomes, and other various cost of living expenses.
The biggest expenses that gay couples face are health care, social security and estate taxes. Health care depends on a person's employer, but in the worst case scenario gay couples pay more than $211,000 alone for health care than straight couples over the course of their lifetimes.
Social Security is also a big bust for gay couples, since the federal government doesn't recognize same-gender marriage. Gay surviving spouses are not entitled to receive their deceased parter's social security benefits, as a straight surviving spouse are.
And then there's estate (inheritance) tax, which is probably the most horrible, unfair example of how straight married couples have it pretty good when it comes to U.S. tax laws. This is the reason Annie Leibovitz is selling off rights to her famous photographs to pay property taxes and loans. She was hit with a 50% inheritance tax when her long-time partner Susan Sontag died and left property to her. Leibovitz is in dire straits and faces losing the rights to all of her photographs, a travesty of justice by any measure.
Straight married couples can transfer an unlimited amount of assets to each other during their lives, and when one of them dies, they don't have to pay any estate tax. The same is not true for same-gender couples. Granted, this really only effects very, very wealthy same-sex couples, but it's still an example of how unfair the U.S. tax system really is. Annie Leibovitz is on the brink of bankruptcy. The Annie Leibovitz, the great artist whose photographs have graced countless galleries and prestige magazines like Vanity Fair. Is the federal government determined to punish her simply for being gay?
The bottom line of the statistics in the Times piece is that gay couples have to pay more throughout their lifetimes because same-gender marriage isn't legal in the U.S. If the federal government chose to recognize same-sex marriage (like Canada, Sweden, Norway, Holland, Belgium, Spain, and South Africa) then all of these costs and penalties would evaporate. It's really as simple as that. No DOMA, no unfair taxes.
A bill has been introduced in Congress called the Respect for Marriage Act (RMA), which would repeal DOMA. The bill was introduced in September by Rep. Jerrold Nagler (D-NY) and has 91 co-sponsors. However, it is unlikely the bill will be voted on until after the 2010 midterm elections and there is a risk that the Democrats will lose seats to Republican conservatives who will oppose the bill. No comparable bill has been introduced in the Senate, although Sen. Russ Feingold (D-WI) and Sen. Charles Schumer (D-NY) have been in talks to formulate a similar measure. So a repeal of DOMA could be in limbo for several years, or never pass at all.
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Congress is reworking a law that would eliminate tax for 2010.
GENE WALDEN on 09/26/2009 at 10:04pm (UTC) | | | (NEW ESTATE TAX LAWS MAY HAVE MAJOR IMPLICATIONS FOR GRATs)
The Minnesota Investor: New rules
could change estate payouts
Congress is reworking a law that
would eliminate tax for 2010.
By GENE WALDEN
Last update: September 19, 2009 - 10:48 PM
THE MINNESOTA INVESTOR
GENE WALDEN
Congress is pushing through some big changes in estate taxation laws that could have an impact on the level of tax-free distributions you can pass on to your heirs.
"In the universe of estate planning, what is going on about us is truly the equivalent of the Big Bang theory," explains Roy M. Adams, an attorney and professor emeritus of estate planning and taxation at Northwestern University School of Law.
Adams was in the Twin Cities last week to discuss the new laws at an estate planning workshop sponsored by Securian Trust Co. and the Salvation Army. He said Congress must act soon to rework an earlier law that is set to eliminate all inheritance taxes for 2010.
"Next year it would be a free ride," says Adams.
Under the existing law, beneficiaries would pay no taxes regardless of the size of the inheritance next year. But in 2011, the tax-exempt amount would drop to $1 million and heirs would pay about a 55 percent tax rate on any inheritance in excess of $1 million. Adams says he expects Congress to pass a revised tax law next month.
"It needs to be done then because if it comes any later the government Bureau of the Budget
wouldn't be able to get the new rules printed and distributed in time for 2010."
Under the proposals, the exemption level would
be $3.5 million per spouse -- before or after your death. Under the current law, you and your spouse can each give away $13,000 per year to your heirs tax-free. In addition, you and your spouse can make additional tax-exempt
contributions of up to a total of $1 million each to your heirs.
Under the new plan, you and your spouse would
each be able to make gifts of up to $3.5 million each -- for a total of $7 million. You can pay out all or part of the $3.5 million while you're alive. If you don't give the full amount away while you're alive, the balance of that $3.5 million would go to your heirs tax-free after you die. Any inheritance beyond the $3.5 million per spouse would be subject to a federal tax rate of 45 percent, plus state tax.
Changes in GRAT Trust rules
"There are currently a number of trusts that allow families to essentially beat the system and give away more to their children without taxes," says Adams. Under the new tax proposal, some of the rules governing those trusts would be changed.
Currently some wealthy families use a "grantor-
retained annuity trust" (GRAT) to pass on much of the appreciation of a particular asset to their heirs
tax-free.
With a GRAT, a family can put thousands or
millions of dollars into the trust, which is set up as an annuity that pays the donor an annual payment for a fixed period of time. At the end of the period, any remaining value of the trust is passed on to the beneficiary as a tax-free gift.
In determining taxes for the trust, the government assumes the trust is growing at a rate set by the IRS, which is currently about 5 percent. But if the trust is earning more than the set rate, then the heirs may get a tax benefit when the assets are distributed.
"On a $1 million investment, the government
assumes you're earning $50,000 a year based on
its set rate, but if the investment is paying 10 percent, your kids would receive $100,000, but it would be taxed as though they're receiving $50,000," said Adams.
However, if the parent dies during the term of the trust, the money reverts to his or her estate and is subject to the estate tax. To minimize the chances of that happening, estate planners have been setting up GRATs with terms as short as two years.
Under the new proposal, GRATs would be
required to be set up with at least a 10-year term.
Adams said Congress is also expected to repeal a rule that allows families to pass on assets with a tax discount through family partnerships.
Gene Walden lives in the Twin Cities and is the author of more than 20 books about business and investing.
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© Copywrite: 2009 All Rights Reserved. Frank A. Cseke, Esq.
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