As my readers are aware, all of us in the estate planning community have been following the mess that Congress created by not passing any sort of law to set the estate tax limits at a permanent level.  As most people now know, the estate tax was repealed effective, January 1, 2010, but is scheduled to be reinstated in 2011 at a rate of 55%.

As a result, many States have taken action and legislatures are introducing bills that would require all estate and trusts to be interpreted as if someone died on December 31, 2009, unless Congress acts to clarify the estate tax law.  On January 12, Virginia was the first state to propose taking action with Maryland, New York and Georgia following closely behind.  The point of this legislation is to carry out what the deceased intentions were and to provide closure and a clear answer to families who are in disagreement where a recent death could result in litigation.  As we discussed in previous blogs an unintended consequent of Congress not acting was there is no “applicable exclusion amount” in 2010.  As a result many estate documents could unintentionally disinherit a spouse or could unintentionally not create a “bypass” trust that will save estate taxes, if any, upon the surviving spouse’s death.  These bills could pass by the end of February and made retroactive to January 1 unless Congress acts.  Federal law always takes precedent. 

*Footnote:  Missouri, the District of Columbia, South Dakota, Minnesota, Tennessee, Indiana, Florida, Ohio, Wisconsin and today Delaware are all drafting legislation to address estate planning documents for decedents dying in 2010 in their respective States.

Also, with the release of the budget yesterday, it appears the office of OMB has indicated that the 2009 level would apply in 2010.  The Wall Street Journal also reported that President Obama has proposed reinstating the estate tax to the levels of 2009 with a $3.5 million exemption with a 45% marginal rate to be extended permanently.  There are different income tax proposals which would eliminate some of the 2001 tax cuts at top rates.

Stay tuned.  I will be writing more on this subject as news breaks.  If you have any questions about your own specific situation or estate planning documents, please send me an email.

As we’ve been discussing, both the estate tax and the generation-skipping transfer tax were repealed at the end of 2009.  The twist being that, at any time, Congress may vote to retroactively re-instate the tax, or, if no action is taken this year, it may automatically renew in 2011.    That said, there is still a gift tax for people who give away more than $1 million during life – the only difference is that the top tax rate has been reduced from 45 percent to 35 percent.
 
One of the many provisions of estate tax law that is often overlooked is the gift tax exclusion for amounts paid directly for someone’s tuition or medical expenses.  Many people understand that they can give away 13K (or 26K for a married couple) each year without any gift or estate tax consequences.  What you might not know is that you can pay for things like medical expenses or tuition in any amount what-so-ever.  You could pay for a friend’s operation or college or business school tuition (or even someone’s private high school or other lower school education tuition) with no gift or estate tax consequence.  Similarly, a grandparent could help their children pay for current, day-to-day medical or tuition expenses - things like doctor co-pays, prescription drugs, and dental bills.  The only condition is that these “med-ed” payments, as they are called, must be made directly to the providers of those services.
 
To facilitate this in the simplest way possible, we have advised clients to open a “Family Savings Account”.   For example, a client opens a bank account in their own name starting at whatever amount they want (adding to it as needed).  They then give debit cards to their children or grandchildren and let them use the debit cards for payments made directly for tuition or medical expenses.  Alternatively, a client can give as many children as they want power of attorney over that account, so that they can write checks (again to medical providers or to educational institutions for tuition). 
 
Although you don’t technically need a lawyer to set up an account such as this, you obviously do need to trust the person who has check-writing authority or a debit card to not spend the money on other things.  And, in some cases, it might just be preferable to have a lawyer, accountant or financial adviser play this role and write checks on behalf your children, grandchildren’s or other desired persons’ medical and tuition expenses.

I have spoken out many times against “Do-It-Yourself” estate planning services - most recently in an article for Boomer-Living.com entiled, ”The Dangers of DIY Wills and Trusts - Packaged Estate Planning Documents Are a Big No-No.”  From LegalZoom and Suze Orman’s Will & Trust Kit to LegacyWriter and Build-A-Will, there are no shortage of companies and products promising “customizable” wills and other estate planning documents – at “a tiny fraction of the cost of an estate planning attorney.” 

There are many flaws with this “one-size-fits-all” model for estate planning:  Laws change.  Laws also vary from state to state.  Most importantly, only a well-experienced professional who is current on the laws and your unique circumstances, can provide you with the kind of security and accuracy crucial to having a solid estate plan.  It’s one of those life choices in which you really will get what you pay for.

A simple story underscores why:

There is an old story about a factory which shut down due to an equipment failure.  The owner of the factory called a renowned expert to rush to the factory to get things moving. The owner told him, “This shutdown is costing us $100,000 per day!”  The expert arrived, walked around the faulty machine, then took out a screwdriver and adjusted a thing or two.  Within moments the machine came back to life and the factory began to hum with activity.  The owner was thrilled—until he was given a bill for $10,000.  He roared, “But it took you less than 10 minutes to fix the machine—it cannot possibly cost $10,000!”  The expert calmly responded, “No, it took me a lifetime to know exactly where and how to use that screwdriver.  The bill is $10,000—but the value to you is $100,000 per day.”

Last week, the Senate took steps towards placing estate tax legislation (the Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Bill of 2009) onto the Senate calendar. This maneuver may result in the Senate bypassing the Senate Finance Committee in an effort to address the most recent estate tax legislation, which expired at the end of 2009.  On December 3, 2009, the House approved the bill, but the Senate, wrapped up in healthcare legislation, failed to act on the measure.

The proposed legislation would indefinitely extend the current exemption for estates up to $3.5 million per individual and $7 million for married couples.  It would also set a maximum rate of 45 percent on estates above this threshold.

A colleague of mine, Adrienne Carlson,  forwarded me a link to her latest blog post, “The Ten Most Obscure Tax Deductions You Should Be Using this Year” and it’s worth the read:

There are tax deductions out there for just about everyone imaginable. Unfortunately, many of them go underreported because few people are even aware of their existence, leaving a multitude of extremely valuable write offs going completely overlooked every year. The following tax deductions and credits remain some of the most commonly forgotten on return forms, but also some of the most lucrative as well. Take advantage of these whenever possible to ensure the most thorough and financially gratifying tax return possible.

1.  Fees for tax preparation and financial planning
2.  Safety equipment for work
3.  Exchange students, adoption, and foster care
4.  Interest on savings bonds
5.  Local and state income tax
6.  Charitable contributions that aren’t cash
7.  Health insurance premiums
8.  Owning a hybrid vehicle
9.  Higher education
10.  Saving for Retirement

For more information on the above deductions, you can read the complete blog post here.

The final year of The 2001 Tax Act (EGTRRA 2001) is now upon us, and estate tax repeal, at least temporarily and unless reinstated retroactively, is upon us.  Quite frankly, I never expected this to happen.  I, along with many of my colleagues, anticipated Congress to act before this.   Now, we have to consider that, at least for some part of the 2010, all transfers at death will be estate tax and generation-skipping transfer tax free. 

The Early Byrd Catches the Worm

That said, due to the Byrd Rule, which limits laws with a negative fiscal impact to 10 years, EGTRAA is set to expire on December 31, 2010.  This means that the estate tax law is scheduled to revert back to what it was as of January 1, 2001, as if the changes never occurred.  (The federal estate tax exemption will become $1,000,000, the GST exemption will be somewhat greater, and the maximum estate tax rate will return 55% - with a surcharge for certain estates of 5%.)

The looming question is:  Will Congress be able to address the massive confusion that is taking place when trying to understand and plan for a year of no estate and GST tax?  Complicating the matter, if Congress were to make new legislation retroactive to January 1, 2010, numerous lawsuits over the constitutionality of such a move may occur.  Such proceedings could end up tied up in the courts, possibly culminating in a Supreme Court decision.  

The Blame Game

It should not be a foregone conclusion that Congress can make the estate tax retroactive to January 1, 2010.  Many already feel the reinstituting the estate tax on a retroactive basis would be unconstitutional.  And, many say it would be in the best interest of the country to do nothing and let EGTRRA sunset (which means a $1,000,000 estate tax exemption, with a maximum rate of 55%).  The Democrats argue that a Republican Congress and President signed the law creating this insanity.  Republicans argue that they have steadfastly argued for total repeal of the “death tax” – which resonated with the people, at least back in 2001. Democrats had the opportunity to permanently end the “death tax” and chose not to.  Both sides had numerous opportunities to compromise on an exemption number (like 3.5 million or 5 million or even greater) and an estate tax rate (like 45% or 35% or even lower).  In addition, this issue will likely be a significant mid-term election discussion.  The most likely outcome of all of this will largely depend on the political priorities on Capitol Hill.

Step by Step

Probably the most controversial and confusing aspect of EGTRAA is that it replaced, for 2010, the estate tax and GST with a modified carryover basis.  Under the law that was effect in 2009, subject to some exceptions, assets owned at death received a basis “step-up” to a fair market value at death.  For example, if a client were to die owning a stock that they purchased many years ago, the beneficiaries could sell that stock at its fair market value of today and pay little or no capital gains tax (though the value of the stock would have been subject to estate taxes at it fair market value on the date of death).  The only capital gains tax that would be paid is the difference between the sale price and fair market value at time of death.

Under the 2010 repeal of the estate tax, a beneficiary receives property with an adjusted basis equal to the lesser of the decedent’s basis or the asset’s fair market value at the date of death.  This means the automatic “step up” is eliminated at death but retains the “step down” for depreciating assets.  Many attorneys agree that this modified carryover basis will impact far more decedents than those that would have been impacted by the estate tax.    To offset this loss, EGTRRA provides the executor or any other person responsible for the decedent’s property can allocate a $1.3 million “aggregate” increase on an asset by asset basis.   Assets left outright to a spouse receive an additional $3 million “spousal property basis increase”.  Assets left to a spouse in a “marital trust” may be eligible for this additional $3 million property basis increase depending on the terms and provisions of the marital trust.  In any event, this ability to increase the basis on certain assets will certain complicate the administration of estates of persons dying in 2010 and could lead to lawsuits if an executor’s action in increasing the basis of certain assets benefits the estate’s beneficiaries unequally.

The Bottom Line

I have always advocated that all existing estate plans created more than 4 years or so ago should be reviewed to make certain the client’s objectives are still being met.  The elimination of the estate tax for 2010 makes it imperative that many estate plans be reviewed and possibly changed.  For instance, if someone created their estate plan when the federal exemption was significantly lower, and should the client die in 2010, a client’s estate planning documents may include a formula that could shift assets from a spouse to another beneficiary.  This may be of particular concern where a client wanted his or her children or other relatives to receive the amount that passed free of estate tax and for the surviving spouse to receive the balance.  If all of the assets pass free of estate tax, then the surviving spouse may end up with nothing.  This could be a totally unintended consequence and could be particularly ugly for second marriages and children from a prior marriage.  It is important to make certain that the will or trust language will ensure assets are available for the surviving spouse.

As all of the above demonstrates, it is important that every person’s estate plan be periodically reviewed and provide the necessary flexibility and provisions to take account of current and ever changing tax circumstances.

As we have been following, the federal estate tax is set to disappear in 2010.   The push by Democrats to extend the current rate permanently failed to pass a short- term extension to override the tax’s expiration date last week.    Currently the top rate is 45%, with a $3.5 million exclusion rate.  Per the 2001 Legislative act and if Congress can get nothing done, there is no estate tax for the 2010 year but come 2011, the rate will increase to 55%, with a $1 million exclusion rate. 

There is also a little known provision inside the 2001 legislative act that may cause much angst to those people who inherit property 2010 and later sell it paying a higher capital gains tax.  This means that you have to calculate the gain based on the price the decedent paid for the asset, instead of the value at the time of transfer.  This means that many people would have a new capital gains liability from the provision in the 2001 Legislative act.  So instead of looking at the 2010 year as a tax break, it will be another tax increase for those that inherit property. 

The combination of depressed asset values and confusion over the estate tax rules has created an environment where people are not moving forward with their planning, sitting on the sidelines waiting for Congress to make a ruling.  Hopefully, Congress will be spurred into action early next year to address the issues around this legislative act.  They need to move forward so that many upper and middle class families can proceed with effective estate planning.

Serves me right, I go on a wonderful 10 day vacation from work and look what happens:  Congress finally passes an estate tax bill.  The full story is that the House has passed a bill that would permanently FREEZE the applicable exclusion amount (i.e., the amount that passes free of Federal estate tax) to 3.5 million and FREEZES the rate at 45%.  The Senate will now take up the passed House bill.  Then, if the Senate makes any changes, it goes to a conference committee.
 
The good news:  Something may happen before the end of this year to end the uncertainty.  AND the bill that passed the House does not change any other aspect of the estate tax laws (other than repealing carryover basis, which would have been a disaster anyway).  Therefore, GRATS, valuation discounts and other estate planning tax reduction techniques are still viable.
 
The bad news:  Anything can happen and NOTHING is permanent.  Hence, Congress can still act before the end of this year to eliminate or restrict GRATS and valuation discounts.  Clients should not be lulled into a false sense of security.  Action should be taken as soon as possible before Congress closes the door on these techniques.

Great food, family get-togethers, holiday cheer…estate planning?!?  While it may seem like a less than ideal topic for a fireside chat, estate planning is critically important and the holidays can present a golden opportunity to get things in motion.

Here are few things to consider:

The More, The Merrier – With siblings scattered across the country and grandkids away at college, it’s rare that families members are the in the same place at the same time.  Odds are that holiday get-togethers are the only exception.  Take advantage of having more of your loved ones under one roof so you can have the conversations you need to have with individuals or a group.

Don’t Be Left Out in the Cold - A common misconception is that estate plans are only important for the ultra wealthy - the Gates, Buffets and Rockfellers of the world.  Nothing could be further from the truth. Yet, more than 60% of all Americans die without one, leaving their estates to be divided and taxed according to predetermined federal and state laws, perhaps in ways they didn’t intend.  If this is the case, then unfortunately, no one will care about the best interests of your family, your heirs and your legacy. 

Ties that Bond – We all love the timeless gift-giving traditions of the holiday season – but that new tie, while nice, certainly isn’t legacy-building.  What do you want to be remembered for?  What do you want to pass on to the next generation?  Estate planning can go well beyond simply who/what will get your assets.  Other considerations include values, taxes, medical care, charitable gifts, educational trusts, pets and more.

Say “No” to Online Shopping – Buying a sweater online is one thing, but drafting a will online is another.  Think of drafting a Will online like trying to tackle your own electrical or plumbing problems.  It’s risky business.  Why chance your family’s future to an online estate planning service instead of hiring an experience professional to assist you?  If you draft a Will by yourself, and it has a problem, by the time it is discovered, it could be too late.  The stakes are too high.

Making a List, Checking It Twice - Even if you already have an estate plan, it needs to be reviewed at least every four years.  That said, if any of the following events occur, you should have your estate plan reviewed immediately: 

• A change in marital status
• The birth of a child
• A change in your state of residence
• A significant change in the value or character of your assets
• A change in intended beneficiaries
• The death of a beneficiary
• The death of a guardian, trustee, or personal representative named in your will
• A change in tax laws affecting federal (and your local state) estate tax deductions and calculations
• A change in privacy laws or other laws that affect the access to medical and financial information

The bottom line:  An outdated or inadequate plan is often worse than no plan at all.

Take time this holiday to discuss estate planning with your loved ones.  You’ll be glad that you did.

A reporter recently asked me the question:  “Who is Responsible for Debts After Someone Dies?”

After someone passes, family members typically have no obligation to pay the debts of the decedent from their sole and individual funds.  Debts of the decedent must be paid by the decedent’s probate estate or otherwise by assets passing from the decedent, as provided under state law. 
 
Every state has a different law and these laws can change at any time, either by legislative action or a court case.  For instance, in Maryland, a creditor or debtor must file a claim within 6 months of death or the debt can be denied and not paid.  Another legal possibility is that a claim can be filed only against the probate estate, so assets that pass outside of probate, like a joint bank account, etc, could be free from attachment by an debtor or creditor. 
 
There are situations in which a family member has accepted responsibility, before death, by being a co-applicant on a credit card or by saying so when the decedent went into a hospital or nursing home.  In those cases, that family member will very likely be liable for the debt. 
 
Finally, if a family member inherits a house or car that has a secured debt, the family member will have to pay the secured debt, or else that creditor can foreclose or repossess the house or car.

A colleague of mine sent me the below info on two tax provisions which are scheduled to expire after December 31, 2009.  Here’s how they might impact you:

1.  For 2009 only, you have the option of skipping your required minimum distribution (RMD) from traditional IRAs and certain other qualified pension plans. This suspension of the RMD rules applies to distributions you would have had to take because you’re over age 70½ or are the beneficiary of an inherited traditional or Roth IRA.

If you took a distribution earlier this year and would like now to reverse it, you have the later of 60 days from the distribution date or November 30, 2009, to roll the money back into a retirement plan.

2.  If you’re 70½ or older, you can make a 2009 donation of up to $100,000 directly from your IRA to a qualified charity without treating the donation as a taxable IRA distribution. (Distributions from employer-sponsored retirement plans - including SIMPLE IRAs - are not eligible.)

No charitable deduction is allowed for the donation unless nondeductible contributions are transferred.  In that case, a charitable contribution deduction may be allowed if you itemize deductions on your tax return.

I have written previous blogs on this topic in an effort to plan and keep my clients informed of the possibilities for the future.  As we rapidly move forward to the end of the year, I thought that by now, we would have seen some discussion in congress on the estate tax law and possibly an amendment to the current legislation.  Everyone had predicted that 2009 would be the year we saw change, but what if Congress just allows the estate tax to go back to 2001 levels?

Let’s review the current law as it exists today 2009:  $3.5 million exclusion from generation skipping transfer (GST) tax; $3.5 million exclusion from estate tax; $1 million exclusion from gift tax; 45% top marginal rate and no credit for state estate taxes (states like Maryland and DC imposed their own estate tax, which is currently a deduction on a Federal estate tax return). 

Now, for 2010 we are slated for no Federal estate tax; no Federal GST tax and $1 million exclusion from gift tax.   If nothing happens in Congress, then we are slated to return in 2011 to the pre-2001 tax laws:  i.e., $1 million GST exemption (as indexed for inflation after 1998); $1 million exclusion from estate tax; $1 million exclusion from gift tax; a 55% top marginal estate tax rate, and state death tax credit reappears (so that any state death tax is a dollar for dollar reduction from the Federal estate tax).

This scenario of uncertainty makes it extremely difficult for advisors and their clients in the creation of estate planning documents.  Some possibilities are: Congress could do nothing; Congress could pass a one year extension of the 2009 law; Congress could extend the current law and exemption levels permanently; Congress could reduce or increase the various exclusions rate etc. 

And, while I hope not, the administration and lawmakers in Congress could just allow the 2001 estate tax reform legislation to expire and therefore the estate tax laws would revert to the pre-2001 limits in 2011. The question becomes how do you plan and discuss strategies and make recommendations to clients.  I have always advised clients to plan for the tax law that we currently have, but to keep your estate plan flexible enough to account for future changes to the tax laws or your assets and net worth.

However, given the current uncertainty and the possibility that Congress could allow the current law to lapse so that we have once again have an exclusion from GST tax to be $1 million (as indexed), some clients may want to plan to avoid GST tax on a full 3.5 million dollars worth of assets, even if the law in the future only allows for an exclusion at a lower rate. 

One strategy would be to make a taxable gift in 2009, pay gift tax in 2010, and exempt as much as 3.5 million from GST tax.  Only clients who have very large estates should even consider this pre-payment of gift (and estate) tax.  If you are interested in this type of strategy, you would be able to provide a future estate and gift and GST tax pool of funds that would be available for multiple generations of your descendants. 

A second strategy would be to create a trust for the benefit of your spouse.  While there would be no current estate or gift tax, you would be able to fully use your 3.5 million exclusion from GST tax by using a currently little used technique called a “reverse QTIP election”.  Basically, you would establish a QTIP Trust for your spouse, fund it with 3.5 million of assets, file a gift tax return next year, and fully allocate your GST exclusion to the 3.5 million gift to the QTIP Trust.  Again, you would be able to provide for your future descendants to have access to a pool of funds that would never be subject to estate, gift or GST taxes.

Using these and other strategies can provide for a tax free transfer of wealth to your future generations.  Creating a flexible estate plan that takes into account the current estate tax laws will produce the most optimal estate plan for you and your heirs.

Here are some of the most common estate planning myths, debunked:

1.  Estate plans are only important for the Gates, Buffets and Rockefellars of the world. 

False.  In fact, nothing could be further from the truth.  Yet, More than 60% of all Americans die without one, leaving their estates to be divided and taxed according to predetermined federal and state laws, perhaps in ways they didn’t intend.  Regardless of the size or value of your estate, peace of mind comes in having a thoughtfully and professionally prepared estate plan.

2.  I can draft my own will using an online estate planning service.

False.  This is a huge no-no.  Buying a sweater online is one thing, but drafting a will online is another. If you think that you will be saving a few dollars by using forms found on the internet or in a do-it-yourself book to prepare your estate planning documents, then your family will be in for a rude awakening when they learn that part or all of your documents are not legally valid/don’t work as you had anticipated or that your assets go to individuals not named in your Will due to outdated beneficiary designations.

3.   I already have a will.  I don’t need further estate planning.

False.  Think you’re covered for life?  This is one of the most common and tragic mistakes when it comes to estate planning.  People dying with outdated, incomplete or unsigned wills – all are recipes for disaster. 

Your (entire) estate plan – will, trusts, heath care proxy, etc. - needs to be reviewed at least every four years and as often as any of the following events/scenarios occur:

-  The birth, death or disability of a child.
-  A change in state residence.
-  A change in marital status.
-  A significant change in the value or character of your financial assets that would make your estate taxable on a Federal or State level.
-  A change in intended beneficiaries.
-  The death of a beneficiary.
-  The death or disability of a guardian, trustee or personal representative.
-  A change in tax laws affecting federal and or state estate tax deductions.
-  A change in privacy laws that affect access to medical or financial information.
-  You have minor or problem children.
-  You want to leave some or all or your estate to charity.

Federal and State Laws Are One in the Same.

False.  Many states, including Maryland, have moved away from the Federal exemption of $3,500.000 and exclude only up to $1 million.  Therefore, even if you are exempt on a Federal level, your estate may still be exposed to State estate taxes.  Furthermore, most individuals don’t realize that state laws are very specific about what can and can’t be in a will, trust, or medical or financial power of attorney.  Or who can and can’t be a witness to a signing of a will or trust, and what formalities or protocols must be observed when signing.  Working with a qualified estate planning attorney will help to avoid this kind of simple and yet costly mistake.

The Bottom Line?

Only a qualified estate lawyer can help you to sort out complex family or financial situations and ensure that your estate is distributed how and to whom you want it to upon your death.

When someone dies, his executor or personal representative is responsible for preparing the decedent’s final income tax return and the decededent’s estate is liable for all income tax due.  If the executor distributes the estate without payment of the income taxes, the IRS could hold the executor personally liable for the unpaid income taxes. 

In a recent Florida case, this is what happened.  The executor’s excuse for not paying the income taxes was that the income was placed in a jointly held account with his brother and that the brother had agreed to pay the income tax.  However, when the brother later refused, the IRS sued the executor, not the brother, and won. 
 
This case is a reminder that anytime someone uses a probate avoidance technique, like a joint account, or paid on death account or transfer on death account, there are unintended consequences, such as the one above.  The person named as executor as the responsible for paying the income and estate taxes, but may not be able to obtain the funds from her persons who receive the assets. 
 
A much better way to plan is the bucket concept.  Either place all your assets in one bucket or direct that all your assets are to be placed in the bucket upon your death, and then the person in control of the bucket can make sure that he or she has the assets to pay the income and estate taxes due at your death.  Then, once those taxes are paid, the assets can be distributed according to your wishes.  This always works whereas Joint accounts paid on death accounts, do not always work and can have unintended consequences that totally undermine your wishes and objectives.  The bucket noted above is a revocable or living trust that is created upon your death and if fully funded avoids probate at death.

Today, the Social Security Administration announced that there will be no cost-of-living increase for 57 million Social Security beneficiaries next year because consumer prices have fallen.

This announcement marks the first time that Social Security benefits have not been increased year over year since the cost-of-living adjustment was put into effect in 1975.

Hoping to off-set the strain this will put on seniors and other Americans such as veterans and people with disabilities, President Obama is calling on Congress to send a second round of $250 in emergency recovery assistance. The original $250 relief payment was paid out of general revenue. That would likely be the case for the second payment as well.

A recent article on TheHill.com, Debate Over Estate Tax Likely to Wait Until 2010″, suggests that 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 is set to expire at the end of the year.

Many experts forsee that the most likely scenario for estate tax reform is a one-year extension on current estate tax laws which would buy Congress time to make broader reform in 2010.

We will, of course, be following this closely!

A recent Wall Street Journal blog reiterated what my firm considers an estate planning must:  Take the time to create an Advanced Medical Directive.  This issue was brought into the spotlight during the unforgettable Schiavo case in which Michael Schiavo went up against his in-laws, politicians, advocacy groups, the courts, and even the government, to have his wife, Terri Schiavo — diagnosed as being in a persistent vegetative state (PVS) for several years — disconnected from her life-sustaining feeding tube.

It is always tragic when someone dies.  In the past couple of months, well known individuals and celebrities have unexpectedly died - Farrah Fawcett, Michael Jackson, Billy Mays and Steve McNair.  It has now become known that Steve McNair did not have a Will or any sort of estate plan.  Besides his current wife and two children, he had two children from a previous relationship.  It is now up to the laws of Tennessee to determine who receives his assets and how and when they are distributed.   Given the probable size of his estate, the IRS may actually be the biggest beneficiary as a result of his death, receiving upwards of 45% of his assets.
 
Most of us do not think we are going to die tomorrow.  This is especially true of athletes.  The lesson that should be learned by these unfortunate deaths is that the future is unknown.  And, while there is a media circus surrounding the death of Michael Jackson, in the end, it will be determined that he created a conservative, private estate plan that will allow for the future wellbeing of his children, mother and others and or charitable causes close to him.
 
The bottom line is no matter how young or healthy you are, no matter your wealth or family situation, estate planning allows you to control who receives  your assets, allows you to determine who makes decisions for you and your young children, allows you to determine how and when your assets are distributed and finally, may prevent the IRS from receiving the lion’s share of your estate.

Currently, up to $3.5 million of an estate’s value is exempt from Federal estate tax for deaths occurring in 2009.  In 2010, the estate tax is scheduled to expire for a period of one year, returning in 2011 with a lower $1,000,000 exemption.  That is, unless Congress has anything to say about it.

Estate taxes have become a major source of revenue for the Federal government and chances are good that Congress is not to let the estate tax expire even for one year.  We in the estate planning community are keeping a watchful eye on this, knowing that chances are good that Congress will enact legislation in order to avoid the full repeal of the estate tax.

Many states, including Maryland, have moved away from the Federal exemption and exclude only $1 million.  Therefore, even if you are exempt on a Federal level, your estate may still be exposed to State estate taxes.  

Advanced planning is the only way to shield against any estate tax.

.

Some things to consider:

Leaving Your Entire State to Your Spouse

The majority of married couples leave everything to the surviving spouse in their wills. In some cases, this can be advantageous.  However, in others, it can mean paying substantial and avoidable estate taxes when the second spouse dies.

Reduce the Size of Your Estate Through Gifting

Using the annual gift tax exclusion of $13,000 per recipient can reduce the size of your estate.  If your spouse joins in the giving, you can transfer up to $26,000 to any number of recipients during the year.

Establish an Irrevocable Life Insurance Policy

In most cases, the proceeds of life insurance policies are subject to tax as part of one’s estate.  Establishing an irrevocable life insurance trust as “owner” of the policy can shelter the proceeds from estate tax.

In response to a budget crisis, the Delaware Legislature and Governor reinstated into Law the Delaware Estate Tax for people dying on or after July 1, 2009.  This new tax will be tied to the federal state death tax as it existed in January 2001 and applies to estates of $3.5 million or more.  After the elimination of the federal state death tax credit in 2005, one of the legacies of the Economic Growth and Tax Relief Act of 2001 (2001 Tax Act), over half of the states in the union lost their estate tax revenue, or they simply decoupled from the federal system altogether to prevent revenue loss.

For example, Virginia had a separate state death tax that they repealed.  This year, in Virginia, three bills have been introduced to create a new estate tax hoping to create over $100 million in revenue for the State.  All of these proposed bills have failed to pass in the legislature.

What this all means:  States facing large budget deficits along with the growing economic challenges are once again looking at “estate taxes” as a means to buffer or balance their budgets by taxing the deceased.

As always, we will be following all of the local jurisdictions in regard to their estate tax laws.  Currently, as stated above, Virginia does not have an estate tax, while Maryland and D.C. both have an estate tax on estates valued at over $1.0 million.

Now that the untimely death of Michael Jackson is turning into a custody battle brewing between the Jackson Family, the biological Mother of his children and possibly the Nanny, I believe it is important opportunity to mention how essential it is that parents name guardians for their children in the event of incapacity or death.

Many people are under the impression that estate planning is “just for the wealthy” or for the elderly.  This could not be farther from the truth.  Whether you have many assets or not, it is essential for families with children to clearly define who should care for your children if you are not able to so.  A court will normally honor the wishes of the parent to determine who should take care of the children. 

No one can predict how or when we will die, however, we can dictate how our children and our assets will be handled after your death with basic estate planning.  This includes appointing someone to make medical and financial decisions for you, if you are unable, as well as naming guardians for your children, for both the long and short term.  Again, if these decisions are not put in writing, you have left it up to a judge to make decisions for you, sometimes after a messy and costly court fight. 

This past winter, one of my clients, a single Mother with two teenage children suddenly died.  Because  thorough and complete estate planning had been done, a close family friend, who agreed to move into my client’s house, was named as the guardian and was able to immediately begin caring for the teenage children.

So use this sad and tragic passing of one of entertainment’s icons as a call to families to take control of your future and that of your children.  Do not wait to have basic estate planning, i.e., wills, advanced medical directives, correct beneficiary designations, power of attorneys and guardianship, documented so if something tragic happens, you have directed who should make decisions, who should care for your children and how your assets shall be used after your death.  And, at the same time, use the opportunity to document the values you want passed along and how you would like for them to be raised.  Don’t let the courts do this for you!

A California court has made the late Michael Jackson’s mother, Katherine Jackson, the temporary administrator of his estate pending a hearing next Monday.  Mrs. Jackson’s had petitioned for the status out of concerns that a host of third parties could try to steal from the estate.

In addition to various bank accounts, Mrs. Jackson and her attorney worry about Michael’s stake in the Sony-ATV Music Publishing Catalog - which includes Beatles’ works — thought to be the most important asset in the estate.

Right now, it’s uncertain whether Michael Jackson had a will as none of the family members were aware of one.

You wouldn’t think so, but many times celebrities dies without a comprehensive estate plan in place.  It does not surprise me that there are already allegations regarding inappropriate conduct by various parties.  I believe that this will be the tip of the iceberg. 

The lesson for us normal folks is to plan early and to make sure all assets are owned properly and that all retirement accounts have the proper beneficiary designations.  Everything should be coordinated and reflect the exact wishes of the individual.  Moreover, it is important that the people close to you know about your planning, though maybe not the exact details, and know who to call when the unfortunate happens.

Charitable gift annuities allow donors to make a tax-deductible contribution and, in exchange, receive regular payments for the rest of their lives.  Ideally, about half the initial gift remains with the charity when the donor dies.

For donors 65 or older, gift annuities might seem like a smart option because they can yield between 5.3% and 9.5 - less than they could probably get from a commercial annuity, but appealing at a time when yields on five-year certificates of deposit and 10-year Treasuries are hovering around 3%.

However, the economic downturn could cause some charities, which typically back the annuities themselves, to have trouble meeting their pay-out obligations.  For example, if a charity goes bankrupt, creditors ahead of you in line could have a claim on assets intended to fund your payments.  Making matters worse, the gift is irrevocable — meaning you can’t get your money back if the charity runs into trouble.

A financial advisor contacted me recently regarding one of her clients.  A widow died in 2006, leaving her estate to her daughter.  Her estate included US Savings bonds of $350,000, of which $280,000 was interest which she had never paid tax on.  The daughter had the bonds changed to her name, thereby deferring the income tax until the savings bonds matured.  This can make sense, but in this case it did not.  Because the estate was subject to state estate tax, but not federal estate tax, there is no offset against the future interest income for the state estate tax paid.  In other words, there are two taxes on the interest income, state estate tax and federal and state income tax.

A better plan would have been to realize some or all of the interest income on the final income return of the widow.  That way the income tax paid would be a deduction against the assets of the estate, thereby saving Maryland estate taxes AND avoiding the double tax situation. 

This is a classic example of having to pay more tax than necessary because of the lack of proper planning and lack of obtaining professional tax advice after someone died.

I have heard that members of a House and Senate negotiating committee have worked out a compromise on estate tax reform.  While details are still not know, it appears that the estate tax would be kept permanently at the 2009 levels.  This means that individuals could exempt $3.5-million from Federal estate taxes and a couple, with basic estate tax planning, could exempt $7-million from Federal estate taxes.  Estates over these amounts would be taxed at a 45 percent rate.

Stay tuned for more breaking news.

Great news and information for anyone interested in including their pets into their estate plan!  This April, Governor O’Malley signed into law HB 149, which will allow statutory pet trusts in the State of Maryland. 

Key Components of HB 149 (These provisions apply only to pet trusts created on or after October 1, 2009.)

• The animal must be alive during the settlor’s lifetime.
• The trust ends at the death of the last animal covered by the trust.
• If the settlor did not appoint someone to enforce the trust, the court may appoint an enforcer. 
  A person with an interest in the welfare of the animal may ask the court to appoint an enforcer or to remove an enforcer who is not doing his/her job. 
• Trust property may be used only for the pet’s benefit unless the court finds that the value of the trust property is excessive. 
• If the settlor did not provide express directions, excess trust property passes to the settlor (if still alive) or to the settlor’s successors in interest if the settlor is dead. 
• The Rule Against Perpetutities does not apply to pet trusts. 

Benefits of a Pet Trust

• Ensures your pets will be cared for, as you yourself have cared for them
• Ensures that there are funds available and a care taking system is in place
• Appoints a caregiver and at least one backup caregiver
• Appoints a Trustee to make sure that the care giver is doing his or her job
• Protects the money designated for the pet and ensures that it lasts for the duration of the pet’s life
• Gives directions regarding health care needs, exercise needs, diet needs, preferred veterinarian, and burial/cremation plans for your pet
• Provides that any funds remaining in trust at the death of the pet goes to charity or a family member
• Provides a method for finding a caretaker in the event that the caretaker or the back-up caretaker you have selected is unavailable
• Assets in a pet trust are NOT subject to the caregiver’s creditors, marital disputes, or bankruptcy. (Alternatively, if you leave an outright gift of money to a person in your will in exchange for the care of yur pet, the money will go to that person’s heirs or beneficiaries at his or her death and will not be available to care for the pet).
• You can provide for a temporary emergency/caregiver in the event that something unexpected happens to you providing them with keys to your home, feeding and care instructions, the name of your veterinarian, and information about permanent care instructions.
• Planning can lead to peace of mind, reducing the anxiety that many pet owners experience when they envision their beloved pet living without them
• There is no assurance that if you leave money to someone outright to care for your pet that they will do what was promised
• To ensure that certain people are notified, so your pet’s care will not be interrupted
• To ensure that caretakers are pre-selected by you
• To provide a source of funds for your pet’s care
• To inform future caretakes of your pet’s care instructions, likes and dislikes, and your wishes as to your pet’s burial and cremation

I recently gave the Wall Street Journal my take on the most important questions you should ask you aging parents.  Here’s the list:

• Have you named someone to make medical decisions for you (and to obtain medical information)?
• Have you named someone to make financial decisions for you? 
• Do you have a list of your assets, passwords, login, other important information; if so, where is it?
• Where do you want to be buried?  Who do you want to invite to your funeral?  What type of funeral do you want?
• Do you hide cash or jewelry in your house?  Can you tell me where it is hidden?
• Do you want any of your grandchildren to get anything when you die? 
• Have you clearly determined who is going to receive your personal effects?
• And the most difficult:   When was the last time you have revised your Will/estate planning and should you revisit it at this time?

Taking the time to ask these questions now will save you from big headaches and financial burdens later.

I remind my clients often to contact us immediately any time there’s been a significant change in their lives, including, but not limited to:  the death of a beneficiary or anyone else named in your will, a change in marital status, new children, a change in state residence, and, as we’ll discuss in more detail, a significant change in the value of your assets or a change in tax laws. 

It’s no secret that the majority of Americans have been impacted by the current economic crisis.  Investment values have sharply declined, leaving many (particularly those nearing retirement) unsure of what to do with their assets. 

This financial uncertainty, coupled with the January 1, 2009 increase of the federal estate tax exemption from $2 million to $3.5 million, may be causing a shift in your estate plan. 

How?  Very often, estate plans can use formula clauses to fund a bypass (tax savings) trust with assets up to the maximum amount of the federal estate tax exemption ($3.5 million) with the “remainder” of the estate (often including IRAs and 401(k) accounts) passing to a surviving spouse. 

For example, a client may wish for a set percentage of assets to pass outright to a surviving spouse.  But, lower asset values and the higher estate tax exemption may result in an inadequate amount.

Another area for concern is with charitable gifts or distributions to children, grandchildren or other relatives on the death of the first spouse.  With fewer assets to go around, one might be concerned about making such allocations out of concern that there won’t be enough left to a surviving spouse.

The bottom line?  Not all estate plans are created equal and they certainly can require updating.  After all, an outdated or inadequate plan is often worse than no plan at all.

In most trusts, there are current beneficiaries and future beneficiaries.  A current beneficiary is someone who is currently entitled to receive, either mandatory or discretionary, distributions of income or principal.  A future beneficiary is only entitled to distributions of trust income or principal upon the death of the current beneficiary or beneficiaries.  The law in most states, including Maryland, has long held that a current beneficiary is entitled to receive an account, on an annual basis, of the income, expenses, gains, losses and distributions of the trust.   However, whether a future beneficiary was entitled to receive an account was not always required.

Today, the Maryland Court of Special Appeals held that a future beneficiary, i.e., someone who was not currently entitled to receive the income or principal of the trust, but is only entitled to receive a distribution upon the death of the current beneficiary, is entitled “to make a reasonable request for an accounting [of the trust] based upon his status as a Trust beneficiary who possesses a future interest in the Trust.”

Also, and maybe more importantly, the trust in this case was a joint revocable trust, one which both spouses create and are the trustees and beneficiaries.  This revocable trust divided into two trusts when the first spouse died.  One of these trusts was irrevocable that could not be changed by the surviving spouse.  The other trust was revocable and could be changed by the surviving spouse.  The Maryland Court of Special Appeals held that the future beneficiary was entitled to receive an accounting of both trusts, even the one trust that the surviving spouse could completely change. 

In my practice, I have rarely created joint revocable trusts, except when I am almost certain that there will be no estate taxes at either spouse’s death.   This case confirms my belief that joint revocable trusts should not be used in Maryland when there will be the creation of an irrevocable trust at the first death in order to save estate taxes at the second death.  In those cases, I always recommend separate revocable trusts.  After this Maryland case, I will continue my practice and recommend separate revocable trusts for married couples who have a potential estate tax problem (i.e., a combined estate in excess of 1 million dollars, which is the amount of assets that can pass free of Maryland estate tax).

A client came to me recently with a very unfortunate story.  Her Great Uncle, Bud, from NY, a single man with no children, had passed away a few months prior and, as is too often the case, he hadn’t properly updated his will before he died.  Like many, he procrastinated.  This unfortunate mistake resulted in everything being left to an ex-fiancée whom the man hadn’t seen in nearly a decade – his home, his investments, the entire estate – that which ultimately included, a 529 Plan which he’d set up for my client’s 6 year old son when the child was a baby.  You see, his Will was over 10 years old, had never been changed, even though he moved states, never married, and started to make gifts to his nieces, nephews and their children.  Moreover, not only did he leave everything to his ex-fiancée, he named her as his executor, and therefore totally in charge of all of his affairs and assets at his death.

You see, when Uncle Bud set up the 529 college education savings plan as a gift to his Great Grand-nephew, he named the great-grandnephew as the beneficiary.  However, what he didn’t do was to add one or both of the child’s parents’ names as the “participant” or “owner”.  You see, the “owner” or the “participant” actually controls the 529 account, even to the extent of changing who the beneficiary is.  Yes, the gift to the great-grandnephew could be changed and given to someone else.  So, when the uncle passed and my client called the provider of the 529 plan (Fidelity) to make sure it was protected, she was told that the 529 account was now considered a part of the deceased’s estate (now belonging to the ex-fiancée) and that because her name wasn’t listed as a owner or participant and because the 529 account was owned by a custodian (i.e., uniform gift or transfer to minor) or a trust, she would need the executor of the estate (also the ex-fiancée) to essentially “turn it over to her” in writing.

How could this be that a gift, so undeniably intended for the great-grandnephew, be taken away?  This is where 529s can be tricky in that they are gifts, but also not gifts.  The law allows for the owner of a 529 Plan to change or remove a beneficiary at any time.  As the executor of my great uncle’s estate, rather than do the honorable thing, the ex fiancée opted instead to remove the child’s name from the 529 plan and transfer it to someone else and/or cash it out. 

My client might have gone to court to contest the ex-fiancée’s decision, but, in this case, the cost of doing so would have surpassed the value of the 529 account itself.  It’s really a shame, but this story underscores the importance of having your financial and estate planning documents thoroughly reviewed and cross-referenced.  Also, the beneficiaries and owners of your accounts must also be reviewed to make sure they are coordinated with your estate planning documents and your goals and objectives.

If you or someone in your family is 70½ or older (or will be this year), or if you have inherited a loved one’s IRA or other retirement plan, here’s important news:  A recent law waives the requirement that you must take a required minimum distribution from your retirement accounts. This includes 401(k) plans, 403(b) plans, certain 457(b) plans, and IRAs.

Normally, those 70½ or older must take a minimum required amount from their retirement accounts every year or face a 50% penalty tax on the amount required to be withdrawn but not taken. The required amount is calculated based on the owner’s life expectancy and the retirement account balance as of December 31st of the previous year.
 
This provision is Congress’ way of saying that because your retirement account may have suffered losses in the recent downtown, you will not be forced to sell at the bottom.  However, if you need the distribution to live on, then this provision does not help you at all.  This provision is only helpful to those who do not need the required minimum distribution.  In those cases, this relief allows for an additional year of tax deferred compounding.

FYI:  This provision is only effective for 2009, and will probably not be extended.

While these are not estate tax related, I wanted to share some information on new income tax provisions that may very well impact you!  Here are some of the key provisions:

-          One of the biggest breaks will come from changes in the Alternative Minimum Tax (AMT), which could mean a $2,300 savings for a family of four.  The AMT was originally meant to ensure that the rich paid some taxes, but in time it has come to hit families making as little as $45,000.

-          If you are unemployed, you will receive an extra $25 a week and your checks will continue until the end of this year. 

-          If your child is in college and you earn less than $160,000, you will be eligible for a $2,500 tax credit.

-          Now is the time to buy a new car, because the sales tax will be an income tax deduction under the bill.

-          First time home owners can receive an $8,000 tax credit for buying.

-          There are increased depreciation deductions for business owners.

Advance planning is always important, but in ways we sometimes do not anticipate.  In our practice, after a client signs their estate planning documents, they are sign the back of one of our business cards, stating that they have appointed so and so to make medical decisions and that a copy of the documents is on file in our offices.  Late last year we did receive a phone call from a hospital, asking us for a copy of the client’s advance medical directive.  We immediately faxed this to the hospital, which allowed the client’s daughter to make important immediate medical decisions.  Today we received a  telephone call of an entirely different manner.  A client had lost her wallet.  The good stranger who found her wallet had no way to contact her until he saw the card we gave her in her wallet.  So, he called us, explained what happened, and we connected him with our client, who will get her wallet and important papers back.  Unanticipated, but incredibly important and helpful.  While you may be reluctant to put your own phone number in your wallet, there is absolutely no downside to putting my phone number in your wallet, and who knows, one day it may help to get your own wallet back!

In a very common scenario, a participant in an ERISA plan (any qualified retirement plan) names his spouse as the beneficiary of his pension plan. The parties subsequently divorce, and although the divorce decree purports to disclaim any interest the spouse may have in the pension, the participant fails to change his beneficiary designation. When the participant dies, how does the plan administrator know where to pay the pension funds?

The Supreme Court answered this question last week in Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, 555 US ___ (January 26, 2009).   Not surprisingly, the Court concluded that the plan administrator’s responsibility is to comply with the terms of the plan document, which in this case meant paying the benefits in accordance with the beneficiary designation.

What does this mean for you?  

Over the past 20 years, I have worked with thousands of individuals to prepare their estate plan and to administer their loved ones estates after death.  Many times the wrong person has been named as the beneficiary of a retirement plan, an IRA or a life insurance policy.  Luckily, when we are doing estate planning for a client, we are able to change the beneficiary designations to make sure that the right persons (and not a divorced spouse or forgotten friend or former companion) receive the proceeds and benefits after death. Sometimes, however, we only get involved after the death of a loved one and then it is too late. In these situations, many times the wrong person will receive the proceeds and benefits, and some times, even though the right person will receive the proceeds, it only happens after significant legal fees or taxes.  And sometimes a minor is named as the beneficiary, and then there are significant court fees and oversight and the minor receives full control at 18, when it may not be appropriate.

What should you do? 

Review your estate plan and do a beneficiary audit.  Review your Will or Trust to make sure the right persons receive your assets and make decisions for you.  Look at every one of your beneficiary designations and make sure that the right person is named to receive the proceeds.  If a minor is named, change the beneficiary to be a trust for the minor.

This is just one more lesson that estate planning is a process, and not a product.  Moreover, it should remind everyone that if you have not adequate estate planning, now is the time.

These changes in the law provide an ideal opportunity to review your current estate plan:

Federal Estate Tax

The federal exemption for estate tax has increased from $2,000,000 to $3,500,000 for 2009. The estate tax is currently scheduled to be repealed in 2010 and reinstated in 2011 with an exemption of $1,000,000.  I believe that Congress may finally change the law in 2009.  Stay tuned for further updates.

Maryland, D.C. and Virginia Estate Tax

The Maryland and D.C. estate tax exemption remains at $1,000,000.  This means that an estate may be subject to Maryland or D.C. estate tax (or another state’s estate tax) even if it is not subject to federal estate tax.  This change has a significant impact on wills and trusts created before 2001.   However, there is no estate tax in Virginia.  Other states have different exemption levels.  Please check with your tax advisor.

Generation Skipping Tax

The federal generation skipping transfer (“GST”) tax exemption has increased to $3,500,000 for 2009 and is scheduled to be repealed in 2010.  The GST tax will be reinstated in 2011, with an exemption level of approximately $1,400,000.  This change affects certain wills and trusts created before 2001 with GST provisions. 

Gift Tax

The annual exclusion has increased from $12,000 to $13,000 for 2009.  Thus in 2009, each person may now transfer up to $13,000 to an unlimited number of individuals free of gift tax.  This change impacts various aspects of planned annual gifting, including the payment of life insurance premiums on policies that are held in an irrevocable trust.

The annual exemption for gifts to a non-citizen spouse has increased from $120,000 to $133,000.  Thus in 2009, a spouse can transfer up to $133,000 to their non-citizen spouse free of gift tax.

The lifetime exemption for gift tax remains at $1,000,000.  As such, the federal gift tax exemption is not equal to the federal estate tax exemption.  This impacts gifting strategies and overall estate planning.

Inheritance Tax

Maryland’s inheritance tax remains unchanged.  Assets distributed to “collateral heirs” at death are subject to a 10% Maryland inheritance tax.  Generally, collateral heirs are individuals other than spouses, parents, children, grandchildren, step children, spouses of children and grandchildren and brothers and sisters.  D.C. and Virginia do not have an inheritance tax.  A few other states have an inheritance tax.  Please check with your tax advisor.

IRA Charitable Rollover

The Emergency Economic Stabilization Act of 2008 (signed into law on October 3, 2008) extended the IRA charitable rollover to all distributions made between January 1, 2008 through December 31, 2009. Taxpayers age 70 ½ and above may donate up to $100,000 from their IRA’s to a public charity and the donated amount will be excluded from the taxpayer’s income.  The donation counts towards the taxpayer’s required minimum distribution amount for the given year.

With Valentines’ Day upon us, love is in the air.  As a boomer and a romantic, I believe that marriage (even the second time around) is a wonderful thing.  That said, the attorney and the realist in me knows that sometimes financial and estate issues can get in the way.  Therefore, there are several things for people - particulalry boomers - to consider before remarrying.

Children from a First Marriage

Naturally, remarrying is more complicated when children are involved.   Two of the most common concerns are:  How will you care for your children financially while providing for a new spouse, and, how can you leave assets fairly between children from your previous marriage and a new spouse?   Sharing these and other concerns with your financial and estate planners is key when deciding on solutions that work for your new family dynamic.

Pre-Marital Agreements

No longer taboo, pre-marital agreements are becoming more and more mainstream - and with good reason.  As you probably know, the reality is that relationships don’t always work out like we expect them too.  Signing one is the difference between protecting your income and your children’s inheritance rights, and not.

Living Arrangements

With marriage, comes that little thing called logistics - such as where to live.  Should you move into your spouse’s house, and the unfortunate happen to them, how can you ensure that you won’t then be kicked out by your deceased spouse’s family?  Likewise, if something were to happen to you, would your spouse, children and/or step children be protected?

Medicaid

If one spouse goes into nursing home, then both spouses’ assets must be used.  So, it is important to be sure that there are sufficient assets or long term care insurance to care for an incapacitated spouse.  Medicaid is one area where state laws differ widely and it is important to work with an experienced local lawyer.

Estate Taxes

Of course, many tax laws have different provisions for married couples.  This is particularly important to understand when it comes to estate tax laws.  A good estate planning attorney should be able to guide you in understanding how the various local and federal estate tax laws may impact you after you remarry.  For example, it’s possible to defer estate taxes when married due to the unlimited marital deduction.  You could even create a trust for your spouse that will qualify for the unlimited marital deduction (and therefore defer estate taxes), while still making sure that any unused assets at your spouse’s death will be given to your children.

Pensions / Social Security

Often overlooked, if one or both spouses are getting a pension, then the new spouse may be entitled to survivor pension.  The same goes for social security.

ERISA Plans / IRA

Here’s where it pays to have an estate planner who is comfortable working in partnership with the financial planning community.  You may need or want a waiver of Employee Retirement Income Security Act (ERISA) plans which has to be done after marriage.  The same goes for IRAs in some states.  In any event, getting remarried is a wonderful opportunity to make sure that the beneficiary of your retirement plans, IRAs and life insurance is correct.  Too many times, divorced spouses forget to remove their former spouse as a beneficiary of their retirement plans, IRAs and life insurance.

Credit Cards and Other Debts

Especially in second marriages, keep your debts and credit cards separate.  The worse scenario would be for your spouse to die leaving you responsible for his or her debts and credit card balances, while leaving all the assets to the children from another marriage. 

The bottom line?  If you’re lucky enough to have once again found love, congratulations!  By all means, enjoy it!  Just remember to do your due diligence before you walk down the aisle and take the steps necessary to protect everything you’ve worked for your entire life.  It’s not “unromantic” – it’s smart. 

“Estate Planning in 2009” – What Changes the New Administration May Bring

By:  Gary Altman, Esq.

It’s the beginning of the New Year and in a few short weeks, Barack Obama will take office as President of the United States.  As we all well know, “change” has been the primary theme and driving force behind the incoming administration.  And while the entire world waits anxiously to see what those changes will entail, we in the estate planning profession are keeping an especially close eye on one thing in particular - the federal estate tax.

Current Law – In 2009, the value of an individual’s estate that can qualify as exempt of federal estate tax - known as the “applicable exclusion amount” - stands at $3.5 million.  (This is up from $2 million in 2008.)  Assets in excess of the applicable exclusion amount are subject to a maximum federal estate tax rate of 45%.  And, while current law provides for a repeal of the federal estate tax in 2010, it further provides for the reinstatement of the federal estate tax for 2011 and beyond with an applicable exclusion amount of only $1 million and a 55% maximum federal estate tax rate.

Looking Back and Ahead – During the 18 month-long campaign season, President Elect Obama (in an effort to appeal to both liberal and conservative voters) proposed freezing  the applicable exclusion amount at $3.5 million, with the tax rate, for estates in excess of that amount, at 45%.  The problem with this proposal is that it was made prior to the unfolding of current economic crisis.  For that reason, many estate planning professionals fear that the government (desperate for revenue sources) may be compelled to lower the applicable exclusion amount (broadening the pool of people eligible for the tax) and likely raise the federal estate planning tax rate.

Additional legislation that may be considered by the government, include:

1. Eliminating the use of Qualified Personal Residence Trusts as a device to save estate taxes on the value of an individual’s home.
   
2. Restricting the utility of Grantor Retained Annuity Trusts by requiring a remainder interest (i.e., a taxable gift, subject to gift taxation) equal to at least 10% of the value of the property transferred.
   
3. Invalidating discounting techniques involving “family limited partnerships” and fractional interest discounts unless they involve an actual for-profit business.

Time is Of the Essence –Soon after the inaugural dust (or confetti) settles, we could see quick action on tax laws.  Major tax bills often occur in the first year after a presidential election (1997 and 2001, for example).  What’s more is that it is possible (as well as constitutional) for laws to be made effective retroactively to the beginning of the year.  Thus, it has never been more important to have your estate plan reviewed and updated.

Gary Altman, Esq. is the Principal and Founder of Altman & Associates, an estate planning law firm in Rockville, MD.  He can be reached on 301-468-3220 or via email at gary@altmanassoicates.net.  To learn more, visit www.altmanassociates.net.

Copyright © 2009 by Gary Altman, Esq.  All Rights Reserved.

1. Use It or Lose It — Use Your Annual Exclusion

The annual gift tax exclusion amount is the amount a person can gift to any number of recipients without a gift tax consequence. This amount is $12,000 ($24,000 for gifts from husband and wife; i.e., split gifts) for 2008. The annual exclusion amount will increase to $13,000 ($26,000 for split gifts) in 2009.

When determining how much annual exclusion you have available to give to a specific person, count the beneficiary’s share of insurance premiums contributed by you to any Insurance/Irrevocable Trust or by other gift but don’t count any gifts for education tuition or medical expenses that you paid directly to a school or medical provider, such as birthday or holiday gifts.

The annual exclusion does not carry over to future years.  Therefore, you either use it this year, or you lose your chance to make this tax free gifts.

2. Utilize Your Gift Tax Exemption

Each person has a lifetime gift tax exclusion of $1,000,000 (this amount is not likely to increase like the estate tax exemption), in addition to the annual exclusion gifts (explained above) and direct payments of medical or tuition expenses.  Thus, an individual can make gifts in excess of the annual gift tax exclusion amounts (discussed above) of up to $1,000,000 during his or her lifetime, before having to pay any gift tax (though a gift tax return has to be filed).

Before you use your lifetime gift tax exclusion, you should consult with a tax advisor to make sure that you use your lifetime gift tax exclusion in the most tax advantageous way.

Gifts between spouses are not subject to gift tax as long as the receiving spouse is a U.S. citizen.

Gifts to a non-citizen spouse are not eligible for a marital deduction or the gift tax exemption but are eligible for a special annual exclusion amount. This non-citizen spouse annual gift exclusion is $133,000 for 2009 and will continue to be indexed for inflation in future years.

Any gift to anyone, including your spouse, can be made outright, to a 529 Plan, to UTMA accounts or to irrevocable trusts.

3. Pay Tuition and Medical Expenses

Payments for tuition and medical expenses are not considered taxable gifts and are not included in annual exclusion limits or in the $1,000,000 lifetime exclusion. A donor, for example, can pay the tuition expenses for a donee at any educational level without any gift tax consequence. In order to be exempt from the gift tax, payments must be made directly to the educational institution or medical professional.  If you have a grandchild or child who is definitely going to a specific college or educational institution, please inquiry with your tax advisor how you can “prepay” for the tuition, without it being considered a gift.

4. Preserve Your Estate Tax Exemption

The estate tax exclusion is currently $2,000,000. In 2009, however, the combined estate tax exclusion for each individual will increase from $2,000,000 to $3,500,000 (the “exclusion amount”), unless Congress changes the law. In light of the increase in the exclusion amount, a husband and wife will be able to protect up to $7,000,000 (in 2009) from the federal estate tax with proper estate planning.

A proper estate plan, at a minimum, requires the first spouse to die to title assets valued at $3,500,000 in his or her own name (or in their revocable trust) for which the surviving spouse is not the designated beneficiary, and a will or revocable trust that carves out the exclusion amount into a trust for the surviving spouse.

It is important to note, while the estate tax exemption is scheduled to increase to $3,500,000 in 2009, followed by the repeal of the estate tax for one year in 2010, in 2011 and thereafter, the estate tax applicable exclusion amount will decrease to $1,000,000 (adjusted for inflation). Additionally, the top current federal estate and generation-skipping tax rate is 45% and, unless the law is changed, will stay at that rate through 2009. In 2010, the federal estate and generation-skipping tax rate is scheduled to fall to 0%, and then revert to a top rate of 55% in 2011.

The top gift tax rate is also currently 45%. However, even after the scheduled repeal of the estate tax in 2010, certain gifts will remain subject to tax at the top individual income tax rate, which is currently 35%.

Also, some states, like Maryland and DC, imposed their own estate tax, so while you may shelter $2,000,000 or $3,500.000 for Federal estate tax purpose, there may still be state estate tax.

5. Fund a 529 Plan

Section 529 of the Internal Revenue Code affords a taxpayer with an opportunity to establish a special account for the purpose of paying higher education expenses. Investments in a 529 Plan accumulate income tax free and distributions used for qualified education expenses are not subject to federal income tax. One common technique is “frontloading” gifts to a 529 education savings plan. You can make five years’ worth of annual exclusion gifts, or $60,000, to a 529 plan in 2008 for the benefit of any one person, but annual exclusion gifting to that person over the next four years will be reduced by $12,000 per year. This is especially effective when markets are depressed.

6. Create and Fund a Grantor Retained Annuity Trust

A Grantor Retained Annuity Trust (”GRAT”) is an irrevocable trust into which you transfer assets into the trust and retain the right to receive annual payments of a fixed dollar amount for a specified term of years. At the end of the trust term, the remaining trust assets pass to family members or a trust for their benefit.

The IRS assumes that a GRAT will grow at a rate equal to the 7520 rate at the time the trust is established (3.4% for December). Growth which exceeds the assumed rate passes to trust beneficiaries free of gift and estate tax. The lower the hurdle or interest rate, the larger the potential gift. GRATs are a preferred wealth transfer option in a low interest rate environment because it is relatively easier to outperform the hurdle rate than in a high interest rate environment. Like many estate planning techniques, GRATs can be very effective when assets values and markets are depressed.

GRATs are also “grantor trusts” which means that the grantor (creator of the trust) is taxed on all of the income. Payment of these income taxes is effectively a tax-free gift to the trust beneficiaries since the trust assets can grow without reduction for income tax payments.

In short, using a GRAT, a client can transfer assets to a trust on a gift-tax-free basis, receive the assets back over a period of years with a rate of return and any excess growth is outside the client’s estate.

7. Create and Fund a QPRT

Real estate values are presently low and many clients are considering transferring their vacation properties or personal homes to their descendants. Under current conditions, individuals have an opportunity to make a discounted gift using a Qualified Personal Residence Trust (”QPRT”).

If structured properly, the QPRT will freeze the value of the taxpayer’s residence at the time they create the trust and transfer the residence thereby resulting in significant estate tax savings. QPRTs are often considered most effective when interest rates are high; however, while interest rates today are currently very low, the low interest rate may be offset by current low housing prices.

After the gift, the donor can continue to live in the residence for the term of the trust, and potentially longer by renting the residence.

8. Intra-family Lending

Low interest rate environments are an excellent time for a legally documented intra-family loan. One means of wealth shifting to the next generation is through the use of loans. Clients can set up an irrevocable trust for the benefit of their beneficiaries and loan the trust money to make investments. Using the Internal Revenue Service (IRS) published rates, which are required to be used to avoid income and gift taxes, the client can lend money to the trust with extremely low interest rates. This creates fantastic opportunities to shift growth investments outside the taxable estate and into a trust for the beneficiaries of the client at no cost. So long as the investments beat the interest rate charged, the beneficiaries win and the client has reduced estate taxes.

Also, since loans are not gifts, there is no need to allocate any estate tax exemption or generation skipping tax exemption. The assets in the trust can avoid estate taxes for hundreds of year!  Many clients already have loans outstanding to their children or to trusts. In this low interest environment, these notes may be renegotiated at a lower rate to reduce the debt service cost and to provide greater growth outside the estate. The notes can be set up with varying due dates and principal amounts and increase the estate’s tax free growth.

9. Freeze Transaction

An effective wealth transfer technique involves a freeze transaction whereby future growth in investments are sold to trusts which benefit a spouse and/or descendants. An example would be a sale of an ownership interest in a income producing real estate or a success family business to a trust for children in exchange for a long-term low interest promissory note or a lifetime stream of payments.

If a client owns a 50% tenant in common interest in a commercial office building, appraised at $2,000,000 in assets, then the 50% tenant in common interest, representing $1,000,000 in pro rata value, might be sold to the trust for a $700,000 promissory note, taking into account a 30% valuation discount. Under this transaction, if the commercial office building increases in value, the growth inures to the trust, which owes back only $700,000 plus interest to the client. Consequently, this immediately moves $300,000 worth of wealth from the client’s taxable estate, and if the $1,000,000 interest int eh commercial office building increases, the difference between the growth in value and $700,000 plus interest has been shifted to the trust for the children.

10. IRA Charitable Rollover

Renewed federal legislation permits individuals 70 1/2 and over to again make a tax-neutral distribution of up to $100,000 from their Individual Retirement Account (IRA) in 2008 and 2009. The charitable transfer may be earmarked for a specific use within a charity but it may not be designated for a donor advised philanthropic fund, supporting foundation, charitable remainder trust or charitable gift annuity. A transfer from an IRA, under this law, is excluded from federal income tax, and qualifies toward the mandatory required minimum distribution but does not qualify for a charitable deduction.

In my last post, I discussed why the holiday season is a great time to discuss estate planning with your family.  In keeping with the holiday theme, today I’m zeroing in on gifting – specifically, passing on wealth to grandchildren.  

Many grandparents want to leave a significant bequest to their grandchildren.  The simplest way is to leave a specific dollar amount or a specific percentage of their estate to their grandchildren.  However, this simple approach is not the most tax or economically efficient method of leaving a bequest to grandchildren.  This article explores two alternative techniques that can provide significantly more benefits than just a simple bequest.

Gifting An IRA – Is it a Good Idea?

The first technique is for grandparents to leave their IRA (or other qualified retirement account) to their grandchildren.  IRA assets are generally included in the owner’s estate and are potentially subject to federal estate taxes and generation skipping transfer tax [when an individual has assets greater than $2,000,000].  These taxes are further compounded by the fact that IRA distributions are included in a beneficiary’s income and therefore subject to income tax.  Consequently, although qualified plans and IRAs are undoubtedly one of the best ways to accumulate dollars for retirement, they are not necessarily good vehicles for passing money to future generations.  The best solution is to leave IRA assets to grandchildren in a technique commonly referred to as IRA stretch planning.

IRA Stretch Planning

IRA Stretch Planning slows down distributions from an IRA and allows pre-tax dollars to continue to grow tax deferred through multiple generations.  Naming the right beneficiary is the first step in the plan.  When the IRA holder is married, the first choice should be the surviving spouse.  But, for a single or widowed individual (i.e. the surviving spouse), the youngest individuals available should be named as the primary beneficiaries.  For example, if a grandparent names his son, age 43, as the beneficiary, he will have 40.7 years to withdraw the IRA that he inherited from his parent.  If the starting account balance is $300,000, the first year distribution would be only $7,370.  If the son died at age 80, after taking almost 2 million in distributions over his lifetime, there would only be $450,000 left in the IRA for his descendants (assuming an 8% annual return).   By contrast, if a granddaughter is named as the beneficiary of a grandparent’s IRA and is 10 years old when the grandparent dies, she will have 72.8 years to withdraw the IRA that she inherited from the grandparent.  If the starting account balance is $300,000, the first year distribution would be only $4,121.  If the granddaughter died at age 80, after taking almost $14 million in distributions over her lifetime, there would still be over $2.3 million left in the IRA for her descendants (again, assuming an 8% annual return).

The next step in the plan is to postpone payout of the IRA until the IRA holder reaches the required minimum distribution age – generally age 70 ½.  Then, required minimum distributions should be taken over the participant’s life if possible and not accelerated, leaving a larger IRA balance for the surviving spouse, and eventually for younger generations.  At the IRA holder’s death, the surviving spouse should roll over the inherited IRA into one or more IRAs, depending on the number of grandchildren, naming each grandchild as the beneficiary of each separate IRA account.  The ability to roll over and delay distributions until age 70 ½ is available only to a surviving spouse, which is why separate IRA accounts are generally not created until the death of the second spouse.  The surviving spouse’s ability to roll over an IRA account provides a window of opportunity to delay further any distributions from the decedent’s IRA, thus stretching out tax deferred growth over another lifetime before distributions are made.

When the surviving spouse dies, each grandchild will receive distributions from his or her separate IRA over his or her own remaining life.  The younger the beneficiary, the longer the payout period.  By choosing younger beneficiaries and extending the deferral period, it is possible to accumulate and grow funds from an inherited IRA over multiple generations.

Now that you have made the decision to leave your IRA to your grandchildren, you must complete your plan.  Besides changing the beneficiary, you have to consider the following items: 

-          First, if you have a taxable estate, determining which assets pay the estate tax.  Most Wills and Revocable Trusts would require the IRA to pay its fair share of any estate taxes.  Since paying estate taxes from IRA assets would defeat the purpose of maximizing wealth transfer to grandchildren, a grandparent may want to change the “tax clause” in his or her Will or Revocable Trust. 

-          Second, some grandparents will replace some or all of the value that is now not going to their children by purchasing a life insurance policy which the children will receive.  If the life insurance policy is owned correctly, it will not be subject to estate taxes. 

-          Finally, since many grandchildren are minors, IRAs can not be left directly to the grandchildren, but instead must be held in a trust for the grandchild’s benefit.  These are very special trusts that are designed to be the beneficiary of an IRA and allow for the IRA distributions to be stretched over the grandchild’s lifetime.  Without the properly structured IRA Trust, the distributions may be wasted by a young beneficiary, controlled by a court, or the IRA stretch defeated by an impulsive grandchild who withdraws the whole IRA at a very young age.

Creating a Perpetual Trust

The second technique is to create a perpetual trust (or one that lasts as long as your state law allows) that will pay for your grandchildren’s and other descendants’ education and medical expenses. If structured properly, this special type of education and medical trust will never be subject to generation-skipping transfer taxes and will be an available pool of money that future generations can use to pay for the ever-rising costs of college and medical expenses.  Many grandparents decide to leave, in their Wills or Revocable Trusts, a percentage of their estates, such as twenty percent, this type of trust.

The Bottom Line

Grandparents take comfort in knowing their wealth will benefit generations to come and there’s more than one avenue to do so.  In the interest of maximizing and protecting what’s passed on, and making it easier on the beneficiary, it’s imperative to have done your due diligence and had things structured accordingly.

Great food, family get-togethers, holiday cheer…estate planning?!?  While it may seem like a less than ideal topic for a fireside chat, estate planning is critically important and the holidays can present a golden opportunity to get things in motion.

Here are few things to consider:

The More, The Merrier – With siblings scattered across the country and grandkids away at college, it’s rare that families members are the in the same place at the same time.  Odds are that holiday get-togethers are the only exception.  Take advantage of having more of your loved ones under one roof so you can have the conversations you need to have with individuals or a group.

Don’t Be Left Out in the Cold - A common misconception is that estate plans are only important for the ultra wealthy - the Gates, Buffets and Rockfellers of the world.  Nothing could be further from the truth. Yet, more than 60% of all Americans die without one, leaving their estates to be divided and taxed according to predetermined federal and state laws, perhaps in ways they didn’t intend.  If this is the case, then unfortunately, no one will care about the best interests of your family, your heirs and your legacy. 

Ties that Bond – We all love the timeless gift-giving traditions of the holiday season – but that new tie, while nice, certainly isn’t legacy-building.  What do you want to be remembered for?  What do you want to pass on to the next generation?  Estate planning can go well beyond simply who/what will get your assets.  Other considerations include values, taxes, medical care, charitable gifts, educational trusts, pets and more.

Say “No” to Online Shopping – Buying a sweater online is one thing, but drafting a will online is another.  Think of drafting a Will online like trying to tackle your own electrical or plumbing problems.  It’s risky business.  Why chance your family’s future to an online estate planning service instead of hiring an experience professional to assist you?  If you draft a Will by yourself, and it has a problem, by the time it is discovered, it could be too late.  The stakes are too high.

Making a List, Checking It Twice - Even if you already have an estate plan, it needs to be reviewed at least every four years.  That said, if any of the following events occur, you should have your estate plan reviewed immediately: 

• A change in marital status
• The birth of a child
• A change in your state of residence
• A significant change in the value or character of your assets
• A change in intended beneficiaries
• The death of a beneficiary
• The death of a guardian, trustee, or personal representative named in your will
• A change in tax laws affecting federal (and your local state) estate tax deductions and calculations
• A change in privacy laws or other laws that affect the access to medical and financial information

The bottom line:  An outdated or inadequate plan is often worse than no plan at all.

Take time this holiday to discuss estate planning with your loved ones.  You’ll be glad that you did.