It appears that the State Bar of North Carolina (Unauthorized Practice) and a few Missouri law firms agree!  Legal Zoom has been slapped with an amended class action petition on behalf of plaintiffs in Missouri  seeking refunds of all fees paid to Legal Zoom by Missouri consumers.  In addition, a suit has been filed by the North Carolina unlawful practice of law committee for the State Bar of North Carolina with a cease and desist letter.    Legal Zoom is aware of the suits and will apparently vigorously defend the claims. 
 
Just remember that fixing your plumbing or electricity may cause a problem that you can have fixed by a professional (provided you do not burn your house down), but most estate planning documents are not actually used until some dies or becomes incapacitated, when it is too late to make changes, and then if they are wrong or not coordinated properly with assets and beneficiary designations, the wrong person may make decisions or receive assets or the right person may receive assets at the wrong time.   I encourage everyone to go to an experienced estate planning lawyer, who is well versed in tax law, who drafts documents customized to each person’s situation, to make sure that your wishes and objectives will be translated into your estate planning documents.  
 
Stay tuned for more comments on these events.

The exact implications of this decision are unclear, however, the decision may eventually grant same-sex spouses rights to health benefits and an exemption from Maryland inheritances, estate and transfer taxes.  That said, it might also impose obligations relating to child support and alimony, if later divorced.

In the past, Maryland has expanded benefits to those registered as “domestic partners”, but this opinion is much broader and may provide an incentive for same-sex couples in Maryland to get married in another state (that allows it).  It will likely be up to Maryland’s highest court to issue the final verdict on this matter and clarification on what it means.  A very controversial political topic, we will be certain to stay on top of this legislation for our clients.

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.

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.

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 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.

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.