This legislation would continue the current $3.5 million exemption and 45% rate, but does not include the spousal "portability." While the bill may very well pass in the House, Senate action is uncertain. More...
This from Howard Hinds of the Curbstone Group in Boston:
Master Limited Partnerships (MLPs) are excellent tools for estate planning:
1. MLP distributions (around 8% yield right now) are considered return of capital, meaning that distributions reduce your basis in the MLP, while allocated net income increases your basis.
2. Tax Shield: Because MLPs own large hard assets (like pipelines) with high depreciation (non-cash) expenses, allocated income to an investor is usually less than 20% of cash distributions in a given year for the first several years of ownership. This creates a tax deferral, which is recaptured when you sell the MLP.
3. When you sell an MLP: (a) the gains from your purchase price to selling price are taxed at capital gains rates, and (b) the difference between your purchase price and your basis (which has been reduced over time) is taxed at ordinary income rates.
4. But, if you die while holding an MLP, the tax deferrals you have accumulated over time are washed away along with the capital gains taxes, and whoever receives those MLPs after you die has a new stepped up basis, so those tax deferrals are not passed along. This can be a very big deal for someone who has owned Kinder Morgan Energy Partners since 1995 and they have $0 basis and the share price is $55 per share
So in addition to being great income vehicles for someone with large estate, MLPs can be great tax shields as well.
On November 17, 2009, Senators Tom Carper (D-DE) and George V. Voinovich (R-OH) reintroduced bipartisan legislation that would freeze the estate tax at its current 2009 level (a $3.5 million exemption and 45% rate) and allow a surviving spouse to elect to use the exemption of the his or her predeceased spouse. The bill was referred to the Senate Finance Committee.
Sounds like a nightmare, but it's true. After an auto accident, Larry Green was put into a body bag and refrigerated. The medical examiner dismissed paramedics' claims of signs of life from Green's "body." He was later determined to be alive, but now is in a nursing home and has limited brain function. Green's family has already recovered $1 million from Franklin County, NC. See this story from the Raleigh News and Observer.
And don't even think about estate tax repeal. From Brian Dooley CPA, MBT's newsletter:
Update: The AMT patch is gone as seventy-three tax breaks will get a twelve month life.
House Ways and Means Committee Chairman Charles Rangel, D-N.Y. is introducing legislation next week that would keep a variety of tax breaks from expiring before the end of the year. However, without the AMT patch, there is a ten percent tax increase for those living in California and New York and a five percent in other states (the math of the AMT depends upon your state tax rate).
Instead of sending the bill through his committee, Rangel plans to dispatch the bill directly to the floor of the House, so there is no debate There are about 73 tax provisions scheduled to expire by Dec. 31, including the credit for research and experimentation expenses, deductions for tuition and state and local taxes, film and TV production expensing rules, a deduction for contributions of food inventory, tax breaks for certain expenses by school teachers, and a host of other goodies. Why only a twelve month extension? It makes the lobbyists pay up each year.
The Estate Tax is not going away. One more year at $3.5 million exemption. In 2011, the exemption plunge to $1million. Let's face it, we need the money. As they say, dead men don't vote.
In a recent Florida case, Bank of America was held liable for refusing to honor a power of attorney:
Copyright 2009 Stuart News Company All Rights Reserved The Stuart News/Port
St. Lucie News (Stuart, Florida) November 15, 2009 Sunday Martin County
Edition SECTION: LOCAL; Pg. B5 LENGTH: 496 words HEADLINE: Stuart man
takeson Bank of America BYLINE: Melissa E. Holsman staff writer BODY:
STUART
-- When Clarence H. Smith Jr. sued Bank of America in 2007 over its
refusal to honor the power of attorney his now-deceased father had enacted years
before, he called it as a case of David against Goliath. And like
David, Smith on Friday walked out of court a winner, armed with a jury award
worth $64,142. "I'm glad we won, but I think it's a victory for more than
just us," said Smith, 67, of Stuart. "It's a victory for anyone who gets a
rough deal from a big bank -- that a little person can prevail against a huge
international bank." After a week-long trial, it took a one-man,
five-women jury 15 minutes to determine Bank of America had not acted
reasonable in September 2007 when it denied Smith Jr.'s request to
transfer $65,000 his father, Clarence H. Smith Sr, then held in a joint account
with a female friend he knew from living at Ocean Palms Retirement Center.
Smith said his ordeal with the bank began when he became suspicious
money may be missing from his father's bank accounts. He presented to
former Stuart branch manager Victoria Carscadden the durable power of attorney
he'd had on behalf of his father with a request to transfer money from the
elder Smith's jointly held accounts into a new account only the father and son
could access. But instead of honoring the request, Carscadden
testified that she consulted bank policies and called the woman on the account
with Clarence Smith Sr., and she accused the son of trying to steal his
father's money. Carscadden said she refused Smith's request because bank
rules governing jointly held accounts require that all signatures on an
account must agree to any transfers or changes. The woman sharing Clarence
Smith Sr.'s account, she said, had refused to allow any money to be moved.
At trial, Smith's Stuart attorney William R. Ponsoldt Jr. showed that
despite Carscadden visiting Clarence Smith Sr. to see he was competent and that
he wanted his son to manage his affairs, she still refused to recognize
Clarence Smith Jr.'s power of attorney. Shortly afterward, Ponsoldt told
jurors, the woman sharing Clarence Smith Sr.'s account moved all the
money into an account only she could access. Clarence Smith Sr. died about
three weeks later, Ponsoldt said. He argued that the bank's refusal to =
honor Smith's power of attorney went against state law. During his closing
argument, Bank of America attorney J. Randolph Liebler of Miami, said
based on bank policies, "it would be absolutely inappropriate to have honored
the power of attorney where there was some allegation of abuse -- rightly or
wrongly." After court, Bank of America spokeswoman Shirley Norton
said they were disappointed in the jury's verdict. "We believe that
neither the facts nor the law support the verdict," she said, "and we plan to
appeal." Smith meanwhile, said he'll use the money to pay bills from
his father's estate. "I feel fortunate we were able to take on Bank of
America," he said. "Think of all the people who can't."
Thanks to Brevard attorney Nicola Melby for bringing this to my attention. North Carolina also has laws to help with enforcement of a valid power of attorney. N.C.GS. Section 32A-40 et sq.
Thanksgiving is less than a week away, but many people currently have turkeys of a different kind - poorly drafted Wills.
If your Will is missing one or more of these features, it's time for an update:
Having these provisions can save a lot of time, money and aggravation in the administration of your estate. And these are just the simplest, most obvious things. Any number of other provisions may be advisable depending on your situation.
Another article from CQ Politics about the Democrats' plan for the estate tax in 2010.
Many people are aware that they can give any number of other people up to $13,000 per year under the federal gift tax annual exclusion (IRC Section 2503(b)). Staying under this number means that no gift tax return has to be filed and that there will be no reduction in the amount that can be passed free of estate taxes at the donor's death.
However, writing gift checks to children, grandchildren or others at the end of the year can cause the donee lose the benefit of the annual exclusion unless:
Bottom line: make sure your donee deposits the check no later than the last business day of the year.
Example: Bob gives his $13,000 gift check to his granddaughter Lucy on Christmas Day, 2009. Lucy deposits the check in her bank on December 31, 2009. The check is paid by the drawee bank on January 7, 2010. This would be completed gift for Bob in 2009.
Planning for tax-qualified plans, which includes IRAs, 401(k)s and qualified retirement plans, requires a careful examination of the potential taxes that impact these assets. Unlike most other assets that receive a “basis step up” to current fair market value upon the owner’s death, IRAs, 401(k)s and other qualified retirement plans do not step-up to the date-of-death value. Therefore, beneficiaries who receive these assets do so subject to income tax. If your estate is subject to estate tax, the value of these assets may be further reduced by the estate tax. And if you name grandchildren or younger generations as beneficiaries, these assets may additionally be reduced by the generation-skipping transfer tax. All tolled, these assets may be reduced by 70% or more.
There are several strategies available to help reduce the impact of these taxes:
Continue Reading...
Coming as no surprise to me, anyway, an article on the website CQ Polictics, House LIkely to Delay Estate Tax Consideration, states that the House will likely postpone any movement on estate tax legislation until after Thanksgiving. I'm still of the opinion that a one year "patch" continuing the current $3.5 million exemption and 45% rate is the most likely outcome.
This courtesy of Professor Chris Hoyt of the University of Missouri (Kansas City) School of Law:
The Tax Court rejected an argument made by the IRS that a donor should
not be able to claim a charitable income tax deduction for a
contribution to a private foundation because the donor effectively
controlled the private foundation. The case is Foxworthy, Inc. v. Comm,
T.C. Memo. 2009-203 (Sept. 9, 2009). This appears to be the first time
that the IRS has raised this argument in court, and it was soundly
rejected by the Tax Court.
The conclusion is helpful to also resolve questions about claiming
charitable income tax deductions for contributions to donor advised
funds and donor directed funds.
The cases that I have found where the courts disallowed a charitable
income tax deduction because of excessive donor control tend to occur
when the donor retains excessive control over the contributed property
(e.g., failure to deliver the property; retained possession of the
property; etc.). By comparison, the ability of a donor to advise or even
direct the specific charitable organizations that should receive grants
from a donor advised fund (Sec. 4966(d)), a donor directed fund (e.g.,
Sec. 170(b)(1)(e)(iii)), or a charitable remainder trust (Rev. Rul.
76-371, 1976-2 C.B. 305) has never before been an issue to prevent an
individual from claiming a charitable income tax deduction under Section
170. This new Tax Court decision buttresses that result.
Click "Continue Reading" for the excerpt of the Tax Court's opinion of the charitable deduction issue. It was just one of issues that the Tax Court addressed in its lengthy opinion.
From the GiftLaw eNewsletter article New Decade Predictions:
"The clear intention of Congress is to start addressing the deficit in 2011 by increasing taxes on upper-income taxpayers. The top brackets are proposed to be returned to 36% and 39.6% in 2011. In addition, the phase-outs known as "PEP" and "Pease" of personal exemptions and a 3% floor on itemized deductions will be restored. Capital gains taxes are likely to be returned to 20%.
The estate tax will also be retained, with a probable top rate of 45%. While the estate exemption is scheduled to return to $1,000,000 in 2011, it is likely to be held at $3.5 million, but could be lowered to the $2 million value that existed from 2006-2008."
Increasing tax rates and a possible lower estate tax exemption should fuel a renewed interest in charitable planning giving, including charitable remainder trusts.
Last Thursday's Wall Street Journal's website featured an article on online estate planning programs: Before It's Too Late: A Test of Online Wills. As you might imagine, I'm not a big fan of do-it-yourself estate planning, particularly for those who have substantial assets. Creating a Will and other documents yourself with the help of software may be better than nothing, but it can create a sense of false security, as it did for the author of the article, Jane Hodges.
In the articles, Hodges says: However, in crafting our revocable trust, the program presented a pop-up note indicating that people with more than $1 million in assets might need an attorney due to changing inheritance tax laws that take effect in 2011. (Our joint assets exceed this amount mainly due to hefty life insurance policies and the value of our home, which we don't own outright.) [Emphasis added.]
In this case Hodges did not see an attorney and thus failed to address a huge potential issue - estate taxes. If the federal estate exemption returns to $1 million in 2011 as scheduled, assets over $1 million, including proceeds of life insurance policies, will be taxed at 55% for federal purposes, not to mention any state estate taxes. Saving a couple of thousand dollars on legal fees could cost her beneficiaries hundreds of thousands of dollars in extra taxes. Plus there are a whole host of other issues that can be addressed by an experienced estate planning attorney that websites ignore. Caveat emptor!
The Elective Share is the value of property a surviving spouse is entitled to get from a deceased spouse. In the absence of a valid prenuptial or postnuptial agreement waiving such rights, when the deceased spouse leaves less than the elective share amount to the survivor, he or she can enforce the elective share.
North Carolina revised its elective share law effective for decedents dying on or after October 1, 2009. The revisions include expended definitions of what property is included in the determination of property subject to the elective share and provisions for valuation of the property.
SL 2009-368 - NCGS Chapter 30, Article 1A
Effective October 1, 2009, Trustees of North Carolina trusts can, subject to certain requirements, appoint the trust property to another trust for the same beneficiary. This "decanting" power can be useful in helping to protect trust funds. The law applies to trusts created before and after the effective date.
Click "Continue Reading" for a Comprehensive Living Trust Checklist to determine whether or not your trust needs to be upgraded. Thanks to attorney Thomas J. Bouman for the checklist, which I have modified for North Carolina purposes.
Continue Reading...
One common oversight I see when reviewing new clients’ financial status is failure to consider the estate tax impact of large life insurance policies. Most people know that life insurance proceeds are received free from income tax. What most don’t know, however, is that the proceeds are part of the insured’s estate for estate tax purposes if:
Life insurance proceeds of any amount can be paid to a U.S. citizen spouse free from tax. But – those same proceeds, or the value of items purchased with the proceeds, will be included in the taxable estate of the surviving spouse.
This may not be a problem for most of us at the current $3.5 million estate tax exemption. However, barring a change in the law, in less than 14 months the exemption will revert to $1 million, and the rate will increase from 45% to 55%. North Carolina adds another 16%.
With a $1 million exemption even a $250,000 policy could be subject to estate tax when combined with the value of real estate, retirement accounts, and all the other assets of a decedent. Why take the chance of losing over half the proceeds to Uncle Sam? The solution is to create an irrevocable life insurance trust (ILIT) to own the policy. The proceeds will then escape taxation at the death of the insured, his or her spouse, and can be structured to avoid taxes at the death of the children or other beneficiaries are well. In addition, the proceeds are protected from creditors and mismanagement by the beneficiaries.
If an existing policy is transferred to an ILIT, the proceeds will still be included in the insured’s estate for estate tax purposes if he or she dies within three years of the transfer, so it's best not to delay planning for existing policies.
ILITs must be structured properly to take into account various estate, gift and income tax issues, as well as state law. Make sure you have an estate planning specialist prepare your ILIT and work with your life insurance agent. ILITs are not inexpensive to create, but your beneficiaries could easily save several hundred thousand dollars or more.
This report on the NC case of Estate of Wilson is from the National Academy of Elder Law Attorneys (NAELA)'s eNewsletter:
Kenneth Wilson was hospitalized from January 7, 2007 through the date of his death on February 22, 2007. While he was hospitalized, his community spouse, Doris, sold her 100% stock ownership in Brothers Deliver Service to her son pursuant to a purchase agreement. The agreement provided for a total payment of $62,531, to be paid in 60 installments of $1041.82. Doris then applied for Medicaid on April 5, 2007. Benefits were denied after the Department determined that the purchase agreement was a countable promissory note. A fair hearing followed affirming that decision. The trial court reviewing the administrative appeal determined that the agreement was not a promissory note, but determined that it was countable as “chattel” since it involved the sale of stock. On appeal, the Court of Appeals reversed, finding that the agreement was not a countable resource. In analyzing the administrative code, the Court found three forms of property defined: real, personal and liquid. The agreement did not fall within the Medicaid Manual’s definitions of real or personal property. Therefore, to be considered countable, it must fall within the manual’s definition of “liquid assets.” Initially, the court of appeals agreed with the trial court that the agreement was not a negotiable promissory note. Its payment terms were too uncertain to constitute an unconditional promise to pay. The court then found that the agreement was not chattel paper; to be classified as such it must be a monetary obligation and thus be capable of being monetarily valued. In this case, the payment terms were too uncertain to determine what value should be given and when payments would begin. Although the court held the agreement was not countable because it did not squarely fit within the terms of a poorly worded manual, the decision appeared to be influenced by its finding that the stock would have been exempt if Doris had simply left it in her name; under North Carolina’s rules, the asset would have been exempt as property actively used in a trade or business.
Estate of Wilson, 2009 N.C. App. LEXIS 1737, Appeal No. COA09-216 (November 3, 2009)
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According to the National Retirement Risk Index prepared by the Center for Retirement Research at Boston College, 51% of American will not be able to afford to retire at age 65.
That means that many of us need to save more, spend less, and plan on working past age 65.
Last week was National Estate Planning Awareness Week - I'm sure most of us didn't know that, but awareness about the necessity of estate planning is pitifully low, so anything that can be done to help folks realize that it's important to plan for the future is good.
Here's an article from USA Today - 5 myths about wills, and what you should do. However, I disagree with one thing in the article - that Do-It-Yourself software and websites are fine for basic wills. The problem is that many people think they need only a basic will, but in reality their situation is not so simple. I don't even recommend using a non-specialist for your estate planning. I have seen many poorly drafted "simple wills" that end up complicating probate and costings thousands of dollars in attorney and court fees more than a properly prepared will would have.
Go see an attorney who specializes in estate planning. Your family and property are too valuable to rely anyone but an expert.
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